48th Street Steakhouse, Inc. v. Rockefeller Center, Inc. (In Re 48th Street Steakhouse, Inc.)48th Street Steakhouse, Inc. v. Rockefeller Center, Inc. (In Re 48th Street Steakhouse, Inc.)
DECISION AND ORDER ON CROSS MOTIONS FOR SUMMARY JUDGMENT BY PLAINTIFF AND DEFENDANTS ROCKEFELLER CENTER INC. AND ROCKEFELLER CENTER PROPERTIES
Plaintiff 48th Street Steakhouse, Inc. (“48th Street”) is the debtor in possession and owner of a ten year old restaurant located in the prestigious Rockefeller Center area. Defendants Rockefeller Center, Inc. (renamed Rockefeller Group, Inc.) (“RGI”) and Rockefeller Center Properties (“RCP”) are respectively the managing partner of RCP and the owner of the premises at which 48th Street’s restaurant is located (collectively, “the landlord”).
Plaintiff and defendants have each moved for summary judgment in an adversary proceeding commenced by 48th Street. At the heart of their controversy is the effectiveness of a post-petition three-day notice of termination served by the landlord on I.S.H. Liquidating Corp. (“ISH”), at least nominally the prime tenant of 48th Street’s premises pursuant to an assignment of lease executed by 48th Street in conjunction with its 1975 purchase of the restaurant from an affiliate of ISH. 48th Street urges that the notice of termination was violative of the automatic stay of section 362 of the Bankruptcy Code, 11 U.S.C. § 362 (the “Code”), and thereby inadequate to divest 48th Street of its interest in the premises. The landlord counters that the lease has been terminated such that 48th Street cannot compel the landlord’s consent *184 to a reassignment from ISH and therefore cannot assume the lease pursuant to section 365 of the Code.
FACTS
1. Pre-Petition Facts
48th Street purchased its restaurant through a series of transactions which are not unusual to the restaurant business. In November, 1975, 48th Street contracted to buy the restaurant from Charley O’s Corp. (“Charley O’s”), issuing a promissory note to the seller in the amount of $207,289.00 (the “Note”) secured by a lien on 48th Street’s chattels, fixtures and equipment. Excluded from the sale was the lease for the premises. 48th Street instead entered into a new lease directly with RGI. That lease, which was dated December 1, 1975 and signed April 7, 1976 1 , expires by its terms on September 30,1994 (the “Lease”). On the same day that the Lease was signed, 48th Street assigned it to ISH pursuant to an Assignment with Consent (“Assignment”) dated December 1, 1975, and executed by 48th Street, ISH and RGI. That Assignment did not release 48th Street of its contractual obligations to RGI. Not only did the Assignment not release 48th Street, but the Lease provided that the majority shareholders of 48th Street were not to change during the period of 48th Street’s liability to the landlord. Pursuant to paragraph 6 of the Assignment, contained in a rider, RGI also consented to a reassignment of the Lease to 48th Street whenever requested by ISH and 48th Street and upon presentation of a fully executed reassignment, the form for which was annexed as an exhibit. Specifically, paragraph 6 of the Assignment reads as follows:
(6) Anything herein or in the lease to the contrary notwithstanding, the landlord will consent to the further assignment of the lease by the Assignee [ISH] to the Assignor [48th Street] whenever requested by the Assignee and the Assignor by executing and delivering an Assignment with Consent and Release in the form attached hereto as Exhibit A provided that concurrently herewith, such Assignment and Consent and Release is duly executed by the Assignor and the As-signee and the agreement of Restaurant Associates Industries, Inc. [an affiliate of ISH] on the fourth page thereof is duly executed by said Restaurant Associates Industries, Inc.
Unlike the Assignment, the form for this reassignment explicitly released the assign- or, here, ISH. At the same time as they executed their Assignment, 48th Street and ISH executed the reassignment which was held in escrow by the law firm Dornbush, Mensch & Mandelstam (the “Dornbush firm”). The escrow, whose terms and conditions were acknowledged in a receipt dated March 24, 1976, was to terminate and the reassignment was to be delivered to 48th Street upon the later of the payment in full of the Note or of all liabilities accruing under the Lease prior to January 1, 1980. 2
As part and parcel of the transaction, ISH sublet the premises to 48th Street for the period of the escrow. RGI consented, in writing, to the subletting and accepted rent payments directly from 48th Street. In consenting to sublease, RGI required, as in the Lease, that the two majority shareholders of 48th Street remain the same, breach of which covenant would revoke RGI’s consent. Both the sublease and the security agreement provided that the payments to be made by 48th Street under the Note constitute additional rent for the use of the subleased premises.
2. Post-Petition Facts
On July 22, 1983, when 48th Street filed a voluntary petition under chapter 11 of the Code, it owed substantial rent to the landlord. On August 1, 1983, American Hospitality Management Co. (“American Hospitality”), 48th Street’s parent company and *185 co-debtor, tendered to RGI use and occupation for the post-petition period of July. That tender was rejected. 3
On approximately August 29, 1983, 4 over a month after the bankruptcy case was commenced, the landlord delivered to ISH a written notice of default which provided that in the event that the arrears were not paid within five days, a written notice would follow which would provide that the Lease would be terminated in three days. Soon thereafter, during the morning of September 1, the promised notice followed, a copy going to 48th Street.
In an effort to protect its interests in the Lease, 48th Street commenced an adversary proceeding against RCP, RGI, ISH and the Dornbush firm. 48th Street sought to enjoin the landlord from taking any actions respecting 48th Street’s Lease and sublease rights, to compel RGI to accept 48th Street’s use and occupation payments, and to obtain a declaration that it was the prime tenant under the Lease. Alleging that all Note payments had been made, 48th Street also sought to compel the Dornbush firm to release the reassignment. In the event that the court did not find 48th Street to be the prime tenant, 48th Street sought alternatively a declaration that, upon full payment to ISH to be fixed by the court, 48th Street will become the prime tenant.
48th Street’s efforts were not limited to commencement of the adversary proceeding. By order to show cause signed September 1, 1983, 48th Street moved for a) authorization to assume the Lease; b) a finding that the landlord was in contempt for violating the automatic stay; and c) a declaration that 48th Street has the right to make the Lease payments so it may be reinstated as prime tenant under the Lease. Contained in that order to show cause (obtained during the afternoon of September 1 after a hearing on notice to the landlord) was an order enjoining the landlord from “interfering with and/or terminating any right, title and interest that the Debtor may enjoy with regard to the lease or premises.” The landlord later sought to vacate this September 1 injunction; the motion was denied by order dated January 3, 1984. Various appellate rulings emanated from the second of the two orders. 5 On January 29, 1985, the district court held that the September 1 injunction was a preliminary one rather than a temporary restraining order, as the landlord had contended, but granted the landlord’s motion for leave to appeal the January 3 order. 6 Eventually the district court affirmed the January 3 order denying the landlord’s motion to vacate the September 3 order. 7
During the pendency of the proceedings before the district court, 48th Street entered into a court-approved settlement of its adversary proceeding against ISH and the Dornbush firm, paving the way for the parties to eventually “put” the reassignment to RGI, unless the Lease has been validly terminated.
THE INSTANT MOTIONS
Pursuant to Fed.R.Civ.P. 56(a) and Fed. R.Bankr.P. 7056, 48th Street seeks summary judgment against the landlord declaring that a) the default and termination notices issued by the landlord were ineffective because they violated the automatic stay provisions of § 362 of the Code; b) alternative *186 ly, the September 1, 1983 injunction served to prevent the termination of the Lease such that 48th Street’s interest in the Lease and/or sublease has not terminated; and c) upon payment of all arrears due and owing under the Lease and/or sublease, 48th Street will be the prime tenant. The landlord has cross moved for partial summary judgment declaring that 48th Street is not the tenant under the Lease, has not been a party to the Lease since July 22, 1983 and did not, by filing its petition on that date, invoke any law that would enjoin or stay the effectiveness of the notices served by the landlord upon ISH. 8
48th Street contends that (i) the Assignment was given as collateral to secure its obligations under the Note so that the Lease itself constitutes property of 48th Street’s estate protected by the automatic stay; (ii) the sublease is property of the estate protected by the automatic stay; (iii) the September injunction prevented the termination of the Lease; and (iv) 48th Street is free to cure its defaults and thereafter assume the Lease pursuant to section 365 of the Code. In opposition, the landlord argues that the automatic stay did not bar the landlord from terminating the Lease with ISH and that the September injunction did not prevent the termination of the Lease because the three-day notice was mailed prior to the issuance of the injunction.
DISCUSSION
Having read the affidavits and briefs in support of the cross motions and having considered the parties’ oral arguments, this court finds that the notices were issued in violation of the automatic stay and that the September injunction served to maintain the status quo of the Lease pending 48th Street’s assumption application. Additionally we hold that the Assignment was designed only to serve as collateral for the Note obligation and thus was not a “true lease assignment,” such that 48th Street was thereby divested of its interest in the Lease.
1. Automatic Stay Violations
Whether 48th Street’s interest in the premises is that of a subtenant, as the *187 landlord urges, or that of an equitable owner, as the debtor urges, the automatic stay was in any event violated when the landlord served upon ISH and the debtor default and termination notices.
Section 362(a)(3) of the Bankruptcy Code operates as a stay against “any act to obtain possession of property of the estate or property from the estate.”
9
By virtue of section 541, which is meant to be read broadly, the commencement of a case creates an estate comprising all the debt- or’s legal and equitable interests. 11 U.S.C. § 541;
see United States v. Whiting Pools,
That the landlord served the notices on ISH, rather than 48th Street, does not insulate the landlord. Indisputably, the landlord’s actions were intended to obtain for it by indirection that which it recognized it could not obtain directly — recapture of the premises in which 48th Street had an interest. But that effort cannot be allowed to succeed, for section 362(a)(3) stays not only acts to obtain “property of the estate” but acts to obtain “property from the estate” and the attempt to wrest possession of property away from a debtor without the imprimatur of the bankruptcy court is therefore proscribed. The legislative history is ample testimony to Congress’ intention to protect interests other than fee simple title.
Paragraph (3) stay any act to obtain possession of ... property from the estate (property over which the estate has control or possession).
H.R. No. 95-595, 95th Cong. 1st Sess. 340-2 (1977); S.R. No. 95-989, 95th Cong. 2nd Sess. 49-51 (1978), U.S.Code Cong. & Admin.News 1978, pp. 5836, 6298.
10
See also Superior Propane v. Zartun (In re Zartun),
Since 48th Street had a ten-year-old pos-sessory interest in the premises as well as, at a minimum, the interest of an assignor and sublessee in those premises, 48th Street necessarily enjoyed the freedom from dismemberment afforded by the automatic stay. And the landlord’s actions were therefore violative of the stay.
See A. Dan Chisholm Inc. v. B.P. Oil Inc. (In re A. Dan Chisholm),
*188
The landlord makes much of the argument that the automatic stay is not intended to afford injunctive coverage to nondebt- or third parties. Although that concept is certainly well grounded, it is not dispositive here.
See Lynch v. Johns-Manville Sales Corp.,
In certain unusual circumstances, a third party may gain protection of the stay as an incidental result of the protection afforded estate property. In recognizing this, one court aptly stated:
Where, however, a debtor and a nondebt- or are so bound by statute or contract that the liability of the nondebtor is imputed to the debtor by operation of law, then the Congressional intent to provide relief to debtors would be frustrated by permitting indirectly what is expressly prohibited by the Code.... Clearly the debtor’s protection must be extended to enjoin litigation against others if the result would be binding upon the debtor’s estate.
Plessey Precision Metals, Inc. v. Metal Center, Inc. (In re Metal Center, Inc.),
Application of the automatic stay to a debtor/assignor/sublessee in possession is not inconsistent with the line of cases previously cited and offered by the landlord that nondebtor parties are not afforded stay protection. Scrutiny of those cases reveals that in no instance was the
debtor’s
property in jeopardy; rather, the relief requested was intended to garner the salutary effect of the automatic stay for a nondebtor entity.
13
But here the peril to
*189
the debtor is manifest for it is axiomatic that, under New York law, when a prime lease falls, so does the sublease. 34 N.Y. Jur.,
Landlord and Tenant
§ 270 (1964);
In re Shopper’s Paradise, Inc.
In holding that the automatic stay prohibited the landlord from terminating the Lease, this court has as its only concern the estate’s interest in that Lease, which interest, in whatever form, is estate property. That ISH may benefit is a consequence of this court’s holding, not a motivation for it. The important goal of the automatic stay, to afford protection to the debtor and its property, should not be sacrificed where its implementation necessarily entails protecting an entity which the stay is not designed to benefit.
Viewing the debtor’s interest in the premises as that of an equitable owner because of the argued collateral assignment, the automatic stay was in any event violated when RGI served the notices. This is so because a debtor’s assignment of property for collateral purposes does not divest the debtor of all interest in the property. Thus, the automatic stay is triggered.
See State of West Virginia v. Has-sett (In re O.P.M. Leasing Services, Inc.),
Having established that the stay has been violated, it follows without discussion that those acts taken in violation of section 362 are void.
See In re Albany Partners, Ltd.,
*190 2. Collateral Lease Assignment
Recognition of the distinction between “true” real estate leases and so called “financing leases” or “leases intended as security” is not at all new to the bankruptcy arena.
15
See First National Bank of Chicago v. Irving Trust Co.,
Congress was not blind to the economic realities which have led to the use of a lease as a financing device or as collateral security. The legislative history to section 502 of the Code, which limits the damages which a landlord may claim, makes clear the Congressional intention that the limitation be applied to only true leases, with the determination that a lease is a true one to turn on the circumstances of each case and the economic substance of the transaction, not on the locus of title, form of transaction or the mere labelling as a lease.
See
124 Cong.Rec.H. 11, 093-94 (Sept. 28, 1978); S 17, 410 (Oct. 6, 1978). After a review of the pertinent documents and undisputed facts, the conclusion that 48th Street’s assignment of its Lease to ISH was for collateral purposes is inescapable.
See Cobham Enterprises, supra,
slip op. at 6-7, (Judge Buschman noting that the giving of a Lease as security is “so typical of sales of restaurants in New York”);
see also Anjo Restaurant Corp. v. Sunrise Hotel Corp.,
On the very same day, the landlord executed: 1) the Lease to 48th Street; 2) the Assignment allowing 48th Street to assign that Lease to ISH and requiring the landlord to permit a reassignment back to its original tenant whenever ISH and 48th Street so requested; and 3) a consent to allow ISH to sublease the premises back to 48th Street. Significantly, the Assignment to which the landlord consented did not release 48th Street from its contractual obligations under the Lease yet the es-crowed reassignment (the form of which was required by the landlord in the Assignment) did release ISH, leading one to conclude that the landlord surely intended its association with ISH to be temporary with 48th Street remaining as its actual tenant. Moreover, in the consent to sublease the landlord provided that the two majority shareholders of 48th Street remain the same, breach of which covenant would revoke the consent. Consonant with our reading of the unambiguous documents are the facts that ISH never took possession of the premises and never paid rent. For the past ten years, it has been 48th Street which has performed under the Lease. Thus, the landlord’s claim that, in its eyes, *191 ISH was its real tenant comes ten years too late and flies in the face of the documents which it executed.
That the landlord may not have been privy to the finer points of the sale of the restaurant business, including the terms of the actual sublease, is of no great moment, for the transactions which the landlord facilitated and in which it participated paint a picture of the relations among the parties. Although the landlord surprisingly did not cite us to
Anjo Restaurant Corp. v. Sunrise Hotel Corp., supra,
Federal Rule of Civil Procedure 56, made applicable to adversary proceedings by virtue of Fed.R.Bankr.P. 7056, provides for the granting of summary judgment where there exists no genuine issue of material fact and the moving party is entitled to such judgment as a matter of law.
Beyah v. Coughlin,
IT IS SO ORDERED.
Notes
. Four months elapsed because 48th Street had to obtain approval from the New York State Liquor Authority for the sale of liquor at the restaurant.
. January 1, 1980 was the date on which Charley O’s lease would have expired. Restaurant Associates Industries, Inc. guaranteed 48th Street’s lease obligations until this date.
. There may have been a second tender, one month later, which was similarly rejected, but the dispute regarding that alleged tender is not relevant and need not be resolved here.
. It is not clear from the record whether this notice was delivered on August 29 or August 26, 1983. Defendants’ statement pursuant to Rule 3(g) of the Civil Rules for the Southern District of New York ("3(g) statement”) admits the correctness of the later date, but their moving papers indicate that the earlier date is the correct one.
. Both orders were entered by Judge Ryan of this court who was assigned the case until his resignation. The first order was never appealed.
. See Memorandum and Order dated January 29, 1985, Index No. 84 Civ. 1241 (S.D.N.Y., MacMahon, J.).
. See Memorandum and Order dated July 12, 1985, Index No. 84 Civ. 1241 (S.D.N.Y., MacM-ahon, J.).
. In its third cross-claim and counterclaim, the landlord requests judgment declaring the Lease and sublease void or permitting it to terminate the Lease and obtain damages because the ownership of 48th Street was allegedly misrepresented, concealed or impermissibly changed. Although the landlord bases its summary judgment motion and its opposition to 48th Street's motion seeking to be declared the prime tenant on the claimed termination of the Lease, it limits its argument for termination to the effectiveness of the termination notice, nowhere raising the grounds for termination or avoidance pleaded in the third counterclaim. Not only are the landlord’s motion papers and memorandum of law conspicuously silent with respect to this defense to 48th Street’s motion (which was not addressed at oral argument, either), but the landlord’s 3(g) statement fails to raise as an undisputed factual issue that the ownership of the debtor was misrepresented, concealed or impermissibly changed.
The very mission of the summary judgment motion is to pierce the pleadings and assess the proof in order to see whether there is a need for a trial. Advisory Committee Note on 1963 amendment to subdivision (e) of Rule 56;
Alithochrome Corporation v. East Coast Finishing Sales Corporation (In re Alithochrome Corporation),
In its fourth counterclaim and affirmative defense, the landlord requests dismissal of 48th Street’s petition. The landlord essentially asserts that the bankruptcy filing was made in bad faith in that the debtor is profitable, is productive, was not insolvent at the time it filed its petition and is not likely to become insolvent. The dismissal sections of the Bankruptcy Code, 1112(b) and 305(a), require notice and a hearing when a party requests such relief. Federal Rule of Bankruptcy Procedure 2002(a)(5) requires twenty days’ notice to, inter alia, the debtor and all creditors. The landlord has not given that notice. Thus, the issue is not properly before this court.
. Section 362(a)(3) was amended by the Bankruptcy Amendments and Federal Judgeship Act of 1984 which amendment is inapplicable here. See note 10 infra.
. The Bankruptcy Amendments and Federal Judgeship Act of 1984, not applicable to the instant case, amended the Code to codify this legislative history. Section 362(a)(3) now reads:
(3) any act to obtain possession of property of the estate or of property from the estate, or to exercise control over property of the estate.
. The case of
In re Autobahn Classics, Inc.,
But even in Autobahn, the lessor sought court approval to lift the automatic stay and did not directly proceed against what was questionably estate property.
. The Plessey court properly notes that the stay is subject to the relief provisions under section 362(d). However, the debtor was held to be initially entitled to the stay protection.
. Recently, a bankruptcy court was faced with an issue similar to the one here. In
Juneau’s Builders Center, Inc.
v.
First National Bank of Gonzales (In re Juneau's Builder’s Center, Inc.),
. Automatic stay violation aside, the district court has already affirmed the bankruptcy court's refusal to vacate the injunction and has determined that the injunction prevented defendants from terminating 48th Street's interest in the Lease pending a determination of 48th Street’s application to assume that Lease.
See
footnotes 6 and 7,
supra.
Unless and until the circuit court of appeals rules otherwise, we assume the continuing validity and effectiveness of the injunction. We note that the injunction appears to have been indisputably intended to prevent the debtor’s forfeiture of its interest in the Lease. The minutes of the hearing before Judge Ryan bear out this interpretation of the injunction, Tr. of September 1, 1983 at 7-8, which is in harmony with the well-established principle that “the purpose of a preliminary injunction is to maintain the
status quo ante
pending a full hearing on the merits.”
Abdul Wall v. Coughlin,
Because the attempted termination of the Lease via the sending of the termination notice violated the automatic stay, the injunction may have been unnecessary, but, in any event, it served to prevent the termination of the Lease.
See generally In re Amber Lingerie, Inc.,
. The distinction has been similarly explored in the personal property context.
See
I. Jones,
Lease or Secured Transaction
— The
Saga Continues Under the Bankruptcy Act,
Comm.LJ. 281 (June/July 1985) and cases cited therein;
In re Mesa Refining Inc.,
. Resolution of this tenancy issue is no doubt intended to form the necessary underpinning for eventual lease assumption under 365 of the Code. But the parties may have travelled a needlessly long route. For in categorizing 48th Street as a
sublessee,
the landlord conveniently ignores the debtor’s status as the original tenant under and assignor of the Lease. While lease assignment terminates privity of estate, it does not affect privity of contract, 34 N.Y.Jur.
Landlord and Tenant
§ 243 (1964), particularly where, as here, there has been no release.
Id.
at §§ 241, 243. And privity of contract alone gives rise to eligibility to assume a lease.
Allied Technology, Inc.
v.
R.B. Brunemann & Sons, Inc. (In re Allied Technology, Inc.),