In re Metroplex on the Atlantic, LLC
This matter comes before the Court on the joint motion (the “Motion”) of Metro-plex on the Atlantic, LLC (the “Debtor”) and DOF IV Metroplex, LLC (“DOF” and, together with the Debtor, the “Movants”) seeking an order in support of confirmation of their Amended Chapter 11 Plan determining that the Debtor’s property located in Far Rockaway, Queens County, New York may be sold under the Plan pursuant to § 363(f)(4) and (5)
BACKGROUND
On May 28, 2015 (the “Filing Date”), the Debtor filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code. No trustee has been appointed in this case' and the Debtor has continued to operate its business as a debtor in possession. The Debtor is the owner of certain real property located at 120 Beach 25th Street a/k/a 121 Beach 26th Street a/k/a Block 15817, Lot 1 in Far Rockaway, Queens County, New York (the “Property”). DOF currently holds a mortgage encumbering the Property. Pursuant to a stipulation between the Debtor and DOF, the amount of DOF’s claim has been fixed at approximately $38 million. (Join Mot. to Approve Stip. Ex. A § 12(a), ECF Doc. No. 88.)
A. The Property
The Block, where the Property is located, is bounded by Beach 25th and 26th Streets on the east and west, Seagirt Avenue on the north, and the Atlantic Ocean on the south. (George Obj. ¶ 1). The Property is located at the southern end of the Block. (Decl. of Peter J. Amend in Supp. of the Obj. of Richard George Ex. A, ECF Doc. No. 146 (hereinafter “George Deck”).) It stretches the width of the Block fronting on both Beach 25th and Beach 26th Streets' and bordered on the south by a public beach belonging to the City of New York. (George Deck Ex. A.) The Far Rockaway boardwalk (the “Boardwalk”) is located directly south of the Property. (Joint Mot. for an Order in Aid of Confirmation ¶ 10, ECF Doc. No. 140 (hereinafter “Confirmation Mot.”).) North of the Property are several bungalows. (Confirmation Mot. ¶ 10.) The bungalows lie on both sides of the Block, along Beach 25th and Beach 26th Streets, with some facing the streets (the outside bungalows) and some facing the middle of the block (the inside bungalows). (Tr. of July 15, 2015 Hr’g 27:17-20, ECF Doc. No. 33.)
In 2007, the Debtor began construction of a 126 unit, fifteen-story condominium complex on the Property (the “Building”). (Am. Disclosure Statement § II.A, ECF Doc. No. 130 (hereinafter “Am. Disc.”); Tr. of Feb. 17, 2016 Hr’g 39:23-40:5, ECF Doe. No. 157 (hereinafter “Trial Tr.”).) The Debtor substantially completed the majority of the Building including the entire exterior, but before construction could be fully completed, the Debtor defaulted on its obligations under the mortgage held
B. The Easement
The Easement was granted to the owners of property on the Block by express grant in 1922. (George Obj. ¶ 1.) The Easement is a 24-foot right of way running down the middle of the Block from Seagirt Avenue to the Atlantic Ocean and is reflected in the Debtor’s deed to the Property. (George Deck Ex. A.; George Deck Ex. B.) In addition to the Easement, two other easements were granted on either side of the Block that are now Beach 25th and Beach 26th Streets. (George Deck Ex. B; Confirmation Mot. ¶ 11.)
The Boardwalk lies to the south of the Property and was built in the 1930s. (Confirmation Mot. ¶ 11.) It runs along the beach across several blocks and streets. (Debtor’s Ex. B; Aff. of Jeff Azuse in Further Supp. of Mot. in Aid of Confirmation, Ex. A, ECF Doc No. 149 (hereinafter “Azuse Deck 2”).) The Boardwalk is raised a few feet above the ground and is easily accessible by ramps at the ends of Beach 25th and Beach 26th Streets. (Debtor’s Ex. A; Aff. of Jeff Azuse in Supp. of Mot. in Aid of Confirmation, Ex. A, ECF Doc No. 140-1 (hereinafter “Azuse Deck 1”).) Currently, the Boardwalk is approximately three feet above the ground. (Trial Tr. 31:8-10; Debtor’s Ex. B.) Accessing the beach via the Easement would require a person to first navigate through the thicket of trees and plants in front of the Boardwalk and then crawl underneath the Boardwalk. (Debtor’s Ex. A; Debtor’s Ex. B; Trial Tr. 31:8-32:1.) George contends that prior to the construction of the building, the Boardwalk was around ten to twelve feet above the ground, and that he maintained a path through the vegetation. (Trial Tr. 43:1-9.) He testified that the Debtor planted new trees and bushes over the Easement which caused additional sand to accumulate under the Boardwalk resulting in the reduction of the height of the Boardwalk. (Trial Tr. 46:11-48:16.) However, Elzbieta Mielczarek (“Mielczarek”), the principal of the Debtor, testified that the height of the Boardwalk is similar now to what it was before construction of the Building. (Trial Tr. 40:12-41:5.)
Owners of the inside bungalows (of which George is one), use the Easement to access their properties from Seagirt Avenue to the north and, allegedly, prior to the construction of the Building, also used it to get to the beach by going underneath the Boardwalk to the south. (Trial Tr. 43:5-13, 49:14-50:13.) Both before the construction of the Building and after, all residents of the Block were able to access the Boardwalk and the beach by utilizing the ramps at the ends of Beach 25th and Beach 26th streets. (Trial Tr. 48:22-49:13.) Residents of the inner bungalows are also able to walk directly through the openings between the bungalows and do not have to walk north to Seagirt Avenue to access Beach 25th and Beach 26th Streets. (Trial Tr. 59:20-60:9.)
C. The Easement Litigation
In 2006, the Debtor commenced an action in the New York State Supreme Court to quiet title to the Property (the “Quiet Title Action”). (George Obj. ¶ 9.) The Debtor sought a declaratory judgment that the Easement had terminated on January 1,. 1930. (George Obj. ¶ 9.) The Debtor, however, failed to prosecute the Quiet Title Action, and the case was dismissed by a judgment dated March 18, 2014. (George Obj. ¶ 11.)
In addition to the Quiet Title Action, George also filed an action seeking to halt the construction of the building.
D. The Plan-
On January 21, 2016, the Movants filed an amended plan (the “Plan”) and an amended disclosure statement (the “Disclosure Statement”). (Am. Chapter 11 Plan, ECF Doc. No. 129 (hereinafter “Plan”); Am. Disclosure Statement, ECF Doc. No. 130.) The Plan proposes to sell the Property at auction pursuant to § 363 free and clear of all claims and interests including the Easement. (Plan Art. IV.A.) Under the terms of the Plan, DOF has agreed to allow $100,000.00 of the proceeds
E. Procedural History
Prior to filing the Plan, the Debtor and DOF engaged in extensive litigation, including a motion filed by the Debtor to approve post-petition financing secured by a lien senior to DOF’s (the “DIP Motion”) and motions filed by DOF to dismiss the case and lift the automatic stay. (Am. Disc. § III.C.) After extensive negotiation, the Debtor ultimately withdrew the DIP Motion, and the Movants then entered into a Plan Support Stipulation and Term Sheet on November 19, 2015. (Am. Disc. § III.C.) On December 14, 2015, an order was entered approving the Plan Support Stipulation and Term Sheet. (Order, ECF Doc. No. 109) The Movants then filed the first plan and disclosure statement as joint proponents on December 23, 2015. (Chapter 11 Plan, ECF Doc. No. 114; Disclosure Statement, ECF Doc. No. 115.)
On December 23, 2015, the Debtor also filed a motion to approve the first disclosure statement (the “Disclosure Motion.). (Mot. to Approve Disclosure Statement, ECF Doc. No. 116.) Both George and the United States Trustee filed objections to the Disclosure Motion. (Obj. of Richard George to Debtor’s Mot. for an Order Approving Disclosure Statement, ECF Doc. No. 123; Obj. of the United States Trustee to the Debtor’s Mot. for an Order Approving Disclosure Statement, ECF Doc. No. 124.) A hearing was held on the Disclosure Motion on January 20, 2016. The Debtor subsequently filed the Plan and Disclosure Statement on January 21, 2016. On January 22, 2016, an order was entered approving the Disclosure Statement. (Order Approving Am. Disclosure Statement, ECF Doc. No. 132.) On January 29, 2016, the Debtor filed the Motion. (Mot. for Order in Aid of Confirmation, ECF Doc. No. 140.) George filed an Objection on February 8,2016 (the “George Objection”). (George Obj.) On February 12, 2016, DOF filed a reply on its own behalf, and the Movants field a joint reply to the George Objection. (Reply to Obj. of Richard George, ECF Doc. No. 148; Joint Reply to
DISCUSSION
The ultimate question to be addressed in deciding this motion is whether a court applying New York law would issue a mandatory injunction requiring the Debtor to tear down the Building to restore the Easement. Assuming the Easement is valid, the Building obstructs the southern portion of it and prevents anyone from using it to walk south across the Property. The south end of the Easement is at the end of the edge of the Boardwalk, and there is no ramp for beach access there. Accessing the beach via the Easement, even without the Building, is difficult if not impossible due to the height of the Boardwalk, which is three feet above the ground, and the presence of extensive vegetation along the land side of the Boardwalk. All the residents of the Block have easy access to both the Boardwalk and the beach via the ramps on Beach 25th and Beach 26th Streets. Restoring the Easement would be of no practical benefit to anyone (except, perhaps, providing personal satisfaction to George). On the other hand, removal of the building would impose a substantial burden on the Debtor, DOF, and all the other unsecured creditors in this case. The Property is the only asset the Debtor owns with any significant value. Removing the Building would significantly reduce the value of the Property and eliminate any hope of the Debtor’s creditors (including George) realizing on their claims in this case. The Plan as proposed provides for payments to holders of Allowed Easement Claims and other unsecured creditors. If the Property cannot be sold free and clear of the Easement, the Plan cannot be confirmed and there will be no recovery for creditors other than DOF in this case.
A. Section 863(f)
Section 363 of the Bankruptcy Code governs the use, lease, or sale of property of the estate. 11 U.S.C § 363. Under § 363(b), a debtor in possession, such as the Debtor, may sell property of the estate outside of the ordinary course of business after notice and a hearing. 11 U.S.C. §§ 363(b) and 1107. In addition, § 363(f) allows a debtor in possession to sell such property
free and clear of any interest in such property of an entity other than the estate, only if—
(1) applicable nonbankruptcy law permits sale of such property free and clear of such interest;
(2) such entity consents;
(3) such interest is a lien and the price at which such property is to be sold is greater than the aggregate value of all liens on such property;
(4) such interest is in bona fide dispute; or
(5) such entity could be compelled, in a legal or equitable proceeding, to accept a money satisfaction of such interest.
11 U.S.C § 363(f). The language of this section is disjunctive; thus, only one of the conditions set forth in § 363(f) need be satisfied in order to sell the property free and clear of claims and interests. Collier on Bankruptcy ¶ 363.06 (16th ed.).
1. The Easement is an “Interest” Under § 363(f)
“An easement is more than a personal privilege to use another’s land, it is an actual interest in that land.” Sutera v. Go Jokir, Inc.,
In this case, the Easement is an in rem interest. Thus, even using the narrower definition of “interest in such property,” the Easement would be subject to § 363(f). George, however, argues that the Property cannot be sold free and clear of the Easement under § 363(f) unless George consents (363(f)(2)) or the Easement is in bona fide dispute (363(f)(4)). To support this argument, George cites Silverman v. Ankari (In re Oyster Bay Cove, Ltd.),
In Oyster Bay I, the trustee filed a motion seeking to hold the winning bidder of an auction held pursuant to § 363 in default for failure to close on the sale. Oyster Bay I,
The winning bidder appealed this decision to the district court. Oyster Bay II,
[cjlearly, 11 U.S.C.A. § 363(f) and Bankruptcy Rule 6004, which refer to the sale of land “free and clear” from these “interests,” are not intended to sever easements and other non-monetary property interests that are created by substantive State law. Indeed, absent the consent of the owner of the easement or theeasement being in bona fide dispute, the Bankruptcy Code does not even allow the Bankruptcy Court to authorize a sale of the property “free and clear” of an easement.
Id. at 255-56 (footnotes omitted).
These statements are dicta. In Oyster Bay I, whether the property could be sold free and clear of an easement or other restriction running with the land was not at issue. The bankruptcy court made no determination regarding whether property could be sold free and clear of the easement. Rather, it decided that, based upon the language of the court’s order approving the terms and conditions of the sale, the property was offered for sale subject to the easement:
The Order which approved the Trustee’s application to sell the property free and clear of all liens, claims encumbrances and rights of others of whatever kind or nature (the “Liens”), with such liens to attach to the proceeds of the sale of the property, means that the property was to have been sold free and clear of liens against the property, ie. mortgage liens, judgment liens, etc., which could attach to the proceeds. The language does not indicate that the property is to be sold free and clear of non-monetary restrictions of record which run with the land. The recitation of a dedication of a street or road to the village is a statement of fact as is the recitation of metes and bounds which runs with the land, and describes that which is being offered for sale.
Oyster Bay I,
In addition, the district court provides no authority for its statement, citing only § 363(f) and Bankruptcy Rule 6004 in it its discussion of the sale of property free and clear of easements. Oyster Bay II,
George also cites to Koepp v. Holland,
Several cases support the proposition that property may be sold free and clear of an easement, like any other in interest in property, under all the prongs of § 363(f), including subsection (f)(5). In In re Dulgerian, an easement holder objected to a motion seeking to sell property free and clear of an easement.' No. 06-10203,
In Newco Energy v. Energytec, Inc. (In re Energytech, Inc.), a holder of a purported covenant running with the land challenged whether a sale of the debtor’s property was free and clear of its interest.
2. George Can Be Compelled to Accept Monetary Satisfaction for the Easement Under New York State Law
Under New York law, a party whose easement rights are violated by an encroachment generally has the right to seek “an injunction directing the removal” of the encroaching structure. N.Y. Real Prop. Acts. Law § 871(1). That statute,
The balance of the equities, however, will generally cut against requiring an owner to tear down a completed structure. See Evangelical Lutheran Church of the Ascension of Snyder v. Sahlem,
George, however, relies on two cases for a different rule: that New York courts will issue an injunction to tear down a completed building where the defendant willfully violated the plaintiffs property rights and where the property rights so violated are substantial. In Andrews v. Cohen, the Court of Appeals held that the rule against requiring demolition of completed buildings “is to be applied with great caution and never where the property affected is substantial, and where the defendant has full knowledge of the facts.” Andrews,
Despite this stated rule, however, Andrews is the only case cited by George and the only case this Court can find that finally determined that a completed structure should be removed, even when the defendant’s actions were willful. In Batchelor v. Hinkle, after the Appellate Division remanded the case with instruction to issue an injunction, the trial court issued the injunction and the Appellate Division affirmed. Batchelor v. Hinkle,
■ In Forstmann v. Joray Holding Co., the plaintiffs brought suit against the defendants seeking an injunction to remove a two-story building on the defendants’ property. Forstmann,
In Sussman Volk Co. v. 88 Delicatessen, Inc., a lease holder brought an action seeking an injunction against its sublessee for extensive modifications the sublessee made to the premises in violation of the terms of the sublease. Sussman,
While not dealing with a completed building, the case of Evangelical Lutheran Church of the Ascension of Snyder v. Sah-lem, cited by George, provides a thorough discussion of the issues. In that case, a church brought an action against a landowner seeking a declaratory judgment that certain restrictive covenants were not in force. Sahlem,
Thus, despite the stated rule that willful violation of a substantial property right justifies injunctive relief, no reported New York case since Andrews has applied this rule to require the removal of a completed structure. It is more accurate to say that the party seeking an injunction to remove a completed structure must show exceptional circumstances of willfulness and a truly substantial property right before an injunction will issue.
For purposes of this decision, it will be assumed that the Debtor had notice of the Easement before constructing the Building. In 2006, prior to the commencement of construction in 2007, George filed a lawsuit against the Debtor in an effort to prevent construction. It will also be assumed the Debtor acted willfully. The Anderson Judgment found that the Debtor willfully violated the Easement. (Anderson Judgement 19.) Although the Anderson Judgment was a default judgment, the Debtor instituted the action and actively participated for a time before abandoning it. Such a judgment may be entitled to preclusive effect under New York law. See Kanat v. Ochsner,
The next question is whether granting the injunction would provide substantial benefit to George. The purpose of the Easement; as set forth in the granting document, is to provide “free and uninterrupted passage” over the right of way created by the Easement. (George Deck Ex B.) The right of way extends from Seagirt Avenue on the north to the Atlantic Ocean on the south. The Building does not obstruct access to Seagirt Avenue. The Property is the southernmost property on the Block; no bungalows or other buildings he between it and the beach. The only useful purpose of the portion of the Easement that is obstructed by the Building is to access the Boardwalk and the beach. Therefore, the precise question to be answered is whether access across the Property to get to the beach and the Boardwalk has substantial value such that George would be entitled to an injunction to remove the Building.
First, George does not live at his property on the Block. He lives on Beach 24th Street, one block over and rents the properties he owns to tenants.
Second, even if the Building were removed, it would not improve access to the beach. Both the Boardwalk and the extensive vegetation prevent anyone from actually reaching the beach via the Easement. George contends that he previously
Third, accessing the Boardwalk itself from the Easement is impossible for all practical purposes. The Boardwalk is approximately three feet above the ground and has railings on either side. A person would have to climb up the side of the railing to get onto the Boardwalk from the Easement.
Fourth, all the residents of the Block have easy access to both the Boardwalk and the Beach via the. ramps on Beach 25th and Beach 26th Streets. This fact is undisputed. The Building does not block access except to the small portion of the Easement running through the Property. Even residents of the inside bungalows can simply walk to one of the streets, and then walk up to the Boardwalk using the ramps. Residents can also access the vegetation on the inside of the Boardwalk by walking to the side of the ramps.
While the Easement is a property right, the evidence shows that the portion of the Easement obstructed by the Building has de minimis value at best. George did not present any evidence at the Hearing regarding the value of the Easement with respect to his property, much less any evidence concerning the value of the portion of the Easement running from his property to the Boardwalk, which is the relevant question here. Rather, George relied upon the Anderson Judgment, which, he claims, shows that the Easement is worth $115,000.00. This amount, howev•er, was awarded by the state court for the diminution of value to Anderson’s property, not George’s. For collateral estoppel to apply under New York law, “the identical issue necessarily must have been decided in the prior action and be decisive of the present action ____” Kaufman,
The final question to be evaluated is the harm that an injunction would work on the Debtor and its creditors. The evidence presented shows that removal of the Building would impose a substantial burden on the Debtor and its creditors. The testimony at the Hearing established that the Property would have significantly lower value without the building, and George does not dispute this. The Property is the only significant asset owned by the Debtor, The Plan is premised on the sale of the Property, including the Building, free and clear of Easement. Under the Plan, all creditors are receiving a distribution through a carve out from DOF. If the Plan is not confirmed, no creditors other than DOF will realize anything on their claims, including George. In short, removing the Building would scuttle the Plan and leave all creditors except DOF with nothing. Thus, an injunction would be a substantial burden on the Debtor and its creditors.
George argues that the Debtor willfully violated his rights and attempts to profit from wrongful conduct. However, George’s conduct in this matter is not that of a litigant with clean hands. George will derive no benefit from the removal of the building, -with possible exception of the satisfaction that may come from prevailing over the Debtor, his long-time adversary. He acknowledged as much at the Hearing stating
Okay, I’m just telling you. So my reason is I’m upset is the law says, what the statutory law, the Public Trust Doctrine says there shall be no obstruction. She stole our property for her own profit and gain. She’s making private use out of public property and the Court should not condone that. That’s my main argument. Whether it’s this or that or I can, with my belly under the boardwalk or go to 26th Street that’s not the issue. The issue is they’re thieves. They stole our property and they shouldn’t be rewarded with a 15 story condominium. That’s my argument.
(Trial Tr. 52:8-18.) Nor should the court reward a litigant’s stubborn desire to pursue a remedy that would not benefit him, and would harm others (including innocent creditors of the Debtor)..
Moreover, George had an opportunity to obtain a determination of his rights with respect to the Easement prior to the construction of the Building, and indeed commenced an action in 2006 to halt construction. After initially granting a temporary restraining order, the state court denied George’s application for a preliminary injunction. Order, George v. Metroplex on the Atlantics, LLC, Index No. 6138/06, May 2, 2006. The state court, in issuing the Anderson Judgment, noted that “the only reason why, allegedly, that wasn’t granted was by [the Debtor] saying there is no easement. And if it shows there is we’ll grant a different easement going through our building so they’ll have the same beach access.” (Anderson Judgment 19.) Even when it must have become apparent to George that no access through
Because the removal of the building would impose a substantial burden on the Debtor and its creditors without providing any actual benefit to George, the Court finds that George can be compelled to accept a monetary satisfaction for his interest in the Easement under state law. Indeed, this is precisely the type of case where an injunction is properly refused. Removal of the Building “would destroy a finished building to vindicate a doubtful right.” Sahlem,
B.Bona Fide Dispute Under § 363(f)(4)
The Movants also argue that the Property may be sold free and Clear of the Easement under § 363(f)(4) because the Easement is in bona fide dispute. However, because the Easement is an interest subject to § 363(f)(5) for which George can be compelled to accept a monetary remedy, the Court does not reach and makes no decision concerning the validity of the Easement or whether it is in bona fide dispute.
C. Unconstitutional Taking
George also argues that the sale of the Property free and clear of the Easement would be an unconstitutional taking under the Fifth Amendment. The provisions of the Bankruptcy Code are subject to the Fifth Amendment’s protections. United States v. Sec. Indus. Bank,
D. Adequate Protection
George contends that if the Property can be sold free and clear of the Easement, he is entitled to adequate protection. Section 363(e) allows the holder of an interest in property of the debtor to seek adequate protection for any proposed use, sale, or lease of the property. 11 U.S.C. § 363(e). In this case, George’s claim is part of Class 4 under the Plan. At a minimum, Class 4 will share in a distribution of $25,000.00. As of the Easement Claim Bar Date, only one other Alleged Easement Holder had filed a claim. Thus, George is set to receive a distribution of $12,500.00 under the Plan, which, the Debtor argues, is sufficient to satisfy any right George may have to adequate protection. In light of the evidence that George’s claim for damages resulting from the obstruction of the Easement by the Building is of de minimis value, the Court finds that the proposed distribution under
CONCLUSION
For the reasons stated above, the Motion is granted and all objections are overruled. A separate order will issue.
Notes
. All statutory references are to the Bankruptcy Code, unless otherwise indicated,
. All references to “ECF Doc. No.” refer to the docket in this case, Case No. 15-42499, unless otherwise noted.
. Exhibit M to the George Dec!., ECF Doc. No. 146-13, was admitted into evidence at the Hearing. It consists of a Notice of Entry of Judgment filed in the Quiet Title Action followed by a true and correct copy of the Final Judgment as Exhibit A. Exhibit A consists of a Notice of Settlement of Judgment, a Final Judgment, a Stipulation, and a transcript of the inquest on damages held on Anderson’s Counterclaim. For convenience, this entire document will be referred to as the “Anderson Judgment,” and the referenced page numbers will refer to the individual pages of the PDF file as it appears on the docket.
. This action was not the first time George has been involved in litigation over construction along the Far Rockaway beach. In the last ten years, he has filed at least three actions seeking to halt or limit construction and development in the neighborhood. See George v. Evans,
. DOF is also entitled to credit bid at any sale of the Property, but if it does so and is the successful bidder, it is required to pay the $100,000.00 in cash itself. (Plan Art. IV.D.6.)
. Capitalized terms not defined herein shall have the same meaning as used in the Plan,
.All references to "Claim No.” refer to claims filed in this case, Case No. 15-42449, unless otherwise specified.
. On November 16, 2015, an order was entered establishing December 31, 2015 as the last day for all purported easement holders to file claims (the "Easement Claim Bar Date”). (Order, ECF Doc. No. 86.) That order was served on all the record property owners for the Block. (Aff. of Service, ECF Doc. No. 87.)
. The court ultimately held that the property could not be sold free and clear of the covenant in that case because the covenant could not be extinguished under applicable non-bankruptcy law, nor could the holder be compelled to accept monetary satisfaction. Jur-gielewicz Duck Farm,
. “Under New York law, collateral estoppel bars relitigation of an issue when (1) the identical issue necessarily was decided in the prior action and is decisive of the present action, and (2) the party to be precluded from relitigating the issue had a full and fair opportunity to litigate the issue in the prior action.” Evans v. Ottimo,