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Illinois Investment Trust No. 92-7163 v. American Grading Co.

April 8, 2009

ILLINOIS INVESTMENT TRUST NO. 92-7163, APPELLANT,
v.
AMERICAN GRADING CO., APPELLEE.



Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 07 C 3268-Matthew F. Kennelly, Judge.

The opinion of the court was delivered by: Wood, Circuit Judge.

ARGUED SEPTEMBER 17, 2008

Before MANION, WOOD, and WILLIAMS, Circuit Judges.

Illinois Investment Trust No. 92-7163 ("Illinois Investment") would like to secure the rights to operate a methane gas collection and conversion system at the McCook landfill, in Lyons, Illinois. Thus far, however, its efforts have been thwarted, because the company from which it wants to acquire those rights, Resource Technology Corporation ("RTC") is in bankruptcy, and both the bankruptcy court and the district court ruled that RTC failed to preserve its rights to the system. An earlier agreement between RTC and American Grading Company, the owner of the landfill, had terminated, and thus there were no rights left for RTC's trustee to pass along to Illinois Investment. On appeal, Illinois Investment has explained why it believes that the lease between RTC and American Grading was not terminated and thus why the trustee may still assume the lease and assign it to Illinois Investment. We conclude, however, that the district court correctly assessed the situation, both on the facts and on the law, and we therefore affirm its judgment.

I.

A brief summary of the sequence of events places the issues in context. As of the mid-1990s, RTC was in the business of collecting methane gas emitted from garbage landfills and converting that gas into usable electric energy. American Grading owned the McCook landfill. On December 27, 1995, RTC and American Grading entered into a lease agreement for the McCook facility, under which RTC was to install and operate a collection and conversion system there, in exchange for royalties to be paid to American Grading. The lease had an initial term of 10 years, and thus was due to expire on December 27, 2005. RTC could extend its term for up to three consecutive periods of five years each by providing written notice of its intent to renew at least 90 days before the expiration of the preceding period.

The royalties under the lease were based on the sale of electrical energy produced by the conversion system. In addition, however, RTC was required to pay American Grading a $100,000 advance royalty payment on January 1, 1996, and each January thereafter for the life of the lease. Finally, the lease contained a termination clause that read in part as follows:

TERMINATION. If either party or its assigns defaults or persistently fails or neglects to perform any duty or obligations [sic] under this Lease, the other party may terminate the Lease by giving written notice of its intention to terminate. If the responsible party fails to correct the default within thirty (30) days after being given notice, the other party may without prejudice to any other remedy, terminate the Lease.

Lease ¶ 16. The termination clause also mentioned "the commencement by the Lessee [RTC] . . . of a voluntary case under the Federal Bankruptcy Laws" as a condition of default.

On November 15, 1999, RTC's creditors filed an involuntary petition for bankruptcy relief under Chapter 7 of the Bankruptcy Code. Shortly thereafter, on January 18, 2000, the court converted the case to a Chapter 11 proceeding, with RTC's consent. The case proceeded under Chapter 11 for several years. In 2002, the Illinois Environmental Protection Agency ("IEPA") issued an operating permit to RTC for the planned gas collection and control system at McCook. See 415 ILCS 5/9, 5/21. That permit could not be transferred or assigned without IEPA's approval. As far as this record shows, despite the issuance of the permit, RTC was doing little or no business at the site.

In light of the lack of progress in turning around RTC's fortunes, on September 21, 2005, the bankruptcy court converted its case back into a Chapter 7 proceeding and appointed a trustee, Jay A. Steinberg, for the estate. On March 16, 2006, the trustee entered into a settlement agreement with some of RTC's creditors, including a group called the Greenblatt Entities, under which the Greenblatt Entities were given the right to designate executory contracts held by RTC that the trustee would be required to assume and then assign to them. (At a later time, the Greenblatt Entities, with the court's permission, assigned their rights under the settlement agreement to Illinois Investment; for the sake of simplicity, we will refer only to Illinois Investment from this point onward.) If the trustee refused to seek the bankruptcy court's approval to assume and assign a contract designated by Illinois Investment, then Illinois Investment had the right to ask the court to compel the trustee to act.

In the meantime, there were some pertinent developments at the McCook site. In December 2005, the trustee sought to obtain access to the site, but he was unsuccessful, because the locks had been changed. On January 1, 2006, RTC's annual advance royalty payment of $100,000 became due, but the trustee did not pay it. A few days later, on January 5, the trustee received the keys to the landfill site. By that time, he had obtained several extensions of the lease from American Grading, but the final extension expired on January 5. Having received no further requests for an extension, American Grading sent the trustee an email on January 19 requesting him to return the keys to the McCook landfill and to refrain from entering the premises. Although the trustee never returned the keys, he also never entered the site after that date. Approximately six weeks later, he entered into the settlement agreement described above. At that point, the trustee abandoned RTC's state operating permit, laid off all the employees and ceased all operations that had related to the McCook landfill.

Illinois Investment, however, was not ready to give up on McCook. On July 7, 2006, at its behest, the trustee filed a motion for entry of an order compelling RTC's estate to assume the lease (among other agreements). American Grading objected on the ground that the lease had expired according to its terms no later than January 5, 2006. The bankruptcy court scheduled a hearing for November 21, 2006, but American Grading failed to appear, because its counsel had withdrawn shortly before the hearing date. At that time, the court ruled that the term of the McCook lease had been extended for a period of five years from December 27, 2005, to December 27, 2010. It stipulated, however, that the estate's right to assume and assign its rights under the lease (and thus the rights of Illinois Investment, as the creditor's assignee) would be subject to further order of the court with respect to "the curing of defaults, if any, and the provision of adequate assurance of future performance . . . ."

After that, American Grading sent two more notices of default with respect to the lease to the trustee, one on December 29, 2006, and the second on January 12, 2007. It allowed thirty days to elapse after the December 29 notice, and then on January 31, 2007, it issued a notice of termination of the lease and sent that to the trustee. On February 8, 2007, the bankruptcy court entered an order setting a date for a trial on the question whether the lease had been terminated. In a handwritten note at the bottom of that order, someone added the following: "The petitioner shall continue the status quo as of December 28, 2006, without prejudice to ABC's right to raise ...


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