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Farber v. Wards Co.

decided: August 4, 1987.

JACK FARBER, PLAINTIFF-APPELLANT-CROSS-APPELLEE,
v.
WARDS CO., INC., THE SURVIVING CORPORATION AFTER THE MERGER OF WARDS CO., INC. AND LAFAYETTE RADIO ELECTRONICS CORPORATION, DEFENDANT-APPELLEE-CROSS-APPELLANT



Appeal and cross-appeal from an order and judgment of the United States District Court for the Eastern District of New York (Leonard D. Wexler, Judge) granting defendant's motion for partial summary judgment and, after a bench trial on the remaining claims, granting the landlord plaintiff an award of $85,946.97 for use and occupancy by the defendant.

Newman, Cardamone, and Winter, Circuit Judges.

Author: Winter

WINTER, Circuit Judge:

This diversity case pits a landlord seeking use and occupancy payments and other damages against his bankrupt tenant's successor in interest. Judge Wexler granted partial summary judgment against the landlord and, after a bench trial on the landlord's remaining claims, awarded him $85,946.97 plus interest. We affirm the judgment except insofar as it disallowed the landlord's claim for damages for the tenant's failure to remove trade fixtures.

BACKGROUND

In order to make the issues on appeal comprehensible, we review at length the somewhat tangled factual and procedural background of this case. In January 1961, Lafayette Radio Electronics Corporation ("Lafayette") entered into a lease with Michael Forte, then the owner of an undeveloped tract of land in Syosset, New York. The lease, as amended, covered a period of twenty years ending December 31, 1981, and granted Lafayette rights of renewal for up to thirty years thereafter in ten-year increments. Forte constructed a building according to Lafayette's specifications, and between 1961 and 1977, pursuant to various lease amendments, expanded the building to suit Lafayette's needs. Plaintiff Jack Farber, a lawyer and businessman, became the owner of the property in 1978.

As enlarged, the Syosset building measured 185,603 square feet and was served by a large parking area. Prior to 1980, Lafayette used the entire building to operate a warehouse, administrative and executive offices, a repair center, and an executive store. In addition, a 12,000-square-foot area served as Lafayette's flagship retail store in its 142-store electronics chain. The rent for the entire space was $162,525.71 per year, net payable at the rate of $13,543.81 per month. Under the lease, Lafayette also paid taxes, water and sewer charges, and liability insurance premiums.

On January 4, 1980, Lafayette filed a Chapter XI petition in bankruptcy but continued to operate under supervision of the court as a debtor in possession. Lafayettee made plans to cut back on operations and to reduce its use of the Syosset building to the 12,000-square-foot retail store. During 1980, Lafayette made repeated proposals to Farber for reducing its occupancy, but Farber demanded that Lafayette relinquish its three ten-year lease renewal options.

During 1980, Lafayette made the monthly rental payments of $13,543.81 as required by the lease, and Farber accepted them without reservation. Lafayette also paid the insurance premiums and taxes, which amounted to about $1.00 per square foot. From January through June 1981, however, Lafayette sent Farber a monthly check for only $9,000, which he deposited with the endorsement "received on account of rents due." Lafayette also ceased payments for taxes or insurance during 1981.

Lafayette's reduced payments began after Lafayette's President Robert Greenberg told Farber in early January 1981 that Lafayette could afford only $9,000 per month in rent. After that conversation, Farber wrote to Greenberg that it was his "sense of the meeting" that if Lafayette delivered to Farber a "clear-cut, unqualified, unconditional" cancellation of its option right, Farber would use his "best efforts" to lease Lafayette the 12,000 square feet it occupied for its retail operations. Farber proposed a lease of 12,000 square feet at $9.00/foot ($108,000/year or $9,000/month). In response, Greenberg formally surrendered Lafayette's renewal options in writing on January 14, 1981. On February 12, Greenberg made a restated lease proposal of 6,000 square feet at $9.00/foot and 18,000 square feet at $3.00/foot. This offer totalled $108,000 per year, or $9,000 per month, the same amount that Farber had proposed on January 12.

On February 24, 1981, Lafayette formally moved in the bankruptcy court to reject its lease under 11 U.S.C. ยง 365. By cross-motion, Farber sought an order requiring Lafayette to pay for use and occupancy of the premises at the rate of $13,543.81 per month (the lease rate) for the months of January, February and March 1981 and for each month thereafter until the premises were vacated. Farber also sought proof from Lafayette that all real estate taxes were paid in full.

By order dated March 24, 1981, the bankruptcy court rejected the lease as of February 28, 1981. The court denied Farber's cross-motion, but preserved Farber's right to file an administrative claim against the estate "for any deficiency for use and occupancy." Pursuant to this authorization, Farber instituted an adversary proceeding against Lafayette in bankruptcy court on May 8, 1981. Farber sought an order lifting the Bankruptcy Code's automatic stay of action against the debtor, see 11 U.S.C. ยง 362(d) (1982 & Supp. III 1985), so that Farber could bring a proceeding to evict Lafayette for payment of less than the full amount of rent for January-March 1981. On May 27, 1981, Farber filed an amended complaint seeking judgment on an administrative claim for use and occupancy at the lease rate plus taxes for the months of January through May 1981, in the total amount of $119,178.00. Up to this point, Farber had made no claim for use and occupancy for any period prior to January 1981. Further, he had consistently alleged that the "reasonable value" of the premises was to be computed at the lease rate plus taxes.

Meanwhile, defendant Wards Co., Inc. ("Wards"), a national retailer of consumer electronics products, had entered the scene as a merger partner for Lafayette. Under the merger agreement, Wards would survive Lafayette at the conclusion of the bankruptcy proceeding and would assume payment of Lafayette's obligations. The conditions precedent to consummation of the merger included approval by the shareholders of both companies and confirmation of Lafayette's Chapter XI plan. Further, Wards retained the right to abandon the merger if the claims against Lafayette exceeded specified amounts before confirmation. By court order, Wards advanced Lafayette $2 million for operating expenses pending consummation of the merger.

During April and May 1981, while Farber's adversary proceeding against Lafayette was pending, Wards negotiated with Farber for a new lease under which Wards would occupy a portion of the Syosset building. On May 21, Farber and Wards' President, Alan Wurtzel, met at the offices of Farber's real estate broker, Steve Baderian. The parties reached an agreement under which Wards would enter into a lease for 4,777 square feet of retail space at net $11.00 per square foot for the first year, net $11.50 per foot for the second year, and net $12.00 for the third year, and 9,576 square feet of warehouse space at a constant gross rate of $4.00 per foot. In a memorandum dated June 19, 1981, Farber confirmed that he had reached an agreement with Wards and set forth the terms as reflected in the notes of the May 21 meeting.

Meanwhile, on June 4, 1981, the return date of Farber's adversary proceeding against Lafayette, Wurtzel and Farber appeared in the bankruptcy court and executed a handwritten document entitled "Agreement with Jack Farber." It provided, inter alia, that Wards would lease space beginning July 1, 1981 in accordance with the June 19 memorandum, and that all of Farber's claims against Lafayette and Wards were to be settled for $100,000. Wards would pay half of this amount in cash and half by performing certain "landlord's work," such ...


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