In re Schraiber
| Decision Date | 12 September 1991 |
| Docket Number | 87 B 17144.,No. 90 C 3890,90 C 3890 |
| Parties | In re Milton SCHRAIBER, Debtor. Alexander S. KNOPFLER, Trustee for Milton Schraiber, Plaintiff-Appellee, v. Milton SCHRAIBER, et al., Defendants-Appellants. |
| Court | U.S. District Court — Northern District of Illinois |
David Perry Leibowitz, Bruce Charles Dopke, Daniel Feldman, Schwartz, Cooper, Kolb & Gaynor, Chtd., Chicago, Ill., for plaintiff-appellee.
John Harold Redfield, Chicago, Ill., for defendants-appellants.
There are many ways to acquire wealth. For the vast majority of people, success is a combination of hard work and luck. This case, however, involves one of those rare situations where the road to wealth is paved with misfortune and mismanagement. There is only one force capable of producing such an anomalous result: the United States Bankruptcy Code. The question confronting this court on appeal is whether such a result can stand.
On October 1, 1985, Richard Erlich signed a five year lease with the debtor, Milton Schraiber, to operate the Oak Mill shopping center. Under the lease, Erlich was required to make a $500,000 security deposit and pay his share of taxes and expenses. In addition, Erlich was required to pay $50,000 per month in rent. The lease also contained an option to purchase the mall so long as the closing of the sale was within 60 days of the exercise of the option.
From the inception of the lease, Erlich was in default. He underpaid his security deposit by $62,000 and paid only $40,000 per month in rent. In November of 1987, Erlich reduced his rental payments to $38,000 per month. By 1990, he owed over $450,000 in back rent.
There is a silver lining to this story. In November of 1987, Schraiber filed for bankruptcy. His portfolio contained only one asset of significant value, Oak Mill Mall ("Mall"), and the only thing standing between his creditors and the Mall was Erlich's option to purchase it. As fate would have it, Erlich found himself in a very favorable position. Unfortunately for Schraiber's creditors, Erlich was a formidable negotiator. He appreciated his position and pressed his advantage.
On July 17, 1989, the trustee of Schraiber's bankruptcy estate filed a motion to sell the Mall. A public auction was held and the high bid was 5.75 million dollars. All parties recommended its rejection.
The trustee's efforts to sell the Mall continued. On May 1, 1990, the trustee executed an agreement to sell the Mall to Oak Mill Enterprises ("Buyer") for 7.1 million dollars, contingent on the Buyer obtaining a new lease with Jewel. On May 25, 1990, the trustee presented three motions to the bankruptcy court: 1) leave to sell the Mall to the Buyer, 2) leave to appoint the Buyer as the exclusive managing and leasing agent of the Mall, 3) leave to compromise Erlich's rights under the lease, in exchange for Erlich's agreement either to the immediate termination of his lease, or to an assignment of his rights under the lease to a party of the trustee's choosing. The motion to enter the settlement with Erlich was granted on that same day.
Under the terms of the settlement, Erlich was to receive $438,000 from the proceeds of the sale. In addition, the estate was required to assume approximately $100,000 in liabilities which were the obligation of Erlich under his lease with Schraiber. Finally, Erlich was to be released from all of his back rent, an amount exceeding $450,000. The gravamen of this appeal is whether Erlich struck too good of a deal for himself.
To understand this appeal, it is essential to eliminate what is not at issue. There is no argument with the terms of the sale or the amount of proceeds it will generate. No one objects to the prospective purchaser, Oak Mill Malls. In fact, no one is suggesting that the sale should be aborted. The only relief being sought is that when the sale is consummated Erlich is given a smaller piece of the pie. Essentially, appellants want to have their pie and eat it to.
There is no gainsaying that Erlich found himself in a powerful bargaining position. Because there is no alleged improprieties, the court assumes that this was an arms length transaction. There is no better barometer of value than the price that the market bears. If it were not for the fact that this settlement is governed by the Bankruptcy Code, this court would not second guess a deal struck between sophisticated businessmen. Under the Code, however, this court is obligated to review settlements approved by the bankruptcy judge, albeit on an abuse of discretion basis. In Re Emerald Oil Co., 807 F.2d 1234, 1239 (5th Cir.1987).
Before this court can reach the question of settlement, it must address whether this appeal is moot. The appellee argues that because the appellants have not sought a stay for the sale of the Mall, the status quo has been inalterably changed and this court can no longer grant any relief. See In Re Roberts Farms, Inc., 652 F.2d 793, 798 (9th Cir.1981); Central States, Southeast and Southwest Area Pension Fund v. Central Transport Inc., 841 F.2d 92, 96 (4th Cir.1988). The appellants counter that the appeal is not moot because this court has the power to prohibit all or a portion of the...
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