In re Robertson
| Decision Date | 07 October 1992 |
| Docket Number | Bankruptcy No. 92-22017(RG). |
| Citation | 147 BR 358 |
| Parties | In re Grace ROBERTSON, Debtor. |
| Court | U.S. Bankruptcy Court — District of New Jersey |
Elaine Harris, South Orange, N.J., for Grace Robertson.
Chester S. Galloway, McCarter & English, Newark, N.J., for Harrison Park Owners, Inc.
DECISION
This matter is presently before the court on the motion of Harrison Park Owners, Inc. ("Harrison Park") for an order granting relief from the automatic stay and declaring a certain proprietary lease terminated. The court heard oral argument on this matter on April 21, 1992.
This court has considered the oral argument of counsel, the pleadings and legal memoranda submitted by the parties, and makes the following findings of fact and conclusions of law as required by Bankruptcy Rule 7052. This matter is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(G). This court has jurisdiction in accordance with 28 U.S.C. § 1334 and the Standing Order of Reference entered by the United States District Court on July 23, 1984.
Harrison Park is the owner of real property in East Orange, New Jersey known as Harrison Park Towers Cooperative Residences (the "Towers"). The Towers is a twenty-one story apartment building with 293 apartments, and is owned under a cooperative form of ownership. Grace Robertson (the "Debtor") is a unit owner of the cooperative and a shareholder in Harrison Park.
On August 27, 1987, the Debtor purchased 385 shares of capital stock of Harrison Park for the price of $79,925.00. These shares were allocated to and gave her possession of Unit 18-M at the Towers. Unit 18-M is the Debtor's primary residence.
Simultaneous with the closing on August 27, 1987, and in order to finance her purchase, the Debtor borrowed $40,000.00 from The Dime Real Estate Services (the "Loan"). The Loan was subsequently assigned to The Dime Savings Bank.1 As security for the Loan, the Debtor executed a loan security agreement and her shares of stock were pledged to The Dime. The Dime also required, as a condition of the Loan, an executed Recognition Agreement whereby Harrison Park agreed to recognize The Dime as the pledged holder of the shares of stock. This agreement contains strict notice provisions which require Harrison Park to notify The Dime of any intention by Harrison Park to terminate the proprietary lease.
Upon the purchase of her shares, the Debtor received a Proprietary Lease enabling her to personally occupy, rent or resell Unit 18-M (the "Proprietary Lease"). As additional security for the Loan, the Debtor assigned the Proprietary Lease to The Dime and gave it a stock power. The Proprietary Lease, including the House Rules, is forty-three pages long and subjects the Debtor to various terms and conditions. In particular, under Paragraph 1, the Debtor is required each year to pay "rent" or "maintenance" in an amount equal to the annual maintenance fee established by the Board of Directors of Harrison Park.2 The rent reserved is equal to the total cash requirements for the operation of the building over the year, multiplied by the percentage ownership of the individual unit owner's share in the entire corporation. This proportionate amount is divided by twelve and is payable in equal monthly installments.
The Debtor defaulted on the required maintenance payments. On February 19, 1991, after several attempts to collect the delinquent payments, Harrison Park notified the Debtor that due to the default and pursuant to Paragraph 31(d) of the Proprietary Lease, her lease would be terminated and her shares canceled. Harrison Park then instituted an action in the Superior Court of New Jersey, Essex County Law Division (the "Superior Court") seeking a judgment against the Debtor for unpaid "rent" in the amount of $9,564.90 and for possession of the unit. At no time prior to the institution of the State court action did Harrison Park notify The Dime of its intention to terminate the lease and cancel the shares, nor did it name The Dime as a party in any of its pleadings.
The Debtor failed to respond to Harrison Park's summons and complaint. On October 25, 1991, the Superior Court entered a Final Order of Default in the amount of $9,514.04, including late fees, attorney fees, and costs, and purportedly granted possession of the unit to Harrison Park. A Writ of Possession was then issued by the court on January 24, 1992. By virtue of the Writ, the Essex County Sheriff sent notice to the Debtor that she was required to vacate the premises by March 13, 1992. However, since the Debtor had filed her Chapter 13 bankruptcy petition on March 11, 1992, any action the Sheriff could have taken to physically remove Debtor from the Property was stayed pursuant to 11 U.S.C. § 362(a)(3). Consequently, Harrison Park filed this motion for relief from stay requesting an entry of an order declaring the Proprietary Lease terminated and to permit it to collect its default judgment entered by the Superior Court.
It should be noted that the debt to Harrison Park is listed in the Debtor's schedules, and the Debtor proposes to pay 100% of the debt in her Chapter 13 Plan. Moreover, the Debtor declares her intent to reaffirm that debt in her individual Statement of Intention. Finally, at the time of filing this motion, the Debtor was, and still is, current with her monthly mortgage payments on the Loan, as well as her pre-confirmation payments to the Standing Trustee under the Chapter 13 Plan.
Harrison Park characterizes the Debtor as a tenant and contends that the Proprietary Lease was validly terminated prior to the filing of a bankruptcy petition. It therefore reasons that the Proprietary Lease is not property of the estate and cause exists to grant relief from the automatic stay. The Debtor opposes the relief sought on the grounds that she is not merely a lessee of the unit, but is in fact the owner, having purchased the premises for $79,925.00. The Debtor also argues that the Writ of Possession is void because at no time was The Dime properly notified of Harrison Park's intention to terminate the Proprietary Lease. Lastly, the Debtor contends that to allow Harrison Park to take possession of Unit 18-M would be an inequitable result under the facts of this case.
The issue before this court is whether the Superior Court default judgment terminated the Debtor's Proprietary Lease prior to the commencement of this bankruptcy action, thus extinguishing all of the Debtor's property rights to Unit 18-M.
It is a well "recognized principle of bankruptcy law that an executory contract or lease validly terminated prior to the institution of the bankruptcy proceedings, is not resurrected by the filing of the petition in bankruptcy and cannot therefore be included among the debtor's assets." Kopelman v. Halvajian (Matter of Triangle Laboratories, Inc.), 663 F.2d 463, 467-68 (3d Cir.1981) (citations omitted). See also, In re Indri, 126 B.R. 443, 445 (Bankr. D.N.J.1991); and In re Telephonics, Inc., 85 B.R. 312, 315 (Bankr.E.D.Pa.1988). Consequently, cause exists for granting relief from the automatic stay when an executory contract is validly terminated prior to the commencement of a bankruptcy case. However, if the termination of an executory contract is not valid, the contract is property of the estate, and accordingly, the Chapter 13 debtor may assume or reject the contract pursuant to the terms of 11 U.S.C. §§ 365 and 1322.
Counsel for Harrison Park acknowledges that there is no reported case law in New Jersey directly on point. However, he argues that the facts in this case and the cooperator/cooperative relationship are analogous to a traditional landlord/tenant relationship under which the landlord may terminate the tenant's lease for failure to pay rent. Therefore, he reasons, since New Jersey law provides that the issuance of a Writ of Possession terminates the tenant's right to possession of the leased premises, that in this case, so too a Writ of Possession terminates the cooperator's right to possession under a proprietary lease. Accordingly, Harrison Park argues, the Debtor's interest in her unit was terminated before the bankruptcy petition was filed, and the Debtor has no right to cure her lease defaults pursuant to a Chapter 13 plan.
Counsel for Harrison Park argues in the alternative that if the court is unwilling to apply the principles of landlord/tenant law to this case, it should look to New Jersey foreclosure law for guidance. Specifically, Harrison Park asserts that the judgment of possession is the functional equivalent to a foreclosure judgment, and therefore, upon entry of the judgment, the Proprietary Lease merged with the judgment and ceased to exist.
The court does not find either argument persuasive for the reasons set forth herein.
This matter could be easily concluded if this case merely involved a traditional landlord/tenant relationship. If that were so, the result would clearly be in favor of Harrison Park. However, in the present case, the relationship between the Debtor and Harrison Park is not strictly that of a landlord and tenant. Rather, Harrison Park is a cooperative association (sometimes referred to as the "cooperative"), the Debtor is a cooperator/shareholder (sometimes referred to as the "cooperator"), and a proprietary lease is an occupancy agreement which defines the relationship between them. A discussion of the differences between the two relationships will help to clarify the inherent problems with the plaintiff's argument.
The New Jersey Legislature has stated that a cooperative "is a hybrid transaction which is not capable of classification entirely as realty or personalty. . . ." N.J.S.A. 46:8D-2. A cooperative is defined as:
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