Port Angeles Waterfront Associates v. Port of Port Angeles (In Re Port Angeles Waterfront Associates)

OPINION

Before MEYERS, JONES and RUSSELL, Bankruptcy Judges.

RUSSELL, Bankruptcy Judge:

Sixty days after Debtor-Appellant filed Chapter 11, Appellee gave notice of termination of the lease pursuant to 11 U.S.C. § 365(d)(4). No motion was made by the Debtor within those sixty days to either assume or reject the lease. The parties filed cross motions for summary judgment, each asking for declaratory judgment on whether the lease had been terminated. The bankruptcy court entered summary judgment for the Appellee. Debtor-Appellant and two secured creditors appeal. We affirm.

FACTS

The facts are not in dispute. On May 14, 1985, Debtor-Appellant Port Angeles Waterfront Associates (“Waterfront”) entered into a lease agreement with the Port of Port Angeles (“Port”), a municipal corporation, to construct and then sublease “the Landing,” a 48,000 square foot commercial complex including a three-story building, boat ramp and a two-level concrete parking garage. This agreement provided that in the event of termination of the lease, Waterfront would have the option to remove any buildings, structures or fixtures within ninety days.

Waterfront constructed the Landing at a cost of $3.5 million, borrowing $1.9 million from Security Pacific Savings Bank (“Bank”) and $400,000 from the City of Port Angeles (“City”). Both loans were evidenced by promissory notes and secured deeds of trust against Waterfront’s interest under the loan agreement.

Port had entered into separate agreements with City and Bank providing that if the port lease should be terminated, for any reason, Port agreed to make a new lease of the property to the lenders on the same terms and conditions set forth in the Port lease for the balance of the Port lease term. Further, Port agreed to provide Waterfront, City and Bank with notice of any breach by Waterfront and an opportunity to cure such breach.

On August 18,1989, Waterfront filed for Chapter 11 relief. The lease agreement and the Landing construction were the Debtor’s only substantial assets. Sixty days after the bankruptcy filing, Port gave notice that the lease agreement was terminated pursuant to 11 U.S.C. § 365(d)(4). No motion was made by the Debtor within those sixty days to either assume or reject the lease. The parties filed cross motions for summary judgment, each asking for declaratory judgement on whether the lease had been terminated.

On April 23, 1990, the bankruptcy court granted Port’s cross-motion, holding that the lease agreement between Waterfront and Port had been terminated. Waterfront, City and Bank (collectively referred to as “Appellants”) now appeal.

ISSUE

Whether the bankruptcy court erred in granting Port’s cross-motion for summary judgment declaring the lease agreement between Waterfront and Port to be terminated by 11 U.S.C. § 365(d)(4).¹

STANDARD OF REVIEW

An order granting summary judgment is reviewed de novo. In re Pacific Express, Inc., 780 F.2d 1482, 1484 (9th Cir.1986); In re Baird, 114 B.R. 198, 201 (9th Cir. BAP 1990).

The interpretation of section 365(d)(4) is a question of law reviewed de novo. In re Moreggia & Sons, Inc., 852 F.2d 1179, 1181 (9th Cir.1988); In re Holm, 931 F.2d 620, 622 (9th Cir.1991).

DISCUSSION

A. 11 U.S.C. § 365(d)(4) APPLIES TO THIS LEASE

The Appellants contend that the subject lease agreement falls outside the operation of 11 U.S.C. § 365(d)(4) because it is not a bona fide lease. Citing In re Moreggia & Sons, Inc., 852 F.2d 1179 (9th Cir.1988), the Appellants argue that the substance of this transaction is not that of lessor-lessee and therefore not subject to the requirement to assume the lease within sixty days. The facts presented in Moreggia are entirely different from those of the case before us.

In Moreggia, at the time of filing bankruptcy, the debtor had no further obligation to pay anything: “Moreggia’s interest is a prepaid right of possession for a substantial future term, ... with no material future obligations.” Moreggia, 852 F.2d at 1186 (emphasis included). Moreg-gia’s obligation to pay “rent” had ceased when the lessor retired its bond indebtedness. The agreement in Moreggia substantially differs from a typical lessor-lessee transaction in that the lessor’s rights of occupancy were in no way contingent or predicated on continuing payment of rent: “The basic rental payments were not related to the value of the possessory right. The bond indebtedness has since been retired.” Moreggia, at 1184.

Here, the Debtor was required to pay rent based on 1) the pro-rata share of the Harbor Area lease as established by the Washington State Department of Natural Resources and 2) a percentage of sublease income including 7% of all professional office subleases, 1% of gross sales for retail subleases, 0.75% of gross restaurant revenues up to $1.5 million and 1.5% thereafter, with a minimum rent of $15,000 per year. The rent was subject to renegotiation every five years.

The remaining provisions of the lease are typical of a landlord-tenant relationship. We see no similarity to the agreement found by the Moreggia court to be outside § 365(d)(4) because the Moreggia agreement required no material future obligations. The Debtor here has all the usual obligations of a tenant. The Appellants’ efforts to minimize them are unconvincing. This agreement is subject to the provisions of § 365(d)(4).

B. MOREGGIA DOES NOT EXTEND EQUITABLE CONSIDERATIONS TO PREVENT FORFEITURES UNDER 11 U.S.C. § 365(d)(4)

Contrary to the Appellants’ broad reading, the Moreggia court did not apply equity to avoid a forfeiture resulting from the application of § 365(d)(4). The Moreggia court’s invocation of equitable powers was much more narrow. The Moreggia court “invoked its equitable powers to look through the form to the substance of the transaction.” In re Moreggia & Sons, 852 F.2d 1179, 1185-86 (9th Cir.1988) (emphasis added). The Moreggia ruling was simply that the lease in question was not a bona fide lease subject to § 365(d)(4). Moreggia should not be so broadly interpreted as to permit circumvention of the straightforward provisions for assumption or rejection of unexpired leases.

To apply equitable considerations to avoid a forfeiture where a debtor fails to assume a lease under 11 U.S.C. § 365(d)(4) would be to gut this section of the Code. There is always a forfeiture of the lease under § 365(d)(4) and contrary to the dissent’s position, there is no forfeiture exception under § 365(d)(4).

C. REJECTION OF THE LEASE IS TERMINATION OF THE LEASE

The argument that the Debtor failed to give the Appellants notice and an opportunity to cure is without merit. There was no breach of the lease. All payments due under the lease were current. There was no default for the Appellants to cure.

When the Debtor failed to assume the lease within the 60 day deadline, the lease was deemed rejected as a matter of law. 11 U.S.C. § 365(d)(4). The Ninth Circuit has clearly ruled on the issue in this case: once rejected, the lease was terminated. Sea Harvest Corp. v. Riviera Land Co., 868 F.2d 1077, 1080 (9th Cir.1989).

The Debtor was then obligated to surrender the premises to the lessor. 11 U.S.C. § 365(d)(4). The Appellants’ argument that the lease was not “terminated” because the lease provides the Debtor 90 days to dismantle and remove the buildings it had constructed is also without merit. The Debtor uses this lease provision to bootstrap its argument by asserting that because immediate surrender after rejection of the lease is not enforceable legally or practically, termination is not possible.

This lease provision only comes into effect upon termination of the lease. By applying circular reasoning, the Debtor is attempting to use a post-termination right to assert that the lease may not be terminated by virtue of that provision. Inclusion of the lease provision allowing the Debtor 90 days to dismantle its improvements does not prohibit application of § 365(d)(4) to this lease. The Debtor got exactly what it bargained for in the lease agreement.

In summary, the facts of this case are straightforward — the Debtor failed to assume the unexpired lease. Under the Code, it is deemed rejected and terminated and the Debtor is obligated to immediately surrender possession. The fact that the Debtor is unable to remove its improvements is irrelevant to the operation of the provisions of § 365(d)(4).

CONCLUSION

We find that Waterfront’s failure assume or reject the lease within the sixty days prescribed by 11 U.S.C. § 365 effectively terminated the lease agreement. We find that the bankruptcy court did not err in granting summary judgment and accordingly AFFIRM.

1 . Unless otherwise indicated, all section references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1330.