Court Opinion

ID: 3002795
Source: CourtListenerOpinion
Date Created: 2015-09-24 20:34:06.080213+00
Date Added: 2024-06-11T11:45:50.902989
License: Public Domain

In the

United States Court of Appeals
               For the Seventh Circuit

No. 07-3993

ILLINOIS INVESTMENT T RUST N O . 92-7163,

                                                             Appellant,
                                  v.

A MERICAN G RADING C O .,
                                                               Appellee.

             Appeal from the United States District Court
        for the Northern District of Illinois, Eastern Division.
            No. 07 C 3268—Matthew F. Kennelly, Judge.

     A RGUED S EPTEMBER 17, 2008—D ECIDED A PRIL 8, 2009

 Before M ANION, W OOD , and W ILLIAMS, Circuit Judges.
  W OOD , Circuit Judge. Illinois Investment Trust No. 92-
7163 (“Illinois Investment”) would like to secure the
rights to operate a methane gas collection and conversion
system at the McCook landfill, in Lyons, Illinois. Thus
far, however, its efforts have been thwarted, because
the company from which it wants to acquire those rights,
Resource Technology Corporation (“RTC”) is in bank-
2                                               No. 07-3993

ruptcy, and both the bankruptcy court and the district
court ruled that RTC failed to preserve its rights to the
system. An earlier agreement between RTC and American
Grading Company, the owner of the landfill, had termi-
nated, and thus there were no rights left for RTC’s
trustee to pass along to Illinois Investment. On appeal,
Illinois Investment has explained why it believes that
the lease between RTC and American Grading was not
terminated and thus why the trustee may still assume
the lease and assign it to Illinois Investment. We con-
clude, however, that the district court correctly assessed
the situation, both on the facts and on the law, and
we therefore affirm its judgment.

                              I
  A brief summary of the sequence of events places the
issues in context. As of the mid-1990s, RTC was in the
business of collecting methane gas emitted from
garbage landfills and converting that gas into usable
electric energy. American Grading owned the McCook
landfill. On December 27, 1995, RTC and American Grad-
ing entered into a lease agreement for the McCook
facility, under which RTC was to install and operate a
collection and conversion system there, in exchange
for royalties to be paid to American Grading. The lease
had an initial term of 10 years, and thus was due to expire
on December 27, 2005. RTC could extend its term for up
to three consecutive periods of five years each by pro-
viding written notice of its intent to renew at least 90 days
before the expiration of the preceding period.
No. 07-3993                                                 3

  The royalties under the lease were based on the sale
of electrical energy produced by the conversion system.
In addition, however, RTC was required to pay
American Grading a $100,000 advance royalty payment on
January 1, 1996, and each January thereafter for the life
of the lease. Finally, the lease contained a termination
clause that read in part as follows:
    TERMINATION. If either party or its assigns defaults
    or persistently fails or neglects to perform any duty
    or obligations [sic] under this Lease, the other party
    may terminate the Lease by giving written notice of
    its intention to terminate. If the responsible party
    fails to correct the default within thirty (30) days after
    being given notice, the other party may without
    prejudice to any other remedy, terminate the Lease.
Lease ¶ 16. The termination clause also mentioned “the
commencement by the Lessee [RTC] . . . of a voluntary
case under the Federal Bankruptcy Laws” as a condition
of default.
  On November 15, 1999, RTC’s creditors filed an involun-
tary petition for bankruptcy relief under Chapter 7 of the
Bankruptcy Code. Shortly thereafter, on January 18,
2000, the court converted the case to a Chapter 11 pro-
ceeding, with RTC’s consent. The case proceeded under
Chapter 11 for several years. In 2002, the Illinois Environ-
mental Protection Agency (“IEPA”) issued an operating
permit to RTC for the planned gas collection and control
system at McCook. See 415 ILCS 5/9, 5/21. That permit
could not be transferred or assigned without IEPA’s
approval. As far as this record shows, despite the
4                                               No. 07-3993

issuance of the permit, RTC was doing little or no busi-
ness at the site.
  In light of the lack of progress in turning around RTC’s
fortunes, on September 21, 2005, the bankruptcy court
converted its case back into a Chapter 7 proceeding and
appointed a trustee, Jay A. Steinberg, for the estate. On
March 16, 2006, the trustee entered into a settlement
agreement with some of RTC’s creditors, including a
group called the Greenblatt Entities, under which the
Greenblatt Entities were given the right to designate
executory contracts held by RTC that the trustee would
be required to assume and then assign to them. (At a
later time, the Greenblatt Entities, with the court’s permis-
sion, assigned their rights under the settlement agree-
ment to Illinois Investment; for the sake of simplicity, we
will refer only to Illinois Investment from this point
onward.) If the trustee refused to seek the bankruptcy
court’s approval to assume and assign a contract desig-
nated by Illinois Investment, then Illinois Investment
had the right to ask the court to compel the trustee to act.
  In the meantime, there were some pertinent develop-
ments at the McCook site. In December 2005, the trustee
sought to obtain access to the site, but he was unsuc-
cessful, because the locks had been changed. On January 1,
2006, RTC’s annual advance royalty payment of $100,000
became due, but the trustee did not pay it. A few days
later, on January 5, the trustee received the keys to the
landfill site. By that time, he had obtained several exten-
sions of the lease from American Grading, but the final
extension expired on January 5. Having received no
No. 07-3993                                                5

further requests for an extension, American Grading
sent the trustee an email on January 19 requesting him
to return the keys to the McCook landfill and to refrain
from entering the premises. Although the trustee never
returned the keys, he also never entered the site after
that date. Approximately six weeks later, he entered
into the settlement agreement described above. At that
point, the trustee abandoned RTC’s state operating
permit, laid off all the employees and ceased all operations
that had related to the McCook landfill.
   Illinois Investment, however, was not ready to give up
on McCook. On July 7, 2006, at its behest, the trustee
filed a motion for entry of an order compelling RTC’s
estate to assume the lease (among other agreements).
American Grading objected on the ground that the lease
had expired according to its terms no later than January 5,
2006. The bankruptcy court scheduled a hearing for
November 21, 2006, but American Grading failed to
appear, because its counsel had withdrawn shortly
before the hearing date. At that time, the court ruled
that the term of the McCook lease had been extended for
a period of five years from December 27, 2005, to Decem-
ber 27, 2010. It stipulated, however, that the estate’s right
to assume and assign its rights under the lease (and
thus the rights of Illinois Investment, as the creditor’s
assignee) would be subject to further order of the
court with respect to “the curing of defaults, if any,
and the provision of adequate assurance of future perfor-
mance . . . .”
  After that, American Grading sent two more notices
of default with respect to the lease to the trustee, one
6                                               No. 07-3993

on December 29, 2006, and the second on January 12,
2007. It allowed thirty days to elapse after the Decem-
ber 29 notice, and then on January 31, 2007, it issued a
notice of termination of the lease and sent that to the
trustee. On February 8, 2007, the bankruptcy court
entered an order setting a date for a trial on the question
whether the lease had been terminated. In a handwritten
note at the bottom of that order, someone added the
following: “The petitioner shall continue the status quo
as of December 28, 2006, without prejudice to ABC’s right
to raise issues set forth in its notice of 12/29/06.” The
trial took place on April 4, 5, and 6, 2007. At the con-
clusion of that trial, the bankruptcy court summarized
its finding:
    [I]t is apparent to me that as of January 1 prior to the
    dispute arising regarding the extension of the agree-
    ment—since at that point the time for extension was
    still outstanding—the lessee, RTC, had an obligation
    to make a hundred thousand dollar advance royalty
    payment reduced by whatever amount of royalties
    had not been earned by American Grading in the
    preceding year.
      That would be information that was in RTC’s con-
    trol and would have enabled RTC to make a some-
    what less than $100,000 payment on January 1 of 2006
    to the extent it could show that there was an over-
    payment of royalties for the preceding year.
      RTC did not make that payment. And upon demand
    by American Grading issued on December 29, 2006,
    failed to make that payment within the subsequent
No. 07-3993                                                7

    30 days. That failure gave rise to termination of the
    contract pursuant to the terms of the lease and the
    notice that was issued by American Grading.
       Now there are a number of other potential grounds
    for termination that in light of this one I will not have
    to reach. . . . The question of the advance royalty, as
    I say, is a very clear one. . . .
      The determination of the Court then will be that this
    contract was validly terminated by American Grading
    and, therefore, is not capable of being assigned by the
    estate to [Illinois Investment].
On April 17, the bankruptcy court supplemented this
finding with a ruling that American Grading had not
prevented RTC from entering the premises of the
McCook landfill.
  On appeal to the district court, Illinois Investment
raised four issues: (1) it was error to characterize RTC’s
failure to make the $100,000 advance royalty payment as
a material breach; (2) the court should have found that
American Grading had prevented RTC from entering
the landfill and performing under the agreement;
(3) the court erred in refusing to allow Illinois Investment
to withdraw some exhibits from its exhibit list; and
(4) the court misinterpreted its own order of February 8,
2007, setting the matter for trial. Overall, Illinois Invest-
ment argued that the bankruptcy court erred when it
ruled that American Grading’s termination of the lease
was effective. The district court rejected each of these
points and affirmed the bankruptcy court.
8                                                No. 07-3993

                              II
   Before this court, Illinois Investment has abandoned its
third argument and rephrased its other arguments as
follows: first, nonpayment of the advance royalty did not
provide a basis for termination, because it was not a
material breach; second, American Grading, by focusing
on the estate’s nonperformance of the agreement after
March 26, 2006 (the date when the trustee abandoned
the IEPA operating permit), forfeited any argument
based on the nonpayment of royalties in January 2006;
third, American Grading prevented RTC from per-
forming under the lease, and thus RTC’s nonperformance
was excused; and finally, the bankruptcy court erred in
its interpretation of the February 8, 2007, order as some-
thing permitting American Grading to rely on events
occurring after December 28, 2006, to support a finding
of termination. We look first at the issues surrounding
the advance royalty payment, and then we consider
briefly Illinois Investment’s arguments about excuse and
the scope of the bankruptcy court’s February 8 order.

                              A
  We begin with the question whether the court was
entitled to consider the nonpayment of royalties at all,
given the fact that the estate did not abandon the
permit until March 26, 2006, several months after the
royalties were due, and American Grading had filed a
motion in limine arguing that RTC’s abandonment of the
lease at the latter time was the “sole” basis for termination.
Both the bankruptcy and the district courts found that
No. 07-3993                                               9

the nonpayment of the advance royalty was an ongoing
violation of the lease, and thus that American Grading
was entitled to raise it as a ground for termination even
after the statement it made in the motion. We agree with
that reasoning. We would have a different question if
the trustee had tendered the $100,000 some time between
January 5 and March 26, and then American Grading
had still insisted that the lease had ended because
RTC abandoned its permit. But that tender never hap-
pened, and so the debt remained outstanding at all rele-
vant times.
  This takes us to the next issue: was the trustee’s failure
to pay the advance royalty a material breach that justified
American Grading’s invocation of the termination provi-
sions of the lease? Illinois Investment argues that the
nonpayment was no more than a technicality, because no
royalties were ever generated during 2006. Neither the
bankruptcy nor the district court was persuaded by this
effort, nor are we. There is nothing in the lease to
suggest that the advance royalty payment is excused if
there are no royalties. All the lease says is that the
amount due would be $100,000 unless RTC could show
that a lesser amount (down to nothing) was owed
because of an unapplied balance from the prior year’s
advance royalty payment that could be credited against
the current year’s obligation. In other words, as
American Grading points out, the lease required RTC to
replenish the advance royalty payment each January 1 so
that at the start of each year American Grading had
$100,000 in hand to secure RTC’s performance. It would
then be able to offset royalties that RTC owed it against
10                                            No. 07-3993

that amount, as the year unfolded. In essence, the
advance royalty obligation functioned as a form of
security for American Grading. A breach of the require-
ment to keep that security in place was thus material
and entitled American Grading to set in motion the
termination provisions of the lease.

                            B
   Even if the breach were material in the abstract,
Illinois Investment argues, it should not have led to a
finding that the lease was terminated, because its nonper-
formance was excused. American Grading did not allow
RTC (through the trustee) onto the premises of the
McCook landfill starting in December 2005, and thus
RTC had no opportunity to perform the contract. This is
essentially an impossibility argument: American Grading
cannot argue breach when its own conduct made
RTC’s performance impossible.
  The facts surrounding the trustee’s access to the site
are somewhat confused. The bankruptcy court found
that American Grading did not entirely prevent the
trustee from entering, because American Grading’s
initial refusal in December 2005 was premised on its
belief that the lease had not been renewed. After that
issue was settled against American Grading (when it
failed to appear at the court’s November 21, 2006, hear-
ing), there was no additional evidence indicating that
American Grading had prevented the trustee from
going onto the landfill. The record showed only that the
trustee received keys to the McCook site on January 5,
No. 07-3993                                             11

2006, and that he never responded to American Grading’s
request of January 19th that he return the keys. Then, on
March 16, 2006, he abandoned the operating permit,
laid off all employees and terminated the operations
related to McCook. The district court thought that the
trustee could have gone to the bankruptcy court at some
point after American Grading demanded the return of
the keys and obtained an order requiring American
Grading to permit him to enter. Some of these facts
suggest that American Grading was responsible for
RTC’s lack of access; others suggest that RTC’s trustee
could have done more.
  We need not resolve this point, because RTC’s failure to
pay advance royalties was independent of whatever
work RTC may have done later in the year that would
have generated current royalties. We thus find that the
dispute over access is not material to the resolution of
this case.

                            C
   Last, we come to Illinois Investment’s rather odd argu-
ment that the bankruptcy court misinterpreted its own
order of February 8, 2007. As we noted earlier, that order
set a date for trial on the issue of termination, and also,
through a handwritten note, required the parties to
maintain “the status quo as of December 28, 2006 with-
out prejudice to AGC’s right to raise issues set forth in
its notice sent 12/29/06.” Two possible interpretations
of this language have been offered: (1) it preserves the
parties’ legal rights on the question of termination; or
12                                             No. 07-3993

(2) it prevents American Grading from raising arguments
about termination because its notice of termination (but
not its notice of default) came after December 28, 2006.
The bankruptcy court chose the first of these interpreta-
tions; Illinois Investment urges us to find that only the
second made any sense.
  We cannot accept Illinois Investment’s position. First,
as the district court also observed, “a court that has
issued an order is in the best position to interpret it.”
Second, the court was about to hold a trial on the
question whether the lease had come to an end. It is far
more logical to interpret the order as one that preserved
the status quo until that trial could be completed than
as one that narrowed the issues so dramatically.

                            III
   We recognize that the practical result of a finding that
the lease between American Grading and RTC with
respect to the McCook landfill was terminated means
that it is not available for any of RTC’s creditors. The
trustee cannot assume a nonexistent agreement, and thus
Illinois Investment (the successor to some creditors) will
not be able to obtain the lease by assignment. Illinois
Investment’s desire to get some value out of the bank-
ruptcy estate, however, cannot trump the ordinary rules
of contract. We A FFIRM the judgment of the district court.

                           4-8-09