Opinion
NO. 301-11305
March 26, 2003
MEMORANDUM OPINION
This matter is before the Court upon the debtor's Motion in Limine as to the proffered experts of Bakersfield Grand Canal, LLC (hereinafter "Grand Canal"). For the reasons below, the Court finds that the debtor's motion should be granted.
I. BACKGROUND
On March 20, 1997, the debtor and Grand Canal entered into a commercial lease (hereinafter "Lease") for a proposed theater in a proposed shopping center in Bakersfield, California. The theater and shopping center were never constructed, and Grand Canal asserts that the debtor breached the Lease by improperly terminating the Lease and by failing to construct a theater as was required. The debtor objects to the claim, asserting that it properly terminated the Lease in conformity with the terms of the Lease.
In accordance with the discovery deadlines set forth in this matter, Grand Canal disclosed the following experts: (1) a property appraisal report by David A. Zoraster, valuing the property as of October 15, 1999, and estimating the prospective future value of the property, and (2) a report by Patricia C. Williams on the present value of rentals and interest based on the Lease. Moreover, according to the debtor's motion, Grand Canal filed a supplemental expert disclosure consisting of an appraisal report by William H. Curtis estimating the "Market Value As Proposed . . . of the Leased Fee Interest on the property."
No supplemental disclosure is in the Court's file.
In response to Grand Canal's disclosures, the debtor filed this Motion in Limine. In the motion, the debtor asserts that, assuming Grand Canal is successful in proving that the debtor breached the Lease, expert testimony regarding the quantum of recovery is unhelpful and inadmissible because the allowed amount of damages is controlled by 11 U.S.C. § 502(b)(6).
Grand Canal presents two arguments in support of the admissibility of their expert testimony. First, Grand Canal asserts that equity mandates the finding of an exception to 11 U.S.C. § 502(b)(6) under the facts of this case, making Grand Canal's proposed expert testimony admissible. In addition, Grand Canal submits that the Lease is actually two separate agreements: an agreement to construct the premises and an agreement to lease the premises. Grand Canal asserts that 11 U.S.C. § 502(b)(6) does not apply to the construction agreement within the Lease. Thus, Grand Canal argues that its expert witnesses should be allowed to testify as to damages caused by the alleged breach of the construction agreement.
II. DISCUSSION
The admissibility of expert testimony is governed by Federal Rule of Evidence 702:
If scientific, technical, or other specialized knowledge will assist the trier of fact to understand the evidence or to determine a fact in issue, a witness qualified as an expert by knowledge, skill, experience, training, or education, may testify thereto in the form of an opinion or otherwise. . . .
In deciding whether Grand Canal's witnesses would assist the Court, the central issue is whether the cap set forth in 11 U.S.C. § 506(b)(2) regarding lease termination damages is applicable to Grand Canal's claim.
A. EXCEPTION TO 11 U.S.C. § 502(b)(6)
Grand Canal argues that the cap set out in 11 U.S.C. § 502(b)(6) was intended to reflect the equities typically present in cases in which the debtor is a bankrupt lessee of real property which will be returned to the landlord claimant once the lease is terminated. Grand Canal points out that because of the debtor's termination of the Lease, Grand Canal never took title to the real property. Therefore, according to Grand Canal, because it has no real property to relet, it has no ability to mitigate its damages. It is this inequity that Grand Canal asks the Court to take into consideration in deciding whether to cap its damages under 11 U.S.C. § 502(b)(6).
In support of its argument that the equities of this case should be considered, Grand Canal cites to In re Danrik, Inc., 92 BR. 964 (Bankr. N.D. Ga. 1988). However, this case does not support Grand Canal's position. In In re Danrik, Inc., the debtor was a guarantor rather than a lessee, and the court found that 11 U.S.C. § 502(b)(6) "does not expressly include or exclude from its application claims of a landlord in the Chapter 11 case of a lease guarantor." Id. at 967. Only after finding that 11 U.S.C. § 502(b)(6) did not "literally" apply to a lease guarantor did the court then considered the equities of the particular case, including the fact that all other claims had been paid in full, that the lessee itself had not sought bankruptcy protection, and that the claim was not disproportionately large. Id. at 972.
While the cap may not apply literally to a lease guarantor, it is clear from the language of 11 U.S.C. § 502(b)(6) that it does apply to claims against a debtor lessee. "There is simply nothing in the plain language of § 502(b)(6) to suggest that a bankruptcy court may depart from the application of the cap on a lessor's claim any time the debtor is solvent or the court otherwise believes the equities of the case might warrant such a departure." In re Federated Dept. Stores, Inc., 131 B.R. 808, 817 (Bankr. S.D. Ohio 1991). See also In re Farley, Inc., 146 B.R. 739, 745 (Bankr. N.D. Ill. 1992) (holding that a claim based on any breach of a lease agreement is limited by the cap set out in § 502(b)(6) regardless of whether the debtor is a lessee or a guarantor); In re Thompson, 116 B.R. 610, 612 (Bankr. S.D. Ohio 1990) (criticizing the decision in Danrik).
As the overwhelming majority of courts have held, this Court finds that to the extent a claim is based on a lessee's termination of a lease, the cap applies without exception. There is just no credible authority for Grand Canal's proposition that this Court should carve out an exception to 11 U.S.C. § 502(b)(6) based on the equities of the case. Where the legislature has already spoken, it is inappropriate to consider the equities of a particular case. In re Southern Cinemas, Inc., 256 B.R. 520, 535 (Bankr. M.D. Fla. 2000).
However, the Court's inquiry does not end here. If the Lease is in fact two separate agreements, then Grand Canal might be entitled to introduce expert testimony regarding the extent of damages caused by the alleged breach of the construction portion of the agreement.
B. BIFURCATION OF THE LEASE
Grand Canal argues that although the agreement is called a Lease, it is actually two separate and distinct agreements: an agreement to construct a movie theater and an agreement to lease a movie theater. Thus, Grand Canal submits that the cap of 11 U.S.C. § 502(b)(6) does not apply to damages caused by the termination of the construction portion of the Lease.
At the hearing of this matter, the Court asked counsel for Grand Canal whether for purposes of 11 U.S.C. § 502(b)(6). there was a difference between the construction covenants of this Lease and covenants for repair and maintenance. This Court has, almost simultaneously with this Memorandum Opinion, entered a Memorandum Opinion and Order in this case regarding claims litigation involving Queensgate Associates, LLC adopting the rationale enunciated in Kuske v. McSherdian (In re McSherdian), 184 B.R. 91 (B.A.P. 9th Cir. 1995) and In re Mr. Gatti's, Inc., 162 B.R. 1004 (Bankr. W.D. Tex. 1994) to hold that a debtor's rejection of a lease results in the breach of all the debtor's obligations under a lease, damages for which are capped by 11 U.S.C. § 502(b)(6). Grand Canal's counsel responded with its argument addressed above that the construction portions of the subject lease are a separate agreement from the Lease and, therefore, damages for breach of the construction agreement are not capped by 11 U.S.C. § 503(b)(6).
In the context of § 365, courts have held that more than one contract may be contained in a single document. See Sumitomo Trust Banking Co., Ltd. v. Holly's, Inc. (In re Holly's, Inc.), 140 B.R. 643, 681 (Bankr. W.D. Mich. 1992). Thus, when a court determines that there are separate contracts, the trustee or debtor-in-possession may reject or assume each contract separately. For example, in In re Plitt Amusement Co. of Washington, Inc., 233 B.R. 837 (Bankr. C.D. Calif. 1999), the court found that a trustee or debtor-in-possession is entitled to assume or reject a lease independently as to each business establishment that is property of the estate. Id. at 848. Accordingly, the court held that the trustee could reject or assume the lease for an individual theater without assuming or rejecting the leases for other theater locations that were part of the master agreement. Id.
In contrast, in In re Plum Run Service Corp., 159 B.R. 496 (Bankr. S.D. Ohio 1993), the bankruptcy court held that a debtor could assume some obligations and reject others in a government maintenance contract. According to the court, the agreement "although comprised of eleven functions, was a single, indivisible agreement, with no appropriate way to segregate the functions into independent, separately assumable contracts." Id. at 499.
We are not dealing here with assumption or rejection of the Lease in this case. Instead the issue here is whether the statutory cap of 11 U.S.C. § 502(b)(6) limiting damages resulting from lease terminations applies to part of the subject lease but not to the construction part. However, these § 365 cases are helpful in evaluating Grand Canal's argument. That is, if the Lease in question is two separate agreements as Grand Canal argues, then a debtor under an identical lease could assume the "lease" portion and reject the construction portion or vice-a-versa. That this Lease is an indivisible agreement is clearly apparent since without construction of the theater there would be nothing for the debtor to lease, and conversely, neither the debtor nor Grand Canal would have agreed to the construction of a theater that the debtor would not have occupied for the term. That this is an indivisible lease agreement is further supported by the analysis utilized by the courts in the assumption/rejection context.
"Whether multiple obligations in an agreement or transaction are severable is a question of state law." Moore v. Pollack (In re Pollack), 139 B.R. 938, 940 (B.A.P. 9th Cir. 1992) (§ 365 case) (citation omitted). Under California, which is applicable in this case pursuant to Section 23.09 of the Lease, "this is a question of the parties' intent based upon the substance and language of the agreement at issue." Id. To determine intent regarding severability of contractual obligations, courts have found three factors useful:
(1) Whether the nature and purpose of the obligations are different;
(2) whether the consideration for the obligations is separate and distinct; and
(3) whether obligations of the parties are interrelated.
Id. at 940-41 (citing Byrd v. Gardinier, Inc. (In re Gardinier, Inc.), 831 F.2d 974, 976 (11th Cir. 1987). See also In re Holly's Inc., 140 B.R. 643, 681.
In reviewing the Lease in question, this Court finds that the parties intended there to be one lease agreement. First, the document is entitled "Lease between Bakersfield Grand Canal, LLC and Regal Cinemas, Inc.," indicating that the document was intended to be a single, all encompassing lease agreement. In addition, the obligations and consideration under the construction and rental portions of the Lease are completely integrated, as shown by Section 2.01 of the Lease, which provides:
LANDLORD, in consideration of the "Rent" (defined in Section 5.01) to be paid and the covenants to be performed by TENANT, does hereby grant, demise and lease unto TENANT the Premises, and TENANT hereby leases and takes the Premises from LANDLORD, for the Term (hereinafter defined), at the rental, and upon the covenants, conditions and other terms herein set forth. LANDLORD hereby grants to TENANT all easement rights and privileges appurtenant thereto which shall include the right of use of the Parking Retention Areas and all other Common Areas by TENANT and its patrons, customers and employees. (Emphasis added.)
Moreover, pursuant to Section 4.01, the "Term" of the Lease is the "Interim Term" (defined as "the period commencing on the date of this Lease and ending on the day immediately preceding the Rent Commencement Date") followed immediately by the period of the "Rent Term" (defined as "the period commencing on the Rent Commencement Date and ending on the Expiration Date"). Thus, the Term of the Lease begins as of the signing of the Lease and continues until the end of the rental period which is "twenty (20) years following the Rent Commencement Date or if the Rent Term is extended, the last day of the applicable Extension Period."
A written agreement must be interpreted to give effect to the mutual intent of the parties as it existed at the time, insofar as that intent can be ascertained and is lawful. Ticor Title Ins. Co. v. Rancho Santa Fe Assn., 177 Cal.App.3d 726, 730 (1986). Moreover, "[i]f contractual language is clear and explicit, it governs." Bank of the West v. Superior Court, 2 Cal.4th 1254, 1264 (1992). In other words, if the contract language "is clear and explicit and does not lead to absurd results," the court should "ascertain intent from the written terms and go no further." Shaw v. Regents of Univ. of California, 58 Cal.App.4th 44, 53 (1997).
In the present case, there is simply nothing within the four corners of the Lease to indicate that the parties intended to create two separate agreements. The Court finds that the agreement is a Lease and that it cannot be bifurcated into two separate agreements. The sections of the document are interwoven and inseparable, and the debtor's construction obligations along with the rent, are consideration for Grand Canal's agreement to lease. Accordingly, the construction covenants are no different than covenants for repair and maintenance — they cannot stand as separate contracts.
Accordingly, the cap for lease damages set forth in 11 U.S.C. § 502(b)(6) applies to Grand Canal's entire claim, and expert testimony is unnecessary and unhelpful in application of the cap. See Fed.R.Evid. 702.
III. CONCLUSION
Grand Canal's entire proof of claim is subject to the lease termination damages cap set forth in 11 U.S.C. § 502(b)(6). Accordingly, the proffered experts on property values and lost profits would not assist the Court in application of § 502(b)(6). Thus, the Court finds that the debtor's Motion in Limine should be granted and that Grand Canal's expert testimony regarding the quantum of recovery is inadmissible.
An appropriate order will enter.
ORDER
For the reasons set forth in the Memorandum Opinion entered contemporaneously with this Order, the debtor's Motion In Limine is GRANTED.
It is so ORDERED.