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Note: Webster Place Athletic Club, LLC (Lessee) engaged the predecessor-in-interest of Ramco-Webster Place, LLC (Landlord) to lease a space in the Webster Place Shopping Center for Lessee’s “high-end” athletic club. As the new owner of the shopping center, however, Lessee alleged that Landlord failed to adequately maintain the premises as required by the lease and that Landlord’s refusal to invest in the property was due to its intention to demolish the shopping center and replace the same with residential spaces. Although paying USD 98,000 per month in rent, Lessee alleged that it had expended “substantial” funds to improve the premises but ultimately sued Landlord in state court for rescission of the lease. In response, Landlord demanded payment on a USD 600,000 letter of credit provided to it by Lessee on the basis that Lessee had failed to pay rent. Thereafter, Landlord filed breach of contract and eviction claims against Lessee which were consolidated with the rescission action.

Shortly before the state court was to rule on Landlord’s motion for possession of the leased premises, Lessee filed for Chapter 11 bankruptcy. Lessee/Debtor also moved to have its rescission claim removed to federal bankruptcy court. The bankruptcy court, however, granted Landlord’s motion to remand due to Lessee/Debtor’s failure to demonstrate subject matter jurisdiction over the rescission claim. Subsequently, Landlord moved to lift the automatic stay regarding the state law claims. The United States Bankruptcy Court for the Northern District of Illinois, Schmetterer, J., denied the motion.

Landlord argued that by lifting the stay on state court proceedings, Lessee/Debtor would not be unfairly prejudiced and that Landlord otherwise had a reasonable likelihood of success regarding its claim that Lessee/Debtor breached the underlying lease. The Judge noted, however, that after Landlord filed its motion to lift the automatic stay, Lessee/Debtor initiated a “new adversary proceeding” by filing a four-count complaint with the bankruptcy court. That complaint included, among others, a claim for breach of lease against Landlord. While Landlord argued that the new claims brought by Lessee/Debtor were “substantially identical” to its own state claims rendering state court the more appropriate forum, the Judge disagreed, noting that “it appears that essentially all of the issues in both the consolidated state court cases and the pending matters in the bankruptcy court arise out of a common set of facts involving alleged breaches of the lease.” As the bankruptcy court could properly assert jurisdiction over the new claims brought by Lessee/Debtor, the Judge concluded that “it would be more economical judicially to try all of the issues together” and denied Landlord’s motion to lift the automatic stay.

[MJK]

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