THE LEASING HOTLINE

For Appellant: Garrett L. Gray.

For Respondent: Peter S. Cane.

Mootness of Appeal Does Not Constitute Irreparable Harm Sufficient to Grant a Stay of Assignment of Lease

A bankruptcy court approved the assignment of Kmart's lease over the objections of the landlord. The court found that Kmart had satisfied all the requirements of the shopping center provisions in the Bankruptcy Code (Section 365), including providing adequate assurance. It also prohibited the enforcement of a lease provision permitting the termination of the lease if Kmart ceased operations. The landlord filed a motion for a stay pending appeal. When the bankruptcy court denied the motion, the landlord appealed to the district court for a stay. The district court denied the motion. It found that the landlord failed to show it would suffer irreparable harm absent the stay. The landlord argued that without a stay, the lease would be assigned, and the appeal would be moot. However, the court held that 'being rendered moot does not itself constitute irreparable harm.'

The landlord also argued that it would lose the goodwill of its tenants because of its inability to enforce all of its lease provisions. However, the landlord did not explain how its goodwill would be harmed in the absence of a stay. The court discussed the case cited by the landlord and concluded that economic harm is generally not sufficient to support a stay. Consequently, the district court affirmed the bankruptcy court's denial of the stay pending appeal.

In re Kmart Corp., Case No. 02 C 9257 N.D. Ill., December 30, 2002.

For Ramco-Gershenson, Inc: Synde B. Keywell & Assoc., Chicago.

For Kmart Corp.: Christina M. Tchen, Skadden, Arps, Slate, Meagher & Flom, Chicago.

Guarantor is Not Relieved of Obligations When Written Guaranty Validates Modifications and Waives Notice

A corporate lessee's president and sole shareholder executed a guaranty for a lease in a mall. The guaranty provided that it was unconditional and remained in effect as to any amendment, modification or renewal of the lease, 'to all of which the undersigned hereby consents in advance.' When the corporate lessee fell behind in rent, the president signed three subsequent agreements. The first agreement limited the guarantor's obligations; the second recited that the guaranty was for one year, and the third, signed by the president only in his capacity as president, released the parties from certain claims.

The lessor sued the lessee and its president for breach of the lease, the guaranty and the three subsequent agreements. The trial court denied the lessor's motion for summary judgment against the lessee and the president. The lessor appealed. The appellate court modified the trial court's order by granting the part of the lessor's motion that sought summary judgment against the lessee's president. The lessee's president argued that there were fact issues regarding whether the original guaranty survived the three later agreements modifying the guaranty and whether oral modifications cancelled his guaranty. The appellate court rejected his arguments on the grounds that the original guaranty expressly validated modifications in the guaranty and waived notice of the modifications to the guarantor.

Boulevard Mall, LLC v. Knight, CA 02-00820. N.Y. App. Civ., 4th Dept., December 30, 2002.

For Appellant: Howard Berger, Duke, Holzman, Yaeger & Photiadis, LLP, Buffalo, NY.

For Respondents: Arnold Weiss, Raichle, Banning, Weiss, PLLC, Buffalo, NY.

Duty to Defend Landlord Pursuant to Lease

A lease required that the tenant indemnify and defend the landlord from liability that was not the result of the landlord's negligence. An employee of the tenant's food service provider was injured while working on the leased premises and sued the tenant and the landlord in state court. The landlord cross-claimed against the tenant for indemnity but did not assert a duty to defend. Instead, the landlord's insurer, Travelers, brought a separate action and the defendants removed the case to federal court based on diversity.

Travelers sought a declaratory judgment that the tenant and its insurer had a duty to defend the state lawsuit and indemnify Travelers for any judgment. The court found that the duty to defend is broader than the duty to indemnify and can be triggered only by a single allegation in the underlying complaint that is covered by a promise to defend. The employee's complaint alleged negligence on the tenant's part, and Travelers' complaint alleged damages arising from the tenant's failure to defend. The tenant moved to dismiss. The court dismissed Travelers' claims for indemnity as not being ripe, but denied the motion to dismiss with respect to the duty to defend. The tenant moved for reconsideration of the denial of the motion to dismiss.

On reconsideration, the tenant argued that state law rendered the indemnification clause unenforceable. NY General Obligations Law '5-321 provides that any agreement in connection with a lease that exempts the lessor from liability for damages caused by its own negligence is unenforceable. The court distinguished the supporting cases cited by the tenant and cited to cases that supported indemnity clauses, which were not rendered unenforceable by '5-321. It noted that the parties in the case at hand were sophisticated business entities who negotiated at arms' length and concluded that the statute did not apply. Furthermore, the lease provision did not exempt the landlord from liability for injuries caused by its own negligence. The court found that the tenant had not met the 'difficult burden' for obtaining reconsideration and let the denial of the motion to dismiss stand, permitting Travelers to proceed on its cause of action for the duty to defend.

Travelers Property Casualty Corp. v. The Fisher Park-Lane Co., 02 Civ.2406 (GWG), S.D.N.Y., December 30, 2002.

For Plaintiffs: Nicholas Caiazzo, Wilson, Elser, Moskowitz, Edelman & Dicker, LLP, N.Y.

For Defendants: Brian Birenbach, Damon & Morey, LLP, Buffalo, NY.

Court Will Not Reform Contract to Incorporate Oral Agreement Absent Evidence of Fraud or Mistake

A landlord sued a lessee personally in U.S. district court for rent due and was awarded $579,000, plus $95,760 in interest. The lessee appealed to the Second U.S. Circuit Court of Appeals, arguing that the parties entered into an oral agreement before the lease was signed and in the absence of the lessee's counsel. This agreement allegedly provided that the lessee would be released from personal liability if he assigned the lease to a corporation, a third of which he owned. The lessee sought to have the lease reformed to incorporate the alleged oral agreement. The court noted that state law allows reformation in the event of fraud or mutual mistake. However, there is a heavy presumption against reformation and a party must offer 'clear, positive and convincing evidence' to overcome this presumption.

The appellate court found the lessee's evidence neither clear nor convincing. He did not offer the defense of fraud or mistake until almost one year after the landlord's petition when he moved to amend his answer. The only other person who corroborated his claim was his son. In addition, he submitted contradictory affidavits regarding the testimony of his attorney. Initially he suggested his attorney would testify about the oral agreement and the mutual mistake. However, his attorney did not testify, and the attorney's affidavit did not even mention an oral agreement, though it did say that the attorney represented the lessee at the execution of the lease. On appeal, the lessee stated that his attorney was 'not present at the signing' of the lease. The court concluded that the affidavits at least established that the lessee was very well represented throughout the negotiations and there was little likelihood of fraud. Moreover, the lessee's evidence of an oral agreement was too weak to support any claim of fraud or mutual mistake. The court finally rejected the lessee's argument that the landlord could pursue his claim for rents only against the corporate assignee. Under state law, an assignment does not release the assignor of its obligations under a lease and a landlord may elect to sue a tenant- assignor or the assignee for rents due. Thus the circuit court affirmed the district court's grant of summary judgment to the landlord.

Khezrie v. Greenberg, No. 02-7447, 2nd Cir., December 26, 2002.

For Appellants: Kenneth M. Lieblich, Mishan, Dayon & Lieblich, New York.

For Appellees: Martin S. Rothman, Seligson, Rothman & Rothman, New York.

Failure to Pay for Goods that the Lease Obligated the Lessee to Purchase Does Not Constitute a Default

A lease for property operated as an asphalt plant required the lessee to purchase all of its stone requirements from the lessor 'in accordance with the terms shown on the face of [the lessor's] invoice to [the lessee.]' When the lessee filed for bankruptcy and wanted to assign its lease, the lessor filed a motion seeking cure of the amount payable by the lessee for stone purchased pursuant to the terms of the lease. The bankruptcy court denied the motion on the grounds that a default in payment for the stone was not a default under the lease. The lessor first appealed to the district court, which affirmed the decision, and then to the circuit court.

The Fourth U.S. Circuit Court of Appeals again affirmed the decision. It stated that the lessee was required under Bankruptcy Code Section 365 (b)(1)(A) to cure any defaults under the lease before it can properly assign it. Examining the lease, the court found no reference to whether payment for the stone was a material term of the lease and no cross-default provision. The purchase of the stone was a material condition of the lease, but the payment for it was explicitly governed by the terms of the invoice. Under state law, invoices are separate contractual obligations; thus without a cross-default provision that incorporates the terms of the invoices into the lease, failure to pay the invoices was not a breach of the lease.

In addition, the court rejected the lessor's argument that the invoices and lease agreement should be considered an integrated, non-severable agreement. It reviewed the three-part test from a recent California case and concluded that they were separate contracts: their purposes were different; the consideration for the lease was distinct from the consideration for the stone; the obligations of the parties under the lease and the invoices were not interrelated. The circuit court, therefore, found that under the express language of the lease, the parties intended the lease obligations to be independent of the obligations contained in the invoices.

In re: The Driggs Corporation, No. 02-1028, 4th Cir., January 3, 2003.

For Appellant: James Durling Fullerton, Fullerton & Wise, Clifton, VA.

For Appellees: Bradley James Swallow, Gordon, Feinblatt, Rothman, Hoffberger & Hollander, LLC, Baltimore.

Sublessor's Acceptance and Retention of Rent Check Created Month-to-Month Tenancy

A sublessor sued a sublessee for damages resulting from the sublessee's failure to vacate the subleased premises at the expiration of the sublease. The sublessee argued that he was a month-to-month tenant. The sublessor argued that the sublessee had no greater rights than the sublessor under the prime lease, which had expired. Thus, argued the sublessor, the sublessee had no legal basis to create a month-to-month tenancy. The court noted that this argument was not raised in the sublessor's motion for summary judgment and thus was not properly raised on appeal. It nevertheless considered the argument and disagreed with the sublessor. The court reasoned that even if the prime lease had terminated, a tenancy by sufferance still could have been created, legitimizing the sublessee's continued occupation of the premises. The sublessor had received and retained a rent check. He deposited the check and made no attempt to refund the payment until after the sublessee raised the defense of the creation of a month-to-month tenancy in an eviction proceeding. Furthermore, the sublessor argued for the first time on appeal, and with no factual support, that it inadvertently had deposited the check. The court, therefore, affirmed the trial court's denial of the sublessor's motion for summary judgment and dismissed the complaint.

International Business Machines Corp. v. Joseph Stevens & Co., LP, 2715, 2716, N.Y. App. Div., 1st Dept., December 31, 2002.

For Appellant: Garrett L. Gray.

For Respondent: Peter S. Cane.

Mootness of Appeal Does Not Constitute Irreparable Harm Sufficient to Grant a Stay of Assignment of Lease

A bankruptcy court approved the assignment of Kmart's lease over the objections of the landlord. The court found that Kmart had satisfied all the requirements of the shopping center provisions in the Bankruptcy Code (Section 365), including providing adequate assurance. It also prohibited the enforcement of a lease provision permitting the termination of the lease if Kmart ceased operations. The landlord filed a motion for a stay pending appeal. When the bankruptcy court denied the motion, the landlord appealed to the district court for a stay. The district court denied the motion. It found that the landlord failed to show it would suffer irreparable harm absent the stay. The landlord argued that without a stay, the lease would be assigned, and the appeal would be moot. However, the court held that 'being rendered moot does not itself constitute irreparable harm.'

The landlord also argued that it would lose the goodwill of its tenants because of its inability to enforce all of its lease provisions. However, the landlord did not explain how its goodwill would be harmed in the absence of a stay. The court discussed the case cited by the landlord and concluded that economic harm is generally not sufficient to support a stay. Consequently, the district court affirmed the bankruptcy court's denial of the stay pending appeal.

In re Kmart Corp., Case No. 02 C 9257 N.D. Ill., December 30, 2002.

For Ramco-Gershenson, Inc: Synde B. Keywell & Assoc., Chicago.

For Kmart Corp.: Christina M. Tchen, Skadden, Arps, Slate, Meagher & Flom, Chicago.

Guarantor is Not Relieved of Obligations When Written Guaranty Validates Modifications and Waives Notice

A corporate lessee's president and sole shareholder executed a guaranty for a lease in a mall. The guaranty provided that it was unconditional and remained in effect as to any amendment, modification or renewal of the lease, 'to all of which the undersigned hereby consents in advance.' When the corporate lessee fell behind in rent, the president signed three subsequent agreements. The first agreement limited the guarantor's obligations; the second recited that the guaranty was for one year, and the third, signed by the president only in his capacity as president, released the parties from certain claims.

The lessor sued the lessee and its president for breach of the lease, the guaranty and the three subsequent agreements. The trial court denied the lessor's motion for summary judgment against the lessee and the president. The lessor appealed. The appellate court modified the trial court's order by granting the part of the lessor's motion that sought summary judgment against the lessee's president. The lessee's president argued that there were fact issues regarding whether the original guaranty survived the three later agreements modifying the guaranty and whether oral modifications cancelled his guaranty. The appellate court rejected his arguments on the grounds that the original guaranty expressly validated modifications in the guaranty and waived notice of the modifications to the guarantor.

Boulevard Mall, LLC v. Knight, CA 02-00820. N.Y. App. Civ., 4th Dept., December 30, 2002.

For Appellant: Howard Berger, Duke, Holzman, Yaeger & Photiadis, LLP, Buffalo, NY.

For Respondents: Arnold Weiss, Raichle, Banning, Weiss, PLLC, Buffalo, NY.

Duty to Defend Landlord Pursuant to Lease

A lease required that the tenant indemnify and defend the landlord from liability that was not the result of the landlord's negligence. An employee of the tenant's food service provider was injured while working on the leased premises and sued the tenant and the landlord in state court. The landlord cross-claimed against the tenant for indemnity but did not assert a duty to defend. Instead, the landlord's insurer, Travelers, brought a separate action and the defendants removed the case to federal court based on diversity.

Travelers sought a declaratory judgment that the tenant and its insurer had a duty to defend the state lawsuit and indemnify Travelers for any judgment. The court found that the duty to defend is broader than the duty to indemnify and can be triggered only by a single allegation in the underlying complaint that is covered by a promise to defend. The employee's complaint alleged negligence on the tenant's part, and Travelers' complaint alleged damages arising from the tenant's failure to defend. The tenant moved to dismiss. The court dismissed Travelers' claims for indemnity as not being ripe, but denied the motion to dismiss with respect to the duty to defend. The tenant moved for reconsideration of the denial of the motion to dismiss.

On reconsideration, the tenant argued that state law rendered the indemnification clause unenforceable. NY General Obligations Law '5-321 provides that any agreement in connection with a lease that exempts the lessor from liability for damages caused by its own negligence is unenforceable. The court distinguished the supporting cases cited by the tenant and cited to cases that supported indemnity clauses, which were not rendered unenforceable by '5-321. It noted that the parties in the case at hand were sophisticated business entities who negotiated at arms' length and concluded that the statute did not apply. Furthermore, the lease provision did not exempt the landlord from liability for injuries caused by its own negligence. The court found that the tenant had not met the 'difficult burden' for obtaining reconsideration and let the denial of the motion to dismiss stand, permitting Travelers to proceed on its cause of action for the duty to defend.

Travelers Property Casualty Corp. v. The Fisher Park-Lane Co., 02 Civ.2406 (GWG), S.D.N.Y., December 30, 2002.

For Plaintiffs: Nicholas Caiazzo, Wilson, Elser, Moskowitz, Edelman & Dicker, LLP, N.Y.

For Defendants: Brian Birenbach, Damon & Morey, LLP, Buffalo, NY.

Court Will Not Reform Contract to Incorporate Oral Agreement Absent Evidence of Fraud or Mistake

A landlord sued a lessee personally in U.S. district court for rent due and was awarded $579,000, plus $95,760 in interest. The lessee appealed to the Second U.S. Circuit Court of Appeals, arguing that the parties entered into an oral agreement before the lease was signed and in the absence of the lessee's counsel. This agreement allegedly provided that the lessee would be released from personal liability if he assigned the lease to a corporation, a third of which he owned. The lessee sought to have the lease reformed to incorporate the alleged oral agreement. The court noted that state law allows reformation in the event of fraud or mutual mistake. However, there is a heavy presumption against reformation and a party must offer 'clear, positive and convincing evidence' to overcome this presumption.

The appellate court found the lessee's evidence neither clear nor convincing. He did not offer the defense of fraud or mistake until almost one year after the landlord's petition when he moved to amend his answer. The only other person who corroborated his claim was his son. In addition, he submitted contradictory affidavits regarding the testimony of his attorney. Initially he suggested his attorney would testify about the oral agreement and the mutual mistake. However, his attorney did not testify, and the attorney's affidavit did not even mention an oral agreement, though it did say that the attorney represented the lessee at the execution of the lease. On appeal, the lessee stated that his attorney was 'not present at the signing' of the lease. The court concluded that the affidavits at least established that the lessee was very well represented throughout the negotiations and there was little likelihood of fraud. Moreover, the lessee's evidence of an oral agreement was too weak to support any claim of fraud or mutual mistake. The court finally rejected the lessee's argument that the landlord could pursue his claim for rents only against the corporate assignee. Under state law, an assignment does not release the assignor of its obligations under a lease and a landlord may elect to sue a tenant- assignor or the assignee for rents due. Thus the circuit court affirmed the district court's grant of summary judgment to the landlord.

Khezrie v. Greenberg, No. 02-7447, 2nd Cir., December 26, 2002.

For Appellants: Kenneth M. Lieblich, Mishan, Dayon & Lieblich, New York.

For Appellees: Martin S. Rothman, Seligson, Rothman & Rothman, New York.

Failure to Pay for Goods that the Lease Obligated the Lessee to Purchase Does Not Constitute a Default

A lease for property operated as an asphalt plant required the lessee to purchase all of its stone requirements from the lessor 'in accordance with the terms shown on the face of [the lessor's] invoice to [the lessee.]' When the lessee filed for bankruptcy and wanted to assign its lease, the lessor filed a motion seeking cure of the amount payable by the lessee for stone purchased pursuant to the terms of the lease. The bankruptcy court denied the motion on the grounds that a default in payment for the stone was not a default under the lease. The lessor first appealed to the district court, which affirmed the decision, and then to the circuit court.

The Fourth U.S. Circuit Court of Appeals again affirmed the decision. It stated that the lessee was required under Bankruptcy Code Section 365 (b)(1)(A) to cure any defaults under the lease before it can properly assign it. Examining the lease, the court found no reference to whether payment for the stone was a material term of the lease and no cross-default provision. The purchase of the stone was a material condition of the lease, but the payment for it was explicitly governed by the terms of the invoice. Under state law, invoices are separate contractual obligations; thus without a cross-default provision that incorporates the terms of the invoices into the lease, failure to pay the invoices was not a breach of the lease.

In addition, the court rejected the lessor's argument that the invoices and lease agreement should be considered an integrated, non-severable agreement. It reviewed the three-part test from a recent California case and concluded that they were separate contracts: their purposes were different; the consideration for the lease was distinct from the consideration for the stone; the obligations of the parties under the lease and the invoices were not interrelated. The circuit court, therefore, found that under the express language of the lease, the parties intended the lease obligations to be independent of the obligations contained in the invoices.

In re: The Driggs Corporation, No. 02-1028, 4th Cir., January 3, 2003.

For Appellant: James Durling Fullerton, Fullerton & Wise, Clifton, VA.

For Appellees: Bradley James Swallow, Gordon, Feinblatt, Rothman, Hoffberger & Hollander, LLC, Baltimore.