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GRJH, Inc. v. McCarthy

January 30, 2008

GRJH, INC., APPELLANT,
v.
WILLIAM M. MCCARTHY, CHAPTER 7 TRUSTEE, APPELLEE.
IN RE: CHAS, INC., DEBTOR



The opinion of the court was delivered by: Hon. Norman A. Mordue, Chief U.S. District Judge

Bkr. No. 05-12844

MEMORANDUM-DECISION AND ORDER

INTRODUCTION

GRJH, Inc. ("GRJH"), a creditor in Bankruptcy Case No. 05-12844 (CHAS, Inc., debtor) appeals from an order of Hon. Robert E. Littlefield, Jr., United States Bankruptcy Judge, dated February 5, 2007, denying its motion to vacate a prior order signed by Judge Littlefield on October 20, 2006. GRJH seeks vacatur of the October 20, 2006 order on the ground of mistake of fact or inadvertence, see Fed. R. Bankr. P. 9024, Fed. R. Civ. P. 60(b)(1), or misrepresentation by an adverse party. See Fed. R. Bankr. P. 9024, Fed. R. Civ. P. 60(b)(3). For the reasons that follow, Judge Littlefield's February 5, 2007 order is affirmed and the appeal dismissed.

FACTS

Background

The undisputed facts are as follows. GRJH leased to CHAS, Inc., the debtor in the underlying Chapter 7 bankruptcy proceeding, premises known as 1529 Crescent Road, Clifton Park, New York ("premises"). On April 1, 2005, the debtor defaulted by failing to make the $5,500 rental payment for the month of April 2005. GRJH terminated the lease and accelerated the entire unpaid rent due in the sum of $365,475. GRJH also retained the debtor's security deposit in the amount of $15,000. On April 23, 2005, the debtor abandoned the premises and GRJH took peaceable possession of the premises and re-leased them. The debtor filed its Chapter 7 petition on April 25, 2005. On April 29, 2005, GRJH advised William M. McCarthy, Esq., the trustee, that it had terminated the lease, accelerated the amount due, and taken possession. GRJH filed a proof of claim against the bankruptcy estate totaling $365,475.

On August 8, 2006, the trustee filed a motion to disallow, reduce, and/or expunge GRJH's claim and allow only an unsecured claim of $5,500. Paragraph 4 of the application states:

That the Trustee objects to the [claim for $365,475] ... for it represents the total rent due under the full term of a lease. Said lease was terminated pre-petition and the lessor/claimant took immediate possession of the premises mitigating and canceling any future lease payments and eliminating any claim pursuant to 11 USC § 365.

On September 8, 2006, GRJH filed the affidavit of its counsel, Matthew J. Sgambettera, Esq., in opposition to the motion, stating in part:

6. In addition, pursuant to Paragraph 30 of the Contractor Agreement, the Debtor deposited $15,000.00 with GRJH representing security for the performance of the Debtor under the terms of the Contractor Agreement. ***

9. The Debtor also agreed that pursuant to Paragraph 1 of the Contractor Agreement, the Debtor agreed to pay the monthly rental payment of $5,500.00 in advance on the first day of each month of the Contractor Agreement.

10. Finally, pursuant to Paragraph 33 of the Lease Agreement, the Debtor agreed that if the Debtor failed to pay any rent under the Lease Agreement,

GRJH could accelerate the entire unpaid rent for the balance of the lease.

11. On April 1, 2005, the Debtor failed to make timely rent payment of $5,500.00 to GRJH under the Contractor Agreement.

12. As a result of the Debtors financial default under the terms of the Lease Agreement, GRJH accelerated the full balance due and owing under the terms of the Lease Agreement in the total amount of $365,475.00.

13. On April 23, 2005, the Debtor abandoned the [premises] and GRJH took peaceable possession of the [premises]. ***

15. On April 29, 2005, GRJH notified the Chapter 7 Trustee that it had taken possession of the [premises] prior to the filing of bankruptcy and terminated the Contractor Agreement.

16. Further, GRJH notified the Chapter 7 Trustee that it had accelerated the full amount due under the Contractor Agreement because the Debtor failed to pay the rent for April.

***

20. [D]espite the Trustee's application [to disallow, reduce or expunge GRJH's claim for $365,475], GRJH's claim is based [on] its valid exercise of an acceleration provision of the terms of the Lease Agreement for the Debtors pre-petition defaults under the Lease Agreement and abandonment of the premises.

The September 13, 2006 Return Date

On September 13, 2006, the return date of the trustee's motion, both parties appeared.*fn1 GRJH did not dispute the trustee's assertion that the property had been continuously occupied and operated after the debtor's default and that only one month's rental was unpaid, i.e., the $5,500 April 2005 payment. The trustee argued that GRJH had mitigated its damages by re-letting the premises and was entitled to only $5,500. He stated:

It's our belief that ... [GRJH] suffered no damages. It had advised me that two days after the filing of the petition he took possession of the premises and continued to operate it. Although I do believe that they're entitled to one month's rent, $5,500 as an unsecured claim.

The trustee added that there would likely be money coming back to the bankruptcy estate inasmuch as GRJH had retained the debtor's $15,000 security deposit.

Mr. Sgambettera contended that GRJH was entitled to claim the entire accelerated amount, relying on the lease terms and New York law. He also stated that the new tenant (apparently a corporation related to GRJH) was paying "whatever the current market rent is on the property"; he did not specify the sum. Nor did he specify any other expenses associated with the termination of the lease and transfer of possession to the new tenant. He added that if they "were dealing with an estate that had ... several hundred thousand dollars in it" he would likely pursue the entire accelerated sum, but, in view of the small size of the bankruptcy estate, "it warrants us sitting down now and saying okay, what is it that we really want to accomplish."

The October 18, 2006 Return Date and the October 20, 2006 Order

Judge Littlefield adjourned the matter until September 27, 2006 to enable GRJH and the trustee to attempt to settle the matter. Thereafter, Judge Littlefield adjourned the return dates from September 27, 2006 to October 4, 2006, then to October 11, 2006, and then to October 18, 2006. Judge Littlefield noted (in his October 20, 2006 order) that the adjournments had been granted at GRJH's request.

On October 18, 2006, the trustee, Mr. McCarthy, appeared before Judge Littlefield. When the matter was called at 9:21 a.m., Mr. Sgambettera, counsel for GRJH, was not present. The trustee stated:

We have reviewed this case a number of times. I think this is about the fourth time I've been down here. We left last week, I had discussions with Mr. Sgambettera. He told me he was going to get back to me on Friday in relation to this matter and perhaps voluntarily withdrawing his claim and he needed an accounting. He was going to give me an accounting as to the $15,000 deposit which he was holding. My ...


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