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Nature of Suit Code: 422
Nature of Suit: Bankruptcy Appeals Rule 28 USC 158
Cause of Action: 

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United States Bankruptcy Appellate Panel

FOR THE EIGHTH CIRCUIT

______

No. 06-6028WM

______

In re: *

 *

CP Holdings, Inc., *

 *

Debtor. *

 *

California Public Employees’ *

Retirement System, *

 *

Plaintiff-Appellee, * Appeal from the United States

 * Bankruptcy Court for the Western

v. * District of Missouri

 *

Janice Stanton, Trustee, and *

CP Holdings, Inc., *

 *

Defendants-Appellants. *

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Submitted: August 23, 2006

Filed: September 14, 2006

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Before KRESSEL, Chief Judge, SCHERMER and McDONALD, Bankruptcy Judges.

______

KRESSEL, Chief Judge.

Appellate Case: 06-6028 Page: 1 Date Filed: 09/14/2006 Entry ID: 2089140
1

 The Honorable Arthur B. Federman, United States Bankruptcy Judge for

the Western District of Missouri. 

2

The Bankruptcy Code contains no such concept. We assume this means the

claim was disallowed.

2

The trustee and CP Holdings, Inc. appeal from a bankruptcy court1 order

determining that California Public Employees’ Retirement System held a perfected

security interest in the debtor’s claim against Kmart. We affirm.

BACKGROUND

In 1989, the debtor signed a promissory note for $12 million with Principal

Mutual Life Insurance Company. Principal endorsed this note to CALPERS, which

became the holder of the note at all times material to this case. The debtor secured the

note in part by granting a Mortgage and an Assignment of Lease and Rents on three

parcels of real estate located in Maryland, Michigan, and Missouri. The Assignment

of Lease and Rents conveyed “all rights of the lessor under all leases affecting the

Mortgaged Premises . . . and all the rents, and other payments arising thereunder.”

The debtor also agreed “not to . . . terminate any of the Leases or accept a surrender

thereof without prior written consent of Assignee.” 

The debtor leased each of the three properties to Kmart. In 2002, Kmart filed

a petition under Chapter 11. During its case, Kmart rejected its leases with the debtor

pursuant to 11 U.S.C. § 365. Both the debtor and CALPERS filed lease rejection

claims in the Kmart bankruptcy case. CALPERS filed its claim relying on the

provision in the Assignment of Lease and Rents that stated “Assignor hereby appoints

Assignee the true and lawful attorney of Assignor . . . with power for it and in its

name, place and stead, to demand, collect, receipt and give complete acquittances for

any and all rents and other amounts herein assigned.” CALPERS’ claim was allowed

in the approximate amount of $3.5 million while the trustee’s was “expunged”.2

Appellate Case: 06-6028 Page: 2 Date Filed: 09/14/2006 Entry ID: 2089140
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On June 13, 2003, the debtor filed its own Chapter 11 petition. The debtor

attempted to relet the Kmart properties and successfully leased the Maryland property

to Home Depot. The property in Michigan was also relet, but the leases were

contingent on confirmation of a Chapter 11 plan. Because the debtor’s case was

converted to Chapter 7 on April 29, 2005, the leases in Michigan were not approved.

After the debtor’s case was converted to Chapter 7, Janice Stanton was

appointed trustee. She now argues that she is entitled to the proceeds from the lease

rejection claims against Kmart. The trustee claims that because the debtor terminated

the Kmart leases, it held only a claim for breach of contract. The trustee concedes that

CALPERS’ security interest in the properties is broad enough to encompass both the

claims for rents and general intangible damages, and that CALPERS therefore has a

security interest in the claim in Kmart’s case. However, she argues that CALPERS

did not properly perfect its security interest on general intangibles, and the trustee can

therefore avoid the security interest under 11 U.S.C. § 544.

CALPERS claims that the debtor did not terminate its leases with Kmart, and

therefore CALPERS’ claim against Kmart was for rents and not contract damages. 

Because it perfected its interest in rents, CALPERS argues, the damages from the

lease rejection claims belong to it and not the trustee.

Standard of Review

We review the bankruptcy court’s factual findings for clear error and its

conclusions of law de novo. Debold v. Case, 452 F.3d 756, 761 (8th Cir. 2006);

Litzinger v. Litzinger (In re Litzinger), 340 B.R. 897, 903 (B.A.P. 8th Cir. 2006).

Appellate Case: 06-6028 Page: 3 Date Filed: 09/14/2006 Entry ID: 2089140
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CALPERS does not concede that termination is sufficient to deprive it of its

perfected security interest, but agrees it is a necessary condition. i.e. CALPERS

would argue that even if the leases were terminated, its security interest would be

perfected as to the debtor’s claim against Kmart. Because we hold that the trustee

has not proven that the leases were terminated, we need not address this issue.

4

DISCUSSION

The trustee’s entire argument is dependant on the factual assertion that the

leases between the debtor and Kmart were terminated.3

 She argues that once

termination of a lease occurs, the tenant’s obligation to pay rent is extinguished and

the landlord may only bring an action for breach of contract, and then only if the

contract specifically allows it. See Circuit City Stores, Inc. v. Rockville Pike Joint

Venture Ltd. P’ship, 829 A.2d 976, 989-990 (Md. 2003). Without the crucial step of

termination, the tenant’s obligation to pay rent continues. See e.g., Winshall v. Ampco

Auto Parks, Inc., 417 F.Supp. 334, 336 (E.D. Mich. 1976). We agree with the

bankruptcy court that the trustee has not demonstrated that the leases were terminated.

Rejection Under 11 U.S.C. § 365 Does Not Terminate a Lease.

Under 11 U.S.C. § 365(g), a lease rejection functions as a breach of the lease,

but not as a termination of the lease. 11 U.S.C. § 365(g); Block Properties Co., Inc.

v. Am. Nat’l Ins. Co., 998 S.W.2d 168, 175 (Mo. Ct. App. 1999). The underlying

obligations of the lease continue upon the rejection of the lease. In re Modern Textile,

Inc. v. P.M. Holding Corp., 900 F.2d 1184, 1191 (8th Cir. 1989).

The Debtor Did Not Expressly Terminate the Leases.

Termination of a leasehold estate may be accomplished through either express

words indicating that the landlord has accepted the surrender of the leasehold, or by

actions that give rise to the inference that surrender has occurred. See Crow v. Kaupp,

50 S.W.2d 995, 998 (Mo. 1932). The debtor’s leases with Kmart provide that, in the

event of Kmart’s bankruptcy, the debtor could terminate the leases with Kmart if the

debtor gave notice of its intention to do so. The Assignment of Lease and Rents

Appellate Case: 06-6028 Page: 4 Date Filed: 09/14/2006 Entry ID: 2089140
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 The affidavit was submitted after the close of evidence and was neither

solicited by or authorized by the bankruptcy court. It was within its discretion to

ignore it.

5

required CALPERS to give its consent prior to the debtor’s termination of the leases.

The debtor neither gave Kmart notice that the debtor was terminating Kmart’s leases,

nor received CALPERS’ permission to terminate the leases. The bankruptcy court’s

finding that the debtor did not expressly terminate the lease was not clearly erroneous.

The Debtor Did Not Implicitly Terminate the Leases.

Even if a landlord does not terminate a leasehold through express words, a

landlord may still terminate a lease through actions which amount to termination. See

Circuit City, 829 A.2d at 988; Winshall v. Ampco Auto Parks, Inc., 417 F.Supp. 334,

336 (E.D. Mich. 1976); Crow, 50 S.W.2d at 998. There is little indication that the

debtor took any actions consistent with lease termination. The trustee provides only

an affidavit by Paul Schwabe, the debtor’s secretary, as evidence to prove that the

debtor terminated the leases.4

 The affidavit contains a conclusory statement that the

debtor terminated the leases with Kmart, but does not list any actions that the debtor

took in order to effect a lease termination. Nor are the debtor’s attempts to relet the

properties sufficient to prove termination. Reletting or attempting to relet a leasehold

is not necessarily determinative when establishing whether a lease has been

terminated. See Winshall, 417 F.Supp. at 336. Given the lack of competent,

persuasive evidence that the debtor terminated Kmart’s leases, we cannot conclude

that the bankruptcy court clearly erred in determining that no termination occurred.

CONCLUSION

Because the trustee failed to show that the debtor terminated Kmart’s leases

either expressly or implicitly, CALPERS’ claim against Kmart is a claim for rents.

CALPERS therefore has a perfected, unavoidable security interest in the debtor’s

claim against Kmart.

Appellate Case: 06-6028 Page: 5 Date Filed: 09/14/2006 Entry ID: 2089140
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For the foregoing reasons, the judgment of the bankruptcy court is affirmed.

Appellate Case: 06-6028 Page: 6 Date Filed: 09/14/2006 Entry ID: 2089140