In re Scarborough-St. James Corp.

• Decision Date: 18 August 2015
• Docket Number: Case No. 15–10625 LSS
• Citation: 535 B.R. 60
• Parties: In re: Scarborough–St. James Corporation, Debtor.
• Court: U.S. Bankruptcy Court — District of Delaware

535 B.R. 60

In re: Scarborough–St. James Corporation, Debtor.

Case No. 15–10625 LSS

United States Bankruptcy Court, D. Delaware.

Signed August 18, 2015

Ian Connor Bifferato, Thomas F. Driscoll III, Bifferato LLC, Wilmington, DE, Michael T. Conway, LeClairRyan, a Professional Corporation, New York, NY, for Debtor.

Opinion¹

LAURIE SELBER SILVERSTEIN, UNITE STATES BANKRUPTCY JUDGE

This bankruptcy case, and the dispute between the parties, revolves around two issues: who—Landlord or Debtor—is entitled to rents generated from the subtenants at a shopping center located in Richmond, Michigan (“Shopping Center”), and in which court(s) should the disputes between the parties be resolved.

Before the Court are two motions. The first motion is for relief from stay (“Motion for Relief from Stay” [D.I. 16] ) filed by 67500 South Main Street, Richmond, LLC (“Landlord”) to permit it to proceed with eviction proceedings against Scarborough–St. James Corporation (“Debtor”) pending in a Michigan state court. The Court held two hearings on the Motion for Relief from Stay and accepted documentary evidence proffered by the parties.² After consideration of the evidence and arguments, the Court finds that the litigation in Michigan should proceed. Accordingly, the Motion for Relief from Stay is granted.

The second motion, also filed by Landlord, is for an order conditioning use of cash collateral and providing adequate protection (“Adequate Protection Motion” [D.I. 41] ). After consideration of the arguments and the evidence submitted by the parties, the Court concludes that the Court's recognition of the Modified Interim Order Awarding Injunctive Relief entered in the Michigan Litigation suffices to provide adequate protection to Landlord for its interest in the Shopping Center and its equitable interest, if any, in the rents. As such, no further relief is necessary at this time.

I. Factual Background

Since 2008, Debtor and Landlord have been litigating the meaning of various provisions in that certain Amended and Restated Intermediate Lease made as of June 26, 2006 (“Lease”) between Richmond Realty Limited Partnership, as landlord, and MCANY of Richmond Fund II Limited Partnership (“MCANY”), as tenant.³ Neither Debtor nor Landlord were the original parties to the Lease. Landlord became the landlord under the Lease (and the owner of the Shopping Center) by foreclosing upon its secured position in the Lease in October 2008.⁴ [D.I. 27 ¶ 17] Debtor became the successor in interest to MCANY on March 16, 2015 when it purchased all of MCANY's rights and interests under the Lease. [D.I. 27 ¶ 8] Prior to the purchase of MCANY's rights, Debtor managed the property and collected rent from the subtenants pursuant to a servicing agreement between MCANY and Debtor. [D.I. 27 ¶ 12] Landlord has not received payment of rent since acquiring ownership of the Shopping Center in October, 2008. [D.I. 16 ¶ 3]

The Arbitration and New York Litigation

The disagreements between Debtor and Landlord regarding the Lease led to significant prepetition litigation in both the New York and Michigan state courts. In the first instance, the New York Supreme Court, Appellate Division held that the dispute was subject to arbitration pursuant to section 18.13 of the Lease,⁵

The Honorable Garrett E. Brown, Jr. (Ret.) (“Arbitrator”)⁶ conducted arbitration proceedings in September and October, 2013. [D.I. 16 Ex. A, ex. 2 at 8] In the arbitration proceedings, Landlord took the position that the Lease was terminated pursuant to the foreclosure, but alternatively that it was owed rent under the Lease. [Id. at 4] Debtor, as manager of the Shopping Center, argued that the Lease was not terminated pursuant to the foreclosure and that Landlord was not owed any rent.⁷ [Id. at 3–4.] Debtor took the position that the Lease provides for payment of rent through credit and debit entries on the books and records of the original tenant and original landlord under the Lease and, except in a certain circumstance not relevant here, rent is never to be paid in cash. [Id. ; D.I. 27 ¶¶ 13–14]

On November 15, 2013, Arbitrator issued an initial ruling holding, inter alia, that the Lease remains valid and enforceable notwithstanding the foreclosure, that rent is due to Landlord, and that the proper calculation of rent is gross revenues minus operating expenses. [D.I. 16 Ex. A, ex. 2 at 2] Following the initial ruling, Debtor requested reargument on various issues, including the calculation of the rent, and again argued that no rent was due to Landlord. [Id. ] Landlord opposed that request, but alternatively stated that if re-argument were allowed, it too wished to re-argue certain points. [Id. ] Briefs were submitted and oral argument was held on January 20, 2014. [Id. ] On January 27, 2014, Arbitrator issued his Final Award. [Id. at 1]

In the Final Award, Arbitrator ruled on each of the claims and counterclaims advanced by the parties as well as the motion to re-argue. Arbitrator determined, again, that the Lease remained valid and enforceable notwithstanding Landlord's foreclosure and that Landlord was owed rent in the amount of gross revenues minus operating expenses. [Id. at 3, 41–42] Arbitrator monetized the rental obligation in part, finding that Debtor owed Landlord rent of $652,911.96 for the period from November 2008 through December 2012 including interest at 9% per annum, and that rent for that period should be paid within 60 days of the Final Award. [Id. ] Arbitrator also ordered Debtor to produce to Landlord income and revenue statements for the year 2013 within ten days of the Final Award. [Id. at 42] Finally, Arbitrator held that the calculation of rent for the year 2013 and all subsequent years should be calculated by the same method used in the Final Award.⁸ [Id. ] Debtor did not pay rent as ordered by Arbitrator.

Landlord filed a motion to confirm the Final Award in the Supreme Court of the State of New York, County of New York: Commercial Division Part 49.⁹ Debtor opposed the motion and filed a cross-motion to vacate or modify the Final Award. On August 4, 2014, the New York Supreme Court issued its Decision and Order granting Landlord's motion to confirm the Final Award and denying Debtor's motion to vacate or modify the Final Award (“Decision and Order”).¹⁰ [D.I. 16 Ex. A, ex. 3] The New York Supreme Court also ordered Landlord to settle an order confirming the Final Award. On December 1, 2014, the New York Court re-issued its August 4, 2014 ruling, and directed the Clerk to enter judgment on the Final Award in favor of Landlord. [D.I. 27 ¶ 7] Thereafter, on March 16, 2015, the New York Supreme Court issued judgment in favor of Landlord in the amount of $720,204.80 (“Judgment”). [D.I. 27 ¶ 7; D.I. 16 ¶ 5] Postpetition, on April 14, 2015, Debtor appealed the Judgment [D.I. 27 ¶ 10]; Debtor did not seek a stay of the Judgment pending appeal.

Landlord's Termination Notice and the Michigan Litigation

After the Final Award, but prior to the Decision and Order, Landlord was not idle. On March 20, 2014, Landlord sent a demand letter to Debtor and MCANY notifying them of an “Event of Default” under the Lease and demanding payment of 2013 rent in the amount of $290,612.51 within 60 days of the date of the letter. [D.I. 16 Ex. A, ex. 4] Landlord calculated the rent pursuant to the formula set forth in the Final Award utilizing the revenue and expense numbers provided by Debtor.¹¹ [Id. ] Landlord warned that if MCANY and Debtor failed to pay the rent, Landlord could exercise all of its remedies, including termination of the Lease. [Id. ]

Landlord followed this letter with another on May 20, 2014 to MCANY and Debtor. [D.I. 16 Ex. A, ex. 5] In the May 20 letter, Landlord noted the lack of response to the March 20 letter and wrote: “[a]ccordingly, pursuant to the Lease, including Section 11.02 thereof, this letter constitutes written notice that the Lease shall expire and terminate on June 20, 2014, as a result of Tenant's failures described above.” [Id. ]

Finally, on August 20, 2014, Landlord sent MCANY and Debtor a Notice to Quit, Termination of Tenancy, and Demand for Immediate Possession (“Notice”). [D.I. 16 Ex. A, ex. 6] In the Notice, Landlord stated that the tenancy under the Lease terminated on June 20, 2014 and demanded that Debtor and MCANY turn over all books and records with the subtenants and all keys to the property, and stop collecting rent from subtenants. [Id. ] Landlord demanded that Debtor cease managing the Shopping Center and take no further action whatsoever with respect to the Shopping Center. [Id. ] Not surprisingly, this did not happen.

On September 10, 2014, Landlord commenced litigation in Michigan state court (42nd Judicial District of the State of Michigan) (“Michigan Litigation”) by filing a Complaint for Termination of Tenancy and for Possession of Premises (“Complaint”).¹² [D.I. 43 Ex. D] Based upon the Final Award and the Notice, Landlord sought a judgment of immediate possession of the Shopping Center and an order evicting Tenant from the Premises as well as an accounting. [Id. at 5–7]

On September 22, 2014, the Michigan Court heard argument on the Complaint as well as Landlord's motion for injunctive relief. [D.I. 42 Ex. A ¶ 12] The Michigan Court determined to defer its ruling on the complaint for possession pending the entry of a final judgment by the New York Court specifying monetary relief to Landlord. [Id. ] The Michigan Court did, however, enter its Interim Order Preserving Status Quo regarding the rents and premises. [Id. ¶ 13] Subsequently, on October 20, 2014, the Michigan Court entered its Modified Interim Order Awarding Injunctive Relief to Landlord. [D.I. 16 Ex. B] In this Order, the court awarded Landlord relief it believed was “necessary and warranted to preserve the status quo and to prevent waste to the premises or injury to Landlord's interest in the premises.” [Id. at 2] Specifically, the Order provides as follows:

IT IS HEREBY ORDERED THAT MCANY of

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