Opinion
105819/2003.
Decided November 4, 2011.
WHITE CASE LLP, Attorneys for Plaintiff, New York, NY, By: Glenn M. Kurtz, Esq., Douglas Baumstein, Esq., Adam Burton, Esq., SULLIVAN CROMWELL, LLP, Attorneys for Defendants, New York, NY, By: David B. Tulchin, Esq., William Farris, Esq., Andrew Gelfand, Esq., Jessica Klein, Esq., Anna Fee, Esq.
In 1992, plaintiff The Stop Shop Supermarket Company's (Stop Shop) predecessors in interest, defendant Vornado Realty Trust's (Vornado) predecessor in interest and entities affiliated with it, and non-party Bradlees-New Jersey, Inc. (Bradlees) entered into a master agreement and guaranty with respect to a number of leases for properties owned by Vornado and occupied by Bradlees. (Exh. Z). The master agreement and guaranty provided for certain rental increases to be paid by Bradlees and gave Vornado the right to reallocate the rental increase among the leases. (Exh. Z, pp. 2-3 (¶ 1(a))). Stop Shop was the guarantor of Bradlees' obligations under the master agreement and under the various leases. ( Id. pp. 8-12 (¶ 11)).
Subsequently, in 2000, Bradlees and its affiliates filed for bankruptcy. (Exh. BQ pp. 3-4, 6-7 (¶¶ 3, 12); Hippler Witness Statement p. 3 (¶ 6)). In the bankruptcy proceeding, Stop Shop and the Bradlees debtors sought, inter alia, to invalidate Vornado's right to reallocate the rental increase as an unenforceable anti-assignment clause under section 365 of the Bankruptcy Code and also asked the Bankruptcy Court to transfer the right to reallocate from Vornado to Stop Shop and the Bradlees debtors. (Exh. CF p. 40 (¶¶ 20, 23)). The Bankruptcy Court granted the relief that was requested. (Exh. 100 p. 42 (¶¶ 20, 23)). On appeal, the U.S. District Court for the Southern District of New York affirmed the invalidation of Vornado's reallocation right but reversed the Bankruptcy Court's decision to transfer this right to Stop Shop and the Bradlees debtors.(Exh. 60 pp. 6-7).
Thereafter, notwithstanding the court order invalidating the reallocation provision, Vornado sent a letter to Stop Shop purporting to reallocate the rental increase to four unexpired leases subject to the master agreement. (Exh. FQ). Stop Shop refused to comply with Vornado's purported reallocation of the rental increase and on March 27, 2003, Stop Shop filed the complaint in this action seeking a declaration that Vornado has no right to reallocate the rental increase and that Stop Shop is not obligated to pay the rental increase following the expiration of the allocated leases. (Complaint p. 7).
On April 9, 2003, Vornado removed this action to the U.S. District Court for the Southern District of New York. (Notice of Removal). The next day, April 10, 2003, Vornado filed a motion in Bankruptcy Court to interpret the Bankruptcy Court's order, as modified on appeal by the District Court, invalidating Vornado's reallocation right under the master agreement as an unenforceable anti-assignment clause. (Exh. 102). Stop Shop opposed the motion and cross-moved for abstention and remand back to this Court. (Exh. 115 p. 2). On June 9, 2004, the Bankruptcy Court granted Stop Shop's cross-motion to abstain and declined to rule on Vornado's motion to interpret. ( Id. p. 12). The Bankruptcy Court concluded that "the parties are non-debtors, Vornado's claims are based primarily on state law, the Motion and the New York Action are only remotely, if at all, related to the bankruptcy proceedings, and federal retention of the cases would not aid in the administration of the bankruptcy estate of a case that is closed." ( Id.). On appeal, the U.S. District Court for the Southern District of New York affirmed the Bankruptcy Court's decision and remanded the matter to this Court. (Exh. 126 p. 11).
On February 15, 2005, Vornado answered the complaint and asserted two counter-claims seeking damages against Stop Shop for the unpaid amount of the rental increase that was allegedly reallocated to the unexpired leases and a declaration that Stop Shop is obligated to pay Vornado, and Vornado is entitled to collect from Stop Shop, the full amount of the rental increase specified in the master agreement so long as any of the leases remain unexpired. (Answer and Counterclaims pp. 20-22). On March 24, 2005, Stop Shop filed a reply to the counterclaims, asserting various affirmative defenses.
In 2005, Vornado and Stop Shop cross-moved for summary judgment. By order dated December 9, 2005, I denied both motions. (Memorandum and Order, Dec. 9, 2005, p. 14). On appeal, the First Department affirmed this decision, noting that "the issue of whether [Stop Shop's] guaranty remains enforceable, notwithstanding the absence of an underlying obligation on the part of the primary obligor, cannot be determined on the basis of the current submissions and in the absence of discovery, particularly with respect to whether the freezing of the rent increases was attributable to actions taken by Vornado rather than the bankruptcy proceeding itself." ( The Stop Shop Supermarket Co. v. Vornado Realty Trust , 35 AD3d 241, 243 [1st Dep't 2006]).
In October 2009, Stop Shop moved for leave to amend its complaint to allege causes of action: (a) for recovery of overpayments of rent "based on Vornado's bad faith refusal to re-let Bordentown and interference and conduct that delayed the re-letting of the Bradlees' Properties"; (b) for breach of the covenant of good faith and fair dealing and breach of the duty to mitigate; and (c) for tortious interference with economic rights. (Plaintiff Stop Shop's Memorandum of Law in Support of its Motion for Leave to Amend its Pleadings, p. 5). By order dated April 22, 2010, I denied Stop Shop's motion with leave to move after trial for an order to conform the pleadings to the proof. (Memorandum and Order, Apr. 22, 2010, pp. 5-6).
A non-jury trial was held to determine Stop Shop's obligations under the master agreement and guaranty. Evidence was taken on November 8 through 10 and 15 through 19, 2010. I received affidavits or affirmations from the following witnesses in place of their testimony on direct examination but each of them appeared live for cross-examination:
For plaintiff:
(a) Thomas Hippler, General Counsel of Stop Shop;
(b) Thomas Lauria, Global Practice Head of the Financial Restructuring and Insolvency Group at White Case LLP and the lead bankruptcy attorney representing Stop Shop in connection with the 2001 Bradlees bankruptcy;
(c) Samuel Mandell, General Counsel of Stop Shop 1982 until 1992 and Senior Vice President of the Stop Shop from 1984 to 1992;
(d) Hugh Kelly, a real estate broker and a self-employed independent contractor with SRS Real Estate Partners, retained by Stop Shop to help market the Bradlees leases;
(e) Paula Konikoff, an independent real estate valuation consultant;
(f) John Ostrowski, Vice President of Retail at Vornado;
(g) Elizabeth Frank, former Vice President of Real Estate for Stop Shop
For defendants:
(a) Steven Roth, Chairman of Vornado;
(b) Joseph Shenker, Chairman of the firm Sullivan Cromwell LLP;
(c) Robinson Lacy, partner at Sullivan Cromwell;
(d) Sandeep Mathrani, President — Retail Division for Vornado;
(e) Jill Rothschild, Vice President — Accounts Receivable for Vornado;
(f) John Birnbaum, Senior Vice President — Retail Counsel for Vornado;
(g) Michael Zucker, Vice President — Leasing in the Retail Division of Vornado;
(h) Leigh Lyons, Vice President of Retail Leasing at Vornado;
(I) Joseph Britton, Vice President and Controller of the Retail Division of Vornado;
(j) Richard Rowan, former Executive Vice President of the Retail Real Estate Division at Vornado.
In addition, Stop Shop introduced portions of the deposition testimony of Joseph Macnow, Executive Vice President of Finance and Administration at Vornado, and Stephen Lehmann, former Vice President of Administration for VF Outlet. Closing arguments were held on March 10, 2011. The parties submitted, among other things, their respective proposed findings of fact and conclusions of law, as well as numerous trial exhibits.
Unless otherwise stated, my findings of fact and conclusions of law are based upon these submissions, as well as the trial transcripts and excerpted witness deposition transcripts that were designated by the parties and incorporated into the record, and of course, from my observations of each witness who testified before me. Each party bears the burden of proving by a preponderance of the evidence that it is entitled to the relief that it seeks.
FINDINGS OF FACT
Stop Shop is a supermarket chain operating in northeast United States. (Exh. IN p. 23). Bradlees was a discount retail chain which, from 1961 to 1988, was owned and operated as a division of Stop Shop. (Mandell Witness Statement p. 1 (¶ 2)). Vornado's business is real estate ownership and development. (Roth Aff. p. 2 (¶ 4)). Vornado owns various commercial properties in the United States which it leases to tenants. ( Id.).
Between 1980 and 1985, Stop Shop entered into leases for stores at 19 shopping centers owned (or in one instance leased) by Vornado ("Leases"). (Exh. Z at Exhibits A, D). The stores were in shopping centers located in Bensalem, PA; Bordentown, NJ; Broomall, PA; Cherry Hill, NJ; Glenolden, PA; Levittown, PA; Marlton, NJ; Turnersville, NJ; East Brunswick, NJ; Hackensack, NJ; Jersey City, NJ; Manalapan, NJ; Middletown, NJ; Totowa, NJ; Union, NJ; Woodbridge, NJ; Chicopee, MA; Newington, CT; and Milford, MA. ( Id.). As of 1985, a Bradlees store was being operated in each of these 19 locations. (Mandell Tr. 479:13-17; Shenker Aff. p. 2 (¶ 4)).
In 1988, Stop Shop was acquired by the leverage buyout firm Kohlberg Kravis Roberts Company ("KKR"). (Mandell Witness Statement p. 2 (¶ 4)). That same year, the Bradlees businesses were incorporated as wholly-owned direct and indirect subsidiaries of Stop Shop. ( Id.). In 1991, Stop Shop began to explore the possibility of spinning off Bradlees from Stop Shop in an initial public offering (the "Spin-Off"). ( Id. p. 2 (¶ 5)). Stop Shop sought to spin-off Bradlees as a separate freestanding company and intended that Bradlees maintain control and continue operations at the stores, including at the 19 Vornado properties. ( Id. p. 2 (¶ 6); Mandell Tr. 452:7-12).
In March and April 1992, Stop Shop entered into negotiations with Vornado regarding Stop Shop's plan to undergo a corporate reorganization. (Shenker Aff. p. 3-7; Mandell Witness Statement p. 3 (¶ 8)). Steven Roth (then Chairman and Chief Executive Officer of Vornado), Samuel Mandell (then Senior Vice President and General Counsel of Stop Shop), and Joseph Shenker (a partner at Sullivan Cromwell) were the principal negotiators. (Shenker Aff. p. 4 (¶¶ 9, 11, 12); Mandell Witness Statement p. 3 (¶ 8); Mandell Tr. 452:4-6; Roth Aff. p. 3 (¶¶ 9)).
Stop Shop needed Vornado's agreement to consummate the Spin-Off so that Stop Shop would be able to assign its leases to Bradlees without the risk of recapture. (Mandell Tr.: 481:13-26; 484:1-13; Shenker Aff. p. 5 (¶ 14); Roth Aff. p. 3 (¶ 11)). Accordingly, the parties negotiated a "consent fee" that Bradlees would pay in exchange for Vornado's consent to the Bradlees spin-off. (Roth Aff. p. 4 (¶ 12); Shenker Aff. p. 6 (¶ 16); Mandell Tr.: 484:1-13, 495:5-496:14; Exh. JE p. 2 (¶ 7)). The parties agreed that this consent fee would be paid over time by Bradlees in the form of a rental increase so long as any one of the 19 Leases, as extended, continued to be in effect ("Rental Increase"). (Mandell Tr. 521:12-17, 522:10-14; Roth Aff. p. 4 (¶ 12); Shenker Aff. p. 9 (¶ 24)). At the time in 1992, the parties did not know which extension options on the Leases would later be exercised and thus could not then know which Lease or Leases would extend furthest into the future. (Mandell Tr. 520:3-14; Shenker Tr. 1189:4-19). However, everybody recognized that this period could be as long as 39 years. (Mandell Tr. 521:5-11; Roth Aff. pp. 6-7 (¶ 19); Shenker Tr. 1189:4-19).Ultimately, the parties agreed that Vornado would have the right to move, i.e. reallocate, the Rental Increase among the 19 Leases to ensure that Vornado could "funnel" the Rental Increase to the last Lease standing and thus receive the full amount of the consent fee. (Shenker Tr. 1115:2-1116:4, 1187:21-1188:6, 1190:10-19; Mandell Tr. 520:15-25; Shenker Aff. p. 10 (¶ 24)).
During the negotiations, Vornado expressed serious concerns about Bradlees' credit. (Mandell Tr. 507:8-11, 508:9-509:2; Shenker Aff. p. 6 (¶ 17); Roth Aff. pp. 4-5 (¶¶ 13, 14)). Stop Shop, a supermarket chain, was in a much more stable business than Bradlees, a discount retailer. (Roth Aff. pp. 4-5 (¶ 14); Shenker Tr. 1175:20-1176:2). At the time, Stop Shop was the tenant under the 19 Leases and Vornado could rely on Stop Shop's credit for payment of the rent due under the Leases. (Mandell Tr. 479:18-21). If the Leases were assigned to Bradlees, Vornado wanted to continue to be able to rely on Stop Shop's credit, rather than solely on the credit of Bradlees. (Mandell Tr. 507:8-11, 508:9-509:2).
This was a "deal-breaker" for Vornado and it would not agree to the Spin-Off without obtaining Stop Shop's credit. ( Id.; Roth Aff. p. 4 (¶ 13)). As a result, the parties negotiated a "hell or high water" guaranty. (Shenker Aff. p. 6-7 (¶ 17); Shenker Tr. 1179:9-12; Roth Aff. p. 4 (¶ 13); Mandell Tr. 508:15-509:2 (referring to a "broad full guaranty")). The parties agreed that no matter what happened to Bradlees, even if, and indeed especially if, it later went into bankruptcy, Stop Shop would remain liable for all of Bradlees' defaulted obligations, including its obligation to pay the consent fee. (Mandell Tr. 516:7-517:19, 518:21-519:8; Roth Aff. pp. 4-5 (¶¶ 13-15); Roth Tr. 681:8-17; Shenker Tr. 1179:9-12).
After the parties agreed to the essential terms of the contract, Stop Shop sent Shenker a draft agreement. (Exh. T). Shenker was surprised when he received this draft because it "did not reflect anything like we had discussed." (Shenker Tr. 1179:16-18). Although the guaranty in this draft stated that Stop Shop's guaranty was "absolutely unconditional and independent of all circumstances whatsoever," it did not specifically address the issue of bankruptcy. (Exh. T pp. 4-5). As previously discussed, this was a major part of the parties' negotiations and an essential term of the parties' agreement. (Mandell Tr. 507:8-508:11; Roth Aff. p. 4 (¶ 13)). Accordingly, Shenker drafted another contract that specifically stated that Stop Shop's guaranty would not be affected by anything that happens to Bradlees, including bankruptcy. (Exh. U p. 8 (¶ 10(e))). The parties exchanged several drafts, all of which were modifications of the first draft. (Exhs. U, V, W, X; see also Shenker Aff. p. 13 (¶ 31)). Stop Shop suggested changes to the drafts, which were sometimes adopted. (Mandell Tr. 471:10-15, 499:10-19; Shenker Aff. pp. 11-13 (¶¶ 26, 28-31)). However, the provision stating that Stop Shop's guaranty will not be impaired by bankruptcy remained unchanged. (Shenker Aff. pp. 13, 16 (¶¶ 31, 33, 39); compare Exh. U p. 8 (¶ 10(e)) and Exh. Z p. 10 (¶ 11(e))).
As a result of these negotiations, the parties entered into the Master Agreement and Guaranty ("Master Agreement"). (Exh. Z). The Master Agreement is dated May 1, 1992. ( Id. p. 1). Stop Shop is a successor to the Stop Shop entities that signed the Master Agreement and Guaranty. (Complaint p. 3). Vornado is the successor to Vornado, Inc., one of the Vornado entities that signed the Master Agreement. (Stop Shop's Proposed Findings of Fact (FoF) p. 1 (¶ 1(c)); Vornado's Proposed Findings of Fact (FoF) p. 13 (¶ 31)). Bradlees is the successor to Bradlees New Jersey, Inc., one of the Bradlees entities that signed the Master Agreement. (Stop Shop's FoF p. 1 (¶ 1(d)); Vornado's FoF p 13 (¶ 32)).
Under the Master Agreement, Vornado and its subsidiaries are defined as the "Landlords," Bradlees is defined as the "Tenant," and Stop Shop is defined as a "Guarantor." (Exh. Z p. 1). The Master Agreement is "governed by and construed in accordance with the laws of the State of New Jersey." ( Id. p. 8 (¶ 8)). The 19 Leases occupied by Bradlees are subject to the Master Agreement. ( Id. p. 1 and Exhibits A, D).
Section 1(a) is the Rental Increase Provision in the Master Agreement. ( Id. pp. 2-3 (¶ 1(a))). Under Section 1(a), Bradlees, as the Tenant under the Leases, agrees to pay to Vornado, the Landlord, "a rental increase above all rentals currently reserved under each of the Leases" in the following amounts:
May 1, 1992 through January 31, 1994$1.5 million per annum
February 1, 1994 through January 31, 1996$1.8 million per annum
February 1, 1996 through January 31, 2002$4 million per annum
February 1, 2002 through January 31, 2012$5 million per annum
And if certain renewal options were exercised,
February 1, 2012 through expiration of the last of the 19 Leases$6 million per annum
Section 1(a) also contains the "Allocation Provision," which provides that "[w]ithin 60 days after the execution of this Agreement, Landlords will supply Tenant with the initial allocation' of the Rental Increase to complete Exhibit B, which allocation shall be in Landlord's sole and absolute discretion." ( Id. p. 2 (¶ 1(a))). After this "initial allocation," Vornado will "have the unilateral and continuing right . . . in their sole and absolute discretion" to change and thereafter re-change "the allocation of the Rental Increase among the Leases . . . until the expiry or termination of the last Lease." ( Id. pp. 2-3 (¶ 1(a))). This "shall be effective immediately upon the delivery by the Landlords of written notice of such reallocation and shall not require any further instrument to give effect thereto." ( Id. p. 3 (¶ 1(a))).
The language of section 1(a) is consistent with the testimony regarding the parties' intent during the negotiations of the Master Agreement for the payment of a "consent fee" in exchange for Vornado's agreement to the Spin-Off. Under section 1(a), Bradlees is obligated to pay the Rental Increase in ever-increasing amounts until the last Lease expires and Vornado has the right to allocate and reallocate the Rental Increase until the expiration of the last standing Lease. In this way, the Allocation Provision acts as a "funnel," allowing Vornado to move the Rental Increase among the Leases to the last standing Lease and thus receive the full amount of the consent fee. (Exh. Z pp. 2-3 (¶ 1(a)); see also Shenker Tr. 1187:21-1188:6).
Section 11 of the Master Agreement is the Guaranty provision. (Exh. Z pp. 8-12 (¶ 11)). Under Section 11(a), Stop Shop "absolutely, unconditionally and irrevocably guarantees to each of the Landlords the full and timely payment, performance and observance of all of the terms, covenants and conditions to be paid, performed or observed by" Bradlees under the Master Agreement or under the Leases. ( Id. pp. 8-9 (¶ 11(a))). In Section 11(e)(e), Stop Shop agreed that its obligations as guarantor would
"not be impaired, abated, deferred, diminished, modified or otherwise affected by . . . any bankruptcy, insolvency, reorganization, arrangement, readjustment, composition, liquidation, rehabilitation or similar or dissimilar proceeding involving or affecting [Bradlees] or any Lease, including, without limitation, any termination or rejection of such Lease by [Bradlees] in connection with such proceedings (and any limitation on the liability of [Bradlees] in such proceeding shall not diminish or limit the liability of [Stop Shop])."
( Id. p. 10 (¶ 11(e)(e))).
Again, the language of the Master Agreement confirms the parties' intent: this was a "hell or high water" guaranty. (Shenker Aff. p. 6-7 (¶ 17); Shenker Tr. 1179:9-12; Roth Aff. p. 4 (¶ 13); Mandell Tr. 508:15-509:2 (referring to a "broad full guaranty")). Throughout the negotiations, Vornado expressed its concern about the risk that Bradlees, which would become a newly-independent discount retailer, might go bankrupt in the future. Vornado demanded that Stop Shop remain independently obligated for all of Bradlees' obligations, including its obligation to pay the consent fee, no matter what happens to Bradlees, even if it files for bankruptcy protection. Section 11(e)(e) provides that Stop Shop's obligations as a guarantor will not be impaired by any Bradlees bankruptcy, and that "any limitation on the liability of [Bradlees] in such proceeding shall not diminish or limit the liability of [Stop Shop]." (Exh. Z p. 19 (¶ 11(e)(e))). This is exactly consistent with the parties' intent that Stop Shop would remain liable no matter what happens to Bradlees, especially if it later goes bankrupt.
By letter to Stop Shop dated June 30, 1992, Vornado made the "initial allocation" of the Rental Increase to Jersey City, East Brunswick, Middletown, Union, and Woodbridge ("Allocated Leases"). (Exh. AF).
On June 23, 1995, Bradlees filed for bankruptcy. (Exh. 8 p. 1). In those proceedings, Bradlees filed motions to assume and assign one of the 19 Leases and reject three others. ( Id. pp. 2-3). On December 23, 1996, pursuant to a stipulation between Vornado, Stop Shop and Bradlees, which was so ordered by the bankruptcy court, Bradlees assigned the Marlton Lease to Kohl's Department Stores, Inc. ("Kohl's") and rejected the Bensalem, Levittown, and Newington Leases. ( Id. p. 4 (¶ 2)).
Stop Shop argues that pursuant to this Stipulation and Order, the Marlton, Bensalem, Levittown and Newington Leases were excluded from the Master Agreement and so Vornado could not reallocate the Rental Increase to these Leases. ( See Stop Shop's FoF p. 41 (¶¶ 33a-d)). However, this argument is belied by the clear terms of the Stipulation and Order, which provides that the Master Agreement "shall remain in full force and effect" and that "[n]othing in this Stipulation and Order shall affect or in any way prejudice the rights of Vornado or Guarantors . . . as against each other under the [Master Agreement]." (Exh. 8 pp. 7-8 (¶ 5)). Therefore, I reject Stop Shop's assertion that after the first Bradlees bankruptcy, "[t]here were 15 Leases subject to the Master Agreement and Guaranty, and those Leases did not include Marlton and Bensalem." ( See Stop Shop's FoF p. 41 (¶¶ 33a-d)). All 19 Leases remained subject to the Master Agreement with respect to Vornado's rights against Stop Shop.
On December 26, 2000, Bradlees again filed for bankruptcy in the U.S. Bankruptcy Court for the Southern District of New York with the intent to liquidate all of its assets. (Hippler Witness Statement p. 3 (¶ 6)). The case was assigned to Bankruptcy Judge Burton R. Lifland. ( See e.g. Exh. BQ p. 1).
Bradlees' primary asset was the unexpired terms of its leases for real property, including its Leases with Vornado. (Hippler Witness Statement p. 3 (¶ 8); Lauria Witness Statement p. 2 (¶ 3)). Fifteen of Bradlees' 19 Leases with Vornado were at issue during the 2001 Bradlees bankruptcy. (Exh. 56 p. 94). These Leases were: Bordentown, Broomall, Cherry Hill, Chicopee, East Brunswick, Glenolden, Hackensack, Jersey City, Manalapan, Middletown, Milford, Turnersville, Totowa, Union and Woodbridge. ( See Exh. Z, at Exhibits A, D (listing the Leases subject to the Master Agreement)). The other four Leases with Vornado were either assigned or rejected by Bradlees during the bankruptcy proceedings in 1996 and thus were not at issue in the 2001 Bradlees bankruptcy. (Exh. 8 p. 4 (¶ 2)).
Under the Bankruptcy Code, Bradlees, as the debtor in the bankruptcy proceedings, had the right to (I) assume and assign any of its unexpired leases to new tenants, or (ii) reject any of its unexpired leases. ( 11 U.S.C. § 365(a)). Stop Shop had a strong interest in assigning the Bradlees leases to new tenants because Stop Shop was Bradlees' guarantor for a majority of these leases. (Hippler Witness Statement pp. 3-4 (¶¶ 9, 11); Lauria Witness Statement pp. 2-3 (¶ 4)). As a result, Stop Stop and Bradlees negotiated the Lease Designation and Disposition Agreement ("LDA"), pursuant to which Stop Shop would pay Bradlees $150 million in exchange for the right to market and assign the Bradlees leases. (Hippler Witness Statement pp. 3-4 (¶¶ 9, 10); Laura Witness Statement pp. 2-3 (¶ 4); Exh BS pp. 3-4 (¶ 5)). Under the LDA, Stop Shop was entitled to the first $150 million in proceeds from the assignment of the leases plus an amount equal to Stop Shop's expenses up to $15 million; 25% of the next $20 million in proceeds; and, after certain reimbursement to the bankruptcy estate, 50% of any excess. (Exh. BS pp. 3-4 (¶ 5); Hippler Witness Statement p. 4 (¶ 10); Lauria Witness Statement pp. 2-3 (¶ 4)).
On January 11, 2001, Bradlees filed a motion seeking court approval of the LDA. (Exh. BS). Stop Shop and Bradlees filed a proposed order in support of their motion which specified the relief they were seeking from the Bankruptcy Court (the "Proposed Order"). (Exh. CF).
In paragraph 20 of the Proposed Order, Bradlees and Stop Shop sought to invalidate the Allocation Provision in the Master Agreement as an anti-assignment provision prohibited by section 365 of the Bankruptcy Code. Paragraph 20 of the Proposed Order provided that "[e]ach and every Anti-Assignment Provision," defined to include the Allocation Provision, "is null, void and of no force and effect in connection with any assignment of the Leases to any Assignees." ( Id. pp. 25, 27, 40 (¶¶ DDD, GGG, 20)). Paragraph EEE of the Proposed Order contained a proposed finding of fact in support of the relief requested in paragraph 20, which stated that the invalidation of the Allocation Provision "will not have a substantially detrimental effect on Vornado because of Vornado's right to assert claims against Stop Shop under the Guaranty." ( Id. p. 26 (¶ EEE)).
In paragraph 23 of the Proposed Order, Stop Shop and Bradlees asked the Bankruptcy Court to grant them "the exclusive right to allocate and reallocate the Rental Increase in accordance with their business judgment." ( Id. p. 40 (¶ 23)). Paragraph FFF of the Proposed Order contained a proposed finding of fact in support of the relief requested in paragraph 23, which stated that "Vornado's primary interest under the [Master Agreement] is the payment, in the aggregate, of the Rental Increase, and Vornado will not suffer material harm or prejudice if such Rental Increase is allocated among the Vornado Leases by the Debtors and Stop Shop because of Vornado's right to assert claims against Stop Shop under the Guaranty." ( Id. p. 26 (¶ FFF)).
The relief requested in paragraph 20 was separate and distinct from the relief requested in paragraph 23 of the Proposed Order. The Bankruptcy Court could have granted paragraph 20 but not paragraph 23 of the Proposed Order. This would have left no party with the right to reallocate the Rental Increase "in connection with any assignment of the Leases to any Assignees." ( Id. p. 40 (¶ 20)). At the end of the day, this is in fact what occurred after the District Court affirmed in part and modified in part the Bankruptcy Court's order.
In their joint memorandum of law to the Bankruptcy Court, Stop Shop and Bradlees argued that the Allocation Provision in the Master Agreement was an unenforceable anti-assignment clause under section 365 of the Bankruptcy Code because it permitted Vornado to "allocate millions of dollars in additional rent to any lease at various points in the future" making it "impossible" for Bradlees to assign these Leases because "[n]o potential assignee will agree to purchase a lease without knowing the future rent." (Exh. CE p. 23). According to Stop Shop and Bradlees, it was the uncertainty to potential assignees regarding the rent due under a specific Lease that rendered the Allocation Provision an anti-assignment clause.
On January 30, 2001, Judge Lifland held a hearing on the motion to approve the LDA, including the relief requested in the Proposed Order. (Exh. 56). Adam Rogoff of Weil, Gotshal Manges appeared on behalf of Bradlees and the affiliated debtors. ( Id. p. 2). Thomas Lauria and Glenn Kurtz of White Case appeared on behalf of Stop Shop. ( Id. p. 4). Robinson Lacy of Sullivan Cromwell represented Vornado. ( Id. p. 10).
At the hearing, Lauria argued in support of the motion to approve the LDA and specifically in support of the relief requested in paragraph 20 and 23 of the Proposed Order, which would invalidate the Allocation Provision as an anti-assignment clause and transfer the right to reallocate to Bradlees and Stop Shop. At the beginning of the hearing, Lauria specifically noted that the relief being requested would not affect the rights and obligations between Vornado and Stop Shop:
[N]othing about this agreement . . . will in any way impair, restrict, reduce or eliminate any preexisting duty or obligation that Stop Shop has under any other arrangement or under law . . . [and] similarly this agreement and Order approving it has no effect on any defense that Stop Shop may have with respect to any such purported obligation or claim against it.
( Id. p. 48).
Bradlees' counsel, Rogoff, argued that the Allocation Provision was an anti-assignment clause because of the uncertainty it created for potential assignees. ( Id. pp. 94-95). Rogoff acknowledged that "[p]rotecting Vornado's legitimate economic interest . . . [was] key" and assured that Vornado would still be "protected with respect to its ability to assert a claim for its economic rights against Stop Shop." ( Id. pp. 95, 97). Lauria, Stop Shop's counsel at the bankruptcy proceedings, testified at the trial in this action that he believed the above statements by Rogoff to be accurate and that he agreed with them. (Lauria Tr. 428:18-429:7).
Lacy argued in opposition to the relief requested by Stop Shop and Bradlees in paragraph 20 and 23 of the Proposed Order. Lacy expressed a concern that if the right to reallocate was transferred to Stop Shop, it would allocate all of the Rental Increase to an expiring Lease and then renege on its guaranty to continue to pay the Rental Increase by arguing that the obligation to pay the Rental Increase expired when the allocated Lease expired. (Exh. 56 pp. 115-16). Lacy asked for reassurance from Stop Shop that "as between Vornado and Stop Shop, Vornado retains the right to reallocate additional rent, the increased rent for the purpose of billing under the guarantee regardless of what happens to the leases themselves?" ( Id. p. 116).
In response to Lacy's request for reassurance, Lauria stated that
nothing about the relief that we are asking the Court to provide today, nothing about the agreement, nothing about the Order, in any way relieves Stop Shop of any existing obligation or duty or liability or claim against it that exists under any previous existing arrangement, nor for that matter, does it affect or impair any defense that Stop Shop may have with respect to any such obligation or liability or claim. No change in the world as between the world and Stop Shop.
( Id. p. 117).
Following these representations, Judge Lifland determined that the Allocation Provision was an anti-assignment clause because it created uncertainty for potential assignees regarding the rent on a given lease and therefore had "the effect completely of precluding the assignment of the fifteen leases." ( Id. pp. 149-51). This was a ruling granting paragraph 20 of the Proposed Order and it rendered the Allocation Provision "null, void and of no force and effect in connection with any assignment of the Leases to any Assignees." (Exh. CF p. 40 (¶ 20)).
Judge Lifland acknowledged that striking the Allocation Provision does not necessarily mean that the right to reallocate the Rental Increase should be transferred to Stop Shop and Bradlees, as requested in paragraph 23 of the Proposed Order. (Exh. 56 p. 152). Accordingly, Judge Lifland made a further inquiry as to the right of Stop Shop and Bradlees to reallocate and asked "at what point are the rents frozen, allocation frozen, right now?" ( Id. p. 152). Judge Lifland was the first person to use the words freeze or "frozen" when referring to the allocation of the Rental Increase.
Lauria responded to Judge Lifland's question by arguing that the right to reallocate should be transferred to Stop Shop and Bradlees because of their joint interest in assigning the Leases. ( Id. pp. 152-53). Lauria assured the Court that "as I have stipulated twice on the record, Stop Shop is ultimately at risk, if you will, on the full amount of the increased rent." ( Id. p. 152). In response to Lauria's argument in favor of transferring the right to reallocate to Stop Shop and Bradlees, Lacy suggested "leaving the rents where they are." ( Id. p. 153). By this he meant that "[t]he amount of rental increase assigned to these different leases will not vary, will stay as it is now, for as long [as] they are in effect." ( Id. p. 158).
Lacy argued that the uncertainty in rent created by the Allocation Provision would completely go away if the relief requested in paragraph 20 of the Proposed Order were granted. Thus, Lacy continued, there would be no basis for granting the additional relief requested in paragraph 23 of the Proposed Order, which would simply allow the debtor to change the rent on its leases in order to be able to assign them more easily. ( Id. p. 156). By arguing against permitting Stop Shop to allocate the Rental Increase, Lacy was not requesting affirmative relief from the Court but was merely arguing against the additional relief Stop Shop and Bradlees were seeking in paragraph 23 of the Proposed Order.
In response, Lauria argued that not giving Stop Shop and Bradlees the right to reallocate the Rental Increase would take "value directly away from the estate" and "that the best thing to do is to permit the Debtors and Stop Shop to do the reallocation on a prospective basis so that we have the most value possible in these leases." ( Id. p. 158). In support of this argument, Lauria again assured the Court and Vornado that "the relief the Court is granting does not relieve Stop Shop of its obligations." ( Id.).
Judge Lifland then stated that he had "no problem" with transferring the right to reallocate to Stop Shop and Bradlees but that he was "also sensitive that in doing that [Vornado] should not necessarily be exposed to litigating the ultimate amount with [Stop Shop]." ( Id.). In response to Judge Lifland's concern, Lauria again promised that the relief Stop Shop sought would not harm Vornado's right to recover the Rental Increase:
[T]here is an increase that is to be paid from the rent, from the leases, and there is a guarantor, and nothing about what we are doing today is releasing the guarantor from its obligations. But those obligations are as they exist today. Just as the ability to collect the rent. If the leases are all rejected, to flip the story, there is no tenant paying rent, and so the only person to look to for the increase is Stop Shop. Vornado is not being put in any worse position than that. They still have Stop Shop to look to for the increase.
( Id. p. 159).
Almost directly after Lauria made this assurance, Judge Lifland granted Stop Shop and Bradlees the right to reallocate the Rental Increase: "Very well, I am going to leave the relief as has been requested. Stop Shop is still responsible to Vornado under its agreement, under its guarantees." ( Id. p. 162). This was the ruling granting paragraph 23 of the Proposed Order which provided that Stop Shop and Bradlees would have "the exclusive right to allocate and reallocate the Rental Increase in accordance with their business judgment." (Exh. CF p. 40 (¶ 23)).
On February 6, 2001, Judge Lifland entered an order reflecting the rulings he made from the bench at the hearing on January 30, 2001 (the "February 6 Order"). (Exh. 100). Paragraph 20 of the February 6 Order provided that "[e]ach and every Anti-Assignment Provision is null, void and of no force and effect in connection with any assignment of the Leases to any Assignees pursuant to the Agreement." ( Id. p. 42 (¶ 20)). With the exception of the additional phrase "pursuant to the Agreement," this was the same relief that Stop Shop and Bradlees requested in paragraph 20 of their Proposed Order. ( See exh. CF p. 40 (¶ 20)). The "Agreement" was defined to be the LDA. (Exh. 100 pp. 1-2). Like in the Proposed Order, the term "Anti-Assignment Provision" was defined to include the Allocation Provision in the Master Agreement. ( Id. pp. 25, 27-28 (¶¶ DDD, GGG)).
In support of his ruling in paragraph 20, Judge Lifland made the factual finding in paragraph EEE of the February 6 Order. Paragraph EEE of the February 6 Order is identical to paragraph EEE of the Proposed Order. ( Id. p. 26 (¶ EEE); Exh. CF p. 26 (¶ EEE)). It states that the invalidation of the Allocation Provision "will not have a substantially detrimental effect on Vornado because of Vornado's right to assert claims against Stop Shop under the Guaranty." (Exh. 100 p. 26 (¶ EEE)).
Paragraph 23 of the February 6 Order is identical to paragraph 23 of the Proposed Order. ( Id. p. 42 (¶ 23); Exh. CF p. 40 (¶ 23)). It provides that Stop Shop and Bradlees "shall have the exclusive right to allocate and reallocate the Rental Increase in accordance with their business judgment." (Exh. 100 p. 42 (¶ 23)). In support of his ruling in paragraph 23, Judge Lifland made the factual finding in paragraph FFF of the February 6 Order. Paragraph FFF of the February 6 Order is identical to paragraph FFF of the Proposed Order. ( Id. pp. 26-27 (¶ FFF); Exh. CF p. 26 (¶ FFF)). In paragraph FFF, Judge Lifland found that "Vornado's primary interest under the [Master Agreement] is the payment, in the aggregate, of the Rental Increase, and Vornado will not suffer material harm or prejudice if such Rental Increase is allocated among the Vornado Leases by the Debtors and Stop Shop because of Vornado's right to assert claims against Stop Shop under the Guaranty." (Exh. 100 p. 26-27 (¶ FFF)).
Vornado appealed the February 6 Order to the U.S. District Court for the Southern District of New York (the "District Court"). (Stop Shop's FoF p. 3 (¶ 4(f)); Vornado's FoF p. 40 (¶ 106)). The appeal was assigned to District Judge Lawrence McKenna. (Exh. 59).
In their joint appeal brief, Stop Shop and Bradlees made the representation to the District Court that "the Bankruptcy Court's determination to strike the Allocation Provision in no way affects Vornado's ability to collect the full amount of the Rental Increase." (Exh. CP pp. 29-30). At the trial of this action, Lauria confirmed that this statement meant that paragraph 20 did not affect Vornado's ability to collect the "full amount of the rental increase:"
Q. So am I right, then, that this sentence on 29 to 30 means that Bradlees and Stop Shop were representing to the District Court, Judge McKenna, that the fact that paragraph 20 was in the Bankruptcy Court order, the paragraph that struck the allocation provision, did not affect Vornado's ability to collect the full amount of the rental increase?
A. Yes.
Q. And the party you could collect from was Stop Shop.
A. The party it might collect from is from a tenant in the lease.
Q. Or it might be from Stop Shop.
A. Correct.
(Lauria Tr. 387:19-388:7). In the same brief, Stop Shop and Bradlees also stated:
Here, unlike in Croton where the Court's reallocation necessarily had significant economic effects on the parties, Judge Lifland's decision has none — no matter how the Rental Increase is allocated Vornado will receive the full amount, either from third party assignees or from the right to assert claims under the Guaranty against Stop Shop.
(Exh. CP p. 41).
Oral argument was held before Judge McKenna on February 8, 2011. (Exh. 59). Rogoff appeared on behalf of Bradlees, Lauria and Kurtz appeared on behalf of Stop Shop, and Lacy appeared on behalf of Vornado. ( Id. p. 2).
At the beginning of the proceedings, Judge McKenna summarized Stop Shop and Bradlees' argument in support of striking the Allocation Provision and suggested that freezing the Rental Increase would resolve any uncertainty created by the Allocation Provision:
I think [that Stop Shop's] argument in favor of the allocation provision being a de facto antiassignment agreement is that it operates to put a prospective purchaser of the lease in the position where they don't know what their rent is going to be, and it is an understandable thing that theoretically the particular one of the 15 properties that the new lessee was considering could end up under the allocation provisions with all of the rent increase theoretically.
Now, if the allocation had been frozen, as [Lacy] suggested in a different part of [his] argument, wouldn't that mean that once you freeze it, that the allocation provisions in the master agreement are no longer a de facto antiassignment clause?
( Id. p. 33).
Lacy agreed with Judge McKenna's observation that if the Rental Increase were frozen, the Allocation Provision would no longer be an anti-assignment clause because there would not be any uncertainty concerning the rent that an assignee of a Lease would pay. However, Lacy clarified that Vornado's agreement was simply in opposition to the additional relief provided in paragraph 23 of the Bankruptcy Court's Order (Stop Shop and Bradlees' request that the right to reallocate the Rental Increase be transferred to them) and that Vornado sought a reversal of the relief granted in both paragraph 20 and 23 of the Bankruptcy Court's Order:
I couldn't have put it better myself . . . Whatever conclusion this court draws concerning the first decision Judge Lifland made, which is that the allocation provision can't be allowed to go on as it is now because it makes it so hard to assign these leases, there is no excuse, your Honor, your Honor, there is no excuse for his next step of turning the power to reallocate over to Bradlees and Stop Shop. The only basis he had for saying that there was a problem with the allocation provision was what you just said, that it makes it hard for an individual tenant to know what the rent is going to be.
As soon as that problem is solved, there is nothing in the Bankruptcy Code, your Honor, that justifies letting Bradlees and Stop Shop change the rents on these leases. The entire effect on assignment, which is the basis for the first decision invalidating the allocation provision, doesn't give you a bit of authority in giving Bradlees the right to reallocate.
( Id. pp. 33-34).
Stop Shop argues that Lacy repeatedly admitted at the District Court proceedings that if Vornado could not reallocate, it would stop receiving payment of the Rental Increase. (Shop Shop's FoF p. 8 (¶ 8j)). Stop Shop's argument is a mis-characterization of what actually occurred before Judge McKenna. Based on the transcript of the District Court proceedings, it is clear that Lacy was only referring to Vornado's ability to receive the Rental Increase from assignees of the Leases. Stop Shop's obligation under the guaranty was not at issue.
Lacy characterized the two basic deals that were struck in the Master Agreement as follows:
In the master agreement, there are a bunch of different things going on, but there are two basic deals that are struck. There is a deal between Vornado and Stop Shop which is untouched by this proceeding, and that is, we are going to let you assign the leases to Bradlees, but you are going to guarantee Bradlees' performance, a perfectly conventional sort of arrangement. We will let you assign, but you will continue to be responsible to make sure that we get paid.
The assignment, of course, occurred, this is the assignment back in 1992. That assignment occurred. Stop Shop got everything that was coming to it under this agreement. Nothing that happens in this proceeding will affect the consideration it received from the guarantee. The guarantee is unaffected by this proceeding.
But between Bradlees and Vornado, the most important things [sic] that Vornado was to receive from Bradlees was the rental increase. It's really the only thing of any importance. It is tens of millions of dollars payable over decades. And the only thing of importance that Bradlees was receiving from Vornado was the right to extend eight of the leases for an additional ten years.
. . .
So if as a result of Judge Lifland's ruling if this court sustains it, if Vornado is losing substantial performance of Bradlees obligations, then it is excused from its obligation.
(Exh. 59 pp. 38-40).
Lacy continued by explaining that the Allocation Provision and Vornado's right to receive the Rental Increase from Bradlees were inextricably linked and so by striking the Allocation Provision, Judge Lifland struck a fundamental part of the deal between Vornado and Bradlees. This was the obligation by Bradlees to continue to pay the Rental Increase until the last Lease expired:
At the moment the entire rental increase has been allocated to leases that expire next year. If Vornado cannot reallocate, then that money will just stop, the money will stop, it will stop getting its four million and five million and six million per year.
. . .
Now, those are extendable at the option of the tenant. The tenant may extend for ten years under the original lease, and I believe that all of those five leases are subject to the additional ten year extension provided in the master agreement. So if things had gone as planned, there was reason to hope that the tenants would extend out for another 20 years. If they didn't extend these, they would extend other leases, and Vornado could reallocate to the other leases.
. . .
One way or another the allocation provision allows Vornado to keep that money coming in for another two decades. Without the allocation provision there is no assurance that the money will come in.
( Id. pp. 42-43).
Stop Shop argues that Lacy's statement above that "[i]f Vornado cannot reallocate, then that money will just stop" is an admission by Vornado that if the District Court affirms the relief granted in paragraph 20 of the Bankruptcy Court Order (striking the Allocation Provision), Vornado would stop receiving payment for the Rental Increase. However, based on reading the entire colloquy before the District Court, it is clear that Lacy was only referring to Vornado's right to receive the Rental Increase from the tenant and was not admitting that Vornado lost the right to continue to receive the Rental Increase from Stop Shop as guarantor.
In fact, Judge McKenna interrupted Lacy to point this out: "Except, well, it's not an assurance, but you have a guarantor." ( Id. p. 43). In response, Lacy clarified his previous argument to explain that it is true, as Judge McKenna observed, that Vornado still has Stop Shop to look to for the payment of the Rental Increase:
Your honor, let me stop. That's correct. The money will be owed by Stop Shop in any event.
We are not talking — I'm sorry, I should have said that at the beginning. We are not talking about losing any chance of getting this money, what taking away the allocation provision does is deprive Vornado of the most reliable source of the money. The most reliable source is the leases themselves, because if the tenant, whoever the tenant is, doesn't pay, Vornado gets the lease back. The obligations under the leases are collateralized, in effect, by the leaseholds themselves. So it as if a mortgage lender was being deprived of its mortgage on the building.
That doesn't take away the right to receive the money entirely, it's true, I grant, but it does take away something very, very important. And as between Bradlees and Vornado, it takes away everything that Bradlees was supposed to do.
Stop Shop will still be providing what it promised, but in the deal that was made between Bradlees and Vornado, which is the deal that included the lease extension options, Bradlees will not be doing anything that it was supposed to be doing.
( Id. pp. 43-44). Thus, Lacy clarified that paragraph 20 of the Bankruptcy Court Order prevented Vornado from reallocating the Rental Increase as against tenants, but that the money would be owed by Stop Shop, in any event, under the guaranty.
Stop Shop also argues that the "District Court expressly cautioned Vornado about losing the Rental Increase if it were frozen onto the Allocated Leases, which were scheduled to expire soon unless a tenant exercised the option terms, and Vornado accepted such risk." (Shop Shop's FoF p. 34 (¶ 27c)). Again, Stop Shop mis-characterizes the proceedings before Judge McKenna. Stop Shop's argument refers to the following colloquy before Judge McKenna:
THE COURT: Question: The fact that you just described that currently the rental increases are allocated to five properties, the leases on which are going to expire sometime next year, how does that interrelate with your suggestion to Judge Lifland that the present allocation should be frozen, or at least that is better than giving it to — I guess that's the way you put it — that is better than giving it to Stop Shop?
LACY: We think they will extend it. These are the most attractive properties. They are the most attractive properties.
. . .
The one thing that is clear is that there is no prospect of continuing to get the rental increase if Bradlees gets to reallocate. From Bradlees' perspective, the right thing to do, if it had the power that Judge Lifland has given them, is clearly to take the entire four million and allocate it to the worse lease in the house, which happens to be, I'm told, for a property called Turnersville. That lease is going to be rejected anyway, it is not a saleable lease. If they take the whole four million and put it on Turnersville and then caused that to terminate it by rejecting it right now, then the right to receive the four million, five million, six million will go up in smoke within weeks of the time we walk out of here.
. . .
What Judge Lifland has done, I submit, so seriously undercuts the right to receive the rental increase that if the decision is affirmed then the extension option should also be [stricken].
(Exh. 59 pp. 46-48).
In this exchange with Judge McKenna, it is clear that Lacy was only referring to Vornado's ability to receive the Rental Increase from the assignees of the Leases. Lacy argued that if the District Court affirms paragraphs 20 and 23 of the Bankruptcy Court's Order, it would relieve the tenant of its obligation to pay the Rental Increase. Lacy argued that if the tenant is relieved of this obligation, then the tenant's right to an extension option under the Leases should also be stricken. Thus, Lacy was only referring to Vornado's ability to collect the Rental Increase from the assignees of the Leases. Vornado's right to continue to receive the Rental Increase from Stop Shop under the guaranty was not at stake.
Moreover, no one suggested at the District Court proceedings that Judge McKenna's affirmance of the February 6 Order could impair Vornado's ability to receive the full amount of the Rental Increase, either from assignees or from Stop Shop under the guaranty. In fact, Bradlees made repeated representations to the District Court during the proceedings on February 8 that Vornado would not suffer any economic prejudice as a result of the Bankruptcy Court Order:
ROGOFF:[T]here is no economic prejudice whatsoever to Vornado. They will still have the ability to assert claims for the rent increase against Stop Shop under the guarantee.
ROGOFF: [T]here is no issue at the end of the day that Vornado will have the right to recover and assert claims for the rent increase. They are either going to get it from Stop Shop under the guarantee, or to the extent we can assign leases and the rent increase — because that's all that is at issue here, the rent increase, how that is allocated — is allocated to an assignee so we can put more rent on there and avoid, without losing the bonus value, they will get it from the third party as significant fees.
ROGOFF: So there is no issue that Vornado will be able to continue to assert claims to receive the rent increases.
ROGOFF: But my main point that I would like to start off with is that Vornado has no economic prejudice by this transaction.
ROGOFF: So come back to my point that Vornado is not really being hurt here.
ROGOFF: Oh, and by the way, we still have Stop Shop with exposure on the guarantee. So the irony is that there is no harm to Vornado, in fact, they are better off.
ROGOFF: [T]he bankruptcy court's determination in this case to strike the allocation provision in no way affects Vornado's ability to collect the full amount of the rental increase nor does it affect Vornado's credit support . . . In fact, to the contrary. It explicitly preserves the right of Vornado to recover and assert claims for the full economics of the rent increase against Stop Shop.
ROGOFF: All of this, again, in the context, your Honor, of no economic prejudice whatsoever to Vornado. They have the right to assert claims under the guarantee.
ROGOFF: Vornado still has the right to the rent increase. They haven't given away that claim.
(Exh. 59 pp. 55, 57, 58, 88, 113, 117).
At no time during the District Court proceedings did Stop Shop's counsel indicate that Rogoff's representations were incorrect and at the trial of this action, Lauria confirmed that he agreed with the above representations to the District Court. (Lauria Tr: 411:15-25, 415:3-7). In fact, Kurtz, Stop Shop's counsel at the District Court proceedings, made similar representations to the District Court:
KURTZ: It bears repeating that the agreement at issue in no way affects the ability of Vornado or the right to Vornado to receive the full amount of the rent increase.
KURTZ: There is absolutely no harm associated with this to Vornado, contrary to their cries to the contrary.
KURTZ: So there is no harm and this court should give no credence to any claim that somehow this agreement adversely affects them even as a security matter because it doesn't.
(Exh. 59 pp. 130, 131, 138).
On February 9, 2001, Judge McKenna issued an oral decision on Vornado's appeal from the February 6 Bankruptcy Court Order. (Exh. 60). Judge McKenna affirmed paragraph 20 of the February 6 Order, finding that the effect of the Allocation Provision made assignment of the Leases impossible because of the uncertainty it created with respect to the rent under a given lease and that the Bankruptcy Court had the power under the Bankruptcy Code to invalidate the Allocation Provision as an anti-assignment clause. ( Id. pp. 4-5). With respect to paragraph 23 of the February 6 Order, Judge McKenna could "see no cognizable basis" to transfer the allocation power to Stop Shop and the Bradlees debtors. ( Id. p. 6). He stated that this "is not called for by the Congressional policy that supports the deletion of de facto antiassignment provisions." ( Id.). Accordingly, Judge McKenna reversed paragraph 23 of the February 6 Order, in effect leaving "the rent increase allocations presently in place . . . through the terms and any lessee's option terms of the leases." ( Id. pp. 6-7). Neither Vornado nor Stop Shop appealed the District Court Order. (Exh. 141 p. 9; Stop Shop's FoF p. 3 (¶ 4h))).
The First Department framed a key factual issue in this action as follows: "whether the freezing of the rent increases was attributable to actions taken by Vornado rather than the bankruptcy proceeding itself." ( The Stop Shop Supermarket Co. v. Vornado Realty Trust , 35 AD3d 241, 243 [1st Dep't 2006]). Stop Shop argues that the freeze was a result of Vornado's actions. Stop Shop's argument is based on the repeated statements by Lacy, Vornado's counsel, asking the Bankruptcy and District Court to freeze the Rental Increase rather than transfer the allocation right to Stop Shop and the Bradlees debtors. Stop Shop also argues that the District Court relied on these statements and granted Vornado the relief it was seeking by freezing the Rental Increase. (Exh. 60 pp. 5-6).
Vornado did not seek any affirmative relief from the Bankruptcy Court. Rather, Vornado only argued in opposition to the relief requested by Stop Shop and Bradlees in paragraph 20 and 23 of the Proposed Order. Lacy's statements asking Judge Lifland to freeze the Rental Increase were made after Judge Lifland, himself, first used the word "frozen" and struck the Allocation Provision as an anti-assignment clause. Lacy opposed the additional relief requested by Stop Shop and Bradlees in paragraph 23 of the Proposed Order.
On appeal to the District Court, Vornado sought a reversal of both paragraph 20 and 23 of the February 6 Order. Lacy argued that even if Judge McKenna affirmed paragraph 20 of the February 6 Order and found that the Allocation Provision was an anti-assignment clause, he should reverse the Bankruptcy Court's decision in paragraph 23 to transfer the right to reallocate to Stop Shop and Bradlees, effectively "freezing" the Rental Increase. Thus, although Vornado sought a reversal of both paragraph 20 and 23 of the Bankruptcy Court Order, it recognized that these two legal issues were separate and that the District Court could affirm all or part of the Bankruptcy Court's Order.
This is in fact what happened when the District Court affirmed paragraph 20 and reversed paragraph 23 of the February 6 Order. Judge McKenna could "see no cognizable basis" to transfer the allocation power to Stop Shop and the debtors and he concluded that this relief "is not called for by the Congressional policy that supports deletion of de facto antiassignment provisions." (Exh. 60 p. 6). Judge McKenna's decision granted the relief Stop Shop and Bradlees sought in paragraph 20 of their Proposed Order and denied the relief they sought in paragraph 23. Judge McKenna's decision did not grant any affirmative relief to Vornado.
Thus, Vornado's arguments in favor of freezing the Rental Increase were made only in opposition to the additional relief requested by Stop Shop and the Bradlees debtors in paragraph 23 of the Proposed Order. Vornado was not seeking any affirmative relief from either the Bankruptcy or the District Court. Accordingly, I conclude that the so-called "freeze" is attributable to the proceedings in the Bankruptcy and District Courts.
Under the LDA, which the Bankruptcy Court approved in its February 6 Order, Stop Shop acquired the right to market and assign Bradlees' leases. (Exh. 100 pp. 31-35; Hippler Witness Statement p. 4 (¶ 10)). For the fifteen Leases with Vornado that were subject to the LDA:-Stop Shop assigned the lease for Milford to Kohl's on or about February 16, 2001. (Exh. CU)
— Stop Shop excluded the lease for Chicopee (Hippler Tr. 231:25-232:8) and Bradlees rejected the Chicopee lease by letter dated February 23, 2001 (Exh. CW)
— Stop Shop excluded the lease for Turnersville (Hippler Tr. 231:25-232:8) and Bradlees rejected the Turnersville leaseby letter dated March 21, 2001 (Exh. DB)
— Stop Shop excluded the leases for Bordentown, Cherry Hill, East Brunswick, Glenolden, Hackensack, Jersey City, Manalapan, Middletown, Union and Woodbridge by letter dated May 24, 2001 (Exh. DI). Bradlees rejected these ten leases by letter dated May 25, 2001. (Exh. DL)
— Stop Shop assigned the lease for Broomall to Giant Food Stores, LLC ("Giant Food") on or about May 31, 2001. (Exh. DO)
— Stop Shop assigned the lease for Totowa to Bed, Bath Beyond on or about October 2, 2001. (Exh. EG)
Stop Shop paid all of the rent due under the Allocated Leases from the time the LDA became effective and until those Leases expired. (Exh. 141 p. 9; Rothschild Aff. p. 2 (¶¶ 5-6). This included the payment of the Rental Increase allocated to each of these Leases. (Exh. 141 p. 9; Rothschild Aff. p. 2 (¶¶ 5-6)). Four of the five Allocated Leases expired on November 30, 2002, and the fifth expired on August 31, 2003. (Exh. IG p. 6; Complaint p. 5; Answer and Counterclaims p. 3).
On November 25, 2002, Vornado sent a letter to Stop Shop purporting to reallocate the Rental Increase under section 1(a) of the Master Agreement to the following locations: Marlton, Turnersville, Bensalem, Broomall (Reallocated Leases). (Exh. FQ). Vornado sought payment of the Rental Increase only from Stop Shop, not from the tenants occupying these locations. (Exh. 141 pp. 4-5; Exh. 142 pp. 6-7). Stop Shop refused to comply with Vornado's purported reallocation and commenced this action.
CONCLUSIONS OF LAW
As discussed earlier, the Master Agreement gave Vornado the right to receive payment of the Rental Increase over a lengthy period that both parties recognized could extend to 2031, depending on the exercise of extension options. The testimony regarding the negotiations of the Master Agreement, and the terms of the Master Agreement itself, confirm that the Rental Increase was in fact a "consent fee" which Vornado would receive in exchange for its consent to Stop Shop's spin-off of the Bradlees stores. Stop Shop got what it wanted from the deal back in 1992 when it received millions of dollars from the Bradlees spin-off. In this action, Stop Shop is trying to avoid paying the full amount of the consent fee. Stop Shop may not avoid this obligation.
A contract, including a contract of guaranty, "must be interpreted according to its clear terms so as to effect the objective expectations of the parties." ( Housatonic Bank Trust Co. v. Fleming, 560 A.2d 97, 99 [N.J. Super. Ct. App. Div. 1989]). At the trial of this action, Vornado introduced testimony regarding the negotiations of the Master Agreement. Stop Shop argues that this testimony is parol evidence and is inadmissible. However, the Master Agreement is governed by New Jersey law which provides that testimony concerning negotiations and other extrinsic evidence is admissible to show the meaning and context of the contract, even if the contract itself is unambiguous. ( Conway v. 287 Corporate Ctr. Assocs., 901 A.2d 341, 347 [N.J. 2006] [internal citations omitted]). Thus, although the Master Agreement is unambiguous, I will consider the testimony concerning the negotiation of the Master Agreement for the purpose of interpreting the Master Agreement only, and not for the purpose of changing any of its terms. ( Id.).
The credible testimony regarding the negotiations of the Master Agreement demonstrates that the Rental Increase was a "consent fee" for the Bradlees spin-off that would be paid over time until the last Lease expired. The terms of the Master Agreement confirm this testimony. Under section 1(a) of the Master Agreement, Bradlees agreed to pay to Vornado a Rental Increase of increasing amounts from May 1, 1992, the date of the Master Agreement, "through expiration" of the last standing Lease. (Exh. Z pp. 2-3 (¶ 1(a))). In this same section, Vornado was given the unilateral right to reallocate the Rental Increase until the last Lease expired, thus creating a funnel for the allocation of the Rental Increase. ( Id.) Vornado's reallocation right was the mechanism for Bradlees' payment of its obligations and determined which of the 19 Leases would bear the Rental Increase.
As the negotiators of the Master Agreement testified, Vornado was reluctant to assign the 19 Leases to Bradlees because it was concerned about Bradlees' credit-worthiness and the risk of bankruptcy. Accordingly, the parties negotiated a "hell or high water" guaranty to ensure that Stop Shop would be liable for all of Bradlees' obligations under the Master Agreement, even if, and indeed especially if, Bradlees filed for bankruptcy. The language of the Master Agreement and Guaranty is consistent with this intent. Section 11(e)(e) provides that Stop Shop's guaranty will not be impaired by
any bankruptcy, insolvency, reorganization, arrangement, readjustment, composition, liquidation, rehabilitation or similar or dissimilar proceeding involving or affecting the Tenant or any Lease, including, without limitation, any termination or rejection of such Lease by the Tenant in connection with such proceedings (and any limitation on the liability of the Tenant in such proceeding shall not diminish or limit the liability of any Guarantor)
(Exh. Z p. 10 (¶ 11(e)(e))).
Under New Jersey law, "the liability of a guarantor is measured by that of the principal, unless the agreement explicitly provides otherwise." ( Nat'l Westminster Bank NJ v. Lomker, 649 A.2d 1328, 1332 [N.J. Super. Ct. Law Div. 1976]). Stop Shop's central argument in this action is that it is not liable for the reallocated Rental Increase because there is no primary obligation. Stop Shop contends that as a guarantor of Bradlees' obligations under the Master Agreement, it is only obligated for Bradlees' defaulted obligations. Stop Shop argues that Bradlees does not have an obligation to pay the Rental Increase because the Allocated Leases expired pursuant to their terms and Vornado could not reallocate the Rental Increase to unexpired Leases as a result of the February 6 Order, as modified by the District Court. Thus, Stop Shop argues, since Bradlees is not obligated to pay the Rental Increase, then Stop Shop, as a guarantor of Bradlees' obligations, cannot be liable. For the reasons that follow, I reject this argument.
The primary issue in this action is whether Vornado retained the right to reallocate the Rental Increase to unexpired Leases despite the Bankruptcy Court's February 6 Order, as amended by the District Court, invalidating the Allocation Provision as an anti-assignment clause. Vornado argues that the February 6 Order, as modified by the District Court, invalidated Vornado's right to reallocate only as to Bradlees and its assignees. However, the February 6 Order could not have modified the obligations of Stop Shop under the Master Agreement, including Vornado's right to reallocate as to Stop Shop.
The entire purpose for invalidating the Allocation Provision was to remove the uncertainty regarding the amount of rent a potential assignee would pay, thus enabling assignment of the fifteen Leases subject to the LDA. This purpose is confirmed in paragraph 20 of the February 6 Order, in which the Bankruptcy Court struck the Allocation Provision as "null, void and of no force and effect in connection with any Assignment of the Leases to any Assignees pursuant to the [LDA]." (Exh. 100 p. 42 (¶ 20)). The parties agree that under paragraph 20, the assignees of the Leases are not responsible for paying any reallocated Rental Increase.
However, neither the Bradlees bankruptcy, nor paragraph 20, affected Vornado's rights against Stop Shop, including Vornado's ability to reallocate the Rental Increase to unexpired Leases for purposes of billing Stop Shop. Indeed, paragraph EEE of the February 6 Order, which contains the bankruptcy court's finding of fact in support of the relief granted in paragraph 20, states that "the invalidation of the [Allocation Provision] will not have a substantially detrimental effect on Vornado because of Vornado's right to assert claims against Stop Shop under the Guaranty." (Exh. 100 p. 26 (¶ EEE)).
Paragraph EEE could not have been true if paragraph 20 were meant to invalidate Vornado's right to reallocate vis-a-vis Stop Shop. The Bankruptcy Court recognized that Vornado's primary interest under the Master Agreement was "the payment, in the aggregate, of the rental increase . . ." (Exh. 100 pp. 26-27 (¶ FFF)). Furthermore, it is undisputed that under paragraph 20, Bradlees and the assignees of the leases are not responsible for paying the reallocated Rental Increase. Thus, under paragraph 20, the only party to look to for payment of the Rental Increase was Stop Shop. Obviously, the relief granted in paragraph 20 would have a "substantially detrimental effect on Vornado" unless it retained the right to reallocate as against Stop Shop.
Indeed, under well-established principles of bankruptcy law, the Bankruptcy Court's order could not have affected Vornado's rights against Stop Shop or relieved Stop Shop of its contractual obligations. The Bankruptcy Code provides that "discharge of a debt of the debtor does not affect the liability of any other entity on, or the property of any other entity for, such debt." ( 11 U.S.C. § 524(e); see also Collier on Bankruptcy P [524.05] [Alan N. Resnick Henry J. Sommer eds., 16th ed.]; First Fidelity Bank v. McAteer, 985 F.2d 114, 118 [3d Cir. 1993] ["[W]hile the Bankruptcy Code expressly alters the contractual obligations of the bankrupt, it does not contemplate the same effect on the obligations and liabilities of third parties."][quotations and citations omitted]). Bradlees was the debtor in the 2001 bankruptcy proceedings, not Stop Shop. Thus the Bankruptcy and District Courts lacked the power to alter the rights and obligations between Vornado and Stop Shop, two non-debtors who were involved in the 2001 Bradlees bankruptcy proceedings.
Furthermore, section 11(e)(e) of the Master Agreement provides that Stop Shop's obligations under the guaranty will not be impaired by "any bankruptcy . . . involving or affecting [Bradlees] or any Lease . . . and any limitation on the liability of [Bradlees] in such proceeding shall not diminish or limit the liability of [Stop Shop]." (Exh. Z p. 10 (¶ 11(e)(e))). The bankruptcy proceeding relieved Bradlees of its obligation to pay the Rental Increase. However, under section 11(e)(e), the Bradlees bankruptcy could not have affected Stop Shop's obligations under the guaranty.
Accordingly, I conclude that notwithstanding the February 6 Order, as modified by the District Court, Vornado retained the right to reallocate the Rental Increase to unexpired Leases for purposes of billing Stop Shop under the guaranty.
Vornado's reallocation is valid for other reasons as well.
By letter to Stop Shop dated November 25, 2002, Vornado exercised its contractual right to reallocate the Rental Increase to the Leases for Marlton, Turnersville, Bensalem, and Broomall. (Exh. FQ). At that time, the Marlton, Turnersville, Bensalem Leases were scheduled to expire on February 28, 2011, and the Broomall Lease was scheduled to expire on February 28, 2006. (Exh. IG p. 6). Thus, these Leases were "still continuing" as required under section 1(a) of the Master Agreement. (Exh. Z p. 3 (¶ 1(a))).
Stop Shop argues that Vornado's use of the word "location" in the November 25, 2002 letter instead of the word "lease" made the reallocation defective. (Stop Shop FoF pp. 13, 44 (¶¶ 9d-f, 33h)). However, to effect a reallocation, the Master Agreement only required that Vornado deliver "written notice of such reallocation" and the format of Vornado's November 25, 2002 letter matched Exhibit B to the Master Agreement as well as Vornado's June 1992 letter initially allocating the Rental Increase. (Exh. Z p. 3 (¶ 1(a)); Exh. Z at Exhibit B; compare Exh. FQ and Exh. AF). Accordingly, I conclude that the November 25, 2002 letter was sufficient to effectuate the reallocation of the Rental Increase.
Pursuant to a December 23, 1996 Stipulation and Order, Bradlees rejected the Bensalem Lease and assigned the Marlton Lease. (Exh. 8 p. 4 (¶ 2)). The Stipulation and Order specifically reserved Vornado's rights under the Master Agreement with respect to Stop Shop. ( Id. pp. 7-8 (¶ 5)). The Bensalem and Marlton Leases were not subject to the LDA, they were not at issue during the 2001 Bradlees bankruptcy and could not have been affected by the Bankruptcy Court's order. Accordingly, I conclude that Vornado was entitled to reallocate to the Marlton and Bensalem Leases as these Leases were not subject to the February 6 Order.
With respect to the fifteen Leases that were subject to the LDA, Bradlees rejected twelve of these Leases, including the Lease for Turnersville. (Exh. DB). During summations on March 10, 2011, I posed the following question to the parties regarding Vornado's rights with respect to these rejected Leases: "When [the leases] come out of bankruptcy back to Vornado, doesn't [sic] Vornado's rights kick back in without concern, without restriction by the so-called freeze order?" (Tr. 10:8-11). Following summations, the parties submitted letter briefs regarding this issue.
If an unexpired lease is rejected in bankruptcy, the rejected lease leaves the bankruptcy estate. ( In re Stoltz, 315 F.3d 80, 85 n. 1 [2d Cir. 2002] ["A rejected lease is abandoned and no longer property of the estate."]; In re Old Carco LLC, 424 B.R. 633, 639 [Bankr. S.D.NY 2010] ["A rejected contract or lease is treated as abandoned and not a part of the bankruptcy estate."]). After rejection, paragraph 20 of the February 6 Order no longer applies to the rejected Leases because at that point, by definition, the Allocation Provision in the Master Agreement could not operate as a de facto anti-assignment provision. Accordingly, Vornado's reallocation of the Rental Increase to the Turnersville Lease in November 2002 is valid as this Lease was rejected in bankruptcy and is no longer subject to the February 6 Order.
The Broomall Lease was subject to the LDA and it was assigned by Stop Shop to Giant Food on or about May 31, 2001. (Exh. DO). As previously discussed, Vornado's reallocation of the Rental Increase to the Broomall Lease was effective for purposes of billing Stop Shop under the guaranty.
Finally, Stop Shop's position in this action is completely contrary to the statements it made to the Bankruptcy and District Courts during the 2001 Bradlees bankruptcy and it should be estopped from asserting this position.
In its motion in limine (motion sequence No. 006), Stop Shop seeks to preclude Vornado from introducing evidence relating to Vornado's estoppel defenses, including portions of: the proposed order Bradlees and Stop Shop submitted to the Bankruptcy Court; the motions papers and memoranda submitted by Bradlees and Stop Shop to the Bankruptcy and District Courts; the February 6 Bankruptcy Court Order; and the transcript of the District Court hearing on February 8, 2001. (Affirmation of Glenn M. Kurtz, Exh. 6 pp. 10-13). Stop Shop argues that Vornado should be precluded from introducing Stop Shop's alleged assurances found throughout these documents because the First Department dismissed Vornado's judicial estoppel and collateral estoppel defenses when it affirmed my decision denying the parties' cross-motions for summary judgment.
In its summary judgment motion, Vornado argued that Stop Shop's attempt to repudiate its obligation to pay the Rental Increase was directly inconsistent with its representations to the federal courts and that Stop Shop should be estopped from asserting a different position in this action. In my decision denying Vornado's summary judgment motion, I concluded that Vornado had not demonstrated its entitlement to summary judgment on the grounds of judicial and collateral estoppel. I found that the statements by Stop Shop that Vornado cited in support of this argument were, "at most, generalized interpretations about the legal consequences of the Master Agreement, something on which Vornado did not have a basis upon which to rely." (Order and Memorandum Decision, Dec. 9, 2005, p. 10). I noted that "[i]f [Stop Shop] asserted that, without qualification, it will to pay to Vornado the full amount of the Rental Increases specified in the Master Agreement as long as any of the Vornado Leases remain unexpired, the result may be different." ( Id. p. 11).The First Department affirmed my decision and finding concerning Vornado's collateral and judicial estoppel arguments. ( The Stop Shop Supermarket Co. v. Vornado Realty Trust , 35 AD3d 241, 243 [1st Dep't 2006]).
Stop Shop contends that Vornado's evidence concerning judicial and collateral estoppel should be excluded because the First Department found that Vornado's estoppel defenses are insufficient as a matter of law. However, it is well established that the denial of a motion for summary judgment is not an adjudication on the merits. ( Clearwater Realty Co. v. Hernandez, 256 AD2d 100, 101 [1st Dep't 1998]). The First Department's ruling means that Vornado was not entitled to judgment as a matter of law based on its estoppel defenses and that there were factual issues that remained and could not be resolved on summary judgment. This ruling does not preclude Vornado from coming forward with additional evidence and a subsequent finding of estoppel. Therefore, Stop Shop's argument is rejected and its motion in limine to preclude Vornado from introducing evidence related to its collateral and judicial estoppel defenses is denied.
The doctrine of judicial estoppel precludes a party who assumed a certain position in a prior legal proceeding, and who secured a judgment in its favor, from assuming a contrary position in another action simply because its interests have changed. ( Gale P. Elston, P.C. v. Dubois , 18 AD3d 301 [1st Dep't 2005]; see also All Terrain Properties v. Hoy, 265 AD2d 87 [1st Dep't 2000][doctrine rests upon principle that a litigant should not lead a court to find a fact one way and then assert in another proceeding that the fact should be determined another way]).
Upon hearing the testimony at the trial of this action and reviewing the transcripts and other documentary evidence from the Bankruptcy and District Court proceedings, I have reevaluated my prior finding and now conclude that Vornado has sufficiently demonstrated, by a preponderance of the evidence, that Stop Shop should be estopped from asserting its position in this action that it is not liable for the full amount of the Rental Increase. As described at length in the Findings of Fact, supra, Stop Shop and Bradlees made repeated representations to the Bankruptcy and District Courts that Vornado would not suffer economic prejudice and could recover the full amount of the Rental Increase if the requested relief was granted. Based in part on these representations, Stop Shop obtained a favorable ruling. Stop Shop cannot now assert a contradictory position in this action.
Stop Shop argues that its representations before the Bankruptcy and District Court were qualified statements regarding its potential liability rather than an assurance that Stop Shop will pay Vornado the full amount of the Rental Increase. Stop Shop bases this argument on its representations in the Bankruptcy and District Court proceedings in which it explicitly stated that Vornado retained the right to make claims under the existing agreement, that it was not making any new concession to Vornado to pay the Rental Increase, and that it was reserving all defenses. (Stop Shop's FoF pp. 38-39 (¶¶ 31(g)-(j))).
This argument does not make sense in the context of the Bankruptcy and District Court proceedings. The Bankruptcy Court recognized that Vornado's primary interest under the Master Agreement is "the payment, in the aggregate, of the Rental Increase . . ." (Exh. 100 pp. 26 (¶ FFF)). Acknowledging that "[p]rotecting Vornado's legitimate economic interest" for "the entire amount of the rent allocation" was "key," Stop Shop and Bradlees repeatedly assured Vornado and the Bankruptcy and District Courts that "Stop Shop is ultimately at risk on the full amount of the increased rent" and that there would be "no economic prejudice whatsoever to Vornado [because] [Vornado] will still have the ability to assert claims for the rent increase against Stop Shop under the guarantee." (Exh. 56 pp. 95-96 [Rogoff speaking before the Bankruptcy Court] [Lauria Tr. 428:18-429:7 (Lauria testifying at the trial of this action that he agreed with Rogoff's statements before the Bankruptcy Court)]; Exh. 59 pp. 55, 57-58, 88, 113, 117 [Rogoff speaking before the District Court] [Lauria Tr. 411:15-25, 415:3-7] [Lauria testifying at the trial of this action that he agreed with Rogoff's statements]; Exh. 59 pp. 130-31, 138 [Kurtz speaking before the District Court]). These representations are stated in terms of "asserting claims" rather than an outright promise that Stop Shop will pay under the guaranty. However, Stop Shop repeatedly asserts that there would be no economic prejudice to Vornado. This could not be true if Stop Shop could justifiably refuse to pay because the Bankruptcy Court granted the relief Stop Shop requested in paragraph 20 by striking the Allocation Provision.
Stop Shop also argues that these representations were made on the premise that both paragraph 20 and paragraph 23 of its Proposed Order would be granted. However, paragraphs 20 and 23 were independent provisions in the Proposed Order and Stop Shop's lawyer, Lauria, understood that they would be reviewed and ruled upon separately. (Lauria Tr. 344:21-345:3, 370:15-371:4, 397:15-18). Moreover, Stop Shop made at least two representations to the Bankruptcy and District Courts that Vornado would not be economically prejudiced if the Allocation Provision was struck. In paragraph EEE of its Proposed Order, Stop Shop stated that "the invalidation of the [Allocation Provision] will not have a substantially detrimental effect on Vornado because of Vornado's right to assert claims against Stop Shop under the guaranty." (Exh. CF p. 26 (¶ EEE)). Then, in its appeal brief, Stop Shop represented to the District Court that "the Bankruptcy Court's determination to strike the Allocation Provision in no way affects Vornado's ability to collect the full amount of the Rental Increase or Vornado's credit support." (Exh. CP pp. 29-30).
In any event, even if both paragraphs 20 and 23 of the February 6 Order had been affirmed by the District Court, Stop Shop's representations in 2001 contradict its position here. Even if Stop Shop's right to reallocate the Rental Increase was affirmed, there would still be a possibility that the Lease(s) carrying the Rental Increase would have expired. Given Stop Shop's position in this action, this would have imposed enormous "economic harm" on Vornado in contradiction to Stop Shop's representations in 2001 that no such harm would befall Vornado as a result of the Bankruptcy Court's approval of the LDA.
The Bankruptcy Court relied on these representations when it invalidated the Allocation Provision. Almost directly after Lauria represented to the Bankruptcy Court that "[Stop Shop has] stipulated that we are still in the same position we are in vis-a-vis our obligations under the guarantee agreement as we were before this was done," Judge Lifland granted the relief requested and noted that "Stop Shop is still responsible to Vornado under its agreement, under its guarantees." (Exh. 56 pp. 161-62). Indeed, in his February 6 Order, Judge Lifland made the factual finding that "the invalidation of the [Allocation Provision] will not have a substantially detrimental effect on Vornado because of Vornado's right to assert claims against Stop Shop under the guaranty." (Exh. 100 p. 26 (¶ EEE)).
Therefore, Stop Shop is judicially estopped from asserting a position in this action contrary to its position before the federal court.
Accordingly, I hold that Vornado retained the right to reallocate the Rental Increase to unexpired Leases under the Master Agreement for purposes of billing Stop Shop under the guaranty. Vornado's reallocation of the Rental Increase in November 2002 was valid and thus Stop Shop is liable for the unpaid Rental Increase.
MITIGATION
Stop Shop argues that even I find in favor of Vornado for purposes of liability, Vornado is not entitled to damages for the unpaid Rental Increase because it failed to mitigate its damages. Stop Shop asserts that it's entitled to over $20 million in damages based on Vornado's alleged breach of its duty to mitigate its damages and Vornado's alleged interference with Stop Shop's assignment of the Leases. (Stop Shop's FoF p. 54-58 (¶¶ 43, 45-46); Stop Shop's CoL pp. 60-61 (¶ 151)).
By order dated April 22, 2010, I denied Stop Shop's motion to amend its complaint to allege causes of action: (a) for recovery of overpayments of rent based on Vornado's "bad faith refusal to re-let Bordentown and interference and conduct that delayed the re-letting of the Bradlees' Properties;" (b) for breach of the covenant of good faith and fair dealing and breach of the duty to mitigate; and (c) for tortious interference with economic rights. (Memorandum and Order, Apr. 22, 2010, p. 4). I found that there would be "significant prejudice" because of the six-year delay in asserting these new allegations and because Stop Shop was seeking to allege new theories of liability that differed drastically from the declaratory relief sought in the complaint. ( Id. p. 5). However, I denied the motion with leave to move after trial for an order to conform the pleadings to the proof. ( Id. pp. 5-6).
Stop Shop now moves in its post-trial papers to conform the pleadings to the evidence presented at trial. (Stop Shop's CoL pp. 61-62 (¶¶ 152-155)). A court "may permit pleadings to be amended before or after judgment to conform them to the evidence." (CPLR § 3025(c)). As discussed below, Stop Shop has failed to meet its burden with regard to these amendments to the pleadings and the application is denied.
Mitigation "limits the plaintiff's recovery by disallowing only those items of damages which could reasonably have been averted." ( Ostrowski v. Azzara, 545 A.2d 148, 154 [N.J. 1988] [quoting Southport Transit Co. v. Avondale Marine Ways, Inc., 234 F.2d 947, 952 (5th Cir. 1956)]). Thus, if the plaintiff failed to mitigate its damages, this may offset the plaintiff's recoverable damages by "[t]he amount of loss that he could reasonably have avoided by . . . making substitute arrangements." ( State v. Ernst Young, LLP, 902 A.2d 338, 348 [N.J. Super. Ct. App. Div. 2006] [quoting Ingraham v. Trowbridge Builders, 687 A.2d 785, 792 [N.J. Super. App. Div. 1997]). In the landlord-tenant context, a landlord mitigates his damages by acting reasonably to re-let the property where the tenant has defaulted. ( Sommer v. Kridel, 378 A.2d 767, 773 [N.J. 1977]).
Stop Shop claims that Vornado is not entitled to recover any damages in this action because it breached its duty to mitigate.
First, Stop Shop argues that Vornado acted unreasonably to mitigate its damages by freezing the Rental Increase onto the Allocated Leases which made it impossible for Stop Shop to assign the Leases. (Stop Shop's FoF pp. 44-45 (¶ 35)). As previously discussed, the freeze of the Rental Increase (for purposes of assignment) occurred as a result of the Bankruptcy and District Court proceedings. Vornado did not freeze the Rental Increase. Accordingly, I reject Stop Shop's argument that Vornado breached its duty to mitigate by freezing the Rental Increase to the Allocated Leases.
Next, Stop Shop argues that Vornado breached its duty to mitigate by marketing the Bradlees properties to potential tenants in early 2001, which interfered with Stop Shop's ability to assign the Leases. (Stop Shop's FoF pp. 45-48 (¶ 36)); Frank Witness Statement pp. 7-8 (¶¶ 25-26)). Stop Shop's argument is really a claim of interference and has nothing to do with any alleged failure to mitigate. Stop Shop's interference claim is an independent tort which arose in 2001, when Stop Shop suffered its alleged injury. However, Stop Shop did not assert this claim until October 2009, when it sought leave to amend the complaint.
Stop Shop argues that its interference claim is timely because it asserted this claim in 2005, in its fourth and sixth affirmative defenses to Vornado's counterclaims. In its fourth affirmative defense, Stop Shop alleged that "Vornado's Counterclaims are barred, in whole or in part, by Vornado's own conduct in irrevocably allocating Rental Increases to leases that expired." (Reply to Counterclaims p. 9). In its sixth affirmative defense, Stop Shop alleged that "Vornado's Counterclaims are barred, in whole or in part, by contracts entered into by Vornado subsequent to the Master Agreement." ( Id.). Clearly, these defenses have nothing to do with Vornado's alleged act of interference of marketing the former Bradlees properties to potential tenants in early 2001.
Stop Shop also argues that its interference claim is timely because it "relates back" to the complaint. (Stop Shop's CoL pp. 65-66 (¶¶ 162-163). CPLR § 203(f) provides that for the purposes of the statute of limitations, a claim in an amended pleading relates back to the time the original pleading was interposed as long as the original claim gives notice of the transaction or occurrence out of which the amended claim arises. (CPLR § 203(f); David D. Siegel, New York Practice § 49 [5th ed. 2011]). The only relief Stop Shop sought in its complaint was a declaration that "Vornado has no right to reallocate the Rental Increases, and [that Stop Shop] is not obligated to pay Rental Increases following the expiration of the Allocated Leases." (Complaint p. 7). Stop Shop's interference claim has nothing to do with the declaratory relief Stop Shop sought in its complaint and the original claim could not have provided Vornado with notice of the events giving rise to Stop Shop's interference claim.
Accordingly, Stop Shop's interference claim is untimely and is barred by the three year statute of limitations applicable in both New York and Massachusetts (where the plaintiff resides). ( Buller v. Giorno , 57 AD3d 216 [1st Dep't 2008]; Stark v. Advanced Magnetics, Inc., 736 N.E.2d 434, 441 [Mass. App. Ct. 2000]).
Even if I conclude that Stop Shop's claim is not barred by the statute of limitations, Stop Shop's interference claim lacks merit. Stop Shop's interference claim is based on letters that Vornado's leasing representatives sent to prospective tenants for the former Bradlees properties owned by Vornado from January 3 to January 5, 2001. (Exhs. 11-25, 29-39). The letters informed these prospective tenants about the upcoming availability of these properties due to the second Bradlees bankruptcy and stated that Vornado controlled these properties. ( Id.). By letter dated January 17, 2001, Bradlees wrote to Vornado asking Vornado "to cease and desist all further attempts to market these properties while they are being marketed the Debtors." (Exh. 162). On January 23, 2001, Vornado responded by letter stating that "the marketing effort referred to therein has ceased." (Exh. BZ). Richard Rowan, the executive vice president of Vornado who supervised the leasing department, testified that immediately after learning about the "cease and desist letter," he instructed all of his staff to stop marketing the former Bradlees properties. (Rowan Aff.. p. 7 (¶ 17); Rowan Tr. 1967:14-1968:10).
Nellie Matjucha, the director of leasing at Vornado during the time of the 2001 Bradlees bankruptcy, testified at her deposition that she continued to market the former Bradlees properties in January 2001, April 2001 and July 2001. (Matjucha Dep. Tr. [Docket No. 192-5] 8:3-7, 64:4-24, 102:21-103:7). However, Rowan testified credibly and unequivocally that after receiving the "cease and desist" letter from Bradlees, he instructed all of Vornado's leasing representatives to stop marketing the former Bradlees properties. (Rowan Tr. 1968:3-10). If Matjucha continued to market the properties, she disregarded his instructions without his knowledge. (Rowan Aff. p. 7 (¶ 17)).
Furthermore, Stop Shop did not present sufficient evidence to show that Vornado's letters to potential tenants chilled the market for assignments. In support of its argument that Vornado's letters interfered with Stop Shop's assignment of the Leases, Stop Shop points out that it assigned a majority of the non-Vornado leases that were subject to the LDA but was only able to assign three of the fifteen Vornado Leases. (Stop Shop's FoF pp. 54-56 (¶¶ 43c-d)). Stop Shop also argues that the fact that Vornado was able to assign all but one of these Leases after it recaptured them demonstrates that the tenants were reluctant to deal with Stop Shop as a result of Vornado's interference. (Stop Shop's FoF pp. 55-56 (¶¶ 43d-f)).
Stop Shop's arguments are purely speculative. There are a myriad of reasons why potential tenants did not rent the former Bradlees properties from Stop Shop. Stop Shop has not presented direct evidence from any potential tenant stating that Vornado's letters from early January 2001 were in any way related to the tenant's refusal to rent these properties from Stop Shop. Accordingly, I conclude that Stop Shop's claim that Vornado's interfered with Stop Shop's assignment of the former Bradlees properties lacks merit.
Next, Stop Shop argues that Vornado breached its duty to mitigate by not re-letting the Bordentown property, which resulted in Stop Shop paying rent for years longer than necessary. (Stop Shop's FoF pp. 49-52 (¶¶ 38a-q)). This is not a breach of Vornado's duty to mitigate its damages. Vornado seeks damages for the unpaid Rental Increase allocated to Marlton, Turnersville, Bensalem and Broomall in November 2002. (Answer and Counterclaims pp. 20-21; Exh. FQ). It is undisputed that under paragraph 20 of the Bankruptcy Court's February 6 Order, the assignees of the Bradlees Leases are not obligated to pay the reallocated Rental Increase. Furthermore, Vornado never allocated any portion of the Rental Increase to Bordentown. (Exh. AF; Exh. FQ). Therefore, Vornado's efforts to re-let Bordentown to a new tenant are not relevant to whether Vornado mitigated its damages in this action. Thus, even if Vornado was able to lease the Bordentown property to a new tenant, this would not have offset Vornado's damages for the unpaid Rental Increase.
Furthermore, Stop Shop's argument that Vornado breached its duty to mitigate by failing to re-let the Bordentown property lacks merit. Bordentown was a difficult property to lease because there was very little demand for this space. (Birnbaum Aff. p. 8 (¶ 18); Mathrani Aff. p. 11 (¶ 22); Zucker Aff. pp. 4-5 (¶ 8)). This was partially due to the location of the shopping center: the Bordentown shopping center is on a secondary highway with light traffic and the front of the former Bradlees store is not visible to drivers from the road. (Zucker Tr. 1700:4-10, 1757:9-11). In addition, a new shopping center located only four miles away from Bordentown was built in 2002. (Zucker Tr. 1700:11-21; Mathrani Aff. pp. 11-12 (¶¶ 22-23)). The new shopping center was significantly larger than Bordentown and potential tenants were drawn to the new shopping center, which had secured a number of large tenants. (Mathrani Tr. 1427:21-22 ["[T]he retail corridor moved to another shopping district."]; Mathrani Aff. p. 11 (¶ 22); Zucker Aff. p. 5 (¶ 9)).
These factors made Bordentown a "challenging property" to lease. (Zucker Tr. 1701:5-6; Birnbaum Aff. p. 8 (¶ 18); Mathrani Aff. p. 11 (¶ 22); Zucker Aff. pp. 4-5 (¶ 8)). In fact, Stop Shop itself tried to assign Bordentown, which was not burdened by the Rental Increase, during the first part of 2001. However, Stop Shop was unsuccessful in assigning Bordentown and Bradlees rejected the Bordentown Lease on May 25, 2001. (Exh. DL).
After the Bradlees Lease was rejected, Vornado had a strong incentive to re-let the former Bradlees store at Bordentown to a new tenant. (Mathrani Tr. 1428:5-14). The former Bradlees property was the "anchor" store for the Bordentown shopping center, i.e. the store that occupies a large percentage of the square footage in the shopping center and drives consumer traffic to the center. (Mathrani Aff. pp. 3-4, 13-14 (¶¶ 7, 27); Zucker Tr. 1754:13, 1757:15-18). The vacancy of the former Bradlees store in Bordentown reduced the overall value of the shopping center. (Mathrani Aff. p. 13 (¶ 26)). Thus, it was in Vornado's interest to secure a tenant for the former Bradlees store at Bordentown.
From the time the Bordentown Lease was rejected in May 2001, Vornado made diligent efforts to find a new tenant for this property. (Rowan Aff. pp. 10-12 (¶¶ 25-27); Mathrani Tr. 1427:10-21; Mathrani Aff. pp. 12, 14-16, 18-20 (¶ 24, 28-34, 41, 43); Birnbaum Aff. pp. 9-10, 15-16 (¶¶ 20-21, 23, 38-39, 42); Zucker Aff. pp. 2-4 (¶¶ 4-7); Lyons Aff. pp. 2-4 (¶¶ 3-5, 7)). Vornado followed the same leasing practices it used to successfully re-let the other former Bradlees stores. (Birnbaum Aff. pp. 3, 7 (¶¶ 6, 15); Mathrani Aff. p. 12 (¶ 24)). Vornado's leasing representatives sent marketing packages to potential tenants; called and met with potential tenants; and repeatedly discussed the vacancy at Bordentown at weekly meetings. (Vornado's FoF pp. 71-72 (¶ 181)). Vornado also reached out to two commercial real estate brokers to help it find a tenant for this store. (Exhs. FW, HI, HJ, HO; Mathrani Tr. 1427:6-9; Mathrani Aff. pp. 14-15, 18 (¶¶ 29, 40)).
Despite Vornado's diligent efforts to find a new tenant for Bordentown, the property has remained vacant since Bradlees rejected the Lease in May 2001. (Mathrani Aff. pp. 10-11 (¶ 21); Birnbaum Aff. pp. 15-16 (¶¶ 41-42)). Stop Shop continued to pay monthly rent for the property pursuant to its obligations as a guarantor under the Master Agreement. (Hippler Witness Statement pp. 23-24 (¶ 54); Hippler Tr. 127:6-8). Stop Shop's rent payment obligations were $716,487.35 per year ($7.36 per square foot) until February 28, 2006 and $740,799.50 per year ($7.61 per square foot) from March 1, 2006 until February 28, 2011, the date on which Stop Shop's obligation to pay rent expired. (Exh. IW[iii], p. 2). Stop Shop was also paying the taxes and common area maintenance charges due under the Bradlees Lease for Bordentown. (Birnbaum Tr. 1572:25-1573:5).
Stop Shop asserts that Vornado breached its duty to mitigate because if Stop Shop had not been paying rent as guarantor, Vornado "would have jumped at any chance to re-let" Bordentown. (Stop Shop's FoF p. 49 (¶ 38c)). In support of this argument, Stop Shop points to three potential tenants that expressed an interest in the Bordentown property: Infinity Fitness, Robert Wood Johnson Health Wellness Center ("RJW"), and VF Outlet. Stop Shop asserts that these tenants did not lease the Bordentown property because Vornado demanded exorbitantly high rent from these tenants, in breach of its duty to mitigate.
In late 2004 and early 2005, Infinity Fitness and RJW expressed an interest in the Bordentown property. In response, Vornado's leasing representative Michael Zucker sent each of these potential tenants a letter outlining a proposal to lease the former Bradlees space at Bordentown for a term of ten years. (Exh. 121; Exh. IW[xxxi]). Neither tenant made a counter-proposal or gave any further indication of interest in the Bordentown property. (Zucker Aff. p. 6 (¶ 11); Birnbaum Tr. 1555:11-15).
Stop Shop contends that Infinity Fitness and RJW lost interest in the Bordentown property because Vornado's proposed rent was well above its own calculation of fair market value. (Hippler Witness Statement p. 24 (¶¶ 55-56); Birnbaum Tr. 1529:20-1530:13). Stop Shop's argument is based on speculation. Stop Shop offers no evidence that either Infinity Fitness or RJW lost interest in the property because of Vornado's proposal letter. If these tenants remained interested in the Bordentown property, they were free to make a counter-offer.
Furthermore, Vornado's internal estimate of market rent for Bordentown did not necessarily accurately reflect what the actual market rate was for the property. As Stop Shop's expert witness in the field of mitigation testified, "if there is no interest in the property at all, it's very difficult to determine what the market might be." (Konikoff Tr. 666:17-18). Moreover, Vornado's budget book reflected an estimate of market rent for that year, not the years into the future that the lease would run. Thus, I reject Stop Shop's argument that Vornado breached its duty to mitigate by proposing above-market rent in its proposal letters to Infinity Fitness and RJW.
In October 2004, VF Outlet, through its broker Creative Realty Group, LLC, sent a letter of intent to Vornado to rent the former Bradlees property at Bordentown for one five-year term at a rent of $7.00 per square foot with one five-year renewal term at $7.50 per square foot and a second five-year renewal term at $8.00 per square foot. (Exh. 120; Hippler Aff. p. 25 (¶ 57)). Under the proposal, Vornado would commit to pay for the renovations necessary to convert the property into a VF Outlet store. (Exh. 120; Birnbaum Aff. p. 11 (¶ 27)). VF Outlet did not specify an exact dollar commitment it expected from Vornado but estimated the total tenant improvement allowance by Vornado would be $14 to $16 per square foot. (Exh. 120; Birnbaum Aff. p. 11 (¶ 27)).
Although Vornado considered VF Outlet's proposal "highly unattractive," Vornado's leasing representatives Birnbaum and Zucker visited a VF Outlet store to evaluate the feasibility of converting the former Bradlees store to a VF Outlet store. (Birnbaum Aff. p. 14 (¶ 35); Zucker Aff. p. 6 (¶ 12)). On January 4, 2005, VF Outlet, through its broker, sent a second letter of intent to Vornado. (Exh. 122). VF Outlet's projected store opening was May 21, 2005, with the original rental period ending on February 28, 2011 ( Id.).
VF Outlet's second proposal included the same base rent for the original lease term and the same option terms as its first proposal. (compare Exh. 122 and Exh. 120). Although in its second proposal VF Outlet included a provision for percentage rent, Stephen Lehmann of VF Outlet conceded at his deposition that in retrospect, there was no chance that VF Outlet would have had sufficient sales to trigger payment under this provision. (Lehman Tr. 963:25-964:4). The VF Outlet proposal required Vornado to pay $16 to $18 per square foot up front for tenant improvements and a brokerage commission of $2.00 per square foot. (Exh. 122). Thus, Vornado's initial outlay would have been $1.7 million to $1.9 million (given the property size of 96,124 square feet). (Exh. 122; Birnbaum Aff. p. 12 (¶ 29)). Even though in "most cases" anchor tenants pay common area maintenance charges ("CAM") and taxes, VF Outlet proposed not paying either, which Vornado estimated to be $3.41 per square foot. (Exh. 122; Mathrani Aff. p. 17 (¶ 37)). However, Stop Shop would pay CAM and taxes pursuant to a contract with Vornado through the first five-year term of VF Outlet's lease. (Birnbaum Tr. 1572:25-1573:5; Zucker Tr. 1731:12-17).
VF Outlet's proposal required a considerable payout from Vornado. Given the fact that the original lease term was only five years (as opposed to 10 years), Vornado's return on this investment was unknown and unlikely to be significant. Based on this, Vornado reasonably concluded that VF Outlet's proposal did not make economic sense for Vornado. Although Birnbaum and Zucker continued attempting to engage VF Outlet in negotiations, VF Outlet appeared to lose interest and a deal was never reached. (Zucker Aff. p. 7-8 (¶ 16); Birnbaum Aff. p. 14 (¶ 37); Mathrani Aff. p. 18 (¶ 38)).
Stop Shop asserts that as part of its duty to mitigate, Vornado was required to act in the economic interests of Stop Shop and that Vornado breached its duty to mitigate by failing to accept the offer from VF Outlet simply because it did not make economic sense for Vornado. (Stop Shop's CoL, pp. 48-49 (¶¶ 119-120); Stop Shop's FoF, pp. 51-54 (¶¶ 38m-q, 42). Stop Shop does not provide any support for its assertion that Vornado was required to act in the economic interests of Stop Shop in order to mitigate damages. In fact, as Stop Shop itself cites in its Proposed Conclusions of Law, a landlord mitigates his damages by acting reasonably to re-let the property where the tenant has defaulted. ( Sommer v. Kridel, 378 A.2d 767, 773 [N.J. 1977]). Given that VF Outlet's offer did not make economic sense for Vornado, it was reasonable for Vornado to reject this offer and continue negotiating with VF Outlet.
In sum, the evidence demonstrates that Vornado acted reasonably with regard to re-letting the former Bradlees property at Bordentown. It is undisputed that the former Bradlees store at Bordentown was a difficult property to lease. Vornado had a strong incentive to re-let the property and from the time Bradlees rejected this Lease in May 2001, Vornado diligently marketed the property to prospective tenants. Vornado contacted two prospective tenants that had expressed interest in the property — Infinity Fitness and RJW — by sending each of them a letter proposal. Although Stop Shop asserts that these tenants lost interest in the property because Vornado proposed rent that was significantly above the market rate, this is mere speculation which lacks evidentiary support. Vornado also engaged VF Outlet regarding leasing the Bordentown property but the parties did not reach a deal because Vornado rejected VF Outlet's unreasonably low bid for the property and VF Outlet subsequently lost interest in leasing this property. Accordingly, I conclude that Vornado acted reasonably to re-let the former Bradlees property at Bordentown and thus it did not breach its duty to mitigate.
Next, Stop Shop argues that Vornado breached its duty to mitigate by not permitting alterations for assignments by Stop Shop. (Stop Shop's FoF p. 52 (¶ 39)). Stop Shop does not provide any evidence of any request for alterations by either Stop Shop or a prospective assignee. Stop Shop's allegations regarding Vornado's position that "it did not believe it was required to agree to alterations" is not evidence that any alterations were ever requested. Moreover, the Bradlees Leases with Vornado contractually prohibited major alterations and Vornado was not required to agree to alterations to facilitate Stop Shop's assignment of the Leases.
Finally, Stop Shop argues that Vornado breached its duty to mitigate by refusing to agree to a January 2001 proposal by Stop Shop to reallocate the Rental Increase. (Stop Shop's FoF pp. 29-30, 45 (¶¶ 24, 35e)). Sometime around January 22, 2001, Richard Rowan (Vice President of Vornado) and Elizabeth Frank (Senior Real Estate Manager for Stop Shop at the time) and Richard Picariello (then Stop Shop's Chief Financial Officer and Frank's boss) discussed by phone and letter a possible reallocation of the Rental Increase. (Frank Witness Statement p. 3 (¶ 8); Rowan Tr. 1942:22-25; Exhs. 53, 55). Stop Shop sought not only a reallocation of the Rental Increase but also a waiver from Vornado of certain restrictions in the Totowa and Union Leases prohibiting supermarkets because Stop Shop was considering assuming those Leases itself. (Frank Witness Statement pp. 4-5 (¶ 12); Rowan Tr. 1940:18-21; Exh. 42A).
After these initial discussions, Rowan faxed a proposed reallocation to Stop Shop on January 25, 2001. (Exh. 53). Rowan proposed, as consideration for what Stop Shop was seeking from Vornado, that Stop Shop return the East Brunswick and Broomall Leases to Vornado and raise the rent on the Totowa Lease by $1 million. (Frank Witness Statement p. 4 (¶ 10); Rowan Tr. 1944:25-1945:14; Exh. 42A). As Stop Shop requested, Vornado's proposal spread the Rental Increase across more of the Leases and it placed no portion of the Rental Increase on Totowa and Broomall, the two Leases Stop Shop wanted to assume. (Exh. 53). The proposal also placed a substantial portion of the Rental Increase on Glenolden, a Lease for which Stop Shop had no guarantor liability for the Rental Increase pursuant to a separate contractual agreement. (Exh. IG p. 9; Exh. 53).
By letter dated January 29, 2011, Frank responded to Vornado's proposal. (Exh. 55). Frank stated that Stop Shop was interested in assuming the Totowa Lease but could not "absorb an additional $1,000,000 in rent in Totowa as proposed. (Exh. 55). Frank also stated that Stop Shop did not want to return the East Brunswick and Broomall Leases because they had substantial value and if these Leases were rejected, it would be difficult to reallocate the Rental Increase in a meaningful way. (Exh. 55; Frank Witness Statement pp. 4-5 (¶¶ 11-15)). In this letter, Frank enclosed Stop Shop counterproposal for a spread of the Rental Increase. (Exh. 55 p. 2).
Stop Shop and Vornado never reached an agreement regarding a reallocation of the Rental Increase. (Frank Tr. 1602:25-1603:22) The next day, on January 30, 2001, the Bankruptcy Court granted Stop Shop and Bradlees the right to reallocate. (Exh. 56 p. 162). As a result, Stop Shop no longer needed to seek a compromise with Vornado regarding a spread of the Rental Increase.
Stop Shop asserts that Vornado breached its duty to mitigate because it failed to cooperate with Stop Shop to reallocate the Rental Increase, thus preventing Stop Shop from assigning the Leases. However, Vornado had no duty to cooperate with Stop Shop on a reallocation of the Rental Increase. Under the Master Agreement, Vornado had the contractual right to reallocate the Rental Increase in its sole discretion. (Exh. Z pp. 2-3 (¶ 1(a))). Furthermore, as demonstrated above, Vornado worked with Stop Shop on a "spread" of the Rental Increase. The fact that the parties did not reach a compromise does not mean that Vornado failed to cooperate. Indeed, the most likely reason the parties did not reach an agreement regarding a reallocation of the Rental Increase is because the Bankruptcy Court granted Stop Shop the right to reallocate the Rental Increase and Stop Shop no longer needed to negotiate a compromise with Vornado. Finally, Stop Shop's assertion that Vornado's failure to cooperate on a reallocation of the Rental Increase prevented Stop Shop from assigning the Leases is speculative and lacks evidentiary support.
Accordingly, I conclude that Vornado did not breach its duty to mitigate its damages and that Stop Shop interference claim and allegations of bad faith by Vornado are time-barred as well as meritless.
DAMAGES
Vornado seeks damages from Stop Shop for the unpaid Rental Increase on the Marlton, Turnersville, Bensalem and Broomall Leases from December 1, 2002 to the date of judgment. (Answer and Counterclaims pp. 20-21; Vornado's FoF pp. 61, 82 (¶¶ 150, 214). Vornado also seeks all applicable interest, costs and disbursements, and attorneys' fees. (Answer and Counterclaims pp. 21-22).
Until November 30, 2002, the Rental Increase was allocated under the Master Agreement to the East Brunswick, Jersey City, Middletown, Union and Woodbridge Leases. (Exh. AF; Rothschild Aff. p. 2 (¶ 5)). Vornado received payment in full of the Rental Increase owed through November 30, 2002. (Rothschild Aff. p. 2 (¶ 6)). The Jersey City, Middletown, Union and Woodbridge Leases expired on November 30, 2002, and the East Brunswick Lease expired August 31, 2003. (Exh. IG p. 6). Stop Shop continued to pay the Rental Increase allocated to these Leases until they expired. (Exh. 141 p. 9; Rothschild Aff. p. 2 (¶¶ 5-6)).
In November 2002, effective December 1, 2002, Vornado reallocated the Rental Increase to the Bensalem, Broomall, Marlton and Turnersville Leases. (Exh. FQ; Rothschild Aff. p. 3 (¶ 7)). The new allocation was as follows: Marlton-30% of the Rental Increase; Turnersville-30% of the Rental Increase; Bensalem-20% of the Rental Increase; and Broomall-20% of the Rental Increase. (Exh. FQ). From December 1, 2002 to February 28, 2011, the Rental Increase allocated to these Leases has accrued at the rate of $416,667 per month ($5 million per year). (Exh. Z p. 2 (¶ 1(a)); Rothschild Aff. p. 3 (¶ 8)). The total amount of the Rental Increase accrued on these Leases from December 1, 2002 to February 28, 2011 is $41,250,001. (Rothschild Aff. p. 3 (¶ 9) [calculating the total amount of the Rental Increase on the Reallcoated Leases from December 1, 2002 through November 30, 2010]; Exh. Z p. 2 (¶ 1(a)) [Rental Increase accrues at $416,667 per month]).
Giant Foods, the assignee of the Broomall Lease exercised an extension option extending the Broomall Lease to February 28, 2016. (Exh. IG pp. 6, 8). On January 19, 2010, Kohl's, the assignee of the Marlton Lease, exercised an extension option extending the Marlton Lease to February 28, 2021. (Exh. IM; Exh. IG p. 6). The Bensalem and Turnersville Leases expired on February 28, 2011 (Exh. IG p. 6; Vornado's FoF p. 59 (¶ 144)).
Vornado has not submitted any evidence nor does it even allege that it has reallocated any portion of the Rental Increase since the expiration of the Bensalem and Turnersville Leases. Furthermore, Vornado does not claim that it is entitled to receive payment of the Rental Increase for any other Leases. Thus, Vornado is not entitled to receive damages for the portion of the Rental Increase allocated to the Bensalem and Turnersville Leases (50% of the total Rental Increase under the Master Agreement) after those Leases expired on February 28, 2011. Beginning March 1, 2011 and through date of judgment, Vornado is only entitled to receive the Rental Increase allocated to the unexpired Marlton and Broomall Leases (50% of the total Rental Increase of $416,667) which accrues at a rate of $208,333.50 per month. (Exh. FQ; Exh. Z p. 2 (¶ 1(a))). After February 1, 2012, this amount will accrue at a rate of $250,000 per month. (Exh. Z p. 2 (¶ 1(a))).
Although Vornado reallocated the Rental Increase in November 2002, Stop Shop did not honor this reallocation and instead continued to pay the Rental Increase that was initially allocated to the East Brunswick, Jersey City, Middletown, Union and Woodbridge Leases until those Leases expired. (Exh. AF; Exh. 141 p. 9; Rothschild Aff. p. 2 (¶¶ 5-6)). Four of these Leases expired in November 2002 and the East Brunswick Lease expired in August 2003. (Exh. IG p. 6). Through November 2002, Stop Shop continued to pay the full amount of the Rental Increase that was due to Vornado and from December 1, 2002 to August 31, 2003, when the East Brunswick Lease expired, Stop Shop made nine partial monthly payments of the Rental Increase of $38,751.54 each for a total of $384,763.86. (Rothschild Aff. p. 3 (¶ 10)). Stop Shop is entitled to a credit for these partial payments.
Stop Shop is also entitled to receive a credit for the rent paid by the replacement tenants at Bensalem. Stop Shop and Vornado entered into a separate agreement for the Turnersville and Bensalem Leases under which Stop Shop receives a credit against amounts due under the Master Agreement with respect to these Leases based on amounts received from replacement tenants for those properties. (Exhs. BF, FC; Rothschild Aff. pp. 3-5 (¶¶ 11, 15)). With respect to Turnersville, Vornado has received $21,812 less from the replacement tenant than the rent owed under the Bradlees Turnersville Lease and thus Stop Shop is not entitled to a credit. (Rothschild Aff. pp. 4-5 (¶ 15)). Pursuant to the agreement for Bensalem, Stop Shop is entitled to a credit against the Rental Increase from the base rent paid by replacement tenants which totals $3,479,601 (through February 28, 2011 the date the Bensalem Lease expired). (Vornado's FoF p. 60 (¶ 147)).
Stop Shop contends that its entitled to receive another credit for the "extra rent" Vornado receives from replacement tenants at the former Bradlees properties in excess of Bradlees' base rent. However, Vornado only seeks damages for the unpaid Rental Increase on the Marlton, Turnersville, Bensalem, and Broomall Leases. Vornado is not earning extra rent on the Marlton and Broomall Leases because those Leases were assigned and the new tenants pay rent under the terms of the Bradlees Leases. (Rothschild Aff. p. 5-6 (¶ 17)). Stop Shop is not entitled to receive a credit for the Rental Increase it owes under these Leases based on the "extra rent" earned by Vornado on the other Leases subject to the Master Agreement. With respect to the Turnersville and Bensalem Leases, Stop Shop and Vornado entered into a separate agreement under which Stop Shop is already receiving a credit for the "extra rent" paid by the replacement tenants in these locations. (Exhs. BF, FC; Rothschild Aff. pp. 3-5 (¶¶ 11, 15)). Thus, Stop Shop is not entitled to a credit based on the extra rent paid by replacement tenants at other locations.
The Rental Increase owed through February 28, 2011, net of the payments made by Stop Shop on the East Brunswick Lease and the credit for rent paid by the replacement tenants in Bensalem, is $37,421,635.14 (calculated by subtracting the partial payment of $348,763.86 and the Bensalem credit of $3,479,601 from $41,250,000). From March 1, 2011 through January 31, 2012, the Rental Increase will accrue at a rate of $208,333.50 per month and $250,000 per month thereafter until the date of judgment.
Vornado also seeks the payment of its costs and disbursements of this action, including attorneys' fees. (Answer and Counterclaims p. 22). Vornado is entitled to an award of attorneys' fees pursuant to the terms of the Master Agreement. (Exh. Z p. 10 (¶ 11(f)); McGuire v. City of Jersey City, 593 A.2d 309, 317 [N.J. 1991]). Stop Shop argues that Vornado is not entitled to introduce evidence of its attorneys' fees because the record is closed and Vornado did not make a motion to bifurcate the trial. However, the amount of attorneys' fees recoverable pursuant to a contract is commonly determined after the issue of liability because "the amount of, if not the right to, attorneys' fees raises post-judgment issues collateral to the merits in the nature of an accounting . . ." ( Paramount Communications, Inc. v. Horsehead Industries, Inc., 287 AD2d 345, 345 [1st Dep't 2001]; see e.g. Nigri v. Liberty Apparel Co. , 76 AD3d 842 , 843 [1st Dep't 2010] [affirming my order "which granted defendants' motion for partial summary judgment to the extent of declaring their entitlement to reimbursement of" their attorneys' fees, and which "referre[d] the calculation of those fees to a special referee"). Vornado is permitted to submit evidence of its attorneys' fees in this action, and the calculation will be sent to a special referee.
Accordingly, it is
ADJUDGED and DECLARED that Vornado has a continuing right to reallocate the Rental Increase to a Lease or Leases subject to the Master Agreement and Guaranty that have not expired and that Stop Shop shall hereafter pay to Vornado the Rental Increase specified in the Master Agreement and Guaranty so long as Vornado has allocated the Rental Increase pursuant to the terms of the Master Agreement and Guaranty to a Lease or Leases that have not expired; and it is further
ORDERED that the Clerk is directed to enter judgment in favor of defendants and against plaintiff in the amount of $37,421,635.14 together with the Rental Increase that has accrued from March 1, 2011 to the date of judgment at the rate of $208,333.50 per month from March 1, 2011 through January 31, 2012 and $250,000 per month thereafter, with interest at the statutory rate on the unpaid Rental Increase from the date of each missed Rental Increase payment until entry of judgment, as calculated by the Clerk, together with costs and disbursements to be taxed by the Clerk upon submission of an appropriate bill of costs; and it is further ORDERED that the defendants are entitled to an award of attorneys' fees; and it is further
ORDERED that the issue of attorneys' fees is severed and an assessment is to be determined by a Special Referee; and it is further
ORDERED that a copy of this decision with notice of entry shall be served on the Special Referee Clerk (Room 119) to arrange a date for the reference to a Special Referee; and it is further
ORDERED that Stop Shop's motion in limine (motion sequence #006) is denied.