ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW JERSEY (Civil Action No. 80-1672)
Before: SEITZ, Chief Judge, ADAMS and GARTH, Circuit Judges
At issue in this appeal is the effect of a clause in a lease which provided that the lease would terminate in the event an insolvency proceeding was filed against the tenant. Complicating the issue in this case is the fact that up to October 1, 1979, the provisions of the Bankruptcy Act of 1898, as amended, governed. After that date the provisions of the Bankruptcy Code, 11 U.S.C. §§ 101 et seq . (Supp. III 1979), controlled. The triggering event, the filing of an involuntary petition in bankruptcy against the tenant, occurred on August 13, 1979, when the old Act was still in force. Under section 70(b) of the old Act, an express bankruptcy termination clause, or ipso facto clause, such as was contained in the instant lease, was generally enforceable. Under section 365(e)(1) of the Code, such a clause is no longer enforceable.
We are here called upon to determine whether the old Act or the new Code controls where the purported termination of the tenancy occurred prior to October 1, 1979, the effective date of the Code. If the old Act governs because Halvajian had effectively terminated the lease prior to October 1, 1979, then on November 19, 1979, when an interim trustee in bankruptcy was appointed, no leasehold interest existed which the trustee could assume.
The bankruptcy judge held as a matter of law that no effect could be given to the ipso facto clause. He thus did not make findings as to whether Halvajian had validly terminated the lease, and if so, on what date. The district court, adopting a similar approach, held for this and other reasons that the trustee had succeeded to the tenant's leasehold rights which could be assumed.
We conclude that the bankruptcy termination clause in the lease would be enforceable if the lease was terminated prior to the effective date of the Code, but we also conclude that the determination of whether and when a valid termination occurred must initially be made by the bankruptcy court. We thus vacate the order of the district court and remand.
The lease between the appellant-landlord, Arthur M. Halvajian, and the debtor, Triangle Laboratories, Inc., covered premises at 316 North 6th Street, Prospect Park, New Jersey, for a term of ten years commencing November 26, 1975. An addendum to the lease granted Triangle an option to purchase the leased premises from Halvajian between December 24, 1975 and March 24, 1981 for $375,000. Among other provisions, the lease contained bankruptcy termination clauses which, in effect, provided that the filing of an involuntary proceeding by or against Triangle constituted an event of default leading to the termination of the lease.The relevant lease clauses are reproduced in the margin.*fn1
On August 13, 1979, an involuntary petition in bankruptcy was filed against Triangle.On that date, Halvajian sent Triangle a letter stating that by virtue of the petition filed against it, Triangle was in default under its lease and that the lease would expire on September 5, 1979 pursuant to the twenty-day termination provision of paragraph 15(b) of the lease. The petition filed against Trianble subsequently was dismissed on October 19, 1979.*fn2
Triangle then, on November 13, 1979, filed a voluntary petition for reorganization under Chapter 11 of the Bankruptcy Code. The Chapter 11 proceedings were converted into a Chapter 7 liquidation bankruptcy on December 21, 1979. After the commencement of these bankruptcy proceedings, appellee Michael S. Kopelman, Triangle's interim trustee, who had been appointed on November 19, 1979, sought to exercise the purchase option in the lease so the property could be sold by the bankruptcy estate to a prospective purchaser for $480,000, thus realizing a $105,000 profit. On December 27, 1979, Kopelman filed a complaint against Halvajian in the United States Bankruptcy Court for the District of New Jersey, seeking a declaration of his right to specific performance of the purchase option.
Halvajian's defense was that, as a result of the August 13, 1979 bankruptcy petition against Triangle and Triangle's alleged default in compliance with the insurance provisions of the lease,*fn3 the lease had been terminated prior to October 1, 1979, the effective date of the Code, as well as prior to the November 13, 1979 Chapter 11 petition and hence was not part of the succeeding bankruptcy estate.*fn4 Therefore, Halvajian asserted, there was no longer a purchase option which the Trustee could exercise.
The bankruptcy court rejected Halvajian's argument. That court, without determining whether and when the lease had been terminated, held that the bankruptcy termination clauses were ineffective under section 365(e)(1) of the Code. The bankruptcy court went on to hold, however, that the lease had been validly terminated for failure to renew the required insurance. Alternatively, the bankruptcy court held that the Trustee had failed properly to assume the lease within the sixty-day period prescribed by section 365(d)(1) of the Bankruptcy Code, 11 U.S.C. § 365(d)(1) (Supp. III 1979), and that hence the lease had been rejected by the Trustee as a matter of law. In re Triangle Laboratories, Inc ., No. 79-0030 (Bankr. Ct. D.N.J. May 5, 1980). The bankruptcy court thus dismissed the Trustee's complaint on May 21, 1980.
On appeal to the district court, Halvajian and the Trustee stipulated that the lease had been properly assumed. The district court, without questioning the effectiveness of that stipulation, held that the lease had not been terminated under either the bankruptcy or the insurance clauses, and thus vacated the order of the bankruptcy court, thereby ruling in favor of the Trustee. In ...