In re Andover Togs, Inc.

Citation231 BR 521
Decision Date12 March 1999
Docket NumberBankruptcy No. 96 B 41437(TLB) to 96 B 41440(TLB).
PartiesIn re ANDOVER TOGS, INC., et al., Reorganized Debtors.
CourtUnited States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Southern District of New York

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Whitman Breed Abbott & Morgan L.L.P., New York City, by Norman N. Kinel, for the Reorganized Debtors.

Wien & Malkin L.L.P., New York City, by Robert C. Buff, for Mid-City Associates.

Chadbourne & Parke L.L.P., New York City, by N. Theodore Zink, Jr., for Special Counsel to Mid-City Associates.

OPINION DENYING IN PART AND GRANTING IN PART THE DEBTOR'S OBJECTIONS TO THE REJECTION, GENERAL UNSECURED AND ADMINISTRATIVE CLAIMS OF MID-CITY ASSOCIATES

TINA L. BROZMAN, Chief Judge.

Introduction

During the course of its successful chapter 11 proceedings, Andover Togs, Inc. ("Andover"), a garment manufacturer, attempted to negotiate with Mid-City Associates ("Mid-City"), its landlord, more favorable terms which would have allowed the debtor to remain at the premises which it had occupied as its executive offices for almost twenty years. Failing to achieve agreement, Andover rejected the lease. When Andover vacated the space to move to more modest headquarters, Mid-City, with an eye towards its perception of what the open market preferred, promptly demolished Andover's improvements. Some time later, Mid-City relet a portion of the space — at a price per square foot higher than what Andover was paying — but only after Mid-City had offered a variety of concessions to its new tenant and paid for substantial construction. Mid-City subsequently filed against Andover claims for damages sustained from the lease's rejection as well as an administrative claim. Andover objected to the various claims on a number of different theories including that the gutting of the space contributed in substantial part to the landlord's damages and that the higher rent per foot precluded any finding of damage to Mid-City. Unfortunately, the unsuccessful outcome of the parties' negotiations seems to have permeated all aspects of their relationship, culminating not only in Andover's objection to the claims filed by Mid-City, but in a request that Mid-City be sanctioned for its trial conduct.

By way of damages from the rejection of the lease under section 365 of the Bankruptcy Code, Mid-City seeks $1,356,670 (the "rejection claim"). The administrative claim, which arises out of 9 days' rent which Andover incurred as a holdover tenant until it vacated the premises, asks from Andover $35,811.31 (the "administrative claim"). Mid-City also asserts a general, unsecured claim in the amount of $195,803.95 for pre-petition rent arrears and charges for air conditioning, cleaning and other services provided by Mid-City (the "unsecured claim"). Andover does not dispute $137,426.23 of the $195,803.95 unsecured claim and $28,650.68 of the $35,811.31 administrative claim. However, Andover requests that I disallow these admittedly valid claims as a sanction for Mid-City's denial that there existed any management agreement regarding the building housing Andover's former headquarters, a denial which Mid-City steadfastly maintained until one of Mid-City's own employees conceded the agreement's existence during trial, not long after which Mid-City produced it. For the reasons set forth below, Andover's motion regarding the unsecured and rejection claims is denied in part and granted in part, and its motion regarding the administrative claim is denied.

I.

On March 19, 1996, Andover and its affiliates filed voluntary petitions for relief under chapter 11 of the Bankruptcy Code. Andover, which is primarily engaged in the design, manufacture, import and sale of popular-priced children's active wear, had streamlined many of its operations and overhead as part of its bankruptcy case. On April 10, 1997, I confirmed their First Amended Plan of Reorganization, which provided for a 100 percent payout, including interest, to all creditors.

Back in August, 1994, Andover had executed a non-residential real property lease with Mid-City, which was subsequently modified three times in 1995 (the "Lease"). The Lease covered the entire 46th floor and approximately 1,390 square feet on the 6th floor in the building in Manhattan known as One Penn Plaza. Andover used the space on the 46th floor for its executive offices as well as for its production, showroom, computer, designer and sewing sample operations, and the 6th floor space for storage. (Tr. 6/2/97 at 528-529). The 46th floor is a tower floor comprising 33,287 square feet with expansive views of the city spanning the East and Hudson Rivers. (Tr. 5/14/97 at 137-138). The Lease, which expires on April 30, 2004, requires Andover to make the following annual base rent payments, payable in monthly installments:

$765,601 through February 28, 1997;
$832,175 for the period of March 1, 1997 through February 28, 2000;
$898,749 for the period of March 1, 2000 through February 28, 2002; and
$932,036 for the period from March 1, 2002 through April 30, 2004.

(Trial Exhibit 1). With the inclusion of the 6th floor space, the annual rent increased by $21,570. The base rent set forth in the Lease does not include charges for electricity, real estate tax escalations or operating expense escalations, although these items appear in the Lease as additional charges which Andover is obligated to pay. (Trial Exhibit 1).

As part of the streamlining of its operations and overhead during the bankruptcy case, Andover sought to reduce its rent and the amount of space it was occupying. Because Andover had been a tenant at One Penn Plaza for nearly 20 years, it had approached Mid-City to further modify the Lease. (Tr. 5/14/97 at 124-125). When negotiations failed, Andover rejected the Lease (Tr. 5/14/97 at 125-126), effective as of August 31, 1996 (the "Rejection Date"), but vacating the premises on September 9, 1996. As of the Rejection Date, approximately 7¾ years of the Lease term remained.

II.
A. The Rejection Claim

Although the primary issue centers on the proper calculation of Mid-City's rejection claim under section 502(b)(6) of the Bankruptcy Code, there are subsidiary issues, such as whether certain spaces were effectively deleted from the Lease by Andover, whether various charges set forth in the Lease may be included in Mid-City's calculation of its rejection claim, and whether Mid-City's gutting of the 46th floor space delayed its reletting of the premises, prevented Mid-City from mitigating its damages and inflated the cost of Mid-City's tenant improvements (included as part of its rejection claim). We begin with those lesser issues.

1. The Purported Deletion of Space

Article 49 of the Lease and Section 5(c) of the Second Lease Modification Agreement provide that Andover may exercise options to delete nearly 6,900 square feet, or approximately 20 percent, of the 46th floor space and the entire 6th floor space from the Lease upon proper and timely written notification, if and so long as Andover is not in default under the Lease beyond any grace period. (Trial Exhibits 1 and 3).

Andover contends that the rejection claim is overstated because it includes $24,724.61 in damages for the 6th floor space which Andover asserts was deleted from the Lease on proper notice to Mid-City. Section 5(c) of the Second Lease Modification Agreement provides that Andover may delete the 6th floor space from the premises upon 90 days' written notice to Mid-City. William Cohen, Chairman and President of Andover, testified that Andover provided actual notice to Mid-City that Andover intended to delete the 6th floor storage space by virtue of having filed its lease rejection motion and providing a copy of it to Mid-City in August, 1996, the same time that Andover notified Mid-City that Andover was going to reject the Lease and vacate the premises (Tr. 5/14/97 at 122-123). No other written notice was provided. (Tr. 5/14/97 at 123).

Article 26 of the Lease details the type and manner of service of any notice required to be given under the Lease, or by any law or governmental regulations. Specifically, Article 26 provides that Mid-City will be deemed to have been served once Andover sends the required notice by registered or certified mail. Because the lease rejection motion was filed less than one month prior to the effective rejection date of August 31, 1996, Andover did not provide Mid-City with the requisite 90 days' notice required to exercise the option, assuming, but not deciding, that Andover did not need to comply with the requirement for registered or certified mail. In any event, had Andover given good notice, the space would not have been deleted from the Lease until sometime in November, 1996, more than 2 months after rejection of the Lease. Thus, the 6th floor space was still part of the Lease at the time it was rejected.

Andover also contends that the rejection claim is overstated because it includes $207,612.37 in damages for that portion of the 46th floor space which Andover asserts was effectively deleted. The Lease provides that Andover may exercise its option to delete this space if the following conditions are met: (i) at least six months' written notice of Andover's exercise of this option must be given to Mid-City (Lease, Article 49); (ii) the notice must be provided by registered or certified mail and addressed to Mid-City at 60 East 42nd Street, New York, New York, or to such other address as Mid-City may designate (Lease, Article 26); and (iii) Andover is not in default under the Lease beyond any grace period (Lease, Article 49). Andover contends that it complied with these conditions by sending a certified letter dated February 26, 1996 (the "February 26th Letter") to Mid-City, six months prior to the date of rejection of the Lease, in which it advised Mid-City of Andover's election to exercise its option to relinquish and delete...

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    • United States
    • New York Supreme Court Appellate Division
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    ...supra at 575). Notice of such default was not required (see Fifty States Mgt. Corp. v Pioneer Auto Parks, supra at 579; In re Andover Togs, Inc., 231 BR 521, 529 [1999]). Furthermore, while the plaintiff is correct that equity may relieve a party against a good faith, de minimus, breach tha......

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