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Leroy Adventures, Inc. v. Cafritz Harbour Group

June 29, 1995

LEROY ADVENTURES, INC., APPELLANT
v.
CAFRITZ HARBOUR GROUP, INC., ET AL., APPELLEES



ON PETITION FOR REHEARING.

Before Ferren and Terry, Associate Judges, and Gallagher, Senior Judge.

PER CURIAM: This case involves certain claims arising out of the bankruptcy and closing Of the Potomac Restaurant. In our earlier opinion, Leroy Adventures, Inc. v. Cafritz Harbour Group, Inc., 640 A.2d 193 (D.C. 1994) (Leroy I), we reversed the trial court's dismissal of appellant's complaint and remanded the case for further proceedings. Appellees filed a petition for rehearing, raising several points. We remain convinced that the result of our prior opinion is sound, namely, that the complaint was erroneously dismissed and that further proceedings in the trial court are required. Having considered the petition for rehearing, however, we find that our analysis has been misunderstood and needs to be clarified. We are also persuaded that we made a mistake in saying that "as a matter of law, the lease must be read as permitting the removal" of the heating, ventilating; and air conditioning equipment ("HVAC"). Id. at 201. We therefore grant the petition for rehearing and partially modify our prior decision.

Part I Of the opinion that follows is a brief summary Of the facts pertinent to the petition for rehearing. For a fuller understanding of the facts, we invite the reader's attention to our opinion in Leroy I, 640 A.2d at 195-197. Part II explains - more clearly than before, we trust -- some of our reasons for reversing the dismissal of the complaint. Part III modifies, in part, our prior holding with respect to the HVAC.

I

Cafe Partners leased property from Washington Harbour Associates ("WHA") to establish the Potomac Restaurant. Royal Bank and Trust Company ("Royal Bank") lent money to Cafe Partners in exchange for (1) a security interest in Cafe Partners' "accounts receivable, contract rights, goods, equipment, inventory, fixtures, furniture, and farm products," and (2) a subordination agreement with WHA which provided that Royal Bank's interest in the collateral was superior to WHA's interest in the collateral.

Cafe Partners failed to meet its obligations under the lease with WHA, and as a result Cafe Partners and WHA entered into a Joint Settlement Agreement which our prior opinion designated as "JSA-1." JSA-1, in which Royal Bank did not participate (and by which Royal Bank was therefore not bound *fn1), released each of the three parts *fn2 from its obligations and gave WHA title to any property remaining on the leased premises more than sixty days after "the earlier of the expiration of the time to object, or the entry of a final non-ap pealable order of the Bankruptcy Court" in which Cafe Partners' bankruptcy case was pending.

Cafe Partners also failed to meet its obligations under the loan agreement with Royal Bank, and as a result Cafe Partners and Royal Bank entered into another Joint Settlement Agreement ("JSA-2"). JSA-2 gave Royal Bank title to Cafe Partners' assets in full satisfaction of Cafe Partners' obligations under the loan agreement. In JSA-2 Cafe Partners designated Royal Bank as its agent under JSA-1 "for the purpose of entering onto the Leased Premises and taking possession of the Equipment remaining at the Leased Premises." Royal Bank then sold to appellant LeRoy Adventures ("LeRoy") all of the equipment it had just "acquired" from Cafe Partners pursuant to JSA-2. A few weeks later, Royal Bank filed with the Recorder of Deeds a UCC-3 Termination Statement, which stated that Royal Bank "no longer claims a security interest" in Cafe Partners' assets.

LeRoy removed from the leased premises many of the assets it had purchased from Royal Bank, but at some time after the expiration of the sixty-day period described in JSA-1, the landlord (WHA) barred LeRoy from entering the premises to remove the rest of the assets, including the HVAC. In preventing LeRoy from entering, WHA relied on the provision in JSA-1 that any property remaining on the premises after sixty days would become WHA's property. In addition, WHA maintained that the HVAC, in any event, "was not the type of property that Cafe Partners, or its successor in interest LeRoy Adventures, was authorized under the lease to remove." Leroy I, 640 A.2d at 195.

II

The first issue on rehearing concerns our previous Conclusion that "the effect of JSA-2 was to give Royal Bank possession: of the collateral for its loan in lieu of foreclosure of its security interest." Id. at 197 (emphasis added). It appears from appellees' petition for rehearing that this language may, have been misleading. The petition states:

If Royal Bank had wanted to foreclose upon its lien and thereby "convert" the lien to ownership, it had several legal options: (1) institute judicial foreclosure proceedings as permitted by U.C.C. § 9-501; (2) follow the strict foreclosure requirements of U.C.C. § 9-504; or (3) repossess the collateral under U.C.C. § 9-503 and retain it under § 9-505.... It is undisputed that Royal Bank -- no novice to the world of secured transactions -- chose none of these courses. Instead, as the panel recognized, it elected to release its lien and effect a settlement with Cafe Partners "in lieu of foreclosure of its security interest." When it did so, however, Royal Bank received no greater rights than those possessed by Cafe Partners -- i.e, the right to remove the personal property within 60 days -- and only these rights were then transferred to [LeRoy Adventures.]

We did not mean to conclude that JSA-2 was an alternative to Royal Bank's foreclosure, but rather that JSA-2 was the functional equivalent of foreclosure. JSA-2 announced the terms of Royal Bank's strict foreclosure, pursuant to D.C. Code § 28:9-505 (2) (1991), *fn3 of its security interest in Cafe Partners' assets, thereby giving Royal Bank a possessory interest in the collateral.

D.C. Code § 28:9-501 provides: "When a debtor is in default under a security agreement, a secured party has the rights and remedies provided in this part [Part 5 of UCC Article 9] and except as limited by subsection (3) those provided in the security agreement." Part 5 Of Article 9 lists several rights and remedies available to the secured party upon the debtor's default. These remedies include the right of the secured party to take possession after default, D.C. Code § 28:9-503, and the right Of the secured party to dispose of the collateral after default, D.C. Code § 28:9-504. An examination of JSA-2 clearly shows, however, that Royal Bank chose neither of these remedies but the strict foreclosure remedy made available under D.C. Code § 28:9-505 (2): "acceptance of the collateral as discharge of the obligation."

Section 28:9-505 (2) states that "a secured party in possession may, after default, propose to retain the collateral in satisfaction of the obligation." *fn4 Under this section, a secured creditor (1) must take possession of the collateral after default; (2) must send written notice to the debtor of its intention to retain the collateral in satisfaction of the obligation, unless the debtor has "signed after default a statement re nouncing or modifying his rights under this subsection," see Fletcher v. Cobuzzi, 499 F. Supp. 694, 699 (W.D. Pa. 1980); (3) must send notice of its intent to foreclose to any other creditor of the debtor who has previously sent the secured creditor written notice of a claim of interest in the collateral, see 2 JAMES J. WHITE & ROBERT S. SUMMERS, UNIFORM COMMERCIAL CODE § 27-8, at 587 (3d ed. 1988) (hereafter WHITE & SUMMERS); and (4) may retain the collateral in satisfaction of the debtor's obligation if, within twenty-one days after sending notice, the secured creditor does not receive an objection in writing from some party entitled to notice. See In re Leeling, 129 B.R. 637 (Bankr. D. Colo. 1991). Other foreclosure remedies in Article 9 allow the secured party to sue the debtor for a deficiency if a sale of the foreclosed collateral does not produce enough money to satisfy the debtor's obligation. See D.C. Code §§ 28:9-502, 28:9-504. *fn5 A secured party who chooses the remedy of strict foreclosure under ...


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