Summary
describing that the requirements for exercising the option agreement were to provide written notice within a stipulated one-month time frame and to pay the stipulated consideration
Summary of this case from In re CoxOpinion
No. 77-2037.
January 30, 1978.
George W. Pigman, Harry McCall, Jr., New Orleans, La., for appellant.
Peter J. Butler, Gayle A. Reynolds, New Orleans, La., for appellee.
Jerry A. Brown, New Orleans, La., for American Can Co.
Joseph E. Friend, New Orleans, La., for Federal Paper Board.
Raymond J. Salassi, New Orleans, La., Harry S. Hardin, III, New Orleans, La., for South Pacific Transport.
Sidney W. Provensal, New Orleans, La., for Farrell, Naulty, Barkley.
David Creigh, Caronado, Cal., for JBC, Inc.
Charles M. Lanier, Harry A. Rosenberg, New Orleans, La., for Hibernia Bank.
Appeals from the United States District Court for the Eastern District of Louisiana.
Before BROWN, Chief Judge, GEWIN and TJOFLAT, Circuit Judges.
Rivercity appeals from certain orders of the Reorganization Court which authorized the trustee of the estate of Jackson Brewing Co., debtor (i) to reject as a burdensome executory contract an option owned by Rivercity to purchase certain real estate and leasehold interests of Jackson, and (ii) to accept as an asset beneficial to the estate an amended lease agreement between Jackson as lessee and Hibernia National Bank as lessor. We affirm.
The orders are dated March 9 and March 25, 1977, respectively. Rivercity also appeals from an order of March 31, 1977, authorizing Hibernia National Bank to dismiss with prejudice its answer to the reorganization petition which alleged that the petition was not filed in good faith. Rivercity has not seriously pressed this issue, and it will not detain us here. Suffice it to say, we believe Rivercity's contentions in this regard to be without merit.
Beer On The Rocks
In October 1974 several trade creditors of Jackson Brewing Company filed an involuntary petition seeking to place Jackson in reorganization under Chapter X of the Bankruptcy Act, 11 U.S.C.A. §§ 501-676. The petition was approved by order dated November 13, 1974, and a reorganization trustee was appointed.
Two interrelated contracts affecting the debtor's real estate are critical to the successful reorganization of Jackson.
In the first of these, dated January 1, 1971, Jackson granted Rivercity, a Louisiana partnership, a five-year option (i) to purchase a strip of land owned by Jackson located on the river side of Decatur Street in New Orleans' French Quarter, and (ii) to acquire the rights of Jackson in a lease between it and Commercial Terminal Warehouse. The total cash consideration for this option was $1,000. Rivercity was to give written notice of its intent to exercise the option between January 1 and 31, 1975, and the closing of the sale was to take place between January 10 and 30, 1976. The purchase price was to be $2,777,128.44.
The members of the Rivercity partnership were Thomas C. Farrell, Jr., Paul A. Naulty, Margaret Perez Barton, and JBC, Inc. When the option was granted, Farrell and Nalty were members of the Jackson board of directors; JBC was a 99% shareholder of Jackson.
See note 7, infra and accompanying text.
The origin of this figure is allegedly the property's depreciated book value as of January 1, 1971.
On January 31, 1975, Rivercity attempted to exercise its option by notifying the trustee of its intent to close the sale on January 30, 1976. The trustee subsequently sought authority from the Reorganization Court to reject the option as an executory contract. Two full days of hearings were held. Uncontradicted evidence, still unchallenged by Rivercity, showed that the fair market value of the property covered by the Rivercity option was at least $5.1 million. The authority requested by the trustee was granted by order dated March 9, 1977, Judge Schwartz entering findings of fact and conclusions of law on March 25, 1977. See "Reasons for Judgment," attached hereto as an appendix.
On October 14, 1975, the trustee filed a plenary action in the Eastern District of Louisiana, William B. Herpel, Trustee, et al. v. The French Eighth, Civil Action No. 75-3185, challenging the option on the basis that it was void ab initio.
At oral argument, the Court was informed that a number of other plenary actions are pending in the District Court with no apparent progress being made or explanations given for the extraordinary delay. These cases are before Judge Gordon and involve basically the same parties, Nos. 75-282, 75-1140, 75-1141, 77-57.
After the option was rejected, Rivercity filed a proof of claim alleging a loss of $3,722,871.56. The following arithmetic probably demonstrates Rivercity's actual opinion as to the property's value:
The second contract was a lease agreement dated December 27, 1949, whereby Commercial Terminal Warehouse, Inc. leased a tract of land to Jackson for a period of 99 years at an annual rental of $22,500. Hibernia National Bank has succeeded to the interests of Commercial and is the present lessor of this property.
The land owned by Commercial is contiguous with the property owned by Jackson which formed the basis of the five-year option agreement. The Commercial-Jackson lease, as noted earlier, was also covered by the Rivercity option.
When the lease was executed, all the stock in Commercial was owned by Edgar B. Fontaine. At his death, the Commercial stock was transferred to the Hibernia National Bank in trust. Upon Commercial's subsequent liquidation, all assets, including the leased property, were transferred to Hibernia as trustee for Fontaine's estate.
In September 1974 Hibernia instituted eviction proceedings against Jackson based on the latter's insolvency. These proceedings were stayed when the Chapter X petition was approved in November 1974. Hibernia answered the petition by denying that it had been filed in good faith and moved to terminate the lease. The trustee took the position that the lease constituted a valuable asset of Jackson and opposed termination. Ultimately, the trustee and Hibernia reached a compromise whereby an escalation clause was added to the lease in exchange for Hibernia's agreement to abandon its demand for cancellation. This compromise was approved by Judge Schwartz on March 25, 1977.
One other bit of history is essential to an understanding of Rivercity's contentions on this appeal. When Jackson began to have financial difficulties, American Can Company, a supplier, allowed Jackson to defer payments. After this extension of credit, Jackson borrowed several million dollars from Whitney National Bank of New Orleans. The Whitney loans were secured by stock pledges and security interests in Jackson's assets. According to Rivercity, the mortgage to Whitney was made and accepted subject to the Rivercity option discussed above. Whitney held a first lien and American held a second lien on the same collateral.
The facts relating to this aspect of the case are particularly complex. Only the bare bones of the story are set forth.
As Jackson's financial condition further deteriorated, American — in order to acquire Whitney's first lien position — bought the Whitney loan and Whitney transferred the pledged stock and all of the security interests, including the mortgage, to American. A strike by Jackson employees and mounting claims of unsecured trade creditors led American to exercise its rights as a pledgee to sell the stock and acquire ownership of all the stock as the only bidder at a sale on June 3, 1974. American thus became the sole stockholder and sole secured creditor of Jackson.
American Can has filed a proof of claim for approximately ten million dollars to which the trustee has objected.
The parties disagree as to the real issue before us. The trustee, American, and Hibernia all contend that the question presented is whether the Reorganization Court properly exercised its discretion in rejecting the Rivercity option as a burdensome executory contract and in accepting the amended lease. Rivercity, on the other hand, strenuously argues that the Court "as a matter of law" had no discretion to exercise.
Rivercity Reply Brief at 2. Indeed, Rivercity concedes that if we find, as we do, that Judge Schwartz had any discretion to exercise, a reversal on the basis of abuse of discretion is not warranted. Id.
Rivercity's argument proceeds as follows. The amount of the mortgage on Jackson's property is more than the present fair market value of the lease and real estate. American has filed a proof of claim asserting a debt in excess of the fair market value, that debt being secured by the mortgage. The trustee's objection to this claim has not been heard. The Reorganization Court has concluded that the option is a burdensome executory contract within the meaning of Section 116(1) of the Bankruptcy Act and has rejected it. However, there is no showing that the option burdens the estate. At this stage such a conclusion is "premature" because no one, other than American, is benefited by the rejection since no assets are being made available to other creditors. If the trustee is ultimately successful in setting aside the mortgage, the option will then become burdensome. Finally, American is contractually subordinated to the right of Rivercity to acquire the property. Therefore, the effect of the order is to decide a dispute between American and Rivercity without allowing Rivercity to be heard.
11 U.S.C.A. § 516(1).
Rivercity also claims that the orders concerning the lease and the good faith issue, see note 1, supra, are similarly premature.
By our action, we do not rule at all one way or the other on the controversy between American and Rivercity.
Rivercity conceded at oral argument that there is absolutely no authority of any kind to support its prematurity argument. And Rivercity has assiduously avoided explaining how an option granted for five years for a consideration of $1,000 to purchase land — worth at least $5.1 million — for $2,777,128.44 could be anything but an onerously burdensome contract to the Jackson estate no matter who, secured or unsecured creditors, ultimately benefits from the rejection.
We view Rivercity's prematurity contention as a transparent attempt to litigate its controversy with American in the Chapter X proceedings. The Reorganization Court properly rejected Rivercity's prematurity contentions and wisely declined to litigate this collateral dispute.
It has generally been held that a court of bankruptcy will not digress, in the administration of a bankrupt estate, to settle collateral disputes. Such a rule is obviously sound. The reason for its existence is to eliminate all extraneous issues from the bankruptcy proceeding and thus secure the early closing of the affairs of the bankrupt estate.
Notwithstanding the urge to decide the controversy between the two creditors of the bankrupt estate is strong, we realize the danger of such a precedent. We fear the effect would be the adoption of a practice which would permit claimants to litigate their differences, which would result in the postponement of the final settlement of bankrupt estates. Creditors who are entitled to dividends should have them and should not be deferred until the judicial disposition of disputes between two creditors whose controversy is of no concern to other creditors or to the estate. If we follow the practice determined by the District Court, the two claimants may litigate their dispute in the proper forum and the referee will be directed to turn the amount of the dividends over to the clerk of such court.
It is true some disputes between creditors may well be disposed of when passing upon the claims filed. In determining what disputes should be litigated, the District Court must be allowed considerable discretion. We are loath to disturb the discretion here exercised, when its effect is to hasten the early settlement of the bankrupt estate.
In re Railroad Supply Co., 7 Cir., 1935, 78 F.2d 530, 532.
For the reasons set forth by us and the attached findings and conclusions set forth by Judge Schwartz which we adopt, we hold that Judge Schwartz had the discretion to issue these orders and that he properly exercised that discretion. Because the reorganization proceedings have been stymied long enough, our mandate shall issue instanter.
See also note 5 as to related plenary proceedings.
AFFIRMED.