In re Webster Place Athletic Club, LLC., Case No. 18 B 30466

In re: Webster Place Athletic Club, LLC., Debtor.

Case No. 18 B 30466

United States Bankruptcy Court Northern District of Illinois Eastern Division

Entered: June 19, 2019

June 18, 2019

Chapter 11

Hon. Jack B. Schmetterer

MEMORANDUM OPINION ON RAMCO-WEBSTER PLACE PLACE, LLC'S MOTION FOR RELIEF FROM THE AUTOMATIC STAY [DKT. NO. 46]

Creditor Ramco-Webster Place, LLC ("Ramco"), the landlord of Debtor Webster Place Athletic Club, LLC ("Debtor") now moves this Court to lift the automatic stay to pursue litigation in state court, namely a breach of contract lawsuit, No. 18-L-006130 (the "Contract Action") and an eviction proceeding, No. 18-M1-708898 (the "Eviction Action") filed in the Circuit Court of Cook County against Debtor. Debtor also has a pending rescission action against Ramco that was originally removed to this forum upon the filing of the bankruptcy case, but was subsequently remanded to the Circuit Court of Cook County. [Adv. No. 18-00916, Dkt. Nos. 37 & 39.]

For the reasons articulated below, Ramco's Motion will be denied by separate order to be entered concurrently herewith.

BACKGROUND

A. Case History and the Court's Decision on the Motion to Remand

Debtor, is an Illinois corporation that owns and operates a high-end athletic club at 1455 West Webster Ave., Stores 4 and 5, in Chicago, Illinois (the "Leased Premises"). [Dkt. Nos. 46 & 58.] The Leased Premises are located within a 32,000 square foot mall, known as the Webster Place Shopping Center (the "Shopping Center") owned by Ramco. [Dkt. Nos. 46 & 58.] Plaintiff executed the lease with Ramco's predecessor-in-interest, the prior owner of the shopping center, which Defendant purchased in February 2017. [Dkt. Nos. 46 & 58.] Since signing the lease, Debtor claims that it has invested a substantial amount of money in improving the Leased Premises and under the lease is to pay approximately $98,000 per month in rent. [Dkt. Nos. 46 & 58.]

The primary dispute between the parties stems from Debtor's allegations that Ramco has failed to live up to its obligations under the lease. Namely, Debtor asserts that Ramco has failed to provide free parking for its nearly 1,800 members and that it has failed to maintain the Shopping Center as a "first class" center. [Dkt. Nos. 46 & 58.] Debtor asserts that Ramco has not been maintaining the Shopping Center or investing additional money because it plans to demolish the Shopping Center and build residential units. This led Debtor to file its rescission action against Ramco in state court, where Debtor sought the entry of a judgment against Ramco: (1) rescinding the lease and (2) requesting that the state court return the parties to the status quo ante, by refunding Debtor's investment in the facility of approximately $3,000,000.00, minus credit for depreciation. In response, Ramco began drawing down a $600,000.00 letter of credit provided by Debtor as a security deposit on the basis that Debtor was not meeting its obligations under the lease by refusing to pay rent. Defendant then filed the Eviction and Contract actions which were consolidated with the rescission action by the state court.

On October 30, 2018, one day before the state court was set to rule on Ramco's Motion for Possession of the Leased Premises, Debtor filed its instant petition for Chapter 11 bankruptcy relief. [Dkt. No. 1.] Shortly thereafter, on November 20, 2018, Debtor filed a notice of removal of just its state court rescission action to this Court. [Adv. No. 18-00916, Dkt. No. 1.] On December 20, 2018, Ramco filed its Motion to Remand the rescission action to the state court. [Adv. No. 18-00916, Dkt. No. 12.] The Court ordered the parties to brief the Motion for Remand on January 10, 2019. [Adv. No. 18-00916, Dkt. No. 15.]

On February 28, 2019, this Court issued its Opinion and Order granting Ramco's Motion for Remand. [Adv. No. 18-00916, Dkt. Nos. 37 & 39.] As explained more fully in the Opinion, Debtor had not satisfied its burden to show that the parties were diverse for the purposes of diversity jurisdiction. Therefore, because Debtor had not shown that the parties were diverse, and because no other basis for jurisdiction existed as the claims did not "arise under" and were not "related to" the underlying Chapter 11 bankruptcy, the Court was required to mandatorily abstain from hearing the removed adversary proceeding pursuant to 28 U.S.C. § 1334(c)(2). Alternatively, the Court explained that equitable abstention would also be appropriate pursuant to 28 U.S.C. § 1452(b).

B. Ramco's Motion for Relief from the Automatic Stay and Other Developments in the Chapter 11 Bankruptcy Case

I. Ramco's Motion for Relief From the Automatic Stay

Since that ruling, Ramco has filed its Motion for Relief from the Automatic Stay. [Dkt. No. 46.] Ramco argues that there is cause for relief from the automatic stay pursuant to 11 U.S.C. § 362(d)(1) because there is no prejudice to Debtor as the consolidated cases will simplyproceed in the forum in which they were filed, the hardship to Ramco outweighs the hardship to Debtor because Ramco is being paid less than the full amount of rent pursuant to a state court order and the state court has already begun working on the consolidated cases, and Ramco has a reasonable likelihood of prevailing on the merits of the consolidated cases because it alleges that Debtor has been in breach of the lease for over 15 months. Matter of Fernstrom Storage and Van Co., 938 F.2d 731 (7th Cir. 1991).

Debtor filed its Response to Ramco's Motion on April 5, 2019. [Dkt. No. 5.] Debtor first argues that there are no defaults to cure under the terms of the lease: contrary to Ramco's assertion that Debtor has been paying less than the full amount of rent, Debtor points to a state court order that it alleges reduced its rent payments from over $98,000 per month to only $25,000 per month ("State Court Rent Order"). Ramco has repeatedly disputed that the State Court Rent Order altered Debtor's obligations pursuant to the lease. Additionally, Debtor asserts that the bankruptcy court, rather than the state court, is the proper forum in which to litigate the disputes between the parties because Ramco's filing of a claim submits it to the jurisdiction of the bankruptcy court. Debtor has filed a new Complaint giving rise to Adversary Proceeding 19 A 244 (discussed in greater detail below), in which Count IV is an objection to Ramco's Claim No. 3. The claim objection coupled with the bankruptcy court's exclusive jurisdiction regarding the assumption or rejection of the underlying lease pursuant to 11 U.S.C. § 365, argues Debtor, means that the bankruptcy court, rather than the state court, is the proper forum to detennine the issues between the parties.

Debtor also argues that no stay relief would be necessary if Debtor wanted to pursue the rescission action in state court, as the automatic stay only prohibits attempts to collect on prepetition claims or otherwise interfere with the property of the estate. As Debtor was the party filing the rescission action, the suit was not against the Debtor and therefore not stayed pursuant to 11 U.S.C. § 362(a)(1). In re Arthur B. Adler and Assoc., Ltd., 588 B.R. 864, 872 (Bankr. N.D. Ill. 2018). Furthermore, Debtor has repeatedly stated in open court its intention to dismiss the rescission action upon the Court granting Debtor permission to assume the lease. However, Debtor argues that the Eviction and Contract actions should remain stayed because allowing Ramco to pursue either outside of the bankruptcy and its related adversary proceeding would be greatly prejudicial. Wilson v. Allegheny Intern, Inc., 134 B.R. 282, 285 (N.D. Ill. 1991); In re Kmart Corporation, 2002 WL 3189033, at *3 (N.D. Ill. 2002). As such, Debtor asserts that thebalance of hardships weighs heavily in favor of the stay remaining in effect because the parties have submitted themselves to the jurisdiction of the bankruptcy court, the lease assumption and claim objections processes must take place in the bankruptcy court, Debtor is not defaulting under the lease each month by paying on $25,000 in rent pursuant to the State Court Rent Order, and until the litigation is resolved and any setoff amount is determined, Debtor contends that it does not have to replenish the $600,000 letter of credit. Furthermore, Debtor argues that Ramco is unlikely to prevail on either the Contract or Eviction actions, and therefore, no stay relief is warranted.

Ramco filed its Reply on April 12, 2019. [Dkt. No. 62.] Ramco argues that the stay should be lifted to allow the consolidated cases to proceed in state court because Debtor's attempts to introduce new issues in the bankruptcy proceeding, namely the new adversary proceeding and the lease assumption motion, are simply attempts to delay a resolution to the litigation. Ramco characterizes Debtor's adversary proceeding as a disguised Motion for Reconsideration of the Opinion and Order remanding the rescission action to the state court. Ramco argues that simply filing a claim does not mean that the state court is stripped of its concurrent jurisdiction over prepetition, unliquidated claims. In re Orseno, 390 B.R. 350, 355 (Bankr. N.D. Ill. 2008). Moreover, while the bankruptcy court may have exclusive jurisdiction over whether Debtor can assume the lease, that does not mean the state court has no authority over lease issues including determining the amount of prepetition rents owed under a lease. Alternatively, Ramco suggests that the Court enter limited stay relief, allowing the parties to file briefs urging the Circuit Court of Cook County to clarify the State Court Rent Order.

II. Other Developments in the Chapter 11 Bankruptcy Case

To fully understand the Court's ruling on the instant Motion for Relief from the Automatic Stay, however, a full picture of the Chapter 11 case as it stands now is required. As noted above, subsequent to Ramco filing its Motion for Relief from the Automatic Stay, Debtor filed a four...