Opinion
Case No. 300-03373
September 30, 2000
Attorneys for W. Fred Williams, FARRIS, WARFIELD KANADAY, PLC, Nashville, Tennessee.
MEMORANDUM IN SUPPORT OF VERIFIED MOTION FOR RELIEF FROM STAY
W. Fred Williams, Trustee for the benefit of Highwoods/Tennessee Holdings, L.P. (the "Landlord".), respectfully submits this memorandum in support of its verified motion for relief from stay.
I. FACTUAL AND PROCEDURAL BACKGROUND
The Landlord is the owner of a commercial building known as Harpeth on the Green II and located at 109 Westpark Drive in Brentwood, Tennessee (Verified Motion for Relief from Stay, ¶ 1.) The Landlord leased Suites 190, 430 and 440 of Harpeth on the Green II to the Debtor (the "Property".), pursuant to a Lease Agreement dated May 22, 1996, as amended by First Amendment to Lease dated October 10, 1996 and Second Amendment to Lease dated Jane 10, 1998 (collectively, the "Lease"). ( Id. ¶ 1 Ex. A).
Under § 3(a) of the Lease, the Debtor was required to tender its monthly rental installments to the Landlord "on the first day of each calendar month." ( Id. ¶ 2 Ex. A.) The Debtor, however, failed to pay rent when clue under the Lease in January 2000. ( Id. ¶ 2.) The Landlord so notified the Debtor of its default by letter dated January 27, 2000. ( Id. ¶ 2 Ex. B.) Nevertheless, the Debtor failed to cure this default and also defaulted by failing to pay rent due under the Lease in February 2000. ( Id. ¶ 2.) In fact, the Landlord has not received any rental payments due from the Debtor in the 2000 calendar year. ( Id.)
Section 13 of the Lease expressly provides in pertinent part:
If Tenant defaults by failing to pay rent or other charges as due hereunder and does not cure such default within five (5) days after the due date of the same . . . Landlord may, at its option, at once or at any time thereafter (but only during continuance of such default or condition) terminate this lease by written notice to Tenant. Upon such termination by Landlord, Tenant will at once surrender possession of Premises to Landlord and remove all of Tenant's effects therefrom; and Landlord may forthwith re-enter the Premises and repossess himself thereof, and remove all persons and effects therefrom, using such force as may be necessary, without being guilty of trespass, forcible entry or detainer or other tort.
( Id. ¶ 3 Ex. A.)
As a result of the Debtor's default for failure to pay rent when due, the Landlord exercised its lawful right under § 13 to terminate the Lease and the Debtor's possessory rights to the Property by written notice dated and hand-delivered to the Debtor on March 1, 2000 (the "Notice of Termination"). ( Id. ¶ 4 Ex. C.) In its Notice of Termination, the Landlord further requested that the Debtor immediately vacate the Property, as required under § 13 of the Lease. ( Id. ¶ 5 Ex. C.) The Debtor, however, has refused to surrender the Property voluntarily. ( Id. ¶ 5.)
Consequently, the Landlord filed a detainer warrant against the Debtor in the Williamson County General Sessions Court, Docket No. 05.62983-65-221. ( Id. ¶ 6 Ex. D.) On April 17, 2000, Judge Lonnie Hoover orally granted judgment in favor of the Landlord and against the Debtor for possession of the Property, as well as for $115,360 in unpaid rent, common area maintenance expenses, late charges, and attorney's fees and expenses (the "Detainer Judgment"). ( Id. ¶ 6.)
The Debtor filed this bankruptcy case on April 19, 2000, after the Lease was terminated but before the Landlord could have the Debtor evicted from the Property. ( Id. ¶¶ 7-8.)
II. ARGUMENT A. The Debtor May Not Assume the Lease Because It Was Terminated Before the Debtor's Commencement of Its Bankruptcy Case.
Section 365(c)(3) of the Bankruptcy Code provides that a lease may not be assumed if "such lease is of nonresidential real property and has been terminated under applicable nonbankruptcy law prior to the order for relief." Thus, if a commercial lease is terminated pursuant to applicable state law before the debtor files for bankruptcy, "the lease leaves nothing to be assumed," even if it can otherwise be categorized as "unexpired." In re Memphis-Friday's Associates, 88 B.R. 880, 834 (Bankr. W.D. Tenn. 1988).
The "applicable nonbankruptcy law" in the present case is the law of the State of Tennessee, as set forth in ¶ 41 of the Lease. (Verified Motion for Relief from Stay, Ex. A.) See Memphis-Friday's, 88 B.R. at 834. A lease generally is deemed to be terminated under Tennessee law when the debtor's possessory interests under the lease have been terminated. See In re Shannon, 54 B.R. 219, 220 (Bankr. M. D. Term. 1986) (citing Smith Maurice Karr Realty Company, Case. No. 380-01112, Adv. Proc. No. 380-0323 (Bankr. M.D. Term. Nov. 4, 1980)).
The Memphis-Friday's decision has been recognized as the "seminal case" as to termination of commercial leases under Tennessee law. In re Pyramid Operating Authority, Inc., 144 BR. 795, 809 (Bankr. W. D. Term. 1992). In Memphis-Friday's, the court flatly rejected the proposition that termination of a commercial lease requires actual re-entry by the landlord, commencement of a suit for possession, or issuance of a writ of possession. See id. 88 B.R. at 836-37. The court explained:
The obvious conclusion to be drawn . . . is that in Tennessee a commercial lease is to be construed and enforced as written. In addition, . . . a commercial lease may be terminated by the Landlord for good cause regardless of possession. It is only upon failure of the lessee to surrender the premises pursuant to a notice of termination in accordance with the lease terms that a commercial Landlord may be required to file an unlawful detainer or ejectment action. In fact it has been held that where a lessee remains in possession following default and consequent termination of the lease, the lessee is a "tenant at sufferance" of the Landlord.
Id. at 837 (citations omitted).
The Landlord recognizes that this Court has held that a residential lease does not expire until execution of the writ of possession by service upon the tenant See In re Talley, 69 B.R. 219, 225 (Bankr. M.D. Tenn. 1986) (Lundin, J.). The Court, however, carefully limited its holding in Talley to residential leases, emphasizing that 11 U.S.C. § 865 (c) "prohibits a trustee [or debtor in possession] to assume or assign an `unexpired' lease of non residential real property if the lease `has been terminated under applicable nonbankruptcy law,' There is no similar restriction on the assumption or assignment of a residential lease." Id. 69 B.R. at 223 (citation omitted) (emphasis added in Talley).
As Chief Judge Paine recently recognized, "[t]he Memphis Friday's decision makes clear that if termination was properly executed in accordance with the terms of the Lease, then the lease is properly terminated in the commercial context regardless of possession." In re Synercom Healthcare Systems, Inc., No. 394-08311. slip op. at 9 (Bankr. M.D. Tenn. Dec. 23, 1994) (copy attached). Relying on the Memphis-Fridays decision, Chief Judge Paine found in Synercom that a commercial lease had been terminated under Tennessee law by a pre-petition notice of termination and, therefore, could not be assumed in bankruptcy by the debtor Id.; see also Pyramid Operating Authority, 144 B.R. at 809, 831, 835 (concluding that commercial leases were terminated upon notice of termination).
Likewise, in the present case, § 13 of the Lease expressly granted the Landlord the option to terminate the Lease by written notice, if the Debtor failed to pay rent within five days of the date when such monthly rental payments were due. (Verified Motion for Relief from Stay, ¶ 3 Ex. A) After the Debtor failed to pay any rent in January and February 2000, the Landlord lawfully exercised its right under § 13 to terminate the Lease by written notice dated and hand-delivered to the Debtor on March 1, 2000. ( Id. ¶¶ 2, 4.) Moreover, on April 17, 2000, the Williamson County General Sessions Court orally granted judgment in favor of the Landlord and against the Debtor for $115,360 and possession of the Property ( Id. ¶ 6.) Thus, because the Lease was properly terminated in accordance with its express terms and conditions before this bankruptcy case was ever filed, the Debtor cannot now assume the Lease under § 365(c)(3). ( Id. ¶ 8.)
B. Relief from Stay Is Not Required to Evict the Debtor Because of the Pro-Petition Termination of the Lease.
In the Synercom case, Chief Judge Paine declared:
Relief from the automatic stay is not required under 11 U.S.C. § 362(b)(10) for "a Landlord to obtain possession of property subject to a lease of nonresidential real property which has terminated by the expiration of the stated terms of the lease before the commencement of bankruptcy." This Court finds the automatic stay does not preclude [the Landlord] from taking action to re-enter the property. Because the Lease had terminated according to applicable nonbankruptcy law, prior to the filing of the petition, there remains nothing of the debtor's rights to protect. [The debtor] has no legal or equitable entitlement to the Lease, and therefore the automatic stay has no application. [The Landlord] need no further permission from this Court to evict [the debtor] pursuant to its remedies as stated in the Lease and under state law. The automatic stay does not protect the debtor from enforcement actions of the Landlord.
Id., slip op. at 10 (citations omitted). Accord In re Issa Corp., 142 B.R. 75, 78 (Bankr. S.D.N.Y. 1992). Likewise, it follows in the present case that the Landlord does not require relief from stay to evict the Debtor from the Property in light of the Landlord's termination of the Lease before the Debtor filed for bankruptcy.
C. Relief from Stay, If Necessary, Is Warranted in this Case.
The Landlord acknowledges that some other courts have limited the application of 11 U.S.C. § 362(b)(10) to cases where the term of the lease has expired prior to the filing of the bankruptcy petition without reference to a termination based on default. See, e.g., Pew v. Michigan River Outfitters, Inc., 1994 U.S. Dist. LEXIS 12550, *10 (S.D. Mich. Aug. 9, 1994) (copy attached). Even if it is true that stay relief is necessary where the lease has not expired by its natural terms, relief from the automatic stay is warranted where the lease is not assumable under 11 U.S.C. § 365(c)(3), as is the case with respect to the Lease at issue here. See Synercom, slip op. at 11 ("For any instance that the automatic stay might be in effect which would prevent further eviction proceedings, this Court grants [the Landlord] relief from the stay to enforce its detainer judgment in accordance with state law.").
III. CONCLUSION
In summary, the Debtor has no interest in the Property, and the automatic stay is not in effect with respect to the Property. Alternatively, the Court should grant relief from the automatic stay so that the Landlord can go forward with its state court action to evict the Debtor from the Property.
ATTACHMENT IN THE UNITED STATES BANKRUPTCY COURT FOR THE MIDDLE DISTRICT OF TENNESSEE
IN RE: ) SYNERCOM HEALTHCARE SYSTEMS, INC., ) Chapter 13 ) Case No. 994-08311 Debtor. ) Judge Paine ) ) )
ORDER
In accordance with the memorandum filed contemporaneously herewith, the Court finds that the Lease between Principal Mutual Life Insurance Company and Synercom Healthcare Systems, Incorporated terminated prior to the filing of bankruptcy. Accordingly, this Court ORDERS that Principal Mutual Life Insurance Company's Motion for Relief from the Automatic Stay is hereby GRANTED.
It is THEREFORE, so ordered.
This 28th day of December, 1994. George Paine ______________________________ George C. Paine, II Chief Judge United States Bankruptcy Court
IN THE UNITED STATES BANKRUPTCY COURT FOR THE MIDDLE DISTRICT OF TENNESSEE
IN RE: ) SYNERCOM HEALTHCARE SYSTEMS, INC., ) Chapter 13 ) Case No. 994-08311 Debtor. ) Judge Paine ) ) )
MEMORANDUM I. Introduction
Principal Mutual Life Insurance Company ("Principal") is the lessor under a pre-petition lease under which debtor, Synercom Healthcare Systems, Incorporated ("Synercom") is the lessee. Principal initiated this contested matter by its Motion for Relief from the Stay. Principal asserts that the automatic stay is not applicable under the provisions of 11 U.S.C. § 362(b)(10), but even if the stay is in effect, that grounds for relief from the stay under 11 U.S.C. § 362(d)(1) and (2). More specifically, Principal claims that Synercom has failed to comply with the mandates of 11 U.S.C. § 365(d)(3).
II. Findings of Fact and Conclusions of Law A. Findings of Fact
Eakin Smith, Incorported is the leasing agent for Principal, the named lessor under a lease dated November 3, 1989 and amended in June 24, 1993. The property leased is located in a commercial building in Maryland Farms Office Park in Brentwood, Tennessee. The Lease began in June of 1990, and is to last until July 31, 1998. The Lease required fixed monthly rental payments of $17,416.98 until July of 1993, and thereafter rent increased to monthly payments of $17,677.56 payable on the first day of each rental month.
Synercom defaulted under the terms of its lease by its failure to timely make its rental payment. Principal sent Synercom a letter dated August 2, 1994 which informed Synercom that it had been in default under the terms of the Lease since July 1, 1993, and that if payment in full was not received within thirty days of receipt of the letter, then Tenant's right of possession [would] thereupon cease and terminate.
Synercom made no rental payments and, refused to relinquish possession. Principal therefore obtained a detainer judgment entered in state court on November 21, 1994. Before the writ could be served upon Synercom, Synercom filed this bankruptcy case on December 6, 1994.
Principal submits that the lease was terminated by issuance of the termination letter in compliance with the terms of the lease followed by the obtaining of a detainer judgment and Writ of Possession. Principal argues that whether the rit of Restitution was actually served is irrelevant since the state court detainer judgment irrevocably terminated the Lease and any future right of possession by Synercom. On the other hand Synercom argues that the terms of the Lease and the actions by Principal terminated Synercom's right to possession, but did not terminate the Lease itself. Synercom remained in possession and the Lease has not been terminated as is evidenced by the very language of the Lease itself.
B. Conclusions of Law
11 U.S.C. § 363(c)(3) of the Code provides that a lease may not assumed to the extent that "such lease is of nonresidential real property and has been terminated under applicable nonbankruptcy law prior to the order for relief." This statute makes clear whether a lease has been terminated prior to bankruptcy so as to preclude the trustee or debtor-in-possession from assuming it is a question not of federal bankruptcy law, but of state law. In re Huffman, 171 B.R. 649, 653 (Bankr. W.D. Mo. 1994); In re Memphis-Friday's Assocs., 88 B.R. 830, 834 (Bankr. W.D. Tenn. 1988). In this case, the law of Tennessee controls the issue of termination of this Lease.
Assuming that the terms of a lease are not otherwise illegal, the law in Tennessee is that the language of the lease will be given effect as written In re Memphis-Friday's Assocs., 88 B.R. at 334, T.C.A. § 47-50-112(a)(1994). In construing contracts, the intention of the parties, as discerned from the language of the Lease, controls. In re Pyramid Operating Authority, Inc., 144 B.R. 795, 809 (Bankr. W.D. Tenn. 1992). The words and terms of the subject contract should be given their usual natural and ordinary meaning. Id.
The language of the Lease dealing with termination is reproduced in part below:
If Tenant shall fail to pay any installment of the fixed rent reserved herein or any other charges at the time the same shall become due and payable, although no demand shall have been made for same, or if Tenant shall violate or fail or neglect to keep and perform any of the terms, covenants, conditions or agreements herein contained on the part of Tenant to be kept and performed, other than payment of rent and the same is not cured or corrected within thirty (30) days after written notice thereof or if the leased premises shall become vacant or deserted, or if Tenant shall make an assignment of asserts for benefit of creditors or file a voluntary petition in bankruptcy or be adjudicated bankrupt or insolvent, or if an involuntary petition in bankruptcy or for receivership be instituted against Tenant and the same not be dismissed within sixty (60) days of filing thereof, then, and in each and every such event, and at all times thereafter, at the option of Landlord, Tenant's right of possession shall thereupon cease and terminate, and Landlord shall be entitled to the possession of the leased premises and to re-enter same and expel or remove Tenant and any other person who may be occupying said premises or any part thereof and any personal property or trade fixtures located therein without demand of rent or demand of possession, any notice to quit or of intention to re-enter being hereby expressly waived by Tenant. In the event of such re-entry by process of law or otherwise, Tenant agrees to and shall remain liable for any and all damage, deficiency or loss of rent which Landlord may sustain by such re-entry; and in such case Landlord reserves full power, which is hereby acceded by Tenant, to re-let the leased premises for the benefit of Tenant, in liquidation and discharge, in whole or in part, as the case may be, of the liability of Tenant under the terms and provisions of this Lease.
If Tenant becomes the subject debtor in a case pending under the Federal Bankruptcy Code, Landlord's right to terminate this Lease under this paragraph shall be subject to the applicable rights, if any, of the Trustee in Bankruptcy to assume or assign this Lease as than provided in the Federal Bankruptcy Code. The failure of the Trustee to effect such assumption or assignment hereof within the applicable time period provided in the Federal Bankruptcy Code shall conclusively and irrevocably constitute the Trustee's rejection of this Lease and waiver of any rights of the Trustee to assume or assign this Lease unless said Trustee . . . Should the Trustee fail to comply with the provisions of the Federal Bankruptcy Code governing the assumption or assignment of this Lease or should the Trustee reject this Lease, then Landlord shall have the right to terminate this Lease by giving thirty (30) days prior written notice to Tenant.
Synercom asserts that Principal's compliance with the above language merely terminates its right of possession, but Principal argues that the language terminates the Lease itself, and furthermore, that termination of the right of possession is tantabount to termination of the Lease.
In re Memphis-Friday's Assocs., 88 B.R. 830 (Bankr. W.D. Tenn. 1988) discussed in depth the issue of termination of commercial leases. In that case, the Chapter 11 debtor sought to assume a commercial lease on property which housed a restaurant. The threehold issue to be decided was whether the lease had been effectively terminated under applicable state law prior to the entry of the order for relief.
The lease gave the landlord the right to terminate in the event of a default by the tenant after providing an opportunity to cure within a specified period of time. Contrary to the terms of the lease, the debtor undertook renovation without prior permission of the landlord, neglected to provide the landlord with the required specifications for the work, and failed to provide the required labor, performance and material bond payments. A materialmen's lien was taken against the property, and because the Debtor had failed to meet its tax obligations, the Tennessee Department of Employment Security placed a lien against the primises. The Debtor was also in arrears on rental payments. The landlord sent a "Notice of Termination and Notice of Additional Defaults" stating that the lease would terminate on a certain date. The debtor argued that despite the above defaults, that the lease had not been properly terminated under Tennessee law, because termination required actual re-entry by the landlord, commencement of a suit for possession, or issuance of a writ of possession.
In finding that the Lease in question had been terminated prior to the order for relief, Judge Brown held that:
[I]n Tennessee a commercial lease is to be construed and enforced as written. In addition, . . . a commercial lease may be terminated by the lessor for good cause shown regardless of posession. It is only upon the failure of the lessee to surrender the premises pursuant to a notice of termination in accordance with the lease terms that a commercial lessor may be required to file an unlawful detainer or ejectment action. In fact, it has been held that where a lessee remains in possession following default and consequent termination of the lease the lessee is a "tenant at sufferance" of the lessor.
The differentation made between commercial and residential leases was a critical linchpin in the Memphis-Friday's decision. The Court in Memphis-Friday's found that the debtor in that case had erroneously relied upon cases dealing with residential rather than commercial real estate. The Court earmarked the differences between commercial and residential leases:
In re Talley, 69 B.R. 219 (Bankr. M.D. Tenn. 1986) held that a residential lease does not expire until execution of the writ of possession by service upon the tenant in the residential contact (emphasis added). This Court in In re Shannon, 54 B.R. 220 (Bankr. M.D. Tenn. 1985) had earlier found that termination was "not effective until the movant's judgment against the debtor had been finalized by writ of possession." The Talley decision makes explicit that execution of the Writ terminates the landlord tenant relationship, and prior to that time, the tenant in the residential context has many and varied right. Talley, 69 B.R. at 223.
the cases cited by the Debtor, involve a determination of when a Debtor's leasehold or freehold interest in residential real estate "expired" or "forfeited" rather than a determination of when a nonresidential lease is "terminated" for purposes of Section 365(c). Accordingly, these cases stand for the proposition that a freehold interest is not forfeited prior to foreclosure sale and that a lease is not "expired" prior to the issuance of a writ of possession pursuant to Tennessee law and when, for purposes of
Section 365(a) of the Bankruptcy Code, the subject property is residential.
Memphis-Friday's, 88 B.R. at 836. 11 U.S.C. § 365(c), "prohibits a trustee [or debtor-in-possession] to assume or assign a `unexpired' lease of non residential real property if the lease has been terminated under applicable nonbankruptcy law. There is no similar restriction on the assumption or assignment of a residential lease." In re Talley, 69 B.R. 219, 223 (Bankr. M.D. Tenn. 1986) (emphasis added). Therefore, for this and other reasons the Memphis-Friday's court, found that the residential cases relied upon by the debtor were not relevant in the commercial lease context. Memphis-Friday's, 88 B.R. at 836.
Pyramid Operating Authority, Inc., 144 B.R. 795, 810 (Bankr. W.D. Tenn. 1992) further emphasizes the distinction between residential leases and commercial leases.
In this case, Principal followed the procedures set forth under the terms of the Lease for notice of termination. When Synercom refused to vacate, Principal obtained a detainer judgement in state court. Upon the refusal once more of Synercom to vacate, Principal applied for, and was granted a Writ of Restitution. Before the writ could be served, Synercom filed bankruptcy and claimed the protection of the automatic stay.
A judgment for unlawful detainer entitles a landlord to possession of the land described in the detainer warrant. T.C.A. § 29-28-124 (Michie 1980 Supp.). A Writ of Possession or Restitution may issue to enforce the detainer judgment T.C.A. § 29-18-127 (Michie 1980 Supp.). The writ directs the local sheriff or constable to remove the defendant from the property and put the plaintiff in peacable possession. T.C.A. § 29-28-127 (Michie 1980 Supp.).
Under the existing case law, and the language of the Lease in this case, it is the opinion of this Court that the commercial lease was terminated under applicable Tennessee law prior to the filing of bankruptcy, and is therefore not subject to the automatic stay provisions or potentially assumable. The Memphis Friday's decision makes clear that if termination was properly executed in accordance with the terms of the Lease, then the lease is property terminated in the commercial context regardless of possession. Nonetheless, even if the letter of termination did not terminate the Lease, Principal obtained a state court detainer judgement which became final on the tenth day after entry by operation of state law. Following that period, Principal then procured the Writ of Restitution in order to enforce its detainer judgment. Although bankruptcy was filed before service of the writ, the Memphis Friday's decision clearly indicates that in the commercial context, the Lease had been terminated prior to bankruptcy by applicable nonbankruptcy law.
T.C.A. § 29-18-126; T.C.A. § 29-28-128 (Michie 1980 Supp.).
Relief from the automatic stay is not required under II U.S.C. § 362(b)(10) for "a lessor to obtain possession of property subject to a lease of nonresidential real property which has terminated by the expiration of the stated terms of the lease before the commencement of bankruptcy." This Court finds that the automatic stay does not preclude Principal from taking action to re-enter the property. Because the Lease had terminated according to applicable nonbankruptcy law, prior to the filing of the petition, there remains nothing of the debtor's rights to protect. Synercom has no legal or equitable entitlement to the Lease, and therefore the automatic stay has no application. Principal needs no further permission from this Court to evict Synercom pursuant to its remedies as stated in the Lease and under state law. The automatic stay does not protect the debtor from enforcement actions of the lessor. In re Memphis-Friday's Assocs. 88 B.R. at 842, 11 U.S.C. 362(b)(10); see also In re Irsa Corp., 142 B.R. 75.78 (Bankr.S.D.N.Y. 1992) (bankruptcy courts must "give preclusive effect to a state court's judgment termination a least prepetition and awarding possession of the premises to the landlord").
Out of an abundance of caution, and in the event that 11 U.S.C. 362(b)(10) did not include leases which have not expired by their natural terms, but rather by termination in accordance with the default provisions of the Lease, Principal requested that relief from the stay be granted in order to proceded with the eviction of Synercom. For any instance that the automatic stay might be in effect which would prevent further eviction proceedings, this Court grants Principal relief from the stay to enforce its detainer judgment in accordance with state law.
III. Conclusions
In light of the foregoing, this Court is satisfied that the subject Lease was terminated under Tennessee law prior to the entry of the order for relief, and is thereby nonassumable under 11 U.S.C. § 365. Furthermore, this Court finds that the automatic stay protection is not available to Synercom under the Code provisions of 11 U.S.C. § 362(b)(10) which limits the effect of the stay with respect to nonresidential real property leases. In the event that the stay remains in effect in any form, Principal is hereby granted relief from the stay to pursue eviction of Synercom pursuant to the terms of state law. Principal's Motion for Relief from Stay is, therefore, GRANTED.
It is, THEREFORE, so ordered.
This __ day of December, 1994.
George Paine ______________________________ George C. Paine, II Chief Judge United States Bankruptcy CourtATTACHMENT 1994 U.S. Dist. LEXIS 12550 printed in FULL format. ROBERT C. PEW, III, and STEPHEN D. PHINNEY, Appellants, v. MICHIGAN RIVER OUTIFITTERS, INC., Appellee. In re: MICHIGAN RIVER OUTFITTERS, INC., Debtor. Case No. 1:94-CV-124 UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF MICHIGAN, SOUTHERN DIVISION 1994 U.S. Dist. LEXIS 12550 August 9, 1994, Decided
PRIOR HISTORY [*1] Bankruptcy Case No. HG 93-8522
JUDGES: McKEAGUE
OPINION BY: DAVID W. McKEAGUE
OPINION: MEMORANDUM OPINION
Appellants Robert C. Pew, III, and Stephen D. Phinney are now before the Court on appeal from the United States Bankruptcy Court for the Western District of Michigan. Appellants appeal the order entered by the Honorable Laurence E. Howard, U.S. Bankruptcy Judge. on January 3, 1994, which denied appellants' motion for lift of stay. This Court has jurisdiction to hear the appeal pursuant to 28 U.S.C. § 158(a).
FACTS
Appellants ("lessors") are the owners of real property located in Rockford, Michigan. The building on that property was leased to the debtor in this matter, Michigan River Outfitters, Inc. ("MRO", "lessee". or "tenant"), pursuant to a non-residential lease dared November 14, 1992. The lease bad a ten-year term. MRO operates a retail store out of the building which specializes in the sale of fly fishing equipment and provides guide services.
Under the terms of the lease, MRO was responsible for rent payments, both base rent and percentage rent calculated as a percentage of gross sales. Pursuant to the percentage rent requirement, MRO was required to deliver [*2] to the appellants, within thirty days following the end of each month, a written statement that showed the amount of gross sales for that month. Payments were to be made at the appellants, business address. MRO also had the obligation to pay all federal, state, and local taxes, and to provide the appellants with various financial records and reports.
Paragraph 7 of the lease specified the various ways MRO could default under the terms of the lease. First, a default occurred if MRO failed, after twenty days written notice, to pay any installment of rent. Second, a default arose if MRO failed, after thirty days written notice, to comply with any term, provision, covenant, or condition of the lease other than the payment of rent. Third, P7(c) stated that MRO would default if MRO "shall become bankrupt or insolvent, or shall make a transfer in fraud of creditors, or shall make an assignment for the benefit of creditors."
The lease also specified what constituted "sufficient notice" under these provisions. Under P 6, notice was deemed sufficient if it was in writing and seat by mail to the other party's business address as provided in the lease.
Paragraph 8 set forth the appellants' remedies [*3] in the event of default. Under that section, if MRO defaulted, appellants, as the lessors, bad the option to:
(a) Terminate this Lease, in which event Lessee shall immediately surrender the Premises to Lessor, and if Lessee fails to do so, Lessor may, without prejudice to any other remedy which it may have for possession or arrearage in rent, repossess the Premises and evict Lessee . . .
(b) Repossess the Premises and evict Lessee and any other person who may be occupying said Premises or any part thereof. and relief the Premises and receive rent therefor. . . . No such entry or taking possession of said Premises by Lessor shall be construed as an election on its part to terminate this Lease unless a written notice of such intention be given to Lessee or unless the termination thereof be declared by a court of competent jurisdiction.
The same section also stated in P 8(c) that:
Pursuit of any of the foregoing remedies shall not preclude pursuit of any of the other remedies herein provided, or any other remedies provided by law or equity. nor shall pursuit of any remedy herein provided constitute a forfeiture or waiver of any rent due to Lessor hereunder, or of [*4] any damages accruing to Lessor by reason of the violation of any of the terms, provisions, or covenants herein contained, nor shall pursuit of any remedy herein provided be deemed or construed to constitute a waiver of any other violation or breach of any of the terms. provisions and covenants herein contained.
On September 10, 1993, counsel for the appellants notified Timothy Fox, the president of MRO, sole director, and 80% shareholder, by letter that MRO was in default under the terms of the lease. The letter stated that MRO had violated P 7(c) of the lease. The letter did not specify how MRO was alleged to have violated that provision. It simply stated that the lease was terminated effective immediately.
After this initial letter, another letter was sent on September 28, 1993. This letter was sent by Boardman River, Inc., which apparently operated as an agent of appellants, although this was not clear from the letter itself. The letter stated that the percentage rent payment was over 200 days delinquent, and that MRO would be in default if payment was not received within twenty days. Termination of the lease was not mentioned. The following day, September 29th, MRO properly [*5] tendered a check for the October base rent, which was accepted by the appellants.
On October 6, 1993, a final letter was faxed to the attorney for MRO by counsel for the appellants. The letter was not sent to MRO's business address. In the letter, counsel detailed the many ways MRO was alleged to have violated the provisions of the lease. According to the letter, MRO was in default for failure to produce financial reports and records. failure to pay the percentage rent, failure to pay federal and state taxes. and making of transfers in fraud of creditors. The letter concluded that appellants had decided to terminate the lease and proceed with the repossession of the premises. Some time later, on October 20, 1993. after the close of business, MRO delivered a check to appellant Pew's personal residence in an attempt to pay the percentage rent due. The check was refused. n1.
n1 During the October 21st hearing in state court. counsel for the appellants initially stated this check for the percentage rent was refused as it was late, falling outside the twenty-day notice period for payment of rent, and constituted only a partial payment of the percentage rent due. Later in the hearing, counsel also stated, explicitly, that the check was not a proper payment because it was not delivered to the appellants' business address as provided in the lease.
[*6] Appellants commenced a state district court action to evict MRO from the building on October 8, 1993. An initial hearing in that case was held on October 21st. Toward the end of the hearing, appellants' counsel questioned the state judge, "You did find that the termination of the lease we're entitled to immediate surrender of the premises?" Judge Servaas R. Servaas explicitly answered no. Instead. Judge Servaas found that appellants had provided MRO with twenty days written notice of default and that MRO had failed to pay the percentage rent as required. Judge Servaas further concluded that the render of the percentage rent on October 20th at Mr. Pew's residence was ineffective under the terms of the lease. The state district judge refrained from rendering a final decision until he had time to consider MRO's claim that appellants waived the right to terminate the lemon October 6th by accepting base rent for the month of October. A second hearing was scheduled.
On October 29, 1993. MRO filed for bankruptcy. The second state court beating was held on November 1, 1993. At that second hearing, MRO did not assert any defenses, choosing instead to rely on the existence of the automatic [*7] stay pursuant to the bankruptcy proceedings. Judge Servaas allowed appellants to proceed with their eviction action, recognizing that the automatic stay only prevented the parties, not the state court. from taking action. The judge then ruled that there bad been no waiver of the October 6th letter of termination although the appellants had accepted base rent for the month of October on September 29th. Appellants were subsequently awarded a judgment for possession of the property. However, the bankruptcy court enjoined appellants from taking further action in state Court to dispossess MRO of the premises, pursuant to the automatic stay.
Appellants then filed a motion for lift of stay in the bankruptcy court. Hearings were held on the motion on December 7th and December 21st. Judge Howard denied the motion in a ruling from the bench on the 21st, and entered an order consistent with that ruling on January 3, 1994. it is that order which is the subject of the appeal now before the Court.
DISCUSSION
This appeal presents essentially one issue for resolution: was the lease properly terminated prior to the filing of the bankruptcy petition by MRO? If the lease was properly terminated, [#8] then appellants would be entitled to relief from the stay and the bankruptcy trustee would be unable to assume the lease. Appellants contend that the bankruptcy judge erred in finding that the lease bad not been terminated prior to the bankruptcy filing, and thus erred in denying the motion to lift from stay.
On appeal, findings of fact by the bankruptcy court are not to be overturned unless they are "clearly erroneous." Bank. R. 8013. Questions of law, however, are entitled to de novo consideration. In Caldwell, 851 F.2d 852, 857 (6th Cir. 1988); In re Zwagerman, 125 B.R. 486 (W.D. Mich. 1991). Thus, Judge Howard's determination to deny the motion to lift the stay is subject to plenary review. Applying this standard, the Court finds that the determination of the bankruptcy court to deny the motion shall be reversed.
Judge Howard's decision to deny appellants' motion to lift the stay was premised on two grounds. First, Judge Howard determined that the lease did not constitute an exception to the automatic stay provisions under 11 U.S.C. § 362, as the ten-year term of the Lease [*9] bad not expired prior to the bankruptcy filing. Second, Judge Howard ruled that the lease had not been properly terminated, and thus could be assumed by the trustee in bankruptcy as an executory contract pursuant to 11 U.S.C. § 365. Appellants contend that the court erred with respect to both conclusions. The Court considers both bases for the order of the bankruptcy court in turn.
I. Exception to Automatic Stay
11 U.S.C. § 362 governs the imposition of the automatic stay upon the filing of a petition for bankruptcy. Under that provision, certain matters and contracts are excepted from the operation of the stay. Of relevance to this appeal, the filing of a petition does not operate to stay:
any act by a lessor to the debtor under a lease of nonresidential real property that has been terminated by the expiration of the stated term of the lease before the commencement of [a bankruptcy case] to obtain possession of such property.
11 U.S.C. § 362(b)(10). Appellants maintain that the lease was properly terminated prior to the bankruptcy filing, and thus that they are [*10] entitled to relief from the operation of the stay under § 362(b)(10).
The bankruptcy court considered this argument and rejected appellants' position. Judge Howard ruled that the clear language of § 362(b)(10) provides that the lease must have terminated by the expiration of the slated term. The judge found that the "stated term" referred to was only that term which provided for the duration of the lease. Since the lease was for a ten-year term, Judge Howard concluded that the lease bad not expired prior to the petition for bankruptcy for purposes of § 362(b)(10), and thus that appellants were not entitled to relief from the stay under that provision.
Appellants contend that Judge Howard erred in finding that termination under § 362(b)(10) could only occur when the duration of the lease expired. They maintain that termination for purposes of exception to the stay can occur when the lease is terminated for violation of obligations under the lease. Appellants cite no authority for this proposition, however. The Court sores that the commentators appear to side with Judge Howard's interpretation of the provision. See, e.g., George M. Treister, et. al, Fundamentals of Bankruptcy Law [*11] 221 (3d ed. 1993) ("Apparently, the automatic stay still applies when such lease terminates because of default or for some reason other than expiration of the stated term."). Moreover, even if Judge Howard had erred, the relevant question would still remain whether the lease bad been properly terminated prior no the filing of the bankruptcy petition. That issue is addressed in the following section.
II. Assumption of Lease by Trustee
Appellants next appeal Judge Howard's decision with respect to assumption of the lease by the trustee pursuant to 11 U.S.C. § 365(c)(3). Under that provision. the mince my not assume an unexpired lease of the debtor if "such lease is of nonresidential property and baa been terminated under applicable nonbankruptcy law prior to the order for relief." 11 U.S.C. *365(c)(3). The bankruptcy court determined that the lease bad not been properly terminated, and thus held that it was not precluded from being assumed under § 365. Accordingly, the motion for lift of stay was denied on this basis as well. Appellants contend this conclusion was erroneous.
Appellants make much of the fact [*12] that neither dispossession of the premises by the tenant nor a final judicial determination that a Lease was validly terminated prepetition are necessary to effect a termination for purposes of § 365(c)(3). Appellants argue that they need not get a final determination in court and dispossess the tenant of the premises in order to terminate the lease under Michigan law and § 365. Appellants are correct in their argument. See In re Escondido West Travelodge, 52 B.R. 376, 379 (S.D. Cal. 1985) ("It is possible to define termination in such a way that events sufficient to constitute termination of a lease ocrur long before a court determines that the termination is valid under state law."); In re Studebaker's of Ft. Lauderdale Ltd., 73 B.R. 217, 219 (Bank. N.D. Fla. 1987)("If the lease is thus terminated, as opposed to the tenant being dispossessed of the premises. then the trustee is precluded from assuming it. The presence of a slight equitable interest by virtue of possession of premises by a debtor has no bearing whatsoever on the issue of the assumability of an unexpired lease."); In re Foxfire Inn of Stuart, Florida, Inc., 30 B.R. 30, 31 (Bankr S.D. Fla. 1983) [*13] ("The termination before bankruptcy of a lease pursuant to its terms and applicable State law results in its expiration, even if . . . the tenant remains in possession as a tenant at sufferance and the landlord has instituted but not yet concluded an eviction proceeding."); In re Mind's of Atlanta, Inc., 5 B.R. 623, 628-29 (Bankr. N.D. Ga. 1980) (landlord properly terminated lease pursuant to provisions of lease after tenant defaulted for failure to pay rent, thus there was no § 365 executory interest that could be assumed). But see In re Fontainebleau Hotel Corp., 515 F.2d 913, 914 (5th Cir. 1975) ("The law of Louisiana requires legal proceedings against a delinquent lessee and a judgment of the proper court before possession may be obtained. Thus the cancellation of the lease for nonpayment of rent is not effective until a court has ordered termination and granted possession."). The weight of the caselaw holds that appellants need not complete legal action and dispossess MW) of the premises to terminate the lease for purposes of § 365(c)(3). n2
n2 The Court thus need not consider appellants' argument that they are entitled to relief pursuant to 11 U S.C. § 365(b)(1). Appellants argued in their brief that the tenant could not assume the lease under § 365(b)(1) as MRO did not provide assurance that it could cure the defaults and comply with the terms of the lease in the future.
[*14]
However, this issue is simply not relevant to this appeal. Judge Howard implicitly assumed in his ruling from the bench that the lease could be terminated for purposes of § 365(c)(3) by proper application of the lease's own default, notice, and termination procedures. Despite appellants' contentions, there is no suggestion in Judge Howard's ruling that a judicial determination is necessary to effectively terminate the lease. Thus. Judge Howard essentially sided with appellants on this point. The only relevant issue is whether the lease was in fact terminated under the applicable provisions and Michigan Law. On that question, Judge Howard considered the actions of the appellants and determined that they did not properly terminate the lease prior to the filing of the petition for bankruptcy on October 29, 1993.
Judge Howard first examined the letter of September 10, 1993, to determine whether that letter constituted a valid termination of the lease. The September 10th letter stated only that P 7(c) of the lease bad been violated and indicated that appellants were terminating the lease effective immediately. Paragraph 7(c) provides that default occurs if MW) shall become bankrupt or [*15] insolvent, or shall make a transfer in fraud of creditors, or shall snake an assignment for the benefit of creditors. Judge Howard ruled that this letter was too vague, the reference to P 7(c) too broad. to constitute proper termination. The bankruptcy court cited no support for this conclusion, however.
At first glance, it appears that Judge Howard's ruling on this point was in error. Paragraph 7(c) does not require notice. nor does it provide a period of time in which the tenant can effect a cure, prior to default. Under this provisions default apparently occurs the moment the lessee becomes bankrupt. makes a fraudulent transfer, or tenders an assignment for the benefit of creditors. Even if notice were required to declare the tenant in default pursuant to 7(c), proper notice would have been sent in this case. Written notice was sent to MRO's business address; there is no additional requirement that lessors provide MRO with detailed or descriptive notice of the provisions violated or the acts which constituted a default. Notice of termination is generally effective so long as it is unequivocal and not subject to any misunderstanding. See 51C C.I.S. § 89(5)(a) (reviewing cases). [*16]
However, despite the fact that the letter satisfied the notice requirements, the notice of termination may well have been too vague in light of the language particular to P 7(c). Under 7(c), one ground for default arises where the tenant becomes bankrupt or insolvent. This basis for default, however, is unenforceable after the petition for bankruptcy is filed. The Bankruptcy Code specifies that:
Notwithstanding a provision in an unexpired lease . . . [a] lease may not be terminated or modified . . . at anytime after the commencement of the [bankruptcy] case solely because of a provision in such . . . lease that is conditioned on —
(A) the insolvency or financial condition of the debtor at any tint before the closing of the case;
(B) the commencement of a [bankruptcy] case . . .
11 U.S.C. § 365(e)(1); see 11 U.S.C. § 363(1). Since one clause of P 7(c) thus cannot serve as the basis for default in certain circumstances, appellants should have clarified which clause they were relying on in the termination notice in order to make the notice clear and to avoid any misunderstanding. Judge Howard's [*17] decision that the letter of September 10, 1993, was too vague to constitute sufficient notice of termination may well have been correct.
Regardless of whether this first letter was effective to terminate the lease, however, appellants waived any notice by their actions in sending the second letter. The second letter was mailed on September 28, 1993. This letter was not sent by the appellants, but rather by Boardman River, Inc., a company which was apparently acting on behalf of the appellants. This agency relationship was not apparent from the letter, however. More importantly, the letter merely notified MRO that the percent— age tent was over 200 days delinquent; there was no attempt whatsoever to terminate the lease.
Judge Howard concluded that the September 28th letter was insufficient to effect termination. The Court agrees. There is no mention of termination in this second kiter. Further, assuming the first letter was sufficient to effect termination, this letter operated to waive that initial notice. Michigan courts have ruled that through certain actions, a landlord can lead the tenant to believe that further proceedings regarding termination are not forthcoming. See First Forest of Blackman v. Smith, 112 Mich. App. 421, 426, 316 N.W2d 442 (1982) [*18] (landlord waived notice to terminate by accepting rental payments for a period of time subsequent to the date specified in the notice). Notice that percentage rent was due could reasonably be viewed as waiving the first notice of immediate termination pursuant to P 7(c).
Furthermore, appellants' actions in accepting the base rent payment for the month of October on September 29, 1993. may have also constituted a waiver. Park Forest, 112 Mich. App. at 426; see also Aspen Enterprises, Ltd. v. Bray, 148 Mich App. 9, 13, 384 N.W.2d 65 (1935) ("In Park Forest, this Court stated that. by accepting rental payments for a period of time subsequent to the date specified in the notice to terminate, the landlord teals the tenant to believe that farther proceedings regarding the termination of the tenancy are not forthcoming."). Appellants did nothing when they accepted the October base rent to indicate that they were reserving their termination rights pursuant to the September 10th letter. See Aspen Enterprises, 148 Mich. App. at 13 (landlord can avoid [*19] waiver by accepting payment with an express reservation of rights under the notice to terminate). They thus sent a signal by way of their actions that the leasing arrangement between the two would continue.
Appellants make two arguments in support of their contention that notice of termination was not waived by their subsequent conduct-First, they contend that the waiver rationale set forth in the Park Forest case, cited above, is inapplicable to the present case. Park Forest involved a residential lease, appellants note, and thus has no applicability so the circumstances surrounding a nonresidential lease. According to appellants, 11 U.S.C. § 305 was drafted to focus exclusively on nonresidential leases, and thus cases which deal with residential Leases are of no import. This argument is without merit. Although appellants are correct that § 365 was drafted so deal with nonresidential leases, this fact baa no bearing on whether MRO's lease was validly terminated pursuant to Michigan law. Park Forest clearly held that in Michigan, notice of termination is waived where a landlord takes certain types of actions which lead the tenant to [*20] believe that further termination proceedings are not forthcoming. Park Forest, 112 Mich. App. or 426. Although that ruling was rendered in she context of a residential lease, there is nothing in the decision which indicates that the ruling is limited to such a context. The Court notes that where a nonresidential lease is at issue, the same concerns govern. It is still inconsistent tent for a landlord to terminate a lease, and then take action which suggests that the landlord has changed its mind. Moreover. the Park Forest court relied on several casts that involved nonresidential leases to support its holding. See Id. w 426-28 (citing to Patterson v. Carrel, 171 Mitch. 296, 137 N.W. 158 (1912), Quality Materials of Tangipahoa v. Labarama, Inc., 301 So.2d 1285 (La.App. 1978), Pollock v. Adams, 548 S.W.2d 239 (Mo.App. 1977), and Village Development Co., Ltd. v. Hubbard, 214 N.W.2d 178 (Iowa 1974), which all involved nonresidential leases).
Second, appellants [*21] contend there was no waiver, as under P 8(c) of the lease. pursuit of any remedies by the lesson does not preclude pursuit of any other remedies provided for in the lease, nor does it forfeit or waive any rent or other obligations due under the terms of the lease. Paragraph 8(c), however, is simply irrelevant to the waiver of notice issue. There is no question but that if appellants had pursued any of the remedies set forth in P 5. they would still be free to pursue other remedies or demand that MW) continue to meet its obligations. For example. had appellants followed up on the September 10th letter by exercising their right to evict MRO and repossess the premises. they would still have the right to pursue other remedies such as collecting the rent due to them. In this case, however, "remedies" are not the issue; notice of default and termination is. Nothing in P 8(c) permits the appellants to give notice of termination, but then take action which indicates that termination is no longer forthcoming. The Court concludes that appellants waived any notice of termination which may have appeared in the first letter of September 10, 1993. by virtue of their subsequent actions. n3.
n3 As a final note on this issue of waiver, the Court notes that it makes no sense to terminate a lease under one provision, then a few days later provide twenty days in which to pay rent under another provision. There would be no reason for a tenant to pay rent pursuant to the latter notice if the lease had already been terminated by operation of the first notice. The Court finds that any reasonable tenant who received a second notice indicating that the tenant had twenty days to pay the rent would conclude that the landlord bad changed its mind about the earlier notice of termination.
[*22]
The final letter was dated October 6, 1993. This particular letter, sent by appellants' lawyer. stated in great detail the provisions of the lease which MRO was alleged to have violated. It concluded that appellants had opted to terminate the lease and proceed with repossession of the premises. The letter does appear to constitute valid notice of termination. However, the Court notes that it was not sent to MRO's business address as required by the notice provision of the lease, but was instead sent to MRO's attorney, Paul Fox. Mr. Fox is the brother of MRO's president, Timothy Fox. The failure to send this notice to the proper address was not addressed by Judge Howard during the bankruptcy court proceedings.
If this Court were to adhere to a technical interpretation of the lease, the failure to send notice to MRO's business address would render the termination invalid. On appeal, MRO argues for just such an interpretation. Appellants themselves have previously taken an analogous position. During the first state court hearing. counsel for the appellants argued that because the tender of percentage rent on October 20, 1993. was not made at the proper address, it did not constitute [*23] a valid payment under the lease. The Court is reluctant however, to hold the parties to such narrow requirements. In this particular instance, it appears notice was properly given. Pursuant to the Michigan Rules of Professional Conduct, a lawyer may not communicate about the subject of the representation with a party whom the lawyer knows to be represented in the matter by counsel. See M.R.P.C. 42. Although litigation between appellants and MRO had not yet commenced — the state court eviction proceeding was not filed until October 8, 1993, two days later — counsel for appellants appears to have acted properly in delivering the notice to Paul Fox, MRO's attorney, rather than to MRO itself. An adversarial relationship appears to have developed. Accordingly, the Court finds that notice was properly made on October 6, 1993.
Even if the Rules of Professional Conduct did not prohibit direct communication by an attorney with a party represented by counsel, notice would still have been proper. The notice provision was designed to ensure that both parties to the lease agreement were fully aware of a default and termination. In this case, the notice delivered by appellants' counsel [*24] clearly did just that. The notice was deficient only in that it was sent to art improper address; otherwise, it complied with all relevant provisions. The recipient of the notice was MRO's attorney, and the brother of MRO's president, sole director. and 80% shareholder. The notice set forth in great detail the provisions which had been defaulted and the conduct which triggered the default. It was unequivocal and not subject to any misunderstanding. See 51C C.J.S. § 89(5)(a). Moreover, the Court notes that there is no claim that MRO was not fully aware of the contents of the October 6th letter. In these circumstances, it is clear that service of notice of termination upon MRO's counsel was sufficient to notify MW) of appellants' intent to terminate the lease. n4
n4 MRO contends that any purported termination was not immediately effective, as under the lease MRO was entitled to various grace periods. Lessee correctly states that under the default provision, default only occurs if lessee fails, after twenty days written notice, to pay any rent due, or fails after thirty days to comply with any other terms or provisions of the lease. The Court notes. however, that under P 7(c), default automatically occurs if lessee "shall become bankrupt or insolvent, or shall make a transfer in fraud of creditors, or shall make an assignment for the benefit of creditors." The October 6th letter specified that one basis for the termination was that there had been a transfer in fraud of creditors. No grace period is required under P 7(c). Accordingly, the termination may well have been effective immediately.
MRO argues that default could not have arisen under P 7(c), as there is no proof there was a transfer in fraud of creditors. Lessee is correct that there was no evidence presented to either the state court or the bankruptcy court which would support a claim of fraud. This issue simply was not considered by the bankruptcy court. The Sixth Circuit has noted that where "the bankruptcy court's factual findings are silent or ambiguous as to an outcome determinative factual question. the district court may not engage in its own factfinding, but, instead, must remand the case to the bankruptcy court" Caldwell, 851 F.2d or 857 (quoting In re Edward M. Johnson and Assoc., Inc. 845 F.d 1395, 1401 (6th Cir. 1988)). Remand is not appropriate on this issue, however, for the question whether MID made a transfer in fraud of creditors is not outcome determinative. Even if there had been no fraud and the termination was thus not effective immediately, the October 6th letter still could have operated to terminate the lease prior to the filing of the bankruptcy petition, the critical date in this case. The petition was filed on October 29, 1993, well over twenty days after MRO received the October 6th letter which gave notice of the failure to pay rent. Thus, if this final notice was not waived, then it did operate to terminate the lease prior to the bankruptcy filing.
[*25]
The only issue remaining, therefore, is whether the October 6, 1993, notice of termination was waived by the appellants' actions in accepting the base rent payment for the month of October back on September 29th. This is the issue which was addressed by the bankruptcy court. Judge Howard ruled that appellants waived the October 6th notice when they accepted the October base rent payment, relying on the Park Forest decision. Appellants maintain that the decision to apply Park Forest was erroneous. First, they contend that Park Forest is inapplicable to this case, as it involved a residential lease. The Court has rejected this argument above. Second, appellants submit that Park Forest is inapplicable as here MPG has additional obligations over and above the payment of base rent. Acceptance of a base rent payment, they claim, does not waive their right to terminate for failure by MRO to pay the percentage rent or perform its other obligations under the lease. It was these defaults upon which the October 6th notice of termination letter was premised, appellants maintain. The Court notes that courts applying the law of other states have noted that acceptance of even a [*26] partial payment of rent is sufficient to waive a notice of termination. See Fairborn Apartments v. Herman, No. 90 CA 28, 1991 W.L. 10962. *3 (Ohio Ct.App. 1991). The action still sends a signal that further termination proceedings will not transpire. See Park Forest, 112 Mich. App. at 426. Acceptance of the base rent thus may still constitute a waiver.
Appellants final claim is that waiver cannot occur as P 8(c) permits appellants to pursue certain remedies without waiving their right to pursue others as well. The Court considered this argument above, and found it to be without merit. Paragraph 8(c) is irrelevant to the notice of termination issue.
Despite these conclusions, however, the Court determines that the waiver rationale set forth in Park Forest is not applicable to the facts of this case. After weighing the circumstances, the Court finds that the October 6th notice of termination was not waived by appellants' actions in accepting base rent for the month of October on September 29, 1993. Although not raised by the parties, the Court notes that the October base rent was paid before the third letter at issue here [*27] was sent. By sending the notice of termination after accepting payment, appellants sent a signal that termination proceedings were still in fact forthcoming pursuant to other terms of the lease, despite the acceptance of the rental payment. Thus, the appellants took non which indicated that their rights of termination were nor waived. See Aspen Enterprises, 148 Mich. App. or 13 ("The landlord might prevent such a belief [that the lease would not be terminated] by accepting payment with an express reservation of rights under the notice to terminate."). MRO was clearly cm notice after the October 6, 1993, letter that lessee was in default and the appellants were terminating the lease. The circumstances of the third letter thus differ from those present in Park Forest. In Park Forest. the landlord sent the tenant a notice of termination in March, demanding possession by the end of April. The landlord then accepted rent from the tenant for the months of April and May. Park Forest, 112 Mich. App. at 425. In that case, the Michigan Court of Appeals found a clear waiver of the March [*28] notice of termination. In the present case appellants explicitly stated after they had accepted payment of the base rent that they were terminating the lease. Appellants' actions were in no way misleading, and thus there was no waiver.
Furthemore, the Court notes that it would be ridiculous to hold that once a landlord accepts base rent for a period of time, the landlord cannot terminate the lease for any reason prior to the end of that period. Such a ruling would permit a tenant to blatantly violate other provisions of the lease throughout that period, just because the tenant satisfied one part of its obligations under the lease.
Accordingly. the Court finds that the letter of October 6, 1993, operated to terminate the lease. Judge Howard's ruling that the notice of termination had been waived was in error. Thus, the lease could not be assumed by the debtor under 1365(c)(3), and the motion for lift of stay should have been granted.
CONCLUSION
For the foregoing reasons, the Court finds that the lease between appellants Pew and Phinney and the debtor, MRO entered into on November 14, 1992, was terminated prior to the tiling of the petition for bankruptcy on October 29, 1993. [*29] Judge Howard's decision to deny the motion to lift the stay was improper. Accordingly. the appeal of the order of the bankruptcy court entered on January 3, 1994, shall be GRANTED. The decision of the bankruptcy court shall be REVERSED.
An order consistent with this opinion shall issue forth-with.
Dated: August 9, 1994
DAVID W. McKEAGUE
UNITED STATES DISTRICT JUDGE
ORDER August 9, 1994, Filed
Pursuant to the Court's memorandum opinion of even date. Robert C. Pew, III, and Stephen D. Phinney's appeal of the order of the bankruptcy court entered on January 3, 1994, is hereby GRANTED. The decision of the United States Bankruptcy Court for the Western District of Michigan is REVERSED.
IT IS SO ORDERED.
Dated: August 9, 1994
DAVID W. McKEAGUE
UNITED STATES DISTRICT JUDGE