In re Bridgepoint Nurseries, Inc.
| Decision Date | 02 January 1996 |
| Docket Number | Bankruptcy No. 92-30007. |
| Citation | 190 BR 215 |
| Parties | In re BRIDGEPOINT NURSERIES, INC., Debtor. |
| Court | U.S. Bankruptcy Court — District of New Jersey |
COPYRIGHT MATERIAL OMITTED
Markowitz and Zindler, Brian W. Hofmeister, Lawrenceville, New Jersey, for Debtor.
Wilentz, Goldman & Spitzer, P.C., Joan Sirkis Lavery, Woodbridge, New Jersey, for Amboy National Bank.
Cohn Bracaglia, John Bracaglia, Jr., Chapter 7 Trustee, Sommerville, New Jersey.
This matter comes to the court as a hearing on the objection of Bridgepoint Nurseries, Inc. ("debtor") to a proposed settlement of controversy between the chapter 7 trustee and Amboy National Bank ("Amboy").
John Bracaglia, the chapter 7 trustee, filed a notice with this court in order to settle a controversy between Amboy and debtor. Pursuant to the settlement Amboy would receive administrative priority and payment for rents that debtor owed to its landlord. The issue presented at the hearing on debtor's objection to this settlement is whether Amboy, as mortgagee of debtor's landlord, is entitled to an administrative claim for those rents which were pledged to Amboy pursuant to landlord's mortgage.
This court has jurisdiction pursuant to 28 U.S.C. § 1334 as a matter arising under 11 U.S.C. § 503. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A), (B) & (O) as it deals with the determination of an alleged administrative claim against the debtor's estate.
On October 23, 1990 debtor filed a voluntary petition under chapter 11 of the bankruptcy code. On October 14, 1992, approximately one month after confirmation of the chapter 11 plan, Amboy filed a proof of administrative claim in the amount of $60,500. The basis of the administrative claim was debtor's use and occupancy of the premises from which debtor conducted its business. The debtor's case was subsequently converted to chapter 7 on March 8, 1993.
Prior to conversion, debtor operated as a wholesaler of nursery stock at 348 Route 601, Belle Mead, New Jersey ("premises"). The premises were owned by debtor's principal, Richard Olesky ("Olesky"). Debtor leased the premises from Olesky pursuant to a lease which required debtor to pay Olesky $4,000 per month as rent. Debtor has not made any rental payments since February 1990.
Amboy held a first and second mortgage on the premises as security for loans given to Olesky. Olesky, also a debtor in a separate chapter 7 bankruptcy proceeding, defaulted on his loan payments to Amboy. The chapter 7 trustee in the Olesky case filed a notice of abandonment of the premises on February 5, 1992, to take effect on February 24, 1992 if no objections were filed. Accordingly, the premises was abandoned by the trustee in Olesky's case on February 24, 1992. Amboy obtained the premises at a mortgage foreclosure sale which took place on January 10, 1995. The sheriff's deed is dated January 20, 1995.
Initially, the chapter 7 trustee in debtor's case questioned Amboy's administrative claim for rents that had accrued during the chapter 11 proceeding. The basis of the trustee's objection was that Amboy was not the landlord, and hence was not entitled to an administrative claim for rents. Nevertheless, the trustee and Amboy agreed to settle the $60,500 claim for $35,000 rather than litigate the issue. However, at the hearing on the objection to the settlement of controversy, debtor objected claiming that Amboy was not entitled to an administrative claim for use and occupancy during the chapter 11 proceedings.
Amboy asserts that it has an administrative claim against the debtor in this case for use and occupancy during the debtor's bankruptcy proceeding. Amboy asserts that as a result of the foreclosure sale it has acquired the premises. As to the period prior to foreclosure, Amboy asserts that the rents are pledged collateral and that Amboy is therefore entitled to collect rents directly from debtor. In the alternative, Amboy argues that the disclosure statement gives the bank rights to the rents. Relying on a footnote in the debtor's disclosure statement, Amboy maintains that the disclosure statement operates as an agreement or a declaration of an administrative claim owed to the bank by the debtor.
Three issues are raised by this objection. First, this court must determine whether a mortgagee can assert an administrative claim for use and occupancy during the bankruptcy proceeding, based on a pledge of rents in the mortgage, where the debtor leases the premises from the mortgagor. Subsumed within that question is the issue concerning when the mortgagee's rights to rents are triggered. The next issue relates to the effect of a mortgage foreclosure judgment and a mortgage foreclosure sale on the mortgagee's rights to the rents. Finally, this court is asked to determine the legal binding effect of language in a chapter 11 debtor's disclosure statement.
A debtor in possession must timely perform all post-petition obligations under "any unexpired lease of nonresidential real property. . . ." 11 U.S.C. § 365(d)(3). 11 U.S.C. § 503 allows administrative claims for actual, necessary costs and expenses for the benefit of the estate1.
There is no question, of course that the payment of rent for the use and occupancy of real estate ordinarily counts as an "actual, necessary" cost to which a landlord, as a creditor, is entitled . . . citations omitted . . . In order to survive, a financial entity almost always needs a physical space to occupy. When a debtor owns no suitable real estate of its own, its only choice is to become a tenant, and to assume the obligations of paying periodic rent to a landlord. In such circumstances, therefore, rent is clearly an "actual, necessary" cost of preserving the estate, since the debtor\'s survival depends on its ability to pay the landlord for the right to possess the space necessary to conduct its business. Because bankruptcy proceedings are considered to be equitable, however, the landlord\'s right to collect monetary relief is somewhat curtailed; a debtor is generally required to pay only a reasonable value for the use and occupancy of the landlord\'s property, which may or may not equal the amount agreed upon in the terms of the lease.
Zagata Fabricators v. Superior Air Products, 893 F.2d 624, 627 (3d Cir.1990) (citing In re Mohawk Indus. Inc., 54 B.R. 409 (Bankr.D.Mass.1985)) (emphasis added).
In this case, it is undisputed that the premises have been used and occupied by the debtor prior to foreclosure sale and that this has been a benefit to the estate. Without the premises the debtor would not have a place from which to continue its business.2 It is disputed, however, that Amboy (as opposed to Olesky, the landlord and owner of the premises) is accorded administrative status for rent for use and occupancy during bankruptcy proceedings. As articulated by the Third Circuit in the Zagata case, it is "the landlord, as a creditor" who is entitled to the administrative claim. Zagata, 893 F.2d at 627. Mr. Olesky was the owner and landlord and therefore a proper creditor of debtor. There is no similar landlord/tenant relationship or nexus between Amboy and the debtor; thus the next issue is whether Amboy, as mortgagee of the landlord, should be afforded administrative priority status.
A preliminary decision must be made as to the legal relationship between debtor and Amboy, and whether the mortgage executed by Olesky gave Amboy a pledge of rents as further security for the loans to Olesky or title to the rents (i.e. an absolute assignment). Any analysis of an assignment or pledge of rents in a bankruptcy case must begin with the recent Third Circuit case, First Fidelity Bank, N.A. v. Jason Realty, L.P., 59 F.3d 423 (3d Cir.1995).
The Third Circuit in Jason Realty decided the issue of whether rents generated by a debtor's real estate are property of the bankruptcy estate. In so doing, Jason delineated the requirements of a pledge versus an assignment. First Fidelity Bank, N.A. v. Jason Realty, L.P., 59 F.3d 423 (3d Cir. 1995). As a preliminary matter, Jason held that in determining property rights courts must look to state law. Id. at 427 (citing Butner v. United States, 440 U.S. 48, 55, 99 S.Ct. 914, 918, 59 L.Ed.2d 136 (1979); Commerce Bank v. Mountain View Village, Inc., 5 F.3d 34, 37 (3d Cir.1993)). Jason found that under New Jersey law assignments of rents are interests in real property and, as such, are created and defined in accordance with the law of situs of the real property. Jason, 59 F.3d at 427.
Turning to state law, Jason held that "analyzing the law of New Jersey . . . it appears that the distinction between an assignment and a pledge of security is based on the precise wording of the pertinent mortgage clause." Id. (citing In re Winslow Center Associates, 50 B.R. 679, 681 (Bankr. E.D.Pa.1985)).
Jason dealt with a dispute between the debtor, Jason Realty, L.P., and a creditor, First Fidelity Bank, N.A. Id. at 423. Debtor, the owner of real estate, obtained a loan from the creditor and secured the loan with two documents, a mortgage on the real estate and assignment of lease contained in a separate document. Id. at 426. The separate assignment stated "THAT the Assignor for good and valuable consideration, receipt whereof is hereby acknowledged, hereby grants, transfers and assigns to the...
To continue reading
Request your trial