In re Embers 86th Street, Inc.

• Decision Date: 07 August 1995
• Docket Number: Bankruptcy No. 95 B 41628 (JLG).
• Parties: In re EMBERS 86TH STREET, INC., Debtor.
• Court: United States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Southern District of New York

184 B.R. 892 (1995)

In re EMBERS 86TH STREET, INC., Debtor.

Bankruptcy No. 95 B 41628 (JLG).

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

August 7, 1995.

COPYRIGHT MATERIAL OMITTED

Martin H. Minsky, New York City, for debtor.

Kaufman Friedman Plotnicki & Grun, L.L.P., New York City, for Landlord.

MEMORANDUM DECISION ON DEBTOR'S MOTION TO ASSUME LEASE

JAMES L. GARRITY, Jr., Bankruptcy Judge.

Embers 86th Street, Inc. ("debtor") operates a cafeteria-style restaurant in rented space (defined below as the "Premises") located at 206 E. 86th Street, New York, New York (the 86th Street Building") which it occupies pursuant to an agreement dated July 10, 1992 (the "Sublease"). S & M Enterprises ("S & M"), as sublessor, has moved pursuant to § 365(a) of the Bankruptcy Code ("Code") for an order directing debtor to assume or reject the Sublease and to pay rent and other obligations allegedly due and owing thereunder. Alternatively, it seeks an order either modifying the automatic stay to permit it to exercise its state court remedies and regain possession of the Premises, or granting it adequate protection of its interests therein. Simultaneously, debtor has moved pursuant to § 365(a) for leave to assume the Sublease. For the reasons stated below, debtor's motion is denied. S & M's motion is denied as moot.¹

Facts

The facts, as established during the evidentiary hearing on these matters, are as follows.² Debtor is a New York corporation jointly owned by Florence Singer and her son Marshall Singer. On or about April 14, 1995, debtor filed a voluntary petition for relief under chapter 11 of the Code. Pursuant to §§ 1107 and 1108 of the Code, it has remained in possession and control of its business and assets as a debtor in possession.

Stephen Perlbinder, Julius Perlbinder, and Barton Mark Perlbinder, doing business as Bar-Mar Associates (collectively, "Bar-Mar") own the 86th Street Building. On or about December 30, 1986, Bar-Mar and MSV Restaurant, Inc. ("MSV") entered into a fifteen (15) year lease (the "Over-Lease") of the store front and a portion of the basement of that building where MSV operated a restaurant. After MSV commenced its restaurant operations, it began utilizing a portion of the building's second floor for storage space. On July 10, 1992, Bar-Mar and MSV executed a Lease Extension and Modification Agreement. Under that agreement Bar-Mar modified the Over-Lease to include as part of the leased space, at no added charge to MSV, the area on the second floor which MSV was then using as storage space, and released any rent claims on account of MSV's use thereof. It also extended the term of the Over-Lease from December 29, 2011 to December 29, 2026. The leased space covered by the Over-Lease, as modified, will be referred to as the "Premises". Thereafter, on July 10, 1992, MSV and debtor executed the Sublease. Its term is from July 10, 1992 to July 31, 2002, with an option reserved to debtor to extend it through July 31, 2007.³ Immediately thereafter, MSV assigned all of its right, title and interest as lessee under the Over-Lease to S & M.

The 86th Street Building abuts a building located at 1517-1519 Third Avenue (the "Third Avenue Building"). Both buildings have rear doors which open on to a common alley area located behind the buildings. The principal means of ingress and egress at the 86th Street Building is a doorway which opens on to 86th street. MSV's predecessor in the 86th Street Building was Geiger Vienna Pastry Shop & Restaurant ("Geiger"). In 1962, Geiger simultaneously operated businesses in the 86th Street and Third Avenue Buildings. Without obtaining the permission of the Third Avenue Building's landlord ("Third Avenue Landlord"), Geiger utilized the alley area as a passageway between the two buildings. On or about July 3, 1962, the Third Avenue Landlord formalized that arrangement by granting Geiger a license (the "License"),⁴ terminable at landlord's will on ten days notice, to utilize the alley "as a passageway to and from the store space of Geiger at the 86th Street Building and the store space occupied and used by Geiger in the Third Avenue Building, and for no other purpose. . . ." License ¶ 1. The License was recorded in the Office of the City Register, New York County, on or about July 16, 1962.

Just prior to the execution of the Sublease, Florence Singer and Marshall Singer toured the Premises with Mihaly Vestergom ("Vestergom"), an officer and director of MSV. Florence Singer testified that it was of paramount importance to the debtor that there be a legal second means of egress from the Premises to insure that debtor could use both floors of the Premises in the operation of its restaurant. Marshall and Florence Singer both testified that during their tour (which was Florence Singer's only visit to the Premises before debtor signed the Sublease; Marshall Singer visited the Premises twice, once with Vestergom six months prior to the execution of the Sublease and once with his mother and Vestergom) they asked Vestergom whether there was a legal second egress from the building. It is undisputed that he advised them that there was a legal means of egress through the alley area with access to the Third Avenue Building. Florence Singer stated that she observed the alley area and the door to the Third Avenue Building which was unlocked and in use. Neither Florence nor Marshall Singer requested Vestergom to provide debtor with documentation evidencing MSV's right to use the egress, or an explanation of the terms regulating its use thereof.

Florence Singer, Marshall Singer, Vestergom and Barton Mark Perlbinder and their respective counsel, attended the closing on July 10, 1992. Before executing the Sublease on behalf of the debtor, Florence Singer again requested assurances that a legal second means of egress from the Premises existed. Vestergom confirmed what he had earlier stated to the Singers. Thereafter, MSV's counsel drafted, and Vestergom executed, an affidavit memorializing Vestergom's advice, which was made part of the Sublease. In pertinent part, the affidavit states:

MSV has used, as a second means of egress from the Premises, a rear alley area with access through a corridor from the rear to the front of the Third Avenue Building openly and consistently since May 1973.

The Fire Department of New York City has inspected the method of egress and not objected to such method.

To the best of my knowledge, this method of egress has been used since the early 1920\'s.

Vestergom Affidavit ¶¶ 3-5.

MSV never operated a restaurant on the second floor of the Premises. Accordingly, when the Sublease was signed, there was neither a public assembly permit nor an appropriate certificate of occupancy for the second floor, although both existed for the first floor. Debtor spent approximately $1 million renovating the Premises. Upon completion of those renovations, debtor sought to obtain a public assembly permit and appropriate certificate of occupancy for the second floor. Both requests were denied because the Premises lacked a legal second means of egress. Thereafter, the fire department issued a cease and desist order, which remains in effect, barring debtor from using the second floor in the operation of the restaurant. Only as those events were unfolding did debtor learn of the existence of the License and that it had been revoked by the Third Avenue Landlord subsequent to the execution of the Sublease.

Debtor fell into default under the Sublease pre-petition. On or about August 24, 1994, S & M served debtor with a Notice to Cure Default Under the Lease demanding debtor to cure defaults of $50,302.38 in rent and additional rent, and $3,333.33 in additional security due under the Sublease. Although the parties negotiated a payout schedule for the arrearages, debtor defaulted thereunder and on December 20, 1994, S & M served a "three-day rent demand" seeking payment of $101,912.36 allegedly due under the Sublease. When debtor failed to comply with the demand, S & M commenced a non-payment summary proceeding in the Civil Court of the State of New York, New York County. On or about January 17, 1995, debtor answered the petition. Thereafter, debtor allegedly proposed to make a payment to S & M of one month's rent, without prejudice, in exchange for a one month adjournment of the trial in the summary proceeding pending settlement discussions. Debtor paid the March 1995 rent, but the settlement discussions proved fruitless. The summary proceeding was set for trial on April 18, 1995. The trial was stayed by the filing of debtor's chapter 11 petition. Debtor is current post-petition under the Sublease.

Discussion

Section 365(b) of the Code furthers chapter 11's goal of promoting reorganization by balancing the debtor's interest in maximizing the value of its estate through the assumption and assignment of its executory leases against the landlord's interest in receiving the benefit of its bargain and being protected against default by the debtor after assumption has occurred. See In re Bygaph, Inc., 56 B.R. 596, 605 (Bankr.S.D.N.Y.1986). Pursuant to § 365(b)(1)(A), as a condition to the assumption of an executory lease, a debtor must either cure existing defaults thereunder or provide "adequate assurance" that it can "promptly cure" those defaults. See 11 U.S.C. § 365(b)(1)(A). For these purposes, "`curing requires payment of all rental arrearages and other money obligations at the time the lease is assumed.'" In re DWE Screw Products, Inc., 157 B.R. 326, 331 (Bankr.N.D.Ohio 1993) (citing 2 William L. Norton, Jr., Norton Bankruptcy Law and Practice § 23.11.55 (1992)). Debtor does not intend to cure its pre-petition default under the Sublease simultaneously with its assumption thereof. Rather, it proposes to remedy that default by making twelve (12) monthly payments of $5,000 and monthly payments of $8,000 thereafter, until the default is cured. It has not specified when those...