Matter of Village Rathskeller, Inc.
DECISION ON MOTION SEEKING RELIEF FROM THE AUTOMATIC STAY
Village Rathskeller, Inc., d/b/a The Village Gate (hereinafter the “Village Gate”), a Bleeker Street restaurant, theatre and cabaret which has played host to countless productions, is considered by many a Greenwich Village institution. It occupies approximately 50,000 square feet of rental space located at 160 Bleeker Street (the “premises”), in the heart of the Village, and derives a great deal of its business from pedestrian traffic.
The Village Gate entered into its lease in May, 1964. Its rent, payable to its landlord, Legent Realty, is a mere $2,000/ month. The lease, under which the debtor has not defaulted, runs through April 30, 2006. Even the debtor admits that the lease rate is significantly below market and that the landlord could rent the premises today for $10,000 per month (a figure which is substantially below that which the other party to this dispute proffers as market value). This below market rent for a significant remaining term would render the lease quite valuable were it not that the lease is subordinate to the lien of the mortgage and that the Village Gate has never obtained a nondisturbance agreement from the mortgagee. The relevant clause of the lease provides, in pertinent part, that:
TENTH: This lease shall be subject and subordinate at all times, to the lien of the mortgages now on the demised premises, and to all advances made or hereafter to be made upon the security thereof, and subject and subordinate to the lien of any mortgage or mortgages which at any time may be made a lien upon the premises.
Manufacturers’ Hanover Trust Co. (“MHTCo.”) is a secured creditor of the landlord. As part of its loan agreement, the landlord granted MHTCo. a security interest in both the premises and its rents. When the landlord started defaulting in its payments to MHTCo., MHTCo. commenced foreclosure proceedings in Supreme Court, New York County, in March, 1990. The Village Gate was named as a necessary party defendant in that foreclosure action by virtue of its leasehold interest in the premises. A receiver was appointed.
The landlord filed for voluntary relief under Chapter 11 of the Bankruptcy Code in January, 1991. The case is pending before Judge Blackshear. Pursuant to Judge Blackshear’s order, the receiver remains in place.
The Village Gate filed its own Chapter 11 petition on June 28, 1991 and has continued to manage and operate its business as a debtor-in-possession. Its case was assigned to me.
In early August, 1991, MHTCo. sought from Judge Blackshear relief from the automatic stay so that it could proceed against the landlord with its foreclosure proceedings. Later that same month, the Village Gate moved to assume its lease on the premises. The Village Gate’s motion made absolutely no mention of the subordination clause in its lease, although the debtor certainly knew that MHTCo. had already commenced foreclosure proceedings in which the Village Gate was a defendant and the effect of which would be to wipe out the Village Gate’s lease. In fact, MHTCo. filed opposition to the assumption raising that very issue. Notwithstanding MHTCo.’s expressed position, the Village Gate asked for nothing special in conjunction with its assumption motion, not even after MHTCo. raised its concerns. On September 30, 1991, I authorized the Village Gate to assume its lease.
Just about two months later, Judge Blackshear approved a stipulation between MHTCo. and the landlord which provided that the automatic stay would be vacated in the landlord’s Chapter 11 case so as to
That accomplished, because the automatic stay protected the Village Gate’s leasehold interest in the premises, MHTCo. asked me for relief from the stay so that it could proceed with its state co.urt foreclosure action. MHTCo. wants to invoke the subordination clause because the Village Gate’s lease encumbers at least half the building and renders it unmarketable at worst or of a very depressed value at best. The debtor challenges not only the propriety of lifting the stay, but MHTCo.’s standing to even seek that relief. Nowhere, however, is there any suggestion that MHTCo. and the landlord are in cahoots or that the landlord will be benefitted in any manner by a foreclosure, the effect of which will wipe out a lease which, from the landlord’s viewpoint, may be said to be onerous.
The testimony adduced establishes that the Village Gate has significantly revamped its operations with the aid of a management consultant to eliminate unnecessary payroll, keep a tighter control on inventory, rent out its premises to producers of shows rather than produce them itself (which eliminates the risks inherent in productions), and install a new audio/video system. Whereas the debtor has operated unprofitably postpetition up through September, 1992, the losses have diminished significantly and the October figures are expected to show that the debtor has begun to operate profitably. Moreover, because one of the debtor’s principals, a well-known impresario, has likely personal liability for some portion of the substantial tax debt of the Village Gate, it is anticipated that he will contribute personal funds towards the debtor’s reorganization.
The debtor theorizes that, in further aid of its reorganization, it will have the subordination provision stricken and remain at the premises paying rent of $2,000 per month.
The determinative issues distill to three: (i) whether MHTCo., as a mortgagee of the debtor’s landlord, has standing as a party in interest to bring this lift stay motion; (ii) whether the debtor may escape the subordination clause in the lease which it assumed either through a declaration that it is unenforceable or through an injunction in aid of confirmation prohibiting its enforcement, and (iii) whether the stay ought be lifted.
DISCUSSION
A. STANDING
We begin, as we must, with standing. The concept of standing subsumes a blend of constitutional requirements and prudential considerations.
Warth v. Seldin,
The statute with which we are concerned is 11 U.S.C. § 362, which automatically stays, among many other things, any act to obtain possession of property of or from the estate or to exercise control over property of the estate. 11 U.S.C. § 362(a)(3);
In re 48th Street Steakhouse, Inc.,
Section 362(d) of the Code states that a “party in interest” may request relief from the automatic stay. However, that term, “party in interest,” is not defined in the Bankruptcy Code.
In re Comcoach Corp.,
In Comcoach, a mortgagee of a building in which the debtor was a tenant sought relief from the automatic stay to add the debtor as a necessary party in a state foreclosure action. The debtor had stopped paying rent. The mortgagee believed, erroneously, that the foreclosure action was stayed, which it was not, since the debtor had never been made a party to it (as a result of which foreclosure would not affect the debtor’s lease). The bankruptcy judge noted that the foreclosure action was not stayed and denied relief from the stay on the grounds that the mortgagee was not a “party in interest” under section 362 entitled to seek such relief. Both the district and circuit courts affirmed.
The Second Circuit interpreted a “party in interest” to be limited to a “creditor”, relying primarily on some legislative history as support for the proposition that “notwithstanding the use of the term ‘party in interest,’ it is only creditors who may obtain relief from the automatic stay.”
The Second Circuit’s decision in
Com-coach
was driven by two facts which are not present here, first, that the mortgagee was not stayed from foreclosing because the debtor was not a party to the action and, second, that the mortgagee had an available remedy to seek payment of rent from the debtor, appointment of a receiver in the unstayed foreclosure action. The Circuit Court noted that such a receiver would have the power to seek redress for the failure to pay rents and would be considered a “party in interest” with standing
Writing in Johns-Manville not three months later, Judge Haight acknowledged the importance of the alternative remedy to the Comcoach decision:
In addition, the court of appeals was apparently influenced in Comcoach by the fact that the bank had misapprehended its remedies in the state court foreclosure proceeding. By taking certain procedural steps, the bank was in a position to avoid any prejudice resulting from its own lack of “party in interest” status. No such ameliorating factor appears in the case at bar. CU [the mov-ant] is presently stayed from pressing its Massachusetts action. If CU cannot seek relief from the- stay, no stratagem exists whereby another may do so for CU’s benefit.
In re Johns-Manville Corp.,
This case stands in stark contrast to
Comcoach,
for MHTCo. has no alternative route to the relief it requests. Although a receiver has remained in place throughout the pendency of the landlord’s bankruptcy case, the receiver has no standing to proceed with the foreclosure action. Only MHTCo. has that right, a right which it cannot exercise against the Village Gate because of the automatic stay. No other entity can obtain for MHTCo. what MHTCo. seeks by virtue of the subordination clause in the Village Gate’s lease, namely, an extinguishment of the Village Gate’s leasehold interest in the premises. Were I to adhere to a strict interpretation of
Comcoach,
I would be precluding MHTCo. from attempting to enforce a right which only it can exercise. In addition, the Village Gate has announced its intention to try to invalidate the clause of the lease which subordinates the lease to the lien of the mortgage. Under the circumstances, it is hard to see how MHTCo. could be anything other than a person aggrieved.
Cf. In re Carl H. Neuman,
Given that MHTCo. is stayed from completing its foreclosure action, that the Village Gate is a necessary party if MHTCo. should seek to terminate the tenancy rights, that the building is unmarketable or its value is severely depressed by the existence of the lease, that the Village Gate has expressed its intention to invalidate the subordination clause, and that no one other than MHTCo. can assert its rights, I believe that Comcoach does not control.
When viewed from the perspective of traditional standing analysis, it seems apparent that MHTCo. ought be permitted to seek stay relief. There can be no doubt that the automatic stay has directly affected MHTCo.; the foreclosure action has been stayed and relief from stay will redress the “injury.” It is also clear that MHTCo. is asserting its own rights which may not be asserted by any other person in its stead. Finally, there is nothing in the language of section 362(d) which suggests that MHTCo. is not within the zone of
B. THE SUBORDINATION CLAUSE
The starting point for any analysis of what the debtor’s estate possesses is section 541(a), which declares that the estate comprises, among other things, all legal or equitable interests of the debtor in property as of the commencement of the case. What constitutes a property interest is defined not by the Code but by applicable nonbankruptcy law.
Butner v. United States,
Property interests are created and defined by state law. Unless some federal interest requires a different result, there is no reason why such interests should be analyzed differently simply because an interested party is involved in a bankruptcy proceeding. Uniform treatment of property interests by both state and federal courts within a State serves to reduce uncertainty, to discourage forum shopping, and to prevent a party from receiving “a windfall merely by reason of the happenstance of bankruptcy.” Lewis v. Manufacturers National Bank,364 U.S. 603 , 609,81 S.Ct. 347 , 350,5 L.Ed.2d 323 .
To the extent an interest is limited in the hands of the debtor, it is equally limited as property of the estate (except to the extent that defenses which are personal against the debtor are not effective against the estate); section 541(a)(1) is not intended to expand the debtor’s rights against others beyond what rights existed at the commencement of the case.
Federal Aviation Administration v. Gull Air, Inc. (In re Gull Air, Inc.),
Leasehold interests are governed in bankruptcy by section 365 of the Code which provides, in pertinent part, that the trustee, subject to court approval, may assume or reject any executory contract or unexpired lease of the debtor. Once an executory contract or unexpired lease is assumed, the lease or contract itself, rather than the right to assume the lease or contract, is property of the estate. Just as the property comes into the estate true to its shape under nonbankruptcy law, when the executory contract or lease is assumed, it is said to be assumed
cum onere.
The defaults are cured but the agreement becomes property of the estate in the same shape as it existed prior to bankruptcy, with all of its benefits and burdens.
See NLRB v. Bildisco & Bildisco,
This is not to say, however, that each and every provision of the assumed agreement is enforceable against the debtor in possession; the Bankruptcy Code itself alters certain rights of the parties.
United States Lines (S.A.), Inc. v. United States (In re McLean Industries, Inc.),
Much of the law in this area is predicated upon the decision of the Second Circuit, written when the former Bankruptcy Act was in effect, in
Queens Boulevard Wine & Liquor Corp. v. Blum,
Although
Queens Boulevard
is strongly knitted into the fabric of the law in this Circuit, if not nationwide, the Second Circuit later emphasized that the judge must look at the totality of circumstances in order to do equity. In
In re D.H. Overmyer Co., Inc.,
So we now look at the totality of circumstances. The subordination provision is neither an express or disguised bankruptcy default clause, nor an antiassignment clause. Once the Village Gate assumed the lease, without seeking any modification of its terms, pursuant to section 541 of the Code the lease as written became part of the estate (except to the extent that sections of the Bankruptcy Code altered its effect while the debtor is in bankruptcy, as discussed above.) The mortgagee, which had already moved to lift the stay in the landlord’s bankruptcy at the time the assumption motion was heard, did not sit idly. It brought its interest to the forefront. But the debtor did nothing to assail the enforceability of the subordination provision and simply assumed the lease. It was only when MHTCo. made this motion to lift the stay that the Village Gate reacted.
In New York, subordination clauses in mortgages and leases and subordination agreements are valid and enforceable.
In re Kizzac Management Corp.,
Bankruptcy does not automatically change this nor does the automatic stay create a nondisturbance agreement once the lease has been assumed. Indeed, subordination provisions are generally enforceable in bankruptcy. See 11 U.S.C. § 510(a) and (c). There is merit to the notion that a subordination provision is an economic term of the landlords’s bargain and ought not lightly be overridden. The merit lies in the fact that the building free of long-term leases may well be worth more than encumbered by the lease and will fetch more at foreclosure should the landlord default. Particularly here is that so where the lease (which is for at least half the space in the building) was entered into many years ago, is now greatly below market, and has another 15 years to run, which can only have a depressing effect on the value of the building. Thus I conclude that on the facts presented, the subordination clause ought not be overridden, assuming I have the power to do so.
C. 362(d) RELIEF IS APPROPRIATE
The only question remaining is what to do with the automatic stay. Section 362(d)(1) of the Code permits the court to terminate, annul, modify or condition the stay for cause, including, but not limited to, the lack of adequate protection of an interest in property of such party in interest. Generally, proceedings which involve the postpetition activities of the debtor need not be stayed since they bear no relationship to the purpose of the stay, protection of the debtor and its estate from creditors. L. King, Collier on Bankruptcy, ¶ 362.-07[3] at 362-71 (15th ed.1992).
There are several factors which lead me to believe that cause exists for modification of the automatic stay. First, the debtor assumed the lease containing the subordination clause. Second, the subordination clause is enforceable. Third, the mortgagee cannot complete its foreclosure of the landlord's building absent relief from the stay. Fourth, the building is not marketable, or is worth little, with the lease in place. Fifth, since the mortgagee is not a creditor of the estate and the debtor has not indicated any intention to acquire the mortgage, the mortgagee’s indebtedness will not be dealt with by the debtor in its plan as a surrogate of sorts for allowing the mortgagee to enforce its rights under its mortgage. Sixth, given the enforceability of the subordination clause, unless the debtor were to come to peace with the mortgagee or relocate, I could not confirm any plan since its feasibility would hinge on a lease which could
The debtor’s management consultant testified that although the debtor had not operated profitably until last month, its operations have improved and should continue to improve. He admitted that the debtor could not fund a plan out of operations at present but indicated that one of the debtor’s principals had expressed a willingness to contribute funds. He also testified that the debtor would shortly be able to afford rent in the vicinity of $15,000 per month, albeit by keeping its belt tight. In light of these circumstances, I am loathe to simply lift the stay without giving the debt- or an opportunity to salvage its business. Accordingly, I will modify the stay to allow the foreclosure to proceed up to the point of judgment. No enforcement may be had until the earlier of vacation of the premises by the Village Gate or April 30, 1993. That should give the Village Gate ample opportunity to renegotiate the terms of its lease with MHTCo. or move.
SETTLE ORDER consistent with this decision.
Notes
. Notwithstanding that the Second Circuit read a limitation into section 362(d) in Comcoach, the statute itself says that a "party in interest” rather than a "creditor” may seek relief from the stay. Since "creditor" is a defined term in bankruptcy, 11 U.S.C. § 101(3), used in a variety of places throughout the Code, see, e.g., §§ 343; 501(a), (b) and (c); 503(b)(3); and 727(c)(1), (d) and (e) (all of which are illustrative of things which Congress has permitted creditors, but not parties in interest, to do), it would seem that Congress, had it meant to exclude from stay relief those who are not creditors, would have said so.
. The state courts focus on whether the mortgagee will be made whole (such as through redemption). Thus, if there were evidence that the value of the premises encumbered by the debtor’s lease nonetheless exceeded the mortgagee’s debt (which would probably be rare and is not the case here), perhaps the equities would tip in favor of the debtor.