In re Puchi Props. Inc.
This matter came before the Court pursuant to the Motion to Enforce Order Confirming
In the Motion, the Plan Trustee asks the Court to: (1) determine that the Debtor validly assumed an unexpired lease (the "Lease") with UETA of Arizona, Inc. ("UETA") through the Chapter 11 Trustee's Plan of Reorganization for Puchi Properties, Inc. Dated May 11, 2015 (the "Plan") (Dkt. 545 at Ex. A), which was confirmed by the Court on March 11, 2016 (Dkt. 545); (2) determine that there are no uncured defaults based on events or conditions that existed or occurred prior to this Court's entry of the Stipulated Order Confirming Plan of Reorganization (the "Confirmation Order") (Dkt. 545); (3) determine that the Lease has not been and may not be terminated based on events that existed or occurred prior to entry of the Confirmation Order; (4) determine that UETA is barred by the doctrine of res judicata from asserting claims raised in a state court complaint pertaining to the Lease; (5) enter orders enforcing the Confirmation Order and compelling UETA to pay $ 24,000 in arrears on account of the Lease, pay $ 8,000 per month pursuant to the Lease, otherwise conform its conduct to the Lease, and comply with the injunction provisions in the Debtor's Plan; and (6) award the Debtor its reasonable attorneys' fees incurred in connection with the Motion. The Motion does not seek any relief pursuant to Federal Rule of Civil Procedure 60,
UETA asserts that it was not provided with notice of the Debtor's Plan or any of the proceedings related thereto and asks the Court to deny the Motion.
On April 4, 2018, the Court held an initial hearing on the Motion and determined that the threshold issue is whether the Plan Trustee validly assumed the Lease between UETA and the Debtor through the Plan. The Court instructed the parties to brief the issue of whether the Lease was validly assumed and set the matter for oral argument.
On June 12, 2018, the Plan Trustee and UETA filed supplemental briefs (Dkts. 829 & 830), and on June 26, 2018, the Court held oral arguments. The Court then took this matter under advisement. Based on the pleadings, oral arguments, and entire record before the Court, the Court now issues its ruling.
This decision constitutes the Court's findings of fact and conclusions of law pursuant to Fed. R. Civ. P. 52, as incorporated by Fed. R. Bankr. P. 7052, and as made applicable to contested matters by Fed. R. Bankr. P. 9014(c).
I. Jurisdiction
A bankruptcy court's post-confirmation jurisdiction is relatively limited. See
Where a court has post-confirmation jurisdiction, retention of jurisdiction provisions will generally be given effect. In re 350 Encinitas Invs., LLC , No. CIV 06CV2085 WQH (POR),
In this case, there is a sufficiently close nexus between the issues raised by the parties and the confirmed Plan such that the Court retains post-confirmation jurisdiction over this matter, especially given that the central issue is whether or not UETA is bound by the Plan and this Court's Confirmation Order. Furthermore, the Plan provides for this Court's retention of jurisdiction to, among other things: (1) construe, implement, enforce, execute, or consummate the Plan, the Confirmation Order or any other Court order; (2) issue injunctions or take other such actions "as may be necessary or appropriate to restrain interference with the Debtor by any party with the Plan or its execution or implementation by any person;" and (3) issue "such orders in aid of consummation of the Plan and the [C]onfirmation [O]rder ... to the full extent authorized by the Bankruptcy Code[.]" (Dkt. 545, Ex. A at 39-40).
II. Issue
The threshold issue before the Court is whether the Debtor validly assumed the UETA Lease through the Plan.
III. Factual and Procedural Background
1. On October 31, 2013, UETA, as tenant, entered into the Lease with the Debtor and third-party Sherman Montgomery ("Montgomery"), as co-landlords, for certain real property located at 361 N. Mariposa Rd., Nogales, Arizona (the "Property"), commencing November 1, 2013, and expiring on October 31, 2033. (Dkt. 795 at Ex. A;
2. Under the Lease, UETA agreed to pay the Debtor and Montgomery $ 8,000 per month in rent, with one-half of such rent to go directly to each co-owner for the first five years of the Lease, and with rent to be adjusted thereafter subject to the terms of the Lease. (Dkt. 795, Ex. A at 3-4).
3. On February 4, 2014, the Debtor filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code.
4. On March 19, 2014, the Court ordered the appointment of a Chapter 11 Trustee and ultimately approved the appointment of Gerald K. Smith (the "Trustee) (Dkts. 89, 93, 159).
5. Pursuant to a letter dated May 28, 2014, which was sent to the Debtor's principal, UETA attempted to terminate the Lease. (Dkt. 803 at Ex. B).
7. Despite being listed on Schedule G, neither UETA nor its counsel were contemporaneously added to the Debtor's Master Mailing List.
8. On or around July 8, 2014, the Trustee notified counsel for UETA that he was at the plan formulation stage and needed copies of UETA's leases with the Debtor. (Dkt. 808, Ex. B at 1).
9. By letter dated July 14, 2014, UETA, through counsel, informed the Trustee that it did not believe the Property was an asset of the bankruptcy estate, and believed that the Debtor may have materially breached the Lease, rendering the Lease no longer effective. (Dkt. 808, Ex. B at 2-4).
10. By letter dated July 30, 2014, the Trustee informed UETA that he was in the process of attempting to determine the ownership of the Property, would initiate a fraudulent transfer suit in order to bring the scheduled 50% ownership interest of the Property into the estate if required, and asserted that there had not been any breach of the Lease. (Dkt. 808, Ex. B at 5).
11. On July 29, 2014, the Trustee filed a Stipulated Motion for Order Authorizing Certain Payments to Trustee (the "Stipulated Motion") (Dkt. 222), which was joined by UETA, and which, after notice and a hearing, the Court approved. (Dkts. 255 & 270). UETA was not given notice of the hearing, and counsel for UETA did not appear at the hearing. (Dkts. 229, 255, 270). The order approving the Stipulated Motion authorized UETA to pay the Trustee certain amounts it was withholding pursuant to writs of garnishment against the Debtor and authorized UETA to make future rent payments directly to the Trustee. (Dkt. 270).
12. On May 11, 2015, the Debtor amended Schedule G, but did not make any changes to the description of the Lease or to the name or mailing address of the lessee to the Lease. (Dkt. 405 at 14).
13. On May 11, 2015, the Trustee filed the Plan, which provides in relevant part:
No ... unexpired leases will be rejected.
Any individual or entity that is a party to an ... unexpired lease assumed pursuant to the Plan who objects to such assumption must file with the Court a written statement stating the basis for the objection. This statement must be filed and served within the deadline for objecting to the confirmation of the Plan .... Any individual or entity that fails to file timely and serve such a statement will be deemed to have waived any objection to the proposed assumption.
(Dkt. 403, Ex. A at 24).
14. The Trustee conceded that he did not serve UETA with the solicitation package. (See Dkt. 830; 6/26/2018 Hearing Tr. 5:3-6; see also Dkt. 468). The Trustee likewise did not serve UETA with formal notice of the confirmation hearing or of the deadline to object to confirmation of the Plan. (See Dkt. 467).
15. UETA did not object to the Plan or to the Debtor's proposed assumption of the Lease.
16. On November 4, 2015, the Court held an initial confirmation hearing, at which time all objections to confirmation were resolved and the Court determined that the Plan was confirmable. (Dkt. 481).
17. On March 11, 2016, the Court entered the Confirmation Order. (Dkt. 545).
18. The Confirmation Order confirmed the Plan as proposed, subject to three
19. Pursuant to the terms of the confirmed Plan, the Debtor assumed "as of the Effective Date each ... Unexpired Lease listed in Schedule G, as amended, whether written or oral, except as otherwise provided for in the Plan." (Dkt. 545, Ex. A at 23). The Lease was listed on Schedule G. The Plan did not provide for any alternative treatment of the Lease. (See Dkt. 545 at Ex. A).
20. There is no evidence that UETA was served with written notice of the Confirmation Order.
21. The effective date of the Plan was March 28, 2016 (the "Effective Date"). (See Dkt. 545 at ¶ 5).
22. On the Effective Date, Gerald K. Smith assumed the duties as Plan Trustee.
23. On November 27, 2017, UETA commenced a lawsuit against the Debtor in Arizona Superior Court, Pima County regarding the parties' rights, obligations, and liabilities under the Lease. (Dkt. 795 at Ex. B).
24. On December 18, 2017, John C. Smith succeeded Gerald K. Smith as Plan Trustee. (Dkt. 791).
25. On January 12, 2018, the Plan Trustee filed the Motion, in which he asks the Court to enforce the Confirmation Order and compel UETA to comply with the terms of the confirmed Plan. (Dkt. 795).
26. On February 16, 2018, UETA timely filed the Response, in which it argues that it was not provided with notice of the Plan or proceedings related thereto, and therefore cannot be bound by the Plan. (Dkt. 803).
27. On March 2, 2018, the Plan Trustee filed the Reply, in which he argues that the actual notice UETA was given of this bankruptcy case coupled with UETA's participation in negotiations and in the reorganization process satisfied UETA's due process rights such that UETA should be bound by the terms of the confirmed Plan. (Dkt. 808).
28. On March 30, 2018, UETA filed the Sur-Reply, in which it maintains that the Lease was not validly assumed given that UETA was not provided with notice of the proposed assumption. (Dkt. 817).
29. On April 2, 2018, the Kuhn/Gabriel Creditors filed the Limited Joinder, in which they assert that UETA had early notice of this bankruptcy case and made the decision not to file a notice of appearance or request for notice, for which UETA should be scrutinized. (Dkt. 819).
30. On April 4, 2018, the Court held an initial hearing on the Motion, at which time the Court ordered further briefing from the parties. (Dkt. 822).
31. On June 12, 2018, the Plan Trustee and UETA filed supplemental briefs in support of their respective positions. (Dkts. 829 & 830).
32. On June 26, 2018, the Court held oral arguments, at which time arguments were presented by the Plan Trustee, counsel for UETA, and counsel for Mr. Montgomery and the Kuhn/Gabriel Creditors. During oral arguments, the Plan Trustee asked the Court to allow him to conduct limited discovery to investigate whether and to what extent UETA had actual knowledge of the Trustee's intent to assume the Lease through the Plan. (See 6/26/2018 Hearing Tr. 4:9-13, 9:6-13). UETA asked the Court to deny the Plan
IV. Legal Analysis & Conclusions of Law
Section 365 of the Code provides the terms by which a debtor may assume or reject an executory contract or unexpired lease.
At least one court has interpreted the Code as contemplating that the counterparty to an unexpired lease which a plan proponent intends to assume through its plan will be given "at least the notice required by Rule 9014, if not by § 1125(b)." In re REPH Acquisition Co. ,
mail to all creditors ... (1) the plan or a court-approved summary of the plan; (2) the disclosure statement approved by the court; (3) notice of the time within which acceptances and rejections of the plan may be filed; and (4) any other information as the court may direct ...."
Fed. R. Bankr. P. 3017(d). After a plan is confirmed, notice of entry of the confirmation order must be promptly mailed to all creditors and other parties in interest. Fed. R. Bankr. P. 3020(c)(2).
Parties, even those with knowledge of the bankruptcy case, are entitled to presume that applicable rules of procedure will be complied with. See In re Mack , No. ADV. RS 06-1160-DN,
Due process requires that "notice [be] reasonably calculated, under all
Parties in interest do not have an affirmative duty to investigate or inject themselves into bankruptcy proceedings. In re Maya Const. Co. ,
"A judgment may be void or unenforceable against a party if it was entered or obtained 'in a manner inconsistent with due process of law.' " Id. at *4 (quoting Owens-Corning Fiberglass Corp. v. Ctr. Wholesale, Inc. (In re Ctr. Wholesale, Inc.) ,
In this case, the Trustee chose to seek assumption of the Lease through the Plan, but failed to comply with the notice requirements set forth in the Code and Rules. The Trustee did not serve UETA with the disclosure statement, Plan, notice of confirmation hearing, or Confirmation Order. UETA, which had at least general knowledge of the pendency of this case, but which did not actively participate in this case,
Ultimately, UETA was not afforded the safeguards it would have been afforded had the Trustee complied with Rules. The Trustee may have failed to serve UETA with the pertinent documents through accident or inadvertence, but ultimately UETA was not given notice reasonably calculated under the circumstances to apprise it of the Trustee's intent to assume the Lease, and afford it a sufficient opportunity to object thereto.
UETA was entitled to presume that the Trustee would comply with the Rules and Code. Given that the relevant inquiry is
Given that UETA did not receive adequate notice of the Plan, confirmation proceedings, or Confirmation Order, UETA cannot be bound by the Confirmation Order. Given that the Trustee did not validly assume the Lease through the Plan, the Lease was deemed rejected as of the Effective Date as a matter of law.
V. Conclusion
Given the foregoing it is the determination of the Court that the Lease was not validly assumed through the Plan, and that such Lease was deemed rejected on the Effective Date of the Plan. This ruling does not address the other issues raised in the Motion.
Wherefore, for good cause shown;
IT IS HEREBY ORDERED denying the Motion as to the relief requested in § V.(A)(1) of the Motion, on the basis that the Lease was not validly assumed.
IT IS FURTHER ORDERED that the Court will set a scheduling conference to determine how this matter should proceed as to the remaining issues.
Notes
Federal Rule of Civil Procedure will hereinafter be referred to as "Fed. R. Civ. P."
Federal Rule of Bankruptcy Procedure will hereinafter be referred to as "Fed. R. Bankr. P." or "Rules."
The Plan Trustee and UETA filed identical copies of the Lease. (See Dkts. 795 at Ex. A and 803 at Ex. 1). The Court will hereinafter refer solely to the copy of the Lease filed at Dkt. 795, Ex. A to avoid redundancy.
A certificate of service was never filed on the docket and the Plan Trustee has not otherwise asserted that UETA was served with the Confirmation Order.
Prior to filing the Response, UETA's only involvement on the docket was with respect to the Stipulated Motion, which counsel for UETA signed, but which was filed by the Trustee. Given that counsel for UETA did not appear in this case at any time prior to confirmation, counsel for UETA was not required to file a notice of appearance at any time during the pertinent pre-confirmation period. See Fed. R. Bankr. P. 9010(b).
The Lease did not ride through the bankruptcy given that the Lease was treated in the Plan. See In re Hernandez ,