Opinion
Case No. 06-10080 (CSS).
August 1, 2007
Scott H. Goldstein, Esq., Bonner Kiernan, Trebach Crociata, LLP, Parsippany, NJ, Attorneys for movant Extra Space Storage.
MEMORANDUM OF LAW IN SUPPORT OF MOTION FOR RELIEF FROM THE AUTOMATIC STAY
PRELIMINARY STATEMENT
We respectfully submit this memorandum of law in support of the movant, Extra Space Storage's motion to require the debtor, the Lovesac Corporation. ("Lovesac") for relief from the automatic stay or alternatively to immediately surrender the premises.
Lovesac who filed for Chapter 11 bankruptcy on January 30, 2006, failed to pay the appropriate rents on one (1) non-residential storage unit with Extra Space. Nonetheless, Lovesac continues to occupy space in Storage USA's facility without paying rent since September 6, 2005. Moreover, Lovesac or the Trustee has failed to assume the non-residential lease in accordance with 11 U.S.C.A. 365(d)(4). As such, the three (3) non-residential leases are deemed rejected by operation of law. Accordingly, we respectfully request relief from the automatic stay to undertake the necessary steps to evict Lovesac and auction the inventory contained in Extra Space's units.
STATEMENT OF FACTS
The movant, Extra Space, is in the business of leasing non-residential storage facilities. On or about July 27, 2005, Extra Space's predecessor in interest, Storage USA entered into a month to month rental agreement with Lovesac to lease a non-residential storage facility for $300.99 per month plus penalty fees for late payments. (See, Rental Agreement for Unit ID No. 4506 attached as Exhibit A to Scott Goldstein Esq.'s Affirmation (Goldstein Aff.). Storage USA subsequently entered into a second undated lease agreement with Lovesac raising the rent to $324.00 per month plus penalty fees for late payments. (See, Storage USA Rental Agreement for Unit ID No. 4506 attached as Exhibit B to Scott Goldstein Esq.'s Affirmation (Goldstein Aff.)). Thereafter on January 19, 2006, Extra Space Storage entered into an agreement with Lovesac retroactive to the date of Lovesac's original agreement with Storage USA (July 27, 2007) to lease non-residential storage space for $324.00 per month plus penalty fees for late payments. (See, Rental Agreement for Unit ID No. 4506 attached as Exhibit C to Scott Goldstein Esq.'s Affirmation (Goldstein Aff.). Lovesac has failed to make any payments since September 6, 2005. Its current outstanding balance with Extra Space is $5,788.12 and continuing to accrue. (See, Unit Transaction History attached as Exhibit D to Goldstein Aff.).
Pursuant to the terms of the lease agreement, Extra Space may terminate the lease at any time provided it gives fifteen (15) days written notice or upon any default by occupant under the terms of the Agreement or the abandonment of the space or project by occupant. See Paragraph 16 within Exhibit C to Goldstein Aff. Likewise, Lovesac's lease with Extra Space also provides that "[I]n the event that Occupant shall fail or refuse to perform any of the covenants, conditions or terms of this Agreement, or in the event Occupant files a voluntary petition in Bankruptcy or suffers a petition in involuntary bankruptcy to be filed against him/her, Occupant shall be deemed in default in the performance of this Agreement, except as limited by law. . . . In the event of a default and without prejudice to any other remedies, Owner may (a) terminate this Agreement or (b) seize and sell the personal property . . ." See Paragraph 10 within Exhibit C to Goldstein Aff.
On or about January 30, 2006, Lovesac voluntarily filed for bankruptcy under Chapter 11. Notwithstanding the fact that Lovesac has failed to pay rents since September 6, 2005, it continues to enjoy the benefits of the subject lease agreements and is presently utilizing Extra Space's storage facilities. Lovesac has made no representation to Extra Space that it intended to assume the non-residential lease and has not obtained written consent from Extra Space to extend the time to assume the subject lease agreements. The time to assume or reject the non-residential lease has expired pursuant to 11 U.S.C.A. 365(d)(4). Accordingly, we respectfully request that this Court order Lovesac to surrender and vacate the leased premises or alternatively grant relief from the automatic stay.
LEGAL ARGUMENT
I. EXTRA SPACE IS ENTITLED TO RELIEF FROM THE AUTOMATIC STAY BECAUSE LOVESAC HAS NO EQUITY IN THE THREE (3) NON-RESIDENTIAL LEASE AGREEMENTS WITH STORAGE USA
Extra Space is entitled to relief from the automatic stay because 1) Lovesac has no equity in the Lease Agreements, and 2) the property is not necessary for an effective reorganization and 3) Lovesac has not paid rent as required by the Lease for nearly two years.
Relief from the automatic stay of an act against property is possible under 11 U.S.C.A. 362(d)(2) if the debtor has no equity in the property and the property is not necessary for an effective reorganization. B.N. Realty Associates v. Lichtenstein, 238 B.R. 249, 258 (Bankr. S.D.N.Y. 1999).
In addition, when considering whether to modify the automatic stay, the Court should take into account the particular circumstances of the case and ascertain what is just to the claimants, the debtor and the estate. See, In re Toluoumis, 170 B.R. 825, 828 (Bankr. S.D.N.Y. 1994). See also, Sonnax Industries Inc. v. Tri Component Products Corp., 907 F.2d 1280 (2nd Cir. 1990) (Elaborating on the meaning of "cause" as stated in 11 U.S.C.A. 362(d)(1) by setting forth twelve potentially relevant factors in deciding whether to lift the automatic stay to permit litigation to continue in another forum).
In the instant matter, assuming arguendo that the subject lease agreements are part of the bankruptcy estate, we respectfully submit that Extra Space should be relieved from the automatic stay because Cash Point has no equity in the subject leased storage facilities. The leased storage facilities are not income generating. It is simply empty space used by Lovesac to store certain items. As a result, the subject lease agreements do not affect the administration of or ultimate closing of the bankruptcy estate. In addition, the debtor and creditors will not be prejudiced by granting Extra Space relief from the stay.
Accordingly, we respectfully request that Extra Space's motion for relief of the automatic stay be granted so that it may pursue all available remedies including the commencement of summary eviction proceedings to evict Lovesac from its facility. We also respectfully request that should Extra Space be relieved from the automatic stay to exercise all available remedies to dispose of the items stored at the subject facility in the event that Lovesac and/or the Trustee fails to remove its items stored at the subject facilities within a reasonable period of time after eviction (approximately 30 days).
II. LOVESAC SHOULD BE ORDERED TO SURRENDER THE SUBJECT PREMISES TO EXTRA SPACE BECAUSE LOVESACT HAS NO POSSESSORY INTEREST IN THE LEASE AGREEMENT AND THE SUBJECT LEASE AGREEMENT IS NOT PROPERTY OF THE ESTATE
A. Lovesac Rejected The Non-residential Lease Agreements
By virtue of its failure to assume the above-described leases, Lovesac has implicitly rejected the leases. The trustee in bankruptcy, subject to the court's approval, may assume or reject an unexpired lease of the debtor. 11 U.S.C.A. 365(a). To assume a lease, the debtor must make a clear, unequivocal, affirmative and specific act of assumption. Id. See e.g., In re O.P. Held, Inc., 77 B.R. 388 (Bankr. N.D.N.Y. 1987); In re BDM Corp., 71 B.R. 142 (Bankr. N.D., Ill. 1987); Treat Fitness Center, Inc. v. Rainbow Investment Co., 60 B.R. 878 (Bankr. 9th Cir. 1986); In re Re-Trac Corp., 59 B.R. 251 (Bankr. D. Minn 1986).
Furthermore 11 U.S.C.A. 365(d) states the following:
(A) . . . [A]n unexpired lease of nonresidential real property under which the debtor is the lessee shall be deemed rejected, and the trustee shall immediately surrender that nonresidential property to the lessor, if the trustee does not assume or reject the unexpired lease by the earlier of —
(i) the date that is 120 days after the date of the order for relief; or
(ii) the date of the entry of an order confirming a plan.
(B)
(i) The court may extend the period . . . prior to the expiration of the 120-day period, for 90 days on the motion of the trustee or lessor for cause.
(ii) If the court grants an extension under clause (i), the court may grant a subsequent extension only upon prior written consent of the lessor in each instance.
11 U.S.C.A. 365(d) (Emphasis added).
A lessor has no affirmative duty to seek lease rejection on the expiration of time since Code § 365(d)(4) is self-executing. In re Re-trac Corp., 59 B.R. at 258. Where the trustee rejects a non-residential real property lease, he must immediately surrender the property to the lessor. In re Henderson, 245 B.R. 449, 453 (Bankr. S.D.N.Y. 2000) citing 11 U.S.C. 365(d)(1). In such a case, rejection is tantamount to termination. Id. If the non-residential lease is rejected by the trustee, Code § 365(d)(4) authorizes the Bankruptcy Court to order the immediate surrender of the leased non-residential real property to the lessor without resorting to state law. See, In re O.P. Held, Inc., 77 B.R. at 391.
Moreover, a lessor will not be constrained by the automatic stay as a result of the debtor's rejection of a lease because the debtor had no possessory interest in the lease and it was not property of the estate. Id. at 8.
Here, Lovesac filed for bankruptcy on January 30, 2006, over three years ago. Since then, it has not affirmatively assumed the subject lease agreements. In fact, both the Trustee and Lovesac have ignored the existence of these leases. Likewise, they have never informed Extra Space of its intentions regarding the subject lease agreements.
Accordingly, because Lovesac has not received written consent from Extra Space to extend the time to assume the subject lease agreements as is required by 11 U.S.C.A. 365(d)(B)(ii), the time to assume the subject lease agreements have therefore expired and the subject lease agreements must be rejected by operation of law. As such, Extra Space is not constrained by the automatic stay because Lovesac has no possessory property interest in the subject lease agreements.
B. Lovesac Has No Possessory Interest In The Non-Residential Leases Because They Terminated In Accordance With The Terms Of The Lease
According to 11 U.S.C.A. 541(b)(2), property of the bankruptcy estate does not include the following:
Any interest of the debtor as a lessee of nonresidential real property that has terminated at the expiration of the stated term of such lease before the commencement of the case under this title, and ceases to include any interest of the debtor as a lessee under a lease of non-residential real property that has terminated at the end of the stated term of such lease during the case.
Furthermore, 11 U.S.C. 362(b)(9) states in pertinent part:
(b) the filing of a petition under the [Bankruptcy Code] does not operate as a stay . . .
(10) of any act by a lessor to the debtor under a lease of nonresidential real property that has terminated by the expiration of the stated terms of the lease before the commencement of or during a case under this title to obtain possession of such property.
11. U.S.C. 362(b)(10).
Moreover, the fact that a lease is terminated prior to the initiation of bankruptcy proceedings or even during the proceedings is sufficient to remove the property from the automatic stay. See, In re Northeastern International Airways, Inc., 56 B.R. 247, 249 (Bankr. S.D. Fla. 1986). The automatic stay also does not apply to a month to month lease because the lessor has no vested property rights and may be terminated at the discretion of the landlord. See, id. at 250.
Here, the Lovesact/Extra Space lease agreement expressly terminates the lease upon Cash Point's filing for bankruptcy and are month to month leases. See Goldstein Aff, Exhibits C, Paragraphs 10 and 16 of the leases. As such, the subject lease agreements are excepted from the automatic stay pursuant to 11 U.S.C. 362(b)(10) because Lovesac has no vested property interest in the leased premises.
Accordingly, we respectfully request that this Court order that the non-residential lease agreements are not subject to the automatic stay. We further request that Extra Space's motion requiring Lovesac to immediately surrender the premises be granted. Finally, we request that Lovesac be ordered to remove all items presently stored in the subject storage facility within a reasonable period of time after eviction (30 days) or the estate shall forfeit any and all rights to them
CONCLUSION
For the foregoing reasons we request that Extra Space's petition be granted in its entirety.
ORDER FOR RELIEF IN AN INVOLUNTARY CASE
On consideration of the petition filed on January 30, 2006, against the above-named debtor, an order for relief under Chapter 11 of the Bankruptcy Code is granted.