In re Kmart Corp.

• Citation: 290 B.R. 601
• Decision Date: 23 October 2002
• Docket Number: No. 02 B 02474.,02 B 02474.
• Parties: In re KMART CORPORATION, et al., Debtors.
• Court: United States Bankruptcy Courts. Seventh Circuit. U.S. Bankruptcy Court — Northern District of Illinois

290 B.R. 601

In re KMART CORPORATION, et al., Debtors.

No. 02 B 02474.

United States Bankruptcy Court, N.D. Illinois, Eastern Division.

October 23, 2002.

COPYRIGHT MATERIAL OMITTED

Joseph D. Frank, Micah R. Krohn, Freeborn & Peters, Chicago, IL, for 4th Leaf, LLC.

William H. Wilhoit, Wilhoit Law Office, Grayson, KY, Deborah L. Thorne, Barnes

& Thornburg, Chicago, IL, for Farmers Hardware Co.

John Wm. Butler, J. Eric Ivester, Mark A. McDermott, Skadden, Arps, Slate, Meagher & Flom, Chicago, IL, for Kmart Corp, et al.

MEMORANDUM OPINION

SUSAN PIERSON SONDERBY, Bankruptcy Judge.

This matter comes before the Court on the Motion of 4th Leaf, L.L.C. ("4th Leaf") to Compel Surrender of Property. 4th Leaf relies upon section 105(a) of title 11 of the United States Code (the "Code") as the statutory predicate for relief. As discussed in detail later, 4th Leaf leased a store located in Kentucky to one of the debtors herein, Kmart Corporation ("Kmart"), pursuant to a master lease. Kmart subleased the store to Farmers Hardware Company ("Farmers"). The Court approved Kmart's rejection of the master lease and sublease shortly after Kmart filed its bankruptcy case.

In its motion, 4th Leaf seeks the following relief: (i) the entry of an order declaring that the master and subleases are void as they were terminated by the rejection; (ii) the entry of a mandatory injunction requiring Farmers to vacate the subject property; and (iii) the award of a money judgment in favor of 4th Leaf and against Farmers in an undetermined amount for unpaid rent.

Farmers requests that this Court dismiss the motion for lack of subject matter jurisdiction. Farmers argues that this Court does not have "related to" jurisdiction over this dispute between two nondebtor third party entities because the resolution of their dispute has no impact upon the bankruptcy estate of Kmart. Kmart agrees with this contention.

Farmers alternatively argues that even if the Court did have "related to" jurisdiction, that the Rooker-Feldman doctrine bars the Court from deciding whether the master and subleases are void as that issue has already been decided by a Kentucky court in litigation between Farmers and 4th Leaf.

Finally, Farmers argues that if the Court has "related to" jurisdiction and Rooker-Feldman doctrine is not a bar, that the Court should abstain from hearing this matter pursuant to section 1334(c) of title 28 of the United States Code.

No one raised the issue of whether 4th Leaf's request for declaratory and injunctive relief requires the filing of an adversary complaint. See Fed. R. Bankr.P. 7001(7) & (9). However, the failure to bring an adversary complaint is not a jurisdictional defect, and the parties can waive the requirement. In re Pence, 905 F.2d 1107, 1109 (7th Cir.1990). Waiver may occur when a party fails to object, no prejudice results from the failure to bring an adversary proceeding, and the parties are cognizant of and have the opportunity to address the issues decided by the court. See In re Zolner, 249 B.R. 287, 292 (N.D.Ill.2000); In re Enfolinc, Inc., 233 B.R. 351, 354 (Bankr.E.D.Va.1999). These conditions have been met in this instance, and the Court will proceed to decide the matter.¹

I. BACKGROUND

A. The Master Lease and Sublease.

Kmart and 37 of its affiliates filed these chapter 11 bankruptcy cases on January 22, 2002 (the "Petition Date"). Prior to the Petition Date, 4th Leaf's predecessor in interest, as lessor, and Kmart, as lessee, entered into a written lease for a certain parcel of real property located in Grayson, Kentucky, for a term of 25 years commencing on October 3, 1980 (the "Master Lease"). The property was improved with a retail store (the "Store"). Kmart, as sublessor, and Farmers, as sublessee, entered into a sublease of the Store dated July 3, 1992, with a scheduled termination date of May 31, 2006 (the "Sublease"). Farmers operates a retail hardware business in the Store.

On January 25, 2002, this Court entered an order approving Kmart's rejection of the Master Lease and Sublease under section 365(a) of the Code, effective as of January 22, 2002, and February 28, 2002, respectively. Kmart surrendered possession of the Store for purposes of Section 365(d)(4) of the Code by sending 4th Leaf a written notice that Kmart had vacated and was tendering possession of the Store to 4th Leaf.

Prior to the rejection of the Sublease, Farmers notified 4th Leaf that it intended to comply with all obligations under both the Master Lease and Sublease. On March 1, 2002, Farmers paid 4th Leaf the monthly rental amount due under the Sublease. 4th Leaf sent Farmers a notice of termination of the Master Lease and Sublease on March 11, 2002 and in the notice indicated that it would take action to evict Farmers from the Store. Farmers refused and continues to refuse to vacate the Store.

B. The Kentucky Court Litigation Between 4th Leaf and Farmers.

Sometime prior to August 2000, 4th Leaf desired to construct three bridges connecting the property upon which the Store is situated with an adjacent commercial development also owned by 4th Leaf. Farmers objected to this plan and on August 16, 2000, Farmers filed a complaint in the Commonwealth of Kentucky, Carter Circuit Court (the "Kentucky Court") against 4th Leaf, seeking inter alia to block the construction of the bridges (the "Kentucky Lawsuit"). Farmers argued that certain provisions of the Master Lease and Sublease prevented 4th Leaf from constructing the bridges. Kmart was initially named as a defendant, but on January 30, 2002, the Kentucky Court issued an agreed order dismissing Kmart as a party defendant.

On March 7, 2002, a date after Kmart rejected the Master Lease and Sublease, Farmers filed a motion for summary judgment with the Kentucky Court. On March 21, 2002, 4th Leaf filed a cross-motion for partial summary judgment. In its cross-motion, 4th Leaf argued that Farmers could not rely on the terms of the Master Lease and Sublease to block the construction of the bridges, because the leases were terminated by virtue of Kmart's rejection of them in the bankruptcy case.

On March 27, 2002, the Kentucky Court entered an order (the "Kentucky Court Order") awarding partial summary judgment to Farmers and directing the sheriff to close access to the bridges and stating, "All remaining issues regarding monetary damages shall be determined by a jury at a later time."² 4th Leaf subsequently filed a "Motion to Alter or Amend" the Kentucky Court Order with the Kentucky Court, which as of this date, has not been ruled on.

On May 8, 2002, 4th Leaf filed this motion, seeking, among other relief, an order declaring that the Master Lease and Sublease were terminated and compelling Farmers to vacate the Store. Farmers and Kmart filed responses, 4th Leaf filed a reply, Farmers filed a sur-reply, and the matter was taken under advisement.

II. DISCUSSION

A. Dismissal for Lack of Subject Matter Jurisdiction

Farmers' first argument against 4th Leaf's motion is that this Court lacks subject matter jurisdiction over the dispute between 4th Leaf and Farmers.

"When a court dismisses an action for lack of subject matter jurisdiction, that court must accept as true all well-pleaded factual allegations and must draw all reasonable inferences in favor of the plaintiff." Remer v. Burlington Area School Dist., 205 F.3d 990, 996 (7th Cir.2000). In addition to the allegations of the complaint, it may consider pertinent evidence the parties have provided outside the pleadings. See id. Harris v. New York State Dept. of Health, 202 F.Supp.2d 143, 147 (S.D.N.Y.2002). Farmers argues that this Court does not have "related to" jurisdiction over its disputes with 4th Leaf, and even if the Court did, the Rooker-Feldman doctrine bars the Court from deciding the dispute.

(i) Does the Court Have "Related to" Jurisdiction Over this Dispute?

The parties devote a lot of attention to the issue of whether their dispute is core or non-core under 28 U.S.C. § 157(b). The Court, however, must take one step back to determine whether subject matter jurisdiction exists before getting to the core/non-core issue. As noted by the court in In re Foundation For New Era Philanthropy,

Usually, for purposes of determining subject matter jurisdiction, the classification issue of core versus non-core is immaterial. So long as the proceeding is "related" to the bankruptcy case, the categorization of core or non-core only affects a bankruptcy court's power to enter a final judgment without the consent of the parties. It does not affect the bankruptcy court's power to hear the dispute.

201 B.R. 382, 387 (Bankr.E.D.Pa.1996) citations omitted.

Accordingly, for the Court to consider the merits of this dispute between 4th Leaf and Farmers, it must first determine whether this is a proceeding that is at least "related to a case under title 11." 28 U.S.C. §§ 1334(b) & 157(a), (c). "A case is `related to' a bankruptcy when the dispute `affects the amount of property for distribution [i.e., the debtor's estate] or the allocation of property among creditors.'" In re Memorial Estates, Inc., 950 F.2d 1364, 1368 (7th Cir.1991), cert. denied, 504 U.S. 986, 112 S.Ct. 2969, 119 L.Ed.2d 589 (1992); see In re Edwards, 962 F.2d 641, 643 (7th Cir.1992); In re Heath, 198 B.R. 298, 302 (S.D.Ind.1996), aff'd 115 F.3d 521 (7th Cir.1997). Even proceedings that allegedly fall within the Court's core jurisdiction must meet this most basic test. See Found. for New Era Philanthropy, 201 B.R. at 388-90; Howell Hydrocarbons, Inc. v. Adams, 897 F.2d 183, 190 (5th Cir.1990). To be "related to" a bankruptcy case, litigation between non-debtor third parties need not concern rights to property belonging to the debtor or the bankruptcy estate. See Edwards, 514 U.S. at 308-10 & notes 5 & 6, 115 S.Ct. 1185; Fisher v. Apostolou, 155 F.3d 876, 882 (7th Cir.1998). Particularly in chapter 11 bankruptcies, courts have recognized the expansive reach of a...