Menu    3 ABR 127 

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF ALASKA

In re)
)U.S.D.C. Appeal
OLYMPIC, INC.,)No. A92-242 Civil
PETER G. ZAMARELLO,)
and CBS REAL ESTATE Co., INC.,)Bankruptcy Court
)No. 3-86-00484-HAR
Debtors.) No. 3-86-00485-HAR
_________________________________)No. 3-86-00486-HAR

Bankruptcy Court Affirmed

This court has jurisdiction of this appeal from the United States Bankruptcy Court for the District of Alaska pursuant to 28 U.S.C. § 158(a). The case is the final in a series of appeals to this court concerning ownership of an eight-story office building in Anchorage, Alaska.

Appellants Henrietta Stewart, Gordon Stewart, and Freeman Hyde (hereinafter collectively "Stewart/Hyde" or "Lessors") are the owners of former Lots 4, 5, and 6 of Block 69 in Anchorage Alaska. On March 1, 1960, Stewart/Hyde and Mr. Hyde's now deceased wife, Virginia Ann Hyde, entered into an agreement with Ray Wolfe as lessee for the lease of these lots for a term of fifty-five years   TOP    3 ABR 128  with two ten-year extension options (hereinafter "Ground Lease")(1)  On August 11, 1960, the Local 878 Building Corporation (hereinafter "Local 878"), owners of the adjacent former Lot 3, Block 69, leased this lot to Ray Wolfe for a term of sixty years. Both leases, in nearly identical language, obligated Ray Wolfe, as part of the rent of the two properties, to construct a single building on the properties at a cost of not less than $100,000.(2)  The leases further provided that, at their expiration, the building would become the property of each lessor.(3)

Ray Wolfe assigned both the Ground Lease and the Lot 3 lease to the Wometco Lathrop Company on July 2 and August 11, 1960, respectively.(4)   Shortly thereafter, Stewart/Hyde and Local 878 agreed to a replat of the former Lots 3, 4, 5, and 6. The replat extinguished the lot lines and created a single new lot, Lot 4-A. (5)

On January 21 and February 3, 1961, the Wometco Lathrop Company entered into amendments to the leases with Stewart/Hyde and   TOP    3 ABR 129  Local 878, respectively, to provide that the Wometco Lathrop Company would construct a single building valued at or above $100,000 on Lot 4-A.(6)   An eight-story building fulfilling the lease requirements was erected by June 1, 1962.(7)

On November 16, 1978, the Wometco Lathrop Company purchased Local 878's interest in the east fifty feet of Lot 4-A, Block 69, making it an owner of a portion of the lot in fee and a lessee of the Ground Lease.(8)  The Wometco Lathrop Company conveyed the fee to Olympic, Incorporated (hereinafter "Olympic") on January 14,1985. (9) That same day, Olympic agreed to assume and Wometco Lathrop Company agreed to assign the latter's interest in the Ground Lease.(10)

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In February of 1985, Olympic conveyed by warranty deed the east fifty feet of Lot 4-A, Block 69, and assigned its interest in the Ground Lease to Peter G. Zamarello and CBS Real Estate Company, Incorporated ("CBS") (hereinafter collectively "Debtors").(11)   The purchase was financed by Weyerhauser, Incorporated ("Weyerhauser") through a loan of $8.2 million to the Debtors. As security for the loan, the Debtors assigned to Weyerhauser all of their interest in the Ground Lease and executed a deed of trust and security agreement covering their interest in the east fifty feet of Lot 4-A, together with other property owned by them. (12)

On January 3, 1986, the Debtors each executed quitclaim deeds to their interest in Lot 4-A, Block 69, in favor of Eastgate, Incorporated (hereinafter "Eastgate").(13) Eight months later, on August 21, 1986, the Debtors filed petitions for relief under Chapter 11 of the Bankruptcy Code.(14)  Eastgate filed a separate petition for relief under Chapter 11 on August 27, 1986.(15) On September 14, 1986, the bankruptcy court ordered that an examiner be appointed to   TOP    3 ABR 131  each of these cases and that the debtors apply to the court for a characterization of any transfer that might be deemed to be preferential within the Bankruptcy Code.(16)

On November 19, 1986, the Debtors filed applications for orders avoiding the transfers of their interests in Lot 4--A, Block 69, to Eastgate.(17) A hearing on these applications was held on December 15, 1986, the bankruptcy court found that the transfers were fraudulent and void ab initio(18), and the consequent order was signed on January 21, 1987.(19)

On January 21, 1987, Stewart/Hyde filed a motion pursuant to 11 U.S.C. § 365(d)(4) for an order requiring that the Debtors surrender their leasehold interest in the Ground Lease for failure to move to assume the lease within sixty days of the filing of bankruptcy.(20) The following day, the Debtors filed a motion to assume the Ground Lease.(21) Both Stewart/Hyde and the Debtors filed motions for summary judgment on whether the Debtors had or could assume the Stewart/Hyde lease. The bankruptcy court did not rule on either of these motions. Instead, in its order of October 4, 1989, the bank-   TOP    3 ABR 132  ruptcy court concluded that Weyerhauser was entitled to summary judgment on its claim that its interests in the building were not impaired regardless of whether the Debtors timely assumed the Ground Lease.(22) This conclusion was upheld by this court on an appeal by Stewart/Hyde.(23)

Following its decision not to eliminate Weyerhauser's interest in the Ground Lease, the bankruptcy court, through an order dated November 14, 1989, approved and ratified certain agreements between the Debtors and Weyerhauser designed to settle their disputes and reconstruct their relationship.(24) One of the agreements provided that, in the event any court enters an order that affects the Ground Lease, Weyerhauser would automatically be entitled to immediate control, possession, and title of the Debtors' entire interests in the lease.(25)

On November 17, 1989, the bankruptcy court entered an order confirming the Debtors' joint plan of reorganization.(26)   TOP    3 ABR 133  Included in that plan was a provision incorporating the agreements restructuring the relationship between Debtors and Weyerhauser.(27) Stewart/Hyde did not appeal this order or the bankruptcy court's earlier approval of the Debtors' and Weyerhauser's agreement.

More than two years later, on January 21, 1992, the bankruptcy court denied Stewart/Hyde's motion for summary judgment concerning the Debtor's surrender of their leasehold interest in the Ground Lease for failure to move to assume the lease.(28) The court concluded that this issue was rendered moot as a result of its November 14, 1989, order approving the restructuring agreements between the Debtors and Weyerhauser, as well as its approval of the Debtor's joint plan of reorganization, which incorporated the terms of the restructuring agreements.(29) According to the court, because "Weyerhauser had previously prevailed in asserting its rights to preserve the property from default, and subsequently reached a workout on the Hill Building property with the debtors", any ruling on the validity of Stewart/Hyde's motion would be "in the nature of an 'advisory opinion' since it would not have varied the outcome."(30) Stewart/Hyde appealed the bankruptcy court's denial of their summary judgment motion.

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Stewart/Hyde assert that the bankruptcy court erred when it concluded that the Debtor's joint plan of reorganization rendered Stewart/Hyde's motion for summary judgment moot, because that plan, along with the Debtor's restructuring agreements with Weyerhauser, occurred after the lease had already ceased to exist. According to Stewart/Hyde, the Ground Lease terminated as a matter of law pursuant to 11 U.S.C. § 365(d) (4), sixty-one days after the Debtors filed for bankruptcy protection. Therefore, any agreement affecting the Ground Lease entered into by the Debtors after the sixty-first day is irrelevant to the determination of whether the Debtors assumed the lease in a timely manner.

Discussion

This dispute involves only the January 21, 1992, order from the bankruptcy court. That order declared moot the issue of whether the Debtors surrendered their interest in the Ground Lease on account of two earlier orders, which protected Weyerhauser's rights in the lease(31) and approved the restructuring agreements between the Debtors and Weyerhauser.(32) The standard of review for this court is to review de novo the bankruptcy court's conclusions of law, while reviewing its findings of fact for clear error. See Sea Harvest Corp. v. Riviera Land Co. 868 F.2d 1077, 1078--79 (9th Cir. 1989).

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Subsection 365(d) (4) requires a trustee of an unexpired lease of nonresidential real property under which the debtor is the lessee to assume or reject the lease within sixty days after the date of the order of relief under Chapter 11. 11 U.S.C. § 365(d) (4); § 11 U.S.C. § 301 (filing of a petition for the commencement of a voluntary case under Chapter 11 constitutes an order for relief).(33) Proper assumption of an unexpired lease within the sixty-day period requires the debtor-lessee to file a document that qualifies as a motion under the bankruptcy rules. Sea Harvest Corp. v. Riviera Land Co., 868 F.2d 1077, 1080 (9th Cir. 1989). If a debtor-lessee does not move to assume the lease within sixty days of filing for protection under the Bankruptcy Code, the lease is deemed rejected and the trustee must immediately surrender the non-residential real property to the lessor. 11 U.S.C.§ 365(d)(4)

In the present case, the Debtors conveyed their interest in the Ground Lease to Eastgate on January 3, 1986. On August 21, 1986, and August 27, 1986, the Debtors and Eastgate, respectively, voluntarily filed for protection under Chapter 11. Neither the Debtors nor Eastgate filed a motion to assume the lease within sixty days of their respective bankruptcy filings. However, less than one month after the filing of the voluntary petitions, the bankruptcy   TOP    3 ABR 136  court ordered the Debtors to apply to the court for a characterization of the transfers which might be deemed to be preferential. After applications for orders avoiding the transfers to Eastgate were filed by the Debtors, the bankruptcy court, on December 15, 1986, ordered that the transfers to Eastgate were void ab initio as fraudulent conveyances. The Debtors filed a motion to assume the Stewart/Hyde Ground Lease on January 22, 1987.

This court joins those bankruptcy courts which have held that, in situations where the leasehold interest is brought back into the estate as a result of a successful fraudulent transfer action or preference action, the sixty-day period under 11 U.S.C. § 365(d) (4) begins to run from the date the leasehold interest in the debtor is reinstated, rather than the date of the entry of the order for relief. See In re Edward Harvey Co., 68 B.R. 851 (Bankr. D. Mass. 1987) (determination that transfer was fraudulent was a precondition to a determination by the trustee to exercise the right to assume the lease); In re Ted Liu's Szechuan Garden, Inc., 55 B.R. 8 (Bankr. D.D.C. 1985) (sixty-day right to assume lease tolled while determination of right to redeem a termination lease was under advisement); In re Bygraph, Inc., 56 B.R. 596 (Bankr. S.D.N.Y. 1986) (sixty-day right to assume lease tolled until after state appellate court decision to reinstate debtor's sublease). Prior to that reinstatement, there is no lease in existence for the trustee to assume   TOP    3 ABR 137  or reject. Harvey, 68 B.R. at 86O.(34) Since the Debtors made a motion to assume the Ground Lease within sixty days after the bankruptcy court determined that the lease was part of the Debtor's estates, the Debtors timely assumed the Ground Lease for purposes of 11 U.S.C. § 365(d) (4).

The bankruptcy court's conclusion----that the issue of whether the Ground Lease was properly assumed was moot because of its finding of Weyerhauser's continuing interest in the lease and its approval of the restructuring agreements between the Debtors and Weyerhauser----was in error. Stewart/Hyde is correct in its assertion that any agreement surrounding the assumption of the Ground Lease entered into by the Debtors after the sixty-first day is irrelevant to the determination of whether the Debtors assumed the lease in a timely manner and could therefore not be relied on by the bankruptcy court as a basis for its decision. However, because this court has concluded that the Debtors timely assumed the Ground Lease, the   TOP    3 ABR 138  result reached by the bankruptcy court was correct. Stewart/Hyde is not entitled to an order declaring the Ground Lease surrendered, not because the issue is moot, but because the Debtors timely assumed the Ground Lease.

The decision of the bankruptcy court denying Stewart/Hyde's motion for summary judgment is affirmed.

    DATED at Anchorage, Alaska, this 6th day of January 1993.


                M. Russell Holland
                United States District Judge

N O T E S:

  TOP    3 ABR 128  1. Memorandum of Points and Authorities in Support of Stewart/Hyde's Motion for Summary Judgment (Bankr. Clerk's Docket No. 571), Exhibit A.

  TOP    3 ABR 128  2. Id.

  TOP    3 ABR 128  3. Id.

  TOP    3 ABR 128  4. Id., Exhibit B. originally the lessee was the Lathrop Company, which later became the Wometco Lathrop Company.

  TOP    3 ABR 128  5. The replat was approved by the City Planning Commission on December 15, 1960, and recorded in the Anchorage Recording District on January 6, 1961. See Debtor's Memorandum of Points and Authorities in Support of Cross-Motion for summary Judgment (Bankr. Clerk's Docket No. 621), Exhibit 1 (copy of filed plat).

  TOP    3 ABR 129  6. Memorandum of Points and Authorities in Support of Stewart/Hyde's Motion for Summary Judgment (Bankr. Clerk's Docket No. 571), Exhibits C and H. The amendments contained the following language regarding construction of the building:

[A] single building erected partly on the premises demised by the Lease and partly on adjoining property, which single building costs not less than $100,000, shall be deemed to constitute compliance with [the lease].
Id., Exhibit C, ¶ 4, at 3.

  TOP    3 ABR 129  7. See Debtor's Memorandum of Points and Authorities in Support of Cross-Motion for Summary Judgment (Bankr. Clerk's Docket No. 621), Exhibit 3 (providing an as-built diagram of the exterior of the building).

  TOP    3 ABR 129  8. Memorandum of Points and Authorities in Support of Stewart/Hyde's Motion for Summary Judgment (Bankr. Clerk's Docket No. 571), Exhibit K.

  TOP    3 ABR 129  9. Id. Exhibit M.

  TOP    3 ABR 129  10. Id. Exhibit N.

  TOP    3 ABR 130  11. Debtor's Memorandum of Points and Authorities in Support of Cross-Motion for Summary Judgment (Bankr. Clerk's Docket No. 621), Exhibit 4 & 5.

  TOP    3 ABR 130  12. Affidavit of Frank Ottaviano (Bankr. Clerk's Docket No. 618), Exhibit AA--DD.

  TOP    3 ABR 130  13. Debtor's Memorandum of Points and Authorities in Support of Cross-Motion for Summary Judgment (Bankr. Clerk's Docket No. 621), Exhibits 7 & 8.

  TOP    3 ABR 130  14. Bankr. Case No. 3-86-00484 (Olympic); No. 3-86-00485 (Zamarello); and No. 3-86-00486 (CBS).

  TOP    3 ABR 130  15. Bankr. Case No. 3-86-00501.

  TOP    3 ABR 131  16. Bankr. Clerk's Docket No. 82.

  TOP    3 ABR 131  17. Bankr. Clerk's Docket No. 166.

  TOP    3 ABR 131  18. Bankr. Clerk's Docket No. 239.

  TOP    3 ABR 131  19. Bankr. Clerk's Docket No. 356, at 2. The order was entered by the clerk of the bankruptcy court on February 3, 1987.

  TOP    3 ABR 131  20. Bankr. Clerk's Docket No. 323.

  TOP    3 ABR 131  21. Bankr. Clerk's Docket No. 331.

  TOP    3 ABR 132  22. Bankr. Clerk's Docket No. 2375. Stewart/Hyde filed a timely motion to alter or amend judgment pursuant to Federal Rule of Bankruptcy Procedure 9023 and Federal Rule of Civil Procedure 59 (e). The bankruptcy court denied this motion more than two years later. Bankr. Clerk's Docket No. 2655. This court affirmed the bankruptcy court's denial. Clerk's Docket No. 14 of district court proceedings.

  TOP    3 ABR 132  23. Clerk's Docket No. 18 of district court proceedings.

  TOP    3 ABR 132  24. Bankr. Clerk's Docket No. 2414.

  TOP    3 ABR 132  25. See Master Agreement (Bankr. Clerk's Docket No. 2385),¶¶ 8(d), 9-(a)-(b).

  TOP    3 ABR 132  26. Bankr. Clerk's Docket No. 2423.

  TOP    3 ABR 133  27. Id. ¶ 3.

  TOP    3 ABR 133  28. Bankr. Clerk's Docket No. 2644; see Bankr. Clerk's Docket No. 2643 (explanation of bankruptcy courts decision).

  TOP    3 ABR 133  29. Bankr. Clerk's Docket No. 2643.

  TOP    3 ABR 133  30. Id.

  TOP    3 ABR 134  31. Order of October 4, 1989 (Bankr. Clerk's Docket No. 2375).

  TOP    3 ABR 134  32. Order of November 14, 1989 (Bankr. Clerk's Docket No. 2423).

  TOP    3 ABR 135  33. In cases under Chapter 11, a trustee is not automatically appointed to administer the bankruptcy estate; instead, a debtor continues to manage his own affairs as a "debtor in possession" with the majority of the powers, functions, and duties of a trustee. See 11 U.S.C. §§ 1104, 1107.

  TOP    3 ABR 137  34. Stewart/Hyde argues that the cases permitting tolling of the sixty-day period to assume a lease are distinguishable from the present case, because those cases involved situations where the lease was terminated before the debtor sought bankruptcy protection. This is a distinction without a difference. The focus of those decisions was not that the leases had all been terminated prior to the individual debtors filing for bankruptcy protection, but the protection of a person's exercise of his legal remedy where that ability is denied in the face of some supervening paramount authority. See In re Edward Harvey Co., 68 B.R. at 861 (decision based on bankruptcy courts bearing responsibility for delay in hearing case); In re Ted Liu's Szechuan Garden, Inc., 55 B.R. at 11 n.5 (noting that the bankruptcy court's actions may have lulled the debtor into failing to assume the lease); In re Bygraph, Inc.,, 56 B.R. at 601 (recognizing that federalism concerns dictate that the court toll the time for assuming a lease while the lease's validity is being determined in state court)