In re: Café La Plage Management, Inc.

• Court: United States Bankruptcy Court, D. Puerto Rico
• Decided: December 11, 2014
• Docket: 14-01977
• Status: Unknown

Opinion

1 IN THE UNITED STATES BANKRUPTCY COURT 2 FOR THE DISTRICT OF PUERTO RICO

3 IN RE: CASE NO. 14-01977 (MCF)

4 CAFÉ LA PLAGE MANAGEMENT, INC. CHAPTER 11

5 Debtor 6

7 OPINION AND ORDER 8 9 Pending before the Court is Lionstone IV Properties, LLC’s 10 (“Lionstone”) motion for summary judgment (Docket No. 123) and 11 Cafe La Plage Management, Inc.’s (“Debtor”) opposition and cross 12 motion for summary judgment (Docket No. 128) regarding the issue 13 of payment of postpetition rent, pursuant to 11 U.S.C. § 14 15 365(d)(5). For the reasons stated below, Lionstone’s motion for 16 summary judgment is granted and Debtor’s cross motion is denied. 17 18 I. UNCONTESTED FACTUAL BACKGROUND 19 20 The Debtor filed a voluntary petition under Chapter 11 of 21 the Bankruptcy Code on March 14, 2014. Prior to its petition 22 for relief, Debtor leased a real estate property from Lionstone 23 to operate a hotel and restaurant business.1 The parties signed a 24 25 26

27 1 Docket No. 113, “Answer to Objection to Claim 7,” Attachment No. 1, Lease Agreement, Lead Case No. 14-01977 lease agreement on April 1, 2009.2 This agreement stated that the 1 monthly lease payment to be paid to the Lionstone by the Debtor 2 3 was to be calculated as a percentage of the monthly “gross 4 revenue” of the operations of the business. The percentages to 5 be paid were: 20% of hotel operations earnings up to $100,000 6 and 25% of any amount greater than $100,000. 7 The Debtor has not made any postpetition rent payments 8 since the filing of the petition. As a result, Lionstone filed 9 a motion requesting payment of these monies by the Debtor 10 11 (Docket No. 77). The parties do not dispute that postpetition 12 rent is owed, but have divergent interpretations of the lease 13 agreement and the amounts due. At the hearing held on September 14 24, 2014, the parties agreed that the matter before the Court is 15 a legal issue regarding the interpretation of the term “gross 16 revenue,” which is used in the lease agreement and is the basis 17 for calculating the amount to be paid in rent by the Debtor. 18 After the parties filed their respective motions for summary 19 20 judgment, the Court conducted an oral argument on December 3, 21 2014. 22

23 2 Debtor has filed a motion to assume the lease agreement.(Docket No. 30). Lionstone has objected to the assumption, alleging that the contractual relationship was terminated and there is nothing to assume or reject. (Docket 24 No. 37). The Court held in abeyance the resolution of Debtor’s motion to assume the lease until a final determination has been pronounced by the local 25 court regarding the contractual relationship between the parties. (Docket No. 69). Therefore, we are not making any judgment as to the validity of the 26 lease or the relationship between the parties and the parties are deemed not to have waived any legal argument pertinent to those issues. Our opinion is 27 limited to the issue of payment of postpetition rents and the amounts due. 1 II. JURISDICTION 2 3 This Court has jurisdiction of the subject matter pursuant 4 to 28 U.S.C. §§ 1334, 157(a) and the “Standing Order of 5 Resolution for Bankruptcy Cases” dated July 19, 1984 (Torruella, 6 C.J.), which refers title 11 proceeding to Bankruptcy Court. 7 8 This is a core proceeding in accordance with 28 U.S.C. § 157(b). 9 10 III. POSITIONS OF THE PARTIES 11 The issue before the Court is the determination of the 12 13 amount owed by the Debtor in postpetition rent. This entails 14 deciding what definition of “gross revenue” should be used in 15 this calculation. 16 The Debtor argues that the amount owed in postpetition rent 17 should be calculated based on “gross revenue” as defined by the 18 Internal Revenue Service (“IRS”) standards that allegedly deduct 19 operating expenses from the final amount which is to be 20 considered “gross revenue.” 21 22 Lionstone argues that the amount owed in postpetition rent 23 should be based on “gross revenue” as defined by the lease 24 agreement between the parties that does not deduct operating 25 expenses from the revenue generated by the Debtor. 26

27 1 IV. DISCUSSION 2 3 A. STANDARD FOR SUMMARY JUDGMENT 4 Rule 7056 of the Federal Rules of Bankruptcy Procedure 5 makes Fed. R. Civ. P. 56(a) applicable in adversary proceedings. 6 Rule 56(a) governs summary judgments and states that: 7 8 [a] party may move for summary judgment, identifying each claim or defense – or the 9 part of each claim or defense – on which summary judgment is sought. The court shall 10 grant summary judgment if the movant shows that there is no general dispute as to any 11 material fact and the movant is entitled to 12 judgment as a matter of law.

13 Fed. R. Civ. P. 56(a). 14 Under Rule 56(c) summary judgment is proper: 15 if the pleadings, depositions, answer to 16 interrogations, and admissions on file, together with the affidavits, if any, show 17 that there is no genuine issue as to any material fact and that the moving party is 18 entitled to judgment as a matter of law… The plain language of Rule 56(c) mandates the 19 entry of summary judgment, after adequate time for discovery and upon motion, against 20 a party who fails to make a showing 21 sufficient to establish the existence of an element essential to the party’s case, and 22 on which that party will bear the burden of proof at trial. 23 Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). 24 25 In regard to material facts, the substantive law will 26 identify which facts are material. “Only disputes over facts 27 that might affect the outcome of the suit under the governing law properly preclude the entry of the summary judgment 1 determination. Factual disputes that are irrelevant or 2 3 unnecessary will not be counted.” Anderson v. Liberty Lobby, 4 Inc., 477 U.S. 242 (1986). 5 6 B. APLICABLE CONTRACT LAW 7 8 In the instant case, Lionstone and the Debtor entered in a 9 lease agreement for the use of commercial property. This fact is 10 uncontested and the lease agreement is included in the record.3 11 In its “Reply to Motion for Summary Judgment,” the Debtor states 12 that “Lionstone is entitled to post-petition rent in consonance 13 with [the] terms of [the] Lease, applicable law and 11 U.S.C. § 14 365(d)(3).”4 Neither party has contested the fact that 15 16 postpetition rents are due to Lionstone. The issue at hand lies 17 not in the existence of a debt owed to Lionstone for 18 postpetition rent, but rather the amount owed and the 19 contractual interpretation that should be used in its 20 calculation. 21 To resolve this contractual dispute, we turn to state law 22 which governs property interests. Unless a different result is 23 required by a federal interest, there is no reason to analyze 24 25 such interests differently simply because an interested party is 26 3 Docket No. 113, “Answer to Objection to Claim 7,” Attachment No. 1, Lease 27 Agreement, Lead Case No. 14-01977. 4 Docket No. 128, “Motion for Summary Judgment re: Post-Petition Rent” at 9. involved in a bankruptcy proceeding. “Uniform treatment of 1 property interests by both state and federal courts within a 2 3 State serves to reduce uncertainty, to discourage forum shopping 4 and to prevent a party from receiving ‘a windfall merely by 5 reason of the happenstance of bankruptcy’. Lewis v. 6 Manufacturers Nat’l Bank, 364 U.S. 603, 609.” Butler v. United 7 States, 440 U.S. 48, 55 (1979). 8 In Puerto Rico, contracts are legally binding from the 9 moment that consent, subject matter and the cause of the 10 11 obligation concur; and from that moment, obligations are created 12 that are legally binding between the contracting parties. Arts. 13 1213 & 1214 of the Civil Code, P.R. Laws Ann. Tit. 31, §§ 3391, 14 2994 (1990). “Contracts are perfected by mere consent, and from 15 that time they are binding, not only with regard to the 16 fulfillment of what has been expressly stipulated, but also with 17 regard to all the consequences which, according to their 18 character, are in accordance with good faith, use, and law.” 19 20 Art. 1210 of the Civil Code, P.R. Laws Ann. Tit. 31, § 3375 21 (1990). 22 “The principle of ‘pacta sunt servanda’ establishes the 23 obligatory force of a contract according to its terms and 24 necessary consequences that are born from the good faith.” Banco 25 Popular de Puerto Rico v. Sucecion Talavera, 174 D.P.R. 686, 693 26 (2008)(our translation); Art. 1044 of the Civil Code, P.R. Laws 27 Ann. Tit. 31, § 2994 (1990). The contracting parties may make 1 the agreement and establish the clauses and conditions which 2 3 they may deem advisable, provided they are not in contravention 4 of law, morals, or public order. Art. 1207 of the Civil Code, 5 P.R. Laws Ann. Tit. 31, § 3372 (1990). However, it has also been 6 decided that certain contracts require interpretation to be able 7 to assess the nature of the obligation in which the parties 8 incurred. Sociedad Legal de Gananciales Irizarry v. Sociedad 9 Legal de Gananciales Garcia, 155 D.P.R. 713 (2001). 10 11 The Puerto Rico Civil Code establishes guidelines to be 12 used in the interpretation of a contract: “If the terms of a 13 contract are clear and leave no doubt as to the intentions of 14 the contracting parties, the literal sense of its stipulations 15 shall be observed. If the words should appear contrary to the 16 evident intention of the contracting parties, the intention 17 shall prevail.” P.R. Laws Ann. Tit. 31, § 3471 (1990); Mega 18 Media Holdings, Inc. v. Aerco Broad. Corp., 852 F. Supp. 2d 189 19 20 (D.P.R. 2012). When the terms of the contract are clear and 21 leave no doubt about the intention of the parties, it is 22 unnecessary to apply the rules of interpretation. Art. 1233 of 23 the Civil Code, P.R. Laws Ann. Titl. 31, § 3471 (1990). 24 Regarding the clear terms of the contract: 25 Article 1233 specifies exactly when 26 extrinsic evidence should be considered. As explained before, only if the literal terms 27 of the contract are in doubt will it be necessary in the first place to examine or 1 interpret the contract with the help of extrinsic evidence. To argue that the 2 intention of the parties takes precedence 3 over a written contract does not change the analysis under Article 1233. The reason that 4 clear and unambiguous terms will not be altered is not that the written word has 5 taken precedence over the intention of the parties when they entered into the contract; 6 rather, under Article 1233, the clear terms 7 of a contract are given preference over subsequent allegations because these terms 8 are supposed to represent in the first place the real intent of the parties at the time 9 they entered into the contract.

10 Hopgood v. Merrill Lynch, Pierce, Fenner & Smith, 839 11 F. Supp. 98 (D.P.R. 1993).

12 It has been decided that “clear terms” are those that by 13 themselves are lucid enough to be understood in only one sense, 14 without giving way to doubt, controversies, nor diversity of 15 interpretation and to understand them, they do not need 16 reasoning or demonstrations susceptible to contesting. Sucecion 17 Ramirez v. Tribunal Superior, 81 D.P.R. 357 (1959). On the other 18 hand, a contract clause is ambiguous when it is susceptible to 19 20 be understood or interpreted in different ways or manners. 21 In regards to generalized terms in a contract, Article 22 1225 of the Civil Code states that “[h]owever general the terms 23 of the contract may be, there should not be understood as 24 included therein things and cases different from those with 25 regard to which the persons interested intended to contract.” 26 P.R. Laws Ann. Tit. 31, § 3473 (1990). In addition, Article 1236 27 of the Civil Code states that “[i]f any stipulation of a 1 contract should admit of different meanings, it should be 2 3 understood in the sense most suitable to give it effect.” P.R. 4 Laws Ann. Tit. 31, § 3474 (1990). When considering the 5 interpretation of contracts, it has been established that: 6 [a]lthough the courts must consider the 7 intention of the parties when interpreting a contract, while doing this, we must assume 8 loyalty, correctness and good faith in its drafting, and interpret it in a way that can 9 lead to the results that conform to the contractual relationship and that follow 10 ethical guidelines. In other words, the 11 courts cannot find darkness or distort the interpretation of contracts in order to 12 arrive at absurd or unjust conclusions.

13 Irizarry, 155 D.P.R. 713 (our translation).

14 The courts cannot arrive at results that differ from that 15 text of the contract, which is what gathers the will of the 16 parties. The courts have the faculty of looking after the 17 compliance of contracts and should not relieve a party of its 18 contractual obligation when the contract is legal, valid and 19 20 without error. De Jesus Gonzalez v. Autoridad de Carreteras, 148 21 D.P.R. 255 (1999). 22 In our case, the contract signed by the parties, 23 establishes that the rent due is based on a percentage of 24 amounts received by the Debtor through business operations. In 25 its relevant clause, the lease agreement states that: 26 3.1.1 Participating Rent. 27 (a) Amount. For each Accounting Period, 1 Tenant shall pay “Participating Rent” in arrears on or before the twentieth (20th) day 2 of each succeeding month with respect to the 3 prior month in an amount equal to twenty percent (20%) of the Gross Revenue for said 4 month up to $100,000 of Gross Revenue and twenty five percent (25%) of any amount over 5 $100,000 of Gross Revenue for said month.5

6 The parties agreed to the previously stated terms and the 7 Debtor retained possession of the property, performing 8 operations that generated revenues that are to be analyzed for 9 the purpose of determining the applicable rent amount. The 10 11 parties do not dispute the percentages that apply to the rent 12 calculation. We must only address the interpretation of “gross 13 revenue” included in the previously mentioned clause and use 14 this definition to compute the rent in question. 15 In the definitions section of the lease agreement, a 16 specific definition of “gross revenue” is included whereby such 17 term is defined as follows: 18 ‘Gross Revenues’ shall mean all revenues, 19 receipts, and income of any kind derived 20 directly or indirectly by Tenant or any sub- tenant from or in connection with the Leased 21 Property or operation of the Hotel including, but not limited to room rentals 22 and food and beverage sales sold and delivered on or off the Hotel whether for 23 cash or credit, paid or collected, 24 determined in accordance with GAAP and Uniform System of Accounts, excluding, 25 however, (a) funds furnished by Landlord, (b) federal, state and municipal excise, 26

27 5 Docket No. 113, “Answer to Objection to Claim 7,” Attachment No. 1, Lease Agreement, Lead Case No. 14-01977, at 9. sales and use taxes and room taxes collected 1 directly from patron and guests or as part of the sales price of any goods, services or 2 displays, such as gross receipts, 3 admissions, cabaret or similar or equivalent taxes and paid over to federal, state or 4 municipal governments, (c) gratuities paid directly to an employee, (d) proceeds of 5 insurance and Awards, (e) proceeds from sale of furnishings, fixtures and equipment which 6 are permitted pursuant to the terms of this 7 Agreement, (f) all loan proceeds from financing or [refinancing] of the Hotel or 8 interests therein or components thereof, (g) interest earned on funds deposited into the 9 Reserve Fund and (h) judgments and awards, except any portion thereof arising from 10 normal business operations of the Hotel.6 11 As stated in its Reply, the Debtor contends that the 12 definition of “gross revenue” that should be applied is the one 13 present in Section 62 of the IRS Code. Debtor alleges that: 14 15 [P]ursuant to IRS standards, “gross income” of an incorporated business is defined as 16 taxable income, consists of total revenues less costs of goods sold, selling and 17 administrative expenses, interest, and extraordinary item. 18

26 U.S.C. § 62.7 19

20 However, the Debtor provides no basis upon which the Court 21 should apply the definition of “gross income” as it appears in 22 the IRS Code instead of the definition of “gross revenue” that 23 was agreed upon in the lease agreement. The definition of “gross 24 revenue” agreed to by the parties is clear and unambiguous. 25 26 6 Docket No. 113, “Answer to Objection to Claim 7,” Attachment No. 1, Lease 27 Agreement, Lead Case No. 14-01977, at 4. 7 Docket No. 128, “Motion for Summary Judgment re: post-petition rent,” at 11. Debtor failed to present a legal basis to justify the 1 application of a definition that is different to the one present 2 3 in the agreement. The definition, as constructed in the 4 agreement, does not contradict any local or federal statute. 5 Thus it is the law between the parties even though Debtor may 6 not favor the provision at this point in time. Therefore, the 7 definition of “gross revenue” to be used in the calculation of 8 rent, is the one included in the lease contract, which is based 9 on all income generated by the Debtor’s business. 8 No more, no 10 11 less. 12 The Court used the Monthly Operating Reports submitted by 13 the Debtor to calculate the amount of postpetition rent owed to 14 Lionstone.9 The total amount of postpetition rents owed from the 15 gross revenues received from March 2014 to October 2014 is 16 $152,106.51. To reach this number, all monthly revenue generated 17 by the Debtor up to $100,000 was multiplied by 20% and any 18 amounts over $100,000 were multiplied by 25%. The table below 19 20 illustrates the monthly payments and the total payment due to 21 Lionstone by Debtor. 22 23 24 8 The definition of “gross revenue” included in the contract does not provide 25 for any operating expense deductions from total business revenue. 9 The payment chart included herein is based on the numbers reflected in 26 Debtor’s monthly operating reports. The Court is not passing judgment over the correctness of the amounts included in the monthly operating reports. If 27 any objection is raised as to the correctness of these reports, the Court will address this matter accordingly. Month Gross Revenue Rent Due 1 2 March, 2014 $24.1510 $4.83 For April,2014 3 4 April, 2014 $1,771.0411 $354.20 For May,2014 5 6 May, 2014 $136,460.0612 $29,115.02 7 For June,2014 8 June, 2014 $123,300.6613 $25,825.17 9 For July,2014 10 July, 2014 $151,088.6614 $32,772.17 11 For August,2014 12 August, 2014 $151,088.6615 $32,772.17 13 For September,2014 14 September, 2014 $63,704.4516 $12,740.89 15 For October,2014 16 17 October, 2014 $92,610.3217 $18,522.06 18 For November, 2014 19 Total $720,048.00 $152,106.51 20

21 22 23

24 10 Docket No. 45, “Operating Report for the period of March, 2014.” 11 Docket No. 57, “Operating Report for the period of April, 2014.” 25 12 Docket No. 94, “Operating Report for the period of May, 2014.” 13 Docket No. 110, “Operating Report for the period of June, 2014.” 26 14 Docket No. 112, “Operating Report for the period of July, 2014.” 15 Docket No. 144, “Operating Report for the period of August, 2014.” 27 16 Docket No. 141, “Operating Report for the period of September, 2014.” 17 Docket No. 149, “Operating Report for the period of October, 2014.” In conclusion, Debtor is ordered to provide within thirty 2 (30) days the payment of $152,106.51 and to pay monthly rent as 3 becomes due and payable in accordance with this ruling. 4 SO ORDERED. 5 ‘ In San Juan, Puerto Rico, this 11 day of December, 2014.

7 - □ hclae ch Coban MTLDRED CABAN FLORES 9 U.S. Bankruptcy Judge 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27

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