In re Fosko Markets, Inc.

• Decision Date: 11 June 1987
• Docket Number: Bankruptcy No. 86 B 12094 (CB).
• Citation: 74 BR 384
• Parties: In re FOSKO MARKETS, INC., d/b/a AHF Super Deli Mart, Debtor.
• Court: U.S. Bankruptcy Court — Southern District of New York

74 B.R. 384 (1987)

In re FOSKO MARKETS, INC., d/b/a AHF Super Deli Mart, Debtor.

Bankruptcy No. 86 B 12094 (CB).

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

May 29, 1987.

Memorandum on Motion for Stay June 11, 1987.

Jaffe & Segal, New York City by David F. Segal, Burton Ross, for landlord.

Kelly, Eckhaus & Mohen, New York City by Thomas P. Mohen, Emanuel G. Tsarnas, for debtor in possession.

DECISION AND ORDER ON LANDLORD'S MOTION TO DEEM THE LEASE REJECTED OR VACATE THE AUTOMATIC STAY

TINA L. BROZMAN, Bankruptcy Judge.

We are asked to decide whether a landlord who, learning of its tenant's bankruptcy, promptly moves to deem its lease rejected or vacate the automatic stay and then accepts one month's use and occupation has waived or should be estopped from asserting that the lease has been rejected by operation of law. We hold that no waiver occurred and that no estoppel is warranted.¹

On October 31, 1986, Fosko Markets, Inc. ("Fosko") filed a petition for reorganization pursuant to Chapter 11 of the Bankruptcy Code, 11 U.S.C. § 1101 et seq. (the "Code"), and was continued in the operation of its business and properties as a debtor in possession. Fosko is the assignee of one Antonios Foskolos, the tenant under a lease with Amsi Associates, Ltd. ("Amsi") for store premises located in Manhattan. It is undisputed that neither Amsi nor a related entity, Amsi Investors (collectively, the "landlord"), was listed as a creditor by Fosko when its chapter 11 petition was filed.

By notice served on April 8, 1987, the landlord moved this court to declare the lease rejected under Code section 365(d)(4) or to vacate the automatic stay under Code section 362, contending (i) that the lease had been rejected when Fosko failed to assume or reject it or obtain an extension of time to do so within 60 days after the case was filed and (ii) that the landlord was contractually permitted to terminate the lease so as to be able to demolish the building. Fosko countered the motion with the defenses of waiver and estoppel and a challenge to the claim of the landlord that it intended to begin demolition of the building. Because it would have been unnecessary for us to determine whether the lease could be terminated if we were to determine that the lease had been rejected, we conducted an evidentiary hearing on May 6 and May 14, 1987 on the defenses of waiver and estoppel, it being conceded by Fosko that it had not moved to assume or reject the lease or to obtain an extension of time to do so. In fact, Fosko has never moved to assume the lease.

FACTS

Sometime in March 1978, Fosko moved into the premises and began conducting business. Although the term of the lease was April 1, 1978 through March 31, 1988, Fosko's principals knew from the outset that their stay at the premises was of indefinite duration both because certain provisions in the lease allowed early termination in the event of demolition and because Douglas Oliver ("Oliver"), who is an officer of Amsi and a general partner of Amsi Investors, repeatedly discussed with them his intention to eventually demolish the building. But the principals were content to operate the business for however long they could at that location.

The base rent reserved under the lease was $6,000 per month for the first five years and $6,666.68 per month for the second. The lease provided for additional rent covering water and sewer charges and for an adjustment of 12.9% of the increase in operating costs and taxes. Increases were payable at year end and decreases were to be reflected in lower rent for the installments falling due after the year end.

The debtor's operation was a cash one; Oliver always collected the rent in cash or sometimes cash and a second party check. In return, he would initial the rent bill as paid. He visited the store at least monthly, to collect rent, and often more frequently. For a long period of time and for at least the past year, Oliver's conversations with the debtor have been conducted with Fotios Tagaris ("Tagaris"), its vice president and secretary. Because Tagaris' use of English is somewhat limited (he is of Greek extraction), the store's manager, John Foskolos ("Foskolos"), sometimes listened and helped smooth any language difficulties.

Over the course of the years, the relationship between the landlord and debtor has been quite cordial. Largely as a result of this the parties did not adhere to the literal terms of the lease regarding the debtor's payment obligations. Specifically, Oliver usually stopped by mid-month to seek the month's rent; if Fosko did not have it ready on that day, he'd arrange a later date for payment. The practice with respect to the additional rent was similarly loose. When the debtor could, it made $500 or $1,000 cash payments on account. On occasion, Oliver selected store merchandise in partial payment. Although the landlord claims that Fosko was not current on additional rent and escalations and by the end of 1986 owed some $37,000, Oliver admitted that because Fosko was a good tenant and paid its base rent without problems, he allowed Fosko latitude on the other obligations. Tagaris and Foskolos denied that Fosko owed the landlord any prepetition additional rent and escalations. Neither party offered any documentary evidence of payment or demand for payment.

With the exception of the discrepancy as to the pre-petition liability, the testimony of the parties was more or less consistent as to the facts just related. But beginning with what occurred in December, 1986, the versions differed sharply. One important fact, however, was agreed: beginning in December Fosko began paying the landlord $6,900.00 monthly instead of $6666.98, the increase to cover 1986 additional rent and escalations payable in 1987. Oliver testified that on December 19, 1986 he had asked Tagaris to pay some additional rent and escalations; Tagaris asked if Fosko could instead make installment payments. Oliver assented. He requested $7,500.00 a month but accepted the lesser figure plus $100 a month in goods because Tagaris represented that it would be easier for him to make that payment.² Oliver also told Tagaris that sometime toward the latter part of January the landlord would be serving them with a ninety day termination notice which Tagaris and he would discuss after the holidays. Oliver flatly denied being informed during the conversation of any bankruptcy filing or other financial difficulties. We found his testimony regarding this conversation to be credible and congruent with so many of the facts as were undisputed.

Fosko presented several different versions of what supposedly occurred on December 19. In an affidavit submitted in opposition to the landlord's motion, Tagaris swore that in November or December he told Oliver "that while we were having financial trouble" Fosko would continue to pay him $6,900.00 a month. Tagaris testified to something quite different, that when Oliver came to pick up the rent "I told him that the shop had filed for bankruptcy" and that Fosko would continue to pay rent. Tagaris had no memory of whether Oliver responded in any manner.

Foskolos in his affidavit swore that Tagaris told Oliver that they "had temporary financial problems." Foskolos' testimony was wholly confused. It was apparent to the court that he was unable to make up his mind about what story he wanted to tell. He testified at one point that Tagaris told Oliver on December 19 that "we are in bankruptcy" to which news Oliver, looking at first "like even he was pulling his leg or something" asked "what does this mean?" Foskolos testified at another point that around December 22, Oliver returned to the store. Foskolos gave three different versions of what was imparted by Tagaris during this second conversation. First he testified that Tagaris told Oliver that they were in bankruptcy. When confronted with his affidavit swearing that Tagaris told Oliver that they were having temporary financial problems, Foskolos testified that that was what Tagaris had said. When afterwards repeatedly pressed by his counsel as to whether he was perhaps confused, he testified that Tagaris told Oliver both that they were having temporary financial problems and that they had filed a bankruptcy. Notwithstanding that Foskolos had earlier testified that Oliver reacted with surprise on December 19 when informed of the bankruptcy, Foskolos claimed that on December 22 when informed of the bankruptcy Oliver "couldn't believe it." Foskolos also testified that during this second conversation Oliver was told that "We are going to get someone to handle the case." This made little sense, of course, because the petition was filed by bankruptcy counsel almost two months earlier. Despite all of this testimony about what Tagaris told Oliver, Foskolos also testified that he told Oliver on December 22 that "we did go into bankruptcy, chapter 11" and that Oliver "didn't believe it." In addition Foskolos claims to have discussed with Oliver in January and February Fosko's bankruptcy. All of this testimony was incredible. Indeed, given the cordial relationship between Oliver and Tagaris, it would have been odd for Oliver to have sought and obtained an increase in rent to help offset additional rent and escalations at the very same time that he was informed that Fosko had filed a chapter 11 petition.

We find considerably more believable and persuasive Oliver's testimony that he learned nothing about the bankruptcy until March 11, 1987. In late January, as promised, the landlord served a notice of termination on Antonios Foskolos, the assignor of the lease. In February, Oliver gave Tagaris a proposed stipulation pursuant to which the lease would have terminated April 30, 1987. Despite the termination, Fosko would have been permitted to remain on the premises until June 30, 1987 and would have received back its security deposit and a payment from the landlord as compensation for...