Opinion
Case No. 01-50874-S Chapter 11
September 9, 2002
MEMORANDUM OPINION
Now before the Court is the "Motion Of BLC Commercial Capital Corp. For Clarification Under 11 U.S.C. § 105 of this Court's Prior Order" ("Motion") filed by BLC Commercial Capital Corp. ("BLC"). This opinion constitutes the Court's findings of fact and conclusions of law required by Fed.R.Bankr.Proc. 7052 and disposes of all issues before the Court.
FACTUAL AND PROCEDURAL BACKGROUND
Woody Enterprises, Inc. ("Debtor"), as Lessee, and Franklin County Water District, as Lessor, entered into that certain Amended Marina Fishing Lodge and Related Facilities Lease (Lease") in January, 1999. The real property which is the subject of the lease is located in Franklin County. Later, BLC loaned the Debtor a sum of money for a marina on the leased property. As security for the loan, inter alia, Franklin County Water District agreed to provide BLC with "notice of default at least thirty (30) days prior to any termination for violation of covenants or non-payment of fees due and [to] give BLC Commercial Capital Corp., the option to cure the default or pay any amounts due, and assume the debtor's rights under the lease." (The March 20, 2000 letter formalizing the Water District's agreement to provide BLC, as secured lender, notice is referred to as "the Weidman Letter" by the parties in their pleadings and will be referred to as such herein.)
Defendant's Exhibit B at p.1, para. 1, correspondence of David Weidman, General Manager of Franklin County Water District, to BLC Commercial Capital Corp., dated March 20, 2000.
The Debtor filed a voluntary petition under Chapter 11 of Title 11 of the U.S. Code on March 9, 2001 and promptly followed it with a Motion To Assume Lease Agreement, as amended. BLC was not made a party to the assumption agreement. However, when the matter was scheduled for hearing, counsel for BLC, who had become active in the case in other respects, was included in the service of notice of such hearing and opportunity to object. Prior to the hearing on the Motion To Assume, on May 17, 2001, Cavazos, Hendricks, Poirot Dewey, P.C., counsel for Franklin County Water District directed correspondence to Locke, Liddell, Sapp, L.L.P., counsel for BLC ( Exhibit "C" to the Response to the Motion For Clarification filed by Franklin County Water District) notifying BLC of defaults and demanding BLC cure same June 22, 2001. Thereafter, on May 29, 2001 at the scheduled hearing on the Motion To Assume, the parties announced to the Court that they had reached an agreement. They presented the agreement to the Court in the form of an Agreed Order which the Court signed. The Agreed Order For Assumption of Lease Agreement Between Debtor And Franklin County Water District has now become final. Counsel for BLC did not appear at the hearing, but Notice of the entry of the May 29, 2001 Agreed Order was served upon counsel for BLC. Pursuant to the terms of the Order on the Motion To Assume the Lease, the Lease was assumed and certain additional obligations were ordered to cure defaults and provide adequate assurance of future performance. The Agreed Order provides:
Affidavit of Elizabeth Freeman, Esq., of Locke, Liddell Sapp, L.L.P., attached as Exhibit 4 to the Motion For Clarification admits that the May 17, letter was sent to BLC. The May 17, 2001 letter is attached to the Motion For Clarification as Exhibit 11. See also Oral Deposition of Timothy Williams, Exhibit 8, pp. 134-136.
The Agreed Order is part of the Court's record and the Court took judicial notice of same at the hearing.
ORDERED that in the event Debtor fails to perform any requirements set forth above within the time frames specified the [Franklin County Water] District shall have the right to provide the Debtor, BLC, and the U.S.Trustee written notice of such failure along with the District's intent to terminate the Lease therefore and a period of ten days thereafter to cure such failure, and if such cure is not accopmplished within such period, the Lease shall terminate as to the Debtor's interest therein only (as opposed to the interest of BLC Commercial Capital Credit Corporation ("BLC"), which is subject to a separate contractual notice procedure between the District and BLC); provided, however, in the event of Debtor's failure to comply with Paragraph 4.B. above, the notice and cure period, if any, shall be as provided in the Lease, and . . .
Paragraph 4.B. requires full and timely compliance with all covenants of the lessee under the Lease.
In the interim, the United States Trustee filed a motion to dismiss or convert citing as basis therefor the Debtor's rising administrative costs, delay and unlikelihood of a feasible reorganization. An order was entered dismissing the case on July 31, 2001 but the case was never closed as a result of motions for reconsideration. Then, on April 3, 2002, BLC filed this Motion for Clarification under 11 U.S.C. § 105. The matter came on pursuant to an expedited setting after which it was taken under advisement following a short period in which to file briefs.
JURISDICTION
Although an order has been entered dismissing the case, which order has become final, the case has never been closed. The order of dismissal, although restricting refiling for a period of 180 days, did not retain jurisdiction over any specified matters. Nonetheless, the Bankruptcy Court has jurisdiction to clarify and enforce its own orders under 11 U.S.C. § 105(a). Neither party objected to this Court's jurisdiction to clarify or enforce its order, although Franklin County Water District prefers the Court abstain.
Franklin County Water District also objected to the procedural posture on the grounds that the relief sought is more appropriately the subject of an adversary proceeding and an adversary proceeding, had one been filed, would be dismissed with the case under 28 U.S.C. § 1334(c)(1) or (2).
DISCUSSION
In this case, the Court must determine first the effect of dismissal of the bankruptcy case on July 31, 2001 upon the Agreed Order For Assumption of Lease Agreement Between Debtor And Franklin County Water District executed by and between the Debtor and Franklin County Water District and entered of record with this Court on May 29, 2001 (the "Agreed Order"). 11 U.S.C. § 349 (b) provides:
"Unless the court, for cause, orders otherwise, a dismissal of a case other than under section 742 of this title —
(1) reinstates —
(A) any proceeding or custodianship superseded under section 543 of this title;
(B) any transfer avoided under section 522, 544, 545, 547, 548, 549, or 724(a) of this title, or preserved under section 510(c)(2), 522(i)(2), or 551 of this title; and
(C) any lien voided under section 506(d) of this title;
(2) vacates any order, judgment, or transfer ordered, under section 522(i)(1), 542, 550, or 553 of this title; and
(3) revests the property of the estate in the entity in which such property was vested immediately before the commencement of the case under this title.
The legislative history of § 349(b) states that `[t]he basic purpose of the subsection is to undo the bankruptcy case, as far as practicable, and to restore all property rights to the position in which they were found at the commencement of the case.' S.Rep. No. 989, 95th Cong., 2d Sess. 49, reprinted in 1978 U.S. Code Cong. Ad.News 5787, 5835. An exception is made for situations in which property of the estate has been sold to a bona fide purchaser for value. Otherwise, the purposes of Congress in enacting this section of the Code is clearly stated. The effect of a dismissal of a case is "to place the parties in the same position that they were in before the bankruptcy petition was filed." 7 Collier On Bankruptcy ¶ 1112.09 at p. 1112-78 (15th ed. rev. 1997). Pursuant to § 349 of the Bankruptcy Code, the only orders vacated upon dismissal of a case are those avoiding a transfer or recovering a setoff. 11 U.S.C. § 349(b)(2). The Bankruptcy Code affords the Courts considerable discretion "to make whatever orders may be necessary and appropriate to protect rights acquired in reliance on the title 11 case." In re Shea Gould, 214 B.R. 739, 750 (Bkrtcy. S.D.N.Y. 1997) citing to 3 Collier On Bankruptcy ¶ 349.03[2] at p. 349-12 (15th ed. rev. 1997).
See In re Searles, 70 B.R. 266, 270 (D.R.I. 1987); see also 3 Collier On Bankruptcy ¶ 349.03[2] at p. 349-12 (15th ed. rev. 1997)
The interplay between § 349 and § 365 is not an issue of first impression. Other Bankruptcy Courts have noted that § 365 is not one of the specifically enumerated sections of the Bankruptcy Code that Congress addressed in § 349(b). In In re BSL Operating Corp., 57 B.R. 945, 952 (Bkrtcy.S.D.N.Y. 1986) the Court characterized § 349 as a "two-edged sword".
While it operates to restore property rights to their initial positions, it also enables the court to "order otherwise for cause." Furthermore, section 349(b) lists the Code sections whose operative impact is specifically undone unless the court orders otherwise. Thus dismissal under section 349(b) reinstates in itemized fashion: proceedings or custodianships that were superseded by the bankruptcy case; avoided transfers; voided liens; vacates any order, judgment or transfer ordered as a result of the avoidance of a transfer; and revests the property of the estate in the entity in which the property was vested at the commencement of the case. Id. Section 365 is not one of the enumerated sections affected by a section 349(b) dismissal.
The Eastern District Bankruptcy Court in New York declined to follow its neighbor, ruling instead:
Each subsection of 11 U.S.C. § 349(b) is independent of each other. To hold that 11 U.S.C. § 349(b) only applies to those sections of the Bankruptcy Code specifically enumerated in 11 U.S.C. § 349(b)(1) and/or (2) is to totally ignore and render meaningless 11 U.S.C. § 349(b)(3).
In re Tri-Glied, Ltd., 179 B.R. 1014, 1020-1021 (Bkrtcy.E.D.N.Y. 1995)
The Bankruptcy Court in In re Depew held that:
[t]he proper reading of § 349(b) is to restrict its operation to the sections of the Bankruptcy Code which it specifically refers to" citing to Florida Peach Corp. v. Commissioner of Internal Revenue, 90 T.C. 678 (1988); Norton v. Hoxie State Bank, 61 B.R. 258, 260 (D.D.Kan. 1986); In re BSL Operating Corp., 57 B.R. 945, 952 (Bankr.S.D.N.Y. 1986). See also U.S. v. Standard State Bank, 91 B.R. 874, 878-79 (D.W.D.Mo. 1988); In re Genovese, 91 B.R. 831, 834 (Bankr.E.D.Tenn. 1988); In re Newton, 64 B.R. 790, 793 (Bankr.C.D.Ill. 1986). It vacates only those orders or judgments which avoided various transfers or interests pursuant to the powers given to a trustee or debtor-in-possession by the Bankruptcy Code. Furthermore, it operates only as to the property of the estate which remains property of the estate on the date of dismissal. Standard State Bank, 91 B.R. at 879; In re Searles, 70 B.R. 266, 270 (D.D.R.I. 1987). See also In re Technical Marine Maintenance Co., 169 F.2d 548, 553 (3rd Cir. 1948); BSL Operating Corp, 57 B.R. at 952. . . .
Matter of Depew, 115 B.R. 965, 971-972(Bkrtcy.N.D. Ind. 1990)
There are no cases directly on point in the Fifth Circuit, but this Court has a clear mandate to follow as to construction of the Code. In United States v. Ron Pair Enterprises, Inc., 489 U.S. 235, 241, 109 S.Ct. 1026, 1030, 103 L.Ed.2d 290 (1989), the Supreme Court found that statutory analysis should begin and end with the language of the statute when the statute is plain. Properly, absent any "indication that doing so would frustrate Congress's clear intention or yield patent absurdity, our obligation is to apply the statute as Congress wrote it." BFP v. Resolution Trust Corporation, 511 U.S. 531, 570, 114 S.Ct. 1757, 1778, 128 L.Ed.2d 556 (1994) (Souter, J., dissenting). This Court is bound, when statutory language is unambiguous to interpret statutes according to the clear meaning of their language. United States v. Turkette, 452 U.S. 576, 580, 101 S.Ct. 2524, 2527, 69 L.Ed.2d 246 (1980). If the statutory language is unambiguous, in the absence of "a clearly expressed legislative intent to the contrary, that language must ordinarily be regarded as conclusive." Turkette, Supra at 2527 citing to Consumer Product Safety Comm'n v. GTE Sylvania, Inc., 447 U.S. 102, 108, 100 S.Ct. 2051, 2056, 64 L.Ed.2d 766 (1980). Accordingly, this Court construes the language of 11 U.S.C. § 349(2) "vacates any order, judgment, or transfer ordered, under section 522(i)(1), 542, 550, or 553 of this title" to exclude orders under § 365 from its ambit. Had Congress intended the vacation of such orders, it would have expressly stated so.
In In the Matter of Petty, the Fifth Circuit held that dismissal of a bankruptcy petition terminated the bankruptcy court's jurisdiction over a case and mooted a pending motion to invoke automatic rejection provisions where the bankruptcy court order entered an order denying a motion under § 365(d) some days after the case had been dismissed. 848 F.2d 654 (5th Cir. 1988). The Fifth Circuit simply held that the Bankruptcy Court lacked jurisdiction to act on the lessor's motion once it had dismissed the case. While there is language that the purpose of Section 349 is "to restore property rights to their pre-action status" the court was speaking in the context of an unresolved motion to reject the lease. It did not suggest that, if the motion had been granted prior to dismissal, the order rejecting the lease would not have been binding post-dismissal.
Given the foregoing conclusion, the Court must clarify and enforce the Agreed Order entered May 29, 2001 in this case.
BLC argues that pursuant to the Agreed Order, BLC and the U.S.Trustee were to receive notice of any default of the Debtor under the Agreed order and BLC had the right to cure same. BLC also argues that "[s]uch notices were to be provided after the Debtor's time to perform under the Assumption [Agreed] Order had expired, June 29, 2001, and BLC's subsequent right to protect the collateral existed for thirty (30) days after the date of such notice, pursuant to the Weidman Letter and the Lease". Motion For Clarification, p. 4, para. 7.
The Court disagrees with both of BLC's premises. The specific notice language to which the parties agreed respecting notice to BLC may be found in the decretal paragraphs on pages 3 and 4 of same:
Ordered that in the event Debtor fails to perform any of the requirements set forth above within the time frames specified, the District shall have the right to provide the Debtor, BLC and the U.S.Trustee written notice of such failure along with the District's intent to terminate the Lease therefore and a period of ten days thereafter to cure such failure, and if such cure is not accomplished within such period, the Lease shall terminate as to the Debtor's interest therein only (as opposed to the interest of B.L.C. Commercial Capital Credit Corporation ("BLC), which is subject to a separate contractual notice procedure between the District and BLC); provided, however, in the event of Debtor's failure to comply with Paragraph 4.B. above, the notice and cure period, if any, shall be as provided in the Lease, and . . .".
First, the decree gives the Water District the right to provide BLC written notice; if the parties intended there to be an obligation of written notice, they should have so specified. They are bound by the terms of their agreement. BLC was not a party to the agreement although it was provided with notice and an opportunity to object to the terms of the Agreed Order; it did not avail itself of such opportunity. The Court finds that not only is there no obligation running between BLC and the Water District under the terms of the Agreed Order there is explicit recognition and reiteration that the rights and obligations between BLC and the Water District were the subject of a separate contract. The Agreed Order simply does not deal with the relationship between BLC and the Water District. This Court has no jurisdiction to enforce a contract between BLC and the Water District entered into prior to the initiation of this bankruptcy case. That contract is between two third parties, neither of whom are Debtors before this Court and it does not affect the bankruptcy estate. This Court disagrees with the BLC's conclusion that the entry of the Agreed Order by the Court "nullified and/or cured any breaches by Debtor and any concurrent notices by the Water District that occurred prior to May 29, 2001". This might be true had the Court held a trial on the merits where all three entities were parties and following same made rulings affecting BLC's position. It did not do so because the two parties to the hearing presented the Agreed Order. No trial on the merits occurred. The Court simply signed off on the parties' agreement. In doing so, the Court approved the voluntary assumption of rights and obligations under the Lease and Letter Agreement between Debtor and the Water District and recognized that the relationship between BLC and the Water District was governed by a separate contract. Therefore, the Agreed Order did not nullify the Water District's notice to BLC provided prior to entry of the Agreed Order and it did not restart the clock requiring the Water District to provide BLC renewed notice of the Debtor's default. This Court expresses no opinion as to whether some provision of the prior agreement between BLC and the Water District might have some bearing on this controversy. This Court has no jurisdiction to consider that issue. The Court must deny BLC's request that this Court require Franklin County Water District to provide renewed notice to BLC. An order will be entered accordingly.
11 U.S.C. § 365(b)(1) provides that "[i]f there has been a default in an executory contract or unexpired lease of the debtor, the trustee may not assume such contract or lease unless, at the time of the assumption of such contract or lease, the trustee — (A) cures, or provides adequate assurance that the trustee will promptly cure, such default; . . .". 11 U.S.C. § 365(b). BLC relies upon NLC v. Lone Star Bldg. Centers, 144 B.R. 170, 179 (Bkrtcy. S.D. Fla. 1992) in which the Court stated "Thus, when the bankruptcy court approves an assumption it necessarily finds that no uncured defaults exist". The statement is made within the context of there having been notice, opportunity for hearing and the court's determination that the trustee has satisfied the requirements of section 365. The requirements may be met by cure or by "assurance" of cure. Contrary to BLC's interpretation, entry of an order assuming a lease or contract does not result in an automatic cure of all defaults by virtue of mere entry of an order. Neither does it constitute a "finding" that no uncured default exists. The Code indisputably provides for the additional, alternative possibility that the creditor receive "adequate assurance" that the trustee will cure the default promptly but at some later date. § 365(b)(1)(A). Therefore, the Court approving assumption determines not that there has been a cure, rather that there has been a cure or adequate assurance of the cure. The parties before this Court negotiated an agreement at arm's length, as represented in the Agreed Order, the terms of which satisfactorily provided such assurance of prompt cure.