In re Leslie Fay Companies, Inc.

• Decision Date: 22 April 1994
• Docket Number: Bankruptcy No. 93-41724 (TLB). Adv. No. 93-9151A.
• Citation: 166 BR 802
• Parties: In re The LESLIE FAY COMPANIES, INC., Debtor. The LESLIE FAY COMPANIES, INC., Plaintiff, v. CORPORATE PROPERTY ASSOCIATES 3, Defendant.
• Court: U.S. Bankruptcy Court — Southern District of New York

166 B.R. 802 (1994)

In re The LESLIE FAY COMPANIES, INC., Debtor The LESLIE FAY COMPANIES, INC., Plaintiff, v. CORPORATE PROPERTY ASSOCIATES 3, Defendant.

Bankruptcy No. 93-41724 (TLB). Adv. No. 93-9151A.

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

April 21, 1994.

As Corrected April 22, 1994.

COPYRIGHT MATERIAL OMITTED

Weil, Gotshal & Manges by Corinne Ball, Erica Ryland and Josh Krevitt, Parker Chapin Flattau & Klimpl by Joel Lewittes and Barry Brett, Special Counsel, New York City, for debtor.

Willkie Farr & Gallagher by Alan Lipkin, New York City, Reed Smith Shaw & McClay by Robert Nicholas, Philadelphia, PA, for defendant.

Stroock Stroock & Lavan by Fred Hodara, New York City, for Official Committee of Unsecured Creditors.

OPINION ON MOTION TO DISMISS

TINA L. BROZMAN, Bankruptcy Judge.

At issue is whether the Bankruptcy Code's cap on the damages which a landlord may receive when its lease is terminated applies to limit the damages from the debtor's breach, not of the lease, but of an exercised purchase option contained in the lease. The Leslie Fay Companies, Inc. ("Leslie Fay"), a chapter 11 debtor in possession, sued Corporate Property Associates 3 ("CPA 3"), seeking, in the first claim for relief, the turnover of a prepetition payment made by Leslie Fay to CPA 3 pursuant to a state court order. CPA 3 asked me to dismiss the complaint pursuant to Fed.R.Civ.P. 12(b)(6), made applicable to the adversary proceeding by virtue of Fed.R.Bankr.P. 7012. At the conclusion of oral argument, I denied the motion insofar as it sought to dismiss the second claim for relief, but reserved decision with respect to the first, with which this decision deals.

I.

In April 1982, Leslie Fay's predecessor in interest and CPA 3 entered into a "sale-leaseback" agreement pursuant to which the predecessor in interest sold certain nonresidential property in Plains Township, Pennsylvania (the "Premises") to CPA 3 and then leased the property back under a 25 year lease. See Complaint ¶¶ 14 and 16. As part and parcel of the lease, CPA 3 also gave Leslie Fay's predecessor an option to purchase the Premises at the end of the tenth year of the lease for a price equal to the greater of $9.4 million or the fair market value of the Premises. See Compl. ¶ 19. On October 8, 1991, Leslie Fay exercised the option as of April 30, 1992.¹ See Compl. ¶ 25. Leslie Fay tendered to CPA 3 $9.4 million. See Compl. ¶¶ 22 and 23. CPA 3 rejected the tender on the theory that the fair market value of the Premises exceeded $9.4 million. See Compl. ¶¶ 23 and 24.

Its tender rejected, Leslie Fay sued CPA 3 in the Pennsylvania Court of Common Pleas seeking an interpretation of terms in the agreement which would ultimately determine the purchase price under the option. See Compl. ¶ 28. That suit was dismissed and the dismissal was affirmed on appeal. See Compl. ¶ 28. After the trial court's decision but before the appeal was decided, Leslie Fay commenced a second action in Pennsylvania seeking to compel CPA 3 to transfer legal title to the Premises. Compl. ¶ 29. On June 11, 1992 the Pennsylvania Court of Common Pleas entered an order pursuant to a stipulation of the parties (the "June 11 Order"). Although this Order effectively denied Leslie Fay's request for immediate specific performance, it provided interim relief until the purchase were completed. See Compl. ¶ 29. Recounting its version of the "relevant part" of the June 11 Order, Leslie Fay acknowledges in the complaint that Leslie Fay was directed to both pay CPA 3 $7.2 million as a deposit against the purchase price of the Premises and also post a $15 million surety bond to secure payment of the balance. See Compl. ¶ 29. However, the June 11 Order also provided that the lease would remain in force until the purchase price were determined and that all interim payments of rent would be credited against the purchase price. See Compl. ¶ 29. Additionally, interest at an annual rate of 12% was to accrue on the purchase price in excess of $7.2 million and on the monthly rental payments made by Leslie Fay to CPA 3. See Compl. ¶ 29.

On April 5, 1993, Leslie Fay filed a voluntary chapter 11 petition which stayed all ongoing proceedings in Pennsylvania. As of the date of the filing of the petition, pursuant to the stipulation embodied in the June 11 Order, the lease was in full force and effect and there were no defaults in rent. See Compl. ¶¶ 34 and 44. Right on the heels of the bankruptcy filing, CPA 3 moved to lift the automatic stay. It sought to commence an arbitration proceeding to determine the fair market value of the Premises so as to enable CPA 3 to recover the remaining balance of the purchase price from the surety bond. Compl. ¶ 31. I denied CPA 3's motion, directed Leslie Fay to commence an adversary proceeding to sort out the parties' respective rights and ordered Leslie Fay to continue to pay rent under the lease pending my further order. See Compl. ¶ 32.

Leslie Fay never moved to assume or reject the lease nor to extend its time to do so. Thus, it now argues that on June 4, 1993, sixty days after the petition was filed, the lease was deemed rejected by operation of law.² See Compl. ¶ 36. The record does not indicate when, if ever, Leslie Fay surrendered the Premises to CPA 3; nor does it specify what action, if any, CPA 3 has taken to mitigate any damages which it may claim to have suffered.

In June 1993, Leslie Fay commenced this adversary proceeding seeking to recover the bulk of the monies paid to CPA 3 pursuant to the June 11 Order. Leslie Fay filed an amended complaint on February 8, 1994; nevertheless, the parties have asked that I decide CPA 3's motion to dismiss without reference to the amended complaint. The first claim for relief (which is all that this decision addresses) pleads that any claim of CPA 3 is limited to $4.5 million pursuant to 11 U.S.C. § 502(b)(6). If the legal theory is correct, then Leslie Fay is said to be entitled to the immediate return of that portion of the cash deposit of $7.2 million, plus interest thereon, which exceeds the maximum $4.5 million allowable amount of CPA 3's claim. See Compl. ¶ 43. Accordingly, Leslie Fay seeks the turnover of the remaining $2.7 million plus interest thereon at a rate of 12%. See Compl. ¶¶ 45-46. As noted earlier, CPA 3 urges that this portion of the complaint fails to state a claim for which relief could be granted.

II.

The ultimate issue here is whether CPA 3 can be compelled on the facts stated in the complaint's first claim for relief to turn over some or all of the $7.2 million transferred to it prepetition. Subsumed in this question is whether the damages resulting from an alleged breach of the option is limited by section 502(b)(6)³ or any other provision of the Bankruptcy Code. Leslie Fay argues that because the option is "inextricably intertwined" with and not severable from the lease, any resulting damages from a breach effectively arise under the lease and are capped by section 502(b)(6). Leslie Fay also argues that even if the option is a severable agreement, section 502(b)(6) applies because the purchase price, and, ipso facto the measure of damages, is "almost entirely comprised of future rent payments." Thus, the argument follows, the option itself was nothing more than an alternative mechanism for the collection of future rent which renders the $7.2 million payment equal to a rental security deposit and subject to the limitation on damages payable to a landlord from the debtor's breach of the landlord's lease. As a final twist, Leslie Fay argues that, even if its theory is incorrect, I must deny the requested relief because I am bound, for purposes of this motion, to accept Leslie Fay's characterization of the purchase price, and, therefore, the $7.2 million installment payment thereon, as prepaid rent. If one accepts the proposition that the $7.2 million is prepaid rent, then even CPA 3 would admit that the complaint is facially sufficient. (CPA 3 quarrels, however, with the notion that I must accept as true Leslie Fay's interpretation of the nature of the purchase price.) Leslie Fay continues along this procedural path by objecting to my consideration of any of the supporting documents appended to CPA 3's motion.

CPA 3, on the other hand, contends that the option is an independent and severable agreement which was irrevocably exercised, pursuant to the October 8, 1991 letter, nearly 18 months prior to the filing of the petition. Thus, CPA 3 argues, any damages suffered arise as a result of a breach in the execution of the sale of the Premises and section 502(b)(6) does not apply. Further, CPA 3 disputes Leslie Fay's contention that the $7.2 million is tantamount to a security deposit for rent, pointing me instead to the June 11 Order which deemed this sum to be "partial payment on account of the purchase price." In light of this Order, CPA 3 asserts, there is no basis for Leslie Fay's bald conclusion that these monies constitute prepaid rent which is subject to the limitations of section 502(b)(6). CPA 3 also argues that turnover is not warranted since "under Pennsylvania law, which governs here, the partial payments are not Leslie Fay's property because a breaching buyer has no right to recover payments made in partial performance of a real property purchase agreement." See Repl.Br. at 27. As for the procedural challenges mounted by Leslie Fay, CPA 3 points me to authority in this Circuit which it believes allows a court to go beyond the four corners of the pleadings in ruling on a motion to dismiss.

III.

A. Fed.R.Civ.P. 12(b)(6)

In support of its motion, CPA 3 appends, among other things, the lease, the June 11 Order and the Option Exercise. See Hirsch Aff., Exs. C, E, and G. Leslie Fay objects to my considering these exhibits for any purpose other than to indicate their existence. The purpose of a motion to dismiss, Leslie Fay argues, is not to evaluate the merits of the cause of action...