In re Sapolin Paints, Inc.
| Decision Date | 06 August 1980 |
| Docket Number | Bankruptcy No. 180-01691-21,180-01807-21. |
| Citation | 5 BR 412 |
| Parties | In re SAPOLIN PAINTS, INC., Woolsey Marine Industries, Inc., Debtors. |
| Court | U.S. Bankruptcy Court — Eastern District of New York |
Robert L. Howard, New York City, for landlord.
Stroock & Stroock & Lavan, New York City, for debtor.
Kaye, Scholer, Fierman, Hays & Handler, New York City, for Chemical Bank.
Weil, Gotshal & Manges, New York City, for Universal Paint Corp.
Marcus & Angel, New York City, Co-Attys., for Creditors' Committee.
Ballon, Stoll & Itzler, Spengler, Carlson, Gubar & Brodsky, New York City, for United Capitol Corp.
Davis, Polk & Wardwell, New York City, for Woolsey Creditors' Committee.
Sapolin Paints, Inc. ("Sapolin") and Woolsey Marine Industries, Inc. ("Woolsey"), debtors and debtors-in-possession, jointly applied for an order pursuant to § 365 of the Bankruptcy Code (11 U.S.C. § 365), authorizing the assumption and assignment of six leases. Arthur Gilbert, the owner of a building at 2750 South Garfield Avenue, Los Angeles, California, which is the subject of one of these leases (the "California Leasehold"), is objecting to such assumption and assignment.
Sapolin filed a petition for an order of relief under Chapter 11 of the United States Bankruptcy Code on April 8, 1980; its wholly-owned subsidiary, Woolsey, filed under Chapter 11 on April 14, 1980. The Court ordered joint administration of the proceedings pursuant to Bankruptcy Rule 117(b), made applicable herein by Bankruptcy Rule 11-14, on April 23, 1980. They are engaged in a liquidating arrangement as permitted by 11 U.S.C. § 1123(b)(4).
On June 12, 1980, pursuant to an auction held in the courtroom, the bulk of the assets of the two debtors Sapolin and Woolsey were sold to United Capital Corp. ("United"), or its designee, for $2,600,000 plus the assumption of certain liabilities. Included in the assets sold were a manufacturing plant, a retail store, several leases of real property, inventory, machinery and equipment, trademarks and copyrights, patents, accounts receivable, secret formulae, and goodwill.
Because Sapolin is currently operating on borrowed money, the parties, under pressure from the creditors of Sapolin and Woolsey, agreed to consummate the sale on July 7, 1980. Among the assets to be transferred were six leases owned by Sapolin or Woolsey.
In order to permit the closing to proceed as scheduled, Sapolin and Woolsey, on June 30, 1980, brought on by order to show cause, on five day's notice, a hearing on their right to assume and assign these six leases, pursuant to § 365 of the Code. As a result of the hearing, Sapolin and Woolsey were able to include in the scheduled closing all their unexpired leases and subleases, except the California Leasehold.1
With respect to the California Leasehold, counsel for Gilbert & Rothschild Co., the lessor named in the lease, filed a "Memorandum in Opposition," claiming the existence of defaults under the lease precluding its assumption or assignment, "among others, in that pursuant to paragraph 17 of that certain lease described above, Sapolin Paints, Inc. has vacated and abandoned the leased premises and Arthur Gilbert has the right to terminate the lease and retake possession of the property."
When it appeared that the controversy respecting the assumption and assignment of the California Leasehold might delay the closing indefinitely, the debtors-in-possession, the purchaser, the creditors' committees, and Chemical Bank, a secured creditor herein, entered into a stipulation to exclude this lease temporarily from the sale. The purchase price has been reduced by $230,000 pending disposition of this proceeding.
The California Leasehold covers a building containing 69,350 square feet located in Commerce City, Los Angeles County, California. It is for a term of 25 years, which will end on September 30, 1989, with an option to renew for another ten years. The rental is payable in four equal quarterly installments, and currently amounts to approximately $56,000 per year, or about 81 cents per square foot per year. The prevailing market rate for similar space is $2.88 per square foot.
The building was erected for use by a paint manufacturer. The lease provides that it is to be used for "manufacturing, warehouse and offices." About 10,000 feet of the building consists of prime office and laboratory space.
Sapolin, with the consent of the landlord, acquired the lease by assignment from Luminal Paints, Inc. on August 26, 1977. The present owner of the leased property is Arthur Gilbert, who acquired it from the original lessor, Gilbert & Rothschild Co., on August 16, 1965.
Section 17(c) of the lease gives the landlord the option of terminating it on the occurrence of a variety of conditions.
The lessor, at his election, and upon notice to the lessee of his intention, may terminate the lease and retake possession of the premises:
"(c) if the Lessee (1) is adjudicated a bankrupt or insolvent, or (2) has a receiver appointed for all or substantially all of its business or assets, or (3) has a trustee appointed for it after a petition has been filed for Lessee\'s reorganization under the Bankruptcy Act of the United States known as the Chandler Act or any future law of the United States having the same general purpose, or (4) if the Lessee shall make an assignment for the benefit of its creditors"
He may also terminate under Paragraph 17(c):
"(5) if Lessee shall vacate or abandon the leased premises."
If either of the foregoing occurs:
"then in any such event the Lessor shall have the right at its election, then or at any time thereafter, and while such default or defaults shall continue, to give the Lessee notice of Lessor\'s intention to terminate this lease and retake possession and thereupon all Lessee\'s rights granted Lessee hereunder shall come to an end, as fully as if such date were the last day of the whole term hereinabove specified, and the Lessee hereby covenants peaceably and quietly to yield up and surrender to the Lessor said leased premises and all structures, buildings, improvements and equipment located thereon, and to execute and deliver to Lessor such instrument or instruments as shall be required by Lessor as will properly evidence termination of Lessee\'s rights hereunder or its interest therein."
The lease also contains a provision pertaining to assignment or subletting:
On March 5, 1980, Sapolin subleased the premises to Universal Paint Corp. ("Universal"), as part of a sale of various California assets. Universal agreed to perform all Sapolin's obligations under its master lease. The sublease provided that Universal was to occupy the premises from March 8 to July 1, 1980; that from July 1, 1980 to August 15, 1980, Sapolin would have the right of possession; and that subsequent to August 15, 1980, each would have an undivided interest in the premises.
Paragraph 5 of the sublease between Sapolin and Universal originally provided as follows:
When it developed during the course of the hearing on Sapolin's right to assign the California Leasehold that Gilbert claimed that this clause disabled Sapolin, or its assignee, from assuring him that the premises would not become vacant or abandoned contrary to Paragraph 17(c) of the master lease, Universal and Sapolin amended Paragraph 5 to read as follows:
2
At the present time, no sub-subtenant has been found for the premises. To facilitate such sub-subletting, Sapolin and Universal intend to remove all the paint manufacturing equipment and related paint filling and loading equipment from the building in order to make it available for rental for use as general office and warehouse space.
Gilbert, Sapolin's landlord, contends that it will take several months to locate a sub-subtenant for the California property during which it will be vacant or abandoned in violation of the terms of the lease. To support that contention, he called as a witness Mr. Emelyn Williams, a commercial real estate broker, who testified that he has been trying for the past six months, without success, to find an occupant for a building forming part of the same complex as the building leased to Sapolin and which will be available for occupancy beginning November 1, 1980 and also owned by Mr. Gilbert. He has been seeking a tenant willing to pay $2.88 per square foot per year, the current going rate in Commerce City for industrial property. However, in the opinion of Mr. Williams, no difficulty would be encountered in renting these premises if it were offered at the rate of 75 cents per square foot per year. There are other vacant buildings in the City of Commerce.
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In re Westview 74th Street Drug Corp.
...are not words of art but were intended by Congress to be given a practical, pragmatic construction. In re Sapolin Paints, Inc., 5 B.R. 412, 420-21 (Bankr.E.D.N.Y.1980). "As designed by Congress, the phrase does not mean absolute insurance that the debtor will thrive and make a profit." In r......