Moreggia & Sons, Inc., In re, 87-1662
| Decision Date | 27 July 1988 |
| Docket Number | No. 87-1662,87-1662 |
| Citation | 852 F.2d 1179 |
| Parties | 19 Collier Bankr.Cas.2d 949, 18 Bankr.Ct.Dec. 206, Bankr. L. Rep. P 72,417 In re MOREGGIA & SONS, INC. CITY OF SAN FRANCISCO MARKET CORPORATION, Plaintiff-Appellant, v. Edward M. WALSH, Trustee; American Poultry Company, Creditor, Defendants-Appellees. |
| Court | U.S. Court of Appeals — Ninth Circuit |
Thomas C. Holman and Barbara J. Kramer, Pettit & Martin, San Francisco, Cal., for plaintiff-appellant.
Linda Sorensen, Phelan, Stuppi, Sorensen & McQuaid, San Francisco, Cal., for defendant-appellee Trustee Walsh.
Sandra J. Shapiro and Carol M. Hehmeyer, Bancroft, Avery & McAlister, San Francisco, Cal., for defendant-appellee American Poultry.
Appeal from the United States District Court for the Northern District of California.
Before TANG, CANBY and BRUNETTI, Circuit Judges.
The City of San Francisco Market Corporation (the Market Corporation) appeals a bankruptcy court's order, (which the district court affirmed), granting creditor's (American Poultry) and Trustee's Motions to Sell Lease, and denying lessor Market Corporation's Motion for Reconsideration of an order extending the time to assume or reject the Lease. The Market Corporation argues that, since the Trustee failed to assume the "Lease" within the 60-day statutory period set by 11 U.S.C. Sec. 365(d)(4)(Supp. IV 1986), the Lease was automatically rejected and the property should be surrendered by the Trustee. The Market Corporation further argues that the operation of Section 365 cannot be waived or, if it can be waived, no waiver occurred. Finally, it argues that conversion of the case from Chapter 11 to Chapter 7 does not commence a new 60-day period for assumption or rejection of the lease. We hold that the property interest embodied in the Lease Agreement is not subject to the operation of section 365(d)(4) and affirm.
The Market Corporation was incorporated in 1961, primarily to provide financial assistance to the City of San Francisco and to help relocate businesses which had been displaced by the City's Golden Gateway Redevelopment Project, which today includes the Embarcadero Center, the Alcoa high-rise office building, the Hyatt Regency Embarcadero Hotel, and other structures. The City was under a legal obligation to relocate the industries being displaced by the project. One such industry was the San Francisco wholesale produce industry. The Market Corporation was responsible for buying out the owners of existing possessory rights in the area of the redevelopment project and for relocating the displaced businesses. The Market Corporation issued bonds to finance the construction of the San Francisco Produce Terminal (the Produce Terminal). It granted fifty year use rights in stalls of the Produce Terminal to the displaced and relocated businesses.
Moreggia & Sons, Inc. (Moreggia), one of the displaced businesses, had entered into an agreement in 1962 with the Market Corporation for two store units in the Produce Terminal. On February 2, 1984, Moreggia assigned its rights under the agreement to American Poultry; on the same date, American Poultry assigned to Moreggia its rights under a second identical lease (the Lease in question in this case) for two other store units in the Produce Terminal. 1
The Lease Agreement was for a total term, including options, of 50 years. The basic monthly rent for each of the two store units was $275.00. The rate was calculated to provide the funds necessary to retire the bonds issued by the Market Corporation. The obligation to pay basic rent ceased upon retirement of Market Corporation's bonded indebtedness. While the Lease terms authorize the Market Corporation to issue new bonds if necessary, such action would require the consent of two-thirds of the lessees.
The agreement also provides for several additional obligations. These include payment of parking and utility charges and of a share of any possessory interest taxes assessed against the Market Corporation. Furthermore, if in any given year the Produce Terminal's costs exceed the combined value of certain Produce Terminal revenues and reserves, the lessee is required to pay his pro-rata share of the excess cost. The Produce Association is required to prepare and obtain approval for a yearly operating budget. The Lease provides, however, that the standards of repair and replacement and of operation of the Produce Terminal established in the Terminal's first year of operation may not be substantially changed without the prior written approval of three-quarters of the lessees.
The agreement further requires the lessee to maintain and repair the leased premises, to pay Produce Association membership fees, to pay a share of the Produce Association's Automobile and Worker's Compensation Insurance, and to provide liability and property damage insurance protection for, among others, the Market Corporation, the Produce Association and the City and County of San Francisco.
On January 17, 1985, Moreggia filed a Chapter 11 bankruptcy petition. By then, the Market Corporation had retired its bonded indebtedness and Moreggia's obligation to pay monthly basic rent had thus previously ceased. Moreggia had paid the Market Corporation a total of $130,000 in basic rent.
On June 7, 1985, Moreggia filed a proposed reorganization plan. The plan was denied on November 8, 1985. On November 27, 1985, the case was converted to a Chapter 7 proceeding. Within sixty days of the conversion, the Trustee obtained an ex parte order extending the time within which to assume or reject any or all of Moreggia's leases and executory contracts. On February 27, 1986, American Poultry applied for authorization for the Trustee to sell the Lease; on March 6, 1986, the Trustee filed a motion to sell the Lease and to assume (if necessary) and assign the Lease. Moreggia, the Internal Revenue Service, and a group of junior lienholders joined in the motions of the Trustee and American Poultry. On March 7, 1986, the Market Corporation filed a motion to reconsider the ex parte extension of time to assume and/or reject unexpired leases and executory contracts and also an opposition to the motion to sell the Lease. The Market Corporation contended that the Trustee had failed to assume the Lease within the 60-day statutory period required by 11 U.S.C. Sec. 365(d)(4), and hence, the Lease was automatically rejected and the property should be surrendered to the Market Corporation.
On June 11, 1986, the bankruptcy court issued an order granting the motions to sell the Lease and denying Market Corporation's motion for reconsideration. The bankruptcy court held that the Lease "is a species of property not governed by the assumption-rejection provisions of [section] 365[ (d)(4) ]." The court further found that, if section 365(d)(4) applied, the Market Corporation had waived its operation. Finally, the bankruptcy court held that in any event the Trustee was entitled to assume or reject the Lease within 60 days of the conversion to the Chapter 7 proceeding. The Market Corporation appealed that decision to the district court. 2 The district court affirmed the bankruptcy court's conclusion that the Lease is not an unexpired lease or an executory contract subject to Section 365(d)(4). It did not reach the remaining issues.
This court independently reviews the bankruptcy court's decision. Ragsdale v. Haller, 780 F.2d 794, 795 (9th Cir.1986). The bankruptcy court's findings of fact are reviewed under the clearly erroneous standard; its conclusions of law are reviewed de novo. Id. The interpretation of a statute is a question of law reviewed de novo. In re Southwest Aircraft Services, Inc., 831 F.2d 848, 849 (9th Cir.1987), cert. denied, --- U.S. ----, 108 S.Ct. 2848, 101 L.Ed.2d 885 (1988).
The Scope of Section 365(d)(4)
We must decide whether the assumption-rejection provisions of section 365(d)(4) apply to this agreement. We begin our inquiry with an analysis of that section's scope, i.e., to what types of agreements section 365(d)(4) applies. Section 365(d)(4) provides:
... in a case under any chapter of this title, if the trustee does not assume or reject an unexpired lease of nonresidential real property under which the debtor is the lessee within 60 days after the date of the order for relief, or within such additional time as the court, for cause, within such 60-day period, fixes, then such lease is deemed rejected, and the trustee shall immediately surrender such nonresidential real property to the lessor.
The Market Corporation asserts that state law determines whether an agreement is a true lease. In re Mesa Refining, Inc., 52 B.R. 359, 362 (Bankr.D.Colo.1985) (). Under California law, the Market Corporation contends, this agreement qualifies as a true lease. See Bachenheimer v. Palm Springs, etc. Corp., 116 Cal.App.2d 580, 591, 254 P.2d 153, 159 (1953) (). The Lease is not, according to the Market Corporation, a disguised security instrument which, arguably, would fall outside the purview of section 365.
We acknowledge that the agreement qualifies as a lease under California state law. However, not every interest that might qualify as a lease under state law is subject to the automatic rejection provision of section 365. Our analysis of the Bankruptcy Code and the legislative history and purpose of section 365(d)(4) convinces us that the appropriate focus is on the federal law purposes of Section 365(d)(4) and the economic realities of this particular arrangement.
The Bankruptcy Code itself provides little guidance in this situation. The term "unexpired lease" is not defined. Section...
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