Opinion
11CVG-03-3226
08-22-2012
PLAZA DEVELOPMENT COMPANY, Plaintiff, v. W. COOPER ENTERPRISES, LLC, et al. Defendants. W. COOPER ENTERPRISES, LLC, and BAJA SOL OHIO, LLC, Third-Party Plaintiffs, v. EL TRIUNFO, LLC, et al., Third- Party Defendants.
JOURNAL ENTRY 1) CONDITIONALLY DENYING MOTION FOR DEFAULT JUDGMENT; (Motion Filed June 21, 2012) 2) CONDITIONALLY GRANTING MOTION FOR LEAVE TO ANSWER; (Motion Filed Aug. 15, 2012) 3) GRANTING MOTION FOR SUMMARY JUDGMENT OF DEFENDANTS 4) DENYING MOTION OF PLAINTIFF PLAZA; (Cross Motions Filed May 9, 2012 and June 11, 2012) and 5) ORDERING STATUS CONFERENCE ON SEPT. 7, 2012.
Frye, J.
I. Motions for Default, and for Leave to Answer
{¶1} Defendants and third-party plaintiffs W. Cooper Enterprises, LLC ("WCE") and Baja Sol Ohio, LLC ("Baja") filed a motion for default judgment against third-party defendants El Triunfo, LLC and Jose Fuentes on June 21. Both third-parties had finally been served in early May 2012 although it is clear they had actual knowledge of this case months before service was perfected. For instance, a lawyer appeared "informally" at a prior court hearing on their behalf. Finally on August 15, attorney J. Harris Leshner -who was not the same attorney that attended the prior hearing - appeared and filed a motion for leave to answer. He also participated in the motion hearing held on August 17, 2012.
{¶2} Under Civ. R. 6(B) and commonly accepted concepts of judicial discretion the court has the ability to relieve a party of some procedural defaults. That is almost mandatory when parties in default finally appear and seek to answer before a judgment actually is entered assuming there has been no significant prejudice to adverse parties. Following discussion on the record on August 17, the court concluded that although third-party defendants were dilatory this case had not yet progressed to the point where it was appropriate to grant a default judgment. Having said that, as also discussed on the record, the court finds that third-party plaintiffs were caused roughly $350 in extra legal expense by the delay in answering. A motion for default was prepared by their counsel, and she invested related work prompted solely by third-party defendants' delay.
{¶3} The court GRANTS third-party defendants leave to file their answer instanter as sought on August 15, conditioned upon prompt payment to counsel for WCE and Baja of $350. The court understands there is no dispute from El Triunfo, LLC or Jose Fuentes about the reasonableness or necessity for the work by WCE and Baja's lawyer, and that third-party defendants will promptly pay the $350.
II. Factual Background to Cross Motions for Summary Judgment.
{¶4} The story begins with a 20-year ground lease for property at 1200 Noe Bixby Road. Plaza Development first leased it in February 1994 (under what is sometimes referred to as the Prime Lease.") Since then the property has been used as a Mexican restaurant.
{¶5} The Prime Lease ended up as an asset in a bankruptcy proceeding. That bankruptcy transferred it in December 2007 to W. Cooper Enterprises, LLC. WCE's effort at a Mexican food venture was marketed through Baja Sol Ohio, LLC, a Minnesota limited liability company. Unfortunately Baja ceased active business around November 2009. (See, Exhibit 11)
{¶6} Baja notified Plaza that it had ceased active restaurant operations by letter dated Nov. 24, 2009. (Exhibit 11) The letter advised the landlord that "[i]t is Tenant's desire that the premises be re-let as soon as possible." However, it also affirmed that "[f]or now, Tenant intends to continue to pay rent and utilities, maintain its current insurance coverage on the property, and maintain the security and alarm system." Counsel for Baja and WCE took the position that "[u]nder the Lease, [merely] going dark is not an event of default." However, the Tenant further offered the keys for pick up by landlord, and offered to cooperate in transferring the liquor licenses as landlord might direct. Tenant left behind the majority of furniture, fixtures and equipment ("FF & E) in the premises, "in the hopes that it will assist in re-letting the premises to a new tenant."
{¶7} Reasonably read, the letter of November 24 unequivocally advised landlord that WCE and Baja would never again use the premises for active business, but that there was not a complete and total repudiation of the Prime Lease. Tenant affirmed that it would stand by and cooperate in steps allowing Plaza to "re-let as soon as possible" and minimize damages for everyone. A Plaza employee (their "VP Commercial Leasing") testified in this case that he "assumed" that Plaza recovered the keys as offered, because in circumstances like these the normal course followed by Plaza was to have maintenance or leasing employees go to in to a rental property and assure the heat was on, that FF & E were left in place, and that there was no damage to the building. (Vollman deposition, pp. 57 - 60; see also Exhibit 22.)
{¶8} Chronologically, the next event in sequence appears to be execution of an 8 ½ page document entitled "Sublease Agreement" dated in May 2010. It was between Baja and El Triunfo, LLC. (Exhibit 18) El Triunfo was at that point a brand new, unrelated business coming into the space. However, it did not become effective until November 9, 2010 because people at Plaza needed to sign indicating "consent to the terms of this Sublease." That did not occur for roughly six months, due to business schedules and more importantly because a realtor affiliated with Plaza was entitled to a $5,000 "commission for re-letting the space for the sublease." (Joshua N. Ruben Depo. p. 22.)
{¶9} The Sublease Agreement was personally guaranteed by Jose Fuentes, individually, in a written document signed in May 2010.
{¶10} The next flurry of activity occurred in November and December 2010. Again, communications occurred by e-mail messages among the parties' lawyers. (Exhibits 19, 22, 24, 26, 28, 32.) Counsel concede that no genuine dispute of fact exists with respect to the story these e-mails convey.
{¶11} A lawyer for Plaza initiated communication on November 5. He advised that "El Triunfo, LLC (Sublessee) is currently in default under the sublease in the total amount of $17,500. Plaza has instructed me to seek an eviction if this balance is not paid." This notice was sent to Pam Curran, one of the outside counsel for WCE and Baja. Several weeks later Josh Ruben of Plaza sent an internal e-mail dated November 23, memorializing that "[t]he new sub-tenant of Baja Sol, El Triunfo, is inquiring about whether or not Baja Sol is current on their balance. They are very concerned that if we evict Baja Sol, they will be gone too (and they haven't even opened yet). Baja Sol is not responding to theirs or my requests/communications. They are also waiting for Baja Sol to sign their portion of the Summary of Tenancy rights so they can get their liquor license that they just paid over $30,000. [sic] they have spent a ton of money in the space and they want to do a direct lease with us if Baja Sol is evicted."
{¶12} The next e-mails are dated December 2. The first was a note to Jay Simon, another of Baja and WEC's Minneapolis lawyers. This e-mail reflects that an eviction proceeding had already been filed in Franklin County Municipal Court, and in connection with it tenders a proposed agreed Entry. A later message from Columbus counsel for Plaza to attorney Simon memorialized that "El Triunfo has put thousands of dollars into renovating the property and is planning on opening for business tomorrow. We are hoping to eventually work out some kind of deal with them, that is why we need this agreed entry so soon."
{¶13} More communication followed on December 8, 2010. Another Columbus lawyer for Plaza (at the Willis Law Firm) e-mailed "Pam and Jay" about his law firm having a conflict of interest between WCE and Plaza. He went on to explain that the plan was for there to be a "release of interest in the tenement for Baja Sol" and a second release given on behalf of WCE, following which "the eviction can be dismissed and the lease with the new tenant can be signed without an eviction." Further, he said, he "understand[s] that there is also a balance allegedly owed by W. Cooper, and the other counsel now involved is going to work on pursuing that." The next day another lawyer at the Willis Law Firm sent a longer email to "Pamela and Jay" with much more detail. First, he reported that "[a] new lease has not been negotiated and/or executed with El Triunfo. Plaza does not want an empty restaurant and is willing to terminate the existing lease with W. Cooper Enterprises and Baja Sol Ohio, and enter into a lease agreement with El Triunfo as the sole tenant." Next, he commented that the only issue in the eviction was possession, and that at that point "Plaza is not suing any party for money. If a new lease is signed and the existing lease terminated with W. Cooper Enterprises and Baja Sol Ohio, then the balance owed will be a matter of collection between W. Cooper Enterprises, Baja Sol Ohio, and Plaza Development. Because the eviction only pertains to possession, the filing of any claims for money will throw this case into protracted litigation and cost every party involved a lot of money. This can be avoided by W. Cooper Enterprises relinquishing all possessory rights to the commercial premises via execution of the attached Entry." Apparently that occurred, for the eviction case was dismissed around December 10, 2010, according to another e-mail message. (Ex. 32).
{¶14} The last significant development was a brand new "Lease Agreement between Plaza Development Company, Lessor, and El Triunfo, LLC dba Poblano's, Lessee" effective January 1, 2011. (Exhibit 37) The terms of it cover more than 13 single-spaced pages. It was a fully integrated document. (¶ 38, p. 13.) The new tenant's obligations were guaranteed by Jose Fuentes. The new Lease did not refer to the previous months during which El Triunfo had been using the property while engaged in retrofitting the space from the Baja Sol design. It also made no reference to the 1994 Prime Lease. The new 2011 lease had a five year term running to December 31, 2015 making it almost two years longer than the former lease. Rental terms from the new tenant were less favorable to the landlord (Plaza) than were those in the original Prime Lease, and a witness from Plaza has said this change in terms was attributable to the general economic downturn in 2007 and 2008, and a shift in market favorability for retail tenants to areas outside I-270. (Affidavit of Nicholas L. Vollman of Plaza, at ¶¶ 6 - 7, filed June 11, 2012.)
{¶15} Joshua Rubin, also an employee of Plaza, testified by deposition. His views about the new January 2011 Lease were offered from his vantage point of five years experience with commercial leasing. (Tr. 46 - 47.) He said that when Plaza made the new lease directly with El Triunfo "I don't think I thought about [or] even really cared about what was going on with the sublease. The only thing I knew was, hey, we're dealing with this lease with Baja Sol and that this direct lease we're doing is going to make that one go away." (Tr. 46.) Mr. Rubin knew in terms of rent that it was "very similar" to the original Prime Lease, and felt "it was a fair deal. It was the same deal they were getting from Baja Sol" as a subtenant. (Tr. 60.)
III. Analysis of the May 2010 Sublease.
{¶16} The import of the May 2010 Sublease Agreement is vigorously contested by the parties. As the court understands it, their concern largely is based on hoary legal decisions in the real property area and the prospect that the ultimate outcome of this case might depend on whether the May 2010 arrangement was a true sublease or instead was an assignment of Baja's rights opening up different legal rules once Plaza dealt directly with El Triunfo. Baja (and WCE) argue for an assignment. They claim that the title "Sublease Agreement" does not control, and that the underlying business arrangement was a complete assignment of Baja's rights for the last four years (2010 -2014) under the Prime Lease. Plaza argues that is incorrect. It contends the arrangement was only a sublease.
{¶17} It is generally accepted that when a lessee transfers all of its interest in a lease for the entire term it is deemed an "assignment" of that lease rather than merely a sublease. A court must examine the parties' language and manifest intent, and seek to determine whether it was to relinquish the original legal relationship under the prime or master lease, or merely to spin off some rights derivatively. On the other hand, when a tenant transfers less than its entire interest under the lease, or transfers its interest for less than the whole term, or makes other arrangements of a more limited nature, there is deemed to be only a sublease or sub-tenancy. In that class of cases the original lessee remains liable to perform under the original lease if the sublessee defaults. Under real property law "[i]t is well settled that no privity of contract exists between a sublessee and an original lessor." Mark-It Place Foods, Inc. v. New Plan Excel Realty Trust, 156 Ohio App.3d 65, 2004-Ohio-411, at ¶ 19 (4th Dist.).
{¶18} The title to a document is not legally controlling. Worth v. Aetna Casualty & Surety Co., 32 Ohio St.3d 238, 241 (1987). Instead, the Tenth District has held that when arguments like this are made "[t]he specific provisions of the lease must be examined to ascertain whether the parties entered into an assignment or sublease." Houser v. Columbia Gas Transmission Corp., 54 Ohio App.3d 145, 148 (10th Dist. 1988). It has also been said that "the distinction between an assignment and a sublease lies in the extent to which the original lease has parted with his interest. An assignment of a leasehold is a transaction whereby a lessee transfers his entire interest in the leased premises for the unexpired term. If a lessee makes a transfer of the leased property for less than the balance of the term he has made a sublease of the leased property. Restatement (Second) of Property §15.1 (1977). Further, the lessee must part with all of his reversionary interest in the property to create an assignment. ." Joseph Bros. Co. v. F.W. Woolworth Co., 641 F.Supp. 822, 824 (N.D. Ohio 1985) (Walinski, J.), affirmed in relevant part, and reversed on other grounds at 844 F.2d 369, 371-72 (6th Cir. 1988).
{¶19} Interestingly, the law offers something of a shortcut to resolve disputes over whether an arrangement is, in law, considered an assignment. The existence of an assignment may be rebuttably presumed or inferred from the transfer of possession to someone other than the original lessee. 65 O. Jur3d 321, Landlord and Tenant §246 (2006); Southcross Commerce Center, LLP v. Tupy Properties, IIC, 766 N.W.2d 704, 708 (Ct. Appeals Minn. 2009). When a rebuttable presumption exists in favor of the nonmoving party it may even preclude summary judgment. Id. at 709 - 710 (also referring to decisions on that procedural point from Florida, New York, New Jersey, and Rhode Island.) While the presumption of an assignment runs against Plaza's argument that this was only a sublease not an assignment, in the end this document is sufficiently clear as to justify a holding that the presumption is overcome by the actual facts.
{¶20} The parties agree there is no genuine issue of material fact. Given the record, in this court's view the presumption that Baja's Sublease Agreement reached with El Triunfo in May 2010 (to which Plaza consented) was really an assignment is overcome. While El Triunfo gained total undisputed possession of the restaurant, and indeed gained several new or broader rights beyond those that Baja possessed, at its heart this was a sublease. It is acknowledged that El Triunfo was authorized to make new alterations and improvements to the premises. (Sublease, Ex. 18, ¶ 6.1) Further, broader renewal rights were given to El Triunfo than Baja itself enjoyed under the original 1994 Prime Lease. (Sublease, ¶ 3.2) On balance, however, the "Sublessee obtain[ed] no more rights and privileges hereunder than Sublessor has as 'tenant' under the Prime Lease with respect to the Premises." (¶ 2.2(e).) (emphasis added). Furthermore, the 1994 Prime Lease provided that even with an assignment the original tenant remained legally liable for future obligations under the Prime Lease for 36-consecutive months (effectively, 3 years pending a consistent demonstration that any assignee could perform.) (1994 Prime Lease, Ex. 3, at ¶ 29, p. 19.).
Although a signatory for purposes of "consent to the terms of this Sublease" Plaza was not clearly a "party" to it. (This was unlike the situation in January 2011 when the new lease was made, as discussed below.) Yet, even if Plaza were considered a party, that would not alter the court's conclusion on the appropriate characterization of the document.
{¶21} While Baja has arguments that this was an assignment, the structure of the Sublease Agreement, repeated references in it to the 1994 "Prime Lease, " and references to Baja as merely the "Sublessor" are among the points that tip the decision the other way. The Prime Lease still governed in May 2010 on most matters of substance, such as appropriate care for the premises. (¶¶ 7.1, 7.2.) Baja - not Plaza - retained "all rights and privileges as 'landlord' under the Prime Lease and may enforce the same against Sublessee" under ¶ 2.2 (b). Conversely, "Sublessee has all rights and privileges as 'tenant' under the Prime Lease with respect to the Premises and may enforce the same [only] against Sublessor." (¶ 2.2(b).) As a matter of law this was a sublease.
IV. Analysis of the January 2011 Lease with El Triunfo.
{¶22} Of course, the story doesn't end with the Sublease Agreement. After some months, Plaza made a new, stand-alone Lease directly with El Triunfo in January 2011. That agreement came on the heels of the Municipal Court case nominally used to evict Baja and WCE (and ultimately resolved voluntarily by arrangements described above.) But using the eviction and related agreements, Plaza regained undisputed possession of the entire property from Baja and WCE. It is also clear that in making the new 2011 lease directly with El Triunfo that Plaza did not reserve any rights against WCE or Baja. Both in the new lease itself and in the e-mails exchanged, enforcement of the original 1994 Prime Lease was largely ignored. Again, the parties both agreed at oral argument that there is no genuine dispute of material fact.
{¶23} The new 2011 Lease with El Triunfo was made on materially different terms than the Prime Lease. It is somewhat less favorable in rental owed the landlord, but it extended the length of the rental term. The content of the 2011 Lease is not ambiguous. Nevertheless, the court can confirm its understanding of the parties' intentions as expressed in that 2011 Lease by considering the parties actions that took place more or less contemporaneously.
{¶24} The multiple e-mail messages exchanged in the period before the new Lease became effective on January 1, 2011, including the formal eviction proceedings that Plaza pursued, all demonstrate clearly that Plaza's primary focus was to assure El Triunfo's successful operation of a new venture. The parties' actions contemporaneously with completion of the new 2011 Lease between Plaza and El Triunfo are not admissible to enlarge or limit the terms of the instrument itself, but they are competent evidence to assist in understanding the intentions of the parties as declared by the words employed in the light of those surrounding circumstances. Third National Bank of Cincinnati v. Laidlaw, 86 Ohio St. 91, 100, 98 N.E. 1015 (1912); see also, Alexander v. Buckeye Pipe Line Co., 53 Ohio St.2d 24 (1978), syllabus paragraph 3.
{¶25} The new Lease arose because Plaza had a legal obligation to minimize or mitigate damages caused by their tenant's breach of the Prime Lease. Syllabus paragraph one of Frenchtown Square Partnership v. Lemstone, Inc., 99 Ohio St.3d 254, 2003-Ohio-3648 unequivocally recognized that a duty to mitigate applies to a commercial lease even if the lessee abandons the leasehold. That holding "does not require a lessor to accept just any available lessee." (Id. at ¶ 19) But, "'Lessees are potentially liable for rents coming due under the agreement [only] as long as the property remains unrented'." Id. at ¶ 15; citing Dennis v. Morgan, 89 Ohio St.3d 417, 419 (2000). The import of these two holdings is that once the new Lease with El Triunfo was made it eliminated Plaza's right to further rent after January 1, 2011 from WCE and Baja. Plaza's exhaustive briefs overlook this cryptic, but case dispositive holding by the Supreme Court.
{¶26} Plaza's new Lease was made "at such odds with the original terms of the [1994] lease, [that] the agreement cannot be considered a mere modification" and it therefore terminated the lessee's liability on the original lease. Morse and Hamilton Ltd. Partnership v. Gourmet Bagel Co., 10th Dist. Case No. 99AP-1253, 2000 Ohio App. LEXIS 4492, at *6 - *10 (Franklin Co. 2000), and cases cited including City National Bank & Trust Co. v. Swain, 2 nd Dist. Case No. 2871, 1939 Ohio Misc. LEXIS 1115, 29 Ohio L. Abs. 16 (Franklin Co. 1939).
{¶27} The parties agree that under Ohio law a lease is just a species of contract. See also, Frenchtown Square, supra, at ¶¶ 12-13, and Dean v. Cincinnati Met. Housing Auth., 1 st Dist. Case No. C-110673, 2012-Ohio-2265, 2012 Ohio App. LEXIS 2010, at ¶ 8. Thus, another sensible way to consider the legal effect of that new 2011 Lease is under the law of novation. "Under Ohio law, 'a contract of novation is created where a previous valid obligation is extinguished by a new valid contract, accomplished by substitution of parties or of the undertaking, with the consent of all the parties, and based on valid consideration'." 216 Jamaica Ave. LLC v. S & R Playhouse Realty Co., 540 F.3d 433, 436 (6th Cir. 2008) (Sutton, J.). "Under Ohio law, the parties' consent to a novation need not be express but may be implicit 'from the circumstances or a party's conduct'." (Id. at 436-37) (citation omitted.) "An agreement between the parties to a contract and a third person, whereby one party is released from the obligations of the contract, and the third person substituted in his stead, is a novation, and requires no further consideration than such release and substitution." Williams v. Ormsby, 131 Ohio St.3d 427, 2012-Ohio-690, at ¶ 45, quoting Bacon v. Daniels, 37 Ohio St. 279 (1881), paragraph two of the syllabus.
{¶28} The court agrees with the characterization of events by counsel for Baja and WCE: "Plaza made a business decision not to let El Triunfo open the restaurant as a subtenant under the Old Lease and decided instead [to] enter into the New Lease which had many features more favorable to Plaza than the Old Lease. The decision terminated the Old Lease by operation of law." (Memorandum filed May 9, 2012, at p. 16). Plaza responds with many arguments built around ¶ 25, the "Defaults by Tenant and Landlord's Remedies" provision in the Prime Lease. (Memorandum filed June 11, 2012, at pp. 5-6.) They are unavailing. The remedy Plaza seeks here under the 1994 Prime Lease - simultaneously enforcing its new lease with El Triunfo while getting additional revenue for the same space under the old, Prime Lease - simply is not available under modern Ohio law.
V. Conclusions.
{¶29} Plaza's Motion for Partial Summary Judgment filed June 11, 2012 must be DENIED. Defendants WCE and Baja's Motion for Summary Judgment filed May 9, 2012 is GRANTED IN PART, consistent with the foregoing discussion.
{¶30} While part D of defendants' motion argues that the fraudulent transfer claims fail as a matter of law once the Prime Lease claim is resolved, since allegedly "Plaza has been paid for the pre-termination rent and expenses owed by WCE and Baja Sol under the Old Lease" the court is uncertain that those facts are shown in the present record. Out of an abundance of caution summary judgment is DENIED on the fraudulent transfer claim of Plaza, but only pending further clarification by counsel. Likewise, no resolution of the third-party claims against El Triunfo and the guarantor is possible on the present record, although presumably those too are eliminated when WCE and Baja have no further financial liability to Plaza.
{¶31} The court will hold a STATUS CONFERENCE with all counsel on Friday September 7, 2012, at 1:30 p.m. to examine what issues and claims, if any, remain open. Obviously, if all counsel agree that the foregoing decision resolves the case at this juncture as to all parties, they may tender a final Judgment to chambers in advance of the conference.
IT IS SO ORDERED.