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AltaNatural Corp. v. New Investments Inc.

United States District Court, W.D. Washington, Seattle

March 12, 2018



          Honorable Richard A. Jones United States District Judge

         This matter comes before the Court on appellant, New Investments Inc.'s (“New Investments”) appeal from the Bankruptcy Court's final judgment entered on August 26, 2016. Dkts. 1, 17, 18. Appellee, Altanatural Corporation (“Altanatural”), filed a brief in opposition, Dkt. 21, and New Investments filed a reply, Dkt. 22.

         New Investments filed for Chapter 11 bankruptcy and subsequently entered into a purchase agreement with Altanatural for the sale of its main asset --a hotel located in Kirkland, Washington (the “Property”). The deed for the sale of the Property did not identify a parking easement (the “Easement”) granting the use of 14 parking spaces to a neighboring condominium complex. Altanatural did not discover the Easement until after closing. In addition, after closing, New Investment continued to occupy two guest rooms and storage space at the hotel, purportedly without consent from Altanatural.

         New Investments appeals the final judgment of the Bankruptcy Court, arguing that the Bankruptcy Court erred in: (1) calculating damages due to the easement; (2) justifying suspension of performance; (3) interpreting the promissory note and applying the equitable doctrine of recoupment; and (4) applying the waiver/estoppel defense with respect to New Investments' occupation of various guest rooms and storage space.

         The Court affirms the Bankruptcy Court's decision. First, after concluding that there was a reasonable certainty as to the fact of damages, the Bankruptcy Court set the damages due to the Easement at $350, 000, which was within the range of admissible evidence. Second, because New Investments' actions constituted a material breach, Altanatural was justified in suspending interest payments under the Promissory Note. Third, Altanatural was entitled to recoup the judgment against the principal balance of the Promissory Note, as the language waiving offset did not include claims that fell within the equitable remedy of recoupment. And finally, the Bankruptcy Court properly rejected New Investments waiver and estoppel defenses, and correctly found that New Investments did not have a right to occupy the hotel property after November 2014.


         For the most part, New Investments has not challenged on appeal the Bankruptcy Court's findings, so the Court draws the factual recitation from the Bankruptcy Court's findings of facts and conclusions of law entered on May 6, 2016 and oral ruling entered on August 18, 2016. Dkt. 18, DR 32 (findings of fact and conclusion of law); DR 44 (oral ruling). On February 4, 2013, New Investments filed a voluntary petition for Chapter 11 bankruptcy. Bankruptcy Case No. 13-bk-10948, Dkt. 1 at 1. New Investments' primary asset was real property including a hotel and restaurant, located at 12233 Totem Lake Way, Kirkland, Washington 98034 (the “Property”). Id.

         On September 12, 2013, New Investments and Altanatural entered into Purchase and Sale Agreement and three separate addendums (the “PSA”), in which Altanatural agreed to purchase the Property from New Investments for $6, 325, 228.00. Dkt. 18, DR 32 at FF No. 1. Altanatural paid $3, 000, 000 of the purchase price as a down payment, and the remaining $3, 325, 228.00 in a promissory note (the “Promissory Note”) executed in favor of New Investments, which was secured by a deed of trust against the Property. Dkt. 18, DR 32 at FF No. 2.

         The PSA required New Investments to: (1) deliver a Special Warranty Deed (“Special Warranty Deed”) to Altanatural conveying the Property with only those encumbrances permitted by the Special Warranty Deed and (2) deliver quiet possession of the Property and clear, marketable title at closing. Dkt. 18, DR 32 at FF Nos. 2, 3. The parties closed the sale on October 4, 2013 and the PSA was incorporated into New Investments' Second Amended Plan of Reorganization. Dkt. 18, DR 32 at FF No. 3.

         The Special Warranty Deed did not identify a parking easement (the “Easement”) that New Investments had granted to a neighboring condominium complex, Chelsea Court II, LLC. Dkt. 18, DR 32 at FF No. 6. The Easement granted exclusive use of 14 parking spots on the Property. Dkt. 18, DR 32 at FF Nos. 6-7. In the spring of 2014, Altanatural learned of the Easement. Dkt. 18, DR 32 at FF No. 6.

         The parties agreed that New Investments' President, Shabnam Aziz, would train and assist Altanatural following the closing, and that she could occupy guest room 227 at the Property. Dkt. 18, DR 32 at FF No. 4. Altanatural did not give express consent for New Investments to occupy any other rooms. Id. Following the closing, New Investments and members of the Aziz family that owned New Investments continued to occupy ten storage rooms and guest rooms 153, 154, 227 and 228 at the Property. Dkt. 18, DR 32 at FF No. 5.

         For several months until November 2014, the parties worked to resolve these issues. During this time, Dr. William Xiong, Executive Vice President of Altanatural, agreed to New Investments' use of the occupied storage rooms, offices, and guest rooms. Dkt. 18, DR 32 at FF No. 9. On November 13, 2014, Altanatural delivered a letter to New Investments and its counsel, demanding that New Investments pay for its use of the rooms, honor its warranties of title and indemnify Altanatural or otherwise have the Easement removed as encumbrance. Dkt. 18, DR 32 at FF No. 10.

         After New Investments failed to address the defaults, Altanatural suspended its payments under the Promissory Note and withheld interest payments for November and December and the December 31, 2014 balloon payment. Dkt. 18, DR 32 at FF No. 11. Until that point Altanatural had made monthly interest payments on the Promissory Note, totaling over $180, 000. Dkt. 18, DR 32 at FF No. 8. The parties negotiated a settlement for several months, and in March 2015 reached an agreement (the “Settlement Agreement”) on the material terms of a resolution: a balloon payment of $2, 990, 000.00 (reduced from $3, 325, 228.00) from Altanatural to New Investments; allocation of the payment in a manner proposed by New Investments; and a right for New Investments to use the hotel rooms on the Property through December 31, 2015. Dkt. 18, DR 32 at FF No. 17. However, the Bankruptcy Court determined that the Settlement Agreement was not enforceable, and therefore it was not approved. Dkt. 18, DR 32 at FF No. 18; DR 44 at 4.[1]

         Between November 2014 and December 2015, storage rooms 1-7, 9, and 10 contained items that were associated with the hotel and/or were not occupied. Dkt. 18, DR 32 at FF No. 18. Storage room 8 was occupied for 377 days and contained non-hotel items. Dkt. 18, DR 32 at FF No. 19. Guest rooms 153, 154, and 156 were not occupied, and it is unclear whether the two offices were occupied in a manner that would preclude use by Altanatural. Id. From November 2014 to October 2015, Shabnam Aziz occupied guest room 288, and her parents, Sheraly Aziz and Zeri Aziz, occupied guest room 227. Dkt. 18, DR 32 at FF No. 20.

         On July 23, 2015, Altanatural filed an adversary proceeding against New Investments. Adversary Case No. 15-ap-01188, Dkt. 1. On August 20, 2015, Altanatural moved for partial summary judgment, claiming a breach of warranty on the Special Warranty Deed and the PSA. Dkt. 18, DR 2. On October 8, 2015, the Bankruptcy Court held oral arguments on Altanatural's motion for partial summary judgment. Dkt. 18, DR 41. On November 12, 2015, the Bankruptcy Court entered an order granting Altanatural's motion in part, leaving the issue of damages for trial. Dkt. 18, DR 14.

         Trial was held on March 10 and 11, 2016. Dkt. 18, DR 42. On May 6, 2016, the Bankruptcy Court entered findings of fact and conclusions of law following trial. Dkt. 18, DR 32. On July 21, 2016 the Bankruptcy Court held a subsequent hearing to set the judgment amount and the parties submitted additional briefing. Dkt. 18, DR 43. On August 18, 2016, the Bankruptcy Court made an oral ruling that it incorporated into its findings of fact and conclusions of law. Dkt. 18, DR 44. The Bankruptcy Court then entered a judgment against New Investments in the principal amount of $415, 848.00 that would be recouped against the remaining payments due under the Promissory Note. Dkt. 18, DR 44 at 21. The Bankruptcy Court stayed enforcement of the judgment pending the appeal, but set aside $230, 000 to pay the judgment and any fees and costs that Altanatural accrued. Dkt. 18, DR 49.

         New Investments promptly appealed. Dkt. 1.


         District courts have jurisdiction to hear appeals from a final judgment and order in a bankruptcy proceeding. See 28 U.S.C. § 158(a)(1). A district court reviews the bankruptcy court's conclusions of law de novo and reviews determinations of fact for clear error. See In re Crow Winthrop Operating P'ship, 241 F.3d 1121, 1123 (9th Cir. 2001) (citing In re Video Depot, Ltd., 127 F.3d 1195, 1197 (9th Cir. 1997)).

         The issues raised on appeal are limited to those addressed below. Smith v. Marsh, 194 F.3d 1045, 1052 (9th Cir. 1999) (“[A]n appellate court will not consider issues not properly raised before the [trial] court.”); Alaska Airlines, Inc. v. United Airlines, Inc., 948 F.2d 536, 546 n. 15 (9th Cir. 1991) (“[A]n appellate court will not reverse a district court on the basis of a theory that was not raised below.”). The court can affirm the bankruptcy court's ruling on any basis supported by the record. See, e.g., Dittman v. California, 191 F.3d 1020, 1027 n.3 (9th Cir. 1999).


         I. Calculation of ...

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