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In re Great Atlantic & Pacific Tea Co., Inc.

United States District Court, S.D. New York

April 28, 2014

In re: THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC., et al., Debtors.
v.
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC., Appellee N. PROVIDENCE, LLC, Appellant,

Page 43

For Appellant: Jessie Christine Basner, Jonathan D. Clemente, Andrea Kitzis Smith, Clemente Mueller, P.A., Morristown, New Jersey.

For Debtor-Appellee: Paul M. Basta, Ray C. Schrock, Andrew Genser, Nathaniel J. Kritzer, Kirkland & Ellis LLP, New York, New York.

Page 44

OPINION AND ORDER

CATHY SEIBEL, U.S.D.J.

Before the Court is the appeal of N. Providence, LLC (" NP" ) from the Bankruptcy Court's September 26, 2011 bench ruling, (AP Doc. 14),[1] and its March 8, 2012 and June 21, 2013 Orders (AP Docs. 18, 36) (collectively, the " Order" ), granting the motion for summary judgment of The Great Atlantic & Pacific Tea Company, Inc. (" A& P" ), and denying NP's motion for summary judgment in an adversary proceeding commenced by NP. The Bankruptcy Court held that under the lease between the parties, A& P was not liable for payments during a period when NP was in breach, including payments of taxes for the third quarter of 2011. For the following reasons, the Bankruptcy Court's Order is AFFIRMED.

I. BACKGROUND

Although this case arises in a lengthy bankruptcy proceeding, the present issue involves little more than a breach of contract dispute between a landlord and tenant. I set forth below only the facts relevant to the disposition of this matter.

A. Factual Background

NP as landlord and A& P as tenant are parties to a 20-year lease (the " Lease" ), dated June 26, 2007, and amended October 23, 2009, for a shopping center located in New Providence, New Jersey. (Compl. ¶ ¶ 18-20.)[2] Under the terms of the Lease, A& P promised to construct a new facility for itself in the shopping center, and NP agreed to pay A& P a construction allowance for the completion of the work. ( See generally Lease Art. 7.)[3]

Specifically, Article 7, Section G of the Lease (hereinafter, " Section 7.G" ), as amended, provided that NP " shall pay to [A& P]" a $1.9 million construction allowance (the " Construction Allowance" ) on or before the ninetieth day following the date that A& P opened its store to the public. ( Id. § 7.G; Amendment § 9(e).)[4] The Lease provided that " if [NP] fails to pay" the Construction Allowance, then A& P's " obligation to pay fixed annual rent and Charges shall abate . . . until [A& P's] receipt of the Construction Allowance, together with interest on the unpaid balance thereof at the Lease Interest Rate (as hereinafter defined)." (Lease § 7.G.)[5]

Page 45

The Lease further provided that A& P " shall have title to the [] Building and all other Improvements constructed" until A& P " shall have been fully reimbursed the Construction Allowance." ( Id.)

The Lease also required A& P to pay to NP the portion of NP's property taxes corresponding to A& P's share of floor space in the shopping center. ( Id. Ex. G at 66.) Such payments thus were " Charges," defined as amounts " payable by [A& P] to [NP]" under the Lease. ( Id. § 4.)

On September 24, 2010, A& P opened its store to the public, thereby giving NP ninety days, or until December 23, 2010, to pay the Construction Allowance. (Compl. ¶ 24.) On October 22, 2010, NP secured a loan commitment for $19.2 million from UBS. ( Id. ¶ 26.) NP and UBS established a target closing date of December 16, 2010, several days before the Construction Allowance was due. ( Id. ¶ 27.)

On December 21, 2010, four days prior to NP's projected closing date, A& P, along with fifty-three other affiliated debtors, filed petitions for chapter 11 relief in the Bankruptcy Court. ( Id. ¶ 28; A& P Mem. 2.)[6] UBS informed NP that it was prepared to proceed with the closing of the loan as soon as A& P assumed the Lease. (Compl. ¶ 29.)[7] A& P did not move to assume the Lease until June 22, 2011, ( see Bankr. Doc. 1959 Ex. 1),[8] and NP did not pay the Construction Allowance within the ninety-day period, (Compl. ¶ 30). As a result, A& P withheld all rent and Charges due under the Lease from December 23, 2010, until September 29, 2011, when, after a nine-month delay, NP finally paid the Construction Allowance. (A& P Mem. 2.)

B. Proceedings Below

On June 28, 2011, NP commenced an adversary proceeding against A& P, seeking a declaration from the Bankruptcy Court that the Construction Allowance owed to A& P must be reduced by the amount of rent payments under the Lease that A& P withheld. (Compl. ¶ 10.) NP argued that Section 7.G of the Lease must be read in conjunction with Section 27.A, titled " LANDLORD'S DEFAULT," which provides that, in the event of NP's default, A& P " may deduct from fixed annual rent and/or Charges" the amount in default " plus interest on the outstanding balance," subject to certain limitations. ( Id. ¶ 23 (citing Lease § 27.A)[9].) NP argued that

Page 46

Section 27.A of the Lease " clearly contemplates that the abatement referred to in Section 7 shall be deemed a credit against [A& P's] obligations under the Lease." ( Id. ¶ 9.) The parties cross-moved for judgment on the Complaint.[10]

On September 26, 2011, the Bankruptcy Court heard oral argument on the motions and issued a partial bench ruling on the record in favor of A& P. ( See 9/26/11 Hr'g Tr. 148:6-154:17.) Judge Drain concluded that " under the plain language of paragraph 7(g) [A& P] has the ability to withhold the payment of fixed annual rent and [] charges until it actually receives the construction allowance." ( See id . at 150:4-7.) He rejected NP's argument that Section 27.A of the Lease modified Section 7.G and " requir[ed] [A& P] to set-off versus simply withholding and abating the payment of rent until the construction allowance is paid." ( See id . at 150:16-22, 151:17-20.) But Judge Drain was troubled that " without any offset or deduction . . . there may be a considerable windfall to [A& P] beyond its readily imaginable or conceivable damages." ( See id . at 154:6-10.) For this reason, Judge Drain ordered additional briefing on " the ...


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