Michael H. Clement Corporation

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
In re 	No. 09-43502 T
Chapter 11
MICHAEL H. CLEMENT CORPORATION,
Debtor-in-Possession.
_______________________________/
MEMORANDUM OF DECISION RE MOTIONS FOR RECONSIDERATION
On October 14, 2009, the Court issued a Memorandum of Decision
(the “Memorandum”) with respect to the motion of Frank C. Alegre, Sr.
and Helen C. Alegre as Trustees of the Frank C. Alegre and Helen C.
Alegre Revocable Trust (hereinafter “Alegre”) for an order deeming a
nonresidential 	lease 	of 	real 	property 	rejected 	due 	to 	the 	debtor’s
failure 	to 	assume 	it 	within 	the 	time 	required 	by 	11 	U.S.C. 	§
365(d)(4) and for surrender of the leased premises. 	An order denying
the motion was entered on November 5, 2009.
On November 13, 2009, Alegre filed a motion for reconsideration
and 	noticed 	a 	hearing 	on 	the 	motion 	for 	December 	14, 	2009. 	On
November 30, 2009, the above-captioned debtor (the “Debtor”) filed an
opposition to the motion and a countermotion. 	On December 4, 2009,
the Court issued an order vacating the hearing on Alegre’s motion for
Signed: January 13, 2010
________________________________________
LESLIE TCHAIKOVSKY
U.S. Bankruptcy Judge
________________________________________
Entered on Docket
January 13, 2010
GLORIA L. FRANKLIN, CLERK
U.S BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
Case: 09-43502 Doc# 140 Filed: 01/13/10 Entered: 01/13/10 15:55:24 Page 1 of
8

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
2
reconsideration and the 	Debtor’s countermotion, indicating that it
would 	review 	the 	motions 	for 	merit 	before 	deciding 	whether 	to 	have
the two motions set for hearing. 	On December 7, 2009, Alegre filed
a reply to the Debtor’s opposition to his motion and an opposition to
the Debtor’s countermotion.
On 	December 	14, 	2009, 	the 	Court 	issued 	an 	order 	in 	which 	it
noted that the two motions were fully briefed but for a reply brief
by 	the 	Debtor 	to 	Alegre’s 	opposition 	to 	its 	countermotion.
Therefore, the Court concluded, it appeared to be most efficient to
give the Debtor a chance to file such a reply brief and to determine
both motions at that time. 	The Court set a deadline of December 23,
2009 	for 	the 	Debtor 	to 	file 	a 	reply 	brief 	and 	indicated 	that 	no
hearing would be conducted unless the Court concluded that one would
be helpful.
DISCUSSION
A. 	SUMMARY OF FACTS AND MEMORANDUM DECISION
The 	underlying 	dispute 	concerns 	real 	property 	located 	at 	3500
Wilbur 	Avenue, 	Antioch, 	California 	(the 	“Property”). 	The 	Property
was formerly owned by the Debtor and was sold to Alegre as part of a
complicated agreement (the “RDA”). 	The Debtor operated its business
on the Property, and the RDA gave it the right to continue to do so.
Michael 	Clement, 	the 	principal 	of 	the 	Debtor, 	and 	other 	members 	of
his family live in trailers located on the Property. At some point in
time, 	which 	point 	has 	now 	occurred, 	the 	RDA 	required 	the 	Debtor 	to
pay rent if it wished to continue to occupy the Property.
Case: 09-43502 Doc# 140 Filed: 01/13/10 Entered: 01/13/10 15:55:24 Page 2 of
8

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
3
The Debtor filed a petition seeking relief under chapter 11 of
the 	Bankruptcy 	Code 	on 	April 	28, 	2009. 	Section 	365(d)(4) 	of 	the
Bankruptcy 	Code 	requires 	that 	a 	nonresidential 	lease 	be 	assumed 	or
rejected within 120 days of the filing of a chapter 11 petition date
unless the Court extends the time for doing so. 	When the Debtor did
not 	comply 	with 	this 	requirement, 	as 	noted 	above, 	Alegre 	filed 	a
motion for an order deeming the lease rejected and for surrender of
the Property.
The 	Debtor 	opposed 	the 	motion 	on 	two 	grounds. 	First, 	it
contended 	that, 	because 	Michael 	Clement 	and 	various 	family 	members
lived 	on 	the 	Property, 	the 	lease 	was 	residential. 	Second, 	it
contended that the lease was so intertwined with the other provisions
of 	the 	RDA 	that 	the 	deadline 	established 	by 	§ 	365(d)(4) 	did 	not
apply.
In 	the 	Memorandum, 	the 	Court 	concluded 	that 	the 	lease 	was
nonresidential. 	The 	RDA 	made 	no 	mention 	of 	the 	Clement 	family’s
right 	to 	reside 	on 	the 	Property. 	Moreover, 	it 	appeared 	that 	the
zoning 	applicable 	to 	the 	Property 	did 	not 	authorize 	the 	Clement
family 	to 	live 	there. 	However, 	the 	Court 	denied 	Alegre’s 	motion
because it agreed with the Debtor that the lease was so intertwined
with 	the 	other 	provisions 	of 	the 	RDA 	as 	to 	make 	the 	deadline
established by § 365(d)(4) inapplicable.
B. 	ALEGRE’S MOTION FOR RECONSIDERATION
Alegre’s 	motion 	for 	reconsideration 	contends 	that 	the 	Court
committed 	a 	manifest 	error 	in 	determining 	that 	the 	lease 	was 	not 	a
bona fide lease so as to be subject to the § 365(d)(4) deadline for
Case: 09-43502 Doc# 140 Filed: 01/13/10 Entered: 01/13/10 15:55:24 Page 3 of
8

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
4
assumption 	or 	rejection. 	The 	Court 	has 	rejected 	the 	Debtor’s
contention that it is the owner of the Property and that the rights
conveyed 	to 	the 	Debtor 	in 	the 	RDA 	do 	not 	constitute 	a 	disguised
financing agreement. 	Alegre asks: “If the RDA does not constitute a
lease, 	what 	is 	it 	and 	what 	are 	Alegre’s 	rights?” 	Alegre 	asserts
that 	the 	Court’s 	holding 	leaves 	unanswered 	numerous 	questions
concerning 	the 	nature 	of 	Alegre’s 	and 	the 	Debtor’s 	contractual
relationship.
Alegre notes that the Court found in the Memorandum that the RDA
appeared 	to 	give 	the 	Debtor 	the 	right 	to 	remain 	on 	the 	Property
forever as long as it paid a fair rental rate. 	Alegre contends that
this 	finding 	is 	a 	manifest 	error, 	because 	California 	law 	does 	not
permit a lease of infinite duration. 	Since the RDA failed to fix a
term 	for 	the 	Debtor’s 	right 	to 	remain 	on 	the 	Property, 	the 	Debtor
held 	only 	a 	month-to-month 	tenancy. 	A 	month-to-month 	tenancy 	is
subject 	to 	the 	deadline 	for 	assumption 	or 	rejection 	under 	§
365(d)(4). 	Alegre also contends that the Court’s other findings with
respect to factors relevant to a determination of whether a contract
constitutes a lease were in manifest error.
In 	opposition 	to 	the 	motion, 	the 	Debtor 	asserts 	that 	Alegre’s
arguments 	are 	simply 	a 	repetition 	of 	those 	originally 	advanced 	and
therefore insufficient to support a motion for reconsideration. 	It
characterizes 	as 	circular 	Alegre’s 	argument 	that 	the 	RDA 	creates 	a
month-to-month 	tenancy, 	because 	California 	law 	does 	not 	permit 	a
lease of an indefinite term. 	The Debtor also contends that the other
factors 	relied 	upon 	by 	the 	Court 	in 	making 	its 	determination
Case: 09-43502 Doc# 140 Filed: 01/13/10 Entered: 01/13/10 15:55:24 Page 4 of
8

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
1Alegre contends that the Court should not consider the
countermotion because it was filed more than 10 days after entry of
the order denying Alegre’s motion. 	The Debtor responds that the
countermotion should be considered a motion pursuant to Rules 59
and/or 60 of the Federal Rules of Civil Procedure. 	In either case,
the Debtor argues, its countermotion would be timely. 	The Court
concludes that the timeliness of the countermotion is moot because,
based on the merits, it declines to grant the countermotion.
5
supported the Court’s conclusion. 	It contends that the RDA created
a hybrid legal relationship between the Debtor and Alegre, containing
some 	characteristics 	of 	a 	lease 	and 	some 	characteristics 	of
ownership.
Alegre’s motion for reconsideration will be denied. 	The Court
agrees with the Debtor that the RDA appears to have created a hybrid
contractual 	relationship 	between 	the 	Debtor 	and 	Alegre, 	part 	lease
and 	part 	property 	right. 	It 	would 	be 	contrary 	to 	the 	expressed
intent of the RDA to characterize the Debtor’s right to remain on the
Property as a month-to-month tenancy. 	Such a right would be subject
to loss at any time at Alegre’s discretion, even if the Debtor were
current on the rent. In any event, for purposes of this motion, the
Court makes no final ruling as to the nature of the rights created by
the RDA. 	The Court simply holds that the Debtor’s failure to assume
or 	reject 	the 	lease-like 	provisions 	of 	the 	RDA 	does 	result 	in 	the
automatic rejection of the Debtor’s right to remain on the Property.
However, 	as 	stated 	in 	the 	Memorandum, 	the 	Debtor 	must 	pay 	the 	fair
market rental rate for doing so.
B. 	DEBTOR’S MOTION FOR RECONSIDERATION
The Debtor asks the Court to reconsider its determination that
the Property was nonresidential real property. 1 	It contends that it
Case: 09-43502 Doc# 140 Filed: 01/13/10 Entered: 01/13/10 15:55:24 Page 5 of
8

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
6
has 	not 	been 	established 	that 	the 	zoning 	on 	the 	Property 	did 	not
permit residential use. 	The Debtor notes that an unlawful detainer
action filed by Alegre was dismissed by the state court. The Debtor
also disputes that the principal use of the Property is commercial.
While 	there 	are 	three 	businesses 	being 	operated 	on 	the 	Property,
there 	are 	also 	three 	family 	groups 	living 	there. 	The 	Debtor 	also
contends that the RDA envisioned the continued residential use of the
Property by Michael Clement and his family members.
These arguments are unpersuasive. 	In its reply to the Debtor’s
opposition 	to 	the 	original 	motion, 	Alegre 	provided 	evidence 	that
residential use of the Property violated the Antioch Municipal Code.
No evidence has been provided as to why the unlawful detainer action
was 	dismissed. 	Moreover, 	the 	Court 	is 	not 	even 	certain 	that 	the
unlawful detainer action even raised the issue of persons living on
the 	Property. 	The 	Court 	notes 	that 	the 	defendant 	in 	the 	action 	is
the Debtor, not Michael Clement or his family members. 	Finally, the
Court 	can 	find 	no 	statement 	in 	the 	RDA 	that 	supports 	the 	Debtor’s
contention that the RDA envisioned the continued residential use of
the Property.
The 	Debtor 	also 	asks 	the 	Court 	to 	reconsider 	its 	finding 	that
the 	RDA 	was 	not 	a 	financing 	lease. 	The 	Debtor 	contends 	that 	the
rent 	initially 	charged 	did 	not 	reflect 	the 	value 	of 	the 	use 	of 	the
Property. 	The 	timing 	of 	the 	rent 	was 	linked 	to 	the 	Holland 	Tract
project. 	Rent 	would 	start 	to 	accrue 	only 	if 	the 	Holland 	Tract
project was not completed within 15 months from the execution date of
the RDA. 	The amount of the $104,000 credit to be applied to the rent
Case: 09-43502 Doc# 140 Filed: 01/13/10 Entered: 01/13/10 15:55:24 Page 6 of
8

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
7
during the initial months after the rent started to accrue was linked
to the purchase price for the Property.
The Court finds these arguments unpersuasive. 	More relevant was
that, once rent began to accrue, the RDA set a rental rate of $5,000
per month initially, increasing to $7,000 thereafter, still later to
be set at the fair market rental rate. 	These provisions appear to be
linked to the value of the Debtor’s use of the Property, not to any
financing arrangement.
CONCLUSION
Both motions for reconsideration are denied. 	Neither party has
established to the Court’s satisfaction any manifest error of fact or
law in the Memorandum. 	Counsel for the Debtor is directed to submit
a proposed form of order denying Alegre’s motion for reconsideration.
Counsel 	for 	Alegre 	is 	directed 	to 	submit 	a 	proposed 	form 	of 	order
denying the Debtor’s countermotion for reconsideration.
END OF DOCUMENT
Case: 09-43502 Doc# 140 Filed: 01/13/10 Entered: 01/13/10 15:55:24 Page 7 of
8

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
8
COURT SERVICE LIST
James A. Tiemstra
Law Offices of James A. Tiemstra
Tribune Tower
409 13th St. 15th Fl
Oakland, CA 94612
Jermeny W. Katz
Pinnacle Law Group
425 California St., Ste. 1800
San Francisco, CA 94104
Steven B. Piser
Law Offices of Steven B. Piser
499 Fourteenth St., Ste. 210
Oakland, CA 94612
Case: 09-43502 Doc# 140 Filed: 01/13/10 Entered: 01/13/10 15:55:24 Page 8 of
8