Theatre Row Phase Ii Associates v. H & I Inc.

• Decision Date: 21 January 2011
• Docket Number: No. 09 cv 06946 (GBD).,09 cv 06946 (GBD).
• Citation: 443 B.R. 592
• Parties: THEATRE ROW PHASE II ASSOCIATES, Defendant–Appellant,v.H & I INC., Plaintiff–Appellee.
• Court: U.S. District Court — Southern District of New York

443 B.R. 592

THEATRE ROW PHASE II ASSOCIATES, Defendant–Appellant,

v.H & I INC., Plaintiff–Appellee.

No. 09 cv 06946 (GBD).

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

Jan. 21, 2011.

David Clifford Burger, New York City, Steven T. Halperin, New York City, for Debtors.

MEMORANDUM DECISION AND ORDER

GEORGE B. DANIELS, District Judge.

Appellant Theatre Row Phase II Associates (“Theatre Row”) appeals from the Final Order of the United States Bankruptcy Court for the Southern District of New York (“Bankruptcy Court”) dated June 23, 2009. The Bankruptcy Court granted a claim by Appellees H & I, Inc. (“H & I”) for a two-percent (2%) interest in certain distributions in Theatre Row's Chapter 11 Bankruptcy case (“H & I claim”) and dismissed all defenses and objections asserted by Theatre Row as precluded under the doctrines of res judicata and collateral estoppel. Theatre Row appeals on the ground that its objections and defenses were neither litigated nor decided in the state court proceeding. Based upon this asserted error, Theatre Row seeks to have this Court reverse the Bankruptcy Court's Final Order and remand this matter to the Bankruptcy Court for further proceedings.

MATERIAL FACTS & PROCEDURAL HISTORY

On or about June 27, 1980, Theatre Row entered into an Assignment and Assumption of Lease agreement with the City of New York, as landlord, and 42nd Street Development Corporation, as tenant. Ex. 12, Debtor's Opposition to Notice of Motion by H & I, Inc. for an Order Determining its Claim to be Allowed and Directing Payment of that Claim, ¶ 4. The leased property consisted of the entire block in Manhattan bounded by West 42nd Street to the north, Tenth Avenue to the west, West 41st Street to the south, and Dryer Avenue to the east (“Property”). Id. Theatre Row succeeded to the rights and obligations of 42nd Street Development Corp. (“Ground Lease”), including a fixed price purchase option for purchase of the Property from the City for the sum of $100,000. Id. Theatre Row's interest in the Ground Lease constituted substantially all of the assets of Theatre Row since 1980. Id.

At some point between 1980 and 1986, a dispute arose between Theatre Row and a long-time principal tenant, National Recording Studio (“NRS”). Id. ¶ 6. The parties reached a settlement agreement under which Theatre Row agreed to give a 2% interest in the Limited Partnership known as Theatre Row Phase II Associates to NRS or a designee selected by Mr. Peter Lustig, one of several interested principals in NRS. Id. ¶ 22 and Exhibit B attached thereto. In exchange, the parties settled all outstanding grievances and executed a Lease Modification Agreement on March 13, 1986. Id. Pursuant to that agreement, Theatre Row directly assigned a 2% interest to H & I, a corporation in which Mr. Lustig was the sole shareholder. Id.

Sixteen years later, in 2002, NRS defaulted in its rent payments to Theatre Row and abandoned the premises. Id. ¶ 12. Theatre Row obtained a judgment against NRS for rent in the amount of $1,745,781.84 plus post-judgment interest increasing the total to over $2 million. Id. ¶ 19 and Exhibit A attached thereto. Theatre Row has been unable to attach any assets of NRS to enforce the judgment. Id. ¶ 20.

On January 10, 2003, Theatre Row filed for Chapter 11 bankruptcy by filing a petition for reorganization with the Bankruptcy Court. Ex. 1, Voluntary Petition (Chapter 11). Theatre Row was forced to sell the Ground Lease, its sole asset, in order to generate sufficient funds to pay its creditors. Ex. 12, ¶ 20. Theatre Row alleges that NRS' failure to pay millions of dollars in rent was the direct and proximate cause of Theatre Row's need to file bankruptcy. Id. On June 9, 2003, H & I timely filed a proof of claim seeking payment of an “unliquidated [2%] interest in the property of debtor,” estimated to be in excess of $3 million. Ex. 11, Motion to Allow Claim of H & I, Inc., ¶ 8–9 and Exhibit A attached thereto. On February 4, 2004, Theatre Row commenced a Special Proceeding pursuant to N.Y. CPLR § 5225(b) against H & I in New York State Supreme Court. Ex. 16, Affidavit in Opposition to Motion to Allow Claim of H & I. Inc., ¶ 4; Ex. 15, Supplemental Declaration in Support of Motion to Allow Claim of H & I, Inc., at 16–24. Theatre Row sought a declaratory judgment that the 2% interest held by H & I was the property of NRS in the hands of a third-party and thus could be used to satisfy the NRS Judgments. Ex. 11, at Exhibit C, Decision and Order. Theatre Row challenged the validity of its direct assignment of the 2% interest to H & I in 1986. Id. It argued that because H & I never provided consideration for the 2% interest, NRS had remained the rightful owner of the property. Id. Theatre Row further argued that NRS could have assigned its 2% interest only upon receipt of full and fair consideration. Id.

On August 2, 2006, the state court entered a Decision and Order dismissing Theatre Row's § 5225(b) proceeding and denying its motion for summary judgment. Id. The state court found that (a) the assignment, which was in exchange for “$1.00 and other good and valuable consideration” was valid; (b) “the assignment executed was between ... [Theatre Row] and [H & I] directly”; (c) “[Theatre Row] made the transfer in 1986 to [H & I] as part of a global settlement with knowledge of all parties and facts”; and (d) the settlement was unchallenged and deemed valid by all parties for eighteen years. Id. The state court concluded that “there has been no fraud and [Theatre Row] does not have a superior right against H & I.” Id. On October 18, 2007, the First Department of the Appellate Division affirmed the Decision and Order. Id., at Exhibit E.

On January 22, 2008, H & I filed a motion in the Bankruptcy Court to allow its claim for 2% of certain Theatre Row distributions. Ex. 11. On March 13, 2008, Theatre Row filed its opposition, asserting objections and defenses such as unclean hands, piercing the corporate veil, unjust enrichment, breach of fiduciary duty, and breach of the implied covenant of good faith and fair dealing.¹ Exs. 12; 13, Response to Debtor's Opposition; 15–16. After hearing oral arguments on March 18, 2008, and September 4, 2008, the Bankruptcy Court entered an Order on October 3, 2008 allowing H & I's Claim and dismissing Theatre Row's objections for the reasons stated on the record at the September hearing (“Allowance Order”). Ex. 12; 14, Transcript of Hearing Held on 3/18/08; 19, Transcript of Hearing Held on 9/4/08; 21, Order Signed Determining H & I Inc.'s Claim to Be Allowed. The Bankruptcy Court explained that the state court proceeding had res judicata and collateral estoppel effect on Theatre Row's objections and defenses. Specifically, the Bankruptcy Court stated, “I think what [Theatre Row] is asking me to do is to in essence allow him to go behind [the State Court's] final judgment.... I think that [Theatre Row] is attempting to have me ... relitigate what they have already litigated in the state court and what there was an adverse ruling on.” Ex. 19, at 6, 9–10.

After further hearings and motions regarding Theatre Row's failure to comply with the Allowance Order and the amount of H & I's 2% interest, the Bankruptcy Court entered the Final Order fixing H & I's Claim in the Chapter 11 case on June 30, 2009. Ex. 38, Final Order Not Signed. The Final Order, which is the subject of the instant appeal, stated that, upon the various prior papers and proceedings, including the Allowance Order: (a) H & I's claim was fixed in the amount of 2% of certain Theatre Row distributions; (b) provision was made for H & I's claim with respect to future Theatre Row distributions; and (c) provision was made for supersedes bond or $1,809,200 being held in escrow in substitute for supercede as bond. Ex. 39, Proposed Counter Order Signed.

JURISDICTION & STANDARD OF REVIEW

District courts have jurisdiction to hear appeals from final orders issued by bankruptcy courts pursuant to 28 U.S.C. § 158(a)(1) and Fed. R. Bankr.P. 8001(a). “On an appeal the district court or bankruptcy appellate panel may affirm, modify, or reverse a bankruptcy judge's judgment, order, or decree or remand with instructions for further proceedings.” Fed. R. Bankr. P. 8013. The Bankruptcy Court's legal conclusions are subject to de novo review, factual findings are subject to a clearly erroneous standard, and decisions based on equitable relief are subject to an abuse of discretion review. See Jackson v. Novak (In re Jackson), 593 F.3d 171, 176 (2d Cir.2010) (“independently review the factual determinations and legal conclusions of the bankruptcy court, accepting the bankruptcy court's factual findings unless they are clearly erroneous....”) (quoting In re Momentum Manufacturing Corp., 25 F.3d 1132, 1136 (2d Cir.1994) (internal quotation omitted)); Nevada Power Co. v. Calpine Corp. (In re Calpine Corp.), 365 B.R. 401, 407 (S.D.N.Y.2007); In re Adelphia Communications Corp., 2006 WL 1559437, at *2, 2006 U.S. Dist. LEXIS 37112, at *6 (S.D.N.Y. June 6, 2006).

PRECLUSIVE EFFECT OF STATE COURT PROCEEDING

Theatre Row argues that the Bankruptcy Court erred in dismissing its objections and defenses to the H & I claim because the state court's § 5225(b) special proceeding did not have res judicata or collateral estoppel effect. Theatre Row identifies Julien J. Studley, Inc. v. Lefrak, 66 A.D.2d 208, 412 N.Y.S.2d 901 (N.Y.App.Div.1979), aff'd, 48 N.Y.2d 954, 425 N.Y.S.2d 65, 401 N.E.2d 187 (1979), as binding precedent that “a § 5225(b) special proceeding raises a different issue than an action asserting claims based on other legal theories such as piercing the corporate veil, agency arguments, and the like,” and thus “neither action would have res judicata or collateral estoppel effect as to the other.” Appellant's Brief at 18. Theatre Row contends that the bankruptcy action involved different issues from the special proceeding because none of its objections...