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United States v. Bedford Associates

decided: July 14, 1983.


Appeals by United States from judgments and orders of the United States District Court for the Southern District of New York, following a bench trial before Henry F. Werker, Judge, which, inter alia, (1) ordered defendants-appellees to pay plaintiff-appellant United States $2,195,779 in restitution for excess rental and utility payments made pursuant to an order of the court, plus $1 in damages for breach of a lease agreement, and denied the United States any such restitution from plaintiff-appellee, (2) ordered the United States to pay plaintiff-appellee, as assignee of rents, a net annual rent of $5,767,239 plus escalation, as just compensation for leasehold interest condemned by the United States as of December 14, 1981, plus $546,224 as reimbursement for operating expenses since that date, and (3) ordered the United States to pay plaintiff-appellee, as assignee, $2,048,438 as amount by which just compensation exceeded rental payments made by the United States since December 14, 1981.

Kearse, Pierce, and Pratt, Circuit Judges.

Author: Kearse

KEARSE, Circuit Judge:

In its third set of appeals to this Court in these consolidated actions, the United States challenges judgments and orders of the United States District Court, Henry F. Werker, Judge, which, principally, (1) awarded the United States nominal damages and limited restitution from defendants-appellees Bedford Associates, et al. ("Bedford"),*fn1 for Bedford's breach of its lease agreement with the government for the building at 120 Church Street in New York City (the "building"), (2) denied the government any restitution from intervenor The Bowery Savings Bank ("Bowery") for payments made by the government to Bowery in connection with the building, and (3) ordered the government to make annual rental payments of $5.7 million, plus escalation, as "just compensation" for its condemnation of a leasehold interest in the building as of December 14, 1981. For the reasons below, we conclude that the judgments of the district court should be modified to (1) grant the government restitution from Bowery in the amount of approximately $76,000 paid by mistake and retained by Bowery with knowledge of the error, and (2) increase by $81,485 the amount of restitution awarded to the government from Bedford. In all other respects we affirm the judgments.


The factual background of the litigation is set forth in detail in our prior opinions in these cases, United States v. Bedford Associates, 618 F.2d 904 (2d Cir. 1980) (" Bedford I "), and United States v. Bedford Associates, 657 F.2d 1300 (2d Cir. 1981), cert. denied, 456 U.S. 914, 72 L. Ed. 2d 173, 102 S. Ct. 1767 (1982) (" Bedford II "), familiarity with which is assumed. For the purposes of this appeal the facts may be summarized briefly as follows.

A. The Events Leading to Bedford I and II

The building is owned by Bedford and mortgaged to Bowery and has been occupied since 1962 by the United States Internal Revenue Service ("IRS"). In October 1978 IRS's lease expired, and the United States General Services Administration ("GSA") sought, having conducted tortuous negotiations with Bedford, to enter into a new lease with Bedford. See Bedford I, 618 F.2d at 908-11. Bedford refused to sign a lease at the rental tendered by the government, and eventually threatened IRS with discontinuation of services to the building. The government brought suit for specific performance of the alleged lease agreement, see id. at 916, 918, and obtained a preliminary injunction against the discontinuation of services; the injunction was granted on the condition that, pending determination of the merits of the suit, the government pay rent and utilities expense.*fn2 In Bedford I we largely affirmed this injunction, although we reduced prospectively the utilities payments required from the government as a condition of its obtaining the injunction. Id. at 923. Following entry of our order reducing the amount to be paid, the government continued for three months to pay at the prior, higher rate, making its payments to Bowery, which had intervened and commenced a foreclosure action on the building. Bowery, after consulting its counsel, elected to retain in silence such excess amounts as the government mistakenly paid, which apparently totaled about $76,000.

Following our remand in Bedford I, a bench trial (the "1980 trial") was held on the merits of the various claims, which included the government's claim for specific performance, a counterclaim by Bedford for damages, and Bowery's claim for foreclosure of the mortgage. In an opinion reported at 491 F. Supp. 848 (1980), the district court ruled against the government and in favor of Bedford with respect to the lease dispute, and granted Bowery's foreclosure claim against Bedford and the government. Most pertinently for the purposes of the present appeal, the court ruled that (1) because of Bedford's repeated attempts to amend its lease offer to GSA and because of several open terms, no lease agreement had been formed between Bedford and the government, and (2) even if a contract had been formed it would have been unenforceable by the government against Bedford because of unconscionability, duress, and misrepresentation by GSA in its dealings with Bedford. The court thus entered judgment in June 1980 dismissing the government's action against Bedford and ordered the government to pay damages to Bedford based on the fair rental value of the building as of the date of trial.

We reviewed these rulings in Bedford II, in which we principally disagreed with the district court's view that no agreement to lease had been formed, see 657 F.2d at 1308-12,*fn3 but agreed that, in light of the findings of bad faith on the part of GSA, the court could properly deny the government specific performance of the lease agreement, id. at 1314.*fn4 We held that the agreement that had been formed would have required the government to pay Bedford rental of $2,226,194 per year (or $185,516 per month), plus increments for certain renovations of the building, and to pay annual rental of $2,902,160 (or $241,847 per month) when renovations were completed. Id. at 1304, 1311. We left it to the district court, however, to determine whether GSA's conduct should be deemed to have excused Bedford from making the renovations. We remanded the case in order for the government to make an election, within 60 days of our mandate, whether to vacate the building or to condemn some interest in it, and for the district court to determine what damages the government should recover from Bedford. We concluded as follows:

We reverse the judgment of the district court insofar as it dismissed the government's action for damages and awarded damages to Bedford; modify it insofar as the monetary award to Bowery was based on fair market rental of the property rather than the rental specified in the lease; and affirm it insofar as it denied specific performance to the government, declared that the government no longer has a leasehold interest in 120 Church Street, foreclosed Bowery's mortgage, quieted title to the building as requested by Bowery, and awarded Bowery an assignment of rents. We remand the matter for adjustment of the rental due Bowery under the decree, for trial of the government's action for damages, and for such other proceedings as may be appropriate.

Id. at 1318-19.

B. The Proceedings and Decisions Following Bedford II

Our mandate in Bedford II issued in September 1981, and on November 19, 1981, the government elected to condemn a leasehold interest in the entire building, to commence on December 14, 1981, and continue through October 31, 1988, with options to renew for the two succeeding five-year periods. The government elected to assume responsibility for all services to the building.

The trial on damages (the "1981 trial") followed shortly. The government sought three categories of damages: (1) restitution, from both Bedford and Bowery, of so much of the rent and utilities it had paid during the course of the lawsuit as exceeded the amounts for which Bedford I and II had determined it was liable; (2) damages for the loss of its lease bargain, which it described as the amount by which the fair market value of the leasehold interest condemned as of December 14, 1981, would thenceforth exceed the rental set by the lease agreement; and (3) consequential damages on account of Bedford's alleged failure to maintain the building. The parties stipulated the precise amounts paid by the government for rent and utilities during various pertinent periods, and both sides presented evidence as to the fair market rental value of the building as of December 14, 1981. No evidence was presented as to the fair rental value at any earlier time.

In an opinion reported at 548 F. Supp. 732 (1982), the district court granted the government considerably less relief than was requested. As to the claim for restitution, the court ruled that the government was not entitled to recover excess utilities payments for any period prior to June 1980. It reasoned that the pre-June 1980 period was governed by the preliminary injunction and that the government's required payments during that period were " '"the price of [preliminary injunctive] relief" '" allowing the government to remain in the building, id. at 737 (quoting Bedford I, 618 F.2d at 917 (quoting Brotherhood of Locomotive Engineers v. Missouri-Kansas-Texas Railroad, 363 U.S. 528, 531, 4 L. Ed. 2d 1379, 80 S. Ct. 1326 (1960))), and were therefore not subject to the equitable remedy of restitution. As to rental payments, the court ruled that since GSA's delays had "caused the commencement of renovations to be postponed until a time when construction costs had skyrocketed and performance would have been economically devastating to Bedford," 548 F. Supp. at 737, the government could recover rental payments only to the extent that they exceeded $241,847 per month, the amount that was to have been payable upon Bedford's completion of renovations.*fn5 On the basis of these rulings, the district court awarded the government restitution of $1,141,476 in rental payments and $1,054,303 in utilities payments. It rejected the government's request for restitution of these amounts from Bowery, and ruled that the government could recover such sums only from Bedford, stating as follows:

Bowery . . . has applied all rents received to pay existing debts of Bedford and to maintain the premises. Having received only that to which it was entitled under the terms of Bedford's mortgage, it is evident that Bowery did not benefit unjustly from the government's overpayments. [Citations omitted.] Under these circumstances, it would be "patently unfair" to require Bowery which stands in the position of "an innocent payee who has received and used the money to satisfy a debt," to repay the money. Equilease Corp. v. Hentz, 634 F.2d [850, 853 (5th Cir. 1981)].

Bedford, on the other hand, did receive the benefit of satisfaction of pre-existing debts as a result of the government's overpayments. Consequently, it is Bedford and not Bowery that may be required to make restitution to the government. See Eightway Corp. v. V. Ponte & Sons, Inc., 99 Misc. 2d 989, 420 N.Y.S.2d 836 (App. T. 2d Dep't 1979).

Id. at 736 (footnote omitted).

As to the claim for damages for Bedford's breach of the lease agreement, the court awarded the government nominal damages of $1. It found, in accordance with the government's proposed findings of fact, that the breach had occurred on December 13, 1978, when Bedford refused to sign the lease tendered to it by GSA. Noting that, although the government had presented no evidence as to the fair rental value of the building as of that date, it had repeatedly argued to the court that the fair rental value on November 1, 1978, was the same as the rent set forth in the proposed lease, i.e., $241,847 per month on completion of renovations, the court ruled that the government was "estopped from changing its position and arguing that the fair market rental of the leasehold was higher on that date." Id. at 740. The court concluded that the government was thus entitled only to nominal damages:

As there was no difference between the asserted rental value of the premises for the term of the lease and the agreed rent as of December 13, 1978, the government's "benefit of the bargain" damages would be zero and ...

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