In re Sanshoe Worldwide Corp.
| Decision Date | 06 March 1992 |
| Docket Number | 91 Civ. 3300 (LBS).,No. 91 Civ. 4485 (LBS),91 Civ. 4485 (LBS) |
| Citation | 139 BR 585 |
| Parties | In re SANSHOE WORLDWIDE CORPORATION, Debtor. EBG MIDTOWN SOUTH CORP., Plaintiff, v. MCLAREN/HART ENVIRONMENTAL ENGINEERING CORPORATION, Defendant. |
| Court | U.S. District Court — Southern District of New York |
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Winick & Rich, P.C., New York City (Jonathan Flaxer, of counsel), for Sanshoe Worldwide Corp.
Seiden, Stempel, Bennett & D'Agostino, New York City (Richard Claman, of counsel), for EBG Midtown South Corp.
Beveridge & Diamond, P.C., New York City (Thomas deRosa, Edward G. Bailey, of counsel), for McLaren/Hart Environmental Engineering Corp.
These cases, a bankruptcy appeal and a declaratory judgment action, both concern the status of a commercial sublease for the 11th floor of premises located at 470 Park Avenue South in New York City, and involve three corporate entities, the Sanshoe Worldwide Corp. (hereinafter "Sanshoe"), McLaren/Hart Environmental Engineering Corp. (hereinafter "Hart"), and EBG Midtown South Corp. (hereinafter "EBG"). In an order entered May 9, 1991, the Bankruptcy Court for the Southern District of New York (Abram, B.J.) approved the assumption of the sublease by Sanshoe the sublessor/debtor, and its assignment to EBG. Hart, the sublessee, now appeals from this order. EBG, the assignee, has brought an action against Hart in this Court, seeking a declaration that the sublease term has ended due to Hart's abandonment, and a award of rent and liquidated damages. Hart now moves to dismiss or stay this action, while EBG moves for summary judgment.
For the reasons that follow, we consolidate these cases for the purpose of deciding the appeal and motions. As discussed below, we affirm the Bankruptcy Court's order, and deny Hart's motion to dismiss or stay the declaratory judgment action. We grant EBG's motion for summary judgment with respect to its claim of abandonment of the premises by Hart. We hold that EBG is entitled to remedies, and refer the rent and damage claims to a Magistrate Judge of the Southern District to determine in a manner consistent with this Opinion.
Sanshoe signed a lease on July 15, 1986 with 470 Park South Associates, L.P. (hereinafter "470 Park South") for the 11th floor of a building located at 470 Park Avenue South. The lease ran for a ten-year term, beginning in September 1986, and ending on August 31, 1996. Under separate lease agreements, Sanshoe also rented the 12th floor and part of the 9th floor in the same building. On January 19, 1990, Hart signed a sublease for the 11th Floor with Sanshoe, which provided that the term would extend through the expiration of the lease in August 1996.
As of December 20, 1990, Sanshoe had not paid its December 1990 rent, and 470 Park South initiated a non-payment proceeding in New York State landlord-tenant court. See Affidavit of Benjamin P. Feldman, Vice-President and General Counsel of EBG, and General Counsel to 470 Park South, ¶ 9 (hereinafter "Feldman Aff."). Sanshoe did not answer the petition. However, Sanshoe tendered and 470 Park South accepted a check representing full payment of the December rent on January 7, 1991. See Letter of Jordan M. Cahn, Winick & Rich, attorneys for Sanshoe, to the Court, July 31, 1991, (accompanied by copy of endorsed check), attached to Plaintiff's Reply Memorandum of Law in Further Support of Motion for Summary Judgment (hereinafter "EBG Reply Mem."). On January 9, 1991 the landlord-tenant court issued a default judgment and warrant against Sanshoe. See Judgment of January 9, 1991, attached to EBG Reply Mem. The warrant was never executed. See Feldman Aff. ¶ 9.
Sanshoe failed to pay the rent due for January 1991, and on or about January 24, 1991, 470 Park South began a new nonpayment proceeding. See Notice of Petition, attached as Exhibit B to Feldman Aff. The hearing for this proceeding was adjourned by stipulation between the parties and then ultimately stayed due to Sanshoe's filing of a bankruptcy petition. See Feldman Aff. ¶ 10. Another nonpayment proceeding was initiated by 470 Park South on or about February 22, 1991 for nonpayment of February rent. See Notice of Petition, attached as Exhibit C to Feldman Aff. Hart, which had paid its rent to Sanshoe during this period, was also named and served in the February petition. No hearing was held on the February petition, and no judgment or warrant issued with respect to either the January or February petitions. See Feldman Aff. ¶ 11.
On March 1, 1991, Sanshoe filed a petition for Chapter 11 protection. On or about March 23, 1991, Hart vacated the premises. See Feldman Aff. ¶ 18; Affidavit in Opposition to Motion for Summary Judgment of Raymond W. Kane, Managing Principal of Hart, at ¶¶ 5, 9 (hereinafter "Kane Aff."). Thereafter, Hart made the payment of base rent that had been due on March 1, 1991, and the payment of base rent due on April 1, 1991. See Feldman Aff. at ¶ 19.
In the course of the Chapter 11 proceedings, on April 24, 1991, Sanshoe brought on by Order to Show Cause, an application seeking Bankruptcy Court approval of a stipulation (hereinafter "Stipulation") between Sanshoe, 470 Park South, and EBG. Under the Stipulation, (1) Sanshoe proposed to assume the lease and sublease for the 11th floor pursuant to 11 U.S.C. § 365 and assign them to EBG, the corporate general partner of 470 Park South; (2) Sanshoe would reject its 9th and 12th floor leases; and (3) 470 Park South consented to such assumption and assignment, agreed to release to Sanshoe an amount representing Sanshoe's remaining security deposit, and waived all claims against Sanshoe's estate arising from the 9th and 12th floor leases.
On May 1, 1991 Hart filed objections to the application, arguing that the requested relief was improper under the Bankruptcy Code, as well as under New York landlord-tenant principles. The Bankruptcy Court held a hearing on the application on May 3, 1991, and on May 9, 1991, it entered an order which approved the Stipulation with certain amendments.
On May 15, 1991,1 Hart commenced an action in New York Supreme Court against 470 Park South and EBG, seeking declaratory relief that the sublease had terminated and that Hart's obligations under the sublease had ended. Hart also seeks rescission of the sublease as well as damages for breach and fraudulent misrepresentation. On May 15, 1991, EBG filed the present action against Hart in federal court seeking a declaratory judgment that the sublease term was ended due to Hart's abandonment, and seeking an award of rent and damages. On May 20, 1991, Hart filed an appeal from the Bankruptcy Court's Order with this Court.
On June 3, 1991, 470 Park South and EBG, defendants in the state action, filed a motion to dismiss or stay that action. Hart moved to dismiss or stay the federal action on June 21, 1991 and on July 3, 1991 EBG moved for summary judgment. On September 12, 1991, this Court heard oral argument on Hart's motion to dismiss and EBG's motion for summary judgment in the federal action, and on the bankruptcy appeal.
As a preliminary matter, we must resolve whether the present declaratory judgment action should be dismissed or stayed, as Hart argues. Hart first contends that this action is barred by the Bankruptcy Court's prior ruling, under the doctrine of res judicata. See Hart Mem. to Dismiss, at 10-16.
In her order approving the Stipulation, Judge Prudence B. Abram ordered the deletion of one of its clauses which provided, "WHEREAS, Debtor warrants that the Sublease is in full force and effect and is binding upon Debtor and Hart." See Order, In Re Sanshoe Worldwide Corp., 91 B 10922 (PBA), May 9, 1991, at 3. Judge Abram also stated that "the Court makes no findings or conclusions" with respect to Hart's claims that the lease or sublease terminated. Id. Hart maintains that this constitutes a final judgment on the merits denying a claim by EBG that the lease or sublease had not terminated. See Hart Mem. to Dismiss, at 12-13.
We find the doctrine of res judicata inapplicable here. The clause in the Stipulation submitted to the Bankruptcy Court for approval was not a "claim" by EBG against Hart, but rather a contract term between EBG and Sanshoe, providing a warranty by Sanshoe, so that if the sublease were held not binding, Sanshoe would be liable to EBG. This warranty had no binding effect on Hart.
During the hearing before Judge Abram, EBG agreed to accept assignment of Sanshoe's interest as sublessor without the warranty. See Transcript of Proceedings before the Hon. Prudence B. Abram, May 3, 1991, at 40 (hereinafter "Bankruptcy Tr."). Judge Abram's Order deleted the clause, and the Court explicitly stated that it was making no finding on the termination issue. See Order, at 3. As the transcript of the hearing makes clear, Judge Abram found that it was not necessary for her to resolve that issue, and preserved it for potential future litigation between the parties. See Bankruptcy Tr. at 122-23. This explicit refusal to resolve the issue does not constitute a final judgment on the merits. See Montana v. United States, 440 U.S. 147, 153, 99 S.Ct. 970, 973, 59 L.Ed.2d 210 (1979); see generally 18 Wright, Miller, and Cooper, Federal Practice & Procedure § 4436. Therefore, we find the doctrine of res judicata does not bar the present action. For similar reasons, we also find that this action does not constitute a collateral attack upon the decision in the Bankruptcy Court.
In its papers, Hart further argues that the state court is the proper forum for resolution of the issues involving the validity of the sublease, so that the federal case should be dismissed or stayed in favor of the pending state action. However, the day before oral argument on the present motions, the state court deferred to this Court and declared that it would take no action...
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