MINNEAPOLIS PERSONAL INJURY ATTORNEY  
attorney Michael E. Douglas Attorney at Law
  Personal Injury Attorney
  St. Paul Workers Compensation Lawyer work comp attorney
 > About Me
   :: My Commitment
   :: Our Community
   
 > Legal Practice Areas
  twin cities comsumer lawPersonal Injury
   :: Traffic Accidents
   :: Medical Malpractice
   :: Social Security Disability
   :: Premises Liability
   :: Wrongful Death
   :: Dog Bite
   :: Back/Spinal/Neck Injuries
   :: Whiplash
   :: Defective Medical Devices
   :: Defective Drugs
  Minnesota Personal InjuryWorkers Compensation
  St. Paul personal injuryConsumer Law
   :: Debt Collection
   :: Repossessions
   :: Foreclosures
   :: Loan, Credit, Banking
   :: Arbitration Agreements
   :: Deception and Fraud
   :: Auto Fraud / Lemon Law
   :: Warranties
   :: Predatory Lending
   
 > Contact Us
   :: Contact Us
 

Law Offices of Michael E. Douglas
P.O. Box 251551
Woodbury, Minnesota 55125-6551
   

 Saint Paul Lawyer
 
 mdouglas@injurylawtwincities.com

 

In re. Shen Ko Investment Group, LLC: US District Court :BANKRUPTCY | REAL PROPERTY - selling property didn't prove acceptance of bankrupt lessee's surrender; future rents

1 The Honorable Dennis D. OBrien, Judge, United States
Bankruptcy Court for the District of Minnesota, presiding.
UNITED STATES DISTRICT COURT
DISTRICT OF MINNESOTA
In The Matter Of: Civil No. 07-4768(DSD)
Shen Ko Investment Group LLC, Bky. No. 06-41228(DDO)
Appellant.
v. ORDER
Timber Lodge Steakhouse, Inc.,
Appellee.
Ralph V. Mitchell, Jr., Esq. and Lapp, Libra, Thomson,
Stoebner & Pusch, 120 South Sixth Street, Suite 2500,
Minneapolis, MN 55402, counsel for appellant.
Alan E. Brown, Esq., Kenneth Corey-Edstrom, Esq., Thomas
J. Flynn, Esq. and Larkin, Hoffman, Daly & Lindgren, 7900
Xerxes Avenue South, Suite 1500, Minneapolis, MN 55431,
counsel for appellee.
This matter is before the court upon Shen Ko Investment Group,
LLCs (Shen Ko) appeal of a final judgment by the United States
Bankruptcy Court for the District of Minnesota.1 Based upon a
review of the file, record and proceedings herein, and for the
following reasons, the court affirms the judgment of the bankruptcy
court in part.
2
BACKGROUND
The facts in this case are undisputed. Shen Ko was the
landlord under a nonresidential lease for a Timber Lodge Steakhouse
restaurant in Madison Wisconsin. In February 2006 - approximately
ten years into the twenty-year agreement - the restaurant closed,
vacating the Madison premises and ceasing payment of rent and other
amounts due under the lease. On June 26, 2006, the restaurants
parent company, Timber Lodge Steakhouse, Inc. (Timber Lodge),
filed for Chapter 11 bankruptcy and moved to reject the Shen Ko
lease. On August 8, 2006, the bankruptcy court approved rejection
effective July 13, 2006, and granted Shen Ko an administrative
claim for post-petition rent due prior to rejection pursuant to 11
U.S.C. 365(d)(3), which Timber Lodge paid in full.
For nearly nine months before Timber Lodge moved out, Shen Ko
had tried to sell the Madison property. Shen Ko finally reached a
deal with a buyer on August 31, 2006, and sold the property for
.53 million. Shortly thereafter, the new owner razed the
building in which the restaurant was formerly housed.
In the purchase and sale documents, Shen Ko reserved its claim
for damages against Timber Lodge. Accordingly, in its proof of
claim in Timber Lodges bankruptcy case, Shen Ko listed claims for
both pre-petition amounts and alleged rejection damages. After
adjusting the damages to comply with the statutory cap set forth in
11 U.S.C. 502(b)(6), Shen Ko claimed 8,869.22 in future rents
3
owed for the remainder of the lease. Timber Lodge accepted Shen
Kos claim for pre-petition amounts and actual damages for August
2006 but objected to the alleged rejection damages.
On September 13, 2007, the bankruptcy court heard oral
argument on Shen Kos damages claim. Shen Ko argued that Minnesota
law - applicable under the terms of its lease with Timber Lodge -
did not require mitigation of damages and that the sale of the
property did not extinguish its right to the rejection damages.
Timber Lodge asserted that Shen Ko lost its claim for future rents
once it sold the property. On October 29, 2007, the bankruptcy
court disallowed Shen Kos claim for post-sale damages. Shen Ko
now appeals the bankruptcy courts ruling.
DISCUSSION
When a bankruptcy courts judgment is appealed to a district
court, that court acts as an appellate court and reviews the
bankruptcy courts legal determinations de novo and findings of
fact for clear error. In re Falcon Prods., Inc., 497 F.3d 838,
840-41 (8th Cir. 2007) (quoting In re Fairfield Pagosa, Inc., 97
F.3d 247, 252 (8th Cir. 1996)).
In this case, the bankruptcy court disallowed Shen Kos proof
of claim for lease rejection damages, determining that Shen Ko has
no right to damages under 11 U.S.C. 502(b)(6) that would
represent future damages under the rejected lease after
4
consummation of the sale of the leased property by Shen Ko
following the rejection. (Bankruptcy Ct. Order of Oct. 29, 2007,
Appellant App. at 81-85.) Specifically, the bankruptcy court held
that Shen Kos sale of the property to a third party terminated the
lease, mitigated damages and proved that Shen Ko intended to
forgive Timber Lodges further obligations and accepted its
surrender of the property, thereby nullifying any recovery of
future rents. (See id. at 84-85.) Shen Ko argues that the
bankruptcy court erred as a matter of law in determining the effect
of Shen Kos sale on its damages claim against Timber Lodge.
Generally, the question of surrender is to be determined by
the law of the state in which the demised premises are situated.
Hotz v. Fed. Reserve Bank, 108 F.2d 216, 218-19 (8th Cir. 1939).
Here, however, the bankruptcy court applied Minnesota law as
dictated by the choice of law provision in the lease, and neither
party objected. (See Appellant App. at 22.) In Minnesota, parties
to a lease may terminate it expressly or by implication.
Provident Mut. Life Ins. Co. v. Tachtronic Instruments, Inc., 394
N.W.2d 161, 164 (Minn. Ct. App. 1986). To terminate a lease by
implication, the parties must intend to terminate the lease - that
is, the landlord must assume[] a position incompatible with the
existence of the landlord-tenant relationship. Benasutti v.
Coast-to-Coast (Cent. Org.), Inc., 392 N.W.2d 695, 697 (Minn. Ct.
App. 1986) (internal quotation omitted). When the terms of the
5
lease permit the landlord to re-enter the premises, however, there
must be unequivocal proof that the landlord intended to forgive the
tenants further obligations under the lease and accepted the
tenants surrender of the premises. Provident Mut., 394 N.W.2d at
164.
The bankruptcy court, citing Bowman v. Plumb, 20 N.W.2d 493
(Minn. 1945), determined that Shen Kos sale of the property was
the unequivocal proof that it forgave Timber Lodges obligations.
In Bowman, the Minnesota Supreme Court held:
A lease may be terminated by operation of law
where the owner of the leased premises has
been a party to some act the validity of which
[it] is estopped from disputing. It may be
thus terminated when the landlord voluntarily
assumes a position incompatible with the
existence of the relationship of landlord and
tenant as between said landlord and the
original lessees. Thus, if a landlord accepts
a third party as a tenant in place of a prior
lessee, in effect this constitutes an
acceptance of the surrender of the leased
property and a consequent termination of the
prior lease by operation of law.
Id. at 494-95. Bowman, however, fails to account for a landlords
right of reentry, to which Shen Ko was entitled upon default. The
lease provides:
Landlord [Shen Ko] can continue this Lease in
full force and effect, and the Lease will
continue in effect as long as Landlord does
not terminate Tenants [Timber Lodge] right to
possession, and Landlord shall have the right
to collect rent and all other charges when
due. During the period Tenant is in default,
6
Landlord can enter the Premises and relet
them, or any part of them, to third parties
for Tenants account.
(Timber Lodge-Shen Ko Lease of July 22, 1996, Appellant App. at
16.) Pursuant to these terms, Shen Kos reentry and agreement with
a third party lessee would not constitute unequivocal proof that
Shen Ko accepted Timber Lodges surrender.
Moreover, Shen Kos sale did not automatically terminate the
lease. Provided that its use and occupancy of the premises was not
disturbed, Timber Lodge agreed in the event of a sale, transfer or
assignment of [Shen Kos] interest ... to attorn to and recognize
such transferee, purchaser, lessor or mortgagee as Landlord under
[the] Lease. (Id. at 12.) The lease, therefore, continued under
the new owner, as did any remedies against Timber Lodge. With the
lease still in effect, Shen Ko validly reserved the right to
enforce those remedies against Timber Lodge. See MHW Ltd. Family
Pship v. Farrokhi, 693 N.W.2d 66, 68 (S.D. 2005); Kirk Corp. v.
First Am. Title Co., 220 Cal. App. 3d 785, 809 (Cal. Ct. App.
1990). However, under the terms of the lease, such remedies were
valid only as long as Landlord does not terminate Tenants right
to possession. (Id. at 16.) In other words, Shen Ko could pursue
lease-authorized remedies as long as Timber Lodge could, in theory,
retake possession of the leased building and property. Once the
new owner razed the former restaurant, though, it terminated any
possibility of Timber Lodge retaking possession. In turn, this
7
action ended Shen Kos ability to recover rent from Timber Lodge.
Accordingly, the destruction of the premises - not the consummation
of the sale - terminated Shen Kos right to recover damages from
Timber Lodge.
The record does not indicate the exact date upon which the new
owner destroyed the building, although it apparently occurred
promptly after the August 31 sale. (Appellee Br. at 4.)
Assuming that the purchase and demolition were not precisely
contemporaneous, Shen Kos recovery extends at least into September
2006, but not past the destruction of the premises.
CONCLUSION
Therefore, IT IS HEREBY ORDERED that:
1. The bankruptcy courts opinion is affirmed in part.
2. Claim No. 78-1, filed by Shen Ko Investment Group, LLC,
in the amount of 8,110.72, resulting from Timber Lodge
Steakhouse, Inc.s rejection of a lease of Wisconsin real estate
where Timber Lodge had operated one of its restaurants, is
disallowed to the extent that it includes damages calculated
pursuant to 11 U.S.C. 502(b)(6) for any period following
8
destruction of the premises on the leased property, and is allowed
to the extent the claim includes damages for the period prior to
destruction of the premises.
LET JUDGMENT BE ENTERED ACCORDINGLY.
Dated: May 7, 2008
s/David S. Doty
David S. Doty, Judge
United States District Court
 

 
 
 

  What day were you injured?

  / /


  What caused your injuries?
Traffic/Bicycle Accident
Work-Related Injury
Wrongful Death
Dog Bite
Slip and Fall
Other:


  How have your injuries affected

  your life?

 


  What kinds of medical care
  professionals have you seen?

 


  What has your treatment cost?

 

  Is Insurance Involved?
My insurance may cover
        this.

Someone else's insurance
        may cover this.

I already filed a claim.
I rejected a settlement
        offer.

I accepted a settlement
        offer.

  Were there any witnesses?
Bystanders Witnessed This.
Police Responded and Filed
        a Police Report

Police Responded but Did
        Not File a Police Report


 

 

          By visiting this page or clicking the
  "submit" button above, you agree
  that you have read and accept this   "disclaimer".
 
Copyright © Michael E. Douglas, Attorney at Law, Saint Paul MN. All Rights Reserved.
Minnesota Law Firm representing Personal Injury, Car / Auto Accident, Workers Compensation, Medical Malpractice, Social Security Disability claims.
Dedicated to Injured Workers, Victims of Negligence, Car Accidents, Victims of Fraud, and those in need of legal assistance.