Memorandum of Decision Re: Effect of Discharge on Option

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Decisions

UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
In re FRED BAKER,                                                                                       No. 97-13872

                 Debtor(s). ______________________________________/
Memorandum of Decision
     When debtor Fred Baker filed his Chapter 7 petition, he scheduled a one-sixth interest in a hotel in the town of Sheep Ranch, California, as having a value of $7,000.00. He claimed this interest as exempt. There were no objections to the claim of exemption, nor did the trustee attempt to administer Baker's interest in the hotel. The case was closed on January 27, 1998. Pursuant to § 554(c) of the Bankruptcy Code , Baker's interest in the hotel was deemed abandoned .      On April 27, 1998, the court granted Baker's application to reopen the case for the purpose of allowing him to seek avoidance of a judgment lien against the hotel held by creditor Charles Solak. Baker's motion to avoid Solak's lien pursuant to §522(f)(1)(A) is now before the court.       The key fact in this dispute is that Baker's interest in the hotel is the subject of an ancient and duly recorded option agreement with this co-tenants. Recorded in 1970, it gives them the option to purchase Baker's interest for a fairly nominal sum in 1998 dollars if Baker ever desires to sell his interest or other conditions arise. If this agreement is disregarded, Baker's interest in the hotel is worth considerably more than $7,000.00, such that Solak's lien does not impair the exemption.      Also of key importance is the fact that just prior to Baker's bankruptcy his co-owners had attempted to enforce their option. This seemingly means that the contract was executory and subject to rejection. In re Robert L. Helms Const. & Dev. Co., Inc., 139 F.3d 702, 706 (9th Cir.1998).       The court has no idea why the Chapter 7 trustee did not pursue the matter. However, it is too late for the trustee to act now, as the property has been abandoned by operation of law and cannot be "un-abandoned." In re Devore, - B.R. -, 98 C.D.O.S. 6405 (9th Cir.BAP 1998). The only issue for the court to decide here is whether the 1970 agreement should be considered in valuing Baker's interest in the hotel.      Section 365(d)(1) of the Bankruptcy Code provides that in a Chapter 7 case an executory contract is deemed rejected if the trustee does not assume it. Since the trustee in this case did not assume the contract, it was rejected . Baker argues that the agreement is now unenforceable. There is a fatal flaw in his logic. "Rejected" does not mean "void."      The effect of a discharge in bankruptcy is set forth in § 524 of the Code. Nowhere is a there a provision which purports to relieve a debtor of nonmonetary obligations under prepetition contracts, executory or not. Rejection does not terminate a contract. In re Lavigne, 114 F.3d 379, 387 (2nd Cir.1997); In re Continental Airlines, 981 F.2d 1450, 1459-61 (5th Cir. 1993). "Rejection merely frees the estate from the obligation to perform; it does not make the contract disappear." Lavigne, supra, citing In re The Drexel Burnham Lambert Group, 138 B.R. 687, 703 (Bkrtcy.S.D.N.Y. 1992). The court in Lavigne went on to note:            Rejection is not the power to release, revoke, repudiate, void, avoid,            cancel or terminate, or even to breach, contract obligations. Rather,            rejection is a bankruptcy estate's election to decline a contract or            lease asset. Id., citing Andrew, Executory Contracts in Bankruptcy: Understanding "Rejection," 59 U.Colo.L.Rev. 845, 931 (1988). Even if a contract is deemed rejected pursuant to § 365(d)(1), it is nonetheless still enforceable after a Chapter 7 discharge. In re Sims, 213 B.R. 641, 643 (Bkrtcy.W.D.Pa.1997). The nondebtor party to a rejected contract may still seek specific performance of the contract after discharge. In re Brown, 211 B.R. 183, 191 (Bkrtcy.E.D.Pa.1997).      Even though the 1970 agreement was "deemed rejected," it is nonetheless still in effect and enforceable against Baker. The court must therefore consider it in determining the value of Baker's interest in the hotel. Because Baker's interest is subject to sale to his co-tenants for the amount he has claimed exempt, Solak's lien impairs the exemption and is avoidable. His motion will accordingly be granted. Counsel for Baker shall submit an appropriate form of order. Dated: September 8, 1998                                                                      ____________________________                                                                                                                Alan Jaroslovsky                                                                                                                United States Bankruptcy Jud