Wilmington Turst, National Association v. Lord & Taylor LLC
| Decision Date | 22 July 2021 |
| Docket Number | Civil Action 3:20cv878 |
| Court | U.S. District Court — Eastern District of Virginia |
| Parties | WILMINGTON TRUST, NATIONAL ASSOCIATION Appellant, v. LORD & TAYLOR LLC, et al., Appellees. |
Wilmington Trust (the “Trust”) appeals a bankruptcy court Order denying the Trust standing to enforce the provisions of a master lease. Lord & Taylor, LLC (“L&T”); Le Tote, Inc. (“Le Tote”); Hudson's Bay Company ULC, HBC U.S. Propco Holding LLC, and HBC Global Properties LLC (together “HBC”); and the Borrower Landlords[1] move to dismiss the appeal pursuant to Rule 8013 of the Federal Rules of Bankruptcy Procedure. (ECF No. 12.) For the reasons that follow, the Court will grant the motion to dismiss.
On appeal from a bankruptcy court, the district court “may affirm, modify, or reverse a bankruptcy court's judgment, order, or decree or remand with instructions for further proceedings.” Midland Funding LLC v. Thomas, 606 B.R. 687, 692 (W.D. Va. 2019) (quoting Harman v. Levin, 772 F.2d 1150, 1153 n.3 (4th Cir. 1985)). Final orders of a bankruptcy court are appealable to a district court pursuant to 28 U.S.C. § 158(a). To be considered a final order, a bankruptcy court order need only dispose of discrete issues within a specific case. Gold v. Guberman ( ), 407 F.3d 656, 660 (4th Cir. 2005) (internal quotations omitted).
When reviewing a bankruptcy court's decision on appeal, a district court functions as an appellate court and applies the standards of review usually applied in federal courts of appeal. Cal. Self-Insurers' Sec. Fund v. Siegel, No. 3:18cv619, 2019 U.S. Dist. LEXIS 167399, at *19-20 (E.D. Va. Sept. 27, 2019). The district court reviews the bankruptcy court's legal conclusions de novo and its factual findings for clear error. Stancill v. Harford Sands, Inc (In re Harford Sands Inc), 372 F.3d 637, 639 (4th Cir. 2004). A finding of fact is clearly erroneous when a court reviewing it, taking into account all of the evidence, is left with the definite and firm conviction that a mistake has been committed. Anderson v. City of Bessemer City, 470 U.S. 564, 573 (1985). In cases where the issues present mixed questions of law and fact, the court will apply the clearly erroneous standard to the factual portion of the inquiry and de novo review to the legal conclusions derived from those facts. Gilbane Bldg. Co. v. Fed. Rsrv. Bank of Richmond, 80 F.3d 895, 905 (4th Cir. 1996).
Under Rule 12(b)(6), a motion to dismiss gauges a complaint's sufficiency without resolving any questions about the facts or testing the claims' merits.[2] Republican Party of N.C. v. Martin, 980 F.2d 943, 952 (4th Cir. 1992). When considering the motion, the court must accept all allegations in the complaint as true and draw all reasonable inferences in the plaintiffs favor. Nemet Chevrolet, Ltd. v. Consumeraffairs.com, Inc., 591 F.3d 250, 253 (4th Cir. 2009).
The principle that the court must accept all allegations as true, however, does not apply to conclusory statements and legal conclusions. See Iqbal, 556 U.S. at 678; Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007). To survive a motion to dismiss, a complaint must state facts that, when accepted as true, state a facially plausible claim to relief. Iqbal, 556 U.S. at 678. “A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Id.
This appeal concerns the Trust's rights under several connected lease documents, some of which date back to 2015. To raise capital for various business ventures, HBC undertook a saleleaseback transaction in 2015 with its 99%-owned subsidiary, HBS Global Properties LLC (“HBS”). (ECF No. 8-8, at 26.) First, HBC, through HBS, sold twenty-four L&T stores to the twenty-four Borrower Landlords. (Id.) The parent company of each Borrower Landlord was HBC-owned company Saks-LT Master Mezzanine, LLC. (ECF No. 2-2, at 215.) L&T, then a wholly owned subsidiary of HBC, leased twenty-four stores from the Borrower Landlords. (ECF No. 2-4, at 28-123.)
A series of documents memorialize these transactions. First, the master lease sets out the terms by which L&T rented twenty-four store locations from twenty-four different Borrower Landlords. The master lease details each of the twenty-four individual mortgages and obligates L&T to pay rent to each Borrower Landlord on each separate property. (Id. at 28, 60.) Second, the Subordination, Non-Disturbance and Attornment Agreement (the “SNDA”) requires that L&T pay rent to a lockbox account rather than directly to the twenty-four Borrower Landlords. (ECF No. 2-5, at 3.) The SNDA does not directly mention the Trust. And third, the loan extension agreement extended an $846 million loan memorialized in the original loan agreement.
The original loan agreement set out the terms of a loan from lenders J.P. Morgan, Bank of America, and Column Financial, Inc. (“Column”) to HBC-controlled special entities, including the Borrower Landlords. (ECF No. 2-3, at 1.) In the loan extension agreement, the lenders (J.P. Morgan, Bank of America, and Column) assigned the loans from themselves to the Trust, (id. at 55, 57, 60; ECF No. 2-7, at 1), thereby obligating the Borrower Landlords to pay the loan back in monthly payments to the Trust. (ECF No. 2-4, at 28-123; ECF No. 2-5, at 1-19; ECF No. 2-4, at 1-27.)
Several other documents further link HBC and the Trust to the master lease. A series of separate, recorded 2015 mortgage assignments with identical effective dates purport to convey “all right, title and interest of Assignor in” each of the Borrower Landlords' mortgages to the Trust.[3] And a loan guaranty states that HBC guarantees the loan on behalf of the Borrower Landlords. (ECF No. 2-7, at 15.)
Le Tote's acquisition of L&T in 2019 connected Le Tote to the lease documents. (ECF No. 8-9, at 1.) As part of the sale, LT Propco LLC (“LT Propco”), a subsidiary of HBC, promised Le Tote that it would pay the outstanding mortgages owed by L&T to the Trust-controlled lockbox account until November 2022. (ECF No. 8-9, at 24.) LT Propco did not make the same guarantee to the Trust, which was not a party to the sale agreement. (ECF. No. 88, at 36.) In a press release announcing the sale, HBC stated that it would “maintain economic responsibility for the rent payments owed by Lord + Taylor at the 38 locations operated by Le Tote for the initial three years post-closing” and that the company “expect[ed] to continue to be liable for approximately $77 million in Lord + Taylor total cash rent on an annual basis.” (ECF No. 8-9, at 1.)
L&T paid its last rent installment in March 2020. (Id. at 140.) Shortly afterwards, HBC informed Situs, which serviced the loan for the Trust, of the default. (ECF No. 8-8, at 10.) No party has paid any rent since. (ECF No. 8-9, at 140.)
In April 2020, the Trust attempted to declare the loan in default, accelerate the loan, and revoke the Borrower Landlords' license to collect rents on behalf of the Trust. (ECF No. 8-8, at 21; ECF No. 8-9, at 140.)
The Trust has repeatedly sought to portray the Borrower Landlords, L&T, Le Tote, and HBC as one entity.[4] In bankruptcy court, the Trust insinuated that these parties had colluded or engaged in shadowy dealings with respect to the failure to compel rent payment under the master lease. (ECF No. 9-4, at 84.) Nothing in the record suggests that the Trust had evidence for these claims beyond charts showing HBC's corporate structure in 2015 and 2019. (ECF No. 2-1, at 108, 112.) The latter chart shows HBC's 25% stake in Le Tote and Le Tote's 100% ownership of L&T. (Id. at 112.)
On October 30, 2021, the bankruptcy court found that the Trust lacked standing to enforce the master lease provisions against L&T directly. (ECF No. 1-1, at 13.) In filing the motion to enforce the leases, the Trust relied on language in the SNDA that the Trust alleged independently established standing based on its status as a third-party beneficiaiy under Article XXXV of the master lease. (Id. at 18.) The bankruptcy court found that Article XXXV concerned only L&T's obligations to the parties designated as landlords under the loan documents, and that the operative language in the SNDA said L&T had to deliver rent funds to the lockbox account only as these funds were due to the Borrower Landlords, not the Trust. (Id. at 6-7.) In other words, the SNDA directed L&T to pay rent to the lockbox account but did not establish any direct L&T obligation to the Trust. The bankruptcy court also found that the part of the master lease concerning rent was in Article III, which gave the Borrower Landlords the right to change the due dates of the rent, and not Article XXXV, which conveyed some protections to the Trust that fell short of enforcement rights. (Id. at 18.)
The Trust attempted to assert ownership of the rents in default. (ECF No. 2-1, at 200.) The bankruptcy court held that under New York law, which all parties agreed governed the lease, no language in the assignment of rents to the Trust could convey title to the rents. (ECF No. 1-1, at 22.) The Trust had only a lien on rent payments. (Id. at 21.) A fundamental principle in bankruptcy law is that a debtor cannot owe identical debt to two different parties. 11 U.S.C.§ 502(e)(1)(B). The bankruptcy court found only that L&T owed rent to the Borrower Landlords, not the Trust. (ECF No. 1-1, at 18.)
On February 3, 2021, the bankruptcy court ordered the assumption and assignment of L&T's rights under the master lease to LT Propco. (ECF No. 10, at 7)....
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