FOR THE NORTHERN DISTRICT OF CALIFORNIA
ELMER'S PANCAKE AND STEAKHOUSE No. 1-89-00068
OF NORTHERN CALIFORNIA, INC.,
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
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
(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
, 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
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.
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 _________________________