Opinion
No. 04 Civ. 2318 (DLC).
August 27, 2004
Jeremy J.O. Harwood, Brian S. Tretter, Healy Baillie, LLP, New York, New York, for Appellant.
Paul N. Silverstein, Andrews Kurth LLP, New York, New York, for Appellee.
OPINION AND ORDER
Cibro Petroleum Products, Inc. ("Cibro") operates a refinery on property leased from the Port of Albany. After filing for bankruptcy, Cibro did not assume or reject the leases as required by the Bankruptcy Code, and has not yet been compelled to do so by the Bankruptcy Court. Despite the unresolved status of the leases, Cibro has continued to conduct business on the premises. The dispute at issue in this appeal arises from the recent permission granted by Bankruptcy Court to Cibro to enter into a long-term contract to provide "terminaling services" from the leased property, including storage services, to CSX Transportation, Inc. ("CSX" and "CSX Agreement"). Appellant Albany Port District Commission ("APDC"), from whom Cibro had leased the property, has objected to Cibro entering into this contract, contending that the contract is an illegal assignment of a lease. It appeals the Bankruptcy Court's December 22, 2003 order (the "December 22 Order") permitting Cibro to enter into the CSX Agreement, and rejecting what APDC characterizes as its cross-motion. The cross-motion had requested that the Bankruptcy Court deny approval of a second terminaling agreement, to wit, Cibro's agreement with Citgo Asphalt Refining Co. ("Citgo" and "Citgo Agreement"). For the following reasons, the December 22 Order is affirmed.
Background
The factual and procedural history of the dispute between Cibro and APDC has been outlined in several prior opinions. See, e.g., 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); In re Winimo Realty Corp., No. 97 Civ. 9307 (JSR), 1998 WL 872500 (S.D.N.Y. Dec. 15, 1998). The following background information is relevant to the instant appeal.
Cibro is a company engaged in refining, marketing, transporting, and distributing asphalt and petroleum products. APDC is a public corporation created by the State of New York in 1925, that facilitates trade and economic activities in the port districts of Albany and Rensselaer, New York. Cibro operates a refinery at the Port of Albany (the "Facility") on property leased by Cibro from APDC. Cibro filed for Chapter 11 relief on January 3, 1992, and remains in bankruptcy pending confirmation of a reorganization plan.
Cibro leased the Facility pursuant to three written leases executed in 1978 and 1979 (the "APDC Leases"). The APDC Leases cover approximately 33 acres of land at the Port of Albany. Among other things, the APDC Leases have renewable options through the year 2055 and are each, by their specific terms, freely assignable by Cibro as lessee without approval by APDC. Cibro was granted the right to operate its business and the Facility, and has the right to raze and remove any and all buildings, as well as to erect and install such buildings, improvements, additions, equipment, machinery, and other plant facilities it desired through 2005. Under the APDC Leases, any such structures erected by Cibro would remain Cibro's personal property. Article 2 of the APDC Leases provides for payment of taxes on the leased land and any property attached to the land The APDC Leases require that Cibro remain current on its tax-related obligations. In addition, the APDC Leases contain identical, broadly-worded arbitration provisions which read, in relevant part: "Any controversy or claim arising out of or relating to this lease or the breach thereof . . . shall be settled by arbitration. . . ."
In 1991, prior to Cibro filing for bankruptcy, Cibro, the City of Albany (the "City"), and the APDC entered into an "Agreement for Payment in Lieu of Taxes" (the "PILOT Agreement"). Under the PILOT Agreement, Cibro was to make payments to the comptroller of the City in lieu of city, county, and school taxes on Cibro's leaseholds at the Port of Albany. The PILOT Agreement makes specific reference to the APDC Leases. In or about 1994, Cibro discontinued making payments under the PILOT Agreement. APDC asserts that Cibro's failure to make the payments under the PILOT Agreement is a default of the APDC Leases. In a May 12, 1998 letter, the chairman of the APDC sent a notice of default to Cibro based on the non-payment of amounts due and owing under the PILOT Agreement.
Having filed for bankruptcy, Cibro was required to assume or reject the APDC Leases under 11 U.S.C. § 365(d)(4), no later than March 3, 1992. Cibro requested and received extensions of time from the Bankruptcy Court to make the decision whether to assume or reject the APDC Leases. Cibro argued that any decision on that matter would be premature because it needed time to formulate a plan of reorganization. As of today's date, Cibro has not been required to assume or reject the APDC Leases and Cibro continues to operate its business in the ordinary course as a debtor in possession.
11 U.S.C. § 365(d)(4) provides, in relevant part, that
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.Id.
After Cibro sold all of its assets located in the New York metropolitan area, and after four years of granting Cibro extensions, the APDC moved in April 1996, to compel Cibro to assume or reject the APDC Leases. In June 1996, Cibro filed an action against the City seeking a declaratory judgment that the PILOT Agreement was void and an accounting of all "payments in lieu of taxes" paid thereon (the "PILOT Proceeding"). In October 1997, APDC intervened in the PILOT Proceeding to assert counterclaims. On January 30, 1998, the Bankruptcy Court dismissed APDC's intervening complaint. In March 1998, the City and APDC filed an amended intervening answer with counterclaims. The City and APDC asserted that the payments called for by the PILOT Agreement are collateral obligations under the APDC Leases and that Cibro's failure to make these payments is a default of those leases.
On May 12, 1998, the City filed two proofs of claim against Cibro. The City seeks more than two million dollars purportedly owed under the PILOT Agreement or, alternatively, taxes owed by Cibro from January 1, 1995 to the present. A proof of claim was also filed by APDC, but was withdrawn on July 16, 1998, after APDC received the rental payments it sought.
In June 1998, Cibro filed a partial summary judgment motion requesting rulings that it did not breach the APDC Leases and it be permitted to assume the APDC Leases pursuant to Section 365 of the Bankruptcy Code. APDC cross-moved for a stay and an order compelling the arbitration of the PILOT Proceeding. The Bankruptcy Court refused on three occasions to compel arbitration of the PILOT Proceeding. On October 25, 2001, however, the Honorable Shira Scheindlin reversed the Bankruptcy Court's refusal to grant arbitration. See In re Winimo, 270 B.R. 108;In re Winimo, 270 B.R. 334.
In October 2003, Cibro entered into the CSX Agreement, which has a renewable five-year term and states that Cibro will, among other things, provide terminaling services to CSX. The terminaling services include storing fuel grade ethanol in the Facility, vessel loading or unloading, and exclusive use of Cibro's asphalt tanks for receiving and loading product. Pursuant to the terms of the CSX Agreement, on or about November 20, Cibro moved the Bankruptcy Court for an order authorizing it to enter into the CSX Agreement. On or about December 11, APDC opposed this motion and contends that it also cross-moved seeking, inter alia, an order prohibiting Cibro from entering into long-term contracts relating to the use of APDC's property by long-term terminaling, through-put agreements, or otherwise, including agreements both with CSX and with Citgo, pending a final decision, after appeal if any, as to whether Cibro is in default and may assume the APDC Leases in accordance with the pending American Arbitration Association ("AAA") arbitration of those issues.
Testimony and briefing in the arbitration were complete on May 12, 2004.
On December 22, the Bankruptcy Court approved the CSX Agreement and rejected what APDC's counsel described as its cross-motion with respect to the Citgo Agreement. The Bankruptcy Court found that the CSX Agreement was not an impermissible assignment of the APDC Leases. The December 22 Order states that
At a December 22 hearing, the Bankruptcy Court rejected APDC's cross-motion. The relevant portion of the hearing is as follows:
MR. HARWOOD [counsel for APDC]: I assume my cross-motion is denied?
THE COURT: For what?
HARWOOD: In respect of the [Citgo] agreement —
COURT: How can you cross-move if there's no Motion that's been made?
HARWOOD: He made a Motion.
SILVERSTEIN [counsel for Cibro]: Not on [Citgo].
HARWOOD: We crossed move [sic] with respect to —
COURT: You can't cross-motion, unless there's a Motion. Not only that, there's really no such thing as a cross-motion. You either oppose the Motion, or bring on your Motion with the Notice time being given so the parties can respond to it.
Although the Bankruptcy Court could have been more explicit, the transcript of the December 22 hearing reflects the Bankruptcy Court's finding that the CSX Agreement was not an illegal assignment of the APDC Leases.
MR. HARWOOD [counsel for APDC]: [The CSX and Citgo Agreements] essentially amount to a sublease. . . . If it looks like a duck, walks like a duck and quacks like a duck —
THE COURT: They're not assuming a contract under 365, they're entering into a new contract, which is a lot different than assuming a new contract —
HARWOOD: But they've not assumed the head contract, which they need to do in order to sublease or enter into a rental agreement —
COURT: But if they enter into a rental agreement, and you're successful in arbitration . . . it goes away; it is not binding on your client . . . They cannot give what they don't have.
HARWOOD: They're doing it now.
COURT: Right now, they have it; it's property of the estate at this point. It will not be property of the estate once you're successful in arbitration.
HARWOOD: They're entering into what amounts to two, one time, five year contracts, when they have not assumed the head lease.
COURT: They can't. It's in arbitration? [sic]
HARWOOD: Then therefore, they can't enter into a long term —
COURT: Oh, yes they can.
it appearing that due notice of the Motion has been given; and it appearing that the Debtors' entry into the Terminaling Agreement is necessary and in the best interests of the Debtors' estates; and after due deliberation and sufficient cause appearing therefor . . .
1. Pursuant to Sections 363(b)(1) and 1108 of the Bankruptcy Code [Cibro] is authorized to enter into the Terminaling Agreement and to take any action necessary to effectuate the Terminaling Agreement and to perform its obligations thereunder.
The December 22 Order is a final and appealable order. Appellate jurisdiction of the December 22 Order exists pursuant to 28 U.S.C. § 158(a)(1).
Subsequent to the filing of the instant appeal, on February 26, 2004, Cibro brought the Citgo Agreement for approval before the Bankruptcy Court. The Citgo Agreement was a renewal and extension of a long-standing ordinary course terminaling relationship existing between Cibro and Citgo, dating back to 1993. APDC objected to Cibro's motion for approval of the Citgo Agreement on the ground that the instant appeal divested the Bankruptcy Court of jurisdiction to consider the matter. On March 23, 2004, the Bankruptcy Court granted Cibro's motion, which is the subject of a separate appeal before the Honorable Miriam Goldman Cedarbaum, No. 04 Civ. 3628.
On July 29, a final AAA arbitration decision was issued (the "July 29 Award") finding, among other things, that the PILOT Agreement was invalid. The July 29 Award concluded that Cibro's failure to make payments under the PILOT Agreement and failure to pay real estate taxes for the 1999 through 2004 fiscal periods did not constitute a default under the APDC Leases. The July 29 Award also found that to the extent that there was a breach of the APDC Leases for failure to pay real estate taxes, such breach did not give rise to a default due to the failure to give adequate notice pursuant to the terms of the lease. The July 29 Award rejected the claims for payments under the PILOT Agreement but required Cibro to pay to the City certain real estate taxes and penalties and interest on such taxes. The July 29 Award stated that if Cibro did not pay the stated amounts within 60 days, the leases would be subject to termination pursuant to the terms of the leases.
Discussion
A district court "may affirm, modify, or reverse a bankruptcy judge's judgment, order, or decree." Rule 8013, Fed.R.Bankr.P. A district court must review the Bankruptcy Court's findings of fact for clear error and its legal conclusions de novo. In re Robert N. Kornfield, 164 F.3d 778, 783 (2d Cir. 1999).
The Bankruptcy Code provides that "[u]nless the court, on request of a party in interest and after notice and a hearing, orders otherwise, the trustee may operate the debtor's business." 11 U.S.C. § 1108. A trustee "may enter into transactions including the sale or lease of property of the estate, in the ordinary course of business, without notice or a hearing, andmay use property of the estate in the ordinary course of business without notice or a hearing." 11 U.S.C. § 363(c)(1) (emphasis supplied). "Property of the estate" includes all legal or equitable interests, including nonresidential leaseholds, of the debtor in property at the commencement of the case. 11 U.S.C. § 541. With respect to transactions outside the ordinary course of business, a trustee may use, sell, or lease property of the estate only after notice and a hearing. 11 U.S.C. § 363(b)(1).
The term "ordinary course of business generally has been accepted to embrace the reasonable expectations of interested parties of the nature of the transactions that the debtor would likely enter in the course of its normal, daily business." In re Lavigne, 114 F.3d 379, 384 (2d Cir. 1997) (citation omitted). Two tests are employed to determine whether a transaction is ordinary — "(1) the creditor's expectation test also known as the vertical test, and (2) the industry-wide test also called the horizontal test." Id. (citation omitted). Under this two-part test, "the touchstone of ordinariness is thus the interested parties' reasonable expectations of what transactions the debtor in possession is likely to enter in the course of its business."Id. at 384-85 (citation omitted). In connection with the vertical test, the court "views the disputed transaction from the vantage point of a hypothetical creditor and inquires whether the transaction subjects a creditor to economic risks of a nature different from those he accepted when he decided to enter into a contract with the debtor." Id. at 385 (citation omitted). The horizontal test involves "an industry-wide perspective in which the debtor's business is compared to other like businesses. In this comparison, the test is whether the postpetition transaction is of a type that other similar businesses would engage in as ordinary business." Id. (citation omitted).
In Chapter 11 cases, "the continued operation [of the debtor's business] is essential to the preservation of the going concern of the business." Collier on Bankruptcy (15th ed. 2003) ¶ 363.03, at 363-24. Courts have consistently found, and APDC does not dispute, that debtors in possession may in appropriate circumstances continue to operate their businesses on leased property even though they have not yet assumed the lease for that property. See, e.g., In re THW Enterprises, Inc., 89 B.R. 351, 355 (S.D.N.Y. 1988); In re Wedtech Corp., 72 B.R. 464, 472 (Bankr. S.D.N.Y. 1987).
A trustee can only assign an unexpired lease, however, if
(A) the trustee assumes such contract or lease in accordance with the provisions of this section; and (B) adequate assurance of future performance by the assignee of such contract or lease is provided, whether or not there has been a default in such contract or lease.11 U.S.C. § 365(f)(2) (emphasis supplied). An "assignment of lease" is defined as "[a]n assignment in which a lessee transfers the entire unexpected remainder of the lease term, as distinguished from a sublease transferring only a portion of the remaining term." Black's Law Dictionary 115 (7th ed. 1999). For the purposes of 11 U.S.C. § 365, "leases of real property shall include any rental agreement to use real property." 11 U.S.C. § 365(m). While a contract to use real property may constitute a lease, "[n]ot all uses of real property" necessarily constitute a lease under 11 U.S.C. § 365(m). Matter of Topco, Inc., 894 F.2d 727, 739 n. 17 (5th Cir. 1990); In re Harris Pine Mills, 862 F.2d 217, 219-20 (9th Cir. 1988). Whether a lease or a landlord tenant relationship has been created depends on the economic substance of the transaction, as governed by state law, not the Bankruptcy Code. See Topco, 894 F.2d at 739 n. 17; Harris, 862 F.2d at 220 n. 5. Assumption of an unexpired lease cannot occur if the debtor has defaulted on the lease unless
at the time of assumption of such contract or lease, the trustee —
(A) cures, or provides adequate assurance that the trustee will promptly cure, such default;
(B) compensates, or provides adequate assurance that the trustee will promptly compensate, a party other than the debtor to such contract or lease, for any actual pecuniary loss to such party resulting from such default; and
(C) provides adequate assurance of future performance under such contract or lease.11 U.S.C. § 365(b)(1).
The Bankruptcy Court acted well within the bounds of 11 U.S.C. § 363 when it authorized Cibro to enter into the CSX Agreement. Regardless of whether the CSX Agreement is considered part of Cibro's ordinary course of business, the parties do not dispute that Cibro is entitled to use its leased property in the conduct of its business after notice and a hearing, and that notice was given and a hearing was held.
APDC argues, however, that the Bankruptcy Court should have addressed the requirements of 11 U.S.C. § 365(f), and found the the Terminaling Agreement to be an improper assignment of the APDC Leases to CSX. APDC contends that because the CSX Agreement permits some of the contracted for terminaling activities to occur at the Facility, the CSX Agreement constitutes an assignment of the APDC Leases for the purposes of 11 U.S.C. § 365(f)(2). In support of this argument, APDC relies heavily on 11 U.S.C. § 365(m), which states that "leases of real property shall include any rental agreement to use real property." 11 U.S.C. § 365(m). APDC argues that until there is a final order stating that Cibro may still assume the APDC Leases and Cibro has cured all its alleged defaults under the APDC Leases, the CSX Agreement is an invalid assignment under 11 U.S.C. § 365(f)(2). APDC is incorrect.
APDC has not shown that the Bankruptcy Court erred in concluding that Cibro had not impermissibly assigned the APDC Leases when it entered into the CSX Agreement. The CSX Agreement does not transfer the entire unexpired remainder of a lease term or even a portion of a remaining term to CSX. In addition, APDC has not identified any governing state law which, when applied to the substance of the CSX transaction, should be construed to support its argument.
Moreover, APDC has not shown that it will suffer any prejudice as a result of the approval of the CSX Agreement. If the July 29 Award becomes a final order and Cibro assumes the APDC Leases, then it is undisputed that the CSX Agreement is valid. On the other hand, if the July 29 Award is not confirmed, and Cibro either cannot or does not assume the APDC Leases, then under the terms of the CSX Agreement and the December 22 Order, the CSX Agreement will be void. Paragraph 4 of the December 22 Order states that in the event that CSX or the Bankruptcy Court terminates the CSX Agreement, CSX and Cibro shall not be entitled to an administrative expense claim for damages. In addition, paragraph 5 of the December 22 Order states that should the APDC Leases be terminated, the Terminaling Agreement shall not be binding upon APDC, as lessor.
Cross-Motion
The Bankruptcy Court refused to address what APDC characterized as its cross-motion to prevent Cibro from entering into the Citgo Agreement. The appeal of this denial is moot. On March 24, 2004, the Bankruptcy Court approved the Citgo Agreement. That decision is on appeal before the Honorable Miriam Goldman Cedarbaum, and any concerns about the Citgo Agreement should be addressed in the context of that appeal. Conclusion
The Bankruptcy Court's December 22 Order is affirmed. The appeal is dismissed.
SO ORDERED.