In re Main, Inc.
| Decision Date | 23 April 1997 |
| Docket Number | Bankruptcy No. 96-19098DAS,96-31813DAS. |
| Citation | 207 BR 832 |
| Parties | In re MAIN, INC., Debtor. In re Eric J. BLATSTEIN, Debtor. |
| Court | U.S. Bankruptcy Court — Eastern District of Pennsylvania |
Steven M. Coren, Philadelphia, PA, for 718 Arch St. Associates.
Mary F. Walrath, Philadelphia, PA, for Corporate Defendants in Adversary Proceedings.
W.J. Winterstein, Jr., Philadelphia, PA, for Morris Lift.
Kevin J. Carey, Mesirov, Gelman, Jaffe Cramer & Jamieson, Philadelphia, PA, for Lori Blatstein.
Frederic Baker, Philadelphia, PA, Ass't. U.S. Trustee.
The instant Objections to claims of over $3 million filed by 718 Arch Street Associates, Ltd. ("Arch"), in its capacity as landlord, require us to interpret 11 U.S.C. § 502(b)(6), which provides a mathematical means of computing a cap on damages resulting from termination of a debtor-tenant's lease of real property. Both parties ask us to adjust the cap to their advantage, Arch by integrating certain aspects of state court decisions on its claim, and the Debtor by requesting deductions for numerous factors, including unrefunded security deposits, rent received from a replacement tenant, a post-judgment garnishment, and compensation for allegedly unreturned personal property.
These arguments drive us to carefully examine the language of § 502(b)(6). Therein, we find that the cap, as opposed to the landlord's total damage claim which it limits, is to be computed solely on the basis of rent, with no adjustments. Accepting the objectors' calculations of the rent payable under the cap without adjustments, we conclude that the cap is $269,159.00. We will therefore sustain the objections in part and fix the landlord's claim at this figure as to both Debtors, one of which (the corporate Debtor) is liable only in the capacity as garnishee of the individual Debtor as putative tenant.
We also note that Arch consequently has standing to maintain adversary proceedings challenging fraudulent conveyances by both Debtors, the discharge of the individual Debtor, and the dischargeability of his debt to Arch. The trustee in the individual Debtor's case could, in any event, pursue the 11 U.S.C. § 727 aspect of that proceeding against the individual Debtor.
MAIN, INC. ("Main") filed a voluntary Chapter 11 bankruptcy case on September 20, 1996. On November 7, 1996, Arch first made its presence known in these cases by filing a motion to dismiss that case. Prior to a hearing on Arch's motion, on December 6, 1996, Main filed a praecipe to voluntarily convert its case to a Chapter 7 case, and Arch withdrew the motion to dismiss. Mitchell W. Miller, Esquire, was appointed as Main's interim trustee.
ERIC L. BLATSTEIN ("Blatstein," with Main, "the Debtors"), who, with his nondebtor wife Lori ("Lori"), owns Main, filed a voluntary individual Chapter 7 bankruptcy case, initially pro se, on December 19, 1996. Michael H. Kaliner, Esquire, was appointed as interim trustee in Blatstein's case.
On January 3, 1997, Arch filed identical adversary proceedings ("the Proceedings") in both the Main and Blatstein cases. Named as defendants in the Proceedings were not only the Debtors, but also Lori; Morris Lift, the accountant for the Debtors who is the President of Main; and a number of other corporations owned by Blatstein and Lori which apparently own and operate clubs and restaurants on the Delaware River waterfront and at other locations in Philadelphia ("the Corporations"). The claims stated in the Proceedings are alleged fraudulent conveyances and a conspiracy to transfer the assets of the Debtors to the Corporations and possibly other entities to impede Arch's collection of its judgments, which have swelled to over $3 million against both Debtors; an objection to Blatstein's discharge pursuant to 11 U.S.C. §§ 727(a)(2), (a)(7); and a challenge of the dischargeability of Blatstein's debt to it under 11 U.S.C. § 523(a)(6).
On February 11, 1997, the original date for same, the trial of the Proceedings was continued until May 1, 1997, although this relisting was on a must-be-heard basis in light of the opposition of several of the defendants to any continuances. Thereafter, we were presented with several discovery disputes as the trial date neared, but these were dealt with by us as soon as possible after they arose, and it appears that the trial will be conducted as scheduled.
The Main case featured a contested trustee election in which Arch championed Kaliner in light of Kaliner's willingness to appoint Arch's counsel as his own special counsel to prosecute the Proceedings as a co-plaintiff. This dispute was resolved when Miller also agreed to appoint Arch's counsel as his special counsel, at which point Arch withdrew its attempt to elect Kaliner in that case. On April 17, 1997, Arch moved to add Miller and Kaliner as parties plaintiff to the Proceedings, and the motions are scheduled to be heard on an expedited basis and likely to be granted on April 24, 1997.
On January 7, 1997, Arch filed several proofs of claim in the cases of Main and Blatstein, in the respective amounts of $3,190,298.10 and $3,398,408.30. The claim against Blatstein was based on a state court confessed judgment entered against him on November 13, 1992, in the amount of $2,774,803.09 for breach of a lease of Arch's property for the operation of a large nightclub, known as the Phoenix. A judgment was entered against Main by default on November 19, 1993, in garnishment proceedings to collect on the claim against Blatstein.
In February 1997 the Debtors each filed objections to Arch's respective claims against them, averring principally that the claims should be reduced in light of the § 502(b)(6) cap. After one continuance, the matters were heard on April 15, 1997. In light of the Debtors' contention that the result could eliminate Arch's claim entirely and destroy its standing to prosecute the Proceedings, we insisted that any briefs to supplement pretrial memoranda presented by the interested parties be submitted by April 22, 1997. We note that the joinder of Kaliner as a party plaintiff to the Proceeding stating, inter alia, § 727 claims against Blatstein renders at least that Proceeding viable irrespective of the outcome of the instant dispute. Our decision that Arch has a valid claim of $269,159 infra renders any further consideration of the standing issue unnecessary.
Blatstein and Gie Liem, the sole shareholder of Growth Properties, Inc. which, through several intermediate entities, owns Arch, were the only witnesses at the hearing. The following facts emerged at the hearing.
The lease by which the Phoenix nightclub was operated had originally been executed in July 1987 and was between Arch and (apparently) Archco Enterprises, Inc. ("Archco"), a corporation owned by Blatstein, although the name of the "tenant" on the lease was blank and the lease was signed by Blatstein without any corporate designation. A security deposit of $6,416 was given to Arch by Archco at that time.
In March 1988, at the request of Arch, a new lease ("the Lease") was executed to permit Arch to increase the square footage of the leased property, without an increase in the rent, to assist it with its bank financing. The cover page, lack of identity of the tenant, and Blatstein's undesignated signature were the same as in the case of the prior lease. A security deposit of an additional $10,000 was paid in connection with the Lease.
In 1989 Archco filed a voluntary Chapter 11 voluntary bankruptcy case, which was assigned to the Honorable Bruce Fox. During that proceeding, Archco filed a motion to assume the Lease. Arch filed an answer which, without disputing Archco's status as the tenant, demanded that the arrearages be cured. An Order was entered by Judge Fox on March 8, 1989, authorizing Archco to assume the Lease.
Archco subsequently defaulted on the Lease and entered into an agreement to pay $5,000 weekly towards back rent in January 1992. Neither Blatstein nor Liem could recall whether any amount in addition to one $5,000 installment was delinquent as of the date that Blatstein and Archco attempted to surreptitiously remove their property from the premises on the night of April 6, 1992. Arch called the police and prevented Blatstein and/or Archco from removing the personal property owned by them from the premises. Blatstein testified that the value of the personal property, which, though, requested in a letter from his counsel, was never returned, had a fair market value of approximately $180,000.
In November 1992 Arch confessed judgment against Blatstein for all of the rent which could have been due under the Lease, which ran through the year 2003. It calculated the rent to be $2,774,803, including attorneys' fees and audit fees. Blatstein unsuccessfully petitioned to open the judgment and this decision was affirmed by the Pennsylvania Superior Court on August 31, 1993, and not appealed further. The Superior Court's Memorandum accompanying an Order reported at 433 Pa.Super. 624, 636 A.2d 1223, rejects Blatstein's argument that the eviction was improper on the ground that Blatstein abandoned the premises when he attempted to remove his personal property therefrom.
The Landlord subsequently re-leased part of the premises to Illusions, Inc. ("Illusions") in July 1993. A security deposit of $11,000 and monthly rent of $5,500 commencing October 1993 was paid by Illusions. Illusions continued to pay rent to Arch until the premises were foreclosed upon by a mortgagee of Arch in October 1994. No adjustment to the judgment was effected on account of the personalty left on the premises, the security deposits, Illusions' rentals, nor Arch's loss of the property in foreclosure.
Arch also served garnishments on other corporations owned by Blatstein and Lori including Main. When Main failed to answer Interrogatories in Garnishment, Arch obtained a...
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