In re Mallett Inc.

1

In re: Mallett, Inc., Debtor.

No. 21-11619 (JLG)

United States Bankruptcy Court, S.D. New York

December 22, 2023

NOT FOR PUBLICATION

Chapter 11

BACKENROTH FRANKEL & KRINSKY, LLP Counsel for Mallett Inc. By: Mark A. Frankel

ANSELL GRIMM & AARON, P.C. Counsel for 929 Madison Avenue, LLC By: Anthony J. D'Artiglio Joshua S. Bauchner

MEMORANDUM DECISION AND ORDER GRANTING THE DEBTOR'S LEASE REJECTION MOTION AND CLAIM REDUCTION MOTION

HON JAMES L. GARRITY, JR. U.S. BANKRUPTCY JUDGE

Introduction^[1]

There are two interrelated motions before the Court. In the Lease Rejection Motion,^[2] the Debtor seeks to reject a twenty-five-year Lease of the Landlord's Premises nunc pro tunc to the Petition Date. The Landlord filed an objection to the motion (the "Lease Rejection Objection")^[3] and the Debtor has filed a reply to the objection (the "Lease Rejection Reply").^[4] The Landlord timely filed the Landlord Claim herein. Pursuant to the Claim Reduction Motion (with the Lease Rejection Motion, the "Motions"),^[5] the Debtor seeks to reduce that claim. The Landlord filed an objection to the motion (the "Claim Reduction Objection"),^[6] and the Landlord filed a reply to the objection (the "Claim Reduction Reply").^[7] The Court heard arguments on the Motions. For the reasons set forth herein, the Court grants the Lease Rejection Motion and the Claim Reduction Motion. In granting the Lease Rejection Motion, the Court grants retroactive relief, rejecting the Lease nunc pro tunc as of the Petition Date. In granting the Claim Reduction Motion, the Court (i) calculates the statutory cap on lease-rejection damages to be $942,947.52; (ii) determines that the portion of the Landlord Claim for unpaid rent through July of 2021 is $1,295,914.80; (iii) determines that the portions of the Landlord Claim seeking additional compensation for postpetition use of the Premises are impermissible as either an administrative claim or as a general unsecured claim; and (iv) determines that attorneys' fees payable to the Landlord's in-house counsel under the Lease total $77,495. The Court considers these matters below.

Background

March 2002-Debtor Executes Lease with Landlord

The Debtor is an antique dealer who formerly operated a store at 929 Madison Avenue in Manhattan (the "Premises").^[8] In March 2002, the Debtor entered into a twenty-five-year lease (the "Lease") of the Premises with 929 Madison Avenue LLC (the "Landlord").^[9]

January 2016-Debtor Executes Sublease with Subtenant

In 2016, after business had declined, the Debtor closed the store and entered into a sublease of the Premises (the "Sublease") with Stella McCartney, a retail-fashion company (the "Subtenant"). Local Rule Statement ¶ 3. At some point during the COVID-19 pandemic, the Subtenant stopped paying rent to the Debtor and breached the Sublease.

Debtor State Court Action

On November 13, 2020, the Debtor sued the Subtenant for breach of the Sublease in New York State Supreme Court (the "State Court"), seeking (i) $1,016,756.51 for rent due between April and November 2020, plus statutory interest; (ii) $674,533.67 for a security deposit that the Subtenant failed to replenish, plus statutory interest; (iii) $9,120,420.32 for the present value of rent that would have accrued for the remaining term of the Sublease until its expiration; (iv) attorneys' fees and expenses; and (v) interest to the extent provided by law.^[10]

On January 8, 2021, the Subtenant answered the Debtor's complaint, asserted counterclaims against the Debtor, and filed a third-party complaint against the Landlord. In it, the Subtenant alleged, in part, that the Landlord was an interested and necessary party to the action because its ownership interest in the Premises might be inequitably affected by a judgment in the action.

On April 7, 2021, the Landlord answered the third-party complaint and asserted three counterclaims against the Subtenant. In support of those claims the Landlord asserted:

Subtenant had been occupying the Premises without paying any money to the Landlord from April 2020 to the time of filing, and the Landlord was therefore entitled to quantum meruit damages of at least $1,538,429.83.

Subtenant engaged in unjust enrichment at the Landlord's expense by occupying the property without paying the Landlord, entitling the Landlord to damages of at least $1,538,429.83.

The Landlord had agreed to the Lease and consented to the Sublease in reliance on the promise that the Debtor and the Subtenant would make timely payments without setoff or deduction from the Subtenant's security deposit. However, the Subtenant's nonpayment forced the Tenant to draw down the deposit, which the Subtenant had not replenished, leaving the security deposit unavailable as a source of recovery for the Landlord-this allegedly constituted another basis for an unjust enrichment claim and warranted imposition of a constructive trust on Subtenant's security deposit.

On June 23, 2021, the Debtor filed an amended complaint against the Subtenant, seeking $1,016,756.51 for rent owed from April through November 2020 and $11,587,940.83 in the present value of rent that would have accrued for the remaining term of the Sublease, and for attorneys' fees. The Debtor also sought to recover the Subtenant's $674,533.67 security deposit.

The State Court ordered mediation of the disputes among the parties. The Debtor reached a settlement with the Subtenant, but not with the Landlord. On August 6, 2021, the Debtor and Subtenant entered into an agreement to settle the action (the "Settlement Agreement").^[11] Pursuant to the agreement, Subtenant paid $3,250,000 to the Debtor in satisfaction of all Rent (approximately $2,181,806.10) and Additional Rent, as defined in the Sublease. Settlement Agreement at 2. Pursuant to the agreement, and without limitation, (i) the Debtor agreed to discontinue litigation against the Subtenant, (ii) both parties agreed to terminate the Sublease, (iii) the Subtenant agreed to surrender and return vacant possession of the Premises in broom-clean condition, free and clear of any and all personal property and equipment, and with moveable trade fixtures removed and the keys to the Premises to Mallett on or prior to August 10, 2021, and (iv) the Subtenant agreed to remove the signage and awning installed on the front of the building and repair any damage caused to the affected portions of the building by such removal at the Subtenant's sole cost and expense. Id. at 2-3.

Landlord State Court Action

On December 8, 2020, the Landlord sued the Debtor for breach of contract under the Lease in the State Court (the "Landlord State Court Action").^[12] The Landlord sought, inter alia, a money judgment of at least $728,940.98, as well as the additional amounts that were to come due under the Lease during the period through and including trial. It also asserted a claim for attorneys' fees under the Lease as a second independent claim.

In July 2021, the Landlord moved the State Court for an order attaching: (i) the $674,533.67 that resulted from the Debtor's draw down of the letter of credit posted by the Subtenant; (ii) all outstanding rent owed by the Subtenant to the Debtor; (iii) damages owed to the Debtor by the Subtenant resulting from the breach and termination of the Sublease; and (iv) the proceeds from certain causes of action asserted by the Debtor in his state case against the Subtenant.^[13] It also sought a preliminary injunction enjoining the Debtor from using any funds received from the Subtenant. The Debtor opposed the motion.^[14] The State Court determined that the Landlord had failed to demonstrate an entitlement to pre-judgment relief, and denied both the pre-judgment attachment and the preliminary injunction.^[15] In August 2021, the Landlord moved to reargue its motion for a prejudgment attachment and preliminary injunction.^[16] The trial court denied that motion two days later.^[17] The Debtor did not respond to the motion.

On September 1, 2021, the State Court granted the Landlord's motion for summary judgment against the Debtor. September 2021 Decision & Order on Motions at 1.^[18] It held that there was "no question of fact that defendant owes plaintiff $1,281,068.45 in unpaid rent." Id. The State Court awarded the Landlord $1,281,068.45 "plus 9% statutory pre-judgment interest from July 30, 2021 to the date judgment is entered." Id. It severed the issue of attorneys' fees for consideration at a later date. Id. at 2. On September 15, 2021, the State Court entered judgment, calculating the total amount (including 9% interest) to be $1,295,914.80 (the "State Court Judgment").^[19]

Debtor Purports to Surrender Keys to the Premises to the Landlord

On or about August 31, 2021, the Debtor surrendered the keys to the Premises to the Landlord, but the Landlord returned the keys and refused to accept turnover of the Premises. Local Rule Statement ¶ 7.

The Chapter 11 Case

On September 15, 2021 (the "Petition Date") the Debtor filed a petition for relief under chapter 11 of the Bankruptcy Code.^[20] On September 17, 2021, the Debtor elected to proceed under subchapter V of chapter 11 of the Bankruptcy Code by filing an amended petition for relief (the "Petition").^[21] The Debtor remained in possession and control of its assets pursuant to sections 1107 and 1108 of the Bankruptcy Code. On or about the Petition Date, Heidi Sorvino, Esq. was appointed Subchapter 5 Trustee.

On the Petition Date, the Debtor moved for an order approving, inter alia, rejection of the Lease nunc pro tunc to the Petition Date, certain lease-rejection procedures, and abandonment of certain property.

On December 8, 2021, the Debtor filed a Plan of Reorganization.^[22]

On March 8, 2022, the Debtor filed...