Opinion
04 Civ. 7513 (DC) 04 Civ. 7549 (DC) 04 Civ. 9688 (DC) 04 Civ. 9689 (DC).
December 22, 2004
NOLAN HELLER, LLP, Justin A. Heller, Esq, Albany, NY, Attorneys for City of Albany.
HEALY BAILLIE, LLP, New York, NY, Jeremy J.O. Harwood, Esq. Brian S. Tretter, Esq. Attorneys for Albany Port District Commission.
ANDREWS KURTH LLP, Paul N. Silverstein, Esq. Lynn E. Judell, Esq. Anju Uchima, Esq. New York, NY, Attorneys for Cibro Petroleum Products, Inc.
MEMORANDUM DECISION
These are consolidated appeals by the City of Albany (the "City") and the Albany Port District Commission (the "Commission") from an order of the United States Bankruptcy Court for the Southern District of New York (Blackshear, J.), dated September 24, 2004, staying enforcement of an arbitration award and granting certain other relief. In addition, the City and the Commission also filed petitions to confirm the arbitration award in question. Cibro Petroleum Products, Inc. ("Cibro"), debtor-appellee, opposes the appeals and also moves to partially vacate the arbitration award or, alternatively, to stay its enforcement.
For the reasons that follow, the Bankruptcy Court's order is affirmed. The petitions to confirm are denied without prejudice, as set forth below. Cibro's motions are granted to the extent that enforcement of the arbitration award is stayed in accordance with the Bankruptcy Court's order.
STATEMENT OF THE CASE
A. The Facts
The facts are largely undisputed and are summarized as follows:
Cibro is (or was) engaged in the business of refining, marketing, transporting, and distributing petroleum and asphalt products. Cibro is the lessee under three long-term leases (the "Leases") with the Commission for some thirty acres of land located at the Port of Albany in the city of Albany (the "Premises"). The leases require Cibro to pay property taxes on the Premises and also contain a mandatory arbitration clause. Cibro has conducted its operations on the Premises since 1978.
In 1991, Cibro entered into an agreement (the "Agreement") with the City and the Commission, pursuant to which Cibro was to make payments "in lieu of taxes" (sometimes referred to as "PILOT payments") to the City of $570,000 annually. Cibro made the payments until 1994, when it ceased doing so. The City continued to invoice Cibro for the PILOT payments through 1997. In 1998, the Commission sent Cibro a notice of default, asserting that Cibro's failure to make the payments constituted a breach of the Leases.
In 2000, the City sent Cibro a property tax bill for the first time since the Agreement was entered into, for city and school taxes covering 1999-2000. The City has continued to send an annual tax bill to Cibro, through 2004. For the fiscal years 1999 through 2003 (for city taxes) and 2000 through 2004 (for school taxes), the taxes assessed by the City, based on its valuation of the Premises, totaled $1,848,136, not including penalties or interest. Cibro has not paid any of these property taxes.
B. Prior Bankruptcy Court Proceedings
In the meantime, on January 3, 1992, Cibro and several affiliates filed a Chapter 11 proceeding in the Bankruptcy Court in the Southern District of New York. These proceedings are still pending.
Pursuant to § 365 of the Bankruptcy Code, Cibro was required to assume or reject the Leases by March 3, 1992. 11 U.S.C. § 365. That deadline has been extended numerous times.
Section 365 of the Bankruptcy Code provides that, with certain exceptions, "the trustee, subject to the court's approval, may assume or reject any executory contract or unexpired lease of the debtor." 11 U.S.C. § 365(a). Pursuant to § 365,
if the trustee does not assume or reject an unexpired lease of nonresidential real property under which the debtor is the lessee within 60 days after the date of the order for relief, or within such additional time as the court, for cause, within such 60-day period, fixes, then such lease is deemed rejected, and the trustee shall immediately surrender such nonresidential real property to the lessor.11 U.S.C. § 365(d)(4).
In 1996, the Commission moved to compel Cibro to assume or reject the Leases. Cibro commenced an adversary proceeding challenging the validity of the Agreement and seeking an accounting of all PILOT payments made under the Agreement. The City answered and cross-claimed for payment of Cibro's purported obligations under the Agreement, and the Commission intervened. On March 2, 1998, Cibro moved for leave to assume the Leases and for a declaration that it was not in default of its obligations under the Leases. The Commission opposed Cibro's motion and moved to compel arbitration on the issue of whether Cibro was in default under the terms of the Leases. Ultimately, after much litigation and mediation that proved unsuccessful, this Court (Scheindlin, J.) ordered the parties to arbitrate their disputes relating to the Agreement and the Leases. See In re Winimo Realty Corp., 276 B.R. 334 (S.D.N.Y. 2001); In re Winimo Realty Corp., 270 B.R. 108 (S.D.N.Y. 2001); In re Winimo Realty Corp., 270 B.R. 99 (S.D.N.Y. 2001).
C. The Arbitration Proceedings
The parties proceeded to arbitration before the American Arbitration Association. During the course of the proceedings, it became clear that the arbitration panel (the "Panel") did not believe it had the jurisdiction or authority to review the City's tax assessments. (See Judell Aff. ¶ 4 Exs. 1 at 109-10, 2 at 584-86, 611-16).
On May 26, 2004, the Panel issued an interim award (the "Interim Award"), holding that the Agreement was "invalid." The Panel also denied the claims for PILOT payments, real estate taxes, and use and occupancy fees for the period from 1995 through 1998. The Panel also held that the taxes assessed by the City on the Premises for the period from 1999 through 2003 for city taxes and 2000 through 2004 for school taxes in the principal amount of $1,848,136 "are due and payable." In addition, the Panel held that Cibro was responsible for all interest and penalties relating to the unpaid taxes and directed the parties to stipulate to the amounts due for penalties and interest. The Panel also found that Cibro's failure to make PILOT payments did not constitute a default under the Leases, and likewise that its failure to pay real estate taxes for the fiscal periods from 1999 through 2004 did not constitute a default under the Leases. The Panel reasoned in this respect that to the extent there was a breach of the Leases by virtue of Cibro's failure to pay real estate taxes, that breach did not give rise to a default because of the failure to give notice of default as required by the Leases. The Panel also denied claims for waste as well as counterclaims seeking a refund and/or offset of PILOT payments. Finally, the Panel concluded that the amounts determined to be due and payable for real estate taxes, penalties, and interest:
shall be due and payable in full within 60 days of the date of the Final Award, failing which the [L]eases shall be deemed subject to termination pursuant to the terms of the [L]eases.
(Judell Aff. Ex. 5).
By letter dated June 3, 2004, Cibro requested that the Panel modify the Interim Award to: (1) order Cibro to pay taxes in the amount to be determined by the Bankruptcy Court following additional bankruptcy proceedings; (2) stay Cibro's obligation to pay such taxes pending a determination by the Bankruptcy Court of the proper tax assessment; and (3) await issuance of a Final Award until after the Bankruptcy Court's determination and to incorporate that determination into the Final Award. (Judell Aff. Ex. 3). Additional correspondence followed.
On July 29, 2004, the Panel issued its final award (the "Final Award"). The Final Award confirmed and incorporated the Interim Award. The Panel also wrote:
Having received and considered the parties' letter submissions subsequent to the issuance of the Interim Award, the Panel denies the relief requested therein. The parties agreed and the Panel concluded at the evidentiary hearing that the Panel lacked jurisdiction to determine the propriety of the assessed valuation amounts with respect to the subject premises. By its award, the Panel takes no position on this issue and does not purport to limit any party or the Bankruptcy Court from taking such action as may be appropriate with respect to the assessed valuations and the resulting real estate taxes, penalties and/or interest assessed against the subject premises.
(Judell Aff. Ex. 5).
The Panel also held that the penalties and interest assessed by the City as of May 31, 2004 in the aggregate of $720,172 "are due and payable." The Panel also noted that its Final Award did not preclude the City from assessing additional penalties and interest for periods after May 31, 2004. The Panel further ruled that the taxes of $1,848,136 and penalties and interest of $720,172 were to be paid in full within 60 days, "failing which the [L]eases shall be deemed subject to termination pursuant to the terms of the [L]eases." The Panel added that payment of any taxes, penalties, or interest "shall not be deemed a waiver of any rights to seek review or otherwise challenge the assessed valuation amounts referred to . . . above." (Id.).
D. The Additional Bankruptcy Proceedings
On July 2, 2004, after the Panel issued the Interim Award but before it issued the Final Award, Cibro commenced an adversary proceeding against the City pursuant to § 505 of the Bankruptcy Code challenging the City's assessment of the property taxes for the Premises (the "505 Proceeding") for the periods in question. Cibro alleged that the City had failed to properly inspect and appraise the Premises and that consequently the taxes were assessed in an arbitrary and improper manner. (Judell Aff. Ex. 10). The City filed an answer, denying the allegations.
Section 505 of the Bankruptcy Code provides that a Bankruptcy Court "may determine the amount or legality of any tax, any fine or penalty relating to a tax, or any addition to tax, whether or not previously assessed, whether or not paid," as long as the amount or legality of the tax was not "contested before and adjudicated by a judicial or administrative tribunal of competent jurisdiction" before the commencement of bankruptcy proceedings. 11 U.S.C. § 505(a). Here, there were no prepetition judicial or administrative proceedings adjudicating the amount or legality of the taxes, and all the relevant events occurred post-petition. Thus, as the parties agree, the amount and legality of the assessed taxes, penalties, and interest could be presented to the Bankruptcy Court for adjudication.
On September 10, 2004, Cibro moved in the Bankruptcy Court for an order pursuant to Bankruptcy Code § 105 staying enforcement of the Final Award pending the Bankruptcy Court's decision in the 505 Proceeding. The motion was scheduled to be heard on September 24, 2004.
On September 23, 2004, the day before the scheduled hearing on the stay motion, the Commission and the City filed petitions to confirm the Final Award. Those cases were assigned to other judges in this Court but have since been transferred to the undersigned and are consolidated herein.
On September 24, 2004, Judge Blackshear — who has presided over the bankruptcy proceedings since their inception in 1992 — conducted the hearing on the stay motion. Ruling from the bench, the Bankruptcy Court granted the motion. (Judell Aff. Ex. 11). An order was entered the same day (the "Stay Order"). The Stay Order stayed enforcement of the Final Award pending a final determination of the 505 Proceeding. It authorized and directed Cibro to place $2,851,100 (approximately 110% of the amount awarded in the Final Award) from a cash collateral account into a segregated interest-bearing escrow account to "be maintained, subject to all parties' . . . rights, pending further order of this Court, for use in connection with any payment of the Property Taxes which may be made after final determination, or other resolution . . . by the parties, of the [505 Proceeding]." (Judell Aff. Ex. 6).
The Stay Order also provided that if funds were eventually released from the escrow account for the payment of amounts found to be owing for property taxes, Cibro's motion to assume the Leases would be granted and the Leases would "be deemed to be immediately assumed" pursuant to § 365. Finally, the Stay Order extended Cibro's time to assume or reject the Leases "until a final determination, or other resolution by the parties, of the [505 Proceeding]." (Id.).
At the conclusion of the hearing on September 24, 2004, the parties and the Bankruptcy Court discussed scheduling in the 505 Proceeding. Judge Blackshear set a discovery cutoff of January 10, 2005 and scheduled a pretrial hearing for January 12, 2005.
E. Prior Proceedings in this Court
Both the City and the Commission appealed the Stay Order to this Court. They also filed petitions to confirm the Final Award. The various cases were consolidated before me and the appeals were handled on an expedited basis. Cibro filed its motions to partially vacate the Final Award or, alternatively, to stay enforcement of the Final Award pending resolution of the 505 Proceeding. The Court heard oral argument on December 20, 2004.
DISCUSSION
The City and the Commission argue that the Stay Order must be reversed because it constitutes an improper modification of an arbitration award. They point out that the Federal Arbitration Act (the "FAA") permits a court to modify an arbitration award only on the limited grounds set forth in § 11 of the FAA, 9 U.S.C. § 11, and they argue that none of those grounds exists in this case.These arguments are rejected and the Stay Order is affirmed, for two reasons: First, the Stay Order did not constitute a modification of the Final Award; rather, it simply delayed payment of property taxes pending a judicial determination of the proper amount of those taxes. Second, even assuming the Stay Order did modify the Final Award, such a modification was permitted by § 11 of the FAA. In considering these issues, I apply ade novo standard of review.
A. The Stay Order Did Not Modify the Final Award
The Stay Order does not modify the Final Award in any substantive sense because it leaves the Panel's key rulings in place and only affects the timing of the payment of taxes, penalties, and interest. The delay in payment is not substantive because the Stay Order requires the segregation of funds into an escrow account, along the lines of the protection provided by a supersedeas bond. In the end, the delay in payment pending Cibro's pursuit of its acknowledged judicial right of review (of the amount of the assessed valuations) is no different from the stay of execution of a judgment awarding a sum of money pending appeal. Moreover, additional interest can be assessed to compensate for the further delay in payment.
The parties agree, as did the Panel, that the Panel did not have jurisdiction to decide "the propriety of the assessed valuation amounts" of the Premises. (Judell Aff. Ex. 5). As the Final Award makes clear, the Panel was not limiting, or even purporting to limit, Cibro's right to challenge "the assessed valuations and the resulting real estate taxes, penalties and/or interest." (Id.). The Panel contemplated that Cibro could, and would, seek review of the assessed valuations and that, as a consequence, the amount of taxes due and owing could change.
The Panel's key rulings — including its determinations that the Agreement was invalid and that Cibro was required to pay property taxes, penalties, and interest for the fiscal years 1999 through 2004 — are not affected by the Stay Order. Indeed, Cibro has repeatedly acknowledged in these proceedings that "it accepts and does not challenge the Panel's decision that it is liable for taxes on the [Premises] in the proper amount for 1999 through 2004." (Cibro Response Br. at 14; see also 12/20/04 Tr. at 33-34). The Stay Order merely delays payment of the real estate taxes until after the proper amounts have been determined, in a proceeding that the Panel clearly contemplated. Cf. Banco de Sequros del Estado v. Mutual Marine Offices, Inc., 257 F. Supp. 2d 681, 686 (S.D.N.Y. 2003) ("Altering the Award such that its enforcement is prolonged pending the appeal is not the type of modification provided for under 9 U.S.C. § 11.").
The City and the Commission argue that the Stay Order does modify the Final Award because the Stay Order permits Cibro to await the outcome of the 505 Proceeding to pay the taxes, penalties, and interest, while the Final Award contemplated payment of the taxes, penalties, and interest first, with Cibro then seeking a refund after the completion of the 505 Proceeding if the assessments were reduced. (12/20/04 Tr. at 9-10). I do not believe this is a distinction of substance, in the context of these bankruptcy proceedings and particularly in light of the requirement of an escrow fund in 110% of the amount awarded. Either way, Cibro has acknowledged that it is liable for property taxes on the Premises for the periods in question, and the escrow fund should provide the City and Commission with some protection.
There is a lack of clarity in the Stay Order, as it provides that the escrow is "subject to all parties' . . . rights, pending further order of the Court." (Judell Aff. Ex. 6). It is unclear from this language whether the claims of secured creditors will have a priority with respect to this escrow fund over the City's claim for taxes. At argument, Cibro's counsel stated that she believed that "Judge Blackshear's intent with respect to that sub-escrow was that [it] was reserved for payment of taxes once the tax amounts were properly determined." (12/20/04 Tr. at 30). Even if the Stay Order were to be interpreted, however, to provide that the rights of the secured creditors remain in place as to the escrow funds, the priorities would be no different than they would have been had the Stay Order not been entered,i.e., the secured creditors would still have a priority. (See id. at 12).
Although the City and the Commission argue that the Stay Order gives Cibro the advantage of waiting until the 505 Proceeding is completed before making a determination whether to assume or reject the Leases, I do not think that is unfair: Cibro should not be forced to make a decision of this magnitude without knowing what the real estate taxes will be. Moreover, at this point discovery is set to close in the 505 Proceeding on January 10, 2005 and thus a resolution may be achieved within a matter of weeks in any event.
In the end, I agree with Judge Blackshear's decision to stay execution of the Final Award pending completion of the 505 Proceedings. Although the City's concern over the additional delay in the payment of real estate taxes is understandable, Cibro would be more prejudiced by being required to pay now what may very well be an incorrect amount and by being required to make a significant business decision based on what may very well turn out to be incorrect information. The additional delay should not be extensive, and some measure of protection for the City has been provided by the creation of the escrow account.
B. Even Assuming the Stay Order Does Modify the Final Award, the Modification Is Proper
Even assuming the Stay Order modified the Final Award, I conclude that the "modification" was permitted under § 11 of the FAA, under either subsection (b) or (c). If, as my reasoning above suggests, the modification is deemed not to affect the merits, then subsection (c) applies, for the Final Award "is imperfect in matter of form." In the alternative, if the modification is deemed to affect the merits, then subsection (b) would apply, for the Panel members "awarded upon a matter not submitted to them," namely, the assessed valuation amounts. I address subsection (c) first and subsection (b) second.
1. Subsection (c)
The Bankruptcy Court had the authority under § 11(c) to modify the Final Award on the ground that it was "imperfect in matter of form not affecting the merits of the controversy." 9 U.S.C. § 11(c). See Productos Mercantiles E Industriales, S.A. v. Faberge USA, Inc., 23 F.3d 41, 45-46 (2d Cir. 1994) (court may modify arbitration award to account for errors in calculations if modification did not affect merits).
The Final Award contemplated that Cibro was liable for real estate taxes and penalties and interest in amounts to be determined by the Bankruptcy Court, but it required, in essence, the interim payment of what it concluded were the presumptively valid amounts, which would be subject to adjustment following the 505 Proceeding. The Stay Order, to the extent it modifies the Final Award at all, did not affect the merits of the controversy because in the end the thrust of the Final Award will be implemented — Cibro will be required to pay the proper amounts of taxes, penalties, and interest determined after the valuation proceedings are complete. The modification is one of "form" only in the sense that under the Stay Order Cibro is permitted to pay the correct amounts after the correct amounts are determined rather than, as provided for in the Final Award, paying what may be incorrect amounts first with an application for a refund to follow. The Panel's key determinations — that the Agreement was invalid and that Cibro owes real estate taxes, penalties, and interest for 1999 through 2004 — are not affected.
2. Subsection (b)
Alternatively, if the modification is one deemed to affect the merits (in which case subsection (c) would be inapplicable), the issue of "the propriety of the assessed valuation amounts" was not a matter submitted to the Panel, and the Panel so recognized. (Judell Aff. Ex. 5). The Panel also recognized that Cibro could seek relief in the Bankruptcy Court and the Bankruptcy Court could order a reduction (or, presumably, an increase) in the "assessed valuations." Significantly, the Panel also recognized that any changes in the assessed valuations would result in changes to the amounts of real estate taxes, penalties, and interest assessed against the Premises. (Id.).
Notwithstanding the recognition that it did not have jurisdiction to determine the proper assessed valuation amounts, which had a direct bearing on the amount of taxes, penalties, and interest, the Panel ordered Cibro to pay specific amounts of taxes, penalties and interest, within a 60-day period of time. In doing so, the Panel essentially decided that the assessed valuations were presumptively valid, treading into an area over which it had no jurisdiction. Indeed, the Final Award is internally inconsistent: although the Panel recognized that it did not have jurisdiction to decide the proper assessed valuations, in essence it did so by assuming that the assessed valuations were correct.
The Panel clearly had jurisdiction to hold, inter alia, that the Agreement was invalid and that Cibro was liable for real estate taxes for the periods from 1999 through 2004. These were matters submitted to the Panel and these were matters within the Panel's jurisdiction. By ordering Cibro to pay specific amounts in taxes and penalties and interest, however, the Panel members exceeded their jurisdiction and "awarded upon a matter not submitted to them." 9 U.S.C. § 11(b).
CONCLUSION
The Stay Order modifies and corrects the Final Award merely by staying a final resolution until after the proper amount of the taxes, penalties, and interest can be determined after the assessed valuations have been reviewed, in proceedings contemplated by the Panel. Accordingly, I conclude that the Stay Order "effect[s] the intent" of the Final Award and "promote[s] justice" among the parties. 9 U.S.C. § 11.The Stay Order is affirmed. The petitions of the City and the Commission to confirm the Final Award are denied, without prejudice to renewal following final resolution of the 505 Proceeding. Cibro's motions are granted only to the extent that enforcement of the Final Award is stayed pending completion of the 505 Proceeding and they are otherwise denied.
SO ORDERED.