Appeal from the United States Bankruptcy Court for the Eastern District of California. BAP No. EC-91-1693-JMeO. Honorable David E. Russell, Bankruptcy Judge, Presiding.
Before: Jones, Meyers, and Ollason, Bankruptcy Judges
Prior to May of 1989, appellant Donald Moore ("Moore") operated a campground facility ("Campground") in Siskiyou County, California. Moore, who operated the Campground through a wholly-owned corporation named Lake Siskiyou Campground R.V. Park & Marina, Inc.("LSI"), leased the Campground property from Siskiyou County ("County").*fn1
In May of 1989, debtors/appellees David and Cheryl Pollock ("Pollocks") agreed to purchase the Campground which included a sublease ("Sublease") of the leasehold under the Master Lease, leasehold improvements and personal property. The purchase price was $1,160,000 with $260,000 payable in cash at the close of escrow and the remainder payable pursuant to a promissory note (" Note") in the amount of $900,000. Under the Note, monthly interest-only payments were due from August 1, 1989 through August 1, 1991, then monthly principal and interest payments were due over a 15-year period.
A security agreement covers the Pollocks' interest in the Sublease and the "improvements, equipment, furniture, fixtures, and personal property" located at the Campground. A financing statement was recorded with the California Secretary of State and a memorandum of Sublease was recorded with the Siskiyou County Recorder.
Counsel for Moore drafted the Sublease with Moore and Lake Siskiyou, Inc. as sublessors and the Pollacks as sublessees.*fn2 The rent provision of the Sublease states:
3. SUBLEASE RENT. Sublessee agrees to pay to Sublessor as rent for the premises described the sum of $1.00 and other valuable consideration, the receipt of which is acknowledged and is evidenced by the Purchase Agreement and Deposit Receipt dated May 16, 1989 and the Promissory Note and Security Agreement dated June 30, 1989.
The Sublease also required the Pollocks to pay county franchise fees and to maintain liability and fire insurance on the Campground.
In March 1991, the Pollocks stopped making payments on the Note. They filed a petition under Chapter 11 of the Bankruptcy Code*fn3 on March 15, 1991.
The Pollocks timely filed a motion to assume the Sublease. They argued that their obligations under the Note were separate and distinct from those under the Sublease and that they were not in default under the Sublease. Thus, the Pollocks asserted that they had complied with Bankruptcy Code § 365(b) and could assume the Sublease.*fn4
Moore opposed the Pollocks' motion to assume the Sublease, arguing that the payments required by the Note were an integral part of the Sublease. Thus, Moore asserted that the Pollocks were required to cure all arrearages under the Note as a condition of assuming the Sublease. Moore relied on the language of paragraphs 3 and 12 of the Sublease. Paragraph 3 is quoted above; paragraph 12 provides as follows:
12. DEFAULT AND RE-ENTRY. If default on the part of Sublessee be made in this agreement or any other agreement in which the demised property is the subject of the agreement, including the Security Agreement executed by the Sublessee herein for the benefit of the Sublessor as the secured party, Sublessor shall have the option of declaring this Sublease forfeited, and the same shall entirely cease, and with the giving by Sublessor of thirty (30) days notice, it shall be lawful for the Sublessor to re-enter and take possession of said premises and remove all persons and property therefrom, and Sublessor may, after taking possession of the premises, at Sublessor's option and without notice to Sublessee, relet the premises, all without prejudice to any other remedies Sublessor may have. It is specifically understood that each and all of the remedies given Sublessor are not exclusive; they ...