Memorandum of Decision Re: Solvency

IN THE UNITED STATES BANKRUPTCY COURT FOR THE NORTHERN DISTRICT OF CALIFORNIA
In re KIRKLAND CATTLE CO.,                                       No. 1-86-01908      Debtor. ______________________/
Memorandum of Decision
     On April 14, 1983, the debtor and Napa Sanitation District executed a document entitled "Memorandum of Understanding." The parties agreed in principle that the debtor would lease back 388 acres it sold to the Sanitation District, and that the Sanitation District would have an irrigation easement over 490 acres of the debtor's property. The memorandum recited that it incorporated "in concept"a form of lease and and a form of easement attached to it, and provided that the final lease and easement documents were to be prepared and finalized using "the concept as agreed to in the above mentioned drafts." No further documents were ever prepared. The debtor now seeks to reject the agreement pursuant to section 365(a) of the Bankruptcy Code; the Sanitation District objects.      While many difficult issues are raised by the present motion, not the least of which is whether there is a valid contract in the first place, the Court sees clearly that it would permit rejection except for one factor, the solvency of the debtor. This factor alone mandates that authorization to reject the contract be denied.      The debtor's schedules list assets in excess of $10 million, with secured claims of $3.6 million (of which $2.4 million is disputed). There are no priority debts, and the debtor concedes that the sole unsecured claim, which was never properly a debt of this estate anyway, has been satisfied in full from a collateral source. The schedules totally belie the notion that any secured creditor with deficiency rights (or any secured creditor at all, for that matter) is undersecured, let alone the idea that any deficiency could not be paid in full through the sale of other assets.      Where a debtor's estate is solvent, no benefit accrues to creditors from rejection of a contract. Rejection merely imposes unnecessary expenses and delays, and creates a new unsecured creditor to be paid in full. Under these circumstances, the Court may decline to authorize rejection. In re Chi-Feng Huang (9th Cir. B.A.P.1982) 23 B.R. 798, 803; In re Meehan (DC E.D.N.Y.1986) 59 B.R. 380, 385. Here, the debtor's clear solvency and the complete absence of unsecured creditors mandate that the debtor be denied authorization to reject whatever contracts may exist between it and the Sanitation District.      Pursuant to Bankruptcy Rule 9021, counsel for theSanitation District shall submit an appropriate form of order.
Dated: June 8, 1988                                                                              _______________________                                                                                                                      Alan Jaroslovsky                                                                                                                      U.S. Bankruptcy