Filed: Oct. 30, 2008
Latest Update: Feb. 12, 2020
Summary: UNPUBLISHED UNITED STATES COURT OF APPEALS FOR THE FOURTH CIRCUIT No. 07-1761 In Re: LAMBERT OIL COMPANY, INCORPORATED, Debtor. - WILLIAM E. CALLAHAN, JR., Trustee, Plaintiff - Appellee, v. MOUNTAIN EMPIRE OIL COMPANY, INCORPORATED, Defendant - Appellant, and QUALITY PROPERTIES, L.P.; ST INVESTMENT COMPANY, LLC, Defendants. Appeal from the United States District Court for the Western District of Virginia, at Abingdon. James P. Jones, Chief District Judge. (1:07-cv-00005-JPJ; BK-03-01183; AP-04-0
Summary: UNPUBLISHED UNITED STATES COURT OF APPEALS FOR THE FOURTH CIRCUIT No. 07-1761 In Re: LAMBERT OIL COMPANY, INCORPORATED, Debtor. - WILLIAM E. CALLAHAN, JR., Trustee, Plaintiff - Appellee, v. MOUNTAIN EMPIRE OIL COMPANY, INCORPORATED, Defendant - Appellant, and QUALITY PROPERTIES, L.P.; ST INVESTMENT COMPANY, LLC, Defendants. Appeal from the United States District Court for the Western District of Virginia, at Abingdon. James P. Jones, Chief District Judge. (1:07-cv-00005-JPJ; BK-03-01183; AP-04-07..
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UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 07-1761
In Re: LAMBERT OIL COMPANY, INCORPORATED,
Debtor.
------------------------------------
WILLIAM E. CALLAHAN, JR., Trustee,
Plaintiff - Appellee,
v.
MOUNTAIN EMPIRE OIL COMPANY, INCORPORATED,
Defendant - Appellant,
and
QUALITY PROPERTIES, L.P.; ST INVESTMENT COMPANY, LLC,
Defendants.
Appeal from the United States District Court for the Western
District of Virginia, at Abingdon. James P. Jones, Chief
District Judge. (1:07-cv-00005-JPJ; BK-03-01183; AP-04-07135)
Argued: September 24, 2008 Decided: October 30, 2008
Before WILLIAMS, Chief Judge, AGEE, Circuit Judge, and T. S.
ELLIS, III, Senior United States District Judge for the Eastern
District of Virginia, sitting by designation.
Affirmed by unpublished per curiam opinion.
Rick J. Bearfield, Johnson City, Tennessee, for Appellant. Lori
Dawn Thompson, LECLAIR RYAN, P.C., Roanoke, Virginia, for
Appellee.
Unpublished opinions are not binding precedent in this circuit.
2
PER CURIAM:
William E. Callahan, Jr., trustee (the “Trustee”) of the
bankruptcy estate of Lambert Oil Company (“Lambert”), filed an
adversary proceeding in bankruptcy court seeking to recover the
fair market rental value for two convenience stores which were
assets of Lambert’s bankruptcy estate. The bankruptcy court
awarded judgment for unpaid rent in favor of the Trustee against
Mountain Empire Oil Company (“MEO”) and the district court
affirmed. MEO now appeals. Because the factual findings of the
bankruptcy court are not clearly erroneous and because the
bankruptcy court did not err in awarding judgment to the Trustee
for rent due from MEO for its pre-sale use and possession of the
stores, we affirm the judgment of the district court.
I.
A.
Lambert contracted to sell two convenience stores to
Quality Properties, L.P. (“Quality”), one located in
Jonesborough, Tennessee, and the other in Bristol, Virginia. In
exchange, Quality agreed to pay a cash amount, assume Lambert’s
secured obligations to Franchise Mortgage Assistance Corporation
(“FMAC”) regarding each store, and further assume a separate
lease for car wash equipment at the Jonesborough store.
3
The purchase contract also provided that Quality would
assume possession and operation of the stores and continue in
possession until the sale closed. During the period of pre-
closing possession, Quality was to “pay daily rent therefore
until closing in an amount equal to” 1/365th of the annual
amounts payable under the car wash lease and the secured FMAC
indebtedness. These payments would be credited to the cash
payment Quality owed Lambert at closing; however, Quality was
not entitled to a return of the “daily rent” payments in the
event the sale did not close.
For reasons not disclosed in the record, Quality never took
possession of or operated either store, made no payments to
Lambert, and no closing took place. Rather, Lambert entered
into a separate agreement with MEO for the management of the
Jonesborough store under which MEO would satisfy all operational
expenses and, “during each day of the term of this Contract . .
. pay to or for the account of Lambert” 1/365th of the annual
amounts due under the secured FMAC indebtedness on that store
and its equipment lease, while MEO retained all gross receipts. 1
Although the record does not contain a corresponding agreement
for the Bristol store, the parties agreed that MEO also assumed
1
Quality and MEO are both owned and controlled by the same
majority shareholders, Warren Broyles and his family.
4
possession of and operated that store and initially paid Lambert
an amount approximating 1/365th of the annual amount due on the
FMAC secured indebtedness for each day of operation.
MEO paid Lambert under these arrangements from April
through September 2002, at which time MEO learned that Lambert
was no longer making payments on the FMAC obligations. After
September 30, 2002, MEO continued to possess and operate the
stores through June 2004 but made no further payments.
In March 2003, Lambert filed a petition under Chapter 11 of
the United States Bankruptcy Code. In September 2003, the case
was converted to a Chapter 7 proceeding and the Trustee was
appointed by the bankruptcy court. The Trustee negotiated with
MEO for payment of the prior unpaid and ongoing rents, but the
parties did not reach an agreement. Instead, MEO and Quality
proposed a purchase of the stores.
In early 2004, at the Trustee’s request, the bankruptcy
court established bidding procedures for sale of the stores.
Quality’s bid was the high bid the Trustee received. Pursuant
to Quality’s bid, the Trustee executed an asset purchase
agreement and conveyed the Jonesborough store to a subsidiary of
MEO and the Bristol store to Quality on June 29, 2004. As
required by the bankruptcy court’s order approving the sale, the
Trustee’s deeds of conveyance were “free and clear of liens,
claims, rights, and interests.”
5
B.
In November 2004, the Trustee brought an adversary
proceeding in the bankruptcy court against MEO, Quality, and a
related party seeking recovery of unpaid rent for the period of
MEO’s pre-sale occupancy of the stores. The Trustee alleged
that unpaid rent from October 1, 2002, through June 28, 2004,
was an asset of the bankruptcy estate. Further, the Trustee
pled that an amount equal to the daily rent set out in the
purchase contract between Lambert and Quality and similarly
under the management agreement between Lambert and MEO was the
fair market daily rental value of the possession, use, and
occupancy of the stores. MEO did not contest that it owed rent
for the pre-sale period (including the pre-bankruptcy, debtor-
in-possession, and Chapter 7 timespans), but argued, inter alia,
that no agreement on rent was ever reached and that rent thus
never accrued. As a consequence MEO contended the rent
obligation was an item of real property which passed upon sale
by the Trustee to the grantees (MEO’s affiliates).
The bankruptcy court found that the amount MEO actually
paid Lambert during MEO’s use and possession prior to the
bankruptcy established the fair market daily rental value for
both stores, limited to the $725.56 daily rent actually claimed
by the Trustee in his complaint.
6
The fact that MEO as the actual operating business
entity was willing to enter into a Management Contract
for the term of a year in which it agreed to pay the
daily cost of the debt service on the two properties
in question in exchange for the right to operate the
convenience stores businesses located there and keep
whatever excess cash flow resulting therefrom it might
be able to generate. is likely as good evidence as a
court is likely to get that, at least in the case of
these two stores, the pro rata daily cost of the debt
service upon these two stores was equivalent to the
fair rental value of such properties as operating
convenience stores businesses.
Callahan v. Mountain Empire Oil Co., Inc. (In re Lambert
Oil Co. Inc.), Ch. 7 Case No. 03-01183-WAS, Adv. No. 04-
07135, slip op. at 21 (Bankr. W.D. Va. Nov. 24, 2006).
The bankruptcy court determined MEO, the entity in actual
possession, was liable to the Trustee for the unpaid rent and
pre-judgment interest. The court also ruled that the Trustee’s
conveyance of the stores free and clear of all liens, claims,
and interests did not absolve MEO of liability for its pre-sale
rental obligation.
MEO appealed to the United States District Court, which
affirmed the judgment of the bankruptcy court. MEO now brings
this appeal.
II.
MEO’s brief enumerates twenty issues on appeal, the gist of
which boil down to three: (1) whether the bankruptcy court
erred in finding MEO liable to the Trustee, either because the
conveyance of the properties extinguished all pre-sale liability
7
from MEO or because there was never an agreement between the
parties that MEO was liable for rent; 2 (2) whether the bankruptcy
court erred because the evidence was insufficient to establish
the amount of fair market daily rental value for both stores,
either because the management agreement was ineffectual, applied
only to the Jonesborough store, or failed to properly reflect
any rental value; 3 and (3) whether the bankruptcy court erred in
failing to find that any liability for rent by MEO was abrogated
under 11 U.S.C. § 365. 4 5
2
Issues 2, 4, 7, 12, and 15.
3
Issues 3, 5, 6, 7, 8, 9, and 18.
4
Issue 19.
5
In Issues 1, 10, 11, 13, 14, 16, 17, and 20 MEO contends
among other things that the court erred in finding that the rent
obligation accrued daily, in finding that MEO was not entitled
to credit against its rent liability for payments paid under the
management agreement, in allowing the Trustee’s expert to
testify, in taking judicial notice of certain facts, and in
awarding pre-judgment interest. However, MEO failed to supply
any legal argument supporting its position on these issues.
Accordingly, we consider these issues waived. See 11126 Balt.
Boulevard v. Prince George’s County, 58 F.3d 988, 993 n.7 (4th
Cir. 1995), abrogated on other grounds by, City of Littleton v.
Z.J. Gifts D-4, L.L.C.,
541 U.S. 774 (2004); see also Audler v.
CBC Innovis Inc.,
519 F.3d 239, 255 (5th Cir. 2008) (“A party
‘waives an issue if he fails to adequately brief it.’”); United
States v. Gupta,
463 F.3d 1182, 1195 (11th Cir. 2006) (“We may
decline to address an argument where a party fails to provide
arguments on the merits of an issue in its initial or reply
brief. Without such argument the issue is deemed waived.”);
Travitz v. N.E. Dep’t ILGWU Health & Welfare Fund,
13 F.3d 704,
711 (3d Cir. 1994) (“When an issue is not pursued in the
argument section of the brief, the appellant has abandoned and
waived that issue on appeal.”).
8
On appeal from the district court, we review the judgment
of the bankruptcy court directly; we review findings of facts
for clear error and legal conclusions de novo. Spence v. Educ.
Credit Mgmt. Corp., No. 06-2114, slip op. at 8 (4th Cir. July
30, 2008); Bowers v. Atlanta Motor Speedway, Inc., 99 F.3d 151,
154 (4th Cir. 1996).
A.
MEO concedes that it used and possessed both stores between
October 2002 and June 2004, the period for which rent was
awarded, but contends that no evidence provided a basis for the
bankruptcy court’s determination that a rent payment obligation
had accrued at the time the stores were conveyed by the Trustee.
In MEO’s view, because no payment obligation had accrued, any
right to collect the rent for MEO’s prior use and possession was
a real property right that passed to the grantees (MEO’s
affiliates) when the Trustee conveyed the real property. We
disagree.
The use and possession of the real property of another
creates a contract implied at law under the law of both
Tennessee and Virginia. Raven Red Ash Coal v. Ball, 39 S.E.2d
231, 237 (1946); Avent v. Hord, 40 Tenn. (3 Head) 458, 461
(1859). Thus, MEO’s liability for use and possession arises
independently from the pre-bankruptcy purchase contract and
9
management agreement. Once accrued, the right to collect rent
for such use and occupation is not an item of real property
which passes to the grantee when the real property is conveyed
but remains personal property owned by the grantor (the Trustee
in this case). See White v. Pleasants, 317 S.E.2d 489, 493
(1984); see also E.T., Ga. & Va. R.R. v. Henderson, 69 Tenn. (1
Lea) 1, 3 (1878) (a right to recover on contract is a chose in
action); Sharp v. Cincinnati, N.O. & T.P.R. Co.,
179 S.W. 375,
376 (1915) (chose in action is personalty). Therefore, MEO was
liable for rent to the Trustee if the rent obligation had
accrued.
In determining whether MEO’s rent obligation had accrued,
the bankruptcy court looked first to the pre-bankruptcy purchase
contract and the management agreement but found no provision in
either instrument for the intervals at which the required
payments were to be paid. However, the court found that “the
liability for rent ‘accrued’ daily,” and turned to the practice
of the parties during the occupancy of the stores, particularly
for the period in which MEO tendered payment to Lambert. Those
payments were tendered monthly in arrears. Thus, the bankruptcy
court held:
the proper rule to apply for that period of time
following the termination or effective abandonment of
the contract by the parties was the same one
applicable to a tenant who enters into possession and
pays rent under an invalid lease, which thereby
10
creates a periodic tenancy with the period of tenancy
being determined by the interval between rental
payments.
Callahan, slip op. at 18.
While MEO’s liability for use and possession of the stores
arises independently from the pre-bankruptcy management
agreement and purchase contract, those instruments and the
conduct of the parties thereunder are nevertheless informative
on the question of when the right to collect rent accrued. The
management agreement clearly provided that “[d]uring each day of
the term of this Contract, MEO shall pay” and the pre-bankruptcy
purchase contract clearly provided for “daily rent.” The
Trustee submitted uncontested evidence that MEO made six
payments, one each in May, June, July, August, September, and
October 2002, ostensibly for the preceding month of use and
possession. Accordingly, there is adequate evidentiary support
for the bankruptcy court’s factual findings that MEO’s rent
obligation accrued daily and was paid monthly in arrears. There
is no clear error in these findings. Consequently, the
bankruptcy court correctly concluded, as a matter of law, that
the accrued rent was personal property, which remained an asset
of the bankruptcy estate, and was not a part of the real
property conveyed by the Trustee.
The bankruptcy court did not err in further holding that
the terms of conveyance of the real property by the Trustee
11
“free and clear of any liens, claims, or interests” had no
effect on MEO’s accrued rental obligation.
Such language has nothing to do with liability for use
and occupation of these stores by any of the
purchasers prior to the sale . . . . In short, the
language of this Court’s Order pursuant to the
Trustee’s Motion provided the same protection to
Quality and MEO as any purchaser of the stores from
liabilities associated with acquisition of ownership
of the properties, but did not release them from
liability for their own pre-sale enjoyment of the
economic benefits flowing from their operation of the
convenience store businesses at the subject locations.
Callahan, slip op. at 24-25.
This conclusion is further supported by the specific
exclusion of any relief from indebtedness for MEO’s occupancy
and possession of the stores in the Trustee’s asset purchase
agreement.
The foregoing exclusion of liability is applicable
only to the liabilities of . . . Lambert Oil Company’s
ownership or occupancy of the Purchased Assets and
shall not operate as a discharge or release of any
liability incurred by the Purchaser as a result of the
Purchaser’s occupancy and use of the Purchased Assets.
The bankruptcy court did not err in determining that MEO
was liable to the Trustee in rent for the two stores from
October 2002 through June 2004.
12
B.
MEO next contends that, even if liable to the Trustee for
rent, the evidence was insufficient to support the bankruptcy
court’s award of $462,181.72. We disagree.
While the bankruptcy court considered the testimony of the
Trustee and the Trustee’s expert witness, it ultimately relied
on the actual conduct of the parties during the occupancy and
use of the stores to establish the rental value. The payments
made by MEO supporting a finding that the fair market daily
value for use and possession of the stores was $732.19 from the
actual conduct of the two independent parties engaged in an
arm’s length transaction. We therefore find no clear error in
the bankruptcy court’s finding that the fair market daily rental
value of the two stores was $725.56, the amount pled by the
Trustee in his complaint, or in the resulting cumulative award
of rent.
C.
Lastly, MEO contends any liability derived from the pre-
bankruptcy purchase contract or management agreement was
abrogated when neither Lambert, as debtor-in-possession, nor the
Trustee assumed the contracts, thereby effecting a rejection of
the agreements by operation of 11 U.S.C. § 365. The bankruptcy
court correctly determined that the statute applies “to any
13
‘unexpired’ lease,” and, as no lease was in effect at the time
the bankruptcy petition was filed, the statute could not apply
to expired pre-bankruptcy agreements as a matter of law.
Moreover, as noted above, MEO’s liability to pay rent
arises out of the contract implied at law from its use and
possession of the two stores before and during the bankruptcy,
not the pre-bankruptcy agreements.
The fact that the two written contracts had either
expired or failed according to their terms long before
bankruptcy transpired cannot alter the facts that the
parties had agreed and acted upon a specific rate of
compensation for the use, occupancy and enjoyment of
the Bristol and Jonesborough stores during a period of
time and MEO remained in actual possession of such
properties thereafter without any express agreement as
to the terms and conditions therefore and without any
compulsion to do so other than its own financial self-
interest.
Callahan, slip op. at 27.
Accordingly, we affirm the bankruptcy court’s holding that
11 U.S.C. § 365 had no effect on MEO’s liability for rent.
III.
For the foregoing reasons, we affirm the judgment of the
district court.
AFFIRMED
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