In re Bh S&B Holdings LLC

• Decision Date: 10 February 2009
• Docket Number: No. 08-14604.,08-14604.
• Parties: In re BH S&B HOLDINGS LLC, et al., Debtors.
• Court: United States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Southern District of New York

401 B.R. 96

In re BH S&B HOLDINGS LLC, et al., Debtors.

No. 08-14604.

United States Bankruptcy Court, S.D. New York.

February 10, 2009.

COPYRIGHT MATERIAL OMITTED

Kevin J. Burke, Cahill Gordon & Reindel LLP, New York, NY, for the Debtors.

Robert M. Hirsh, Arent Fox LLP, New York, NY, for the Official Committee of Unsecured Creditors.

Stephanie Goldstein, Fried, Frank, Harris, Shriver & Jacobson LLP, New York, NY, for VNO 100 West 33rd Street LLC & Vornado 692 Broadway LLC.

MEMORANDUM DECISION GRANTING IN PART AND DENYING IN PART MOTION TO COMPEL DEBTORS TO REMOVE MECHANICS' LIENS

MARTIN GLENN, Bankruptcy Judge.

Pending before the Court is Vornado 692 Broadway LLC's and VNO 100 West 33rd Street LLC's (together, "Vornado") motion and amended motion to compel the Debtors to remove mechanics' liens from two properties owned by Vornado and leased by the Debtors, or, in the alternative, to compel the Debtors to indemnify Vornado against the liens. For the reasons explained below, the motion is granted in part and denied in part.

BACKGROUND

Steve & Barry's was a specialty retailer of apparel and accessories. (ECF Doc. #30 ¶ 5.) The company operated out of many stores, two of which, located in New York City at 692 Broadway and 100 West 33rd St., were owned by Vornado. The 692 Broadway lease was signed on December 28, 2007, and the 100 West 33rd lease was signed on May 1, 2005. On July 9, 2008, Steve & Barry's filed a chapter 11 petition. (Case No. 08-12579(ALG).) On August 22, 2008, and by order of the court on that day, the company entered into an agreement to sell substantially all of its assets to the current Debtors. (No. 08-12579(ALG), ECF Doc. # 628-1 ¶ 16.) On August 25, 2008, in connection with that agreement, the Debtors assumed a number of leases, including the two at issue in this case, and continued to operate the stores. (No. 08-12579(ALG), ECF Doc. #628-3, § 4.1) The agreement provided that the leases were assumed free and clear of all liens and encumbrances.

The leases required the tenant to "keep the Building, the Premises and this Lease free from any mechanics, materialmans or similar liens or encumbrances, and any claims therefore, in connection with any Work." Furthermore, the leases provided that if a lien is filed, the tenant is obligated to "remove any such lien or encumbrance by bond or otherwise within sixty (60) days after notice from Landlord. If Tenant fails to do so, Landlord may pay the amount or take such other action, as Landlord deems necessary to remove such lien or encumbrance, without being responsible for investigating the validity thereof. The amount so paid and costs incurred by Landlord shall be deemed additional Rent under this Lease payable upon demand, without limitation as to other remedies available to Landlord." Finally, the leases also provided that the Debtors must indemnify Vornado against any liens that may attach to the properties. The Debtors admit that they were obligated to perform under the leases.

Before the Debtors assumed the two leases (when the two stores were still being operated by Steve & Barry's), and over the course of the following six months, numerous mechanics' liens were recorded against the two properties:

                DATE OF LIEN FILING   LIENHOLDER                    AMOUNT           PROPERTY
                August 11, 2008       Kleinknecht Electric Co.      $15,245.48       100 West 33rd
                August 11, 20081      Kleinknecht Electric Co.      $15,245.48       100 West 33rd
                November 17, 2008     B.R. Fries & Associates       $1,217,724.10    692 Broadway
                December 19, 2008     Secure Door and Hardware      $11,542.56       692 Broadway
                December 22, 2008     Lab Plumbing & Heating Co.    $19,440          692 Broadway
                December 23, 2008     Excel Flooring of Tri-State   $94,215.40       692 Broadway
                December 26, 2008     Marjam Supply Co.             $21,689.05       692 Broadway
                January 12, 2009      ANR Mechanical Corp.          $36,000          692 Broadway
                

The Debtors filed their chapter 11 petitions on November 19, 2008, and continued to operate these two stores. On November 25, 2008, the Court signed an order outlining procedures that would allow the Debtors to reject nonresidential leases for all of their locations. (ECF Doc. #80.) On January 6, 2009, the Debtors filed a Notice of Rejection of Executory Contracts or Unexpired Leases of Nonresidential Real Property. (ECF Doc. #237.) The notice provided that the two Vornado properties, among many others (including other Vornado properties), would be rejected as of January 16, 2009. (Id.) On January 15, 2009, Vornado filed a response to the notice of rejection² and a companion motion to compel the Debtors to perform postpetition lease obligations, pursuant to Bankruptcy Code § 365(d)(3), with respect to the mechanics' liens described above.³ (ECF Docs. # 267, 268.) Specifically, Vornado argues that the Debtors should be compelled to remove all of the above liens, or, in the alternative, to indemnify Vornado against the liens. The Debtors filed a timely objection (ECF Doc. # 298), Vornado filed a reply in further support of its motion (ECF Doc. # 315), and oral argument was heard on February 3, 2009. For the reasons explained below, Vornado's motion is granted in part and denied in part to the extent provided herein.

DISCUSSION

A. Section 365(d)(3)

Section 365(d)(3) provides that "the trustee shall timely perform all obligations of the debtor . . . arising from and after the order for relief under any unexpired lease of nonresidential real property, until such lease is assumed or rejected, notwithstanding section 503(b)(1) of this title." The consequences of violating § 365(d)(3) have developed on a case-by-case basis, but many courts have held that the landlord would be entitled to an administrative expense claim under such circumstances. 3 COLLIER'S ON BANKRUPTCY ¶ 365.04[3][g] (15th ed. rev.2005).

On its face, § 365(d)(3) only applies to obligations under a nonresidential lease that arise postpetition and pre-rejection. Indeed, "Congress enacted [§ 365(d)(3)] to ameliorate the perceived inequities that lessors of nonresidential real property had faced during the period after a Chapter 11 filing but before assumption or rejection." In re Stone Barn Manhattan LLC, 398 B.R. 359, 361 (Bankr.S.D.N.Y.2008) (Gropper, J.). The word "obligation" is not defined in the Code. "[I]t is thus apparently used in its commonly understood sense. Black's Law Dictionary defines it as `[t]hat which a person is bound to do or forebear; any duty imposed by law, promise, contract, relations of society, courtesy, kindness, etc.'" CenterPoint Props. v. Montgomery Ward Holding Corp. (In re Montgomery Ward Holding Corp.), 268 F.3d 205, 209 (3d Cir.2001) (citing BLACK'S LAW DICTIONARY 968-69 (5th ed.1979)); see also In re McCrory Corp., 210 B.R. 934, 939 (S.D.N.Y.1997) (finding that while use of the word "obligations" may be unambiguous, the language of § 365(d)(3) was "far from clear"). The Debtors' duties to Vornado here are undoubtedly obligations, since they arose under a valid contract. The only question then is when these obligations arose.

The Debtors rely on the Arizona bankruptcy court's recent decision in In re Designer Doors, Inc., 389 B.R. 832 (Bankr D.Ariz.2008), to argue that all of the obligations they owe Vornado are either prepetition or post-rejection and so fall outside the scope of § 365(d)(3). In Designer Doors, a nonresidential lease contained the same two clauses at issue here: one requirement to keep the property free of liens and encumbrances and another to indemnify the landlord against any liens that may be filed. Prepetition, the debtor contracted with a dry-wall company to make improvements to the property but failed to pay it. The debtor then filed a chapter 11 petition. Five days after the petition was filed, the dry-wall company filed a mechanic's lien against the property. Three months later, but before the debtor rejected the lease, the dry-wall company filed suit against the landlord seeking to foreclose on the property and for attorneys' fees. The landlord spent $3,992 defending the suit. The landlord then filed an administrative expense claim against the debtor for removing the liens, paying the attorneys' fees, and indemnifying it against the liens.

The court, relying on Arizona state law, held that because the improvements on the property were made prepetition, the mechanic's lien was a prepetition obligation not covered by § 365(d)(3). Id. at 836-37 (citing A.R.S. § 33-983(A) ("A person who furnishes professional services or material or labors . . . shall have a lien on the lot or parcel of contiguous land . . . for professional services or material furnished and labor performed.")). The court further held that the timing of when the indemnification obligation arises depends on when the lease obligates payments. Id. at 841. As a result, the attorneys' fee obligation arose at the time the landlord incurred it—i.e., postpetition and pre-rejection—and was entitled to be treated as an administrative claim. Id. at 842. The indemnification against the lien claim, however, "either arose when the lien arose or when the landlord suffered a loss on account of the lien (probably the latter)." Id. Because the "tenant breached its obligation to keep the premises free from such liens the moment the work began to be performed," the obligation arose prepetition. Id. (emphasis in original).

The Court finds the analysis in Designer Doors compelling and follows it to a large degree, but because the statutory predicates for mechanics' liens are different in New York and in Arizona, the Court reaches a different result. Specifically, in contrast to Arizona where mechanics' liens arise at the time the work is performed, in New York a mechanic's lien arises "from the time of filing a notice of such lien." N.Y. LIEN LAW § 3. "This means that the filing of the notice is the act which creates the lien, and there is...