S. MARTIN TEEL, Jr., Bankruptcy Judge.
This is the court's decision estimating the claim of MR 619 H Street Capital LLC ("MR 619") for purposes of voting on the most recent plan of reorganization filed by the debtor, Cheng & Company, L.L.C. ("Debtor").
MR 619 filed a proof of claim in this case asserting a secured claim in the amount of $1,378,245.22 for "Money Loaned under Note and Deed of Trust." The Debtor has objected to that claim. The Debtor's objection asserts that the Debtor is entitled to rescind the deed of trust securing MR 619's claim and to recover damages suffered by the Debtor as a result of the breach of certain obligations, which damages are a complete offset to the amounts owed to MR 619. The parties have agreed to the lifting of the automatic stay of 11 U.S.C. § 362(a) so that the Superior Court may proceed in litigation pending there to determine the merits of the Debtor's claims against MR 619 and other entities not before this court.
MR 619 requested pursuant to Bankruptcy Rule 3018(a) that its claim be temporarily allowed for the purpose of voting on the Debtor's First Amended Plan of Reorganization, as Modified (July 20, 2015) (Dkt. No. 68) ("Plan"). The court issued a scheduling order (Dkt. No. 83) for a hearing to be held for the purpose of estimating MR 619's claim. Prior to the issuance of that scheduling order, the Debtor sought to amend its objection to MR 619's claim to include all of the grounds asserted in the Second Amended Complaint
Pursuant to Bankruptcy Rule 3018(a), a bankruptcy judge after notice and hearing "may temporarily allow the claim or interest [of a creditor] in an amount which the court deems proper for the purpose of accepting or rejecting a plan." Fed. R. Bankr. P. 3018(a). The policy behind temporarily allowing claims is to prevent possible abuse by plan proponents who might ensure acceptance of a plan by filing last minute objections to the claims of dissenting creditors. See Stone Hedge Properties v. Phoenix Capital Corp. (In re Stone Hedge Properties), 191 B.R. 59, 63 (Bankr. M.D. Pa. 1995); see also 9 Collier on Bankruptcy ¶ 3018.01[5] (Alan N. Resnick & Henry J. Sommer eds. 16th ed.). "Neither the [Bankruptcy] Code nor the [Bankruptcy] Rules prescribe any method for estimating a claim [for voting purposes], and it is therefore committed to the reasonable discretion of the court, . . . which should employ whatever method is best suited to the circumstances of the case." In re Ralph Lauren Womenswear, Inc., 197 B.R. 771, 775 (Bankr. S.D. N.Y. 1996) (citation omitted). The Ralph Lauren Court continued:
In re Ralph Lauren Womenswear, Inc., 197 B.R. at 775.
What complicates the matter is that the Agreement also addressed a separate sale of property known as the Eye Street Property by its owners (the "Eye Street Sellers") (collectively, 614 Eye Street L.L.C., Anthony Chun Yuk Cheng, and Yun-Li Cheng) to a purchaser (the "Eye Street Purchaser") (ACY and YL Cheng LLC). However, the Agreement made clear the H Street Property sale and the Eye Street Property sale were independent of each other. First, the Debtor does not dispute that the H Street Purchaser (MR 619) and the Eye Street Purchaser are separate legal entities. Second, the Agreement recited at page 1:
Third, and importantly, the opening paragraph of the Agreement, after listing the Eye Street Purchaser, the H Street Purchaser, the Eye Street Seller, and the H Street Seller as the parties, provided:
(Emphasis (bold and italics) in original.) The parties did not intend that the sale of one Property was to be dependent upon whether a sale of the other Property closed. The Eye Street Property sale closed shortly after execution of the Agreement. The sale of the H Street Property awaited timely satisfaction of the H Street Acquisition Requirements.
The Debtor's Second Amended Complaint attempts to hold MR 619 liable for an obligation under the Agreement, after the development of the Eye Street Property was completed, to convey space known as the Eye Street Retail Unit (carved out of the improved Eye Street Property) to the Eye Street Seller. (The Eye Street Seller has assigned its rights in that regard to the Debtor). For reasons discussed below, that was an obligation of the Eye Street Purchaser, not MR 619 as the H Street Purchaser.
The term "Developer" in § 12.19.1 was unambiguous in meaning only the Eye Street Purchaser. Section 12.19.1 of the Agreement provides that:
(Emphasis in original.) Contrary to the Debtor's argument, the term "Developer" as used in that provision does not include MR 619. The Agreement is not ambiguous in that regard because the Agreement is, in context, not fairly susceptible of the interpretation the Debtor urges, for the following three reasons.
First, only the Eye Street Purchaser would have been able to convey the Eye Street Retail Unit as required by § 12.19.1. The Agreement did not contemplate that MR 619 (the H Street Purchaser) would acquire the Eye Street Property and be in a position to convey it to the Eye Street Seller. The H Street Purchaser was not acquiring the Eye Street Property out of which, after development was to be completed, the Eye Street Retail Unit was to be carved out and conveyed to the Eye Street Seller. Indeed, MR 619 has acquired no property pursuant to the Agreement. It made sense in § 12.19.1 to refer to the Purchaser as the Developer because it was only after the Eye Street Property was developed that the Eye Street Retail Unit was to be conveyed to the Eye Street Seller. Elsewhere, the Agreement referred to the "Purchaser" conveying the Eye Street Retail Unit to the Eye Street Seller:
The term "
(Emphasis in original.) The term "Purchaser Affiliate" is defined under § 12.4 of the Agreement, page 79, as follows:
(Emphasis in original.) I agree with MR 619 that:
Memorandum of Law of MR 619 H Street Capital LLC in Connection with Rule 3018 Hearing, at 10 (Dkt. No. 110).
Second, although the term "Project" (as defined at page 15 of the Agreement) can be read as including both Properties, MR 619 was created only to purchase the H Street Property and is not acquiring that Property or any other Property, and thus it (1) was not acquiring title to the Eye Street Property, and (2) had nothing to do with the development of the Eye Street Property, and thus is not a Developer with respect to the Eye Street Property. And, as discussed above, that is reinforced by § 12.19.1 which contemplates that the developer obligation regarding the Eye Street Retail Unit is to convey title by special warranty deed, something that only the Eye Street Purchaser could accomplish. To elaborate, interpreting the Agreement otherwise would be contrary to the opening provisions of the Agreement that:
(Emphasis added.) By its nature, the obligation to convey the Eye Street Retail Unit was an obligation applicable to the Eye Street Purchaser, and was not an obligation applicable to the H Street Purchaser who would not have the necessary title to convey the Eye Street Retail Unit to the Eye Street Seller. Certainly, the Agreement did not
Third, the definition of "Developer" requires that an entity "develops the Project in accordance with this Agreement" in order to be a Developer. MR 619 is not included in the definition of "Developer" as a Purchaser, or otherwise, because it does not and will not own any property which comprises Purchaser's Assemblage and because it is not developing and will not develop the Project in accordance with the Agreement.
Even if the Agreement were ambiguous as to the meaning of the term "Developer," which it is not, the background to this provision indicates that the term "Developer" should be interpreted in § 12.19.1 as not meaning MR 619 but only meaning the Eye Street Purchaser. Mark Tenenbaum, the attorney who was negotiating the drafting of the Agreement on behalf of Debtor never conveyed to his counterparts on the other side that he intended the definition of "Developer" to mean both Purchasers regardless of the particular part of the Agreement being interpreted. That is to say, Mr. Tenenbaum never told his counterparts on the other side that he meant the term "Developer" to make MR 619 liable for the obligations of the Eye Street Seller. In addition, the discussions that were held demonstrate that the reference to "Purchaser Affiliates" in the definition of Developer was intended to assure that whoever ended up with title to the properties within one of the two Purchasers' Assemblages would be on the hook to comply with the obligations relating to that Assemblage.
Finally, even if MR 619 had an obligation to convey the Eye Street Property, which it does not, that obligation was terminated. Section 2.2.3(e)(ii)(D) makes clear that upon MR 619's exercising its right to cancel the H Street purchase, all of its obligations under the Agreement were terminated. The Debtor does not dispute that MR 619 was entitled under § 2.2.4(c) to terminate the Agreement because the H Street Acquisition Requirements had not been met timely, in which case § 2.2.3(e) would apply. Under § 2.2.3(e)(ii)(D), such a termination of the Agreement:
This was reinforced by § 2.2.3(e)(iv), which provided:
Accordingly, even if MR 619 could be viewed as a Developer obligated to convey the Eye Street Retail Unit, the provisions of § 2.2.3(e) make clear that MR 619 (as the H Street Purchaser) no longer had any such obligation upon its rightfully invoking a termination under § 2.2.4(c).
In the Second Amended Complaint, the Debtor also asserts that it has been damaged due to the breach of a promise under the Agreement to provide parking spaces, specifically alleging that "the PSA also promised the Seller that it would have the right to park in the new garage that would be constructed as part of the Eye Street Improvements." Second Amended Complaint, at 41, ¶ 160. Plainly it was the Eye Street Purchaser that was obligated under that provision of the Agreement, as it was to be the owner of the Eye Street Improvements.
In the Second Amended Complaint, the Debtor asserts that by sending the Notice of Termination also signed by the Eye Street Purchaser, MR 619 violated the right of Debtor to receive the Eye Street Retail Unit. Second Amended Complaint, at 40-41, ¶¶ 156-57. This is the same argument raised by the Debtor during the hearing of July 29, 2015, that was "rejected" by this Court during the hearing and in its order of July 30, 2015. See Order re Objection to Claim of MR 619 H Street Capital, LLC, at 2 (Dkt. No. 62) ("The debtor argues that by joining in the [Notice of Termination] submitted collectively by the Eye Street Purchaser and itself as the Purchaser, MR 619 should be viewed as engaging in the breach of the Purchase and Sale Agreement by the Eye Street Purchaser. I rejected that argument.") (italics in original). MR 619 was not obligated to convey the Eye Street Retail Unit to the Eye Street Seller. Accordingly, any contractual breach by way of a letter stating that the obligation to convey that unit was terminated could only be committed by the Eye Street Purchaser.
In the Second Amended Complaint, the Debtor asserts that the H Street Deposit Note "incorporated the terms and conditions of the PSA and was expressly subject to the terms and conditions of the PSA." Second Amended Complaint, at 32, ¶ 118. Based on the alleged "material breach of the PSA by Purchaser", Debtor asserts that it has the right to rescind the Agreement and terminate its obligations under the H Street Deposit Note. Second Amended Complaint, at 47, ¶ 189. The H Street Deposit Note is the basis of the Claim and a copy of the note is attached to MR 619's proof of claim. The Debtor's premise that the H Street Deposit Note incorporated the terms and conditions of the Agreement is incorrect. Only the "applicable terms" of the Agreement are deemed to be incorporated in the H Street Deposit Note, not all of the terms and conditions of the Agreement. Further, the Agreement clearly provides that the Debtor remains liable to pay the outstanding principal and all accrued interest under the H Street Deposit Note notwithstanding the termination of the Agreement. PSA, at § 2.2.3(f)(iv). Moreover, for the reasons stated herein, MR 619 has not breached the Agreement as is alleged by Debtor in the Second Amended Complaint.
Finally, the Debtor attempts to hold MR 619 liable on a tort theory. Its Second Amended Complaint alleges on page 55:
The probable outcome in the jury trial in the Superior Court is that the Debtor will not be able to demonstrate that MR 619 committed a tort and, even if it did, that any substantial damages would be awarded.
It is doubtful that a jury would conclude that MR 619 intentionally misled Mr. Tenenbaum on this aspect of the Agreement. Section 2.2.4(c)(i) of the Agreement allows the H Street Purchaser not to purchase the H Street Property due to the failure to achieve the H Street Acquisition Requirements, which provision incorporates by reference § 2.2.3(e)(ii), page 13 of the Agreement. Subpart (C) of § 2.2.3(e)(ii) stated that:
On December 16, 2012, Eugene Tibbs, the attorney for MR 619 and the Eye Street Purchaser, sent a revised redline version of the purchase and sale agreement to Mr. Tenenbaum, and among the many proposed changes in the document was a short phrase added by Mr. Tibbs to the end of subpart (C) of § 2.2.3(e)(ii) which read "in which case, all of Seller's rights in the Property shall be extinguished, and Purchaser shall be free to develop the Property without providing the Condominium Properties to Seller." Mr. Tibbs had added this additional phrase to a section of the Agreement which dealt exclusively with the rights and obligations of the H Street Seller and H Street Purchaser with respect to the H Street Property.
The obvious purpose of this additional phrase was to clarify that, should the H Street Purchaser end up acquiring the H Street Property through a foreclosure sale after termination of its obligation to purchase the H Street Property, the H Street Purchaser would not have a continuing obligation to convey to the H Street Seller the so-called H Street Retail Unit and H Street Basement Unit that were to be built as part of the H Street Improvements. However, the specific language proposed by Mr. Tibbs incorrectly stated that upon a default "all of the Seller's rights in the Property shall be extinguished." This was an incorrect statement as a matter of law in that the exercise of the rights to foreclose under the H Street Mortgage did not immediately extinguish at that time all of the Debtor's rights in the H Street Property. Rather, upon a default the Debtor would still retain fee simple ownership of the H Street Property, along with whatever rights and protections it had under the H Street Mortgage, until such time as the foreclosure process was completed and legal title to the H Street Property was conveyed to a third party as a result of the foreclosure sale.
Upon receipt of the December 16, 2012, draft of the Agreement from Mr. Tibbs, Mr. Tenenbaum had a phone call with Mr. Tibbs and pointed out this problem with his proposed language. In order to make the phrase consistent with the intended purpose of the change and applicable law, Mr. Tenenbaum proposed alternative language in lieu of the phrase suggested by Mr. Tibbs, which read as follows:
Mr. Tenenbaum discussed the changes to § 2.2.3(e) with Mr. Tibbs at the time the December 16 and December 18, 2012, drafts were exchanged. During that discussion, they did not discuss the meaning of "Condominium Properties." Mr. Tenenbaum did not believe it was necessary to clarify that it referred solely to the H Street Retail Unit and the H Street Basement Unit because he thought it was obvious that the whole section applied only to the H Street transaction. Mr. Tibbs also did not recall discussing this particular issue with Mr. Tenenbaum but his belief (both then and now) was that "Condominium Properties" would encompass both (1) the H Street Retail Unit and the H Street Basement Unit and (2) the Eye Street Retail Unit.
Both attorneys were under great pressure to quickly finish the drafting of the contract and only were discussing particular language if one of them thought there was a problem. There is no evidence to suggest that Mr. Tibbs or MR 619 intended to hide their interpretation of this clause from Mr. Tenenbaum and the Debtor, and indeed Mr. Tibbs's demeanor and testimony at the hearing indicated that he would not be the kind of person to engage in such chicanery. To the extent that Mr. Tenenbaum's addition of part (D) to § 2.2.3(e)(ii) benefitted MR 619, he is the one who drafted it, and MR 619 had no obligation to inform him that this provision would permit termination of the entire Agreement if the Agreement did indeed support such an interpretation.
Even if a jury found that the Debtor was intentionally misled, little or no damages would likely be awarded against MR 619 based on this tort theory. The jury would likely conclude that, when MR 619 tendered its notice of termination, there was no termination of the obligation of the Eye Street Purchaser to convey to the Eye Street Seller the Eye Street Retail Unit. Like the rest of the Agreement, and as contemplated by the opening paragraph of the Agreement, the provisions that MR 619 argues resulted in a termination of the obligation to convey the Eye Street Retail Unit must be read in context, and when read in context they do not support MR 619's argument:
Because the Eye Street Seller's right (now held by the Debtor) to receive the Eye Street Retail Unit would remain in place, the Debtor would be entitled to recover any damages for a breach of that Agreement. Therefore, the jury would not likely find it necessary to award damages under a tort theory other than, perhaps, attorney's fees incurred fighting against an interpretation of the Agreement that treated the entire Agreement terminated.
In any event, even if MR 619 could be held liable on this tort theory, the Debtor failed to quantify the amount of such attorney's fees, and a jury would have a difficult time allocating the attorney's fees in the parties' litigation between attorney time spent litigating contract issues versus attorney time litigating any damages arising from failure of MR 619 and the Eye Street Purchaser to disclose that they viewed § 2.2.3(e)(ii)(D) as permitting termination of the obligation of the Eye Street Purchaser to convey the Eye Street Retail Unit.
In light of the Agreement's true contextual meaning, the tort theory does not work at all. The Debtor relied upon what is the correct interpretation of the Agreement insofar as whether the Eye Street Purchaser's obligation to convey the Eye Street Retail Unit survived MR 619's termination of MR 619's obligations under the Agreement.
Assume that MR 619 and the Eye Street Purchaser knew that the Eye Street Seller held the view that an invocation by MR 619 of § 2.2.3(e)(ii)(D) would not terminate the Eye Street Purchaser's obligation to convey the Eye Street Retail Unit to the Eye Street Seller. Their failure to disclose their contrary view of the effect of § 2.2.3(e)(ii)(D) would have had adverse consequences only if their view was a correct view of what the Agreement, on its face, provided. In other words, concealing an erroneous view of what the Agreement provided caused no damage. Advancing now (and after the invocation of § 2.2.3(e)(ii)(D)) their erroneous view of the Agreement is meaningless as far as harming the Debtor is concerned because the Debtor's correct view of the Agreement will prevail. In that regard, MR 619 and the Eye Street Purchaser are free in litigation, within the advocacy limits imposed by Fed. R. Bankr. P. 9011 (or its Superior Court equivalent) to urge the court to adopt their erroneous interpretation, and the Debtor does not suggest, in this complicated contract interpretation dispute, that the arguments that MR 619 and the Eye Street Purchaser have advanced here and in the Superior Court do not conform to those advocacy limits.
Moreover, even if, hypothetically, the Agreement had contained a right to treat the obligation to convey the Eye Street Retail Unit as terminated if the H Street Purchaser invoked § 2.2.3(e)(ii), that obligation was the Eye Street Purchaser's obligation. It is only the Eye Street Purchaser who has standing to take the position that the obligation was terminated. If the Eye Street Purchaser declined to take the position that its obligation was terminated, it would not matter that the H Street Purchaser maintained that the obligation was terminated. So it is the Eye Street Purchaser who has engaged in conduct regarding the interpretation of § 2.2.3(e)(ii)(D) that has allegedly caused the Debtor harm. Stated differently, it was the Eye Street Purchaser that had a duty to deal fairly with the Eye Street Seller in not concealing its belief that the Agreement permitted it to treat the obligation as terminated upon the H Street Purchaser's invocation of § 2.2.3(e)(ii), if it understood that the Eye Street Seller was under the erroneous belief to the contrary. So any tort of concealing the belief that it, the Eye Street Purchaser, had such a right lies at the door of the Eye Street Purchaser, not the H Street Purchaser.
An appropriate order follows.
