IN RE MAISON GRANDE CONDOMINIUM ASS'N, INC.
Decision Date | 13 January 2010 |
Docket Number | No. 09-21589-LMI.,09-21589-LMI. |
Citation | 425 B.R. 684 |
Parties | In re MAISON GRANDE CONDOMINIUM ASSOCIATION, INC., a Florida not-for-profit corporation, Debtor. |
Court | U.S. Bankruptcy Court — Southern District of Florida |
COPYRIGHT MATERIAL OMITTED
David N. Stern, Michael S. Hoffman, Scott A. Underwood, Esq., Thomas M. Messana, Esq., Fort Lauderdale, FL, for Debtor.
ORDER GRANTING DEBTOR'S MOTION TO REJECT UNEXPIRED LEASE
This cause came before me at an evidentiary hearing conducted on September 9, September 16, and October 2, 2009, regarding the relief sought by the Debtor, Maison Grande Condominium Association, Inc. in the Debtor's Emergency Motion to Reject Unexpired Lease (D.E. #8) (the "Rejection Motion"). I have considered the Rejection Motion, the Response (D.E. #84) and Supplement to Response (D.E. #118) to the Rejection Motion filed by Dorten, Inc. and Robert L. Siegel, the Debtor's Reply Briefs (D.E. #120 and #121), the testimony of the witnesses, the admitted evidence, and the argument of counsel. Based on all of the foregoing, and for the reasons set forth below, I grant the Rejection Motion.1
The Debtor, Maison Grande Condominium Association, Inc. (the "Debtor" or the "Association"), was formed by the filing of Articles of Incorporation (the "Articles") with the Florida Secretary of State on March 23, 1971. Exhibit "F" to Lessor's Trial Exhibit #1. Maison Grande, Inc. (the "Developer") formed the Association to serve as the condominium association for the Maison Grande Condominium (the "Maison Grande" or "Condominium").
The Maison Grande Condominium was created by the filing of the November 24, 1971, Declaration of Condominium ("Declaration") of Maison Grande Condominium by the Developer in Official Records Book 7485, at Pages 835-912, of the Public Records of Miami-Dade County, Florida. Lessor's Ex. 1.
The Maison Grande Condominium is a residential condominium2 located at 6039 Collins Avenue in Miami Beach, Florida. The Maison Grande is situated on oceanfront property. T. 341, In. 8-9.3 It is comprised of 502 privately owned units and common areas. The Maison Grande is managed by the Association, a Florida not-for-profit corporation. The unit owners fund the Association primarily through maintenance assessments, which accrue monthly. Additionally, from time to time, the Association raises money by making special assessments. (D.E. #8, ¶ 6).4
While the Developer was in control of the Association, it caused the Association to execute a document entitled "Ninety-Nine Year Lease" (the "Lease"). The other parties to the Lease were the Siegel Family Trust (the "Trust") and Dorten, Inc. ("Dorten"). The Trust and Dorten (collectively referred to as the "Lessor") were affiliates of the Developer when the Lease was executed. One individual, Robert L. Turchin, signed the Lease for both sides of the transaction, as president of both Dorten and the Association. Pursuant to the Lease, the Lessor leased to the Association a sliver of real property, approximately 10,000 square feet, on which is located a swimming pool, a small portion of the pool deck, and certain parking garage spaces located underneath the pool.
The Lease is for a term of 99 years commencing on November 24, 1971. The Lease is currently in year 38 of its 99-year term. The amount of rent due under the Lease in 1971 was $20,160 per month, or $241,920 a year. Lessor's Ex. 2, p. 3. However, the Lease provides that the rental payment due shall increase each year by a formula tied to the "Consumer's Price Index, United States Average—All Items of Food." Id. at pp. 3-4.5 Currently, the rent due under the Lease is $112,241.95 per month, or $1,346,903.40 a year. (D.E. #8, ¶ 14). The Lease also provides that the Association and the unit owners are responsible for payment of taxes, insurance, upkeep and maintenance of the leased premises. Lessor's Ex. 2, pp. 5, 7, 8.
Starting in 2008, a significant number of unit owners became delinquent on their assessment obligations to the Association. As a result, the Association lacked the resources to pay all of its expenses. The Association's financial difficulties continued into 2009. By early 2009, approximately twenty-five percent (25%) of unit owners were delinquent on the payment of their assessment obligations including obligations to pay a special assessment that had been levied the prior year. Many of those units lacked equity and were the subject of mortgage foreclosure proceedings.
The board of directors of the Association (the "Board") responded to the adverse financial impact of the delinquencies by closely scrutinizing expenses, taking various steps to reduce those expenses, and working with legal counsel to seek to collect assessments from delinquent unit owners. Notwithstanding such steps, the Association's expenses continued to exceed its revenue. T. 71-73.
The Board considered whether it could cover the shortfall by imposing another special assessment against unit owners. In so doing, the Board solicited the input of unit owners. Some owners advised members of the Board that they lacked the financial resources to pay additional assessments. Others advised the Board that they would refuse to pay additional assessments that were only necessitated by other owners not paying their fair share. T. 80, In. 1-25.
The Board also took into consideration the demographics of the unit owners, including the fact that many are elderly and on fixed incomes. Based on such information, the Board determined that it could not remedy the Association's financial difficulties through increased assessments, because that would only result in increased delinquencies.
The Board examined its budget to see if any further expenses could be reduced or eliminated. However, by this point the only expenses being paid were electric, water, cleaning service, the car valet (there is no parking for guests) and the pool.6 The Board then considered whether it could eliminate the shortfall by eliminating or reducing its single largest expense— rent payments under the Lease. The Board formed a special committee comprised of Board members and other unit owners to study the situation. Although the Board explained its financial difficulties to the Lessor and attempted to negotiate a purchase of the leased premises, the Lessor ultimately refused to consider a sale. T. 61-62, In. 25-3; T. 88, In. 9-11.
In or about January 2009, the Association ceased paying the monthly rent due under the Lease. On or about April 23, 2009, the Lessor filed an action in the Circuit Court of Miami-Dade County, Florida, and thereafter sought the appointment of a receiver to take control of the Association. (D.E. #84-5). On June 10, 2009, the Association commenced this bankruptcy case by filing a voluntary petition for relief under Chapter 11 of Title 11 of the United States Code (the "Bankruptcy Code"). At the time the Association filed its petition, a hearing on Lessor's Urgent Motion to Appoint Receiver in the state court action had been scheduled for June 22, 2009. (D.E. #84-5).
On June 12, 2009, the Association filed the Rejection Motion. The Debtor submits it did so in an attempt to relieve the Association of its sizeable and growing payment obligation for benefits that were not critical to the operation of the Condominium or the health and safety of unit owners. The Lessor claims the Association filed bankruptcy solely for the purpose of rejecting the Lease.
The Rejection Motion was filed as an emergency and originally scheduled for hearing on June 18, 2009. The Lessor filed a Motion to Continue, citing unavailability, and the Lessor and the Association filed an Agreed Order continuing the hearing until June 23, 2009. (D.E. #24). This date apparently created a conflict for the Debtor and so a second Agreed Order was submitted and signed, continuing the hearing to July 15, 2009. (D.E. #27). The Lessor and the Association agreed to a further continuance based on the parties' decision to mediate. A final Agreed Order was submitted and signed continuing the hearing on the Rejection Motion to September 9, 2009. (D.E. #48). The mediation was unsuccessful and so the evidentiary hearing went forward on September 9, continued on September 16 and concluded on October 2, 2009.7
In the Rejection Motion the Debtor argues that rejection of the Lease is appropriate because the monthly rent due under the Lease is oppressive, unrelated to the Lessor's actual cost, and a strain on the Debtor's resources. The Debtor seeks rejection of the Lease in order "to pay all allowed claims in full over a reasonable plan term and continue healthy operations thereafter."
On August 17, 2009, the Lessor filed its response to the Rejection Motion. The Lessor's primary argument is that the Association cannot reject the Lease because the Association has failed to exercise its business judgment appropriately—"without trying to be overly dramatic or trite, it is almost unimaginable how one could think of a more egregious example of a complete lack of judgment of any kind." (D.E. #84, p. 2).
The Lessor argues that rejection of the Lease will cause the Condominium to lose its Certificate of Occupancy, that rejection will subject each of the individual unit owners to direct payment of all Lease obligations,8 and to possible foreclosure of alleged liens on their units, and that rejection will give the Lessor the right to foreclose its alleged security interest on all property of the Condominium and the Association.
I. Legal Standard
Section 365 of the Bankruptcy Code affords the right to reject executory contracts and unexpired leases to a trustee in a bankruptcy case, subject only to court approval. 11 U.S.C. § 365. Because the Association operates as a debtor-in-possession in this Chapter 11 case, it possesses the rights afforded trustees by section 365. See 11 U.S.C. § 1107.
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