Ashley Livonia A&P LLC v. the Great Atlantic & Pacific Tea Company ( 2015 )

STATE OF MICHIGAN
COURT OF APPEALS
ASHLEY LIVONIA A&P, L.L.C., UNPUBLISHED
June 16, 2015
Plaintiff-Appellee/Cross-Appellant,
and
GE COMMERCIAL FINANCE BUSINESS
PROPERTY CORPORATION,
Intervening Plaintiff-
Appellee/Cross-Appellant,
v No. 319288
Wayne Circuit Court
THE GREAT ATLANTIC & PACIFIC TEA LC No. 10-007576-CK
COMPANY, INC.,
Defendant,
and
BORMAN’S, INC.,
Defendant-Appellant/Cross-
Appellee,
and
MASTRONARDI PRODUCE-USA, INC.,
Intervening Defendant-
Appellee/Cross-Appellant.
Before: MARKEY, P.J., and OWENS and GLEICHER, JJ.
PER CURIAM.
Defendant Borman’s, Inc. appeals as of right the grant of partial summary disposition in
favor of plaintiff Ashley Livonia A&P, L.L.C., intervening plaintiff GE Commercial Finance
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Business Property Corporation, and intervening defendant Mastronardi Produce-USA, Inc. in
this commercial lease litigation following a discharge in bankruptcy. On cross-appeal, Ashley,
GE, and Mastronardi challenge the circuit court’s denial of their request for sanctions. We
affirm.
I. BACKGROUND
This case centers on a warehouse that Borman’s (connected with the now defunct Farmer
Jack grocery store chain) leased and used before its bankruptcy. GE had provided a long-term
loan to cover renovations at the property. The property was owned by Ashley, but the loan
payments were to be made by Borman’s as part of its lease agreement. The property is now
occupied by Mastronardi. On the eve of its bankruptcy, Borman’s sublet the property to
Mastronardi, and Ashley agreed to continue Mastronardi as a tenant even after Borman’s was
removed from the equation. Although millions of dollars were at stake in this case, the disputes
remaining on appeal are minimal, centering on $238,000 that represents Mastronardi’s security
deposit and September 2010 rent payment.
II. BORMAN’S APPELLATE CHALLENGES
Various parties asserted entitlement to $238,000 that Mastronardi placed in escrow to
cover its security deposit and September 2010 rent payment until the proper recipient could be
determined. The circuit court granted summary disposition in favor of Ashley, GE and
Mastronardi and distributed the funds to GE and Ashley. Borman’s contends that these funds
were assets of the bankruptcy estate. The funds were included in the bankruptcy discharge and
reorganization plan, Borman’s argues, and therefore the bankruptcy court orders have res
judicata and collateral estoppel effect on this state court action. Ashley, GE, and Mastronardi
deny that the funds were part of the bankruptcy estate, leaving their distribution to the circuit
court. That Borman’s is not entitled to the funds, they assert, is further supported by the fact that
Ashley evicted Borman’s for breaching its lease before Mastronardi paid the disputed funds into
escrow. Ashley, GE, and Mastronardi also note Borman’s failure to include these payments in
the schedules accompanying its bankruptcy petition.
As discussed by this Court in Landin v Healthsource Saginaw, Inc, 305 Mich. App. 519,
523; 854 NW2d 152 (2014), “This Court reviews de novo a trial court’s decision to grant or deny
a motion for summary disposition.” Specifically:
A motion for summary disposition under MCR 2.116(C)(10) tests the factual
sufficiency of the complaint. In evaluating a motion for summary disposition
brought under (C)(10), a reviewing court considers affidavits, pleadings,
depositions, admissions, and other evidence submitted by the parties in the light
most favorable to the party opposing the motion. If the proffered evidence fails to
establish a genuine issue regarding any material fact, the moving party is entitled
to judgment as a matter of law. [Id. (quotation marks and citations omitted).]
Borman’s arguments are extremely complex and rely on very specific provisions taken
from myriad documents executed between the various parties, as well as a significant
compilation of documents and orders from the bankruptcy proceedings. Borman’s argument
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hinges on the inclusion of the disputed funds in the bankruptcy estate. Therefore, this Court’s
only logical course is to first resolve whether the disputed payments were subject to inclusion in
Borman’s bankruptcy estate. If they were part of the estate, it will be necessary to discern how
bankruptcy law controls the resolution of this matter. If Borman’s premise is in error and the
payments were not part of the bankruptcy estate, the majority of Borman’s arguments folds like a
house of cards and are functionally irrelevant.
As discussed in In re AFI Servs, LLC, 486 B.R. 827, 835 (Bankr SD Texas, 2013) (case
citations omitted):
Property of the estate is defined broadly and encompasses “all legal or
equitable interests of the debtor in property as of the commencement of the case
. . . wherever located and by whomever held.” 11 USC 541(a). Despite this
broad definition, the estate does not receive more rights than those that the debtor
has in property as of the commencement of the case—in other words, if a debtor’s
interest in property is limited at the time of filing, the estate’s right in the property
is also so limited.
Of particular significance is the recognition that “[t]he nature and extent of a debtor’s interest in
property is determined by reference to applicable state law[.]” Id.
In AFI Servs, the bankruptcy court noted that a multifactored test had been developed
over years of caselaw to determine whether escrowed funds are the property of a bankruptcy
estate. The determination “depends entirely on the nature and circumstances of the escrow
agreement.” Id. at 840 (quotation marks and citation omitted). We find this test highly
instructive. The factors to be considered are:
(1) whether the debtor initiated or agreed to the creation of the escrow account;
(2) whether the debtor exercises any control over the escrow account; (3) the
incipient source of the escrow account; (4) the nature of funds within the escrow
account; (5) the recipient of the escrow account’s remainder funds (if any); (6) the
targeted benefit of the escrow account; and (7) the purpose of the escrow
account’s creation. [Id. (quotation marks and citations omitted).]
Application of these factors supports the circuit court’s conclusion that the disputed funds were
not part of Borman’s bankruptcy estate.
First, although Borman’s stipulated to Mastronardi’s placement of its September 2010
rent and security deposit into the escrow account, the account was initiated by the circuit court in
response to Mastronardi’s concerns regarding the dispute between Ashley/GE and Borman’s
over entitlement to the funds. The account was created to safeguard Mastronardi’s funds so it
would not be required to pay twice for the same indebtedness. Accordingly, the first AFI Servs
factor does not weigh in Borman’s favor. It is clear from the record that Borman’s had no
control over the account. Therefore, the second AFI Servs factor supports that the funds were not
property of the bankruptcy estate. The “incipient source” of the funds in the escrow account was
Mastronardi’s pocket, also suggesting that the account is not part of the bankruptcy estate.
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Because there are no “remainder funds” to be distributed, the fifth factor is deemed neutral and
does not serve to advance or undermine Borman’s contention.
The remaining three factors—(4) “the nature of the funds,” (6) “the targeted benefit” of
the funds, and (7) “the purpose of the escrow account’s creation”—must be evaluated in
accordance with applicable state law. Id. at 835, 840. The “nature of the funds” is best
described by their purpose; the funds covered Mastronardi’s September 2010 rent payment and
security deposit. The funds were not deposited for the benefit of Borman’s, they were deposited
for the benefit of whoever was legally determined to be the rightful landlord at the time in
question. Similarly, the third and final factor, “the purpose of the escrow account[]” does not
favor a determination that the funds were part of the bankruptcy estate. The purpose of the
account was to ascertain the proper recipient and to safeguard the funds until such a
determination could be made. The account was created to protect Mastronardi from the
obligation of having to make multiple payments should the funds be misdirected or misused, not
to protect Borman’s.
Ultimately, both logic and state law support that the disputed funds were not part of the
bankruptcy estate. The escrow account was not initiated or funded until October 18, 2010. At
that point, Borman’s had already been evicted from the subject premises and dispossessed of the
property for the previous two-month period. The monies remitted by Mastronardi reflect an
obligation for September 2010. Based on terms of the lease and sublease, Ashley was
functioning and recognized as Mastronardi’s landlord at that time.
“A sublessee cannot be held liable to his lessor for rents which accrue subsequent to the
termination of all rights of the lessor in the leasehold premises.” Cohn v Mary Lee Candies, 293
Mich. 157, 168; 291 N.W. 259 (1940), citing Marsh v Butterworth, 4 Mich. 575 (1857), and City of
Hamtramck v Roesink, 286 Mich. 65; 281 N.W. 539 (1938). Historically, it is well-recognized that
“[r]ent is a sum stipulated to be paid for the actual use and enjoyment of another’s land. . . . The
actual enjoyment of the land is the consideration for the rent which is to be paid[.]” Marsh, 4
Mich. at 577. “In other words, the full enjoyment for the full term is a condition precedent to the
payment of rent.” Id. There is no dispute that Borman’s was lawfully dispossessed when Ashley
evicted it from the premises in August 2010. Because Borman’s could not legally provide its
subtenant, Mastronardi, with possession and quiet enjoyment of the property, its right to receive
rent was terminated.
Borman’s and Ashley both recognized, even as Borman’s was entering a sublease with
Mastronardi, that Borman’s rights to the warehouse would soon be severed. In accordance with
the terms of the nondisturbance and attornment agreement effectuated in conjunction with the
sublease:
[Ashley] hereby agrees that so long as [Mastronardi] is not in default beyond any
applicable grace, cure or notice period under the Sublease: (a) [Ashley] shall not
name [Mastronardi] in or make [Mastronardi] a party to any summary or other
proceeding against [Borman’s] by reason of a default by [Borman’s] under the
Overlease so as to cut off the rights of [Mastronardi] under the Sublease, and (b)
[Mastronardi’s] possession of the Demised Premises shall not be disturbed and
[Mastronardi’s] rights under the Sublease shall not be affected by any termination
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of the Overlease, whether under such proceedings or in accordance with the terms
of the Overlease or otherwise; and [Ashley] and [Mastronardi] hereby agree that,
upon any such termination of the Overlease (i) the sublease shall become a direct
lease between [Ashley], as landlord, and [Mastronardi], as tenant[.]
Even an earlier agreement between Ashley and its lender GE supports that the escrowed
funds were not part of the bankruptcy estate. The document specifically indicated that GE “is
irrevocably entitled to receive the tenant loan rent” identified in the lease between Ashley and
Borman’s. Accordingly, even if Borman’s had a continuing interest in its sublease in September
2010, Borman’s would not have been entitled to the entirety of the funds placed in escrow.
Borman’s contends that its eviction by Ashley did not terminate its lease agreement. This
argument is disingenuous. While Borman’s obligations under its lease or contract with Ashley
continued, relevant documents such as the nondisturbance and attornment agreement provided a
mechanism to avoid disruption of the subtenant’s possession and minimize Borman’s
obligations. It is nonsensical to suggest that Mastronardi would be required to continue to remit
a rental payment to Borman’s when Borman’s no longer functioned as its landlord because
Borman’s had been evicted by its landlord. After Borman’s eviction, it could not fulfill its lease
obligation of guaranteeing Mastronardi’s continued possession and quiet enjoyment, and that
duty fell to Ashley. Borman’s no longer had obligations entitling it to payment.
Notably, Borman’s does not dispute that it breached its lease with Ashley in June 2010,
by failing to remit required rental payments. Long before this event occurred, GE perfected its
assignment of rents. In accordance with MCL 554.232:
The assignment of rents, when so made, shall be a good and valid
assignment of the rents to accrue under any lease or leases in existence or coming
into existence during the period the mortgage is in effect, against the mortgagor or
mortgagors or those claiming under or through them from the date of the
recording of such mortgage, and shall be binding upon the tenant under the lease
or leases upon service of a copy of the instrument under which the assignment is
made, together with notice of default. . . .
A “mortgagor’s default is sufficient to finalize the mortgagee’s interest in the rents as against the
mortgagor.” Otis Elevator Co v Mid-America Realty Investors, 206 Mich. App. 710, 714; 522
NW2d 732 (1994). The factual history is not disputed. Borman’s breached its lease with Ashley
in June 2010, and was evicted from the premises in August 2010. GE issued a notice of default
on October 1, 2010, instructing Mastronardi to remit rent payments to GE, satisfying the
statutory conditions. In accordance with the assignment and statutory provision, Borman’s
interest in the rents terminated upon completion of the notice and service requirement by GE. In
re Mount Pleasant Ltd Partnership, 144 B.R. 727, 734 (Bankr WD Mich, 1992) (“But where the
notice and service procedure has been completed, the debtor has lost the legal right to collect the
rents.”). As discussed in Otis Elevator Co, this interpretation of the statutory provision regarding
the assignment of rents has been acknowledged by bankruptcy courts as follows:
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“Under section 1 of Michigan’s statute, giving ‘binding effect’ to the
assignment is conditioned only upon default. Therefore, at the point of default the
mortgagor becomes obligated as contractually provided in the assignment.
* * *
. . . Once default occurs, . . . the assignment becomes binding, and the
mortgagee has a “choate” or present vested right in the rents. . . . [Otis Elevator
Co, 206 Mich. App. at 714, quoting Mount Pleasant Ltd Partnership, 144 B.R. at
733-734 (first, second, and third alterations in original).]
Because GE’s assignment of rents was perfected following the default, Borman’s lost any right
to collect the rents and the circuit court correctly granted summary disposition and distributed
Mastronardi’s escrowed rental payment to GE.
Ashley, GE, and Mastronardi also argue that Borman’s failure to specifically identify the
subject funds in the escrow account as an asset on schedules submitted in the bankruptcy action
demonstrate Borman’s acknowledgement that they were not assets of the estate. Borman’s
responds by suggesting that its opponents’ provision of these schedules on appeal is an improper
expansion of the lower court record. “This Court’s review is limited to the record established by
the trial court, and a party may not expand the record on appeal.” Sherman v Sea Ray Boats, Inc,
251 Mich. App. 41, 56; 649 NW2d 783 (2002); MCR 7.210(A)(1); MCR 7.212(C)(6), (D)(1). We
need not address this argument as the issue can be resolved without reference to the challenged
bankruptcy schedules. However, we note that GE did provide the circuit court a link to these
documents in its motion for summary disposition, and the circuit court made comments
suggesting knowledge of these schedules: “Why wasn’t it listed as an asset in the bankruptcy
estate if it was an asset?”
Once the circuit court summarily determined that Ashley and GE, rather than Borman’s,
was legally entitled to the escrowed rent payments, it also correctly determined entitlement to the
escrowed security deposit to the appropriate parties. We are confounded by Borman’s continued
insistence that it is entitled to the security deposit. As Borman’s neither possessed nor had a
legal right to possess the warehouse, it could bear no future financial repercussions of property
damage caused by Mastronardi. Only Mastronardi’s acting landlord—Ashley—could suffer
such damages down the road that could be offset by the security deposit. We find instructive an
analogous case dealing with the provision of security for future utility services. In that matter,
the Court of Appeals for the Fifth Circuit recognized that “possible hindrance to the
rehabilitative purposes of Chapter XI cannot bootstrap the bankruptcy court’s summary
jurisdiction to cover property rights which are not in the actual or constructive possession of the
debtor.” Matter of Security Investment Props, Inc, 559 F2d 1321, 1326 (CA 5, 1977).
Moreover, the escrowed security deposit is not currently subject to any disbursement. It will be
effectively retained in trust until either the conclusion or breach of Mastronardi’s tenancy to
determine any entitlement to offset. Further, for the reasons previously cited, using the test
elucidated in AFI Servs, 486 B.R. at 835, 840, Borman’s has not demonstrated that the security
deposit was part of the bankruptcy estate.
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In addition, the order relied on by Borman’s to suggest that the bankruptcy court had
adjudicated ownership of the security deposit is unavailing. The January 11, 2011 bankruptcy
court rejection order indicated that “Debtors’ Motion does not affect Ashley . . . or [GE]’s rights
to the security deposit paid by sub-tenant Mastronardi, pursuant to the Stipulated Order entered
on October 18, 2010, in the State Court Action . . . and the Debtors fully reserve their rights, if
any, in this respect.” Contrary to Borman’s assertion, the order acknowledges the claim of
Ashley and GE to the security deposit and specifically indicates that their rights are not affected
by Borman’s rejection of the lease and sublease in the bankruptcy proceedings. As such, the
circuit court was correct in its grant of summary disposition and award of the security deposit to
Ashley as the current landlord of Mastronardi.
This outcome renders the remainder of Borman’s arguments moot. We need not address
Borman’s res judicata and collateral estoppel claims. The orders of the bankruptcy court did not
adjudicate the ownership of the escrowed funds, because they were not assets of the bankruptcy
estate. Accordingly, there is nothing more for this Court to review in relation to Borman’s
appellate challenges. See Anglers of AuSable, Inc v Dep’t of Environmental Quality, 486 Mich.
982, 983; 783 NW2d 502 (2010), amended 783 NW2d 385 (2010) (citation omitted) (“[T]his
Court does not reach moot questions or declare principles or rules of law that have no practical
legal effect in the case before us unless the issue is one of public significance that is likely to
recur, yet evade judicial review.”).
III. CROSS-APPEAL
On cross-appeal, Ashley, GE and Mastronardi challenge the circuit court’s denial of their
motion for sanctions based on the lack of cognizable legal merit and the frivolous nature of
Borman’s claim to entitlement over the escrowed funds. We review for clear error a lower
court’s determination whether an action is frivolous and whether sanctions are appropriate.
Guerrero v Smith, 280 Mich. App. 647, 677; 761 NW2d 723 (2008); In re Attorney Fees & Costs,
233 Mich. App. 694, 701; 593 NW2d 589 (1999). “A trial court’s decision is clearly erroneous
when, although there is evidence to support it, the reviewing court is left with a definite and firm
conviction that a mistake has been made.” Attorney Fees & Costs, 233 Mich. App. at 701.
As discussed in Holton v Ward, 303 Mich. App. 718, 734; 847 NW2d 1 (2014) (some
quotation marks and case citations omitted):
Awards of costs and attorney fees are recoverable only where specifically
authorized by a statute, a court rule, or a recognized exception. If a pleading is
signed in violation of MCR 2.114(D), the party or attorney, or both, must be
sanctioned. MCR 2.114(F) provides that “a party pleading a frivolous claim . . . is
subject to costs as provided in MCR 2.625(A)(2).” In turn, MCR 2.625(A)(2)
states, “[I]f the court finds . . . an action or defense was frivolous, costs shall be
awarded as provided by MCL 600.2591.” MCL 600.2591(1) mandates that, if a
claim or defense is found to be frivolous, “the court . . . shall award to the
prevailing party the costs and fees incurred by that party in connection with the
civil action by assessing the costs and fees against the nonprevailing party and
their attorney.” The statute defines “frivolous” to mean “that at least 1 of the
following conditions is met”:
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(i) The party’s primary purpose in initiating the action or asserting
the defense was to harass, embarrass, or injure the prevailing party.
(ii) The party had no reasonable basis to believe that the facts
underlying that party’s legal position were in fact true.
(iii) The party’s legal position was devoid of arguable legal merit.
[MCL 600.2591(3)(a).]
“The determination whether a claim or defense is frivolous must be based on the
circumstances at the time it was asserted.” Jerico Constr, Inc v Quadrants, Inc, 257 Mich. App.
22, 36; 666 NW2d 310 (2003). “Not every error in legal analysis constitutes a frivolous
position.” Id. (quotation marks and citation omitted). However, in accordance with statutory
law and the court rules, an attorney and his or her client are subject to an affirmative duty to
conduct a reasonable inquiry into both the factual and the legal viability of their claims and
arguments before signing any document. See Attorney General v Harkins, 257 Mich. App. 564,
576; 669 NW2d 296 (2003). An objective standard is used to determine if the inquiry was
reasonable. Id. Subjective good faith is not relevant. Rather, reasonableness is determined by
the effort made in investigating a claim or position, and the determination of reasonable inquiry
is dependent upon the particular facts of the case. Id.
Initially, the circuit court found Borman’s position suspect, given the undisputed factual
circumstances presented and applicable state law. The court therefore indicated that it would
assess fees if Borman’s did not prevail on the motion for summary disposition. Yet, at the
conclusion of the summary disposition hearing, the circuit court declined to award attorney fees
or sanctions, finding that Borman’s “presented an arguable ground for contesting the motion”
and that the request for sanctions “was a very close question.”
In declining to award sanctions, the circuit court necessarily determined that Borman’s
claims and arguments could not be construed as “frivolous” as that term is defined in MCL
600.2591(3)(a). Based on a review of the lower court file and proceedings, there is no evidence
that Borman’s primary purpose in this action was to “harass, embarrass, or injure the prevailing
party” as required by MCL 600.2591(3)(a)(i). In addition, the majority of the underlying facts in
this matter were undisputed, negating the application of MCL 600.2591(3)(a)(ii). Borman’s
arguments arose not from a dispute of the facts, but rather whether the law of bankruptcy was to
be applied to those facts. Finally, in reference to MCL 600.2591(3)(a)(iii), it must be determined
whether the position asserted by Borman’s was “devoid of arguable legal merit.”
This Court has previously explained:
We will not construe MCL 600.2591 . . . in a manner that has a chilling
effect on advocacy or prevents the filing of all but the most clear-cut cases. Nor
will we construe the statute in a manner that prevents a party from bringing a
difficult case or asserting a novel defense, or penalizes a party whose claim
initially appears viable but later becomes unpersuasive. Moreover, an attorney or
party should not be dissuaded from disposing of an initially sound case which
becomes less meritorious as it develops because they fear the penalty of attorney
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fees and costs under this statute. [Louya v William Beaumont Hosp, 190 Mich
App 151, 163; 475 NW2d 434 (1991).]
Accordingly:
The statutory scheme is designed to sanction attorneys and litigants who file
lawsuits or defenses without reasonable inquiry into the factual basis of a claim or
defense, not to discipline those whose cases are complex or face an “uphill fight.”
The ultimate outcome of the case does not necessarily determine the issue of
frivolousness. [Id. at 163-164.]
The issues presented in this case were complicated by the intervening bankruptcy
proceedings. Even before the bankruptcy, the parties disputed entitlement to the subject funds,
requiring their placement in escrow until the matter could be resolved. Earlier in the current
litigation, Borman’s was actually successful in obtaining the grant of partial summary disposition
in its favor on other issues. As such, we cannot describe as clearly erroneous the circuit court’s
finding that Borman’s “presented an arguable ground” for asserting entitlement to Mastronardi’s
September 2010 rent payment.
Similarly, although the circuit court found that Borman’s claim of entitlement to the
security deposit comprised a “very close question” in terms of a sanctions award, we discern no
clear error in the court’s denial of the request. Again, given the complexity of the parties’
tangled relationships and the confusion caused by the intervening bankruptcy proceedings, there
is support for the court’s determination that Borman’s claim had some legal basis. “Not every
error in legal analysis constitutes a frivolous position. Moreover, merely because this Court
concludes that a legal position asserted by a party should be rejected does not mean that the party
was acting frivolously in advocating its position.” Kitchen v Kitchen, 465 Mich. 654, 663; 641
NW2d 245 (2002).
We affirm.
/s/ Jane E. Markey
/s/ Donald S. Owens
/s/ Elizabeth L. Gleicher
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