LHI Liquidation Co. Inc.

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UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
In re:
LHI LIQUIDATION CO., INC., et al.,
Debtors.
NOT FOR PUBLICATION
Case No. 13-14050 (MG)
(Jointly Administered)
MEMORANDUM OPINION AND ORDER DENYING MOTION OF GRISTEDES
FOODS, INC. TO COMPEL MADISON CAPITAL HOLDINGS LLC AND
MC LONG TERM HOLDINGS LLC TO COMPLY WITH ASSUMPTION ORDER
A P P E A R A N C E S:
GOLDBERG WEPRIN FINKEL GOLDSTEIN LLP
Attorneys for Gristedes Foods, Inc.
1501 Broadway – 22nd Floor
New York, New York 10036
By: 	Kevin J. Nash, Esq.
DUANE MORRIS LLP
Attorneys for Ansonia Commercial LLC
1540 Broadway
New York, New York 10036
By: 	Lawrence J. Kotler, Esq.
COLE SCHOTZ P.C.
Attorneys for Madison Capital Holdings LLC
and MC Long Term Holdings LLC
1325 Avenue of the Americas, 19th floor
New York, New York 10019
By: 	Leo V. Leyva, Esq.
Ilana Volkov, Esq.
MARTIN GLENN
UNITED STATES BANKRUPTCY JUDGE
Pending before the Court is the motion (the “Motion,” ECF Doc. # 1032) of Gristedes
Foods, Inc. (“Gristedes”) to compel Madison Capital Holdings LLC (“Madison Capital”) and
MC Long Term Holdings LLC (“MC Long Term,” together with Madison Capital, the
“Madisons”) to comply with their purported adequate assurance obligations required by the
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Court’s order (the “Assumption Order,” ECF Doc. # 636) authorizing the assumption and
assignment of the Gristedes Sub-Sublease (defined below). By the Motion, Gristedes seeks to
compel payment by Madison Capital and MC Long Term on pain of contempt.
Asonia Commercial LLC (“Asonia”) filed a limited response (the “Asonia Response,”
ECF Doc. # 1038) and Madison Capital and MC Holdings filed a memorandum of law in
opposition (the “Madison Objection,” ECF Doc. # 1042).1 Gristedes filed a reply (the “Reply,”
ECF Doc. # 1050).
For the reasons stated below, the Motion is DENIED.
I. 	BACKGROUND
A. 	General Background
Loehmann’s Holding, Inc., et al. (the “Debtors”) filed for chapter 11 protection on
December 15, 2013 (the “Petition Date”). This dispute relates to the assumption and assignment
of the Gristedes’ sub-sublease (the “Sub-Sublease”) for the premises at 2101-2115 Broadway,
New York (the “Broadway Premises”). The Broadway Premises are subject to a series of
integrated lease and sublease agreements originating from a prime lease, as amended, originally
made by and between the predecessor to Asonia, as landlord, and The Great Atlantic & Pacific
Tea Company (“A&P”), as tenant, dated June 25, 1997 (the “Prime Lease”). (Mot. ¶ 10.) In
October 2002, Gristedes entered into a sublease with A&P and operated at the Broadway
Premises for three years. (Id. ¶ 11.) In October 26, 2005, Gristedes entered into the Sub-
Sublease with Loehmann’s Operating Co., pursuant to which Loehmann’s operated at the
Broadway Premises through the date of its bankruptcy. (Id. ¶ 12.) In connection with A&P’s
first bankruptcy, the Prime Lease was rejected in favor of a tri-party agreement whereby
1 	The Madison Objection is supported by the declaration of Leo V. Leyva (the “Leyva Declaration,” ECF
Doc. # 1043).
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Gristedes became the direct tenant of Ansonia and Loehmann’s became Gristedes’ sub-tenant.
(Id. ¶ 13.) After Loehmann’s filed for bankruptcy, it packaged its store leases for sale pursuant
to a designation agreement (the “Designation Rights Agreement”) with Madison Capital in
which Madison Capital bought the right to designate on Loehmann’s behalf various stores for
either assumption or rejection in bankruptcy. (Id. ¶ 14.)
On January 23, 2014, the Court entered an order approving Madison Capital’s purchase
of lease “designation rights” from the Debtors for the sum of $6,350,000 pursuant to the
Designation Rights Agreement. (ECF Doc. # 301.) In accordance with the Designation Rights
Agreement, Madison Capital directed the Debtors to provide notice of the assumption of the
Sub-Sublease and assignment to a limited liability company, MC Long Term. 2 (Madison Obj. at
5.) Accordingly, the Debtors filed the Notice of Debtors’ Intent to Assume and Assign
Unexpired Real Property Lease (the “Notice of Assignment,” ECF Doc. # 449). The Notice of
Assignment identified MC Long Term as the intended assignee and provided information
regarding MC Long Term’s adequate assurance of future performance. (Id. Ex. C.)
After the Debtors filed the Notice of Assignment, Gristedes filed a reservation of rights
(the “First Reservation of Rights,” ECF Doc. # 468). In addition to reserving its rights, Gristedes
stated that MC Long Term’s agreement to establish a one month security deposit satisfied its
adequate assurance issue:
Gristedes also reserves its rights regarding the adequate assurance
of future performance. 	As this pleading was prepared, Gristedes
obtained MC Long Term Holding’s agreement to establish a one
month security deposit with Gristedes to satisfy the adequate
assurance issue. This is acceptable to Gristedes.
2 	MC Long Term is a limited liability company that is owned and managed by the principals of Madison
Capital.
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(First Reservation of Rights at 2.) About two months later, Gristedes filed another reservation of
rights in response to the Notice of Assignment, but it only addressed Gristedes’ concerns with
respect to the anticipated interplay between Gristedes and Asonia under the Sublease and makes
no mention of MC Long Term or Madison Capital. (ECF Doc. # 565.)
With Grsitedes’ consent, the Court entered an order approving the assumption and
assignment of the Sub-Sublease and related agreements to MC Long Term (the “Assumption
Order,” ECF Doc. # 636). With respect to adequate assurance, the Assumption Order states:
The Debtors and [MC Long Term] have provided both [Gristedes]
and [Ansonia] with adequate assurance of future performance
within the meaning of 11 U.S.C. §§ 365(b)(1), 365(b)(3) and
365(f)(2)(b); provided, however, that the Assignee, as additional
adequate 	assurance, 	shall 	provide 	[Gristedes] 	and 	with 	an
additional security deposit equivalent to one (1) month’s rent.
(Assumption Order ¶ 3 (underline in original).) Upon assignment of the Sub-Sublease (which
closed on July 1, 2014), Asonia and Gristedes were paid $96,414 to cure the Debtors’ defaults
under the Sub-Sublease (and the over-lease) in accordance with the terms of the Assumption
Order, and MC Long Term became the new tenant under the Sub-Sublease. (Madison Obj. at 7
(citing Leyva Decl. ¶ 13).) The one month of additional rent of $170,257.08 as a security deposit
remains unpaid. (Mot. ¶ 3.)
B. 	Prior Litigation
On March 6, 2015, Ansonia commenced a non-payment action in the Civil Court of the
City of New York against Gristedes and Madison Capital. (Madison Obj. at 7; Leyva Decl. ¶
15.) In its answer, Madison Capital asserted numerous affirmative defenses, including that it
was not a party to the subject leases. (Madison Obj. at 7.) Gristedes’ answer asserted cross-
claims against Madison Capital seeking to recover possession of the premises as well as
damages, including the unpaid additional security deposit. (Id.) After Madison Capital moved
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to dismiss Gristedes’ cross-claims, Gristedes agreed to dismissal through a stipulation dated May
6, 2015. (Id.)
On May 22, 2015, Gristedes commenced a separate lawsuit in the Supreme Court of New
York County (the “Supreme Court Litigation”) against both Madison Capital and MC Long
Term. (Id. at 8.) Gristedes sought an award of damages against MC Long Term for non-
payment of rent and for the unpaid additional security deposit; Gristedes also sought a
determination that Madison Capital is jointly and severally liable for such damages based on a
corporate veil piercing claim. (Id.) On June 1, 2015, Gristedes filed another non-payment
petition in the Civil Court of the City of New York against MC Long Term “c/o Madison Capital
Holdings LLC,” seeking possession of the premises and a money judgment for the non-payment
of rent and the additional security deposit (the “Civil Court Litigation”). (Id.) In response to the
Civil Court Litigation, MC Long Term relinquished possession of the premises to Gristedes and
consented to the entry of judgment in favor of Gristedes in the amount of $2,468,458.25,
representing all unpaid rent and taxes due under the Sub-Sublease through September 2016 (the
“Stipulation of Settlement”). (Id.) In exchange for MC Long Term consenting to entry of the
judgment, Gristedes dismissed all claims against MC Long Term, including those asserted in the
Supreme Court Litigation.3 (Id.)
C. 	Gristedes’ Arguments
Gristedes argues that both Madison Capital and MC Long Term should be compelled to
comply with the Assumption Order’s requirement to provide adequate assurance of future
performance. (Mot. ¶ 26.) Gristedes contends that the adequate performance requirement covers
both Madison Capital and MC Long Term. (Id.) Gristedes argues that after inducing Gristedes’
3 	Gristedes continues to pursue several causes of action against Madison Capital in the Supreme Court
Litigation, including claims for piercing the corporate veil and alter ego liability. Madison Capital moved to dismiss
these claims; the motion to dismiss remains pending.
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consent based on Madison Capital’s strong financial standing after directing parties to its
website, Madison Capital cannot now divorce itself from ensuing defaults and “hide behind a
shell entity.” (Id.) Gristedes further contends that Madison Capital injected its own financial
strength into the analysis by coupling the concept of MC Long Term’s adequate assurance with
its own operating performance and such was a knowing and calculated decision that constituted
an implied, if not express, representation that MC Long Term would be a long term tenant and
adequately capitalized. (Id. ¶ 28.)
Gristedes contends that the failure of Madison Capital to meet its adequate assurance
commitment to Gristedes should be punishable by contempt unless Madison Capital honors the
letter and spirit of the Assumption Order by the payment of the security deposit and Madison
Capital’s additional capitalization of MC Long Term. (Id. ¶ 31.)
D. 	Asonia’s Arguments
In its limited response, Ansonia argues that Gristedes has failed and refused to honor its
obligations under its sublease resulting in a state action by Ansonia against Gristedes on March
6, 2015, which, contrary to Gristedes’ representations in the Motion, remains ongoing. (Ansonia
Response ¶ 6.) Moreover, neither Gristedes nor MC Long Term has paid the rent or real estate
taxes as required by the Sub-Sublease. (Id. ¶ 7.) Ansonia asserts that the arrears under the Sub-
Sublease exceed $1.4 million. (Id.)
Ansonia contends that, to extent that the Court directs either Madison Capital or MC
Long Term to pay the additional security deposit of $170,257.08, the Court should direct the
payment to Ansonia, as the over-landlord, and not to Gristedes. (Id. ¶ 8.)
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E. 	Madison Capital and MC Long Term Holding’s Arguments
In response, the Madisons contend that (i) the Motion is procedurally defective and lacks
merit, (ii) Gristedes’ conduct and acceptance of benefits from the Madisons foreclose its rights to
pursue the additional security deposit and (iii) Gristedes’ intentional decision not to seek
additional adequate assurance protection in the Assumption Order bars a claim against Madison
Capital for the payment of the additional security deposit. (See generally Madison Obj.)
First, the Madisons argue that the Motion effectively seeks to have the Court determine
that Madison Capital is liable for MC Long Term’s obligation to pay the additional security
deposit referenced in the Assumption Order and require further capitalization of MC Long Term.
(Id. at 10.) In doing so, the Madisons contend that Gristedes is asserting a claim for monetary
relief against a party with no factual or legal responsibility. (Id.) The Madisons further contend
that even if the Court had the ability to hear this dispute between two non-debtor parties (which
the Madisons contend the Court does not), the proper procedural tool for seeking this type of
relief is an adversary proceeding. (Id. at 11.) Additionally, the Madisons contend that Gristedes
has failed to meet the requirements for piercing the corporate veil. (Id.)
Second, the Madisons contend that Gristedes is equitably estopped from asserting a claim
against Madison Capital for payment of the additional security deposit based on Gristedes’
statement in its First Reservation of Rights in which it stated that it was “acceptable” that only
MC Long Term would be responsible to establish the additional one month security deposit. (Id.
at 14.)
Third, the Madisons argue that Gristedes’ intentional decision not to pursue additional
adequate protection in the Assumption Order bars any claim against Madison Capital. (Id. at
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16.) The Madisons argue that Gristedes could have demanded, for example, a corporate
guarantee, a letter of credit, or a larger security deposit. (Id.)
II. 	DISCUSSION
The genesis of this dispute is the Assumption Order entered by this Court, with Gristedes
consent, approving the assumption of the Sub-Lease and assignment to MC Long Term.
(Assumption Order at 2 (“the Sub-Sublandlord and the Landlord having agreed to the entry of
this Order . . . .”).) Nothing in the Assumption Order imposed any obligation on Madison
Capital to pay any amounts due from MC Long Term. 4 Contrary to Gristedes’ argument, the
Court is not required to “interpret” the confirmed chapter 11 plan or the Assumption Order.
Gristedes expressly agreed to the establishment of one month’s rent as security deposit by
MC Long Term (not Madison Capital) in its First Reservation of Rights:
Gristedes also reserves its rights regarding the adequate assurance
of future performance. 	As this pleading was prepared, Gristedes
obtained MC Long Term Holding’s agreement to establish a one
month security deposit with Gristedes to satisfy the adequate
assurance issue. This is acceptable to Gristedes.
(First Reservation of Rights at 2 (emphasis added).)
The agreement requiring a security deposit by MC Long Term contradicts Gristedes’
argument that it relied on the financial strength of Madison Capital when consenting to the
assumption and assignment of the Sub-Sublease. The Assumption Order does not even mention
Madison Capital. If Gristedes believed that Madison Capital held itself out as potentially liable
for MC Long Term’s obligations, it should have insisted that the Assumption Order reflect such
4 	Gristedes argues that Madison Capital should be compelled to meet the adequate assurance obligations of
MC Long Term, and upon failing to do so, Madison Capital should be held in contempt. Contempt would not be an
available remedy even if this Court had jurisdiction, which it concludes it does not. Contempt may only be ordered
based on clear and convincing evidence of a violation of a clear and unambiguous order. The Assumption Order is
not a clear and unambiguous order imposing a payment obligation on Madison Capital. See City of New York v.
Local 28, Sheet Metal Workers’ Int’l Ass’n, 170 F.3d 279, 282–83 (2d Cir. 1999) (“A party may be held in contempt
only if it is proven by ‘clear and convincing’ evidence that the party violated a ‘clear and unambiguous’ order of the
court.” (citations omitted)).
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a requirement. Additionally, MC Long Term was described throughout the proceedings as a
limited liability company “owned and operated by the principals of Madison Capital”; this does
not support Gristedes’ argument that Madison Capital would be responsible for the obligations of
MC Long Term. Gristedes fails to provide any authority that a corporate parent incurs liability
for the adequate assurance obligations of a wholly owned subsidiary or affiliate absent a
contractual provision or order imposing such a requirement.
When MC Long Term failed to perform as required by the terms of the Assumption
Order, Gristedes filed several lawsuits in state court against Madison Capital and MC Long
Term. Indeed, Gristedes has already recovered a $2,468,458.25 judgment against MC Long
Term. Unable to recover damages based on its judgment against MC Long Term, Gristedes is
also pursuing claims in state court to recover its judgment against Madison Capital based on
piercing the corporate veil and alter ego. Civil contempt of MC Long Term—apparently a
judgment proof defendant—is not an available remedy.5 The dispute against Madison Capital is
a matter properly resolved by the state court.
Gristedes’ counsel acknowledged during the hearing on the Motion that this post-
confirmation dispute between Gristedes and Madison Capital—two non-debtor parties—can
have no conceivable effect on the Debtors. Therefore, the Court concludes that it does not have
subject matter jurisdiction over this dispute. See generally Park Ave. Radiologists, P.C. v.
Melnick (In re Park Ave. Radiologists, P.C.), 450 B.R. 461, 467–69 (Bankr. S.D.N.Y. 2011).
5 	Civil contempt is appropriate only when “obedience is within the power of the party being coerced by the
order.” Schoenberg v. Shapolsky Publishers, Inc., 971 F.2d 926, 935 (2d Cir. 1992). See also Shillitani v. United
States, 384 U.S. 364, 370-71 (1966) (concluding that the justification for civil contempt depends upon the ability of
the contemnor to comply with the court’s order); Badgley v. Santacroce, 800 F.2d 33, 36 (2d Cir. 1986) (stating that
because compliance with a court’s directive is the goal, an order of civil contempt is appropriate “only when it
appears that obedience is within the power of the party being coerced by the order”) (citation omitted); In re Marc
Rich & Co., A.G., 736 F.2d 864, 866 (2d Cir. 1984) (concluding that civil contempt is a coercive sanction, and thus a
person held in civil contempt must be able to comply with the court order at issue).
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Even if such jurisdiction did exist, the Court believes that abstention pursuant to 28 U.S.C. §
1334(c)(1) is appropriate under the circumstances. This is a post-confirmation dispute that arises
between two non-debtor parties and, as such, it would have no material effect on the
administration of the estates.
III. 	CONCLUSION
For the forgoing reasons, the Motion is DENIED.
IT IS SO ORDERED.
Dated: 	March 30, 2016
New York, New York
_____Martin Glenn____________
MARTIN GLENN
United States Bankruptcy Judge
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