In Re Conston Corp., Inc.
OPINION
A. INTRODUCTION
At issue is interpretation of
B. UNDERLYING FACTS
These cases involve 31 related debtor-corporations, retailers of large-size women’s apparel (“the Debtors”), which operated a cumulative number of over 350 retail stores prior to their bankruptcy filing on June 22, 1990. In August, 1990, the majority shareholders of the Debtors sold their stock to Cascade International, Inc. (“Cascade”). In addition to funding a Plan of Reorganization, confirmed on April 18, 1991, which will ultimately pay all creditors in full, Cascade embarked on a program to reduce the number of the Debtor’s retail stores by about one-half.
All of the decisions as to which stores should be retained and the leases assumed, and which stores were to be closed and the leases rejected, were not easy to make. In the instances of about forty (40) of the stores, the Debtors paid post-petition rent for several months, but ultimately decided to reject the leases.
After confirmation, the Debtors commenced the tedious process of objecting to hundreds of proofs of claims, all of which would have had to have been paid in full if the Debtors did not successfully object thereto.
See
Both issues presented require interpretation of
(6) if such claim is the claim of a lessor for damages resulting from the termination of a lease of real property, such claim exceeds—
(A) the rent reserved by such lease, without acceleration, for the greater of one year, or 15 percent, not to exceed three years, of the remaining term of such lease, following the earlier of—
(i) the date of the filing of the petition; and
(ii) the date on which such lessor repossessed, or the lessee surrendered, the leased property; plus
(B) any unpaid rent due under such lease, without acceleration, on the earlier of such dates;
According to the Debtors’ counsel, the first issue (may the Debtors deduct post-petition rent payments in the
The second issue was raised by only two landlords. Counsel for the Debtors and the landlords agreed that this was because the relevant lease provisions were unique to those leases. The leases, attached as exhibits to the parties’ Stipulation of Pacts, provide, at Article 8, that
[i]n addition to the minimum annual rental specified in Article I [which is entitled “Fundamental Lease Provisions” and recites a “Minimum Annual Rental” figure], Tenant shall pay, monthly in advance, a utility charge to reimburse Landlord for utilities furnished by Landlord, if any, to the premises.
Earlier in the lease, at Article 5E, it is provided that
[t]he Tenant shall pay, as additional rent, all sums of money required to be paid pursuant to the terms of Article 5B and 5C [addressing “minimum annual rent” and “taxes and insurance expense,” respectively], the sums to be paid pursuant to Articles 8, 19 [addressing common area charges], 20 [addressing “enclosed mall” charges], 29 [addressing “merchant association” fees] and Exhibit “C” of this Lease [relating to construction of tenants’ stores], and all other sums of money or charges required to be paid by Tenant under this Lease, whether or not the same be designated “additional rent.”
The parties stipulated that the fixed utility charges at the two locations in issue were $517 per month and $960 per month, respectively. 1
A third issue is before us for decision, which we reach only due to our resolution in favor of the landlords on the first issue. On July 22, 1991, a paralegal employed by a management company for two of the landlords executed a letter agreement stipulating to allowance of these landlords’ claims in specific sums which included deductions of the post-petition rents paid by the Debtors to these landlords in the calculations. This paralegal had apparently filed the most recent proofs of claims of these landlords and had actively negotiated the settlement of the claims with the Debtors’ counsel, without consulting Philadelphia counsel who had represented these landlords previously in the course of this case. On July 30,1991, that same Philadelphia counsel directed a letter to the Debtors’ counsel which purported to revoke the letter agreement of July 22, 1991. No impropriety on behalf of the Debtors’ counsel *452 in negotiating with the paralegal, as opposed to Philadelphia counsel, was alleged in the July 30, 1991, letter, or in the course of oral argument on July 31, 1991.
C. DISCUSSION
1.
The Debtors are not Authorized to Deduct their Post-Petition Rental Payments in Calculating the Cap on the Landlords’ Claims Under
The historical “differing treatment” of landlords’ claims, in contrast to that of other allowable claims, is well chronicled by Collier. 3 COLLIER ON BANKRUPTCY, 11502.02[7], at 502-54 to 502-64 (15th ed. 1990). In 1934, the predecessor to
the rent reserved by the lease, without acceleration, for the year next succeeding the date of the surrender of the premises to the landlord or the date of reentry of the landlord, whichever first occurs, whether before or after bankruptcy, plus an amount equal to the unpaid rent accrued, without acceleration, up to such date: ...
In the drafting of the Code, the inclusion of an amount “equal to the unpaid rent accrued,” in addition to the rent payable over the next year or the future three years, was omitted.
Id.,
11502.02[7][b], [c], [d], at 502-58 to 502-62. There are statements in the legislative history that indicate a presumed continued vitality of the holding in
Oldden v. Tonto Realty Corp.,
The issue of whether the Debtors are entitled to deduct post-petition rental payments from landlords’ claims in making the
FAC’s post-petition rent payments should also be deducted from RBLP’s maximum allowed claim. See In re Stewart’s Properties, Inc.,41 B.R. 353 (Bankr.D.Haw.1984), (where the court noted that the maximum amount allowable under old§ 502(b)(7) [now§ 502(b)(6) ] was the rent for one year from the date of filing of the petition, minus administrative rent previously paid.) If post-petition rental payments were not subtracted from the maximum allowable claim, a debtor who ceased payment of rent immediately upon filing a bankruptcy petition would be in a better position than a debtor who fulfilled his duties under § 365(d)(3). Such a result could not have been intended. The legislative history of§ 502(b)(6) states that “this subsection does not apply to limit administrative expense claims for *453 use of the leased premises to which the landlord is otherwise entitled.” House Report at 6309-6310.
The First Alliance court therefore concludes that the deduction of post-petition payments is logical because it provides an incentive to debtor-tenants to pay post-petition rents.
The
First Alliance
court cites, with approval,
We also agree with the
Goldblatt
analysis. As we read
The
First Alliance
court does not appear to recognize the inconsistency of its result with that reached in
Goldblatt.
Furthermore, we cannot agree with
First Alliance’s
suggestion that a contrary interpretation of
The instant landlords have been equally as creative as the
First Alliance
court in putting forth hypothetical situations which suggest that their interpretation of
2. Nevertheless, the Debtors are Entitled to Enforce the Prior Agreement of Two Landlords to Reduce Their Claims by the Amount of the Debtors’ Post-Petition Payments.
The foregoing conclusion requires us to decide whether the two landlords whose representative paralegal agreed to accept the Debtors’ calculations are bound to their agreement. We find that they are.
As Judge Fox cogently stated in
In re Paolino,
[i]t is well settled that a trial court has jurisdiction to enforce a settlement agreement made by litigants in a pending case. The jurisdiction is founded on the strong public policy which favors the settlement of disputes and avoidance of costly and time consuming litigation. E.g., Pugh v. Super Fresh Food Markets, Inc.,640 F.Supp. 1306 (E.D.Pa.1986); Rosso v. Foodsales, Inc.,500 F.Supp. 274 (E.D.Pa.1980). A settlement agreement is contractual in nature; the essential ingredient of a binding agreement is the parties’ mutual assent to the terms and conditions of the settlement. See Macy v. United States,557 F.2d 391 (3d Cir.1977); Pugh. “An agreement to settle a lawsuit, voluntarily entered into, is binding upon the parties, whether or not made in the presence of the court, and even in the absence of a writing.” Morris v. Gaspero,522 F.Supp. 121 (E.D.Pa.1981), quoting Green v. John H. Lewis & Co.,436 F.2d 389 , 390 (3d Cir.1970); accord, Good v. Pennsylvania Railroad Co.,384 F.2d 989 (3d Cir.1967). The agreement remains binding even if a party has a change of heart after he agreed to its terms but before the terms are reduced to writing. E.g., Pugh.
In speaking of the circumstances under which a party can extricate itself from a settlement, we observed in
In re United Church of the Ministers of God,
[t]he principles of law pertinent to such circumstances are well-stated in a district court Opinion written by present Circuit Judge Edward R. Becker in United States v. Kulp,365 F.Supp. 747 , 763 (E.D.Pa.1973), aff'd,497 F.2d 921 , 922 (3d Cir.1974). Although finding that such stipulations are generally enforceable, Judge Becker held that
“[a] court may allow a party to withdraw from a stipulation if the moving party can prove that he relied to this detriment on representations that were untrue, or that the stipulation stemmed from fraud, accident, mistake, inadvertence, surprise, or excusable neglect, or that some other reason justifies relief. See Norwich Pharmacal Co. v. Rakway, Inc.,189 F.Supp. 348 (E.D.Pa.1960); Rarick v. United Steelworkers of America,202 F.Supp. 902 (W.D.Pa.1962).”
See also, e.g., United States v. Camp,723 F.2d 741 , 745-46 (9th Cir.1984); Coastal States Marketing, Inc. v. Hunt,694 F.2d 1358 , 1369 (5th Cir.1983); Jacintoport Corp. v. Greater Baton Rouge Port Comm’n,599 F.Supp. 21 , 23 (M.D.La.1984), rev’d on other grounds,762 F.2d 435 (5th Cir.1985), cert. denied,474 U.S. 1057 ,106 S.Ct. 797 ,88 L.Ed.2d 774 (1986); and Albee Homes, Inc. v. Lutman,274 F.Supp. 875 , 877 (E.D.Pa.1967), aff 'd in part and appeal dismissed in part,406 F.2d 11 (3d Cir.1969).
The landlords in issue made firm, unambiguous, and complete settlements with the Debtors. There are no claims of misrepresentations by the Debtors, nor any allegations which rise to the level of “fraud, accident, mistake, inadvertence, surprise, or excusable neglect.” The landlords in issue agreed to terms which were consistent with those agreed to by about half of the other landlords, and arguably were supported by the only reported bankruptcy case on point (First Alliance). Their rea *455 son for attempting to repudiate these agreements appear to be, purely and simply, a change of heart, though doubtless a change of heart motivated by Philadelphia counsel’s enlightenment. The fact that Philadelphia counsel represented these landlords at an earlier stage did not establish a prerequisite, especially in light of the apparently equal bargaining power of the parties, that the Debtors seek out the approval of the settlement of these landlords’ claims from Philadelphia counsel. Rather, it was the duty of the landlords to consult with counsel of their choice. These landlords having entered into this agreement without choosing to consult their Philadelphia counsel is no basis to set aside the agreement reached by their authorized representative.
In sum, if settlements are to receive their due respect and consideration, they cannot be so easily undermined as these landlords suggest. We therefore conclude that the two landlords who agreed to terms with the Debtors by the letter agreement of July 22, 1991, are bound to those terms, despite our previous holding which would have expanded their rights.
3.
Utility Charges Which the Lease Expressly States are Part of the Rent and Which are Imposed in a Manner Similar to Rent May Be Included as “Rent Reserved” in
The final issue requires us to determine precisely what is “rent reserved” under
Despite their lack of precedential support, we believe that the landlords are entitled to prevail on this issue on the basis of the clear meaning of the terms in the context of these particular leases, as they did on the first issue in question due to the clear meaning of the pertinent Code language. Article 5E of the lease in issue specifically categorizes the contested utility charges as “additional rent.” This categorization does not appear forced or illogical, as the utility charges in issue were fixed, regular monthly payments, exactly like the “true rent” itself. In fact, they constituted between twelve (12%) percent and slightly over thirteen (13%) percent of the regular monthly payments due from the tenants in issue.
See
page 451 n. 1
supra.
It is true that the language of Article 5E almost proves too much, by purporting to classify
all
charges to the tenants as “additional rent.” However, the landlords conceded (and we think properly) that sums of money due under the lease in only certain contingencies, such as attorney’s fees, would not be properly classifiable as “rent reserved,” irrespective of what the leases attempted to say, since such charges are neither fixed nor regular. Therefore, we conclude that appendages to “pure” rent are allowable as “rent reserved” under
In
Storage Technology,
the attorney’s fees in issue were apparently categorized as “rent” in the parties’ lease. 77 B.R. at
*456
824. However, as the instant landlords conceded, such charges were not regular, fixed monthly charges and therefore were not properly classifiable as “rent reserved.” It is unclear whether any of the charges found to be non-rent in
Heck’s
were designated as rent in the parties’ lease. In any event, the reference to “utility charges” in issue in
Heck’s
was vague and lumped with other charges which clearly were not the sort of regular, fixed, substantial monthly charges as are in issue here. Therefore, both
Heck’s
and
Storage Technology
present factual scenarios which are significantly distinguishable from those at issue in the instant case. We therefore decline to apply the holdings of these cases to the instant facts, and conclude that the utility charges in issue here are a component of the “rent reserved” in the leases in question under
At the hearing on July 81, 1991, the Debtors presented us with an “omnibus order” which would have not only determined the outcomes of numerous other Objections to proofs of claims which were apparently uncontested, but also would have resolved the issues addressed in this Opinion favorably to the Debtors. In this Opinion, we have rejected the two principal contentions of the Debtors. The parties advised us at oral argument on July 31, 1991, that they had agreed to the alternative mathematical calculations which could be plugged in upon our making decisions on these issues. We therefore will direct that the Debtors redraft the omnibus order to render it consistent with the conclusions reached in this Opinion, and we will execute same after a brief period to allow other interested parties to make any objections to the form or content of the Debtors’ draft has lapsed.
Notes
. Other monthly charges for these locations were minimum rent of $2,482.50, common area maintenance charge of $828 and taxes of $123 at one location; and minimum rent of $3,852.50, common area maintenance charge of $2,471, taxes of $269, and air conditioning charge of $375 at the other. Therefore, the utility charges were about thirteen (13%) percent and twelve (12%) percent, respectively, of the monthly charges due under these leases.