Petition for Writ of Certiorari — Coleman Oil Co. v. Circle K Corp., 216 B.R. 1166 (1998) (No. 97-1067)

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ee Supreme Court, U.S.

\\ FILED

97 1067 DEC 2 4 1997

NO.__pprteg OF THE CLERK

IN THE

SUPREME COURT OF THE UNITED STATES

OCTOBER TERM 1997

COLEMAN OIL COMPANY, INC., a New Hampshire

corporation,

Petitioner,

THE CIRCLE K CORPORATION, et al.,

Respondents.

ee we em eee ee ee ee me eee eee eee ee ee ee eee eee

ON PETITION FOR WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS FOR THE

NINTH CIRCUIT

Carolyn J. Johnsen

Joseph A. Schenk

Counsel of Record

HEBERT, SCHENK & JOHNSEN, P..,C.

1440 East Missouri Avenue, Suite 125

Phoenix, AZ 85014

602-248-8203

Attorneys for Petitioner

QUESTION PRESENTED FOR REVIEW

Whether a bankruptcy court has the implied, non-statutory

authority to abrogate fundamental contract nights by altering

the terms of an existing contract on the grounds that such

alterations “effectuate the objectives of 11 U.S.C. §365" by

allowing a debtor to renew an executory contract when its

prior defaults would otherwise prevent it from doing so?

LIST OF PARTIES

The parties are the petitioner, Coleman Oil Company, Inc., a

New Hampshire corporation (“Coleman”) and Respondents,

The Circle K Corporation, Circle K Convenience Stores,

Inc., Circle K Management Company, Lar-lin, Inc., First

Circle Properties, Inc., Utotem, Inc., Utotem Markets of

Arizona, Inc., U Totem of Alabama Inc., U-tote'm of

Colorado Inc.,U-tote-m of Miami, Inc., Tic Toc Systems,

Inc., Monterre Properties, Inc., Shop & Go, Inc., Circle K

General, Inc., Circle

Charter Marketing Company, Charter Marketing Company

(Connecticut), Mr. B's Oil Co., Inc., Mr. B's Food Mart, Inc.,

NPI Corporation, Old Colony Petroleum Company, Inc..,

New England Petroleum Distributors, Inc., and 44th Street &

Camelback Limited Partnership (“Debtors”).

K Hawaii, Inc., Combined Aviation Co..

iil

TABLE OF CONTENTS

QUESTION PRESENTED FOR REVIEW .............

LIST OF PARTIES .......- 0-0-0 se ee ee eee e cece eees ii

BE PART REE EIIGD 5 0 6 605 55 6 0 od elelad se wilele os V

DISCUSSIONS AND OPINIONS OF LOWER

Ea ES |

ee a sae ches cb a ekhias dee eee 2

ee + rr 2

RONMENT GPE ROMER GARE 05 ccc nce cccsccsscees 2

REASONS FOR GRANTING THE WRIT............. 4

I, THIS CASE PRESENTS AN IMPORTANT

QUESTION OF FIRST IMPRESSION

REGARDING THE EXTENT TO WHICH

THE BANKRUPTCY COURT HAS THE

IMPLIED AUTHORITY TO ABROGATE

EXISTING CONTRACT RIGHTS. ...... 4

I]. THE NINTH CIRCUIT COURT OF

APPEALS DECISION DEPARTS FROM

ALL RECOGNIZED RULES OF

STATUTORY CONSTRUCTION ....... 5

A. Section 365 of the Bankruptcy Code

Contains No Provision Supporting the

Ninth Circuit's Ruling............ 6

B. The Ninth Circuit’s Ruling Is Contrary

to Principles Embodied in the

a re 10

ad The Ninth Circuit Has Violated the

“Plain Meaning” Rule .......... 13

D. The Ninth Circuit’s Ruling Has A

Broad And Negative Impact On The

Commercial Marketplace. ....... 16

ee ee eee ae ree eet ae 17

RIO Ns OL 50s he Sd ee a ee ee aeee dl. 18

TABLE OF AUTHORITIES

CASES

, 458 U.S. 569, 571

5 PR ee Pe 13

127 F.3d 904 (9 Cir. 1997)... 6. cece eee eee eee eee: 2

cei 2) Pn rr orcs. ce oe 10

S98 SA DID | icc ev ee een ee Veeesereewecess 8

veh wT LS i worppre err er te te 3,3; 44 0

190 B.R. 370 (Bankr. 9" Cir. 1996) ......-.0--- eee eee 2

A &), Soe ee Peere eee a Cee he Cee 10

OM o>) eer ree ers Se 7

, . . = 2) ee eran ce er oe 13

American Airlines, Inc. v. Wolens, 513 U.S. 219, 230, 115

S.Cu, BET, SZSLIGGS) «nw cee cee e ews ceceteneeees 4

Pity of Covi Pana Lending 1 sented

Partnership, 71 F.3d 1221, 1226 (6" Cir. 1995) ......-. 12

Col eike I New H we |

Plaintiff v. The Circle K Corporation, et al.. Defendants,

Chapter 11, Case Nos. B-90-5052 PHX GBN to B-90-5075

PHX GBN (Jointly Administered), Adversary No. 91-974-

GBN,(Bankruptcy D. Ariz., April 6, 1994) .........---- l

Hazen First State Bank v, Speight, 888 F.2d 574, 576

"i el © |) nnn oo ok 11

Inre Advent Corp.,, 24 B.R. 612, 614 (Bankr. 1* Cir.

WINS So. 819 6 occurence oesyeratgeenneys th che ys 1]

In Re Cook United, Inc,, 53 B.R. 342, 345 (Bankr.N.D.Ohio

| rer ac re ap ee ae i)

In Re Crabb, 48 B.R. 165 (Bankr. D. Mass. 1985) ...... 16

In re Gull Air, Inc,, 890 F.2d 1255, 1262 (1* Cir. 1989) .. 11

In re G-N Partners, 48 B.R. 462, 466 (Bankr. D. Minn.

SOUR 60.b bas cede cake bee ue ee ee i2

cS , 196

B.R. 87, 95 (Bankr.N.D.IIl. 1996, aff'd, 1997WL 619824

CODES 5 dowvcn hace nee FO eae 14,15

In re Intermet Realty Partnership, 26 B.R. 383

eS A || ee ee ee ee 12

Inre M.S. Freight Distribution, Inc., 172 B.R. 976, 979

CRE, WT ca TUES a bubs 4s Khe ae bbe Bike ek CaN AA oka s 14

In re Pacific-Atlantic Trading Co,, 27 F.3d 401, 403

Pe, FI ov i eckiniccstivaisnki a BAA. 14

In re Paul Harris Stores, Inc., 148 B.R. 307, 313-14

CREE BOE a: 60:s.0.0.0.0's'e0 a nck ol leablokc’ stab ccs La 14

Inre S.E. Nichols Inc., 120 B.R. 745, 747

CORES. STOO sc xretw oo owed SU hee Lad. 12

In re Thomas, 883 F.2d 991, 995 (11" Cir. 1989),

cert, denied, 497 U.S. 1007 (1990) ...............2.. 1]

Inre Tirenational Corp.. 47 B.R. 674 (Bankr.N.D.Ohio

SWOST Coca saa CPR re I a A. 10

In re Webster Clothes, Inc,, 36 B.R. 260, 1263

GAM NEE. vidickvsedtioeies 15

And Coordination Unit, 507 U.S. 163, 168 (1993) ...... 10

466 F.2d 171 a dys, BA ete Oe a! Gee 9

arerenen cane ?

Environmental Protection,

474 U.S. 494, 502 (1986) .... eer e eer ee reer erceee: )

Moody v, Amoco Oil Co., 734 F.2d 1200, 1213 (7 Cir.

(| bona ga GSS AMS ESE Se ee 1]

N.L.R.B. vy. Bildisco and Bildisco, 465 U.S. 513, 532

PRUE Uc aes Aveta iss rekese cage esess ess 12

National Boiler Mktg. Ass'n v. United Stats, 436 US.

ee ee Perens 17

Patterson v. Shumate, 504 U.S. 753, 761 (1992) ......-- 13

Rice v. Sioux City Cemetery, 349 U.S. 70, 79 (1955) .... 17

, 762 F.2d 1303,

1311 (5™ Cir. 1985). .....cceceeeereeeccereererece: 12

Bros. Construction Co., 928 U.S. 177, 188 (1913) ...... 17

States v. Ruzicka, 329 U.S. yt) eno 17

U.S. Term Limits, Inc. v. Thomton, 514 U.S. 779,

FOS He DIGS) ccs cscs cee rec cescecevesetecens 10

U.S. v, Ron Pair Enterprises, Inc.. 489 U.S. 235, 244 .. 9, 13

STATUTES

SUR UD oss Fane Sass a8 eo caren sacar es ees 3

OF OR NE oc nse ovine ce oa alee vey ee yews 08% 4,11

Eis Dod | Sree Ce Coie i-10, 12-17

Le eee ee ene nee eee er 14

FE i ee 1

PU Be SE re re ee 4

Le 2

LEGISLATIVE HISTORY

H.R. Rep. No. 595, 95" Cong., 1" Sess., reprinted in 1978

U.S. Code Cong. & Ad. News 5787. ................. 1]

H.R. Rep. No. 95-595, 95" Cong., 1" Sess., 348-9 (1977).

See Senate Report No. 95-989, 95" Cong., 2d Sess. 59

CIPO s crc cebcebeceed ea tee Tle ere ier... 8

H.R.Rep. No. 882, 95" Cong., 2d Sess.1984, reprinted

in 1984 U.S. Code Cong. & Ad. News 576. ........... 15

No.

IN THE

SUPREME COURT OF THE UNITED STATES

OCTOBER TERM 1997

COLEMAN OIL COMPANY, INC., a New Hampshire

corporation,

Petitioner,

Vv.

THE CIRCLE K CORPORATION, et al.,

Respondents.

PETITION FOR WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

PETITION FOR WRIT OF CERTIORARI

The Petitioner, Coleman Oil Company. Inc. respectfully

requests that a writ of certiorari issue to review the judgment

and opinion of the United States Court of Appeals for the

Ninth Circuit, filed October 22. 1997.

DISCUSSIONS AND OPINIONS OF LOWER COURTS

On April 6, 1994 the United States Bankruptcy Court for the

District of Arizona issued its Order granting summary

judgment in favor of Debtors New aston Petroleum

Distributors, Inc. and Old Colony Petroleum permitting the

assumption of certain leases of real property owned by

Coleman.

(“In re Circle K Corporation, et al.”), Chapter 11,

Case Nos. B-90-5052 PHX GBN to B-90-5075 PHX GBN

Saery, | Administered), Adversary No. 91-974-GBN, docket

at 73 (Bankr. D. Ariz., April 6, 1994). The Order was not

officially reported but has been reprinted in the Appendix at

page la.

Coleman appealed the Order to the Bankruptcy Appellate

Panel for the Ninth Circuit (“BAP”) which affirmed the

lower court in a split decision with opinions written by both

the majority and dissenting judges. An initial decision was

released by the BAP on December 11, 1995, but an amended

Opinion was issued on January 8, 1996. The BAP Opinion is

reported at 190 B.R. 370 (Bankr. 9" Cir. 1996), and is

reprinted in the Appendix at page 9a.

The matter was appealed to the Ninth Circuit Court of

Appeals which affirmed the BAP, again in a split decision.

The Ninth Circuit Opinion, filed on October 22, 1997, is

reported at 127 F.3d 904 (9" Cir. 1997) and is reprinted in

the Appendix at page 43a.

JURISDICTION

The-United States Court of Appeals for the Ninth Circuit

filed its Opinion on October 22, 1997. The jurisdiction of

this Court to review the decision of the United States Court

of Appeals for the Ninth Circuit is invoked under 28 U.S.C.

§1254(1).

STATUTES INVOLVED

This Petition involves the proper interpretation of 1] U.S.C.

§365 which has been reproduced in its entirety in the

Appendix at page 60a.

STATEMENT OF THE CASE

In 1977, Coleman Oil Company (“Coleman”) leased to

Pickering Oil Heat, Inc. (“Pickering”) six retail gasoline

stores located in New Hampshire and Maine. Through a

series of acquisitions and mergers, two subsidiaries of the

Circle K Corporation eventually claimed to be the holders of

the leasehold interests originally held by Pickering. Each

identical lease agreement provided for a ten year term with

options to renew for two additional five year terms, provided

that none of the leases were in default at the time the options

hb OREM PLL COLLAB LLL, AP eet BOE COI A OE ERS

were exercised.

On May 15, 1990, the Circle K Corporation and its

subsidiaries (“Debtors”) filed a Chapter 11 bankruptcy

petition and immediately requested an extension of the 60-

day deadline in which to assume or reject the Coleman leases

pursuant to 11 U.S.C. §365(d)(4). The Bankruptcy Court

granted the extension which ultimately continued for nearly

three years.

In 1992 the Debtors attempted to exercise the second renewal

option to extend the terms of the Coleman leases, even

though defaults in at least some of the leases existed. In

March and April of 1993, the Debtors filed motions to

assume the Coleman leases and subsequently filed a motion

for summary judgment with respect to the issues raised in the

assumption motions. Federal jurisdiction over the dispute

was invoked pursuant to 11 U.S.C. §157(b). The Bankruptcy

Court granted the Debtors’ motion for summary judgment by

Order dated April 6, 1994 (“Order”) and permitted the

Debtors to assume the leases.

Coleman appealed the Order to the Bankruptcy Appellate

Panel for the Ninth Circuit (“BAP”). The BAP affirmed,

holding that Coleman had failed to raise a material issue of

fact regarding the Debtors’ status as assignees of the leases

and that the Debtors” exercise of the two renewal options

was valid even though defaults existed at the time of the

second extension. Judge Barry Russell dissented, concluding

that Section 365 of the Bankruptcy Code did not authorize

the Bankruptcy Court to modify the express terms of the

leases.

Coleman appealed to the Ninth Circuit Court of Appeals -

which affirmed the BAP’s decision. The Ninth Circuit held

that the Debtors could exercise their final option to renew the

leases without first curing their pre-petition defaults, stating

that “no principle of bankruptcy or contract law precludes us

from permitting the Debtors here to extend their leases in a

manner contrary to the leases’ terms. when to do so will

effectuate the purposes of section 365.” 127 F.3d at 911.

Judge Pamela Ann Rymer dissented in part, opining that

nothing in 11 U.S.C. §365 allows debtors to disregard the

requirements of their leases and renew while in default.

REASONS FOR GRANTING THE WRIT

I. THIS CASE PRESENTS AN IMPORTANT

QUESTION OF FIRST IMPRESSION

REGARDING THE EXTENT TO WHICH THE

BANKRUPTCY COURT HAS THE IMPLIED

AUTHORITY TO ABROGATE EXISTING

CONTRACT RIGHTS.

Private contract rights should not be lightly regarded by the

courts. As this Court has recognized, “[m]arket efficiency

requires effective means to enforce private agreements.”

American Airlines, Inc, v. Wolens, 513 U.S. 219, 230, 115

S.Ct. 817, 824 (1995). Consequently, courts should be

extremely reluctant to alter private contract rights on the

basis of a perceived need to “effectuate” a statute which does

not expressly provide for such a result.

Without question, there are provisions within the Bankruptcy

Code which can have an impact on private contract rights.

For example, 1] U.S.C. §362 imposes an automatic stay

upon the filing of a bankruptcy petition which prevents

creditors from taking any action to enforce their contract

rights against the debtor without first obtaining relief from

the Bankruptcy Court. 11 U.S.C. §365(e) generally prevents

the enforcement of provisions which make the filing of a

bankruptcy grounds for terminating or modifying an

executory contract or unexpired lease. Ultimately, 11 U.S.C.

§727 allows bankruptcy debtors to completely discharge pre-

petition contract obligations. All of these provisions have

one thing in common — each represents a circumstance

where Congress has made an express determination that the

benefits to be gained from a national bankruptcy policy

outweigh the preservation of private contract rights.

The implication by a bankruptcy court of the power to alter

existing contracts in furtherance of a debtor’s efforts to

reorganize creates two significant problems. First, it injects

bankruptcy courts into the legislative arena, requiring the

court to assume that the absence of express statutory

language was accidental and forcing it to anticipate how

Congress would have weighed the interest in enforcing

private contracts inst a Hee 4 policy favoring the

eco ,

private market forces by adding unpredictability to the

contract formation process. |

In the present case, the Ninth Circuit has held as a matter of

first impression that a bankruptcy debtor is not bound by an

unambiguous provision in an executory lease which requires

it to cure all defaults as a condition for exercising a renewal

option. Prior to this case, no court had ever addressed this

specific -_ issue. As Judge Rymer noted in her dissenting

a wrong turn.

Il. THE NINTH CIRCUIT COURT OF APPEALS

DECISION DEPARTS FROM ALL RECOGNIZED

RULES OF STATUTORY CONSTRUCTION

1] U.S.C. §365 permits the assumption or rejection of an

executory contract or lease. It does not empower a court to

rewrite contractual terms. In this case, the Ninth Circuit has

sanctioned the abrogation of contractual rights and has

sweepingly held that bankruptcy policy justifies such

interference. Nowhere has Congress expressly granted such

authority to the Bankruptcy Court.

The leases at issue provide as follows:

Lessee shall have two (2)

additional and successive

terms of five (5) years .. . , by

giving Lessor at least six (6)

months written notice dees

provided that Lessee’s right to

extend is conditioned upon the

SPE : F mn defaul

of payments under any of the

other leases . . . (emphasis

added).

Thus, there were two conditions precedent to exercising the

renewal option: notice and an absence of default. Although

there is no dispute that the Debtors failed to meet the second

prerequisite, the courts below determined that the option

could be exercised and the term of the leases ed. In so

ruling, they effectively excised a material provision of the

parties’ agreement and substituted a judge-made term. This is

a step which is not contemplated by the Bankruptcy Code

and which can only lead to unpredictability in the

commercial marketplace.

This petition should be granted because the Ninth Circuit

decision violates fundamental principles of statutory

construction. It creates out of whole cloth a rule of law

which effectively authorizes the bankruptcy court to modify

executory contracts whenever doing so would assist a

debtor's efforts to reorganize.

A. Section 365 of the Bankruptcy Code Contains

No Provision Supporting the Ninth Circuit's

Ruling.

The Ninth Circuit majority attempts to characterize its

decision as an interpretation of 11 U.S.C. §365. However, as

Judge Rymer aptly noted in her dissent,

... nothing in §365 . . . allows

debtors to disregard their

leases and renew while in

: 7

default. . . .

Section 365 does not extend

the time to exercise the option

or to meet conditions

precedent. Nor does §365 give

the debtor the right to opt to

renew a cozitract that is in

default when the contract by its

terms requires that a default

first be cured. To hold

otherwise rewrites the lease

and, as I read it, §365. 127

F.3d at 911.

Similarly, Judge Russell, dissenting from the BAP decision

stated,

I know of no provision in the

Bankruptcy Code which gives

a debtor in possession the right

to exercise an option without

also curing any default as

required by the very contract

which gives the lessee the right

to exercise the option.

Although the majority argues

that §365 abrogates an

important right of the lessor in

the lease, i.e.. the right to have

all defaults cured when the

option is exercised. they point

to no specific part of §365 to

achieve this result.

There is nothing in §365 that

extends the time to exercise the

option and the fulfillment of

any conditions precedent, such

as not being in default, at the

time of the purported exercise.

190 B.R. at 379.

A review of §365 substantiates the dissenters’ position.

Nevertheless, the Ninth Circuit majority reasoned that

rewriting a contract is permissible Comes “all kinds of

interferences with contractual — occur in bankruptcy

proceedings.” 127 F.3d at 910. It cited as support for this

proposition §365(a) which permits the rejection of an entire

contract, the automatic stay, and the debtor’s — to cure a

default even though the contract does not provide for cure.

But, in each of these cases, Congress has specifically

delineated an exception to the enforcement of a contractual

term. For example, the fact that ipso facto clauses are

unenforceable is explicitly set forth in §365(e). The debtor’s

power to assume or reject and to cure defaults is expressly

provided for in §365(a) and (b). Obviously, when Congress

desired to permit a contractual modification in bankruptcy, it

so legislated. Nothing in §365 remotely suggests that

Congress has authorized the court to abrogate a nondebtor

"s contract rights on an ad hoc basis. In fact, the

egislative history of §365 supports just the opposite

conclusion:

The unenforcibility of ipso

facto or bankruptcy clauses

Ae pe under this section

a he sist Ti

nondebtor party to executory

contracts and unexpired leases.

If the trustee is to assume a

contract or lease, the court will

performance under the contract

or lease gives the other

contracting party the full

benefit of his bargain. H.R.

Rep. No. 95-595, 95" Cong.,

1* Sess., 348-9 (1977). See

Senate Report No. 95-989, 95"

Cong.. 2d Sess. 59 (1978).

(emphasis added)

This Court has recognized that Congress did not intend for

acne ere

the Bankruptcy Code to obliterate general contract law.

Congress has repeatedly expressed its legislative

determination “that the trustee [or debtor-in-possession] is

not to have carte blanche to ignore non-bankruptcy law.”

U.S. v. Ron Pair Enterprises, Inc., 489 U.S. 235, 244, citing

Environmental Protection, 474 U.S. 494, 502 (1986).

Other courts addressing similar facts have also recognized

their limited authority to modify private contracts. For

example, in In Re Cook United, Inc., 53 B.R. 342, 345

(Bankr.N.D.Ohio 1985), the court stated:

Debtor is requesting this Court

to rewrite the leases and

Section 365 of the Bankruptcy

Code, by holding that even

though it was in default,

Debtor had a right to exercise

its option to renew the leases

prior to its assuming said

leases and curing the defaults.

This Court cannot do so. The

bankruptcy court has no

~ if lif

Matter of Schokbeton Indus..

Inc., 466 F.2d 171 (5" Cir.

iy Se

To allow Debtor to exercise

the option without assuming

the lease would be a

the contractual rights of the

lessor, because he would not

know if the lessee intended to

remain, the very thing for

which he bargained. Where

the lessor has requested

assumption or rejection.

Debtor must assume before it

may exercise an option to

renew. In order for Debtor to

reap the benefits of a contract,

it must at the same time bear

the burdens of that contract. In

re Tirenational Corp., 47 B.R.

- 674 (Bankr.N.D.Ohio 1985).

(emphasis added)

Therefore, the Ninth Circuit’s interpretation of §365 violates

an accepted maxim of statutory construction, expressio unius

est exclusio alterius — the expression of one thing is the

exclusion of another. U.S. Term Limits, Inc, v. Thornton,

514 U.S. 779, 793 fn. 9 (1995); Lectherman v. Tarrant

; er it, 507

U.S. 163, 168 (1993). Congress has dictated that certain

contract modifications are warranted in furtherance of

bankruptcy policy. These are set forth in che Bankruptcy

Code. Congress did not provide for court-orchestrated

contractual bargaining. That is what occurred in this case

when the Ninth Circuit advocated a rule of law permitting

the Bankruptcy Court to override the parties’ agreement in

order to “effectuate” §365.

B. The Ninth Circuit's Ruling Is Contrary to

Principles Embodied in the Bankruptcy Code.

The Ninth Circuit found “‘the purpose behind §365 is to

balance the state law contract right of the creditor to receive

the benefit of his bargain with the federal law equitable night

of the debtor to have an opportunity to reorganize.’ ... The

lessor will then get the benefit of its bargain upon

assumption, when the debtor lessee must cure the defaults.”

fu F.3d at 909, quoting from BAP Opinion, 190 B.R. at

376.

But this ruling is a derogation of principles embodied in

§365 and other sections of the Bankruptcy Code. The

property of a debtor. including contractual rights, enters the

bankruptcy estate intact. The Seventh Circuit has stated:

[Whatever rights a debtor has

in property at the

commencement of the case

continue in bankruptcy — no

more, no less. Section 541 is

not intended to expand the

debtor’s rights against others

more than they exist at the

commencement of the case.

Moody v. Amoco Oil Co., 734 F.2d 1200, 1213 (7™ Cir.

1984) citing H.R. Rep. No. 595, 95" Cong., 1* Sess.,

reprinted in 1978 U.S. Code Cong. & Ad. News 5787. See

also , 883 F.2d 991, 995 (1 1" Cir. 1989), cert.

denied, 497 U.S. 1007 (1990).

More specifically, several Circuits including the Ninth , are

in accord that nothing in the Bankruptcy Code enlarges a

debtor’s rights to extend the term of an executory contract.

The automatic stay does not

toll the mere running of time

under a contract, and thus it

does not prevent automatic

termination of the contract ...

Section 362 does not give a

debtor greater rights in a

contract. Thus, debtors cannot

rely on Section 362 to prevent

termination of the contracts.

F.2d at 1213.

Vv ight, 888 F.2d 574.

See also Hazen First State Bank v. Speight

576 (8" Cir. 1989); In re Carroll, 903 F.2d 1266, 1271 cg"

Cir. 1990).

Similarly, the First Circuit in In re Gull Air, Inc., 890 F.2d

1255, 1262 (1* Cir. 1989) held that “when a debtor’s

proprietary interest expires by operation of an express

condition. the Bankruptcy Code does not preserve that

interest and prevent termination.” See also In re Advent

Corp., 24 B.R. 612, 614 (Bankr. 1* Cir. 1982) (“The

Bankruptcy Code neither —— the rights of a debtor

under a contract, nor prevents the termination of a contract

by "s own terms.”); In re G-N Partners, 48 B.R. 462, 466

(Bankr. D. Minn. 1985) (“Nothing in §365 gives the trustee

the right to extend indefinitely a time provision in an option

any more than a trustee could extend the right to occupancy

under a lease past the stated lease period by purporting to

assume it.”); , 26 B.R. 383

(Bankr.E.D.Pa. 1983) (“Time is always of the essence in an

option contract and, unless exercised, an option expires on

the specified date ... The filing of a petition for

reorganization under Chapter 11 does not expand the rights

of the debtor under an option agreement.”).

The Ninth Circuit’s decision permitting bankruptcy courts to

engage in arbitrary contractual redrafting does not square

with this well-settled principle that the material terms of a

pre-petition contract are to be preserved. It essentially

authorizes bankruptcy courts to rewrite executory contracts

whenever doing so would enhance a debtor’s ability to

reorganize.

In addition, the Ninth Circuit's ruling does not comport with

another well-established principle that a debtor cannot elect

certain terms it desires to assume and reject others; it must

assume Cum onere, ildi ildisco, 465

U.S. 513, 532 (1984). See also

Capital Bank, 762 F.2d 1303, 1311 (5™ Cir. 1985); City of

| 1311 (5° “er

F.3d 1221, 1226 (6" Cir. 1995) (Neither the debtor nor the

bankruptcy court may excise material obligations Owing to

the non-debtor contracting party.); :

120 B.R. 745, 747 (Bankr. S.D.N.Y. 1990) (“It is well-settled

that a debtor cannot assume part of an unexpired lease while

rejecting another part; the debtor must assume the lezse in

‘oto with both the benefits and burdens intact.”).

It is illogical that the same principle would not apply pre-

assumption. Surely, Congress did not intend that a debtor

would be accorded the right to revise a contract prior to

assuming it when it is not permitted to do so after

assumption.

Under the guise of fostering reorganization, the Ninth Circuit

has created a rule of law which has no conceptual support in

any other facet of bankruptcy law. Judge Russell pinpointed

the ramifications of such a result:

Upon close scrutiny, those

cases represent judges

‘legislating’ a result with no

basis under §365, in order to

achieve a result which those

courts felt would better serve

some bankruptcy a or As

the majority states: ‘This

policy also balances the

contract rights of the landlord,

while protecting the debtor's

rights to the §365 period under

which to decide whether to

assume or reject the lease.’ In

my opinion, the balancing act

is an improper taking of the

lessor’s bargained for

contractual rights. 190 B.R. at

380.

tf The Ninth Circuit Has Violated the “Plain

Meaning” Rule

This Court has held that the “plain meaning of legislation

should be conclusive. except in ‘rare cases [in which] the

literal application of a statute will produce a result

demonstrably at odds with the intentions of its drafters."

. 489 U.S. 235, 242 (1989).

quoting Griffin v. Oceanic Contractors, Inc,, 458 U.S. 569,

571 (1982); See also Patterson v, Shumate, 504 U.S. 753.

761 (1992). The Ninth Circuit has given no credence to the

unequivocal language of §365 (d)(3) which requires debtors

to abide by their post-petition lease obligations prior to

assumption or rejection.

Section 365 (d)(3) provides that:

The trustee shall timely

the debtor, except those

specified in §365 (b)(2),

arising from and after the order

for relief under any unexpired

lease of non-residential real

property, until such lease is

assumed or rejected,

notwithstanding §503 (b)(1) of

the this title . . . (emphasis

added).

In holding that the renewal option could be exercised,

notwithstanding the existence of an uncured default, the

Ninth Circuit reached an interpretation of §365 which defies

the clear language of the statute. The requirement to “timely

perform all obligations” arising after ihabanlecnies filing is

absolute, and the Ninth Circuit had no Statutory basis for

eliminating the Debtors’ burden to fulfill all conditions

precedent to the exercise of its option to renew the Coleman

leases. See i ibuti , 172 B.R.

976, 979 (Bankr. W.D. Wa.) (“This court therefore concludes

that ‘all obligations’ means just that.”).

Section 365(d)(3) was enacted in 1984 “to ameliorate the

immediate financial burden borne by lessors of

nonresidential property during the period in which trustees

decided whether to assume a lease.” ific-

Trading Co,, 27 F.3d 401, 403 (9" Cir. 1994). See also In re

| , 196 B.R. 87,

95 (Bankr.N.D.IIl. 1996), aff'd. 1997 WL 619824 (1997)); In

, 148 B.R. 307, 313-14 (S.D.Ind.

1992). The legislative history for this provision fully °

supports this conclusion.

[T]he landlord is forced to

provide current services — the

use of its property, utilities,

security, and other services —

without current payment. No

other creditor is put in this

position. In addition, the other

tenants often must increase

their common area charge

payments to compensate for

the trustee’s failure to make

the required payments for the

debtor. The bill would lessen

these problems by requiring

the trustee

obligations of the debtor under

a lease of nonresidential real

property at the time required in

the lease. (Emphasis added).

H.R.Rep. No. 882, 95" Cong.,

tape reprinted in

1984

News 576.

This congressional intent and the language of the statute are

in accord; the purpose of §365(d)(3) is to protect the landlord

who is bound to a pre-petition lease by requiring the debtor

to abide by the requirements of the lease until it is assumed

or rejected. See

, 196 B.R. at 95.

In this case, the Ninth Circuit ignored the precise mandate of

§365(d)(3) in ruling that the Debtors could exercise the

renewal option without meeting the post-petition conditions

for extending the lease term. Under the clear language of the

statute, these were obligations that had to be timely

performed — the price. according to Congress, paid by the

debtor to a landlord forced against its will to provide

preassumption services.

In reaching its decision. the court below relied upon the

reasoning of In re Webster Clothes, Inc., 36 B.R. 260, 1263

(D.Md. 1984), and that court’s conclusion that the goal of

§365 is “the preservation of the status quo until the debtor-in-

possession decides whether to assume or reject.”

Significantly, Webster was decided prior to the 1984

amendments to the Bankruptcy Code. If the Ninth Circuit

had followed the plain language of §365(d)(3) as passed by

the 1984 amendments, the preservation of the status quo

would have required strict compliance with lease provisions,

including the requirement that all defaults be cured prior to

the exercise of any renewal options.

For whatever reason, the Ninth Circuit was unduly concerned

with the notion that requiring the Debtors to cure their

defaults prior to exercising the renewal option had the

practical effect of forcing an early decision to assume or

reject. But this concern has no place in a proper analysis of

§365(d)(3). For example, if the Debtors had failed to meet

the notice precondition to exercising the option as opposed to

the cure requirement, it is doubtful that the court’s analysis

would have become so strained. If the Debtors had simply

failed to give timely notice of an intent to renew, it is fairly

clear that the lease option would have expired because the

Debtors would have failed to meet a contractual obligation.

See In Re Crabb, 48 B.R. 165 (Bankr. D. Mass. 1985) (court

refused to revive an expired lease because the debtor failed

post-petition to give proper notice electing to exercise an

option to extend). There is simply no reason to reach a

different result simply because the Debtor’s default involved

an uncured prior breach rather than the failure to give a

required notice.

D. The Ninth Circuit's Ruling Has A Broad And

Negative Impact On The Commercial

Marketplace.

The Ninth Circuit failed to take into account the devastating

effects that its decision will have on future commercial

transactions. The majority wrote: “Thus no principle of

bankruptcy or contract law precludes us from permitting the

Debtors here to extend their leases in a manner contrary to

the leases’ terms, when to do so will effectuate the purposes

of section 365.” 127 F.3d at 911. This statement imposes no

limitation on the types of modifications that can be made to

reduce the burden on a debtor wishing to assume an

executory contract. Under this analysis, nothing would

prevent a bankruptcy court from adjusting the amount of

rent. eliminating a notice requirement, or lengthening the

contract term indefinitely. Any modification supposedly

furthering reorganization would be justifiable.

Neither §365 nor any other provision of the Bankruptcy

Code contemplates that non-debtor parties can be compelled

essentially to enter into new agreements on terms for which

they did not bargain and over which they had no control. As

this Court has stated, “the highest public policy is found in

the enforcement of the contract which was actually made.”

, 228 U.S. 177, 188 (1913). Certiorari is

warranted in order to address an issue which has a potentially

disastrous impact on commercial law.

CONCLUSION

In the past, the United States Supreme Court has granted

petitions for review of decisions involving statutory

construction or application based upon the significance of the

issue in the administration of a statute. See States v.

Ruzicka, 329 U.S. 287 (1946). Review has also been granted

when the issue under review may impact other facets of

society or when the case involves a matter of public interest.

See Nati "nv. Uni , 436 US.

816. 820 (1978); Rice v. Sioux City Cemetery, 349 U.S. 70.

79 (1955). Such considerations are clearly present in the

instant case.

Based on the foregoing. Petitioner respectfully requests that

the United States Supreme Court accept its Petition for Writ

of Certiorari in order to address the proper interpretation of

11 U.S.C. §365 and that it reverse the Opinion of the Ninth

Circuit Court of Appeals in this case.

Carolyn J. Johnsen

Joseph A. Schenk

Counsel of Record

HEBERT, SCHENK & JOHNSEN, P..C.

1440 East Missouri Avenue, Suite 125

Phoenix, AZ 85014

602-248-8203

Attorneys for Petitioner

APPENDIX

Order of the United States Bankruptcy Court for

the District of Arizona entered April 6,

09O8 sis e656S sR hss es la

Opinion and Amended Opinion of the United States

Bankruptcy Appellate Panel of the Ninth

Circuit filed December 11, 1995 and

Amended January 8, 1996............ 9a

Opinion of the United States Court of Appeals

for the Ninth Circuit filed October 22,

Bankruptcy Code, Section 365

OS ees SN eR, 60a

FILED

APR 06 1994

KEVIN E. O’BRIEN CLERK

UNITED STATES

BANKRUPTCY COURT

FOR THE DISTRICT OF ARIZONA

UNITED STATES BANKRUPTCY

DISTRICT OF ARIZONA

In re Chapter 11

THE CIRCLE K Nos. B-90-5052-PHX-GBN

CORPORATION; to B-90-5075-PHX-GBN

CIRCLE K

CONVENIENCE (Jointly Administered)

STORES, INC.;

CIRCLE K

)

MANAGEMENT )

COMPANY; LAR-LIN, )

INC.; FIRST CIRCLE )

PROPERTIES.INC.; )

UTOTEM, INC..; )

UTOTEM MARKETS )

OF ARIZONA, INC.. )

U TOTEM OF )

ALABAMA. INC.; )

U-TOTE'M OF )

COLORADO INC..; )

U-TOTE™M OF )

MIAMI, INC.; TIC )

TOC SYSTEMS. )

INC.; MONTERRE )

PROPERTIES, INC.: )

SHOP & GO. INC.. )

CIRCLE K GENERAL,

INC.; CIRCLE K

HAWAII, INC.;

COMBINED

AVIATION CO.;

CHARTER

MARKETING

COMPANY

(CONNECTICUT);

CHARTER

MARKETING

COMPANY; MR. B’S

OIL CO., INC.; MR.

B’S FOOD MART

INC.; NPI

CORPORATION; OLD

COLONY PETROLEU

COMPANY, INC-.;

NEW ENGLAND

PETROLEUM

DISTRIBUTORS,

INC.; and 44TH

STREET &

CAMELBACK

LIMITED

PARTNERSHIP,

ll a a a

)

Debtors.

COLEMAN OIL

COMPANY, INC., a

New Hampshire

corporation,

Adversary no. 91-974-GBN

asst Aneel Manis Sal ad Mlgeih slab eakade il Seal keds at tamik Mae Aes aca aaa a

Plaintiff,

)

vs. ) ORDER

)

THE CIRCLE K )

CORPORATION, )

et al. )

)

_Defendants. )

This matter is before the Court on debtors' Motion

for Summary Judgment (Adversary Docket No. 51).

Upon consideration of the papers filed in this

adversary proceeding, including documentary and affidavit

testimony as to the chain of name changes, mergers,

liquidation of subsidiary into parent corporations and

assignments by which debtors New England Petroleum

Distributors, Inc. and Old Colony Petroleum, Inc., now

known as The Circle K Corporation, claim to be the current

assignees and holders of the leasehold interests described in

paragraphs | and 2 below, and upon consideration of oral

argument on March 17, 1994, and of the interests of

creditors and the estates, this Court finds and concludes that

the debtors New England Petroleum Distributors, Inc. and

Old Colony Petroleum, Inc. were the assignees and holders

of the leasehold interests and properly exercised their rights

as assignees to renew the leases of Stores 2604. 2605,

84802. 84803. 84804, 84805 ("Subject Stores") in 1987 and

1992: the leases have not been nor are they now terminated;

there is no genuine issue of material fact and debtors'

Motion For Summary Judgment should be granted as a

matter of law.

Detailed findings of fact and conclusions of law

were made in the Court's ruling from the bench on March

17, 1994,

IT IS ORDERED, ADJUDGED AND

DECREED as follows:

1. Pursuant to the confirmed Plan of

Reorganization, Old Colony Petroleum Company, Inc. was

merged into Circle K Convenience Stores, Inc. on July 23,

1993; on July 26, 1993, The Circle K Corporation merged

into Circle K Convenience Stores, Inc.; in connection with

that merger Circle K Convenience Stores, Inc. changed its

name to The Circle K Corporation. The corporation now

known as The Circle K Corporation is the current assignee

and holder of the lessee's interest in the leaseholds granted

by Coleman Oil, Inc. ("COC") as lessor to Pickering Oil

Heat, Inc. as lessee pursuant to documents dated November

21, 1977, in:

Circle K

Store No.: Address: Description

2604 2975 Lafayette Rd. Exhibit A hereto

Portsmouth, NH incorporated herein

2605 #7 Old Dover Rd. __ Exhibit B hereto

Durham, NH incorporated herein

2. New England Petroleum Distributors, Inc. is the

current assignee and holder of the lessee's interest in the

leaseholds granted by Coleman Oil, Inc. as lessor to

Pickering Oil Heat, Inc. as lessee pursuant to documents

dated November 21, 1977, in:

Circle K

Store No. Address: Description:

84802 Rt. 16B Exhibit C hereto

Old Rochester Rd. incorporated herein

Dover, NH

84803 Route 125 Exhibit D hereto

Epping, NH incorporated herein

84804 158 Front Street Exhibit E hereto

Exeter, NH incorporated herein

84805 Route 236 Exhibit F hereto

Kittery, Maine incorporated herein

3. Debtors' Motion for Summary Judgment is

granted.

4. Plaintiff's objections are overruled and the debtors

Fourth, Eighth and Ninth Motions to Assume Real Property

Leases, Subleases and Attendant Contracts are hereby

granted and approved to the extent the motions seek

approval of assumption of the leases to Stores 2604, 2605,

84802, 84803, 84804 and 84805.

5. The only post-petition defaults alleged to exist

concern only Store 2605 and total $190.96. Such defaults

are de minimis. They cannot result in the avoidance of the

otherwise properly exercised renewals of the leases of the

subject stores. Debtors are to retender this amount to

plaintiff.

6. Debtors believe they have cured all pre-petition

monetary defaults through the confirmed plan and by

payment of tax reimbursements to COC. Debtors believe

there are no defaults remaining to be cured with respect to

the assumption of the leases of Stores 2604, 2605, 84802,

84803 or 84804. If plaintiff believes there remain defaults

to be cured with respect to those stores, it shall provide to

debtors and the Court a specific list of such defaults within

30 days from the entry of this order, in connection with a

motion to require their cure.

7. The Court shall retain jurisdiction over

assumption of the Subject Stores to determine the existence

of such defaults as may be specified by COC as provided in

this order and their cure. Any pleadings directed to such

defaults and their cure for purposes of debtors assumption

shall be filed in the bankruptcy proceeding.

8. The adversary will be used by the Court to retain

jurisdiction over cure of defaults in connection with

assumption of the leases of the Subject Stores by debtors

pursuant to 11 U.S.C. S 365(b).

9. This order resolves plaintiff's objection to the

form of the order lodged by defendants.

10. The parties will appear for a status hearing, to

last no longer than 15 minutes, on May 11, 1994, at 9:15

a.m., in Hearing Room No. 2, Fifth Floor, United States

Courthouse, 230 North First Avenue, Phoenix, Arizona.

DATED this 6" day of April, 1994.

Neetee Bon —

George B. Nielsen, Jr.

United States Bankruptcy Judge

Copy mailed the 6" day of April, 1994, to:

Carolyn J. Johnsen

Hebert, Schenk & Johnsen, P.C.

1440 E. Missouri, Suite 125

Phoenix, AZ 85014

Attorneys for Plaintiff

D. J. Baker

Weil, Gotshal & Manges

700 Louisiana, Suite 1600

Houston, TX 77002

Attorneys for Debtors

Harvey R. Miller

Weil, Gotshal & Manges

767 Fifth Avenue

New York, NY 10153

Attorneys for Debtors

John J. Dawson

Streich Lang

100 W. Washington, Suite 2100

Phoenix, AZ 85003

Attorneys for Debtors

Tad R. Smith

Kemp, Smith, Duncan & Hammond

P. 0. Drawer 2800

El Paso, TX 79999-2800

Attorneys for Debtors

James L. Rasmussen

Kemp, Smith, Duncan & Hammond, P.C.

P. 0. Box 1276

Albuquerque, NM 87103

Attorneys for Debtors

By:

Deputy Clerk

ORDERED PUBLISHED

FILED DEC 11 1995

NANCY B. DICKERSON, CLERK

U.S. BKCY. APP. PANEL

OF THE NINTH CIRCUIT

UNITED STATES BANKRUPTCY APPELLATE PANEL

OF THE NINTH CIRCUIT

In re ) BAP No. AZ-94-1422-JMeR

)

THE CIRCLE K ) BK. No. 90-5052-PHX-GBN

CORPORATION, et al., ) to 90-5075-PHX-GBN

)

Debtors. ) Adv. No. 91-974-GBN

CORPORATION, et al.,

Appellees.

)

COLEMAN OIL ) OPINION

COMPANY, INC., )

a New Hampshire )

corporation, )

Appellant, )

VS. )

)

THE CIRCLE K )

)

Argued and Submitted on September 28, 1994

at Phoenix, Arizona

Filed - DEC 11 1995

Appeal from the United States Bankruptcy Court

for the District of Arizona

Honorable George B. Nielsen, Jr.,

Chief Bankruptcy Judge, Presiding

Before: JONES, MEYERS, and RUSSELL, Bankruptcy

Judges.

JONES, Bankruptcy Judge:

A lessor leased nine gasoline service stations in New

Hampshire and Maine to a lessee. The lease agreement was for

ten years but could be renewed for two additional five-year

periods. Through a series of mergers, acquisitions, and

dissolutions, six of the stations ended up in the Circle K family

of convenience stores.

Circle K declared bankruptcy and its subsidiaries gave

notice that they intended to renew the leases even though the

leases had not been assumed. Instead of moving to force Circle

K to assume or reject under S 365(d)(2).' the lessor filed an

adversary complaint arguing that the leases could net be

renewed because (1) Circle K was not a proper assignee; (2) the

leases were in default; and (3) the leases had not been assumed.

Circle K moved for and was granted summary judgment. The

lessor appeals. We AFFIRM.

1. FACTS

On November 21. 1977, Coleman Oil Company, Inc.

1 Unless otherwise indicated, all references to Chapters, Sections

and Rules are to the Bankruptcy Code, 11 U.S.C. §§ 101, el seg, and to

the Federal Rules of Bankruptcy Procedure, Rules 1001, et seq.

10a

("Coleman") and Pickering Oil Heat, Inc. ("Pickering") entered

into multiple ten-year lease agreements. The leases covered the

following convenience store locations in Maine and New

Hampshire: (1) Kittery; (2) Epping; (3) Exeter; (4) Dover; (5)

Portsmouth: and (6) Durham. Paragraph 3 of the leases gave

Pickering the following renewal rights:

Lessee shall have two (2) additional and

successive terms of five (5) years each on the

same terms and conditions as during the

original term (except there shall be no

extension rights beyond the two contained in

this paragraph), by giving Lessor at least six

(6) months written notice of such extension

prior to the expiration of the original or any

extended term as the case may be, provided

that Lessee's right to extend is conditioned

upon the Lessee not being in default hereunder

and is not in default of payments under any of

the other leases described on Schedule C

attached hereto.

The first option to renew the leases needed to be

exercised on or about June 1, 1987. The second option to

renew needed to be exercised on or about June 1, 1992.

NPI Corporation ("NPI") acquired Pickering's stock

and other assets on December 31, 1983. NPI is the parent

company of Debtor New England Petroleum Distributor

("New England") and Debtor Old Colony Petroleum, Inc.

("Old Colony"). New England claims that it is the valid holder

of an assignment of the leases on the Kittery, Epping, Exeter,

and Dover properties. Old Colony claims assignment of leases

on the Portsmouth and Durham locations. NPI merged with

lla

Charter International Oil Company ("Charter") on December

27, 1989. Circle K had previously acquired Charter on May 6,

1988, by purchasing all of its stock. During all of these

transitions Coleman received and accepted the bargained for

lease payments of $1,250 per month for each location.

On March 9, 1987, New England sent letters to

Coleman exercising the option to renew the leases. On May

18, 1987, Old Colony also sent Coleman written notice that it

was exercising its option to renew. Coleman did not object to

the renewals, and continued to accept rent from both

companies for the leased properties.

On May 15, 1989, Coleman informed its counsel that

it might have to begin eviction proceedings, due to various

defaults under the leases, unless New England and Old Colony

could cure their defaults. Circle K, Old Colony, and New

England, together with the rest of the Circle K family

(collectively referred to as "Debtors"), filed for chapter 11

protection on May 15, 1990. The Debtors requested, and

received, several orders during the bankruptcy proceedings

granting extensions of time within which to assume or reject

unexpired leases of nonresidential real property. See ] 1 U.S.C.

§ 365(d)(4) (1994) (requiring assumption of leases of

nonresidential real property within 60 days of filing the

petition unless an extension is granted by the bankruptcy

court).

Coleman filed an adversary proceeding on October 11,

1991, seeking a declaration that Circle K was a tenant-at-will

with no right to renew the leases, and also seeking relief from

Stay to terminate the leases. On March 5 and March 31, 1992,

New England and Old Colony sent letters to Coleman

exercising the option to renew for the second 5-year period.

12a

The Debtors then moved for summary judgment in the

adversary proceeding, asking the court to decide as a matter of

law that (1) the Debtors were the legal assignees of the

leaseholds and thus entitled to renew the leases; and (2) that

the Debtors' renewal of the leases was effective even though

the Debtors were in default in contravention of the lease's

specific condition precedent. The bankruptcy court granted the

motion for summary judgment on April 5, 1994. Coleman

appeals.

Il. ISSUES

1. Did the bankruptcy court err in holding as a matter

of law that the Debtors are proper assignees of the Pickering

lease?

2. Did the bankruptcy court err in holding as a matter

of law that the Debtors could exercise their option to renew

the leases even though the Debtors were in default. in

contravention of the lease's specific condition precedent?

III. STANDARD OF REVIEW

We review a grant of summary judgment de novo, E.g..

In re Hyman, 123 B.R. 342, 344 (9th Cir. BAP 1991), aff'd,

967 F.2d 1316 (9th Cir. 1992). On motion for summary

judgment, the moving party has the burden to show that there

are no genuine issues of material fact and therefore they are

entitled to judgment as a matter of law. Celotex Corp. _v.

Catrett, 477 U.S. 317, 325 (1986).

IV. DISCUSSION

Coleman attacks the grant of summary judgment on

l3a

three fronts. First, Coleman argues that there are unresolved

factual issues concerning the propriety of the Debtors’ lease

assignments which preclude a grant of summary judgment.

Second, Coleman argues that the assignments are legally

invalid under the statute of frauds because the assignments are

not evidenced by a writing. Finally, Coleman argues that even

assuming that the Debtors are valid assignees or successors, a

chapter 11 debtor may not exercise an option to renew a lease

unless the debtor first assumes the lease and cures any

defaults. We address each of these arguments in turn.

A. Assignment of the Leases.

Coleman argues first that there are factual issues that

must be resolved in order to determine whether the Debtors

have a legal interest in the leasehold. Coleman points to the

somewhat confusing series of mergers and acquisitions, the

lack of written assignments to New England and Old Colony,

and the lack of notice to Coleman of any purported

assignments. The terms of the leases do not support these

arguments.

The November 21, 1977 contract between Coleman

and Pickering provides as follows:

11. Lessee shall have the nght and privilege to

assign this Lease or sublet said Premises in

whole or in part, any extension thereof, upon

such terms as to it shall seem _ best,

PROVIDED, HOWEVER. that in the event of

an assignment or sublet the Lessee shall remain

primarily liable on said Lease.

l4a —~

22. The word "Lessor" herein shall be

construed to include the said Lessor and

Lessor’s heirs, representatives, successors and

assigns, as the cace may be, and "Lessee"

herein shall be construed to include the said

Lessee, its successors and assigns.

The bankruptcy court interpreted this language as follows:

The lease agreement itself specifically notes

that the Lease is binding upon the parties and

their successors and assigns. . . . The term

Lessee itself is specifically construed to include

successors and assigns.

The bankruptcy court found nothing in the contract to indicate

that a formal assignment was required before a related entity

could exercise the right to renew. The court also found nothing

in the contract to indicate that Coleman required notice of

assignments. The only requirement was that the original

lessee, Pickering, would remain primarily liable under the

lease. Finally, applicable Massachusetts law states that the

surviving corporation of a merger or a_ consolidated

corporation is vested with all right. title and interest in "all of

the property. real, personal. or mixed" of the original

corporation. Mass. Gen. L. Ch. 516 §§ 46(a)(4), (b), and (c)

(1991).?

Having moved for summary judgment, the initial

burden of showing an absence of any issues of material fact

~ Massachusetts is the state of incorporation of Old Colony,

New England, NP Corp.. NPI. and Pickering.

lSa

was upon the Debtors. We feel that the Debtors met their

burden. The Debtors provided affidavits and documents

concerning the numerous mergers, acquisitions and

dissolutions. The bankruptcy court made the following

conclusions:

So in short, with respect to the Portsmouth and

Durham stores, the chain of ownership of

lessee's interest is as follows: Pickering to

Pickering Old Colony, Inc., to Northeast

Petroleum Corporation, to Old Colony

Petroleum Company. With respect to the

Epping, Exeter, Kittery and Dover stores, the

chain of ownership in the lessee's interest is as

follows: Pickering to Pickering Old Colony,

Inc., to Northeast Petroleum Corporation, to

New England Petroleum Distributors, Inc.

We agree with the bankruptcy court's conclusion that

the documents presented by Debtors showed a chain of

transfer of the subject leases.

Pursuant to Celotex, once the moving party has met its

burden, the opposing party then has the burden to come

forward with a more convincing showing that summary

judgment is not appropriate. Celotex, 477 U.S. at 324.

Coleman argues that the chain of assignment is too confusing

to follow. Coleman also argues that there are holes in the

paper trail presented by Debtors. and that Debtors’ later

behavior was inconsistent with the notion of an earlier

assignment.

Coleman does not successfully argue that the chain of

assignment is deficient as a matter of fact or that the contract

l6a

between Coleman and Pickering required documentation of

assignments. Therefore, Coleman has failed to meet its burden

pursuant to Celotex. We agree with the bankruptcy court's

conclusion that no formal assignment of the leases or notice to

the landlord was contemplated or required by the lease terms.

Therefore, we affirm the bankruptcy court's decision that the

Debtors were proper assignees of the lease, and therefore had

the right to exercise the renewal option.

B. Applicability of the Statute of Frauds

Coleman next attempts to raise a statute of frauds

defense. It argues that a leasehold interest is subject to the

statute of frauds and therefore the lease assignments at issue are

invalid because they are not evidenced by a writing.

The bankruptcy court ruled that the statute of frauds was

inapplicable because Coleman was not a party to the

assignments. It concluded that third parties cannot assert the

statute of frauds as a defense to an action by the direct parties

to a contract because the statute of frauds is a shield, not a

sword. Because the statute is intended to prevent fraud by one

of the contracting parties on the other, if those parties recognize

the contract. the protection afforded by the statute is

unnecessary. Chapman v. Ford, 227 A.2d 26, 31 (Md. 1967));

see_also Restatement (Second) of Contracts § 144 (1981)

(stating that only a party to a contract or a transferee or

successor of a party to the contract can assert that the contract

is unenforceable under the statute of frauds).

We agree with this conclusion and therefore affirm the

bankruptcy court's ruling that the statute of frauds is

inapplicable in this case.

17a

C. Exercise of the Renewal Option in Bankruptcy

Coleman next argues that the Debtors’ attempt to

exercise the renewal right for the final five-year option must fail

because the Debtors were in default at the time they attempted

to exercise the option to renew.’ Coleman argues that the

Debtors would have had to assume the lease and cure the

defaults before they could exercise the right to renew. Since the

Debtors failed to cure the defaults and assume the lease before

the option period ran, the leases expired and there is nothing for

the Debtors to now assume.

The heart of Coleman's argument against the Debtors’

assumption of the leases lies in the conflict that often occurs

between bankruptcy law and state law contract rights. Under

paragraph 3 of the leases, a lessee could not exercise the option

to renew a lease for another five-year period if the lessee was

in default on the lease payments. At the time the Debtors

attempted to exercise the option to renew, they were in default

on the leases. It is therefore arguable that outside of bankruptcy,

Coleman might have refused to accept the renewal unless the

Debtors cured the minor defaults.“

*The Debtors had defaulted both pre- and postpetition. While

the exact amount and nature of the alleged defaults is unclear, the

bankruptcy court characterized them as de minimis. The prepetition

defaults apparently involved the failure by the Debtors to maintain the

Kittery property in good repair and to pay property taxes in the amount

of $4,470 on the Durham and Portsmouth stores. All postpetition

property taxes were paid before Circle K exercised the options to renew.

and the bankruptcy court stated that the amount of postpetition defaults

existing at the time of renewal were alleged to be less than $200.

‘it is by no means certain that outside of bankruptcy Coleman

could have refused to accept the Debtor's attempt to exercise their option

to renew. As the dissent points out, state anti-forfeiture law may have

18a

The dissent argues that the same result should occur in

bankruptcy; i.e., that the Debtors should be required to cure all

pre- and postpetition defaults, no matter how small, in the time

specified within the leases in order to exercise their option to

renew. We disagree, and for the reasons discussed below hold

that a debtor who is a lessee under a lease which conditions

renewal upon not being in default may exercise its option to

renew without first curing the default or assuming the lease.

1. Section 365(d)

The current version of § 365(d)(2) states that in a case

under chapter 1 1, a trustee may assume or reject an unexpired

lease of residential real property at any time before

confirmation of the plan, unless the landlord asks for, and

receives, a court order forcing the trustee to assume or reject the

lease within a specified period. 11 U.S.C. § 365(d)(2) (1994).

Section 365(d)(4) states that a trustee must assume an

unexpired lease of nonresidential real property within 60 days

of filing the petition, unless the trustee asks for a longer period

of time. 11 U.S.C. § 365(d)(4) (1994).

Prior to the Bankruptcy Amendments and Federal

Judgeship Act of 1984 ("BAFJA"). however, § 365 did not

create a distinction between residential and nonresidential

leases of real property.* In both cases a chapter 11 debtor in

prevented Coleman from refusing to allow Circle K to renew the leases

due to the de minimis nature of the defaults.

°BAFJA amended § 365(d) by adding § 365(d)(2), which

required assumption or rejection of an unexpired lease of nonresidential

real property within 60 days after the order for relief. Bankruptcy

Amendments and-Federal Judgeship Act of 1984, Pub. L. No. 98-353, §

362. 98 Stat. 333. 361 (1984); 2 Lawrence P. King, Collier on

Bankruptcy, | 365.03 at 365-24 n.1 (15th ed. 1995).

19a

possession had until plan confirmation to decide whether to

accept or reject an unexpired lease of real property, subject only

to the landlord's right to ask the bankruptcy court to shorten

that period. In pre-BAFJA decisions, therefore, landlords often

brought motions to have the assumption/rejection period

shortened. Some of these decisions involved situations similar

to the instant appeal--an attempt by a debtor to exercise a

option to renew an unexpired lease before actually assuming the

lease and curing any defaults. Because the landlord had to come

into court in order to shorten the assumption/rejection period,

these decisions created a rule that turned on whether or not the

landlord had asserted that "right."

This rule was first enunciated in In re Webster Clothes.

Inc., 36 B.R. 260 (Bankr. D. Md. 1984). In Webster, the

bankruptcy court allowed a debtor to exercise his option to

renew an unexpired lease even though the debtor had defaulted

prepetition. The court based its holding on various factors,

including a statement that "[h]aving failed to avail itself of the

statutory procedure for securing an earlier assumption or

rejection of the lease, [the landlord] will not be heard to

complain that [the debtor] had not assumed the lease at the time

it exercised the Option.” Id. at 264.

The rule was also applied in In re Cook United Inc., 53

B.R. 342 (Bankr. N.D. Ohio 1985). In Cook United, the

landlord had requested, and received. a court order forcing the

debtor to assume or reject the unexpired lease within 60 days.

For that reason the court held that the debtor could not renew

*The other determining factors were that (1) section 365

governed the cure of defaults in unexpired leases; (2) the prepetition

defaults were minor; and (3) the landlord had demonstrated no

compensable, pecuniary loss resulting from the debtor's default. Webster,

36 B.R. at 264.

20a

;

‘

the lease unless it first assumed the lease and cured all defaults.

Id. at 345. The court's opinion, however, clearly indicates that

until a landlord files a motion asking the court to force the

debtor to assume or reject the leases, "the federal policy to

allow the debtor time to decide whether or not it will promptly

cure a default outweighs state law contract provisions to the

contrary.” Id.

A similar situation also arose in In re Revco D.S.. Inc..

111 B.R. 626 (Bankr. N.D. Ohio 1989). Although Revco arose

after the BAFJA amendments, the debtor requested, and

received, an order extending the period for assuming the lease

until plan confirmation. Applying the Webster analysis, the

court held that the debtor could "exercise its right to renew the

Lease without assuming the Lease and curing the prepetition

[default]," id. at 630, because the landlord had not "requested

the Court to order debtor to assume or reject within a specified

period of time.” [d.at 629.

We agree with the reasoning of the above cases.

However, given the current version of § 365 which places the

burden on the debtor to seek an extension of time within

which to assume or reject an unexpired lease of nonresidential

property, we decline to base our decision on whether or not the

landlord has sought a court order compelling the debtor to

assume or reject within a specified time. Instead, we hold

simply that a debtor who has defaulted prepetition on an

unexpired lease may exercise its option to. renew that lease

without first assuming the lease or curing any prepetition

defaults. Of course, such exercise must be conditioned upon

the eventual assumption of the lease within the applicable time

period and cure of all defaults in compliance with the

requirements of § 365(b)(1).

The policy behind the Bankruptcy Code supports such

a rule of law. The purpose behind S 365 is to balance the state

law contract right of the creditor to receive the benefit of his

bargain with the federal law equitable right of the debtor to

have an opportunity to reorganize. See Webster, 36 B.R. at

263. This is accomplished by forcing the debtor to abide by

the contract provisions during pendency of the bankruptcy and

cure any prepetition defaults upon assumption while

prohibiting the creditor from enforcing any prepetition default

remedies. 11 U.S.C. §§ 365(b)(1), 365(d)(3), 362(a)(3) (1994).

This balance, we believe, allows a debtor to exercise an option

to renew an unexpired lease without first curing any

prepetition defaults.’ Coleman will receive the benefit of its

bargain when, on assumption of the leases, Debtors are

required to cure all pre- and postpetition defaults.

The dissent initially states that no other court has ever

stated the rule of law which we adopt in this decision.

However, as the above discussion demonstrates, our decision

is supported by Revco, Cook, and Webster. The dissent

disagrees with the holdings of these cases by concluding that

they "represent judges ‘legislating’ a result" with no statutory

authority. We decline to accept that characterization of these

holdings, preferring to instead to view them as proper exercise

of a bankruptcy court's authority to interpret the Bankruptcy

Code in situations where the Code does not clearly resolve an

issue.

"As previously cited cases have illustrated, the lessor may

prevent this occurrence by moving the bankruptcy court to force the

debtor to assume or reject the unexpired lease before the option period

expires.

22a

The dissent quotes one statement from Cook United for

what it believes is the correct view of this issue--that a

bankruptcy court "has no authority to modify or nullify

contractual provisions." Cook United, 53 B.R. at 345.

However, the bankruptcy court in Cook United cited In the

Matter of Schokbeton Indus. Inc., 466 F.2d 171 Sth Cir. 1972),

as authority for this proposition. As the following discussion

indicates, the reasoning behind Schokbeton is clearly

inapplicable.

Schokbeton was a case decided during an "arrangement

proceeding" under Chapter XI of the Bankruptcy Act and

which concerned the termination of a franchise agreement.

There was no automatic stay in Chapter XI arrangement

proceedings; instead, § 314 gave the court discretion to enjoin

or stay the commencement or continuation of any suits against

property of the debtor and to enjoin or stay any act to enforce

any lien against property of the debtor. Bankruptcy Act of

1898, 30 Stat. 544 (1898) (as amended by the Chandler Act,

Pub. L. No. 75-696, S 314, 52 Stat. 840, 907 (1938)), repealed

by Bankruptcy Reform Act of 1978, Pub. L. No. 98598, § 401,

92 Stat. 2549, 2682 (1978). In Schokbeton, the franchise

agreement provided for a 60-day grace period to cure any

default in royalty payments. The franchisee did default and the

franchisor notified him that he had 60 days in which to cure.

Before the expiration of the 60 days, the franchisee filed a

petition under Chapter XI of the Bankruptcy Act.

Notwithstanding the bankruptcy filing, the franchisor

terminated the franchise after the 60 days expired. The

franchisee then petitioned the bankruptcy referee to enjoin the

franchisor from granting the exclusive franchise to another

licensee. Schokbeton, 466 F.2d at 173-74. After the referee

granted the injunction, the franchisor appealed.

23a

The Fifth Circuit reversed, holding that under the

Bankruptcy Act "a contractual termination provision is

unaffected by the filing of a petition in bankruptcy and may be

enforced against the trustee or debtor in possession." Id, at

176. The court also noted that under the Bankruptcy Act a

contract or lease provision which stated that filing a

bankruptcy petition automatically terminated the lease was

valid and could not be enjoined by a bankruptcy referee. Id.

This decision, and the rationale behind it, is clearly not

applicable under the Bankruptcy Code. Cook United, 53 B.R.

at 345; 11 U.S.C. § 365(e)(1)(B) (1994) (preventing

enforcement of any clause in an executory contract or

unexpired lease which purports t terminate the agreement if

one party files for bankruptcy).

We are also concerned with the leverage landlords

would receive if debtors were forced to cure prepetition

defaults before deciding whether or not to assume a lease.

Bankruptcy Code § 365(b)(1) requires a debtor to cure or

provide adequate assurances that it will promptly cure

prepetition defaults at the time it assumes or rejects a contract.

11 U.S.C. § 365(b)(1) (1994). If a debtor does not assume a

contract or unexpired lease, the existing default becomes an

unsecured claim and is paid with no more priority than any

other unsecured creditor enjoys under the Code. E.g.. In-re_

Pacific Express Inc., 780 F.2d 1482, 1486 (9th Cir. 1986). A

debtor in possession can assume or reject an executory

contract or unexpired lease of residential real property at any

time before plan confirmation. 11 U.S.C. S$ 365(d)(2) (1994).

Although an unexpired lease of nonresidential real property

must be assumed or rejected within 60 days of filing the

petition, 11 U.S.C. § 365(d)(4) (1994), debtors are often

granted extensions of time well beyond this 60-day period.

24a

Under the dissent's rationale. a lessor could force a

debtor to cure prepetition defaults in order to preserve its right

to exercise a renewal option. If the lease is ultimately rejected,

however, the prepetition default would have been a general

unsecured claim. In effect, the lessor is given leverage to

squeeze a preference out of the debtor. We do not feel this

result is in line with the policy behind the Bankruptcy Code in

general or behind § 365 specifically.

The dissent disagrees with this analysis, stating that the

lessor's exercise of its "lawfully bargained for rights" in this

situation is not unfair "leverage," but merely enforcement of

its contract rights. The dissent characterizes our holding as a

"balancing act [which] is an improper taking of the lessor's

bargained for contractual rights." This view is at odds with

both the plain language and purposes of the Bankruptcy Code,

which in various ways nullifies, modifies or stays creditors’

lawfully bargained for contract rights. E.g., 11 U.S.C. §§ 362,

365, 522(f), 524, 544, 545 (1994). If the dissent's theery were

correct, then any landlord could defeat § 365 by inserting a

lease provision that requires a complete cure of any defaults

before exercising an option in the lease. Surely the Bankruptcy

Code was not intended to allow such circumvention. E.g..

365(e)(1)(B) (1994).

2. Section 108

The dissent fails to cite a single case in support of its

position that a debtor must cure all prepetition defaults before

exercising an option to renew which is conditioned upon the

debtor not being in default. Instead. the dissent points to §

108(b). Section 108(b) states that if state law or an agreement

fixes a certain period in which the debtor may cure any

defaults, and the default period has not yet expired at the time

25a

of filing bankruptcy, the debtor has until the later of the end of

the period contained in the agreement or 60 days after the

bankruptcy petition is filed.

We disagree with this analysis, finding more

persuasive the reasoning behind the decision in Moody v._

Amoco Qi] Co., 734 F.2d 1200 (7th Cir.), cert. denied, 469

U.S. 982 (1984). * In Moody, a jobbership contract between

the debtor and a creditor provided for a fifteen day cure period

after a default. The debtor defaulted, then filed bankruptcy

before expiration of the fifteen day cure period. The creditor,

referring to § 108(b), argued that the debtor had to cure its

default within 60 days or the jobbership contract would

terminate. The court disagreed, holding that "section 108(b)

does not apply to curing defaults in executory contracts"

because "[s]ection 365 specifically governs. ...” Id, at 1215;

accord, In re McCallen, 49 B.R. 948, 952 (Bankr. D. Or.

1985).°

The dissent argues that the rationale behind Moody is

not applicable to the instant appeal. because "[a]lthough § 365

“Although the Moody decision specifically concerned executory

contracts, its reasoning is just as applicable to unexpired leases.

*Moody, the Seventh Circuit distinguished the case of Johnson

vy. First Nat'l Bank of Montevideo, 719 F.2d 270 (8th Cir. 1983), cert.

denied. 465 U.S. 1012 (1984), which held that § 108(b), rather than §

362, governed the expiration of a statutory period of redemption of a

mortgage. The court in Moody explained that § 362 does not specifically

apply to redemption periods and therefore there was no direct conflict

between those two provisions. However, there is a direct conflict

between § 108(b) and S 365 as applied to executory contracts (and

unexpired leases), and therefore these two sections "should not [be]

appl[ied] . . . so as to cause irreconcilable conflict. . . ." Moody, 734 F.2d

at 1215 n.15.

26a

may extend the time for curing defaults until assumption of the

lease, it does not eliminate the contractual necessity of not

being in default when attempting to exercise the options to

extend the leases." However, the dissent fails to cite any

Statutory or case authority for this distinction. We think the

policy considerations outlined in Moody are-applicable in the

instant appeal:

This holding is consistent with the policies

underlying the different provisions and the

Code in general. The purpose behind section

108(b) is to permit the debtor an extension of

time for doing certain acts necessary to

preserve his rights. It would be anomalous to

apply it to restrict debtor's rights . ... Applying

section 108(b) here would force debtors to

decide whether to cure long before they must

decide whether to assume or reject the contract

and long before they know whether any

reorganization plan will be confirmed. Finally,

the purpose behind chapter 11 is "to permit

successful rehabilitation of debtors" and "to

prevent a debtor from going into liquidation."

Debtors must be permitted a certain amount of

flexibility in determining whether to assume or

to reject a contract. Specific provisions of the

Code should be interpreted with this goal in

mind. To interpret the Code so as to minimize

flexibility and rush the debtor into what may be

an improvident decision does not further the

purposes of the reorganization provisions.

Moody, 734 F.2d at 1216 (citation omitted).

27a

D. Alternative State law Theory

Responding to Coleman's argument that the leases had

terminated prepetition due to the invalidity of the lease

assignments, the bankruptcy court supported its grant of

summary judgment by applying the Ninth Circuit opinion in

In re Waterkist Corp., 775 F.2d 1089, 1091 (9th Cir. 1985).

Waterkist presents a two-part analysis, first asking whether the

lease-was terminated prepetition pursuant to the contract under

applicable state law and, if so, asking whether the termination

would have been reversed under state anti-forfeiture

provisions. We decline to address this issue, however, because

the Waterkist analysis requires the balancing of equities

between lessor and lessee in order to decide whether state anti-

forfeiture provisions would prevent termination of a lease.

This determination requires findings of fact inappropriate on

a motion for summary judgment.

V. CONCLUSION

Coleman challenges the chain of assignment between

Pickering and Debtors, but fails to meet its burden under

Celotex. Having failed to raise material issues of fact,

Coleman raises the statute of frauds as an issue of law.

However, Coleman lacks standing to raise this legal argument

because it was not a party to the assignment contract. Finally.

§ 365(d) permits a debtor to exercise an option to renew an

unexpired lease prior to assumption and cure. Accordingly, the

order granting summary judgment is AFFIRMED.

RUSSELL, Bankruptcy Judge, dissenting:

I respectfully dissent.

28a

Although | agree with the majority that the debtors in

possession are proper assignees of the leases, | cannot agree

that the leases were properly assumed. I agree with Coleman's

argument that the attempt by the debtors in possession to

exercise the extension rights for the final five-year option must

fail because the debtors in possession were in default both pre-

and postpetition.

TT a ee a i

The issue before us is not whether the debtors in

possession can exercise their options to renew the six leases

without assuming the leases and curing the defaults. '° Rather,

the issue before us is whether the options could have been

exercised without first curing the defaults. If not, then there

were no leases for the debtors in possession to later assume.

Paragraph 3 of the leases provides that the lessee could

exercise the extension rights:

[B]y giving Lessor at least six (6) months

written notice of such extension prior to the

expiration of the original or any extended term

as the case may be, Provided that Lessee's right

to extend is conditioned upon the Lessee not

of payments under any of the other leases

described on Schedule C attached hereto.

(Emphasis added.)

PIG Te LEO ING PFO PRO O Gs. we ak

The debtors in possession filed their bankruptcy cases

on May 15, 1990. Under the leases. the first extension of the

*°However, if this were the issue, | would hold that in order to

exercise their options to extend the six leases, the debtors in possession

must assume the leases and perforce cure the defaults.

29a

leases would have expired on November 20, 1992, unless the

written notices to renew were given by May 20, 1992.

Although the written notices were sent, the leases were in

default at that time.

I know of no provision in the Bankruptcy Code which

gives a debtor in possession the right to exercise an option

without also curing any default as required by the very

contract which gives the lessee the right to exercise the option.

Although the majority argues that § 365 abrogates an

important right of the lessor in the lease, i.e., the right to have

all defaults cured when the option is exercised, they point to

no specific part of § 365 to achieve this result.

There is nothing in § 365 that extends the time to

exercise the option and the fulfillment of any conditions

precedent, such as not being in default, at the time of the

purported exercise. Since the time to exercise the options

expired, the leases were terminated.

It is clear that the notice required to exercise the option

was not extended pursuant to§ 108(b). '' Therefore, pursuant

‘Section 108(b) provides:

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

applicable nonbankruptcy law, an order entered in a

nonbankruptcy proceeding, or an agreement fixes a period

within which the debtor or an individual protected under section

1201 or 1301 of this title may file any pleading, demand, notice,

or proof of claim or loss, cure a 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 -

30a

Maat yA

tal

to 93 of the leases, the debtors in possession were required to

timely exercise the options. Indeed, the debtors in possession

recognized the need to timely exercise the options by

attempting to do so. However, a condition precedent for the

right to exercise the options was not being in default on the

leases. Since the defaults were not cured, there was no timely

exercise of the options. Thus, the leases were terminated.

The majority states its holding as follows:

We disagree [with the dissent] and for the

reasons discussed below hold that a debtor who

is a lessee under a lease which conditions

renewal upon not being in default may exercise

its option to renew without first curing the

default or assuming the lease.

Unfortunately for the majority. no other court, at least

none of those cited by the majority, has ever stated such a rule

of law.

The majority relies on a number of bankruptcy court

decisions, mainly, In re Revco D.S.. Inc, 111 B.R. 626

(Bankr. N.D. Ohio 1989), In. re Webster Clothes. Inc., 36 B.R.

260 (Bankr. D. Md. 1984). In re Cook United. Inc., 53 B.R.

342 (Bankr. N.D. Ohio .985) and Ip_re Tirenational Corp., 41

B.R. 647 (Bankr. N.D. Ohio 1985).

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

period occurring on or after the commencement of the case; or

(2) 60 days after the order for relief. 11 U.S.C. § 108(b)

(emphasis added).

3la

Upon close scrutiny, those cases represent judges

"legislating" a result with no basis under § 365, in order to

achieve a result which those courts felt would better serve

some bankruptcy purpose. As the majority states: "This policy

also balances the contract rights of the landlord, while

protecting the debtor's rights to the § 365 period under which

to decide whether to assume or reject the lease." In my

opinion, the balancing act is an improper taking of the lessor's

bargained for contractual rights.

The majority first notes that they “are concemed with

the dissent's position would give to landlords". The then

disagrees with my dissent as follows:

Under the dissent's rationale, a lessor could

force a debtor to cure prepetition defaults in

order to preserve its rights to exercise a

renewal option. If the lease is ultimately

rejected, however, the prepetition default

would have been a general unsecured claim. In

effect, the lessor is given leverage to squeeze a

preference out of the debtor. We do not feel

this result is in line with the policy behind the

Bankruptcy Code in general or behind § 365

specifically.

The majority has a very interesting way of looking at

a lessor’s contractual rights in a pejorative sense of giving "the

lessor leverage to squeeze a preference out of the debtor”. ]

suppose it is possible for a court to look at any party's exercise

of its lawfully bargained for rights against a debtor in

possession as unfair "leverage." However, | choose not to view

parties’ rights in this light.

32a

EHS REL OES POE GAR IO 1 i?

Indeed, the court in Cook United, supra, stated what |

believe is the law:

Debtor is requesting this Court to rewrite the

leases and Section 365 of the Bankruptcy

Code, by holding that even though it was in

default, Debtor had a right to exercise its

option to renew the leases prior to its assuming

said leases and curing the defaults. This Court

cannot do so. The bankruptcy court has no

sullherity te medif—or_mulfis —coniract M F Schokl Neg

466 F.2d 171 (Sth Cir. 1972).

53 B.R. at 345 (emphasis added).

Moody v. Amoco Oi] Co,, 734 F.2d 1200 (7th Cir.),

cert denied, 469 U.S. 982 (1984), offers no support for the

majority's holding. In relevant part, Moody merely stands for

the proposition that § 108 does not generally apply to curing

defaults in executory contracts, but that such time limit is

governed by § 365.

Moody is of no assistance to the majority's reasoning

because the time limit that is in question in the case before us

is the period of time in which to timely exercise an option.

Although § 365 may extend the time for curing defaults until

assumption of the lease. it does not eliminate the contractual

necessity of not being in default when attempting to exercise

the options to extend the leases.

The facts in Revco were very similar to those in the

case before us. While in default, the debtor in possession

notified the lessor. postpetition, that it was exercising its

33a

option to extend the lease. The court held that the debtor in

possession could properly exercise the option to extend the

lease, without assuming the lease and curing the default,

because the lessor failed to request the court to order the

debtor in possession to assume or reject the lease. Without any

independent analysis, the court based its holding on the

following cases: Cook United, supra; Tirenational, supra; and

Webster, supra.

In Cook United, the court held that the option to extend

the leases could not be exercised without the debtor in

possession first assuming the leases and curing the defaults.

Approximately one month prior to the date on which the

debtor in possession was required to exercise the option under

the leases, the lessor filed an application to require the debtor

in possession to assume OF reject the leases. The debtor in

possession failed to assume or reject the leases prior to the

expiration of the leases.

The holding of Cook United which is relevant to the

matter before us was stated as follows:

Once a request is made by the lessor to assume

or reject, federal policy no longer overrides the

contract, and the lease terms retain their

original effect. Thus once Glimcher filed for an

order to assume or reject, Debtor had to assume

and cure all defaults before it could exercise

the option to renew. This is especially so where

the lease provision in question is an option to

renew. Such provisions are designed to provide

the lessor with enough time to find a new

tenant if the lease is not renewed. To allow

Debtor to exercise the option without assuming

34a

the lease would be a substantial interference

with the contractual rights of the lessor,

because he would not know if the lessee

intended to remain, the very thing for which he

bargained. Where the lessor has requested

assumption or rejection, Debtor must assume

before it may exercise an option to renew. In

order for Debtor to reap the benefits of a

contract, it must at the same time bear the

burdens of that contract. In_re Tirenational

Corp., 47 B.R. 647 (Bankr. N.D. Ohio 1985).

53 B.R. at 345.

My only disagreement with the above statement by the

court in Cook United is that 1 see no requirement in either

bankruptcy or non-bankruptcy law that the lessor must first

apply to the bankruptcy court to order the debtor in possession

to assume or reject the lease before being entitled to the

contractual benefits of the lease which the Cook United court

stated it ". . . has no authority to modify or nullify... .” Id

The only case authority cited by the court in Cook

United for the purported rule of law is Tirenational. supra,

which does not support this conclusion and which offers no

support for the majority's position.

Tirenational involved two separate chapter 11 cases in

which the debtor in possession in the first case was the

franchisor and the debtor in possession in the second case was

the franchisee. After the filing of the franchisor's case, but

before the filing of the franchisee's case, the franchisee was in

substantial default on its payments. Therefore, the franchisor

notified the franchisee that the franchise agreement was

35a

terminated.

The issue before the court was whether the franchisor

could exercise its termination rights without first assuming the

franchise agreement. If it could, then the agreement was

terminated prior to the franchisee's filing its chapter 11 case

and consequently would not be property of the franchisee's

bankruptcy estate.

The court correctly held that until the agreement was

assumed or rejected, it remained in effect and the

franchisor/debtor in possession could exercise its termination

rights against the franchisee. The case did not involve the

exercise of an option to extend and did not involve any

purported requirement that a lessor file a motion requiring a

lessee to assume or reject the lease before the lessor could

exercise its contractual rights.

Therefore, Tirenational is not relevant to the question

before us. i.e., whether a debtor in possession can exercise an

option in violation of the express terms of the lease requiring

the lessee not to be in default at the time the option is

exercised.

In Webster, supra, the debtor in possession filed an

application for authority to assume an unexpired lease for

retail premises located in a shopping center, including a five-

year extension period provided in the lease.

The debtor in possession timely notified the lessor of

its intention to extend the lease. The lessor refused to accept

the extension because the debtor was in default and had not

assumed the lease. As in the case before us, the lease provided

that to extend the lease for a five-year period, it must not be in

36a

default. The court held that the attempted extension was

effective, the lease had not terminated under its own terms and

the lease could be assumed.

The court then announced its ruling as follows:

Having failed to avail itself of the statutory

procedure [under § 365(d)(4)] for securing an

earlier assumption or rejection of the lease,

Forbes-Cohen [lessor] will not be heard to

complain that Webster [debtor in possession]

had not assumed the lease at the time it

exercised the Option.

36 B.R. at 264.

Apparently, not completely satisfied with its newly

announced rule, the court went on to note that the default was

; "minor." The court then concluded:

As a court of equity, this Court is loathe to

enforce a forfeiture of the Option on the basis

of a minor default. Webster's effective exercise

of the Option deprives Forbes-Cohen only of

the chance to relet the Premises to another

tenant at a higher rent, a windfall. To hold that

Webster has not exercised the Option would be

to deprive the estate of a valuable asset and

frustrate the cure provisions of Section 365.

sg pee ABR LZ FOO PEGA AOE LG A EMI IIL IOOGO MN: POL Ate Mae: mo

' ld. (citation omitted).

APNE ee,

Although there is no authority for the court under

federal law to excuse even a "minor" default, there may very

37a

well have been state anti-forfeiture laws which would allow

the court to avoid a forfeiture. Indeed, as discussed below, |

would reverse and remand the case before us for the

bankruptcy court to make such a determination under state

anti-forfeiture law.

It is clear from the record, as the majority concedes,

that there were both pre- and postpetition defaults under the

leases. The majority also concedes that the determination and

the amount of the defaults was not appropriate on a motion for

summary judgment.

Under state anti-forfeiture law, however, it may be

possible for the debtors in possession to avoid the termination

of the leases. Therefore, this matter should be reversed and

remanded to the bankruptcy court in order to provide the

debtors in possession the opportunity to have the bankruptcy

court consider reviving the leases under state anti-forfeiture

law.

CONCLUSION

The failure of the debtors in possession to cure all

defaults at the time of their attempted exercise of the options, in

violation of the specific requirement in the leases, resulted in the

leases being terminated for failure to timely exercise the options.

Nevertheless, it may be possible for the debtors in possession to

revive the leases pursuant to state antiforfeiture law.

1 would therefore. REVERSE the bankruptcy court's

granting of the motion for summary judgment by the debtors

in possession, and REMAND the matter for the bankruptcy

court to consider the possible revival of the leases under state

anti-forfeiture law. :

38a

REIT ENR AE TIONING OLR LLL LE MELE OBER NAS

ORDERED PUBLISHED

FILED

Jan - 8 1996

Nancy B. Dickerson, Clerk

L.S. BKCY, APP. PANEL

OF THE NINTH CIRCUIT

UNITED STATES BANKRUPTCY APPELLATE PANEL

OF THE NINTH CIRCUIT

In re

THE CIRCLE K

CORPORATION, et al.,

) BAP No. AZ-94-1422-JMeR

)

) BK. No. 90-5052-PHX-GBN

) to 90-5075-PHX-GBN

)

Debtors. ) Adv. No. 91-974-GBN

COLEMAN OIL ) AMENDED

COMPANY, INC.., ) OPINION

a New Hampshire )

corporation,

Appellant. a

VS.

THE CIRCLE K

CORPORATION. et al..

Appellees.

Argued and Submitted on September 28, 1994

at Phoenix, Arizona

39a

Opinion Filed - December 11, 1995

Amended Opinion Filed JAN - 8 1996

Appeal from the United States Bankruptcy Court

for the District of Arizona

Honorable George B. Nielsen, Jr.,

Chief Bankruptcy Judge, Presiding

Before: JONES, MEYERS, and RUSSELL, Bankruptcy Judges.

The dissent argues that the rationale behind Moody

is not applicable to the instant appeal, because [a]lthough §

365 may extend the time for curing defaults until

assumption of the lease, it does not eliminate the contractual

necessity of not being in default when attempting to

exercise the options to extend the leases. However, the

dissent fails to cite any statutory or case authority for this

distinction. We think the policy considerations outlined in

Moody are applicable in the instant appeal:

This holding is consistent with the policies

underlying the different provisions and the

Code in general. The purpose behind section

108(b) is to permit the debtor an extension of

time for doing certain acts necessary to

preserve his rights. It would be anomalous to

apply it to restrict debtor's rights... .

Applying section 108(b) here would force

debtors to decide whether to cure long before

they must decide whether to assume or reject

the contract and long before they know

whether any reorganization plan will be

confirmed. Finally. the purpose behind

40a

chapter 11 is “to permit successful

rehabilitation of debtors" and "to prevent a

debtor from going into liquidation.. Debtors

must be permitted a certain amount of

flexibility in determining whether to assume

or to reject a contract. Specific provisions of

the Code should be interpreted with this goal

in mind. To interpret the Code so a" to

minimize flexibility and rush the debtor into

what may be an improvident decision does

not further the purposes of the reorganization

provisions.

Moody, 734 F.2d at 1216 (citation omitted).

D. Alternative State law Theory

As discussed above, the bankruptcy court rejected

Coleman's argument that the leases had automatically

terminated pre- or postpetition because the Debtors were in

default at the time they exercised the options to renew. The

bankruptcy court then stated that even if it held that the

leases had terminated, state antiforfeiture law would allow

the debtors to reinstate the leases. The bankruptcy court

cited In re Waterkist Corp., 775 F.2d 1089 (9th Cir. 1985),

as support. Waterkist presents a two-part analysis for

determining whether a debtor can reverse the prepetition

termination of a lease and thereafter assume the lease in

bankruptcy; Under the Waterkist analysis. a court first

determines whether the lease was terminated prepetition

pursuant to the contract under applicable state law and, if

so, whether the termination would have been reversed under

State anti-forfeiture provisions. The bankruptcy court

4la

indicated that under this analysis, the Debtors would

probably be entitled to assume the leases even if they had

terminated. We decline to address the propriety of this fact-

intensive analysis, however, because we have already

affirmed the bankruptcy court's decision for the reasons

expressed in Part IV, subsection C above.

V. CONCLUSION

Coleman challenges the chain of assignment between

Pickering and Debtors, but fails to meet its burden under

Celotex. Having failed to raise material issues of fact,

Coleman raises the statute of frauds as an issue of law.

However, Coleman lacks standing to raise this legal

argument because it was not a party to the assignment

contract. Finally, § 365(d) permits a debtor to exercise an

option to renew an unexpired lease prior to assumption and

cure. Accordingly’ the order granting summary judgment is

AFFIRMED.

42a

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

In re: THe Cmcve K Corporation;

Circle K Convenience Stores, Inc.;

Circle K. Management Company;

Lar-Lin, Inc.; First Circle

Properties, Inc.; Utotem, Inc.;

Utotem Markets of Arizona, Inc.;

U Totem of Alabama Inc.;

U-Tote’M of Colorado Inc.;

U-Tote-M of Miami, Inc.; Tic Toc

Systems, Inc.; Monterre Properties

Inc.; Shop & Go, Inc.; Circle K

General, Inc.; Circle K Hawaii,

Company

(Connecticut); Mr. B’s Oil Co.,

Inc.; Mr. B’s Food Mart, Inc.; NPI

Corporation; Old Colony

Petroleum Company, Inc.; New

England Petroleum Distributors,

Inc.; and 44th Street & Camelback

Limited Partnership,

Debtors.

CoLeman On Company, INc.,

Appellant,

Tue Circe K Corporation,

Appellee.

;

13157

43a

No. 96-15200

BAP No.

AZ 94-01422-JmeR

OPINION

13158 in re: Tue Circie K Corporation

from the Ninth Circuit

Bankruptcy Appellate Panel

Jones, Myers and Russell, Judges, Presiding

March 10, 1997—San Francisco, California

Before: Byron R. White,* Associate Justice, Retired,

William C. Canby and Pamela Ann Rymer, Circuit Judges.

Opinion by Judge Canby; Partial Concurrence and

Partial Dissent by Judge Rymer

SUMMARY

Bankruptcy/Real Estate

The court of appeals affirmed a judgment of the bankruptcy

appellate panel (BAP). The court held that a lease Prove

oPrng the exercise of a renewal option by a lessee in deft"

does not preclude a defaulting Chapter 11 bankruptcy debtor

from doing SO.

Appellant Coleman Oil Company leased gasoline stations

to Pickering Oil Heat for ten years with options to renew for

two additional five-year terms. The leases permitted renewal

on six months notice if none of the leases was in default.

Two subsidiaries of appellee the Circle K Corporation

(New England Petroleum Distributors and Old Colony Petro-

wie Honorable Byron R. White, Retired Associate Justice of the

United Suates Supreme Court, sitting by designanon.

44a

In re: THe Circe K Corporation 13159

renewal of the leases in 1987, the subsidiaries defaulted on

some of the lease provisions; they and Circle K sought Chap-

ter 11 bankruptcy protection. They obtained an extension of

time from the bankruptcy court to make their decision to

assume or reject the leases until after the June 1992 expiration

of the first renewals.

Coleman brought an adversary action, alleging that the

debtors were merely tenants at will. Coleman contended that

the debtors were not assignees of the leases because the

assignments were defective and violated the statute of frauds.

Alternatively, Coleman asserted that even if the assignments

were valid, the lessees had failed to exercise the options prop-

erly, so that the leases had expired unrenewed.

In March 1992, Old Colony and New England notified

Coleman that they had elected to extend the leases for another

five years, even though the prepetition defaults had not been

cured. In the adversary action, the debtors moved for sum-

mary judgment. The bankruptcy court granted the motion.

The BAP affirmed, concluding that Coleman had failed to

raise a material issue of fact regarding the debtors’ status as

assignees, Coleman lacked standing to challenge the assign-

ments under the statute of frauds; and the debtors successfully

renewed the leases even though they were in default at the

time of the second exercise. As did the bankruptcy court, the

BAP based its ruling on the rationale underlying 11 U.S.C.

§ 365: to balance the state-law contract right of the creditor to

receive the benefit of its bargain with the federal law equita-

ble right of the debtors to an opportunity to reorganize.

Coleman appealed, reiterating its position in the bankruptcy

court, and asserting that summary judgment was inappropriate

because it had raised an issue of material fact: the debtors’

actions (contemporaneous requests to extend some of the

same leases) had been inconsistent with the assignments.

45a

13160 In re: THe Circle K CORPORATION

ar eed rent and otherwise treated the debtors as lessees Tt

veare after 1987. Coleman was estopped from assomn® &

Yrare later that the leases expired in 1967. The leases

emained effective from 1987 to 1992.

[5] In conjunction with the automatic stay, § 365 suspends

ant vrmination of lease that is in default, it extends the dete

In re: THE Circte K CORPORATION 13161

depriving the debtors of the opportunity to reorganize without

burdening the estate with unexpired lease obligations.

[7] All kinds of interference with contractual rights occur

in bankruptcy proceedings. No principle of bankruptcy or

contract law precluded the courts from permitting the debtors

to extend the leases in a manner contrary to the leases’ terms,

without first curing the defaults. Thus renewed, the leases did

not expire in 1992, and the debtors could assume them, curing

the defaults or giving assurance of prompt cure at that time.

Judge Rymer concurred in part and dissented in part, con-

cluding that § 365 does not extend the time to exercise an

option to renew a lease, or to meet conditions precedent to

doing so.

COUNSEL

Carolyn Johnsen, Herbert, Schenk, Johnsen & Dake, Phoenix,

Arizona, for the appellants.

James L. Rasmussen, Kemp, Smith, Duncan & Hammond,

Albuquerque, New Mexico, for the appellees.

OPINION

CANBY, Circuit Judge:

This case presents the question whether a lessee debtor in

bankruptcy, prior to deciding whether to accept or reject non-

residential leases, may exercise an option to renew the leases

even though the lessee debtor is in default and the leases spec-

ify that they may not be renewed if in default.

“47a

13162 In re; THE CIRCLE K CorPORATION

The Coleman Oil Company, as lessor, leased six gasoline

stations in New Hampshire and Maine for ten years, with

options to the lessee to renew for two additional five-year

terms. Each lease permitted renewal only if none of the leases

have acquired the lessees’ interests under the leases by @

series of acquisitions and mergers. After one renewal of the

(“the Debtors”) then sought and received an extension of time

their future choice to accept or reject, the Debtors

exercised their option to extend the leases for a second five-

term, even though pre-petition defaults in at least some

of the leases had not been

The paramount question before us is whether the need to

the Debtors’ rights under 11 U.S.C. § 365 to accept

or reject the leases overcomes the leases’ requirement that

none of the leases be in default at the time of renewal. We

conclude, as did the bankruptcy court and the Bankruptcy

ate Panel (“BAP”), that the leases may be renewed

despite the uncured defaults. We also reject other arguments

prog appellants, and accordingly affirm the judgment of

the BAP.

L BACKGROUND

48a

In re: THe Crrae K CorPORA TION 13163

The leases provided for an initial term of ten years, and

gave Pickering the right to renew for two additional five-year

terms under certain conditions:

Lessee shall have two (2) additional and successive

terms of five (5) years each . . . by giving the Lessor

at least six (6) months written notice of such exten-

ER 5 Exh. A at 2 (emphasis added). Thus, for Pickering or its

assignees to extend the leases to the maximum period, they

were required to exercise the first option by June 1987, and

The Debtors assert that they acquired Pickering’s interest in

the leases through a series of corporate mergers and acquisi-

tions. Northeast Petroleum Inc. (“NPI”) is the parent corpora-

tion of New England Petroleum and Old Colony Petroleum.

NPI acquired Pickering’s stock in December 1983 and

merged with Charter Intemational Oil in December 1989. Cir-

During all of these transitions, Coleman received and

accepted the full lease payments every month for each of the

leases.

‘Under the Chapter 11 Plan of Reorganization. Old Colony and New

England merged into the Circle K Corporation. Because that meree®

occurred after the final extension of the leases. we ignore it for purposes

of this opinion.

49a

13164 in re: THe Cirncte K Corporation

In March 1987, New England notified Coleman by letter

that it elected to renew its leases for five years. In May 1987,

Old Colony also notified Coleman by letter that it was exer-

cising its renewal option. Coleman did not object to the

renewals, and continued to accept the companies’ rent pay-

ments.

New England and Old Colony defaulted under some of the

lease provisions. The parties dispute the exact nature and tim-

ing of the defaults. It is agreed that New England failed to

maintain the Kittery property. Coleman also states that Old

Colony failed to pay the property taxes on the Durham and

Portsmouth properties.

Circle K and its affiliates filed for Chapter 11 bankruptcy

protection in May 1990. The Debtors requested, and were

granted, extensions of time within which to assume or reject

the Coleman leases. See 11 U.S.C. § 365(4)(4).

In October 1991, Coleman filed an adversary action in the

bankruptcy court, seeking a declaration that the Debtors were

merely tenants at will. Coleman argued that the Debtors were

not assignees of the leases because the assignments had never

been properly executed and violated the stamte of frauds.

Coleman also argued that, even if the Debtors were assignees,

they had failed properly to exercise options to renew the

leases, so that the leases expired either in 1987 or during the

bankruptcy proceedings in 1992. Coleman also sought relief

from the automatic stay so that it could take possession of the

properties.

In March 1992, New England and Old Colony informed

Coleman by letter of their election to extend the leases for

another five year term. The Debtors then moved for summary

judgment in the adversary action, asserting that: (1) they were

the assignees of the leases and thus entitled to renew them,

and (2) the renewals were effective even if the pre-petition

50a

In re: THe Cirncce K Corporation 13165

defaults had not been cured. The bankruptcy court granted the

motion.

Coleman appealed to the BAP. The BAP affirmed, con-

cluding that (1) Coleman failed to raise a material issue of

fact regarding the Debtors’ status as assignees of the leases;

(2) Coleman lacked standing to challenge the assignments

under the statute of frauds; and (3) the Debtors successfully

renewed the leases for both five-year terms even though they

were in default at the time of the second extension. Coleman

Oil Co. v. Circle K Corp., (In re Circle K ), 190 B.R. 370

(1996).

Judge Russell dissented. He agreed with the majority that

the Debtors were the assignees of the leases and that Coleman

lacked standing to challenge the assignments under the statute

of frauds. He disagreed, however, with the majority’s conclu-

sions regarding the Debtors’ post-petition extensions of the

leases. He concluded that the Debtors’ attempts to renew the

leases for the second time were ineffective under the terms of

the leases, because the Debtors were in defau't. Jd. at 378-82.

0. ANALYSIS

A. Assignment Of The Leases

The first question is whether Coleman raised a triable issue

of fact as to whether the Debtors were assignees of the six leases.”

See Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986).

The Debtors have relied on a series of corporate mergers and

acquisitions to establish their status as assignees. Although

the chain of events is somewhat intricate, we conclude that

the Debtors adequately established that the leases had been

assigned to them.

*We review de novo the BAP’s decisions. Alsberg v. Robertson (in re

Alsberg). 68 F.3d 312, 314 (9th Cir. 1995). We independently review

bankruptcy court rulings on appeal from the BAP. Finalco, Inc. v. Roose-

velt, (In re Roosevelt), 87 F.3d 311, 314 (9th Cir. 1996).

5la

13166 In re: THE Circ.e K CorroraTion

NPI, the parent corporation of New England and Old Col-

ony, became an assignee of the leases by acquiring Pickering,

the original lessee, in December 1983. A Plan of Liquidation

evidences that transaction, and states that “Pickering will

transfer all its assets” to NPI. ER 5 Exh. P. at |. Charter then

merged with NPI in 1989, after Circle K had acquired Charter

in 1988. A Stock Purchase Agreement evidences Circle K's

acquisition of Charter. ER 5 Exh. N.

Portsmouth and Durham leases from NPI to Old Colony dated

May 1985. ER 5 Exh. B. As to the four New England leases,

the Debtors produced an affidavit and a May 1989 letter from

affidavit is of Paul Welch, the president of New England, and

he states that New England became the assignee of the four

leases in March 1987. ER 7 at 2-3. The May 1989 letter con-

firms that information. ER 7 Exh. 1. We thus conclude that

Coleman’s attacks on the “paper trail” lack merit.

October 1992 retroactive written assignment of four leases to

New England. AS the Debtors respond, however, any met!

‘stent of mistaken behavior on their part does not mers Ft

not occurred. See Anderson v. Liberty Lobby, Inc.. 477 US.

242, 252 (1986). We thus conclude that Coleman has failed

to raise a genuine issue of material fact regarding the assign-

ments. See id. (“The mere existence of a scintilla of evidence

OOK

In re: THE CircLe K CorporaTion 13167

in support of the plaintiff's position will be insufficient” to

defeat summary judgment).

[2] Coleman finally contends that the assignments are

invalid because the Debtors have not produced formal written

instruments of transfer. There is, however, a written assign-

ment of the Portsmouth and Durham leases from NPI to Old

Colony dated May 1985. ER 5 Exh. B. In any event, the

leases do not require that assignments be in writing. The

leases give the lessee the right simply to assign, with the con-

party

of Frauds § 220 (1943). The parties to the assignments do not

challenge their validity; it would be for them, not Coleman,

to raise the statute of frauds as a defense to enforcement of the

assignments if they so chose. See id., see also Restatement

(Second) of Contracts § 144 (1982). We conclude, therefore,

that the Debtors were properly granted summary judgment on

this point.

B. Extension of the Leases

The next question is whether the Debtors successfully

extended the leases in 1987 and 1992. The leases placed two

conditions on renewal: (1) the Debtors had to give Coleman

six months advance written notice of their intent to renew,

and (2) the Debtors could not be in default on any lease at the

time of renewal. ER 5 Exh. A at 2. Coleman contends that the

Debtors failed to meet these conditions for the renewals in

1987 and in 1992.

1. Extension Of The Leases In 1987

With regard to the 1987 renewals, Coleman contends that

the Debtors failed to meet both the notice and the default

requirements. Coleman argues that the Debtors did not meet

53a

13168 In re: THe Circte K Corporation

the notice requirement because Old Colony and New England

gave notice of extensions of leases that they had not yet been

assigned. Coleman also asserts that at least the Kittery lease

was in default in 1987.

[3] We conclude that the extensions in 1987 are no longer

open to challenge. Whether there were any defaults and

whether there was any imperfection in the way that the notice

was given, all parties acted as if the extensions were effective

and any objections to them have long since been waived. See,

e.g., Oxford Properties & Fin. Lid. v. Engle, 943 F.2d 1150,

1153-54 (9th Cir. 1991). Coleman continually accepted rent

from the Debtors and otherwise treated the Debtors as lessees

for many years after 1987. Coleman is estopped from assert-

ing now, ten years later, that the leases expired in 1987. See

id. The leases thus remained effective for the five-year term

from 1987 to 1992.

2. Extension Of The Leases In 1992

[4] With respect to the 1992 post-bankruptcy-petition

extension of the leases, Coleman argues that the Debtors’

renewals were ineffective because the ~ases were in default.

We agree that there were defaults under at least some of the

leases.” There was a pre-petition default on the Kittery lease

because the Debtors left the property in disrepair. There also

may have been some monetary pre-petition defaults on the

Durham, Portsmouth, and Epping leases. The exact nature and

extent of the defaults is immaterial because, for reasons we

will now explain, we conclude that the bankruptcy court had

the power to permit the Debtors to extend the leases without

first curing the defaults. The Debtors thus preserved their abil-

ity later to assume the leases. See 11 U.S.C. § 365(a).

"Because we conclude that the 1992 renewals were effective even

though there were defaults. we need not resolve ‘he issue of the enforce-

ability in bankruptcy of the leases’ cross-default provisions, under which

a default in any lease prevents renewal of all of them.

54a

In re: THe Cirncte K Corporation 13169

[5] The bankruptcy court and the BAP based their rulings

on the rationale underlying section 365.‘ As the BAP stated,

“(t]he purpose behind § 365 is to balance the state law con-

tract right of the creditor to receive the benefit of his bargain

with the federal law equitable right of the debtor to have an

Opportunity to reorganize.” Coleman Oil Co., 190 B.R. at 376;

see also City of San Francisco Market Corp. v. Walsh, (in re

Moreggia & Sons, Inc.), 852 F.2d 1179, 1185 (9th Cir. 1988).

Section 365, in conjunction with the automatic stay provision

of section 362, accordingly suspends, once the bankruptcy

petition is filed, the termination of a lease that is in. default;

it extends* a debtor lessee’s opportunity to cure any defaults

until the debtor has the chance to decide whether to assume

the lease. See 11 U.S.C. §§ 362, 365 (1994); Post v. Sigel &

Co., (in re Sigel & Co.), 923 F.2d 142, 144-45 (9th Cir.

1991). The lessor will then get the benefit of its bargain upon

assumption, when the debtor lessee must cure the defaults.

See 11 U.S.C. § 365(6)(1).

If the bankruptcy court could not allow a debtor lessee to

renew a lease without first curing defaults, section 365’s basic

purpose would be frustrated. The debtor would be denied the

benefit of section 365’s “suspension of time” in order to

determine whether to assume or reject the lease. See id.

§ 365(d)(4). For example, if the bankruptcy court could not

permit the Debtors to exercise their renewal option without

“The curing of defaults in an executory contract or unexpired lease is

governed by section 365, not by the more restrictive extension-of-time

provisions of section 108(b). Se» Moody v. Amoco Oil Co., 734 F.2d 1200,

1215-16 (7th Cir. 1984). We agree with the majority of the BAP that sec-

tion 365 also encompasses the curing of defaults prior to the exercise of

an option to renew. See Coleman Oil Co.. 190 B.R. at 377-78. On this

appeal, neither party has contended thai section 108(b) governs.

“The “extension” minimally is 60 days from the date of the order for

relief. See 11 U.S.C. § 365(4)(4). But the bankruptcy count, as in this case.

often grants the debtor's request to extend that period. See id.: see, ¢.g..

Willamette Waterfront, Lid. v. Victoria Station, Inc., (in re Victoria Station

Inc.), 875 F.2d 1380, 1384-85 (9th Cir. 1989).

55a

13170 In re: THe Crate K Corporation

curing their pre-petition defaults; the Debtors’ later choice to

assume or reject the leases, guaranteed by section 365,

becomes flawed. If the Debtors failed to cure the defaults at

renewal (as they did in this case), the leases would expire and

the Debtors would be wholly unable later to exercise the

choice to assume or reject the unexpired leases. On the other

hand, if the Debtors cured the defaults in order to preserve

unsecured claims against the bankruptcy estate. See e.g.

Pacific Express, Inc. v. Teknetron Infoswitch Corp. (In re

Pacific Express, Inc.), 780 F.2d 1482, 1486 (9th Cir. 1986).

If, however, the Debtors have been forced to cure the pre-

petition defaults in order to preserve their choice to assume or

reject, then a later election to reject leaves the lessor with a

preference over other pre-petition general creditors.

[6] The practical effect of requiring the Debtors to cure pre-

petition defaults in order to extend the leases thus would be

to require an early decision whether to assume or reject the

leases. But the bankruptcy court here had explicitly extended

beyond June 1992 the Debtors’ time to decide whether to

assume or reject. The bankruptcy court was not compelled to

require a course of action that would render its extension of

time illusory, thus depriving the Debtors of the opportunity to

reorganize without prematurely the estate with

875 F.2d at 1384-85.

ot eran Be Debtors were required to perform obligations of the

ret after the order for relief and before assumpuon of the leases.

See ll § 365(dX3). The only posi-petition default established here

was less than $200 with regard to one property. The amount was tendered

when notice of the default was given to the Debtors. The bankruptcy court

characterized this defauk as de minimis and we agree. In these circum-

stances, the BAP did not exr in concluding that, in order to preserve the

choice under section 365 to assume or reject the leases, cure of this

default. too, was not required for exercise of the option to renew. iM

56a

In re: THe Cincie K Corporation 13171

We find persuasive the reasoning in in re Webster, Clothes,

Inc., 36 B.R. 260 (D. Md. 1984). There, the bankruptcy court

implied a power under section 365 to allow a debtor lessee to

exercise options. As in the present case, Webster's leases pro-

vided for options to extend, but only so long as Webster was

not in default. See id. at 262. Webster was in default under the

leases, but the court held that Webster nonetheless could

extend them. /d. at 262-63. ‘The court concluded that the gen-

eral purpose behind section 365 supported such a result, not-

ing that the section's goal is “the preservation of the status

quo until the debtor-in-possession decides whether to assume

or reject.” Id. at 263. We recognize that Webster was decided

before the 1984 amendments to section 365, at a time when

the debtor had no obligation to exercise the choice to assume

Or reject a lease until confirmation of the plan. The result in

Webster accordingly was based in part on the failure of the

lessor to move to shorten the time for election. See id. at 264:

see also Cook United, Inc. v. Washington Distrib., Inc., 53

B.R. 342, 345 (ND. Ohio 1985). But the remaining rationale

of Webster is applicable here: a future election under section

365 to assume or reject will be rendered largely illusory if

pre-petition defaults must be cured in order to keep the lease

alive for the election.

[7] Coleman argues that the bankruptcy court lacks the

power to “re-write” the parties’ contract. See, ¢.¢., Shokbeton

Indus.. Inc. v. Shokbeton Products Corp., (in re Shokbeton

Indus.), 466 F.2d 171 (Sth Cir. 1972). But all kinds of inter-

ferences with contractual rights occur in bankruptcy proceed-

ings. Section 365(a) permits a debtor to reject an executory

contract or unexpired lease altogether, which wholly contra-

venes the contract or lease as written. The automatic stay in

bankruptcy frequently prevents the enforcement of contracts

according to their terms. We have held that a bankruptcy

debtor may cure a default and avoid the termination of a con-

tract even if the contract does not allow for cure. Post, 923

F.2d at 144-45. Thus no principle of bankruptcy or contract

law precludes us from permitting the Debtors here to extend

57a

13172 In re: THe Circe K CoRPORATION

their leases in a manner contrary to the leases’ terms, when 10

do so will effectuate the purposes of section 365.

[8] We therefore affirm the BAP’s decision that the Debt-

ors could exercise their final option to renew the leases with-

leases did not expire in 1992, and the Debtors could later

assume them, curing the defaults or giving assurance of

prompt cure at that time. See 11 U.S.C. § 365(0X 1A).

I. CONCLUSION

extension had been properly executed. Finally, to effectuate

The judgment of the BAP is AFFIRMED.

RYMER, Circuit Judge, concurring in part and dissenting in

despite being in default, contrary to an express condition pre-

cedent in the lease, is uncharted. While the majority’s view is

p I see nothing in § 365 that allows debtors to disre-

gard their leases and renew while in default.

In re: THe Circte K Corporation 13173

default at the time the debtors tried to exercise the option, the

right to renew was lost. Section 365 does not extend the time

to exercise the option or to meet conditions precedent. Nor

does § 365 give the debtor the right to opt to renew a contract

that is in default when the contract by its terms requires that

a default first be cured.

To hold otherwise rewrites the lease and, as I read it, § 365.

Therefore, for the reasons given by Bankruptcy Judge Russell

in his BAP dissent, Coleman Oil Co., Inc. v. The Circle K

Corp. (In re The Circle K Corp.), 190 B.R. 370, 378-82

(1995) (Russell, BJ., dissenting), I would reverse.

Although I agree that Coleman’s arguments about the chain

of title and the statute of frauds fail, there are disputes of fact

about who was in default and where. I would leave these

issues, as well as state law forfeiture issues, to the bankruptcy

court on remand.

59a

Chapter 365

Executory Contracts and Unexpired Leases

BANKRUPTCY CODE, Section 365

(11 U.S.C. § 365)

§ 365. Executory contracts and unexpired leases.

(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.

(b) (1) If there has been a default in an executory contract Or

unexpired lease of the debtor, the trustee may not assume such

contract or lease unless, at the time of assumption of such

contract or lease, the trustee—

(A) cures, or provides adequate assurance that the trustee

will promptly cure, such default;

(B) compensates, or provides adequate assurance that the

trustee will promptly compensate. a party other than the debtor

to such contract or lease, for any actual pecuniary loss to such

party resulting from such default. and

such contract or lease.

(2) Paragraph (1) of this subsection does not apply to a

default that is a breach of a provision relating to—

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(A) the insolvency or financial condition of the debtor at any

time before the closing of the case;

(B) the commencement of a case under this title;

case under this title or a custodian before such commencement;

(D) the satisfaction of any penalty rate or provision relating

to a default arising from any failure by the debtor to perform

nonmonetary obligations under the executory contract or

unexpired lease.

(3) For'the purposes of paragraph (1) of this subsection and

paragraph (2)(B) of subsection (f), adequate assurance of future

performance of a lease of real property in a shopping center

includes adequate assurance—

(A) of the source of rent and other consideration due under

such lease, and in the case of an assignment, that the financial

condition and operating performance of the proposed assignee

and its guarantors, if any, shall be similar to the financial

condition and operating performance of the debtor and its

guarantors. if any, as of the time the debtor became the lessee

under the lease;

- (B) that any percentage rent due under such lease will not

decline substantially:

all the provisions thereof, including (but not limited to)

provisions such as a radius, location, use. or exclusivity

provision, and will not breach any such provision contained in

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any other lease, financing agreement, or master agreement

relating to such shopping center, and

(D) that assumption or assignment of such lease will not

disrupt any tenant mix or balance in such shopping center.

(4) Notwithstanding any other provision of this section, if

there has been a default in an unexpired lease of the debtor,

other than a default of a kind specified in paragraph (2) of this

subsection, the trustee may not require a lessor to provide

services or supplies incidental to such lease before assumption

of such lease unless the lessor is compensated under the terms

of such lease for any services and supplies provided under such

lease before assumption of such lease.

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,

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(2) such contract is a contract to make a loan, or extend other

debt financing or financial accommodations, to or for the

-benefit of the debtor, or to issue a security of the debtor;

(3) such lease is of nonresidential real property and has been

terminated under applicable nonbankruptcy law prior to the

order for relief; or

(4) such lease is of nonresidential real property under which

the debtor is lessee of an aircraft terminal or aircraft gate at an

airport at which the debtor is the lessee under one or more

additional nonresidential leases of an aircraft terminal or

aircraft gate and the trustee, in connection with such

assumption or assignment, does not assume all such leases or

does not assume and assign all of such leases to the same

person, except that the trustee may assume or assign less than

all of such leases with the airport operator's written consent.

(d) (1) In a case under chapter 7 of this title, if the trustee

does not assume or reject an executory contract or unexpired

lease of residential real property or of personal property of

the debtor within 60 days after the order for relief, or within

such additional time as the court. for cause, within such 60-

day period, fixes, then such contract or lease is deemed

rejected.

(2) In a case under chapter 9, 11, 12. or 13 of this title, the

trustee may assume or reject an executory contract or

unexpired lease of residential real property or of personal

property of the debtor at any time before the confirmation of

a plan but the court. on the request of any party to such

contract or lease, may order the trustee to determine within a

specifed period of time whether to assume of reject such

contract or lease.

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(3) The trustee shall timely perform all the obligations of

the debtor, except those specified in section 365(b)(2),

arising from and after the order for relief under any

unexpired lease of nonresidential real property, until such

lease is assumed or rejected, notwithstanding section

503(b)(1) of this title. The court may extend, for cause, the

time for performance of any such obligation that arises

within 60 days after the date of the order for relief, but the

time for performance shall not be extended beyond such 60-

day period. This subsection shall not be deemed to affect the

trustee's obligations under the provisions of subsection (b) or

(f) of this section. Acceptance of any such performance does

not constitute waiver or relinquishment of the lessor's rights

under such lease or under this title.

(4) Notwithstanding paragraphs (1) and (2), in a case

under any chapter of this title, if the trustee does not assume

or reject an unexpired lease of nonresidential real property

under which the debtor is the lessee within 60 days after the

date of the order for relief, or within such additional time as

- the court, for cause, within such 60-day period, fixes. then

such lease is deemed rejected, and the trustee shall

immediately surrender such nonresidential real property to

the lessor.

(5) Notwithstanding paragraphs (1) and (4) of this

subsection, in a case under any chapter of this title, if the

trustee does not assume or reject an unexpired lease of

nonresidential real property under which the debtor is an

affected air carrier that is the lessee of-an aircraft terminal or

aircraft gate before the occurrence of a termination event,

then (unless the court orders the trustee to assume such

unexpired leases within 5 days after the termination event), at

the option of the airport operator, such lease is deemed

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rejected 5 days after the occurrence of a termination event

and the trustee shall immediately surrender possession of the

premises to the airport operator; except that the lease shall

not be deemed to be rejected unless the airport operator first

waives the right to damages related to the rejection. In the

event that the lease is deemed to be rejected under this

paragraph, the airport operator shall provide the affected air

carrier adequate opportunity after the surrender of the

premises to remove the fixtures and equipment installed by

the affected air carrier.

(6) For the purposes of paragraph (5) of this subsection

and paragraph (f)(1) of this section, the occurrence of a

termination event means, with respect to a debtor which is an

affected air carrier that is the lessee of an aircraft terminal or

aircraft gate—

(A) the entry under section 301 or 302 of this title of an

order for relief under chapter 7 of this title;

(B) the conversion of a case under any chapter of this title to

a case under chapter 7 of this title: or

section 362(a) of this title with respect to aircraft. aircraft

engines, propellers, appliances, or spare parts, as defined in

section 101 of section 40102 of title 49, except for property of

the debtor found by the court not to be necessary to an effective

reorganization.

(7) Any order entered by the court pursuant to paragraph (4)

extending the period within which the trustee of an affected air

carrier must assume or reject an unexpired lease of

nonresidential real property shall be without prejudice to—

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(A) the right of the trustee to seek further extensions within

such additional time period granted by the court pursuant to

paragraph (4); and

(B) the right of any lessor or any other party in interest to

request, at any time, a shortening or termination of the period

within which the trustee must assume or reject an unexpired

lease of nonresidential real property.

(8) The burden of proof for establishing cause for an

extension by an affected air carrier under paragraph (4) or the

maintenance of a previously granted extension under paragraph

(7)(A) and (B) shall at all times remain with the trustee.

(9) For purposes of determining cause under paragraph (7)

with respect to an unexpired lease of nonresidential real

property between the debtor that is an affected air carrier and an

airport operator under which such debtor is the lessee of an

airport terminal or an airport gate. the court shall consider,

among other relevant factors, whether substantial harm will

result to the airport operator or airline passengers as a result of

the extension or the maintenance of a previously granted

extension. In making the determination of substantial harm, the

court shall consider, among other relevant factors. the level of

actual use of the terminals or gates which are the subject of the

lease, the public interest in actual use of such terminals or

gates, the existence of competing demands for the use of such

terminals or gates, the effect of the court's extension or

termination of the period of time to assume or reject the lease

on such debtor's ability to successfully reorganize under chapter

1] of this title, and whether the trustee of the affected air carner

is capable of continuing to comply with its obligations under

section 365(d)(3) of this title.

(10) The trustee shall timely perform all of the obligations of

the debtor, except those specified in section 365(b)(2). first

arising from or after 60 days after the order for relief in a case

under chapter 11 of this title under an unexpired lease of

personal property (other than personal property leased to an

individual primarily for personal, family, or household

purposes), until such lease is assumed or rejected

notwithstanding section 503(b)(1) of this title, unless the court,

after notice and a hearing and based on the equities of the case,

orders otherwise with respect to the obligations or timely

performance thereof. This subsection shall not be deemed to

affect the trustee's obligations under the provisions of subsec-

tion (b) or (f). Acceptance of any such performance does not

constitute waiver or relinquishment of the lessor’s rights under

such lease or under this title.

(e) (1) Notwithstanding a provision in an executory contract

or unexpired lease, or in applicable law, an executory contract

or unexpired lease of the debtor may not be terminated or

modified, and any right or obligation under such contract or

lease may not be terminated or modified, at any time after the

commencement of the case solely because of a provision in

such contract or lease that is conditioned on—

(A) the insolvency or financial condition of the debtor at any

time before the closing of the case; ~

(B) the commencement of a case under this title; or

case under this title or a custodian before such commencement.

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(2) Paragraph (1) of this subsection does not apply to an

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—

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

to such contract or lease from accepting performance from or

rendering performance to the trustee or to an assignee of such

contract or lease, whether or not such contract or lease prohibits

or restricts assignment of rights or delegation of duties; and

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

assignment;

(B) such contract is a contract to make a loan, or extend other

debt financing or financial accommodations, to or for the

benefit of the debtor, or to issue a security of the debtor.

(f)(1) Except as provided in subsection (c) of this section,

notwithstanding a provision in an executory contract or

unexpired lease of the debtor. or in applicable law, that

prohibits, restricts, or conditions the assignment of such

contract or lease, the trustee may assign such contract or lease

under paragraph (2) of this subsection; except that the trustee

may not assign an unexpired lease of nonresidential real

property under which the debtor is an affected air carrier that is

the lessee of an aircraft terminal or aircraft gate if there has

occurred a termination event.

(2) The trustee may assign an executory contract or

unexpired lease of the debtor only if—

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(A) the trustee assumes such contract or lease in accordance

with the provisions of this section: and

(B) adequate assurance of future performance by the assignee

of such contract or lease is provided, whether or not there has

been a default in such contract or lease.

(3) Notwithstanding a provision in an executory contract or

unexpired lease of the debtor, or in applicable law that

terminates or modifies, or permits a party other than the debtor

to terminate or modify, such contract or lease or a right or

obligation under such contract or lease on account of an

assignment of such contract or lease. such contract, lease, right,

or obligation may not be terminated or modified under such

Provision because of the assumption or assignment of such

contract or lease by the trustee.

(g) Except as provided in subsections (h)(2) and (i)(2) of this

section, the rejection of an executory contract or unexpired

lease of the debtor constitutes a breach of such contract or

lease—

(1) if such contract or lease has not been assumed under this

section or under a plan confirmed under chapter 9, Il, 12, or 13

of this title, immediately before the date of the filing of the

petition: or

(2) if such contract or lease has been assumed under this

section or under a plan confirmed under chapter 9, 11, 12, or 13

of this title—

(A) if before such rejection the case has not been converted

under section 1112, 1208, or 1307 of this title, at the time of

such rejection: or

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(B) if before such rejection the case has been converted

under section 1112, 1208, or 1307 of this title—

(i) immediately before the date of such conversion, if such

contract or lease was assumed before such conversion; or

(ii) at the time of such rejection, if such contract or lease was

assumed after such conversion.

(h) (1) (A) If the trustee rejects an unexpired lease of real

property under which the debtor is the lessor and—

(i) if the rejection by the trustee amounts to such a breach as

would entitle the lessee to treat such lease as terminated by

virtue of its terms, applicable nonbankruptcy law, or any

agreement made by the lessee, then the lessee under such lease _

may treat such lease as terminated by the rejection: or

(ii) if the term of such lease has commenced, the lessee may

retain its rights under such lease (including nghts such as those

relating to the amount and timing of payment of rent and other

amounts payable by the lessee and any nght of use, possession,

quiet enjoyment, subletting. assignment. or hypothecation) that

are in or appurtenant to the real property for the balance of the

term of such lease and for any renewal or extension of such

rights to the extent that such nghts are enforceable under

applicable nonbankruptcy law.

(B) If the lessee retains its mghts under subparagraph (A)(ii),

the lessee may offset against the rent reserved under such lease

for the balance of the term after the date of the rejection of such

lease and for the term of any renewal or extension of such

lease, the value of any damage caused by the nonperformance

after the date of such rejection. of any obligation of the debtor

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under such lease, but the lessee shall not have any other night

against the estate or the debtor on account of any damage

occurring after such date caused by such nonperformance.

center with respect to which the lessee elects to retain its nghts

under subparagraph (A)(ii) does not affect the enforceability

under applicable nonbankruptcy law of any provision in the

lease pertaining to radius, location, use, exclusivity, or tenant

mix or balance.

(D) In this paragraph, “lessee” includes any successor,

assign. Or mortgagee permitted under the terms of such lease.

(2) (A) If the trustee rejects a timeshare interest under a

timeshare plan under which the debtor is the timeshare interest

seller and—

(i) if the rejection amounts to such a breach as would

entitle the timeshare interest purchaser to treat th. .imeshare

plan as terminated under its terms. applicable nonbankruptcy

law, or any agreement made by timeshare interest purchaser,

the timeshare interest purchaser under the timeshare plan

may treat the timeshare plan as terminated by such rejection:

(ii) if the term of such timeshare interest has commenced,

then the timeshare interest purchaser may retain its rights in

such timeshare interest for the balance of such term and for any

term of renewal or extension of such timeshare interest to the

extent that such rights are enforceable under applicable

nonbankruptcy law.

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(B) If the timeshare interest purchaser retains its rights under

subparagraph (A), such timeshare interest purchaser may offset

against the moneys due for such timeshare interest for the

balance of the term after the date of the rejection of such

timeshare interest, and the term of any renewal or extension of

such timeshare interest, the value of any damage caused by the

nonperformance after the date of such rejection, of any

obligation of the debtor under such timeshare plan, but the

timeshare interest purchaser shall not have any right against the

estate or the debtor on account of any damage occurring after

such date caused by such nonperformance.

(i)(1) If the trustee rejects an executory contract of the debtor

for the sale of real property or for the sale of a timeshare

interest under a timeshare plan, under which the purchaser is in

possession, such purchaser may treat such contract as

terminated, or, in the alternative, may remain in possession of

such real property or timeshare interest. :

(2) if such purchaser remains in possession—

(A) such purchaser shall continue to make all payments due

under such contract. but may, offset against such payments any

damages occurring after the date of the rejection of such

contract caused by the non-performance of any obligation of the

debtor after such date, but such purchaser does not have any

rights against the estate on account of any damages ansing after

such date from such rejection, other than such offset; and

(B) the trustee shall deliver title to such purchaser in

accordance with the provisions of such contract, but is relieved

of all other obligations to perform under such contract.

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(j) A purchaser that treats an executory contract as

terminated under subsection (i) of this section, or a party whose

executory contract to purchase real property from the debtor is

rejected and under which such party is not in possession, has a

lien on the interest of the debtor in such property for the

recovery of any portion of the purchase price that such

purchaser or party has paid.

(k) Assignment by the trustee to an entity of a contract or

lease assumed under this section relieves the trustee and the

estate from any liability for any breach of such contract or lease

occurring after such assignment.

(1) If an unexpired lease under which the debtor is the lessee

is assigned pursuant to this section, the lessor of the property

may require a deposit or other security for the performance of

the debtor's obligations under the lease substantially the same

as would have been required by the landlord upon the initial

leasing to a similar tenant.

(m) For purposes of this section 365 and sections 541(b)(2)

and 362(b) 10), leases of real property shall include any rental

agreement to use real property.

(n) (1) If the trustee rejects an executory contract under

which the debtor is a licensor of a right to intellectual property,

the licensee under such contract may elect—

(A) to treat such contract as terminated by such rejection if

such rejection by the trustee amounts to such a breach as would

entitle the licensee to treat such contract as terminated by virtue

of its own terms, applicable nonbankruptcy law. or an

agreement made by the licensee with another entity; or

(B) to retain its rights (including a right to enforce any

exclusivity provision of such contract, but excluding any other

right under applicable nonbankruptcy law to specific

performance of such contract) under such contract and under

any agreement supplementary to such contract, to such

intellectual property (including any embodiment of such

intellectual property to the extent protected by applicable

nonbankruptcy law), as such rights existed immediately before

the case commenced, for—

(i) the duration of such contract; and

(ii) any period for which such contract may be extended by

the licensee as of right under applicable nonbankruptcy law.

(2) If the licensee elects to retain its rights, as described in

paragraph (1)(B) of this subsection, under such contract—

(A) the trustee shall allow the licensee to exercise such

rights;

(B) the licensee shall make all royalty payments due under

such contract for the duration of such contract and for any

period described in paragraph (1)(B) of this subsection for

which the licensee extends such contract; and

(i) any might of setoff it may have with respect to such

contract under this title or applicable nonbankruptcy law; and

(ii) any claim allowable under section 503(b) of this title

arising from the performance of such contract.

(3) If the licensee elects to retain its rights. as described in

paragraph (1)(B) of this subsection, then on the written request

of the licensee the trustee shall —

(A) to the extent provided in such contract, or any agreement

supplementary to such contract, provide to the licensee any

intellectual property (including such embodiment) held by the

trustee; and

(B) not interfere with the rights of the licensee as provided

in such contract, or any agreement supplementary to such

contract, to such intellectual property ( including such

embodiment) including any right to obtain such intellectual!

property (or such embodiment) from another entity.

(4) Unless and until the trustee rejects such contract. on the

written request of the licensee the trustee shall —

(A) to the extent provided in such contract or any agreement

supplementary to such contract—

(i) perform such contract: or

(ii) provide to the licensee such intellectual property

(including any embodiment of such intellectual property to the

extent protected by applicable nonbankruptcy law) held by the

trustee: and

(B) not interfere with the rights of the licensee as provided

in such contract, or any agreement supplementary to such

contract, to such intellectual property ( including such

embodiment). including any right to obtain such intellectual

property (or such embodiment) from another entity.

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(0) In a case under chapter 11 of this title, the trustee shall be

deemed to have assumed (consistent with the debtor's other

obligations under section 507), and shall immediately cure any

deficit under, any commitment by the debtor to a Federal

depository institutions regulatory agency (or predecessor to

such agency) to maintain the capital of an insured depository

institution, and any claim for a subsequent breach of the

obligations thereunder shall be entitled to priority under sectior

507. This subsection shall not extend any commitment that

would otherwise be terminated by any act of such an agency.

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