Opinion
Case No. 12-10526
04-25-2012
In re: J.B. Flex, Inc. Debtor
This document has been electronically entered in the records of the United States Bankruptcy Court for the Southern District of Ohio.
IT IS SO ORDERED.
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Burton Perlman
United States Bankruptcy Judge
Chapter 11
Judge Burton Perlman
DECISION
In this chapter 11 case filed February 6, 2012, Debtor J.B. Flex, Inc. operates Take 5 Bar and Grill (hereafter "Debtor"). Debtor carries on its business in premises located at 6945 Harrison Avenue, Cincinnati, Ohio 45247 (the "Premises") pursuant to a Lease from HOCO Taylor Creek, LLC (hereafter "Lessor"). I. Background.
On February 6, 2012, Debtor filed a Motion with memorandum to Assume Real Property Lease Including Option to Renew. The motion related to the Premises occupied by Debtor. Lessor filed a Memorandum in Opposition to the Motion. The matter came on for hearing before the Court on April 2, 2012.
Prior to the bankruptcy filing, creditor Merchants Bank filed a foreclosure action in the Hamilton County Common Pleas Court, of Ohio. In that action, Merchants Bank moved for appointment of a Receiver. James Collier, on November 1, 2011, was appointed Receiver. Collier has been operating Debtor's business since his appointment. Collier was recognized by this Court as Debtor in Possession.
The pre-filing debtor entity was owned by Paul Walpole, John Walpole, and a third party (the "Equity Holders"). The Equity Holders maintain their status as owners and guarantors of Debtor.
II. Jurisdiction.
This Court has jurisdiction of this matter pursuant to 28 U.S.C. § 1334(b) and the General Order of Reference entered in this district. This is a core proceeding arising under 28 U.S.C. § 157.
III. Positions of the Parties.
A. Lessor's position
Lessor has two arguments that the Lease is invalid and may not be assumed by Debtor. First, Lessor states that the Lease was never notarized, making the Lease not compliant with Ohio's Statute of Conveyances at O.R.C. 5301.01 and therefore invalid. Lessor cites authority for the propositions that (1) this lack of formality may not be cured under O.R.C. 2719.01 , (2) should not be equitably reformed by this Court, and (3) is not excused by Debtor's part performance. Lessor contends that in the event of an invalid lease, where the payment of rent takes place on a monthly basis, the tenancy is from month to month. Lessor then argues that an option to renew is not recognized where there is an implied month to month tenancy. Lessor requests that the Court find that Debtor is a month to month tenant by operation of law.
"When there is an omission, defect, or error in an instrument in writing or in a proceeding by reason of the inadvertence of an officer, or of a party, person, or body corporate, so that it is not in strict conformity with the laws of this state, the courts of this state may give full effect to such instrument or proceeding, according to the true, manifest intention of the parties thereto." O.R.C. 2719.01.
Lessor also contends that, even assuming Debtor had a renewal option, such option was not timely exercised. The Receiver only gave notice in mid-November, 2011 that he was exercising the option, whereas the Lease stated that the option had to be exercised nine (9) months prior to the expiration of the Lease, that is by October 31, 2011.
B. Debtor's position
Debtor argues that its part performance excused compliance with the requirements of O.R.C. 5301.01. Debtor contends that it has properly exercised the option to renew the Lease. Accordingly, Debtor argues that the Lease is now set to expire on July 31, 2017. Debtor concedes that the Receiver did not timely exercise the renewal option. However, Debtor asserts that it was believed by the other owners of Debtor that its then manager, Thomas D. Scott ("Scott"), had timely exercised the option to renew. Debtor contends that after the Receiver was unable to verify that renewal, the Receiver tardily exercised the renewal option. Debtor contends that equity, in the absence of prejudice to a lessor, should allow a late renewal.
Debtor disagrees with Lessor's contention that the payment term has defaulted to month to month.
IV. Facts and Discussion.
Debtor occupies the Premises pursuant to a Lease entered into with Lessor on February 4, 2004. The signatures to the Lease were not notarized. Debtor operates a bar and grill under the name "Take 5 Bar and Grill" on the Premises. Debtor has occupied the Premises continually since 2004. Debtor is current in its rent payments.
On February 4, 2004, Scott signed the original Lease as President on behalf of Debtor. The Premises when leased were unfinished. Consequently, the Lease contemplates construction by the tenant in order to fully equip the Premises for the proper operation of its business. Debtor obtained a loan to finance this expansion. The space was furnished and equipped, and the bar and grill has been operating there ever since. On May 21, 2007, an amendment to the Lease was entered into between the parties. Again, Scott signed as President of Debtor. The amendment dealt with additional space which would enable Debtor to expand its premises from 3,000 sq. ft. to 4,200 sq. ft. plus an additional 1,000 sq. ft. of outside patio area. On May 31, 2007, Debtor obtained an additional loan, which was used to expand its original space into the adjacent space and to equip and set up the adjacent space.
Scott was in charge of all day to day operations of the business from the time the Lease was entered into until the Receiver was appointed, by the Common Pleas Court, and stayed on for a short time after Collier's appointment.
The Ohio Revised Code at § 5301.01 states in relevant part:
(A) A deed, mortgage, land contract as referred to in division (A)(2)(b) of section 317.08 of the Revised Code, or lease of any interest in real property and a memorandum of trust as described in division (A) of section 5301.255 of the Revised Code shall be signed by the grantor, mortgagor, vendor, or
lessor in the case of a deed, mortgage, land contract, or lease or shall be signed by the trustee in the case of a memorandum of trust. The signing shall be acknowledged by the grantor, mortgagor, vendor, or lessor, or by the trustee, before a judge or clerk of a court of record in this state, or a county auditor, county engineer, notary public, or mayor, who shall certify the acknowledgment and subscribe the official's name to the certificate of the acknowledgment.
In determining matters of rights in land, this Court must follow the law of Ohio. Butner v. U.S., 440 U.S. 48, 55, 99 S. Ct. 914, 918 (1979); Noland v. Wells Fargo Bank N.A. (In re Williams), 395 B.R. 33, 40 (Bankr. S.D. Ohio 2008). It is true that in Delfino v. Paul Davies Chevrolet, Inc. (1965), 2 Ohio St.2d 282, 31 O.O.2d 557, 209 N.E.2d 194, the court held that the requirements of § 5301.01 must be adhered to for a valid leased document. Beside the Delfino case, however, there is authority in Ohio which rejects the rigidity of Delfino.
In Sigg v. Subway Sandwich Shops, Inc., 1997 WL 410725 (Ohio App. 3 Dist., 1997), Olsen was the owner of premises that were the subject of a lease agreement with Subway. Olsen sold the premises in 1988, and Olsen's purchaser sold the premises to Sigg on September 6, 1991. Sigg notified Subway that the lease was defectively executed under Ohio law. Consequently, he argued that a month to month tenancy was in effect, that he was terminating the tenancy, and he demanded that Subway vacate the premises. Sigg filed a complaint in the state court for forcible entry and detainer, for declaratory judgment against Subway, for possession of the premises, and for a declaration that the lease agreement was invalid and unenforceable. The trial court entered judgment holding the lease to be defectively executed and therefore invalid. The appellate court reversed the trial court. The appellate court held that the terms of the lease were adhered to by all parties for the ten years prior to Sigg raising the claim that the lease was invalid. Therefore, its terms were binding. The court further held at *3:
Part performance of an agreement (the lease) defectively executed under the Statute of Conveyances removes that agreement from the operation of the statute when four factors are present: (1) unequivocal acts by the party relying on the agreement . . . (2) the acts are exclusively referable to the agreement; (3) the acts change the party's position to his detriment; and (4) the acts make it impossible to place the parties in statu quo.The Sigg court concluded that in its case, the events which transpired met the part performance requirements to validate the defectively executed lease.
So here, Debtor expended considerable time and money to furnish and equip the premises so that it could be operated as a bar and grill. Here, just as in Sigg, Debtor paid an increasing amount of rent each year as provided in the Lease. These acts by Debtor were the "unequivocal acts by the party relying on the agreement," the first requirement for part performance of an agreement to take it out of the operation of the Statute and Conveyances. Those acts by Debtor were "exclusively referable to the agreement," for the lease agreement was the basis for the relationship between the parties. There is no question that Debtor's actions in furnishing, equipping, and carry on its business in its original space, and its expanded space, changed Debtor's position to its detriment because it was left with the loans taken out for that purpose. Finally, Debtor's actions in adapting the space for its business purposes, and landlord's acceptance of the benefit of the contract under the Lease, make it impossible to return the parties to the positions they would have held if the Lease had never occurred.
As to Lessor's contention that the tenancy by Debtor is a month a month tenancy, the Court disagrees. Rental is dealt with in the Lease at Section 1.1(h). There it is provided " 'Minimum Annual Rent': Rental in the dollar amount(s) for the Lease Year(s) and payable in equal monthly installments." This language under the law of Ohio created a year to year tenancy, the monthly installment language not withstanding. Cesta v. Manfredi, 101 Ohio App. 3d 326, 655 N.E. 2d 755 (Ohio App. 11th Dist. 1995); Baltimore & Ohio RR. Co. v. West (1897), 57 Ohio St. 161, 165, 49 N.E. 344, 345.
Our conclusion that the original Lease, though defectively executed, was removed from the operation of the Statute of Conveyances and was valid, extends as well to the Amendment to the Lease of May 21, 2007. The Amendment provides that the initial term of the Lease be changed to expire July 31, 2012 instead of April 30, 2009. The Amendment also includes an express provision that Debtor had an option to renew for five years from July 31, 2012. The Amendment also provides that the Lease remains in effect other than as modified by the Amendment. The original Lease at Section 11.19, "Renewal Option," provided that "Lessee may exercise its right to extend the term hereof by serving written notice of such extension upon Landlord at least nine (9) months prior to the expiration of the original term or first renewal term of this lease," but that if the Lessee is in default at the time of renewal, the renewal will not be effective. In the case before the Court, there is no default under the terms of the Lease. Debtor is current in its rent payments. The alleged breaches cited by Lessor regarding the filing of the present bankruptcy case, insolvency, and the like, are unforceable. See § 541(c); § 365(e)(1).
Because the expiration date pursuant to the Amendment is July 31, 2012, notice of renewal should have been given by October 31, 2011. The evidence was that notice was not given until November 18, 2011.
This Court holds, however, that the Notice of Renewal was sufficient to renew the Lease. The evidence was that Scott, then the operator of the business, was instructed to file the renewal notice in sufficient time, but did not do so. Paul Walpole, an equity holder of Debtor, testified at the hearing. Walpole testified that Scott had been instructed in ample time to give notice of renewal of the Lease. The Court finds Wapole's testimony credible. Evidently, however, there is no evidence that Scott carried out the instruction. The instruction came from the Equity Holders. The Receiver was appointed and took over the business on November 1, 2011, the day after the notice period for renewal closed. The Receiver did not know whether Scott had exercised the renewal notice, and only gave his own notice two weeks plus a few days late. On the evidence before it, the Court holds that the late notice of renewal is excused. Debtor has continually occupied and operated its business in the Premises since February 4, 2004. Lessor has in all that time received the benefits of the Lease. The failure to timely renew occurred in part because, though instructed to do so, Scott failed to give the required notice. The Receiver failed to timely do so because he did not assume office until the day after notice was due.
On these facts the Court grants equitable relief to Debtor, and holds that the Renewal of the Lease was effective. In Keybank v. MRN Limited Partnership, 193 Ohio App. 3d 424 (Ohio App. 8 Dist., 2011), the court granted equitable relief for failure timely to exercise an option to renew. In doing so, it found that the lessee had made an understandable honest mistake and there was no evidence that a twenty-four-day delay had resulted in prejudice to the lessor. The Keybank court relied on Ward v. Washington Dist., Inc. (1980), 67 Ohio App. 2d 49, 21 O.O. 3d 362, 425 N.E. 2d 420, in reaching its conclusion. There the court said "the well settled rule is that unless the delay in renewing is so great as to be inexcusable, a failure to renew within the specified time will not preclude equitable relief." Id. at 53. In Ward, equitable relief was granted where the failure to timely renew was caused by an honest mistake, and lessor would not be prejudiced by the delay. Keybank also relied on Benton v. Tecumseh Corrugated Box Co.,1985 WL 8208 (Ohio App. 6 Dist., 1985), where the court found that failure to timely renew was due to a miscommunication between lessee and his attorney, and the delay was for fourteen days. The court in Benton granted equitable relief.
On the basis of the foregoing, the Court finds that there was an honest mistake on the part of Debtor, and there is no evidence of prejudice to the Lessor. We hold the Lease to be valid and in effect, and Debtor's Motion to Assume Real Property Lease Including Option to Renew will be granted.
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The foregoing constitutes the findings of fact and conclusions of law of the court.
Copies to:
Default List
Donald K. Swartz
285 E. Main Street
Batavia, OH 45103
Kyle M. Rapier
315 South Monument Avenue
Hamilton, OH 45011