Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caed-2_06-cv-02273/USCOURTS-caed-2_06-cv-02273-1/pdf.json

Nature of Suit Code: 423
Nature of Suit: Bankruptcy Withdrawal 28 USC 157
Cause of Action: 28:0157 Motion for Withdrawal of Reference

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28 * This matter was determined to be suitable for decision without

oral argument. L.R. 78-230(h).

1

IN THE UNITED STATES DISTRICT COURT

FOR THE EASTERN DISTRICT OF CALIFORNIA

THOMAS ACEITUNO, Chapter 7 Trustee,)

and STEPHEN REYNOLDS, Chapter 7 )

Trustee, )

) 2:06-cv-2273-GEB-DAD

Plaintiffs, )

)

v. ) ORDER*

)

KBI NORCAL, INC., et al., )

)

Defendants. )

)

Defendant KBI NorCal (“KBI”) moves for summary judgment on

Plaintiffs’ Seventeenth Claim for Relief in their First Amended

Complaint. Plaintiffs oppose this motion.

BACKGROUND

 KBI purchased certain assets and assumed certain

liabilities of Blusar Manufacturing (“Blusar”) in September 2002

pursuant to a written agreement (“Purchase Agreement”). (Statement of

Undisputed Facts (“SUF”) ¶ 1.) Blusar was owned by Serguey Sarkisov. 

(Id.) Blusar occupied the property on which its manufacturing

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operations were located (the “Location”) pursuant to a written lease

(“Original Lease”). (Id. ¶ 7.) The Original Lease provided that it

would continue until October 31, 2004. (Id. ¶ 8.) The Purchase

Agreement provided that Blusar agreed to sublease the Location to KBI

for a term of one year. (Id. ¶ 11.) In addition, section 4.4 of the

Purchase Agreement (“section 4.4”) stated that “[KBI] agrees to pay

[Blusar] $45,000 per month if [KBI] has not vacated the [Location] at

the end of the one-year term.” (Def. Ex. C, at ¶ 4.4.) Therefore, on

the same day the Purchase Agreement was executed, a sublease

(“Sublease”) was executed between the parties. (SUF ¶ 14.) The

Sublease provided for a one-year term commencing September 23, 2002. 

(Id. ¶ 15.) 

Sarkisov and Blusar each filed a voluntary petition for

relief under chapter 7 of title 11 on November 27, 2002. (Id. ¶ 2.) 

Plaintiff Stephen Reynolds was appointed Sarkisov’s chapter 7 trustee

and Plaintiff Thomas Aceituno was appointed Blusar’s chapter 7

trustee. (Id. ¶¶ 3, 5.) Plaintiffs never obtained court approval to

assume the Purchase Agreement, Original Lease, or Sublease. (Id. ¶

16.) After Blusar and Sarkisov filed for bankruptcy, KBI entered into

a lease with the owners of the Location (“New Lease”). (Id. ¶ 18.) 

KBI has occupied the Location continually since it took possession in

2002. (Id. ¶ 20.) 

Plaintiffs allege they are entitled to enforce the penalty

provision of the Purchase Agreement against KBI since KBI has remained

in possession of the Location beyond the one year contemplated by the

Sublease. (First Am. Compl. ¶¶ 107-11.)

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3

DISCUSSION

I. Executory Contract

KBI argues it is entitled to summary judgment because the

Purchase Agreement was an executory contract and therefore, was deemed

rejected when Plaintiffs failed to obtain court approval to assume it. 

(Def.’s Mot. at 7:8-12.) Plaintiffs rejoin the “Purchase Agreement

was not an executory contract-which means that it was not rejected.” 

(Pls.’ Opp’n at 1:21-22.)

Plaintiffs, subject to court approval, were entitled to

assume or reject any executory contract or unexpired lease of the

debtors. 11 U.S.C. § 365(a). If an executory contract is not assumed

with court approval, it is deemed rejected and all rights under the

contract are terminated. Id. § 365(d)(1). 

An executory contract is “one on which performance is due to

some extent on both sides.” In re Texscan Corp., 976 F.2d 1269, 1272

(9th Cir. 1992). An executory contract is one in which both parties

have remaining obligations which “would constitute a material breach

and thus excuse the performance of the other” if performance were not

completed. Id. “The materiality of a remaining obligation and

whether the failure to perform a remaining obligation is a material

breach of the contract is an issue of state law.” Id. California law

provides that whether “a breach is so material as to constitute cause

for the injured party to terminate a contract is ordinarily a question

for the trier of fact.” Superior Motels, Inc. v. Rinn Motor Hotels,

Inc., 195 Cal. App. 3d 1032, 1052 (1987).

KBI explains that Blusar has remaining obligations under the

Purchase Agreement the failure of which to complete would constitute a

material breach. (Defs.’ Mot. at 6:12-24.) But, KBI has not shown

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that KBI has remaining obligations that would render the Purchase

Agreement executory. Although the record indicates KBI had

obligations under the Sublease; specifically, to pay rent, “courts

have consistently held that contracts that only required payment by

the debtor are not executory.” In re THC Financial Corp., 686 F.2d

799, 804 (9th Cir. 1982). To prevail on summary judgment, KBI was

required to show “the obligations of both parties [we]re so far

unperformed that the failure of either party to complete performance

would constitute a material breach.” In re Texscan Corp., 976 F.2d at

1272. KBI has not met this burden and therefore, summary judgment is

denied on the issue of whether the Purchase Agreement is executory.

II. Severability/Incorporation

KBI further asserts summary judgment is appropriate arguing

that section 4.4 of the Purchase Agreement “may be severed from the

Purchase Agreement and treated as part of the Sublease for purposes of

11 U.S.C. § 365.” (Def.’s Mot. at 8:17-18.) KBI argues this

treatment of section 4.4 should result in this section being deemed

rejected along with the Sublease. (Id. at 9:21-23.) Plaintiffs

counter that it is not appropriate to sever section 4.4 from the

Purchase Agreement and incorporate it into the Sublease. (Pls.’ Opp’n

at 18:8-9.) 

Section 365 provides that the trustees have a right to

assume and reject unexpired leases and executory contracts, provided

that the court approves. See In re Plitt Amusement Co. of Wash.,

Inc., 233 B.R. 837, 847 (Bankr. C.D. Cal. 1999). “A trustee or debtor

in possession must be permitted to pick and choose, to make this

determination authorized by section 365.” Id. Courts have rejected

attempts by a trustee to assume part of a contract or lease and reject

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the remainder. Id. at 840. Since section 4.4 is located within the

Purchase Agreement, KBI has not shown that Plaintiffs should be deemed

to have rejected this portion of the Purchase Agreement even though

they are arguably still bound to the remainder. Therefore, KBI has

not shown it is entitled to summary judgment.

III. Contract Interpretation

KBI further argues that the seventeenth claim “fails as a

matter of law even if the Court heeds Plaintiffs’ request to read the

Purchase Agreement in isolation.” (Def.’s Reply at 8:7-8.) KBI

contends that under general contract law interpretation, section 4.4

of the Purchase Agreement is not enforceable because Blusar’s

rejection of the Original Lease constitutes a breach of the Purchase

Agreement, thereby precluding Blusar from enforcing the remaining

provisions. (Id. at 8:9-15.) However, KBI did not raise this

argument until its Reply brief. Since a new argument should not be

raised for the first time in a Reply, this issue is not reached.

Stewart v. Wachowski, 2004 U.S. Dist. LEXIS 26608, at *40 (C.D. Cal.

Sept. 28, 2004) (“Courts decline to consider arguments that are raised

for the first time in reply.”)

CONCLUSION

For the stated reasons, KBI’s motion for summary judgment on

Plaintiffs’ seventeenth claim for relief is denied.

IT IS SO ORDERED.

Dated: June 4, 2007

 

GARLAND E. BURRELL, JR.

United States District Judge

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