Court Opinion

ID: 7014050
Source: CourtListenerOpinion
Date Created: 2022-07-24 04:15:10.288602+00
Date Added: 2024-06-11T16:10:18.662004
License: Public Domain

JACOBS, Circuit Judge,
dissenting.
I respectfully dissent.
This dispute concerning the rent payable under a storelease was decided by the bankruptcy court against the landlord and in favor of two successive tenants:
• the Debtor, which held the premises until confirmation of the plan, and
• Marianne, Ltd. (“Marianne”), which acquired the lease, effective on the date of plan confirmation, pursuant to an asset sale approved by order of the bankruptcy court.
I dissent [i] because the bankruptcy court wrongly assumed jurisdiction over the landlord’s claim against Marianne, a dispute that could not affect the bankrupt *233estate because Marianne did not acquire its interest prior to confirmation of the plan, and [ii] because the bankruptcy court’s erroneous reading of the lease (affirmed by the majority without discussion) results in a commercial absurdity. One passage in the bankruptcy court’s opinion erroneously premised jurisdiction in part on supposed needs to foster “bidderf] reli[ance] on the certainty of [the bankruptcy court] determining the terms and conditions of the Leases that were being sold” and to avoid a “chilling affect [sic] on sales conducted in bankruptcy cases.” This passage creates an impression that buyers presume and rely upon a bias in bankruptcy court favoring debtors (and those who succeed to the debtors’ interests) — an impression that is not dispelled by the merits decision, which unaccountably favors the party that acquired its interest pursuant to the plan. Worse, this passage commends the assumed bias because it promotes the sale of the assets marketed by bankrupt estates.
1
The majority closely considers whether the bankruptcy court had jurisdiction over Marianne’s rent obligation, which accrued post-confirmation. (Jurisdiction over the landlord’s claim concerning the pre-confirmation rent owed by the Debtor is undoubted.) In the end, the majority predicates jurisdiction on a number of circumstances and properly declines to say whether less than all the circumstances found would suffice to support jurisdiction. But I cannot agree even with that cautious and limited holding.
In aid of its purported jurisdiction, the bankruptcy court enjoined proceedings in a lawsuit between Marianne and the landlord in Aguadilla, Puerto Rico, where the mall is located. Thus the bankruptcy court ousted the Puerto Rico Superior Court from deciding under Puerto Rico law the terms of a Puerto Rico lease with a Puerto Rico tenant, where the only connection to the bankrupt estate was that the tenant assumed the lease under the terms of the plan of confirmation. Among the facts cited in the majority opinion to justify this jurisdictional reach is the bankruptcy court’s finding that the landlord’s suit against Marianne in Puerto Rico seeks to recover disputed rents that allegedly accrued in part prior to confirmation. The first complaint is ambiguous in that respect, but in a hearing before the bankruptcy judge the landlord categorically disclaimed any intent to recover from Marianne any rent allegedly owed by the Debtor. The bankruptcy court’s contempt power is amply sufficient to enforce such a representation to abide by the terms of the confirmation plan. The amended complaint, filed the day before the bankruptcy court enjoined the Puerto Rico litigation, seeks nothing but rent accrued post-confirmation.
Having found a sufficient basis for jurisdiction, the majority affirms the ruling on the merits summarily — which is not remarkable since there is little in this lease dispute that would ordinarily require a published opinion. But I consider the merits important because I cannot account for the result reached by the bankruptcy court otherwise than as a measure in aid of the bankruptcy court’s explicit desire to foster “bidder[ ] reh[ance] on the certainty of [the bankruptcy court] determining the terms and conditions of the Leases that were being sold” and avoid a “chilling affect [sic] on sales conducted in bankruptcy cases.”
2
The following few facts bear on the merits. The Debtor, which operated a retad chain, elected to assume the store lease in *234a mall owned by Luan Investment, S.E. in Agu adilla, Puerto Rico. Having assumed the lease, the Debtor assigned it for value to Marianne, pursuant to court order, effective on the date of the plan confirmation.
The 1990 lease contains the usual provisions concerning its term and the rent, but provides that if the tenant opens for business prior to occupancy by anchor stores, the tenant pay (in lieu of rent) a relatively nominal percentage of sales; and that after occupancy by anchor stores, the initial 12-year lease term would begin and a fixed rent (subject to escalation) would become payable. Although anchor tenant K-Mart moved in, a second anchor tenant (Amigo) arrived in 1996, the year following the tenant’s bankruptcy. Since 1996, the landlord and the Debtor have been disputing whether the only acceptable second anchor under the lease was Sears, which has never moved in. The bankruptcy court ruled that Rider 2A of the lease is decisive on that issue:
Tenant shall not be required to open for business ... or pay any rent and the commencement date shall not be deemed to have occurred until such time as seventy-five (75%) percent of the small store[] gross leasable retail space, K-Mart and Sears, . have opened for business with the public at the Shopping Center (the “Opening Date”). If Tenant shall, at Tenant’s sole option, elect to open for business with the public prior to such time, Tenant’s sole obligation with respect to payment of any rent or additional rent hereunder shall be to pay four (Iflo) percent of Gross Sales, as hereinafter defined, for each month until the Opening Date shall have occurred (the applicable rent is hereinafter referred to as the “Pre-Opening Date Rental”). Such four (4%) percent shall be payable within 20 days following the end of each month prior to the Opening Date.
(Emphasis added.) Relying on Rider 2A, the Debtor and Marianne argued that as a matter of law because Sears never moved in, the commencement date of the lease term never arrived and the obligation to pay posi-Opening Date rent never arose. This argument is defeated, in my view, by subsection 1(h) of the lease, under the rubric “Basie Provision and Definitions,” which at least raises a question of fact as to whether the anchor that moved in is an adequate “replacement”:
PRINCIPAL TENANT: K Mart and Sears (or replacement(s) thereof), (and their sublessees, successors or assigns).
(Emphasis added.) The bankruptcy court discounted this clause as a boilerplate definition not used elsewhere in the lease. However, paragraph 1 (of which the “Principal Tenant” definition above is a subsection) provides — in the first substantive sentence of the Lease — that it is itself “integral” and “incorporated into this Lease in all respects.” Indeed, several basic and indispensable provisions are sub-paragraphs of section 1: thus subpara-graph 1(a) supplies the date of the lease (August 6, 1990), and subparagraph l(i) designates the mall space the tenant is to occupy.1
3
In the absence of Sears, a question arises as to whether the tenant that did occupy the anchor space is a “replacement” within the meaning of subparagraph 1(h). If so, Marianne owes rent as a tenant under the lease; if not, then by virtue *235of Rider 2A, the rent obligation did not arise (and never will), with consequences that a Puerto Rico court should decide, and probably will.
The lease terms are imperfectly drafted, and the parties could dispute (as they have) whether occupancy by a “replacement” tenant in the anchor space would trigger the post-Opening Date rental obligation, and if so, whether a particular anchor tenant is an adequate replacement within the parties’ contemplation. Landlord’s counsel proffered [i] deposition testimony by the executive who negotiated the lease on tenant’s behalf that any department store would satisfy the anchor tenant requirement and [ii] testimony by its rental agent that the words permitting “replacement” anchor tenants were inserted because Sears had as yet made no commitment to occupy the anchor space. (Counsel for the tenants have not contested the landlord’s characterization of the parol evidence.)
In granting a motion to exclude that parol evidence, the bankruptcy court ruled that the “terms of the lease related to the payment of the rent obligation are not ambiguous.” Under Puerto Rico law, the intention of the parties governs the interpretation of the contractual terms at issue here. See 31 P.R.Laws Ann. § 3471 (“If the words should appear contrary to the evident intention of the contracting parties, the intention shall prevail.”) Extrinsic evidence may be used to determine the parties’ intention “[w]here a mistake or imperfection of the agreement is put in issue by the pleadings.” See 32 P.R.Laws Ann.App. IV, R. 69(B). Parol evidence was clearly required in this dispute under Puerto Rico law because the contract is laced with Riders, it is imperfectly drafted, it uses inconsistent terminology for the same things, and the reading held to be required by the supposedly unambiguous language creates a contract that lacks essential terms (such as beginning or end) and is commercially absurd.
The bankruptcy court’s interpretation of the contract, that the tenant owes only “the Pre-Opening Date rent,” is a commercial absurdity because (inter alia) under that reading of Rider 2A: [1] the “Opening Date” of the mall has not yet come; [2] the “commencement date” of the 1990 lease has not yet arrived; [3] the “Lease Term” — twelve years followed by a five-year renewal term — has not yet begun; and [4] the tenant’s obligation to pay post-Opening Date rent has not yet accrued. And none of these things will ever happen. Since surrender of the premises is not required until the end of the Lease Term, it may be that the bankruptcy court contemplates a perpetual tenancy in which Marianne’s only obligation is to pay four percent of gross sales if any, so long as it chooses to stay, or until the world comes to an end. Alternatively, the bankruptcy court may have envisioned (oddly) that the “Pre-Opening Date rent” would be paid for the post-Opening Date term of the lease. But the bankruptcy court has made no ruling as to the term of the rental obligation; the only provision construed is the one that determined the sole claim before the court, which was the landlord’s claim for past rent due. In short, although the judgment decides the rent (i.e., the Rider 2A payment in lieu of rent), the judgment does not fix the term of occupancy. Moreover, the ruling that the payment obligation is found in Rider 2A necessarily means that there is no leasehold because the condition precedent (the occupancy by certain anchor stores) was not met. Rider 19A provides that:
Not withstanding anything to the contrary herein, should any of the K-Mart or Sears lease not be signed within twelve (12) months from the date of this *236lease, Tenant shall have the right to terminate the Lease by delivering notice to Landlord to such effect within sixty (60) days from the last day of the said twelve (12) month period.
(Emphasis added.) The Riders, read together, mean to me that if the anchor-store condition (however construed) was not met for a year, the tenant had 60 days either to walk away, or to waive the condition in Rider 2A and thereby assume its posi-Opening Date obligations under the lease (including, not least, rent). The tenant did nothing, however, and the landlord could obviously do nothing by virtue of the automatic stay. This state of affairs obviously has consequences that go beyond the rent question decided by the bankruptcy court. However, those consequences could not until now be sorted out by the Puerto Rico Superior Court because the bankruptcy court enjoined the landlord from seeking relief in that forum.
The bankruptcy court’s judgment means that payment of the pre-Opening Date rent is not a breach; by the same token, however, because the lease term begins only after the “Opening Date,” the judgment means that there is no lease for a term of years. So I see nothing that prevents the landlord, armed with the bankruptcy court’s judgment that the condition has not been met, and wielding that judgment as a sword, from seeking in Puerto Rico any relief at law or equity that Puerto Rico law may afford in such a circumstance, possibly including eviction and the imposition of fair market rent during hold-over.
4
In its jurisdictional analysis, the majority cites all but one of the reasons cited by the bankruptcy court. The majority omits (and thereby properly discounts) the idea that bankruptcy jurisdiction can rest (as the bankruptcy court ruled) on a supposed need to [1] foster “bidder[] reli[ance] on the certainty of [the bankruptcy court] determining the terms and conditions of the Leases that were being sold,” and [2] avoid a “chilling affect [sic] on sales conducted in bankruptcy cases.” Tellingly, the bankruptcy court also justified its assertion of jurisdiction over the landlord’s dispute with the Debtor on the need to “maximize the assets [of] the estate”. These reasons rely for their force entirely on an assumption that the bankruptcy court will be biased in favor of the Debtor and those who bid on assets of the estate. But for that bias, what palpable interest could Marianne have had in the construal of the disputed lease terms in the Southern District of New York rather than in the Commonwealth of Puerto Rico? The leasehold was formed in Puerto Rico; the mall is in Aguadilla; the obligations are being performed (or not) there; and the local law of the Commonwealth (concerning real property and contracts) solely controls. See generally Northern Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50, 84, 102 S.Ct. 2858, 73 L.Ed.2d 598 (1982) (warning of “unwarranted encroachment” by bankruptcy courts over contractual rights arising under state law); see also In re United States Lines, Inc., 197 F.3d 631, 637 (2d Cir., 1999) (“Congress has minimal authority to control the manner in which ‘a right created by state law ... ’ may be adjudicated.” (quoting Marathon, 458 U.S. at 84, 102 S.Ct. 2858)).
* H* *
The majority did not mention or endorse the bankruptcy court’s assertion of power to adjudicate disputes concerning the value of interests and things sold by a debtor pursuant to a bankruptcy court order. I dissent chiefly to emphasize that there can be no such power, and that the rationale *237asserted by the bankruptcy court for exercising such power — in essence, that the bankruptcy court can thereby promote the marketing of estate assets generally by maximizing the value of those assets in subsequent litigation — is invalid: the actual or supposed institutional bias of a forum is not a basis for its exercise of jurisdiction.

. The bankruptcy court cited a lease provision giving primacy to manuscript terms over printed terms, and therefore deemed the typewritten Rider 2A paramount. The key words in subparagraph 1(h) are of course also typewritten manuscript.