GSL of Ill, LLC v. McCaffety Elec. Co. (In re Demay Int'l LLC), Bankruptcy Case No. 09–35759–H4–11.

Decision Date30 March 2012
Docket NumberBankruptcy Case No. 09–35759–H4–11.,Civil Action No. H–10–2128.
Citation471 B.R. 510
PartiesIn re DEMAY INTERNATIONAL LLC, Debtor. GSL of Ill, LLC, Appellant, v. McCaffety Electric Company, Appellee.
CourtU.S. District Court — Southern District of Texas


Peter Johnson, Law Offices of Peter Johnson, Houston, TX, for Appellant.

Richard Allen Simmons, Waldron and Schneider LLP, Houston, TX, for Appellee.


MELINDA HARMON, District Judge.

The above referenced action is an appeal of a bankruptcy judge's June 9, 2010 order 1 overruling an Objection to Proof of Claim 67 of McCaffety Electric Co., Inc. (McCaffety) and directing that McCaffety be paid $337,279 from the escrow proceeds from a sale of assets of the Debtor Demay International, LLC's estate.

The Bankruptcy Court observed at the opening of his Memorandum Opinion that he was addressing “thorny issues related to trade fixtures, removables, mechanic's liens, and leases” in this battle between GLS of Ill, LLC (GSL), the Debtor's largest secured creditor, and McCaffety, holding a mechanic's lien on the electrical equipment McCaffety installed on the Debtor's leased premises. # 4–37 at p. 1.

After reviewing the record and the applicable law, the Court finds no error in the Bankruptcy Court's rulings and accordingly affirms the Memorandum Opinion and Order.

Relevant Facts

Around November 22, 2006 Demay International, LLC (“Demay” or “the Debtor”), as lessee, entered into a commercial real property lease agreement (“Lease Agreement”) (ROA # 4–18) with Dumay Real Estate, LLC (“Landlord”), an entity unrelated to the Debtor. Section E(1) on p. 5 of the Lease Agreement (the “Alterations Provision”) stated,

1. Alterations. Any physical additions or improvements to the Premises made by Tenant will become property of Landlord. Landlord may require that Tenant, at the end of the Term and at Tenant's expense, remove any physical addition and improvements, repair any alterations, and restore the Premises to the condition existing at the Commencement Date, normal wear excepted.

They also agreed, in a “Tenant Improvement Rider to the Lease,” that the cost of the improvements to the leased premise would be borne mainly by the Landlord (# 4–18 at p. 13):

B. Performance of Work. Tenant will be responsible for retaining Contractor to perform the Work, subject to approval of Landlord. Contractor will obtain all required permits for the Work. After approval of the Plans, Contractor will be instructed to perform the Work in accordance with the approved Plans and all applicable laws. The cost of performance of the Work will be borne as follows: Landlord will provide costs up to $3,750,000 on a first dollars in basis. All costs over and above the $3,750,000 shall be borne by Tenant and advanced by tenant in equal funding draws with Landlord once the cost of the work exceeds a $3,000,000 floor.

After execution of the lease on the property, which was permitted for manufacturing and general industrial use, Demay contracted with McCaffety to install conduit copper wire, light fixtures, panels, breakers and connections to (1) equipment (machines and air conditioning), (2) offices, (3) plugs, and (4) switches, in addition to incoming primary service and outgoing secondary service to feed low voltage and high voltage panels, and electrical controlling mechanisms (the “Electrical Equipment” 2). Tr. 5/27/10 at p. 28, l.22–p. 29, l. 22. The Electrical Equipment was installed by McCaffety between August 2008January 2009. The termination date of the lease was May 31, 2022.

On August 4, 2009 Demay filed a voluntary petition for relief under Chapter 11 of title 11 of the United States Code in the United States Bankruptcy Court for the Southern District of Texas, Case No. 09–35759–H4–11,In re: Demay International, LLC, Debtor.3 By that time, Demay had paid more than $1,536,592 to McCaffety for the electrical work, but still owed McCaffety $337,279 under the contract. That amount is undisputed. McCaffety claimed a mechanic and materialman's lien 4 against Demay and the Landlord that would attach to the leasehold, including the removables.

On September 10, 2009, the Debtor filed its schedules, and in Schedule B—Personal Property, the Debtor listed “Tenant Improvements” under the “Type of Property” category ([o]ther personal property of any kind not already listed”), with the current value of the Debtor's interest as “unknown.” Thus the Debtor represented that the improvements were part of the estate.

On November 20, 2009, creditor McCaffety filed a Proof of Claim (No. 67) in the amount of $337,279 in Demay's bankruptcy case and alleged a security interest pursuant to the mechanic and materialman's lien and the electrical system that McCaffety installed at the premises, under Texas Property Code Ann. § 53.001 (Vernon).5 ROA # 4–15, Ex. A; Memorandum Op. at ¶ 3. ROA # 4–43, 4–44, 4–45, 4–46, 4–47. Attached to McCaffety's proof of claim was an affidavit from Robert McCaffety, the general manager and part-owner of McCaffety, attesting, “Said material and labor were furnished to Dumay Real Estate LLC by Claimant ... for improvement of real property.” ROA # 4–15, Ex. B.6

Also on November 20, 2009 creditor GSL filed a secured proof of claim in Demay's bankruptcy case 7 for $14,505,220.46 and claimed that it held a security interest in essentially all of Demay's assets under Texas Business and Commerce Code Ann. § 9.102. ROA # 4–37 (Memorandum Op. at ¶ 2).

Title 11 U.S.C. § 365(d)(4) (emphasis added by the Court) enacted as part of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”),

(A) Subject to subparagraph B, an unexpired lease of nonresidential real property under which the debtor is the lessee shall be deemed rejected, and the trustee shall immediately surrender that real property to the lessor, if the trustee does not assume or reject the unexpired lease by the earlier of—

(i) the date that is 120 days 8 after the date of the order for relief; or

(ii) the date of entry of an order confirming a plan.

(B)(i) The court may extend the period determined under subparagraph (A) prior to the expiration of the 120–day period for 90 days on the motion of the trustee or lessor for cause.

(ii) If the court grants an extension under clause (i), the court may grant a subsequent extension only upon prior written consent of the lessor in each instance.

Under § 365(d)(4), the deadline for Demay to assume or reject executory contracts and unexpired leases, in other words the Lease Agreement at issue here, was December 2, 2010. Bankr.Docket # 1. On December 16, 2009 the Bankruptcy Court granted Demay's motion to extend time to accept or reject executory contracts-real estate lease until March 2, 2010. ROA # 4–8. No party-in-interest objected to the extension order even though it was outside of the 120–day period in the statute.

On December 22, 2009 the Debtor, in its Motion for Order Approving Bidding Procedures for the Sale of Substantially All of Debtor's Assets Pursuant to 11 U.S.C. § 363 Free and Clear of Liens, moved for authority to sell all of its assets pursuant to 11 U.S.C. § 363 through auction. On January 11, 2010 McCaffety filed an objection to the proposed sale, stating that the proceeds from the proposed sale would not fully satisfy the outstanding debt owed to McCaffety by the Debtor and demanding that the motion be denied or that McCaffety's mechanic and materialman's lien be recognized in the proceeds of any sale. ROA # 4–11. McCaffety claimed that under the Texas Property Code Ann. § 53, its valid mechanic and materialman's lien against leasehold improvements in the amount of $447,279 had priority status over GSL's secured claims.

On January 13, 2010, the Debtor filed an objection to McCaffety's claim on the grounds that the claim should be disallowed as a secured claim (thus becoming an unsecured claim 11 U.S.C. § 506(a)9) because the property was leased and thus not the property of the Debtor, which was only a tenant, and therefore the claim was not secured by property of the estate as required by 11 U.S.C. § 506(a). ROA # 4–16, 4–17, 4–18. Also on January 13, 2010, McCaffety filed a Motion for Relief From Stay, in the face of an impending sale of the assets, so that McCaffety could “go after the removables because of concerns that we were going to lose our position with the leasehold being sold.” # 4–58 at p. 11, ll.20–23 (Transcript of hearing on May 27, 2010).

On January 21, 2010 McCaffety and the Debtor entered into a compromise agreement (“first compromise” or “first stipulation”) of the objection to McCaffety's proof of claim, signed by the Bankruptcy Judge, that would allow the sale to take place, with the determination of McCaffety's claim allowance to be made at a later date. In accord with the language of that compromise,the Bankruptcy Court entered an order that the particular assets being transferred under the terms of Schedule A attached to the “Stalking Horse” bid 10 under the terms of First Sale Motion “do not include items upon which McCaffety has a lien”; it further provided that if the successful purchaser assumed the Debtor's Lease with Dumay, it would be subject to McCaffety's lien rights, if valid. ROA # 4–19, 4–20.11

On February 4, 2010 the Bankruptcy Court approved the Debtor's authority to enter into an APA with the auction's successful bidder, the Stalking Horse Bid, and the bidding procedures for the sale of substantially all of Debtor's assets “free and clear of liens, claims, interests and other encumbrances,” pursuant to 11 U.S.C. § 363, and other relief (ROA # 4–20). Included in this order is an Addendum to Asset Purchase Agreement, the second compromise, 12 which added terms to the APA: It provided,

With respect to the dispute related to the extent, priority and validity of the lien and claim of [McCaffety], and as outlined in that certain Order dated January 21, 2010 signed by Judge Bohm related to...

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