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In re Malese 18 Corp.

March 9, 2010

IN RE: MALESE 18 CORP., DEBTOR.
RM 18 CORP., APPELLANT,
v.
AZTEX ASSOCIATES, L.P. AND THE BANK OF NEW YORK MELLON TRUST, N.A., AS TRUSTEE, APPELLEES.



On Appeal From: United States Bankruptcy Court Eastern District of New York Ch. 11 Case No. 02-80586 (DTE).

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

MEMORANDUM OF DECISION AND ORDER

In this bankruptcy appeal, Appellant RM 18 Corp. ("RM 18") challenges an order entered by United States Bankruptcy Judge Dorothy T. Eisenberg on April 16, 2009. That order was the result of a remand from this Court on appeal of a previous order on the same issue, entered by Judge Eisenberg on June 28, 2005. The appeal is opposed by Appellees Aztex Associates, L.P. ("Aztex") and Bank of New York Mellon Trust, N.A. ("New York Mellon"). For the reasons set forth below, the Court dismisses the appeal as moot.

I. BACKGROUND

This proceeding arises out of the bankruptcy filing by Kmart Corporation on January 22, 2002 in the Bankruptcy Court for the Northern District of Illinois. The Court provides a brief summary of the relevant background facts below, but additional specifics of the case are set forth in greater detail in the Court's previous order in this matter, In re Malease 14FK Corp., 351 B.R. 34 (E.D.N.Y. 2006). Familiarity with those facts is presumed.

Lawrence Kadish and Howard Kadish formed debtor Malese 18 Corp. ("Malese 18") and appellant RM 18 in the early 1980's. They created the entities to participate in a complex real estate transaction with Kmart that was apparently engineered to provide Kmart certain tax benefits. Pursuant to this transaction, Malese 18 received its only asset: the right to collect rent from Kmart for eighteen of its stores. However, Malese 18 did not own the eighteen stores, but rather itself leased them from Appellee Aztex. Aztex was similarly involved in the transaction, and held a 25-year estate in the properties, subject to mortgage liens on the properties. These liens were held by a trust that is now managed by Appellee New York Mellon. The remainder interest in the eighteen properties was contracted to pass to RM 18, Malese 18's sister company, on January 1, 2010. At that time, RM 18 would also assume the obligations of the properties' mortgages.

Because the store leases to Kmart were Malese 18's only assets, Kmart's bankruptcy directly threatened Malese 18's solvency. Thus, two days after Kmart filed for bankruptcy on January 22, 2002, Malese 18 filed for bankruptcy in the Eastern District of New York. That case was assigned to Bankruptcy Judge Dorothy T. Eisenberg. Malese 18 emerged from bankruptcy shortly after filing, pursuant to a stipulation with Aztex that was approved on July 1, 2002 (the "Malese Stipulation"). The Malese Stipulation provided that Malese 18 would transfer all of its stock to the beneficial ownership of Aztex, and Aztex would assume the right and responsibility to pursue all of Malese 18's claims against Kmart. The upshot for Lawrence and Howard Kadish, the owners of Malese 18 and RM 18, was that any recovery on the Kmart claims would be used in part to pay the mortgage debt encumbering the eighteen properties. As RM 18 was still slated to take possession of these properties on January 1, 2010, this was a significant benefit to the Kadishes.

Presumably to protect the Kadishes' interest, the Malese Stipulation provided that Aztex could not settle the claim against Kmart "without the prior consent of [Lawrence] Kadish, which consent shall not be unreasonably withheld or delayed." (Malese Stipulation, ¶ 5.) Sometime in the spring of 2005, Aztex and New York Mellon came to terms with Kmart on the claim, and agreed to accept approximately $17 million in stock from Kmart to extinguish the claim. However, Kadish refused to consent to the settlement, asserting that the claim was worth much more. Therefore, on June 3, 2005, Aztex moved the Bankruptcy Court for the Eastern District of New York to reopen the Malese 18 bankruptcy, and to rule that Kadish was unreasonably withholding his consent. On June 28, 2005, Judge Eisenberg granted this motion in its entirety. With Judge Eisenberg's order in hand, Aztex and New York Mellon presented the proposed $17 million settlement to Kmart's bankruptcy judge, who approved it on July 11, 2005 (the "Kmart Settlement"). RM 18 and the Kadishes did not move to stay either Judge Eisenberg's order or the Kmart Settlement.

The substance of the parties' disagreement on the value of the Kmart claim is described in detail in the Court's previous decision. In re Malease 14FK Corp., 351 B.R. at 38--39. In sum, Kadish argued that certain rent, called "Deferred Rent" and valued at approximately $30 million, was due and owing to Malese 18 before Kmart filed for bankruptcy. Aztex believed this rent did not become due and owing until after the bankruptcy filing. This was relevant because the Bankruptcy Code allows creditors to make claims for the full value of back rent, but imposes a 15% recovery cap on claims for rent owed after a bankruptcy petition is filed. "Deferred Rent" under the Kmart leases did not fit neatly into either of these categories. The leases provided that the Deferred Rent accrued prior to Kmart's bankruptcy, but no Deferred Rent had been paid and it was not obvious it could become payable without a lease termination.

In her June 28, 2005 decision, Judge Eisenberg held that the Deferred Rent was subject to the 15% recovery cap as a matter of law, and that Kadish's basis for withholding consent was therefore unreasonable. Although RM 18 sought no stay of this order, it did file an appeal. On September 26, 2006, this Court issued a decision, In re Malease 14FK Corp., 351 B.R. at 34, reversing Judge Eisenberg's characterization of the Deferred Rent, and holding that it was not subject to the 15% recovery cap. The Court also found that Kadish had a legitimate, non-arbitrary business reason for withholding its consent to the settlement. However, the Court stated that it could not determine whether Kadish had reasonably withheld his consent without also considering the underlying reasonableness of the Kmart Settlement. As the Bankruptcy Court had not analyzed the reasonableness of the Kmart Settlement, this Court remanded the matter to Judge Eisenberg for further proceedings to develop this record.

On February 3, 2009, Judge Eisenberg held a hearing on the reasonableness of the Kmart Settlement. In her decision on April 16, 2009, In re Malese 18 Corp., No. 8-02-80586-478, Slip Copy, 2009 WL 1044556, * 8 (Bkrtcy. E.D.N.Y. April 16, 2009), she found that the Kmart Settlement was reasonable, and that Kadish had unreasonably withheld his consent. At the time of the February 3, 2009 hearing, at least four payments of Kmart stock had already been made to Aztex and/or New York Mellon pursuant to the Kmart Settlement. Therefore, Judge Eisenberg also stated that "[i]t would appear that this proceeding may be moot as it is uncertain whether the parties can be restored to the same positions they were in respectively at the time Aztex and Kmart negotiated the Kmart Settlement." Id., 2009 WL 1044556 at * 8.

RM 18 now appeals from Judge Eisenberg's April 16, 2009 decision. Aztex and New York Mellon oppose the RM 18 appeal on the merits, as well as on the basis of mootness. Finding that the present appeal has been rendered moot, the Court dismisses the present appeal without addressing its merits.

II. DISCUSSION

A. Mootness Standard in ...


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