Anderson v. State (In re Anderson)

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In re DUANE E. ANDERSON, and JEANNE C. ANDERSON, Debtors.

DUANE E. ANDERSON, and JEANNE C. ANDERSON, Plaintiffs. v. STATE OF MONTANA and MONTANA DEPT. OF NATURAL RESOURCES AND CONSERVATION, Defendants.

No. 21-10115-BPH

Adv. No. 21-ap-01005-BPH

United States Bankruptcy Court, D. Montana

November 28, 2022

MEMORANDUM OF DECISION

HON BENJAMIN P. HURSH UNITED STATES BANKRUPTCY COURT JUDGE.

In this adversary proceeding, Defendants, Montana Department of Natural Resources and Conservation ("DNRC") and the State of Montana ("State"), filed a "Motion for Summary Judgment" and "Memorandum in Support of Motion for Summary Judgment" on June 13, 2022, at ECF No. 121 (collectively "Defendants' Motion"). The Andersons filed a "Brief in Opposition to Defendants' Motion for Summary Judgment" on July 11 2022, at ECF No. 126 ("Andersons' Response"). Defendants filed a "Reply in Support of Defendants' Motion for Summary Judgment" on July 25, 2022, at ECF No. 127 ("Defendants' Reply").

I. Jurisdiction

This adversary proceeding was initiated when the Andersons removed pending litigation in state court to this Court pursuant to 28 U.S.C. § 1452(a), 28 U.S.C. §§ 157(b)(2)(B), (O), and 1334(b). This Court has original and exclusive jurisdiction over this adversary proceeding pursuant to 28 U.S.C. § 1334(b), (e) and Standing Order BMM-20 ("Standing Order").

"[T]he district courts shall have original but not exclusive jurisdiction of all civil proceedings arising under title 11, or arising in or related to cases under title 11." 28 U.S.C. § 1334(b). Exclusive jurisdiction is conferred on this Court pursuant to 28 U.S.C. § 1334(e)(1). The "district court in which a case under title 11 is commenced or is pending shall have exclusive jurisdiction - of all the property, wherever located, of the debtor as of the commencement of such case, and of property of the estate." 28 U.S.C. § 1334(e)(1). Gardner v. United States (In re Gardner), 913 F.2d 1515, 1518 (10th Cir.1990) ("A bankruptcy court has jurisdiction over disputes regarding alleged property of the bankruptcy estate at the outset of the case. When property leaves the bankruptcy estate, however, the bankruptcy court's jurisdiction typically lapses, and the property's relationship to the bankruptcy proceeding comes to an end.").

The Standing Order refers to the bankruptcy judges of this district, "all cases under Title 11 of the United States Code and all proceedings arising under or arising in or related to a case under Title 11."

II. Background and Summary of Arguments

Prior to filing their bankruptcy petition, the Andersons leased certain tracts of land from DNRC. The specific leases in dispute are Montana state leases Nos. 447, 449, 4351 and 6168 ("State Leases"). DNRC contends that effective April 1, 2020, the State Leases were cancelled due to default in payment of annual rent by the Andersons. The Andersons challenged DNRC's termination of the leases. After informal efforts failed, Andersons filed a complaint alleging the State Leases between Andersons and DNRC were unlawfully terminated by DNRC. Complaint, ¶¶ 1-3, Mar. 18, 2021, Mont. First Jud. Dist. Ct., CDV 2021-278 ("State Court Litigation"). The causes of action asserted in the Verified Complaint (ECF No. 1-1) ("Verified Complaint") include breach of contract, tortious breach of the implied covenant of good faith and fair dealing, injunctive, and declaratory relief. Id. Specifically, Andersons requested injunctive relief to enjoin DNRC from taking any action to lease the subject land; and a declaration that the State Leases are valid and should be reinstated. In addition to this relief, Andersons sought damages and attorney fees. The State Court Litigation was in its infancy when Andersons filed their bankruptcy petition.

This Court previously entered an Order denying Plaintiff's Motion for Summary Judgment and Granting DNRC's Cross Motion for Summary Judgment with respect to the due date of the grazing lease payments under the State Leases. Memorandum of Decision at ECF No. 109 ("Decision"); Order at ECF No. 110 ("Order"). Although the Decision makes clear that, under the plain language of the State Leases as well as the statutes and administrative rules presented in the relevant briefing, the grazing lease payment was due on or before April 1, 2020, the Decision and Order expressly state that "the issue of whether the cancellation of the State Leases was valid, and the parties' respective interests in the State Leases has not been adjudicated and is reserved for trial or further motions." Id. Accordingly, the Defendants' Motion seeks summary judgment and a determination that the State Leases were terminated as a matter of law. Andersons' Response requests the Court deny Defendants' Motion and asserts that Defendants' argument fails to account for previous instances where DNRC exercised discretion in accepting payments after April 1.

On August 22, 2022, once Defendants' Motion had been fully briefed, the Court issued an Order, noting, "DNRC's Statement of Uncontested Facts ("SUF"), specifically ¶¶ 14-34, at ECF No. 121-2, is not seriously contested."^[1] The Court further observed:

Although Andersons submitted a "First Supplemental Statement of Genuine Issues," with their Response, nothing in it contradicts DNRC's SUF in a relevant or material way. Instead, Andersons focus on: the March 26, and March 30, 2020 Directives issued by Governor Bullock (collectively referred to as the "COVID Directives"); and Duane Anderson's health and service to his country. Andersons' emphasis on Duane Anderson's health and service to the country effectively arouses the Court's sympathy, but it does not persuade it that either genuine issues of material fact preclude summary judgment, or that DNRC is not entitled to judgment as a matter of law.^[2]

The Court provided Andersons an opportunity to persuade the Court otherwise and set a hearing for argument. The Court outlined the issues to be addressed:

1. Review the COVID Directives and specifically identify for the Court the precise language in the COVID Directives they contend modifies the State Leases;

2. Identify in the Verified Complaint, or other pleading (with a specific citation to the Court's docket), any indicia of Andersons' claim for a contractual breach of the Covenant of Good Faith and Fair Dealing;

3. If Andersons persuade the Court a claim for a contractual breach of the Covenant of Good Faith and Fair Dealing was pled and maintained, Andersons shall specifically identify those facts (with a specific citation to the Court's docket), Andersons contend are indicia of DNRC's failure to act honestly and observe reasonable commercial standards of fair dealing with the lease agreements . . .

The Court held a hearing on Defendants' Motion, Andersons' Response, and Defendants' Reply on September 26, 2022.

A. Defendants' Motion

Defendants' Motion requests summary judgment asserting that the State Leases were properly cancelled for nonpayment pursuant to the plain language of the State Leases and Mont. Code Ann. § 77-6-506(1). Defendants' Motion specifically requests the Court enter summary judgment "declaring that State Lease Nos. 447, 449, 4351 and 6168, were properly cancelled as a matter of law; denying Plaintiffs' breach of contract claim; concluding that cancellation of the Leases was not arbitrary, capricious, or unlawful; declaring that Plaintiffs have no interest in the 3,104.25 acres of school trust land previously leased pursuant to State Lease Nos. 447, 449, 4351 and 6168; and, denying any and all other relief requested by Plaintiffs."

Defendants support their request by arguing that, despite Andersons mailing the check before the April 1, 2020, deadline, the check was only "conditional payment" of the grazing rent. Defendants persuasively argue that payment was conditioned upon Andersons having sufficient funds in their account to fulfil the payment obligation. Defendants assert the lack of funds in the account justified termination of the State Leases as a matter of law.

B. Andersons' Response

The Andersons' Response requests summary judgment be denied presenting three alternative supporting arguments. First, Andersons assert genuine issues of fact remain as to whether Defendants breached the terms of the State Leases as modified by executive orders and directives. Second, Andersons argue genuine issues of fact remain as to whether Defendants' failure to make reasonable payment accommodations during the COVID-19 pandemic constitutes a breach of the duty of good faith and fair dealing. Finally, Andersons assert genuine fact issues remain as to whether the Andersons were excused from timely performance due to COVID-19 impracticability.

C. Defendants' Reply

Defendants' Reply addresses the Anderson's Response and provides supporting argument in favor of granting Defendants' Motion. Defendants' Reply requests the Court reject the arguments presented in Anderson's Response, alleging the issues have either already been resolved or were inadequately pled in the Verified Complaint. Specifically, Defendants' Reply objects to the three arguments presented in Anderson's Response as "collateral attacks" that are "contrary to the law of the case" and "contrary to the requirements of notice and pleading." In the alternative, Defendants' Reply addresses the merits of each argument raised in the Andersons' Response by asserting Andersons failed to present genuine issues of material fact.

III. Facts^[3]

1. DNRC mailed Plaintiffs an invoice of $6,671.20 due on the State Leases on or before March 1, 2020.^[4] The invoice stated:

Under the provisions of section 77-6-506 AND 77-1-208, MCA this rental is due and payable by March 01, 2020. A penalty of $25 per lease is assessed on

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