In re Durso Supermarkets, Inc., Bankruptcy No. 92 B 43864 (PBA). Adv. No. 93-9475A (JHG).

CourtUnited States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Southern District of New York
Writing for the CourtJEFFRY H. GALLET
Citation193 BR 682
PartiesIn re DURSO SUPERMARKETS, INC., Debtor. DURSO SUPERMARKETS, INC., Plaintiff, v. Florence B. D'URSO, Trustee, as Assignee of Florence B. D'Urso, Executrix of the Estate of Camillo J. D'Urso, Deceased, Defendant.
Docket NumberBankruptcy No. 92 B 43864 (PBA). Adv. No. 93-9475A (JHG).
Decision Date20 March 1996

193 B.R. 682 (1996)

Florence B. D'URSO, Trustee, as Assignee of Florence B. D'Urso, Executrix of the Estate of Camillo J. D'Urso, Deceased, Defendant.

Bankruptcy No. 92 B 43864 (PBA). Adv. No. 93-9475A (JHG).

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

March 20, 1996.

193 BR 683
193 BR 684
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Cadwalader, Wickersham & Taft, New York City by H. Peter Haveles, Jr., Florence I. Barber, Manal Zakhary Khalil, for Debtor

Schlam, Stone & Dolan, New York City, and Law Offices of Burton S. Weston, Manhasset, NY, and Stephan B. Gleich & Associates, Great Neck, NY (Richard H. Dolan, Burton S. Weston, of Counsel), for Defendant.


JEFFRY H. GALLET, Bankruptcy Judge.


Before me1 is yet another round in the continuing conflict between the Plaintiff, Durso Supermarkets Inc., ("DSI") and the Defendant, Florence D'Urso ("Mrs. D'Urso"). Prior to their stop in my court, these parties have litigated, and continue to litigate, in various state and federal trial and appellate courts. There is no reason to believe that this is their last field of legal combat.

DSI claims that a certain lease termination ("Lease Termination"), pursuant to a "cross-default" provision, constitutes a fraudulent conveyance.2 It does not seek to be restored to possession of the properties, rather, it seeks to recover the value of the leasehold ("Leasehold" or "Lease"), including the "enterprise value" lost because it could not continue to do business in the previously leased premises ("Leased Premises").

DSI also claims that it is entitled to a payment or credit equal to the value of the inventory and fixtures it left in the Leased Premises, when they were returned to Mrs. D'Urso.3

The Lease covered three parcels of real property, with free standing commercial buildings, located at Fteley Avenue in the Bronx, New York (the "Fteley Property" or "Fteley Store"); Lefferts Boulevard in Queens, New York (the "Lefferts Property" or "Lefferts Store"); and Merrick Road in Freeport, Long Island (the "Freeport Property" or "Freeport Store") (collectively the "Leased Properties"), in which DSI operated supermarkets. DSI contends that by virtue of the Lease Termination, the three supermarkets, for which it had paid, were transferred to Mrs. D'Urso without consideration. DSI also claims that, at the time of the alleged transfer, it was insolvent and did not receive reasonably equivalent value for the Leasehold.

Mrs. D'Urso responds that her termination of the Lease does not constitute a fraudulent conveyance because the necessary elements of a fraudulent conveyance were not present. Primarily, she disputes DSI's contention that termination of a lease is a transfer within the provisions of the Bankruptcy Code (the "Code"). Moreover, she argues the Lease had no value and, therefore, nothing requiring equivalent value was transferred.

In addition, Mrs. D'Urso argues that she is entitled to amounts owed from DSI for unpaid

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rents, taxes and expenses on the Leased Properties and for damages she sustained as a result of DSI's breach of the Lease


A. Bankruptcy Related Proceeding

DSI filed its chapter 11 petition on July 9, 1992. That case is pending before the Hon. Prudence B. Abram, U.S.B.J. On August 18, 1993, DSI commenced this adversary proceeding, which was reassigned to me.

B. Background

The Beginning

DSI was a corporation engaged in the business of owning and operating a chain of supermarkets in the New York metropolitan area. The company was founded by Camillo J. D'Urso ("Mr. D'Urso"), who, along with his brother, operated the business. During that time, he was married to Mrs. D'Urso. Even though she was not involved in the financing or operation of the supermarkets, she was the Vice President for Design and Planning. In that role, Mrs. D'Urso was responsible for the color scheme, decoration and layout of the supermarkets.

In November of 1986, Mr. D'Urso died. Mrs. D'Urso, who was the sole trustee of an inter-vivos trust created under an agreement dated April 16, 1973, became the sole executrix of her husband's estate.

After Mr. D'Urso's death, Mrs. D'Urso tried to run the business. She became the Chairman of the Board and Chief Executive Officer of DSI. Albert Ferraldi, the President of the company, ran the day to day operations. Mr. Ferraldi had been Vice-President and Chief of Purchasing, prior to Mr. D'Urso's death.

At the time of Mr. D'Urso's death, Mr. and Mrs. D'Urso had four children: Lisa, who was twenty-two, twins, Mark and Donna, who were twenty-four, and David, who was twenty-five. Except for David, who had worked in his father's company since he was eleven or twelve, none of the children had been substantially involved in the business prior to Mr. D'Urso's death.

While he attended college, David worked at DSI as an Assistant Controller. After he graduated from college, he worked in the stores to learn the business. He was an Assistant Grocery Manager in the Lefferts Store for five months, Grocery Manager of the Queens Village store for seven months and a Manager in the Coop City store. He then spent a year and a half at a store on Boston Post Road in the Bronx, where he was promoted to Assistant Store Manager. In August of 1986, he was promoted to Store Manager of the Kissena Boulevard store in Flushing, Queens. He had been there for four months when his father died.

After Mr. D'Urso's death, David became Vice President and the Administrative Assistant to the President. David's primary function was to oversee all payments. He also analyzed leases for Ferraldi.

David held the title of Vice President for about a year and a half. When his mother decided to sell the stores, David went into the field as a District Manager, with responsibility for six stores in The Bronx. Once the stores were sold, he worked on closing the books and then left DSI to pursue jobs with other supermarket companies. Eventually, he went to D'Agostino Supermarkets, where he worked until the summer of 1992.

The Sale

In 1988, Mrs. D'Urso decided to sell the business. She had been diagnosed with cancer and, although she had intended to keep the business in the family, she felt her children were too young to run it. Mrs. D'Urso retained Solomon Brothers to implement the sale.

In 1988, Mrs. D'Urso was introduced to Fredrick Schulman ("Schulman"),4 an attorney in the real estate business. Schulman, his sister, Faye Peltz, and her husband, Sam

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Peltz ("Peltz"), were active in the supermarket industry

Schulman offered to purchase the stock of DSI on behalf of himself and T.F. Acquisition Corp. ("T.F."), a company controlled by Peltz. DSI, however, was not Schulman's first experience in the supermarket industry. Schulman testified that he had "grown up" in the business. His sister Faye was an owner and operator of supermarkets. Schulman worked in her stores while he attended college and law school. After graduation from law school, he performed legal work for his sister in connection with her supermarket business.

While he worked for her, Schulman observed the bankruptcies of other supermarket chains, including Bohack and Food Fair. He made offers, on his sister's behalf, to purchase Bohack and Food Fair stores.

At the time of the acquisition, Schulman was responsible for arranging and negotiating the financing. Additionally, Schulman functioned as a financial consultant and advisor to T.F. with respect to the relationship between Westinghouse Credit Corporation ("Westinghouse"), one of T.F.'s lenders, and Mrs. D'Urso.

After T.F. acquired DSI, Schulman also performed crisis management, including arranging for supplies, merchandise and inventory for the stores. Schulman, however, neither is an experienced retailer, nor was he substantially involved in the day to day operations of the supermarkets.

On or about June 9, 1989, Mrs. Durso and T.F. entered into a stock purchase agreement (the "Agreement"). Mrs. Durso agreed to sell T.F. all the stock of DSI for approximately $43.2 million. The deal closed on August 31, 1989. On that date, T.F. was renamed DSI.

The purchase was highly leveraged. T.F. borrowed $35 million from Westinghouse, which was paid to Mrs. D'Urso at the closing. The remaining $8.2 million was paid by a note (the "Note") secured by a first mortgage (the "Mortgage") on three supermarket properties, Co-Op City, Avenue A, and East 115th Street. The Note, which was personally guaranteed by Peltz and Schulman, was due on September 1, 1991.

As part of the Agreement, Mrs. D'Urso and DSI contemporaneously signed a 21-year lease/purchase option agreement (which is the Lease at issue), for the Leased Properties and a fourth property at East 110th Street in Manhattan. It included a 15-month option for DSI to buy the realty for $5.8 million. The rent was calculated as a 11.5% return on the option price, unless DSI failed to exercise it, in which case it increased to 16% of the option price. DSI did not exercise its option.

Immediately following the execution of the Lease, the East 110th Street property was sublet, with Mrs. D'Urso's permission.

The Cross-Default Provision

The Note and the Lease contained cross-default provisions (the "Cross-Default Provision"). Under section 13.01(a) of the Note, an event of default is defined as a "failure to make payment of any part of the indebtedness to be paid under the note." In the event of default, Mrs. D'Urso could, among other things, consider the entire outstanding principal balance, together with accrued interest, due and payable.

Additionally, section 11.01(g)5 of the Lease provides that any event of default under the Mortgage is a default under the Lease "if as a result of that default, the entire unpaid principal balance of that debt shall have become due and payable."...

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