In re Theatre Row Phase II Associates, Bankruptcy No. 03-10134 (PCB).

• Decision Date: 11 April 2008
• Docket Number: Adversary No. 04-04718 (PCB).,Bankruptcy No. 03-10134 (PCB).
• Citation: 385 B.R. 511
• Parties: In re THEATRE ROW PHASE II ASSOCIATES, Debtor. Request of Madison Equities, LLC for Payment of Administrative Expenses, and Madison Equities, LLC, Plaintiff, v. William J. Condren, Defendant.
• Court: U.S. Bankruptcy Court — Southern District of New York

385 B.R. 511

In re THEATRE ROW PHASE II ASSOCIATES, Debtor Request of Madison Equities, LLC for Payment of Administrative Expenses, and Madison Equities, LLC, Plaintiff, v. William J. Condren, Defendant.

Bankruptcy No. 03-10134 (PCB).

Adversary No. 04-04718 (PCB).

United States Bankruptcy Court, S.D. New York.

April 11, 2008.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Hass & Gottlieb, by Lawrence M. Gottlieb, Esq., Scarsdale, NY, M. Stuart Goldberg LLC, by Marc Stuart Goldberg, Esq., White Plains, NY, for Madison Equities, LLC.

Robinson Brog Leinwand Greene Genovese & Gluck, P.C., by Robert Leinwand, Esq., David Burger, Esq., New York, NY, for Debtor.

Gabriela P. Cacucci, Esq., New York City Law Department, Office of the Corporation Counsel, New York, NY, for the City of New York.

MEMORANDUM DECISION GRANTING MOTION TO DISMISS

PRUDENCE CARTER BEATTY, Bankruptcy Judge.

Theatre Row Phase II Associates, the debtor (the "Debtor") in this confirmed Chapter 11 case, was formerly the owner of the entire city block in Manhattan located between 10th Avenue and Dyer Avenue and bounded by 42^nd Street on the north and 41st Street on the south (the "Property"). Pursuant to an order of the Court, the Debtor was authorized to sell the Property to TRM Associates, L.L.C. ("TRM"). Following the sale of the Property and confirmation of a Chapter 11 plan, Madison Equities, LLC ("Madison"), who had been negotiating for the acquisition of the Property with the Debtor for many months prior to its sale to TRM, made a motion seeking payment of over $20 million in administrative expense claims (the "Request"). Shortly after filing the Request, Madison commenced an adversary proceeding against William J. Condren ("Condren"), the co-general partner of the Debtor. The factual allegations in the Request are identical to those made in the complaint in the adversary proceeding (the "Complaint").¹

In response to the Request and Complaint, the Debtor and Condren filed a joint Motion to Dismiss. For the reasons set forth below, the Court grants the Motion to Dismiss the Request and the Complaint.

Statement of Facts²

1. On January 10, 2003 (the "Filing Date") the Debtor filed a voluntary petition under Chapter 11 of the United States Bankruptcy Code (the "Code").³ The Debtor is a New York limited partnership.⁴

2. As of the Filing Date the Debtor had been the ground lessee of the Property since the early 1980's. The Property is located in an area that was known as Theatre Row and was one of various revitalization efforts of the City of New York undertaken in the early 1980's.⁵ The City of New York was the landlord under the Debtor's ground lease. The 40-year ground lease contained the right to one 10-year renewal term as well as granting the ground lessee the option to purchase the Property under certain circumstances for $100,000. The original ground lease transaction also involved the granting of several mortgages that were unpaid at the Filing Date. There was a small mortgage of about $450,000 held by the Ford Foundation. In addition there were significantly more substantial mortgages held by the City of New York's Economic Development Corporation ("EDC") and the Department of Citywide Administrative Services ("DCAS") (hereafter together with the City of New York, the "City") that had been granted as part of the original ground lease transaction. EDC filed a proof of claim in the amount for about $3.6 million. DCAS filed a proof of claim in the amount for approximately $7.7 million.

3. Debtor's major source of income was from leasing out the old Westside Airlines terminal located on a portion of the Property to various recording studios.⁶ Before the Filing Date, the Debtor and the tenant of that building had a dispute that ultimately went to arbitration over the rental due for a renewal term. The Debtor also had other disputes with the tenant over what it viewed as unlawful subleasing of certain of the leased space by the tenant. The arbitration award fixed a very substantially increased rental rate for the renewal term. Prior to the Filing Date, the tenant had ceased paying rent and had moved out abruptly after the award was issued. This left the Debtor without an adequate source of income to meet its obligations under the ground lease and as well as on the mortgages.

4. Shortly after the Filing Date and on January 18, 2003, the Debtor filed an adversary proceeding against the City seeking to have this court determine the proper calculation of the interest due on to the City on one of the mortgages, which raised complex legal issues and involved certain disputed facts. See A.P. 03-02056. In addition an action pending in the state court, which involved the City's attempt to collect the unpaid rent on the ground lease, was removed to the federal district court and referred to the bankruptcy court. See A.P. 03-02056. Both these litigations were contentious. See, e.g., Transcript 7/22/2004 (ECF No. 123). In addition to the disputes over the mortgage and lease payments, the City made numerous objections throughout the Chapter 11 case to such things as the Debtor's request for extensions of time to file a Chapter 11 plan.⁷

5. Realization of value from the Property sufficient to keep the ground lease payments current and pay the mortgages was an overarching objective of the Chapter 11 case because of the Debtor's illiquid state. Although the Debtor valued its interest in the Property on its schedules for an amount in excess of the amounts due on the outstanding mortgages, it needed the protection of Chapter 11 and the automatic stay to achieve a recovery satisfactory to its general and limited partners, as well as to deal with the City's claims.

6. From the Request and the Complaint it appears that in an effort to reach that goal, among other things, the Debtor, through Condren its managing partner, engaged in negotiations with Madison over the terms of a possible ground lease for the Property from late 2002, throughout 2003 and into Summer 2004. The Request and Complaint contain much detail about those negotiations. Just less than a year after the Filing Date, Condren sent a letter dated January 2, 2004 to Robert Gladstone ("Gladstone"), the managing member of Madison. Condren's January 2nd letter requested that Gladstone reconsider two provisions of Madison's proposal, including the provision for the rent during the initial term and the provision regarding rent during construction.⁸ The letter included the following language: "In consideration of the long and sustained effort you have already invested in this project, you are entitled to and are getting a last look." This so-called last look language ("Last Look Language") is repeatedly referred to by Madison in the Request and the Complaint. Condren also advised Gladstone in the letter that he was "in receipt of another offer from another developer" for the Property.

7. Madison and Condren continued to engage in negotiations after January 2004. While Condren's co-partner, Dyer, had been content until around mid-April 2004 to allow Condren to move forward with his negotiations, at that time Dyer solicited or received a cash offer of $60 million for the purchase of the Property from the Brodsky Organization. Condren was opposed to the Brodsky offer.⁹ The City was also interested in the $60 million offer from the Brodsky Organization. See ECF No. 106.

8. In the Spring of 2004, the City began discussions with the Debtor over a proposal of the Metropolitan Transit Authority (the "MTA") to extend the No. 7 subway line from the Port Authority further West, which would include placement of subway exits on the Property as well as possible utilization of a portion of the Property as a staging area for the subway construction. Madison was opposed to the placement of anything related to the subway on the Property. Madison alleges that Condren supported Madison's opposition to the City's subway plans with respect to the Property. Complaint ¶ 114. However, it is undisputed that in or about May 2004 Madison met directly with the City to discuss the subway issue in an attempt to resolve it satisfactorily. Condren consented to the meetings but did not attend. The City was seeking to reach an amicable but immediate agreement on the subway placement issues on the Property in the absence of which it was prepared to commence partial condemnation proceedings. The extension of the subway over the Property was but one element of a larger development project for other city-owned or controlled property located several blocks west of the Property.

The negotiations between the Debtor and Madison reached their apparent culmination in early August 2004 when a final draft ground lease between Madison and the Debtor was circulated. See Request ¶¶ 117-118. Condren then advised Madison that, rather than a ground lease, his partners were seeking to sell the Property. See Request ¶ 120. Madison does not allege that the change in the nature of the transaction from a ground lease to a sale was unacceptable to it. According to Madison, Condren stated that he had a purchase offer in hand from TRM of $100 million plus an additional $2.5 million payment to the City. See Request ¶ 121. The Request and Complaint detail further statements alleged to have been made by Condren in which he in words or substance agreed that Madison could have the deal at $105 million. Complaint ¶ 122-123. Thereafter Condren advised Madison that TRM had raised its offer to $107 million in addition to certain amounts on the City Claims and it stated to have again agreed to allow Madison a "last look". Complaint ¶ 127.

10. Madison states that it matched the TRM offer and Condren agreed they had a deal. Complaint ¶ 128. A ten-hour negotiation session occurred on August 11, 2004. Complaint ¶ 130. Following the negotiation session at approximately 1:37 a.m. on August 13, 2004, a final execution copy of a purchase and sale...