Opinion
No. 55188/11.
2012-03-9
380 YORKTOWN FOOD CORP., Plaintiff, v. 380 DOWNING DRIVE, LLC, Defendant.
Zeichner Ellman & Krause LLP by Bruce S. Goodman, Esq., New York, attorneys for plaintiff. Shamberg Marwell & Hollis, P.C. by P. Daniel Hollis, III, Esq., John S. Marwell, Esq., Carrie E. Hilpert, Esq., Mount Kisco, attorneys for defendant.
Zeichner Ellman & Krause LLP by Bruce S. Goodman, Esq., New York, attorneys for plaintiff. Shamberg Marwell & Hollis, P.C. by P. Daniel Hollis, III, Esq., John S. Marwell, Esq., Carrie E. Hilpert, Esq., Mount Kisco, attorneys for defendant.
ALAN D. SCHEINKMAN, J.
Plaintiff, 380 Yorktown Food Corp. (“Plaintiff” or “Yorktown Food”) moves, pursuant to CPLR 3212, for an order granting it summary judgment and a judgment declaring the rights, responsibilities and obligations of the parties with regard to a sublease entered into between Plaintiff and non-party The Great Atlantic & Pacific Tea Company (“A & P”) concerning property located at 380 Downing Drive, Yorktown Heights, New York (the “Property”) dated July 23, 1992 (the “Sublease”). Defendant 380 Downing Drive, LLC (“Defendant” or “380 Downing Drive”) opposes Plaintiff's motion and cross-moves, pursuant to CPLR 3212, for an order denying Plaintiff's motion and granting Defendant's cross-motion for a judgment dismissing Plaintiff's Complaint, denying Plaintiff's claimed right to possession and directing that Plaintiff's sublease be deemed terminated. Defendant also seeks summary judgment on its counterclaim for ejectment. Plaintiff opposes Defendant's cross-motion.
FACTUAL AND PROCEDURAL BACKGROUND
This action was initiated September 7, 2011 by Plaintiff's filing of a Summons and Complaint. Plaintiff also presented a proposed Order to Show Cause (“OTSC”) seeking a Yellowstone Injunction to enjoin Defendant from terminating or canceling the Sublease or otherwise interfering with Yorktown Food's right of possession to the Property. As discussed infra, the request for a Yellowstone Injunction has been mooted by Defendant's amendment of its answer to assert a counterclaim for ejectment.
Based on the allegations of the Complaint, Plaintiff asserts that Defendant and A & P entered into the Overlease for the Property on May 21, 1971 and on July 23, 1992, A & P entered into the Sublease with Plaintiff (Affidavit of Joseph Friedman, sworn to September 2, 2011 [“Friedman Aff.”], Ex. H [hereinafter “Complaint”] at ¶¶ 8–9, a copy of the Overlease is attached as Ex. A to the Friedman Aff.
, and a copy of the Sublease is attached as Ex. B to the Friedman Aff.). The Sublease was for a five-year term with options to Plaintiff to renew for seven additional five-year terms. The current five-year term is scheduled to end in June 2012, at which time Plaintiff asserts that it intends to renew the Sublease for an additional five years (Complaint at ¶ 10). On June 28, 1998, Plaintiff entered into a Sub–Sublease with Turco's North LLC (“Turco's”) (Complaint at ¶ 11, a copy of the Sub–Sublease is attached as Ex. C to the Friedman Aff.).
The Court notes that the parties agree on the document which constitutes the Overlease ( see Ex. A to the Friedman Aff. and Ex. A to the affirmation of P. Daniel Hollis III, Esq. dated October 14, 2011). However, that document is dated May 21, 1971 but apparently was executed in June 2011. Further, while the document clearly lists A & P as the tenant, the document lists S. & H. Shopping Center, Inc., a New Jersey corporation, as the landlord. Since both parties contend that Defendant was the counterparty to A & P, the Court will assume that something happened to put Defendant, a New York limited liability company, into the landlord's position.
At issue in this dispute is Plaintiff's contention that A & P and Defendant improperly colluded to attempt to terminate Plaintiff's Sublease (and, in turn, Turco's Sub–Sublease) through A & P's voluntary rejection of the Overlease as a debtor in a Chapter 11 bankruptcy pending in the United States Bankruptcy Court for the Southern District of New York, Case No. 10–24549(RDD) (the “Bankruptcy Action”). In this regard, Plaintiff vigorously contests Defendant's position that A & P's rejection has extinguished Plaintiff's rights under the Sublease and disputes that Defendant has any right to interfere with Plaintiff's possession of the Property.
In the Complaint, Plaintiff references Defendant's threats to institute a summary proceeding in the Yorktown Justice Court, but those threats have been mooted by Defendant's choice to assert a common law counterclaim for ejectment rather than pursuing a summary proceeding.
In support of its continued right to possession under the Sublease, Plaintiff contends that because A & P's rejection was a voluntary surrender, Plaintiff became Defendant's immediate tenant and Defendant has no right to terminate Plaintiff's Sublease. Plaintiff seeks an injunction against Defendant's termination and a declaratory judgment that “Defendant is not entitled to terminate the Sublease ... [and] that Yorktown Food is entitled to continue its possession of the Property pursuant to the terms of the Sublease....” (Complaint at ¶ 27).
At the oral argument on Plaintiff's request for interim Yellowstone relief on September 7, 2011, the Court questioned its ability to issue a restraining order given that it was Defendant's position that the Sublease was already extinguished as a result of the rejection by A & P of the Overlease in the Bankruptcy Action. Further, because Defendant had not issued a notice of default, there was no cure period to extend, the sine qua non of a Yellowstone injunction ( see Korovo Milk Bar of White Plains, Inc. v. Pre Properties LLC, 70 AD3d 646 [2d Dept 2010] ). In addition, while there was an indication that Defendant intended to bring a summary proceeding in the Yorktown Town Court, no such proceeding had been initiated so there was nothing to enjoin. Given that the application was either inappropriate or not ripe, Plaintiff's counsel agreed to withdraw its Yellowstone injunction application and convert its motion to a motion for summary judgment.
Because both sides were amenable to this action being resolved here rather than in the Yorktown Justice Court, the Court scheduled another conference for September 16, 2011 so that counsel could contact Turco's counsel and A & P's counsel to determine if they wished to intervene in this action. At the September 16, 2011 conference, the Court was advised by A & P's counsel that A & P would not intervene
and that it would be providing a written response waiving further notification and agreeing to be bound by whatever the outcome may be. Turco's counsel informally appeared at the conference and advised the Court that Turco's would not be intervening in the action. The Court then set a summary judgment schedule and these motions ensued.
A & P's decision not to intervene is likely the result of its agreement with Defendant to reject the lease, which provides that A & P will neither (1) assert any defenses or counterclaims in the Landlord Action initiated by Defendant to re-enter and repossess the Property, nor (2) interfere with any attempt by Defendant to re-enter or repossess the Property ( see Stipulation and Order Authorizing Debtors to Reject the Unexpired Lease of Non–Residential Real Property Between A & P and 380 Downing Drive, LLC dated July 6, 2011, Friedman, Ex. F [hereinafter “Rejection Order”] at ¶ 18[a] and [c] ).
On January 5, 2012, this Court initiated a conference call with Plaintiff's and Defendant's counsel based on its belief that because the only claims and counterclaims asserted were for declaratory relief and because any decision issued by this Court on the declaratory judgment claim and counterclaim would be advisory only to the ultimate eviction proceeding that would occur subsequent to this Court's decision, counsel agreed to tee up the issue in a manner such that this Court's determination would have a binding effect
by having Defendant amend its answer to assert a counterclaim for ejectment.
The issue of whether or not the Overlease, and therefore, the Sublease was terminated and whether or not Plaintiff continued to have a possessory interest in the property would be finally determined by this Court's grant or denial of Defendant's cross-motion for summary judgment on its ejectment counterclaim so as to have a res judicata and collateral estoppel effect once all appeals have been exhausted.
This avoids the prospect of duplicative litigation in the Yorktown Justice Court, as well as the possibility of two different appeal paths, one to the Appellate Division and one to the Appellate Term, as well as the possibility of inconsistent results.
On January 19, 2012, Defendant amended its answer by denying the material allegation of the Complaint— i.e., that the rejection resulting from the stipulated Amagreement between A & P and Defendant was a voluntary surrender ( see Answer at ¶ 18)—asserting several affirmative defenses, and interposing two counterclaims, one for a declaratory judgment
and the second for a judgment pursuant to the common law remedy of ejectment under Article 6 of the RPAPL.
The first counterclaim seeks a declaratory judgment that “the termination of the Lease between Defendant and A & P resulting from the Bankruptcy Order and the terms of Plaintiff's sublease extinguish any and all rights of Plaintiff under the sublease and entitle Defendant to a judgment, pursuant to CPLR 3001 and 3017(b), declaring Plaintiff's rights under the Lease terminated and a declaration that pursuant to the Bankruptcy Order, and upon reentry by Defendant in the Property, that Plaintiff's rights are extinguished” (Amended Answer at ¶¶ 35–36).
The basis for this counterclaim is that because the rejection was held in the “Stipulation and Order Authorizing Debtors to Reject the Unexpired Lease of Non–Residential Real Property Between A & P and 380 Downing Drive, LLC”, which was approved by the Bankruptcy Court on August 18, 2011 (the “Rejection Order”), to be a default under the Overlease and Sublease, Defendant is entitled to re-enter and repossess the Property (Amended Answer and Counterclaims at ¶ 43). Defendant contends that it is entitled to this relief because Plaintiff's right to possession was extinguished upon the termination of the Overlease and the language of the Sublease and although Plaintiff is not physically in possession, it claims a right to possession based on the provisions of its Sub–Sublease with Turco's. According to Defendant, “a judgment against Plaintiff will effect complete relief since Plaintiff is the real party in interest and it would be the obligation of Plaintiff in any event to remove the undertenant Turco's” ( id. at ¶ 45). Finally, Defendant asserts that a judgment pursuant to RPAPL § 637 is proper because a judgment of possession against Plaintiff and in favor of Defendant would provide Defendant with any rights or interest held by Plaintiff ( id. at ¶ 46).
On January 31, 2012, Plaintiff replied to Defendant's counterclaim by denying its material allegations and asserting various affirmative defenses. The Court then marked the motion fully submitted.
A. Plaintiff's Contentions in Support of its Motion for Summary Judgment
In support of its motion, Plaintiff submits an affirmation from its counsel, an affidavit from its President, Joseph Friedman, and a memorandum of law. In his affidavit, Friedman attaches the documentary evidence at issue
and attests to many of the facts set forth in the Complaint, which will not be reiterated herein. He confirms that Plaintiff intends to exercise its option to renew for an additional five-year term in June 2012 ( id. at ¶ 10) and he summarily states that “Yorktown Food is not i[n] breach of any of its obligations under either the Sublease or the Sub–Sublease” ( id. at ¶ 11).
These documents include the Overlease, Sublease and Sub–Sublease, the Rejection Order and the pleadings submitted on the Assumption and Assignment Agreement that was allegedly thwarted by Defendant.
According to Plaintiff, A & P filed for bankruptcy relief under Chapter 11 of Title 11 of the United States Bankruptcy Code on December 12, 2010. Based on A & P's filing for bankruptcy protection, Plaintiff and A & P entered into an Assignment and Assumption of Lease (the “Assumption Agreement”) in which Plaintiff agreed to pay A & P $100,000 in exchange for A & P's agreement to assume the Overlease and assign it to Plaintiff. As evidence of the Assumption Agreement, Plaintiff attaches an unsigned order that the parties presented to the Bankruptcy Court for approval that reflects the parties' Assumption Agreement ( id. at ¶ 14, and Ex. D thereto). Friedman explains that on June 17, 2011, Defendant objected to A & P's motion seeking the Bankruptcy Court's approval of the Assumption Agreement and disclosed in its Objection that it had offered to pay A & P $200,000 to reject the Overlease (a copy of Defendant's Objection is attached as Friedman, Ex. E). According to Friedman, after Defendant increased its offer to $300,000, A & P and Defendant executed the “Stipulation and Order Authorizing Debtors to Reject the Unexpired Lease of Non–Residential Real Property Between A & P and 380 Downing Drive, LLC” dated July 16, 2011, which was approved by the Bankruptcy Court on August 18, 2011 (the “Rejection Order”) (Friedman, Ex. F). Friedman points out that in this Rejection Order, Defendant not only agreed to pay A & P $300,000 to reject the Overlease and Sublease pursuant to 11 U.S.C. § 365(d)(4), but also agreed to waive pre-petition claims (including rejection damage claims) and certain post-petition rent claims (Friedman Aff. at ¶ 17).
Friedman explains that on September 2, 2011, Plaintiff received a letter from Defendant's counsel, P. Daniel Hollis, III, Esq. (Shamberg Marwell & Hollis, P.C.) in which Defendant contended that Plaintiff's rights under the Sublease had been extinguished by virtue of A & P's rejection of the Overlease as well as A & P's acknowledgment of its breach of the Overlease in the Rejection Order (Friedman Aff., Ex. G). In that notice, Defendant advised that it would be bringing a summary proceeding against A & P, Plaintiff and sub-subtenant Turco's to regain possession of the Property ( id.). Friedman concludes by stating that unless this Court enjoins Defendant from terminating the Sublease until the Court resolves Yorktown Food's right to remain in possession of the Property, Plaintiff will suffer immediate and irreparable harm because it will lose its valuable leasehold and will be in breach of the Sub–Sublease.
For its legal argument, Plaintiff claims that A & P's rejection of the Overlease in the Bankruptcy Action was a voluntary surrender of the Overlease. Accordingly, under New York law, Defendant may not terminate the Sublease because, upon such voluntary surrender, Plaintiff became “the immediate tenant of [Defendant] pursuant to the terms of the sublease as if no surrender had been made” and Defendant has no right to seek Plaintiff's eviction (Pltf's Mem. of Law at 8).
Plaintiff's contentions in support of its request for Yellowstone relief need not now be discussed.
It is Plaintiff's position that the relevant provision of the Bankruptcy Code (11 U.S.C. § 365[h][1][A][ii] ) makes clear “that a tenant's or subtenant's right to remain in possession of the property following their lessor's rejection of a lease is governed by state law” ( id. at 10). To support of its interpretation, Plaintiff relies on decisions from bankruptcy courts in the Western
Matter of Dial–A–Tire, Inc., 78 BR 13 (Bankr WD N.Y.1987).
Districts of New York, as well as on a decision from the bankruptcy court in the Western District of Pennsylvania.
Matter of Elmhurst Transmission Corp., 60 BR 9 (Bankr ED N.Y.1986).
Based on the Code's language and these decisions, Plaintiff argues that under New York law, “the voluntary surrender of a lease by a tenant-sublessor does not deprive a subtenant of the right to remain in possession of the property, the subtenant is entitled to remain in possession subject to the terms of the sublease when the rejection constitutes a voluntary surrender” ( id. at 12). In support of this latter point, Plaintiff relies on a decision from the Connecticut Supreme Court
Matter of Elephant Bar Restaurant, Inc., 195 BR 353 (Bankr WD Pa 1996).
and a decision from a Missouri Court of Appeals
Bargain Mart, Inc. v. Lipkis, 561 A.2d 1365 (Conn Sup Ct 1989).
wherein the courts held that the subtenant was entitled to remain in possession of the property following the rejection of the overlease in bankruptcy.
Block Props. Co. v. American Natl Ins. Co., 998 S.W.2d 168 (Mo Ct App 1999).
Plaintiff concludes by arguing that since A & P's agreement to reject the Overlease in exchange for, among other things, $300,000, constituted a voluntary surrender, the Rejection Order has no impact on Plaintiff's Sublease and its right to possession was not extinguished.
B. Defendant's Contentions in Opposition and in Support of its Cross–Motion for Summary Judgment
In opposition to Plaintiff's motion and in support of its cross-motion, Defendant submits an affidavit from its bankruptcy counsel, Monika J. Machen, Esq., and an affirmation from its counsel of record in this action. In her affidavit, Ms. Machen confirms Plaintiff's description of the authenticity and terms of the Overlease, Sublease, and Sub–Sublease. Ms. Machen states that under Section 365(d)(4)(A)(i) of the Bankruptcy Code, a debtor has 120 days from the date of the filing to assume or reject an unexpired lease but may request a 90–day extension of that period for cause. Thus, the period may be extended for up to 210 days but thereafter, any additional extensions must be consented to by the landlord. She states that if an unexpired lease is not assumed within the time period(s), it is automatically rejected by operation of law. She states that in the Bankruptcy Action, the 210–day period expired on July 10, 2011.
She contends that on April 6, 2011, A & P filed a motion for the entry of an order seeking, among other things, the approval of A & P's rejection of certain leases, including the Overlease and Sublease, because they “ represent [ed] a drain on the estate's liquidity and [we]re associated with properties where the Debtors no longer conducted business ' “ (Affidavit in Opposition of Monika J. Machen, Esq., sworn to October 14, 2011 [“Machen Opp. Aff.”] at ¶ 7, quoting Rejection Motion, Ex. A at ¶ 14 [emphasis added] ). Machen notes that when she received the Bankruptcy Court's Order dated May 2, 2011 on the Rejection Motion, which did not include a rejection of the Overlease and Sublease, she contacted A & P's counsel to find out why those aspects had been withdrawn from the motion and was advised that A & P was in negotiations with Plaintiff regarding an assumption and assignment of the Property to Plaintiff. She avers that when A & P filed the Notice of Assumption and Assignment on June 8, 2011, (Machen Opp. Aff. Ex. C) advising of A & P's intent to assume the Overlease and then sell or assign it to Plaintiff for $100,000, Defendant filed its Objection (Friedman Aff., Ex. E, Machen Opp. Aff., Ex. D). The grounds for Defendant's Objection included, inter alia, that under Bankruptcy Code §§ 365(b)(1)(C) and 365(f)(2), A & P could not require Defendant to accept Plaintiff as a direct tenant because A & P had not provided evidence that Plaintiff was an acceptable tenant, and indeed, A & P would not be able to do so since Plaintiff had failed to pay rent to A & P for the 2011 calendar year (Machen Opp. Aff. at ¶ 11).
Machen asserts that while Turco's filed a pleading in opposition to Defendant's Objection, neither A & P nor Plaintiff submitted any opposition to it ( id. at ¶ 12; a copy of Turco's opposition is attached as Machen Opp. Aff., Ex. E). She further explains that as a result of Defendant's Objection, A & P was required to conduct an evidentiary hearing on or before July 10, 2011 in order to obtain the Bankruptcy Court's approval of the assignment of the Overlease to Plaintiff, but no such hearing was ever scheduled. It is Defendant's position that because Defendant would have been entitled to discovery before such a hearing could commence, and because the deadline of July 10, 2011 was fast approaching, an assignment and assumption of the Overlease by the July 10 deadline was virtually impossible and an automatic rejection by virtue of section 365(d)(4) of the Bankruptcy Code was inevitable.
She avers that unless A & P held a contested evidentiary hearing to assume and assign the lease by July 10, 2011, A & P would be “forever foreclosed under federal bankruptcy laws from assuming the Lease and assigning their interest to a third party—including Plaintiff/Subtenant—and would be compelled to reject the Lease and Sublease by operation of law. See 11 U.S.C. § 365(d)(4)” (Machen Opp. Aff. at ¶ 18).
According to Defendant, as a result of A & P's compromised bargaining position, Defendant and A & P settled Defendant's Objection by Defendant's payment of $300,000
to A & P in exchange for A & P's rejection of the Lease and Sublease and its grant of certain relief from the automatic stay to Defendant ( id. at 17). According to Machen, on July 6, 2011, four days before the expiration of the 210–day deadline, A & P filed with the Bankruptcy Court the “Notice of Presentment of Stipulation and Order Authorizing Debtors to Reject the Unexpired Lease of Non–Residential Real Property Between A & P and 380 Downing Drive, LLC” (the “Lease Rejection Notice”) ( id., Ex. F). She avers, on information and belief, that Plaintiff was served with a copy of this Notice and, as a result, was “entitled to make higher and better bids for the Lease” ( id. at ¶ 18) but failed to do so. She further contends that Plaintiff did not seek to hold an emergency hearing on the Assumption and Assignment Notice or the Lease Rejection Notice prior to the passage of the deadline.
The $300,000 was a negotiated sum and was meant to represent the amount A & P would need to in order to defend a litigation brought against it by Plaintiff based on A & P's breach of the Sublease.
It is Defendant's position that as a result of A & P's and Plaintiff's failure to prosecute the Assumption and Assignment Notice, the deadline passed without assumption and assignment and “the Lease therefore became incapable of being assumed or assigned after July 10, 2011, resulting in the ultimate rejection of the Lease (and related Sublease)” ( id. at ¶ 20). She avers that five days after the deadline, Plaintiff filed an objection to the Lease Rejection Notice, but the only objection propounded by Plaintiff was that “A & P had breached its agreement to assign the Lease to Plaintiff/Subtenant and had failed to return the Lease Purchase Price of $100,000 to Plaintiff/Subtenant” ( id. at ¶ 21). Based on Plaintiff's objection, the Bankruptcy Court scheduled a hearing for August 16, 2011, and at the hearing, after A & P's counsel stated that A & P would refund the $100,000 to Plaintiff, Plaintiff filed a Notice of Withdrawal of Objection to the proposed Rejection Order ( id. at ¶ 23, and Ex. I thereto).
Thereafter, on August 18, 2011, the Bankruptcy Court so-ordered the Rejection Order. According to Machen, the Rejection Order authorized the rejection of the Overlease and Sublease and entitled Defendant to re-enter and repossess the Property ( id. at ¶ 24). She states that no party has appealed this Order and “Plaintiff/Subtenant was given every opportunity to participate in, and did in fact participate in, the A & P Bankruptcy Proceeding with regard to matters relating to the treatment of the Lease and Sublease ....“ ( id. at ¶ 26).
In his affirmation, Mr. Hollis poses the issue to be decided as “whether the [Rejection Order] in the A & P Chapter 11 Bankruptcy proceeding constitutes a voluntary surrender' under New York law and whether, upon Defendant's re-entry of the Lease Premises and termination of the Lease, Plaintiff's rights to possession of the Leased Premises under the Sublease will terminate as well” (Affirmation of P. Daniel Hollis, III. Esq. [“Hollis Opp. Aff.”] at ¶ 6). Mr. Hollis reiterates the effect of the bankruptcy filing by A & P and the requirement that A & P assume or reject the Overlease within the 210–day deadline. Mr. Hollis states that because the Rejection Order provided that the rejection was a default under the Overlease and Sublease, Defendant is entitled to re-enter and re-possess the Property ( id. at ¶ 10). It is Defendant's position that to have a voluntary surrender, “it must not be made pursuant to any provision in the paramount lease ... [and] the subtenant must not have been a party to the surrender agreement. Defendant argues that the rejection of the lease in the Bankruptcy Court was not a voluntary surrender and was instead a default (breach) of the Overlease as the parties stated at paragraph 18 of the Rejection Order” (Hollis Opp. Aff. at ¶ 24). Defendant further argues that Plaintiff “was constructively a party to the [Rejection Order] ... because Plaintiff was a party in the Proceeding ... and participated fully in that Proceeding, including actually filing an Objection to the Lease Rejection Notice and then formally withdrawing that Objection” and then failing to appeal the Rejection Order ( id. at ¶ 25). Defendant contends that the plain and unambiguous provisions of the Sublease support its contention since paragraph 5A of the Sublease provides that “[i]f the Overlease terminates or is terminated for any reason whatsoever, then this Sublease shall terminate simultaneously therewith”
( id. at ¶¶ 11, 14–21, 46). Further, at paragraph 18 of the Rejection Order, A & P admits to having defaulted on the Overlease. According to Defendant, this admitted default allows Defendant to terminate the Overlease, which in turn, terminates and extinguishes Plaintiff's right to possession under the Sublease. Mr. Hollis further points out, without providing the basis for his knowledge, that Defendant has never accepted rent from Plaintiff, “has not recognized Plaintiff as a tenant or subtenant and never executed a Nondisturbance Agreement
The Sub–Sublease similarly provides in section 5.A that “If the Sublease terminates or is terminated for any reason whatsoever, then this Sub–Sublease shall terminate simultaneously therewith” (Hollis Aff. at ¶ 20, and Ex. C thereto).
as to Plaintiff. Furthermore, Plaintiff is not occupying the Leased Premises” ( id . at ¶ 13).
In a typical nondisturbance agreement, a landlord agrees with the subtenant that if the prime lease is terminated due to the prime tenant's default, the sublease will continue and the landlord with not disturb the possession of the subtenant as long as the subtenant complies with the requirements of the sublease.
In his Affirmation, while Mr. Hollis distinguishes the cases upon which Plaintiff relies,
he nevertheless concedes certain points. First, that when a lease and sublease are rejected in a bankruptcy proceeding, the issue related to the right of possession is determined by New York law ( id. at ¶ 30). Second, that Defendant has only expressed its intent to terminate the Overlease by instituting a summary proceeding ( id. at ¶ 33). Mr. Hollis points that Plaintiff would not have been permitted to assume the Overlease absent Defendant's consent, which was not forthcoming because (1) Plaintiff was not operating its business at the Property, (2) Plaintiff had not paid rent to A & P for the 2011 calendar year (and Mr. Hollis attaches as Ex. D a copy of a letter from Plaintiff's bankruptcy counsel to A & P dated June 8, 2011 supporting this fact), and (3) Plaintiff and A & P had been engaged in litigation over the terms of the Sublease since 2004 citing 380 Yorktown Food Corp. v. Great Atlantic & Pacific Tea Company, Inc. (30 AD3d 403 [2d Dept 2004] [issue of fact as to whether A & P's opening of another store nearby was a breach of the sublease; judgment granted against Plaintiff as to nonpayment of real estate taxes and common area maintenance charges] ).
Although Defendant also submits a memorandum of law to support its legal authority, Mr. Hollis cites to case law in his affirmation making the affirmation a briefermation, a practice discouraged by this Court. Counsel should refrain from this practice in his future submissions.
Defendant argues that although the Rejection Order was the result of the a stipulated settlement between A & P and Defendant, and therefore, was not a judicial determination of any litigated right, it nevertheless is a contract and its embodiment in an order “places it and the matters covered by it beyond further controversy” ( id. at ¶ 41). According to Defendant, in light of Plaintiff's failure to object to the entry of the Rejection Order and failure to appeal the same although a party to the Bankruptcy Proceeding, “Plaintiff's present attempts to circumvent and relitigate the Bankruptcy Court's [Rejection Order'] ... should not be granted” ( id. at ¶ 43).
Defendants point out that a sublease can confer no greater rights on a subtenant than the landlord has conferred on the prime tenant pursuant to its lease and Plaintiff is bound by the terms of its Sublease (section 5.A) which provided that it would be terminated if the Overlease was terminated for any reason whatsoever (Def's Mem. at 13). Further, that Plaintiff's request that the Court declare that it is not in default of the Sublease must be denied because “[t]he question of default is an issue of fact as between A & P and Plaintiff and it appears that Plaintiff may be in default as evidenced by its failure to pay rent ... and its ongoing litigation with A & P” ( id. at ¶ 53).
Defendant's arguments in opposition to Plaintiff's request for Yellowstone relief need not be addressed.
According to Defendant, under section 365(h) of the Bankruptcy Code, Plaintiff may not retain possession of the Property since A & P has surrendered its possessory interest by its rejection of the Overlease pursuant to section 365(d)(4) of the Bankruptcy Code:
the majority [of cases] h[o]ld that rejection of the master lease by a debtor/sublessor terminates any underlying subleases, thereby extinguishing the subtenant's right to possession of the premises ... Even in the line of cases where courts hold that the subtenant's rights must be determined by state law, it is abundantly clear that Plaintiff is not entitled to possession under applicable New York State Law.
* * *
Further, even if Section 365(h)(ii) of the Bankruptcy Code grants Plaintiff certain possessory rights ... it can only do so if Plaintiff is not in breach of the Sublease itself ... Plaintiff has failed to demonstrate that it is current with rental payments to A & P for the 2011 calendar year and/or that it has continued to make rental payments to A & P as required under the Sublease. Plaintiff is not entitled to enforce the Sublease to the extent it is in breach of the same ( id. at ¶¶ 55, 57; Def's Opp. Mem. at 15–17).
In its Memorandum of Law, Defendant asserts many of the same arguments made in counsel's affirmation, which will not be reiterated herein. Some additional nuances to the arguments made include Defendant's assertion that Plaintiff is not entitled to the declaratory relief it is requesting ( i.e., a declaration that it is in compliance with all of the terms of the Sublease and Defendant is not entitled to terminate the Sublease) because Plaintiff has not established, prima facie, that it is not in default. Indeed, according to Defendant, there is an admission in Plaintiff's counsel's letter that Plaintiff failed to pay amounts due in 2011 ( see Hollis Opp. Aff., Ex. D). Defendant further contends that a voluntary surrender did not occur because a voluntary surrender is the equivalent of a termination and the Rejection Order makes clear that the rejection was merely a breach of the Overlease and that termination would occur only “as a result of a summary proceeding in the Justice Court of the Town of Yorktown based upon A & P's default under the Lease, including its non-payment of rent” (Def's Opp. Mem. at 2). Alternatively, Defendant contends that even the rejection is viewed a voluntary surrender, “Plaintiff is estopped from claiming that such surrender did not terminate Plaintiff's subtenancy rights, because Plaintiff was intimately and actively involved in the proceedings before the Bankruptcy Court leading up to the entry of the [Rejection Order] ... had a full and fair opportunity to request that its rights be protected through the Lease rejection and failed to do so. As a result, Plaintiff was in effect a party to the [Rejection Order] and should be denied a second bite at the apple” ( id. at 3).
C. Plaintiff's Reply in Further Support of its Motion and in Opposition to Defendant's Cross–Motion
In further support of its motion, Plaintiff submits another affidavit from its President, Joseph Friedman, an affirmation from its bankruptcy counsel, and a reply memorandum of law. In his affidavit, Friedman states that Plaintiff paid A & P $100,000 for the Assumption Agreement and further that Plaintiff “has paid or has attempted to pay all rent it owed under the Sublease in 2011” (Reply Affidavit of Joseph Friedman, sworn to October 27, 2011 [“Friedman Reply Aff.”] at ¶ 3).
He avers that Plaintiff paid the rent from January 2011 to April 2011 directly to A & P and in support, Friedman attaches copies of those negotiated checks ( id. at ¶ 3 and Ex. J thereto). Friedman explains that the rent due for the months of May through August 2011 were paid for by A & P's withholding $35,000 from the $100,000 A & P agreed to return to Plaintiff after A & P withdrew from the Assumption Agreement and Plaintiff withdrew its objection to the application to approve the Rejection Order
(Friedman Reply Aff. at ¶ 4 [emphasis added] ). In support, Friedman attaches a copy of the wire transfer from A & P to Plaintiff in the amount of $65,0000 ( id. and Ex. K thereto). Finally, Friedman avers that Plaintiff has attempted to pay the rent for September and October directly to Defendant, but Defendant's counsel has returned these payments ( id . at ¶ 5 and Ex. L thereto). As a result, Plaintiff is holding this money aside pending the determination of this action.
As will be discussed, infra, this is essentially a concession that Plaintiff was made a party to the proceedings to approve the Rejection Order and voluntarily withdrew its objection to the Rejection Order after A & P agreed to return the $100,000 Plaintiff had paid to A & P in exchange for the failed Assumption Agreement.
Friedman refutes Defendant's contention that it never consented to the Sublease and in support, Friedman attaches a copy of a letter agreement dated July 17, 1992 wherein Defendant's property manager provided his express consent to the Sublease on July 20, 1992 ( id. at ¶ 6).
Plaintiff also submits an affirmation from its bankruptcy counsel. In it, counsel disputes Defendant's version of the facts and queries whether Ms. Machen's affidavit is one of a fact witness or an expert witness, as Ms. Machen offers her opinion that rejection of the Overlease was inevitable. Thus, Plaintiff submits that to the extent it is being relied upon as an expert affidavit, this Court should disregard it because (1) she fails to establish her qualifications, and (2) she opines on questions of law or mixed questions of law and fact that are within this Court's purview and do not require expert testimony (Reply Affirmation of Nathan Schwed, Esq. dated October 27, 2011 at 3, n. 2). Mr. Schwed refutes Ms. Machen's opinion that rejection was inevitable and instead, argues that but for Defendant's interference, A & P would have assumed the Overlease and assigned it to Plaintiff ( id. at ¶ 9).
In terms of its legal argument, Plaintiff refutes that Plaintiff's compliance and nonbreach of the Sublease is an issue to be resolved in this action because the only relief Plaintiff is seeking is a declaratory judgment that Defendant is not entitled to terminate the Sublease or retake its possession because A & P's rejection was “a voluntary surrender of the Overlease occurred based on the substance of the transaction between Defendant and A & P” (Pltf's Reply Mem. at 6). In this regard, Plaintiff argues that “[b]ecause A & P's surrender of the Overlease was not made pursuant to the Overlease's termination provisions, and because it was bought and paid for by Defendant [and as such is a manufactured breach], there can be no question that A & P voluntarily surrendered the Overlease to Defendant, and [Plaintiff] is entitled to remain in possession of the Property” ( id. at 2). Plaintiff asserts that but for Defendant's inducement to A & P to breach the Overlease, A & P would have assumed it by the deadline and assigned it to Plaintiff ( id. at 6).
In further support of its position that Section 365(h)(1)(A)(ii) provides Plaintiff with the right, based upon applicable nonbankruptcy law, upon A & P's rejection of the Overlease, to retain its leasehold interest, Plaintiff relies on the statutory intent, which was to guaranty sublessees such as Plaintiff the right to retain their leasehold interests in the event of a rejection ( id. at 5).
Plaintiff argues Defendant's position that no voluntary surrender occurred “is belied by its admission that (i) no termination provision of the Overlease was triggered, and (ii) it paid A & P $300,000 and other consideration to induce A & P to renege on the Assumption Agreement with Yorktown Food, and reject the Overlease” ( id. at 6).
Plaintiff points out inconsistencies in Defendant's argument—namely, if Defendant accepts the holding of Matter of Dial–A–Tire, Inc., supra—that once a lease and sublease are rejected in a bankruptcy the issue of the right to possession is determined by state law—then Defendant's argument that a debtor/sublessor's rejection of a master lease has the effect of terminating the underlying leases and extinguishing a subtenant's right to continued possession is an entirely inaccurate statement of law (Reply Mem. at 11–12). According to Plaintiff, while the traditional view is in accordance with this statement, the emerging view is that rejection is “not synonymous with lease termination' “ and “[t]he extent to which a third party's rights in a lease remain in tact after the debtor's breach ... is an issue of state law' “ (Reply Mem. at 13–14, quoting Syufy Enters. v. City of Oakland, 104 Cal App 4th 869, 881 [Cal Ct App 2002] ). Thus, Plaintiff argues that the rejection of the Overlease did not terminate the Sublease and instead was a voluntary surrender and any future termination of the Overlease cannot impact Plaintiff's possessory right to the property under the Sublease ( id. at 14).
PLAINTIFF'S APPLICATION FOR A YELLOWSTONE INJUNCTION IS MOOT
The Yellowstone injunction arose from the New York Court of Appeals' decision in First Natl. Stores, Inc. v. Yellowstone Shopping Ctr., Inc. (21 N.Y.2d 630 [1968] ).The purpose of a Yellowstone injunction is to toll the running of the cure period so that after a determination of the merits, the tenant may cure any established defect and avoid forfeiture of the lease (King Party Ctr. of Pitkin Ave., Inc. v. Minco Realty, LLC, 286 A.D.2d 373, 374 [2d Dept 2001]; see Graubard Mollen Horowitz Pomeranz & Shapiro v. 600 Third Ave. Assoc., 93 N.Y.2d 508, 515 [1999] ). But for the availability of a toll, the tenant would be forced into an “all or nothing” position: the tenant could stand on its rights, refuse to cure, and litigate the issue when the landlord sought to dispossess the tenant, risking the lease if the tenant's defense failed; alternatively, the tenant could simply cure, thus accepting the landlord's position, even though it may have a legitimate basis for disagreement ( see Post v. 120 East End Ave. Corp., 62 N.Y.2d 19, 24–26 [1984] ).Yellowstone injunctions—which toll the cure period—have been “commonplace” ( id. at 24–25). Tenants seeking Yellowstone relief are not required to meet the exacting three-part test for preliminary injunctive relief and, instead, must meet a lesser four-part standard. To obtain Yellowstone relief, a tenant must show: (1) it holds a commercial lease; (2) it has received from the landlord a notice of default; (3) the application for a temporary restraining order was made prior to the termination of the lease; and (4) it has the desire and ability to cure the alleged default by means short of vacating the premises (Purdue Pharma, LP v. Ardsley Partners, LP, 5 AD3d 654 [2d Dept 2004]; Mayfair Super Markets, Inc. v. Serota, 262 A.D.2d 461 [2d Dept 1999]; Long Island Gynecological Serv., P.C. v. 1103 Stewart Ave. Assoc.Ltd. Partnership, 224 A.D.2d 591 [2d Dept 1996]; see also Korova Milk Bar of White Plains, Inc. v. Pre Prop., Inc., 70 AD3d 646 [2d Dept 2010] ).
The issue over whether a Yellowstone injunction is needed to enjoin Defendant from bringing the summary proceeding in the Yorktown Justice Court has been mooted by Defendant's counterclaim for ejectment in this action. Accordingly, since the continued viability of Plaintiff's right to possess the Property will rise or fall on this Court's decision on whether to grant Defendant summary judgment on its counterclaim for ejectment, and there are no other eviction proceedings either pending or threatened, the Court need not address Plaintiff's application for a Yellowstone Injunction.
THE SUMMARY JUDGMENT STANDARD
The proponent of a motion for summary judgment carries the initial burden of production of evidence as well as the burden of persuasion (Alvarez v. Prospect Hosp., 68 N.Y.2d 320 [1986] ). The moving party must tender sufficient evidence to demonstrate as a matter of law the absence of a material issue of fact.
Failure to make that initial showing requires denial of the motion, regardless of the sufficiency of the opposing papers ( Winegrad v. New York University Med. Center, 64 N.Y.2d 851, 643–644 [1985];St. Luke's–Roosevelt Hosp. v. American Tr. Ins. Co., 274 A.D.2d 511 [2d Dept 2000]; Greenberg v. Manlon Realty, Inc., 43 A.D.2d 968 [2d Dept 1974] ). Once the moving party has made a prima facie showing of entitlement of summary judgment, the burden of production shifts to the opponent, who must now go forward and produce sufficient evidence in admissible form to establish the existence of a triable issue of fact or demonstrate an acceptable excuse for failing to do so ( Zuckerman v. City of New York, 49 N.Y.2d 557, 562 [1980];Tillem v. Cablevision Sys. Corp., 38 AD3d 878 [2d Dept 2007] ).
There is no requirement that proof be submitted in the form of an affidavit, as opposed to other acceptable forms, such as deposition testimony (Muniz v. Bacchus, 282 A.D.2d 387 [1st Dept 2001] ).
The court's main function on a motion for summary judgment is issue finding rather than issue determination (Sillman v. Twentieth Century–Fox Film Corp., 3 N.Y.2d 395 [1957] ). Since summary judgment is a drastic remedy, it should not be granted where there is any doubt as to the existence of a triable issue (Rotuba Extruders, Inc. v. Ceppos, 46 N.Y.2d 223 [1978] ). Thus, when the existence of an issue of fact is even arguable or debatable, summary judgment should be denied (Stone v. Goodson, 8 N.Y.2d 8 [1960];Sillman v. Twentieth Century Fox Film Corp., supra ). In reviewing a motion for summary judgment, the Court must accept as true the evidence presented by the nonmoving party and must deny the motion if there is “even arguably any doubt as to the existence of a triable issue” (Baker v. Briarcliff School Dist., 205 A.D.2d 652, 661–662 [2d Dept 1994] ).
The threshold inquiry in a motion for summary judgment involving a contract dispute is whether the contract is free from ambiguity such that its provisions may be enforced without resort to extrinsic evidence. The interpretation of an unambiguous contract is a question of law for the court (Kass v. Kass, 91 N.Y.2d 554, 566 [1998];W.W.W. Assoc., Inc. v. Giancontieri, 77 N.Y.2d 157 [1990];Taussig v. Clipper Group, L.P., 13 AD3d 166, 167 [2004],lv denied4 NY3d 707 [2005];1550 Fifth Avenue Bay Shore, LLC v. 1550 Fifth Avenue, LLC, 297 A.D.2d 781, 783 [2002],lv denied99 N.Y.2d 505 [2003] ). Contract terms are ambiguous if they are “capable of more than one meaning when viewed objectively by a reasonably intelligent person who has examined the context of the entire integrated agreement and who is cognizant of the customs, practices, usages and terminology as generally understood in the particular trade or business' “ (Sayers v. Rochester Tel. Corp. Supplemental Mgt. Pension Plan, 7 F3d 1091, 1095 [2d Cir1993], quoting Walk–In Med. Ctr., Inc. v. Breuer Cap. Corp., 818 F.2d 260 [2d Cir1987]; see also Computer Assoc. Intl. Inc. v. U.S. Balloon Mfg. Co., 10 AD3d 699, 699 [2d Dept 2004] [“[a] contract is unambiguous if the language it uses has a definite and precise meaning, unattended by danger of misconception in the purport of the [agreement] itself, and concerning which there is no reasonable basis for a difference of opinion' “] ). A court's task is “to determine whether such clauses are ambiguous when read in the context of the entire agreement' ... By examining the entire contract, [the Court] safeguard[s] against adopting an interpretation that would render any individual provision superfluous ... Parties to a contract may not create an ambiguity merely by urging conflicting interpretations of their agreement' “ (Sayers, 7 F3d at 1095 [citations omitted] ).
The Court of Appeals has emphasized that “when parties set down their agreement in a clear, complete document, their writing should ... be enforced according to its terms' “ (Vermont Teddy Bear Co. v. 538 Madison Realty Co., 1 NY3d 470, 475 [2004],quoting W .W.W. Assoc., Inc. v. Giancontieri, 77 N.Y.2d 157 [1990] ) and that this rule has special import “in the context of real property transactions, where commercial certainty is of paramount concern, and where ... the instrument was negotiated between sophisticated, counseled business people at arm's length' “ ( id., quoting Matter of Wallace v. 600 Partners Co., 86 N.Y.2d 543, 548 [1995] ). “In such circumstances, courts should be extremely reluctant to interpret an agreement as impliedly stating something which the parties have neglected to specifically include' “ ( id., quoting Rowe v. Great Atl. & Pac. Tea Co., 46 N.Y.2d 62, 72 [1978] ).
A “lease is subject to the rules of construction applicable to any other agreement” (George Backer Mgt. Corp. v. Acme Quilting Co., 46 N.Y.2d 211, 217 [1978] ). “In interpreting a contract, the intent of the parties governs ... A contract should be construed so as to give full meaning and effect to all of its provisions ... Where the intent of the parties can be determined from the face of the agreement, interpretation is a matter of law and the case is ripe for summary judgment ... On the other hand, if it is necessary to refer to extrinsic facts, which may be in conflict, to determine the intent of the parties, there is a question of fact and summary judgment should be denied” (American Express Bank, Ltd. v. Uniroyal, Inc., 164 A.D.2d 275, 277 [1990],lv denied77 N.Y.2d 807 [1991] ). “Where consideration of a contract as a whole resolves an ambiguity created by one clause, there is no occasion to consider extrinsic evidence of the parties' intent” (Hudson–Port Ewen Assoc., L.P. v. Kuo, 78 N.Y.2d 944, 945 [1991] ).
“[T]he aim is a practical interpretation of the expressions of the parties to the end that there be a realization of [their] reasonable expectations' “ (Brown Bros. Elec. Contr., Inc. v. Beam Constr. Corp., 41 N.Y.2d 397, 400 [1977];see also South Road Assoc., LLC v. International Business Machines Corp., 2 AD3d 829, 833 [2003],affd4 NY3d 272 [2005] [“[t]he language of a contract must be interpreted to reach a practical interpretation of the expressions of the parties so that their reasonable expectations will be realized' “] ). Thus, “[t]he rules of construction of contracts require [the court] to adopt an interpretation which gives meaning to every provision of a contract or, in the negative, no provision of a contract should be left without force and effect” (Muzak Corp. v. Hotel Taft Corp., 1 N.Y.2d 42, 46 [1956];see also Columbus Park Corp. v. Department of Hous. Preserv. & Dev. of City of New York, 80 N.Y.2d 19, 31 [1992];Two Guys from Harrison–N.Y., Inc. v. S.F.R. Realty Assoc., 63 N.Y.2d 396, 403 [1984];Singh v. Atakhanian, 31 AD3d 425, 427 [2d Dept 2006] [“A contract should not be interpreted in such a way as would leave one of its provisions substantially without force or effect”] ).
Where there is an inconsistency between a specific provision and a general provision of a contract, the specific provision controls (Aguirre v. City of New York, 214 A.D.2d 692, 693 [2d Dept 1995] ). Likewise “a contract which confers certain rights or benefits in one clause will not be construed in other provisions completely to undermine those rights or benefits” (Ronnen v. Ajax Elec. Motor Corp., 88 N.Y.2d 582, 5901996).
THE EFFECT OF A & P'S REJECTION OF THE OVERLEASE
As will be seen, where the bankrupt party holds a commercial lease, the Bankruptcy Court permits the trustee to either reject the lease (and end the bankrupt party's obligations thereunder) and surrender the property or to assume the lease (and continue the obligations thereunder). When a owner/lessor files for bankruptcy and rejects the lease, the tenant may remain on the premises for the duration of the lease to the extent allowed by state law. The problem is that, where there is a sublease, a bankrupt tenant is both a lessor and a lessee. Viewing the bankrupt tenant as a direct lessee suggests that it can reject the lease and surrender the property, while viewing the bankrupt tenant as a sublessor suggests that the subtenant may have the ability under state law to remain on the premises for the duration of the sublease.
As noted by one court, “[t]he effect of rejection is one of the great mysteries of bankruptcy law. As a rule, a rejection of a lease gives rise to a pre-petition breach
.... but does not terminate the lease ... This broad rule is nonetheless subject to a significant exception. Where the trustee rejects a non-residential real property lease, he must immediately surrender the property to the lessor. 11 U.S.C. § 365(d)(1). In such a case, rejection is tantamount to termination” ( Matter of Henderson, 245 BR 449, 453 [Bankr SD N.Y.2000] ). Based on a recent trend in the case law, however, a rejection does not necessarily equate with termination. The confusion stems from the contradictory provisions found in the Bankruptcy Code with regard to a trustee's rejection of an unexpired lease involving non-residential property.
.Section 365(g)(1) provides that rejection constitutes a breach of the lease “immediately before the date of the filing of the petition” (11 U.S.C. § 365[g][1] ).
Section 365(a) of the Bankruptcy Code, gives a trustee of the debtor, subject to the court's approval, the right to “assume or reject any executory contract ... of the debtor” which includes unexpired leases involving non-residential real property. The decision to assume or reject an unexpired lease is governed by the business judgment rule (Matter of Minges, 602 F.2d 38, 42–43 [2d Cir1979] ).
The effect of a rejection of a lease is set forth in section 365(d)(4) of the Bankruptcy Code, which provides that upon rejection of a lease by a debtor (lessee), non-residential real property must be immediately surrendered to lessor ( 11 U.S.C. § 365[d][4] ).
“The business judgment rule is a presumption that in making a business decision the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company' “ (Matter of Integrated Resources, Inc., 147 BR 650, 656 [SD N.Y.1992], lv dismissed3 F3d 49 [2d Cir1992], quoting Smith v. Van Gorkon, 448 A.2d 859, 872 [Del Sup Ct 1985] ). Under this standard, the decision is presumed rational and the party opposing a debtor's proposed exercise of business judgment bears the burden of rebutting the presumption.
When the only issue is the rights of the landlord as against the debtor tenant, courts have held that Section 365(d)(4) is self-effectuating such that the debtor must immediately surrender the premises ( i.e., that a warrant of surrender issue out of the bankruptcy court) rather than requiring that “an order lifting the Code § 362 stay [be issued] so that state court eviction proceedings may continue” (Matter of O.P. Held, Inc., 77 BR 388, 391 [Bankr ND N.Y.1987]; see also Matter of Damianopoulos, 93 BR 3 [Bankr ND N.Y.1988]; Matter of U.S. Fax, Inc., 114 BR 70 [ED Pa 1990]; Matter of Chris–Kay Foods E., Inc., 118 BR 70, 72 [Bankr ED Mich] ).
That said, where there is a sublease and, therefore, the debtor is not only lessee but a sublessor, some courts and commentators have found that the provisions of 11 U.S.C. § 365(h)(1)(A), governing the possessory rights of a lessee vis a vis a debtor landlord in the event of a rejection of a lease, apply equally to the rights of a sublessee vis a vis its debtor sublessor in the event of a rejection of the lease by the sublessor debtor ( see Sankaran, Note, Rejection Versus Termination: A Sublessee's Rights in a Lease Rejected in a Bankruptcy Proceeding Under 11 U.S.C. 365(D)(4), 99 Mich. L Rev 853, 866 [2001] ).
Section 365(h)(1)(A)provides, in pertinent part, that when a trustee of a lessor rejects an unexpired lease, the lessee “may treat such lease ... as terminated ... or may remain in possession of the leasehold ... for the balance of such term and for any renewal or extension of such term that is enforceable by such lessee ... under applicable non-bankruptcy law” ( 11 U.S.C. § 365[h][1]; see also Matter of Elmhurst Transmission Corp., 60 BR 9, 10 [Bank ED N.Y.1986] ).
Section 356(h) provides in full:
(1) If the Trustee rejects an unexpired lease of real property of the debtor under which the debtor is the lessor ... the lessee ... may treat such lease ... as terminated by such rejection, where the disaffirmance by the trustee amounts to such a breach as would entitle the lessee ... to treat such lease ... as terminated by virtue of its own terms, applicable nonbankruptcy law, or other agreements the lessee ... has made with other parties; or, in the alternative, the lessee ... may remain in possession of the leasehold ... under any lease ... the term of which has commenced for the balance of such term and for any renewal or extension of such term that is enforceable by such lessee ... under applicable nonbankruptcy law (15 U.S.C. § 365[h] ).
These mutually inconsistent provisions, which have the effect of requiring that the trustee of a debtor lessee immediately surrender the leased premises after rejection but seemingly allow a sublessee to invoke the protections of Section 365(h)(1)(A)(ii) so as to not have to surrender possession of the leased premises to its sublessor that has rejected the sublease, have led to a split in authority over whether a Chapter 11 debtor/lessee's rejection of a lease results in the lease's termination
or whether it is to be viewed simply as a breach of the lease, which may or may not result in a determination that the lease has been terminated in summary proceedings in state court. As one court noted “[t]he application of these subsections ... produces the anomalous result of the Debtor being obligated to surrender the Premises, but [the sublessee] not necessarily having to” ( Matter of Dial–A–Tire, Inc ., 78 BR 13, 16 [Bankr WD N.Y.1987], citing Matter of Elmhurst Transmission Corp., 60 BR 9, 10 [Bankr ED N.Y.1986] ). The distinction between a breach versus a termination is critical because it is well settled that (1) a sublease terminates upon termination of the master lease, and (2) a landlord is not required to accept performance of a defaulting tenant's obligations from a subtenant absent an agreement to do so ( e.g., a nondisturbance agreement) (Friedman on Leases § 7:7.3, 7:7.4[A]. 7:7.4[B]-{b}[2] ).
As noted in Whalen, Commercial Ground Leases, Subleases and Leasehold Mortgages in Bankruptcy, PLIREF–COMLEAS, App. D (2012)(hereinafter “ Whalen ”) there is currently a split in authority with 23 out of 45 cases the author reviewed holding that such a rejection results in termination and the remaining 22 holding that it is merely a breach. The author further notes that the courts holding that a rejection results in a termination of the lease do so largely on the basis that the 1984 Amendments to Section 365 of the Bankruptcy Code (the “shopping center amendments”), including the requirement that a debtor lessee either assume or reject a lease within 120 days and upon a rejection to immediately surrender the premises to the landlord, were enacted to protect the landlords “who suffer unfairly from delays encountered in bankruptcy proceedings' “ ( Whalen at 2, quoting Matter of Elm Inn, Inc., 942 F.2d 630, 635 [9th Cir1991] ). Accordingly, “[i]t would be contrary to this policy to allow mortgagees or sublessees whose rights are derived solely from a debtor's interest as direct lessee to continue to tie up the property with litigation in bankruptcy court or in state court' “ ( Whalen at 2, quoting Matter of 6177 Realty Assoc., Inc., 142 BR 1017 [Bankr SD Fla 1992] ). There have been several recent decisions not cited in the Whalen article, all of which hold that a rejection does not equate with a termination of the lease and instead, that the rejection constitutes a mere breach of the lease ( see Osprey–Troy Officentre L.L.C. v. World–Alliance Fin. Corp., 2011 WL 4537086 [ED Mich.2011];Cahaba Forests, LLC v. Hay, 2012 WL 380126 [MD Ala 2012] ).
The inherent conflict in these provisions is exemplified by the decision in Matter of Stalter & Co., Ltd. (99 BR 327 [ED La 1989] ).
There, a sublessee (Keaty & Keaty) argued that it had a right to remain in the premises pursuant to Section 365(h)(1) after its debtor-sublessor (Stalter & Co.) rejected both the master lease and the sublease. Even though the sublessee objected to the rejection, the bankruptcy court approved the rejection of the master lease and the sublease based on the debtor's failure to formally give notice of its decision to reject both leases and based on the “deemed rejected” provisions of Section 365(d)(4) having been triggered. As such, the trustee was required to “immediately surrender such nonresidential property to the lessor” ( 11 U.S.C. § 365[d][4] ).
It is interesting to note that Turco's cited Stalter in its “Statement of Turco's North LLC in Support of the Assumption and Assignment of the Yorktown Heights Paramount Lease to 380 Yorktown Food and Reservation of Rights” dated June 30, 2011 submitted in the Bankruptcy Action, Turco's argued in favor of the Assumption Agreement based on the fact that “[a] rejection of the Paramount Lease would create a domino effect of additional liability since rejection of the Paramount Lease also terminates the A & P Sublease and the Sub–Sublease. While the subtenants do not appear to have possessory rights under § 365(h) in this context [citing Stalter ] ... damage claims exist under 11 U.S.C. § 365(g)(1). At a minimum, claims can be asserted by 380 Yorktown of up to one year's rent. [See 11 U.S.C. § 502(b)(6).]” (Machen Opp. Aff., Ex. E at ¶ 15).
The Stalter Court reconciled these inconsistent provisions by holding:
11 U.S.C. § 365 governs a bankrupt's acceptance or rejection of executory contracts and unexpired leases. In the event of rejection of an unexpired lease by the debtor as lessor or sublessor,§ 365(h) affords specific rights and remedies to the rejecting debtor and to its tenant or subtenant. Section 365(h)does not purport to afford the tenant of such rejecting debtor rights against anyone other than the debtor. Moreover, § 365(d)(4) specifically requires that if a bankrupt, as lessee, rejects an unexpired lease of nonresidential real property, “he shall immediately surrender such nonresidential real property to the lessor.” Accordingly, Keaty & Keaty's contention that § 356(h) gives it the right to hold the Leased Premises as [the landlord's] unwelcome guest is not only unsupported by the text of § 365(h) but is flatly contradicted by § 365(d)(4)'s grant to [the landlord] of the right immediately to regain its property. A law that commands two mutually exclusive events cannot be obeyed. The only rational view is that § 365(h) does not afford Keaty & Keaty a right against [the landlord] to occupy the Leased Premises after Stalter's rejection of the Master Lease. Accordingly, the rights of [the landlord] and Keaty & Keaty against each other are questions of state law to be decided by the state court, as was correctly [noted] by the Bankruptcy Court in this case and in every other case found where the Bankruptcy Court considered the issue of a subtenant's rights under § 365(h) against the owner of lease property ... 11 U.S.C. § 365(h), however, does address the rights of Keaty & Keaty as against Stalter. Had Stalter, as [the landlord's] lessee, accepted the Master Lease, but, as sublessor, rejected Keaty & Keaty's sublease,§ 365(h) would have afforded Keaty & Keaty certain rights of occupancy as against Stalter, its sublessor. Stalter's rejection as lessee of the Master Lease, by terminating the very rights that Stalter had sublet to Keaty & Keaty, caused the demise of the Sublease and deprived Keaty & Keaty of any right to occupy the Leased Premises. Keaty & Keaty's remedy for all damages resulting from Stalter's action is to treat the Sublease as terminated, as is its undisputed right under § 365(h), and to file a general claim against Stalter's estate in Stalter's bankruptcy proceeding ... While § 365(h) gives a sublessee the right to maintain its possessory interest in a subleasehold when the debtor has rejected the sublease, there is no real property to which the subleasehold attaches as soon as the primary lease is terminated. In other words, § 365(h) does not give a subtenant any further rights to prevent any termination, for whatever reason, of the underlying master lease, in addition to whatever nonbankruptcy rights the subtenant may already have (Matter of Stalter & Co., Ltd., 99 BR at 330–331 [emphasis in original] ).
Stalter was cited with approval by the bankruptcy court in Matter of J.T. Moran Fin. Corp. (124 BR 924 [Bankr SD N.Y.1992] ), but based on different facts than those presented in this case.
Judges sitting in the same jurisdiction have differing views on this issue. For example, bankruptcy court judges from the Southern District of New York have came to opposite conclusions on this issue with some holding that a rejection results in a termination and others holding that the rejection merely results in a breach ( compare Matter of Ames Dept. Stores, Inc., 148 BR 756 [Bankr SD NY1993] [rejection merely a breach] with Matter of Child World, Inc., 142 BR 87 [Bankr SD N.Y.1992], vacated on reconsideration on other grounds158 BR 35 [Bankr SD N.Y.1993] [rejection results in a termination] ).
Despite the divergent views, the weight of authority in New York as well as the emerging trend
seems to be that a rejection does not automatically result in a termination of the master lease, but is merely a beach of the master lease, with the rights of a sublessee as against the prime landlord to be determined in accordance with state law ( see, e.g.Matter of Dial–A–Tire, Inc., supra; Matter of Tri–Glied, Ltd., 179 BR 1014 [Bankr ED N.Y.1995]; Matter of Ames Dept. Stores, Inc., supra; Matter of Elmhurst Transmissions Corp., supra
See, e.g., Matter of Austin Dev. Co., 19 F3d 1077 (5th Cir1994), cert denied513 U.S. 874 (1994); Matter of Cahaba Forests, LLC, 2012 WL 380126 (MD Ala 2012); Matter of Osprey–Troy Officentre, L.L.C. v. World Alliance Fin. Corp., 2011 WL 4537086 (ED Mich.2011); Matter of Park, 275 BR 253 (Bankr ED Va 2002).
). However, in the one New York case in which the ultimate issue is decided— i.e., the possessory rights of a sublessee when its sublessor debtor has rejected (either affirmatively or by default by failing to assume within the requisite 120 days and the lease being deemed rejected under Section 365[d] ) the master lease and sublease—the court found the possessory rights to have been terminated.
The court in Matter of Elmhurst Transmissions punted the issue on grounds of abstention but in dicta, the court suggested that the sublease had terminated by stating “the debtor's former subtenant wants a preliminary injunction against eviction even though his lessor, the debtor, has no rights in the property. If a debtor's lease is rejected in bankruptcy, 11 U.S.C. § 365(h)(1), affords his subtenant no more than their rights under state law. Accordingly, this case belongs in state court” (Matter of Elmhurst Transmissions, 60 BR at 10).
Specifically, in Matter of Tri–Glied, Ltd., supra, the debtor lessee, filed its first Chapter 11 bankruptcy and during that proceeding, it neither assumed nor rejected the lease and therefore, the lease was deemed rejected under Section 365(d)(4). On the motion of the U.S. Trustee and on the consent of the debtor, the first bankruptcy proceeding was dismissed. Following the dismissal, the landlord-tenant proceeding that had been stayed based on the debtor's filing of its first bankruptcy petition, was unstayed and a hearing in that proceeding was scheduled for October 24, 1994. Three days before the hearing date, the debtor filed its second Chapter 11 petition, and the landlord advised the debtor of its position that it did not believe that there was a lease to assume since it had been deemed rejected in the first bankruptcy. Debtor moved to extend its time to assume or reject the lease arguing, inter alia, that the deemed rejection of the Lease did not terminate the lease. By contrast, the landlord argued that the deemed rejection terminated the lease and the termination was not affected by the dismissal of the first bankruptcy case.
The bankruptcy court first addressed whether the lease had been terminated and noted that there was no consensus on the issue of whether a rejection under 11 U.S.C. § 365(d)(4) constitutes termination or results in a mere breach of the lease. In deciding to follow the line of cases finding a rejection to be a mere breach of the lease, the court followed the reasoning of the United States Court of Appeals for the Fifth Circuit in Matter of Austin Dev. Co . (19 F3d 1077 [5th Cir1994], cert denied513 U.S. 874 [1994] ) and a law review article, Andrew, Executory Contracts in Bankruptcy, Understanding Rejection, 59 U Colo L Rev 845 [1988] [hereinafter “ Andrew ”]
which define rejection as nothing more than the estate's method of declining to become obligated under the terms of a particular lease. Professor Andrew states: “rejection is not the revocation or repudiation or cancellation of a contract or lease, nor does it affect the contract or lease liabilities ... [r]ejection ... merely means that the bankruptcy estate itself will not become a party to [the contract or lease]. Simply put, the election to assume or reject' is the election to assume or not assume; rejection' is the name for the latter alternative” (Matter of Tri–Glied Ltd., supra, 179 BR at 1018,quoting Andrew at 848–849).
Thus, the court held that by rejecting the lease, the trustee was merely abandoning the leasehold in the same way the he/she would abandon any other property of the estate and, as such, the lease was not extinguished but reverted to the position it occupied prior to the bankruptcy (Matter of Tri–Glied Ltd., supra, 179 BR at 1018).
In deciding what the post-rejection ramifications of the breach/abandonment of the lease would be, the court noted that all of the cases that had addressed a debtor's post-rejection rights found the debtor-lessee's possessory rights under the lease terminated upon the lease being deemed rejected ( id., citing Matter of Elm Inn, Inc., 942 F.2d 630, 633 [9th Cir1992]; Matter of BSL Operating Corp., 57 BR 945 [SD N.Y.1986]; Matter of Re– Trac Corp., 59 BR 251 [Bankr.Minn 1986] ). The court agreed with the reasoning of these cases because
To hold otherwise and say that a debtor-lessee retains the right to possess the leased premises following the deemed rejection of said lease would not only fly in the face of the plain meaning of 11 U.S.C. § 365(d)(4) but also be in clear conflict with the purpose of the section. Section 365(d)(4) was added to the Bankruptcy Code in 1984 as one of the so-called “shopping center” amendments ... Before 1984, debtors in possession had no fixed deadline for assuming or rejecting unexpired non-residential leases of real property. The primary purpose of ... [the amendment] “was to protect lessors (particularly shopping center operators) from delay and uncertainty by forcing a trustee or a debtor in possession to decide quickly whether to assume unexpired leases” ... [so as to] “enable the lessors to once again rent the premises and to earn income from the demised premises” (Matter of Tri–Glied, Ltd., 279 BR at 1019 [citations omitted] ).
Thus, the court held “[d]uring the first sixty (60) days following the commencement of the Debtor's first case, the right to possess the Premises remained property of the estate. However, upon the deemed rejection of the Lease, this right of possession terminated. Accordingly, as of the dismissal of the Debtor's first case, property of the estate' did not include the right to possession of the Premises. Since it is only property of the estate' as of the date of dismissal that revests upon dismissal, the right to possession of the Premises did not revest in the Debtor upon the dismissal of its first case” ( id. at 1021). The rationale of this case—namely, that while a rejection does not result in a termination of the master lease, it does result in a termination of the debtor-tenant's right to possession and therefore, the possessory rights of the subtenant likewise terminated—is found in other cases as well ( see, e.g., Syufy Enter., L.P. v. City of Oakland, 104 Cal App 4th 869 [Cal Ct App, First Dist 2002] ).
And while Matter of Child Word, Inc.(142 BR 87 [SD N.Y.1992] ) follows the older view that a rejection equates with a termination, its analysis is nevertheless relevant. In Matter of Child World, the debtor Child World, as tenant of a commercial lease, moved for an order authorizing it to reject a commercial lease and the subtenant (PolyGram Group Distribution, Inc.) opposed the motion on the ground that the rejection should not oust PolyGram from possession of the premises. The court held that the debtor's rejection of its prime lease and sublease did not result in the preservation of any possessory interest by the subtenant in the property pursuant to 11 U.S.C. § 365(h). In holding that the approval of the rejection of the prime lease and sublease terminated the subtenant's right of occupancy, the court noted.
[a] debtor may assume or reject an unexpired lease in accordance with 11 U.S.C. § 365[a] in the exercise of its best business judgment. Generally, when the debtor is the lessor, the lessee's possessory interest is preserved for “the lessee ... for the balance of such term and for any renewal or extension of such term that is enforceable by such lessee ... under applicable bankruptcy law.” 11. U.S.C. § 365(h)(1). In the instant case, the debtor is both lessee and lessor; it is the lessee under the prime lease with WRC and it is the lessor under the sublease with PolyGram. Although the debtor seeks to reject both the prime lease and the sublease with PolyGram, it does not wish to fix a simultaneous effective date for both leases.... The issue for determination is not the debtor's right to reject the sublease as well as the prime lease, but rather, may the debtor oust the sublessee from possession after rejection, despite the preservation of the possessory interest expressed in 11 U.S.C. § 365(h). If the debtor sought to terminate the prime lease and the sublease simultaneously on July 31, 1992, there would be no question that PolyGram, as sublessee, could not occupy the lease premises after the debtor's rejection of the prime lease ... This is so because the sublease depends upon the continued viability of the prime lease, and the rejection of the prime lease also results in the rejection of the sublease ... When a prime lease fails, so does the sublease ... Had the debtor assumed the prime lease, but rejected the sublease, the subtenant ... would have had the benefit of the preserved possessory interest afforded under 11 U.S.C. § 365(h) ... However, the debtor's rejection of the prime lease also resulted in the rejection of the sublease and deprived the sublessee, PolyGram, of any right to occupy the lease premises following such rejection (Matter of Child World, Inc., 142 BR at 89).
In Cahaba Forests, LLC v. Hay (2012 WL 380126 [MD Ala 2012] ), a subtenant (Cahaba Forests, LLC) filed a declaratory judgment action against the landlord (collectively the Twilleys) for the court to decide the issue of whether the rejection of the lease and sublease by the debtor tenant (Bowater Alabama LLC) operated to terminate Cahaba's possessory rights in the property. Cahaba, like Plaintiff here, contended that its right to possess the property under the sublease continued to the end of the lease period despite the bankruptcy of Bowater and the rejection of the lease and sublease by Bowater. By contrast, the Twilleys argued that they had the right to possession based on Section 365(d)(4) of the Bankruptcy Code from the date the lease had been deemed rejected. In Cahaba, the court agreed that the rejection did not serve as a termination of the lease and it only meant that a breach had occurred holding:
So, what we have here is a case where the debtor/lesssee (Bowater) was required by bankruptcy law to immediately surrender possession of the subject property to its lessor (the Twilleys) upon its deemed rejection of a lease, which at that time was a breached lease, under which Cahaba was a sublessee, and with the rights of the sublessee as against the original lessors to be determined according to Alabama law (Cahaba Forests, LLC, 2012 WL 380126 at * 7 [MD Ala 2012] ).
The court explained that under Alabama law (like New York law), “a sublessee's right to possession of the property is subject to the terms and conditions of the master lease ... Therefore, the validity of Cahaba's Sublease will turn directly on the continuing validity of the Bowater's breached-but-not terminated Master Lease in light of Bowater's breach and surrender under bankruptcy law. Accordingly, this court will look to the provisions of the Master Lease which give rise to termination and the enforceability of those provisions under Alabama law” ( id. at * 8).
In deciding whether the lease had been terminated, the court noted that the Master Lease had an ipso facto clause which provided that in the event of the filing by the tenant of a petition for reorganization under the bankruptcy laws, the landlord would have the option of immediately cancelling and terminating the lease. Cahaba disputed that this provision allowed the Twilleys to terminate the lease because under the Bankruptcy Code § 365(e)(1), such clauses are void and unenforceable as ipso facto clauses.
The court disagreed noting that Section 365(e) was limited in its application to bankruptcy proceedings since the purpose of the provision is “to protect the bankrupt debtor and its creditors by allowing the debtor's trustee to accept an advantageous unexpired lease in spite of the bankruptcy, and to reject others. While the bankrupt lessee is protected by the bankruptcy law from any liability to its lessor under an unexpired lease, there is no reason, or legislative intent, for this to adversely affect any other rights of the innocent lessor under state law” ( id. at * 9).
Accordingly, the court held that the
Master Lease, by virtue of its being deemed rejected, is no longer subject to the automatic stay, and therefore, no longer part of the bankruptcy estate ... [T]he effect of the Master Lease and Sublease being deemed rejected and the non-residential real property being surrendered to the Twilleys, is that the rights of the Lessors, the Twilleys, and the sublessee, Cahaba, are governed by the terms of the Master Lease and Sublease, free of any bankruptcy law prohibition against enforcement of a bankruptcy or “ipso facto” clause ... The bankruptcy clause in the Master Lease here gave the Twilleys the right to terminate the lease in the event of the lessees filing for bankruptcy. § 365(d)(4) of the Bankruptcy Code had the effect of staying that right for a period of time, to give Bowater's trustee the opportunity to assume the Master Lease and Sublease. Once that time passed without assumption, they were deemed rejected, were no longer subject to being a part of the bankruptcy estate, and the Twilleys were then entitled to possession of the property, free of the bankruptcy proceedings and subject to all terms of the Master Lease, which had been assumed by Cahaba under the Sublease. The Master Lease did not make the filing in bankruptcy by Bowater an automatic termination, but gave the Twilleys the option of terminating the master Lease or of continuing with it, with the Sublease still in effect. Thus, under Jopat
, the Twilleys were free to terminate the Master Lease, and upon its termination, Cahaba's rights under the Sublease would also terminate. This result is not only by operation of law, but under the specific term of Cahaba's sublease by which Cahaba agreed that “[t]his sublease shall terminate in the event the Main Lease terminates” ( id. at * 10; see also Ilkhchooyi v. Best, 37 Cal App 4th 395, 404 [Cal Ct of App, Fourth District 1995] [same] ).
This reference is to USA Petroleum Corp. v. Jopat Bldg. Corp . (343 So.2d 501 [Ala Sup Ct 1977] ).
Based on the foregoing authority, given that A & P's rejection of the Overlease did not result in the automatic termination of the Overlease but only a breach, the Court shall now turn to whether the rejection should be viewed as a voluntary surrender or a substantial breach of the Overlease's terms, entitling Defendant to its termination and summary judgment on its counterclaim for ejectment.
THE EFFECT OF A & P'S REJECTION ON THE OVERLEASE
In line with the foregoing authority, and as the parties seemingly concede,
the rights as between Plaintiff and Defendant must be determined in accordance with New York law. Of course, it is the application of New York law to A & P's breach where the parties' views diverge. It is Plaintiff's position that it is entitled to continue the leasehold as the agreement to reject the Overlease and surrender the property was not a valid termination agreement, but rather a voluntary surrender. By contrast, it is Defendant's position that given the fact that the parties agreed, which agreement was approved by the bankruptcy court through its “so-ordering” of the Rejection Order, that the rejection constituted a breach entitling Defendant to terminate the Overlease in this action and an order granting it summary judgment on its counterclaim for ejectment.
The best evidence of the Defendant and A & P's understanding of the effect of A & P's rejection is evidenced in the language they used to describe the effect of the rejection in the Rejection Order, which clearly defines the rejection as constituting a breach entitling Defendant to seek to re-enter and repossess the Property.
The parties agree that a termination of the Overlease results in a termination of the Sublease and the Sub–Sublease given that “[a] subtenant is always bound by the terms of the underlying lease, which is the source of its rights....” (Mann Theatres Corp. of California v. Mid–Island Shopping Plaza, Co., 94 A.D.2d 466, 471 [2d Dept 1983], affd62 N.Y.2d 930 [1984];Millicom Inc. v. Breed, Abbott & Morgan, 160 A.D.2d 496, 497 [1st Dept 1990], lv denied76 N.Y.2d 703 [1990] ).
Courts have held the subtenant obligated to the paramount lease's terms when the sublease incorporates by reference the terms of the sublease or makes the sublease's terms “subject and subordinate” to the paramount lease's provisions ( see Geltzer v. DuFour Pastry Kitchens, Inc., 34 AD3d 364 [1st Dept 2006]; Institute for Eastwest Studies, Inc. v. National Audubon Socy., Inc., 17 Misc.3d 1108(A), 2007 N.Y. Slip Op 51882(U) [Sup Ct N.Y. County 2007] ).
While it is well settled that a termination of an overlease necessarily terminates the sublease and extinguishes the sublessee's possessory rights to the property, an exception to the rule exists when, rather than a termination in accordance with a lease's terms, the tenant voluntarily surrenders the lease through a termination agreement that is not made pursuant to any terms of the overlease and the sublessee was not made a party to such termination agreement (Kottler v. New York Bargain House, 242 N.Y. 28 [1926] ). In the case of a voluntary surrender by a sublessor to its lessor, the sublease is not terminated and the sublessee becomes the tenant of the lessor
( Duane Reade v. I.G. Second Generation Partners, L.P., 280 A.D.2d 410 [1st Dept 2001], lv denied96 N.Y.2d 716 [2001];Ocean Grille, Inc. v. Pell, 226 A.D.2d 603, 605 [2d Dept 1996]; DaCosta's Automotive, Inc. v. Birchwood Plaza Shell, Inc., 106 A.D.2d 484 [2d Dept 1984] ). “Under the voluntary surrender doctrine, a non-defaulting prime tenant's voluntary surrender of the main lease to the landlord transforms the subtenant into the landlord's direct tenant ... This doctrine makes sense; without it the landlord and the prime tenant can collude to deprive an innocent subtenant from the benefit of his bargain” ( Johns v. AMC Beauty Salon, 29 Misc.3d 342, 346 [Civ Ct, N.Y. County 2010], citing Eten v. Luyster, 60 N.Y.2d 252, 259 [1875], Duane Reade, supra ). However, if a surrender is not voluntary, then the sublessee's rights fall because the provisions of a sublease are subject to the termination rights of a landlord set forth in a main lease ( Ocean Grille, Inc., supra DaCosta's Automotive, Inc., supra; Lippe v. Professional Surgical Supply Co., 132 Misc.2d 293 [Civ Ct Queens County 1986] ).
“The effect of a voluntary surrender is equivalent to a transfer of the reversion, the interests of the landlord and tenant merge, and what remains is the landlord's fee subject to the subtenancy. Such subtenancy remains because the landlord may not affect the rights of third parties who were not parties to their separate surrender agreement” (Precision Dynamics Corp. v. Retailers Representatives, Inc., 120 Misc.2d 180, 182 [Civ Ct, N.Y. County 1983], citing Ashton Holding Co. v. Levitt, 191 AD 91 [1st Dept 1920]; Eten v. Luyster, 60 N.Y. 252 [1875] ).
It is undisputed that here, the Sublease's existence was entirely dependent upon the continued viability of the Overlease since section 5A of the Sublease provides that
Subtenant agrees, as an express inducement for Sublandord's executing this Sublease, that if there is any conflict between the provisions of this Sublease and the provisions of the Overlease which would permit Subtenant to do or cause to be done or suffer or permit any act or thing to be done which is prohibited by the Overlease then the provisions of the Overlease shall prevail. If the Overlease terminates or its terminated for any reason whatsoever, then this Sublease shall terminate simultaneously therewith (emphasis added).
As noted by some courts, the fact that an eviction proceeding is settled rather than pursued to a final judgment does not convert the outcome from a cancellation to a voluntary surrender ( Lippe, supra see also Thal v. S.G.D. Corp., 625 So.2d 852, 853 [Fla Dist Ct App 1993] ).
In Lippe, the landlord brought a holdover proceeding against its tenant Professional Surgical Supply Co. (“PSS”) and its subtenant Space Lease, Inc. The landlord had previously instituted a summary non-payment proceeding against PSS but PSS filed for bankruptcy protection and on September 11, 1985 the Bankruptcy Court rendered a decision which granted PSS a 90–stay of the surrender order. Therefore, on December 10, 1985, the lease was rejected when the surrender order expired. Thereafter, by stipulation dated February 10, 1986, PSS's attorney agreed to a final judgment of possession, which was not binding on Space Lease. After the Bankruptcy Court issued an order vacating the prior stay of proceedings to recover possession of the leased premises on April 8, 1986, the landlord commenced this holdover proceeding.
In Lippe, the Court found that the stipulation entered into between PSS and the landlord was not a voluntary surrender because there was no evidence that the landlord and PSS joined together voluntarily to surrender the lease term and PSS actually attempted to protect its tenancy by requesting an extension on the stay so it could assume the lease. When PSS failed to pay its rent, the Bankruptcy Court held that PSS substantially breached the lease requiring PSS to surrender possession. Accordingly, the court held that
The stipulation herein served as a short-cut taken by PSS on the eve of trial. It had already breached its lease, and the next step would have been a trial, and possibly an eviction. The stipulation merely avoided the need for further litigation. The surrender of the lease by PSS, therefore, occurred by operation of law. It was not a voluntary surrender (Lippe, 132 Misc.2d at 296).
The court held that where the prime tenancy has been terminated, the relationship between the landlord and subtenant changes and a subtenant who continues in possession becomes a tenancy at sufferance. Accordingly, the landlord had to serve a 30 day notice to the tenant and subtenant that they had to remove their possessions from the property and their failure to do so subjected the summary proceeding to dismissal.
Similarly, in Thal, supra, the court held that the settlement of eviction proceeding, which included provision that deemed the master lease cancelled based on tenant's default in master lease, was not a voluntary surrender as against a subtenant. The two items of particular importance to the court were (1) the settlement agreement contained a provision that required the “entry of a Final Judgment in favor of [lessors] on Court I and III' of the complaint; and (2) the leases were commercial leases involving sophisticated business people with the subtenant aware that the sublease was subject to the terms of the master lease and “[a]nyone taking a subtenancy should be aware of his vulnerability ... and should have some arrangements with the tenant or head landlord to protect himself' “ (Thal, 625 So.2d at 853).
The Court agrees with this line of reasoning. Plaintiff is a sophisticated party and could readily have negotiated a nondisturbance agreement for itself to ensure that in the event of a default by its sublessor, Defendant would allow the sublease to continue. By contrast, the result of finding a voluntary surrender in a circumstance such as this, where the tenant has rejected the lease, would result in the landlord having no choice but to accept Plaintiff as its direct tenant. This was not the bargain the landlord struck with A & P. Indeed, such a determination completely eviscerates the landlord's right to object to the debtor's assumption and assignment of the Overlease, which is what occurred in this case, and which is what precipitated the eventual Rejection Order. And as noted by the court in Stalter, Plaintiff is not left without recourse as its remedy is to sue A & P for all damages resulting from A & P's breach and to file a general claim against A & P's estate in the Bankruptcy Action.
The primary case relied upon by Plaintiff for a voluntary surrender having occurred in this matter is Bargain Mart, Inc. v. Lipkis (561 A.D.2d 1365 [Conn Sup Ct 1989] ). In Bargain Mart, G. Harold Welch obtained a lease to a building from its owner, the Estate of Edward Malley, and proceeded to sublet the building to the Edward Malley Company, which proceeded to sub-sublet a portion of the premises to Bargain Mart. Thereafter, Outlet Department Stores, Inc., acquired the Malley Company's subleasehold interest under Welch Lease subject to Bargain Mart's sub-sublease. Outlet subsequently filed for bankruptcy and sought approval from the bankruptcy court to reject the lease, which was given in May 1982. In March 1983, after the Malley Estate transferred its fee interest to the Malley Heirs, the new owners served a notice to quit on Welch based on his alleged failure to pay rent and taxes from November 1982 to February 1982. In April 1984, the Malley Heirs and Welch settled the summary proceeding by stipulation and the court did not decide any of the claims on the merits. Thereafter, the Malley Heirs sold the property to Lipkis, who purchased it “subject to the rights of the tenants in possession” (Bargain Mart, Inc., supra, 561 A.2d at 1367). Thereafter, Lipkis provided notice to Bargain Mart that it viewed it a month-to-month tenant and at some point thereafter, Lipkis began denying heat to Bargain Mart at which point Bargain Mart instituted an action to require Lipkis to provide heat. At the conclusion of a three-day hearing, the court in that case decided that the sublease between Malley Company and Bargain Mart was valid and subsisting because there had been a voluntary surrender, rather than a termination of the Outlet lease. The Connecticut Supreme Court affirmed based on the trial court's finding that because following Welch's request that the Bankruptcy Court approve the rejection
Welch made no attempt to suspend the automatic stay under 11 U.S .C. § 362(d), nor did he thereafter express an intent to terminate the lease, “by some unequivocal act clearly showing the exercise of that option” ... such as by initiating summary process action....
* * *
In finding that Outlet “breached” the lease upon the bankruptcy court's approval of the rejection, the trial court implicitly found that Outlet had thereby surrendered the lease “in a manner contrary to the provisions of termination of the lease....” ... Further, Welch's conduct subsequent to the rejection of the Outlet Lease, as well as his trial testimony, indicated that he treated Outlet's rejection as a “voluntary surrender” which he accepted. Welch never attempted to terminate Bargain Mart's tenancy as a result of the extinguishment of the Outlet Lease. Indeed, he testified ... that the Bargain Mart “sublease was still intact” and was still in full force and effect after Outlet's rejection. Moreover, Bargain Mart continued to occupy the premises for the five years after Outlet's departure ... [t]he trial court could reasonably have inferred ... that the parties intended the rejection of the Outlet Lease as a “voluntary surrender” ( id. at 131–133 [citations omitted] ).
The facts of Bargain Mart are inapposite.
Here, Plaintiff was an active participant in the Bankruptcy Action in both the failed assumption of the Overlease process and then rejection process. Thus, it is undisputed that Plaintiff was served with a copy of the application for approval of the Rejection Order and that Plaintiff initially objected to same but then affirmatively withdrew its objection when A & P agreed to return its $100,000 deposit. Furthermore, unlike Bargain Mart, Defendant at all times indicated its intent to seek to re-enter and repossess the Property based on the Rejection Order and, therefore, did not treat the Sublease as though it was still intact by allowing Plaintiff to remain in possession of the Property for over two years following the rejection.
Likewise, the facts of Block Prop., Co. v. American Natl. Ins. Co. (998 S.W.2d 168 [Mo Ct App 1999] ) are also inapposite because in that case, the overlease contained no provision providing what type of default would allow the lessor to enter the premises. Accordingly, because there “was no provision in either the master lease or the sublease which would have operated to terminate the master lease or give the appellant the right to retake possession of the property under the circumstances presented ... [the court had to] look to the general law of contracts to determine whether the respondents retained the right to possess the property despite breach of the master lease ...” There, the court held that the landlord had not demonstrated that the rejection of the master lease constituted a substantial breach of the lease entitling the landlord to terminate the overlease.
The Rejection Order, which was so-ordered by the Bankruptcy Court, provides:
WHEREAS, on June 8, 2011, the Debtors filed their Notice of Assumption and Assignment for the Lease of 380 Downing Drive, Yorktown Heights, New York and Proposed Assumption and Assignment Order Pursuant to Non–Operating Lease Procedures (the “Assignment Notice”) [Docket No. 1829]. Pursuant to the Assignment Notice, the Debtors proposed to assume and assign the Lease to the Sublessee for consideration equal to $100,000 less any cure amounts due to the Landlord (the “ Sublessee Offer ”);
WHEREAS, on June 17, 2011, the Landlord filed its objection (the “Landlord Objection”) [Docket No. 1940] to the Assignment Notice. The Landlord has offered to pay significantly more than the Sublessee Offer for rejection of the Lease;
WHEREAS, after arms' length negotiation between the Debtors and the Landlord, the Parties have agreed that the Landlord shall pay the amount of $300,000.00 to the Debtors and waive its prepetition claims (including any rejection damage claims) and certain postpetition claims (as described more fully herein) against the Debtor in exchange for rejection of the Lease and Sublease (the “ Landlord Offer ”);
WHEREAS, the Debtors have determined that the Landlord Offer exceeds all other offers and proposals made with respect to the Lease, including, but not limited to, the Sublessee Offer; and
WHEREAS, by this Stipulation and Order, the Parties hereby wish to: (a) address the rejection of the Lease and Sublease on the terms set forth herein; (b) address any claims the Landlord may have against the Debtors on account of or related to the Lease; and (c) agree to all other terms and provisions contained herein.
NOW THEREFORE, in consideration of the foregoing and of the mutual covenants hereinafter set forth, the parties hereto stipulate and agree as follows:
* * *
18. Debtors' Representations and Acknowledgments.
(a)The debtors hereby acknowledge that: (i) rejection of the Lease constitutes a breach of such Lease under applicable law; (ii) such breach entitles the Landlord to re-enter and repossess the Premises pursuant to an action or proceeding commenced by the Landlord to recover possession of the Premises (such action or proceeding, the “Landlord Action”); and (iii) the Debtors will not assert any defenses or counterclaims in the Landlord Action initiated by the Landlord to re-enter or repossess the Premises.
(b)Upon the Effective Rejection Date, the automatic stay under section 362 of the Bankruptcy Code will be lifted for the limited purpose of allowing the Landlord to file the Landlord Action against the Debtors. The Debtors hereby agree to accept service of process and any notice of eviction relating to such Landlord Action.
(c)The Debtors agree not to interfere in any attempt by the Landlord to re-enter or repossess the Premises after the Effective Rejection Date.
(d)As soon as reasonably practicable, the Debtors will provide all such information and documentation as may be deemed necessary the Landlord for it to prosecute the Landlord Action, including, without limitation, copies of any subleases relating to the Premises.
Based on this discussion, the Court concludes that A & P's rejection of the Overlease in the Bankruptcy Action did not constitute a voluntary surrender.
Unlike the usual circumstances under which a voluntary surrender occurs, there is nothing voluntary about having to choose between assumption and rejection in a Chapter 11 proceeding and the ultimate choice is entirely dependent upon parties' relative bargaining power coupled with the overall financial benefit of the leasehold to the bankruptcy estate. The Court agrees with Defendant's arguments that there are certain undisputed facts that make clear that A & P's rejection did not constitute a voluntary surrender. First, the Rejection Order's terms made clear that it was not resulting in a termination of the Overlease and A & P did not surrender its possessory interest; instead, the parties agreed that the rejection constituted a breach of the Overlease entitling Plaintiff to bring an action or proceeding to recover the possession of the Property. Second, given that the rejection was deemed a breach of the Overlease, it occurred pursuant to the Overlease's terms. Third, by withdrawing its objection to the proposed Rejection Order and then by failing to pursue any appeals of that Rejection Order, Plaintiff was, in effect, a party to the Rejection Order. Accordingly, the Rejection Order was made pursuant to the default provisions of the Overlease and, Plaintiff, for all intents and purposes, was made a party to the Rejection Order.
As noted by Whalen
the subtenant might argue that the rejection by the prime tenant in bankruptcy of the prime lease is like a voluntary surrender to the landlord that should not affect the sublease. But there is nothing voluntary in the landlord's “acceptance” of rejection under section 365(d)(4); it is more accurate to say that termination (if any) of a lease following rejection by the prime tenant is neither a voluntary surrender accepted by the landlord nor a termination for default, even if rejection is a “breach” ( Whalen at 7).
Because there is no basis for a finding of a voluntary surrender, the Court holds that Defendant is entitled to an order granting it summary judgment on its counterclaim for an ejectment as the substantial breach by A & P through its rejection of the Overlease in the Bankruptcy Action entitles Defendant to terminate the Overlease. Because the Overlease falls, Plaintiff's Sublease also falls as does Plaintiff's possessory rights in the Property. Accordingly, the Court shall grant summary judgment to Defendant on its counterclaim for ejectment.
To allow a sublessor, to whom the landlord has no privity of contract and whose Sublease is entirely dependent upon the continued viability of the Overlease, to be allowed, in effect, to step into the shoes of the direct tenant (A & P) though not under the terms of the Overlease but under the terms of a Sublease with which Defendant was not a party, flies in the face of the reasonable expectations of the parties. For Defendant, it leased the Property to A & P and while it allowed for the Sublease and the Sub–Sublease to occur, it did so only because no matter what happened with the Sublease and the Sub–Sublease, A & P would always be on the hook for the rent.
As a result of the Rejection Order, A & P is no longer liable for rent under the Overlease. To foist Plaintiff on Defendant as a direct tenant when Defendant never entered into a landlord tenant relationship with Plaintiff and, indeed, appears to have no desire to enter into such a relationship, solely on the basis that Section 365(h) protects Plaintiff's possessory interests in the Property, seems without legal or equitable merit. While the forfeiture of the Sublease and Sub–Sublease is also harsh (although, as noted previously, Plaintiff does have a claim for damages), this eventuality was easily foreseen and could have been protected against by Plaintiff's requiring that Defendant enter into a Non–Disturbance Agreement. Given the reasonable expectations of the parties as well as a weighing of who should shoulder the risk of a bankruptcy by a tenant holding an unexpired non-residential lease, it seems evident to this Court that such a risk of loss resides with the subtenant who failed to avail itself of adequate security measures such as a Non–Disturbance Agreement.
Paragraph 28 of the Overlease provides that A & P could sublet the Property but that such subletting would not release A & P from its liability to Defendant under the terms of the Overlease (Hollis Opp. Aff., Ex. A at ¶ 28).
CONCLUSION
The Court has considered the following papers in connection with this application:
1)Notice of Motion dated October 4, 2011; Affirmation of Emergency of Bruce S. Goodman, Esq. dated September 6, 2011; Affidavit of Joseph Friedman, sworn to September 2, 2011, together with the exhibits annexed thereto;
2)Memorandum of Law in Support of Order to Show Cause and Yellowstone Injunction dated September 6, 2011;
3)Notice of Cross–Motion dated October 14, 2011; Affirmation of P. Daniel Hollis III, Esq. in Opposition to Plaintiff's Motion for Summary Judgment; Affidavit in Opposition of Monika J. Machen, Esq. sworn to October 14, 2011, together with the exhibits annexed thereto;
4)Defendant's Memorandum of Law in Opposition to Plaintiff's Motion for Summary Judgment and in Support of Defendant's Cross–Motion for Summary Judgment dated October 14, 2011; and.
5)Reply Affidavit of Joseph Friedman, sworn to October 26, 2011, together with the exhibits annexed thereto; Reply Affirmation of Nathan Schwed, Esq. dated October 27, 2011, together with the exhibits annexed thereto; and.
6)Reply Memorandum of Law dated October 27, 2011.
Based upon the foregoing papers, and for the reasons set forth above, it is hereby
ORDERED that the motion of Plaintiff 380 Yorktown Food Corp. for summary judgment against Defendant 380 Downing Drive, LLC is denied; and it is further
ORDERED that the cross-motion of Defendant 380 Downing Drive, LLC for an order granting it summary judgment on its common law cause of action for ejectment shall be granted; and it is further
ORDERED that Defendant 380 Downing Drive, LLC shall, pursuant to the provisions of 22 N.Y.C.R.R § 202.48, submit a proposed judgment to the Court (and not the Clerk of the Court) for noticed for settlement on April 6, 2012 (no appearances required).
The foregoing constitutes the Decision and Order of this Court.