In re Wingspread Corp.

• Decision Date: 29 September 1992
• Docket Number: Bankruptcy No. 87B10619 (TLB) to 87B10630 (TLB),No. 91 Civ. 1926 (PNL).,91 Civ. 1926 (PNL).
• Citation: 145 BR 784
• Parties: In re WINGSPREAD CORPORATION, et al., Debtors. PANDORA INDUSTRIES, INC., Appellant, v. PARAMOUNT COMMUNICATIONS INC., f/k/a Gulf & Western Inc. and Harold Young, Trustee, Appellees.
• Court: U.S. District Court — Southern District of New York

145 B.R. 784 (1992)

In re WINGSPREAD CORPORATION, et al., Debtors.

PANDORA INDUSTRIES, INC., Appellant, v. PARAMOUNT COMMUNICATIONS INC., f/k/a Gulf & Western Inc. and Harold Young, Trustee, Appellees.

Bankruptcy Nos. 87B10619 (TLB) to 87B10630 (TLB), No. 91 Civ. 1926 (PNL).

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

September 29, 1992.

Daniel A. Zimmerman, New York City, for appellant Pandora Industries, Inc.

Weil, Gotshal & Manges (Marcia L. Goldstein, Brian S. Rosen, Kevin W. Barrett, Roger F. Assad, of counsel), for appellee Paramount Communications Inc.

OPINION AND ORDER

LEVAL, District Judge.

Pandora Industries, Inc. appeals the Bankruptcy Court's decision requiring it to reimburse Paramount Communications Inc. for monies advanced by Paramount to a lessor to cure defaults in leases held by Pandora.

BACKGROUND

On September 15, 1983, Kayser Roth Corporation, a former wholly owned subsidiary of Paramount Communications Inc., entered into three real property leases with the lessor, One Dow Court, Inc ("Dow").¹ Each of these leases was essentially identical except as to the site leased and the amount of rent. Simultaneous to the execution of the leases, Paramount executed three guaranties of its subsidiary's obligation as lessee.²

In September 1983, Kayser Roth assigned its interest in the leases to its affiliate, Gulfkay, Inc. At the same time, Paramount restated its guaranties of the lessee's obligations. In June 1985, Gulfkay assigned its interest as lessee under the leases to PSI, one of the Debtors in the bankruptcy proceedings. The assignments provided that they "shall not release Assignor Gulfkay from any of its obligations under the lease including the payment of all rents, additional rents and other payments reserved thereunder. . . ." Paramount again restated its guaranties of the lessee's obligations. Thereafter, in September, 1985, Paramount sold all of the stock of Gulfkay and Kayser-Roth and assumed their liabilities.

On April 8, 1987, the Debtors (including the assignee of Gulfkay's lease) filed voluntary petitions for relief under chapter 11 of the Bankruptcy Code. On that same day, the lessor Dow sent three letters to Paramount asserting that each of the leases was in default. Paramount acknowledged its guaranties but expressed concern that if it honored the guaranties by paying Dow the outstanding rent, the Debtors might later exercise their option under bankruptcy law to assume the executory portion of the leases and contend that no cure was necessary because no defaults existed. Seeking to avoid this risk, Paramount entered into three agreements with Dow ("the May 21 letters") providing that Paramount would advance monies to Dow to cover the amounts owed by the Debtors, but that the defaults under the leases would remain outstanding. The agreements further provided that in the event the Debtors assumed the leases and cured the defaults by payment of the arrearages, Dow would turn those payments over to Paramount as repayment for the monies previously advanced. In the event that the Debtors rejected the lease, Dow would apply the amounts advanced to Paramount's obligations.³ Under these agreements, in May 1987, Paramount advanced Dow an amount equal to the rental arrearage under the leases.

By motion dated April 8, 1988, the Debtors sought to assume the executory lease agreements and assign them to appellant Pandora.⁴ Paramount objected to the motion on the basis that the defaults in the leases had not been cured.

As all parties were eager to conclude the Debtors' assignment of the leases to Pandora, it was agreed that Pandora would post a letter of credit at closing in the amount of $123,791 in favor of Paramount, pending and subject to the later determination of Paramount's cross-motion for reimbursement of its advances. By order dated April 26, 1988, amended and restated on May 5, 1988, Judge Brozman approved the sale.

By order dated October 3, 1988, the bankruptcy court converted the cases to chapter 7. Thereafter, Paramount moved for summary judgment, seeking to recover the amount necessary to cure the continuing defaults under the leases. Pandora and the Trustee cross-moved for summary judgment.

Judge Brozman granted Paramount's motion for summary judgment and denied Pandora's and the Trustee's cross-motions for summary judgment. The Bankruptcy Court held that the payments made by Paramount to the lessor subrogated Paramount to the rights of the lessor against the Debtor as lessee and that such rights of subrogation permitted Paramount to demand that the Debtor cure all defaults relating to the leases that Paramount had paid for the debtor. Pandora, the assignee of the Debtors' interest as lessee of its assumed leases, appealed.

DISCUSSION

A bankruptcy court's conclusions of law are subject to de novo review. In re Ionosphere Clubs, Inc., 922 F.2d 984, 988-99 (2d Cir.1990). Taking the facts in the light most favorable to Pandora, this court must determine whether there is no genuine issue of material fact and whether Paramount is entitled to judgment as a matter of law.

A debtor in possession may assign an unexpired lease only if it assumes such lease in accordance with § 365(b) of the Bankruptcy Code, which provides that

"if there has been a default in an . . . unexpired lease of the debtor, the trustee may not assume such . . . lease unless, at the time of assumption of such . . . lease, the trustee — (A) cures, or provides adequate assurance that the trustee will promptly cure, such default; (B) compensates, or provides adequate assurance that the trustee will promptly compensate, a party other than the debtor to such . . . lease, for any pecuniary loss to such party resulting from such default. . . . "

11 U.S.C. § 365(b). Courts have held that a right to immediate cure, such as that provided for in § 365, gives rise to a priority administrative expense under § 507(a)(2). See LJC Corp. v. Boyle, 768 F.2d 1489, 1494 n. 6 (D.C.Cir.1985); In re Monroe Well Serv., Inc., 83 B.R. 317 (Bkrtcy.E.D.Pa.1988).

The parties to this appeal have never disputed that, in accordance with § 365(b), Dow as lessor would have had (if Paramount had not paid Dow) the right to compel the Debtors to cure all defaults and compensate Dow for pecuniary loss as a condition to the Debtors' assumption of the leases. The question on this appeal is whether Paramount may assert these same rights pursuant to § 509(a) of the Bankruptcy Code which governs "Claims of Codebtors." Section 509(a) provides in pertinent part that

an entity that is liable with the debtor on, or has secured, a claim of a creditor against a debtor, and that pays such claim, is subrogated to the rights of such creditor to the extent of such payment.

11 U.S.C. § 509(a).

Courts have divided on the relation between § 509 subrogation and the more familiar equitable doctrine of subrogation.⁵ The Ninth Circuit has stated that "when a bankruptcy court adjudicates a dispute arising from a contract claim, it must apply state law unless the bankruptcy code provides otherwise." In re New England Fish Co., 749 F.2d 1277, 1280 (9th Cir.1984) (emphasis added). Professing fidelity to this principle, some courts have held that, given the provision of § 509, the equitable doctrine of subrogation should not apply. See Creditor's Committee v. Massachusetts Department of Revenue, 105 B.R. 145, 154 (D.Mass.1989) (§ 509 clearly controls subrogation under the bankruptcy code); In re Cooper, 83 B.R. 544, 546 (Bkrtcy.C.D.Ill.1988) ("The right of a codebtor to subrogate under the Code is a federally created right. The right neither refers to nor is based on state law."). Other courts have held that a party asserting the right to subrogation under § 509 must satisfy the same prerequisites as those required by the doctrine of equitable subrogation. See, e.g., In re Kaiser Steel Corp., 89 B.R. 150, 152 (Bkrtcy.D.Colo.1988). And still other courts have found that § 509 provides an additional, but not exclusive, remedy in bankruptcy. See, e.g., In re Spirtos, 103 B.R. 240 (Bkrtcy.C.D.Cal. 1989). Given this uncertain relation, I will consider both § 509 and the doctrine of equitable subrogation in reaching my decision.

Relying on both state and federal law, Pandora argues that the bankruptcy court erred on three points, each of which provides a sufficient basis for vacation. First, Pandora argues that Paramount does not have standing to assert a right to subrogation because the advances made by Paramount did not constitute "payments." Second, Pandora argues that subrogation is not available to Paramount because Paramount advanced funds to satisfy its own primary liability, rather than the Debtors' liability. Finally, Pandora argues that the bankruptcy doctrine of equity of distribution precludes Paramount from using § 509 subrogation to gain priority for its claim.

A. The Question of Payment

Pandora argues that Paramount does not have standing to assert a subrogation claim under the Bankruptcy Code because Paramount did not pay the default. Pandora argues that instead, pursuant to the May 21 letters, Paramount merely advanced monies sufficient to cover the default. Given the May 21 arrangement, Pandora argues that Dow, not Paramount, had a claim for pre-petition rents, but Dow failed to assert that claim.

In making this argument, Pandora relies on a literal reading of § 509(a) of the Code, which provides that

". . . an entity that is liable with the debtor on . . . a claim of a creditor against the debtor, and that pays such claim, is subrogated to the rights of such creditor to the extent of such payment."

11 U.S.C. § 509(a) (emphasis added). Pandora also relies on New York cases holding that a potential subrogee has no cause of action until it has made payment in full to the obligee. See, e.g., Ross v. Pawtucket Mut. Ins. Co., 13 N.Y.2d 233, 235, 246 N.Y.S.2d 213, 195 N.E.2d 892 (1963).

I conclude that the Bankruptcy Court was correct in...