In re: Case No. F02-00237-DMD

YVONNE M. CORRY and BRIAN L. CORRY, d/b/a Denali Smoke Shack,

Debtors.

Chapter 7

GRANDE DENALI PROPERTIES, L.L.C., an Alaska limited liability corporation,

Plaintiff,

FIRST NATIONAL BANK ALASKA, STEPHEN E. JONES, TONI M. KAUFMANN, and LARRY COMPTON, TRUSTEE,

Defendants.

Adv. No. 03-90054-DMD

Plaintiff Grande Denali filed this adversary proceeding for declaratory relief, seeking a determination that it retained a valid and enforceable easement in property located near Denali National Park after the trustee’s sale of such property by auction. Grande Denali and First National Bank Alaska have filed cross motions for summary judgment. The court will treat both motions as ones for partial summary judgment, because issues raised in the pleadings regarding damages have not been addressed in the motions. Defendants Jones, Kaufman and Compton, the chapter 7 trustee, have joined in Grande Denali’s motion. For the reasons stated below, I find in favor of Grande Denali.

The material facts pertinent to the existence of a road easement in favor of Grande Denali, and whether that road easement survived the bankruptcy trustee’s sale of Tract A-1-A to First National, are not in dispute. The debtors, Brian and Yvonne Corry, filed a chapter 7 petition on March 12, 2002. At the time of filing, they were leasing, with an option to purchase, real property near Denali National Park described as Tract A-1-A, Denali Park River Estates Subdivision, from defendants Jones and Kaufman. The lease and purchase option were entered in December of 1999. The purchase option included all easements, rights-of-way, reservations or other interests affecting Tract A-1-A.

The Corrys intended to relocate their restaurant, Denali Smoke Shack, onto the property before the 2000 summer tourist season started. The property fronted the Parks Highway, but needed improved road access before the business could open. Defendant First National Bank Alaska (“FNBA”) extended a loan of approximately $220,000 to the Corrys for the purpose of relocating the restaurant and making improvements to the building. To secure this obligation, the Corrys gave FNBA an assignment of the lease and option to purchase and a deed of trust encumbering the leasehold.

The Corry’s and FNBA’s interests in the leasehold were subject to a platted access easement in favor of Tracts A-2-A and A-3 of Denali Park River Estates Subdivision and Tract A of Kingfisher Development Subdivision. Jones and Kaufman owned the tracts benefitted by the access easement at this time. Tracts A-2-A and A-3 were adjacent to Tract A-1-A on its northern border; while Tract A of Kingfisher Development Subdivision was located immediately behind and uphill of these parcels. The platted easement was essentially

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parallel to the Parks Highway, with access to Tract A-1-A starting at its southern corner and then traversing north across the parcel to Tract A-2-A.

In January of 2000, Jones and Kaufman negotiated the sale of Kingfisher Tract A to Grande Denali. Because this parcel had no existing road access to the Parks Highway, access rights were specifically negotiated prior to the sale. ^1.

Jones, Kaufman and Grande Denali initially anticipated running the road to Kingfisher Tract A over Tracts A-2-A and A-3 of the Denali Parks subdivision. However, the land on the lower portions of Tracts A-2-A and A-3 was too steep to accommodate a road to Kingfisher Tract A. An alternative route, involving a number of switchbacks over all 3 of the Denali River tracts owned by Jones and Kaufman, was proposed. The alternative route entered Tract A-1-A from the Parks Highway at its northern border, rather than from the southern border as platted. It then crossed the parcel in a large switchback before going onto adjoining tract A-2-A. Because of the leasehold interest on Tract A-1-A, in March of 2000 Jones and Kaufman obtained the Corrys’ consent before authorizing Grande Denali access to Kingfisher Tract A via the alternative route. The situation turned out to be beneficial to the Corrys because they were having difficulty paying for the road and foundation improvements needed for their restaurant. In exchange for Grande Denali’s construction of a road to and a foundation for their restaurant, they agreed to the alternative access route. Jones, Kaufman and the Corrys executed various memoranda and other documents evidencing their approval of this alternative access route for Grande Denali, although an express written grant of an easement was never recorded.

Grande Denali built the road over the agreed alternative access route. This road provided access to the Corry’s restaurant, and then snaked up the hill over tracts A-1-A,

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A-2-A and A-3 to the Kingfisher subdivision, where Grande Denali built a large hotel on a bluff overlooking the Nenana River. Grande Denali also built the foundation and parking areas for the Corry’s restaurant. It completed this work in sufficient time that the Corrys were able to move their restaurant onto Tract A-1-A and open for business in time for the 2000 tourist season. Grande Denali estimates that it spent about $100,000 for the road work, site pad and parking areas for the Corrys, and $1.9 million for completion of the road to Kingfisher Tract A.

In May of 2000, William Renfrew, an officer of FNBA, visited Tract A-1-A after Grande Denali had started work on the road. At the time of his visit, the road clearly varied from the platted easement. It started from the northern, rather than southern, border of the parcel. It did not parallel the Parks Highway but started up the hill, away from the highway, ending about 100 yards above the site where the restaurant had been placed. No one from FNBA inspected Tract A-1-A again until after the trustee’s sale of the property.

Grande Denali completed the road up to Kingfisher Tract A in 2000, and its lodge was opened for business in May of 2001. Both the road and the hotel are clearly visible from the Parks Highway, impossible to overlook. The road was in use for roughly two years before the Corrys filed their chapter 7 petition in March, 2002. At the Corry’s § 341 meeting, held on April 11, 2002, debtors mentioned the road in their discussions with the trustee about the value of their restaurant. Mr. Corry said Grande Denali had provided “dirt work” for the restaurant in exchange for road access to the hotel. He also indicated that he felt the road enhanced the value of Tract A-1-A because of the improved access, not only to that tract but to the hotel above. ^2.

The trustee decided to try to sell the Corry’s restaurant and the property before the 2002 summer tourist season started in mid-May. On April 15, 2002, the trustee filed an application to accept the lease, cure the defaults under the lease, exercise the option to purchase and auction the property free and clear of liens and encumbrances. The titles of both the application and notice indicated a sale free and clear of liens. The trustee proposed a conditional assumption of the lease and exercise of the option to purchase Tract A-1-A, contingent upon being able to sell the property at auction for sufficient funds to pay, at a minimum, the option price, the arrearages on the lease, and the lien of FNBA in full. If the auction failed to generate the minimum bid amount, the trustee would withdraw his conditional assumption of the lease and it would be deemed rejected. The application provided, in part:

The fixtures located on the property and the Lease itself are encumbered by a lien and assignment, respectively, in favor of [FNBA]. The debt is scheduled as $220,000. First National reports the current balance is approximately $219,226. The State of Alaska Employment Security Division has a recorded tax lien for $3,629. To the Trustee’s knowledge, the property is otherwise unencumbered. ^3.

The application invited prospective bidders to contact the trustee to arrange for an inspection of the property. It further cautioned that the sale would be without warranty of any kind and that prospective purchasers should investigate the condition of and title to the property before bidding.

The trustee filed an errata on April 16, 2002, which contained exhibits that had been omitted in error from the application. These exhibits included a copy of an access

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agreement the Corrys had signed in April, 2000, for the alternative access route over Tract A-1-A, a drawing showing the revised access route, and a legal description of the route.

The application was noticed to all parties on the matrix. FNBA and Jones were served with notice of the application, but Grande Denali was not. No objections were filed and, after a hearing on May 6, 2002, the court approved the trustee’s application and authorized the auction of the property to go forward on May 8. The order, like the trustee’s application, stated that the sale was to be without warranty of any kind and urged prospective purchasers to investigate the condition of and title to the property before bidding.

Although the trustee expected to have several bidders at the auction, the only party who bid on the property was FNBA. As previously noted, FNBA did not make a physical inspection of the property before the auction. The sale of the property to FNBA was approved by the court on May 8, 2002. The lease arrearages were paid and Jones and Kaufman executed a statutory warranty deed to Tract A-1-A in favor of the trustee, excepting from warranty only the encumbrances and reservations created by U.S. Patent and “liens or encumbrances granted or suffered by Denali Smoke Shack, Yvonne M. Corry or Brian L. Corry.” ^4.

The trustee in turn conveyed Tract A-1-A to FNBA without warranty by quitclaim deed dated July 23, 2002. However, the quitclaim deed did preserve the warranties made by Jones and Kaufman in their conveyance to the trustee.

FNBA says it was unaware of the existence of the road over Tract A-1-A until after it purchased the property. It believes the trustee’s sale of the property extinguished any access rights Grande Denali may have had over Tract A-1-A. Sometime after the summer of 2002, FNBA blocked the road and denied Grande Denali access to the hotel. This adversary

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proceeding was subsequently initiated by Grande Denali on March 18, 2003, seeking a declaratory judgment that it had an easement over Tract A-1-A. Grande Denali and FNBA have filed cross motions for summary judgment. The trustee, Jones and Kaufman have joined in Grande Denali’s motion. FNBA has also filed a motion in the main case seeking relief from the orders authorizing the auction and sale of the property.

A. The Estate’s Interest in Tract A-1-A was Subject to an Access Easement in Favor of Grande Denali

What constitutes property of the estate is determined as of the time the debtor’s petition is filed. ^5.

Property of the estate includes all legal or equitable interests of the debtor in property as of the commencement of the case. ^6.

State law determines the nature and extent of a debtor’s interest in property. ^7.

At the time FNBA acquired a lien against the Corry’s leasehold interest in Tract A-1-A, the parcel was subject to a platted easement ensuring access to Tracts A-2-A and A-3 of Denali Park River Estates and Kingfisher Tract A. The configuration of the land prevented the platted easement from serving its purpose as to Kingfisher Tract A. Jones and Kaufman, who owned the 4 parcels subject to the easement, explicitly agreed to provide access to Kingfisher Tract A at the time they sold this tract to Grande Denali. Jones, Kaufman, the Corrys and Grande Denali all agreed to the alternative access route that ultimately became the road to the hotel.

Although never formally documented and recorded, Grande Denali had an access easement over this alternative route at the time the Corrys filed bankruptcy. FNBA places great importance on the fact that this was an unrecorded interest. However, there are several different ways an easement can be created. ^8.

I concur with the plaintiff’s analysis that an easement was granted, by consent of the parties, by implication, or by estoppel. At the time the Corrys filed bankruptcy, their interest, and thus the estate’s interest, in Tract A-1-A was subject to the access easement in favor of Kingfisher Tract A. Although the easement was junior to FNBA’s lien on the Corry’s leasehold, it survived the trustee’s sale of Tract A-1-A in bankruptcy.

B. The Easement was not Extinguished by the Trustee’s Sale Free & Clear of Liens

A trustee can sell property of the estate free and clear of any interest in the property, under certain conditions. ^9.

In this case, the trustee noticed an application for a sale free and clear of liens. A lien is defined under the Bankruptcy Code as a “charge against or interest in property to secure payment of a debt or performance of an obligation.” ^10.

An easement may be an encumbrance under state law, ^11.

but it is not a lien under the Bankruptcy Code.

The trustee’s application to sell specifically noted two liens that encumbered the Corry’s leasehold and the fixtures located thereon: FNBA’s security interest and deed of trust, and a tax lien in favor of the State of Alaska. The trustee indicated that, to the best of his knowledge, the property was otherwise unencumbered. Implicit in this indication is that

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the property was unencumbered by other liens; there is nothing in the application to indicate that other interests, even of record (such as the platted easement, or the rights of way reserved by U.S. Patent), would be affected by the trustee’s sale. The clear intent of the transaction was to pay liens against the property, not to eliminate any and all interests in the property. The trustee made no assurances that he had disclosed all encumbrances or interests in the property and advised prospective purchasers to independently investigate the condition of and title to the property before bidding.

FNBA attacks the sale on the grounds of insufficient notice. First, FNBA suggests that the order authorizing the sale is void because Grande Denali was not given notice of the proposed sale. Fed. R. Bankr. P. 6004(c) requires that notice of a proposed sale free and clear of liens be given to all parties who have liens or other interests in the affected property. A failure to give proper notice may render an order authorizing a § 363 sale void to the extent that it authorizes a sale free and clear of a non-noticed party’s interest in the property, because the court would not have personal jurisdiction over the non-noticed party. ^12.

Personal jurisdiction is an individual right and deficiencies in service may be raised, or waived, only by the party who has been denied procedural due process. ^13.

FNBA lacks standing to raise any service defects as to Grande Denali, ^14.

and Grande Denali consents to the trustee’s sale, provided its easement has not been extinguished the sale.

FNBA further argues that there is a defect in the sale because the trustee failed to advise the court and FNBA that he intended to sell Tract A-1-A subject to the easement. Its argument is:

Mr. Compton was not remiss in inspecting the property. He saw the road and assumed from its existence, without inquiry of plaintiff, Jones or Kaufman, that plaintiff had an easement of some sort to use the road. He did not notify plaintiff of his motion or sale because he did not intend the sale to extinguish the easement he assumed plaintiff owned.

Neither was Mr. Compton’s intention to sell Tract A-1-A subject to the easement necessarily remiss. Section 363(b) allowed him to sell the property “as is,” subject to the easement and every other interest, leaving it to the prospective purchasers to make their own determination of what those interests are . . . .

Mr. Compton’s error was in not disclosing his intent to sell the property subject to the easement (and his implementation of that intent by not notifying plaintiff) when he applied for and obtained authorization to sell Tract A-1-A “free and clear of liens and encumbrances” and, then, confirmation that he had sold the property “free and clear of interests of other entities.” By not disclosing that his intention was to foreclose First National’s security interest but not an inferior interest, Mr. Compton denied First National the opportunity to object to such a sale and to seek leave to foreclose all interests itself, or to let the success of Mr. Compton’s auction depend on someone else bidding the minimum price for the property. ^15.

FNBA relies on state foreclosure law to support its contention that the trustee’s notice of the sale was defective as to prospective purchasers. State foreclosure law is inapplicable here. The rule of caveat emptor applies in bankruptcy sales. ^16.

“[A] purchaser at a judicial sale is presumed to know that the only title the trustee can sell is the trustee’s own right, title, and

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interest in the property.” ^17.

In certain circumstances, a purchaser’s belief that he is buying property free and clear may not be justified. ^18.

Further, under state law, “[a] purchaser is considered apprised of those facts obvious from an inspection of the property,” ^19.

and takes property burdened by an open and visible easement subject to the easement. ^20.

Parties are presumed to contract in reference to the condition of the property at the time of a sale. ^21.

FNBA wore two hats in this transaction. It was both a lienholder and a bidder at an auction. The trustee owed a fiduciary duty to FNBA as a known lienholder, in that he was to protect its interest in the property. ^22.

He satisfied this duty by assuring that the property would only sell at auction if sufficient funds were bid in to pay FNBA’s lien in full. However, FNBA’s status as a lienholder did not entitle it to greater protections as a prospective purchaser. Here, the trustee was selling Tract A-1-A by auction, without warranty; he was not conducting a foreclosure under state law. The trustee was not required to give prospective bidders assurances about the title or condition of the property, and made it clear that he was giving none. The duty to inspect the property was placed squarely on prospective purchasers, who were urged to investigate the condition of the property and title to the property before bidding. They were invited to contact the trustee to arrange for an inspection. FNBA didn’t do this. And, had it inspected the property, it would have discovered the road.

Grande Denali acquired an easement for access to Kingfisher Tract A over Tract A-1-A in early 2000. This easement was openly visible and in use at the time the Corrys filed their bankruptcy petition. The trustee’s application to sell property free and clear of liens did not extinguish the easement. All prospective bidders at the auction of Tract A-1-A were placed on notice that they should investigate the condition of and title to the property before bidding. FNBA failed to do this. It has purchased Tract A-1-A subject to the easement. Grande Denali’s motion for summary judgment will, therefore, be granted.

2. Grande Denali’s Mot. for Summ. J., filed June 20, 2003 [Docket No. 50], Ex. A, pp. 17-21.

3. Trustee’s Application to Accept Lease, Set Conditions for Acceptance of Lease, Exercise of Option to Purchase Under Lease, for Auction Free and Clear of Liens and for Approval of Sale, filed Apr. 15, 2002 [Docket No. 26 in In re Corry, Main Case No. F02-00237-DMD], at p. 2.

6. 11 U.S.C. § 541(a)(1). The exceptions to § 541(a)(1) are not applicable here.

7. Hanf v. Summers (In re Summers), 332 F.3d 1240, 1242 (9th Cir. 2003), citing Abele v. Modern Fin. Plans Serv., Inc. (In re Cohen), 300 F.3d 1097, 1104 (9th Cir. 2002).

8. Freightways Terminal Co. v. Indus. and Commercial Constr., Inc., 381 P.2d 977, 983 (Alaska 1963).

12. Citicorp Mortgage, Inc. v. Brooks (In re Ex-Cel Concrete Co., Inc.), 178 B.R. 198, 203-205 (B.A.P. 9th Cir. 1995).

13. Parsons v. Plotkin (In re Pacific Land Sales, Inc.), 187 B.R. 302, 309 (B.A.P. 9th Cir. 1995), citing Kulko v. Superior Ct. of Calif., 436 U.S. 84, 91 (1978); Ins. Corp. of Ireland, Ltd. v. Compagnie des Bauxites de Guinee, 456 U.S. 694, 702-05 (1982).

15. FNBA’s Mot. for Summ. J. and Opp’n to Pl.’s Mot. for Summ. J., filed Aug. 20, 2003 [Docket No. 59], at pp. 36-37 (citations omitted, emphasis in original).

16. United States v. Aldrich (In re Rigden), 795 F.2d 727, 732 (9th Cir. 1986).

22. United States v. Aldrich (In re Rigden), 795 F.2d 727, 729 (9th Cir. 1986).