Mitsuwa Corp. v. Orama Hospitality Grp., Ltd. (In re Orama Hospitality Grp., Ltd.), Case No.: 17-21720 (JKS)

• Decision Date: 13 June 2019
• Docket Number: Case No.: 17-21720 (JKS),Adv. Pro.: 18-01041-JKS
• Citation: 601 B.R. 340
• Parties: IN RE: ORAMA HOSPITALITY GROUP, LTD., Debtors. Mitsuwa Corporation, Plaintiff, v. Orama Hospitality Group, Ltd., Defendant.
• Court: U.S. Bankruptcy Court — District of New Jersey

601 B.R. 340

IN RE: ORAMA HOSPITALITY GROUP, LTD., Debtors.Mitsuwa Corporation, Plaintiff,

v.Orama Hospitality Group, Ltd., Defendant.

Case No.: 17-21720 (JKS)

Adv. Pro.: 18-01041-JKS

United States Bankruptcy Court, D. New Jersey.

Signed June 13, 2019

Entered June 14, 2019

McMANIMON, SCOTLAND & BAUMANN, LLC, Thomas M. Walsh, Esq., 75 Livingston Avenue, Roseland, New Jersey 07068, Counsel for Chapter 7 Trustee

MITCHELL SILBERBERG & KNUPP LLP, David B. Gordon, Esq., 12 East 49 Street, 30^th Floor, New York, New York 10017, Counsel for Landlord/Mitsuwa Corporation

DECISION AND ORDER RE: SUMMARY JUDGMENT MOTIONS

HONORABLE JOHN K. SHERWOOD, UNITED STATES BANKRUPTCY JUDGE

The relief set forth on the following pages, numbered three (3) through eighteen (18), is hereby ORDERED.

INTRODUCTION

Under New Jersey law, liquor licenses cannot be pledged as collateral for the debts of the holder of the license. Thus, in bankruptcy cases, these licenses are usually unencumbered assets, available to fund the costs of administration of a bankruptcy case as well as distributions to general unsecured creditors. In the motions before the Court, Mitsuwa Corporation ("Mitsuwa"), the landlord and a creditor of Orama Hospitality Group, Ltd. (the "Debtor"), claims that it had a pre-petition interest in the Debtor's liquor license which essentially removes the license from the Debtor's bankruptcy estate and delivers it to Mitsuwa in partial satisfaction of its claim. Mitsuwa relies on a pre-petition repurchase option contract with the Debtor that enables Mitsuwa to buy the liquor license back from the Debtor using its claims against the Debtor as currency — essentially the right to "credit bid."¹

The Debtor's Chapter 7 Trustee, Donald V. Biase (the "Trustee"), wants to sell the Debtor's liquor license and use the proceeds to pay the estate's creditors. The Trustee maintains that Mitsuwa's repurchase option is an executory contract that has been rejected — thus, Mitsuwa is left with nothing more than an unsecured claim. The Trustee also asserts that the repurchase option is unenforceable under New Jersey law. Both parties have submitted compelling arguments. For the reasons set forth below, the Court rules in favor of the Trustee and concludes that Mitsuwa's repurchase option is an executory contract that has been rejected and Mitsuwa is not entitled to specific performance. Also, the repurchase option cannot be enforced because it violates New Jersey law which prohibits encumbrances against liquor licenses.

JURISDICTION

The Court has jurisdiction over this proceeding pursuant to 28 U.S.C. §§ 1334(b), 157(a), and the Standing Order of Reference from the United States District Court for the District of New Jersey dated July 23, 1984, as amended September 18, 2012. This matter is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A), (B), (C), (E), and (O). Venue is proper under 28 U.S.C. §§ 1408 and 1409(a).

FACTS AND PROCEDURAL HISTORY

The Debtor filed a Chapter 11 proceeding on June 6, 2017 while operating a restaurant in Edgewater, New Jersey in premises leased from Mitsuwa. The Debtor and Mitsuwa were parties to litigation in State Court over defaults under the lease and amounts due from the Debtor to Mitsuwa under a promissory note when the bankruptcy case was filed. Mitsuwa sought relief from the automatic stay to allow the State Court litigation to continue but the Court denied this request. The Debtor was given an opportunity to revive its tenancy in the course of the bankruptcy proceedings provided it paid rent to Mitsuwa.²

Efforts to resolve the issues between the Debtor and Mitsuwa in the Bankruptcy Court's mediation program were unsuccessful. Shortly thereafter, the Court denied a motion by the Debtor to assume the lease.³ Mitsuwa commenced this adversary proceeding on February 5, 2018 seeking to compel the Debtor to turn over the liquor license. The Debtor agreed to vacate the leased premises by September 4, 2018.⁴ Then, the Debtor's case was converted to Chapter 7 and the Trustee was appointed.⁵ The Trustee has assumed the defense of Mitsuwa's adversary proceeding on behalf of the Debtor's estate.

In the Chapter 7 case, the Trustee sought to sell the Debtor's liquor license to a third party for $538,000 "free and clear of liens, claims and encumbrances."⁶ Mitsuwa opposed this motion and it is clear that the issues raised in this adversary proceeding concerning ownership of the liquor license have to be resolved before the Trustee's motion to sell is heard.

Both parties have moved for summary judgment. The Court heard oral argument on April 30, 2019 and reserved decision. While the case was on reserve, the United States Supreme Court issued its decision in Mission Product Holdings v. Tempnology, ––– U.S. ––––, 139 S.Ct. 1652, 203 L.Ed. 2d 876 (2019). Counsel for Mitsuwa brought this decision to the Court's attention and requested that the Court consider the impact of Mission Product on the issues before the Court. The parties submitted supplemental briefs.⁷ It appears that there are no genuine issues of material fact and this case is ready to be decided.

The most important document here is a Contract for Sale of Liquor License between the Debtor and Mitsuwa dated May 24, 2012 (the "CFS").⁸ Under the CFS, the Debtor bought the liquor license from Mitsuwa for $700,000 -- $50,000 was paid in cash and $650,000 in the form of a promissory note. Section 13 of the CFS provided Mitsuwa with an option to repurchase the liquor license. The right to exercise the option was triggered by, among other things, a default by the Debtor under its lease with Mitsuwa. The option price was $700,000 which was payable either in cash or by an offset of the amounts due to Mitsuwa under the promissory note and/or the lease. In the Court's view, this repurchase option, coupled with the right to "credit bid" for the license, is a well-conceived effort to retain an interest in the liquor license that could be exercised in the event of a credit default by the Debtor. Since this repurchase option is not a "lien" or "pledge" in a literal sense, it arguably does not run afoul of New Jersey's law against liquor license encumbrances, N.J.S.A. 33:1-26.⁹

Mitsuwa claims that it exercised its repurchase option on November 20, 2015 when it filed its Amended Complaint against the Debtor in State Court.¹⁰ Specifically, in Count III of the Amended Complaint, Mitsuwa demands judgment directing the Debtor to transfer the liquor license back to it. The Trustee disputes that this alone constitutes proper notice of Mitsuwa's election to exercise the repurchase option under the terms of the CFS. The Trustee correctly notes that there is nothing in the "WHEREFORE" provision under Count III (or any other provision) that refers to the CFS or the exercise of an option. The Trustee also argues that under § 13 of the CFS, some formal written notice of the exercise of the option was required but was never provided. Mitsuwa responds that pursuant to § 13(c) of the CFS, it was the Debtor that was obligated to provide Mitsuwa with formal notice of a triggering event. It contends that none of the notice requirements or deadlines in § 13 of the CFS applied to Mitsuwa. Mitsuwa cites to § 13(c) of the CFS which provides in part: "In the event of a breach of any of the terms of [the lease], the Seller herein [Mitsuwa] may exercise its right immediately upon the happening of such breach."

The Court views the notice provisions in §§ 13(a) - (c) of the CFS to be unclear. The provision in § 13(c) which requires the Debtor to give notice of its own breach under the lease to Mitsuwa also seems illogical. For the most part, it was the Debtor that owed performance to Mitsuwa under the lease and promissory note in the form of payments. If those payments were not made, the natural course would be for Mitsuwa to declare default and exercise its remedies. But that is not how the CFS is written. In any event, even the language cited above by Mitsuwa from § 13(c) of the CFS suggests that Mitsuwa had to do something in order to "exercise" its repurchase right. And, the only evidence on the record is the demand in Count III of the Amended Complaint discussed above which says nothing about the exercise of an option to repurchase.

There is no dispute that the amounts due to Mitsuwa under the lease and the promissory note are more than enough to pay the $700,000 option purchase price. Obviously, Mitsuwa would want to use its claims to pay for the transfer of the license, especially now that the Debtor is in bankruptcy. But, the CFS gives Mitsuwa the right to pay cash if it so elects. It seems that if Mitsuwa was going to exercise the repurchase option, it would do so in a written instrument saying that the option was being exercised pursuant to the terms of the CFS and that it was also exercising the right to offset its claims against the Debtor as opposed to paying cash.¹¹

To summarize, the state of affairs regarding the liquor license when this bankruptcy case was filed was unsettled. Mitsuwa certainly had the right under the CFS to exercise its option to repurchase the license by offsetting its claim against the Debtor as opposed to paying cash. The Court does not believe that Mitsuwa's demand for return of the license in Count III of the Amended Complaint should be viewed as the exercise of the option for a number of reasons — (1) the statement is made within a State Court Complaint that was primarily focused on breach of the lease, eviction from the leased premises and collection of the amount due under the promissory note; (2) it says nothing about the exercise of the option under § 13 of the CFS; and (3) it does not say whether Mitsuwa would be paying the purchase price in cash or by offset.

But, even if Mitsuwa gave proper notice of its intent to exercise the option before this case was filed, there is no question that the liquor license still remains in the Debtor's name. The Debtor cannot transfer its...