950 Meat & Grocery Inc.
MEMORANDUM DECISION AND ORDER GRANTING RELIEF FROM THE AUTOMATIC STAY
APPEARANCES:
Attorneys for Debtor
475 Park Avenue South, 18th Floor
New York, New York 10016
Clifford A. Katz, Esq.
Of Counsel
KAPLAN LEVENSON P.C.
Attorneys for General Trading C. Inc. and GLC Market Street, LLC
630 Third Avenue
New York, New York 10017
Steven M. Kaplan, Esq.
Of Counsel
MEYER, SUOZZI, ENGLISH & KLEIN, P.C.
Attorneys for NewBank
1350 Broadway, Suite 501
New York, New York 10018-0026
Edward J. LoBello, Esq.
Jordan D. Weiss, Esq.
Of Counsel
STUART M. BERNSTEIN
United States Bankruptcy Judge:
Prior to the Petition Date, Grocery Leasing Corp. (“GLC“) and General Trading Co., Inc. (“GTC“, together with GLC, “General“) sued the Debtor and several affiliates in New Jersey State Court (“State Court Action“). The Defendants, including the Debtor, counterclaimed. The Debtor subsequently commenced this chapter 11 case on the еve of the trial of the State Court Action triggering the automatic stay as to General‘s claims against the Debtor. General now seeks relief from the automatic stay (the “Motion“)1 to continue the State Court Action. The Debtor opposes the Motion2 and NewBank, a secured creditor, joins in the Debtor‘s Opposition.3
BACKGROUND
GTC is a wholesale food distributor to supermarkets. GLC, an affiliate of GTC, is the tenant of a retail supermarket located at 946-956 Market Street, Paterson, New Jersey (“Premises“). Pursuant to a letter agreement, dated July 20, 2012 (“APA“),4 and among other things, GTC sold to the Debtor all fixtures, furnishings and inventory located in the Premises for $2,262,000. The same day, the Debtor and GLC entered into an Agreement of Sublease (“Sublease“)5 to enable the Debtor to operate the supermarket and GTC and the Debtor also entered into a security agreement (“Security Agreement“)6 by which the Debtor granted GTC and its affiliates a security interest in all of the Debtor‘s assets. General apparently had business relationships with affiliates of the Debtor and the Security Agreement included a сross-default provision. As a result, the Debtor‘s assets also secured the obligations of and performance by the affiliates.
The deal documents included, among other things, a requirement that the Debtor purchase all of its inventory from GTC (“Supply Covenant“). Paragraph 4 of the APA states in pertinent part:
Buyer hereby agrees that. . . it shall purchase from Seller. . . all of Buyer‘s inventory requirements for the Store consisting of products which are sold or available for sale by Seller. . . at prices and upon terms then offered by Seller . . . to its customers generally.
Similarly, paragraph 48 of the Sublease states in relevant part:
Subtenant hereby agrees that. . . shall purchase from GTC . . . all of Subtenant‘s inventory requiremеnts for the Store ( as defined in the Letter Agreement) consisting of products which are sold or available for sale by GTC . . . at prices and upon terms then offered by GTC . . . to its customers generally.
Likewise, paragraph 12 of the Security Agreement states in pertinent part:
TO INDUCE SECURED PARTY TO CREATE THE OBLIGATIONS AND TO ASSURE THE PROMPT REPAYMENT THEREOF, ... DEBTOR SHALL PURCHASE ALL OF ITS INVENTORY REQUIREMENTS THAT ARE AVAILABLE FOR SALE BY SECURED PARTY (INCLUDING WITHOUT LIMITATION GROCERY, DAIRY, DELI AND FROZEN PRODUCTS). . . .
Finally, all three agreements are governed by New Jersey law. (APA at ¶ 10; Sublease at ¶ 42; Seсurity Agreement at ¶ 11.04.)
On October 23, 2017, the Debtor entered into a series of agreements by which it became a member of the Key Food Stores Co-operative, Inc. (“Key Food“) and agreed to purchase 95% of its inventory through Key Food. (Reply Declaration of Steven M. Kaplan, dated May 11, 2020, Exhibit J (“Kaplan Reply Decl.“)(ECF Doc. # 54-2).) The Debtor does not deny this but offers various justifications. General
General commenced the State Court Action against the Debtor, Ken Tavera, the Debtor‘s principal, and several other supermarkets owned by Tavera, including F.T. Meat Corp., Bronx 656 Food Corp., 323 Meat & Grocery, Inc. (“323 Meat“), and V.T. Meat & Grocery, Inc. (“V.T. Meat“) (with the Debtor and Tavera, the “Defendants“). The First Amended Complaint, (Kaplan Decl., Exhibit H), sought a judgment for possession of the Premises (Count I); breach of Sublease, APA and Security Agreement by the Debtor (Count II); breach of personal guaranty by Tavera (Count III); breach of various cross-default provisions by the Debtor and other Defendants (Count IV); unjust enrichment against the Debtor (Count V); account stated against the Debtor (Count VI); breach of the 323 Meat Security Agreement by 323 Meat (Count VII); and replevin against the Debtor and 323 Meat (Count VIII).
The Defendants’ answer, (Kaplan Decl., Exhibit I), denied the material allegations (although the Debtor does not disрute that it purchased inventory from third parties through Key Food) and asserted numerous counterclaims. These included breach of the APA against GTC for failing to carry the products that the Debtor needed to effectively compete (Counterclaim I); breach of contract by GLC for requiring the Debtor to remove storage containers from outside the Premises after agreeing to their installation (Counterclaim II); breach of the implied covenant of good faith and fair dealing by GTC and GLC for failing or refusing to supply inventory at commercially reasonable prices and taking the retaliatory action of wrongfully evicting the Debtor (Counterclaim III); breach of New Jersey‘s anti-trust and consumer fraud stаtutes by GTC for an improper requirements contract (Counterclaims IV, V); improper eviction by GLC (Counterclaim VI); breach of a rebate agreement by GTC for failing to pay agreed-upon rebates on inventory purchased by 323 Meat, V.T. Meat and the Debtor (Counterclaim VI); and breach of contract by GTC in failing to advertise on behalf of the Debtor dеspite charging a monthly fee for this service (Counterclaim VII).
Discovery was fully completed, and a bench trial was set for March 2, 2020. The Debtor filed this chapter 11 case on February 27, 2020, three days before the trial, triggering the automatic stay.
DISCUSSION
The filing of a bankruptcy petition automatically stays “the commencement or continuation of a judiciаl, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case under this title, or to recover a claim against the debtor that arose before the commencement of the case under this title.”
- whether relief would result in a partial or complete resolution of the issues;
- lack of any connection with or interference with the bankruptcy case;
- whether the other proceeding involves the debtor as a fiduciary;
- whether a specialized tribunal with the necessary expertise has been established to hear the cause of action;
- whether the debtor‘s insurer has assumed full responsibility for defending it;
- whether the action primarily involves third parties;
- whether litigation in another forum would prejudice the interests of other creditors;
- whether the judgment claim arising from the other action is subject to equitable subordination;
- whether movant‘s success in the other proceeding would result in a judicial lien avoidable by the debtor;
- the interests of judicial economy and the expeditious and economical resolution of litigation;
- whether the parties are ready for trial in the other proceeding; and
- impact of the stay on the parties and the balance of harms.
Id. at 1286. Not all of the factors are relevant in every case, Schneiderman v. Bogdanovich (In re Bogdanovich), 292 F.3d 104, 110 (2d Cir. 2002); Mazzeo v. Lenhart (In re Mazzeo), 167 F.3d 139, 143 (2d Cir. 1999), and the Court need not assign equal weight to each factor. In re Keene Corp., 171 B.R. 180, 183 (Bankr. S.D.N.Y. 1994).
Here, several relevant Sonnax Factors weigh in favor of stay relief. The State Court Action involves a multi-party dispute and counterclaims by the Defendants. The automatic stay does not stay the сlaims against the non-debtors, Teachers Ins. & Annuity Ass‘n of Am. v. Butler, 803 F.2d 61, 65 (2d Cir. 1986) (“It is well-established that stays pursuant to § 362(a) are limited to debtors and do not encompass non-bankrupt co-defendants.“), or the counterclaims asserted by the Defendants, including the Debtor, against General. Verragio, Ltd. v. AE Jewelers, Inc., No. 15 Civ. 6500 (CM), 2017 WL 1753478, at *1 (S.D.N.Y. Apr. 27, 2017) (“It is well-settled that an automatic stay pursuant to
The Debtor‘s Opposition mainly argues that the continuation of the State Court Action will prejudice the Debtor‘s creditors and lead to duplicate litigation and the possibility of inconsistent results.10 (Factors 7, 10.) First, General filed a $2 million claim in the chapter 11 case commenced by the Debtor‘s affiliate, JT Meat & Grocery Corp., Case no. 20-10060 (SMB). (Opposition, Exhibit A.) The proof of claim states that it “is the subject of ongoing litigation in NJ state court.” (Id. at p. 2.) The affiliated debtor in that chapter case (“JT“) is not a party to the State Court Action but is party to an agreement with General under which it guaranteed the obligations of its affiliates. Presumably, the reference to the “litigation in NJ state court” signifies that the claims against JT are based on the breaches of the affiliates’ obligations that are the subject of the State Court Action.11 Second, the Debtor‘s most valuable asset is its interest in the Sublease. General maintains that the Sublease was terminated pre-petition, cannot be assumed and is not property of the estate. The issue, critical to the Debtor‘s successful reorganization, will be decided in the State Court Action unless this Court prevents it and decides the question.12
There are two responses. One, the possibility of multiple litigations became inevitable once the Debtor filed this chapter 11 case rather than proceed to trial in the State Court Action. The automatic stay
[I]t is important to keep in mind that the bankruptcy court‘s “business judgment” in deciding a motion to assume is just that—a judgment of the sort a businessman would make. In no way is this decision a formal ruling on the underlying disputed issues, and thus will receive no collateral estoppel effеct. In a given case, a bankruptcy court might decide that it would be beneficial for the trustee or debtor-in-possession to assume a certain contract because the court thinks it unlikely that a court would hold that the debtor had breached the contract, and thus assuming the contract would be a good “business judgment.” This “business judgment” could turn out to be wrong, hоwever, if a later fact finder in an adversary proceeding decides that the underlying contract was in fact breached. In such a case, the judge‘s wrong decision is simply an error of business judgment, not legal error.
Orion Pictures Corp. v. Showtime Networks, Inc. (In re Orion Pictures Corp.), 4 F.3d 1095, 1099 (2d Cir. 1993). At best, therefore, this Court can only make an informed business judgment whether it makes sense for the Debtor to spend its time and money pursuing an assumption and assignment of the Sublease and curing defaults when, it may turn out, the Sublease was terminated pre-petition and the Debtor had no Sublease to assume.
Finally, I note that balancing the harms caused by the impact of the stay, (Factor 12), also weighs in favor of stay relief. For the reasons stated, the Debtor will not likely be able to assign the Sublease until the termination issue is resolved. At a minimum, it may have to accept a depressed price from a buyer unwilling to assume the risk that a court will decide in the future that the Sublease had been terminated. Delaying this resolution by continuing the stay will not benefit the Debtor or the creditors of this estate. On the other hand, continuing the stay prevents GLC from exercising whatever rights it has to recover the Premises.
Accordingly, I conclude that the Motion is granted with one caveat. If General recovers a money judgment against the Debtor, it cannot collect the judgment except through this bankruptcy proceeding.
So ordered.
Dated: New York, New York
May 20, 2020
/s/ Stuart M. Bernstein
STUART M. BERNSTEIN
United States Bankruptcy Judge