Opinion
Civ. Nos. 03-1082 (DRD), 03-1391 (DRD), Bankruptcy Case No. 02-38465 (DHS).
August 18, 2003
Richard L. Zucker, Esq., Lasser Hochman, L.L.C., Roseland, NJ, Attorney for Appellant Levin Properties L.P.
Nancy Isaacson, Esq., Laura E. Quinn, Esq., Goldstein, Lem Isaacson, P.C., Springfield, NJ, Attorneys for Debtor/Appellee Lens Lab of Paramus, Inc.
David Panitz, Esq., Hackensack, NJ, Attorney for Appellee Eyeglass Services Industries, Inc.
OPINION
Appellant Levin Properties ("Levin") has appealed from two orders of the Bankruptcy Court: one issued January 31, 2003 (the "January 31 Order") and the other issued February 27, 2003 (the "February 27 Order"). (The docket number for the appeal from the January 31 Order (the "1082 Appeal") is 03-1082; the appeal from the February 27 Order (the "1391 Appeal") is filed under 03-1391. Because the appeals raise many common issues, they are both addressed in a single opinion, set forth below. For the following reasons, both the January 31 Order and the February 27 Order will be affirmed.
BACKGROUND
Lens Lab has, since 1998, operated an eyeglass services business on premises (the "Premises") located in Paramus, New Jersey, and owned by Levin. The Premises are subject to a lease between ESI as tenant and Levin as landlord. Lens Lab occupies the Premises under a sublease between it and ESI. On August 20, 2001, Levin purportedly terminated its lease agreement with ESI and the tenancy created by that agreement, citing grounds including non-payment of rent, an improper (according to Levin) sublease to Lens Lab, and the operation of a business on the Premises under an unapproved name. On August 27, 2001 Levin sued in New Jersey Superior Court seeking, among other things, possession of the Premises. Following discovery, Levin filed a motion for partial summary judgment on the issue of possession. On August 1, 2002, the day before the return date of the motion, Lens Lab filed a bankruptcy petition pursuant to 11 U.S.C. § 301.
While recognizing that the bankruptcy Petition stayed all proceedings as to Lens Lab, the state court nevertheless proceeded to decide the motion for partial summary judgment with respect to ESI, declaring that Levin had properly terminated its lease. The state court's judgment is embodied in an August 2, 2002 advisory opinion and in an August 30, 2002 order (the "August 2002 Order"). The state court did not order any relief directly affecting Lens Lab. On September 27, 2002, the state court issued an order (the "September 2002 Order" or the "Damages Award") granting partial summary judgment in favor of Levin and awarding damages against ESI — at least in part based on a wrongful holdover of a terminated lease. Lens Lab remains in possession of the Premises, has continued to pay rent post-Petition, and continues to operate a business on the Premises.
On October 7, 2002 Levin moved before the Bankruptcy Court for immediate possession of the Premises on two grounds: (1) that its August 2001 termination of ESI's lease had effectively terminated ESI's and therefore Lens Lab's rights to possession and (2) that, even assuming that the termination had not been effective, Lens Lab had failed to assume its sublease with ESI within 60 days of its bankruptcy petition, so that the sublease was deemed rejected under 11 U.S.C. § 365.
On November 27, 2002, Lens Lab cross moved for an order declaring that Levin violated the automatic stay, that the state court order purporting to determine ESI's and Levin's rights to the Premises was void ab initio, and that the debtor assumed its sublease. Lens Lab also cross moved for sanctions against Levin.
On January, 31, 2003, the Bankruptcy Court issued the Order challenged, in part, in the 1082 Appeal. Paragraph 1 of the order denied Levin's motion for immediate possession without prejudice. Paragraph 2 declared that the state court's August 2, 2002 advisory opinion and August 30, 2002 order were void ab initio. Paragraph 3 stated that the "Debtor's interest in the premises leased by ESI from Levin and subleased by Debtor . . . is property of the estate pursuant to 11 U.S.C. § 541 and subject to protection by 11 U.S.C. § 362(a)" (imposing the automatic stay); paragraph 3 also noted that Levin reserved its right to seek a determination that ESI's lease had been terminated in August of 2001. It is these three paragraphs of the January 31 order that were originally the subject of the 1082 Appeal. The January 31 Order also postponed the determination whether sanctions against Levin were appropriate for violation of the stay; it required Lens Lab to file a motion either for approval of a new sublease with ESI or for a determination that ESI had waived automatic rejection of the existing sublease; and it required Lens Lab to file an adversary proceeding to determine the "nature, extent, and validity" of its interest in the Premises.
Lens Lab has since initiated the adversary proceeding, and it has filed the required motion for approval of a new sublease with ESI. That motion was granted, over Levin's objection, on February 4, 2003.
On February 27, 2003, the Bankruptcy Court issued the order challenged in the 1391 Appeal. In the February 27 Order, the Bankruptcy Court granted a motion by ESI (which Lens Lab had joined) for a declaration that the September 27, 2002 state court Damages Award against ESI was also void ab initio.
Appellees moved to dismiss both Appeals for lack of appellate jurisdiction — contending that the challenged orders were not final and therefore not appealable under 28 U.S.C. § 158(a). Lens Lab's motion to dismiss the 1082 Appeal was granted with respect to the appeal from the Bankruptcy Court's denial without prejudice of Levin's motion for immediate possession (paragraph 1 of the January 31 order). The motion was denied with respect to the appeal from the Bankruptcy Court's determination that the August 2002 state court orders were void ab initio (paragraph 2), and with respect to the Bankruptcy Court's determination that Lens Lab's interest in the premises is property of the estate (paragraph 3). ESI's motion to dismiss the 1391 Appeal was denied in its entirety.
DISCUSSION
I. Appellate Jurisdiction and Standard of Review
This court has appellate jurisdiction over final orders of the Bankruptcy Court pursuant to 28 U.S.C. § 158(a)(1) and reviews its conclusions of law de novo. In re Ben Franklin Hotel Assocs., 186 F.3d 301, 304 (3d Cir. 1999). The Bankruptcy Court's findings of fact are reviewed for clear error. J.P. Fyfe, Inc. of Florida v. Bradco Supply Corp., 891 F.2d 66, 69 (3d Cir. 1989).
II. The Appeal from the January 31 Order (03-1082)
As modified in part by the partial grant of Lens Lab's motion to dismiss, the 1082 Appeal challenges the Bankruptcy Court's determinations that Lens Lab's interest in the Premises was property of the estate for the purposes of 11 U.S.C. § 541 and 11 U.S.C. § 362(a) and that the state court's August 2002 Order was void ab initio as violative of the automatic stay under § 362. Levin contends that Lens Lab's interest in the Premises was not property of the estate under the relevant provisions. It also argues that the Bankruptcy Court could not declare the August 2002 Order a violation of the automatic stay (and void as such) because the August 2002 order directly adjudicated only ESI's rights to the Premises and because the stay had not been affirmatively extended, under 11 U.S.C. § 105(a), to actions against ESI.
Although Levin purportedly terminated ESI's lease before Lens Lab's bankruptcy filing, Lens Lab's continuing possessory interest in the Premises was correctly deemed property of the estate by the Bankruptcy Court. Because the adjudication of ESI's rights to the Premises inevitably implicates Lens Lab's continued right to possession under its sublease, and because actions to obtain possession of property of the estate are automatically stayed under § 362 (without any need to resort to § 105), the Bankruptcy Court was also correct to declare the state court's August 2002 order void ab initio. The Bankruptcy Court's January 31 Order must therefore be affirmed.
A. Lens Lab's Interest in the Premises as Property of the Estate
Section 541 of the Bankruptcy Code, 11 U.S.C. § 541, sets forth the types of property interests which are included in the bankruptcy estate. The property of the estate includes "all legal or equitable interests of the debtor in property as of the commencement of the case." § 541(a)(1). Section 362(a)(3) of the Bankruptcy Code stays any action "to obtain possession of property of the estate or to exercise control over property of the estate."
Under clear Court of Appeals authority, even a "mere possessory interest in real property, without any accompanying legal interest," is property of the estate subject to the protection of the automatic stay. In re Atl. Bus. Cmty Corp., 901 F.2d 325, 328 (3d Cir. 1990) (quoting In re 48th Street Steakhouse, 835 F.2d 427, 430 (2d Cir. 1987). Given Levin's purported pre-petition termination of its lease with ESI, the nature and extent of Lens Lab's legal interest in the Premises is uncertain. It is however evident that Lens Lab has a possessory interest in the Premises, and that interest is accordingly property of the estate. While the facts of Atlantic Business and 48th Street Steakhouse differ somewhat from those in this case, most notably in that Levin gave ESI notice of default and initiated proceedings aimed at obtaining possession before Lens Lab's bankruptcy, the distinctions do not call for a different result. Even if one assumes that Levin's August 2001 notice to ESI effectively terminated ESI's lease and, by necessary extension, Lens Lab's sublease, it manifestly did not terminate Lens Lab's possessory interest in the Premises. Cf. In re DiCamillo, 206 B.R. 64, 67 (Bankr. D.N.J. 1997) ("[U]nder New Jersey law, the entry of a judgment of possession terminates the tenant's entitlement to possession.").
Levin cites St. Clair, 251 B.R. 660 (D.N.J. 2000), aff'd, 281 F.3d 224 (3d Cir 2001), for the proposition that physical possession unaccompanied by any "good-faith, colorable claim" to possession is not protected by the automatic stay. Id. at 667. But St. Clair (even if it was correctly decided under Atlantic Business) is distinguishable from the present case because inSt. Clair the debtor's right to continuing possession of the property at issue had been adjudicated, whereas here no judgment has been entered awarding Levin possession of the Premises. The court in St. Clair reasoned that an unrestricted application of the automatic stay to naked possession of property would protect even avowed trespassers. Here Debtor Lens Lab is no trespasser: its position is at least comparable to that of the tenant at sufferance in Atlantic Business. See Mintz v. Metropolitan Life Ins. Co., 153 N.J. Super. 329, 333 (Dist.Ct. 1977) (stating that "the requisites for a tenancy at sufferance are (1) lawful entry and (2) a holding over after the termination of the right under which he entered" and that a "tenant at sufferance differs from a trespasser in that the trespasser does not enter into possession lawfully") (citing Standard Realty Co. v. Gates, 99 N.J. Eq. 271 (Ch. 1926), and United States v. Whipple Hardware Co., 191 F. 945 (3d Cir. 1911)); see also Xerox Corp. v. Listmark Computer Sys., 142 N.J. Super. 232, 237-41 (App.Div. 1976) (characterizing as a tenant at sufferance a subtenant holding over after its interest in the premises had been terminated by the termination of the sublessor's lease). Levin has cited no case from within this circuit, and the Court has found none, in which the automatic stay has been held inapplicable to the interest of a debtor in actual possession of property where a lease has been purportedly terminated, but where the validity of the termination is disputed and no judgment of possession has been entered. At least one court in this district has indicated in dicta that an interest such as Lens Lab's here is property of the estate for the purposes of the automatic stay. See In re DiCamillo, 206 B.R. 64.
Levin's reliance on In re Policy Realty Corp., 242 B.R. 121 (S.D.N.Y. 1999), aff'd, 213 F.3d 626, 2000 U.S. App. LEXIS 17282 (2d Cir. May 2, 2000), is also misplaced. In Policy a subtenant/debtor's interest in the premises at issue was deemed not to be covered by the stay because the primary tenant's lease had been terminated pre-petition. But Policy is inapposite if only because in that case the debtor was not in possession of the premises at issue.
The court in DiCamillo noted that under 11 U.S.C. § 541(b)(2) a debtor's pre-petition interest in a nonresidential lease "that has terminated at the expiration of the stated term of such lease" is not included as property of the bankruptcy estate and that similarly "under § 362(b)(10), proceedings by a landlord to obtain possession of nonresidential property are not automatically stayed where the lease is `terminated by the expiration of the stated term of the lease' either before the filing or during the pendency of the case." 206 B.R. at 69-70. Distinguishing leases that expire at the ends of their stated terms from leases that are terminated when landlord's declare defaults, the DiCamillo court observed that by reverse implication "[p]resumably, if a lease terminated otherwise than by expiration of the term, and the debtor is still in possession at the time of the commencement of the case, the automatic stay is activated against a landlord's pursuit to gain possession of the property." Id. at 70. A contrary view might be suggested byIn re Egyptian Bros. Donut, Inc., 190 B.R. 26 (Bankr. D.N.J. 1995). There the court held (in a case where a debtor's leases had been terminated for default and writs of possession had been issued pre-petition) that even if under § 541(b)(2) an involuntarily terminated lease is property of the estate, it is non-assumable under 11 U.S.C. § 365(c)(3); and the court granted the landlord relief from the automatic stay to permit it to regain possession. It must be emphasized however that Egyptian Brothers, even if correctly decided, is distinguished from the present case by the fact that rights to possession had been adjudicated and writs of possession had been issued pre-petition. The decisive issue before the court was whether bankruptcy law would allow the debtor to avoid an otherwise valid termination and assume the lease.
A conclusion that Lens Lab's possessory interest in the Premises is outside the protection of the automatic stay would be inconsistent with the purposes underlying the automatic stay. "The automatic stay is one of the fundamental debtor protections provided by the bankruptcy laws. It gives the debtor a breathing spell from his creditors. It stops all collection efforts, all harassment, and all foreclosure actions. It permits the debtor to attempt a repayment or reorganization plan or simply to be relieved of the financial pressures that drove him into bankruptcy." Assoc. of St. Croix Condo. Owners v. St. Croix Hotel Corp., 682 F.2d 446, 448 (3d Cir. 1982). If Lens Lab's interest in the Premises could be covered by the stay only if Levin's purported termination of ESI's lease was ineffective, then determining the scope of stay might effectively compel the Debtor and ESI to engage in comprehensive litigation regarding their rights to the Premises (the very sort of litigation the stay is intended to postpone).
B. Applicability of the Stay to Proceedings against ESI
The fact that the state court's August 2002 Order was addressed directly to ESI rather than the Debtor Lens Lab does not mean that it could not be declared void by the Bankruptcy Court as a violation of the automatic stay. As the parties agree, Lens Lab's legal rights to the Premises are entirely derivative of ESI's; accordingly, the attempt to establish that ESI's lease had been effectively terminated necessarily represented a simultaneous attack on Lens Lab's rights. Although generally the automatic stay does not extend to claims against non-debtors, McCartney v. Integra Nat'l Bank North, 106 F.3d 506, 509-10 (3d Cir. 1997), its protection does reach such claims under "unusual circumstances" where "there is such identity between the debtor and the third-party defendant that the debtor may be said to be the real party defendant and that a judgment against the third-party defendant will in effect be a judgment or finding against the debtor." Id. at 510 (citing A.H. Robins Co., Inc. v. Piccinin, 788 F.2d 994, 999 (4th Cir. 1986)). A case such as this, where a judgment against a prime tenant would necessarily operate to terminate the rights of a debtor/subtenant, clearly presents such unusual circumstances.See 48th Street Steakhouse, 835 F.2d 427.
Because the state court's proceedings with respect to ESI's rights to the Premises were part of an effort to obtain possession of property of the estate, those proceedings were automatically stayed under § 362 when Lens Lab filed for bankruptcy. There is no merit to Levin's contention that Lens Lab or ESI was required to seek a separate injunction under § 105 in order to bring the state court's adjudication of ESI's rights within the scope of the automatic stay. The stay is by the terms of the statute automatic. In some cases, where a stay is sought of proceedings against a non-debtor that do not so directly and inherently seek property of the estate, a better argument might be made that a separate injunction is necessary. But where, as here, an action against a non-debtor is in itself an attempt to obtain property of the estate, there can be no such requirement.
Even where property of the estate is not sought directly, it is not clear that a separate injunction would be required. InMcCartney, 106 F.3d 506, for example, the Court of Appeals determined that a creditor had been prevented from pursuing a deficiency judgment against a non-debtor by the automatic stay because the deficiency judgment action would have required the participation of the debtor. There is no indication in the Court of Appeals opinion that a separate injunction under § 105 was in place, and it therefore appears that the Court regarded the operation of the stay as automatic.
III. The Appeal from the February 27, 2003 Order (03-1391)
Levin offers two main arguments in its appeal from the February 27 Order. First, it contends that the Bankruptcy Court lacked jurisdiction to declare void the state court's September 2002 Order. Second (in an argument that partially resembles one phase of its attack on the January 31 Order), Levin argues that the state court did not violate the automatic stay by awarding damages to Levin in the September 2002 Order, and that that Order was accordingly not void ab initio.
Neither of Levin's arguments has merit. First, the motion by ESI and Lens Lab for a declaration that the state court's September 2002 Order violated the automatic stay was within the core jurisdiction of the Bankruptcy Court as defined by 28 U.S.C. § 157. The Court of Appeals has held that "a proceeding is core under section 157 if it invokes a substantive right provided by title 11 or if it is a proceeding that, by its nature, could arise only in the context of a bankruptcy case." In re Marcus Hook Dev. Park Inc., 943 F.2d 261, 267 (3d Cir. 1991). By seeking a declaration that the September 2002 order was void ab initio as a violation of the automatic stay, ESI and Debtor Lens Lab (when it joined ESI's motion) asserted a right provided by Title 11, and their motion could clearly not have arisen outside the context of a bankruptcy case. Levin's jurisdictional argument appears to confuse the Bankruptcy Court's jurisdiction to adjudicate the underlying dispute between Levin and ESI with its jurisdiction to decide the scope of the automatic stay. The former may be open to question; the latter quite clearly is not. Levin also suggests that because the state court had concurrent jurisdiction to decide whether the stay barred consideration of Levin's claims, its decision to proceed somehow precluded the Bankruptcy Court from determining that the September 2002 order was void ab initio. This argument is directly refuted by Raymark Industries, Inc. v. Lai, 973 F.2d 1125, 1131-32 (3d Cir. 1992), in which the Court of Appeals held that principles of finality do not prevent a bankruptcy court from declaring that judicial actions taken in violation of the automatic stay are void ab initio.
Levin's attack on the merits of the Bankruptcy Court's decision (its argument that the state court's damages award to ESI was not a violation of the stay) is also unpersuasive. Levin contends that because the September 2002 Order awarded only damages to Levin (to be paid by ESI), it did not reach property of the estate and therefore was not a violation of the stay. This argument, though superficially appealing, ignores the fact that the Damages Award in large part relies upon and necessarily incorporates the state court's prior determination that Levin's termination of ESI's lease was effective. A portion of the damages awarded are for wrongful holdover on the Premises by ESI. Because such damages could not possibly be awarded without a determination that the lease was effectively terminated (and therefore that ESI and Lens Lab had no rights under their leases to remain on the Premises), the state court violated the automatic stay when it proceeded with an adjudication of Levin's damages claim. To hold otherwise would substantially deprive the automatic stay of any effect in this case. As the discussion above with respect to the 1082 Appeal shows, the automatic stay prevents a landlord in Levin's position from obtaining an adjudication of a tenant's rights to premises where such an adjudication would also determine the rights of a debtor/subtenant. Such a rule would have little effect if a landlord could circumvent it in any case where it sought damages as well as possession from its primary tenant. Because the proceedings from which the state court's Damages Award emerged represented an attempt to obtain property of the estate, the Damages Award was void as a violation of the automatic stay.
Levin argues (as it does in the 1082 Appeal) that the Damages Award could not be void because the state court proceedings had not been stayed specifically by injunction under § 105. Here again, however, because the Damages Award incorporated a determination of rights to property of the estate for the purposes of § 362, it was subject to the automatic stay and accordingly void even in the absence of any resort to § 105.