72 Townsend LLC

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UNITED STATES BANKRUPTCY COURT
FOR THE NORTHERN DISTRICT OF CALIFORNIA
In re
72 TOWNSEND, LLC,
Debtor.
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Case No. 09-33684 TEC
Chapter 11
MEMORANDUM RE MOTION FOR RELIEF FROM STAY FILED BY NORTHSHORE
RESOURCES VIII LP AND NORTHSHORE RESOURCES IX LP
On January 15, 2010, Northshore Resources VIII LP and
Northshore Resources IX LP (collectively, Northshore) filed a
motion for relief from the automatic stay to allow it to proceed
with its prepetition arbitration against Debtor. 	The court
determined at the initial hearing on February 1, 2010 that relief
from stay might not be appropriate if the real property option
agreement between the parties were executory under 11 U.S.C.
§ 365, because Debtor would have the right to reject an executory
contract and convert Northshore’s claim into a claim for money
damages. 	Accordingly, the court scheduled further proceedings to
determine whether the option agreement is executory.
Upon due consideration, and for the reasons set forth below,
the court determines that the option agreement is not executory,
Signed and Filed: April 22, 2010
________________________________________
THOMAS E. CARLSON
U.S. Bankruptcy Judge
________________________________________
Entered on Docket
April 23, 2010
GLORIA L. FRANKLIN, CLERK
U.S BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
Case: 09-33684 Doc# 74 Filed: 04/22/10 Entered: 04/23/10 11:47:46 Page 1 of 9

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and that relief from stay should be granted to allow Northshore to
enforce in the pending arbitration action and separate state-court
action all of its rights under the Option Agreement (defined
below).
UNDISPUTED MATERIAL FACTS
On October 28, 2004, Northshore Resources IV LP (Northshore
IV) sold real property located at 64-72 Townsend Street in San
Francisco, California (the Property) to Lambert Development, LLC
(Lambert) for the purpose of developing a mixed-use residential and
commercial condominium project. 	The Property is divided into three
separate parcels: 64 Townsend, 66 Townsend, and 72 Townsend. 	In
connection with the sale of the Property, Lambert and Northshore IV
agreed that Northshore IV would retain an option to repurchase the
commercial portion of the Property, 64 Townsend and 66 Townsend
(the Commercial Parcels), and that the option agreement would be
executed after the subdivision map was recorded. 	Northshore IV
paid for the agreed-upon option via a substantial reduction in the
sale price of the Property. 	Option Agmt. § 1(a). 	With Northshore
IV’s consent, the Property was transferred from Lambert to Debtor
on May 22, 2007, subject to Northshore IV’s option rights.
On June 29, 2007, Debtor and Northshore IV entered into the
Option Agreement For Purchase of Commercial Parcel (the Option
Agreement), pursuant to which Northshore had the option to purchase
the Commercial Parcels. 	On June 10, 2009, Northshore IV assigned
and transferred its interest in the Option Agreement to Northshore.
The Option Agreement grants Northshore an exclusive and
unconditional option to purchase the Commercial Parcels at an
exercise price of ten dollars. 	§ 1(a). 	The Option term commenced
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on April 27, 2009 (the date the subdivision map was recorded).
§ 1(c). 	The Option could be exercised by Northshore giving written
notice to Debtor before the October 27, 2009 expiration date.
§ 1(d).
The Option Agreement requires satisfaction of the following
conditions by Northshore: (a) payment of ten dollars, § 2(b)(ii);
(b) execution and delivery by Northshore of such assignments, bills
of sale, and other documents reasonably necessary to convey title,
§ 2(b)(iii); (c) compliance with all material obligations under the
Option Agreement, § 2(b)(v); (d) written certification that the
representations and warranties in the Option Agreement remain true
and correct, § 2(b)(vi); (e) approval of the Reciprocal Easement
Agreement for recording; and (f) delivery to the title company of
additional documents and written escrow instructions reasonably
necessary for conveyance of the Commercial Parcels. 	The Option
Agreement also requires Northshore to pay the cost of the title
insurance premium for the title policy, the recording of the grant
deed, all escrow fees and closing costs, and a pro-rated portion of
real estate taxes, utilities, and other property expenses. 	§ 2(c).
On February 17, 2009, construction of the Commercial Parcels
was complete and a Notice of Completion was recorded.
On May 22, 2009, Northshore timely exercised its option to
purchase the Commercial Parcels.
On June 10, 2009, Northshore e-mailed Debtor a form of the
General Assignments and the other required closing documents,
including Grant Deeds, Buyer’s Certificates, Seller’s Certificates,
and a required certificate related to withholding taxes. 	The e-
mail stated that “unless otherwise notified, we plan on delivering
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1 Schedule I, Description of the Property; Schedule II, List
of Plans; Schedule III, List of Service Contracts; Schedule IV,
List of Warranties.
2 After making its demand, the parties agreed to an
arbitrator, Judge David Garcia of JAMS; Northshore paid the
arbitrator’s initial fees; and, on September 2, 2009, Northshore
served its arbitration statement on Debtor.
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the closing documents to escrow on Friday for signing.” 	Debtor
made no requested changes to the General Assignments. 	On June 15,
2009, Northshore again e-mailed Debtor requesting comments to the
closing documents, including the General Assignments, stating “we
would like any comments you have to the closing documents by
Wednesday so we can circulate final versions of the closing
documents by Friday.” 	Debtor did not provide any such comments.
On July 10, 2009, Northshore executed the General Assignments in
the form that had been provided to Debtor and delivered the General
Assignments to escrow. 	The General Assignments provided to Debtor
and delivered to escrow did not include the Schedules referenced in
the General Assignments. 1
On July 8, 2009, Northshore submitted its draft written escrow
instructions to the title company for its approval. 	On July 10,
2009, Northshore delivered executed escrow instructions to the
title company.
On July 10, 2009, Northshore deposited into escrow its portion
of the closing costs and escrow fees, including payments of taxes,
utilities, and property expenses.
On July 22, 2009, Northshore invoked the Option Agreement’s
arbitration provision, and made its demand for arbitration on
Debtor. 2
On August 31, 2009, Northshore paid ten dollars into escrow.
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On September 1, 2009, Northshore filed in San Francisco
Superior Court an action against Debtor for specific performance,
breach of contract, quiet title, and declaratory relief, Case No.
09-492093 (the State-Court Action).
On November 17, 2009, the Reciprocal Easement Agreement was
recorded.
On November 23, 2009, Debtor filed chapter 11, and Northshore
submitted to the title company supplemental escrow instructions for
the title company’s approval.
LAW
On request of a party in interest, a court may grant relief
from stay for cause. 	11 U.S.C. § 362(d)(1). 	A decision to grant
or deny relief from stay is committed to the sound discretion of
the bankruptcy court. 	In re Conejo Enter., Inc., 96 F.3d 346, 351
(9th Cir. 1996). 	If relief from stay is sought to enforce an
arbitration agreement, the bankruptcy court must grant relief from
stay, unless the party opposing arbitration establishes that
Congress intended to preclude a waiver of judicial remedies for the
particular claim at issue. 	Elec. Mach. Enter., Inc. v. Whiting-
Turner (In re Elec. Mach. Enter., Inc.), 479 F.3d 791, 795 (11th
Cir. 2007); Mintze v. AGFS, 434 F.3d 222, 229 (3rd Cir. 2006); MBNA
America Bank v. Hill, 436 F.3d 104, 109-10 (2nd Cir. 2006). 	The
court assumes, without deciding, that Congress intended to preclude
a waiver of judicial remedies for the bankruptcy court to determine
whether a contract is executory. 	The court assumes, without
deciding, that if the Option Agreement is executory, the court has
discretion to deny relief from stay so that Debtor could reject the
Option Agreement and convert Northshore’s claim for specific
performance into a claim for money damages.
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28 3 These additional closing items were: a form of grant deed
approved by Northshore; a state withholding certificate requested
from Northshore; issuance of a title policy that is not subject to
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Whether the Option Agreement is executory depends upon whether
“the obligations of both parties are so unperformed that the
failure of either party to complete performance would constitute a
material breach and thus excuse the performance of the other.”
Unsecured Creditors Comm. v. Southmark Corp. (In re Robert L. Helms
Constr. & Dev. Co., Inc.), 139 F.3d 702, 705 (9th Cir. 1998).
Whether failure to complete performance constitutes a material
breach excusing performance by the other party is a matter of state
contract law. 	Griffel v. Murphy (In re Wegner), 839 F.2d 533, 536
(9th Cir. 1988). 	An option contract “may on occasion be an
executory contract, for instance, where the optionee has announced
that he is exercising the option, but [has] not yet followed
through with the purchase at the option price”, Helms, 139 F.3d at
706, or if the optionee had other material obligations to perform,
such as constructing improvements on the land. 	Horton v. Rehbein
(In re Rehbein), 60 B.R. 436, 441 (9th Cir. BAP 1986) (dictum).
Debtor acknowledges Northshore’s exercise of the Option, but
contends that the Option Agreement is executory for the following
reasons: (1) because the draft General Assignments prepared by
Northshore were never expressly approved by Debtor and did not
include any of the required Schedules; (2) because Northshore filed
a lis pendens that attaches to all of Debtor’s property, including
Debtor’s real property at 72 Townsend Street and failed to release
the lis pendens and to dismiss the State-Court Action; and
(3) because Northshore submitted unexecuted, supplemental draft
escrow instructions to the title company, which instructions point
to additional closing items not completed as of the petition date. 3
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the SB Architects mechanics lien; issuance of title policy
endorsements; Northshore’s payment of prorated taxes, utilities,
and property expenses; further authorization to close escrow
following receipt Debtor’s “Deliveries and other conditions;”; and
Northshore’s approval of the revised General Assignments with
schedules.
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Whether a breach is material is a question of fact, and is
determined with reference to the effect of the breach on the non-
breaching party. 	Coughlin v. Blair, 41 Cal. 2d 587, 599 (1953);
Associated Lathing & Plastering Co. v. Louis C. Dunn, Inc., 135
Cal. App. 2d 40, 49-51 (1995). 	The breach of a non-material term
does not excuse the non-breaching party from performing its
obligations under the contract. 	Karz v. Dept. of Prof. &
Vocational Stds., 11 Cal. App. 2d 554, 557 (1936). 	A breach that
occurs at the inception of a contract is more likely to be
considered material, because it indicates future difficulty in
obtaining performance from the breaching party. 	Whitney Inv. Co.
v. Westview Devp. Co., 273 Cal. App. 2d 594, 602 (1969); Associated
Lathing, 135 Cal. App. 2d at 49-50. 	A party to a contract is not
entitled to rescind or abandon a contract for an alleged breach of
that contract when the breach does not go to the root of the
consideration. 	Walker v. Harbor Business Blocks Co., 181 Cal. 773,
780 (1919); accord 12 Miller & Starr Cal. Real Estate § 34:2 (3rd
ed. 2008).
The evidence demonstrates that, as of the petition date,
Northshore had fully performed all of its material obligations
under the Option Agreement and that, nothwithstanding the
supplemental escrow instructions, the only remaining acts to be
performed were ministerial acts related to the closing of escrow.
That Debtor failed to execute the General Assignments prepetition
and failed to provide Northshore with the Schedules to the General
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4 The other four cases cited by Debtor are not Ninth Circuit
cases. 	Three of the four cases define executory contracts in a
different manner than the Ninth Circuit. 	The other case is
irrelevant. 	In re Simon Transportation Svcs., Inc., 292 B.R. 207
(Bankr. D. Utah 2003) and Sipes v. Atlantic Gulf Communities Corp.
(In re General Devp. Corp.), 84 F.3d 1366 (11th Cir 1996) both
applied a “functional approach”, evaluating whether assumption or
rejection would ultimately benefit the estate and its creditors.
This approach has never been adopted by the Ninth Circuit. 	In re
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Assignments does not mean that Northshore failed to perform a
material obligation. 	Northshore had fully performed its obligation
with respect to the General Assignments prepetition when it
provided two rounds of drafts to Debtor for review and comment, and
when it thereafter executed the General Assignments, having
received no comments from Debtor. 	That Northshore mistakenly
included a legal description of the Residential Parcel when it
recorded its lis pendens also does not render the Option Agreement
executory, because Northshore’s independent obligation to modify
the lis pendens is not a requirement under the Option Agreement,
and does not excuse Debtor’s performance under the Option
Agreement.
The only Ninth Circuit cases cited by Debtor do not support
its argument that the Option Agreement is executory. 	In Benevides
v. Alexander, 670 F.2d 885 (9th Cir. 1982), the court held that the
purchase and sale agreement regarding Defendant’s home remained
executory because, inter alia, Plaintiffs had not paid the full
amount required under the contract. 	In In re Sigel & Co., Ltd.,
923 F.2d 142 (9th Cir. 1982), the joint venture agreement was held
to be executory, because the non-defaulting party had neither
tendered nor offered to tender any amount to acquire the defaulting
party’s interest in the joint venture. 	As noted above, Northshore
fully paid the Option Consideration when it sold the Property at a
substantially reduced price. 4
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W&L Associates, Inc., 71 B.R. 962 (Bankr. E.D. Pa. 1987) did not
define executory contract with reference to the materiality of a
party’s breach. 	Finally, In re Sun Belt Electrical Contractors,
Inc., 56 B.R. 686, 688-89 (Bankr. N.D. Ga. 1986) is irrelevant to
the present dispute. 	Sun Belt concerned whether a failure to issue
checks jointly payable to a construction contractor and its
materials supplier constituted a material breach.
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Because no material obligations remained on Northshore’s part,
the Option Agreement is no longer executory. 	The court determines
that the consideration for the Option Agreement was fully paid
prepetition when Northshore IV sold the Property at a substantially
reduced price, and that Northshore in substance became the
equitable owner of the Commercial Parcels when it gave written
notice of its exercise of the Option. 	Accordingly, relief from
stay should be granted.
CONCLUSION
The Option Agreement is not executory. 	The court will enter
an order granting relief from stay to permit Northshore to enforce
in the pending arbitration and State-Court Action all of its rights
under the Option Agreement, provided that Northshore may enforce a
judgment against Debtor for money damages only in this bankruptcy
case, and conditioned upon Northshore’s release of the Residential
Parcel from the recorded lis pendens.
**END OF MEMORANDUM**
Case: 09-33684 Doc# 74 Filed: 04/22/10 Entered: 04/23/10 11:47:46 Page 9 of 9