Решение суда
Rose v. JAGA, Inc. et al., гражданское дело № 5:05CV166 (N.D. W.Va.), апелляция по делу о банкротстве № 02-51295: меморандум-заключение и определение (Memorandum Opinion and Order) о частичной отмене решения в порядке упрощённого производства (summary judgment) и возвращении дела в суд низшей инстанции (25 июля 2006 г., док. 8)
US District Court, Northern District of West Virginia [федеральный окружной суд Северного округа Западной Виргинии]; судья Фредерик П. Стамп-младший (Frederick P. Stamp, Jr.)
Апелляция землевладельца в рамках дел корпораций Нью-Вриндавана (New Vrindaban) по Chapter 11 [процедура реорганизации по Кодексу США о банкротстве], касающаяся заключённого в 1968 г. договора сроком на 99 лет в отношении 132 акров. Ничего не зачернено.
Rose v. JAGA, Inc. et al., гражданское дело № 5:05CV166 (N.D. W.Va.), апелляция по делу о банкротстве № 02-51295: меморандум-заключение и определение (Memorandum Opinion and Order) о частичной отмене решения в порядке упрощённого производства (summary judgment) и возвращении дела в суд низшей инстанции (25 июля 2006 г., док. 8)
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IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF WEST VIRGINIA
IN RE:
JAGA, INC., et al. Bankruptcy No. 02-51295 etc.
Debtor.
BETTY C. ROSE,
Plaintiff,
Vv. Civil Action No. 5:05CV166
JAGA, INC.,
INTERNATIONAL SOCIETY FOR KRISHNA
CONSCIOUSNESS, NEW MATHURA VRINDABAN,
NRS, INC.,
INTERNATIONAL SOCIETY FOR KRISHA
CONSCIOUSNESS OF WEST VIRGINIA,
NEW VRINDABAN COMMUNITY, INCORPORATED
AND CATHEDRAL OF HEALING, INC.,
WEST VIRGINIA BUREAU OF EMPLOYMENT PROGRAMS,
TORT CLAIMANTS and CLASS ACTION PLAINTIFFS,
Defendants.
MEMORANDUM OPINION AND ORDER
VACATING IN PART SUMMARY JUDGMENT
AND REMANDING FOR FURTHER CONSIDERATION
Betty C. Rose (“Rose”), Trustee of the Tatia Rose Trust,
appeals an order from the bankruptcy court that granted a motion
for summary judgment in favor of JAGA, Inc. and associated debtors
(collectively, “Debtors”),' and overruled Rose’s objection that a
1968 Land Agreement (“Agreement”) should have been either
‘Associated debtors include International Society for Krishna
Consciousness New Mathura Vrindaban, NRS, Inc., International
Society for Krishna Consciousness of West Virginia, New Vrindaban
Community, Inc. and Cathedral of Healing, Inc.
automatically terminated as an unassumed lease for nonresidential
property pursuant to 11 U.S.C. § 365(d) (4), or terminated for
breach of an implied covenant in the lease, itself. For the
reasons stated below, this Court finds that this action should be
remanded to the United States Bankruptcy Court for the Northern
District of West Virginia for further consideration of the
Agreement pursuant to West Virginia law and § 365(d) (4).
I. Background
Rose’s appeal concerns the status of 132 acres of real
property in Marshall County, West Virginia. In 1968, the property
was transferred from Richard Rose, Jr. and Phyllis E. Rose to
Howard Wheeler pursuant to a 99 year Agreement titled a “lease.”
Under the terms of the Agreement, Wheeler paid a total of
$4,000.00, of which $1,500.00 was paid upon execution of the
Agreement and the remaining $2,500.00 was paid over the first five
years of the Agreement. The Agreement also required Wheeler to pay
all real estate taxes.
Assignment rights were limited by the terms of the Agreement.
Wheeler needed permission from the Roses, their heirs or
representatives if he wished to assign the Agreement to third
parties, in general. However, the Agreement freely granted Wheeler
the right to assign his rights under the Agreement without
permission to “a religious foundation, or religious institution, or
religious corporation, or any group that shall hold generally to
the philosophic concept of maintaining a religious retreat or
philosophic Ashram See Agreement, Bankr. Docket, Item 5,
ao
Ex. A. On February 1, 1974, Wheeler assigned his interests under
the Agreement to the New Vrindaban Community, Inc.
On April 16, 2002, the Debtors, including the New Vrindaban
Community, Inc. to whom the property was assigned, filed for
Chapter 11 bankruptcy protection in the United States Bankruptcy
Court for the Northern District of West Virginia. On August Il,
2004, the Debtors filed their plan and disclosure statement.
As stated above, Rose objected to the Debtors’ plan and
disclosure statement maintaining that the 1968 Agreement was
improperly characterized. On cross-motions for summary judgment,
the bankruptcy court determined that the Agreement was not a true
lease under federal law for purposes of §$ 365(d) (4), and therefore,
that the assumption or rejection language of that provision was
inapplicable. Moreover, the bankruptcy court rejected Rose’s
arguments that the 1974 assignment was improper and that the
Agreement was forfeited for violation of the covenant against
illegal or immoral activities.
On appeal, Rose argues that the bankruptcy court erred by
failing to find the Agreement to be a true lease triggering the
default termination provision of § 365(d) (4). In addition, Rose
argues that summary judgment should not have been granted in favor
of the Debtors because issues of material fact exist as to whether
an alleged improper assignment terminated the Agreement and whether
alleged violations of implied covenants terminated the Agreement.
Il. Standard of Review
On appeal from the bankruptcy court, the district court acts
as an appellate court and reviews the bankruptcy court’s findings
of fact for clear error and conclusions of law de novo. See In re
Johnson, 960 F.2d 396, 399 (4th Cir. 1992); Travelers Ins. Co. v.
Bryson Prop., XVIII (In re Bryson Prop., XVIII), 961 F.2d 496, 499
(4th Cir.), cert. denied sub nom., Bryson Prop., XVIII v. Travelers
Ins. Co., 506 U.S. 866 (1992). Accordingly, this Court reviews de
novo the bankruptcy court’s application of federal law to find that
the Agreement was not a true lease for purposes of § 365(d) (4).
III. Discussion
A. Applying State Law to Determine if True Lease
In the bankruptcy court’s August 17, 2005 order denying
summary judgment in favor of Rose and granting summary judgment in
favor of the debtor, the bankruptcy court reasoned that if the
Agreement was a true lease, the assumption and rejection provisions
of § 365(d)
(4) would apply and the Court would consider whether the
property was residential or nonresidential, whether the 1974
assignment was valid and whether any covenants were broken that
could have resulted in forfeiture of rights under the Agreement.
(Order at 2.) If the Agreement was not a true lease, the
bankruptcy court found that § 365(d) (4) would be inapplicable, the
question of whether the lease was residential or nonresidential
would be irrelevant, and the Court would need only consider whether
the 1974 assignment was valid and whether any covenants were
broken.
Section 365(d) (4) states in pertinent part:
[I]f 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.
id. (emphasis added).
There is no dispute that the bankruptcy trustee neither
rejected nor assumed the 1968 Agreement. Instead, the focus is on
the automatic termination provision and the meaning of “lease” in
§$ 365 (d) (4). The bankruptcy court held that state law was not
applicable to the definition of lease for purposes of § 365(d) (4).
This Court disagrees.
As a general rule, the determination of property rights in the
assets of a bankrupt’s estate is a matter of state law. In re
Merrit Dredging Co., Inc., 839 F.2d 203, 205 (4th Cir. 1988). The
Fourth Circuit elaborates:
Property interests are created and defined by state law.
Unless some federal interest requires a different result,
there is no reason why such interests should be analyzed
differently simply because an interested party is
involved in a bankruptcy proceeding.
Merrit Dredging at 206 (citing Butner v. United States, 440 U.S.
48, 55 (1979)).
Turning to the Bankruptcy Code, this Court recognizes that the
term “lease” is not specifically defined. However, this Court
acknowledges that § 365(d)
(4) requires for its operation, and as a
matter of federal law, a substantive lease. As Judge Easterbrook
explains, it is helpful in defining “lease” in § 365(d) (4) to
consider the distinction that the Code makes between new expenses
and old debt. See United Airlines, Inc. v. HSBC Bank USA, N.A.,
416 F.3d 609, 612-13 (7th Cir. 2005). When a firm emerges from
bankruptcy, it is generally required to cover all new expenses
while debt acquired before bankruptcy is adjusted. In this vein,
Section 365, which deals with leases, classifies payments
for retaining airplanes and occupying business premises
as new expenses, just like payments for labor and jet
fuel. The rules for credit, by contrast, treat debt
service as an “old” expense to be adjusted to deal with
financial distress.
Id. at 613. “This works nicely when rent under a lease really does
pay for new inputs. . . [b]ut “rent” that represents the cost of
funds for capital assets or past operations .. . has the quality
of debt.” Id. (emphasis included). Thus, to treat as a lease an
instrument that, in substance, creates a security interest is to
frustrate an important distinction made in the bankruptcy code
between new expenses and old debt.
Accordingly, federal law requires a court to interpret a
“lease” in § 365(d)
(4) as meaning a lease in substance, not merely
in form. Nevertheless, to determine the exact substantive formula
that constitutes a lease from state to state, federal law is silent
and a court must return to state law for guidance. See Merrit
Dredging at 206; Butner at 55; see e.g. United Airlines at 615;
Baker v. Harris Pine Mills, 862 F.2d 217, 220 n.5 (9th Cir. 1988).
It is at this juncture that this Court departs from the
bankruptcy court’s rationale. Relying on United Airlines and In re
Moreggia & Sons, Inc., 852 F.2d 1179 (9th Cir. 1987), the
bankruptcy court found that state law was irrelevant in its
analysis of the lease at issue in this action. To the contrary,
United Airlines states that, “because nothing in the Bankruptcy
Code says which economic features of a transaction have what
consequences, we turn to state law.” United Airlines at 615.
Similarly, the bankruptcy court’s reliance on In re Moreggia
appears to be misplaced. Only four months after the opinion in In
re Moregqgia, the Ninth Circuit turned to Oregon law to define an
agreement for purposes of § 365. Baker at 220. The Ninth Circuit
explained that, while federal law requires a lease to be a true
lease in economic substance, “what constitutes a lease or a
landlord tenant relationship as a matter of economic substance,
depends on state law, not on the Bankruptcy Code, absent statutory
authority.” Id. at 220 n.5 (citations omitted)
.*
“Baker attempts to distinguish In re Moreqgia by indicating
that § 365(d)
(4) may require further analysis where an instrument
is a lease under state law, but lacks a landlord tenant
In this case, the Agreement involved real property in West
Virginia. While this Court is not critical of elements applied by
the Second Circuit upon which the bankruptcy court relied to find
no lease, this Court recognizes that “federal judges are not the
source of state law or even its oracles.” United Airlines at 616.
Accordingly, this Court finds that the bankruptcy court should have
considered West Virginia law in order to determine whether the
Agreement constituted a lease so long as West Virginia identifies
leases in a functional rather than formal manner. This Court
believes that it does.
While West Virginia gives weight to the words in an agreement
used by the parties, a formal approach, its courts also recognize
that “each case must in great measure depend on its own peculiar
circumstances.” Minor v. Pursglove Coal Mining Co., 161 S.E. 425,
426 (W. Va. 1931); see also First Huntington Nat. Bank v. Gideon-
Broh Realty Co., 79 S.E.2d 675, 679-80 (W. Va. 1954). “When it
appears from the context that another meaning was intended [by an
Agreement] such [formal] words will not be applied in their
relationship, creates no executory burdens in the debtor, destroys
the intent behind § 365(d) (4) and fails to pass muster under
certain equitable considerations. Baker at 220 n.6. United
Airlines explains the distinction succinctly: “A state law that
identified a ‘lease’ in a formal rather than a functional manner
would conflict with the Code, because it would disrupt the federal
system of separating financial from economic distress; a state
approach that gives a little more or a little less weight to one of
several ‘factors’ does not conflict with any federal rule, because
there is none with which it could conflict.” Id. at 615 (emphasis
included) (citations omitted).
technical sense.” Lane v. Board of Educ. of Lincoln County, 131
S.E.2d 165, 169 (W. Va. 1963).
Because this Court believes that West Virginia considers the
substantive nature of an instrument in determining whether it
constitutes a lease, this Court believes that this action must be
remanded for further consideration of the 1968 Agreement pursuant
to West Virginia law.°*
B. Assignment and Forfeiture Holding
As stated above, Rose also argues that the bankruptcy court
erred in its findings with regard to the 1974 assignment of the
Agreement and the covenant against illegal and immoral activity.
This Court finds no error in the bankruptcy court’s analysis on
either of these remaining issues. First, this Court agrees that
the 1974 assignment to the New Vrindaban Community, Inc. complied
with the Agreement’s provision that any assignment be made to a
religious foundation, institution, corporation or group generally
holding to the philosophic concept of maintaining a religious
retreat or philosophic Ashram. Second, this Court agrees that
forfeiture of the Agreement is not available for the alleged breach
of an implied covenant in this particular case. See McKenzie v.
Cherry River Coal & Coke Co., 466 S.E.2d 810, 817 (W. Va. 1995).
°Tt should be noted that if the bankruptcy court finds the
Agreement to be a lease under West Virginia law, it should address
whether the lease is residential and apply §$ 365(d)(4) if
applicable.
Accordingly, this Court affirms the bankruptcy court’s holding on
these two points.
IV. Conclusion
For the reasons stated above, the order of the United States
Bankruptcy Court for the Northern District of West Virginia
granting summary judgment in favor of the debtor is hereby VACATED
and this matter is REMANDED to the Bankruptcy Court for further
consideration consistent with this memorandum opinion and order.
IT IS SO ORDERED.
The Clerk is DIRECTED to transmit a copy of this memorandum
opinion and order to counsel of record herein and to the Clerk of
the United States Bankruptcy Court for the Northern District of
West Virginia. It is further DIRECTED that this appeal be
DISMISSED and STRICKEN from the active docket of this Court.
DATED: July 25, 2006
/s/ Frederick P. Stamp, Jr.
FREDERICK P. STAMP, JR.
UNITED STATES DISTRICT JUDGE
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