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Bankruptcy Judge Carey Denies Motion to Reconsider Decision on Percentage Rent Due to Landlord Upon Assumption of Lease

By Charlene D. Davis

On January 14, 2014, Bankruptcy Judge Kevin J. Carey issued a memorandum opinion order in the Filene’s Basement case denying a motion to reconsider an earlier decision that one of the Debtors, Syms Corp. (“Syms”) owed a landlord unpaid rent.  In denying the motion to reconsider the decision, the Court applied the three part analysis applicable to Federal Rule of Bankruptcy Procedure 9023 to find that Syms failed to satisfy its burden of showing any clear errors of law warranting a different outcome.

In the underlying dispute, Syms and U.S. Bank, the holder of the rent claim, had both moved for summary judgment in the context of Syms’ motion to assume in a lease of property in Secaucus, New Jersey (the “Lease”).  U.S. Bank had objected to assumption initially asserting it was owed $3.5 million as an administrative claim.  The rent claim was based on a provision in a Lease that entitled the landlord to a percentage rent equal to 15 percent of the Tenant’s “Annual Net Cash Flow” (the “Percentage Rent”).  Annual Net Cash flow was defined in the Lease as “any net excess refinancing proceeds received during any calendar year from any permanent mortgage refinancing of all or any part of the Demised Land and/or Buildings thereon.”  The term “net excess refinancing proceeds” was defined as: “the amount by which the principal amount of any refinanced permanent mortgage covering a building on the Demised Land exceeds the unpaid principal balance of any existing mortgage covering such building, minus all costs and expenses incurred in connection with any such refinancing.”

During the Lease term, Syms entered into a Second Amendment to a Credit Agreement with Bank of America for an approximately $10 million Loan and granted Bank of America a leasehold mortgage on the Lease (the “Mortgage”).  The maximum liability on the Mortgage was capped at $23.4 million. The loan was subsequently repaid.  U.S. Bank’s Percentage Rent claim was based on 15% of the Mortgage amount.  The Court found that U.S. Bank was entitled to the Percentage Rent but limited the amount of the Annual New Cash Flow to the $10 million in proceeds that Syms had actually received from the loan under the Second Amendment.

In its motion for reconsideration, Syms argued that 1) in determining that the Mortgage was a “permanent mortgage,” under the Lease, the Court failed to consider whether the Mortgage constituted a “refinancing since the lease provision refers to a “permanent mortgage refinancing”; 2) that the Court improperly applied a canon of contract interpretation not applicable to the Lease; and 3) the Court’s interpretation of the term “permanent” as used in the Lease conflicts with common usage.

The Court first addressed Syms’s argument that the financing was not a refinancing; finding that because Syms had failed to raise it (other than in a footnote) in the summary judgment briefs, the argument was waived.  The Court then considered Syms’ remaining two contentions together; finding that it had properly determined the meaning of “permanent mortgage” by reference to the Lease provisions as a whole, even if it had referenced a canon of construction only applicable (under New Jersey law) to  insurance contracts and without reference to common usage.  The Court concluded that by applying any of the common use definitions offered by Syms for the term “permanent mortgage” other terms of the lease would not be given their full effect; specifically, the mortgages excluded from the calculation of Percentage Rent.  Based on these conclusions, the Court denied the motion to reconsider.  A copy of the opinion can be found here.

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