CV ENTERTAINMENT GROUP INC

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Case:08-03393-ESL7 Doc#:102 Filed:08/19/08 Entered:08/19/08 14:13:02 Desc: Main

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AUTHENTICATED /
U.S. GOVERNMENT.
INFORMATION
GPO

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UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF PUERTO RICO

IN RE:

CV ENTERTAINMENT GROUP, INC.
: Case No. 08-03393-ESL
Debtor : Chapter 11

OPINION AND ORDER

Before the court is Empresas Puertorriquefias de Desarrollo, Inc.’s (“EPD’’) “Motion For

Determination that Expired Lease With [EPD] Is Not Property Of The Estate And That Automatic

Stay Is Not Applicable to The Pending Eviction Proceedings”, filed on June 6, 2008. (Dkt. 29) (the

“Motion for Determination”). The Motion for Determination seeks an order declaring that the lease
contract between EPD and CV Entertainment Group, Inc. (“Debtor”), was terminated before the
petition date and is no longer executory, is not property of the estate, and is, therefore, not subject
to the automatic stay or assumable by Debtor. Debtor filed its answer in opposition on June 25,
2008, (Dkt. 42) (“Debtor’s Opposition”). EPD filed a reply in support of its Motion for
Determination on July 15, 2008. (Dkt. 68) (“EPD’s Reply”). For the reasons set forth below, the
Motion for Determination is granted.
The Issues
The issue before the court is whether under Puerto Rico law a lessor can terminate a lease
pursuant to a notice of termination provision in the contract; or whether Puerto Rico law requires a
judicial determination in a plenary action or an eviction proceeding to terminate the lease contract.
We hold that under Puerto Rico law, EPD effectively terminated the lease contract through

its notice to Debtor without the need for a judicial declaration terminating the contract. A decree of

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eviction is intended to allow the lessor to peacefully regain possession of the leased premises, and
is not a legal pre-requisite to validly terminate the lease.
Facts and Background:

The following facts are undisputed. The Debtor filed for chapter 11 reorganization on May
29, 2008 and continues to conduct its affairs as a debtor-in-possession (“DIP”). The Debtor and EPD
are parties to a land lease that was assigned to the Debtor in June 2005 (the “lease”).' Among other
businesses, the Debtor operates an eight hall movie theater in the Mayaguez Mall Shopping Center
in premises leased from EPD (the “demised premises”). Section 16.1 of the lease contains a
“default” provision which, among other things, grants EPD the power to terminate the lease for non-
payment in ten days, after written notice of the default has been given (30 days for other types of
default not at issue in this case). On February 7, 2008, EPD mailed the default notice to the Debtor.
The notice clearly warned the Debtor that 1fit did not cure the $120,913 in arrears due as of that date
within ten days, such failure to cure would trigger the automatic termination of the lease without
further notice. EPD calculated Debtor’s cure period to end on February 17, 2008. Upon Debtor’s
failure to pay, EPD filed a summary eviction proceeding on February 21, 2008. The final eviction
hearing was scheduled for May 30, 2008. The Debtor filed for bankruptcy on May 29, 2008, thus
staying the eviction action.
The Parties’ Arguments

EPD argues that under Puerto Rico law it has the power and right to terminate the lease
pursuant to the contract’s termination provision, without the need for judicial action. EPD further

states that to the extent that a lessor such as EPD must resort to judicial action to evict the Debtor,

"Pursuant to the order entered on July 18, 2008 (Dkt. 73), EPD filed a copy of the lease (Dkt.
76, Exhibit 1), the June 2005 assignment of the lease to Debtor (the “assignment” Id., Exhibit 2), and
the “Default Notice” served on Debtor ( the “notice” Id., Exhibit 3).

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such a proceeding is to evict the lessee from the demised premises, and is not a prerequisite to
terminate the lease contract. EPD rejects any argument that this court can reinstate the lease and
allow the Debtor to assume it in bankruptcy once the lease has been validly terminated,

The Debtor argues that its interest in the lease contract is property of the estate pursuant to

section 541 of the Bankruptcy Code because the lease contract was not completely and irrevocably

terminated before the commencement of the bankruptcy case. The Debtor further alleges that it can
assume the contract under section 365(a) of the Bankruptcy Code. The Debtor bases its conclusions
on its assertion that a judicial determination through a plenary action or eviction proceeding is
necessary to terminate the lease. Absent such a final judicial determination the lease is still in effect
and assumable by the Debtor. The Debtor also alleges that EPD’s unilateral termination is
invalidated by section 365(e) of the Bankruptcy Code which addresses the so called ipso facto
clauses in contracts. Lastly, the Debtor invokes the equity powers of the bankruptcy court to deny
the enforcement of a termination clause in a contract after balancing the interests and prejudices of
the landlord and the debtor, as the court did in Jn re Land Management, Inc., 14 B.R. 607 (Bankr.
D.P.R. 1981). |
Discussion:

The Supreme Court of the Commonwealth of Puerto Rico in The Federal Land Bank of
Baltimore v. Ramon Echeandia, 48 D.P.R. 320, 1935 WL 5764 (1935), held that a party to an
agreement can terminate the same pursuant to a notice of termination provided for in the terms of
the agreement. This case constitutes the seminal precedent under Civil Code Art. 1077 [31 L.P.R.A.
3052] recognizing the power of termination of a contract by notice without the need for a court
decree terminating the agreement. The Supreme Court of Puerto Rico’s decision in The Federal

Land Bank of Baltimore has been followed in this district. In Fagot Rodriguez v. Republic of Costa

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Rica, 139 F.Supp.2d 173 (D.P.R. 2001), the U.S. District Court for the District of Puerto Rico
addressed the issue of termination of a lease by notice without court intervention and upheld the
lessor’s right fo terminate the lease by notice pursuant to the terms of the agreement. 139 F.Supp.2d
at 181-183 (holding that under Puerto Rico law, the lease was effectively terminated by the lessor’s
notice of default and termination, and any newly formed holdover tenancy was terminated upon
service of the complaint against the holdover tenant); accord, Campos del Toro v. Tribunal Superior
de Puerto Rico, 75 D.P.R. 370, 1953 WL 8224 (1953) (holding that a lease agreement can be
terminated at the election of the lessor either by notice of termination, or by filing suit for eviction;
in the latter case notice of the eviction action effectively substitutes as notice of termination under
the contract and extinguishes the lessee’s right to continued possession of the leased premises). See
also Mayaguez Shipping Terminal, Ine. v. Tirado, 56 D.P.R. 71, 1940 WL 8081 (1940) (upon
expiration of the fifteen-day period after notice of termination was served, the licensee was
possessing the premises without any right or title, at sufferance and subject to summary eviction).

Debtor misconstmes the effects of Art. 1077 ($3052) over this case and misapplies the other
election ofremedies to rescind contracts available to lessors of property under Articles 1446 (§ 4053)
and 1459 (§ 4066) of the Civil Code. EPD could file an ordinary civil suit to rescind the lease under
Art. 1446, or it could proceed to judicially dispossess the lessee under Art. 1459 for lack of payment.
The lessor or lessee have the option of selecting the remedy to rescind the lease under Article 1446,
that is, request rescission of the contract and indemnification for damages, or only the latter, leaving
the contract in force. Mora Development Corp. v. Sandin, 118 D.P.R. 733, 18 P.R. Offic. Trans.
847, P.R., Apr 29, 1987. The Debtor should not confuse the statutory right to terminate by notice
under Art. 1077 with the right to file for rescission or eviction under other statutes, because an action

for eviction is in and of itself a separate act of termination. Gonzalez Guerrido v. Solis Ortiz, 2006

Case:0B-03393-ESL7 Doc#:102 Filed:08/19/08 Entered:08/19/08 14:13:02 Desc: Main

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WL 2385452 , *9 N, 4 (TCA 2006) citing Mora Development Corp., supra; Cf Fagot Rodriguez,
supra; Campos del Toro, supra.

The Debtor has not challenged the validity of the termination provision in the lease or the
notice; nor can Debtor dispute the necessity of the eviction proceeding as a separate means for EPD
to peacefully regain possession of the leased premises. See Mora Development, supra. Upon
Debtor’s failure to cure its payment default within the ten days granted by the terms of EPD’s notice,
said notice terminated the lease contract and ended the Debtor’s right to continue possessing the
leased premises. As this court once stated in an analogous context, “[a] lease contract that is validly
terminated pursuant to state law may not be resutrected by the filing of a bankruptcy petition.” Jn re
Santos Borrero, 75 B.R. 141, 142 (Bankr. D-P.R. 1987) citing Moedy v. Amoco Oil Co., 734 F.2d
1200, 1212 (7" Cir. 1984) (holding that section 365 does not give a debtor the right to assume a
contract that was terminated pre-petition). After all, the filing of a petition cannot resuscitate the
debtor’s right to continued performance by the creditor under a contract that was validly terminated
pre-petition. 734 F.2d at 1214; In re Heghmann, 316 B.R. 395 (1° Cir. BAP 2004).

In conclusion, and in light of the holding in Bank of Baltimore and its progeny, it is settled
law in Puerto Rico that EPD effectively terminated the lease pre-petition upon the giving of notice
of termination issued pursuant to the terms of the lease, without the need for a declaratory action to
terminate the lease. The rule in Bank of Baltimore is eminently sensible because a valid agreement
is “the law” between the contracting parties and must be performed accordingly. Constructora
Bauza, Inc., v. Garcia Lopez, 129 D.P.R. 579, 593, 1991 P.R.-Eng, 735-859, P.R. Dec 17, 1991, In
this context, a unilateral termination provision is valid and enforceable and sufficient to terminate
any binding agreement without the need for judicial declaration to that effect. Flores v. Municipio

de Caguas, 114 D.P.R. 521, 14 P.R. Offic. Trans. 674, P.R., Jun 30, 1983 (Civil Code Art. 1077

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reco gnizes the power and validity under the civil law of unilateral termination by notice; such power

operates ex propio vigore by the will of the parties even if the contract at issue does not contain a

written termimation provision). The pending eviction proceeding against Debtor is an independent

action intended to regulate the process whereby EPD will regain possession of the leased premises

and does not limit the effectivity of the notice of termination.

Since the lease contract was terminated prior to the filing of the petition, the automatic stay
cannot be used as shield to obstruct EPD’s right to regain possession of its property through
resolution of the pending eviction proceeding. Such an event is specifically excepted from the
automatic stay provisions of section 362(a). 11 U.S.C. §362(b)(10). in re Southcoast Express, Inc.
And Sky View Lines, LLC, 337 B.R. 739 (Bankr. D. Mass. 2006).

The court also finds that section 365(e) which invalidates the termination clauses known as
ipso facto’ clauses is not applicable to the facts of this case. The prohibition in Section 365(e), by
its own terms, applies only to the termination of an executory contract or lease “at any time after the
commencement of the case.” A prepetition termination does not come within the protection of
§365(e).

Lastly, this court declines to follow the decision in Jn re Land Management to the extent that
a lease “technically terminated ...is assumable.” The bankruptcy court in Land Management found
that “[t]ermination per se did not give the Authority right to take immediate possession of the land

without intervention of the court.” 14 B.R. at 612. The court then balanced the equities of the case .

2-11 U.S.C. § 365(e)(1), “popularly known as the ipso facto clause,” prevents executory
contracts and leases from being automatically terminated by filing for bankruptcy. “The aim is to
protect the right of the bankruptcy estate to adopt, reaffirm and continue a contract or lease where
this will serve the estate’s interests.” Liberty Mutual Insurance Company v. Greenwich Insurance
Company, 417 F.3d 193, 198 (1* Cir. 2005). See also, Summit Investment and Development
Corporation v, Leroux, 69 F.3d 608, 610 (1* Cir. 1995).

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and found that, being in possession of the property, the debtor had a leasehold interest in the same,
and could assume the lease. Land Management was decided in 1981. The Bankruptcy Amendments
and Federal Judgeship Act of 1984, Pub. L. No. 98-353, 98 Stat. 333, effective July 10, 1984, added
a new exception to the automatic stay, now § 362(b)(10), to include lessor’s act under a
nonresidential property lease terminated before the commencement of the case. The 1984
amendment undercuts the rationale in Land Management.

For all the foregoing reasons, EPD’s Motion for Determination is hereby granted,

SO ORDERED.

San Juan, Puerto Rico, this 19" day of August, 2008.

GRIQUE S. LAMOUTTE
‘U.S. Bankruptcy Judge