In re Metroplex on the Atl., LLC

Decision Date24 February 2016
Docket NumberCase No. 15–42499–cec
Citation545 B.R. 786
Parties In re: Metroplex on the Atlantic, LLC, Debtor.
CourtU.S. Bankruptcy Court — Eastern District of New York

Bonnie Pollack, Esq., Alissa Piccione, Esq., Cullen & Dykman LLP, Garden City, N.Y., Counsel for the Debtor.

Lawrence P. Gottesman, Esq., Allegaert Berger & Vogel LLP, New York, New York, Counsel for Secured Creditor DOF IV Metroplex, LLC.

Philip Smaylovsky, Esq., Peter J. Amend, Esq., Orrick, Herrington & Sutcliffe LLP, New York, New York, Counsel for Richard George

William Curtin, Esq., Office of the United States Trustee, New York, New York, Counsel for the United States Trustee.

DECISION AFTER HEARING

Carla E. Craig

, United States Bankruptcy Judge

This matter comes before the Court on the joint motion (the "Motion") of Metroplex on the Atlantic, LLC (the "Debtor") and DOF IV Metroplex, LLC ("DOF" and, together with the Debtor, the "Movants") seeking an order in support of confirmation of their Amended Chapter 11 Plan determining that the Debtor's property located in Far Rockaway, Queens County, New York may be sold under the Plan pursuant to § 363(f)(4) and (5)1 free and clear of all claims and interests including an alleged easement running with the land. For the reasons stated below, the Motion is granted.

BACKGROUND

On May 28, 2015 (the "Filing Date"), the Debtor filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code. No trustee has been appointed in this case and the Debtor has continued to operate its business as a debtor in possession. The Debtor is the owner of certain real property located at 120 Beach 25th Street a/k/a 121 Beach 26th Street a/k/a Block 15817, Lot 1 in Far Rockaway, Queens County, New York (the "Property"). DOF currently holds a mortgage encumbering the Property. Pursuant to a stipulation between the Debtor and DOF, the amount of DOF's claim has been fixed at approximately $38 million. (Join Mot. to Approve Stip. Ex. A § 12(a), ECF Doc. No. 88.)2 The Property is also allegedly subject to a 24–foot wide easement (the "Easement") running through the middle of Block 15817 (the "Block"). (Obj. of Richard George ¶ 1, ECF Doc. No. 144 (hereinafter "George Obj.").)

A. The Property

The Block, where the Property is located, is bounded by Beach 25th and 26th Streets on the east and west, Seagirt Avenue on the north, and the Atlantic Ocean on the south. (George Obj. ¶ 1). The Property is located at the southern end of the Block. (Decl. of Peter J. Amend in Supp. of the Obj. of Richard George Ex. A, ECF Doc. No. 146 (hereinafter "George Decl.").) It stretches the width of the Block fronting on both Beach 25th and Beach 26th Streets and bordered on the south by a public beach belonging to the City of New York. (George Decl. Ex. A.) The Far Rockaway boardwalk (the "Boardwalk") is located directly south of the Property. (Joint Mot. for an Order in Aid of Confirmation ¶ 10, ECF Doc. No. 140 (hereinafter "Confirmation Mot.").) North of the Property are several bungalows. (Confirmation Mot. ¶ 10.) The bungalows lie on both sides of the Block, along Beach 25th and Beach 26th Streets, with some facing the streets (the outside bungalows) and some facing the middle of the block (the inside bungalows). (Tr. of July 15, 2015 Hr'g 27:17–20, ECF Doc. No. 33.)

In 2007, the Debtor began construction of a 126 unit, fifteen-story condominium complex on the Property (the "Building"). (Am. Disclosure Statement § II.A, ECF Doc. No. 130 (hereinafter "Am. Disc."); Tr. of Feb. 17, 2016 Hr'g 39:23–40:5, ECF Doc. No. 157 (hereinafter "Trial Tr.").) The Debtor substantially completed the majority of the Building including the entire exterior, but before construction could be fully completed, the Debtor defaulted on its obligations under the mortgage held by DOF's predecessor in interest. (Am. Disc. § II.A.) DOF commenced foreclosure proceedings, and a foreclosure judgment was entered on October 1, 2014. (Am. Disc. § II.A.)

B. The Easement

The Easement was granted to the owners of property on the Block by express grant in 1922. (George Obj. ¶ 1.) The Easement is a 24–foot right of way running down the middle of the Block from Seagirt Avenue to the Atlantic Ocean and is reflected in the Debtor's deed to the Property. (George Decl. Ex. A.; George Decl. Ex. B.) In addition to the Easement, two other easements were granted on either side of the Block that are now Beach 25th and Beach 26th Streets. (George Decl. Ex. B; Confirmation Mot. ¶ 11.)

The Boardwalk lies to the south of the Property and was built in the 1930s. (Confirmation Mot. ¶ 11.) It runs along the beach across several blocks and streets. (Debtor's Ex. B; Aff. of Jeff Azuse in Further Supp. of Mot. in Aid of Confirmation, Ex. A, ECF Doc No. 149 (hereinafter "Azuse Decl. 2").) The Boardwalk is raised a few feet above the ground and is easily accessible by ramps at the ends of Beach 25th and Beach 26th Streets. (Debtor's Ex. A; Aff. of Jeff Azuse in Supp. of Mot. in Aid of Confirmation, Ex. A, ECF Doc No. 140–1 (hereinafter "Azuse Decl. 1").) Currently, the Boardwalk is approximately three feet above the ground. (Trial Tr. 31:8–10; Debtor's Ex. B.) Accessing the beach via the Easement would require a person to first navigate through the thicket of trees and plants in front of the Boardwalk and then crawl underneath the Boardwalk. (Debtor's Ex. A; Debtor's Ex. B; Trial Tr. 31:8–32:1.) George contends that prior to the construction of the building, the Boardwalk was around ten to twelve feet above the ground, and that he maintained a path through the vegetation. (Trial Tr. 43:1–9.) He testified that the Debtor planted new trees and bushes over the Easement which caused additional sand to accumulate under the Boardwalk resulting in the reduction of the height of the Boardwalk. (Trial Tr. 46:11–48:16.) However, Elzbieta Mielczarek ("Mielczarek"), the principal of the Debtor, testified that the height of the Boardwalk is similar now to what it was before construction of the Building. (Trial Tr. 40:12–41:5.)

Owners of the inside bungalows (of which George is one), use the Easement to access their properties from Seagirt Avenue to the north and, allegedly, prior to the construction of the Building, also used it to get to the beach by going underneath the Boardwalk to the south. (Trial Tr. 43:5–13, 49:14–50:13.) Both before the construction of the Building and after, all residents of the Block were able to access the Boardwalk and the beach by utilizing the ramps at the ends of Beach 25th and Beach 26th streets. (Trial Tr. 48:22–49:13.) Residents of the inner bungalows are also able to walk directly through the openings between the bungalows and do not have to walk north to Seagirt Avenue to access Beach 25th and Beach 26th Streets. (Trial Tr. 59:20–60:9.)

C. The Easement Litigation

In 2006, the Debtor commenced an action in the New York State Supreme Court to quiet title to the Property (the "Quiet Title Action"). (George Obj. ¶ 9.) The Debtor sought a declaratory judgment that the Easement had terminated on January 1, 1930. (George Obj. ¶ 9.) The Debtor, however, failed to prosecute the Quiet Title Action, and the case was dismissed by a judgment dated March 18, 2014. (George Obj. ¶ 11.)

Two of the defendants alleged in the Quiet Title Action to hold rights to the Easement have appeared in this case: Susan Anderson ("Anderson") and Richard George ("George"). Anderson's claim is based on counterclaims asserted in the Quiet Title Action for violations of the Easement. (Confirmation Mot. ¶ 14.) Because the Debtor abandoned the Quiet Title Action, the court struck the Debtor's answer to the counterclaims and entered judgment in favor of Anderson. (Confirmation Mot. ¶ 15; George Obj. ¶ 13.) The court found that there was a valid easement, and that the Debtor had intentionally and willfully violated the easement. (Anderson Judgment 14–19.)3 The judgment is in the amount of $650,400.00, comprising $115,000.00 in damages for diminution of value in Anderson's property, $35,400.00 in damages to Anderson's property, and $500,000.00 in punitive damages. (Anderson Judgment 11.) George was also a defendant in the Quiet Title Action, but did not assert any counterclaims. (Tr. of Feb. 18, 2016 Hr'g 63:15–65:15.)

In addition to the Quiet Title Action, George also filed an action seeking to halt the construction of the building.4 See George v. Metroplex on the Atlantics, LLC, Index No. 6138/06; (Limited Obj. of Susan Anderson and Richard George to Debtor's DIP Financing Motion ¶ 10, ECF Doc. No. 50 (hereinafter "George DIP Obj.").) The court denied George's request for a preliminary injunction and construction continued. (George DIP Obj. ¶ 10.) According to the transcript attached to the Anderson Judgment, construction was not halted because the Debtor represented to the court that the Easement had terminated, and, even if it had not terminated, they would accommodate it in the construction; however, the Debtor did not make any accommodations for the Easement. (Anderson Judgment 19.)

D. The Plan

On January 21, 2016, the Movants filed an amended plan (the "Plan") and an amended disclosure statement (the "Disclosure Statement"). (Am. Chapter 11 Plan, ECF Doc. No. 129 (hereinafter "Plan"); Am. Disclosure Statement, ECF Doc. No. 130.) The Plan proposes to sell the Property at auction pursuant to § 363 free and clear of all claims and interests including the Easement. (Plan Art. IV.A.) Under the terms of the Plan, DOF has agreed to allow $100,000.00 of the proceeds from the sale5 of the Property to be paid to certain creditors, including any alleged easement holders, before DOF recovers on account of its claim. (Plan Art. IV.E.) Of that $100,000.00, $25,000.00 will go to fund the Class 4 Payment Pool,6 $25,000.00 will go to fund the Class 5 Payment Pool, and $50,000.00 will go to fund the Class 6 Payment Pool. (Plan Art. IV.E.) In the event the Net Sale Proceeds exceed $27,500,000.00, additional funds will be directed to the Payment Pools...

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