UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF KENTUCKY
DEBTOR CASE NO. 95-60732
This matter is before the Court on the Trustee's Motion for Order Authorizing Assumption of Lease, filed herein on January 19, 1996. At issue is a residential lease to the debtor from Marlene and Walter Stacy ("the Stacys") by an instrument dated December 15, 1991. Marlene Stacy is the debtor's sister. The Stacys filed an Objection to Motion for Order Authorizing Assumption of Lease on February 7, 1996, and the Trustee filed a Response on February 12, 1996. The Stacys filed a Motion for Relief from Stay to Terminate Lease on March 7, 1996. The Motion was overruled by Order entered on July 23, 1996. The Trustee, the Stacys, and the debtor have all submitted briefs.
The record in this case reveals that the debtor filed his Chapter 7 petition in this Court on December 11, 1995. His schedules set out liens against a leased house and property. The lease, a copy of which has been filed in this case, provides for a term of twenty years, commencing on December 15, 1991, and for three additional terms of twenty years each. The lease does not provide for the payment of any rent, but requires the debtor to keep and maintain the property, and, among other things, to keep the property free from liens and other encumbrances.
According to the debtor's deposition taken on February 23, 1996, he sold the property which is the subject of this lease to the Stacys in December 1990. The consideration for the sale was assumption of the mortgage, or about $40,000.00. The debtor became a co-signer on the mortgage. The Stacys made mortgage payments for about a year, and then became unable to keep them up. They and the debtor then entered into the lease, and the debtor agreed to make the mortgage payments in their stead. (Deposition of Edward Tincher, pp. 25-31). This agreement is not part of the lease.
The debtor further testified that there was no dwelling on the property in 1991, but that he began building a house there in June 1993. Outbuildings including a barn, a shed and a shop, were also constructed. The construction of the house went on for about a year, when the contractor "pulled out," leaving the debtor to finish it himself. The liens that were placed against the property were materialmen's liens of subcontractors who were not paid by the contractor. (Tincher depo., pp. 35-40).
The Trustee's Motion maintained that the debtor was not in default on the lease, and that the liens had been released. The Stacys' Objection countered that the debtor had violated the lease in allowing the liens to be placed against the property. The Trustee's Response argued that no default had occurred because the Laurel Circuit Court ordered the liens released in the Partial Summary Judgment entered therein in Civil Action No. 94-CI-310, "Clay Building Supply, Inc. v. Shepherd Plumbing and Builders; Eugene Shepherd; Hence Shepherd; Edward Tincher; Marlene Stacy and Walter Stacy; Cumberland Valley National Bank and Trust; Sidings Sales, Inc."
The Trustee stated that he could assume the lease even if a default had occurred if he met the conditions of 11 U.S.C.'365(b)(1), i.e., cure, compensation of pecuniary loss, and future performance. He further argued that his efforts to cure by having the liens released would only benefit the lessors and would cause no loss. In his Memorandum in Support of his Motion to Assume Lease the Trustee elaborated on this argument by submitting two offers to purchase the leasehold and fee interest. The Trustee contends that these offers would cure any default by satisfying the liens against the property.
The Stacys respond that since the default is non-monetary the Trustee has a right to cure it only if it constitutes a "claim" so that it can be cured by the payment of money. They cite in support of this proposition In re Mack, 1993 WL 722255 (Bkrtcy.E.D.Pa. 1993). There the court agreed with other courts that non-monetary defaults were curable, but stated:
If the non-monetary default creates a 'claim', so that it may be cured by payment of money, section 365(b) permits the debtor to assume the lease ... But if there is no right to pay money, then there is no right to cure under section 365(b) unless nonbankruptcy law permits the debtor to cure the default with future performance of some sort.
At page 6.
The Stacys go on to argue that the Trustee has not established what the cure for the default under consideration here would be, or his ability to bring about any such cure.
The Trustee has proposed to sell the leasehold for $80,000.00, and satisfy the liens out of the proceeds of the sale, thereby providing a "monetary" cure for a "non-monetary" default. The Stacys, however, contend that this amount is not enough to "cure" because there are approximately $34,000.00 in liens against the property, as well as a mortgage in excess of $78,000.00 in favor of Cumberland Valley National Bank. The only mortgage in regard to the subject property is listed on the debtor's schedules as the $45,109.94 mortgage executed by the Stacys and the debtor as co-signer, and the Stacys have offered no evidence of another mortgage or further indebtedness.
As set out above, the debtor agreed to take over the mortgage payments on the property from the Stacys, but this agreement is not set out in the lease. If the debtor/lessee was not obligated under the lease, there is no reason why the purchaser of the leasehold would be so obligated. The lease itself provides that it "contains the entire agreement between the parties and may not be altered, amended or mofified unless done so in writing and signed by all the parties."
It therefore appears that the Trustee could cure the default by satisfying the liens, and even compensate the Stacys for their financial expenditures in responding to lawsuits filed by the various materialmen. However, a question remains concerning whether the Trustee could adequately assure performance under the lease, the third prong of 11 U.S.C.'365(b).
Adequate assurance of future performance is not defined in the Bankruptcy Code and is to be determined by factual conditions. See Matter of U.L. Radio Corp., 19 B.R. 537, 542 (Bkrtcy.S.D.N.Y. 1982). That court further stated that the "primary focus of adequate assurance is the ... ability to satisfy financial obligations under the lease." Id., at page 543. Here there are no financial obligations under the lease except those that have arisen on account of the liens, and those would be satisfied by the offer to purchase.
It therefore appears that the Trustee can satisfy the requirements of 11 U.S.C.'365(b) and should be allowed to assume the lease between the Stacys and the debtor. An order in conformity with this opinion will be entered separately.
By the Court -
James D. Lyon, Esq., Trustee
John O. Morgan Jr., Esq.
Marcia A. Smith, Esq.
Robert J.Brown, Esq.