Memorandum of Decision Re: Ownership of Windmills

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Judge's Decisions
UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
In re FLOWIND CORPORATION,                                       No. 97-12265      Debtor(s). ______________________________________/ WINDKRAFT, INC.,      Plaintiff(s),    v.                                                                                 A.P. No. 98-1091 FLOWIND CORPORATION, et al.,      Defendant(s). _______________________________________/
Memorandum of Decision

I. Introduction
     The facts in this matter are neither complicated nor, with one exception, subject to much dispute. The main dispute is over the legal rights which flow from the facts.      In 1989, plaintiff Windkraft, Inc, purchased from defendant FloWind Corporation the right to erect power-generating windmills on land leased from third parties by FloWind. Windkraft paid the full $2 million purchase price, and erected three test windmills. It then ran into financial difficulties and seemingly disappeared from the face of the earth, leaving behind the three windmills and a fair amount of unpaid debt to workmen and contractors.      During the early '90s, FloWind's officers noted that Windkraft had disappeared and mused as to how they might reacquire the assets sold to Windkraft. By 1997, when FloWind filed its Chapter 11 petition, its officers and attorneys had convinced themselves that FloWind still owned the assets Windkraft had purchased and paid for. The assets were scheduled as assets of FloWind, and Windkraft was not even scheduled as a creditor.      Like a long-lost husband appearing at the church on the day his wife was to remarry, and about as welcome, Windkraft surfaced just as FloWind's plan of reorganization was being considered.(1) The plan was to be effectuated by the sale of all assets to defendants Windco LLC and Cameron Ridge LLC. The court heard its claim to ownership rights on an expedited basis, as the issue bears directly on the feasibility of the plan.(2)
II. Facts
     FloWind is in its second Chapter 11 proceeding. Its first was filed in 1988 in the Oakland division of this court and a plan of reorganization was confirmed in 1989. As part of that reorganization, the bankruptcy court expressly approved assumption and assignment of contract rights to Windkraft for $2 million. Winkraft paid the full amount of the purchase price upon the close of escrow. However, the records of the lessor were never officially changed to reflect the assignment. The court must now decide whether Windkraft is the owner of these assets or whether FloWind is free to sell them to defendants Windco and Cameron Ridge pursuant to its second Chapter 11.      The assets involved are the rights to erect electricity-generating windmills on land owned by private individuals and the federal government in Altamont Pass and Tehachapi, California. Only the Tehachapi assets are at issue here. They consist of wind rights in two large parcels of land owned by the federal government known as sections 28 and 32, and leases of four privately owned parcels (described in the purchase agreement as "optional leases.") Almost all of the attention at trial was given to Section 32, as it is the most crucial and valuable area.(3)      Section 32 is a 640-acre parcel dotted with windmills. The windmills are not owned by FloWind, but by individual limited partnerships formed by FloWind, which assigned to each partnership the rights to the area where its windmill was located. Windkraft's three test windmills were erected in the southeast corner of Section 32.      The only significant factual dispute is how much of Section 32 Windkraft bought from FloWind in 1989. The contract specifies "the wind development rights applicable to that unassigned portion of the Right-of-Way held by FloWind from the Bureau of Land Management ("BLM") on Section 32." The meaning of the provision is clear to the court: Windkraft was purchasing all of FloWind's rights in Section 32 which had not already been assigned by FloWind to limited partnerships. Despite this clear language, defendants sought to prove by parol evidence that the parties only intended the contract to apply to the southeast corner where Windkraft erected its three windmills. The court finds this evidence unconvincing and insufficient to justify deviating from the plain language of the contract.(4)      The contract provided for FloWind to obtain a "lessor and/or Bankruptcy Court approved assignment " of the wind development rights to Section 32. Court approval of the assumption and assignment was in fact obtained. However, the BLM did not initially agree to an outright assignment; its assent was more in the nature of a sublease, whereby FloWind remained the primary lessee. FloWind argues that the failure of Windkraft to obtain a formal assignment consistent with the form of the agreement means that Windkraft never actually got anything for its $2 million.      The court agrees with Windkraft that the lack of a formal assignment is not fatal to Windkraft's ownership rights.(5) It is clear that the BLM never had any substantive objections to Windkraft's purchase of FloWind's rights in Section 32; it just wanted a different form for the transaction with which neither Windkraft nor FloWind had any problem. Moreover, the BLM was fully aware of the bankruptcy proceedings and in fact actively participated in the sale by predicating that its consent was conditioned upon the payment to it of $132,438.42 in FloWind delinquencies from escrow.      In fact, the record demonstrated only flexibility and cooperation on the part of the BLM, to the point that FloWind claimed its Section 28 rights as an asset even though the grant was to another entity from whom FloWind purchased the rights in a sale approved by a bankruptcy court. According to FloWind, BLM construed(6) it to be the owner of the Section 28 rights even though formal assignment papers had never been signed. Thus, FloWind seeks to refute Windkraft's ownership of Section 32 even though its claims are essentially identical to FloWind's ownership claims to Section 28.      Moreover, the willingness of both Windkraft and FlowWind to work with the BLM regarding the form of the transaction does not negate the fact that the bankruptcy court formally ordered the assumption and assignment of the executory contracts. The order is certainly binding on the BLM, given its involvement in the case.(7) The mere fact that Windkraft chose to work with the BLM rather that fight with it did not mean that it had no rights. By order of the court, FloWind's contract with the BLM was assumed and assigned to Windkraft. The failure of the BLM to issue paperwork consistent with the order does not divest Windkraft of rights it bought and paid for pursuant to court order.
III. Legal Analysis
     Section 541(a)(1) of the Code provides, in pertinent part, that the bankruptcy estate is comprised of all legal or equitable interests of the debtor in property at the commencement of the case. In this case, FloWind had neither a legal nor an equitable interest in the wind rights; all it had was naked record title because the BLM had not adjusted its records to reflect assumption and assignment of the rights to Windkraft. Bare record title is not enough to establish the estate's property rights under § 541(a)(1).      Under state law, a person may have equitable title if he has paid for property pursuant to a contract of sale but has not yet received the property. Some bankruptcy courts have held that equitable title alone is enough to prevail over the estate pursuant to § 541(d) of the Bankruptcy Code.(8) See, e.g., In re Bullet Jet Charter, Inc., 177 B.R. 593 (Bkrtcy.N.D.Ill.1995); In re Green Lantern, Inc., 64 B.R. 356 (Bkrtcy.W.D.Pa.1986). However, Windkraft has much more than equitable title. The bankruptcy court issued an order transferring FloWind's rights to it, and Windkraft had exercised its rights by constructing three windmills. On the date of filing, Windkraft had both equitable and legal title. All FloWind owned was bare record title, by virtue of the fact that it was still the owner in BLM records. The situation is the same as where a debtor, prior to bankruptcy, sold real property and delivered a deed to a purchaser who took possession but failed to record the deed. All the debtor had upon commencement of the case was record title, not legal or equitable title.      Under some circumstances, record title is enough to give the bankruptcy estate rights if the rights of the purchaser are not effective against bona fide purchasers and are therefore avoidable under § 544 of the Bankruptcy Code. However, in this case FloWind has waived any right to avoid Windkraft's interest. Even if it had not waived these rights, the construction of the three windmills may well have been enough to make Windkraft's rights unavoidable. See In re Probasco, 839 F.2d 1352, 1354-55 (9th Cir. 1988).      The court finds no merit in FloWind's argument that the assignment of its rights to Windkraft was void because the BLM never offically approved it. The BLM may well have had cause to object to the assumption and assignment based on federal law which requires its consent to assignment of land rights. However, a motion to assume and assign a contract is a contested matter between the bankruptcy estate and the lessor. Sea Harvest Corp. v. Riviera Land Co., 868 F.2d 1077, 1079 (9th Cir. 1989). Since the BLM could have raised the issue before the bankruptcy court and chose not to, the order of the bankruptcy court approving the assignment is binding on the BLM. Principles of res judicata prohibit raising the issue after assignment has been ordered. See In re Diamond Mfg. Co., 164 B.R. 189, 200-02 (Bkrtcy.S.D.Ga.1994).      The court also declines to apply the doctrine of laches to bar Windkraft from asserting its rights. Not only would application of that equitable doctrine have the inequitable result of a windfall to FloWind and a forfeiture by Windkraft (to the detriment of Windkraft's innocent creditors), but the contract specifically provides that "no delay on the part of the Parties in exercising any right, power or remedy shall operate as a waiver thereof . . ." Moreover, it is impossible for FloWind to show prejudice by any delay because it was paid in full.      Lastly, the court rejects FloWind's argument that the agreement was executory and subject to rejection by FloWind pursuant to § 365 of the Code. Where one side to a contract has substantially performed its side of the bargain, such that its failure to perform further would not excuse performance by the other side, the contract is not executory. In re Texscan Corp., 976 F.2d 1269, 1272 (9th Cir. 1992). Windkraft fully performed its obligations under the contract, making it no longer executory and therefore not subject to § 365. FloWind agues that further performance was necessary to negotiate a "user agreement" between them because the BLM did not issue a consent to the assignment as approved by the court. However, as noted above, the BLM had no right to refuse to honor the assignment once the court had approved it. The fact that Windkraft elected to work with the BLM rather than press its rights and proceed in an adversarial manner did not mean that Windkraft had no such rights, nor did it turn a completed contract into an executory contract. While the court has found no cases involving wind rights, in similar circumstances involving oil and gas rights the courts have consistently declined to call the contract executory. See, e.g., Matter of Murexco Petroleum, Inc., 15 F.3d 60 (5th Cir. 1994); Matter of Biron, Inc., 23 B.R. 241 (Bkrtcy.S.D. Ohio 1982).
IV. Conclusion
     In the final analysis, FloWind's position is completely without substance. It agreed to sell Windkraft wind rights; the court approved and ordered the sale; Windkraft paid the full purchase price; the escrow closed; and Windkraft took possession of its rights and exercised them. Windkraft owed no money to FloWind. The attempt of FloWind to assert ownership of the rights it sold to Windkraft , and its unmitigated gall in attempting to sell the same rights to someone else, is nothing less than attempted larceny. It is supported only by the happenstance that the BLM has not adjusted its records to reflect the order of the bankruptcy court. The court will not abet this crime.      For the foregoing reasons, the court will enter a judgment declaring that none of the defendants has any right, title or interest in the rights acquired by Windkraft pursuant to the bankruptcy court order of February 4, 1989, and that such rights belong only to Windkraft.      Since this matter was heard on an expedited basis due to the need to resolve the feasibility of FloWind's plan, there is need for entry of judgment as to the rights adjudicated herein and no just reason for delay. Accordingly, judgment on these matters will be entered separately pursuant to FRCP 54(b). The court will hear the remaining claims in the normal course.      This memorandum constitutes the court's findings and conclusions pursuant to FRCP 52(a) and FRBP 7052. Counsel for Windkraft shall submit an appropriate form of judgment forthwith.
Dated: April 23, 1999                                                                              ____________________________                                                                                                                      Alan Jaroslovsky                                                                                                                      United States Bankruptcy Judge
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1. Windkraft's re-emergence is the result of efforts by its creditors, who have acquired its ownership. The court does not consider this to be of much relevance.

2. The plan was confirmed, with defendants Windco and Cameron Ridge agreeing to be subject to Windkraft's claims. As part of the agreement to confirm the plan, FloWind waived any avoidance claims against Windkraft.

3. The contract is actually for the right to generate 13 megawatts of power. Under the contract, the rights to Section 32 were to be transferred immediately; the rights to Section 28 and the Optional Leases were to be transferred only if requested by Windkraft.

4. Defendants sought to introduce expert testimony that only the southeast corner of Section 32 was suitable for new windmills without interfering with existing windmills. The court excluded this testimony because the issue before it is the portion of Section 32 FloWind agreed to sell, not the use to which Windkraft could put each portion. Windkraft's interpretation of the contract was largely supported by defendants' own witnesses. There was insufficient evidence to justify the court's interpretation of the contract other than its plain meaning. Therefore, expert testimony as to how the contract should have been worded or what the parties really meant is not justified.

5. Windco and Cameron Ridge have stepped into the shoes of FloWind. The court accordingly discusses only the rights of FloWind.

6. From page 4, line 2, of defendants' proposed findings and conclusions.

7. FloWind argues that orders approving sales create no rights, which is certainly true. However, orders approving the assumption and assignment of leases or executory contracts do create rights, and are binding on lessors.

8. Section 541(d) provides, in pertinent part:

     Property in which the debtor holds, as of the commencement of the case,      only legal title and not an equitable interest . . . becomes property of the      estate . . . only to the extent of the debtor's legal title to such property,      but not to the extent of any equitable interest in such property that the      debtor does not hold.<