Stop & Shop Supermarket Co. v Vornado Realty Trust

[*1] Stop & Shop Supermarket Co. v Vornado Realty Trust 2005 NY Slip Op 52078(U) [10 Misc 3d 1062(A)] Decided on December 9, 2005 Supreme Court, New York County Fried, J. Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431. This opinion is uncorrected and will not be published in the printed Official Reports.

Decided on December 9, 2005
Supreme Court, New York County

THE Stop & Shop Supermarket Company, Plaintiff,

against

Vornado Realty Trust, BENSALEM HOLDING COMPANY, LP, BORDERTOWN VF LLC, CHERRY HILL VF LLC, EAST BRUNSWICK VF LLC, HACKENSACK VF LLC, JERSEY CITY VF LLC, MANALAPAN VF LLC, MIDDLETOWN VF LLC, PHILADELPHIA HOLDING COMPANY LP, PIKE HOLDING COMPANY LP, TWO GUYS-MASS., LLC, TURNERSVILLE VF LLC, UNION VF LLC, and WOODBRIDGE VF LLC, Defendants.



105819/03



For Plaintiff:

White & Case

1155 Avenue of the Americas

New York, New York 10036

(Glenn M. Kurtz, Daniel P. Goldberg,

Maja Fabula)

For Defendants:

Sullivan & Cromwell LLP

125 Broad Street

New York, New York 10004

(John L. Warden, Robinson B. Lacy,

William L. Farris)

Bernard J. Fried, J.

Defendants (collectively, Vornado) move, pursuant to CPLR 3212, for summary judgment dismissing the complaint, and awarding counterclaim-plaintiff Vornado Realty Trust judgment on its counterclaims. Plaintiff, The Stop & Shop Supermarket Company (S&S), cross-moves, pursuant [*2]to CPLR 3212, for summary judgment on each claim that it asserts in its complaint.

Except where noted, the following facts are not in dispute, having been resolved by the parties' Rule 19-a Statements of Material Facts. S&S and Vornado are parties to a Master Agreement and Guaranty, dated May 1, 1992 (Master Agreement), to which the original parties were (1) Vornado Inc., Two Guys from Harrison, Inc., Evesham Holding Corporation, Turnersville Holding Corporation, Two-Guys-Mass., Inc., and Two-Guys-Conn., Inc., as "Landlords," (2) Bradlees New Jersey, Inc., as "Tenant," and (3) The Stop & Shop Companies, Inc., Stop & Shop Supermarket Holdings Co., Inc., The Stop & Shop Supermarket Company, Bradlees, Inc., Stop & Shop Holdings, Inc., Bradlees New York, Inc.; Bradlees New York Holdings, Inc., Bradlees New England, Inc., and Bradlees New England Holdings, Inc., as "Guarantors."

Bradlees Stores, Inc. is the successor to Tenant Bradlees New Jersey, Inc., S&S is the successor to The Stop & Shop Companies, Inc., as well as certain Guarantor affiliates; and Vornado is the successor to Vornado, Inc., one of the Landlords under the Master Agreement. The original Tenant and Bradlees Stores, Inc. are referred to as "Bradlees." Vornado is the landlord under leases of nineteen retail locations to wholly-owned subsidiaries or affiliates of S&S (Vornado Leases). S&S assigned the leases to Bradlees, which assignment required Vornado's consent.

On December 26, 2000, with the intention of liquidating its business, Bradlees commenced a proceeding in the United States Bankruptcy Court for the Southern District of New York, entitled In re Bradlees Stores, Inc., Nos. 00-16033 (BRL), 00-16035 (BRL), and 00-16036 (BRL) (Bradlees Bankruptcy). In that proceeding, Bradlees asked United States Bankruptcy Judge Burton R. Lifland to invalidate certain unidentified lease provisions, pursuant to Section 365 (f) of the Bankruptcy Code, on the ground that they were anti-assignment provisions. Judge Lifland concluded that the "Allocation Provision" (set forth in Paragraph 1 [a] of the Master Agreement) was a de facto anti-assignment provision.

Vornado claims that the Allocation Provision granted it the right, in its sole discretion, to allocate "Rental Increases" (as defined in the Master Agreement) among the Vornado Leases, and that it could reallocate the Rental Increases among the Vornado Leases every five years, or whenever a Vornado Lease, to which it had previously allocated part of the Rental Increases, expired. According to S&S, this provision provided Vornado with the right to allocate and reallocate the Rental Increases among the leases at issue only under certain specified conditions.

In the Bradlees Bankruptcy, Bradlees Stores Inc., Bradlees, Inc., and New Horizons of Yonkers, Inc. (collectively, Bradlees Debtors) negotiated a "Lease Designation and Disposition Agreement," pursuant to which, S&S asserts, S&S would market the Bradlees Debtors' leases for assignment, including the Vornado Leases at issue in this action. Vornado contends that the Lease Designation and Disposition Agreement gave S&S the right either to acquire Bradlees' leases or to identify designees to which the leases would be assigned.

In the bankruptcy proceeding, Bradlees and S&S submitted a joint memorandum of law in support of a motion seeking, among other things, the authority to sell the right to assign their interests in their leases, and the approval of a process for the subsequent sale of such leases. Bankruptcy Judge Lifland granted the relief that Bradlees and S&S requested, and gave them the right to reallocate the Rental Increases.

Vornado claims that the Bankruptcy Court found that the invalidation of the Vornado provisions of the Master Lease, on anti-assignment grounds, would not have a substantial [*3]detrimental effect on it because of its right to assert claims against S&S, as Guarantor. S&S contends that the Bankruptcy Court did not address any consequences of the freezing of the Rental Increases to expiring leases, which is the situation presented here.

Vornado appealed the Bankruptcy Court's order to the United States District Court for the Southern District of New York. The appeal was assigned to United States District Judge Lawrence M. McKenna. On February 9, 2001, Judge McKenna rendered his decision, holding that the Bankruptcy Court had not erred in finding that the Allocation Provision was a de facto anti-assignment provision. He reversed in part, however, the Bankruptcy Court decision stating: "On this issue the Bankruptcy Court is reversed, and the present allocation of the rent increases will remain in place, will be frozen, as Vornado requested of Judge Lifland at the January 30, 2001 hearing and again of this court yesterday, without any right on the part of debtor and/or Stop & Shop to reallocate."

Four of the five leases to which the Rental Increases were allocated expired on November 30, 2002. The fifth lease, for a store located in East Brunswick, expired on August 31, 2003. By letter dated November 25, 2002, Vornado advised S&S that it was reallocating the Rental Increases to four other leases subject to the Master Agreement, for premises in Marlton and Turnersville, New Jersey, and Bensalem and Broomall, Pennsylvania, which notice S&S refused to honor.

S&S commenced this action seeking a declaration that, pursuant to the District Court's order, the Rental Increases are now frozen to the Allocated Leases, Vornado has no right to reallocate them to other Vornado Leases, and S&S is not obligated to pay Rental Increases following the expiration of the Allocated Leases.

Defendants' answer contains two counterclaims. The first seeks damages for S&S's alleged failure to pay the entire amount of the Rental Increases, totaling $416,666.67 per month. The second counterclaim seeks a declaration that S&S is obligated 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. Vornado now argues that it is entitled to summary judgment on three independent grounds: (1) In the Master Agreement, S&S unconditionally guaranteed all of Bradlees' obligations under the Master Agreement, and expressly agreed that its obligations as guarantor would not be affected by any bankruptcy proceedings relating to Bradlees;(2) In a contested proceeding in the Bradlees Bankruptcy, Bradlees and S&S persuaded the Bankruptcy Court to modify some of Bradlees' obligations, and the District Court to affirm the modification order, by representing that the modification would not harm Vornado because S&S would be obligated to make the payments pursuant to the guaranty; and(3) In the same proceeding, the Bankruptcy Court explicitly determined that its order modifying Bradlees' obligations under the Master Agreement would not harm Vornado because S&S would be obligated to make the payments pursuant to the guarantees, and the District Court relied on and affirmed that finding when it affirmed the relevant provisions of the order.

S&S contends that Vornado's reliance upon Paragraph 11 of the Master Agreement is [*4]inconsequential, because it was Vornado's freezing of the Rental Increases that discharged S&S's guaranty, not the Bradlees' Bankruptcy. S&S contends further that Vornado chose to allocate the Rental Increases to specific leases and to freeze those allocations forever, thereby foreclosing any chance of reallocation by any party. Under the Master Agreement, S&S asserts, it guaranteed only Bradlees' obligations, and because Bradlees no longer has an obligation to pay the Rental Increases due to the expiration of the operative leases (not due to a discharge in bankruptcy), there is no extant obligation for S&S to guarantee.

I am denying both motions. Contrary to the parties' assertions, this matter is not ripe for summary disposition. Indeed, the parties devote a substantial portion of their arguments to the interpretation that they urge me to draw from statements that their respective counsel made in the underlying bankruptcy proceedings and before the District Court. Their reliance upon those statements serves only to highlight the issues of fact existing here, not dispose of them. Also indicative of the numerous factual issues presented is the following list of a portion of the motion papers (as denominated by the parties): (1) Vornado's Rule 19-a "Statement of Undisputed Facts"; (2) S&S's "Counter Statement of Undisputed Facts and Response to Vornado's Statement of Undisputed Facts"; (3) Vornado's "Statement (A) Replying to S&S's Response to Vornado's Statement of Undisputed Facts and (B) Responding to S&S's Counter-Statement of Undisputed Facts"; and (4) S&S's "Response to Vornado's Unauthorized Reply to Rule 19(a) Statement." If the matter were as straightforward as the parties represent, then four sets of papers pertaining to Rule 19-a Statements and Counterstatements of Undisputed Facts would be unnecessary.

Vornado first contends that I can summarily dispose of the motion in its favor by reference to Paragraph 11 (e) of the Master Agreement wherein S&S unconditionally guaranteed all of Bradlees' obligations under the Master Agreement, and expressly agreed that any bankruptcy proceedings relating to Bradlees would not affect its obligations as guarantor. Paragraph 11 (e) provides, in relevant part, that the guaranty will not be: "impaired, abated, deferred, diminished, modified or otherwise affected by any event, condition, occurrence, circumstance, proceeding, action or failure to act . . . including but not limited to . . . (e) 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) . . . ."

Paragraph 8 of the Master Agreement provides that it is to be governed by and construed in accordance with New Jersey law. Under New Jersey law, where the terms of a contract are clear and unambiguous, there is no room for interpretation or construction, and the courts must enforce those terms as written (Karl's Sales and Serv. v Gimbel Bros., Inc., 249 NJ Super 487, 592 A2d 647 [NJ App Div], cert denied 127 NJ 548, 606 A2d 362 [1991]). However, a guarantor is not bound beyond the strict terms of its promise, and its obligation cannot be extended by implication (Center 48 Ltd. Partnership v May Dept. Stores Co., 355 NJ Super 390, 810 A2d 610 [NJ App Div 2002]).

Vornado contends that it is entitled to summary judgment based upon Paragraph 11 of the Master Agreement, because the primary obligation became unenforceable due to bankruptcy, and [*5]S&S, itself, imposed a freeze of the Rental Increases, because it sought to invalidate the Allocation Provision, which then left no contractual provision authorizing anyone to shift the Rental Increases vis-a-vis the Tenants.

Whether the primary obligation became unenforceable due to bankruptcy, as asserted by Vornado, or whether it was Vornado's irrevocable allocation, as asserted by S&S, that terminated S&S's obligations to pay Rental Increases, cannot be resolved on these papers, because there are factual issues bearing upon actions taken by Vornado relating to the freezing of the Rental Increases. In reversing a portion of Judge Lifland's decision, Judge McKenna stated: "The Bankruptcy Court, however, went further than precluding Vornado's exercise of the power to allocate future rent increases. In essence, it transferred that right to the debtor and Stop & Shop. The only suggestion as to the reason for this action I can find in the record is that Judge Lifland thought that it would assist the marketing of the leases, and, no doubt, it would do that. However, as then bankruptcy Judge Swain recognized in In re Kropel, 232 B.R. 57, 67-68 (Bankruptcy E.D. NY 1999), there is no federal policy which requires severance of a lease condition solely because it makes the debtor's reorganization more feasible. That principal [sic], of course, would apply equally to a liquidation. On this issue the Bankruptcy Court is reversed, and the present allocation of the rent increases will remain in place, will be frozen, as Vornado requested of Judge Lifland at the January 30, 2001 hearing and again of this court yesterday, without any right on part of debtor and/or Stop & Shop to reallocate (emphasis added).

* * * "So in sum, the decision appealed from is affirmed, with the exception that it is reversed insofar as it transferred the allocation right to debtor and Stop & Shop, and the rent increase allocations presently in place will remain in effect through the terms and any lessee's option terms of the leases."

Hence, there may be merit to S&S's assertion that it was action affirmatively taken by Vornado, and not the bankruptcy proceeding itself, that caused the freezing of the Rental Increases. To the extent that S&S argues that it, as Guarantor, cannot be liable because the primary obligor is no longer liable, however, that assertion may be without merit, in that discharging the Guarantor's obligation would controvert the plain language of Paragraph 11 (e). Generally, a discharge in bankruptcy does not affect the liability of any other entity regarding that debt (Roman v Hudson Tel. Assocs., 11 AD3d 346 [1st Dept 2004]), and the contract is enforced in accordance with its express written terms, which evidences the parties' intention and agreement (Jacobs v Great Pacific Century Corp., 104 NJ 580, 518 A2d 223 [1986]). Moreover, in Paragraph 11 (a), S&S not only guaranteed the obligations under the leases, but also "all of the terms, covenants and conditions to be paid, performed or observed by the Tenant hereunder."

Vornado has also not demonstrated entitlement to summary judgment on its ground number two judicial estoppel. Vornado argues that S&S's attempt to repudiate its obligation to pay the Rental Increases is directly inconsistent with its representations to the federal courts. As an example, it cites counsel for Bradlees, who stated at oral argument in the District Court on February [*6]8, 2001: "Now, other big picture concepts before I get into the specifics. As Mr. Lacy aptly noted, and I think to protect his position vis-a-vis Stop & Shop for the record was compelled to note, there 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."

Vornado also cites statements of S&S's counsel, who "was present and he added his own assurances": "The next major issue that Vornado has raised is the antiassignment provision. It bears repeating that the agreement at issue in no way affects the ability of Vornado or the right of Vornado to receive the full amount of the rental increase."

Additionally, Vornado cites S&S's counsel's statement before the Bankruptcy Court: "We have earlier stipulated on the record, and I will repeat the stipulation, 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 line or claim."

(Affirmation of Robinson B. Lacy, Esq., dated May 16, 2005 [Lacy Aff.], Exh. 12, at 117). Vornado interprets the statements as meaning that S&S acknowledged that it would remain liable, as Guarantor, to pay the full amount of the Rental Increases as if they had been reallocated to the leases that provide the maximum income to Vornado.

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 Dept 2005]). Here, it appears that S&S's statements involve, 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. They are not factual assertions, and thus, they are not the type of representations in which courts find the doctrine of judicial estoppel to be applicable (see All Terrain Properties v Hoy, 265 AD2d 87 [1st Dept 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]).

Vornado's cited cases are actually illustrative of this premise, and they do not support a contrary finding (see e.g. Leonia Bank v Kouri, 3 AD3d 213 [1st Dept 2004] [judicial estoppel precludes wife, who in earlier divorce proceeding stipulated that title to loft was placed in her name only as collateral for certain obligations, from asserting in a later proceeding that she owned the loft outright]; Secured Equities Inv. v McFarland, 300 AD2d 1137 [4th Dept 2002] [plaintiff judicially estopped from asserting that the mortgage was never accelerated when, in an earlier action, its predecessor secured a default judgment based upon the representation that it had accelerated the mortgage]; D & L Holdings, LLC v RCG Goldman Co., LLC, 287 AD2d 65 [1st Dept 2001] [judicial estoppel applicable where court granted an extension based upon party's representation that it would pay agreed sums to compensate for the harm caused by the delay, without asserting further claims [*7]against the property], lv denied 97 NY2d 611 [2002]; Ford Motor Credit Co. v Colonial Funding Corp., 215 AD2d 435 [2d Dept 1995] [judicial estoppel applies where party in prior action took position that equipment lease was genuine, and in a subsequent proceeding, argued that it was a disguise for a usurious purchase and lease-back transaction]; see also R.A. Assoc. v Lerner, 265 AD2d 541 [2d Dept 1999] [in prior proceeding, plaintiff prevailed on its assertion that the parties had agreed upon the balance of indebtedness (account stated), and cannot now seek to recover in quantum meruit]).

If S&S 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. Furthermore, in addition to stating that "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," S&S counsel also stated "nor for that matter, does it affect or impair any defense that Stop & Shop may have with respect to any such obligation or line or claim."

As for ground three, Vornado contends that S&S is collaterally estopped from seeking to repudiate the guaranty because Judge Lifland determined that "the invalidation of the Vornado Provisions will not have a substantially detrimental effect on Vornado because of Vornado's right to assert claims against Stop & Shop under the guaranty."

To invoke the doctrine of collateral estoppel, two prongs must be satisfied: (1) the identical issue was necessarily decided in the prior proceeding, and (2) there was a full and fair opportunity to contest that issue in the prior proceeding (Zimmerman v Tower Ins. Co. of New York, 13 AD3d 137 [1st Dept 2004]). The party seeking the benefit of collateral estoppel must demonstrate that the identical issue was necessarily decided in the prior adjudication, and is decisive in the newly presented circumstance and forum (David v Biondo, 92 NY2d 318 [1998]). I am not persuaded that the issue was necessarily decided in the Bankruptcy Proceedings.

Vornado is relying the following statement of the Bankruptcy Court in its February 6, 2001 decision (Lacy Aff., Exh. 5, at EEE): "Further, the invalidation of the Vornado provisions will not have a substantially detrimental effect on Vornado because of Vornado's right to assert claims against Stop & Shop under the Guaranty."

That the Bankruptcy Court stated that Vornado retains the right to assert claims against S&S under the Guaranty does not necessarily result in a finding that Vornado has the right to reallocate the Rental Increases, or that S&S is obligated to pay Rental Increases following the expiration of the Allocated Leases, which is what is at issue here.

The statement appears to merely recognize that Paragraph 11 (e) of the Master Agreement provides that bankruptcy shall not diminish or limit the liability of any Guarantor, but neither the Bankruptcy Court nor the District Court resolved the issue as to the extent of that liability. Furthermore, it is unclear whether either court, nevertheless, would have invalidated the provision even upon a finding of a substantial, detrimental effect, because of the determination that the Allocation Provision violated Section 365 (f) of the Bankruptcy Code. Collateral estoppel will only be given effect to matters actually litigated and determined in a prior action (Kaufman v Eli Lilly and Co., 65 NY2d 449 [1985]).

For the same reasons, S&S's cross motion for summary judgment is denied. S&S contends [*8]that Vornado should be judicially estopped from trying to reallocate or otherwise circumvent the allocation freeze, because it advocated for and obtained the freeze of the Rental Increases, and that the Master Agreement requires an allocation of Rental Increases for Vornado to recover. However, even if it prevails as to these assertions, there remains the issue of the enforceability of the Guaranty under the Master Agreement, as discussed above, i.e., whether the primary obligation became unenforceable due to bankruptcy, as asserted by Vornado, or whether it was Vornado's irrevocable allocation, as asserted by S&S, that terminated S&S's obligations to pay Rental Increases. If it became unenforceable due to bankruptcy, and not the actions taken by Vornado, then its liability, as Guarantor, arguably, would be tied to the first paragraph of the Master Agreement which provides for annual rental increases regarding the Vornado Leases for space occupied by Bradlees-New Jersey, and also provides Vornado with the right to allocate to various Vornado Leases, the initial allocation of the Rental Increases, and later reallocate the Rental Increases to different Vornado Leases under certain circumstances. In Paragraph 11 (a), S&S guaranteed "the full and timely payment, performance and observance of all of the terms, covenants and conditions to be paid, performed or observed by the Tenant hereunder . . . ."

Vornado also argues that the affirmative defenses to the counterclaims are without merit as a matter of law. The first affirmative defense - failure to state a cause of action - is mere surplusage and requires no action by the court (D'Agostino v Harding, 217 AD2d 835 [3d Dept 1995]). As for the second affirmative defense (res judicata, collateral estoppel, and judicial estoppel), third affirmative defense (counterclaims are barred by the terms of the Master Agreement as modified by the Bankruptcy Court), fourth affirmative defense (counterclaims are barred by Vornado's own conduct in irrevocably allocating Rental Increases to expired leases), fifth affirmative defense (obligations sought against S&S are not owed by the primary obligor), and sixth affirmative defense (counterclaims are barred by contracts entered into by Vornado subsequent to the Master Agreement), all of them involve issues of fact, as discussed above, and are not disposed of here as a matter of law. The seventh affirmative defense (waiver, laches, estoppel, and ratification) is without merit, because S&S has asserted no facts to support this affirmative defense, and the estoppel defenses are contained in the second affirmative defense.

Finally, the request for attorney's fees under the Master Agreement is denied, because there has not been as yet an adjudication of a breach by S&S (see Paragraph 11 [f] of the Master Agreement).

Accordingly, it is

ORDERED that Vornado's motion for summary judgment is denied; and it is further

ORDERED that S&S's cross motion for summary judgment is denied.

Dated:

ENTER:

__________________

J.S.C.