Opinion
Case No. 95-15250-AM, Contested Matter No. 96-1019-AM
February 22, 1996
Donald F. King, Esquire, Odin, Feldman Pittleman, P.C., Fairfax, VA, for the plaintiff
Leon S. Demsky, Esquire, Pelton, Balland, Young, Demsky, Baskin O'Malie, P.C., Arlington, VA, for the debtor-defendant
MEMORANDUM OPINION
This matter is before the court on the motion of the Estate of Cassius C. Carter, Jr., and the Cassius C. Carter, Jr., Revocable Trust ("the landlord") for relief from the automatic stay in order to proceed with the prosecution of an unlawful detainer action in state court and to obtain possession of the premises located at 2600 Huntington Avenue, Alexandria, Virginia, where the debtor, Techline Automotive Inc., of Virginia, carries on its business. The plaintiffs are the owners of the building and the debtor is — or was, as the case may be — the tenant. The plaintiffs assert that relief from the automatic stay is proper because the lease was terminated prior to the filing of the debtor's bankruptcy petition and, therefore, the debtor no longer has any interest in the property. The debtor, not surprisingly, denies these allegations. Additionally, the debtor has filed a motion to assume the lease as an executory contract.
Both the motion for relief from stay and the motion to assume the lease were scheduled for hearing at the same time. The court, after receiving the evidence of the parties on the motion for relief from stay, continued the hearing on the motion to assume the lease pending a determination on the relief from stay.
An evidentiary hearing was held on February 7, 1996. Doris M. Carter — the executrix of the Estate of Cassius C. Carter, Jr. — testified, and both parties presented documentary evidence. The Court then set the matter over for a final hearing in order to review the evidence and the authorities cited by the parties. Both parties have filed post-trial briefs, and the court is now prepared to rule. For the reasons stated in this opinion, this court finds that the lease was not terminated pre-petition and denies the motion for relief from the automatic stay.
The following discussion constitutes the court's findings of fact and conclusions of law as required by F.R.Bankr.P. 7052.
FACTS
The debtor in this case, Techline Automotive, Inc. of Virginia, formerly known as Techline Automotive, Inc., filed a voluntary chapter 11 petition in this court on November 24, 1995, and continues in operation of its business as debtor in possession. Its business consists of an automobile repair shop which it operates at 2600 Huntington Avenue, Alexandria, Virginia (Fairfax County).
The debtor occupies the premises under a lease dated February 23, 1993. The lease has an initial term of 5 years and provides for rent payments of $10,609.00 per month "without setoff or deduction of any kind." Ms. Carter testified that until August, 1995, the debtor always paid its rent in full and on time. However, at some point in the early summer of 1995, a dispute developed between the debtor and the landlord concerning the use of parking spaces in front of the building. As a result of this dispute, on August 25, 1995, the debtor's attorney informed Ms. Carter that the rent, instead of being paid to the landlord, had been placed in an interest-bearing escrow account until the dispute was resolved. Defendant's Exhibit 8.
Neither party presented any evidence as to the merits of the dispute, and the court makes no findings with respect to the dispute except to note its existence.
When she did not receive the rent for August, 1995, Ms. Carter sent two notices to the tenant. The first, dated August 29, 1995, was entitled: "FIVE DAYS NOTICE TO PAY OR QUIT" and read:
While the two notices are separate exhibits, they are both dated the same day — August 29, 1995 — and the "Notice to Vacate" (Plaintiff's Exhibit 3) makes reference to the " above . . . Notice to Pay or Quit" (Plaintiff's Exhibit 2) (empahsis added). The logical inference is that the these two notices were sent and received together.
YOU WILL PLEASE TAKE NOTICE that you are justly indebted unto the Estate of Cassius C. Carter, Jr. *** in the sums of (i) rent for August-September, 1995, due August 23, 1995, in the amount of $10,609.00 with interest at 6% per annum from August 28, 1995, pursuant to paragraphs 1, 2, 20, and 27 of the Warehouse Lease, which rent is now in default, (ii) prorated Insurance as per the notice of June 22, 1995, and now past due and in default, in the amount of $2,152.00 pursuant to the preamble and paragraphs 1, 2 and 4 of the lease, and (iii) taxes due July 5, 1995, as per the notice of August 21, 1995, (past due as of September 21, 1995 and not now in default) in the amount of $4,918.93 pursuant to paragraph 25 of the lease *** and, pursuant to paragraph 20 of the lease, the Landlord demands payment of the above rent and sums within five (5) days of the default in the payment of such rent and other payments or require and demands possession of the aforesaid premises; in default of which the Estate of Cassius C. Carter, Jr. *** shall proceed by due process of law to recover possession of said premises and all sums due Landlord.
Plaintiffs Exhibit 2.
The second notice, also dated August 29, 1995, was entitled "NOTICE TO VACATE" and read:
YOU WILL PLEASE TAKE NOTICE that the Estate of Cassius C. Carter Jr. and Cassius C. Carter Jr. Revocable Trust *** hereby terminate your occupancy for non-payment of rent and other payments on the premises located as 2600 Huntington Avenue *** as described above in the Notice to Pay or Quit; WHEREFORE, the owners *** hereby require and demand possession of the aforesaid premises thirty (30) days after receipt of this notice in accordance with the laws of the Commonwealth of Virginia and pursuant to the terms in paragraph 20 of the Lease Agreement dated February 23, 1985 [sic].
Plaintiff's Exhibit 3.
Like the August rent, the September and October rent — as well as the insurance payment referred to in the five-day notice and the first-half 1995 Fairfax County real estate taxes — were deposited into the escrow account and the landlord was notified by the debtor's attorney. Defendant's Exhibits 9, 10, 11, and 12.
On September 7, 1995, the landlord commenced an unlawful detainer action in the General District Court of Fairfax County. A hearing was set for October 20, 1995. The debtor then removed the action to the Fairfax County Circuit Court after posting a removal bond in the amount of $49,506.93, representing the entire arrearage owed at that point to the landlord.
On November 4, 1995, Ms. Carter sent the debtor a letter requesting payment of the second-half 1995 Fairfax County real estate taxes. The letter read: Dear Mr. Miller:
The second half of 1995 Fairfax County Real Estate taxes are now due for the premises you lease at 2600 Huntington Avenue, Alexandria, VA.
Amount due = $4,918.93
Please send your check made payable to: "Doris M. Carter, Agency" for the above amount by return mail.
Also send all future rent or insurance checks, made payable in the same manner as stated above.
Sincerely,
/s/
Doris M. Carter
Defendant's Exhibit 13. In response, on November 11, Mr. Miller, the debtor's president, sent a check in the amount of $4,918.93 made payable to Ms. Carter with the annotation "Taxes — 2600 Huntington." The check was deposited into what appears to be the landlord's account on November 16, 1995. Defendant's Exhibit 13.
Prior to a scheduled hearing on the landlord's motion for summary judgment in the unlawful detainer action, the tenant filed its chapter 11 petition in this court on November 24, 1995.
CONCLUSIONS OF LAW
This court has jurisdiction of this controversy under 28 U.S.C. § 1334 and 157(a) and the general order of reference entered by the United States District Court of the Eastern District of Virginia on August 15, 1984. This is a core proceeding under 28 U.S.C. § 157(b)(2)(G).
In the matter before the court, the landlord seeks relief from the automatic stay so that it may proceed with its unlawful detainer action in the state court and regain possession of the premises. Under § 362(a)(1) and (a)(3) of the Bankruptcy Code, the filing of a bankruptcy petition operates as a stay, among other acts, of "the continuation, including the issuance or employment of process, of a judicial *** action or proceeding against the debtor that was *** commenced before the commencement of the case under this title" as well as of "any act to obtain possession of property of the estate." At the request of the party stayed, however, the bankruptcy court may grant relief from the stay
such as by terminating, annulling, modifying, or conditioning such stay —
(1) for cause. . . .
§ 362(d), Bankruptcy Code. As the Fourth Circuit has explained,
The automatic stay gives the bankruptcy court an opportunity to harmonize the interest of both debtor and creditors while preserving the debtor's assets for repayment and reorganization of his or her obligations. According to section 362(d), the bankruptcy court may lift the stay "for cause." Because the Code provides no definition of what constitutes "cause," courts must determine when discretionary relief is appropriate on a case-by-case basis.Robbins v. Robbins (In re Robbins), 964 F.2d 342, 345 (4th Cir. 1992).
Decisions in this district have held that termination of a lease pre-petition constitutes cause for granting relief from stay to permit a landlord to re-enter the leased property. In re Q.T., t/a Quick Trucks Company, 118 B.R. 47 (Bankr. E.D.Va. 1990) (Shelley, J). Here, the landlord asserts that relief is proper because the lease was terminated prior to the debtor filing its bankruptcy petition. As a result, the landlord contends that the debtor no longer has any interest in the property. Consequently, the landlord urges this court to apply the rule set forth in In re Mimi's of Atlanta, Inc., 5 B.R. 623 (Bankr. N.D. Ga. 1980), aff'd, Matter of Mimi's of Atlanta, Inc., 11 B.R. 710 (N.D. Ga. 1981) to the facts presented in this case. In Mimi's, the defendant purchased two restaurants and assumed the obligations under the leases with the plaintiff. The defendant, however, never made any rental payments to the plaintiff. Accordingly, the plaintiff notified the tenants that they would be in default if the arrearages were not cured within 10 days of the receipt of the notice. Since the tenants failed to cure the arrearages, the landlord, pursuant to the lease terms, unilaterally terminated the leases. On the same date as the termination, the landlord sent a letter to the tenants that informed them of the termination. Id., at 625. Shortly after the termination, dispossessory proceedings were initiated in the state court. Before any writs were issued, however, the proceedings were stayed by the debtors' filing of voluntary chapter 11 petitions. In light of the facts presented to it, the court held:
The lease agreements at issue in the instant cases have, without question, been validly terminated, thereby causing all executory elements to have evaporated. The parties agreed prior to bankruptcy that the lease agreements could be unilaterally terminated upon the occurrence of certain events. One of those events, which involved the failure to pay rent, has occurred, and the landlord/Plaintiff thereafter did exactly what the leases provided it must to in order to effect a termination. Accordingly, the debtors became, as of the date of termination, *** tenants-holding-over, and their leasehold interest was reduced to an estate at sufferance.Id., at 628. The decision in Mimi's has been followed in this district. See, In re Tenfield, 12 B.R. 12 (Bankr. E.D.Va. 1981) (Shelley, J.) (Where lessor obtained judgment and writ of possession, and where the lease had been terminated pre-petition, the lessee had no interest in the demised premises, and no executory contract existed which could be assumed). The present case, therefore, turns on whether or not, as a legal and factual matter, the lease was validly terminated pre-petition.
A resolution of this issue in favor of the landlord would be determinative of the debtor's motion to assume the lease, since under § 365(c)(2), Bankruptcy Code, a trustee or debtor in possession may not assume a lease if "such lease is of nonresidential real property and has been terminated under applicable nonbankruptcy law prior to the order for relief.
The lease between the landlord and the debtor provides in pertinent part:
TWENTY:
DEFAULT:
(a)(1) If Tenant shall default in the payment of rent or other payments required of Tenant, or any part thereof and if such default shall continue for five (5) days after the payment shall be due, or (2) if Tenant shall default in the performance or observance of any other agreement or condition on its part to be performed, *** Landlord lawfully may immediately, or at any time thereafter, and without any further notice or demand, terminate this lease and Tenant will forthwith quit and surrender the demised premises, but Tenant shall remain liable as hereinafter provided.
In Virginia, the parties' contract becomes the law of the case unless it violates a rule of law or is against public policy. Winn v. Aleda Const. Co., 227 Va. 304, 315 S.E.2d 193 (1984). When the terms of a contact are clear and unambiguous, the terms will be given their plain and ordinary meaning. Marriott Corp. v. Combined Properties, 239 Va. 506, 319 S.E.2d 313 (1990).
In this case, the lease clearly states that upon default for failure to pay rent, the landlord may terminate the lease if a payment of rent is more than five days late without any "further notice or demand." If the landlord chooses to terminate the lease, then the tenant is required to "forthwith quit and surrender the premises." While no notice, as such, is required as a condition of termination, nevertheless termination is not automatic upon the failure to pay rent, and the landlord must take some action unequivocally terminating the lease. One obvious way of doing so is to send the tenant a notice stating that the lease has been terminated. The landlord did not do so. Instead, the landlord sent the tenant notices that required the tenant to vacate but, for whatever reason, did not terminate the lease.
Not only are the two notices not consistent with each other, but the "Five Days Notice To Pay or Quit" is internally confusing. By its title it suggests an attempt to invoke the provisions of § 55-225, Code of Virginia, infra, which allows a landlord to bring an unlawful detainer action if the tenant fails to pay rent within 5 days "after notice, in writing, requiring possession of the premises or the payment of rent" (emphasis added). The text of the notice sent by the landlord in this case, however, demanded payment "within five (5) days of the default in the payment of such rent" (emphasis added) — a period that in literal terms had already elapsed, since the rent was due on August 23rd, and the notice was sent on August 29th — thereby contradicting the "or" ("Pay Or Quit") of the caption.
Virginia has long held that "a notice to terminate must be clear and unequivocal, leaving no doubt as to the intention of the party giving it." H.N. Patterson v. National Advertising Company, 213 Va. 562, 193 S.E.2d 676 (1973), citing Epes v. Napoleon Palmieri, 181 Va. 332, 25 S.E.2d 279 (1943) (to constitute legal notice under a lease clause relative to whether to terminate a lease, the language must be `explicit and positive'); and C.B. Antrim's Executor v. Parker, 158 Va. 1, 163 S.E. 71 (1932).
Relying on the rules set forth above, the Virginia Supreme Court has recently decided two cases which addressed commercial lease termination. The two leases are at opposite ends of the spectrum. The first lease, in the case of Marina Shores, Ltd. v. Cohn-Phillips, Ltd., 246 Va. 222, 435 S.E.2d 136 (1993), stated that upon the failure of the tenant to make any payment of rent as and when due, the landlord, "may at any time thereafter, with or without notice or demand *** terminate the tenant's right to possession of the Premises by any lawful means, in which case this Lease shall terminate and tenant shall immediately surrender possession to landlord." 246 Va. at 224 (emphasis added). After the tenant defaulted on the rent, the landlord sent a letter to the tenant expressly terminating the lease. The tenant attempted to argue that the letter from the landlord stating that the lease was terminated was not a "lawful means" of termination and that the landlord was required to comply with the statutory five-day notice provision. The court held that the letter was a "lawful means" of terminating the lease within the meaning of the lease agreement. On the other end of the spectrum is the lease in the case of Aiglon Associates, Ltd. v. Allan, 248 Va. 150, 445 S.E.2d 138 (1994). There, the court held that a shopping center landlord did not terminate the lease, triggering the rent acceleration clause, by re-entering the premises after the tenant decided not to open his store or by filing suit in general district court for past due rent. In that case, upon a reentry by the landlord, the lease unambiguously stated: "No such reentry or taking possession of the leased premises by Landlord shall be construed as an election on its part to terminate this Lease unless a written notice of such intention be given to Tenant or unless the termination thereof be decreed by a court of competent jurisdiction." 248 Va. at 152. In determining that the lease had not been terminated, the court noted further that the landlord did not provide the tenant with a written notice of termination and no language in the lease permitted the filing of legal process to be deemed a written notice of termination. 248 Va. at 153. In both cases, the Virginia Supreme Court determined that the lease clauses related to lease termination were clear and unambiguous and that the landlord's actions to notify the tenant of its intentions were proper and in accordance with the lease terms.
§ 55-225, Code of Virginia ("Failure to pay certain rents after five days' notice forfeits right of possession") provides:
If any tenant or lessee of premises in a city or town, or in any subdivision of suburban and other lands divided into building lots for residential purposes, or of premises anywhere used for residential purposes, and not for farming or agriculture, being in default in the payment of rent, shall so continue for five days after notice, in writing, requiring possession of the premises or the payment of rent, such tenant or lessee shall thereby forfeit his right to the possession. In such case the possession of the defendant may, at the option of the landlord or lessor, be deemed unlawful, and he may proceed to recover in the same manner provided by Article 13 (§ 8.01-124 et seq.) of Chapter 3 of Title 8.01.
Unfortunately, in the present case, the two notices sent by the landlord were not so explicit. One — the "pay or quit" notice — states: "The Landlord demands the payment of the above rent and sums within five (5) days of the default *** or require [sic] and demands possession of the aforesaid premises." Plaintiff's Exhibit 2. The other — the notice to vacate — states that the owners "hereby terminate your occupancy *** as described above in the Notice to Pay or Quit [and] hereby require and demand possession of the aforesaid premises thirty days after receipt of this notice." (emphasis added) The notices refer solely to "occupancy," not to lease termination. These terms are not synonymous. Furthermore, these notices, which are both dated August 29, 1995, and were apparently sent together, conflict with one another. While one notice, depending on how it is read, purports to give a five-day cure period before requiring possession, the other demands possession within 30 days after receipt of the notice, regardless of any cure. And while both in one way or another demand possession, neither states that the lease is or will be terminated. In light of the foregoing, this court cannot conclude that Techline Automotive Inc. was given "clear and unequivocal" notice of lease termination. Consequently, this court cannot find that the lease was, in fact, terminated pre-petition.
"Lease termination" and "occupancy" are not terms that are defined either in the lease agreement or in the Virginia statute. In the context of a lease, "termination" has been defined as "an end in time or existence; close; cessation; conclusion *** usually before the anticipated term of the lease." Black's Law Dictionary (6th ed.) The Virginia Supreme Court has defined the effect of a notice to terminate a lease as a "notice *** to put an end to the relation of landlord and tenant." Epes, 181 Va. at 336, citing Antrim's Ex'r. v. Parker, supra. "Occupancy" has been defined as "taking possession of property and use of the same." Black's Law Dictionary (6th ed.).
It was suggested by landlord's counsel in oral argument that, even if there was doubt as to the landlord's intention to treat the lease as terminated, the filing of the unlawful detainer action in the General District Court of Fairfax County for possession should be considered as notice of termination. This court, however, finds no language in the lease that permits the filing of legal process to be deemed a written notice of termination. See Aiglon Associates, supra, 248 Va. at 153 ("We disagree with Allan's argument that Aiglon's pleadings filed in the general district court constituted a notice of Aiglon's intention to terminate the lease. We find no language in the lease that permits the filing of legal process to be deemed a written notice of termination.")
Furthermore, the affirmative actions of the landlord — even after the unlawful detainer action was filed — contradict its assertion that it believed the lease to have been terminated. On November 4, 1995, the landlord's representative, Ms. Carter, sent a letter to the tenant requesting the payment of the second half 1995 Fairfax County real estate taxes "for the premises [Techline] lease[s] at 2600 Huntington Avenue." The letter also clearly directed that " all future rent or insurance checks" were to be paid to Ms. Carter. (emphasis added) Defendant's Exhibit 13. In response, the debtor sent a check in the amount of $4,918.93 directly to Ms. Carter with the annotation "Taxes — 2600 Huntington." The check was subsequently deposited. Defendant's Exhibit 13. Consequently, it is clear that the landlord still considered the tenant to be bound by the lease. The landlord's affirmative actions are inconsistent with one who considers the landlord-tenant relationship to be at an end.
Paragraph 25 of the lease provides:
The Tenant agrees when the same becomes due and payable, to pay all real estate taxes, which are assessed against the demised premises and which are applicable to and become payable during the term of this lease. *** If the Tenant fails to pay any such real estate taxes, which it is obligated to pay pursuant to this lease and if such default shall continue for a period of thirty (30) days after the Landlord shall have given the Tenant notice in writing of the existence thereof, then and in such event the Landlord may pay such real estate taxes together with the interest and penalties thereon and the amount so paid shall be deemed additional rent due and payable by the Tenant to the Landlord.
This situation is quite different from the one faced by the court in General Appliance Storage Co. v. Richmond, Fredericks burg and Potomac Railroad Co., 221 Va. 176, 267 S.E.2d 161 (1980). In that case, the court held that the landlord's acceptance of the tenant's current monthly rent, while the tenant remained in default for past due rent, after the landlord had already explicitly notified the tenant of its intent to terminate the lease in 30 days if the defaults were not cured, did not constitute a waiver of its right to terminate the lease. Quoting Eagler v. Little, 217 Va. 869, 234 S.E.2d 242 (1977), the court said: "The waiver of one forfeiture is of course not a waiver of a subsequent forfeiture: And if the act of forfeiture be continuing, a waiver of a right of re-entry for one breach will not preclude a re-entry for a new continuing breach." 221 Va. at 179. In the present case, had the landlord given the tenant the proper notice of termination, the November payment to the landlord would likely not have been sufficient either to waive the right of termination due to the rent default or to defeat the termination under a theory of equitable estoppel. This court, however, expressly does not rule on this issue because it has already determined that the landlord, while it had a right to terminate the lease for the failure to pay rent, did not terminate the lease.
One final issue that must be addressed — although it was never vigorously pressed — is the landlord's suggestion that the debtor assigned the lease in contravention of the lease terms. On February 28, 1995, Techline Automotive, Inc. formally amended its articles of incorporation to change its name to Techline Automotive, Inc. of Virginia. Defendant's Exhibits 5 and 6. The plaintiffs' motion for relief pleads that the lease was terminated pre-petition due to "tenant's default" prior to the filing of the unlawful detainer action. While the motion itself is vague as to the nature of the default, the preceding paragraphs of the pleading contend, "The Debtor's petition filed herein states that Techline Automotive Inc., of Virginia was formerly known as Techline Automotive, Inc. The Plaintiffs have no knowledge of the existence of a corporation by the name of Techline Automotive, Inc. of Virginia, or of how it comes to possess the Leased Premises. The Plaintiffs have not consented to an assignment of the Lease." While the plaintiffs' trial memorandum argues that the failure to pay rent is the "tenant default" primarily at issue, the plaintiffs continue to maintain that they "suspect *** that the Lease was assigned to another entity contrary to the terms of the Lease."
The lease states that tenant "expressly covenants that it will not assign *** this agreement without the prior written consent of Landlord." It further states, "In the event the tenant hereunder shall be a corporation, any transfer, sale pledge or other disposition of the stock of the Tenant shall be deemed an assignment of this lease and therefore prohibited without the express written consent of Landlord" (emphasis added). The remedy for a default is similarly set forth in the lease: "(2) if Tenant shall default in the performance or observance of any other agreement or condition on its part to be performed and if Tenant shall fail to cure said default within ten (10) days after notice of said default from Landlord, *** Landlord lawfully may immediately, or at any time thereafter, and without any further notice or demand, terminate this lease and Tenant will forthwith quit and surrender the demised remises." There is no evidence in the record suggesting that the landlord, even if it considered the tenant's change of name to be an assignment that required the prior written consent of the landlord, ever sent the tenant — in accordance with the requirements under the lease — a notice of the default indicating that the tenant had 10 days in which to cure the default. Furthermore, the court, in reviewing the unrebutted evidence submitted by the defendant, specifically the Articles of Amendment of Techline Automotive, Inc., concludes that the amendment was solely a change in name which did not involve a transfer, sale, pledge or other disposition of the corporation's stock in contravention of the lease.
In conclusion, for the reasons stated herein, this court finds that the lease was not terminated pre-petition. Consequently, cause does not exist, at the present time, to grant relief from the automatic stay on the ground that the debtor has no rights in the lease. Although the court has determined that the lease was not terminated prior to the filing of the petition, the tenant — by paying the rent into an escrow held by a third party — clearly continues to remain in default of the payment terms explicitly set forth in the lease. However, the amount required to make the landlord whole — $49,506.93 — is currently being held in the registry of the Fairfax County Circuit Court and is available to be paid to the landlord. Accordingly, since there is a reasonable basis to believe that the debtor may prevail on its motion to assume the lease — which of course will require that the debtor cure any existing defaults and provide "adequate assurance" of future performance — the court determines that relief from stay should be denied until the debtor's motion to assume the lease is decided. If, upon hearing that motion (which the court continued to March 12, 1996), the court does not permit the lease to be assumed, the court will consider a renewed motion for relief from the automatic stay.
Paragraph One of the lease provides, "All rents are payable in advance without set-off or deduction of any kind, upon the twenty third (23rd) day of each calendar month of the tenancy at the office of the Landlord, or such other place as the Landlord may from time to time designate."
The debtor in possession has filed a motion in this court to direct that those funds be paid to the landlord.
A separate order will be issued consistent with this opinion denying relief from the automatic stay.