Opinion
Case No. 399-02649, Jointly Administered
October 24, 2002
Mid-America Asset Management, Inc. ("Mid-America"), the management agent for the Owner/Landlord ("Owner") of the Burbank Town Shopping Center in Burbank, Illinois, by and trough its attorneys, Schenk, Annes, Brookman Tepper, Ltd., and Baker, Donelson, Bearman Caldwell, hereby submits its Memorandum in Support of its conditional objection to Debtors' Real Estate Notice concerning the sale of the property described as Service Merchandise Store No. 191, Burbank, Illinois, dated September 16, 2002 ("Real Estate Notice"), and in support thereof states as follows:
INTRODUCTION AND FACTS
Mid-America is the management agent for the Burbank Town Shopping Center in Burbank, Illinois. On June 20, 1984, the Owner and the Debtors entered into a sale agreement for the purchase of the land on which the Service Merchandise Store in Burbank Town Center is located (the "Property"). The land is an out parcel located within the shopping center. The Property is encumbered by a Declaration of Protective Covenants, Restrictions, and Easements Agreement dated December 8, 1983, a Construction, Operation and Easement Agreement dated June 20, 1984, and a Supplemental Agreement dated June 26, 1984 (collectively, the "Reciprocal Easement Agreement" or "REA"), copies of which are included in the Exhibits to this Memorandum as Exhibit "A" and are incorporated herein by reference.
The Debtor has paid all post-petition amounts due under the REA but failed to pay pre-petition charges due in the amount of $44,455.66, Mid-America timely filed a cure claim for this pre-petition amount due the Owner and it is the position of Mid-America that the REA is an executory contract for which the Debtor must cure any default before it can assume and transfer the REA. Mid-America also seeks payment of its legal fees to enforce its rights under the REA as an Administrative Claim and pursuant to the terms of the REA.
There are approximately $2,000 to $3,000 in unpaid post-petition common area maintenance charges due under the REA which the Debtor and Owner are reviewing and will resolve. All other post-petition changes have been paid by the Debtor.
The Debtor, by its Real Estate Notice dated September 16, 2002, a copy of which is included in the Exhibits to this Memorandum as Exhibit "B" and is incorporated herein by reference, seeks to transfer the Property and assume and assign the Reciprocal Easement Agreement without curing the pre-petition defaults.
APPLICABLE LAW AND THE RECIPROCAL EASEMENT AGREEMENT A. The Applicable Bankruptcy Code
The statutory provisions of 11 U.S.C. § 365(b)(1) are clear with respect to the assumption and assignment of executory contracts:
If there has been a default in an executory contract or unexpired lease of the debtor, the trustee may not assume such contract or lease unless, at the time of assumption of such contract or lease, the trustee (A) cures, or provides adequate assurance that the trustee will promptly cure, such default; (B) compensates, or provides adequate assurance that the trustee will promptly compensate, a party other than the debtor to such contract or lease, for any actual pecuniary loss to such party resulting from such default; and (C) provides adequate assurance of future performance under such contract or lease.
B. The Reciprocal Easement Agreement
The Reciprocal Easement Agreement provides in part for:
a. the establishment of certain Detention Ponds pursuant to the applicable Detention Pond Ordinances and each party, including the Debtor, must pay its share of the cost of maintenance;
b. the ingress and egress of pedestrian and motor vehicle traffic;
c. a mutual easement for the operation, maintenance and repair of various utilities, over an upon the collective property; and,
d. the maintenance of roadways and paved areas for the access of pedestrians and motor vehicles.
(Exhibit "A", Declaration of Protective Covenants, Restrictions and Easements, at pages 2-3, 6-12).
The Debtor and Landlord have ongoing obligations under the Reciprocal Easement Agreement:
a. to repair, manage and maintain the utilities located on their respective properties in conformity with first-class shopping center standards;
b. to abide by the terms of the Reciprocal Easement Agreement with respect to the erection of buildings and signs and the permitted uses of the property;
c. to provide for the maintenance of their property;
d. to properly insure the property against liability and indemnify the other parties; and,
e. Service Merchandise has the ongoing obligation to pay its proportionate share of Common Area Maintenance, Real Estate Taxes, and other maintenance obligations and charges.
(Exhibit "A", Declaration of Protective Covenants, Restrictions and Easements at pages 13-19, Supplemental Agreement, at pages 3-5).
Section 9.03 of the Reciprocal Easement Agreement states:
All restrictions, conditions, covenants, easements and agreements contained herein or granted hereby are made for the direct, mutual and reciprocal benefit of each and every part and portion of the Property; shall create mutual, equitable servitudes upon each portion of the Property in favor of any other portion of the Property; shall create reciprocal rights and obligations between the respective owners of all portions of the Property and privity of contract and estate between or among all grantees of said portions of the Property and their respective beneficiaries, heirs, successors and assigns; and shall, as to the owner of each portion of the Property and its respective beneficiaries, heirs, successors and assigns, operate as covenants running with the land for the benefit of all other portions of the Property. (Exhibit "A", Declaration of Protective Covenants, Restrictions and Easements at pages 41-42).
ARGUMENT
A. The Debtor Has Not Objected To The Claims Filed By Mid-America
Mid-America filed its Proof of Claim for pre-petition arrearages under the Reciprocal Easement Agreement in the amount of $44,155.66. The claim was scheduled by the claims agent with "5046" as the assigned claim number, a copy of which is included in the Exhibits to this Memorandum as Exhibit "C" and is incorporated herein by reference.
Mid-America filed its Cure Proof of Claim for pre-petition arrearage under the Reciprocal Easement Agreement in the amount of $44,155.66. The claim was scheduled by the claims agent with "5047" as the assigned claim number, a copy of which is included in the Exhibits to this Memorandum as Exhibit "D" and is incorporated herein by reference.
The basis for these claims is that the pre-petition amounts due under the Reciprocal Easement Agreement remain unpaid. Pursuant to 11 U.S.C. § 365, the Debtor must assume or reject all unexpired leases and executory contracts. However, the Debtor wishes to sell the Property and simultaneously transfer to the Designated Rights Purchaser the benefits afforded the Debtor under Reciprocal Easement Agreement. Under the Bankruptcy Code, the Debtor may not transfer an interest in an executory contract unless it cures the pre-petition defaults. Because the Debtor has not objected to the claims filed by Mid-America and now seeks to assign this executory contract, it has waived its right to object and must pay the cute amounts.
B. The Debtors' Pleadings Acknowledge That The REA Is Executory.
The Debtor, in its pleadings in this matter, has already stated that "REAs" are executory contacts, yet it now seeks to avoid its obligations under the Reciprocal Easement Agreement.
Pursuant to the Debtors' Motion for Order Pursuant to 11 U.S.C. § 363 and Bankruptcy Rule 6004(A) Authorizing and Approving the Sale of Designation Rights with Respect to Substantially All of the Debtors' Real Estate Assets. Subject to Higher and Better Offers; et al., the Debtor sought and received the Court's approval to formalize bidding procedures and the treatment of Debtors' property and property interests in the impending sale and auction. On page 33 of the Motion, ". . . Debtors request the authorization to assume and assign the underlying leases (the `Leases') and, at the Proposed Purchaser or its designee's election, other contracts, such as Reciprocal Easement Agreements, affecting the Properties (the ` Contracts') to ultimate assignees. Section 365 of the Bankruptcy Code authorizes a debtor to assume and/or assign its executory contracts and unexpired leases subject to the approval of the Bankruptcy Court . . ." [Emphasis added].
Pursuant to Debtors' Motion and for the purposes of the disposition of Debtors' property interests, the Debtor has affirmed that the Reciprocal Easement Agreements, including the REA at Burbank Town Center, are executory contracts and should be treated as executory contracts under the Bankruptcy Code.
The Property held in fee by the Debtor at the Burbank Town Center was included as among those properties to be sold and assigned to the Successful Bidder. Pursuant to the Court's Order and the Debtor's Real Estate Notice, the Property is now to be tranferred to the Designated Rights Purchaser, SM Newco Burbank, L.L.C.
This Court's order of March 16, 2002 provides in part that the Debtor must cure the defaults referenced in the Debtors' Motion. At paragraph 26 the Order Pursuant to 11 U.S.C. § 363 and Bankruptcy Rule 6004(A) Authorizing and Approving the Sale of Designation Rights with Respect to Substantially All of the Debtors' Real Estate Assets, Subject to Higher and Better Offers; and (B) Granting Other Relief, states, "To the extent required by the Bankruptcy Code, the Debtors and/or Successful Bidder shall cure any and all monetary defaults under the marketable Properties at or about the time of their assumption and assignment." (A copy of the Order is included in the Exhibits to this Memonandum as Exhibit "E" and is incorporated herein by reference.
The Reciprocal Easement Agreement is a monetary default arising under one of the Debtors' marketable properties, and therefore must be cured prior to transfer.
C. The Reciprocal Easement Agreement Is Executory Under The Accepted Bankrupcy Definition For Executory Contracts And Pursuant To Related Case Law
An executory contract is one "under which the obligation of both the bankrupt and the other party to the contract are so far unperformed that the failure of either to complete performance would constitute a material breach excusing the performance of the other." Countryman, Vern C., "Executory Contacts in Bankruptcy Pt. 1," 57 Minn. L.Rev. 439 (1973). This definition is accepted by the courts and applied in conjunction with applicable state law.
Where vendors moved to have a Chapter 13 debtor assume or assign an executory real estate installment contract the court held that: "The Bankruptcy Code does not contain an explicit definition of the term `executory contract,' and many courts, including the Seventh Circuit Court of Appeals, have adopted the so-called Countryman definition as reflecting Congressional intent in enacting § 365. In re: Fitch, 174 B.R. 96, 100 (Bankr. S.D. Ill., 1994). Under this definition, there must be significant unperformed obligations on both sides for a contract to qualify as executory. Determination of the significance of the remaining obligations is made by looking to state law, as state law controls with regard to property rights in assets of a debtor's estate." In re: Vinson, 202 B.R. 972, 974 (Bankr. S.D. Ill. 1996). See also In re: Rachels Industries, Inc., 109 B.R. 797, 803-804 (Bankr. W.D.Tenn., 1991), and In re: Monument Record Corp., 61 B.R. 866, 867-868 (Bankr. M.D.Tenn., 1986).
1. The Definition of Executory Contract Applies regardless of whether the contract is a covenant that runs with the land.
This definition has not been applied directly to reciprocal easements. However, courts have applied the same standards to other covenants running with land as well as condominium declarations. For general reference, several scholars have drawn conclusions based upon the holdings of similar cases. See Garfinkel, M., May All or Portions of a Recorded Shopping Center Reciprocal Arrangements be Rejected as an Executory Agreement Under § 365 of the Bankruptcy Code?, 28 Real Property, Probate and Trust Journal 83 (1993). See also Savage, D., Reciprocal Easement Agreements: Assumption and Rejection in Bankruptcy, 19 Real Estate Law Journal 99 (1990).
However, scholars generally agree that the issue is not purely based upon whether an agreement "runs with" or "touches and concerns" the land, but is more related to the question of whether a covenant or encumbrance requires the future performance of both parties. If one or both parties have performed their obligations under the covenant or encumbrance, then it is the same as any other contract where one party has performed — it is not executory. However, simply stating that a covenant runs with the land or was recorded with the property does not establish that it cannot be executory. Courts have held that a covenant is executory where both parties have remaining obligations that they must perform. See Garfinkel, M., May All or Portions of a Recorded Shopping Center Reciprocal Arrangements be Rejected as an Executory Agreement Under § 365 of the Bankruptcy Code?, 28 Real Property, Probate and Trust Journal 83, 93-95 (1993).
2. The litmus test for an executory contract is the presence of ongoing mutual obligations.
Even though an agreement "runs with the land" it does not necessarily mean that the agreement is not executory. Rather, the test is whether both parties have ongoing mutual obligations, as in the case here. In In re: Coordinated Financial Planning Corp. v. McMillan, 65 BR. 711, 714 (Bankr. App. Pan. 9th Cir. Cal., 1986), the Chapter 7 trustee moved to reject as an executory contract a right of first refusal that debtor's predecessors in interest had granted to co-owners of the property. The court held that the agreement giving the co-owners a right of first refusal was ". . . a covenant running with the land and an executory contract which can be rejected by the trustee pursuant to § 365." Id. at 714. Therefore, the test is not whether the easement runs with the land, but whether both parties have ongoing obligations to perform.
Where a reciprocal easement binds both parties to mutual and ongoing obligations, a court should hold that the easement agreement is an executory contract. A restrictive easement that does not bind the parties to ongoing mutual obligations is not executory. In Gouvela v. Tazbir, 37 F.3d 295 (7t Cir., 1994), the Chapter 11 debtor filed a petition to set aside a restrictive, reciprocal land covenant which encumbered her home in an Ohio subdivision and restricted the neighborhood to single-story, residential property. The Debtor wished to use her property as a commercial music store. Unable to operate her store due to the covenant, she filed a Chapter 11 bankruptcy petition.
The trustee in Gouveia argued that the covenant was an executory contract that could be rejected pursuant to § 365. The Seventh Circuit Court of Appeals sustained the decision of the Bankruptcy Court and held that the covenant was not an executory contract because there were no further obligations to be performed by either party. Id. at 298-299.
In contrast with the case at bar, Gouveia is completely different from the facts presented here. First, the court's strongest foundation for the holding of Gouveia is that both parties had completed their obligations to perform. The neighbors had a present night to enjoy their property in a commercial-free neighborhood, but no parties to the covenant were required to do anything at the time the bankruptcy petition was filed. Here, however, both parties have an ongoing present and future obligation to perform under the REA. Both parties must perform or the agreement will be breached. Therefore, the holding in Gouveia is inapplicable.
In a similar case, the Bankruptcy Court for the Southern District of New York held that where the covenant or restriction involved does not require performance by the non-debtor party, the covenant may not be rejected because there are no ongoing mutual obligations. In In re: 523 E. Fifth Street Housing Preservation Development Fund, 79 BR. 568, 572-573 (Bankr. S.D.N.Y., 1987), the court held that a covenant restricting property use to low income housing may not be rejected as executory in that no duties remained for the non-debtor party to perform. However, where the obligations are ongoing as they are in the instant case, the agreement is executory.
3. The Debtor must accept or reject the contract as a, whole.
The Debtor may not reject one part of the Reciprocal Easement Agreement obligation to pay the pre-petition arrearages due) while accepting and assigning the other parts. In re: Case, 91 B.R. 102, 104 (Bankr. D.Colo., 1988). Holding sustained in In re: Ryan, 100 BR. 411, 416 (Bankr. N.D.Ill., 1989). In Case, the Chapter 13 debtors attempted to characterize their condominium declaration as an executory contract so that they could "reject" it while remaining in possession and ownership of the property. The court held that under Colorado state law, the debtor cannot partially reject an executory contract. 91 B.R. at 104.
A condominium declaration is very similar to a reciprocal easement agreement in a shopping center, as here. Both parties generally have ongoing obligations that grant the future right to possession and control and require the payment for and maintenance of common areas. As in Case, the Debtor may not repudiate their obligation to pay and simultaneously retain the benefits of the Reciprocal Easement Agreement. The Debtor may assume in whole or it may reject in whole.
The holding in Case was sustained by the Bankruptcy Court for the Northern District of Illinois in In re: Ryan, 100 B.R. 411, 416 (Bankr. N.D.Ill., 1989). There, the Chapter 7 debtors sought the discharge of post-petition condominium assessments and the contempt order against the condominium association. The Court, citing the decision in Case, held. "If the debtor retains possession of the unit and/or asserts an ownership interest in the property. the condominium declaration has not been rejected. If, on the other hand, the debtor surrenders possession and tenders the ownership interest to the association before or upon filing a petition under Title 11, the executory declaration is rejected and the obligation to pay post-petition assessments may be discharged. This is a fair accommodation of the rights and needs of the association while accomplishing the broad goals of the Bankruptcy Code." Id. at 4, 6.
4. Debtor has benefited from the contract and the landlord and the landlord/ owner should be compensated.
The Owner, having performed all its obligations under the Reciprocal Easement Agreement, is entitled to the full benefit of its bargain. Id. See also In re: Comdisto, Inc., 270 B.R. 909, 910-911 (Bankr. N.D. III., 2001).
In In re: Independent American Real Estate, Inc., 146 BR. 546, 549 and 552 (Bankr. N.D. Tex., 1992), the Chapter 7 trustee attempted to object to a claim filed in connection with the rejection of a "construction agreement." The Debtor entered into a construction agreement, which included several individual agreements, including an agreement entitled "Easements, Covenants, and Restrictions Agreement". Id. at 549. The court found that the collective agreements, including the one referenced above, amounted to an executory contracts in part because of the mutual and ongoing obligations of both parties, despite the fact that some of the obligations were contingent in nature. Id. at 552. Here, the obligations are not contingent. The Debtor must perform and the Owner must perform. The court should respectfully follow the holding in Independent, and find that the Reciprocal Easement Agreement is an executory contract.
D. Mid-America is Entitled to the Payment of its Administrative Expensed for Attoney's Fees Incurred in Connection with the Enforcement of the Provisions of the Reciorocal Easement AgreementThe amounts listed in the Proof of Claim and Cure Proof of Claim filed by Mid-America are exclusive of legal fees incurred. The Reciprocal Easement Agreement provides for the payment of attorney's fees. Applicable case law establishes that Mid-America is entitled to attorney's fees in connection with its efforts to enforce performance of the obligations under the Reciprocal Easement Agreement. In re: Entertainment, Inc., 223 B.R. 141, 152-153 (Bankr. N.D.Ill., 1998). Mid-America contends that such legal fees were incurred in connection with its enforcement of rights and duties in connection with the Reciprocal Easement Agreement and Debtors' sale of the property to the Designated Rights Purchaser.
Section 5.03(b) of the Declaration of Protective Covenants, Restrictions and Easements dated December 8, 1983 (part of the Reciprocal Easement Agreement) states, "From and after the date of the existence of an assessment, the amount of such assessment together with interest thereon accrued as aforesaid, together with costs and reasonable attorney's fees incurred in the collection of same shall be a charge on the Trust B Property if Trust B is in Default, the Trust A Property if Trust A is in Default or the Trust C Property if Trust C is in Default and shall be a continuing lien thereon in favor of the part that paid such assessment, its beneficiary, and their respective successors and assigns." Section 6.03 further states, "In any legal or equitable proceeding for the enforcement or to restrain the violation of this Declaration or any provision hereof, the losing party or parties shall pay the attorneys' fees of the prevailing party or parties, in such amount as may be fixed by the court in such proceedings. All remedies provided herein or at law or in equity shall be cumulative and not exclusive." Exhibit "A", pages 36-38). The Property at issue herein is governed by this agreement and was part of "Trust B" before it was transferred to the Debtor.
The Bankruptcy Code provides that where there is a default in an executory contract of the debtor, such executory contract may not be assumed until the trustee "combensates . . . a party other than the debtor to such contract or lease, for any actual pecuniary loss to such party resulting from such default." 11 U.S.C. § 365(b)(1). Further, when the debtor assumes an executory contract, it does so cum onere, and may be compelled to pay attorney's fees incurred in connection with the enforcement of the obligations of an executory contract or lease where provided for under the agreement and authorized under applicable state law. See, e.g. In re: Shangra-La, Inc., 167 F.3d 843, 850 (4th Cir., 1999). See also In re: Entertainment, Inc., 223 B.R. 141, 152-153 (Bank.r. N.D.Ill. 1998).
Mid-America requests that this Court grant Mid-America leave to now amend the total amount of the default arising under the Reciprocal Easement Agreement so that it reflects amounts due for legal fees incurred to enforce the PEA and the Owner/Landlord's rights.
CONCLUSION
The Reciprocal Easement Agreement is an executory contract that must be rejected or assumed by the Debtor. Mid-America properly filed its claims for pre-petition amounts due under the REA pursuant to the Bankruptcy Code, and the Debtor has not objected to the claims. The Debtor, by its conduct and pleadings has demonstrated its intent that the Reciprocal Easement Agreement be treated as an executory contract. The Reciprocal Easement Agreement satisfies the accepted definition of an executory contract, and the case law supports a finding that the Reciprocal Easement Agreement is an executory contract.
WHEREFORE, Mid-America Asset Management, Inc., the management agent for the Owner/Landlord of the Burbank Town Shopping Center in Burbank, Illinois, respectfully requests that this Court enter an order as follows;
A. Granting the Conditional Objection of Mid-America Asset Management, Inc., to Debtors' "Real Estate Notice" for the Sale of Store No. 191 to the Designated Rights Purchaser does not object to Debtors' sale of the property to SM Newco Burbank, L.L.C.;
B. Order that the Debtor and/or the Designated Rights Purchaser cure the defaults arising under the Reciprocal Easement Agreement in the amount of $44,155.66;
C. Order that the Debtor and/or the Designated Rights Purchaser cure the defaults arising under the Reciprocal Easement Agreement for the reasonable legal fees of Mid-America Asset Management, Inc. as an Administrative Claim to enforce its rights under the Reciprocal Easement Agreement; and,
D. Order any further relief the Court finds just and equitable.
ORDER
Upon the Conditional Objection, dated September 26, 2002 of Mid-America Asset Management, Inc. ("Mid-America"), the management agent for the Owner/Landlord ("Owner") of the Burbank Town Shopping Center in Burbank, Illinois, to Debtors' Real Estate Notice concerning the sale of the property described as Service Merchandise Store No. 191, Burbank, Illinois, dated September 16, 2002 ("Real Estate Notice"), all parties in interest having been heard or having had the opportunity to be heard, and upon the entire record herein, and good and sufficient cause appearing therefor:
IT IS HEREBY FOUND AND DETERMINED:
A. The Reciprocal Easement Agreement at the Debtors' property In Burbank, Illinois, is an executory contract;
B. Debtors will promptly pay to the Owner the pre-petition amount due, $44,155.66;
C. Debtors are responsible to pay the Owner as an Administrative Expense its reasonable legal fees to pursue this matter in an amount to be determined by this Court upon Fee Petition to be filed on behalf of the Owner;
D. The Court shall retain jurisdiction over any matter or dispute arising from or relating to the implementation of this Order; and,