Opinion
BANKRUPTCY No. 03-18978 SR
July 25, 2003
OPINION
Introduction.
Before the Court is the Motion of Callowhill Center Associates ("Callowhill") in which it requests that the Court 1) Dismiss this Chapter 11 case under 11 U.S.C. § 1112, 2) "suspend" proceedings in the case under 11 U.S.C. § 305(a)(1) or, 3) in the alternative, modify the automatic stay as to Callowhill under 11 U.S.C. § 362(d)(1). An answer opposing all three requests was filed by the Debtor, 421 Willow Corporation ("Willow") and a hearing was held on July 17, 2003. At the hearing, Callowhill advanced what the Court characterized as a threshold legal issue, which is to say that Callowhill argued that by virtue of certain pre-petition events which had occurred in state court litigation between the parties, the automatic stay did not even apply to Callowhill, and it should therefore be declared free, as a matter of law, from any restrictions the bankruptcy stay might otherwise present. Willow argued to the contrary on this point. This disagreement, notwithstanding, the parties nevertheless indicated their intention and desire to present certain evidence with respect to the pending motion. At the conclusion of preliminary oral argument, however, the Court indicated that it chose to forego the immediate taking of evidence and resolve the potentially dispositive legal question first. As the Court herein resolves that question adversely to Callowhill, the automatic stay will remain in place and this contested matter will be set down for further hearing.
Background.
The background of this case is set forth in considerable detail in the lengthy written submissions of the parties, but all of it is not immediately relevant herein. The salient facts for present purposes are, as follows:
On March 28, 1995 Willow and Callowhill entered into a written lease agreement for real property located at 417 North 7th Street, Philadelphia, PA. The lease had an initial term of 10 years and provided for two ten year extensions. As lessee, Willow used the premises principally as a venue for live musical performances, trading under the name "The Electric Factory." The lease contained language which restricted the right of Willow to assign or sublet the premises without the prior written consent of Callowhill.
On February 28, 2000 the stock of a related entity known as Electric Factory Concerts, Inc. ("ECF, Inc.") was sold to an entity known as SFX Entertainment, Inc. ("SFX") ECF, Inc. consisted of itself and two affiliate corporations, Concert Advertising, Inc. and ECF Services, Inc. ECF, Inc was owned, in part, by Larry Magid and Adam Spivak, who are also the co-owners of Willow.
Among other things, the stock purchase agreement attendant to the aforesaid February 2000 transaction called for the prompt transfer of Willow's lease with Callowhill to SFX. Thus, following the February 2000 transaction, Willow requested permission from Callowhill to assign its lease to SFX. This request, however, was denied. Interestingly, the stock purchase agreement had contemplated that possibility and provided that if landlord consent could not be obtained, Willow's principals were to cause Willow to enter into a management agreement with SFX that provided SFX with the same economic benefits and control it would have received had Callowhill consented to the lease assignment.
Subsequent to the above events Willow and Callowhill became embroiled in various lawsuits over a myriad of issues, the most recent of which took the form of separate breach of contract and tort actions commenced by Willow against Callowhill, on or about May 18, 2001, in the Philadelphia Court of Common Pleas. These actions, which were consolidated, were resisted by Callowhill which lodged counterclaims of its own, one of which was a request that the lease be declared terminated, In February 2003, Callowhill moved for Summary Judgment in the pending action, In an Order and Memorandum Opinion dated May 23, 2003, the Court (Cohen, J.) granted Callowhill's request. The Court found that although the management agreement that Willow and SFX had agreed to enter into was not memorialized in writing, it existed nevertheless and, more to the point, since the terms of the management agreement were identical to the contemplated assignment of the lease from Willow to SFX, Willow had in effect assigned the lease to SFX without Callowhill's consent. As a consequence of this de facto assignment, said the Court, Willow was in breach of the lease and the lease was therefore terminated. The Court's Order then invited follow-up submissions from the parties, vis-a-vis damages, or a request for a further hearing thereon.
On June 6, 2003, Callowhill wrote Willow advising it that in view of the Common Pleas Court decision it viewed Willow as a holdover tenant which it would consider to be a trespasser thirty days thereafter. On June 10, 2003, the Common Pleas Court denied Willow's request for reconsideration of the May 23, 2003 Order. Willow commenced this Chapter 11 case the same day.
Callowhill filed the present motion on June 26, 2003. In it, Callowhill asserts that the bankruptcy case should be dismissed for cause because it was not filed in good faith. On this score, Callowhill argues that this case presents what is essentially a two-party dispute, and that it has been commenced by Willow solely as a tactical maneuver to avoid the consequences of the Common Pleas Court's lease termination ruling. Alternatively, Callowhill asks the Court to abstain and suspend all proceedings in the case under 11 U.S.C. § 305(a)(1), for the sake of efficiency and expediency, in order that the parties' State Court litigation might continue to conclusion. Finally, Callowhill argues that should the Court decline to do either of the foregoing, it should, at a minimum, modify the automatic stay as to Callowhill, so as to permit the continuation of proceedings in state court. On this point, Callowhill argues that because the subject lease was declared terminated prior to the commencement of the bankruptcy case, it is not even an asset of the bankruptcy estate and therefore the automatic stay does not even apply.
At the July 17, 2003 hearing, Callowhill emphasized that it was proceeding in this Court only out of an abundance of caution, and against the event that it should later be determined that the bankruptcy stay in fact applied, In such event, however, Callowhill argued that because there has been a valid pre-petition termination of the lease, the lease cannot be resurrected herein. See 11 U.S.C. § 541(b)(2); see also In re Triangle Laboratories, Inc., 663 F.2d 463, 467-68 (3d Cir. 1981) (restating that it is a "recognized principle of bankruptcy law that an executory contract or lease validly terminated prior to the institution of bankruptcy proceeding is not resurrected by the filing of the petition in bankruptcy, and cannot, therefore, be included among the debtor's assets"). Consequently, any executory contract "is not assumable in a bankruptcy case if it has been terminated prior to the filing of the case." In re Greenfield Dry Cleaning and Laundry, Inc., 249 B.R. 634, 641 (Bankr. E.D.Pa. 2000); see also 11 U.S.C. § 365(c)(3), which provides that the Trustee may not assume or assign any executory contract or unexpired lease of the debtor where "such lease is of nonresidential real property and has been terminated under applicable non-bankruptcy law prior to the order for relief. Accordingly, says Callowhill, there is nothing left for Willow to assume herein under 11 U.S.C. § 365, and cause, therefore, exists to modify the automatic stay so that Callowhill can return to state court and proceed with steps to regain possession of the leased premises and obtain an assessment of its damages.
Willow, for its part, contests the entirety of Callowhill's position. At the outset, Willow argues that the instant Chapter 11 case has indeed been commenced in good faith in a legitimate effort to reorganize its financial affairs. Willow stresses, in particular, that at stake for it are a valuable leasehold estate and extensive, valuable leasehold improvements. Willow also notes that it has numerous other creditors, and at least one of these appeared at the hearing in support of Willow's position. Willow, in its brief, offers a particularly extensive review of the decisional law which informs a Bankruptcy Court's determination of the good faith filing requirement and argues that the circumstances herein meet the requisite criteria.
As to Callowhill's request for a suspension of proceedings, Willow argues that under Bankruptcy Code § 305(a)(1) such relief is appropriate only where the interest of both the Debtor and its creditors would be better served. Willow argues that while Callowhill undoubtedly would prefer suspension, that result is clearly not in the Debtor's interest, nor for that matter would the interest of the Debtor's other creditors be served thereby.
Willow also takes issue with Callowhill's most basic contention, which is that the lease between the parties has been terminated. On this score, Willow maintains that under Pennsylvania law, a tenancy is preserved until the moment of actual and complete eviction. Until such time, says Willow, a tenant may cure monetary or non-monetary defaults and avoid termination of its leasehold. Based on this argument, Willow contends that it is entitled to "cure" the default described by the Philadelphia Common Pleas Court as the basis for its termination ruling and thereafter assume the lease under 11 U.S.C. § 365.
Even so, says Willow, should the Court nevertheless find otherwise, Callowhill, it maintains, has still failed to demonstrate cause sufficient to warrant modification of the automatic stay, which Willow stresses, applies in this setting. On the latter score, Willow points to the following discussion by the Court in In re Borbridge, 66 B.R. 998 (Bankr. E.D. Pa. 1986):
In this district, it has been settled for some time that "property of the estate" under 11 U.S.C. § 541 includes even a bare possessory interest in leased property, even if the lease was terminated prior to bankruptcy, and that such property is subject to the automatic stay, 11 U.S.C. § 362(d)(3). See In re Law Clinic of Mott Grey, P. C., 39 B.R. at 74 n. 3; In re Lewis, 15 B.R. 643 (Bankr. E.D.Pa. 1981); In re Andorra Meat Market, Inc., 7 B.R. 744 (Bankr.E.D.Pa. 1980).
Id. at 1002
See also In re Maxwell, 40 B.R. 231, 237 (N.D. Ill. 1984) (recognizing that a debtor in possession, under a terminated lease which left it with only a tenancy at sufferance, held this limited equitable interest which was protected by the automatic stay), In re Eclair Bakery Ltd., 255 B.R. 121, 133-34 (Bankr. S.D.N.Y. 2000) quoting In re 48th Street Steakhouse, Inc. 835 F.2d 427, 430 (2nd Cir. 1987) cert denied 485 U.S. 1035, 108 S.Ct. 1596, 99 L.Ed. 910 (1988) ('"a mere possessory interest in real property, without any accompanying legal interest, is sufficient to trigger the protection of the automatic stay'"); In re Black, 58 B.R. 60, 62 (Bankr. E.D. Pa. 1986) ("[t]he stay is pervasive, and we have held that it bars the dispossession of a debtor from realty even when the debtor has `only a bare right of possession unsanctioned by law,' such as the interest of a tenant at sufferance"); In re Dennison, 50 B.R. 950, 953 n. 2 (Bankr. E.D. Pa. 1985). ("Even though movant holds title to the property in question, the automatic stay of § 362(a) applies to movant's attempts to gain possession.") Willow thus urges the Court to deny Callowhill's Motion in its entirety.
Discussion.
At the outset the Court observes that if one assumes for purposes of discussion that Willow remains in possession of the leased premises, then the automatic stay indeed applies in the present setting. Callowhill was thus prudent to have proceeded as it has. However, the Court rejects Willow's proposition that its lease has not been terminated. The pre-petition Order of the Philadelphia Common Pleas Court is explicit on this very point. Although not raised in its original pleading, at the July 17, 2003 hearing, and in a post-hearing written submission, Callowhill argues that this Court is obliged to uphold that determination, and is indeed barred from reviewing this decision of the Common Pleas Court under the Rooker/Feldman doctrine. The Court agrees.
The Court acknowledges that there may be some disagreement between the parties as to the question of whether Willow or SFX is in physical possession of the property. The parties are invited to present evidence on that issue at the follow-up hearing scheduled via the accompanying Order.
As a general rule, lower federal courts are without power to sit in direct review of state court decisions. District of Columbia Court of Appeals v. Feldman, 460 U.S. 462, 481, 103 S.Ct. 1303, 1314 (1983). "The Rooker/Feldman doctrine[,] . . . derived from two Supreme Court cases decided sixty years apart, Rooker v. Fidelity Trust Co., 263 U.S. 413 (1923), and . . . Feldman, [supra,] . . . expresses the principle that `federal trial courts have only original subject matter, and not appellate, jurisdiction [and] . . . may not entertain appellate review of [or collateral attack on] a state court judgment.'" In re Singleton, 230 B.R. 533, 536 (6th Cir. BAP 1999) (citation omitted). Moreover, if an issue presented to a federal court is "inextricably intertwined" with the state court's decision, and in ruling on the issue, the district court is in essence being called upon to review the state court decision, the district court is similarly without jurisdiction to consider the matter. Feldman, 460 U.S. at 483. A claim is inextricably intertwined with a state court decision if the relief requested from the federal court would effectively reverse the state court or void its ruling. In re Siskin, 258 B.R. 554, 564 (Bankr. E.D.N.Y. 2001) ( citing In re Hatcher, 218 B.R. 441, 447 (8th Cir. BAP 1998), aff'd, 175 F.3d 1024 (8th Cir. 1999)). However, where a state court does not actually litigate a claim, federal courts may retain subject matter jurisdiction. Parkview Associates Partnership v. City of Lebanon, 225 F.3d 321, 325-26 (3d. Cir. 2000).
Clearly, the Rooker/Feldman doctrine is implicated herein, as Willow's contention that its lease has not in fact been terminated would of necessity require this Court to revisit and review the Common Pleas Court's ruling directly on point. The Court will not do so. Rather, in view of the above precepts the Court is constrained to uphold the decision of the Common Pleas Court, and accordingly it does so. The lease between Willow and Callowhill is terminated and was terminated prior to commencement of this case. The inquiry, however, does not entirely end here. Attached to Willow's responsive pleading as Exhibit "D-3" is an adversary complaint entitled 421 Willow Corporation v. Callowhill Center Associates, L.P. (Adversary No. 03-732). In this Complaint Willow acknowledges that its lease was declared terminated by Order of the Philadelphia Common Pleas Court, however it seeks to avoid that termination as either a preference under 11 U.S.C. § 547, or a constructively fraudulent transfer under 11 U.S.C. § 548. Willow would like the automatic stay to remain in place while this litigation is prosecuted here. If successful on either count, says Willow, the pre-petition lease termination can be avoided, placing Willow back in the position it was in prior to the termination. At that point, says Willow, it will undertake to cure the non-monetary default which lead to the termination of its lease, and it will thereafter seek to assume the lease as an executory contract under 11 U.S.C. § 365 of the Bankruptcy Code.
The Rooker/Feldman doctrine applies even where a state court judgment may be in error, a question this Court takes no position on. See In re Singleton, 230 B.R. 533, 538 (6th Cir. BAP 1999).
The availability of the Bankruptcy Code's avoidance powers as a means by which to avoid the consequences of a pre-petition lease termination was addressed in only passing fashion at the July 17, 2003 hearing; Willow having raised it, but Callowhill having made no formal response. At this juncture, and based on authorities referred to in Willow's complaint, the Court is not prepared to dismiss the viability of Willow's legal theory out of hand. Nor is the Court in a position to determine whether if the theory is viable the interests of Callowhill would be adequately protected, such that if the litigation were to go forward its rights would not be eroded. Accordingly, although the Court finds in favor of Callowhill vis a vis, the preliminary legal issue it raised at the hearing; to wit: the fact of an effective pre-petition lease termination, the Court finds that this question, in retrospect, is not wholly dispositive of this contested matter. At this juncture, although much more might be said by the Court on the subjects of dismissal, suspension or stay relief, the Court will refrain from such comment, deeming it more appropriate that the parties be afforded the opportunity, precluded by the Court's bifurcation of the issues, to make such evidentiary record in support of their respective positions as they deem necessary. As previously noted, the Court will therefore direct that the automatic stay remain in place pending a follow up hearing and further Order of the Court.
An appropriate Order follows.
ORDER
AND NOW, upon consideration of the Motion of Callowhill Center Associates ("Callowhill") to Dismiss this Chapter 11 case under 11 U.S.C. § 1112, "suspend" proceedings in the case under 11 U.S.C. § 305(a)(1) or, in the alternative, to modify the automatic stay as to Callowhill under 11 U.S.C. § 362(d)(1), the answer of Willow in opposition thereto, and after hearing held July 17, 2003, it is hereby:
ORDERED, that the automatic stay shall remain in place pending further Order of Court; and it is further:
ORDERED, that a further hearing in this matter shall be and hereby is scheduled for August 14, 2003, 10:00 A.M. United States Bankruptcy Court, 900 Market Street, 2nd Floor, Courtroom No. 4, Philadelphia, Pennsylvania, 19107.