BANKRUPTCY No. 03-49462(GMB)
The opinion of the court was delivered by: Irenas, Senior District Judge
This matter comes before the Court on the appeal of Debtor Nickels Midway Pier, LLC ("Nickels") and cross-appeal of Wild Waves, LLC ("Wild Waves"), from the Bankruptcy Court's order of September 14, 2005, authorizing Nickels to reject an executory contract with Wild Waves, pursuant to 11 U.S.C. § 365(a), and holding that Wild Waves is entitled to the protections set forth in § 365(i).
Nickels is a real estate purchasing, leasing and management company. Nickels owns a pier located at 3500 Boardwalk, Wildwood, New Jersey ("Pier"), which it purchased in 1976. In or about the early spring of 1999, Nickels entered into a written lease agreement ("Lease") with Wild Waves, in which Wild Waves would lease 70% of the Pier ("leased premises") for the purpose of constructing and operating a water park.*fn1 (See Lease; Nickels Appendix:*fn2 19-30)
The Lease specifies a term of approximately sixteen years, beginning on May 15, 1999, and terminating on December 31, 2014.
(Lease at ¶ 3; NA:20) The Lease also provides that Wild Waves may extend the Lease for three additional five-year terms. (Lease at ¶ 34; NA:27) Nickels was required to give possession of the leased premises to Wild Waves on October 1, 1999, although Wild Waves was permitted limited access to the leased premises before that date. (Lease at ¶¶ 7, 10; NA:21-22) Wild Waves was obligated to make five rental payments of $50,000 each year, beginning on January 1, 2000, with an increase in rent effective January 1, 2003. (Lease at ¶ 4; NA:20) Wild Waves was also required to pay annually to Nickels one-third of the real estate taxes for the entire Pier. (Lease at ¶ 9; NA:21)
The Lease includes a provision in which Nickels acknowledges that Wild Waves will be seeking financing to construct a water park on the Pier and permits a lien to be placed on the Pier by Wild Waves' financing institution. (Lease at ¶ 20(c); NA:25) The provision specifies that Nickels is not obligated to assume personal responsibility for the payment of the lien or to subordinate any existing mortgage to the lien of Wild Waves' financing institution. (Id.)
The Lease does not mention any agreement between the parties that Nickels would sell the entire Pier to Wild Waves. Wild Waves asserts, however, that it also had an oral agreement with Nickels to buy the Pier in 2003. A written document entitled Agreement for the Sale of Real Estate (hereinafter "Agreement for Sale") was prepared but was not executed, as it was not signed by a representative of Nickels. (Agreement for Sale; NA:48-62) Nickels maintained that it never agreed to sell the Pier to Wild Waves. Wild Waves never furnished any payment called for by the Agreement for Sale and Nickels never delivered the deed.
On September 29, 1999, the parties agreed to several amendments to the Lease which were memorialized in a written and executed document entitled Amendment to Lease. (NA:488-89) The amendments include a provision obligating Wild Waves to pay $400,000 as additional collateral in consideration of Nickels permitting Wild Waves to encumber the Pier in order to obtain financing for the water park. (Id.) Nickels was obligated to hold the money as collateral until Wild Waves' mortgage from Sun Bank matured in or about 2004, but could use the money in the interim to cure any defaults by Wild Waves on the Sun Bank mortgage. (Id.) The Amendment to Lease does not mention any agreement to sell the Pier.
In 2001, Nickels instituted a civil action against Wild Waves in New Jersey Superior Court, Chancery Division ("State Court Action").*fn3 Wild Waves filed a counterclaim in the State Court Action seeking a determination that an oral contract for sale of the Pier existed between the parties.
Before the State Court Action could be resolved, Nickels filed for chapter 11 bankruptcy on December 8, 2003. On December 16, 2003, Nickels filed a motion to reject the Lease, pursuant to 11 U.S.C. § 365 ("Motion to Reject"). Wild Waves filed a motion for stay relief to pursue its counterclaim in the State Court Action, which the Bankruptcy Court granted on February 20, 2004. The Bankruptcy Court also reserved its decision on the Motion to Reject until the resolution of the State Court Action.
In a letter opinion dated April 12, 2005, Presiding Judge George Seltzer of the Superior Court, Chancery Division, held that an oral contract for sale of the Pier existed between Nickels and Wild Waves. Nickels Midway Pier v. Wild Waves, No. CPM-53-01 (N.J. Super. Ct. Ch. Div. Apr. 12, 2005)(hereinafter "Letter Op.") Judge Seltzer held that the contract for sale required Nickels to sell and Wild Waves to buy the Pier for a price of $5.5 million in 2003. (Letter Op. at 1) Wild Waves was to pay $3.490 million*fn4 in cash with Nickels taking back a $2 million mortgage. (Letter Op. at 14)
He determined that the agreement to sell was reached in May, 1999, and the final terms of the sale were contained in the unexecuted Agreement for Sale, which was sent from Nickels' counsel to Wild Waves on May 17, 1999. (Letter Op. at 2) The unexecuted Agreement for Sale provided that the sale was contingent upon Wild Waves receiving a written commitment from an institutional lender to make a mortgage loan in the amount of $5.4 million*fn5 on or before three months of the date of the closing.*fn6 (Agreement for Sale at ¶ 4; NA:50-51) The date of the closing was set for January 31, 2003. (Id. at ¶ 5; NA:51)
After reviewing other contemporaneous communications between Nickels and Wild Waves, Judge Seltzer concluded:
I am, therefore, satisfied, beyond any hesitation, that Nickels Midway Pier and Wild Waves had reached an agreement that would require Wild Waves to lease a portion of the Pier for a three year period and thereafter purchase it in accordance with the terms of [Agreement for Sale]. I am further certain that the lease and sale were two aspects of a thoroughly integrated agreement. Although only the portion of agreement [sic] respecting the lease was committed to an executed writing, I remain absolutely convinced that these parties intended to be bound as to the sale, even in the absence of an executed writing. (Letter Op. at 9-10) He determined that the Lease was one component of a transaction that was to culminate in the sale of the Pier, and was entered into in part to aid Wild Waves in securing financing for the water park. (Letter Op. at 11)
After resolution of Wild Waves' counterclaim in the State Court Action, Nickels sought to proceed with its Motion to Reject in Bankruptcy Court. Although it is not entirely clear from the record on appeal, it appears that upon an oral motion by Nickels, the Bankruptcy Court and the parties treated the renewed Motion to Reject as encompassing both the written Lease and the oral contract for sale (collectively the "Agreement"), pursuant to Judge Seltzer's ruling. (See Tr. Of Aug. 9, 2005, Hearing at 7:11-18; NA:72)
The Bankruptcy Court held a hearing on the Motion to Reject on August 9, 2005, and issued its opinion on September 1, 2005, and an order on September 14, 2005. Bankruptcy Judge Burns first held that the Agreement was an executory contract for the purposes of 11 U.S.C. § 365(a). She concluded that the Agreement had not been terminated prior to the filing of the bankruptcy petition by any anticipatory repudiation on the part of Nickels, and that Wild Waves was estopped from arguing otherwise. Bankruptcy Judge Burns noted that substantial performance under the Agreement was still outstanding by both parties.
The Bankruptcy Court next held that Nickels was permitted to reject the Agreement pursuant to § 365(a). Bankruptcy Judge Burns concluded that Nickels exercised reasonable business judgment in rejecting the Agreement, as real estate values in Wildwood had increased and Nickels had multiple offers to buy the Pier at much higher prices than in the Agreement. The Bankruptcy Court rejected Wild Waves' argument that Nickels could not reject the Agreement because Wild Waves was entitled to specific performance of the Agreement under state law. Bankruptcy Judge Burns determined that the protections granted in § 365(i) to parties whose contracts for sale of real property have been rejected by a debtor preempted Wild Waves' specific performance claim. The Bankruptcy Court also held that Wild Waves' cause of action for specific performance of the Agreement was a claim in bankruptcy under 11 U.S.C. § 101(5) and thus could be discharged in a bankruptcy proceeding.
Finally, the Bankruptcy Court concluded that Wild Waves was entitled to the protections of § 365(i) because it was a "purchaser in possession" within the meaning of that section even though it was only in possession of 70% of the Pier. Nickels appeals the Bankruptcy Court's determination and Wild Waves cross-appeals.
The District Court has jurisdiction to hear appeals from final judgments, orders and decrees of the Bankruptcy Court in cases and proceedings referred pursuant to 28 U.S.C. § 157(a) to the Bankruptcy Court. 28 U.S.C. § 158(a). The Bankruptcy Court exercised jurisdiction over this case pursuant to § 157(a) and thus, under § 158(a), this Court has jurisdiction over the appeals of the parties from the final order of the Bankruptcy Court.
The District Court reviews de novo the legal determinations of the Bankruptcy Court. In re Fairfield Exec. Assoc., 161 B.R. 595, 599 (Bankr. D.N.J. 1993). The factual determinations of the Bankruptcy Court will be left undisturbed on ...