Opinion
NOT FOR PUBLICATION
Argued and Submitted at Helena, Montana: March 18, 2008
Appeal from the United States Bankruptcy Court for the District of Montana. Bk. No. 07-60316-RBK, Adv. No. 07-00045-RBK. Hon. Ralph B. Kirscher, Chief Bankruptcy Judge, Presiding.
Before: PAPPAS, DUNN and JURY, Bankruptcy Judges.
MEMORANDUM
Chapter 13 Debtors James and Jennifer Hayes (" Debtors") commenced an adversary proceeding against the owners of land (" the Landowners") located adjacent to Debtors' property, seeking the bankruptcy court's determination that certain restrictive covenants relating to the Landowners' properties were invalid or executory contracts that could be rejected by Debtors in their bankruptcy case. The bankruptcy court decided that the restrictive covenants were valid property interests, not executory contracts, and therefore could not be rejected. It then made six additional rulings in its Judgment. The Landowners appealed the six additional rulings, and Debtors cross-appealed the determination that the restrictive covenants are not executory contracts.
Unless otherwise indicated, all chapter, section and rule references are to the Bankruptcy Code, 11 U.S.C. § § 101-1532, and to the Federal Rules of Bankruptcy Procedure, Rules 1001-9037.
We AFFIRM the bankruptcy court's order that the restrictive covenants are valid property interests and not executory contracts, and we REVERSE the bankruptcy court's six additional rulings.
In this recitation, the Panel relies primarily on information taken from the Debtors' excerpts of record because Landowners did not comply with Rule 8009(b). Specifically, Landowners did not provide copies of the adversary complaint, the answer, the notice of appeal, the relevant entries from the bankruptcy court's docket, and the transcript of the trial held on September 7, 2007. Debtors provided the missing documents in their excerpts.
In 1990, Tom and Suzanne Hanson (" Hansons") purchased four parcels of property, totaling 80 acres, near Helena, Montana. The two eastern parcels, identified in the real estate records as Lots 8 and 12, were developed by Hansons. On this property they built a water ski lake known as Serenity Lake. They also established a minor subdivision on the property known as Water Ski Mania Estates (" WSME"), consisting of five lots located on the east side of Serenity Lake. Those five lots were eventually purchased by the Landowners.
Hansons also developed the western parcels. There, they built No Wake Lake. Hansons sold the western parcels to an unrelated party and those parcels are not at issue in this appeal.
The five Landowners are Brian and Linda Heeny (" Heenys"), Kevin and Amy Syrvud, Frank and Dori Creasia, Edwin and Linda Simmons, and Robert and Nancy Jardon.
In conjunction with their development of WSME, Hansons prepared and executed restrictive covenants (the " Restrictive Covenants") which were recorded on November 5, 1991. The pertinent provisions of the Restrictive Covenants include the following:
o They refer to the owner of the lake as the " Lakeowner" and to the owner of any lot in WSME as a " Landowner." o They provide for the establishment of an " Association" composed of the Landowners, and that the Association would control common property and coordinate other matters of interest to the Landowners. o " Section VI Lake Use: A unique aspect of landownership in [WSME] is the lifetime right to the use of the adjacent body of water presently called Serenity Lake. . . . All decisions concerning the lake will be made by [L]akeowner." o " Section VI-a. Landowner use of the lake is subject to negotiations between the Association and [L]akeowner." o " Section VI-f. A maximum of six (6) landowners shall be allowed the use of the lake. Five (5) landowners shall be owners of lots in [WSME] and one landowner shall be the owner of a single family dwelling built on property immediately west of the lake." o " Section VI-g. The Landowners shall have first collectively and then individually the right of first refusal for the purchase of the lake property." o " Section VI-h. The Lakeowner may levy assessments for the purpose of maintenance of the lake structure should it become necessary. The fee should not be in excess of the cost of maintenance of the lake and requires a majority vote of the Association." o " Section VI-i. Landowner's use of the lake is subject to the bylaws of Water Ski Mania. . . . Expulsion [from lake access for violation of the bylaws] will require a majority vote of the Association and in case of tie the Lakeowner will decide."
Although Section VI of the Restrictive Covenants uses the term " lifetime" to refer to the duration of the right of the Landowners to use Serenity Lake, Section VIII provides that the covenants are binding for 30 years and are automatically renewed indefinitely for additional 10-year periods, unless modified by a majority vote of the Landowners.
Initially, Hansons occupied Lot 1 of WSME, selling Lots 2-5 between 1991 and 1994. In 1996, Hansons decided to sell Lot 1 and build a new home. They convened a meeting of the five members of WSME to seek the Landowners' views on relocation of Hansons' proposed new home from the west side of Serenity Lake (as contemplated in Section VI-f of the Restrictive Covenants, quoted above) to the south side. Four of the Landowners gave oral consent to Hansons' proposal; the other, Heenys, also gave oral consent after Hansons agreed to reduce the hours Hansons' commercial ski school used Serenity Lake.
Hansons completed construction of a home on the southeast side of Serenity Lake in 2002. When a conflict arose between Hansons and the Landowners, in April 2002, Hansons filed an action, Hanson v. Water Ski Mania Estates, in Montana First District Court, Lewis and Clark County, no. 2002-264 (the " District Court Action"). In the District Court Action, Hansons sought a declaratory judgment that, pursuant to the parties' oral agreements, even though their new house was located on the south side of Serenity Lake, they were the sixth Landowner referred to in Section VI-f of the Restrictive Covenants and therefore had the right to use the lake. The state district court disagreed, holding instead that the Restrictive Covenants had, under state law, vested the parties with property rights. As a result, the district court ruled that any modifications of those rights would be subject to compliance with the state statute of frauds, and Hansons' purported transfer of the sixth lot rights from the west side to the south side of the lake required execution of a written instrument, or a fully executed oral agreement, to be enforceable.
On appeal, the Montana Supreme Court affirmed the district court's judgment:
We conclude the District Court correctly analyzed the written covenants. Regardless of the Hansons' intent at the time the covenants were written and executed, the Hansons are not identified as the sixth landowner. . . . Moreover, as determined by the District Court, under the covenants there is no method by which the sixth landowner lake use rights expressly granted to a parcel of " property immediately west of the lake" could be transferred to a parcel of property on the south end of the lake.
Hanson v. Water Ski Mania Estates, 2005 MT 47, 326 Mont. 154, 158-59, 108 P.3d 481 (2005).
The Montana Supreme Court also affirmed the district court's determination that there was no enforceable oral agreement that could modify the Restrictive Covenants because no consideration had been given by Hansons to the Landowners in exchange for modifying the Restrictive Covenants.
In July 2004, Hansons sold their remaining interest in Lots 8 and 12 to Debtors, consisting of approximately 27 acres with improvements, including Serenity Lake, a home, a dock, a boat launch, and the rights to the trade name " Water Ski Mania" (together, the " Property"). Of course, this sale did not include the five lots which had already been sold to the Landowners.
As previously noted, Water Ski Mania Estates is the name of the subdivision of five lots owned by Landowners. The trade name " Water Ski Mania, " refers to the 27 acres with improvements of Lots 8 and 12 which remained after WSME was created. There is no legal relationship between WSME and Water Ski Mania.
At the later trial in the bankruptcy court, both Debtors and Hansons provided evidence of troubled relations between the Landowners and the Lakeowner. Don Parsons testified that he had attempted to purchase the Property from Hansons in 1999. Mr. Parsons withdrew from the sale after he communicated with the Landowners, and came to the conclusion that they would treat his rights to use the lake as subordinate to their rights. Tom Hanson testified that, by 2004, he was forced to sell the Property below its appraised value to Debtors because of ongoing poor relations with the Landowners. Then, in 2006, Debtors attempted to sell the Property to Christopher van Sys. The Landowners allegedly made demands on Mr. van Sys to produce financial and other documentation generally not made available to the holder of a right of first refusal, and as a result, the sale was aborted.
Debtors and Hansons described other problems they experienced over the years with the Landowners. They allege that the Landowners have held unauthorized water ski clinics and tournaments on Serenity Lake, have invited guests to use the lake without paying any guest fees (and caused members of Debtors' Ski Club not to renew their paying memberships), and that Heenys have constructed a dock on Serenity Lake that Debtors contend is not authorized and creates a hazard. As the bankruptcy court would conclude, the " evidence in this case overwhelmingly shows that the actions of the [Landowners] have had an adverse impact upon the debtors." Memorandum of Decision at 9 (October 3, 2007).
On April 4, 2007, Debtors filed a chapter 13 petition. On June 21, 2007, Debtors commenced the adversary proceeding against the Landowners and the Association which is the subject of this appeal.
Robert G. Drummond was appointed to serve as chapter 13 trustee. Mr. Drummond filed statements generally supporting Debtors' positions in the bankruptcy case, but was neither a party nor an active participant in the adversary proceeding.
On May 25, 2007, Debtors had filed an ex parte motion for a temporary restraining order " disallowing the [Landowners] and the Water Ski Mania Estates Homeowners Association from using the ski lake until the issue of the Restrictive Covenant[s] has been resolved so that no liability is incurred and the bankruptcy estate is not put at risk." The bankruptcy court denied this motion because it had not been made via an adversary proceeding as required by Rule 7001(7) and, in any event, because Debtors' request would not satisfy the requirements for a temporary restraining order under Rule 7065.
The bankruptcy court conducted a pretrial conference in the adversary proceeding on August 15, 2007, at which the parties appeared through counsel. The court instructed the parties to submit a pretrial order to identify the issues and to govern the trial.
A Final Pre-trial Order (the " PTO"), approved by counsel for both Debtors and the Landowners, was submitted and entered by the bankruptcy court on September 4, 2007. The PTO provided that it would supersede " the pleadings filed by the parties and shall govern the course of the trial unless it appears that modification of the Pretrial Order is necessary to prevent manifest injustice." In relevant part, the PTO provided:
VIII. Disputed Factual Issues.
1. Whether Restrictive Covenants are property rights which cannot be avoided or executory contracts which can be terminated.
2. Whether or not the covenants are valid and enforceable against the Owners of Lots 8 and 12.
3. Whether any member of the Water Ski Mania [Estates] Homeowners Association at the time that the Hayes Bankruptcy was filed owed any further performance of an obligation under the contract whereby they purchased their realty.
IX. Relief Sought.
The Debtors are seeking to have the Restrictive Covenants declared either invalid or [] executory contracts and then terminate them.
X. Points of Law.
1. Whether or not the restrictive covenants are valid?
2. Exclusive of Lots 8 and 12, are the restrictive covenants property interests that run with the land and therefore belong to the defendants and [cannot] be avoided by this court?
3. Whether or not Water Ski Mania Estates Restrictive Covenants constitute an executory contract that can be avoided by the Debtors?
The bankruptcy court conducted a trial in the adversary proceeding on September 7, 2007. At the conclusion of Debtors' presentation of evidence and testimony, at the Landowners' request, the bankruptcy court ruled orally that the Restrictive Covenants were not invalid and were not executory contracts that could be rejected in Debtors' bankruptcy case under § 365(a). Tr. Trial 150:18-20. The court also ruled that the Landowners' right of first refusal under the Restrictive Covenants was a continuing right that applied to subsequent sales. Tr. Trial 151:5-12. The court appeared to rule that " As it relates to the use restrictions, I find the lots are subject to that." Tr. Trial 151:18-19.
As it indicated to the parties it would, the bankruptcy court later memorialized its findings and conclusions in a Memorandum of Decision (" Memorandum") and a separate Judgment entered on October 3, 2007. The conclusions of law in the Memorandum, and the relief awarded in the Judgment, were specified in seven separately numbered provisions. They stated:
1. The Restrictive Covenants at issue in this Proceeding are not an executory contract subject to rejection under 11 U.S.C. § 365.
2. The landowners' right of first refusal is not a right of last approval, and merely allows the landowners to match the price and terms of any acceptable bona fide offer.
3. Commercial use of Serenity Lake by the landowners and/or their guests is expressly forbidden.
4. Any unauthorized use of Serenity Lake by the landowners and/or their guests is expressly forbidden.
5. The use of Serenity Lake by landowners for clinics and tournaments is expressly forbidden.
6. The Defendants Brian and Linda Heeny shall remove their dock from Serenity Lake on or before March 1, 2008.
7. Debtors are the sixth landowner identified in the Restrictive Covenants and as the sixth landowner and as the lakeowner, have the right to enforce the Restrictive Covenants.
The Landowners filed a timely appeal of the provisions of paragraphs 2-7 of the Judgment on October 12, 2007 (" Additional Orders"). Debtors filed a cross-appeal of paragraphs 1-2 on October 24, 2007.
Debtors' cross-appeal was late-filed under Rule 8002(a), which requires that cross-appeals be filed within 10 days of the original appeal. However, our court of appeals instructs that the timely filing of a cross-appeal " is a rule of practice, which can be waived at the [appellate] court's discretion, rather than a jurisdictional requirement." Mendocino Envtl. Ctr. v. Mendocino County, 192 F.3d 1283, 1298 (9th Cir. 1999). In deciding whether to exercise discretion to allow an untimely cross-appeal, the Panel considers four factors: whether the issues on appeal and cross-appeal are related and involve the same parties; whether the cross-appeal was merely late or not filed at all; whether the nature of the bankruptcy court's opinion should have put appellee on notice of the need to file a cross-appeal; and whether the scope of the issues on appeal is clear, and the extent of prejudice to the appellant. Kosmala v. Imhof (In re Hessco), 295 B.R. 372, 376 (9th Cir. BAP 2003). The issues raised in the appeal and cross-appeal are clearly related and involve the same parties, the cross-appeal was filed only two days late, the bankruptcy court's opinion put Debtors on notice that Debtors' position on the executory contract issue was rejected, the scope of the Landowners' issues was clear, and, finally, the Landowners did not object, and have not been prejudiced, by the late filing of the cross-appeal. Accordingly, the Panel exercises its discretion to consider the late-filed cross-appeal.
JURISDICTION
The bankruptcy court had jurisdiction pursuant to 28 U.S.C. § 1334. Its determination of the status of the Restrictive Covenants as executory contracts in the bankruptcy case was a core proceeding under 28 U.S.C. § 157(b)(2)(A), (M) and (O). To the extent the bankruptcy court's determination of the other issues raised by the parties may have been noncore, neither party objected, and we deem both parties to have consented to the entry of a final order by the bankruptcy court. 28 U.S.C. § 157(c)(2). We have jurisdiction pursuant to 28 U.S.C. § 158.
ISSUES
1. Whether the bankruptcy court erred by considering issues and entering orders outside the scope of the PTO and without advance notice to, and allowing an opportunity to present evidence testimony at trial by, the Landowners.2. Whether the bankruptcy court erred in ruling that the Restrictive Covenants do not constitute an executory contract that may be rejected in Debtors' bankruptcy case under § 365(a).
STANDARDS OF REVIEW
The bankruptcy court's conclusions of law are reviewed de novo and its factual findings for clear error. In re Dawson, 367 F.3d 1174, 1177 (9th Cir. 2004).
Whether procedures employed by the bankruptcy court comport with requirements of due process is reviewed de novo. In re Garvida, 347 B.R. 697, 703 (9th Cir. BAP 2006).
A trial court's interpretation of contract provisions is reviewed de novo. United States v. 1, 377 Acres of Land, 352 F.3d 1259, 1264 (9th Cir. 2003).
DISCUSSION
I.
The bankruptcy court erred by considering issues and granting relief outside the scope of the PTO and without notice to, and an opportunity to present evidence by, the Landowners.
In its Memorandum and Judgment, the bankruptcy court made six rulings that are challenged on appeal by the Landowners. The bankruptcy court decided that the Landowners' right of first refusal is not a right of last approval; that Landowners and their guests were forbidden from any commercial use of Serenity Lake, or from unauthorized use or clinics or tournaments; that the Heenys must remove their dock from the lake no later than March 1, 2008; and that Debtors are the " sixth landowner" identified in the Restrictive Covenants.
At the time the bankruptcy court entered the PTO in this proceeding, it acknowledged on the record that " the pretrial order has been approved and will govern the proceedings." Tr. Trial 12:9-11 (September 4, 2007). The only relief sought in the PTO specified that " [t]he Debtors are seeking to have the Restrictive Covenants declared either invalid or [] executory contracts and then [to] terminate them." The " Disputed Factual Issues" and " Points of Law" identified in the PTO concerned only the validity of the Restrictive Covenants and whether they were executory contracts for bankruptcy treatment purposes.
When the PTO is read fairly, the issues of fact and law to be decided by the bankruptcy court are narrowly circumscribed. There is no indication in the PTO that the bankruptcy court would comprehensively address or examine the nature and extent of the rights of the parties under the various Restrictive Covenants, nor that it would grant the sort of relief specified in the Additional Orders. As a result, as is explained below, the Landowners are justifiably concerned that entry of the Additional Orders exceeded the scope of the PTO.
In addition, it appears that the Landowners were deprived of their rights to due process at trial because, while the Additional Orders substantially affected their property rights, they were given no effective advance notice that this might occur, nor were they afforded an effective opportunity to be heard concerning the issues. We therefore conclude that the bankruptcy court erred in entering the six Additional Orders.
A.
Fed.R.Civ.P. 16, made applicable in bankruptcy adversary proceedings by Rule 7016, describes the purpose and effect of pretrial orders:
Pretrial Orders. After any conference under this rule, the court should issue an order reciting the action taken. This order controls the course of the action unless the court modifies it.
Final Pretrial Conference and Orders. . . . The court may modify the order issued after a final pretrial conference only to prevent manifest injustice.
FED. R. CIV. P. 16(d), (e).
Our court of appeals has consistently ruled that, once a final pretrial order is entered pursuant to Rule 16(e), setting forth the parties and issues for trial, modifications are allowed " only to prevent manifest injustice." Byrd v. Guess, 137 F.3d 1126, 1131-32 (9th Cir. 1998) (quoting Johnson v. Mammoth Recreations, Inc., 975 F.2d 604, 608 (9th Cir. 1992)); AmerisourceBergen Corp. v. Dialysist West, Inc., 465 F.3d 946, 957 (9th Cir. 2006). " It goes without saying that a pre-trial order controls the scope and course of trial; a claim or issue not included in the order is waived, unless presented at trial without objection." Arsement v. Spinnaker Exploration Co., 400 F.3d 238, 245 (5th Cir. 2005) (cited by the Ninth Circuit in AmerisourceBergen, 465 F.3d at 957).
Even if an issue is pleaded in the complaint, " [a] pretrial order generally supersedes the pleadings, and the parties are bound by its contents." Patterson v. Hughes Aircraft Co., 11 F.3d 948, 950 (9th Cir. 1993); United States v. Joyce, 511 F.2d 1127, 1130 n.1 (9th Cir. 1975) (" The parties are bound by their agreement to limit the issues to be tried.").
Under Rule 7016 and this case law, the bankruptcy court was empowered to modify the issues of fact and law, and relief to be granted, specified in the PTO, but only to " prevent manifest injustice." Fed.R.Civ.P. 16(e); DP. Aviation v. Smiths Indus. Aero. & Def. Sys., 268 F.3d 829, 841 (9th Cir. 2001) (" A pretrial order should be liberally construed to permit any issues at trial that are embraced within its language. However, particular evidence or theories which are not at least implicitly included in the order are barred unless the order is first modified to prevent manifest injustice.").
The record does not show that, before or at trial, either party requested that the PTO be modified so that the bankruptcy court could consider and grant relief concerning the subject matter of the Additional Orders. Also, it does not show that the bankruptcy court decided, sua sponte, that it was necessary to prevent a " manifest injustice" that it grant additional relief not specified in the PTO.
The Ninth Circuit has instructed that a trial court consider four factors in determining whether manifest injustice requires modifying a final pretrial order:
(1) the degree of prejudice or surprise to the defendants if the order is modified; (2) the ability of the defendants to cure any prejudice; (3) the impact of the modification on the orderly and efficient conduct of the case; and (4) any degree of willfulness or bad faith on the part of the party seeking the modification.
Byrd, 137 F.3d at 1132. There is no evidence in this case that the parties engaged in bad faith, so Factor 4 is not relevant here. Factor 3 could arguably support an expansion of the issues set forth in the PTO, in that such a modification could allow settlement of issues that would otherwise require another trial. However, Factors 1 and 2 clearly do not favor any modification of the PTO under these facts, because the Landowners would presumably be surprised and prejudiced by a post-trial modification of the PTO without an opportunity to be heard concerning these issues.
It therefore appears that the issues decided, and the relief granted, by the bankruptcy court in the Additional Orders exceeded the PTO.
B.
Entry of the Additional Orders by the bankruptcy court under this procedure also implicates the due process rights of the Landowners. As the Panel wrote in Educ. Credit Mgmt. Corp. v. Repp (In re Repp),
the cornerstone of modern due process analysis is Mullane v. Central Hanover Bank & Trust Co., 339 U.S. 306, 70 S.Ct. 652, 94 L.Ed. 865 (1950). " Notice must be reasonably calculated, under all the circumstances, to apprise interested parties of the pendency of the action and afford them an opportunity to object. It must be of such a nature as reasonably to convey the required information and afford a reasonable time for response." Id . at 314.
307 B.R. 144, 148 (9th Cir. BAP 2004).
The Ninth Circuit expanded on this requirement of notice and opportunity to be heard. " It is well settled that 'the root requirement of the Due Process Clause [is] that an individual be given an opportunity for a hearing before he is deprived of any significant property interest.' Cleveland Bd. of Educ. v. Loudermill, 470 U.S. 532, 541, 105 S.Ct. 1487, 1493, 84 L.Ed.2d 494 (1985)." Clements v. Airport Auth. Of Washoe County, 69 F.3d 321, 333 (9th Cir. 1995).
Our due process analysis mandates consideration of three factors: 1) Were " significant property interests" of the Landowners implicated in the Additional Orders? 2) Did the Landowners have adequate notice of the issues? 3) Did the Landowners have an opportunity to be heard on those issues? The answer to the first question is, arguably, in the affirmative; the second and third questions must be answered in the negative.
In the District Court Action, the district court ruled that " the right to use the Lake was a right that, under the express terms of the Restrictive Covenants, ran with the land, and therefore was an interest in real property." Hanson, 326 Mont. at 159. This ruling was effectively affirmed when the Montana Supreme Court decided that the state statute of frauds applied to modifications of the Restrictive Covenants. Id.
The Montana Supreme Court rulings in Hanson were declared " law of the case" by the bankruptcy court " as it relates to anything that was in dispute between the parties at District Court level." Tr. Trial 57:7-8. We agree. Moreover, Debtors admit that one purpose for filing the adversary proceeding was to obtain a judicial declaration that Debtors were the " sixth Landowner, " and as a Landowner had a property right of access to the lake during the 35 hours per week provided in the Restrictive Covenants for exclusive use of Landowners. Therefore, there can be little doubt that " property interests" of the Landowners were implicated when the bankruptcy court entered the Additional Orders. As such, the Landowners had a right to fair and effective notice and a right to be heard before the bankruptcy court could deprive them of, or limit, their interests in their property.
The Landowners were given no advance notice that the bankruptcy court intended to grant relief of the sort provided in the Additional Orders. As discussed above, the PTO clearly made no reference to the issues upon which the court would grant the Additional Orders. The PTO superseded the other pleadings, including the complaint. And the parties had the right to rely on the statement of issues in the PTO to prepare for trial. " Because parties rely on [the] pretrial conference to inform them precisely what is in controversy, [a] pretrial order is treated as superseding the pleadings and establishing issues to be considered at trial." Erff v. MarkHon Indus., Inc., 781 F.2d 613 (7th Cir. 1986). The Landowners did not have adequate notice before, or even during, the trial that the bankruptcy court would consider the issues upon which it based its Additional Orders.
Even if the PTO did not supersede the complaint under Rule 16(e) and case law, the Debtors' complaint did not request the sorts of relief granted in the Additional Orders. The only relief requested in the complaint, besides a declaration that the Restrictive Covenants were either invalid or executory contracts, was entry of a temporary restraining order " terminating the homeowners use of the lake and being in any contact with the Debtor(s) until this matter is finalized."
While there is considerable argument in the parties' briefs concerning whether the Landowners had a fair opportunity to present evidence and testimony, and otherwise to be heard, our examination of the trial transcript shows that the bankruptcy court did not offer the Landowners a sufficiently clear opportunity to meet the needs of due process, nor did the Landowners waive any right to be heard.
During the testimonial phase of the trial, the bankruptcy court heard from Don Parsons, Hanson, Hayes, and Bill Bahney, the realtor appointed by the court to market the Property. The transcript shows the following testimonial evidence was adduced that relates to the Additional Orders:o Regarding Order 2 (right of first refusal), Hanson testified that he offered Landowners, individually and collectively, right of first refusal on Parsons' offer and then again on Hayes' offer. Tr. Trial 78:2 - 80:14.o Regarding Order 3 (forbidding commercial use of the lake by Landholders), Hayes testified on both direct and cross-examination as to his belief that only the Lakeholder had the right to commercial use. Tr. Trial 116:7-9, 117:22-24.o Regarding Order 4 (forbidding unauthorized use), Hayes testified that there were numerous infractions of the rules in the bylaws, that he sent 40-50 emails to different Landowners complaining about infractions, but did not specify any particular examples of unauthorized use, nor did he ever make a formal complaint to the Association. Tr. Trial 119:17-120:21.o Regarding Order 5 (forbidding clinics and tournaments), Hayes testified that there were unauthorized clinics and tournaments held on Serenity Lake in 2007, but did not provide details. He also stated that in 2005 and 2006, he funded tournaments that the Heenys arranged and managed. Tr. Transcript 119:1-16.o Regarding Order 6 (ordering Heenys to remove their dock), there is no discussion of this topic in the trial transcript.o Regarding Order 7 (Debtors are the sixth Landowner), there was extended testimony from Hanson about why he decided to move his house from the west side of Serenity Lake (as contemplated in Section VI-f of the Restrictive Covenants) to the southeast side, and his reasons for believing that the sixth Landowner use rights should attach to that location. Tr. Trial 31:24 - 37:18. Hayes simply stated that he agreed with Hanson's testimony regarding the sixth Landowner issue. Tr. Trial 113:1.
Following the close of testimony, Landowners asked the bankruptcy court to dismiss Debtors' claim that the Restrictive Covenants be voided. Before the court announced its ruling, there was a colloquy among counsel and the court which considered whether Debtors had presented a prima facie case on the executory contract issue and there was no discussion about the issues which resulted in the Additional Orders. Tr. Trial 139:18 - 147:20. After this discussion, the bankruptcy court announced its intent to rule that the Restrictive Covenants were not invalid, and were not executory contracts subject to rejection in Debtors' bankruptcy case. Tr. Trial 150:18-19.
We construe the Landowners' motion to have been a motion for judgment on partial findings. Rule 7052 (incorporating Fed.R.Civ.P. 52(c).
The court next ruled that the Landowners' had a right of first refusal and this right continued with each sale of the Property, Tr. Trial 151:5-7, and that the Landowners were subject to use restrictions in the Restrictive Covenants. Tr. Trial 151:18-19. The court then stated, " Anything? Any question? Any concern? Any -- not misunderstanding; but do you understand what I'm saying?" Tr. Trial 154:1-3. The Landowners' attorney then asked the court for clarification that sale of the Property was subject to the Restrictive Covenants. Upon the court's reply that any sale would be subject to the Restrictive Covenants, the Landowners' attorney replied, " So other than that, my clients will step back from anything like that." Tr. Trial 154:12-19. The court indicated that it would take the matters under submission, and would provide a written ruling and Judgment. Tr. Trial 156:21-25.
It is not clear in the transcript which " use" restrictions the bankruptcy court concludes are binding on the Landowners. The court discusses an apparent ambiguity between Section VI-a of the Restrictive Covenants, which provides that use is subject to negotiation between the Association and Lakeowner, and Section VI-i which states that the bylaws of Water Ski Mania control lake use. The court stated that, if a particular use had a detrimental effect on possible sale of the Property, the court was prepared to entertain an action for damages. Tr. Trial 152:5-9.
At that point, the bankruptcy court also granted Debtors' separate motion filed in the bankruptcy case for authority to list and market the Property for sale. Tr. Trial 153:4-7. The Landowners did not appeal this ruling or order.
We do not believe this brief exchange or the earlier colloquy effectively advised the Landowners about the extent of relief the bankruptcy court was considering, nor did it adequately offer the Landowners an opportunity to offer testimony or evidence on the other issues dealt with in the Additional Orders. We also do not believe the Landowners waived their rights in this exchange to submit evidence or be heard on those issues.
Following the court's rulings on the record, Debtors twice asked for clarification regarding whether Landowners had a right to commercial use of Serenity Lake. Both counsel briefly addressed that issue. The court made several comments: " Yeah, I don't think that [Landowners] are prohibited [from commercial use]." Tr. Trial 156:10-12. " You know, I'm not sure that there is that exclusive use to the lake owner of the commercial." Tr. Trial 159:22-23. " See, I don't see that it [Restrictive Covenant] says " exclusive right" [of the Lakeowner] like it does with some other things." Tr. Trial 160:13-14. Given these comments and that there was never a request in the PTO or in any pleading in this case for a permanent prohibition on commercial use by the Landowners, the Landowners clearly did not have notice or effective opportunity to address the commercial use issue before the bankruptcy court entered its order forbidding commercial use by the Landowners.
For these reasons, the Panel concludes that the bankruptcy court erred by considering issues and granting relief in the Additional Orders beyond the scope of the PTO and, in doing so, the Landowners' due process rights were violated.
II.
The bankruptcy court did not err in ruling that the Restrictive Covenants do not constitute an executory contract.
Debtors raise two issues on cross-appeal: that the bankruptcy court erred in ruling that the Restrictive Covenants did not constitute an executory contract that could be rejected under § 365(a); and that it erred in concluding that the " right of first refusal" was still in effect. The former issue is examined below. However, as discussed in the previous section concerning the Additional Orders, the bankruptcy court's ruling about the Landowners' right of first refusal was not encompassed in the PTO, nor did the Landowners have adequate notice that the bankruptcy court would grant relief concerning the issue. Since we reverse all six of the Additional Orders, the Panel need not consider the cross-appeal's objection to the second, " right of first refusal" order.
Both parties agree that the controlling law on whether the Restrictive Covenants constitute an executory contract is In re Robert L. Helms Constr. & Dev. Co., Inc., 139 F.3d 702 (9th Cir. 1998). In Helms, the court of appeals considered whether an option was an executory contract for purposes of § 365(a). It began its analysis with the oft-cited " Countryman definition": a contract is executory if " the obligations of both parties are so unperformed that the failure of either party to complete performance would constitute a material breach and thus excuse the performance of the other." Vern Countryman, Executory Contracts in Bankruptcy, 57 MINN. L. REV. 439, 450 (1973), quoted in Griffel v. Murphy (In re Wegner), 839 F.2d 533, 536 (9th Cir. 1988). In applying that definition to the facts, the Ninth Circuit was troubled by the contingent nature of option contracts, because performance by the optionor is only obligated if the paid-for option was exercised. It noted that some courts have ruled that an optionee had fulfilled its only true obligation by paying for it; the creation of any further obligation lies within the optionee's sole discretion, so the contract cannot be executory. Helms, 139 F.3d at 705 (citing Brown v. Snellen (In re Giesing), 96 B.R. 229, 232 (Bankr. W.D. Mo. 1989); Travelodge Int'l, Inc. v. Cont'l Props, Inc. (In re Cont'l Props., Inc.), 15 B.R. 732, 736 (Bankr. D. Haw. 1981)). Partly based upon these concerns, the court in Helms ruled that a contract is not executory unless the contract requires further performance by both parties at the time the bankruptcy petition is filed.
Although not binding authority, the Seventh Circuit's analysis in Gouveia v. Tazbir, 37 F.3d 295 (7th Cir. 1994), is also instructive. In that decision, the court directly addressed whether a restrictive covenant on real property was an executory contract that could be rejected in a bankruptcy case. The Seventh Circuit reasoned that, although restrictive covenants contain the characteristics of both a contract and an interest in land, the primary nature of such covenants is preservation of a land interest, not future duties in contract. Although there will almost always be some incidental continuing obligations under a restrictive covenant, those duties were not the kind of obligations Congress intended to impact in enacting § 365. Thus, the court decided that restrictive covenants on real estate are not executory contracts subject to termination under § 365. Gouveia, 37 F.3d at 298-99.
In this case, the Landowners argue that they had no obligations on the petition date remaining to be performed under the Restrictive Covenants. In their view, they completed their performance of their real estate contracts by purchasing parcels of land between 1991 and 1994, many years before the bankruptcy petition was filed, and by agreeing to be bound by the Restrictive Covenants in effect on the purchase date.
Debtors counter in their Reply Brief that there were numerous obligations imposed on the Landowners by the Restrictive Covenants. However, of those alleged obligations, only two (to maintain insurance on their boats, and to abide by the bylaws of Water Ski Mania) were contained in the Restrictive Covenants. And if a particular landowner failed to perform these alleged obligations, the only relief available to Debtors under the Restrictive Covenants was to request that the Association expel the offending landowner for a set period of time. Clearly, though, even if the Landowners' duties contained in the Restrictive Covenants were ignored by one or more of them, Debtors were not excused from performance of their obligations under the Restrictive Covenants for such breaches.
The other obligations of the Landowners appear to be derivative of the alleged obligation to abide by the bylaws. The bylaws are not included in the record on appeal. The Landowners moved to strike any testimony or reference to the bylaws at trial because they were not listed as an exhibit in the PTO and were never introduced into evidence. Tr. Trial 81:18. The court responded, " I'm going to reserve on your objection. I think it raises a good point." Tr. Trial 85:11-12. When counsel later repeated his objection, the court ruled, " you may have a continuing objection." Tr. Trial 107:14-15. There is no indication in the transcript that the court finally ruled on this evidentiary objection.
The bankruptcy court concluded that " given my review of the covenants, they're not executory. I find that they may have unilateral obligations and do have unilateral obligations which can be enforced." Tr. Trial 150:18-21 (emphasis added). In short, the bankruptcy court determined that there were no mutual obligations, either at the time of filing of the petition or later. Consequently, the bankruptcy court's determination that the Restrictive Covenants were not executory contracts is consistent with Helms.
The bankruptcy court memorialized this finding in its written Memorandum:
In the case sub judice, this Court does not believe that the Restrictive Covenants meet the definition of executory contracts . . . as discussed in [Helms]. Accordingly, Debtors are not allowed to reject or breach the restrictive covenants under 11 U.S.C. § 365.
We agree with the bankruptcy court's analysis and conclude that the bankruptcy court did not err in ruling that the Restrictive Covenants were not executory contracts that could be rejected in Debtors' bankruptcy case.
CONCLUSION
We REVERSE the six Additional Orders in the court's Judgment and AFFIRM the bankruptcy court's decision that the Restrictive Covenants are not executory contracts.