Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-arwd-1_06-cv-01059/USCOURTS-arwd-1_06-cv-01059-0/pdf.json

Nature of Suit Code: 422
Nature of Suit: Bankruptcy Appeals Rule 28 USC 158
Cause of Action: 28:0158 Notice of Appeal re Bankruptcy Matter (BAP)

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IN THE UNITED STATES DISTRICT COURT

WESTERN DISTRICT OF ARKANSAS

EL DORADO DIVISION

CHARLES D. LOTT, DEBTOR IN POSSESSION APPELLANT

v. Civil No. 06-1059

SPONER LAND, LTD. APPELLEE

O R D E R

Now on this 2nd day of February, 2007, comes on for

consideration the captioned matter, and from the briefs of the

parties and the record on appeal, the Court finds and orders as

follows:

1. This is an appeal from the United States Bankruptcy

Court for the Western District of Arkansas, by a Chapter 11 Debtor

in Possession, Charles D. Lott ("Lott"). The Bankruptcy Court

granted one of Lott's creditors, Sponer Land, Ltd. ("Sponer")

relief from the automatic stay of 11 U.S.C. §362, so that Sponer

could go forward with efforts to evict Lott from leased premises

(the "Property") owned by Sponer, so that Sponer can sell the

land.

2. Four issues are presented:

* Did the Bankruptcy Court exceed its jurisdiction by

granting relief from the automatic stay because proper

notice of the motion seeking such relief was not given

as required by the Bankruptcy Rules?

* Did the Bankruptcy Court err in concluding that the

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Debtor in Possession held the Property in question under

a month to month lease?

* Did the Bankruptcy Court err in concluding that the

right of the Debtor in Possession to purchase the

Property was barred by the Statute of Frauds?

* Did the Bankruptcy Court err in ruling that the Debtor

in Possession had no equity in the Property and it was

not necessary to his reorganization?

3. This Court's jurisdiction arises pursuant to 28 U.S.C.

§158(a)(1). The Court reviews the legal conclusions of the

Bankruptcy Court de novo, and reviews its findings of fact under

the "clearly erroneous" standard. In re Reynolds, 425 F.3d 526,

531 (8th Cir. 2005).

4. The facts relevant to decision are as follows:

In May, 2002, Lott and Sponer entered into a Lease Agreement

(With Option To Purchase) (the "Lease") whereby Lott would lease

the Property for a two-year term at $8,000 per year, with an

option to purchase it for $250,000. The original term of the

Lease was from May 6, 2002, until May 6, 2004.

The Lease provided, with regard to the option, that "[a]t any

time during the original term of this lease, Lessee shall have an

exclusive option to purchase the property by giving written notice

to Lessor of Lessee's intention to exercise this option. . . . In

the event this option is exercised and Lessee purchases the

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property, then all lease payments made to date of purchase shall

be credited towards the purchase price." No signed copy of the

Lease is in evidence, but Lott's attorney acknowledged at the

hearing that there was such a copy in existence, and there was no

dispute that the document introduced at the hearing was an

accurate, although unsigned, copy of the Lease.

The Property is acreage used to pasture cattle and cut hay,

and also has a dwelling on it.

Lott paid the $8,000 rental in full at the beginning of each

year during the original term of the Lease. He lived on the

Property with his family, and made improvements to it, but did not

exercise the option to purchase. His adult sons ran cattle on the

land.

In May, 2004, Sponer sent Lott a written contract to purchase

the Property for $250,000, but Lott did not sign it. Instead, he

held over the lease, and began paying $12,000 a year, which he

paid at the rate of $1,000 per month. 

In August, 2005, Sponer listed the Property for sale with a

real estate agent. The agent posted a sign on the Property,

advertised the Property in the newspaper, and began to bring

prospective buyers to look the Property over. 

One prospective buyer was Michael Suttle. Suttle visited the

Property twice while making up his mind whether to buy it, and

talked with both Lott and his wife. Neither Lott nor his wife

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said anything to Suttle about Lott having an option to purchase or

a right of first refusal as to the Property.

On November 25, 2005, a contract for sale of the Property was

executed between Sponer and Suttle. Closing was set for January

7, 2006.

Sponer sent Lott a Notice To Vacate by December 31, 2005, and

also had the County Sheriff serve a Notice To Vacate. The

Sheriff's notice was served on December 7, 2005; the mailed

notice was received on December 8, 2005.

On December 12, 2005, Lott filed a Chapter 11 Petition for

bankruptcy.

On January 19, 2006, Sponer filed a Motion For Relief From

Stay. A hearing was held on February 21, 2006, following which

the Bankruptcy Court granted the motion ore tenus. The Bankruptcy

Court held that when the Lease ended by its terms in May of 2004,

Lott became a holdover tenant with a month-to-month tenancy and

any agreement with regard to a right to purchase after that would

be unenforceable pursuant to the Arkansas Statute of Frauds. The

Bankruptcy Court further found that no improvements were made on

the strength of an oral promise to sell -- which would take the

matter out of the Statute of Frauds -- because all of the

improvements were made while the written Lease was in effect and

were, therefore, made in reliance on the written rather than the

oral agreement of the parties. The Bankruptcy Court further found

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that the Notice To Vacate was given before Lott's bankruptcy

petition was filed, and more than thirty days before the planned

eviction, leading to the conclusion that Lott had no equitable

interest in the Property. The Bankruptcy Court therefore granted

Sponer relief from the automatic stay, allowing it to evict Lott

from the Property.

This ruling was formalized by Order dated March 9, 2006, and

Notice of Appeal was filed on March 10, 2006.

5. Lott first argues that the Bankruptcy Court exceeded its

jurisdiction by granting relief from the automatic stay because

proper notice of the motion seeking such relief was not given as

required by the Bankruptcy Rules. Rule 4001(a)(1) provides that

a motion for relief from an automatic stay "shall be made in

accordance with Rule 9014 and shall be served . . . if the case is

. . . a chapter 11 reorganization case and no committee of

unsecured creditors has been appointed pursuant to §1102, on the

creditors included on the list filed pursuant to Rule 1007(d). .

. ." Rule 1007(d) requires a Chapter 11 debtor to file a list of

the creditors holding the twenty largest unsecured claims.

The Certificate Of Service on the Motion For Relief From Stay

reflects that it was served by mail only upon Lott's attorney and

the Chapter 11 Trustee. The electronic file-mark reflects service

on those individuals, as well as Sponer's attorney and on Claude

Hawkins (representing the IRS), Maurice Rogers (representing Deere

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& Company), Richard Roper (representing First State Bank of

Warren), and Jeff Wood (representing Ford Motor Credit Company).

The IRS and Ford Motor Credit Company are on Lott's list of

creditors holding the twenty largest unsecured claims.

Sponer points out that this argument was raised for the first

time after the Bankruptcy Court entered its Order, via a Motion

For Continuation Of The Automatic Stay During Appeal filed on

March 10, 2006. This was the same date as the Notice Of Appeal,

although the Motion (document #85 in the bankruptcy proceeding)

was filed after the Notice Of Appeal (document #83) and therefore

the issue was, technically, raised for the first time on appeal.

That circumstance does not prohibit review of the issue, because

the issue is purely one of law and requires no additional factual

development. Orr v. Wal-Mart Stores, Inc., 297 F.3d 720 (8th Cir.

2002).

Sponer also argues that the failure to serve the creditors is

not a jurisdictional defect, citing Henderson v. U.S., 517 U.S.

654 (1996). While the Court does not find Henderson helpful, it

agrees with Sponer that failure to serve the creditors is not a

jurisdictional defect. Lott invoked the jurisdiction of the

Bankruptcy Court, and he had notice and an opportunity to appear

at the hearing on the motion.

A search of the case law reveals virtually nothing that bears

on the issue. In re Calvert, 135 B.R. 398 (Bkrtcy.S.D.Cal. 1991),

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cited by Lott, held that failure to serve a motion for relief from

stay on the twenty largest unsecured creditors caused the motion

to be "procedurally defective," and the motion was denied on that

basis, without prejudice. The Court does not, however, find that

case persuasive in the circumstances now before the Court. As

will be seen from the remainder of this opinion, the Court finds

that Lott's substantive arguments are without merit, and it would

serve little purpose to return this matter to the Bankruptcy Court

for the giving of notice to the creditors. The outcome would be

the same, although much money would have been spent and much time

lost. The Court, therefore, concludes that the failure to give

notice was, in the circumstances of this case, harmless error.

6. Lott next argues that the Bankruptcy Court erred in

concluding that the Debtor in Possession held the Property in

question under a month-to-month lease. He argues that under

Arkansas law, when a tenant under a lease for a term of years

holds over and pays rent according to the terms of the lease, he

becomes a tenant from year-to-year and his tenancy can only be

terminated by the giving of six months' notice.

While this is a correct statement of Arkansas law, the rule

is not absolute. It can be rebutted by proof. Heral v. Smith, 33

Ark.App. 143, 803 S.W.2d 938 (1991). In this case, the Court

believes that the Bankruptcy Court's finding that Lott became a

month-to-month tenant is supported by proof sufficient to rebut

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the general rule. Both Lott and Sponer agree that the method of

paying rent changed from an annual payment at the beginning of the

year to monthly payments. This fact strongly suggests that the

intent of both landlord and tenant was that there be a month-tomonth tenancy after the original term of the Lease expired. In

addition, Lott testified that when he paid his rent in December,

2005, that would have extended his option to purchase "for thirty

days, 'til the first of the following month." While the Court

does not agree that the option was extended, for reasons set forth

below, the fact that Lott believed he was extending the option on

a month-to-month basis by payment of rent is evidence that he had

a month-to-month tenancy.

Nor does A.C.A. §18-16-105 offer Lott any comfort, in

providing that the owner of "farmlands which are leased under an

oral agreement may elect not to renew the oral rental or lease

agreement for the following calendar year by giving written notice

. . . on or before June 30, that the lease or rental agreement

will not be renewed for the following calendar year." Lott

contends that the Notice To Vacate he received in December, 2005,

would entitle him to remain in possession of the Property until

December 31, 2007. 

The Court does not agree. The statute in question applies to

an oral one-year lease and to a tenancy from year to year, Steele

v. Murphy, 279 Ark. 235, 650 S.W.2d 573 (1983), but neither case

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Charles Sponer testified that even after May, 2004, Lott could have purchased the 1

Property: "if he'd brought me the cash, he could have got it at anytime." Lott seems

to interpret this as evidence of an oral contract to sell. The Court deems it merely

evidence of Sponer's desire to sell the Property to any willing and able buyer. 

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law nor logic makes it applicable to a tenancy from month to

month. Cf. Plafcan v. Griggs, 291 Ark. 335, 724 S.W.2d 467

(1987)("the statute only establishes a date when an owner has to

give notice to terminate a year to year farm lease"). 

7. Lott next argues that the Bankruptcy Court erred in

concluding that his right to purchase the Property was barred by

the Statute of Frauds, which provides that a contract for the sale

of lands must be in writing. A.C.A. §4-59-101. Lott contends he

was in possession of the Property pursuant to a contract to

purchase, and that -- combined with the fact that he made

improvements to the Property -- takes the contract for sale out of

the Statute of Frauds. 

The flaw in this argument is that there was no contract for

sale of the Property to Lott. Lott had an option to purchase the 1

Property, during the original term of the Lease. An option is "a

contractual obligation to keep an offer open for a specified

period, so that the offeror cannot revoke the offer during that

period." Black's Law Dictionary, Eighth Edition. Until that

offer was accepted by Lott, it did not become a contract for sale,

and Lott admittedly never exercised the option. He testified that

he made improvements on the expectation that he would exercise the

option, but that he never had the financial ability to do so. Nor

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is Lott correct in arguing that he has paid part of the purchase

price of the land. The Lease only provided that Lott's lease

payments would be credited toward the purchase price in the event

the option was exercised, and thus his lease payments never became

eligible to be so credited.

Most troubling of Lott's arguments on this point is that the

Bankruptcy Court's ruling has imposed a forfeiture upon him of the

improvements he made to the Property. He points out that equity

will seize upon slight circumstances to avoid a forfeiture.

However, as the Eighth Circuit has recognized, forfeitures are

often a necessity in bankruptcy proceedings, In re Wieseler, 934

F.2d 965, 967 (8th Cir. 1991), and Lott set himself up for the

loss by spending money on improvements when he was financially

unable to exercise the option to purchase. 

8. Finally, Lott contends that the Bankruptcy Court erred

in ruling that he had no equity in the Property and it was not

necessary to his reorganization. For the reasons set forth in

this opinion, the Court agrees with the Bankruptcy Court that at

the time Lott received the Notice To Vacate, he was a month-tomonth tenant, and none of his lease payments was credited toward

purchase of the Property, leaving him without equity in the

Property. Nor did Lott have an option to purchase the Property at

that point, since the Lease specifically only granted the option

for the original term of the Lease. That term had ended in May,

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2004.

Lott's argument that the Property is necessary to his

reorganization is that "a roof over one's head is necessary in

order to have an effective reorganization." He relies on Matter

of Jones, 119 B.R. 996 (Bkrtcy.N.D.Ind. 1990), where the court

refused to lift the stay to allow sale of a luxury car, even

though a less expensive one could be bought, because the car was

debtor's only means of transportation and a car was necessary to

an effective reorganization. From that, Lott apparently reasons

that he should be allowed to remain in possession of the Property,

because it is his only place to live, and a place to live is

necessary to an effective reorganization.

The Court is not persuaded by this argument. The business

which Lott operates, and which will be affected by his

reorganization, is a welding operation which is not located on the

Property. The cattle on the Property belong not to Lott but to

his adult sons. The cost of living on the Property is relatively

high when compared to what one might expect to rent dwelling space

for, and might in fact detract from the prospect of a successful

reorganization. There is no showing that residential rentals are

in short supply in the area, or that the dwelling on the Property

has some special necessary features (such as handicap access) not

readily available in the rental market. 

The Court is persuaded that the cases cited by Sponer are

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more apropos. See, e.g., In re Wilks, 123 B.R. 555

(Bkrtcy.W.D.Tex. 1991). The Bankruptcy Court did not err in

finding that the Property was not necessary to Lott's

reorganization.

IT IS THEREFORE ORDERED that the decision of the decision of

the United States Bankruptcy Court for the Western District of

Arkansas, granting Sponer Land, Ltd., relief from the automatic

stay in the Chapter 11 proceedings of Charles D. Lott, is

affirmed.

IT IS SO ORDERED.

 /s/Jimm Larry Hendren 

JIMM LARRY HENDREN

UNITED STATES DISTRICT JUDGE

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