EDWARD J. EMMONS, CLERK 13 □□ \o. U.S. BANKRUPTCY COURT □□ NORTHERN DISTRICT OF CALIFORNIA ay a yy □□□ Signed and Filed: February 28, 2020 □□□□□□□ 2 ! eh 4 DENNIS MONTALI 5 U.S. Bankruptcy Judge 6 7 UNITED STATES BANKRUPTCY COURT 8 NORTHERN DISTRICT OF CALIFORNIA 9 In re: ) Bankruptcy Case 10 ) No. 19-30088-DM PG&E CORPORATION, ) 11 ) Chapter 11 12 - and - ) ) Jointly Administered 13 ||/PACIFIC GAS AND ELECTRIC COMPANY, ) ) 14 Debtors. 15 . ) L] Affects PG&E Corporation ) 16 Affects Pacific Gas and ) W Electric Company Affects both Debtors ) 18 ) * All papers shall be filed in ) 19 ||the Lead Case, No. 19-30088 (DM) .’ 20 ||—W-Y- _-Y- -_-->- 7-7 TY} MEMORANDUM DECISION REGARDING (1) VLAZAKIS’ MOTION AS TO INAPPLICABILITY OF STAY, AND IN THE ALTERNATIVE FOR RELIEF FROM 22 STAY (DKT. 4846) and (2) DEBTORS’ MOTION TO REJECT VLAZAKIS’ 23 CONTRACT AND GRANT RELATED RELIEF (DKT. 5272) 24 ||I1. Procedural History 25 On November 22, 2019, George Vlazakis, Maria Barbis, John 26 ||Barbis and Athanasia Vlazakis (collectively, the “Vlazakis 27 |;Parties”) filed a Motion as to Inapplicability of Stay, and in 2g Alternative for Relief from Stay (“MRS”) (dkt. 4846), which -1-
1 Pacific Gas and Electric Company (“Utility”) and PG&E 2 Corporation (collectively, “Debtors”) opposed (dkt. 5089). At 3 the initial hearing on the MRS, Debtors indicated that they 4 intended to reject a contact relevant to the MRS. The court 5 therefore directed Debtors to file a motion to reject the 6 contract and a further opposition to the MRS and directed the 7 Vlazakis Parties to file a further opposition thereafter. 8 On January 6, 2020, Debtors filed a Motion to Reject 9 Vlazakis’ Contract and Grant Related Relief and Brief in Support 10 of Rejectability (“Motion to Reject”) (dkt. 5272). The 11 Vlazakis Parties filed an opposition on January 20, 2020 (dkt. 12 5415) and Debtors filed a reply on January 31, 2020 (dkt. 5588). 13 Following a hearing on February 11, 2020, the court took both 14 the MRS and the Motion to Reject under submission. For the 15 reasons set forth below, the court is granting the former and 16 denying the latter. 17 II. Relevant Facts 18 In 2015, the Utility purchased property in Oakland adjacent 19 to a building owned by the Vlazakis Parties. That building is 20 supported by three I-beams which cross a strip of land owned by 21 the Utility and are bolted to the brick wall of the Utility’s 22 building. Without these I-beams, the Vlazakis Parties’ building 23 would likely collapse, as it has no exterior or interior wall of 24 its own along the property line shared with the Utility. Decn. 25 of Brian Garber, dkt. 5273-2, ¶ 4. 26 The Utility intends to build a new gas regulation 27 substation at this location to meet safety standards and code 28 requirements “and [to] enhance the inspection of gas 1 transmission lines and the safe management of the lines in an 2 emergency.” Motion to Reject at dkt. 5272, ECF pg. 7, lines 5- 3 7; see also Decn. of Brian Garber, dkt. 5273-2, ¶ 3. To do so, 4 it must remove the bolted I-beams. Id. As a result, the 5 Vlazakis Parties’ building will have no support for its roof. 6 Id. at lines 14-15. 7 Upon realizing it would need to demolish its building in 8 order to build the substation, the Utility entered into a letter 9 agreement with the Vlazakis Parties in November 2017 (the 10 “Letter Agreement”). The Utility agreed to buttress its wall to 11 which the I-beams are attached and to convey the adjacent strip 12 of land to the Vlazakis Parties, provided that it obtained 13 necessary regulatory permits and approvals. Decn. of Brian 14 Garber, dkt. 5273 at ¶ 7; Letter Agreement, dkt. 5273-1 at ¶ 4. 15 In turn, the Vlazakis Parties agreed to “cooperate in the effort 16 to obtain City Approval and CPUC Approval, including signing any 17 related documents that may be necessary for such approvals.” 18 Letter Agreement, dkt. 5273-1 at ¶¶ 1 and 5. 19 Paragraph 2 of the Letter Agreement described the specific 20 work that PG&E and the Vlazakis Parties contemplated: 21 PG&E will reinforce the existing masonry wall 22 on its property located at the Southeast corner of 3rd and Market Street, which constitutes the easterly 23 wall of the existing building and immediately 24 adjacent to the easterly property line. PG&E shall install wall bracings to stabilize the wall. All 25 work will conform to standards and codes of applicable engineering and local state and federal 26 codes. 27 Dkt. 5273-2 at ECF pg. 9. 28 1 The Utility contends that the Vlazakis Parties did not 2 satisfy a condition imposed by the City of Oakland for 3 regulatory approval of the project: the Vlazakis Parties had to 4 make their property compliant with seismic codes and ADA law. 5 The Vlazakis Parties refused, but the City of Oakland 6 nonetheless approved the wall-bracing aspect of the proposed 7 project. Decn. of Brian Garber, dkt. 5273 at ¶¶ 3, 9-10; Garber 8 Decl. Ex. A. Thus, any noncompliance by the Vlazakis Parties 9 was immaterial for the purposes of the underlying motions. 10 After the Utility received the required approval from the 11 City of Oakland of the wall-bracing design contemplated by 12 paragraph 2 of the Letter Agreement, “it became clear that the 13 design was not compatible with the Utility’s gas transmission 14 engineers’ plans for the Project.” Decn. of Brian Garber, dkt. 15 5273 at ¶ 10. The Utility thus abandoned the design that was 16 the subject of paragraph 2 of the Letter Agreement. Over the 17 subsequent months and years, the Utility continued to work with 18 the City of Oakland and the Vlazakis Parties and other 19 regulatory agencies to address the encroachment and build the 20 substation. Id. at ¶ 4-11. 21 After filing its chapter 11 petition on January 29, 2019, 22 the Utility filed a state court complaint against the Vlazakis 23 Parties, asserting causes of action for trespass and nuisance 24 and seeking injunctive relief. The Vlazakis Parties filed an 25 answer and sought relief to file an affirmative cross-complaint 26 to assert a quiet title claim seeking legal and equitable rights 27 to continued use of the wall. In particular, the Vlazakis 28 Parties contended that the wall is a common party wall in which 1 they have an easement. See Fourteenth Affirmative Defense in 2 Answer of George Vlazakis, appended to Decn. of Ronald F. 3 Berestka, Esq. at dkt. 5417, ECF pg. 33. 4 Because the Utility asserted that the cross-complaint 5 violated the automatic stay, the Vlazakis Parties filed their 6 MRS. Debtors filed the Motion to Reject in response. 7 III. Discussion 8 In arguing that the Letter Agreement should be rejected, 9 Debtors contend that performance is still owed by both sides to 10 the agreement, and the Letter Agreement is thus executory. The 11 court disagrees. An executory contract is one under which the 12 obligations of both the debtor and the other party “are so far 13 unperformed that the failure of either to complete performance 14 would constitute a material breach and thus excuse the 15 performance of the other.” In re Robert Helms Const. & Dev. 16 Co., 139 F.3d 702, 705 (9th Cir. 1998), citing Vern Countryman, 17 Executory Contracts in Bankruptcy, 58 Minn. L. Rev. 439, 479 18 (1974). 19 The primary remaining performance due by the Vlazakis 20 Parties is to provide PG&E and subcontractor “required access to 21 parcels 011-0111-001 and 001-0111-002 for the stabilization of 22 the masonry wall and construction of the concrete block wall; 23 including the right to work, laydown and stage construction 24 materials and equipment during the work.” See Letter Agreement, 25 dkt. 5273-1 at pg. 3, ¶ 8. As noted previously, however, the 26 Utility has determined that the wall-bracing design requiring 27 such access is not feasible. Consequently, the contemplated 28 performance by the Vlazakis Parties has been rendered 1 unnecessary for the purposes for which it was contracted.
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EDWARD J. EMMONS, CLERK 13 □□ \o. U.S. BANKRUPTCY COURT □□ NORTHERN DISTRICT OF CALIFORNIA ay a yy □□□ Signed and Filed: February 28, 2020 □□□□□□□ 2 ! eh 4 DENNIS MONTALI 5 U.S. Bankruptcy Judge 6 7 UNITED STATES BANKRUPTCY COURT 8 NORTHERN DISTRICT OF CALIFORNIA 9 In re: ) Bankruptcy Case 10 ) No. 19-30088-DM PG&E CORPORATION, ) 11 ) Chapter 11 12 - and - ) ) Jointly Administered 13 ||/PACIFIC GAS AND ELECTRIC COMPANY, ) ) 14 Debtors. 15 . ) L] Affects PG&E Corporation ) 16 Affects Pacific Gas and ) W Electric Company Affects both Debtors ) 18 ) * All papers shall be filed in ) 19 ||the Lead Case, No. 19-30088 (DM) .’ 20 ||—W-Y- _-Y- -_-->- 7-7 TY} MEMORANDUM DECISION REGARDING (1) VLAZAKIS’ MOTION AS TO INAPPLICABILITY OF STAY, AND IN THE ALTERNATIVE FOR RELIEF FROM 22 STAY (DKT. 4846) and (2) DEBTORS’ MOTION TO REJECT VLAZAKIS’ 23 CONTRACT AND GRANT RELATED RELIEF (DKT. 5272) 24 ||I1. Procedural History 25 On November 22, 2019, George Vlazakis, Maria Barbis, John 26 ||Barbis and Athanasia Vlazakis (collectively, the “Vlazakis 27 |;Parties”) filed a Motion as to Inapplicability of Stay, and in 2g Alternative for Relief from Stay (“MRS”) (dkt. 4846), which -1-
1 Pacific Gas and Electric Company (“Utility”) and PG&E 2 Corporation (collectively, “Debtors”) opposed (dkt. 5089). At 3 the initial hearing on the MRS, Debtors indicated that they 4 intended to reject a contact relevant to the MRS. The court 5 therefore directed Debtors to file a motion to reject the 6 contract and a further opposition to the MRS and directed the 7 Vlazakis Parties to file a further opposition thereafter. 8 On January 6, 2020, Debtors filed a Motion to Reject 9 Vlazakis’ Contract and Grant Related Relief and Brief in Support 10 of Rejectability (“Motion to Reject”) (dkt. 5272). The 11 Vlazakis Parties filed an opposition on January 20, 2020 (dkt. 12 5415) and Debtors filed a reply on January 31, 2020 (dkt. 5588). 13 Following a hearing on February 11, 2020, the court took both 14 the MRS and the Motion to Reject under submission. For the 15 reasons set forth below, the court is granting the former and 16 denying the latter. 17 II. Relevant Facts 18 In 2015, the Utility purchased property in Oakland adjacent 19 to a building owned by the Vlazakis Parties. That building is 20 supported by three I-beams which cross a strip of land owned by 21 the Utility and are bolted to the brick wall of the Utility’s 22 building. Without these I-beams, the Vlazakis Parties’ building 23 would likely collapse, as it has no exterior or interior wall of 24 its own along the property line shared with the Utility. Decn. 25 of Brian Garber, dkt. 5273-2, ¶ 4. 26 The Utility intends to build a new gas regulation 27 substation at this location to meet safety standards and code 28 requirements “and [to] enhance the inspection of gas 1 transmission lines and the safe management of the lines in an 2 emergency.” Motion to Reject at dkt. 5272, ECF pg. 7, lines 5- 3 7; see also Decn. of Brian Garber, dkt. 5273-2, ¶ 3. To do so, 4 it must remove the bolted I-beams. Id. As a result, the 5 Vlazakis Parties’ building will have no support for its roof. 6 Id. at lines 14-15. 7 Upon realizing it would need to demolish its building in 8 order to build the substation, the Utility entered into a letter 9 agreement with the Vlazakis Parties in November 2017 (the 10 “Letter Agreement”). The Utility agreed to buttress its wall to 11 which the I-beams are attached and to convey the adjacent strip 12 of land to the Vlazakis Parties, provided that it obtained 13 necessary regulatory permits and approvals. Decn. of Brian 14 Garber, dkt. 5273 at ¶ 7; Letter Agreement, dkt. 5273-1 at ¶ 4. 15 In turn, the Vlazakis Parties agreed to “cooperate in the effort 16 to obtain City Approval and CPUC Approval, including signing any 17 related documents that may be necessary for such approvals.” 18 Letter Agreement, dkt. 5273-1 at ¶¶ 1 and 5. 19 Paragraph 2 of the Letter Agreement described the specific 20 work that PG&E and the Vlazakis Parties contemplated: 21 PG&E will reinforce the existing masonry wall 22 on its property located at the Southeast corner of 3rd and Market Street, which constitutes the easterly 23 wall of the existing building and immediately 24 adjacent to the easterly property line. PG&E shall install wall bracings to stabilize the wall. All 25 work will conform to standards and codes of applicable engineering and local state and federal 26 codes. 27 Dkt. 5273-2 at ECF pg. 9. 28 1 The Utility contends that the Vlazakis Parties did not 2 satisfy a condition imposed by the City of Oakland for 3 regulatory approval of the project: the Vlazakis Parties had to 4 make their property compliant with seismic codes and ADA law. 5 The Vlazakis Parties refused, but the City of Oakland 6 nonetheless approved the wall-bracing aspect of the proposed 7 project. Decn. of Brian Garber, dkt. 5273 at ¶¶ 3, 9-10; Garber 8 Decl. Ex. A. Thus, any noncompliance by the Vlazakis Parties 9 was immaterial for the purposes of the underlying motions. 10 After the Utility received the required approval from the 11 City of Oakland of the wall-bracing design contemplated by 12 paragraph 2 of the Letter Agreement, “it became clear that the 13 design was not compatible with the Utility’s gas transmission 14 engineers’ plans for the Project.” Decn. of Brian Garber, dkt. 15 5273 at ¶ 10. The Utility thus abandoned the design that was 16 the subject of paragraph 2 of the Letter Agreement. Over the 17 subsequent months and years, the Utility continued to work with 18 the City of Oakland and the Vlazakis Parties and other 19 regulatory agencies to address the encroachment and build the 20 substation. Id. at ¶ 4-11. 21 After filing its chapter 11 petition on January 29, 2019, 22 the Utility filed a state court complaint against the Vlazakis 23 Parties, asserting causes of action for trespass and nuisance 24 and seeking injunctive relief. The Vlazakis Parties filed an 25 answer and sought relief to file an affirmative cross-complaint 26 to assert a quiet title claim seeking legal and equitable rights 27 to continued use of the wall. In particular, the Vlazakis 28 Parties contended that the wall is a common party wall in which 1 they have an easement. See Fourteenth Affirmative Defense in 2 Answer of George Vlazakis, appended to Decn. of Ronald F. 3 Berestka, Esq. at dkt. 5417, ECF pg. 33. 4 Because the Utility asserted that the cross-complaint 5 violated the automatic stay, the Vlazakis Parties filed their 6 MRS. Debtors filed the Motion to Reject in response. 7 III. Discussion 8 In arguing that the Letter Agreement should be rejected, 9 Debtors contend that performance is still owed by both sides to 10 the agreement, and the Letter Agreement is thus executory. The 11 court disagrees. An executory contract is one under which the 12 obligations of both the debtor and the other party “are so far 13 unperformed that the failure of either to complete performance 14 would constitute a material breach and thus excuse the 15 performance of the other.” In re Robert Helms Const. & Dev. 16 Co., 139 F.3d 702, 705 (9th Cir. 1998), citing Vern Countryman, 17 Executory Contracts in Bankruptcy, 58 Minn. L. Rev. 439, 479 18 (1974). 19 The primary remaining performance due by the Vlazakis 20 Parties is to provide PG&E and subcontractor “required access to 21 parcels 011-0111-001 and 001-0111-002 for the stabilization of 22 the masonry wall and construction of the concrete block wall; 23 including the right to work, laydown and stage construction 24 materials and equipment during the work.” See Letter Agreement, 25 dkt. 5273-1 at pg. 3, ¶ 8. As noted previously, however, the 26 Utility has determined that the wall-bracing design requiring 27 such access is not feasible. Consequently, the contemplated 28 performance by the Vlazakis Parties has been rendered 1 unnecessary for the purposes for which it was contracted. 2 PG&E’s own abandonment of the planned work described in 3 paragraph 3 of the Letter Agreement absolved the Vlazakis 4 Parties of the corresponding obligation to provide access for 5 the performance of such work. There is no other term in the 6 Letter Agreement giving rise to an ongoing and outstanding 7 obligation to perform by the Vlazakis parties. Under governing 8 Ninth Circuit law, therefore, the Letter Agreement is not 9 executory and thus is not subject to section 3651. See, e.g., In 10 re Robert L. Helms Constr. & Dev. Co., 139 F.3d 702, 706 (9th 11 Cir. 1998) (en banc) (to determine whether a contract is 12 executory, a court looks “to outstanding obligations at the time 13 the petition for relief is filed and ask whether both sides must 14 still perform”).2 Stated differently, the conduct by the Utility 15 after its decision not to go forward on the project leads the 16 court to conclude from the undisputed facts of this long- 17 simmering dispute that there simply was no longer a viable 18 executory contract for it to reject under the Bankruptcy Code. 19 The issues in dispute in the state court action do not 20 involve any question of bankruptcy law. To the contrary, the 21 Utility asserts three causes of action arising under state law: 22 (1) Abatement of Nuisance under Civil Code § 3479 et seq.; (2) 23 24 1 11 U.S.C. § 365.
25 2 Given that the Letter Agreement is no longer executory, the 26 court does not have to determine whether the decision to reject it satisfies the business judgment rule. Agarwal v. Pomona 27 Valley Med. Grp., Inc. (In re Pomona Valley Med. Grp., Inc.), 476 F.3d 665, 670 (9th Cir. 2007). 28 1 Trespass; and (3) Declaratory Relief (Removal of Encroachment). 2 See Decn. of Ronald F. Bereska, Esq. at dkt. 5417, ECF pp. 5- 3 13). Similarly, the claims asserted in the verified cross- 4 complaint filed by the Vlazakis Parties are governed by 5 California state law: (1) Quiet Title (Implied Easement by 6 Existing Use); (2) Quiet Title (Prescriptive Easement); (3) 7 Quiet Title (Easement by Necessity); (4) Breach of Contract; 8 (5) Breach of Covenant of Good Faith and Fair Dealing; (6) 9 Negligence; and (7) Declaratory Relief. 10 Even though the Utility’s complaint and the Vlazakis 11 Parties’ complaint involve solely state law issues, Debtors seek 12 to reject the Letter Agreement and thereby sever the breach of 13 contract and breach of covenant causes of action from the 14 balance of Vlazakis Parties’ cross-claims, arguing that the 15 addition of these cross-claims could delay the May trial date in 16 state court (and thus the necessary construction of the new gas 17 pipelines and gas regulation substation). Debtors assert that 18 the breach of contract claims should be litigated through the 19 bankruptcy court’s claims allowance process. This court 20 disagrees. Assuming that (and this court takes no position) 21 the Letter Agreement somehow accords the Vlazakis Parties any 22 equitable or monetary claims or defenses relating to the 23 encroachment, the state court should resolve it under non- 24 bankruptcy principles. This is particularly appropriate as the 25 equitable defenses raised by the Vlazakis Parties include three 26 claims for easement. Rejection of the Letter Agreement would 27 not alter that outcome, as Section 365 cannot be used to reject 28 1 restrictive covenants and easements, assuming they in fact 2 exist.3 3 IV. Conclusion 4 For the foregoing reasons, the court will deny the Motion 5 to Reject and grant the MRS. Counsel for the Vlazakis Parties 6 should upload orders for each motion, and comply with B.L.R. 7 9021-1(c) prior to uploading them. 8 **END OF MEMORANDUM**
9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 3 In Gouveia v. Tazbir, 37 F.3d 295, 298 (7th Cir. 1994), the 24 Seventh Circuit directly addressed whether a restrictive covenant on real property was an executory contract that could be rejected in a 25 bankruptcy case. It reasoned that, although restrictive covenants contain the characteristics of both a contract and an interest in 26 land, the primary nature of such covenants is preservation of a land interest not subject to section 365 termination or rejection. Id. at 27 298–99. In an unpublished decision, the Ninth Circuit Bankruptcy Appellate Panel followed and adopted the holding of Gouveia v. 28 Tazbir. In re Hayes, 2008 WL 8444812 (9th Cir. BAP 2008).