Art and Architecture Books of the 21st Century and 400 S. La Brea, LLC, a California limited liabilit

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UNITED STATES BANKRUPTCY COURT
CENTRAL DISTRICT OF CALIFORNIA
LOS ANGELES DIVISION
In re
ART AND ARCHITECTURE BOOKS OF
THE 21ST CENTURY,
Debtor.
Case No. 2:13-bk-14135-RK
Chapter 11
SEPARATE STATEMENT OF DECISION
ON DEBTOR’S MOTION TO ASSUME
MASTER LEASE ON PREMISES AT
5500 WILSHIRE BOULEVARD, LOS
ANGELES, CALIFORNIA
The contested matter of the motion of debtor to assume the Master Lease (NNN),
5500 Wilshire Blvd., Los Angeles (“Lease” or “lease”) on the premises located at 5500
Wilshire Boulevard, Los Angeles, California, was tried before the undersigned United
States Bankruptcy Judge on August 19, 28, and 30, and September 4 and 10, 2013. (A
copy of the Lease was received into evidence as Trial Exhibit 1.)
The court has jurisdiction over the motion under 28 U.S.C. § 1334. The motion is
a core proceeding under 28 U.S.C. §§ 157(a) and (b)(2)(A) and (M). Venue is proper in
this judicial district pursuant to 28 U.S.C. § 1409(a).
FILED & ENTERED
SEP 12 2013
CLERK U.S. BANKRUPTCY COURT
Central District of California
BY DEPUTY CLERK	gae
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In this separate statement of decision, the court provides additional explanation of
its reasoning for its decision on the motion. At the court’s request, the parties separately
submitted proposed findings of fact and conclusions of law, which the court has
considered and adopted in part. The court has separately issued findings of fact and
conclusions of law as required by Fed. R. Bankr. P. 7052, and this separate statement of
decision also sets forth additional findings of fact and conclusions of law.
By the motion, the debtor seeks to assume the lease. Debtor as a debtor-in-
possession is permitted, with court approval, to “assume or reject any executory contract
or unexpired lease of the debtor” pursuant to 11 U.S.C. § 365(a); see also, In re Windmill
Farms, Inc., 841 F.2d 1467, 1469 (9th Cir. 1988); 11 U.S.C. § 1107 (a debtor-in-
possession generally has the rights, powers, functions and duties of a trustee in a
Chapter 11 bankruptcy case). Debtor contends that it may assume the Lease as an
executory contract pursuant to 11 U.S.C. § 365(c)(1) or (3). However, debtor as a
debtor-in-possession may not assume an executory contract or unexpired lease if
applicable law excuses a party from accepting performance from the debtor and such
party does not consent to such assumption; or an unexpired nonresidential lease which
has been terminated under applicable nonbankruptcy law prior to the bankruptcy. 11
U.S.C. § 365(c)(1) and (3); In re Windmill Farms, Inc., 841 F.2d at 1469. The landlord
opposes the motion, contending that debtor cannot assume the lease because it was
terminated under applicable state law and therefore, non-assumable, and that
alternatively, debtor cannot assume the lease because it cannot provide adequate
assurance of future performance under the lease.
Thus, the two main issues in this contested matter of the motion to assume lease
are: (1) whether the lease was terminated; and (2) whether debtor can provide adequate
assurance of future performance.
Whether debtor may assume the lease depends on whether the lease was
previously terminated under applicable state law. In re Windmill Farms, Inc., 841 F.2d at
1469. The landlord contends that pursuant to its statutory remedy of unlawful detainer
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and its contractual remedy under the lease, the lease terminated under California law, the
law applicable to the lease, when it instituted unlawful detainer proceedings in the
Superior Court of California on December 20, 2012 after giving debtor a proper notice to
pay rent or quit on December 3 or 4, 2012 (the relevant date of the notice to pay rent or
quit is a hotly disputed legal issue). Lease, §§ 22.1, 23.1 and 23.4; California Code of
Civil Procedure, §§ 1161 and 1161.1. The landlord further contends that if the lease was
validly terminated, the debtor cannot obtain relief from forfeiture under California law
because it waived a right to obtain such relief in the lease, and alternatively, it does not
qualify for such relief if there was no waiver. See California Code of Civil Procedure,
§ 1179. Debtor contends that the lease was not terminated because no proper notice to
pay rent or quit was issued to support a valid lease termination when the unlawful
detainer proceedings were brought. If the lease was validly terminated, debtor
alternatively contends that the waiver of any right to relief from forfeiture is unenforceable
as a matter of public policy and that it has demonstrated hardship to warrant relief from
forfeiture.
California Civil Code, § 1951.2(a) provides that “if [a lessee’s or tenant’s] right to
possession is terminated by the lessor because of a breach of the lease, the lease
terminates.” See also, In re Windmill Farms, Inc., 841 F.2d at 1470; California Code of
Civil Procedure, §§ 1161 and 1161.1. Under the subject lease agreement, to terminate
debtor’s tenancy under the lease for nonpayment of rent, the landlord has both a
statutory remedy for unlawful detainer and a contractual remedy for termination pursuant
to the terms of the lease. Lease, §§ 22.1, 23.1 and 23.4; California Code of Civil
Procedure, §§ 1161 and 1161.1; see also, Schulman v. Vera, 108 Cal.App.3d 552, 561-
564 (1980).
Under the statutory remedy of unlawful detainer in California Code of Civil
Procedure, § 1161 or 1161.1, a landlord can terminate a commercial tenancy for
nonpayment of rent by giving a proper three-day notice to pay rent or quit and instituting
a unlawful detainer action if the rent is not paid by the expiration of the notice period.
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See, In re Windmill Farms, Inc., 841 F.2d at 1470-1471. A tenant is “guilty of unlawful
detainer” when he continues in possession without the landlord’s permission after default
in the payment of rent and three days’ notice has been served upon the tenant by the
landlord. California Code of Civil Procedure, § 1161(2). As the Ninth Circuit observed in
Windmill Farms, under the California unlawful detainer statutes, California Code of Civil
Procedure, §§ 1161 and 1174, “upon the expiration of three days after the lessor has
given the lessee the notice required by section 1161(2), if the lessee has failed to pay the
rent in default, the lessor has terminated the lessee’s right to possession.” 841 F.2d at
1470-1471. However, the statutory remedy of unlawful detainer requires strict
compliance with its procedures because the proceedings are summary in nature, and
substantial compliance is not sufficient. Kwok v. Bergren, 130 Cal. App.3d 596, 599-600
(1982); see also, Schulman v. Vera, 108 Cal.App.3d at 563-564; 7 Miller and Starr,
California Real Estate, § 19:214 (3rd ed. 2004 and 2012-2013 Supp.). The basis for an
unlawful detainer action “may be either breach of contract or tortious possession of
property.” 7 Miller and Starr, California Real Estate, § 19:214 at 664 and n. 10, citing,
Fragomeno v. Insurance Co. of the West, 207 Cal.App.3d 822, 831 (1989), disapproved
on other grounds, Vanderberg v. Superior Court, 21 Cal.4th 815 (1999).
The court determines that landlord’s statutory “three-day notice” under California
Code of Civil Procedure, § 1161(2), to pay rent or quit (a copy of the statutory notice to
pay rent or quit, which was ten days rather than three days, was received into evidence
as Exhibit 7; this notice will be referred to herein as the “statutory notice to pay rent or
quit”) was defective because it was issued or given before there was any default on the
part of the debtor as the tenant of the lease, regardless of whether there was a so-called
big “D” or little “d” default. See, Stoltenberg v. Harveston, 1 Cal. 2d 264, 268 (1934).
The court does not draw any distinction between a big “D” default or a little “d” default
because the parties negotiated terms as to what would constitute a default under the
lease. Lease, § 22.1. The parties do not dispute that under the lease, monthly rent owed
by the debtor as the tenant to the landlord is due on the first business day of the month.
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Lease, §§ 5.1 and 31.9. For the month of December 2012, this due date of rent under
these provisions for December 2012 was December 3, 2013. Id. The parties agree that
the first business day of December 2012 was Monday, December 3, 2012 and that the
rent due date under Lease, §§ 5.1 and 31.9, for December 2012 was that day. There is
no dispute that the landlord’s statutory notice to pay rent or quit incorrectly stated that the
due date was Saturday, December 1, 2012, which was not a business day.1 There is
also no dispute that the landlord’s statutory notice to pay rent or quit was signed by the
landlord’s agent, Bradley Van Auken, dated December 3, 2013, and that the notice was
actually issued on December 3, 2012. There is no dispute that the landlord’s statutory
notice to pay rent or quit was addressed to the debtor as tenant, and represented:
“TENANT has defaulted in the payment of rental charges due under the LEASE.” Trial
Exhibit 7. Furthermore, there is no dispute the notice was sent out by the landlord from
its Ohio office on that day as evidenced by the Federal Express pickup of the notice at
7:32 p.m. Eastern Time on that day, and that the notice to pay rent or quit was delivered
by Federal Express to debtor on December 4, 2012. There is no dispute that the debtor
did not pay the rent for December 2012 on December 3, 2012 or any time thereafter.
The parties dispute the legal effect of the landlord’s notice to pay rent or quit.
Debtor argues that the landlord’s notice to pay rent or quit was defective under either
meaning of little “d” default or big “D” Default (“default” meaning the failure by Debtor to
make any payment of rent by the nominal due date, December 3, 2012, and “Default”
meaning the failure by Debtor to make any payment of rent where such failure continues
for ten days after written notice from the landlord). Lease, §§ 5.1, 22.1, 31.9; see also,
Stoltenberg v. Harveston, 1 Cal. 2d at 268 (describing a rent due date in a lease before
the date a default could be declared by the landlord as a “nominal due date”); see also,
1 The landlord reasonably argues that the incorrect statement of the due date is not material, citing
Carrasco v. Tseheridis, No. E052158, 2011 WL 6141042 (Cal. App. 4th Dist., Dec. 9, 2011), and the court
does not disagree. Debtor conceded as much at closing argument.
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AERC Desmond Tower, LLC’s Trial Brief in Support of its Objection to Motion to Assume
Master Lease (“Landlord’s Trial Brief”), filed on August 14, 2013, at 17-18 (setting forth
the landlord’s little “d” default argument that it had the right to terminate the lease). Thus,
debtor argues the notice was premature since it was issued on December 3, 2012, before
the rent was past due based on the due date under Lease, §§ 5.1 and 31.9, and before
there was any “Default” under Lease, § 22.1, and alternatively, the notice was premature
and issued before there was any “Default” after ten days written notice that rent payment
was not received when due pursuant to Lease, § 22.1(c). See Debtor’s Trial Brief in
Support of Motion of Debtor to Assume Master Lease, filed on August 14, 2013, at 16-23;
accord, Trial Brief of Official Committee of Unsecured Creditors, filed on August 14, 2013,
at 7-11.
The landlord argues that its statutory notice to pay rent or quit was effective as a
notice to quit under California Code of Civil Procedure, § 1161(2), and was not premature
because the notice was given by Federal Express delivery on debtor on December 4,
2012 pursuant to Lease, § 31.10, after the rent due date of December 3, 2012 under
Lease, §§ 5.1 and 31.9. See Landlord’s Trial Brief at 17-18. The landlord alternatively
argues that it was permitted to give notice to quit within 10 days if rent was not paid at
any time permitted under the Lease, §22.1. The landlord further argues that the statutory
notice to pay rent or quit was not premature because it was issued at the close of the
business day on the rent due date and it was physically impossible for the debtor to
tender timely payment of the rent, even if debtor had attempted to pay rent by the due
date of December 3, 2012, which it had not.
However, admittedly, the landlord put the notice to pay rent or quit in the Federal
Express pickup box at 6:30 p.m. Eastern Time on December 3, 2012, which was before
the close of the business day Pacific Time (i.e., 3:30 p.m.) where the property and debtor
are located. Moreover, the landlord issued its statutory notice to pay rent or quit,
declaring debtor to be in default, on the rent due date under Lease, § 5.1 and 31.9, of
December 3, 2012, even before the rent was in default. Although the landlord’s statutory
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notice to pay rent or quit represented that “TENANT has defaulted in the payment of
rental charges due under the LEASE,” this representation was not true when the
landlord’s agent, Mr. Van Auken, signed it and when the landlord sent it out by putting it
into the Federal Express pickup box on December 3, 2012. Evidently, this was an
anticipatory declaration by the landlord of the tenant’s breach or default under the lease.
Moreover, the declaration of default by the landlord in its statutory notice to pay
rent or quit dated December 3, 2012 was not factually or legally correct when it was
made, or even when it was delivered on the following day, December 4, 2012. 2 As held
by the California Supreme Court in Stoltenberg v. Harveston, if the parties contracted for
a notice period before a default may be declared, the landlord must wait until the end of
the notice period to issue the statutory notice to pay rent or quit and declare an intent to
terminate the lease. 1 Cal. 2d at 268. 3 Here, under the facts of this case, the first day
debtor was under any legal obligation to pay the December rent was December 3, 2012,
2 As the court stated at trial, it may be bad public policy to enforce a statutory notice to pay rent or quit to
effectuate a lease forfeiture which contains statements by the landlord’s agent which were not true when
they were made.
3 In Stoltenberg v. Harveston, the California Supreme Court noted that the parties contracted in a written
lease for the payment of rent monthly in advance on the 1st day of each month. 1 Cal.2d at 267-268. The
California Supreme Court further noted that the lease provided, “No default shall be declared by reason of
any provision herein for failure to pay rent upon the day herein specified until five days have elapsed after
the same may have become due and payable, and permission is hereby granted the lessees to pay the
same at any time within the five days after the same may have become due and payable hereunder.” Id.
The court observed that under the lease, no rent was paid by the tenants on May 1, 1932, the day when a
monthly payment of rent became “due and payable,” or at any time thereafter. Id. The landlord served
written notice on the tenants to pay rent or quit on May 7, 1932. Id. Although the tenants contended notice
of default was given prematurely because May 1, 1932 was a Sunday and therefore a holiday, and the five-
day period mentioned in the lease did not begin to run until the next day, May 2, 1932, and did not end until
May 7, 1932, the court held notice was not premature under the lease. Id. at 267-268. The court
reasoned that based on the terms of the lease, the tenants were not in default if they paid rent within five
days after the first day of the month, which was the nominal day of payment of rent, and thus the first day
tenants were under any legal obligation to pay the rent was May 6, 1932. Id. Not having been paid on that
day, the tenants were thus in default under the terms of the lease and the notice given by the landlord the
following day was not premature. Id. The significance of Stoltenberg, for the purposes of this case, is that
the California Supreme Court looked at the express terms of the lease to determine when there was a
default in the payment of rent in order for a default to be declared in a statutory notice to proceed with
unlawful detainer. Id.
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the nominal day of payment, and the landlord issued the notice before the close of the
business day on that date. Lease, §§ 5.1 and 31.9.
The express terms of the Lease, § 22.1, defined what constituted a “Default” under
the Lease. With respect to “Default” for nonpayment of rent, the Lease provided in
§ 22.1: “22.1. Tenant’s Default. The occurrence of any one or more of the following
events shall constitute a “Default” under this Lease by Tenant: . . . c. the failure by
Tenant to make any payment of Rent, Additional Rent or any other payment required to
be made by Tenant hereunder, where such failure continues for ten (10) days after
written notice hereof from the Landlord that such payment was not received when due.”
Moreover, the parties agreed that the exclusive notice for “Default” for rent nonpayment
was under this provision, § 22.1: “Any notice sent by Landlord pursuant to this Section
22.1 shall be in lieu of, and not in addition to, any notice required under any applicable
Law.” Cf., Lease, § 23.4 (rights and remedies of the landlord are cumulative and may
include any one or all remedies which may be provided by law or in equity, whether or not
stated in the lease).
Under § 22.1 of the Lease, a “Default” only occurs ten days after the landlord
gives written notice that rent was not received when due. As “Default” is a defined term
agreed to by the parties as a matter of contract in § 22.1 of the Lease, the landlord’s
statutory notice to pay rent or quit is premature because it was issued prior to December
13, 2012, or ten days after any written notice of nonpayment of rent pursuant to § 22.1.
Stoltenberg v. Harveston, 1 Cal. 2d at 268. By contract, the landlord cannot declare a
default without a “Default.” Id.; see also, Lease, § 22.1(b); California Code of Civil
Procedure, § 1161(2). There is no statutory unlawful detainer remedy without a proper
notice to pay rent or quit based upon an actual breach of the lease contract, which was
not the case when the notice to pay rent or quit was issued or delivered here. There was
no breach of the lease contract for nonpayment of rent until there was a “Default” under
§ 22.1 of the Lease as agreed to by the parties, so the landlord’s statutory notice to pay
rent or quit was premature, whether issued on December 3, 2012 or delivered on
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December 4, 2012, because there could have been no “Default” until December 14, 2012
(“Default” for rent nonpayment could only occur only “where such failure [to pay rent]
continues for ten (10) days after written notice thereof from Landlord that such payment
was not received when due”). At trial, Mr. Van Auken admitted that at the time the
landlord served the notice to quit, there was no big “D” default under the lease, although
he did not concede that the landlord commenced termination proceedings before a big
“D” default. Trial Testimony of Bradley Van Auken, August 30, 2013, at 4:02 p.m. Thus,
the landlord cannot rely upon the statutory notice to quit or pay rent dated December 3,
2012 either to enforce its statutory remedy for unlawful detainer or its contractual
remedies under the lease to terminate the lease.
The landlord argues that despite the lack of a contractual “Default” by debtor under
§ 22.1 of the Lease, it can rely upon the statutory remedy for unlawful detainer pursuant
to California Code of Civil Procedure, § 1161(2) based on a little “d” default. See
Landlord’s Trial Brief at 17-18. The landlord argues that because debtor did not pay rent
by the nominal rent due date of December 3, 2012, there was a little “d” default in the
payment of rent within the meaning of California Code of Civil Procedure, § 1161(2). The
landlord’s little “d” argument is undercut by the reference to little “d” in that code provision
which is modified by the phrase, “pursuant to the lease or agreement under which the
property is held,” and thus, any default within the meaning of § 1161(2) must be
considered in reference to the terms of the lease or agreement between the parties.
Thus, the analysis of little “d” default is the same as big “D” Default, i.e., there was no
breach of the lease, or default with little “d” or big “D” when the statutory notice to pay
rent or quit was issued on December 3, 2012 or delivered on December 4, 2012. When
asked about this language, “pursuant to the lease or agreement under which the property
is held,” in context of the phrase relied upon by the landlord, “after default in the payment
of rent,” the landlord discounted the importance of the modifying language as merely
relating to the issue of whether the debtor continued in unlawful possession after a
default in rent payment, which in its view did not concern the validity of the notice.
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However, this argument itself undercuts the landlord’s argument based on a little “d”
default since there is no other reference to little “d” default by the landlord in the statute or
elsewhere in support of its little “d” argument.
The landlord heavily relies upon the decision in Fifth and Broadway Partnership v.
Kimny, Inc., 102 Cal.App.3d 195 (1980) to argue that the landlord had both contractual
and statutory remedies to terminate the lease in this case. In Fifth and Broadway
Partnership, the California court of appeal held that under the terms of the lease, the
landlord had at its option to declare a forfeiture after 90 days after notice of a default or to
exercise its statutory remedy to regain possession of the premises through unlawful
detainer. 102 Cal.App.3d at 199-203, citing inter alia, Article XI of the Master Lease,
Forfeiture for Default. In commenting on the terms of the lease, the court in Fifth and
Broadway Partnership stated: “The master lease seems to contemplate that upon the
lessee’s breach of any of its covenants plaintiff may either (1) give the lessee 90 days’
notice of such default and at the end of that period declare the lease terminated, or (2)
commence a proceeding in unlawful detainer (See fn. 3 [footnote quoting California Code
of Civil Procedure, § 1161(2), omitted]).” Id. at 201. The court further stated: “In other
words, termination of the lease by giving the 90-day notice specified therein is optional;
plaintiff may forego that remedy and instead institute unlawful detainer proceedings
pursuant to statute.” Id. Thus, as the court observed, “Plaintiff chose the latter course
and gave a three-day statutory notice to pay rent or quit the premises.” Id. Accordingly,
the court in Fifth and Broadway Partnership upheld the landlord’s pursuit of the statutory
remedy of unlawful detainer over the optional contractual forfeiture remedy: “Therefore,
plaintiff’s failure to give the 90-day notice pursuant to the lease does not bar the present
action or render it premature.” Id. The landlord argues that it simply exercised its
statutory remedy of unlawful detainer to declare a forfeiture after rent was expected not to
be paid by the due date of December 3, 2012 and giving a 10-day notice to pay rent or
quit under the literal terms of the unlawful detainer statute, California Code of Civil
Procedure, § 1161(2), and consistent with its purpose. See Fifth and Broadway
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Partnership v. Kimny, Inc., 102 Cal.App.3d at 203 (“The purpose of an unlawful detainer
action is to restore to the landlord possession of his property when a tenant fails to pay
the rent.”)(citation omitted). As the court in Fifth and Broadway Partnership further noted,
“An unlawful detainer action is not based on contract; it is a statutory proceeding and is
governed solely by the provisions of the statute creating it.” Id. at 200 (citations omitted).
Debtor argues that Fifth and Broadway Partnership is distinguishable because the
court in that case “determined that the 90-day post-default notice provision set forth in the
lease was only optional, and not mandatory, and therefore, the landlord had the choice of
termination procedures after default,” but “this conclusion was not based on an
interpretation of CCP § 1161, but rather an interpretation of the lease and the specific
requirements therein.” Debtor’s Objections to Landlord’s Proposed Finding[s] and
Conclusions of Law, filed on September 9, 2013, at 8. Debtor further argues: “In Fifth
and Broadway, the lease did not have the type of mandatory pre-Default notice
requirements and lock-step approach to commencement of termination remedies that is
present here.” Id.
While an unlawful detainer action is statutory in nature and not based on contract,
as noted in Fifth and Broadway Partnership, it is governed by the statute creating it,
which does refer to the terms of the contract in construing its operation. California Code
of Civil Procedure, § 1161(2) (referring to “after default in the payment of rent, pursuant to
the lease or agreement under which the property is so held”). In this regard, the court
considers the character of a lease as having a dual nature of “a conveyance of an estate
in the land and a contract between the lessor (landlord) and the lessee (tenant) for
possession and use of the property in consideration of rent,” but with “the modern
tendency to construe [a lease] and its obligations according to the rules of interpretation
and performance of contracts generally.” 12 Witkin, Summary of California Law, Real
Property, § 518 at 593-594 (10th ed. 2005 and 2013 Supp.), citing inter alia, Medico-
Dental Building Co. of Los Angeles v. Horton & Converse, 21 Cal.2d 411, 418 (1942). In
Medico-Dental Building Co. of Los Angeles, the California Supreme Court stated:
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While it is true that a lease is primarily a conveyance in that it transfers an
estate to the lessee, it also presents the aspect of a contract. This dual
character serves to create two distinct sets of rights and obligations---one
comprising those growing out of the relation of landlord and tenant, and
said to be based on the privity of estate, and the other comprising those
growing out of the express stipulations of the lease, and so said to be
based on privity of contract. Those features of the lease which are strictly
contractual in nature should be construed according to the rules for the
interpretation of contracts generally and in conformity with the fundamental
principle that the intentions of the parties should be given effect as far as
possible. In line with this concept is the authoritative observation in 32
Am.Jur. § 144, p. 145, that “covenants and stipulations on the part of the
lessor and lessee are to be construed to be dependent upon each other or
independent of each other, according to the intention of the parties and the
good sense of the case, and technical words should give way to such
intention.”
21 Cal.2d at 418-419 (citations and some internal quotation marks omitted). The
California courts, including the cases cited by the parties and by the court in the case,
including Fifth and Broadway Partnership v. Kimny, Schulman v. Vera, and Stoltenberg v.
Harveston, have construed the provisions of the subject leases in applying the unlawful
detainer statutes, currently California Code of Civil Procedure, § 1161 et seq. In its
analysis in this case, the court construes the terms of the specific lease, here, the Master
Lease between the parties, in applying the unlawful detainer statute, California Code of
Civil Procedure, § 1161(2). While the unlawful detainer remedy is statutory and not
contractual, this does not mean that the express terms of the lease, or contract, are
ignored; rather, the express terms of the lease must be considered in determining
whether a tenant is “guilty of unlawful detainer,” i.e., continuing to possess the premises
where there has been a default in the rent, pursuant to the lease. California Code of Civil
Procedure, § 1161(2). Thus, the court agrees with debtor that the landlord is construing
the unlawful detainer statute out of context by ignoring the language of the statute
referring to default under the lease, which is specifically defined by the lease as agreed to
by the parties, and defining “default” without reference to the lease.
Fifth and Broadway Partnership is distinguishable because there was no reference
to how “default” was defined by the lease in that case whereas default was specifically
defined by the lease in this case. 102 Cal.App.3d at 199-203 and n. 2. The landlord
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argues that there was a default in the payment in rent under California Code of Civil
Procedure, § 1161, because the rent was not paid by the nominal due date under the
lease, but there was no default in payment of rent as the parties had agreed to define that
term in their lease. Lease, §§ 5.1, 22.1(b) and 31.9, Trial Exhibit 1. Thus, the court
concludes that the landlord’s statutory remedy of unlawful detainer does not hold up
because the landlord issued or served a premature statutory notice to pay rent or quit,
which is not in strict compliance with the unlawful detainer statute, which requires strict
compliance. See, e.g., Kwok v. Bergren, 130 Cal.App.3d at 600 (strict compliance with
unlawful detainer procedures required); cf., In re Windmill Farms, Inc., 841 F.2d at 1471
(“under California law a lease terminates for nonpayment of rent at least by the time the
lessor files an unlawful detainer action, provided that a proper three-days notice to pay
rent or quit has been given . . . .”) (emphasis added).
The landlord could have cured this procedural defect of notice by simply issuing
another statutory notice to pay rent or quit or a contractual notice of termination of lease,
which did not have the procedural defects of the December 3, 2012 notice, but did not.
Instead, the landlord filed an unlawful detainer action based on the defective notice to
pay rent or quit. See Friedman, Garcia and Hagarty, California Practice Guide: Landlord-
Tenant, ¶ 7.111.1 (2013) (Practice pointer: “ . . . Commencing an unlawful detainer
without curing the defective first notice will lead to inevitable delays and may substantially
compromi8se the landlord’s right to gain repossession (tenant might, in the interim, ‘cure’
the rent default, though long after the first three-day period.”). Therefore, the court
concludes that there was no valid termination of the lease under the statutory remedy of
unlawful detainer and that the landlord’s arguments in opposition to the motion fail.
The court also determines that there was no valid termination of the lease under
the contractual remedy pursuant to § 23.1 of the Lease. That provision states, “In the
event of any such Default . . . Landlord shall have the immediate option to terminate this
Lease and all rights of Tenant thereunder.” Lease, § 23.1. The landlord argues that the
December notice to quit also operated to terminate the lease as it gave notice of its
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intention to terminate the lease for nonpayment of rent within ten days. Landlord’s
Proposed Findings of Fact and Conclusions of Law, lodged on September 9, 2013, at 18.
Debtor argues that the landlord did not meet the “predicate requirement in Article 23 [of
the Lease] that such [termination] rights only be exercised ‘[i]n the event of any such
‘Default.’” Debtor’s Objections to Landlord’s Proposed Findings of Fact and Conclusions
of Law, filed on September 9, 2013, at 7. The court agrees with Debtor that the landlord
has not shown that it followed the pre-Default notice requirements of the Lease, § 22.1
and 23.1, in order to exercise its termination rights under the lease. As discussed
previously, the December 3, 2012 notice to pay rent or quit was premature and therefore
cannot serve as a termination of the lease because a “Default” under the terms of the
lease had not yet occurred.
Because the court determines that the lease was not validly terminated for want of
a proper statutory notice to pay rent or quit as required by California Code of Civil
Procedure, 1161(2) or pursuant to the terms of the lease, there is no need for debtor to
establish entitlement to relief from forfeiture under California Code of Civil Procedure, §
1179, to seek to assume the lease pursuant to 11 U.S.C. § 365(a). Moreover, because
the lease has not been terminated, the court determines that debtor is not liable for any
holdover rent or damages from “holding over” under the Lease, §21.2. Thus, the court
determines that debtor may assume the lease if it cures the arrearages and provides
adequate assurance of future performance as required by 11 U.S.C. § 365.
The landlord argues that the motion should be denied because debtor cannot
provide adequate assurance of future performance because the debtor has chronically
failed to pay rent on time since the inception of the lease and its financial condition is
unstable and precarious. The landlord’s arguments are not without force and make a
reasonable case for denial based on adequate assurance; however, the court finds that
debtor has shown by the preponderance of the evidence that it can provide adequate
assurance of future performance to assume the lease.
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The term ‘adequate assurance’ of future performance was intended to be given a
practical, pragmatic construction. See, In Re Evelyn Byrnes, Inc., 32 B.R. 825, 828-829
(Bankr. S.D.N.Y. 1983). The focus is on the debtor’s ability to satisfy the financial
obligations imposed by the lease. See id. Debtor’s monthly operating reports show that
debtor’s post-petition revenues are in excess of the amounts generated prior to the
petition date, and are sufficient to enable debtor to pay its obligations to the landlord
under the Master Lease as they become due. Trial Exhibits 11-15. Debtor has offered
credible evidence that its subtenant rental revenue could fund a substantial portion of its
future rent obligations to the landlord under the Master Lease, especially if Wells Fargo
Bank subleases space on the premises from Debtor. Furthermore, debtor has obtained a
loan commitment in the sum of $1,575,000 from Wilson Administrative Services Ltd. for
the purpose of funding the debtor’s assumption of the Master Lease and the assumption
of debtor’s other real property lease located in Beverly Hills, California (i.e., there are
sufficient funds from this source to cure the arrearages on the Master Lease and to
provide additional funds (approximately $400,000) as additional adequate assurance of
future performance under the Master Lease). Debtor has also offered credible evidence
that the inventory of debtor’s owned art work and consigned art work (excluding posters)
may have a value in excess of $39 million, also supporting a finding debtor can provide
adequate assurance. Trial Exhibits 51 and 52; Trial Testimony of Douglas Chrismas;
Direct Valuation Testimony of Douglas Chrismas. These circumstances indicate that
debtor has available resources to perform its rent obligations under the Master Lease in
the future. While debtor has had problems in not paying rent by the nominal date of
payment of rent under the lease on the first business day of the month (prompting the
landlord to issue rent overdue notices and to bring the premature unlawful detainer
action), and in making proper payment of rent (such as tendering checks drawn without
sufficient funds in its account), as well as having cash flow issues in the past (e.g.,
resorting to “pawn shop” financing, bank account statements showing checks drawn
without sufficient fund balances at the time of issuance, issuing check stop payment
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orders without notifying the payee), the court is satisfied that the debtor has offered
sufficient evidence of adequate assurance of future performance under the lease by its
current financial resources and inventory as well as its postpetition performance under
the lease. See Direct Testimony of Shirley Holst; Trial Testimony of Shirley Holst; Direct
Testimony of Bradley Van Auken by Declaration; Trial Testimony of Bradley Van Auken;
Direct Testimony of Dr. Barbara Luna by Declaration; Trial Testimony of Dr. Barbara
Luna; Trial Testimony of Gary Mendelson.
Thus, the court determines that debtor may assume the lease pursuant to 11
U.S.C. § 365 and the motion to assume the lease should be granted.
However, as debtor argues, a guaranty is not required to show adequate
assurance of future performance. Debtor’s Trial Brief at 31, citing In re Natco Industries,
Inc., 54 B.R. 436, 440 (Bankr. S.D.N.Y. 1985) and In re Sunrise Restaurants, Inc., 135
B.R. 135 B.R. 149 (Bankr. M.D. Fla. 1991). Nevertheless, there is no guaranty that
debtor may not default on the Master Lease in the future, and if that happens, there is no
guaranty that the landlord may not succeed in a future attempt to regain possession of
the lease premises based on a proper exercise of its contractual and statutory remedies
as lessor. While there may be some “lingering doubts” of future performance, the debtor
would be wise to continues its good postpetition performance under the Master Lease
and fully comply with the terms of the lease to avoid any defaults with a capital “D”, but
not engage in risky or dubious financial behavior, such as issuing checks on bank
accounts without sufficient funds or issuing stop payment orders on checks without
notifying the payee, particularly if the payee is the landlord.
///
///
///
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This memorandum decision constitutes additional findings of fact and conclusions
of law of the court in granting the motion.
IT IS SO ORDERED.
###
Date: September 12, 2013
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NOTICE OF ENTERED ORDER AND SERVICE LIST
Notice is given by the court that a judgment or order entitled (specify) SEPARATE STATEMENT OF
DECISION ON DEBTOR’S MOTION TO ASSUME MASTER LEASE ON PREMISES AT 5500 WILSHIRE
BOULEVARD, LOS ANGELES, CALIFORNIA was entered on the date indicated as “Entered” on the first
page of this judgment or order and will be served in the manner indicated below:
I. SERVED BY THE COURT VIA NOTICE OF ELECTRONIC FILING (“NEF”) – Pursuant to controlling
General Order(s) and Local Bankruptcy Rule(s), the foregoing document was served on the following
person(s) by the court via NEF and hyperlink to the judgment or order. As of September 12, 2013, the
following person(s) are currently on the Electronic Mail Notice List for this bankruptcy case or adversary
proceeding to receive NEF transmission at the email address(es) indicated below:
Jason Balitzer jbalitzer@sulmeyerlaw.com
Ron Bender rb@lnbyb.com
Bruce Bennett bbennett@jonesday.com
Carol Chow CChow@Stutman.com
Marina Fineman mfineman@stutman.com
Michael F Frank mfrankatty@aol.com
Thomas M Geher tmg@jmbm.com, we1@jmbm.com;fc3@jmbm.com
Eric D Goldberg egoldberg@stutman.com
Asa S Hami ahami@sulmeyerlaw.com
Asa S Hami ahami@sulmeyerlaw.com
Mary D Lane mal@msk.com, mec@msk.com
Daniel A Lev dlev@sulmeyerlaw.com, asokolowski@sulmeyerlaw.com
Daniel A Lev dlev@sulmeyerlaw.com, asokolowski@sulmeyerlaw.com
Sidney P Levinson slevinson@jonesday.com, kfloyd@ecf.inforuptcy.com;kfloyd@jonesday.com
Alvin Mar alvin.mar@usdoj.gov
Krikor J Meshefejian kjm@lnbrb.com
Alan I Nahmias anahmias@mbnlawyers.com, jdale@mirmanbubman.com
Alan I Nahmias anahmias@mbnlawyers.com, jdale@mirmanbubman.com
Christine M Pajak cpajak@stutman.com
Christine M Pajak cpajak@stutman.com
Danielle A Pham dpham@stutman.com, daniellepham@gmail.com
Danielle A Pham dpham@stutman.com, daniellepham@gmail.com
Kurt Ramlo kr@lnbyb.com, marla@lnbyb.com
Christopher O Rivas crivas@reedsmith.com
Victor A Sahn vsahn@sulmeyerlaw.com,
agonzalez@sulmeyerlaw.com,asokolowski@sulmeyerlaw.com
Victor A Sahn vsahn@sulmeyerlaw.com,
agonzalez@sulmeyerlaw.com,asokolowski@sulmeyerlaw.com
Michael C Schneidereit mschneidereit@jonesday.com, jhchase@jonesday.com
United States Trustee (LA) ustpregion16.la.ecf@usdoj.gov
Steven Werth swerth@sulmeyerlaw.com, asokolowski@sulmeyerlaw.com;slee@sulmeyerlaw.com
Beth Ann R Young bry@lnbyb.com
II. SERVED BY THE COURT VIA U.S. MAIL: A copy of this notice and a true copy of this judgment or
order was sent by U.S. Mail, first class, postage prepaid, to the following person(s) and/or entity(ies) at the
address(es) indicated below:
Debtor
Art and Architecture Books of the 21st Century
5514 Wilshire Blvd
Los Angeles, CA 90036
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III. TO BE SERVED BY THE LODGING PARTY: Within 72 hours after receipt of a copy of this judgment or
order which bears an “Entered” stamp, the party lodging the judgment or order will serve a complete copy
bearing an “Entered” stamp by U.S. Mail, overnight mail, facsimile transmission or email and file a proof of
service of the entered order on the following person(s) and/or entity(ies) at the address(es), facsimile
transmission number(s) and/or email address(es) indicated below:
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