FAGO et al v. TWO ANCO DRIVE ASSOCIATES

Filing 12

OPINION. Signed by Judge Noel L. Hillman on 9/25/2015. (dmr)

UNITED STATES DISTRICT COURT
DISTRICT OF NEW JERSEY
PAUL JOSEPH FAGO and SUSAN
JEAN FAGO,

Civil No. 14-6482 (NLH)
OPINION

Appellants,
v.
TWO ANCO DRIVE ASSOCIATES,
Appellee.

APPEARANCES:
NEIL I. STERNSTEIN
FIVE ABERDEEN PLACE
WOODBURY, NJ 08096
On behalf of appellants
WARREN S. WOLF
GOLDBERG & WOLF, LLC
1949 BERLIN ROAD, STE 201
CHERRY HILL, NJ 08003
On behalf of appellee
HILLMAN, District Judge
Pending before the Court is the debtors’ appeal of the
bankruptcy court’s order denying the debtors’ fifth modified
Chapter 13 plan, and creating a priority administrative claim in
favor of the debtors’ landlord.

For the reasons expressed

below, the decision of the bankruptcy court will be affirmed,
and the debtors’ appeal will be dismissed.
BACKGROUND
Appellants, Paul and Susan Fago, are cabinetmakers who, in

May 2001, leased a nonresidential property owned by appellee,
Two Anco Drive Associates (TADA), to conduct their business.
The lease was to expire on April 30, 2004.

An amendment to the

lease was signed on August 8, 2005, for an additional lease term
of October 1, 2005 through September 30, 2007.

The record does

not show that the Fagos and TADA entered into another lease
amendment, but the Fagos continued their tenancy past October 1,
2007.

According to TADA, the Fagos then began failing to make

their monthly lease payments, and by November 2010, the Fagos
had failed to pay rent to TADA for over twelve months.

On

December 14, 2010, TADA filed a complaint in New Jersey Superior
Court, seeking to evict the Fagos and obtain a judgment in
possession.

The Fagos were provided until January 1, 2011 to

pay TADA a stipulated amount of $16,480.00 in order to have the
complaint dismissed.
On January 13, 2011, the Fagos and TADA signed a courtprovided form titled, “Consent to Enter Judgment (Tenant
Remains).”

The agreement provided that the Fagos would make

four monthly installments of $4,020.00 on February 1, 2011,
March 1, 2011, April 1, 2011, and May 1, 2011.

The agreement

also provided, “It is understood that landlord will provide
written notice and tenant will have the opportunity to cure
within one week.”

Further, the Fagos agreed to pay $1,600.00

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each month for rent as required by the rental agreement, in
addition to the four monthly payments.

The agreement explained:

4. All payments made during the term of this
agreement shall be applied first to the rents that
become due after today, and then they shall be
applied to pay the balance of the arrears stated
in paragraph 1. If the Tenant makes all payments
required in paragraph 2b of this agreement, the
Landlord agrees not to request a warrant of
removal. If the Tenant does not make all payments
required in paragraph 2b of this agreement, the
Tenant agrees that the Landlord, with notice to
the tenant, may file a certification stating when
and what the breach was and that a warrant of
removal may then be issued by the clerk.
THIS MEANS THAT IF THE TENANT FAILS TO MAKE ANY
PAYMENT THAT IS REQUIRED IN PARAGRAPH 2b OF THIS
AGREEMENT, THE TENANT MAY BE EVICTED AS PERMITTED
BY LAW AFTER THE SERVICE OF THE WARRANT OF
REMOVAL.
5. This agreement shall end when the Tenant
has paid the full amount of rent stated in
paragraph 1 and then the judgment shall be vacated
and the complaint shall be dismissed.

The Fagos made a payment of $1,440.00 in February 2011, and
no payments thereafter.

On May 11, 2011, the Fagos filed a

voluntary petition for bankruptcy under Chapter 13. 1
filed an original plan and four modified plans.

The Fagos

In all of these

plans, the Fagos listed TADA as a creditor holding a secured

1

A chapter 13 bankruptcy is also called a wage earner's plan. It
enables individuals with regular income to develop a plan to
repay all or part of their debts. Under this chapter, debtors
propose a repayment plan to make installments to creditors over
three to five years. See 11 U.S.C. § 1322.
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claim, indicated that they had an unexpired lease with TADA, and
that they assumed the lease.

In their fifth plan, approved by

the bankruptcy court on June 8, 2012, the Fagos provided TADA
with a priority claim in the amount of $24,413.00, and listing
the reason for providing TADA with a priority claim as “cure
rent for commercial property.”

The Chapter 13 plan form

specifically noted that priority claims approved by the trustee
and bankruptcy judge were to be paid in full before payment to
other creditors.
The Fagos remained on the property, but they failed to pay
rent for August, September, and October 2012.

On November 6,

2012, TADA filed a motion for relief from the automatic stay
because of the Fagos’ failure to pay their current rent
payments, and their failure to make any payments under their
June 2012 plan to cure the pre-petition rent arrearage.

Even

though the Fagos paid TADA $6,400 in November 2012, which they
claim caught them up on post-petition rent, the bankruptcy court
granted TADA’s motion to lift the stay so that TADA could start
eviction proceedings.

Before TADA could proceed on its

eviction, the Fagos filed a motion to reinstate the stay.

On

January 29, 2013, the Fagos withdrew that motion, and on January
31, 2013, the Fagos voluntarily left the property.
On February 25, 2013, the Fagos filed their sixth Chapter

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13 plan.

In their newest plan, the Fagos proposed to eliminate

TADA’s priority claim, stating that because they were evicted,
they no longer had an unexpired lease.

TADA objected to the

Fagos’ modified plan, noting that it was still owed $19,708.58
out of the $24,413.00 claim.

On September 15, 2014, the

bankruptcy court granted TADA a priority administrative claim of
$24,413.00, with a balance owed of $19,708.58, and ordered that
the administrative claim could not be reduced by any subsequent
plan.

On September 19, 2014, the bankruptcy court dismissed the

Fagos’ Chapter 13 case for failing to submit a feasible plan,
and for failing to make all required pre-confirmation payments
to the trustee.
The Fagos have filed the instant appeal, arguing that the
bankruptcy court erred when it denied their final modified plan
and granted TADA an administrative claim.

TADA argues that the

bankruptcy court did not err, and the Fagos’ appeal should be
dismissed.
DISCUSSION
A.

Jurisdiction and Standard

This Court has jurisdiction over the appeal from the
bankruptcy court’s September 15, 2014 order pursuant to 28
U.S.C. § 158(a), which provides in relevant part: “The district
courts of the United States shall have jurisdiction to hear

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appeals from final judgments, orders and decrees

. . . of

bankruptcy judges entered in cases and proceedings referred to
the bankruptcy judges under section 157 of this title.

An

appeal under this subsection shall be taken only to the district
court for the judicial district in which the bankruptcy judge is
serving.”
In reviewing a determination of the bankruptcy court, the
district court subjects the bankruptcy court’s legal
determinations to plenary review, reviewing its factual findings
for clear error, and considering its exercise of discretion for
abuse thereof.

In re United Healthcare Sys., Inc., 396 F.3d

247, 249 (3d Cir. 2005).
B.

Analysis

The primary issue that must be considered to resolve this
appeal is the status of the lease between the Fagos and TADA.
The Bankruptcy Code permits a debtor to assume or reject an
unexpired lease.

11 U.S.C. § 365(a).

A debtor would choose to

assume an unexpired lease so that a landlord is prevented from
seeking relief from the automatic stay and proceed with its
remedies, which includes an action for possession of the
premises.

But where, as here, “there has been a default in an

executory contract or unexpired lease of the debtor,” the
unexpired lease cannot be assumed unless, at the time of

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assumption, “the trustee . . . cures, or provides adequate
assurance that the trustee will promptly cure, such default . .
. .”

11 U.S.C. § 365(b)(1).

If an unexpired lease is assumed

by the debtor in possession and such action is approved by the
court, such assumption and approval creates a new administrative
obligation of the estate which must be paid as a first priority
in distribution.

In re Juvennelliano, 464 B.R. 651, 653 (Bankr.

D. Del. 2011) (citations omitted).

Damages resulting from the

post-confirmation breach of an assumed lease give rise to an
administrative expense claim, but the administrative claim
should be allowed only to the extent that the assumed lease
benefitted the estate.

Id.

In this case, the bankruptcy court, in accordance with 11
U.S.C. § 365, approved five Chapter 13 plans where the Fagos
assumed the unexpired lease with TADA, and provided TADA with a
priority claim in the amount to cure of their pre-petition
default on the lease.

Presumably, the Fagos chose to assume the

lease in order to avail themselves of the automatic stay, which
would prevent TADA from commencing eviction proceedings based on
the Fagos’ default of the January 13, 2011 consent judgment, and
allow them to continue operating their business.

In order to

receive the protection of the automatic stay, however, the Fagos
were required to promise to cure their default and provide TADA

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with a priority claim.

The Fagos’ first five Chapter 13 plans

contained these provisions, and the Fagos remained on the TADA
premises for about 18 months after filing bankruptcy.
When the Fagos filed their sixth Chapter 13 plan in
February 2013, they did an about face.

The Fagos indicated they

were rejecting the TADA lease because there was no lease to
assume since it had been terminated by TADA due to their
eviction.

Because there was no assumed lease, TADA’s priority

claim was extinguished, and TADA was relegated back to unsecured
nonpriority creditor status.

This sixth plan came after the

Fagos defaulted on their post-petition obligation to pay the
August, September, and October 2012 rent to TADA, in addition to
the $19,000 outstanding to cure the pre-petition default, and
after TADA had sought relief from the stay to commence eviction
proceedings.

This sixth plan also came after the Fagos

voluntarily left the premises on January 31, 2013.
The bankruptcy court rejected the Fagos’ sixth plan, and
held them to their prior plan from June 2012, where the Fagos
had assumed the lease, and TADA had a priority claim for the
pre-petition default.

The bankruptcy court awarded TADA damages

resulting from the post-confirmation breach of an assumed lease
in the form of an administrative expense claim.
In their appeal, the Fagos challenge the bankruptcy’s

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determination to reject their sixth plan.

The Fagos now

consider themselves to have been tenants-at-will since the
amended lease expired on September 30, 2007.

The Fagos argue

that because they did not have a valid lease with TADA, they
could not assume a nonexistent lease or provide TADA with a
priority claim for pre-petition obligations.

The Fagos also

argue that their status as tenants-at-will did not prevent TADA
from commencing eviction proceedings against them at any time
for their failure to comply with the consent judgment because,
without a lease, TADA was not subject to the automatic stay. 2

2

Although it does not appear that the parties entered into
formal amendments of the original lease to cover the entire
twelve-year tenancy, it appears that until January 2013, both
the Fagos and TADA proceeded under the understanding that the
tenancy was governed by the terms of the 2004 lease. This type
of arrangement would be considered a “month-to-month” tenancy
rather than a “tenancy-at-will.” See N.J.S.A. 46:8-10
(“Whenever a tenant whose original term of leasing shall be for
a period of one month or longer shall hold over or remain in
possession of the demised premises beyond the term of the
letting, the tenancy created by or resulting from acceptance of
rent by the landlord shall be a tenancy from month to month in
the absence of any agreement to the contrary.”); 34 Label St.
Associates v. R.C. Search Co., No. A-4556-08T3, 2010 WL 1425723,
at *2 (N.J. Super. Ct. App. Div. Apr. 8, 2010) (“Where a written
lease expires, it is converted to a month-to-month tenancy,
absent “any agreement to the contrary.” N.J.S.A. 46:8–10.
Thereafter, a holdover tenant of commercial space may be evicted
on thirty days’ notice. N.J.S.A. 2A:18–53(a).”); Stamboulos v.
McKee, 342 A.2d 529, 530-31 (N.J. Super. Ct. App. Div. 1975)
(“[A] month-to-month tenancy is a continuing tenancy, which does
not give rise to a new relationship for each month. . . . [A]
new tenancy was established only when the existing monthly
tenancy was actually ended and the new one commenced.”); cf.
Katz v. Inglis, 109 N.J.L. 54, 55, 160 A. 314, 315 (1932)
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In addition to the fact that it is unclear whether the
Fagos presented this specific premise to the bankruptcy court
when it rejected their sixth plan, the Fagos’ five prior plans,
all approved by the bankruptcy court, belie their change of
course.

It appears that when the Fagos realized that they would

not be able to cure their pre-petition obligation to TADA, they
attempted to negotiate with TADA.

The details of the

negotiation are not clear, but the Fagos contend that TADA
agreed to accept the late payment of post-petition rent, allow
the Fagos to abandon the property, and be relieved of their prepetition debt on the consent judgment.

The bankruptcy court

rejected this change of position, particularly because the
supposed negotiation was refuted by TADA.
As the bankruptcy court observed, the Fagos retained the
protection of the automatic stay from being evicted for over a
year while they repeatedly classified their relationship with
TADA as an unexpired lease that they assumed.

Moreover, they

were able to continue their business operations uninterrupted,

(“Where, as here, a tenant has entered premises under a void
lease, without more, the tenancy is a tenancy at will.”);
McEowen v. Drake, 14 N.J.L. 523, 525 (1835) (“The [tenancy at
will] doctrine is very distinctly laid down in Adams on Eject.
103-4-7, &c. edition of 1821; showing not only that a general
occupation of lands creates [a tenancy at will], but also the
nature of the few cases of tenancy at will, that occur in modern
times.”).
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which benefited the bankruptcy estate as a whole.

That the

Fagos, after five modified plans, realized that they could not
fulfill their obligations, should not cast error on the
bankruptcy court for rejecting the Fagos’ 11th hour attempt to
re-categorize their relationship with TADA and wipe out a
$19,000 pre-petition debt.
Instead of unilaterally modifying the assumption of a lease
and acceptance of the obligation to cure the default to the
rejection of a non-lease and be relieved of the obligation to
cure the default because they realized that they could not
afford the repayment obligations under their Chapter 13 plan,
the Fagos should have sought to convert their bankruptcy to a
more economically appropriate type.

The debtors cannot blame

the bankruptcy court for accepting and enforcing the plans that
they themselves had proposed. 3

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The Fagos’ change in position is also contrary to the doctrine
of judicial estoppel. As the Third Circuit explained,
Judicial estoppel, sometimes called the “doctrine
against the assertion of inconsistent positions,” is a
judge-made doctrine that seeks to prevent a litigant
from asserting a position inconsistent with one that
she has previously asserted in the same or in a
previous proceeding. It is not intended to eliminate
all inconsistencies, however slight or inadvertent;
rather, it is designed to prevent litigants from
“playing ‘fast and loose with the courts.’” Scarano v.
Central R. Co. of New Jersey, 203 F.2d 510, 513 (3d
Cir.1953) (citation omitted). “The basic principle ...
is that absent any good explanation, a party should
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Accordingly, the Court finds that the bankruptcy court
committed no error in rejecting the Fagos’ fifth modified plan
and providing TADA, pursuant to 11 U.S.C. § 365(a), with a
priority administrative claim for the balance of the Fagos’ prepetition debt.

The order of the bankruptcy court will be

affirmed, and the Fagos’ appeal dismissed.

An appropriate Order

will be entered.

Date: September 25, 2015
At Camden, New Jersey

s/ Noel L. Hillman
NOEL L. HILLMAN, U.S.D.J.

not be allowed to gain an advantage by litigation on
one theory, and then seek an inconsistent advantage by
pursuing an incompatible theory.” 18 Charles A.
Wright, Arthur R. Miller & Edward H. Cooper, Federal
Practice and Procedure § 4477 (1981), p. 782.
Ryan Operations G.P. v. Santiam-Midwest Lumber Co., 81 F.3d 355,
358 (3d Cir. 1996).
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