In re S.A. Holding Co., LLC, No. 05-19874 (DHS).

• Decision Date: 22 December 2006
• Docket Number: No. 05-19874 (DHS).,No. 05-23403(DHS).,No. 05-19876(DHS).
• Citation: 357 B.R. 51
• Parties: In re S.A. HOLDING CO., LLC, et al., Debtors.
• Court: U.S. Bankruptcy Court — District of New Jersey

357 B.R. 51

In re S.A. HOLDING CO., LLC, et al., Debtors.

No. 05-19874 (DHS).

No. 05-19876(DHS).

No. 05-23403(DHS).

United States Bankruptcy Court, D. New Jersey.

December 22, 2006.

Stuart Gold, Esq., Mandelbaum, Salsburg, Gold, Lazris & Discenza, P.C., West Orange, NJ, for Debtors.

Gary N. Marks, Esq., Norris, McLaughlin & Marcus, P.A. Attorneys for City of South Amboy, NJ & City Authorities.

OPINION

MICHAEL B. KAPLAN, Bankruptcy Judge.

MEMORANDUM DECISION

Currently before this Court is the motion filed by the above-captioned Debtor seeking the entry of an order pursuant to Section 365(a) of Title 11 of the United States Code, 11 U.S.C. §§ 101 et seq. (the "Bankruptcy Code"), rejecting a settlement agreement with the City of South Amboy (the "City") previously reached in related state and federal court litigations ("Motion"). For the reasons set forth below, this Court finds that the subject settlement agreement, as amended by the parties, is not an "executory contract" subject to rejection pursuant to the above-cited statute, and thus, the Debtors' Motion is denied.

I. JURISDICTION

The court has jurisdiction over this contested matter under 28 U.S.C. §§ 1334(a) and 157(a) and the Standing Order of the United States District Court dated July 10, 1984 referring all bankruptcy cases to the bankruptcy court. This matter is a core proceeding within the meaning of 28, U.S.C. § 157(b)(2). See, e.g., In re Venture Stores, Inc., 1998 WL 748847 (Bankr. D.Del.) (motion to reject executory contract is a core matter). The statutory predicates for the relief sought herein are § 365 of the Bankruptcy Code and Fed. R. Bankr.P. 6006.

II. FACTS AND PROCEDURAL HISTORY¹ Initial Litigations

On March 30, 2005, S.A. Holding Co., LLC ("S.A.") and Delilah's Den of S.A., Inc. ("Delilah's") each commenced bankruptcy cases by filing voluntary petitions for relief under Chapter 11 of Title 11 of the United States Code (the "Bankruptcy Code"). Thereafter, on April 22, 2005, 86 Broad Street Corporation ("86 Broad", and collectively with S.A. and Delilah's, the "Debtors") commenced a bankruptcy case by filing a voluntary petition for relief under Chapter 11 of the Bankruptcy Code. The estates of the Debtors are being jointly administered. S.A. is a New Jersey limited liability company that owns real property located at 3630 Route 35 North, in the City of South Amboy, Middlesex County, New Jersey (the "Property"). Delilah's is a New Jersey corporation that owns and operates an adult nightclub at the Property. 86 Broad is a New Jersey Corporation that owns a currently inactive liquor license, in the City of South Amboy, Middlesex County, New Jersey, which was previously used in connection with the club at the Property.

The Debtors and the City have been in litigation since 1995. The first lawsuit was commenced in the Superior Court of New Jersey, Law Division, Middlesex County, involving Delilah's and another entity known as S.A. Package Goods, Inc., (the "State Court Action"). In the State Court Action, the City sought a determination as to whether Delilah's could continue to operate as an adult club in South Amboy. A second action was commenced in the United States District Court for the District of New Jersey by Delilah's and 86 Broad, followed by yet another action against the City and its Zoning Board.

Settlement Agreements and Enforcement Efforts

On July 30, 1998, a settlement was reached (the "Settlement Agreement"), which authorized Delilah's to continue to operate for two years as a "go-go club" and then revert to its prior use. On or about September 6, 2001, the Settlement Agreement was amended to: (i) provide for the immediate and permanent abandonment of the contested "go-go bar" use of the Property "in exchange for a 24 month extension of the current sexually oriented business use of the premises", (ii) authorize Delilah's accordingly to operate for two more years as a "go-go club"; and (iii) provide for the City to designate the property for redevelopment and establish a redevelopment plan (the "Amended Settlement Agreement" or "Agreement")². Consistent with the terms of the Amendment, on March 19, 2003, the City placed the property in a redevelopment zone, approved a redevelopment plan and thereafter, on December 1, 2003, adopted the redevelopment plan, by enactment of an ordinance. The Debtors did not oppose any of these actions.³

On November 18, 2003, the City filed a motion in the Superior Court of New Jersey to enforce the Amendment. Specifically, the City sought to close the business as was agreed and for payment of its counsel fees and costs. The Debtors for the first time sought to challenge the redevelopment plan. The Superior Court entered judgment in favor of the City on December 23, 2004 and directed the business to close immediately. Among other things, the court found that the Debtors, who had not previously objected to the proposed redevelopment plan, were now barred from doing so⁴.

On December 28, 2004, the Debtors filed a motion for leave to appeal and for emergent relief. By Order dated January 6, 2005, the Appellate Division vacated the trial court's Order and remanded the case for an evidentiary hearing on certain alleged breach of contract issues arising from the Amendment. The Appellate Division temporarily stayed the order directing the closing of the business pending a decision on remand, thus allowing the Debtors to continue to operate. After several delays, the evidentiary hearing on the remand to the Superior Court was to finally take place on March 31, 2005. However, the day before the hearing, on March 30, 2005, the Debtors filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code, thereby automatically staying the final disposition of the State Court Actions and allowing the business to continue operating.

Post Bankruptcy Proceedings

Immediately after filing their voluntary bankruptcy petitions, Delilah's and S.A. commenced an adversary proceeding (the "Adversary Proceeding") in the Bankruptcy Court against the City, the City of South Amboy Zoning Board of Adjustment, the South Amboy Redevelopment Agency and the South Amboy Planning Board, seeking: (i) damages for violation of the Debtors' constitutional rights; (ii) a declaratory judgment and injunctive relief; (iii) to avoid and recover an avoidable transfer; (iv) damages; and (v) rescission of the contract. In connection with the commencement of the Adversary Proceeding, Delilah's and S.A. filed an application for a preliminary and permanent injunction enjoining, without limitation, the City Authorities from continuing to prosecute the State. Court Action in any court except the United States Bankruptcy Court.

Ultimately, the Bankruptcy Court entered an Order on June 20, 2005, which provides that: (i) the Bankruptcy Court will abstain from hearing the claims raised in the litigation; (ii) the City Authorities are authorized to proceed with the State Court Litigation against the Debtors (including any appellate process), (iii) the Debtors are authorized to bring any and all additional claims they have against the City Authorities; (iv) any claims brought by the Debtors against the City Authorities would be subject to all rights and defenses the City Authorities may have under applicable law; (v) the City Authorities are enjoined pursuant to section 105(a) of the Bankruptcy Code, from shutting down the Debtors' business pending entry of a final non-appealable order from the trial or appellate court(s) of competent jurisdiction conclusively and finally resolving all issues between the parties in the litigation; and (vi) the injunction issued would remain in effect pending entry of a further order by the Bankruptcy Court.

Additional District and Bankruptcy Court Actions

Notwithstanding the above-referenced order of the. Bankruptcy Court, litigation between the parties has advanced exponentially in the federal courts. To wit, On June 24, 2005, the Debtors commenced an adversary proceeding in, the Bankruptcy Court against Kara Homes Development, LLC ("Kara Homes"), the City, South Amboy Zoning Board of Adjustment, the South Amboy Redevelopment Agency, and the South Amboy Planning Board ("City Defendants"), seeking a declaratory judgment and damages for the alleged interference by the City Defendants with a Purchase and Sale Agreement between the Debtors and Kara Homes. Additionally, on July 7, 2005, the Debtors filed a complaint against the City, the South Amboy Zoning Board of Adjustment, the South Amboy Planning Board, the South Amboy Redevelopment Agency, John Lanza, Director of Law of the City of South Amboy and John O'Leary, Mayor of South Amboy, in the United States District Court ("District Court") seeking entry of judgment, inter alia, (i) awarding Debtors' damages for violations of their rights under the First, Fifth and Fourteenth Amendments of the United States Constitution; (ii) declaring that application of N.J.S.A. 2C: 34-7 to the Debtors' Property and its business is unconstitutional; (iii) against the City avoiding and setting aside the Amended Settlement Agreement pursuant to 11 U.S.C. § 544(b) and applicable state law; and (iv) against the City recovering the property transferred in connection with execution of the Amended Settlement Agreement, or the value of such property, pursuant to 11 U.S.C. § 550(a) for the benefit of the Debtors' bankruptcy estate. Not content with these procedural maneuvers, the Debtors also filed a Notice of Removal in the District Court and removed the State Court Litigation to the District Court.

Debtors have brought the within motion seeking to reject the Agreement, pursuant to 11 U.S.C. § 365(a), contending that the Agreement remains executory due to the City's alleged failure to designate the Property as an area in need of redevelopment and adopt an enhanced redevelopment plan permitting development of high density residential housing. The City opposes...