Case 14-01756-MBK Doc 29 Filed 06/24/15 Entered 06/24/15 14:56:24 Desc Main
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`Chapter 11
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`Case No. 14-22654 (MBK)
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`Ad. Pro. No. 14-01756 (MBK)
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`FOR PUBLICATION
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`UNITED STATES BANKRUPTCY COURT
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`DISTRICT OF NEW JERSEY
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`In Re:
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`REVEL AC, INC., et al.
`Debtors.1
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`-------------------------------------------------------X
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`IDEA Boardwalk, LLC,
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`v.
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`Plaintiff
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`Revel Entertainment Group, LLC,
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`Defendant.
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`APPEARANCES:
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`Stuart J. Moskovitz, Esq.
`Law Offices of Stuart J. Moskovitz, Esq.
`819 Highway 33
`Freehold, NJ 07728
`Attorney for Polo North Country Club, Inc.
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`1 The Debtors in these chapter 11 cases, along with the last four digits of each debtor’s federal tax identification
`number, are: Revel AC, Inc. (3856), Revel AC, LLC (4456), Revel Atlantic City, LLC (9513), Revel Entertainment
`Group, LLC (2321), NB Acquisition, LLC (9387) and SI LLC (3856).
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`Case 14-01756-MBK Doc 29 Filed 06/24/15 Entered 06/24/15 14:56:24 Desc Main
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`Jeffrey Cooper, Esq.
`Barry Roy, Esq.
`Rabinowitz, Lubetkin & Tully, L.L.C.
`293 Eisenhower Parkway, Suite 100
`Livingston, NJ 07039
`Attorneys for IDEA Boardwalk, LLC
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`Warren J. Martin Jr., Esq.
`Porzio Bromberg & Newman P.C.
`100 Southgate Parkway, P.O. Box 1997
`Morristown, NJ 07962
`Attorneys for Exhale Enterprises XXI, Inc., GRGAC1, LLC, GRGAC2, LLC, GRGAC3, LLC,
`Mussel Bar AC, LLC, PM Atlantic City, LLC, RJ Atlantic City, LLC and The Marshall Retail
`Group, LLC (“Amenity Tenants”)
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`Robert K. Dakis, Esq.
`Morrison Cohen, LLP
`909 3rd Avenue
`New York, NY 10022
`Attorneys for American Cut AC Marc Forgione, Azure AC Allegretti, and Lugo AC, LLC (“LDV
`Tenants”)
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`Michael D. Sirota, Esq.
`Warren A. Usatine, Esq.
`Ryan T. Jareck, Esq.
`Cole Schotz P.C.
`25 Main Street, P.O. Box 800
`Hackensack, NJ 07602
`Attorneys for the Official Committee of Unsecured Creditors
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`Michael Viscount, Esq.
`Samuel Israel, Esq.
`Fox Rothschild LLP
`2000 Market Street, 20th Floor
`Philadelphia, PA 19103
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`-and-
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`John K. Cunningham, Esq.
`Richard S. Kebrdle, Esq.
`Kevin M. McGill, Esq.
`Jason N. Zakia, Esq.
`White & Case LLP
`200 South Biscayne Boulevard, Suite 4900
`Miami, FL 33131
`Attorneys for the Debtors
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`MICHAEL B. KAPLAN, U.S.B.J.
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`2
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`Case 14-01756-MBK Doc 29 Filed 06/24/15 Entered 06/24/15 14:56:24 Desc Main
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`MEMORANDUM DECISION
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`INTRODUCTION
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`Before the Court is the cross motion (“Cross Motion”) of IDEA Boardwalk, LLC
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`(“IDEA”), filed in connection with the Debtors’ prior motion to reject certain leases and
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`executory contracts, in which IDEA seeks an order clarifying its rights under 11 U.S.C. § 365(h).
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`In rendering its decision herein, the Court also addresses the respective rights of the Amenity
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`Tenants2 and the LDV Tenants3, which subsequently joined in the Cross Motion (hereinafter,
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`IDEA, the Amenity Tenants, and the LDV Tenants may be referred to, collectively, as “the
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`Tenants”). Prior to the bankruptcy filing, each of the Tenants had entered into agreements
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`(“Agreements”) with the Debtors, under which the Tenants operated various retail facilities on
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`the Debtors’ premises. Whether the Agreements are in fact true leases or memorializations of
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`some other form of contractual relationship (e.g., management or joint venture agreements) is an
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`issue in dispute that must be decided in order for the Court to determine whether the Tenants are
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`entitled to protections afforded by § 365(h).
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`This matter also comes before the Court on the Debtors’ motion to dismiss the first
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`amended adversary complaint (“Complaint”) filed by IDEA against the Debtor/Defendant,4
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`seeking temporary and permanent injunctive and declaratory relief. The Court addresses only
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`Count One of the Complaint, which consists of IDEA’s request to preliminarily enjoin the
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`2 The Amenity Tenants consist of Exhale Enterprises XXI, Inc., GRGAC1, LLC, GRGAC2, LLC, GRGAC3, LLC,
`Mussel Bar AC, LLC, PM Atlantic City, LLC, RJ Atlantic City, LLC and The Marshall Retail Group, LLC.
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` 3
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` The LDV Tenants consist of American Cut AC Marc Forgione, LLC, Azure AC Allegretti, LLC, and Lugo AC,
`LLC. The group of entities that now constitute the LDV Tenants were originally part of the Amenity Tenants, but
`later obtained separate counsel and received designation as the LDV Tenants.
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` 4
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` After the Court approved a sale of the Debtors’ assets to Polo North Country Club, Inc., (“Polo North”), Polo
`North stepped into the shoes of the Debtors. On June 22, 2015, an order was entered which substituted Polo North
`as defendant in this adversary proceeding.
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`3
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`Defendant from engaging in conduct that prevents IDEA from enjoying its possessory rights,
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`including the right to utilities and necessary easements. The Court has heard oral argument on
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`June 11, 2015 and June 24, 2015 and has accepted, in lieu of testimony, the following documents
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`and accompanying exhibits:
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`• First Amended Verified Complaint in Adversary Proceeding; Ad. Pro. No. 14-01756
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`• Affidavits of Michael I. Barry, Dkt. Nos. 1521 and 1782
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`• Affidavit of Kevin DeSanctis, Dkt. No. 1541
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`• Affidavits of Jason Spillerman, Dkt. Nos. 1828 and 1873
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`• Affidavit of John Meadow, Dkt. No. 1830
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`• Affidavit of Barbara Stack, Dkt. No. 1869
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`For the reasons set forth below, the Court denies the Defendant’s pending motion to dismiss and
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`grants, in part, the relief sought by IDEA in its Cross Motion and in Count One of the Complaint.
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`PROCEDURAL BACKGROUND IN THE MAIN CASE
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`On June 19, 2014, Revel AC, Inc. and its affiliated debtors and debtors in possession
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`(“Debtors”)5 each filed a voluntary petition for relief under Chapter 11 of the United States Code
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`(“Bankruptcy Code”).
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`On August 28, 2014, the Debtors filed a motion (the “Rejection Motion)” to reject the
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`Agreements held with the Tenants. The Rejection Motion sought rejection of the Agreements
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`nunc pro tunc to the Debtors’ shutdown date of September 2, 2014 (“Shutdown Date”). On the
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`Shutdown Date, the Debtors ceased operations and barred the Tenants from accessing the
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`5 The Debtors owned and operated a 6.2 million square foot facility that served as a resort and casino, with retail
`stores, restaurants and bars on the premises.
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`4
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`premises. Each of the Tenants gave notice of its intent to continue exercising possessory
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`leasehold rights under § 365(h).
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`On April 6, 2015, the Court entered an order (“Sale Order”) approving the sale of the
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`Debtors’ assets to Polo North, pursuant to § 363 of the Bankruptcy Code. The sale closing
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`occurred on the following day. Thereafter, on April 13, 2015, IDEA filed its Cross Motion,
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`seeking clarification of its § 365(h) rights as they related to the pending Rejection Motion.
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`Subsequently, on April 20, 2015, the Court entered an order granting the Rejection Motion.6
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`Polo North adopts the position originally set forth by the Debtor/Defendant, that the
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`Tenants’ § 365(h) elections were invalid because the Agreements are not true leases. Polo North
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`contends that the Agreements are either management or joint venture agreements, and,
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`consequently, there are no possessory rights capable of being retained by the Tenants. As such,
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`the Agreements would not fall within the purview of § 365(h). Needless to say, the Tenants
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`maintain that the dictates of § 365(h) do apply because the Agreements are indeed true leases. At
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`this juncture, the parties seek a determination of their respective rights. For the reasons set forth
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`below, the Court grants IDEA’s Cross Motion in part, by reaffirming the applicability of
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`§ 365(h) with regard to the rejected Agreements.
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`PROCEDURAL BACKGROUND IN THE ADVERSARY PROCEEDING
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`On September 3, 2014, IDEA filed its initial verified complaint, which commenced an
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`adversary proceeding against the Debtor/Defendant. As noted above, as a consequence of the
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`§ 363 sale, Polo North is now deemed the Defendant in this action. On September 26, 2014,
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`6 The Tenants had also made certain administrative expense requests as to lost profits and other damages under the
`Agreements as a result of the Debtors’ shutdown. The Debtors filed an objection to the administrative claims of the
`Amenity Tenants and the LDV Tenants. This objection has been resolved pending the Court’s determination of the
`parties’ respective § 365(h) rights. In other words, the Amenity Tenants and LDV Tenants intend to withdraw their
`administrative expense requests so long as the Court fixes their possessory rights under § 365(h).
`5
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`IDEA filed its first amended Complaint. In Count One of the Complaint, IDEA seeks to
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`preliminarily enjoin the Defendant from engaging in conduct that prevents IDEA from enjoying
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`its possessory rights, including the right to utilities and necessary easements. On October 13,
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`2014, the Debtors filed a motion to dismiss the Complaint.
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`JURISDICTION
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`The Court has jurisdiction over both the contested matter and complaint under 28 U.S.C.
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`§§ 1334(a) and 157(a) and the Standing Order of the United States District Court dated July 10,
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`1984, as amended October 17, 2013, referring all bankruptcy cases to the bankruptcy court.
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`In Stoe v. Flaherty, 436 F.3d 209 (3d Cir. 2006), the Third Circuit outlined the
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`bankruptcy court’s jurisdiction as follows:
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`Bankruptcy jurisdiction extends to four types of title 11 matters:
`(1) cases “under” title 11; (2) proceedings “arising under” title 11;
`(3) proceedings “arising in” a case under title 11; and (4)
`proceedings “related to” a case under title 11. In re Combustion
`Eng'g, Inc., 391 F.3d 190, 225 (3d Cir.2005). The category of
`cases “under” title 11 “refers merely to the bankruptcy petition
`itself.” Id. at 225–26 n. 38 (quotation and citation omitted). A case
`“arises under” title 11 “if it invokes a substantive right provided by
`title 11.” Torkelsen v. Maggio (In re Guild & Gallery Plus, Inc.),
`72 F.3d 1171, 1178 (3d Cir.1996). Bankruptcy “arising under”
`jurisdiction is analogous to 28 U.S.C. § 1331, which provides for
`original jurisdiction in district courts “of all civil actions arising
`under the Constitution, laws, or treaties of the United States.” 1
`Collier on Bankruptcy § 3.01[4][c][i] at 3–21–22 (15th ed.
`rev.2005); see also Wood v. Wood (Matter of Wood), 825 F.2d 90,
`96–97 (5th Cir.1987). The category of proceedings “arising in”
`bankruptcy cases “includes such things as administrative matters,
`orders to turn over property of the estate and determinations of the
`validity, extent, or priority of liens.” 1 Collier on Bankruptcy
`§ 3.01[4][c][iv] at 3–31 (quotations and footnotes omitted).
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`Proceedings “arise in” a bankruptcy case, “if they have no
`existence outside of the bankruptcy.” United States Trustee v.
`Gryphon at the Stone Mansion, Inc., 166 F.3d 552, 556 (3d
`Cir.1999). Finally, a proceeding is “related to” a bankruptcy case if
`“the outcome of that proceeding could conceivably have any effect
`on the estate being administered in bankruptcy.” In re Pacor, Inc.
`v. Higgins, 743 F.2d 984, 994 (3d Cir.1984); see also In re
`Federal–Mogul Global, Inc., 300 F.3d 368, 381 (3d Cir.2002)
`(noting that Pacor “clearly remains good law in this circuit” in this
`respect).
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`Stoe, 436 F.3d at 216.
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`These matters are core proceedings within the meaning of 28 U.S.C. § 157(b)(2)(A), (N),
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`and (O), and these matters “arise under” title 11. In In re Bell, 476 B.R. 168, 175 (Bankr. E.D.
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`Pa. 2012), the court explained that “arising under” jurisdiction includes any proceeding which
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`invokes a substantive right under the Bankruptcy Code. Indeed, the current action is one which
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`involves the substantive rights granted by § 365(h). See In re Ciena Capital LLC, 2009 WL
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`2905759, at *4 (Bankr. S.D.N.Y. July 28, 2009) (noting that § 365(h) is “a substantive section of
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`the Bankruptcy Code.”).
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`A proceeding that arises under title 11 is also described as one that “involve[s] a cause of
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`action created or determined by a provision of title 11.” In re Ciena Capital LLC, 2009 WL
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`2905759, at *5. In Ciena Capital LLC, the debtor subleased a portion of its property to Alstra,
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`and then rejected the lease. Among other things, Alstra sought a declaration regarding its
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`§ 365(h) rights. The court held that:
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`[i]n seeking to apply a section of title 11 of the United States Code
`(the “Bankruptcy Code”), Alstra invokes the Court's “arising
`under” jurisdiction. Congress used the phrase “arising under title
`11” to describe those proceedings that involve a cause of action
`created or determined by a provision of title 11. Wood v. Wood
`(Matter of Wood), 825 F.2d 90, 96 (5th Cir.1987). Indeed, the only
`reason that Alstra can avail itself of that section of title 11 is
`because of the Debtor's bankruptcy filing. Had there been no
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`bankruptcy case, there would be no basis upon which Alstra could
`seek to have that section apply.
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`The claims “arising under” Title 11 need not affect or benefit the
`estate as a condition of bankruptcy jurisdiction. In re Housecraft
`Industries USA, Inc., 310 F.3d 64 (2d Cir.2002). Consequently,
`“arising under” jurisdiction is present “even if the litigation could
`not affect the estate.” Id. Thus, the Court has jurisdiction to
`determine the issue raised by Alstra concerning that Bankruptcy
`Code section.
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`In re Ciena Capital LLC, 2009 WL 2905759, at *5. Here, the only reason that the Tenants may
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`avail themselves of the possessory rights set forth under § 365(h) is because of the Debtors’
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`bankruptcy filing. Thus, the Court holds that these proceedings are predicated upon a provision
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`of title 11, and qualify as matters “arising under” title 11.
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`At a bare minimum, the Court maintains “related to” jurisdiction over the disputes. If the
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`Agreements were deemed to not be true leases, so that § 365(h) would not come into play, the
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`Tenants would retain pre-petition breach of contract claims (or maybe even administrative
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`claims) against the estate. In that instance, the nature and extent of such claims would impact
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`confirmation of a plan of reorganization and the distribution to general unsecured creditors
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`thereunder.
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`A matter is “related to” a Chapter 11 case if it “could conceivably have any effect on the
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`estate being administered in bankruptcy.” Belcufine v. Aloe, 112 F.3d 633, 636 (3d Cir. 1997)
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`(quoting Pacor v. Higgins, 743 F.2d 984, 994 (3d Cir. 1984)). In Belcufine, the Third Circuit
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`further defined the test as whether the outcome of the case “could alter the Debtor’s rights,
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`liabilities, options, or freedom of action (either positively or negatively) and which in any way
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`impacts upon the handling and administration of the bankrupt estate.” United States Trustee v.
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`Gryphon at the Stone Mansion, Inc., 166 F.3d 552, 556 (3d Cir. 1999). As the Eleventh Circuit
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`has stated, any “interpretation of [related to jurisdiction] must ... avoid the inefficiencies of
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`piecemeal adjudication and promote judicial economy by aiding in the efficient and expeditious
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`resolution of all matters connected to the debtor’s estate.” Matter of Lemco Gypsum, Inc., 910
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`F.2d 784, 787 (11th Cir. 1990). Without a doubt, resolution of the disputes between the Tenants
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`and Polo North potentially impacts the Debtors’ obligations and the continued administration of
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`this Chapter 11 proceeding.
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`To the extent this Court’s statutory jurisdiction remains at issue, the Court notes that it
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`also possesses ancillary jurisdiction to hear these matters. Bankruptcy courts, as courts of limited
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`jurisdiction, may exercise subject matter jurisdiction on two grounds: statutory jurisdiction under
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`28 U.S.C. § 1334 and ancillary (sometimes called inherent) jurisdiction. See In re Fibermark,
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`Inc., 369 B.R. 761, 764 (Bankr. D. Vt. 2007); In re Chateaugay Corp., 201 B.R. 48, 62
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`(Bankr.S.D.N.Y.1996), aff'd 213 B.R. 633 (S.D.N.Y.1997). The District Court, in In re
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`Chateaugay Corp., held that “[b]ankruptcy courts have inherent or ancillary jurisdiction to
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`interpret and enforce their own orders wholly independent of the statutory grant under 28 U.S.C.
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`§ 1334.” Cf. Local Loan Co. v. Hunt, 292 U.S. 234, 239 (1934) (“That a federal court of equity
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`has jurisdiction of a bill ancillary to an original case or proceeding in the same court, whether at
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`law or in equity, to secure or preserve the fruits and advantages of a judgment or decree rendered
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`therein, is well settled.”).
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`The United States Supreme Court has held that federal courts may assert ancillary
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`jurisdiction for two separate, though sometimes related purposes: (1) to permit disposition by a
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`single court of claims that are, in varying respects and degrees, factually interdependent, and (2)
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`to enable a court to function successfully, that is, to manage its proceedings, vindicate its
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`authority, and effectuate its decrees. Kokkonen v. Guardian Life Ins. Co. of America, 511 U.S.
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`375, 380–81 (1994) (citations omitted). Here, the Court is asserting ancillary jurisdiction to
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`enforce the Sale Order, which expressly reserved this Court’s jurisdiction over matters arising
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`out of or related to the Sale Order. The Sale Order provides:
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`This Court shall retain exclusive jurisdiction to resolve any
`controversy or claim arising out of or related to this Sale
`Order, the [Asset Purchase] Agreement or any related agreements,
`including, without limitation: (i) any actual or alleged breach
`or violation of this Sale Order, the [Asset Purchase] Agreement
`or any related agreements; (ii) the enforcement of any relief
`granted in this Sale Order; or (iii) as otherwise set forth in the
`[Asset Purchase] Agreement.
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`Sale Order, Dkt. No. 1550, ¶ 37 (emphasis added). The Sale Order further specifies that the sale
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`was made subject to the possessory interests of the Tenants. The Sale Order states:
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`Notwithstanding anything to the contrary in this Sale Order or the
`Agreement, the Sale of the Assets to [Polo North] pursuant to this
`Sale Order shall not be free and clear of (i) any existing tenancies
`and/or possessory interests of the Amenity Tenants, ACR and
`IDEA, respectively, pending the Debtors' rejection pursuant to
`section 365 of the Bankruptcy Code of the agreements containing
`such
`tenancies and/or possessory
`interests (the "Possessory
`Agreements"), and (ii) any rights elected to be retained by each of
`the non-debtor counterparties to the Possessory Agreements
`pursuant to section 365(h) of the Bankruptcy Code after the
`Debtors' rejection of the respective Possessory Agreements (such
`tenancies, interests and rights referred to in (i) and (ii) collectively,
`the "Possessory Interests").
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`Sale Order, Dkt. No. 1550, ¶ 18. Issues as to whether the Tenants possess any rights under § 365,
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`and their ability to act on such rights over Polo North’s objection, fall well within the parameters
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`of ¶ 37 of the Sale Order, and this Court maintains exclusive jurisdiction to resolve the disputes.
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`As noted, the matters presented herein are core proceedings under 28 U.S.C. § 157(b). To
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`the extent there is a challenge to the Court’s ability to render a final judgment, the failure of the
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`parties to object to the Sale Order constitutes consent to this Court’s authority. The United States
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`Supreme Court recently reaffirmed that “Article III is not violated when the parties knowingly
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`and voluntarily consent to adjudication by a bankruptcy judge.” Wellness Int'l Network, Ltd. v.
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`Sharif, 135 S. Ct. 1932, 1939 (2015). The Supreme Court acknowledged that consent need not be
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`express. Id. at 1947. Here, when the parties agreed to the terms of the Sale Order, they consented
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`to the specific grant of both exclusive jurisdiction and authority of the bankruptcy court.
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`Lastly, venue is proper in this Court under 28 U.S.C. §§ 1408 and 1409. The Court issues
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`the following findings of fact and conclusions of law pursuant to Fed. R. Bankr. P. 7052.7
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`I.
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`Cross Motion
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`DISCUSSION
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`a. True Leases or Management / Joint Venture Agreements
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`The Court rules that the Agreements are true leases. Each of the Agreements share certain
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`characteristics, and therefore, the Court examines them together. First, the Court looks to New
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`Jersey law to determine what constitutes a true lease.
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`Generally, a lease exists when there is an agreement by the lessor
`to turn over specific premises to the exclusive possession of a
`lessee for a definite time period. In return, the lessor receives a
`payment of rent from the lessee. Thiokol Chem. Corp. v. Morris
`County Bd. of Taxation, 41 N.J. 405, 197 A.2d 176, 182 (1964).
`“Frequently, a lease is spoken of as a hiring of land, or a sale of the
`possession, occupancy and profits of land for a term.” Id. Whether
`a lease exists depends on the intention of the parties as expressed
`by a written document or the conduct of the parties to the alleged
`lease. Id. Where the intentions of the parties is unclear, the burden
`is on the party asserting the existence of a lease to demonstrate a
`landlord-tenant relationship. Id.; Town of Kearny v. Municipal
`Sanitary Landfill Auth., 143 N.J.Super. 449, 363 A.2d 390, 393–94
`(1976); Outerbridge Terminal, Inc. v. City of Perth Amboy, 179
`N.J.Super. 400, 432 A.2d 141, 144 (1980).
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`7 To the extent that any of the findings of fact might constitute conclusions of law, they are adopted as such.
`Conversely, to the extent that any conclusions of law constitute findings of fact, they are adopted as such.
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`Matter of Great N. Forest Products, Inc., 135 B.R. 46, 55 (Bankr. W.D. Mich. 1991) (applying
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`New Jersey law). This Court regards Thiokol Chemical Corp. v. Morris County Board of
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`Taxation, 41 N.J. 405 (1964) as persuasive authority for what constitutes a true lease in the state
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`of New Jersey. In Thiokol, the court held that
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`whether a particular agreement is a lease depends upon the
`intention of the parties as revealed by the language employed in
`establishing their relationship, and, where doubt exists, by the
`circumstances surrounding its making as well as by their course of
`operation under it. 51 C.J.S. Landlord & Tenant s 202e. And, in
`situations where the ambiguity or doubt gives rise to a factual
`question as to the intention of the parties, the burden is on the party
`asserting
`it
`to demonstrate existence of
`the
`lessor-lessee
`relationship.
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`Thiokol, 41 N.J. at 417. The Defendant places before the Court ample case law supporting the
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`contention that a court must not be swayed by “form over substance” when determining the
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`existence of a true lease. While this maxim is accurate, at some point form becomes substance.
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`We have reached that point. The express terms of the Agreements, together with supporting
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`affidavits, make it clear that the Debtors and the Tenants had the unequivocal intention of
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`entering into true lease agreements. As set forth in Thiokol, supra, the intention of the parties
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`may be revealed by language in the Agreements. Within the Agreements, the terms “tenant”,
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`“lease”, “landlord”, and “rent” are used hundreds, if not thousands of times. Moreover, each of
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`the Agreements contain explicit language that illustrate the creation of a true lease. For instance,
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`section 21.12 of IDEA’s Agreement expressly states that
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`[n]othing contained in this Lease shall be deemed or construed as
`creating the relationship of principal and agent, employer and
`employee or of partnership or joint venture between the parties
`hereto, it being understood and agreed that neither the method of
`computing rent, payment of the Tenant Fees nor any other
`provision contained herein nor any acts of the parties hereto shall
`be deemed to create any relationship between the parties other
`than that of Landlord and Tenant. The provisions of this lease
`relating to the Percentage Rent payable hereunder are included
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`solely for the purpose of providing a method whereby adequate
`rent is to be measured and ascertained.
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`IDEA Lease Agreement, Dkt. No. 1521, Exhibit A-2, section 21.12 (emphasis added). Similar
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`language is contained in the Agreements held by the Amenity Tenants and the LDV Tenants.
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`Additional provisions in the Agreements serve as indicia that the parties intended to create
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`possessory leasehold interests. For instance, the Agreements contain quiet enjoyment provisions.
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`Such language, which grants the Tenants the right to enjoy the property for the purpose for
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`which it was leased, is typically found in lease agreements and suggests a grant of possessory
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`rights.
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`In the resolution of ambiguity or doubt, the Court considers the factors listed in Thiokol,
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`supra, as stated below:
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`[I]n the resolution of ambiguity or doubt, absence of (1) a
`stipulation for rent as such, or other consideration regarded by the
`parties as constituting payment for the transfer of possession, and
`(2) a term; and presence of (1) limitations on exclusive possession
`and control of the premises, and (2) a right in the owner to revoke
`the permit to use at any time, are factors militating against the
`existence of a lease.
`
`Id. First, the Agreements provide for the payment of rent. Polo North has adopted an argument,
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`previously set forth by the Debtors, that since rent payments are based on a percentage of
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`revenue, the Agreements do not qualify as true leases. The Court disagrees. As noted by the
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`Tenants, percentage rent leases have been accepted for over 100 years in New Jersey. See
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`Thropp v. Field, 26 N.J. Eq. 82, 83 (Ch. 1875); see also In re Adoption of N.J.A.C. 13:38-1.3(f),
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`N.J. Super. 536, 545 (App. Div. 2001) (noting that there exists “a longstanding common practice
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`of paying rent to a shopping mall landlord based on a percentage of gross income.”). Second,
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`each Agreement provides for a set term of years, with options to renew at the end. Third, the
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`Agreements grant the Tenants possessory interests and the rights to exclusive use of the leased
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`premises during the specified term. Lastly, the Agreements are not revocable at any time by the
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`landlord, but rather, are revocable only upon certain events of default. Each of these factors
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`militates in favor of finding that the Agreements are true leases.
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`The Court is cognizant that it must look at the substance of the transaction rather than
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`simply the form of the agreement in determining whether there exists a true lease. For the
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`foregoing reasons, the language contained in the Agreements, as well as the conduct of the
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`parties undertaken from the outset of the Agreements, demonstrate typical landlord-tenant
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`relationships, and the substance of the transactions buttress the Court’s determination that the
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`Agreements are indeed true leases.
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`b. Interplay Between §§ 365 and 363
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`Since IDEA, the Amenity Tenants, and the LDV Tenants are each found to hold true
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`leases, they are also entitled to their respective possessory rights under § 365(h). The Tenants
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`retain these rights notwithstanding a sale of the Debtors’ assets under § 363 of the Bankruptcy
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`Code.
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`Sections 363(b) and (f) of the Bankruptcy Code permit for the sale of a debtor's assets
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`free and clear of any interest in property. Here, the sale to Polo North was expressly made
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`subject to the interests of the Tenants. See Sale Order, Dkt. No. 1550, ¶ 18. Notwithstanding, the
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`Court rules that a § 363 sale does not and could not trump the rights granted to the Tenants by
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`§ 365(h).
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`Section 365(h) provides:
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`(h)(1)(A) If the trustee rejects an unexpired lease of real property
`under which the debtor is the lessor and—
`
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`(i) if the rejection by the trustee amounts to such a breach
`as would entitle the lessee to treat such lease as terminated
`by virtue of its terms, applicable nonbankruptcy law, or any
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`agreement made by the lessee, then the lessee under such
`lease may treat such lease as terminated by the rejection; or
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`(ii) if the term of such lease has commenced, the lessee
`may retain its rights under such lease (including rights such
`as those relating to the amount and timing of payment of
`rent and other amounts payable by the lessee and any right
`of use, possession, quiet enjoyment, subletting, assignment,
`or hypothecation) that are in or appurtenant to the real
`property for the balance of the term of such lease and for
`any renewal or extension of such rights to the extent that
`such rights are enforceable under applicable nonbankruptcy
`law.
`
`(B) If the lessee retains its rights under subparagraph (A)(ii), the
`lessee may offset against the rent reserved under such lease for the
`balance of the term after the date of the rejection of such lease and
`for the term of any renewal or extension of such lease, the value of
`any damage caused by the nonperformance after the date of such
`rejection, of any obligation of the debtor under such lease, but the
`lessee shall not have any other right against the estate or the debtor
`on account of any damage occurring after such date caused by such
`nonperformance.
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`11 U.S.C. § 365(h). This Court previously has addressed the interplay between §§ 363 and 365.
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`In In re Crumbs Bake Shop, Inc., 522 B.R. 766, 777 (Bankr. D. N.J. 2014), this Court held that
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`nothing in § 363(f) trumps, supersedes, or otherwise overrides the rights of licensees under
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`§ 365(n). The Court sees no reason to reach a different conclusion in the present case with regard
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`to the Tenants’ rights under § 365(h). Inasmuch as there are notable similarities between
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`§ 365(n) and § 365(h), the Crumbs analysis is relevant here:
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`It is well established that the appropriate way to construe a statute
`is to conclude that the specific governs over the general . . . In re
`Churchill Properties III, Ltd. P'ship, 197 B.R. 283, 288 (Bankr.
`N.D. Ill. 1996). In Churchill, the court recognized that § 365(h) is
`specific, as it grants a particular set of clearly stated rights to
`lessees of rejected leases. That is, Congress specifically gave
`lessees the option to remain in possession after a lease rejection. If
`the court were to allow a § 363(f) sale free and clear of the lessee's
`interest, “the application of [§ 365(h) ] as it relates to non-debtor
`lessees would be nugatory.” In re Churchill Properties, 197 B.R. at
`288. Indeed, “it would make little sense to permit a general
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`provision, such as [§] 363(f), to override [§ 365's] purpose. The