Memorandum of Decision Re: Surrender of Leased Premises

FOR THE NORTHERN DISTRICT OF CALIFORNIA In re ELMER'S PANCAKE AND STEAKHOUSE                                       No. 1-89-00068 OF NORTHERN CALIFORNIA, INC.,      Debtor. _____________________________/
Memorandum of Decision
     The facts in this matter, as the Court finds them, are not complicated. The debtor operates a restaurant on the leased premises at 4175 Solano Avenue, Napa, California. The restaurant did not do well in 1988, and fell behind in its rent. The landlord mailed a 3-day notice to pay rent or quit to the debtor on December 17, 1988.      On Sunday, January 15, 1989, at about 10:00 P.M., the landlord went to the premises, roused the manager who was closing for the night, and demanded the keys. The manager called the debtor's president, Frank Calderwood, who was taken by surprise by the landlord's demand and at first refused to comply. However, after a brief conversation with the landlord, he told the manager to turn the keys over. The landlord immediately changed the locks, and left behind inside the premises a notice that he accepted surrender of the premises and the lease was accordingly terminated.      The next day was a national holiday. On the following day, Tuesday, January 17, Calderwood filed a Chapter 11 bankruptcy petition for the debtor in the afternoon and then broke into the restaurant and changed the locks that evening. He proceeded to operate the business for a few weeks, until he found a buyer for the restaurant.      The purchase price for the restaurant is sufficient to cure all defaults under the lease, compensate the landlord for his expenses, and leave a considerable sum to pay other debts. The debtor now seeks leave to assume and assign the lease to the purchaser in accordance with section 365(b) of the Bankruptcy Code. The landlord argues that because the lease was terminated prior to the bankruptcy assumption and assignment are barred by section 365(c)(3).      The 3-day notice mailed by the landlord on December 17 seems irrelevant. Not only is there no proof of its proper service, but even if service were proper it is not too late to assume the lease so long as the requirements of California's anti-forfeiture statute are met. In re Windmill Farms (9th Cir.1988) 841 F.2d 1467. Given the totally of the circumstances, and the fact that the landlord is to made completely whole from the sale, the Court would have no problem relieving the forfeiture.      The real issue here is whether the lease was terminated under California law by surrender on January 17. If it was, then section 365(c)(3) of the Code prohibits its assumption or assignment.      A surrender of the lease occurs only by either express agreement between the landlord and the tenant or by acts so inconsistent with the lease as to imply an agreement to surrender. 42 Cal.Jur.3d, Landlord and Tenant, section 251. The evidence did not establish an express agreement to surrender; the Court must therefore determine if the circumstances justify a finding that the lease was surrendered by implication.      The circumstances do not indicate that the debtor intended to surrender the lease. At the time of the alleged surrender, the debtor was still actively in business, no unlawful detainer suit had been commenced, and an effective 3-day notice had not even been given. The evidence clearly showed that Calderwood was surprised by the late-night phone call and had no opportunity to consult his counsel, and that he was preoccupied with his wife's health problems and not prepared for a confrontation. Further evidence that there was no surrender include the fact that all of the debtor's property, including a large amount of cash, remained on the premises, and the fact that Calderwood took action to regain control on the next business day.      Even if the Court found an intent on the debtor's part to surrender (which it does not), the lease would still be assumable unless the landlord had completed the agreement to accept surrender before the bankruptcy was filed. The mere acceptance of keys is not sufficient to establish a surrender of the lease. 42 Cal.Jur.3d, supra, at p. 281, citing Dorn v. Oppenheim 45 Cal.App. 312, Anheauser-Busch Brewing Assoc. v. American Products Co. 59 Cal.App. 718, and Dickinson v. Electric Corp. (1935) 10 Cal.App.2d 207. According to the lease itself, there could be no surrender until the landlord delivered written notice to the debtor of its acceptance of the surrender. The Court does not see how leaving such a notice inside the premises could meet this requirement, since the debtor was locked out of the premises and could not have seen the notice until after the bankruptcy petition was filed and 1it reasserted its right to the premises.

     1. It should be noted that while the Court does not condone the debtor's break-in to regain possession of the premises, that act occurred after the petition was filed and is therefore not relevant to a determination of whether the lease had already been terminated when the petition was filed.
     Moreover, although the issue is not presently before the Court, it is possible that even if there had been a surrender it could be avoided as a constructive fraudulent conveyance and the power to assign the lease could be revived. See In re Edward Harvey Co., Inc. (Bkrtcy.D.Mass.1987) 68 B.R. 851.      From all of the evidence, the Court concludes that the debtor did not intend to surrender the lease, and that in any event there had been no effectively accepted surrender when the debtor's bankruptcy petition was filed. Accordingly, the debtor may assume and assign the lease so long as the landlord is made whole pursuant to section 365(b)(1) of the Bankruptcy Code. The landlord's motion for relief rom the stay will be denied, without prejudice to renewal if the sale is not quickly consummated.      Counsel for the debtor shall submit an appropriate form of order, which counsel for the landlord shall approve as to form.
Dated: February 19, 1989                                                                              _________________________                                                                                                                      Alan Jaroslovsky                                                                                                                      U.S. Bankruptcy