Ashley Livonia A&P, LLC v. Great Atl. & Pac. Tea Co., 319288

• Decision Date: 16 June 2015
• Docket Number: No. 319288,319288
• Parties: ASHLEY LIVONIA A&P, LLC, Plaintiff-Appellee/Cross-Appellant, and GE COMMERCIAL FINANCE BUSINESS PROPERTY CORPORATION, Intervening Plaintiff-Appellee/Cross-Appellant, v. THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC., Defendant, and BORMAN'S, INC., Defendant-Appellant/Cross-Appellee, and MASTRONARDI PRODUCE-USA, INC., Intervening Defendant-Appellee/Cross-Appellant.
• Court: Court of Appeal of Michigan — District of US

ASHLEY LIVONIA A&P, LLC, Plaintiff-Appellee/Cross-Appellant,andGE COMMERCIAL FINANCE BUSINESSPROPERTY CORPORATION, Intervening Plaintiff-Appellee/Cross-Appellant, v. THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC., Defendant,andBORMAN'S, INC., Defendant-Appellant/Cross-Appellee,andMASTRONARDI PRODUCE-USA, INC., Intervening Defendant-Appellee/Cross-Appellant.

No. 319288

STATE OF MICHIGAN COURT OF APPEALS

June 16, 2015

UNPUBLISHED

Wayne Circuit Court

LC No. 10-007576-CK

Before: MARKEY, P.J., and OWENS and GLEICHER, JJ.

PER CURIAM.

Defendant Borman's, Inc. appeals as of right the grant of partial summary disposition in favor of plaintiff Ashley Livonia A&P, L.L.C., intervening plaintiff GE Commercial FinanceBusiness Property Corporation, and intervening defendant Mastronardi Produce-USA, Inc. in this commercial lease litigation following a discharge in bankruptcy. On cross-appeal, Ashley, GE, and Mastronardi challenge the circuit court's denial of their request for sanctions. We affirm.

I. BACKGROUND

This case centers on a warehouse that Borman's (connected with the now defunct Farmer Jack grocery store chain) leased and used before its bankruptcy. GE had provided a long-term loan to cover renovations at the property. The property was owned by Ashley, but the loan payments were to be made by Borman's as part of its lease agreement. The property is now occupied by Mastronardi. On the eve of its bankruptcy, Borman's sublet the property to Mastronardi, and Ashley agreed to continue Mastronardi as a tenant even after Borman's was removed from the equation. Although millions of dollars were at stake in this case, the disputes remaining on appeal are minimal, centering on $238,000 that represents Mastronardi's security deposit and September 2010 rent payment.

II. BORMAN'S APPELLATE CHALLENGES

Various parties asserted entitlement to $238,000 that Mastronardi placed in escrow to cover its security deposit and September 2010 rent payment until the proper recipient could be determined. The circuit court granted summary disposition in favor of Ashley, GE and Mastronardi and distributed the funds to GE and Ashley. Borman's contends that these funds were assets of the bankruptcy estate. The funds were included in the bankruptcy discharge and reorganization plan, Borman's argues, and therefore the bankruptcy court orders have res judicata and collateral estoppel effect on this state court action. Ashley, GE, and Mastronardi deny that the funds were part of the bankruptcy estate, leaving their distribution to the circuit court. That Borman's is not entitled to the funds, they assert, is further supported by the fact that Ashley evicted Borman's for breaching its lease before Mastronardi paid the disputed funds into escrow. Ashley, GE, and Mastronardi also note Borman's failure to include these payments in the schedules accompanying its bankruptcy petition.

As discussed by this Court in Landin v Healthsource Saginaw, Inc, 305 Mich App 519, 523; 854 NW2d 152 (2014), "This Court reviews de novo a trial court's decision to grant or deny a motion for summary disposition." Specifically:

A motion for summary disposition under MCR 2.116(C)(10) tests the factual sufficiency of the complaint. In evaluating a motion for summary disposition brought under (C)(10), a reviewing court considers affidavits, pleadings, depositions, admissions, and other evidence submitted by the parties in the light most favorable to the party opposing the motion. If the proffered evidence fails to establish a genuine issue regarding any material fact, the moving party is entitled to judgment as a matter of law. [Id. (quotation marks and citations omitted).]

Borman's arguments are extremely complex and rely on very specific provisions taken from myriad documents executed between the various parties, as well as a significant compilation of documents and orders from the bankruptcy proceedings. Borman's argumenthinges on the inclusion of the disputed funds in the bankruptcy estate. Therefore, this Court's only logical course is to first resolve whether the disputed payments were subject to inclusion in Borman's bankruptcy estate. If they were part of the estate, it will be necessary to discern how bankruptcy law controls the resolution of this matter. If Borman's premise is in error and the payments were not part of the bankruptcy estate, the majority of Borman's arguments folds like a house of cards and are functionally irrelevant.

As discussed in In re AFI Servs, LLC, 486 BR 827, 835 (Bankr SD Texas, 2013) (case citations omitted):

Property of the estate is defined broadly and encompasses "all legal or equitable interests of the debtor in property as of the commencement of the case . . . wherever located and by whomever held." 11 USC 541(a). Despite this broad definition, the estate does not receive more rights than those that the debtor has in property as of the commencement of the case—in other words, if a debtor's interest in property is limited at the time of filing, the estate's right in the property is also so limited.

Of particular significance is the recognition that "[t]he nature and extent of a debtor's interest in property is determined by reference to applicable state law[.]" Id.

In AFI Servs, the bankruptcy court noted that a multifactored test had been developed over years of caselaw to determine whether escrowed funds are the property of a bankruptcy estate. The determination "depends entirely on the nature and circumstances of the escrow agreement." Id. at 840 (quotation marks and citation omitted). We find this test highly instructive. The factors to be considered are:

(1) whether the debtor initiated or agreed to the creation of the escrow account; (2) whether the debtor exercises any control over the escrow account; (3) the incipient source of the escrow account; (4) the nature of funds within the escrow account; (5) the recipient of the escrow account's remainder funds (if any); (6) the targeted benefit of the escrow account; and (7) the purpose of the escrow account's creation. [Id. (quotation marks and citations omitted).]

Application of these factors supports the circuit court's conclusion that the disputed funds were not part of Borman's bankruptcy estate.

First, although Borman's stipulated to Mastronardi's placement of its September 2010 rent and security deposit into the escrow account, the account was initiated by the circuit court in response to Mastronardi's concerns regarding the dispute between Ashley/GE and Borman's over entitlement to the funds. The account was created to safeguard Mastronardi's funds so it would not be required to pay twice for the same indebtedness. Accordingly, the first AFI Servs factor does not weigh in Borman's favor. It is clear from the record that Borman's had no control over the account. Therefore, the second AFI Servs factor supports that the funds were not property of the bankruptcy estate. The "incipient source" of the funds in the escrow account was Mastronardi's pocket, also suggesting that the account is not part of the bankruptcy estate.Because there are no "remainder funds" to be distributed, the fifth factor is deemed neutral and does not serve to advance or undermine Borman's contention.

The remaining three factors—(4) "the nature of the funds," (6) "the targeted benefit" of the funds, and (7) "the purpose of the escrow account's creation"—must be evaluated in accordance with applicable state law. Id. at 835, 840. The "nature of the funds" is best described by their purpose; the funds covered Mastronardi's September 2010 rent payment and security deposit. The funds were not deposited for the benefit of Borman's, they were deposited for the benefit of whoever was legally determined to be the rightful landlord at the time in question. Similarly, the third and final factor, "the purpose of the escrow account[]" does not favor a determination that the funds were part of the bankruptcy estate. The purpose of the account was to ascertain the proper recipient and to safeguard the funds until such a determination could be made. The account was created to protect Mastronardi from the obligation of having to make multiple payments should the funds be misdirected or misused, not to protect Borman's.

Ultimately, both logic and state law support that the disputed funds were not part of the bankruptcy estate. The escrow account was not initiated or funded until October 18, 2010. At that point, Borman's had already been evicted from the subject premises and dispossessed of the property for the previous two-month period. The monies remitted by Mastronardi reflect an obligation for September 2010. Based on terms of the lease and sublease, Ashley was functioning and recognized as Mastronardi's landlord at that time.

"A sublessee cannot be held liable to his lessor for rents which accrue subsequent to the termination of all rights of the lessor in the leasehold premises." Cohn v Mary Lee Candies, 293 Mich 157, 168; 291 NW 259 (1940), citing Marsh v Butterworth, 4 Mich 575 (1857), and City of Hamtramck v Roesink, 286 Mich 65; 281 NW 539 (1938). Historically, it is well-recognized that "[r]ent is a sum stipulated to be paid for the actual use and enjoyment of another's land. . . . The actual enjoyment of the land is the consideration for the rent which is to be paid[.]" Marsh, 4 Mich at 577. "In other words, the full enjoyment for the full term is a condition precedent to the payment of rent." Id. There is no dispute that Borman's was lawfully dispossessed when Ashley evicted it from the premises in August 2010. Because Borman's could not legally provide its subtenant, Mastronardi, with possession and quiet enjoyment of the property, its right to receive rent was terminated.

Borman's and Ashley both recognized, even as Borman's was entering a sublease with Mastronardi, that Borman's rights to the warehouse would soon be severed. In accordance with the terms of the nondisturbance and attornment agreement effectuated...