In re Circle 10 Rest., LLC

519 B.R. 95

In re: Circle 10 Restaurant, LLC, Debtor.

Case No.: 13–14820RG

United States Bankruptcy Court, D. New Jersey.

Signed November 7, 2014

Rabinowitz, Lubetkin & Tully, LLC, By: John J. Harmon, Esq., 293 Eisenhower Parkway, Suite 100, Livingston, NJ 0039, Counsel to Jay L. Lubetkin, Chapter 7 Trustee.

Riker, Danzig, Scherer, Hyland & Perretti, LLP, By: Joseph L. Schwartz, Esq., Kevin J. Larner, Esq., Headquarters Plaza, One Speedwell Avenue, Morristown, NJ 07962, Attorney(s) for RELM, LLC.

Office of New Jersey Attorney General, By: Jennifer M. Huege, Esq., Deputy Attorney

General of the State of New Jersey, 140 East Front Street, P.O. Box 087, Trenton, NJ 08625–0087, Attorney(s) for New Jersey Division of Alcoholic Beverage Control.

Office of New Jersey Attorney General, By: Heather Lynn Anderson, Esq., Jonathan B. Peitz, Esq., Deputy Attorney General of the State of New Jersey, R.J. Hughes Justice Complex, 25 Market Street, P.O. Box 106, Trenton, NJ 08625, Attorney(s) for New Jersey Division of Taxation.

Connell Foley LLP, By: Stephen V. Falanga, Esq., Philip W. Allogramento III, Esq., 85 Livingston Avenue, Roseland, NJ 008, Attorney(s) for Creditor, Lim Chew Corp.

OPINION

ROSEMARY GAMBARDELLA, BANKRUPTCY JUDGE

Matter Before the Court

Before the Court is Trustee's Motion to Reclassify Alleged Secured Claim of RELM, LLC to a general unsecured claim.¹ A hearing was conducted on May 22, 2014. The following constitutes this Court's findings of fact and conclusions of law.

Statement of Facts and Procedural Background

1. Factual Background

Prior to its bankruptcy filing Debtor had operated a restaurant under the name Margarita's in Livingston, New Jersey. Motion to Reclassify, at 3. On May 23, 2012, Debtor and its principles, Matthew Stadtmauer and Neal Erman, executed a Loan Agreement, Time Note and Unlimited Guaranty, with Northern Bank and Trust Company (“Northern Bank”) for a $375,000 loan. See id. On the same day, Debtor entered into a Loan and Security Agreement with Northern Bank which granted Northern Bank a security interest in all of Debtor's rights to all of its personal property, present and after-acquired, explicitly including accounts, chattel paper, goods, inventory, equipment, instruments, documents, and general intangibles. See id. On May 22, 2013, Northern Bank assigned to RELM, LLC (“RELM”) all its rights and obligations in the loan note, guaranty, and security agreement.Id. On June 13, 2013, RELM filed a proof of claim, # 22, in the amount of $378,779.59, asserting a secured claim based on its rights as Northern Bank's assignee. Id.

2. Procedural Background

On March 8, 2013, Debtor filed a voluntary petition for relief under chapter 7 of the Bankruptcy Code. On March 11, 2013, Jay L. Lubetkin was appointed as Chapter 7 Trustee by the Office of the United States Trustee. ECF # 4.

On April 11, 2013, the Trustee filed a Motion for an Order approving bidding and sale noticing procedures and scheduling a hearing on the sale of Debtor's Class C retail plenary consumption liquor license (the “Liquor License”) to Onyx Equities III, LLC (“Onyx”) for $500,000 free and clear of all liens and encumbrances, subject to a higher and better offer (the “Sale Motion”). See ECF # 18, at 1.

On April 17, 2013, Debtor's former landlord and present creditor Lim Chew Corp. (“Lim Chew”) filed an Objection to the Sale Motion (“First Objection”) on the grounds that the proposed break-up fee and overbid requirements were unreasonable and impermissible, Trustee's request that all offers remain open and irrevocable until entry of an approval order was unreasonable, and the identity of the proposed purchaser should be disclosed prior to this Court's approval of bid procedures. See ECF # 25, at 1–2.

This Court held a hearing on the Sale Motion and Lim Chew's Objection on April 18, 2013.

On April 28, 2013, this Court entered an Amended Order Approving Bidding Procedures, Approving Sale Noticing Procedures, and Scheduling Subsequent Hearing to consider the Sale of the Debtor's Liquor License. ECF # 28.

On May 16, 2013, Lim Chew filed an Objection to Trustee's Motion to Sell Debtor's Liquor License (“Second Objection”), arguing inter alia that Trustee lacked authority to sell the Liquor License free and clear of Lim Chew's rights under its pre-petition agreement, to wit, the Lease, Promissory Note and Right of First Refusal dated October 20, 2010. See ECF # 33, at 2.

On May 20, 2013 Trustee filed a Response to Lim Chew's Second Objection, asserting that Debtor held absolute, unfettered title to the Liquor License; therefore, Trustee may sell the Liquor License free and clear of Lim Chew's rights under the agreement. See ECF # 35, at 1–2. Further, Trustee argued that Lim Chew's right of first refusal under the agreement was an executory contract that could be rejected by Trustee or alternatively rejection of the right of the Integrated Lease Agreement, the Right of First Refusal Agreement and other agreements arising out of the October 20, 2010 transactions between the Debtor and Landlord. See id. at 2–3.

On the same date, Trustee filed a separate Motion for an Order Confirming Rejection by operation of law of Lim Chew's Right of First Refusal Agreement by operation of law, sixty days after the commencement of the Debtor's case. Alternatively, the Trustee argued that to the extent the Right of First Refusal is part of the Lease as an integrated component of the October 20, 2010 transactions between the Debtor and the Landlord, it may be rejected by the Trustee pursuant to 11 U.S.C. § 365(d)(1). ECF # 46. Numerous filings followed.

On May 21, 2010 Onyx Equities III LLC, the stalking horse bidder, filed a response to the Landlord's objection to the sale, asserting that the Liquor License could be sold to the highest bidder free and clear of the rejected Right of First Refusal. On May 23 and 24, 2013, this Court held the auction for sale of the Liquor License.

On June 27, 2013, the Trustee filed a Notice of Motion for Order Approving Settlement between Trustee and Lim Chew respecting Lim Chew's objection to Trustee's proposed sale of the Liquor License to Onyx. See ECF # 61.

In the Motion to Approve Settlement the Trustee sets forth:

In connection with the Debtor's execution of the Lease Agreement, it also executed a Right of First Refusal Agreement by which it granted the Landlord the right of first refusal to purchase the Liquor License for a sum of $100,000, plus the principals payments paid as of such time by the Debtor on account of a $500,000 promissory note executed in favor of the Landlord arising out of the Debtor's purchase of the Liquor License from it. According to the Landlord, the purchase price under the right of first refusal would be $135,000.

The Liquor License was independently appraised at the request of the Trustee by A. Atkins Appraisal Corp. for $400,000.

By prior Application to the Court, the Chapter 7 Trustee sought Bankruptcy Court approval of the sale of the Liquor License to Onyx Equities III, LLC (“Onyx”) for a purchase price of $500,000. Pursuant to bidding procedures approved by the Court, an auction for the purchase of the Liquor License premised upon Onyx's stalking horse bid took place before the Court and ultimately, Onyx submitted the highest and best offer of $835,000 for the purchase of the Liquor License.

Subsequently, the Court entered an Order confirming Onyx's compliance with In re Abbotts Dairies of Pennsylvania, Inc ., 788 F.2d 143 (3d Cir.1986).

At all times from and after the filing of the Trustee's Application for the sale of the Liquor License, the Landlord objected to the sale of the Liquor License, asserting, inter alia : (i) that pursuant to the Right of First Refusal Agreement, it was entitled to purchase the Liquor License for $135,000; (ii) that the Right of First Refusal Agreement was not an executory contract which could be rejected; and (iii) that even if the Right of First Refusal Agreement constituted an executory contract either rejected by operation of law or intended to be rejected by the Trustee as part of the Lease Agreement pursuant to an independent rejection Motion filed by the Trustee, the Landlord was nonetheless entitled to specific performance under the Right of First Refusal Agreement. See Settlement Motion at ¶¶ 5–9.

On July 9, 2013, Neal Erman, a principal of Debtor, filed a Limited Objection to the Motion for Order Approving Settlement objecting to the Landlord's reservation of rights with respect to any and all claims it may hold against the Debtor's members. requesting that Lim Chew be forever barred from bringing any action against Debtor's members including Mr. Erman. See ECF # 67, at 3.

On July 12, 2013, after a hearing held on July 11, 2013, this Court entered an Order Approving Settlement, Authorizing Sale of Liquor License, and for Other Related Relief. ECF # 69.

On July 26, 2013, this Court entered an Amended Order Approving Settlement, Authorizing Sale of Liquor License, and for Other Related Relief. ECF # 71. Among other things, it ordered:

[T]hat the Trustee is authorized and directed to take all actions and execute all documents which may be necessary and appropriate to effectuate the sale of the Debtor's Liquor License to [Livingston Town Center Liquor License, LLC, assignee of Onyx rights under the April 8, 2013 asset purchase agreement] for the sum of $835,000, free and clear of restrictions, special conditions or limitations, all vendors charges, violations, restrictions, liens, liquor bills, claims, interests, and encumbrances (collectively, the “Encumbrances”), such Encumbrances to attach to the proceeds of sale, excepting from any such encumbrances a $62,500 portion of the proceeds [....]

[T]hat the transfer of the Liquor License to LTC shall be free and clear of all Encumbrances;

[T]hat the Lease Agreement between the Debtor and Landlord is hereby rejected;

[T]hat the Right of First Refusal Agreement between the Debtor and the Landlord is deemed rejected;

[T]hat

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