Burger Boys, Inc. v. South Street Seaport Ltd. Partnership (In Re Burger Boys, Inc.)Burger Boys, Inc. v. South Street Seaport Ltd. Partnership (In Re Burger Boys, Inc.)
MEMORANDUM DECISION
The Debtor, Burger Boys, Inc. (“Burger Boys”), appeals an Order of the Bankruptcy Court, dated June 21, 1994, abstaining under 28 U.S.C. § 1334(c) from adjudicating an ad
Burger Boys operates a store in the Market Building located at South Street Seaport in New York City. South Street Seaport is the Burger Boys’ landlord. On May 17, 1983, the parties entered the lease for the Market Building premises. The lease expires December 31, 2004. On October 11, 1993, South Street Seaport commenced a non-payment summary proceeding in the Civil Court of the City of New York (“the Summary Proceeding”) to evict Burger Boys. In response, Burger Boys asserted six counterclaims for damages alleging, in essence, that the South Street Seaport has “abandoned” the Market Budding for a new budding in the area, in breach of the terms of the lease. South Street Seaport raised an affirmative defense that the assertion of counterclaims was barred by the terms of the lease. On the eve of trial, Burger Boys filed a Chapter 11 petition, thereby automatically staying the Summary Proceeding. See 11 U.S.C. § 362. On May 2, 1994, Burger Boys filed an adversary proceeding in the Bankruptcy Court (“the Adversary Proceeding”) asserting the same six claims contained in its counterclaims in the Summary Proceeding.
On June 21, 1994 South Street Seaport moved for abstention from the Adversary Proceeding under 28 U.S.C. § 1334(c)(2). The Bankruptcy Court granted the motion on the condition that South Street Seaport withdraw its affirmative defense to the counterclaims in the Summary Proceeding and consent to the transfer of the counterclaims to State Supreme Court where more extensive discovery is permitted. The Bankruptcy Court held that the Adversary Proceeding was “noncore”, and that mandatory abstention was required because each of the six factors listed in § 1334(c)(2) was present.
The Bankruptcy Court also granted South Street Seaport’s motion for relief from the automatic stay in the event that Burger Boys failed to assume or reject the lease within sixty days. The Court, however, stayed that Order pending the determination of this appeal, upon the condition that Burger Boys continue to pay rent in accordance with the terms of the lease.
On this appeal, Burger Boys claims that mandatory abstention was not required because the Adversary Proceeding is a “core” proceeding under § 1334(e)(2), and that granting relief from the automatic stay of South Street Seaport’s Summary Proceeding was improper because the Bankruptcy Court erred in its balancing of the hardships. We find these contentions unpersuasive. 1
Under 28 U.S.C. § 1334(c)(2), a bankruptcy court must abstain from a non-core proceeding — a proceeding that is “related to” a case under title 11, but does not itself “arise under” title 11 or “arise in” a ease under title ll.
2
In contrast, a proceeding that “arises under” title 11 or “arises in” a case under title 11 is a “core proceeding.” A core proceeding is generally defined as a matter which would have no existence outside of the bankruptcy ease. See, e.g.,
In re Kolinsky,
Burger Boys contends that its Adversary Proceeding is a core proceeding under 28 U.S.C. § 1334(c)(2), and thus mandatory abstention is inappropriate, for two reasons: First, the lease is “property of the estate” under 11 U.S.C. § 541(a)(1), and second, its Adversary Proceeding is premised on both pre- and post-petition wrongful acts by South Street Seaport. With regard to its first ground, Burger Boys claims that because its Adversary Proceeding is related to “property of the estate” and “the relief sought ... is coupled in a material way with the reorganization of Burger Boys and its ability to propose and confirm a Chapter 11 plan and to adjust its debtor-creditor relationships”, the Adversary Proceeding is a core proceeding.
Northern Pipeline Construction Co. v. Marathon Pipe Line
Company,
3
The problem with [that] approach is that it creates an exception to Marathon that would swallow the rule. Any contract action that the debtor would pursue against a defendant presumably would be expected to inure to the benefit of the debtor estate and thus ‘concern’ its ‘administration.’ Certainly this is true here where the outcome could determine [the debtor’s] continued viability as an enterprise. Nonetheless, the Adversary Proceeding remains a pre-petition contract action that the Supreme Court held in Marathon may not be adjudged by a non-Article III judge.
Moreover, where, as here, the “property of the estate” (the breach proceeds and Burger Boys’ rights under the lease) is conditional upon the debtor prevailing in the adversary proceeding, courts have consistently held the adversary proceeding is noneore. See, e.g.,
In re J.T. Moran Financial Corp.,
Burger Boys supports its position by analogy to
In re Celotex Corporation,
In Celotex and Plaza, however, the determination of core was supported by a particular nexus between the adversary proceeding and the reorganization plan. In each ease, the insurance policies at issue were purchased by the debtor to indemnify itself against the parties involved in the reorganization plan. That nexus is absent here. Burger Boys claims that the proceeds from the Adversary Proceeding will be distributed among its creditors, but the contract in dispute, the lease agreement, unlike the insurance policies in Celotex and Plaza, was not executed by Burger Boys to indemnify itself against its creditors in bankruptcy.
Burger Boys’ second argument — that its Adversary Proceeding is core because it is premised on both pre- and post-petition wrongful acts by South Street Seaport — asserts that this continuing damage to the “property of the estate” requires a core determination.
To be sure, numerous courts have held that post-petition contract disputes with a debtor are core proceedings because they necessarily arise in cases under title 11 and concern the administration of the estate. See
Kenston Management Co., Inc. v. Lisa Realty Co.,
In both cases, however, the point at which the cause of action arose was critical. Because the causes of action did not exist on the date of the filing of the petitions, the contract disputes were held to be post-petition, core proceedings. In
O’Sullivans,
the Court held that although some of the defendant’s allegedly wrongful acts occurred during the two months prior to the filing of the petition, the actions that caused the destruction of the debtor’s business occurred post-petition: “A fair reading of the complaint indicates that at the date of the filing of the petition, no meaningful cause of action ... for damages yet existed that the debtor could assert.”
Although
Kenston
involved a pre-petition lease agreement, the adversary proceeding pertained to a breach of a different, post-petition contract, namely, a settlement agreement that was executed and breached post-petition. In holding that the adversary proceeding was a core proceeding,
Kenston
distinguished
Marathon
on precisely this basis: “In Marathon, ... the adversary proceeding involved not only a pre-petition contract, but a pre-petition breach of that contract.”
J.T. Moran
supports this result. There, the Court, relying upon
Beard v. Braunstein,
B. Relief from the Automatic Stay under 11 U.S.C. § 862
The burden of proof on a motion to lift or modify an automatic stay is a shifting one. Section 362(d)(1) requires an initial showing of “cause” by the movant. Once the movant establishes “cause,” the burden of proof shifts to the debtor. 11 U.S.C. § 362(g)(1). Burger Boys argues that the Bankruptcy Court erred in granting relief from the stay because the movant failed to show “cause”.
“Cause” is defined neither by the statute nor its legislative history. In
Sonnax Industries, Inc. v. Tri Component Corp.,
Burger Boys argues that the Bankruptcy Court erred in granting relief fi*om the automatic stay because it failed specifically to address or, in any event, to weigh properly the
Curtis
factors. Although
In re Abrantes Construction Corp.,
Sonnax
did not expressly require specific consideration of the
Curtis
factors nor did it consider each one. Other courts have expressly held that
Sonnax
does not require consideration of each of the factors: “only those factors relevant to a particular case need by considered, ... and the Court need not assign them equal weight.” See
In re Helen Touloumis,
It is evident from the record that the Bankruptcy Court did consider five of the Curtis factors, albeit not by name: (a) The Court ascertained whether relief would result in a partial or complete resolution of the issues by inquiring how the whole case, including Burger Boys’ counterclaims, could be tried in Civil Court and made arrangements for full relief by conditioning its abstention Order on South Street Seaport’s consent to the transfer of Burger Boys’ counterclaims to State Court; 7 (b) In its determination that the Adversary Proceeding was a noncore proceeding from which it was required to abstain, the Court essentially decided that litigation of the issues in another forum would not interfere with the bankruptcy proceeding; 8 (c) The Court addressed how best to serve the interests of judicial economy and the expeditious and economical resolution of the litigation; 9 (d) The Court knew the parties were ready for trial in the other proceeding, because Burger Boys had filed its Chapter 11 petition “on the eve of the Civil Court trial”; 10 (e) The Court balanced the harms and impact of the stay on the parties by crafting an order that permitted Burger Boys an extension of sixty days to assume or reject the lease during which time the automatic stay would continue, provided South Street Seaport received use and occupancy fees. And, the Court abstained under an arrangement that would allow both parties to litigate their claims fully.
Although Burger Boys argues that seven of the
Curtis
factors are implicated in this ease, it essentially makes one point as to why the balance of harm weighs in favor of continuing the automatic stay — it will have to litigate in three different forums
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at a prohibitive cost. Since it cannot afford to litigate its claims at such a cost, it claims the lease will be lost and the business will be forced into liquidation to the detriment of not only itself, but also all of its creditors. The validity of this claim is an issue of fact. The Bankruptcy Court’s weighing of this factor may be overturned only if found to be “clearly erroneous.” Courts have held, however, that the increased costs of litigating in a particular forum are not so prejudicial as to require continuance of a stay. See, e.g.,
In re Keene Corporation,
The decision to grant relief from the automatic stay is logical within the context of the Bankruptcy Court’s determination that it
Because there is no evidence to support a conclusion that the Bankruptcy Court erred in weighing the Curtis factors or balancing the hardships to the parties, the Order of the Bankruptcy Court granting relief from the automatic stay was proper. For the foregoing reasons, the Bankruptcy Court’s Order of June 21, 1994 is affirmed in all respects.
SO ORDERED.
Notes
. The Appellee argues that this appeal from the Bankruptcy Court's Order granting relief from the automatic stay should be dismissed as moot. The Appellee asserts that the Appellant violated a condition of the stay pending appeal by failing to make timely rent payments, and thus the stay pending appeal never took effect. Because the Appellant did not assume the lease in sixty days, according to the Appellee the lease should be presumed rejected as a matter of law. We decline to dismiss the appeal as moot because we find that the issue is not properly before us.
There is no evidence in the record, except disputed allegations in the appellate briefs, of the nonpayment of rent nor its untimeliness. The Appellee has failed to cite any cases supporting its contention that untimeliness in rent payments should be considered a condition of the stay pending appeal, violation of which would render the stay ineffective. The Appellee cites only cases in which the Appellants failed to obtain a stay pending appeal. In the interim, the assets at issue were sold. The courts held that the appeals from the orders of the bankruptcy courts were moot because the district courts were unable to grant effective relief without unraveling the consummated sales. Because the Appellee in this case has presented no evidence that this Court would be unable to fashion relief (i.e.,
. Other factors are relevant to a Bankruptcy Court's decision to abstain. The Appellant does not dispute, however, that (1) a timely motion for abstention was made by the Appellee, (2) its adversary proceeding is based upon a state law cause of action, (3) its adversary proceeding could not have been commenced in a Court of the United States absent jurisdiction under title 11, (4) an action is pending in a state court of appropriate jurisdiction, and (5) the pending state action may be timely adjudicated.
. In Marathon, the debtor/appellant, after filing a petition for bankruptcy, filed an adversary proceeding in the bankruptcy court against the ap-pellee seeking damages for alleged breaches of contract and warranty. The appellee sought dismissal of the suit on the ground that the 1978 Act unconstitutionally conferred Article III judicial power upon judges who lacked life tenure and protection against salary diminution.
. For the plurality, Justice Brennan wrote: “[T]he restructuring of debtor-creditor relations, which is at the core of the federal bankruptcy power, must be distinguished from the adjudication of state-created private rights, such as the right to recover contract damages that is at issue in this case.”
.
See In re Orion Pictures Corp.,
. The
Curtis
factors are: (1) whether relief would result in a partial or complete resolution of the issues; (2) lack of any connection with or interference with the bankruptcy case; (3) whether the other proceeding involves the debtor as a fiduciary; (4) whether a specialized tribunal with the necessary expertise has been established to hear the cause of action; (5) whether the debt- or’s insurer has assumed full responsibility for defending it; (6) whether the action primarily involves third parties; (7) whether litigation in another forum would prejudice the interests of other creditors; (8) whether the judgement claim arising from the other action is subject to equitable subordination; (9) whether movant's success in the other proceeding would result in a judicial lien avoidable by the debtor; (10) the interests of judicial economy and the expeditious and economical resolution of litigation; (11) whether the parties are ready for trial in the other proceeding; and (12) impact of the stay on the parties and the balance of harms.
. Transcript of Hearing, June 21, 1994, pp. 5-8.
. Id. at 9-10.
. Id. at 20.
. Id. at 24.
.The summary nonpayment proceeding will remain in the Civil Court of the City of New York; the Appellant's counterclaims will be removed or transferred to the State Supreme Court; and, the Chapter 11 bankruptcy proceeding will be conducted in the Bankruptcy Court.