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  • RLT WINS BEFORE THIRD CIRCUIT IN IN REVEL CASE

RLT WINS BEFORE THIRD CIRCUIT IN IN REVEL CASE

RLT WINS BEFORE THIRD CIRCUIT IN IN REVEL CASE

by rltlawfirm / Tuesday, 15 January 2019 / Published in Uncategorized

On November 30, 2018, the United States Third Circuit Court of Appeals upheld rulings of U.S. Bankruptcy Judge Michael Kaplan and U.S. District Judge Michael A. Shipp in favor of RLT’s client IDEA Boardwalk, LLC (“IDEA”), the former operator of the highly successful HQ Nightclub and HQ Beachclub at the Revel Casino. The Third Circuit ruled that when a bankrupt landlord rejects a tenant’s lease, § 365(h) of the Bankruptcy Code and the doctrine of equitable recoupment will allow the tenant to offset its damages, even if it means that the tenant remains in possession without paying rent.

IDEA’s lease contained what it characterized as a recoupment provision. In his opinion for the Third Circuit, Judge Thomas L. Ambro summarized the provision as meaning that the tenant would pay no rent unless the nightclubs turned a profit. The bankruptcy and district courts agreed that the recoupment provision was enforceable, effectively meaning that IDEA was not liable for rent.

Polo North, Country Club, Inc., the purchaser of the Revel, appealed to the Third Circuit and lost again. The Third Circuit said there was “no doubt” that the recoupment clause was one of the rental terms that remained enforceable after rejection under Section 365(h)(1)(A)(ii). “To render the ‘recoupment’ component . . . inoperative, while still calculating the ‘rent’ component using the same formula, would upend the rent framework established in the Lease and deny [the tenant’s] statutory right to remain in possession of the premises under the same ‘rental terms,’” Judge Ambro said.

The Third Circuit also sided with IDEA on an independent ground. It ruled that IDEA also had a common law right of recoupment, sometimes referred to as equitable recoupment, which offsets obligations arising between the same parts in the same transaction. Judge Ambro said there was “no question” that the rental obligation and the tenant’s recoupment rights arose from the same transaction. He said it would be “inequitable” if IDEA were required to pay rent without the offsetting reductions afforded by the recoupment provision. In short, Judge Ambro said that IDEA “is entitled to reduce its rent obligations by recoupment amounts under the Lease based on the doctrine of equitable recoupment.”

IDEA was represented in the Third Circuit appeal by Barry J. Roy, Jeffrey A. Cooper, and John J. Harmon.

If you have any questions regarding this matter, please do not hesitate to call Barry J. Roy or Jeffrey A. Cooper at (973) 597-9100.

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Rabinowitz, Lubetkin & Tully, LLC is a six (6) lawyer firm that focuses its practice in the areas of bankruptcy, civil litigation, and commercial real estate. RLT’s attorneys are leaders in their field. Chambers USA, which lists America’s leading lawyers for business, and is a highly-respected legal directory based on in-depth interviews with in-house counsel and private practice attorneys, recently ranked RLT ahead of many larger well-respected firms. RLT was described as "deliver[ing] effective, timely and beneficial services that yielded favorable results." RLT was also noted as "hav[ing] tremendous knowledge and [the ability to] do timely and efficient work."

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