In re Lee Road Partners, Ltd.

Citation155 BR 55
Decision Date09 June 1993
Docket NumberBankruptcy No. 192-19210-260.
PartiesIn re LEE ROAD PARTNERS, LTD., Debtor.
CourtUnited States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Eastern District of New York

Marks & Murase, New York City by Eric S. Brown, for debtor.

Cascone, Cole & Savage, New York City by Denise L. Savage, for F.W. Woolworth Co.

Carlton, Fields, Ward, Emmanuel, Smith & Cutler, P.A. West Palm Beach, FL, by Robert N. Gilbert, for Ross Stores.

Drinker, Biddle & Reath, Philadelphia, PA, by Andrew C. Kassner, for Penn Ins. and Annuity Co.

DECISION

CONRAD B. DUBERSTEIN, Chief Judge.

This matter is before the Court upon the motion of the Debtor, Lee Road Partners, Ltd. (the "Debtor"), which seeks an order pursuant to § 365(a) allowing it to reject a lease with F.W. Woolworth Co. ("Woolworth"), wherein the Debtor is the lessor and Woolworth the lessee.

FACTS

The Debtor is the owner and operator of the Lee Road Shopping Center located in Orlando, Florida. The Debtor acquired the subject property in the Fall of 1984.

On May 21, 1971, the Debtor's predecessor in interest, as lessor, leased 100,000 sq. ft. to Woolworth, as lessee (the "Overlease"). Thereafter, from 1971-1982, a Woolco store, operated by Woolworth, occupied the leased premises.

In 1983, the Woolco store was closed and the premises were subleased by Woolworth as follows:

a. On May 2, 1983, Woolworth, as sublessor, leased space to J. Byrons which subsequently assigned its interest in this sublease to Ross Stores, Inc. ("Ross"). This sublease is scheduled to expire on January 30, 1994; however, it provides for five successive options to extend the sublease for five years per option.
b. On August 9, 1983, Woolworth, as sublessor, leased space to J.J. Whispers ("Whispers"). This sublease is scheduled to expire on January 30, 1994; however, it provides for two successive options to extend the sublease for five years per option.
c. On August 12, 1983, Woolworth, as sublessor, leased space to First Thompson Joint Venture ("First Thompson"). The sublease is scheduled to expire on January 30, 1994; however, it provides for five successive options to extend the sublease for five years per option.

On November 30, 1984, subsequent to the Debtor becoming owner of the subject property, First Thompson assigned its interest in its sublease to the Debtor creating a unique situation in which the Debtor was (1) the owner/lessor of the entire premises with Woolworth as lessee and (2) the sublessee of the subleased area with Woolworth as sublessor (the "Underlease"). According to the Debtor, Woolworth is reaping a windfall inasmuch as it collects approximately $1.00 more per sq. ft. ($100,000 per annum) under its subleases than it pays to the Debtor under the Overlease.

On February 18, 1992, Penn Insurance and Annuity Company ("PIA") commenced foreclosure proceedings in the Circuit Court in Orange County, Florida, against the Debtor in accordance with a mortgage it holds affecting the subject property.1 The Court's attention has been called to the fact that the Overlease existed prior to PIA obtaining its mortgage on the premises. Woolworth's Supplemental App. at 8 n. 4. This action was pending as of the filing date.

On June 23, 1992, Woolworth, as sublessor, started an eviction action under the Underlease against the Debtor, as sublessee, in the Circuit Court of Orange County, Florida, because the Debtor was in substantial arrears.2 This action was also pending as of the filing date.

On October 30, 1992, the Debtor filed its petition for relief under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court for the Eastern District of New York.

On February 8, 1993, Woolworth filed a motion seeking to dismiss the Debtor's Chapter 11 case, or in the alternative, to transfer venue to the Middle District of Florida.3 Thereafter, on March 17, 1993, the Debtor made the within motion to reject the Overlease with Woolworth.4 Both Woolworth and Ross filed papers in opposition to this motion.5

A. Rejection of Overlease

The Debtor seeks to reject the Overlease pursuant to § 365(a)6 on the grounds that it is in the best interest of the estate. Following rejection of the Overlease, the Debtor plans to negotiate new leases with the existing tenants which would require them to bear their share of real property taxes, etc. By so doing, the Debtor would be able to capture for itself "Woolworth's windfall" and thereby increase its revenues by approximately $100,000 per annum.7

Central to the Debtor's argument is its contention that following rejection of the Overlease, Woolworth and its sublessees will no longer be entitled to possession of the premises. Although § 365(h) allows a lessee to remain in possession of the lease-hold following rejection of the lease,8 the Debtor argues that the term "remain in possession" is limited to tenants in physical possession of the property. Since Woolworth is functioning as a landlord and not physically possessing the property, the Debtor concludes that Woolworth is therefore ineligible for protection under § 365(h).9

The Debtor contends that its view is in accord with the legislative intent behind the enactment of the statute. In support of this position, the Debtor notes that In re Stable Mews Assocs., 35 B.R. 603 (Bankr. S.D.N.Y.1983) and In re Upland/Euclid, Ltd., 56 B.R. 250 (Bankr. 9th Cir.1985), which addressed the issue of altering or amending the terms of a lease following rejection by a debtor-lessor, concerned tenants who were in physical possession of the property. More importantly, the Debtor relies on In re Marina Enter., Inc., 14 B.R. 327 (Bankr.S.D.Fla.1981), for the proposition that physical possession is necessary for protection under § 365(h).

In opposition, Woolworth and Ross claim that terminating the Overlease would not be in the best interest of the estate and would actually hinder the Debtor's ability to effectuate a successful plan of reorganization. Additionally, they contend that both § 365(h) and Florida law prevent either Woolworth or the subtenants from being ousted from possession of the lease-hold in the event the Debtor is allowed to reject the Overlease.

DISCUSSION

From the outset, the Court notes that "problems concerning the rejection of unexpired leases of real property when the debtor is the lessor rather than the lessee are infrequently litigated. . . ." 2 Lawrence P. King et al., Collier on Bankruptcy, ¶ 365.09, at 365-57 (15th ed. 1992). See 1 D. Epstein, S. Nickles & J. White, Bankruptcy 452 (1992) (very few reported cases involving rejection of leases by lessors).

Under § 365(a), the trustee or debtor-in-possession may reject an unexpired lease subject to the court's approval. 11 U.S.C. § 365(a); In re Airport Executive Ctr., Ltd., 138 B.R. 628, 629 (Bankr. M.D.Fla.1992). Although the Bankruptcy Code contains no instructions or standards for properly reviewing such decisions, the business judgment test is considered the proper method to evaluate such actions. In re Minges, 602 F.2d 38 (2d Cir.1979); In re Child World, Inc., 142 B.R. 87 (Bankr. S.D.N.Y.1992); In re Hooker Invs., Inc., 131 B.R. 922 (Bankr.S.D.N.Y.1991); In re Leibinger-Roberts, Inc., 105 B.R. 208 (Bankr.E.D.N.Y.1989); In re Stable Mews Assocs., Inc., 41 B.R. 594 (Bankr.S.D.N.Y. 1984); In re Shangri-La Nursing Ctr., Inc., 31 B.R. 367 (Bankr.E.D.N.Y.1983). This test requires that the trustee or debtor-in-possession demonstrate that rejection of the executory contract will benefit the estate. Id.

The Debtor maintains that rejecting the lease will benefit the estate. However, the Debtor's analysis of the benefits is predicated upon its ability to oust Woolworth and negotiate new leases with the existing tenants. In order to determine whether the Debtor's assertions are correct, it is necessary to determine Woolworth's rights under § 365(h).

A. Statutory Construction

Section 365(h)(1) states in relevant part as follows:

If the trustee rejects an unexpired lease of real property of the debtor under which the debtor is the lessor, . . . the lessee . . . may remain in possession of the leasehold . . . under any lease . . . the term of which has commenced for the balance of such term and for any renewal or extension of such term that is enforceable by such lessee . . . under applicable nonbankruptcy law.

11 U.S.C. § 365(h)(1).

To properly interpret § 365(h), the Court's inquiry begins with the plain language of the statute. United States v. Ron Pair Enters., Inc., 489 U.S. 235, 241, 109 S.Ct. 1026, 1030, 103 L.Ed.2d 290 (1989). The Supreme Court, in discussing the Bankruptcy Code, has stated:

in such a substantial overhaul of the system, it is not appropriate or realistic to expect Congress to have explained with particularity each step it took. Rather, as long as the statutory scheme is coherent and consistent, there generally is no need for a court to inquire beyond the plain language of the statute.

Id. at 240-41, 109 S.Ct. at 1030. See also In re Chateaugay Corp., 920 F.2d 183, 184 (2d Cir.1990).

Since the word "possession" is not defined within the statute, it is to be interpreted according to its ordinary, contemporary, common meaning. In re Pioneer Inv. Servs., ___ U.S. ___, 113 S.Ct. 1489, 123 L.Ed.2d 74 (1993); Perrin v. United States, 444 U.S. 37, 42, 100 S.Ct. 311, 314, 62 L.Ed.2d 199 (1979). Webster's Seventh New Collegiate Dictionary (1965) defines "possession" as:

1a: the act of having or taking into control
b: control or occupancy of property without regard to ownership
c: ownership

According to Black's Law Dictionary, possession is "the detention and control . . . of anything which may be the subject of property, for one's use and enjoyment, either as owner or as the proprietor of a qualified right in it, and either held personally or by another who exercises it in one's place and name." Black's Law Dictionary 1047 (5th ed. 1979) (emphasis added).

Although the Debtor argues that the scope of § 365(h) is limited to those in physical...

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