The Minesen Company

Date Signed:

November 17, 2021 ky Be» < OSPERED:

ety Robert J. Faris

ier OF ge United States Bankruptcy Judge

UNITED STATES BANKRUPTCY COURT

DISTRICT OF HAWAII

In re: Case No. 19-00849

Chapter 11

THE MINESEN COMPANY,

Re: Dkt. 100

Debtor.

MEMORANDUM OF DECISION REGARDING

ASSUMPTION OF EXECUTORY CONTRACTS AND LEASES

The Minesen Company, debtor and debtor in possession (“Minesen”),

has filed a motion (ECF 100) for authority to assume the following contracts

and leases pursuant to § 365:!

' Unless otherwise indicated, all references to sections refer to the Bankruptcy Code, 11

U.S.C, and all references to rules refer to the Federal Rules of Bankruptcy Procedure.

1. Contract No. NAFBA3-93-C-001 between Minesen and US Army

Morale, Welfare and Recreation Fund, a Non-Appropriated Fund

Instrumentality, dated January 14, 1993 (the “MWR Contract,” Ex.2

M-1);

2. Amendment / Modification No. P00018 to the MWR Contract, dated

April 18, 2017 (the “MWR Contract Modification,” Ex. M-2);

3. Lease No. DACA84-1-91-14 between the United States of America

through the Secretary of the Army, as lessor, and Minesen, as lessee,

dated February 1, 1993 (the “Lease,” Ex. M-3);

4. Lease No. DACA84-1-17-121, between the Secretary of the Army, as

lessor, and Minesen, as lessee (the “Picnic Area Lease,” Ex. M-5);

and

5. Memorandum of Agreement between the 25th Infantry Division

(Light)/US Army Garrison Hawaii; US Army Community and

Family Support Center; and Minesen, effective May 11, 1994 (the

“Operating Agreement,” Ex. M-4).

2 “Ex.” refers to trial exhibits.

The court held an evidentiary hearing on the motion on June 2, 3, and

7, July 28 and 29, and August 2, 5, 12, 18, and 19, 2021. At the evidentiary

hearing, Johnathon Bolton and Janice Futa represented Minesen, Dana

Barbata and Natalie Moreland represented the US Army Morale, Welfare

and Recreation Fund (the “Fund”), and Christopher Muzzi represented

Pangolin, LLC.

This memorandum sets forth my findings of fact and conclusions of

law.3

I. BACKGROUND FACTS

Minesen operates a hotel known as the Inn at Schofield Barracks (the

“Inn”) on the U.S. Army’s Schofield Barracks installation. The Inn is a

“transient lodging facility,” or “TLF,” that provides housing for

servicemembers and their families, usually when they are changing duty

stations to or from Hawaii or are temporarily assigned to Hawaii.

The Lease and Picnic Area Lease authorize Minesen to use the land on

3 Fed. R. Civ. P. 52(a)(1), made applicable to this contested matter by Fed. R. Bankr. P.

9014(c) and 7052.

which the Inn is constructed and an adjacent recreational area. The MWR

Contract, as modified by the MWR Contract Modification (and other written

modifications), states the terms under which Minesen constructed and

operates the Inn. The Operating Agreement specifies certain aspects of the

relationship between Minesen and the Schofield Barracks garrison

command, including the provision of electricity.

The MWR Contract (as modified), Lease, Picnic Area Lease, and

Operating Agreement (collectively the “Contracts”) are inextricably linked.

The MWR Contract required Minesen to enter into the Lease and the

Operating Agreement; the Lease, Picnic Area Lease, and Operating

Agreement each provide that they terminate when the MWR Contract

terminates; and a default under the Lease is a default under the MWR

Contract and vice versa. The MWR Contract will expire on May 31, 2026.

II. LEGAL STANDARDS

Minesen moves for authority to assume the Contracts under § 365(a):

“Except as provided in sections 765 and 766 of this title and in subsections

(b), (c), and (d) of this section, the trustee, subject to the court's approval,

may assume or reject any executory contract or unexpired lease of the

debtor.”

Minesen, as the debtor in possession in this chapter 11 case, has the

power of a trustee under § 365.4 There is no dispute that the Contracts are

executory contracts and unexpired leases within the meaning of this section.

Section 365 (b)(1) places conditions on the assumption of a contract

that is in default:

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 other than a default that is a

breach of a provision relating to the satisfaction of any provision

(other than a penalty rate or penalty provision) relating to a

default arising from any failure to perform nonmonetary

obligations under an unexpired lease of real property, if it is

impossible for the trustee to cure such default by performing

nonmonetary acts at and after the time of assumption . . .;

(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

4 § 1107(a).

(C) provides adequate assurance of future performance

under such contract or lease.

A party seeking to assume a contract need not cure immaterial

breaches. See Vanderpark Properties, Inc. v. Buchbinder (In re Windmill Farms,

Inc.), 841 F.2d 1467, 1473 (9th Cir. 1988) (holding that alleged nonmonetary

defaults were not of sufficient substance to preclude assumption of the

lease); In re Rachel Industries, Inc., 109 B.R. 797, 799-800 (Bankr. W.D Tenn.

1990) (describing that, if a default of the debtor’s obligations existed, the

Court must analyze each of those asserted defaults to determine whether any

is material); In re Empire Equities Capital Corp., 405 B.R. 687, 691 (Bankr.

S.D.N.Y. 2009) (“A default precludes assumption of an executory contract

under § 365 if it is both incurable and material in the sense that it goes to the

very essence of the contract, i.e., the bargained for exchange.”) (internal

quotations omitted).

Minesen must also show that it has exercised reasonable business

judgment in deciding to assume the Contracts. Durkin v. Benedor Corp. (In re

G.I. Indus., Inc.), 204 F.3d 1276, 1282 (9th Cir. 2000) (stating that “a

bankruptcy court applies the business judgment rule to evaluate a trustee's

rejection decision”); In re Hertz, 536 B.R. 434, 442 (Bankr. C.D. Cal. 2015)

(“The propriety of a decision to assume or reject an unexpired lease . . .

normally is determined under the deferential ‘business judgment’ test.”).

Section 365(c)(1) bars the assumption of certain contracts and leases:

The trustee may not assume or assign any executory contract or

unexpired lease of the debtor, whether or not such contract or

lease prohibits or restricts assignment of rights or delegation of

duties, if—

(1)(A) applicable law excuses a party, other than the debtor, to

such contract or lease from accepting performance from or

rendering performance to an entity other than the debtor or the

debtor in possession, whether or not such contract or lease

prohibits or restricts assignment of rights or delegation of duties;

and

(B) such party does not consent to such assumption or

assignment . . . .

Under § 365, the nondebtor party to the contract has the burden of

coming forward with all alleged defaults and demonstrating that any

required notice of default has been properly given. Kings Terrace Nursing

Home & Health Related Facility v. New York State Dep’t of Social Servs. (In re

Kings Terrace Nursing Home & Health Related Facility), Case No. 91 B 11478

(FGC), 1995 WL 65531, at *26 (Bankr. S.D.N.Y. 1995). Once defaults are

properly established, the burden then shifts to the debtor to prove that the

defaults have either been cured or will be cured promptly and that there

exists adequate assurance of future performance. See id.; In re Rachel

Industries, 109 B.R. at 802 (“In a proceeding under § 365, the party moving to

assume a lease has the ultimate burden of persuasion that the lease is one

subject to assumption and that all requirements for assumption have been

met. However, the [non-debtor] has the initial burden of showing defaults

and that those defaults have been properly noticed to the lessee.”) (internal

citations omitted).

Thus, the Fund must demonstrate the existence of material defaults,

but Minesen must ultimately prove by a preponderance of the evidence that

those defaults have been or will be cured and that there is adequate

assurance of future performance.

III. DISCUSSION

A. The Fund’s Motivation

Minesen argues that the Fund is acting in bad faith. It contends that the

Fund wants to terminate the MWR Contract for default because in that event

the Fund will be able to recover part of the money it paid to Minesen in a

2017 settlement (discussed in section III.D.1 below). I reject this argument.

First, the evidence does not bear it out. The Fund and Minesen have

fought for many years, but Minesen bears at least equal responsibility for

that situation. I find that the Fund seeks to hold Minesen to the terms of the

Contracts because it is entitled to Minesen’s performance under those

Contracts, and not for some improper motive.

Second, Minesen’s argument is an attempt to deflect attention from the

real issues. The central question is whether Minesen can satisfy § 365.

Minesen bears this ultimate burden even though the Fund hopes that it

cannot or will not do so.

B. Anti-Assignment Act

The Fund argues that § 365(c)(1) bars assumption of the Contracts

because the Anti-Assignment Act (41 U.S.C. § 6305) is an “applicable law”

that excuses the Fund from accepting performance from any party other than

Minesen:

The party to whom the Federal Government gives a contract or

order may not transfer the contract or order, or any interest in the

contract or order, to another party. A purported transfer in

violation of this subsection annuls the contract or order so far as

the Federal Government is concerned, except that all rights of

action for breach of contract are reserved to the Federal

Government.

41 U.S.C.A. § 6305(a).

It does not matter that Minesen intends to assume the Contracts and

keep them rather than assign them to another party. The Ninth Circuit

applies the so-called “hypothetical test” to § 365(c)(1): a debtor may not

assume a contract if it could not assign that contract to a third party, even if

the debtor does not actually propose to assign the contract. Perlman v.

Catapult Entertainment, Inc. (In re Catapult Entertainment, Inc.), 165 F.3d 747,

750 (9th Cir. 1999).

The Anti-Assignment Act is an “applicable law” under § 365(c)(1).

United States v. TechDyn Systems Corp. (In re TechDyn Systems Corp.), 235 B.R.

857 (Bankr. E.D. Va. 1999) (holding that the debtor could not assume a

contract under which the debtor maintained and repaired

telecommunications networks on military bases); In re Plum Run Service

Corp., 159 B.R. 496, 500-01 (Bankr. S.D. Ohio (1993) (holding that the debtor

could not assume a contract to provide maintenance services at the

Guantanamo Bay naval base).

Minesen argues that the Anti-Assignment Act does not apply because

the MWR Contract says that the United States government is not a party to

it. The definition of “Government” states that “The [United States]

Government is not a party to this contract . . . .” (Ex. M-1 at M-10008.) But

this language cannot be read in isolation. The rest of that very sentence

reads: “and no funds appropriated by Congress are in any way obligated or

can be obligated by virtue of any provision of this contract.” Id. Similar

language appears just above the parties’ signatures: “NO FUNDS OF THE

UNITED STATES GOVERNMENT WILL BE PAID OR BE DUE TO THE

CONTRACTOR BY VIRTUE OF THIS CONTRACT.” (Ex. M-1 at M-10002.)

Read in context, the first part of the sentence defining “Government” was

intended only to reinforce the point that, if Minesen were entitled to any

payment or recovery under the MWR Contract, the company could look only

to the Fund, and not to the United States government in general.

Other provisions of the MWR Contract make clear that the Fund is part

of the United States government. The definition of the Fund says that it is “a

nonappropriated fund instrumentality (NAFI) of the United States. . .” (Ex. M-1

at M-10008, emphasis added.) Virtually identical language appears in the

preamble of the MWR Contract. (Ex. M-1 at M-10002.) Section I, paragraph 1

of the MWR Contract provides that the Fund is exercising authority

delegated to it by the Secretary of the Army. (Ex. M-1 at M-10007.) As an

instrumentality of the government and a delegee of powers from a cabinet

member, the Fund is part of the federal government.

The Fund’s status as a NAFI is significant. “NAFIs are federal

government entities whose monies do not come from congressional

appropriation but rather primarily from [their] own activities, services, and

product sales.” Minesen Co. v. McHugh, 671 F.3d 1332, 1336 (Fed. Cir. 2012)

(cleaned up). The Supreme Court has held that military post exchanges,

which are the paradigm of a NAFI, “as now operated are arms of the

government deemed by it essential for the performance of governmental

functions. They are integral parts of the War Department, share in fulfilling

the duties entrusted to it, and partake of whatever immunities it may have

under the constitution and federal statutes.” Standard Oil Co. of California v.

Johnson, 316 U.S. 481, 485 (1942). This is true even though “[t]he government

assumes none of the financial obligations of the exchange.” Id. In short, a

NAFI is part of the government, even though the government is not liable for

its obligations.

Thus, the MWR Contract is covered by the Anti-Assignment Act

despite the language cited by Minesen. But even if the MWR Contract were

not covered, the Lease and Picnic Area Lease are undoubtedly government

contracts because the “United States of America” is the named lessor. (Ex. M-

3 at 10078; Ex. M-5 at 10095.) The same is true of the Operating Agreement

because elements of the Department of the Army are parties to it. (Ex. M-4 at

M-10090.) The MWR Contract depends on the leases and the Operating

Agreement; it would make no sense to assume the MWR Contract if Minesen

could not also assume the Lease, the Picnic Area Lease, and the Operating

Agreement.

But the government can waive the benefits of the Anti-Assignment Act.

Tuftco Corp. v. United States, 614 F.2d 740, 745 (Ct. Cl. 1980) (“Consistent with

the situations in which the Anti-Assignment Act has been deemed

inapplicable stands the long-recognized principle that [d]espite the bar of the

Anti-Assignment statute (41 U.S.C. § 15), the Government, if it chooses to do

so, may recognize an assignment.”) (cleaned up). Waiver is usually based on

the government’s acceptance of or acquiescence to a specific assignment. Id.

But a prospective waiver is also enforceable: if the contract permits

assignments, the government must honor those provisions and cannot hide

behind the Anti-Assignment Act. See, e.g., Liberty Ammunition, Inc. v. United

States, 101 Fed. Cl. 581, 588 (2011) (holding that a contractual provision

authorizing assignments to an entity completely owned and controlled by a

contracting party, or as part of a transfer of all or substantially all of a

contracting party’s assets, potentially waived the Anti-Assignment Act).

The MWR Contract provides that Minesen may not assign or novate

the contract without the Fund’s written consent. But it also provides that

“such consent will not be unreasonably withheld.” (Ex. M-1 at M-10020.)

When the Fund agreed to limit its power to reject assignments, it waived the

protections of the Anti-Assignment Act.

Therefore, § 365(c) does not prevent assumption of the Contracts.

C. Minesen’s Alleged Defaults

1. Notice of defaults

Minesen argues that the Fund has not given it notices to cure certain

defaults and that it need not cure those defaults as a condition to assumption

of the Contracts. I disagree.

Section 365 provides that a debtor in possession must cure all defaults

under the assumed contract or lease. To determine whether the debtor is in

“default” and what constitutes a “cure,” one must look to the terms of the

contract.5

5 In re Cochise College Park, Inc., 703 F.2d 1339, 1361 n.4 (9th Cir. 1983) (“Although whether

a given contract is ‘executory’ under the Bankruptcy Act is an issue of federal law . . . the

question of the legal consequences of one party’s failure to perform its remaining

obligations under a contract is an issue of state contract law . . . a bankruptcy court should

determine whether one of the parties’ failure to perform its remaining obligations would

give rise to a “material breach” excusing performance by other party under the contract

law applicable to the contract under the choice of law rules of the state in which the court

sits”). Under Hawaii law, “breach of contract” and “default” mean a failure to perform a

legal or contractual duty or any promise which forms the whole or part of a contract, and

a “material breach” is one that is “so substantial and fundamental as to defeat the object

of the parties in making the agreement.” Aickin v. Ocean View Investments Co., Inc., 84

Hawai’i 447, 457 n.16, 460 (Haw. 1997).

The MWR Contract requires Minesen to perform various obligations.

In most cases, Minesen must do those things without waiting for the Fund to

tell it to do them. The MWR Contract requires the Fund to give notices, not

as a precondition to Minesen’s obligation to perform its obligations, but

rather as a precondition to its exercise of remedies after Minesen defaults. In

other words, the Fund’s failure to give notice of default does not excuse

Minesen’s obligation to perform under the Contracts.

Minesen argues that case law provides that the Fund is barred from

asserting any default for which it did not give pre-petition notice. However,

the case law does not support Minesen’s argument. Those cases provide

clearly that post-petition notice is sufficient. For example, in In re Rachels

Indus., Inc., where Article 10 of the lease in question provided that a default

under the lease existed only if there was no cure within thirty days of receipt

of notice, the court determined that notice provided not only post-petition,

but also after the filing of the motion to assume, was sufficient. 109 B.R. at

811-812 (W.D. Tenn. 1990).

Therefore, the Fund’s failure to give cure or termination notices pre-

petition has no bearing on Minesen’s obligation to cure a proven default

under § 365.

2. Involvement of other Army institutions

Minesen suggests that it need not cure certain defaults because it owes

performance to entities other than the Fund. For example, Minesen points

out that it pays electrical charges to the garrison’s Department of Public

Works (“DPW”), and not to the Fund. I reject this argument for two reasons.

First, the Fund, DPW, the Schofield Barracks garrison, the other

affected Army agencies and institutions, and indeed the Army itself, are all

instrumentalities of the federal government. Minesen’s performance

nominally owed to the Fund, the DPW, and the other organizations is really

owed to the United States. The fact that the government has created various

internal organizations to carry out its functions does not change Minesen’s

obligations under the Contracts.

Second, even if DPW (for example) were truly separate from the Fund,

it would not matter. Section 365 requires Minesen to cure its material

defaults under the Contracts. If the Contracts require Minesen to render

performance to third parties and Minesen fails to perform, Minesen is in

default under the Contracts, and it cannot assume the Contracts without

curing those defaults.

3. Nonpayment for electricity

Paragraph 24 of the Lease requires Minesen to

pay the cost, as determined by the [garrison command] of

producing and/or supplying any utilities and other services

furnished by the Government or through Government-owned

facilities for the use of [Minesen], including [Minesen’s]

proportionate share of the cost of operation and maintenance of

the Government-owned facilities by which such utilities or

services are provided or supplied. Payment shall be made in the

method prescribed by the said Officer, upon bills rendered

monthly.

Paragraph 5b(3) of the Operating Agreement requires the garrison

command to “provide appropriate utilities to the Inn on a reimbursable

basis. Invoices shall be provided to [Minesen] on a monthly basis.” Pursuant

to paragraph 5c(5), Minesen agreed to “promptly settle utility charges upon

verification of accuracy.”

The Fund contends that Minesen has breached the agreements by

failing to pay electrical charges amounting to $561,538.89 through June 2021

plus additional amounts for subsequent months. Minesen denies that it owes

this amount on three grounds.

First, Minesen argues that it did not receive monthly bills as the

contracts require. I find that Minesen usually received bills (which the

garrison calls “statements of account”) monthly, but that sometimes it

received statements more or less often than that. I find, however, that any

delay or irregularity in sending statements to Minesen does not excuse

Minesen’s obligation to pay for electricity under the Contracts.

Second, Minesen argues that the amounts billed are questionable

because they vary from month to month in inexplicable ways. Mr. Jensen

testified that the Inn’s electricity consumption depends on occupancy, and

that the variation in the electric bills does not correlate with changes in

occupancy. Therefore, Minesen has paid for electricity based on a formula

that Mr. Jensen devised, rather than the bills.

But the Fund established that the electric bills can vary even if

occupancy does not. The Fund’s witnesses credibly testified that variations

in the bills were partly attributable to changes in the rates billed by the

electric utility that furnishes power to the Schofield Barracks installation and

partly to the fact that the billing periods were sometimes longer or shorter

than a calendar month. The bills in evidence bear this out: total electrical

usage varies seasonally and is generally highest in the summer, when air

conditioning usage peaks, and the rate charged for electricity by the utility

varies from month to month. The Fund also proved that the Inn consumes

electricity, not just for guest rooms, but also for the office, convenience store,

and laundry room. (The laundry room is heavily used, not only by guests at

the Inn, but by other members of the garrison community, because it is the

only public laundry facility at Schofield Barracks.) For these reasons, it is not

surprising that electricity usage does not exactly track occupancy.

Most importantly, Minesen offered only suspicions, and no evidence,

that the bills were wrong. The electric meter that measures power supplied

to the Inn was installed recently (in 2017) and Minesen offered no evidence

that it is inaccurate or unreliable. I find that the electricity billings are

accurate.

Third, Minesen argues that DPW prevented it from verifying the

accuracy of the bills. Prior to 2017, Minesen was able to read the meter itself,

whenever it chose to do so. In 2017, DPW placed a locked cover on the

electric meter to protect it from the elements and passers-by. This made it

impossible for Minesen to read the meter at times of its choosing. I find that

the garrison has informed Minesen whenever DPW plans to read the meter

and has invited Minesen to look at the meter at those times, but Minesen did

not always take that opportunity. (Ex. M-65 at M-11429.) Minesen offered no

evidence that DPW’s personnel have read the meter incorrectly. Minesen

wants to read the meter daily but has not convincingly explained why such

frequent readings are necessary to verify the electric charges. Minesen also

wants to install its own submeter, but Minesen has not explained why its

submeter would be more accurate than DPW’s or what the parties should do

if the submeter produced different readings than DPW’s meter. I find that

Minesen has had an ample opportunity to verify the electricity charges and

that Minesen is obligated to settle the charges immediately.

Fourth, there is a dispute about whether Minesen must pay for utilities

in advance or in arrears. Until about 2017, the garrison billed Minesen for

electricity in arrears, after Minesen had consumed the electricity. In or

around 2017, Army regulations changed to require non-federal customers to

pay for an entire year’s estimated utility charges in advance. Annual

payment is inconsistent with the MWR Contract; that contract does not

explicitly provide for payment in arrears, but that had been the parties’

practice for over twenty years. Eventually, Minesen and the garrison agreed

that the garrison would bill Minesen for one month’s estimated utility

charges in advance, subject to a periodic “true up” to match the estimated

bills to actual consumption. Although the parties never reduced this

agreement to a signed writing, both parties are apparently content with it, so

it should continue unless and until the parties agree to a further modification

of the MWR Contract and the Operating Agreement.

I find that Minesen is in default under the Contracts for failure to pay

electric bills and that Minesen owes $561,538.89 through June 2021 plus

additional amounts charged for subsequent months.

4. Sale of alcoholic beverages

(a) Distilled spirits

Section I, paragraph 26 of the MWR Contract provides that Minesen

“shall not sell, store, dispense, or knowingly permit the sale, storage or

dispensing of any distilled spirits” at the Inn.

Despite this flat prohibition, Minesen has admittedly sold distilled

spirits at the Inn for many years, with only a few recent breaks. Minesen

attempts to justify this in two ways.

First, Minesen relies on section I, paragraph 4a of the MWR Contract,

which requires Minesen to operate and maintain “a limited-service hotel

with normal services and amenities. . .” Minesen says that selling minibottles

of liquor is a “normal amenity” of a limited-service hotel. This argument

fails. It is an elementary rule of contract interpretation that specific

provisions control general provisions. See, e.g., Shivkov v. Artex Risk Solutions,

Inc., 974 F.3d 1051, 1063 (9th Cir. 2020) (“It is a standard rule of contract

interpretation that specific terms control over general ones.”) (internal

citations omitted); Kaiser Hawaii Kai Development Co. v. Murray, 49 Haw. 214,

228 (Haw. 1966) (“in case of inconsistency between general and specific

provisions, the specific controls the general.”). The general statement about

“amenities” does not trump the specific prohibition of “distilled spirits.”

Second, Minesen offered evidence that the Fund and the garrison

command did not object to Minesen’s liquor sales until 2016, although

Minesen had sold liquor for many years before that. Minesen says that this

history means that it did not breach the Contracts by selling distilled spirits.

Minesen did not prove, however, that there was either a waiver or an oral

modification of the distilled spirits provision. There was no persuasive

evidence that the Fund or the garrison command knew, prior to 2016, that

MWR was selling alcohol or that either the Fund or the garrison command

agreed to modify the distilled spirits provision at any time. Therefore, the

MWR Contract still prohibits Minesen from selling distilled spirits, and

Minesen’s sales of distilled spirits were breaches of that contract.

(b) Beer and wine.

Minesen has also sold beer and wine at the Inn. Beer and wine are not

“distilled spirits,” but other provisions of the Contracts come into play.6

Section I, paragraph 10.h of the MWR Contract requires Minesen to

“adhere to all applicable Federal, State, and local laws, codes, ordinances,

and regulations pertaining to the construction, operation, use, repair, and

maintenance of the [Inn]. If a conflict occurs between the provisions of this

contract and the applicable Federal, State, and local laws the latter shall

prevail.” Similarly, paragraph 11 of the Lease requires Minesen to “comply

with all applicable laws, ordinances, and regulations of the Government, of

the state, county, and municipality wherein the [Inn] is located, with regard

to . . . licenses . . . and all other matters.”

Reinforcing these provisions, section I, paragraph 32 of the MWR

Contract says that “the leased premises are presently subject to concurrent

jurisdiction,” meaning that the Schofield Barracks garrison is subject, not

only to federal law and the Army’s regulations, but also to state and local

6 Section 19(a) of the Picnic Area Lease provides that Minesen “shall not sell, store or

dispense, or permit the sale, storage, or dispensing of beer or other intoxicating liquors on

the premises.” Because the liquor sales were made at the convenience store rather than

within the picnic area, Minesen is not in breach of the Picnic Area Lease.

law. This provision recognizes that, under § 16(b) of the Admissions Act, the

federal and Hawaii state governments have concurrent legislative

jurisdiction over military bases existing at the time of Hawaii’s admission to

the union, unless Congress legislates otherwise. See Kalaka Nui, Inc. v. Actus

Lend Lease, LLC, Civ. No. 08-00308 SOM/LEK, 2009 WL 1227892, at *5 (D.

Haw. May 5, 2009) (“The Admission Act [Pub.L. No. 86–3, 73 Stat. 4, 11–12

(March 18, 1959)] clearly provides that Hawaii has concurrent jurisdiction

over such military bases [Hickam Air Force Base] so long as state jurisdiction

is consistent with post-Admission Act laws enacted by the United States

Congress.”); State v. Thomas, 8 Haw. App. 497, 504, 810 P.2d 668, 672 (1991)

(“Absent a concrete pronouncement by the federal government that it

desires or requires exclusive jurisdiction over the land at Iroquois Point, we

must give effect to the concurrent jurisdiction established by § 16(b) [of the

Admissions Act].”) I take judicial notice that Schofield Barracks was a

military installation when Hawaii became a state. No Congressional

legislation limits the concurrent jurisdiction of the state and local

governments over Schofield Barracks.7

Therefore, the Contracts require Minesen to comply with any

applicable State, county, and local laws, including liquor licensing laws.

Hawaii law provides that, with limited exceptions not applicable here,

one must have a license issued by the county to sell “liquor,” Haw. Rev. Stat.

§§ 281-101, 101.4, which includes distilled spirits, beer, and wine, id. § 281-1.

The statute does not exclude sales of liquor on military bases. The MWR

Contract makes Minesen, “responsible for obtaining any necessary

licenses. . . .” (M-1 at M-1011.)

Minesen does not have a liquor license, so its sales of alcoholic

beverages are defaults under the Contracts.8

7 Jack’s Tours, Inc. v. Kilauea Military Camp, 112 Hawaii 150 (2006), is not to the contrary. In

that case, a private bus operator argued that Kilauea Military Camp, a NAFI, could not

offer bus tours without obtaining a license from the state’s Public Utilities Commission.

Kilauea Military Camp argued that, as an arm of the federal government that Congress

had not subjected to state law, it was immune from state regulation. The Hawaii Supreme

Court agreed. But the liquor license requirement in this case does not fall on the Fund;

rather, it falls on Minesen, and Minesen lacks governmental immunity and has expressly

agreed to comply with state and local law.

8 Mr. Jensen testified that the Honolulu Liquor Commission told Minesen that the

commission was not concerned with liquor sales on military bases. There is no evidence

of who made this statement, whether that person knew all relevant facts, or that the

person was authorized to bind the commission.

5. Reports

Section 1, paragraph 16 of the MWR Contract, as amended by

Modification No. P00018, requires Minesen to provide the Fund with three

sets of financial reports: (1) “annual operating, capital expenditure and cash

flow budget projections, no later than 30 days prior to the beginning of the

calendar year”; (2) “monthly financials of the [Inn] that are in conformance

with generally accepted accounting principles and the most current edition

of the Uniform System of Accounts for Lodging . . . . within 20 calendar days

following the reporting period”; and (3) “compilation report accompanied

with the compiled financial statements or Independent Accountant’s Review

Report within 90 calendar days following the calendar year. . .” (M-2 at M-

10073.)

Minesen contends that it has produced all required reports, that if any

are missing it can provide them promptly, and that any tardiness in

providing the reports is immaterial. But the Fund points out, and Minesen

does not deny, that some of the reports do not comply with GAAP. (M-48.)

The evidence at trial was not sufficient to establish whether and to

what extent Minesen is in default in this respect.

6. Pangolin Management Agreement

Section I, paragraph 45 of the MWR Contract provides that, within 7

days after awarding a “subcontract,” Minesen must deliver to the Fund a

statement naming the subcontractor and describing the subcontractor’s

work.

In 2014, Minesen and Pangolin entered into a management agreement,

pursuant to which Pangolin agreed to manage the Inn. Pangolin is wholly

owned by Max Jensen, who also owns 95% of Minesen’s stock.9

Pangolin is a “subcontractor” of Minesen within the ordinary meaning

of that word because Pangolin agreed to do some of the things that Minesen

was obligated to do under the MWR Contract. (I am not convinced by

Minesen’s argument that the provision applies only to construction

subcontractors; the placement of the provision within the agreement does

9 Minesen claims that its former lender, First Hawaiian Bank, insisted that Minesen enter

into a management agreement. I do not credit the testimony in support of this contention,

but it is irrelevant. Minesen must comply with the MWR Contract no matter what First

Hawaiian Bank told it to do.

not override its plain words.) Minesen did not timely deliver the required

statement to the Fund (although some of the financial reports it provided to

the Fund disclosed payments to Pangolin).10

But Minesen’s failure to comply with this provision of the MWR

Contract did not injure the Fund. The MWR Contract only requires Minesen

to give the Fund after-the-fact notice of a subcontractor and does not give the

Fund any approval rights. The Fund would have had no additional rights,

and here is no evidence that the Fund would have behaved differently, if

Minesen had given timely and proper notice. I find this breach was

immaterial and need not be cured.

7. Pangolin Indebtedness

Section 1, paragraph 20 of the MWR Contract provides that “[t]he

Fund reserves the right to approve any initial and future financing of the

[Inn], including the refinancing of any loans, however, approval will not be

10 Minesen also argues that a consent document signed by the Fund confirms that the

Fund received a copy of the management agreement. That document (Ex M-43 at M-

10911) says no such thing. Rather, it says that the fund “acknowledge[s] receiving copies

of the Mortgage, the promissory note, the loan document, and other documents

evidencing and governing the loan;” it does not say that the Fund received all of the loan

documents, and never mentions the management agreement.

unreasonably withheld.” (M-1 at M-10015.)

In 2014, Minesen borrowed $10,600,000 from First Hawaiian Bank. The

loan was secured by mortgages of the Leases and security interests in

Minesen’s interest in the MWR Contract and the RRA (described in the next

section). Max Jensen personally guaranteed the loan. The Fund consented to

these mortgages and security interests, acknowledged that Minesen was not

then in default, and agreed to give notices of default to First Hawaiian Bank.

(Ex. M-43 at M-10910.)11

In 2018, the Fund sent Minesen multiple notices of defaults under the

MWR Contract. The Fund sent copies of these notices to First Hawaiian Bank

as it had agreed. In May and June 2018, First Hawaiian Bank notified

Minesen and Mr. Jensen that Minesen’s defaults under the MWR Contract

were also defaults under the loan. First Hawaiian Bank demanded that

Minesen either cure its defaults under the MWR Contract or pay off the loan

in full. Minesen and Mr. Jensen elected to have Pangolin pay off First

11 First Hawaiian Bank also took a collateral assignment of the Pangolin management

agreement. The written consent signed by the Fund (Ex. 43) does not mention this

document.

Hawaiian Bank. Minesen and Pangolin (but not First Hawaiian Bank or the

Fund) then signed an agreement stating that Pangolin would be

“subrogated” to First Hawaiian Bank’s rights.

I find that the term “refinancing,” as used in the MWR Contract, is

ambiguous, in that one can reasonably read it to include or exclude the

transaction in which Pangolin repaid the First Hawaiian Bank debt. I further

find that, in the context of the MWR Contract, the term “refinancing”

includes that transaction. The Fund has a compelling interest in Minesen’s

financial condition. Minesen provides an important service to the Fund’s

constituency (soldiers and their families) often at a challenging time in their

lives (while they are moving from one home to another). The Fund has a

good reason to monitor Minesen’s financial ability to provide this service.

The MWR Contract requires Minesen to provide these services at below-

market rates, which increases the financial risk of Minesen’s operation. For

these reasons, the MWR Contract requires Minesen to keep the Fund

informed of the details of its finances and operations. For the same reasons,

the term “refinancing” should be given a broad meaning, to preserve the

Fund’s oversight of Minesen’s finances. The Fund has good reason to want

to know whether a lender of which it has approved has been replaced by

another lender, and, more specifically, whether an insider “lender” has

replaced an independent financial institution.

In addition, the legal consequences of the Pangolin transaction should

hinge on its substance rather than its form. If Pangolin had lent money to

Minesen (on exactly the same terms as the First Hawaiian Bank loan) and

Minesen had used that money to repay First Hawaiian Bank, all parties

would agree that a “refinancing” had occurred. The only difference between

that hypothetical case and this case is that Pangolin paid the money directly

to First Hawaiian Bank rather than routing it through Minesen. Because the

result of both scenarios is the same (Pangolin’s money paid off Minesen’s

debt to First Hawaiian Bank), the legal consequences should also be the

same.

Thus, the Pangolin “subrogation” transaction12 was a “refinancing” to

12 It is not clear that subrogation is legally available. Under Hawaii law, the subrogation

doctrine “is not to be applied in favor of one who has officiously, and as a mere volunteer,

paid the debt of another, for which neither he nor his property was under any obligation

which the Fund did not consent. If Minesen had asked for the Fund’s

consent, the Fund could reasonably have withheld consent because at that

time Minesen was in default under the MWR Contract and was facing

imminent termination.

8. Replacement Reserve Account

Section I, paragraph 12 of the MWR Contract provides that Minesen

“shall maintain a replacement reserve account (“RRA”) into which will be

deposited four (4) percent of gross revenues.” The funds in the RRA “shall

be used for the planned renovations, major repairs, and replacement of the

facilities[,] furnishings, fixtures, interior and exterior finishes, and other

component [sic].”

The MWR Contract does not expressly define the “planned

renovations, major repairs, and replacement[s],” but other provisions

to pay; and it is not allowed where it works any injustice to the rights of others.” Alamida

v. Wilson, 53 Haw. 398, 403 (1972). Pangolin was not indebted to First Hawaiian Bank and

using subrogation to circumvent the Fund’s approval rights would be unjust to the Fund.

Further, First Hawaiian Bank released its mortgages and security interests. Minesen does

not explain how Pangolin could resurrect those rights in the face of the strong arm power

under § 544(a).

contemplate that the plans would require mutual agreement of the Fund and

Minesen. Section I, paragraph 13 provides that “Planning for the upgrades

and/or renovations of the [Inn] will occur at a minimum of every three years.

The [Fund’s] Contracting Officer … will jointly with Minesen approve all

capital expense plans.” Section I, paragraph 12 provides that, when the

MWR Contract terminates, any funds remaining in the RRA “shall first be

applied to the planned renovations, major repairs and replacement of the

property and those items identified since the most recent renovation plan

was developed that the Fund and [Minesen] mutually agree require repair or

replacement.”

Minesen has not deposited four percent of its gross revenues in an

RRA. This is a breach of the MWR Contract.

Minesen argues that it is not in default, or that its default is excused,

because Minesen has spent at least four percent of its gross revenues on

“renovations, repairs and replacements, and their maintenance.” (ECF 289-1

at 16-17.) This argument is unavailing.

First, I find that Minesen did not prove that the parties waived or

orally modified the RRA provisions of the MWR Contract. Although

Minesen’s financial reports to the Fund disclosed expenditures for repairs,

there is no evidence that Minesen disclosed to the Fund that it was making

the kinds of “renovations, major repairs, and replacements” for which the

RRA was intended.

Second, the MWR Contract does not permit Minesen to decide

unilaterally on these expenses. On the contrary, the MWR Contract

contemplates that the Fund and Minesen must agree on expenditures of this

type.

Third, even if Minesen had the unilateral power to decide on these

expenses, it has not provided enough evidence to prove that its expenditures

were for “renovations, major repairs, and replacements,” as opposed to

ordinary maintenance and less-than-major repairs. For example, Minesen

claims credit against the RRA deposit obligation for “internet expenses,”

“office supplies,” “software/hardware & training/travel expense,” and the

like.

Fourth, Minesen’s failure to deposit money in the RRA frustrates the

provision of the MWR Contract that money in the RRA upon termination

will be used to complete ongoing or planned renovations before any excess

funds are released to Minesen. If Minesen does not make deposits as

required, MWR would have to use its own funds for that purpose. By

keeping money in its own accounts rather than funding the RRA, Minesen

has frustrated this provision.

The evidence does not establish the total shortfall in the RRA deposits.

For 2018, the amount was $397,564.52. The Fund offered reports showing the

amounts for other years, but I declined to receive them in evidence because

the Fund did not timely produce them.

9. Room overcharges

Section I, paragraph 14 specifies the room rates that Minesen was

initially allowed to charge. Paragraph 15 provides for adjustments of the

room rates and provides that, “[a]ny agreed upon rate changes shall be made

effective the first day of the second month after approval by written

modification to this contract and signed by both parties.” The same

paragraph also provides that “[t]he room rates shall not exceed the

maximum lodging portion of the transient lodging allowance (TLA),”

meaning the lodging costs for which the government reimburses military

travelers.

In August 2015, Minesen requested a room rate adjustment. In early

2016, the parties agreed on a rate sheet with one change left to make.

Although the parties had not signed a contract modification, Minesen began

charging the new, higher rates.

The Fund sent a written modification of the MWR Contract to Mr.

Jensen for execution. He did not sign it because he thought it was incorrect.

The Fund prepared and transmitted more versions of the modification, but

Mr. Jensen still failed to sign.

The early versions of the modification specified that it would go into

effect on March 1, 2016. This effective date was itself a modification of the

MWR Contract, which provided that rate changes would go into effect after

the parties signed a written contract modification. When Mr. Jensen refused

to sign for three years, however, the Fund was no longer willing to make this

concession. Accordingly, the Fund transmitted another version of the

modification document that said it would go into effect upon execution. Mr.

Jensen eventually signed this version on May 29, 2019. By then, Minesen had

been charging the higher rates for over three years. This is a default under

the MWR Contract.

The total amount that Minesen charged to guests in excess of the

approved room rates is $1,097,438.95. In addition, Minesen charged guests a

total of $9,027 in excess of the maximum lodging portion of the transient

lodging allowance.

Minesen attempts to avoid the consequences of its breach in several

ways.

First, it claims that the Fund orally approved the rates in 2016, before

Minesen began charging them. The Fund’s contracting officer denies this. I

credit the contracting officer’s testimony, partly because Minesen’s

contention is inconsistent with Mr. Jensen’s testimony that the initial

versions of the written contract modification were wrong. This means that

the Fund and Minesen did not have a meeting of the minds at that point. I

find that the Fund never agreed to waive or modify the contract provisions

requiring that all modifications be set forth in signed writings.

Second, Minesen claims that the Fund lacks standing to raise this issue.

Minesen reasons that only the soldiers who paid Minesen’s room rates could

have been hurt by overcharges, and they were not hurt because Minesen’s

rates were always less than the per diem travel reimbursements to which

soldiers were entitled. This argument ignores the fact that the Army

reimburses official travelers for their actual lodging expenses up to the

maximum per diem allowance. According to the military’s Joint Travel

Regulations (“JTR”), “The calculation of per diem allowances for each travel

day is based on the actual amount paid for lodging, limited to the lodging portion

of the locality per diem rate, plus the applicable meal rate and incidental

expense (M&IE) rate, unless otherwise stated in the JTR.”13 Therefore, the

government paid soldiers more than it should have paid because Minesen

charged soldiers more than the approved rates under the MWR Contract.

Moreover, as described above, § 365 does not distinguish between a breach

13 The Joint Travel Regulations (JTR): Uniformed Service Members and DOD Civilian

Employees (November 1, 2021), defensetravel.dod.mil/Docs/perdiem/JTR.pdf at 2-25

(emphasis added).

against the nondebtor contracting party and one against a third party.

Instead, if there is any material breach, the debtor must demonstrate it has

cured it or provide adequate assurance.

Third, Minesen claims that the Fund released the overcharge claims in

the 2017 settlement agreement. This is false. That agreement does not include

a general release of all claims. Rather, the Fund released Minesen of all

claims “arising under” certain identified ASBCA appeals. (Ex. M-6 at M-

10123.) The recitals to the settlement agreement make clear that those

appeals relate solely to the Inn’s status as “government quarters.” (See

section III.D.1 below.) Those appeals had nothing to do with the maximum

room rates under the MWR Contract. Therefore, the release does not apply.

Fourth, Minesen argues that, if the Fund is right that the Inn is no

longer “government quarters” due to the 2017 settlement agreement, then

the Fund has no right to limit Minesen’s room rates. The MWR Contract does

not support this agreement. The Government Quarters Provision of the

MWR Contract (discussed in section III.D.1 below) is separate from and

independent of the room rates provision. Deleting the Government Quarters

Provision had no effect on the room rates provision. Minesen surely wishes it

could set its own rates, but it gave up that right when it signed the MWR

Contract and did not regain that right when it signed the 2017 settlement

agreement.

10. Name change

In or around 2018, Minesin began to advertise the Inn as the “Sunrise

Inn.” This was in breach of Section I, paragraph 8 of the MWR Contract,

which provides that the Fund would select the name of the Inn with

Minesin’s approval. The Fund did not select or approve the “Sunrise Inn”

name. Minesen eventually stopped using the Sunrise Inn name, so the

default has been cured. There is no evidence that the name change injured

the Fund.

D. The Business Judgment Test

Minesen’s decision to assume the Contracts is a reasonable exercise of

its business judgment and assumption of the Contracts is undoubtedly in the

best interest of the bankruptcy estate. Minesen has operated the Inn at a

substantial profit for many years and will likely generate substantial

additional profits from operating the Inn during the remaining term of the

MWR Contract. This will be true even after Minesen cures the defaults

identified above.

1. Statements of non-availability

The parties have argued at length about whether the Fund has

wrongfully refused to allow Minesen to offer so-called statements of

nonavailability, or SNAs. Neither party has explained, however, exactly how

that question is legally relevant to assumption of the Contracts. I assume that

Minesen contends that the Fund has breached the contract and that its own

breaches are, therefore, excused.

Further, the issue is relevant to whether Minesen has exercised proper

business judgment in deciding to assume the agreements. Minesen says that

the right to issue SNAs is a key component of its business model. This

argument is disingenuous. Minesen’s evidence shows that it has operated

the Inn profitably even after its right to issue SNAs was withdrawn.

Minesen’s cash on hand has increased from about $700,000 on the date of the

chapter 11 petition to over $5 million at the end of February 2021. (ECF 319 at

6.) In Minesen’s own words, Minesen “can clearly operate the Inn at a profit,

even though [sic] an unprecedented pandemic that wreaked havoc on hotels

in Hawaii.” Id. “In fact, the evidence has shown that Minesen has had

excellent performance during the Summer of 2021.” (ECF 492 at 5.) Minesen

does not attempt to reconcile its boasts about its recent financial performance

with its laments about the loss of the SNAs.

Originally, the MWR Contract gave official travelers a powerful

financial incentive to stay at the Inn. Section I, paragraph 7 of the MWR

Contract (the “Government Quarters Provision”) states:

TLF DEFINED AS GOVERNMENT QUARTERS. The

completed TLF will fall within the current Joint Federal Travel

Regulation definition of government quarters, if its use is

directed in accordance with the regulation of the military

service concerned. The Joint Federal Travel Regulation and

any definition contained therein is subject to change at any

time. Travelers receiving government per diem payment, in

order not to forfeit their per diem entitlement, will be required

to patronize the TLF on a mandatory basis as long as

confirmed reservation priorities are in accordance with those

provided at Section III, Operation Requirements.

Section 5b(7) of the 1994 Operating Agreement reinforced section 7 of

the MWR Contract by requiring the Schofield Barracks garrison command to

[r]efer all Schofield Barracks official travelers to the Inn at

Schofield Barracks for assignment of quarters. The Inn is

considered Government quarters in accordance with the Joint

Federal Travel Regulation, Appendix A, definition of

Government quarters, subparagraph 6. Personnel on official

travel who are authorized use of the Inn will not be issued

statements of non-availability unless the Inn is at maximum

capacity.

The Government Quarters Provision benefitted Minesen by giving it a

captive market: in order to obtain any reimbursement for their lodging costs,

official military travelers had to stay at the Inn (unless it was full).

In practice, the Government Quarters Provision required a

servicemember to seek a reservation at the Inn. If the Inn were full for the

servicemember’s dates of stay, the Inn issued an SNA stating that lodging at

the Inn was unavailable. With an SNA, the servicemember could stay in

other lodgings and still obtain reimbursement.

In or around 1997, the Joint Federal Travel Regulations (now called the

Joint Travel Regulations, or “JTR”) were changed to allow soldiers to use

their per diem allotment to stay at any hotel, regardless of whether

government quarters were available. This reduced travelers’ incentives to

stay at the Inn. It did not eliminate those incentives, however: the Inn is

located on the Schofield Barracks installation, close to servicemembers’

places of work and schools for their children; and there are no other hotels in

the immediate vicinity.

In 1999, Minesen asserted a claim against the Fund for breach of

contract, damages, and other relief relating to this change in the JTR. The

Fund denied the claim and Minesen appealed to the Armed Services Board

of Contract Appeals (“ASBCA”).

After almost seven years of contentious litigation, the ASBCA

determined in 2006 that the Fund had breached the MWR Contract by

acquiescing to the change to the JTR. Appeals of -- Minesen Co., 2007-1

B.C.A. (CCH) P33,456, 165856, 2006 ASBCA LEXIS 101, *203 (A.S.B.C.A.

November 20, 2006). The ASBCA left the determination of damages for

further proceedings.

After another decade of litigation, Minesen and the Fund entered into a

settlement agreement dated April 28, 2017. (Ex. M-6.) The Fund agreed to

pay Minesen $8,375,000.00 (in addition to prior payments totaling

$893,025.00) “for any additional past lost profits and any anticipatory lost

profits due to [the Fund’s] breach through the expiration of the contract.”14

The parties also agreed to modify the MWR Contract by (among other

things) deleting the Government Quarters Provision, and they agreed that

the deletion of that paragraph from the MWR Contract “voided” paragraph

5b(7) of the Operating Agreement. Also on April 28, 2017, the Fund and

Debtor executed the Modification Agreement, which formally incorporated

the changes required by the Settlement Agreement into the MWR Contract.

The Fund contends that the deletion of the Government Quarters

Provision from the MWR Contract and the corresponding change to the

Operating Agreement meant that official military travelers could obtain

maximum reimbursement if they stayed at another hotel, even if they did

not have an SNA for the Inn. Minesen argues that SNAs were required even

after these changes. For the following reasons, I agree with the Fund’s

position and reject Minesen’s position on this issue.

First, the plain language of the Settlement Agreement is consistent with

14 Minesen evidently did not need the money to sustain its operations. “The proceeds of

settlement were $8,375,000 which were promptly distributed to [Minesen’s] shareholder.”

(Ex. M-14 at M-10289.)

the Fund’s position and cannot be reconciled with Minesen’s position. If

Minesen’s position were correct, the deletion of the Government Quarters

Provision would have been a meaningless gesture. The parties would not

have agreed to that change unless it meant something, and the obvious

meaning of the change is that the Inn would no longer be treated as

“government quarters.”

Second, other terms of the Settlement Agreement contradict Minesen’s

position. The Settlement Agreement provides that the Fund’s payment was

meant to compensate Minesen, not only for past lost profits, but also for

“any anticipatory lost profits due to [the Fund’s] breach through the

expiration of the [MWR] Contract.” If Minesen were entitled to issue SNAs

after the Settlement Agreement, there could not have been any “lost future

profits” due to the absence of SNAs.

Third, Max Jensen testified at trial that, during the meeting that led to

the Settlement Agreement, Jennifer Sherman (who was and is the Fund’s

contracting officer with authority over the MWR Contract) orally assured

him that Minesen would still control the SNAs after the Settlement

Agreement. Ms. Sherman testified that she said no such thing. Mr. Jensen’s

testimony is extrinsic evidence contradicting the plain meaning of the

integrated Settlement Agreement; his testimony is inadmissible under the

parol evidence rule.15 Even if Mr. Jensen’s testimony were admissible, I find

Ms. Sherman’s testimony on this point more credible than his. I do not

believe that Ms. Sherman told Mr. Jensen that the changes to the MWR

Contract and the Operating Agreement were meaningless. I find that Ms.

Sherman did not give such an assurance to Mr. Jensen or Minesen.

Fourth, Minesen points out that, for about a year after the Settlement

Agreement, the Fund and the garrison continued to allow Minesen to issue

SNAs. Ms. Sherman and witnesses from the garrison command acknowledge

this but state that it was done at least in part for the convenience of traveling

servicemembers. Many guests of the Inn are traveling due to a permanent

change of station, or “PCS.” The Settlement Agreement was signed in late

April, just before the summer months during which most PCS travel occurs.

15 See, e.g., Cleary v. News Corp., 30 F.3d 1255, 1263 (9th Cir. 1994); Hawaiian Ass’n of

Seventh-Day Adventists v. Wong, 130 Hawai’i 36 (Haw. 2013).

(Relocation is less burdensome on servicemembers’ families during the

summer because the children are out of school.) Also, most PCS travel is

planned many months in advance. The garrison command chose to continue

to allow Minesen to issue SNAs, not to benefit Minesen or modify the

Settlement Agreement, but rather to avoid disrupting servicemembers’ travel

plans. Therefore, there was no modification of the Settlement Agreement.

Fifth, Minesen claims that, even if the Inn is no longer “government

quarters” under the MWR Contract, it remains “government quarters” by

virtue of the JTR. This is false.

The relevant provision of the JTR (Ex. R-33 at R-50428) states that

“Government Qtrs” includes “[l]odging facilities (other than privatized

housing on a U.S. Installation if the lodging facilities are owned and

operated by a private sector entity and the use of the lodging facilities is

directed by Service regulations.” Ms. Sherman testified that the use of the

Inn is not “directed by Service regulations.” Minesen offered no evidence or

argument to the contrary. Ms. Sherman’s testimony is consistent with Section

I, paragraph 30.b of the MWR Contract, which provides that Minesen’s

“personnel shall not be placed under the supervision, direction, or

evaluation of a Federal officer, military or civilian, in connection the

performance under this contract.” Minesen’s duties to the Fund and the

other arms of the government stem from the Contracts, and not from Army

regulations. Therefore, the Inn is not “government quarters” under the JTR.

E. Cure and Compensation

1. Curable or incurable defaults

The Fund argues that multiple of Minesen’s breaches are nonmonetary

and are historical facts that cannot be undone. The Fund then argues, under

the “historical fact” theory, the contracts and leases are not assumable.16 But

16 The Fund cites a line of cases including In re Deppe, 110 B.R. 898, 904 (Bankr. D. Minn.

1990), In re Lee West Enterprises, Inc., 179 B.R. 204, 207 (Bankr. C.D. Cal. 1995), and, most

recently, In re Claremont Acquisition, 113 F.3d 1029, 1034 (9th Cir. 1997). In each of those

cases, the breach at issue was the failure of a franchisee to avoid an interruption in

operations. The courts in those cases determined these breaches – the lapses in operations

– took place and were a historical fact that the estates could not overcome. Those courts

highlighted the gravity of those breaches by describing that the specific breach of

interruption of operation was greatly significant in the damage it caused to goodwill such

that not only did the contracts recognize its important – in one case even allowing the

franchisor to terminate the agreement immediately without the necessity of any notice or

time to cure – but also state statutes allowed termination in the event of interrupted

operations. The Fund attempts unpersuasively to argue that the provisions governing

notice of subcontractors, supplying financial reports, and requiring consent to new

financing are equally material and grave. However, I decline to extend the historical fact

theory beyond the franchisor-franchisee context to bar assumption.

Minesen must cure only material defaults that are so substantial and

fundamental as to defeat the object of the agreement. See Aickin, 84 Hawai’i

at 460 (Haw. 1997).

I am not persuaded that any tardiness in providing the reports is so

substantial as to defeat the purpose of the Contracts. The requirement to

provide the reports is material, but Minesen’s delay to date in providing

them is not material and is curable. Similarly, I find that the breaches of the

timeliness requirements for notice of subcontractors and obtaining consent

prior to new financing are not material.

2. Nonpayment for electricity

Minesen must immediately pay electricity bills in the amount of

$561,538.89 through June 2021 plus additional amounts charged for

subsequent months.

3. Sale of alcoholic beverages

Minesen must immediately cease all sales of alcoholic beverages unless

and until it receives (1) explicit written permission from the garrison

commander or the Fund to resume such sales and (2) a liquor license issued

by the Honolulu Liquor Commission or an explicit written statement from

the commission that Minesen is not required to have a liquor license. No

compensation for Minesen’s past liquor sales is required as there is no

evidence that Minesen’s sales injured anyone (for example, by reducing

liquor sales at approved outlets).

4. Reports

Not later than fourteen days after entry of this decision, the Fund must

provide a list of all reports that Minesen is required to provide under the

MWR Contract, as amended by Modification No. P00018, and that have not

been provided or that do not comply with the contractual requirements

(other than the due date of any tardy reports). Not later than 28 days after

the Fund provides this list, Minesen must either provide the reports or file a

detailed objection to the inclusion of some or all of the reports on the list.

5. Pangolin Management Agreement and Indebtedness

No further action is required to cure Minesen’s failure to provide a

written notice of the Pangolin management agreement.

Pangolin must immediately release (or convert to equity) all claims

against Minesen arising out of its repayment of the First Hawaiian Bank

loan.

6. Replacement Reserve Account

The evidence received at trial does not permit me to determine

the full amount that Minesen is required to deposit in the RRA (because the

Fund did not offer all of the required evidence timely). Not later than

fourteen days after entry of this decision, the Fund must provide a detailed

statement of the amount which it contends Minesen is required to deposit.

Not later than 28 days after the Fund provides this statement, Minesen must

file a statement describing any amount that it contends it is not obligated to

deposit, including factual and legal support for its contentions, and must

deposit any portion of the amount that it does not dispute.

7. Room overcharges

Minesen must immediately refund $1,097,438.95 to the Fund. In

addition, Minesen must take reasonable steps to refund those guests whom

it charged more than the maximum lodging portion of the transient lodging

allowance. Minesen must promptly ascertain the names of the affected

guests and the amount owed to each of them. The Fund must assist Minesen

to locate the guests so the refunds may be sent to them. The parties must

attempt to agree on a procedure for making the refunds and to address any

refunds that cannot be made.

F. Adequate Assurance of Future Performance

There is no dispute that Minesen has the financial ability to perform its

future obligations under the Contracts. Although Minesen threatened to seek

a termination for infeasibility under Section II, paragraph 11 of the MWR

Contract, it did not make such a claim at trial and instead depicted its

operation as successful. Despite the loss of the SNAs, Minesen’s financial

results have been outstanding.

The Fund’s arguments about future performance rest on its lack of

confidence in Minesen’s intention, rather than its ability, to perform.

Minesen’s track record of performance has been poor. It has consistently

adopted unreasonable interpretations of the Contracts. When the Fund’s

contracting officer has taken positions that Minesen does not like, Minesen

has approached the garrison command hoping to get a better answer:

playing one element of the Army against another in this fashion has not

engendered trust. Minesen seems to have gone out of its way to make life

more difficult for the Fund, probably in the hope that the Fund would elect

to terminate the MWR Contract for convenience. (If the Fund did so, the

Fund would have to pay Minesen the discounted present value of its

projected future net cash flows before debt service. This would give Minesen

the monetary equivalent of continued operation of the Inn without the effort

and risks.)

Nevertheless, I find that, if Minesen makes the cure payments that this

order requires, Minesen will have provided adequate assurance of future

performance. It would be irrational and self-defeating if Minesen defaulted

after investing millions of additional dollars to make the required cure

payments. In addition, Minesen and the Fund are bound by my

interpretations of the Contracts, so there should be fewer disputes in the

future.

IV. CONCLUSION

Minesen’s motion is granted conditioned upon its completion of the

cures set forth above. The court will hold a further hearing on January 24,

2022, at2:00 o’clock p.m., to address the status of Minesen’s cure.

END OF MEMORANDUM OF DECISION