Matter of Parkview-Gem, Inc.

• Decision Date: 20 February 1979
• Docket Number: 73-B-1683-W-2.,No. 78-0731-CV-W-2,78-0731-CV-W-2
• Citation: 465 F. Supp. 629
• Parties: In the Matter of PARKVIEW-GEM, INC., a Delaware Corporation, Debtor. William F. MAUER, Trustee, Plaintiff/Appellant, v. CORONDOLET REALTY TRUST, Defendant/Respondent.
• Court: U.S. District Court — Western District of Missouri

465 F. Supp. 629

In the Matter of PARKVIEW-GEM, INC., a Delaware Corporation, Debtor William F. MAUER, Trustee, Plaintiff/Appellant, v. CORONDOLET REALTY TRUST, Defendant/Respondent.

Nos. 78-0731-CV-W-2, 73-B-1683-W-2.

United States District Court, W. D. Missouri, W. D.

February 20, 1979.

COPYRIGHT MATERIAL OMITTED

Patrick Lysaught, Jackson & Sherman, Kansas City, Mo., for plaintiff-appellant.

Michael R. Roser, Berman, DeLeve, Kuchan & Chapman, Kansas City, Mo., for defendant-respondent.

MEMORANDUM OPINION AND ORDER AFFIRMING THE DECISION OF THE BANKRUPTCY JUDGE

COLLINSON, District Judge.

I. INTRODUCTION

This is an appeal by the trustee for Parkview-Gem, Inc., a debtor in reorganization proceedings under Chapter X of the Bankruptcy Act, 11 U.S.C. §§ 501 et seq. (1970). The Bankruptcy Court allowed in part certain claims asserted against Parkview by Corondolet Realty Trust. Corondolet has not appealed those portions of the Bankruptcy Court's order which deny in part the claims in question. Pursuant to Local Bankruptcy Rule 19(F), the parties have stipulated that the appeal may be considered on the briefs filed in the proceedings below.¹

The issue on appeal is whether the Bankruptcy Court erred in partially allowing repair and remodeling expenses in computing a lessor's claim for damages under § 202 of the Bankruptcy Act, 11 U.S.C. § 602, which in relevant part provides:

The claim of the landlord for injury resulting from the rejection of an unexpired lease of real estate or for damages or indemnity under a covenant contained in such lease shall be provable, but shall be limited to an amount not to exceed the rent, without acceleration, reserved by such lease for the three years next succeeding the date of the surrender of the premises to the landlord or the date of reentry of the landlord, whichever first occurs, * * *.

The Court has jurisdiction to decide the issues presented in this appeal under the provisions of 28 U.S.C. § 1334 and 11 U.S.C. § 11(10). For the reasons stated below, the order of the Bankruptcy Court will be affirmed.

II. STATEMENT OF FACTS

In November, 1966 and October, 1967, four leases on property located in Memphis, Tennessee were executed between Corondolet as lessor and Parkview as lessee.² Each leasehold was for a twenty-year term. The leases called for a minimum base rental, payable in monthly installments, and an annual adjustment based on the All Commodities Wholesale Price Index published by the United States Department of Labor. This adjustment was designated "additional rental." Also payable as "additional rental" by the lessee were all taxes, assessments and other public charges on the property. Parkview covenanted to pay all utility bills and to maintain both casualty and liability insurance on the premises. Parkview was also obligated to make all repairs necessary to maintain the premises in good and safe condition. The leases were thus what the parties have called "net-net," that is, the lessee was to pay all costs attributable to occupancy of the premises except ground rent.³

In April, 1973, Parkview gave Corondolet notice that it intended to cease doing business at all four locations. Rent was paid through August, 1973. At that time, an agreement was executed suspending Parkview's rental obligations on three of the properties and modifying its obligations on the fourth. The agreement recited Parkview's financial difficulties and stated that Corondolet was attempting to relet the premises. Among the various provisions were the following:

Corondolet agrees not to look to Tenant under said leases, or Parent under its guarantee of said leases, for payment of all monies expended and to be expended by Corondolet in order to remodel said premises and otherwise make them ready for occupancy by new tenants. The approximate cost of such remodeling is presently estimated to be $1,850,000.00.

* * * * * *

Anything to the contrary herein contained notwithstanding, in the event that either Tenant or Parent files a petition or in the event any petition is filed against either of them under any provision of the Bankruptcy Act, * * *, then upon the happening of such event all payments suspended pursuant to the terms of this agreement shall be deemed automatically and ipso facto reinstated in full and shall be immediately due and payable without notice or demand (which notice and demand are hereby waived) and any and all claims Corondolet may now have and then may have against either or both of said Tenant or Parent under and pursuant to the aforesaid four (4) leases and the guarantee thereof by Parent and under and pursuant to the guarantee of both Tenant and Parent contained in this agreement shall be provable and allowable in full, which claims shall include but will not be limited to claims for damages arising from the breach of the aforesaid leases and all costs and expenses of remodeling and reletting said premises.

* * * * * *

Tenant and Parent shall at their own cost and expense make any necessary repairs to the aforesaid premises so as to put said premises in a reasonable condition for construction to proceed in order to accommodate new tenants. Corondolet agrees to cooperate so as not to require any repairs that would be obviated by contemplated reconstruction of such premises.

* * * * * *

(Emphasis added.)⁴

As things turned out, Parkview was unable to meet its general financial obligations and the reorganization proceedings were commenced. Thereafter, the trustee rejected, or caused to be rejected, all four leases pursuant to § 116(1) of the Bankruptcy Act, 11 U.S.C. § 516(1).⁵ In due course, Corondolet filed three claims in the reorganization proceedings claiming damages resulting from rejection of the leases.⁶

Parkview was what the parties have called a "single-user." This means that the entire leased area in each of the four locations was used for one retail operation. Following rejection of the leases, Corondolet attempted to obtain new "single-user" tenants but, for one reason or another, was unable to do so.⁷ All four properties were ultimately relet to "multiple users," i. e., several smaller retail stores. These lessees demanded that Corondolet make extensive renovations and repairs to the four locations. The alterations were made and Corondolet incurred expenses totaling $3,340,424.00 for the four properties.

III. THE DISPUTED CLAIM

Under § 202 of the Bankruptcy Act, 11 U.S.C. § 602, quoted above, the most that can be recovered as damages from rejection of an executory lease is the rent reserved for the three years following termination of the leasehold. The relevant three-year period in this case is September 1, 1973 to August 31, 1976. Parkview would have paid $3,299,349.00 for rent on the four properties during that period of time. Accordingly, that figure is the maximum amount allowable.⁸

During the three-year period, however, Corondolet collected rent from the new tenants totaling $1,922,312.00. The difference between what Parkview would have paid and what the new tenants paid is $1,377,067.00. This amount is clearly allowable under the statute and there is no dispute on that point.

Corondolet contended in the Bankruptcy Court that it should also be entitled to recover the remodeling expenses it incurred in obtaining the new tenants. Its position was that these expenses were reasonable and necessary to mitigate the damages. As noted, these expenditures totaled $3,340,424.00. This figure added to the difference in rental would give Corondolet a claim totaling $4,717,491.00. However, since the statute sets the maximum allowable claim at three years' rental, in this case $3,299,349.00, Corondolet contended that it should be allowed that sum.

Responding to the claim for expenses, the trustee argued that the remodeling enhanced the value of the premises by changing single-purpose facilities into more marketable multipurpose facilities. The trustee also argued that the remodeling allowed Corondolet to obtain leases for a longer term and that this factor also enhanced the value of the premises.⁹ The trustee pointed out that the four properties could have been relet as warehouse space without any renovation and the difference in rent would have been an allowable claim. That being so, continued the trustee, the fact that Corondolet voluntarily opted for higher rent and good long-term tenants by altering the premises should not be allowed to enhance its claim. This is because the trustee viewed the remodeling charges as "more than offset" by the increased value of the premises. Trustee's Brief, p. 3. Finally, the trustee contended that these expenditures are not really expenses in the accounting sense because the remodeling costs have been amortized over the terms of the new leases or longer for the work done to the buildings.

The trustee concedes that items of expense incurred by a lessor for repairs which were intended to be included as rental under a "net-net" lease are properly chargeable to the lessee. The trustee argues in this case that the only such items properly chargeable to Parkview are expenses for roof repair since Parkview would have been obligated under the leases to make such repairs. The amount spent for roofing repairs on the four properties totaled $200,753.00. This figure added to the difference in rental would give Corondolet a claim totaling $1,577,820.00.

Thus, the parties agree that Corondolet has an allowable claim but disagree by $961,237.00 as to the amount of the claim. The Bankruptcy Court allowed less than Corondolet claimed but more than the trustee conceded. Emphasizing that a Bankruptcy Court is a court of equity, and recognizing that there was some merit to both sides of the dispute, the Court stated:

. . . because it is impossible to determine from the evidence the increased value of the premises to the landlord over the years, I will allow the landlord's expenses for sitework, roof and building structure in sum si

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