Searching over 5,500,000 cases.

Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.

In re Malease 14FK Corp.

September 26, 2006


The opinion of the court was delivered by: Spatt, District Judge.


This appeal is related to the filing of chapter 11 bankruptcy by Kmart Corporation ("Kmart") in the United States Bankruptcy Court for the Northern District of Illinois. The appellant RM 18 Corp., and the appellees Aztex Associates, L.P. ("Aztex"), Aztex Corporation, and J.P. Morgan Trust Company, N.A. ("JP Morgan"), all had claims in connection with, or arising out of, the rejection by Kmart, as lessee, of certain commercial leases it had with Malese 18 Corp. the debtor in the underlying chapter 11 bankruptcy before United States Bankruptcy Judge Dorothy T. Eisenberg. The Malese 18 Corp. bankruptcy was resolved through a stipulation and order authorizing Aztex to pursue those claims against Kmart related to the leases, but the stipulation expressly required the consent of Lawrence Kadish, a principal of Malese 18 Corp. and RM 18 Corp. Aztex and JP Morgan reached an accord with Kmart regarding a proposed settlement, but RM 18 Corp. withheld its consent. In response to a motion by Aztex to reopen the case and enforce the terms of the order, the Bankruptcy Court ordered that RM 18 Corp. was unreasonably withholding its consent, and authorized Aztex and JP Morgan to effectuate the proposed settlement. The issue on this appeal is whether that withholding of consent by RM 18 Corp. was unreasonable.


This complex case involves a maze of various real estate and corporate transactions. The 18 separate leases at issue in this appeal are all identical, and, as noted by the Bankruptcy Court, were one part of a complex transaction structured by Merrill Lynch as a tax shelter and investment vehicle for the parties and Kmart. Tr. June 28, 2006, H'rg at 37. The 18 properties were first purchased on November 30, 1982, by Aztex Corp., from a wholly-owned subsidiary of Kmart ("Aztex Properties") for $25,693,939. At the same time, the properties were leased back to Kmart pursuant to 18 separate leases (the "Kmart Leases"), each with an initial term of 25 years. The leases contained provisions for the payment of both "Basic Rent" and "Deferred Basic Rent." The rent under the leases was incurred and accrued in 50 semi-annual installments, but the amount that was actually payable varied for each installment according to a rent schedule.

After acquiring the properties, Aztex Corp. then issued notes in favor of Merrill Lynch Corporate Pass Through Securities ("MLCPS"), which were secured by first mortgage liens on the properties and by assignments of the Kmart Leases. MLCPS then created the MLCPS Trust to hold the notes, mortgages, and lease assignments ("Aztex Loan Documents").

On December 31, 1982, MLCPS sold all of its interest in the MLCPS Trust to Kmart. Kmart financed the acquisition by creating its own trust. To create the trust, Kmart entered into a pooling agreement with NBD, formerly known as National Bank of Detroit.

On May 2, 1983, Aztex Corp. conveyed to Aztex Associates L.P. an estate for 25 years in the land of Aztex Properties and a fee interest in the improvements on such properties. Aztex Associates L.P. assumed the obligations owed to MLCPS under the notes and took title to the property subject to the mortgages. Aztex Associates L.P. then leased this interest back to Aztex Corp. pursuant to a single master lease (the "Aztex Master Lease").

Concurrent with this leasing arrangement, Malese 18 Corp. was formed by Lawrence Kadish and RM 18 Corp. was formed by Howard Kadish to participate in a "sandwich lease" with respect to the lease of the Aztex Properties. A sandwich lease is a lease in which the lessee subleases the property to a third party, usually for more rent than under the original lease. Black's Law Dictionary (8th ed. 2004). The ingredients to this sandwich included Malese 18 Corp., who became the lessee to Aztex under the Aztex Master Lease and the direct lessor to Kmart under the Kmart Leases. In this transaction, RM 18 Corp. received from Aztex Corp. a fee interest in the land of the Aztex Properties to commence after the expiration of the estate in years held by Aztex Associates L.P. Based on the remainder interest, RM 18 Corp. will receive a fee interest in the Aztex Properties on January 1, 2010. This arrangement was confirmed on May 2, 1983 by 18 separate "Three Party Agreements" between Malese 18 Corp., RM 18 Corp., and Aztex Associates L.P.

On January 22, 2002, Kmart filed for protection under Chapter 11 of the Bankruptcy Code. Two days later, on January 24, 2002, Malese 18 Corp. filed its own voluntary petition for relief under Chapter 11. The Malese 18 Corp. case was ultimately resolved through a Stipulation and Order Resolving Issues Relating to Master Lease and Dismissing Bankruptcy Case ("Malese Stipulation") agreed to by Aztex and Malese 18 Corp. and approved by Judge Eisenberg on July 1, 2002.

The Malese Stipulation required all of the capital stock of Malese 18 Corp. to be conveyed to an entity that was to be designated at a later date. The only asset of Malese 18 Corp. consisted of the Kmart Leases and the related claims against Kmart. The Malese Stipulation required Aztex to pursue any and all claims arising out of or in connection with the breach or rejection of the 18 Kmart Leases. Under the Stipulation, these claims were defined to include deferred rent, the claims filed by Malese 18 Corp. in the Kmart bankruptcy, and any other claims relating to the Kmart Leases. Further, the Malese Stipulation stated that "no settlement, or compromise of all or any portion of the Kmart Claims will be made without the prior consent of Kadish, which consent shall not be unreasonably withheld or delayed." Malese Stipulation ¶ 5. While it is unclear from the stipulation which Kadish was required to give his consent, it appears undisputed that it referred to Lawrence Kadish. In the stipulation, it was also agreed that the proceeds or recovery on any of the Kmart claims would be used first to pay the principal and interest on the mortgage debt on the Aztex Properties as agreed to under the Aztex Leases, the Kmart Leases, and the Three Party Agreements. RM 18 Corp. is not a party to the Stipulation and Order, but the stipulation expressly states that RM 18 Corp. has standing to enforce the agreement. Malese Stipulation ¶ 6, 10.

Pursuant to the Malese Stipulation, and in pursuit of the claims against Kmart, Aztex apparently designated JP Morgan as trustee of the assets under the Kmart Leases. JP Morgan then filed a proof of claim in the Kmart bankruptcy for the claims under the Kmart Leases. Thereafter, Aztex and JP Morgan pursued settlement negotiations with Kmart. In the spring of 2005, Aztex and JP Morgan reached an accord with Kmart. The proposed settlement that was reached would allow a Class 5 lease-rejection claim in the total amount of $16,947,571.39, which included, among other items, a claim for Deferred Basic Rent in the amount of $4,290,734.49.

The proof of claim originally filed by Malese 18 Corp. was in the total amount of $72,848,058.00, which included a claim of $29,707,578.00 for Deferred Basic Rent. During settlement negotiations with Kmart, Aztex and JP Morgan took the position that the Deferred Basic Rent owed under the leases would be capped by section 502 of the Bankruptcy Code, and thus limited to $4,290,734.49.

Upon being notified of the proposed settlement, RM 18 Corp. objected because it did not encompass or provide for the allowance of $25,416, 843.51 of the $29,707,578.00 in Deferred Basic Rent allegedly owed to Malese 18 Corp. under the Kmart Leases. RM 18 Corp. argued that it was entitled to this deferred basic rent because it constituted a pre-petition claim that was not capped under the Bankruptcy Code. In its brief, RM 18 Corp. notes that such additional monies, if allowed in the settlement, would benefit all parties involved because they would be applied to pay down the mortgage indebtedness on the Aztex Properties held by JP Morgan, in which RM 18 Corp. receives a fee interest in the year 2010 after the expiration of the estate in years held by Aztex.

On June 3, 2005, Aztex filed a motion in the Bankruptcy Court to reopen the Malese 18 Corp. case and requesting that the court: (1) enforce the Malese Stipulation; (2) determine that the proposed settlement of the claims against Kmart was reasonable; (3) find that the refusal by the principal of RM 18 Corp., Lawrence Kadish, to consent to the proposed settlement was unreasonable and deem his consent given; and (4) authorize Aztex and JP Morgan to effectuate the settlement. RM 18 Corp. filed a brief response consenting to the reopening of the case and requesting an evidentiary hearing.

On June 23, 2005, an initial argument was held on Aztex's motion. Aztex objected to the request by RM 18 Corp. for an evidentiary hearing because the terms of the proposed settlement called for the claims to be paid in a distribution of stock, which made the approval of the settlement time sensitive. The stock could only be distributed on the first day of the quarter, which would be either July 1, 2005 or October 1, 2005. Aztex claimed that the value of the stock could drop during that time and requested a bond in the amount of 16.3 million to protect its interest if a hearing was granted. Tr. June 23, 2005 H'rg at 13. After all parties were heard, the Bankruptcy Court agreed to reopen the Malese 18 Corp. bankruptcy case and ruled that RM 18 Corp. would be entitled to an evidentiary hearing on the reasonableness of its consent only if it posted a $5 million bond by June 27, 2005 at 3:00pm.

At the June 27, 2005 status conference, RM 18 Corp. notified the Bankruptcy Court that it was unable to post the $5 million bond. However, RM 18 Corp. argued that its refusal to consent to the proposed settlement could be determined to be reasonable without an evidentiary hearing. RM 18 Corp. argued that the parties had a meritorious claim against Kmart to more than $25 million of deferred rent under the Kmart Leases that could be ascertained from the face of the lease. Focusing solely on the issue of whether the deferred rent under the Kmart Leases was capped under section 502 of the Bankruptcy Code, the Bankruptcy Judge found that the deferred rent would only have become due and owing if the lease had terminated, and thus it was properly capped under the Code. Based upon this determination, the Bankruptcy Court found that the withholding of approval by RM 18 Corp. was unreasonable. The court then entered an order granting Aztex the authority to execute the proposed settlement.

Following the Bankruptcy Court's decision, RM 18 Corp. appealed to this Court, arguing that the Bankruptcy Court erred in finding that the consent of RM 18 Corp. was unreasonably withheld, and erred in authorizing the proposed settlement with Kmart. On the other hand, Aztex and JP Morgan presented the"deemed" consent of Kadish to the settlement to the Illinois Bankruptcy Court, which approved the settlement with Kmart. RM 18 Corp. has also appealed the order of the Illinois Bankruptcy Court approving the settlement, but did not seek to stay implementation of the settlement.


A. The "Scrivener's Error"

Before addressing the merits of the appeal, the Court must resolve certain errors that have been identified by both parties in this appeal. The motion to enforce the settlement in the Bankruptcy Court and the subsequent appeal that was commenced by RM 18 Corp. have all proceeded in the wrong, but related, bankruptcy case entitled Malease 14FK Corp., Case No. 02-80587. The correct bankruptcy ...

Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.