Petition — Good Hope Refineries, Inc. v. Benavides

79-618 |

In the nee a

Supreme Court of the United States.

OcrTosBER TERM, 1979.

No. 79-

GOOD HOPE REFINERIES, INC.,

PETITIONER,

BELIA R. BENAVIDES, FLUMENCIO MUNOZ, EDNA

AMADA M. LOZANO, LUIS ANTONIO MUNOZ anpb

OMAR ALBERTO MUNOZ,

RESPONDENTS.

Petition for a Writ of Certiorari to the United States Court

of Appeals for the First Circuit.

STEPHEN F. Gorpon,

Caro. J. KENNER,

Gene K. Lanpy,

ANDREW EGENDORF,

Wipett, SLATER & GOLDMAN, P.C.,

60 State Street,

Boston, Massachusetts 02109.

Attorneys for the Petitioner.

BATEMAN & SLADE, INC. BOSTON , MASSACHUSETTS.

nnn sana”

ee ee ce ee

ee eel

Table of Contents.

Opinions below

Jurisdiction

Questions presented

Statutory provisions involved

Statement of the case

Reasons for granting the writ

Conclusion

Appendix A

Appendix B

Appendix C

Appendix D

Table of Authorities Cited.

CASES.

City Bank Farmers Trust Co. v. Irving Trust Co., 299

U.S. 433 (1936)

Isaacs v. Hobbs Tie & Timber Co., 282 U.S. 734 (1931)

Pepper v. Litton, 308 U.S. 295 (1939)

Schokbeton Industries, Inc. v. Schokbeton Products

Corp., 466 F. 2d 171 (5th Cir. 1972)

Segal v. Rochelle, 382 U.S. 375 (1966)

Wright v. Union Central L. Ins. Co., 304 U.S. 502

(1937)

lln

lln

lin

ll

7n

lin

Table of Contents.

Opinions below

Jurisdiction

Questions presented

Statutory provisions involved

Statement of the case

Reasons for granting the writ

Conclusion

Appendix A

Appendix B

Appendix C

Appendix D

Table of Authorities Cited.

CASES.

City Bank Farmers Trust Co. v. Irving Trust Co., 299

U.S. 433 (1936)

Isaacs v. Hobbs Tie & Timber Co., 282 U.S. 734 (1931)

Pepper v. Litton, 308 U.S. 295 (1939)

Schokbeton Industries, Inc. v. Schokbeton Products

Corp., 466 F. 2d 171 (5th Cir. 1972)

Segal v. Rochelle, 382 U.S. 375 (1966)

Wright v. Union Central L. Ins. Co., 304 U.S. 502

(1937)

lin

lln

lln

ll

7n

lln

ii TABLE OF AUTHORITIES CITED.

CONSTITUTIONAL AND STATUTORY PROVISIONS.

United States Constitution, Article 1, section 8 lln

Bankruptcy Act

§ 2; 11 U.S.C. § 11 lln

§ 11; 11 U.S.C. § 29 passim, 20a

§ 24; 11 U.S.C. § 47 2

§ 60; 11 U.S.C. § 96 7n

§ 67; 11 U.S.C. § 107 7n

§ 70; 11 U.S.C. § 110 2, 6,7, 23a

§ 113; 11 U.S.C. §513 8n

§ 116; 11 U.S.C. § 516 8n

§ 148; 11 U.S.C. § 548 8n

§ 302; 11 U.S.C. § 702 4n

§ 313; 11 U.S.C. § 713 7n

§ 314; 11 U.S.C. § 714 8n

§ 342; 11 U.S.C. § 742 5n

§ 414; 11 U.S.C. § 814 8n

§ 428; 11 U.S.C. § 828 8n

§ 614; 11 U.S.C. § 1014 8n

28 U.S.C.

§ 1254(1) 2

Bankruptcy Reform Act of 1978, Pub. L. No. 95-598,

92 Stat. 2549 (1978)

§ 108 2, 24a

§ 541 14n

Bankruptcy Rule 607 7n

Bankruptcy Rule 11-53 7n

TABLE OF AUTHORITIES CITED.

MISCELLANEOUS.

Report of the Commission on the Bankruptcy Laws of

the United States, H.R. Doc. No. 93-137, 93d.

iii

Cong., Ist Sess., Pt. 1 (1973) 9n, 13n

Report of the Committee of the Judiciary, House of

Representatives, To Accompany H.R. 8200, H.R.

REP. NO. 95-595, 95th Cong., Ist Sess. (1977) 9n, 15n

Report of the Committee of the Judiciary, United States

Senate, To Accompany S. 2266, S. REP. NO. 95-

989, 95th Cong., 2d Sess. (1978).

Proposed Amendments to the Bankruptcy Act: Hear-

ings on H.R. 6439 before the House of Representa-

tives; Committee on the Judiciary, 75th Cong., June

2, 1937.

Proceedings of Third Seminar for Referees in Bank-

ruptcy, Vol. III (1966)

1A Collier on Bankruptcy, 14th Edition (1974)

4A Collier on Bankruptcy, 14th Edition (1967)

Countryman, “Executory Contracts in Bankruptcy,”

58 Minn. L. Rev., Part II, 479 (1974).

Creedon and Zinman, “Landlord’s Bankruptcy: Lais-

sez les Lessees,” 26 The Business Lawyer 1391 (1971)

14n

5, 8n

In the

Supreme Court of the United States.

OcrToBER TERM, 1979.

No. 79-

GOOD HOPE REFINERIES, INC.,

PETITIONER,

v.

BELIA R. BENAVIDES, FLUMENCIO MUNOZ, EDNA

AMADA M. LOZANO, LUIS ANTONIO MUNOZ anpb

OMAR ALBERTO MUNOZ,

RESPONDENTS.

Petition for a Writ of Certiorari to the United States Court

of Appeals for the First Circuit.

Good Hope Refineries, Inc., petitions for a writ of certiorari

to review a judgment of the United States Court of Appeals for

the First Circuit.

Opinions Below.

The opinion of the Court of Appeals, not yet officially

reported, appears as Appendix A annexed herete. That opinion

2

affirmed an unreported decision of the United States District

Court for the District of Massachusetts (Appendix B). The

District Court's decision affirmed an order of the Bankruptcy

Court (Appendix C) dismissing the complaint, with prejudice,

for lack of jurisdiction.

Jurisdiction.

The judgment of the Court of Appeals (Appendix A) was

entered on July 17, 1979. The jurisdiction of this court is in-

voked under 28 U.S.C. § 1254(1) and § 24(c) of the Bank-

ruptcy Act (hereinafter “the Act”), 11 U.S.C. § 47(c).

Question Presented.

Whether the First Circuit’s decision, holding that the

60-day grace period provided by § 11(e) of the Act does not

enlarge the time to exercise a contract option, is repugnant to

fundamental bankruptcy policies of preserving assets for

creditor distribution and debtor rehabilitation; promoting ac-

cess to the release afforded by the Act and preventing detri-

ment to a debtor on account of the filing of a petition.

Statutory Provisions Involved.

Sections 11(e), 70a, and 70b of the Act, 11 U.S.C. §§ 29(e),

110a and 110b, and § 108 of the Bankruptcy Reform Act of

1978, 11 U.S.C. § 108, are set forth in Appendix D.

3

Statement of the Case.

On November 8, 1974, Good Hope Refineries, Inc. (“Refin-

eries”), petitioner, entered into an oil and gas lease (“the

Lease”) with respondents (“Lessors”). The Lease was for a

term of three years, in consideration for which Refineries

made a “bonus” payment of more than $107,000. Under the

terms of the Lease, Refineries as lessee was to begin drilling

operations within one year, and, if drilling was not begun, the

Lease terminated unless Refineries made a delay rental pay-

ment of $7,174.38 prior to the anniversary date of the Lease,

November 8, 1975. On October 30, 1975, Refineries tendered

a check for the delay rental. The next day Refineries filed a

Chapter XI petition. Refineries’ bank immediately set off an

indebtedness against Refineries’ deposits and dishonored the

delay rental check when it was presented for collection. On

November 18, 1975, Refineries tendered a cashier’s check for

the delay rentals which tender was refused.'

In March of 1976, Refineries filed a complaint in the Bank-

ruptcy Court seeking to establish its continuing rights in the

lease. After hearing argument, the Bankruptcy Court dis-

missed the complaint on the ground that the Lease had ter-

minated automatically on November 8, 1975, and the Court

therefore lacked jurisdiction. Refineries appealed to the

District Court, which held that because the Lease was ad-

mittedly in existence on the date of the filing of the Chapter XI

petition, the Bankruptcy Court had jurisdiction to determine

whether Refineries had any rights in the Lease. The District

Court went on to hold that under the applicable Texas law,

the Lease terminated automatically upon Refineries’ failure to

make good tender of the delay rental and that nothing in the

' Refineries re-tender was made immediately subsequent to its learning of

dishonor of its October 30, 1975 check.

4

Bankruptcy Act enabled the debtor-in-possession to cure such

default.

The First Circuit affirmed, disagreeing with Refineries’ con-

tention that § 11(e) of the Act, 11 U.S.C. § 29(e), provided a

60-day extension of the time within which Refineries was per-

mitted to tender payment to extend the Lease for another

year.

Reasons for Granting the Writ.

The First Circuit’s decision is founded on a narrow reading

of § 11(e),* the pertinent portion of which provides:

Where, by any agreement, a period of limitation is fixed

for instituting a suit or proceeding upon any claim, or for

presenting or filing any claim, proof of claim, proof of

loss, demand, notice, or the like, or where in any pro-

ceeding, judicial or otherwise, a period of limitation is

fixed, either in such proceeding or by applicable Federal

or State law, for taking any action, filing any claim or

pleading, or doing any act, and where in any such case

such period had not expired at the date of the filing of the

petition in bankruptcy, the receiver or trustee of the

bankrupt may, for the benefit of the estate, take any such

action or do any such act, required of or permitted to the

bankrupt, within a period of sixty days subsequent to the

date of adjudication or within such further period as may

be permitted by the agreement or in the proceeding or by

applicable Federal or State law as the case may be.

*Section 11, which is set forth in Appendix D, is made applicable to

Chapter XI proceedings by § 302 of the Act, 11 U.S.C. § 702.

5

Refineries contended that the effect of § 11(e) was to extend

the time allowed for tender of its Lease extension payment to

60 days after the filing of its Chapter XI petition and that thus

its tender on November 18, 1975 was timely. The First Cir-

cuit disagreed and held that § 11(e) did not enlarge Refineries’

time to tender the delay rental payment.

The First Circuit decision rests primarily on the language of

§ 1l(e). Appendix A, pp. 5-8. However, that language is ad-

mittedly ambiguous. The First Circuit itself stated that the

words of § 11(e) were “not a model of clarity.” Appendix A,

_ p. 5. Similarly, Professor Countryman characterizes the lan-

guage as “rather inscrutable.”* Refineries’ interpretation of

§ 1l(e) is a permissible reading of the language of the statute.

The statute allows a trustee or debtor-in-possession‘* 60 days to

present any “demand, notice or the like.” The question before

the lower court was whether the ambiguous language, “the

like,” includes a payment of a comparatively nominal amount

to extend for one year lease rights purchased for $107,000.

Collier’s reading of § 11(e) supports Refineries’ view:

The last sentence in subdivision e is designed to apply

where a period of limitation has been fixed by contract or

where there is a time limit set for the doing of certain

acts, such as the filing of pleadings or claims, and where

such periods oi cime have not expired prior to the filing of

*Countryman, Executory Contracts in Bankruptcy, Part Il, 58 Minn.

L. Rev. 479, 507 (1974).

‘Throughout this petition the terms “trustee” and “debtor” are used inter-

changeably. See § 342 of the Act, 11 U.S.C. § 742, which provides that

where no trustee is appointed in a Chapter XI case, the debtor “shall have all

the title and exercise all the powers of a trustee” appointed under the Act.

6

the petition in bankruptcy. It was thought that an exten-

sion of time should be given the receiver or trustee in such

cases, as in cases affected by a state or federal statute of

limitation, so that the receiver or trustee could take the

necessary steps to preserve for the estate rights which

might otherwise be barred.

1A Collier on Bankruptcy, J 11.13 (1974) at 1223.

The First Circuit’s error was to resolve the ambiguities of

the language oi § 11(e) without due regard for the policy of the

Act as a whole and the legislative history of § 11(e) in particu-

lar. By doing so, it vitiated the integrated statutory scheme of

the Act and impaired the protection of assets available to

creditors and essential for debtor rehabilitation which Con-

gress intended. The decision ignores the fundamental policies

of the Act in three ways:

1. The First Circuit’s interpretation of § 11(e) is incon-

sistent with § 70a, 11 U.S.C. 110a, which defines proper-

ty of the estate, and § 70b, 11 U.S.C. 110b, which per-

mits assumption or rejection of executory contracts;

2. The First Circuit’s interpretation of § 11(e) is in-

consistent with the legislative history; and

3. The First Circuit’s interpretation of § 11(e) is anti-

thetical to policies which the Act was designed to pro-

mote.

Section 11(e) was enacted in 1938 as part of the sweeping

reform of the Act. Among other amendments, Congress also

introduced a great number of changes in § 70a and substan-

tially redefined what constitutes property of the estate; it

broadened the categories of assets to which title vests in the

trustee or debtor-in-possession, seeking to secure for creditors

7

everything of value the bankrupt or debtor possesses. Most

importantly, it established the date of filing of the petition as

the point upon which and from which all essential rights are

determined.> The First Circuit’s interpretation of § 11(e)

establishes the contract termination date, here November 8,

1975, the anniversary date of the Lease, as the date determina-

tive of the parties’ rights. This is inconsistent with § 70a and

violative of the rule that the date of filing the petition is the

relevant date.

Section 70b of the Act,® a vital part of the 1938 legislation,

granted a trustee 60 days within which to assume or reject ex-

ecutory contracts.” Both §§ 11(e) and 70b provide an identical

60-day grace period and were designed to work in tandem in

order to achieve the common purpose of affording the trustee a

5 Segal v. Rochelle, 382 U.S. 375, 379 (1966).

Section 70a, 11 U.S.C. § 110a. “[T]he time of filing the petition has now

been firmly established as the date of cleavage upon which the law operates

to transform the debtor’s property into assets available for administration

and distribution in bankruptcy . . ..” 4A Collier on Bankruptcy, 14th Edi-

tion, J 70.03 (1967), p. 33.

Protections of estate assets similar to those provided in §§ 70a and 70b are

contained in §§ 60 (preferences), 67d (fraudulent conveyances), 70c (rights of

trustee as lien creditor), and 70e (rights of trustee as successor to creditors

under state law) (respectively, 11 U.S.C. §§ 96, 107d, 110c and 110e).

®11 U.S.C. § 110b.

7 As orginally enacted, the 60 days began to run from the date of adjudica-

tion. A 1962 amendment, recognizing that trustees are sometimes not ap-

pointed for several weeks after adjudication, enlarged the period to 60 days

from adjudication or 30 days after the trustee’s qualification, whichever is

later. See Bankruptcy Rules 607 and 11-53 and § 313(1) of the Act, 11

U.S.C. § 713.

The section also expressly permits the court to extend or reduce the time

“for cause shown.”

8

brief hiatus to examine and evaluate all his contractual rights.°®

Freezing the status of both the bankrupt/debtor and the non-

bankrupt/debtor parties to any contract renders a protection

similar to that of the automatic stay®: the status quo is main-

tained briefly in order to permit the trustee time to assess his

*Countryman, Executory Contracts in Bankruptcy, Part II, 58 Minn. L.

Rev. 479, 507 ‘°974) states:

[I]f the trustee wishes to assume an executory contract, he should be

able to cure a default in the contract unless the bankrupt’s time for cur-

ing the default has expired. And a rather inscrutable provision in sec-

tion 1le might be interpreted to mean that, if the time for cure has not

expired at the filing of the bankruptcy petition, the trustee may in

some cases have at least 60 days thereafter to cure the default.

In calling for clarification of the law relating to executory contracts,

Countryman suggested:

Amendments would be desirable also to make clear that the doctrine of

anticipatory breach, other provisions of nonbankruptcy law and ex-

press provisions in contracts and leases should not be available to

enable the other contracting party to deprive the trustee of this option

under the Bankruptcy Act to assume or reject executory contracts. The

trustee should also be given a reasonable time to cure prebankruptcy

and postbankruptcy defaults without regard to whether the debtor has

such a right under the contract or under nonbankruptcy law.

Id. p. 564 (emphasis added).

*Sections lla, 113, 116, 148, 314, 414, 428 and 614 of the Act.

The House Report on the Bankruptcy Reform Act cogently summarized

the existing automatic stay provisions:

The automatic stay is one of the fundamental debtor protections pro-

vided by the bankruptcy laws. It gives the debtor a breathing spell

from his creditors. It stops all collection efforts, all harassment, and

all foreclosure actions. It permits the debtor to attempt a repayment

9

position.'° If the First Circuit’s erroneous interpretation of

§ 11(e) is not overturned, an entire class of contractual rights

will be lost to the estate. In every situation where the estate

contains option rights, the trustee or debtor needs the 60 days

provided by § 11(e) to assess the value of the option rights in

light of the proceedings. Without such protection under

§ 1l(e), valuable rights of the estate will expire before any

remedial action can be taken.'' In addition, a broadly

remedial interpretation of § 11(e) is necessary to prevent loss of

rights due to inadvertence, since “confusion and. . . in-

adequacy of records . . . usually attend the situation existing

immediately before bankruptcy.” !* The First Circuit’s inter-

pretation of § 11(e) is thus inconsistent with all those provi-

sions of the Act which operate to save for the estate the

debtor’s assets as of the date of the petition.

or reorganization plan, or simply to be relieved of the financial

pressures that drove him into bankruptcy.

The stay is not permanent. . . . However, it is important that the

trustee have an opportunity to inventory the debtor’s position before

proceeding with the administration of the case.

Report of the Committee on the Judiciary, House of Representatives, To

Accompany H.R. 8200, H.R. REP. NO. 95-595, 95th Cong., Ist Sess. (1977)

at 340-41. Congress intended § 11(e) to provide a similar breathing spell.

'© As Professor MacLachlan stated, “it takes the receiver 60 days to find out

where the toilet is.” Creedon and Zinman, “Landlord’s Bankruptcy: Laissez

Les Lessees,” 26 The Business Lawyer 1391, 1440 (1970).

'' The situation to which § 11(e) is applicable is where, as in the instant

case, the contract right was extant as of the date of the filing of the petition.

Section 11(e) is not applicable to and does not revive a contract right or claim

which expired prior to the filing of the petition.

'2 Report of the Commission on the Bankruptcy Laws of the United States

(hereinafter “the Commission”), H.R. Doc. No. 93-137, 93d. Cong., Ist

Sess., Pt. I (1973) p. 19.

10

It is manifest from the legislative history '* that it was Con-

gress’s salutary purpose to preserve the assets available for the

satisfaction of creditors’ claims. In a Chapter XI proceeding,

as in the instant case, where the financial rehabilitation of the

debtor and preservation of assets essential for the formulation

of a feasible plan of arrangement are the primary goals, these

purposes are even more compelling. The First Circuit’s inter-

pretation of § 11(e) is inimical to this broad remedial purpose.

The First Circuit’s reading of § 11(e) rests in part on the er-

roneous premise that Congress did not intend to alter the eco-

* Mr. Teitelbaum: [Section 11(e)] tolls the statute of limitations

against a receiver or trustee and gives him a further opportunity to

bring any action which the estate may have, which otherwise he may

be debarred from bringing by reason of the operation of a Federal or

State statute of limitations. It seemed to us that the same extension

should obtain not only where the bar is by virtue of a State or Federal

statute but also where the bar is by virtue of some provision in an

agreement.

Mr. Teitelbaum: [The 60-day extension] gives the receiver or the

trustees an opportunity to turn around for 60 days and see what the

situation is and file the proof of loss within that period, even though,

by virtue of the agreement, the time may have expired a day or so after

the petition in bankruptcy was filed.

Mr. Chairman: [The provision] fixes the status of the parties as it

was at the time the estate came under the control of the bankruptcy

court?

Mr. Teitelbaum: For the period of time prescribed in the section.

It tolls the statute for that period of time, in order to give an opportuni-

ty to the successor in interest, the receiver or trustee, to take appro-

priate action.

Proposed Amendments to the Bankruptcy Act: Hearings on H.R. 6439

before the House of Representatives; Committee on the Judiciary, 75th Con-

gress, 33-35, June 2, 1937 (emphasis added).

1]

nomic position and expectations of parties to a contract. Con-

trary to the rationale of Schokbeton Industries, Inc., v. Schok-

beton Products Corp., 466 F. 2d 171 (5th Cir. 1972) to which

the First Circuit subscribed, Congress expressly sanctioned the

temporary suspension of the debtor’s obligations under an ex-

ecutory contract while simultaneously holding the other party

to the bargain.'* The very purpose of the constitutional man-

date to Congress under the Bankruptcy Clause'® is to permit

the subordination of private contract rights to the rehabilitory

scheme of the Act for the good of the public as a whole. For

this reason, the First Circuit’s characterizing Refineries’ inter-

pretation of § 11(e) as anomalous is misplaced.'® It should be

noted that the broad equitable powers of the bankruptcy court

may be invoked to protect a creditor who finds his legitimate

interests endangered.'’

The First Circuit decision is a barrier to the filing of a peti-

tion; it inhibits free access to the protection of the Act. Pro-

spective bankrupts and debtors, cognizant of the First Circuit

'4“Bankruptcy proceedings constantly modify and affect the property

rights established by state law.” Wright v. Union Central L. Ins. Co., 304

U.S. 502, 517 (1938). See e.g., Isaacs v. Hobbs Tie & Timber Co., 282 U.S.

734 (1931); City Bank Farmers Trust Co. v. Irving Trust Co., 299 U.S. 433

(1937).

'S Article I, section 8 of the United States Constitution.

16 “It would be anomalous indeed if section 11(e), a provision dealing

mainly with suits and claims by the trustee, could be used to alter con-

tractual rights substantially where time is of the essence and the debtor

or trustee has defaulted. It would be even more anomalous if, in the

case of an option contract, section 11(e) allowed the trustee to procure

a right that never existed and for which no consideration has ever been

paid, i.e., the right to exercise an option long after its termination

date.” (Appendix A, pp. 7-8.)

'7Section 2 of the Act, 11 U.S.C. § 11; Pepper v. Litton, 308 U.S. 295

(1939). Such relief would be available to protect the interest of the seller of a

ten-day option to purchase securities in the First Circuit's hypothetical (Ap-

pendix A, p. 6).

12

rule, are compelled to forestall seeking relief under the Act.

They must wait until they are able to exercise all options to

purchase, to renew leases and the like since the trustee will not

be afforded any grace period. Even the slightest delay by a

financially distressed company in instituting proceedings

under the Act is dangerous. During a period of delay,

creditors exploit remedies which they will no longer have

when the petition is filed. Delay often precludes effective

rehabilitation of the debtor.'* In the aggregate, failures to ex-

peditiously institute proceedings under the Act have a

debilitating effect on the national economy. '®

‘8 Conditions now prevailing in our modern industry and commerce

render the prompt assembling of assets of paramount importance.

While there may be instances where the attorney for the bankrupt

properly instructs his client as to his obligations with regard to the

assets of the estate until the trustee takes over, and the client takes all of

the protective measures necessary for the safeguarding and preserva-

tion of the assets, this may be the exception rather than the rule. In

most instances, however, this is not the case; and unless some protec-

tive action is taken at once, unattended, abandoned assets may be jeop-

ardized. The assets may be spoiled, lost or stolen, thereby causing

great loss to creditors which may prove to be irreparable or extremely

difficult and costly to repair.

Proceedings of Third Seminar for Referees in Bankruptcy, Vol. III (1966),

p. 39 (emphasis added). The foregoing discussion relates to the 1962 amend-

ment to § 70a of the Act, 11 U.S.C. § 110a, but is probative of Refineries’ in-

terpretation of § 11(e).

'® The Commission has encountered a generally prevalent opinion in the

business community that a major factor explaining the smallness of

distributions in business bankruptcies is the delay in the institution of

proceedings for liquidation until assets are largely depleted.

There should be no legal barrier to voluntary petitions.

Initiating relief should not be a death knell. The process should en-

courage resort to it, by debtors and creditors, that cuts short the

13

The First Circuit’s naive assertion that “[T]he simple

answer to any apparent harshness of the result in this case is

that a prudent man who plans to file a Chapter XI petition

tomorrow uses a cashier’s check to make an important pay-

ment today” ignores fundamental considerations. First, deb-

tors must often institute bankruptcy proceeding in haste —

without the time for leisurely planning. Second, there is

usually a hiatus after the filing of a petition and before the

trustee qualifies or the debtor ‘s authorized to conduct its

business, during which no one can act for the estate. Third, a

trustee in bankruptcy may not even qualify until after the con-

tract right has expired. Finally, no entity can protect its assets

from forfeiture if an involuntary petition is filed against it.®°

dissipation of assets and accumulation of debts. Belated commence-

ment of a case may kill an opportunity for reorganization or arrange-

ment.

The Commission Report, H.R. Doc. No. 93-137, 93d. Cong., Ist Sess., Pt.

I (1973), p. 14, 75 (emphasis supplied).

*° The following example illustrates this:

In 1970 ABC Company and XYZ Company enter into a lease financing

agreement for a costly knitting machine having a useful life of 15

years. The agreement provides that ABC shall pay monthly rentals for

8 years and that ABC has an option to purchase the machine, which

must be exercised on or before December 31, 1977, for a comparatively

nominal amount. If ABC fails to exercise, XYZ may sell the machine

to another party. On December 15, 1977, an involuntary petition is

filed against ABC. ABC’s trustee qualifies on January 5, 1978.

Under the First Circuit’s rule, XYZ is free to sell the machine as of January 1,

1978 and ABC's trustee has no rights in the machine, those rights having

automatically expired under the lease terms on December 31, 1977. It is im-

mediately apparent that there is nothing which ABC or ABC’s trustee could

do to prevent this forfeiture. Both are utterly powerless to protect the estate’s

valuable asset. XYZ, however, reaps a windfall since it can now either elect

14

The inevitable result of the First Circuit’s interpretation of

§ 11(e) is to permit the non-debtor contracting party to abuse

the Act in order to gain valuable contract rights of the debtor.

The non-debtor party to the contract reaps a windfall, just as

the Lessors in this case did. This result is inimical to Con-

gress’s desire to prevent detriment to a debtor on account of his

filing a petition.

Finally, this Court should grant certiorari because the lower

court decision entailed the first judicial pronouncement on

§ 108(b)*! of the Bankruptcy Reform Act of 1978, which gov-

to sell the knitting machine to a third party at a price substantially better

than the one provided in the agreement or waive ABC’s failure to exercise its

option. The better rule would afford ABC’s trustee 60 days from December

15, 1977 to determine whether or not to exercise the option. Only given such

a brief respite, will he be able to make an educated assessment of the situa-

tion. XYZ’s interests will not be endangered; if it feels they are, it may make

application to the bankruptcy court to shorten the time.

2! That the purpose of § 108(b), set forth in Appendix D, is identical to that

of § 11(e) is demonstrated by the legislative history:

Subsections (a) and (b) [of Section 108], derived from Bankruptcy Act

Section 11, permit the trustee, when he steps into the shoes of the debt-

or, an extension of time for filing an action or doing some other act that

is required to preserve the debtor's rights.

Report of the Committee on the Judiciary, United States Senate, to Accom-

pany S.2266, S. REP. NO. 95-989, 95th Cong., 2d Sess. 30 (1978). Compare

in this regard the legislative history of § 541 of the Bankruptcy Reform Act,

which defines property of the estate and parallels § 70a of the Act:

“(Section 541] is not intended to expand the debtor’s rights against

others more than they exist at the commencement of the case. For ex-

ample, if the debtor has a claim that is barred at the time of the com-

mencement of the case by the statute of limitations, then the trustee

would not be able to pursue that claim, because he too would be

barred. He could take no greater rights than the debtor himself had.

But see proposed 11 U.S.C. 108, which would permit the trustee a toll-

15

erns cases filed on or after October 1, 1979. Appendix A, p. 8.

Even though the § 11(e) problem arose under the Act, the de-

cision below makes it clear that the First Circuit’s erroneous

interpretation of § 1l(e), will live on and will disrupt the

statutory framework of the new Act in precisely the same man-

ner, with identical adverse repercussions.

Conclusion.

For the foregoing reasons, a writ of certiorari should issue to

review the judgment and opinion of the Court of Appeals for

the First Circuit.

Respectfully submitted,

STEPHEN F. GORDON,

CAROL J. KENNER,

GENE K. LANDY,

ANDREW EGENDORF

WIDETT, SLATER

& GOLDMAN, P.C.,

60 State Street,

Boston, Massachusetts 02109.

Dated: October 15, 1979.

ing of the statute of limitations if it had not run before the date of the

filing of the petition.”

Report of the Committee on the Judiciary, House of Representatives, to Ac-

company H.R. 8200, H.R. REP. NO. 95-595, 95th Cong., Ist Sess. 367-68

(1977).

16

la

Appendix A.

United States Court of Appeals

For the First Circuit

No. 79-1134

GOOD HOPE REFINERIES, INC.,

PLAINTIFF, APPELLANT,

v.

BELIA R. BENAVIDES, et al.,

DEFENDANTS, APPELLEES.

APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF MASSACHUSETTS

[Hon. FRANK J. Murray, Senior District Judge]

Before Corrin, Chief Judge,

CAMPBELL and Bowness, Circuit Judges

Stephen F. Gordon. with whom Carol J. Kenner, and Widett,

Widett, Slater & Goldman, P.C., were on brief, for appellant.

Wayne H. Eisenhauer, with whom John E. Mann, and Mann,

Freed. Kazen & Hansen, were on brief, for appellees.

July 17, 1979

Corrin, Chief Judge. This is an appeal in a proceeding

under Chapter XI of the Bankruptcy Act from a district court’s

dismissal of a complaint seeking to establish rights under an oil

and gas lease. We affirm.

The facts giving rise to this appeal are fairly simple. On

November 8, 1974, appellant refining company entered into

an oil and gas lease with appellees. Under the terms of the

lease, appellant as lessee was to begin drilling operations

within one year, and, if drilling was not begun, the lease auto-

matically terminated unless appellant paid a delay rental prior

to the anniversary date of the lease. On October 30, 1975, ap-

pellant tendered a check for the delay rental. The next day,

appellant filed a Chapter XI petition. Appellant’s bank im-

mediately set off against appellant’s deposits and dishonored

the delay rental check when it was presented for collection.

2a

2 GOOD HOPE REFINERIES, INC. 0. BENAVIDES

On November 18, 1975, appellant tendered a cashier’s check

for the delay rentals, which tender was refused as untimely.

In March of 1976, appellant filed a complaint in the bank-

ruptcy court seeking to establish its continuing rights in the

lease. After hearing argument, the bankruptcy court dismissed

the complaint on the ground that the lease had terminated

automatically on November 8, 1975, and the court therefore

lacked jurisdiction’ Appellant appealed to the district court,

which held that because the lease was admittedly in existence

on the date of filing of the Chapter XI petition, the bankruptcy

court had jurisdiction to determine whether appellant had any

continuing rights in the lease. The district court went on to

hold that under the Texas law applicable to this case* the lease

terminated automatically upon failure to make good tender of

delay rerital and that nothing in the Bankruptcy Act enabled

the debtor-in-possession to cure such failure. We agree.

As an initial matter, appellant argues that the district court

erred in reaching the merits of the dispute after deciding that

the bankruptcy court did have jurisdiction to determine the

rights involved. This argument breaks down into two conten-

tions, that some as vet unspecified factual allegations remain

to be proven to the fact finder and that appellant was unfairly -

surprised because it had no opportunity to argue the merits of

the Texas law involved. As far as facts are concerned, ap-

pellant’s complaint sets forth such information that “it appears

to a certainty that the Plaintiff is entitled to no relief under any

' As the district court noted. the grounds for the bankruptcy

court's decision were somewhat unclear. Appellees had argued both

that the court lacked jurisdiction because the asset involved had

evaporated and that appellant's complaint should be dismissed on

the merits because neither Texas law nor the bankruptcy act enabled

the debtor-in-possession to revive a moribund mineral lease. The

bankruptcy court’s “jurisdictional” decision was based on a ground

that could also support a decision on the merits, i.e., that the debtor

had no rights in the lease.

? The land and minerals involved are situated in Texas and the

parties agree that Texas law provides the initial ground rules for

determining the extent of appellant’s property interests in the lease.

3a

OPINION OF THE COURT 3

statement of facts which could be proved in support of the

complaint.” Ballou v. General Electric Co., 393 F.2d 398, 400

(1st Cir. 1968). Appellant had ample opportunity to amend its

pleadings before the bankruptcy court and failed to do so.

More important, in both the district court and in this court,

appellant failed to mention any relevant facts that might be

added to the complaint, preferring instead to rely upon ihe

general assertion that it is entitled to be heard on the facts.

Such a bald demand, without more, is simply not enough

when the facts alleged in the complaint affirmatively preclude

relief.

As for opportunity to be heard on the merits, we note that

appellees’ original motion in the bankruptcy court both chal-

lenged that court’s jurisdiction and moved to dismiss for failure

to state a claim. Both arguments revolved around the same

issues of Texas law. In the district court, appellees again

argued that state law had terminated all of appellant’s rights.

This procedural posture put appellant on clear notice that the

merits, as well as the jurisdictional question, were in issue.

- Finally, even if appellant were surprised by a decision on the

merits in the district court, it has had ample opportunity to

argue Texas law to this court. Even if appellant were excused

from raising legal arguments below because of the unusual

procedural history of this case, there is no excuse for not put-

ting its legal cards on the table at this point. Cf. Slotnick v.

Straviskey, 560 F.2d 31, 33 (1st Cir. 1977) (court of appeals

will affirm dismissal entered on erroneous ground if record

reveals suit is without merit).

Turning to the merits, Texas law leaves no room for doubt

about the effect of failure to make good tender of delay ren-

tals. The form of conveyance used here is commonly called an

“unless” lease. If the lessee fails to drill, his rights in the lease

automatically terminate unless timely payment of delay rentals

is made. The Texas courts characterize the conveyance as

creating a determinable fee interest in the minerals in place,

which interest reverts automatically to the grantor upon

4a

4 GOOD HOPE REFINERIES, INC. 0. BENAVIDES

failure to drill or pay. W.T. Waggoner Estate v. Sigler Oil

Co.. 118 Tex. 509, 19 S.W.2d 27, 28 (1929); Waggoner &

Zeller Oil Co. v. Deike, 508 S.W.2d 163 (Tex. Ct. App. 1974).

Tender of a bad check is not sufficient tender to forestall the

reverter. Nelson Bunker Hunt Trust Estate v. Jarmon, 345

S.W.2d 579, 581 (Tex. Ct. App. 1961). This rule applies even

if the lessor knows that the delay rental check has been dishon-

ored prior to the anniversary date of the lease and fails to in-

form the lessee. Id. Thus, if appellant has any continuing

rights in the oil and gas lease, such rights must spring from

some change that federal bankruptcy law imposes upon nor-

mal Texas property rules.

Appellant argues that section 11(e) of the Bankruptcy Act,

11 U.S.C. § 29(e), changes the result that would be reached

under Texas law. The first sentence of that section sets a two

year statute of limitations for suits by a trustee and is conced-

edly not applicable here. The second sentence provides a spe-

cial 60 day period for the trustee (or debtor-in-possession) to

perfect certain rights of the debtor, as follows:

“Where, by any agreement, a period of limitation is

fixed for instituting a suit or proceeding upon any claim,

or for presenting or filing any claim, proof of claim, proof

of loss, demand, notice, or the like, or where in any pro-

ceeding, judicial or otherwise, a period of limitation is

fixed, either in such proceeding or by applicable Federal

or State law, for taking any action, filing any claim or

pleading, or doing any act, and where in any such case

such period had not expired at the date of the filing of the

petition in bankruptcy, the receiver or trustee of the

bankrupt may, for the benefit of the estate, take any such

action or do any such act, required of or permitted to the

bankrupt, within a period of sixty days subsequent to the

date of adjudication or within such further period as may

be permitted by the agreement, or in the proceeding or

by applicable Federal or State law, as the case may be.”

<>

5a

OPINION OF THE COURT 5

Appellant argues that the statutory language allowing the

trustee to “take any . . . action or do any act” necessary to

preserve the debtor's rights within 60 days of adjudication

allowed appellant to make the delay rental payment within 60

days of the date of filing of the Chapter XI petition. If this

argument is correct, then appellant's tender of delay rentals on

November 18, 1975, preserved its rights in the lease.

The parties agree that the act appellant sought to perform

within the 60 day period may be fairly analogized to exercising

an option to extend an option to purchase property. There is

precedent for so viewing the function of a delay rental pay-

ment. Empire Gas & Fuel Co. v. Saunders, 22 F.2d 733 (5th

Cir. 1927), cert. dismissed, 278 U.S. 581 (1928). Thus, ap-

pellant would have us read section 11(e) as providing an

automatic extension of an option contract for a period of up to

60 days from the date of adjudication. We cannot do so.

Although not a model of clarity, we chink the statute can

only be read as affecting two separate types of limitations

derived from two different sources, both types being extended

for 60 days upon filing. First, there are “period[s] of limita-

tion” created “by an agreement”. Such periods are extended

only if they set a limit on the time available “for instituting a

suit or proceeding upon any claim, or for presenting or filing

any claim, proof of claim, proof of loss, demand, notice, or the

like . . . .” (Emphasis added.) Second, there is a broader cate-

gory of types of limitations, giving the trustee an extra 60 days

“for taking any action, filing any claim or pleading, or doing

any act... .” This broader category of limitations extended by

section 1l(e) only comes into play, however, “where in any

proceeding, judicial cr otherwise, a period of limitation is fixed,

either in such proceeding or by applicable Federal or State law

. . .”3 (Emphasis added.) The instant case does not involve

> We think this reading the only logical parsing of the admittedly

complex sentence involved. The key to the logical breaks in the sen-

tence is the use of the word “where”. As we read it, the sentence can

be simplified as follows: “Where an agreement limits the time to

6a

6 GOOD HOPE PzFINERIES, INC. 0. BENAVIDES

any “proceeding”. Rather, if the time limit on appellant's op-

tion to drill can be viewed as a “period of limitation” at all, it

is a limitation created by agreement.

By its language section 1!/e) only expands consensual limita-

tions if they involve “the like” of presenting proof of claim,

proof of loss, demand, or notice. We do not think that making

a payment to extend or exercise an option is akin to making a

claim against an insurance policy or surety bond. Cf. Goosen

v. Indemnity Ins. Co. of North America, 234 F.2d 463 (6th

Cir. 1956) (section 11(e) applies to extend period to file notice

of claim on bond). In the case of a payment to extend an op-

tion, the debtor is obliged to tender a certain performance,

which performance is the consideration for the extension, by a

certain time, and time is expressly of the essence. In the case of

a notice to an insurance company, the debtor must comply

with a condition precedent on the company’s obligation to

perform, which condition is not in the nature of the concur-

rent condition of consideration supporting the bargain, but

rather is a condition protecting the insurance company from

stale and possibly fraudulent claims. Two examples make this

theoretical distinction concrete: an insurance company would

not be unfairly surprised or prejudiced if a 60 day notice of

claim provision were extended by operation of law to 120

days, but the seller of a ten day option to purchase securities

would find his expectations, and his economic position,

radically altered if the option were suddenly extended to 70

days. ;

The Fifth Circuit applied a similar rationale in Schokbeton

Indus. Inc. v. Schokbeton Products Corp., 466 F.2d 171 (5th

Cir. 1971). The debtor Products was an exclusive licensee of

Industries. Products defaulted on royalty payments. Pursuant

to the licensing agreement, Industries demanded cure within

make a claim against the promisor, or where the rules of a pro-

ceeding limit the time for taking a procedural step in that pro-

ceeding, and where such a time limit has not expired at the time of

filing, the trustee has a minimum of 60 days from filing to make a

claim or take a procedural step.”

Ta

OPINION OF THE COURT 7

60 days, on pain of termination of the licensing agreement.

Products then filed a Chapter XI petition. When the 60 days

allowed under the contract to cure a default had expired, In-

dustries sent Products a notice of termination. Four months

later, Products sued in bankruptcy court to establish the vitali-

ty of the licensing agreement and arrange a schedule of pay-

ment of overdue royalties. Without considering the fact that

Products had not cured its default within the 60 day period

provided by section 11(e), the Fifth Circuit held that section

11(e) “provides no basis for suspending the debtor’s obligations

under an executory contract while simultaneously holding the

other party to the bargain.” Id. at 176.

We agree with appellant that Schokbeton is distinguishable

on its facts; the 60 day period under 11(e) had long since ex-

pired when the debtor tried to cure its default. Moreover, we

think the Schokbeton court’s holding a bit overbroad.

Technically, a debtor's obligation to inform an insurance com-

pany of a claim is suspended by section 11(e) while the com-

pany is simultaneously held to the bargain. Nevertheless, we

think the basic rationale of Schokbeton supports our refusal to

apply section 11(e) to extend option contracts. The Schokbeton

court pointed out that when a trustee exercises his power

under section 70(b), 11 U.S.C. § 110(b), to assume an ex-

ecutory contract, the trustee obtains only such contractual

rights as the debtor had and assumes all burdens to which the

debtor was subject. Jd. at 175 (and cases cited therein). If the

debtor has committed, or the trustee commits, an incurable

breach, the trustee has no continuing rights under the con-

tract. Cf. Matter of Gulfco Investment Corp., 520 F.2d 741

(10th Cir. 1975) (trustee allowed a “reasonable” time to decide

whether or not to adopt installment purchase contract; reason-

able time may exceed contractual deadline for installment

payment if large equity involved and contract complex). It

would be anomalous indeed if section 11(e), a provision deal-

ing mainly with suits and claims by the trustee, could be used

to alter contractual rights substantially where time is of the

8a

8 GOOD HOPE REFINERIES, INC. U. BENAVIDES

essence and the debtor or the trustee has defaulted. It would

be even more anom:ious if, in the case of an option contract,

section 11(e) allowed the trustee to procure a right that never

existed and for which no consideration has ever been paid,

i.e., the right to exercise an option long after its termination

date.

We think the preceding discussion also disposes of appel-

lant’s arguments based upon the Bankruptcy Reform Act of

1978, P.L. No. 95-598, 92 Stat. 2549. Section 108(b) of the

Reform Act replaces the old section 11(e) and adds to the

various acts permitted within the 60 day period a power to

“cure a default”. 92 Stat. 2556. Citing inconclusive legislative

history, appellant argues that section 108 was meant to recod-

ify section 11(e) and thus should influence our reading of the

old Act. Assuming arguendo that the new Act in any way

reflects upon the old, we do not think the new section 108(b)

helps appellant. When a debtor or a trustee fails to exercise or

renew an option by paying the agreed price, there is no con-

tractual “default” to be cured. The rights that the debtor pur-

chased for the price of the option have merely expired of their

own terms. There is no obligation to exercise or extend such an

option, and thus no default when further payment is not

made. Appellant has cited no case supporting its contrary

reading of section 1l(e), and no language in the statute nor

reason of policy justifies such a reading. We must reject appel-

lant’s position.

Finally, we have considered appellant's extensive, if vague

arguments that the bankruptcy court should be allowed to

consider the inequities involved here and exercise its equitable

jurisdiction to remedy the situation. The law is settled,

however, that “unless” leases are true option contracts in the

sense that failure to drill or pay does not work a forfeiture. See

Empire Gas & Fuel Co. v. Saunders, supra. The simple

answer to any apparent harshness of the result in this case is

9a

OPINION OF THE COURT 0]

that a prudent man who plans to file a Chapter XI petition

tomorrow uses a cashier’s check to make an important pay-

ment today.

Affirmed.

10a

Appendix B.

UNITED STATES DISTRICT COURT

DISTRICT OF MASSACHUSETTS

GOOD HOPE REFINERIES, INC., Appellant

v. Bk. No. 75-2741-M

BELIA R. BENAVIDES ET AL., Appellees

Memorandum

Murray, Senior District Judge

Good Hope Refineries, Inc. (Good Hope), has appealed

from the order of the bankruptcy judge dismissing its com-

plaint to establish rights under a lease agreement entered into

by appellees, as lessors, and Good Hope, as lessee. The

ultimate relief sought by the complaint is a determination that

the lease agreement is validly existing and in force and effect.

The lease was executed on November 8, 1974 and granted to

Good Hope exclusive rights to conduct drilling operations on

the leased premises in Laredo, Texas, necessary for oil and gas

production. The lease was in full force and effect on October

31, 1975 when Good Hope filed a petition under Chapter XI of

the Bankruptcy Act. The bankruptcy court by ‘order con-

tinued Good Hope in possession of its properties to operate its

business. On or before November 8, 1975, the first anniver-

sary of the execution of the lease, Good Hope tendered a check

for $7174.38 to the Union National Bank of Laredo to the

credit of the appellees. The check was returned by the bank

for insufficient funds, because on or about November 3, as a

result of the Chapter XI filing, the bank had offset all funds

lla

then on deposit in Good Hope’s account. Immediately after

receiving notice of dishonor on or about November 18, Good

Hope tendered in hand a bank cashier’s check to Belia R.

Benavides, one of the appellees, who refused to accept it. All

appellees! have concurred in the refusal to accept tender, and

have declared their intention to consider the lease terminated.

The bankruptcy court initially issued a preliminary injunc-

tion to enjoin defendant/appellees from dispossessing Good

Hope of the leasehold interest, and later granted defendant/

appellees’ motion to dismiss* the complaint with prejudice.

This appeal followed.

Although the precise ground of the order of dismissal * does

not clearly appear, if the record justifies dismissal with preju-

'The other appellees are Flumencio Munoz, Edna Amada M. Lozano,

Luis Antonio Munoz, and Omar Alberto Munoz.

? Defendants’ motion stated as grounds, inter alia:

1. That this Court has no jurisdiction since the terminated leasehold

interest is not an asset of the bankruptcy estate since the lease termi-

nated by its own terms on November 8, 1975.

3. That Defendants are entitled to judgment as a matter of law

since the Complaint fails to state a cause of action against those De-

fendants.

3The bankruptcy judge’s order read as follows:

Upon consideration of the Motion to Dismiss Complaint to Establish

Rights Under Lease, it appearing to the Court that the Motion should

be granted, and that this court has no jurisdiction or control of the

asset involved, being an oil and gas lease that terminated by the terms

thereof on November 8, 1975, it is by the Court this 9th day of June,

1976.

Orperep, that the Complaint to Establish Rights Under Lease be,

and the same is hereby, dismissed with prejudice, and

FurrHER Orperep, that the Preliminary Injunction issued in this

matter on April 8, 1976 be and the same is hereby, dissolved and

vacated.

12a

dice this court may properly affirm even though the bankrupt-

cy judge may have relied upon an incorrect ground. See Local

Division No. 714 v. Greater Portland Transit District, slip op.

at 20 (Ist Cir., November 15, 1978). The subject matter of the

complaint is within the jurisdiction of the bankruptcy court

and this court on appeal. The motion to dismiss addressed the

merits of Good Hope’s claim presented by the complaint, and

the parties argued and briefed the sufficiency of the complaint

in the court below and in this court. See alse Appellant’s

Statement of Issues on Appeal. The factual record consists

only of undisputed facts, and affirmance, if granted, would

not intrude upon the discretion, expertise or fact-finding func-

tion of the bankruptcy court. On such a record the bankrupt-

cy court is in no better position than is this court to determine

whether “it appears beyond doubt that the plaintiff can prove

no set of facts in support of [its] claim which would entitle [it]

to relief”. Conley v. Gibson, 355 U.S. 41, 45-46 (1975). Ap-

pellees argue that no legal or equitable grounds exist to revive

the oil and gas lease that terminated by its own terms. How-

ever, appellant contends that there are three theories which

support the complaint: (1) exceptions may exist to the general

principles of Texas law, (2) section lle [11 U.S.C. § 29(e)] of

the Bankruptcy Act provides for an enlargement of time to

tender the delay rental, and (3) the complaint is sufficient to

invoke the equity power of the bankruptcy court to enjoin

forfeiture of the lease. The court will address them.

I

The parties are in agreement that the law of Texas, where

the land is situated, is well settled with respect to the issues

presented in the case, and the court will apply the applicable

Texas law.

13a

The oil and gas lease incorporated in the complaint contains

a so-called “unless clause” * which provides for automatic ter-

mination of the lease unless lessee commences drilling opera-

tions or pays a specified sum (delay rental) on or before the

first anniversary of the execution of the lease. Such an instru-

ment is a lease in name only; it is more like the grant of a deter-

minable fee. See Walker, “The Nature of Property Interests

Created by an Oil and Gas Lease in Texas”, 7 Tex. L. Rev. 539

(1929). The “unless clause” operates as a common law limita-

tion upon the lessee’s interest. W. T. Waggoner Estate v.

Sigler Oil Co., 19 S.W. 2d 27 (Tex. 1929); Colby v. Sun Oil

Co., 288 S.W. 2d 221 (Tex. Civ. App. 1956), writ refused

n.r.e. Because no obligation exists on the part of the lessee to

drill or pay the delay rental, neither party has a cause of action

where the lessee fails to drill or pay. See Waggoner ¢ Zeller

Oil Co. v. Deike, 508 S.W. 2d 163 (Tex. Civ. App. 1974), writ

refused n.r.e.; 2 Summers, The Law of Oil and Gas, §§ 339,

452 (2d ed. 1958). Indeed, the lessor need take no judicial or

‘The lease provision, relevant to this appeal appears in Clause IV and

reads, in part, as follows:

If operations for drilling are not commenced on said land on or

before One (1) year from the date hereof, this lease shall then termi-

nate as to both parties, unless on or before such anniversary date,

Lessee shall pay or tender to Lessor or to credit of Lessor in the Union

National Bank of Laredo, at Laredo, Texas, (which bank and its suc-

cessors are Lessor’s agent and shall continue as the depository for all

the rentals payable hereunder regardless of changes in ownership of

said land or the rentals) the sum of Seven Thousand One Hundred

Seventy-Four and 38/100ths ($7,178.38) Dollars, herein call rental,

which will cover the privilege of deferring commencement of drilling

operations for a period of twelve (12) months. In like manner, the

commencement of drilling operations may be further deferred for suc-

cessive periods of twelve (12) months each during the primary term by

the payment of such delay rentals. The payment or tender of rental

may be made by the check or draft of Lessee delivered to Lessor or to

said bank on or before said date of payment... .

l4a

other formal action in order to claim his reversion in the land if

the lessee fails to drill or pay by the anniversary date. Humble

Oil & Refining Co. v. Davis, 296 S.W. 285 (Tex. Comm. App.

1927); W. T. Waggoner Estate v. Sigler Oil Co., supra; Sum-

mers, supra § 337.

There are no allegations to support any claim that drilling

operations had occurred. Further, the complaint fails to show

that appellant’s tender was effective. There is no allegation of

any agreement by the bank to honor the check despite insuffi-

ciency ot funds. See Hamilton v. Baker, 214 S.W. 2d 460

(Tex. 1948). The complaint shows that appellant’s own ac-

tion in filing the Chapter XI petition caused the check to be re-

turned. It is “well settled that where a check is tendered in

payment of delay rentals under an ‘unless’ lease, if the lease is

to be perfected, the check must in fact be good”. Nelson

Bunker Hunt Trust Estate v. Jake Jarmon, 345 S.W. 2d 579,

581 (Tex. Civ. App. 1961), writ refused. Here the bank acted

predictably in setting off the funds in appellant’s account, par-

ticularly where inaction could have caused the bank to lose

any setoff rights it had. See In Re Applied Logic Corp., 576

F.2d 952 (2d Cir. 1978); Farmers Bank of Clinton v. Julian,

383 F.2d 314 (8th Cir.), cert. denied 389 U.S. 1021 (1967);

First National Bank in Fort Lauderdale v. Davis, 317 F.2d 770

(Sth Cir. 1963); In re Williams, 422 F. Supp. 342, 345 (N.D.

Ga. 1976); 9 Collier, Bankruptcy {7.10 at 57-58 n.11. But cf.

Baker v. Gold Seal Liquors, 417 U.S. 467 (1974); Ben Hyman

& Co., Inc. v. Fulton National Bank, 423 F. Supp. 1006 (N.D.

Ga. 1976), appeal dismissed 577 F.2d 966 (5th Cir. 1978).

The check was not good, and the record will not support a

valid argument by appellant that only circumstances beyond

its control caused return of the check. No case holds that

Texas law will excuse late tender in the circumstances shown

here.

l5a

There are no allegations in the complaint which would sup-

port any exceptions to Texas law on the payment of delay rent-

al. See generally Williams and Meyers, The Law of Oil and

Gas, § 606.6. There are no allegations giving rise to an estop-

pel. Compare Humble Oil & Refining Co. v. Harrison, 205

S.W. 2d 355 (Tex. 1947). Tender of the cashier’s check, being

untimely, could not prevent termination of the lease; strict

adherence to the deadline for payment of the delay rental is re-

quired. Williams and Meyers, supra § 606.2. Good Hope’s

complete failure to allege any facts that would support a claim

that drilling on the land had occurred, or would excuse failure

to make proper tender, constitutes a glaring omission in the

complaint. The omission is so significant that, if the facts “ex-

isted, [they] would clearly dominate the case”, making it “fair

to assume that those facts do not exist”. O’Brien v. DiGrazia,

544 F.2d 543, 546 n.3 (1st Cir. 1976). The complaint presents

no case for relief under Texas law.

II

Proceedings under Chapter XI incorporate, except where

inconsistent, principles applicable to bankruptcy proceedings.

11 U.S.C. § 702. However, there is no merit to appellant’s

contention that Section lle of the Bankruptcy Act [11 U.S.C.

§ 29(e)] permits enlargement of the time to tender the delay

rental. Neither the language of section lle nor its proper ap-

plication absolves appellant from its agreement to suffer ter-

mination of the lease. Neither does section 1 le operate to res-

urrect for appellant the opportunity afforded by the lease

which was never seized. In Schokbeton Industries, Inc. v.

Schokbeton Products Corporation, 466 F.2d 171, 176 (5th Cir.

1972), the court, dealing with section lle in a Chapter XI

case, pointed out:

16a

Obviously that statute permits a trustee, receiver or debt-

or in possession to avoid a statutory (and perhaps a con-

tractual) time limitation that would otherwise bar a

claim asserted on behalf of the debtor. [Citations omit-

ted.] It provides no basis for suspending the debtor’s

obligations under an executory contract while simultane-

ously holding the other party to the bargain. [Italics in

original.] [Footnotes omitted. ]

The court is not persuaded by appellant’s argument that uni-

lateral postponement of the contractual termination provision

of the lease is permitted by section lle or the Chapter XI pro-

ceedings.

Ill

The complaint does not set forth a case for relief from the

operation of the termination clause within the equity jurisdic-

tion of the bankruptcy court. Undoubtedly that court pos-

sesses equitable powers to prevent a forfeiture that threatens a

Chapter XI arrangement. Queens Boulevard Wine & Liquor

Corp. v. Blum, 503 F.2d 202 (2d Cir. 1974); Matter of M & M

Transportation Company, 437 F. Supp. 821 (S.D. N.Y. 1977).

These cases are clearly distinguishable from the instant case.°

The nature of the lease agreement before the court and appel-

lant’s failure to extend its rights under it precluded the occur-

*These cases are clearly distinguishable from the instant appeal in three

significant respects. Neither case involved an oil and gas lease, which is a

lease in name only. Unlike Good Hope, the debtors had physical possession

of the leased land or equipment so that enjoining a forfeiture helped preserve

the status quo pending an arrangement. Finally, both cases involved

covenants, not special limitations upon an estate imposing no obligations on

the lessee and making time of the essence.

17a

rence of a forfeiture that would threaten a potential arrange-

ment. See Walker, supra at 8 Texas L. Rev. 483, 528-29

(1930). The parties made time of the essence of the opportuni-

ty afforded appellant, who was under no obligation to act.

See Summers, supra § 452, 117-126. 27 Am. Jur. 2d, Equity

§ 30. It is apparent from the nature of the lease agreement

that the delay rental was not the essential object of the parties

and termination only an incident intended to secure the pay-

ment. Gillespie v. Bobo, 271 F. 641, 643-44 (5th Cir. 1921).

See also Mattison v. Trotti, 262 F.2d 339, 342 (5th Cir. 1959).

Termination of the lease did not operate to divest appellant of

any interest in the land or any vested right. Appellant had not

invested any money or industry in the premises, and it did not

stand to lose by the termination anything that it had previous-

ly acquired. The lease agreement from its inception until its

first anniversary remained executory. At most appellant had

acquired under the lease agreement a right in the nature of an

option with a self-operating termination provision. Appellant

having acquired no other rights or interest in the land there is

nothing that the bankruptcy court could preserve for the credi-

tors. See Callaway v. Benton, 336 U.S. 132, 141-43 (1949).

There are no facts alleged to support the conclusion that pay-

ment of the delay rentai is in the best interests of the creditors.

IV

Although appellant did not argue the point on appeal, the

complaint alleges that the November 18 tender was within the

sixty-day period allowed by the lease agreement for curing a

“default”. However, there is no merit to such claim. A provi-

sion allowing time to cure a “default” does not enlarge the

time in which lessee must comply with the terms of the special

limitation upon his interest. Waggoner & Zeller Oil Co. v.

18a

Deike, supra; Stephenson v. Calliham, 289 S.W. 158 (Tex.

Civ. App. 1926).

Finally, there is no merit to appellant’s contention that sec-

tion 70b of the Bankruptcy Act [11 U.S.C. § 110(b)] applies to

the case here. Appellant did have the option to keep the lease

agreement in force and effect by a timely payment of the delay

rental. Had it made the payment the lease agreement would

qualify as an executory contract under section 70b. See Mat-

ter of Jackson Brewing Company, 567 F.2d 618, 623 (5th Cir.

1978), and cases cited. However, the option no longer existed

after November 8, 1975, and when appellant failed to pay the

delay rental on or before that date, there was no contract, ex-

ecutory or otherwise, for the debtor to affirm or reject under

section 70b. 8 Collier, supra J 3.15{3].

Having disposed of appellant’s contentions, the court has

considered whether the case should be remanded to permit ap-

pellant to seek to amend the complaint, if possible. See Ballou

v. General Electric Company, 393 F.2d 398 (1st Cir. 1968);

Sonus Corp v. Matsushita Electric Industrial Company, Ltd,

61 F.R.D. 644, 650 (D. Mass. 1974). However, the present

pleadings incorporating the lease agreement make an appro-

priate amendment virtually improbable.* See O’Brien v. De-

Grazia, supra at 546 n.3. The appeal is dismissed.

FRANK J. MURRAY

Senior District Judge

Dated January 25, 1979

*It is clear that Good Hope could not allege that drilling operations have

commenced, in light of its counsel’s express and implied admissions that

there has been no drilling. See Transcript of Bankruptcy Court Proceedings

(May 14, 1976) p. 32. Brief for appellant on appeal, p. 4. It would obvious-

ly be futile to remand for the purpose of allowing Good Hope to amend its

complaint to allege that drilling has taken place, or to remand to allow an

amendment to allege facts that would excuse timely tender.

19a

Appendix C.

UNITED STATES OF AMERICA

IN THE UNITED STATES DISTRICT COURT FOR THE

DISTRICT OF MASSACHUSETTS

IN THE MATTER OF:

GOOD HOPE REFINERIES, CHAPTER XI PROCEEDINGS

INC., No. 75-2741-G

Debtor

GOOD HOPE REFINERIES, INC.

VS.

BELIA R. BENAVIDES, FLUMENCIO MUNOZ,

EDNA AMADA M. LOZANO, LUIS ANTONIO

MUNOZ & OMAR ALBERTO MUNOZ

Order

Upon consideration of the Motion to Dismiss Complaint to

Establish Rights Under Lease, it appearing to the Court that

the Motion should be granted, and that this court has no juris-

diction or control of the asset involved, being an oil and gas

lease that terminated by the terms thereof on November 8,

1975, it is by the Court this 9th day of June, 1976,

ORDERED, that the Complaint to Establish Rights Under

Lease be, and the same is hereby, dismissed with prejudice;

and

FURTHER ORDERED, that the Preliminary Injunction

issued in this matter on April 8, 1976 be, and the same is here-

by, dissolved and vacated.

PAUL W. GLENNON

Bankruptcy Judge

20a

Appendix D.

BANKRUPTCY ACT, § I1l(e), 11 U.S.C. § 29(e)

§ 29. [Suits By and Against Bankrupts. ]

(e) A receiver or trustee may, within two years subsequent

to the date of adjudication or within such further period of

time as the Federal or State law may permit, institute pro-

ceedings in behalf of the estate upon any claim against which

the period of limitation fixed by Federal or State law had not

expired at the time of the filing of the petition in bankruptcy.

Where, by any agreement, a period of limitation is fixed for

instituting a suit or proceeding upon any claim, or for present-

ing or filing any claim, proof of claim, proof of loss, demand,

notice, or the like, or where in any proceeding, judicial or

otherwise, a period of limitation is fixed, either in such pro-

ceeding or by applicable Federal or State law, for taking any

action, filing any claim or pleading, or doing any act, and

where in any such case such period had not expired at the date

of the filing of the petition in bankruptcy, the receiver or

trustee of the bankrupt may, for the benefit of the estate, take

any such action or do any such act, required of or permitted to

the bankrupt, within a period of sixty days subsequent to the

date of adjudication or within such further period as may be

permitted by the agreement or in the proceeding or by appli-

cable Federal or State law as the case may be.

BANKRUPTCY ACT, § 70(a), 11 U.S.C. § 110(a).

§ 70. [Title to Property.]

(a) The trustee of the estate of a bankrupt and his successor

or successors, if any, upon his or their appointment and quali-

2la

fication, shall in turn be vested by operation of law with the

title of the bankrupt as of the date of the filing of the petition

initiating a proceeding under this Act, except insofar as it is to

property which is held to be exempt, to all of the following

kinds of property wherever located (1) documents relating to

his property; (2) interests in patents, patent rights, copyrights,

and trade-marks, and in applications therefor: Provided, that

in case the trustee, within thirty days after appointment and

qualification, does not notify the applicant for a patent, copy-

right, or trade-mark of his election to prosecute the applica-

tion to allowance or rejection, the bankrupt may apply to the

court for an order revesting him with the title thereto, which

petition shall be granted unless for cause shown by the trustee

the court grants further time to the trustee for making such

election; and such applicant may, in any event, at any time

petition the court to be revested with such title in case the

trustee shall fail to prosecute such application with reasonable

diligence; and the court, upon revesting the bankrupt with

such title, shall direct the trustee to execute proper instruments

of transfer to make the same effective in law and upon the

records: (3) powers which he might have exercised for his own

benefit, but not those which he might have exercised solely for

sone other person; (4) property transferred by him in fraud of

his creditors; (5) property, including rights of action, which

prior to the filing of the petition he could by any means have

transferred or which might have been levied upon and sold

under judicial process against him, or otherwise seized, im-

pounded, or sequestered: Provided, That rights of action ex

delicto for libel, slander, injuries to the person of the bankrupt

or of a relative, whether or not resulting in death, seduction,

and criminal conversation shall not vest in the trustee unless by

the law of the State such rights of action are subject to attach-

ment, execution, garnishment, sequestration, or other judicial

process: And provided further, That when any bankrupt,

22a

who is a natural person, shall have any insurance policy which

has a cash surrender value payable to himself, his estate, or

personal representatives, he may, within thirty days alter the

cash surrender value has been ascertained and stated to the

trustee by the company issuing the same, pay or secure to the

trustee the sum so ascertained and stated, and continue to

hold, own, and carry such policy free from the claims of the

creditors participating in the distribution of his estate under

the bankruptcy proceedings, otherwise the policy shall pass to

the trustees as assets; (6) rights of action arising upon con-

tracts, or usury, or the unlawful taking or detention of or in-

jury to his property; (7) contingent remainders, executory de-

vises and limitations, rights of entry for condition broken,

rights or possibilities of reverter, and like interests in real prop-

erty, which were nonassignable prior to bankruptcy and

which, within six months thereafter, become assignable inter-

ests or estates or give rise to powers in the bankrupt to acquire

assignable interests or estates; and (8) property held by an

assignee for the benefit of creditors appointed under an assign-

ment which constituted an act of bankruptcy, which property

shall, for the purposes of this Act, be deemed to be held by the

assignee as the agent of the bankrupt and shall be subject to

the summary jurisdiction of the court.

All property, wherever located, except insofar as it is prop-

erty which is held to be exempt, which vests in the bankrupt

within six months after bankruptcy by bequest, devise or in-

heritance shall vest in the trustee and his successor or suc-

cessors, if any, upon his or their appointment and qualifica-

tion, as of the date when it vested in the bankrupt, and shall be

free and discharged from any transfer made or suffered by the

bankrupt after bankruptcy.

All property, wherever located, except insofar as it is prop-

erty which is held to be exempt, in which the bankrupt has at

the date of bankruptcy an estate or interest by the entirety and

23a

which within six months after bankruptcy becomes transfer-

able in whole or in part solely by the bankrupt shall, to the ex-

tent it becomes so transferable, vest in the trustee and his suc-

cessor or successors, if any, upon his or their appointment and

qualification, as of the date of bankruptcy.

The title of the trustee shall not be affected by the prior

possession of a receiver or other officer of any court.

BANKRUPTCY ACT, § 70(b), 11 U.S.C. § 110(b).

§ 70.

(b). The trustee shall assume or reject an executory con-

tract, including an unexpired lease of real property, within six-

ty days after the adjudication or within thirty days after the

qualification of the trustee, whichever is later, but the court

may for cause shown extend or reduce the time. Any such

contract or lease not assumed or rejected within that time shall

be deemed to be rejected. If a trustee is not appointed, any

such contract or lease shall be deemed to be rejected within

thirty days after the date of the order directing that a trustee

be not appointed. A trustee shall file, within sixty days after

adjudication or within thirty days after he has qualified,

whichever is later, unless the court for cause shown extends or

reduces the time, a statement under oath showing which, if

any, of the contracts of the bankrupt are executory in whole or

in part, including unexpired leases of real property, and

which, if any, have been rejected by the trustee. Unless a

lease of real property expressly otherwise provides, a rejection

of the lease or of any covenant therein by the trustee of the

lessor does not deprive the lessee of his estate. A general cove-

nant or condition in a lease that it shall not be assigned shall

not be construed to prevent the trustee from assuming the same

24a

at his election and subsequently assigning the same; but an ex-

press covenant that an assignment by operation of law or the

bankruptcy of a specified party thereto or of either party shall

terminate the lease or give the other party an election to termi-

nate the same is enforcible. A trustee who elects to assume a

contract or lease of the bankrupt and who subsequently, with

the approval of the court and upon such terms and conditions

as the court may fix after hearing upon notice to the other par-

ty to the contract or lease, assigns the contract or lease to a

third person, is not liable for breaches occurring after the

assignment.

Section 108 of the Bankruptcy Code of 1978

(11 U.S.C. § 108)

§ 108. Extension of time.

(a) If applicable law, an order entered in a proceeding, or

an agreement fixes a period within which the debtor may com-

mence an action, and such period has not expired before the

date of the filing of the petition, the trustee may commence

such action only before the later of —

(1) the end of such period, including any suspension of

such period occurring on or after the commencement of

the case; and

(2) two years after the order for relief.

(b) Except as provided in subsection (a) of this section, if

applicable law, an order entered in a proceeding, or an agree-

ment fixes a period within which the debtor or an individual

protected under section 1301 of this title may file any

pleading, demand, notice, or proof of claim or loss, cure a

25a

default, or perform any other similar act, and such period has

not expired before the date of the filing of the petition, the

trustee may only file, cure, or perform, as the case may be,

before the later of—

(1) the end of such period, including any suspension of

such period occurring on or after the commencement of

the case; and

(2) 60 days after the order for relief.

(c) Except as provided in section 524 of this title, if ap-

plicable law, an order entered in a proceeding, or an agree-

ment fixes a period for commencing or continuing a civil ac-

tion in a court other than a bankruptcy court on a claim

against the debtor, or against an individual with respect to

which such individual is protected under section 1301 of this

title, and such period has not expired before the date of the fil-

ing of the petition, then such period does not expire until the

later of —

(1) the end of such period, including any suspension of

such period occurring on or after the commencement of

the case; and

(2) 30 days after notice of the termination or expira-

tion of the stay under section 362, 722, or 1301 of this

title, as the case may be, with respect to such claim.