In re Lasercad Reprographics, Ltd.
| Decision Date | 31 October 1989 |
| Docket Number | Adv. No. 87-6137A.,Bankruptcy No. 86 B 11102 (BRL) |
| Citation | 106 BR 793 |
| Parties | In re LASERCAD REPROGRAPHICS, LTD., Debtor. Harold YOUNG, as Interim Trustee in Bankruptcy for Lasercad Reprographics, Ltd., Plaintiff, v. FARMINGDALE FOOD MARKET, INC., Defendant. FARMINGDALE FOOD MARKET, INC., Defendant/Third Party Plaintiff, v. STATE BANK OF LONG ISLAND, Third Party Defendant. |
| Court | U.S. Bankruptcy Court — Southern District of New York |
Whitman & Ransom by Norman N. Kinel, New York City, for trustee.
Meltzer, Lippe, Goldstein & Wolf, P.C. by John E. Westerman, Ronald M. Terenzi, Mineola, N.Y., for Farmingdale Food Market, Inc., defendant/third party plaintiff.
Rivkin, Radler, Dunne & Bayh by Martin F. Brecker, New York City, for State Bank of Long Island, third party defendant.
DECISION ON MOTION AND CROSSMOTION FOR SUMMARY JUDGMENT
I. BACKGROUND
The instant motions for summary judgment arise in the context of an adversary proceeding brought by Harold Young, the Chapter 7 Trustee (the "Trustee") to determine the extent, validity and priority, if any, of an alleged security interest or lien of Farmingdale Food Market, Inc. ("Farmingdale") in the property of the debtor, Lasercad Reprographics Ltd. ("Lasercad/Debtor"). To make this determination requires an exploration into an intricate web of transactions and relationships including the purchase by the real property owner of a leasehold interest in his own real property.
The undisputed facts relevant to this controversy as described in the various Statements pursuant to Rule 13(h) of the Local Bankruptcy Rules (the "13(h) Statements")1 are as follows:
On or about August 19, 1977, H.C. Bohack Co., Inc. assigned its interest as tenant (the "Lease") to Farmingdale pursuant to an assignment and bill of sale, with respect to commercial property located at 335 Main Street, Farmingdale, New York (the "Leasehold Property") owned by Staller Properties, Inc. ("Staller"). By letter dated January 10, 1979 from Farmingdale to Staller, Farmingdale Food exercised its right to extend the Lease for the period beginning January 15, 1980 and ending January 14, 1990.
Thereafter, Farmingdale's interest in the Lease was transferred to Lasercad via an Assignment of Lease and Assumption Agreement dated July 31, 1984 (the "Assignment Agreement"). The Assignment Agreement is the central focus of this controversy.
On or about January 21, 1986, State Bank of Long Island ("State Bank") loaned $300,000 to Lasercad (the "Loan"). As collateral security for the loan, Lasercad granted State Bank a leasehold mortgage in the premises (the "Leasehold Mortgage"). State Bank recorded the Leasehold Mortgage at the office of the County Clerk, Nassau County, New York, on January 23, 1986. Prior to the recordation of the Leasehold Mortgage, no mortgage on the Lease was recorded in the real property records of Nassau County. As discussed more fully herein, New York has adopted a race notice statute which provides that an unrecorded conveyance is invalid as against a subsequent purchaser for value who records without knowledge of the prior unrecorded instrument2.
On June 20, 1986, Lasercad filed a voluntary petition for relief pursuant to Chapter 11 of the Bankruptcy Code (the "Code") and on September 10, 1986, the case was converted to one under Chapter 7 of the Code.
Subsequently, Farmingdale filed a notice of motion and application dated August 14, 1986 seeking relief from the automatic stay to allow it to execute upon its alleged possessory rights as provided in the Assignment Agreement. That motion was later incorporated into this adversary proceeding.
On November 5, 1987, upon application of the Trustee, this Court issued an Order directing certain parties in interest in Debtor's case to show cause why an omnibus order should not be entered, inter alia, approving the Trustee's proposed assumption of the Lease and sale of Trustee's right, title and interest in the Lease to Staller, the fee owner. Simultaneously, the Trustee instituted this adversary proceeding pursuant to a complaint (the "Complaint") seeking judgment against Farmingdale (a) declaring that Farmingdale has no lien or other interest in the Lease or other property of Debtor, (b) determining Farmingdale's claim to be a pre-petition unsecured obligation of Debtor for an amount to be determined and fixed by the Court and to be treated in accordance with that level of priority, and (c) determining that Farmingdale may not object to the Trustee's proposed assumption of the Lease and sale of all his right, title and interest in and to Staller.
Farmingdale then joined State Bank as a third-party defendant praying the Court declare Farmingdale's interest to be superior to the prior recorded interest of State Bank.
On November 9, 1987, this Court approved the sale of the Leasehold Property to Staller, free and clear of liens for the amount of $450,000 with liens of Farmingdale and State Bank, if any, to attach to the proceeds of sale. The net proceeds of the sale amounted to approximately $427,362.55.
On April 11, 1988, the Trustee moved for entry of an order authorizing him to deposit the net proceeds with State Bank pending the resolution of the instant adversary proceeding. In conjunction with the Trustee's application, State Bank agreed to waive its right to continue to accrue interest on the loan after April 20, 1988 if the amount of money owed to it inclusive of interest and exclusive of legal fees accruing after November 17, 1987, was deposited in an account with State Bank pending the resolution of the instant adversary proceeding. On April 20, 1988, this Court entered an Order granting the Trustee's motion.
By notice of motion, State Bank brought the instant motion for summary judgment (the "Motion") pursuant to Federal Rules of Civil Procedure ("Federal Rules"), Federal Rule 56 made applicable herein pursuant to Bankruptcy Rule 7056 for an order adjudging (i) that State Bank holds a perfected first priority security interest and mortgage upon the leasehold interest of Lasercad in certain real property described above which attaches to the proceeds of said leasehold interest pursuant to this Court's Order dated April 20, 1988; (ii) fixing State Bank's claim in the amount of $380,348.12 in addition to legal fees to be fixed by this Court; and (iii) directing that State Bank be paid $410,997.34 from the segregated account of the Trustee, maintained at State Bank.
Subsequently, Farmingdale cross-moved for summary judgment (the "Cross-Motion") for a judgment: (1) finding that Farmingdale held a first priority security interest in a lease of the property in question herein; (2) determining that Farmingdale's lien attached to the proceeds of the sale of such lease; and (3) fixing Farmingdale's claim in the amount of $364,848.67, in addition to legal fees to be fixed by the Court.
As previously set forth, it is undisputed that State Bank holds a recorded mortgage in the Leasehold Property. Nevertheless, Farmingdale maintains that it holds a prior unrecorded security interest entitling it to priority over the interest of State Bank. Farmingdale bases its assertion on the language of ¶ 8 of the Assignment Agreement which provides:
The Assignee shall assign this Assignment of Lease and Assumption Agreement to the attorney for the Assignor who shall hold the same in escrow. If in the event that Assignor (sic) does not pay his rent in accordance with the terms of this agreement, and the Assignee is so notified by the attorney for the Assignor by registered mail, return receipt requested and by ordinary mail, with a right to pay said rent within 72 hours, then Assignor shall be entitled to enforce its rights hereunder in a summary proceeding.
Consequently, Farmingdale maintains that the language of ¶ 8 quoted above created a reassignment by Lasercad in its favor as collateral security. Furthermore, Farmingdale relies upon State Bank's alleged knowledge of this "reassignment" to support its claim of prior right to that of State Bank.
In contrast, State Bank argues, inter alia, that the Assignment Agreement was merely an escrow arrangement and that the conditions of the escrow were never fulfilled nor was the allegedly escrowed document ever delivered out of escrow to Farmingdale. Furthermore, State Bank maintains that sometime in January, 1986, the escrow agent turned over a fully executed original Assignment Agreement to Lasercad; thus if an escrow had been created by the language of ¶ 8, then the escrow had been released as of January 1986.
It should be noted at this juncture, that whether or not the document which was turned over to State Bank was a fully executed original or merely a copy, is the one factual hurdle this Court had to overcome in order to be able to resolve this controversy in a summary fashion. It is undisputed, however, that a document was turned over by the escrow agent to State Bank. (Transcript at 42.) Consequently, a rather lengthy examination and comparison of State Bank's fully executed "original" and two other such documents was conducted at the hearing on this matter. It seems, although no one is positive on this issue, that there exists three executed "originals" or documents that appear to resemble "originals".3 No claim has been made that any of the documents are forgeries.
In contrast, Farmingdale alleges that there exists only one "original" and that the other documents, including the document turned over to State Bank, are clearly "copies." In this regard, Farmingdale states that "it is undisputed that Farmingdale's President, Sam Zeibaq delivered the only executed original ribbon copy of the Assignment Agreement to the offices of Farmingdale's attorney, Jack Easa, and that the executed original ribbon copy of the Assignment Agreement was never released by him." (Affidavit of John E. Westerman at ¶ 6; see also, Farmingdale's 13(h) Statement at ¶ 16.)
Upon...
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