Memorandum of Decision Re: 50 Year Sublease

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In re PATRICK and KATHLEEN McMAHON,                                                                           No. 95-11897      Debtors. ___________________________/
Memorandum of Decision
     In 1984, debtor Patrick McMahon paid Pier 39 Limited Partnership $100,000.00 for a 50-year sublease of a boat slip at Pier 39, San Francisco. Pier 39 has a master lease with the city. The sublease does not require the payment of rent in the conventional sense, but requires McMahon to pay monthly fees for maintenance, repair, operation, and management of the premises. The lease provides that the lien for these fees shall be a mortgage within the meaning of section 2920 of the California Civil Code, and may be enforced in the same manner as foreclosure of liens on real property.      Before the filing, McMahon failed to pay the fees and was sued for them by Pier 39. McMahon prevailed at the trial level, with the state court holding that because Pier 39 had previously sued for money damages it was barred from recovery by California Code of Civil Procedure section 726. However, this ruling was reversed on appeal and a money judgment was ordered to be entered. The appellate court ruled that due to procedural errors Pier 39 had lost its right to foreclose based on this particular debt.      Now before the court are McMahon's amended plan proposing to pay Pier 39 seventy cents on the dollar, Pier 39's motion to have its lease deemed rejected, and McMahon's motion to assume the lease if it is found to be an executory contract.      The court has no difficulty disposing of Pier 39's arguments that the court should apply section 365 of the Bankruptcy Code to deem McMahon's interest in the slip forfeited as an unassumed executory contract. A court of equity looks through the form of a contract to its substance. Where the agreement grants a 50-year interest in return for a payment of $100,000.00, and provides for relatively nominal payments thereafter, it is not a true lease subject to the automatic rejection provisions of section 365. In re Moreggia & Sons, Inc., 852 F.2d 1179 (9th Cir.1988). The fact that the nominal payments are to be enforced by foreclosure rather than unlawful detainer proceedings further establishes that the agreement did not create a typical landlord/tenant relationship.      Further, the state appellate court made it clear that the judgment for unpaid fees was unsecured. Pier 39 advances no reason why its existence poses an impediment to confirmation so long as Pier 39 would not receive more that seventy cents of the dollar if the case were a Chapter 7 case and so long as McMahon and his wife are devoting all disposable income for 36 months. Since the amended plan so provides, the court would confirm it if everything else was acceptable. However, the terms of Attachment 1 do not seem proper, in that the amount of attorney's fees will be left to the state court to fix and the sublease the debtors propose appears to violate the terms of the agreement with Pier 39.      Moreover, the plan fails to deal with McMahon's accruing postpetition monthly fees due to Pier 39. Since the already-confirmed original plan did not modify the right to these fees (and probably could not), Pier 39 is entitled to full payment of fees accruing postpetition. The court is in no way inclined to allow modification of this right at this late date, even if the amended plan so provided (it does not). If McMahon's postpetition fees are not current, the court will entertain Pier 39's motion for modification of the automatic stay.      To summarize:      1. The agreement between Pier 39 and McMahon is not governed by section 365 of the Bankruptcy Code. Pier 39's motion to have it deemed rejected (and McMahon's motion to assume) will be accordingly denied. In any further proceedings, Pier 39 will be treated as an unsecured creditor as to the judgment and a secured creditor as to McMahon's other obligations under the agreement.      2. The amended plan is not confirmed solely because the provisions of Attachment 1 are not acceptable. A further confirmation hearing will be held on February 24, 1997, at 1:30 P.M.      3. As a secured creditor, Pier 39 may seek modification of the automatic stay to foreclose if McMahon is not current in his postpetition fee obligations.      Either side may submit appropriate orders in conformance with this memorandum.
Dated: January 28, 1997                                                                     _______________________                                                                                                            Alan Jaroslovsky                                                                                                            U.S. Bankruptcy