Speedwell Ventures, LL v. Berley Assocs. (In re Pazzo Pazzo, Inc.)
| Decision Date | 25 August 2022 |
| Docket Number | Bankruptcy 18-13516,18-13914 (JKS),Bankruptcy Adversary 18-1216 (JKS) |
| Parties | In re: PAZZO PAZZO, INC., Chapter 11, Debtor, In re: BERLEY ASSOCIATES, LTD., Chapter 11, Debtor, SPEEDWELL VENTURES, LLC, Plaintiff, v. BERLEY ASSOCIATES, LTD., and PAZZO PAZZO, INC., Defendants/Third- Party Plaintiffs, v. 62-74 SPEEDWELL AVE, LLC., Third-Party Defendant/Fourth- Party Plaintiff, v. STEWART TITLE GUARENTY CO., Fourth-Party Defendant. Civil Action Nos. 19-21633, 21-15548 (ES) |
| Court | U.S. District Court — District of New Jersey |
Not for Publication
ON APPEAL FROM ORDERS OF THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF NEW JERSEY
In civil action number 19-21633, 62-74 Speedwell Ave, LLC (“62-74”) appeals the Bankruptcy Court's decision granting Stewart Title Guaranty Corp.'s (“Stewart”) motion for summary judgment. In civil action number 21-15548, Speedwell Ventures, LLC (“Speedwell”) challenges the Bankruptcy Court's decision granting 62-74's motion to voluntarily dismiss its crossclaims. Because the genesis of these appeals is the same, the Court decides both in this single Opinion, and does so without oral argument. See Fed. R. Bankr. P. 8019(b)(3). For the following reasons, the Court AFFIRMS both of the Bankruptcy Court's decisions.
These appeals concern claims for indemnity and defense costs related to a dispute about real property located at 62-74 Speedwell Avenue in Morristown, New Jersey (the “Property”). In particular, 62-74 purchased the Property from Speedwell. Its title was challenged by Berley Associates, Ltd. (“Berley”) and Pazzo Pazzo, Inc. (“Pazzo”)-a former owner and a former lessee of the Property, respectively-in their respective Chapter 11 bankruptcy petitions. In response, 62-74, among other things filed crossclaims against Speedwell and a fourth-party complaint against Stewart. In both actions, 62-74 claimed a right to indemnification. To better contextualize these disputes, the Court first outlines the facts of the related dispute over the Property, and then the facts more particularly related to the indemnity claims and the Bankruptcy Court's decisions.
Berley previously owned the Property and leased it to an affiliated entity, Pazzo, to operate an Italian restaurant. (Civ. No 19-21633, D.E. Nos. 3-1 to 3-3, Appendix on Appeal, Volumes I to III (“19-21633 App'x”) at 204). After Berley filed a Chapter 11 bankruptcy petition in 2012, Berley sold the Property to one of its secured creditors, Lenox Hill Investors, LLC, as part of its reorganization. (Id. at 230). Pursuant to the sale, Berley retained an option to purchase the Property at a set price. (Id. at 236). After Lenox Hill Investors assigned its interest to Speedwell, Speedwell and Berley executed a separate option contract for the purchase of the Property. (Id. at 243).
Pursuant to the option and lease agreements, Speedwell could, upon termination of the lease, demand that Berley exercise its right to purchase the Property within thirty days. (Id. at 245). The lease terminated ten days after Speedwell gave Pazzo a notice terminating the lease. (Id. at 217). Speedwell could issue a notice terminating the lease upon “an event of default,” which included “abandonment, vacation or desertion of the” Property. (Id. at 216-17). Thus, taken together, if Pazzo abandoned or vacated the Property, then Speedwell could issue Pazzo a termination notice, after which the lease would terminate in ten days; Speedwell could then issue Berley a notice demanding it exercise its right to purchase the Property within thirty days.
On June 9, 2017, Speedwell sought to terminate the lease for, among other things, Pazzo abandoning and vacating the Property. (Id. at 256). The June 9 notice also served as a notice demanding Berley exercise its right to purchase the Property within thirty days after “the termination of the Lease.” (Id.). Berley did not exercise its right to purchase the Property, and on August 1, 2017, counsel for Speedwell sent a notice to Berley indicating that the option had lapsed. (Id. at 258-61). On August 18, 2017, the discharge of the option was recorded in the Morris County Clerk's Office. (Id. at 263-65). Thereafter, Speedwell sold the Property to Scotto Holdings, LLC (“Scotto”), which formed 62-74 to assign its interest in the Property. (Id. at 188 & 478).
Months later, on February 23 and 28, 2018, Pazzo and Berley separately filed for relief pursuant to Chapter 11 of the Bankruptcy Code. (Id. at 23 & 28). In their asset schedules, Pazzo listed the lease and Berley listed the option. (Id. at 38). On May 2, 2018, Speedwell filed a complaint seeking a declaratory judgment that neither the lease nor the option belonged to the bankruptcy estates. (Id. at 79-80). On June 21, 2018, Pazzo and Berley filed an answer and countercomplaint against Speedwell, and a third-party complaint against 62-74. (Id. at 300). The countercomplaint and third-party complaint raised two identical counts for relief: Count one sought to “set[] aside the transfer and termination of the Option as fraudulent pursuant to 11 U.S.C. § 548(a)(1)(B)”; and count two sought a declaration that the lease “is an executory contract or unexpired lease of the debtor that Pazzo . . . may assume or reject pursuant to 11 U.S.C. § 365.” (Id. at 312, 314 & 318-19).
After holding a two-and-a-half-day bench trial, the Bankruptcy Court held that the lease was validly terminated for abandonment and vacation, placing its reasons on the record on March 11, 2019. (Id. at 370-71 & 373-93). On April 24, 2019, in a written opinion, the Bankruptcy Court held that the option was not recoverable as a fraudulent conveyance under 11 U.S.C. § 548(a)(1)(B) because Berley's failure to exercise its right to purchase the Property was not a “transfer” of the Property within the meaning of Bankruptcy Code. (Id. at 400-02); see also In re Pazzo Pazzo, Inc., No. 18-13516, 2019 WL 1858845, at *2-3 (Bankr. D.N.J. Apr. 24, 2019). Pazzo and Berley appealed both rulings.
On June 18, 2021, the Court affirmed the Bankruptcy Court. See Pazzo Pazzo, Inc. v. Speedwell Ventures, LLC, No. 18-15361, 2021 WL 2493487 (D.N.J. June 18, 2021). In particular, the Court held that the Bankruptcy Court did not commit clear error in finding that Pazzo abandoned or vacated the Property. Id. at *5-6. The Court also held that the option was not recoverable as a fraudulent conveyance because a naturally expired right to buy property is not a transfer of that property within the meaning of Bankruptcy Code. Id. at *6-9. The Court's rulings are now on appeal to the Third Circuit.
With that context in mind, the Court outlines the facts more particularly related to 62-74's purchase of the Property and the indemnity agreements it entered.
On December 22, 2017, just a few months after the option was discharged, Speedwell entered into a purchase and sale agreement to sell the Property to Scotto for $3,300,000. (19-21633 App'x at 481). The sale agreement represented that the lease and option were terminated. (Id. at 492). But it provided that Speedwell and its principal, Jack Zakim, would indemnify, defend, and hold harmless Scotto for all claims asserted against Scotto related to the lease or option to the extent title insurance did not cover the claims. (Id. at 500).
On February 2, 2018, Speedwell and Scotto entered into an amended sale agreement. (Id. at 266). The amended sale agreement dropped the sale price by $300,000. (Id. at 267). The parties agreed that Speedwell and Zakim would indemnify, defend, and hold harmless Scotto for all claims asserted against Scotto related to the lease or option to the extent not covered by title insurance. (Id. at 269). But the amended sale agreement changed the indemnification provision in several ways:
On or around February 9, 2018, Scotto formed 62-74 to take title to the Property, and it assigned 62-74 the right to purchase the Property. (Id. at 474). The sale of the Property closed on or around February 14, 2018. (Id. at 281-82).
On February 16, 2018, CB Title, an agent of Stewart, issued a policy of title insurance (the “Policy”) that insured 62-74 in connection with the Property. (Id. at 288). Relevant here are two provisions of the Policy. First, Exclusion 3(a) of the Policy excluded from coverage (Id. at 290 (emphasis added)). Second, Exception 8 in Schedule B of the Policy excepted from coverage damages and costs (Id. at 297).
After Berley and Pazzo filed their Chapter 11 petitions and asserted claims to recover the lease and option, 62-74 sought indemnification and a defense from Stewart. In a letter dated July 6, 2018, Stewart denied 62-74's request for coverage relating to the lease, citing Exception 8 of the Policy for the rights of tenants of unrecorded leases, but granted...
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