In re Harbour House Operating Corp.
| Decision Date | 21 December 1982 |
| Docket Number | Bankruptcy No. 82-672-HL. |
| Citation | 26 BR 324 |
| Parties | In re HARBOUR HOUSE OPERATING CORP., Harbour House Realty Corp., and Deja Vu, Inc., Debtors. |
| Court | U.S. Bankruptcy Court — District of Massachusetts |
COPYRIGHT MATERIAL OMITTED
Peter Nils Baylor, Nutter, McClennen & Fish, Boston, Mass., for Trustee.
Joel Lewin, Snyder, Tepper & Comen, Boston, Mass., for Deja Vu, Inc.
Guy B. Moss, Widett, Slater & Goldman, Boston, Mass., for Creditor's Committee of Deja Vu, Inc.
Daniel M. Glosband, Goldstein & Manello, Boston, Mass., for debtors-Harbour House.
MEMORANDUM ON STATUS OF DEJA VU, INC. RE HARBOUR HOUSE OPERATING CORP. AND HARBOUR HOUSE REALTY CORP.
This case first came before the Court when the two entities, Harbour House Operating Corp. and Harbour House Realty Corp., filed voluntary Chapter 11 petitions on March 24, 1982. Harbour House Realty Corp. (Realty) is the record owner of a hotel premise known as the Harbour House Hotel located in Lynn, Massachusetts. Harbour House Operating Corp. (Operating) is the operator of the hotel facility. The significance of the two different entities will come out later in this opinion. The Harbour House Realty Corp. and Harbour House Operating Corp. are being jointly administered. (Hereinafter the two entities will be referred to collectively as the "Harbour House").
Shortly after the two Chapter 11 petitions were filed, the debtors filed a motion to reject an executory contract between the debtors and Deja Vu, Inc. (Deja Vu). Deja Vu is a Massachusetts corporation which operates a lounge and nightclub on the premises of the Harbour House Hotel. The day the Court was to hear the motion to reject the executory contract, Deja Vu filed a voluntary Chapter 11 petition and the proceeding was stayed.
Both debtors have now filed complaints for relief from stay. Ultimately, Harbour House seeks to dispossess Deja Vu, contending that control of the lounge is essential to any successful reorganization and by contrast, Deja Vu seeks to have its right to operate the lounge under a lease affirmed as necessary to a successful reorganization. The demographics add force to the arguments since the hotel is a small operation of only 91 rooms, while the lounge may be the tail that wags the dog with its 1200 person seating capacity. Deja Vu was granted partial relief from stay so that a proceeding in the Essex Superior Court, Commonwealth of Massachusetts, entitled Joseph Cataldo and Deja Vu, Inc. v. Christopher P. Recklitis, Harbour House Realty Corp., and Harbour House Operating Corp., could continue. Many of the issues which are now being raised before the bankruptcy court had been raised in that lawsuit. Since that lawsuit had already been assigned to and had been partially heard by a state court master, the stay was lifted so that the proceedings before the master could be completed and his report filed.1
A master's report has now been filed. The findings of fact have been affirmed and adopted by this Court after a hearing on objections. Whatever objections now remain are to questions of law or damages. A trustee has been appointed for the Harbour House debtors and he has supplanted the debtor-in-possession as the party in this proceeding.
From May 18th to June 21st, 1982, the master held hearings on an almost daily basis and there were over 33 separate transcripts. The master's report is over 100 pages in length. Therefore, only the relevant findings of fact will be discussed in this memorandum. All of the findings of fact in the report have been adopted, but not the conclusions of law or findings as to damages. The parties have briefed their respective positions. The following issues of law remain to be determined by this Court. First, the Court must determine whether the agreement between Deja Vu and Harbour House creates a leasehold interest in favor of Deja Vu and if so, what rights Deja Vu and Harbour House have in this lease under the Bankruptcy Code. Second, the Court must determine what rights and amounts of recovery Deja Vu has against Harbour House under various oral and written contracts. Finally, the Court must determine whether any of Deja Vu's claims are secured by virtue of an equitable lien on the real property.
To understand the issues, a summary of the master's findings is necessary to present a factual background. In the fall of 1980, Joseph Cataldo (Cataldo), the principal officer of Deja Vu, negotiated with Christopher P. Recklitis (Recklitis), about operating or leasing the lounge in the Harbour House Hotel. Although Recklitis had no official management position with the Harbour House Hotel, and his exact legal relationship to Harbour House is less than clear, the master found that he acted on behalf of the hotel2 and neither party has questioned his authority either as manager or agent to represent Harbour House. I find that in fact, he controlled the operations of Harbour House. The negotiations between the parties essentially arrived at the following terms: (a) the annual rental would be ten thousand ($10,000) dollars per month or one-third of the profits; (b) Harbour House would pay the expenses of utilities, taxes and insurance; and, (c) Cataldo would, at his own expense convert the lounge to a "disco" operation, which he estimated would cost one hundred fifty thousand ($150,000) dollars. In furtherance of the deal, Cataldo paid a security deposit of fifty thousand ($50,000) dollars and loaned forty-one thousand ($41,000) dollars to Harbour House. All of the above agreements were oral. Relying on the oral agreements, Cataldo, without waiting for the lease that was supposed to be drawn up by counsel for Harbour House, began the restoration of the lounge. In December, 1980, with the work well along, the parties met to review draft agreements but they were not signed due to various disagreements and Cataldo stopped work for a day or so. Cataldo, after oral assurances from Recklitis, continued working on the lounge. The master found that Cataldo spent one hundred seventy eight thousand ($178,000) dollars on the work. The lounge opened for business on December 23, 1980 and was destroyed in a fire the following evening.
The parties subsequently met in February, 1981 and Cataldo insisted that he receive one hundred fifty thousand ($150,000) dollars of the insurance proceeds. The master found that Recklitis agreed that Deja Vu would receive one hundred fifty thousand ($150,000) dollars of the insurance proceeds. Cataldo told Recklitis that he could do the necessary rehabilitative structural work on the lounge for one hundred thousand ($100,000) dollars, and he also agreed to do work to improve the hotel lobby for fifty thousand ($50,000) dollars, an area not related to the lounge premises.
On February 28, 1981, a Lease, Management and Consulting Agreement, and Tripartite Agreement were executed by the parties. The agreements were dated back to November 24, 1980. It is clear from an examination of the documents that whatever else they are and whatever ambiguities they may contain, they do not within their four corners constitute a lease of the lounge to Deja Vu.
The Tripartite Agreement presents the following technical structure. Harbour House Realty Corp., (Realty) which owns the real estate, leases the premises to Harbour House Operating Corp. (Operating). A Management and Consulting Agreement (Management Agreement) encompasses the arrangement between Operating and Deja Vu for Deja Vu to manage and operate the lounge.
When an owner of an estate in land grants to another the right to possession of the property, retaining a reversion, the transaction is a lease. I American Law of Real Property § 3.2 at 177 (1952). In order for the lease to be anything more than a tenancy at will, it must be in writing. Mass.Gen.Laws ch. 183 § 3. A lease of land conveys an interest in land, requires a writing to comply with the statute of frauds, and transfers possession. Baseball Publishing Co. v. Mattie B. Bruton, 302 Mass. 54, 18 N.E.2d 362 (1938). If the instrument does not grant possession, but grants only the right to use the premises, then the instrument is a license not a lease. Jones v. Donnelly, 221 Mass. 213, 217, 108 N.E. 1063 (1915). The only document Deja Vu has which could evidence a lease is the Management Agreement. The usual test of whether a document is a lease is whether the instrument gives the so-called lessee exclusive possession of the premises. Gerould Co. v. Arnold Constable & Co., 65 F.2d 444, 446 (1st Cir.1933); Roberts v. Lynn Ice Co., 187 Mass. 402, 406, 73 N.E. 523 (1905). Although Deja Vu argues that it had a right to exclusive possession, the Management Contract states that:
It is Manager\'s (Deja Vu) function to manage the operation of the Lounge; it is understood that this will be done according to standards and criteria acceptable to Manager and Harbour House (emphasis added).
The language does not indicate that Deja Vu is to have exclusive possession. Further, while not determinative, the usual terms of conveyance, such as "grant", "lease", "let", or "demise" are not in the Management Agreement. Instead, the Agreement provides that Deja Vu will furnish "operational and consulting services in connection with the conduct of the food, beverage, entertainment and pool operations at the lounge...." The Agreement is carefully drafted not to be a lease. The evidence indicates and the master found that it was intentionally drafted this way because Operating owned the liquor license and a liquor license cannot be transferred without approval of the regulatory authorities and, further, the lessee must be the licensee. Mass.Gen.Laws ch. 138 § 23. Master's Report, at 59-60. If Deja Vu was the lessee, the license would have to be transferred to it and this was something Harbour House was unwilling to do. Counsel for Harbour House made it clear that the documents were drafted to protect the liquor license...
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