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GILBERT, SEGALL & YOUNG v. BANK OF MONTREAL

March 6, 1992

GILBERT, SEGALL AND YOUNG, Plaintiff, against BANK OF MONTREAL, Defendant.


The opinion of the court was delivered by: SHIRLEY WOHL KRAM

MEMORANDUM OPINION AND ORDER

 SHIRLEY WOHL KRAM, U.S.D.J.

 Plaintiff Gilbert, Segall and Young ("GSY") instituted this action for a declaratory judgment pursuant to 28 U.S.C. §§ 2201 and 2202 for the purpose of determining its liability under a lease of commercial office space if it vacates the premises prior to the expiration of the term of the lease and makes no future rental payments to defendant Bank of Montreal (the "Bank"). The Bank moves to dismiss GSY's complaint, pursuant to Federal Rules of Civil Procedure 12(b)(1) and 12(c), on the ground that this Court lacks subject matter jurisdiction. The Bank argues that the instant action does not present an "actual controversy" between the parties as required under § 2201, and therefore is not within the jurisdiction of this Court. GSY opposes the Bank's motion to dismiss, and pursuant to an order of the Court dated November 26, 1991, cross-moves for an order, under Federal Rule of Civil Procedure 15(a), granting GSY leave to serve an amended complaint. For the reasons set forth below, the Bank's motion to dismiss is denied, and GSY's motion for leave to amend its complaint is granted.

 BACKGROUND1

 According to the original complaint, on or about June 3, 1975, GSY and the Bank's predecessor in interest, Colt Industries Inc. ("Colt"), entered into an Agreement of Lease (the "Lease") whereby GSY leased space in 430 Park Avenue for a term of ten years and eight days, from October 23, 1975 through October 31, 1985, for a fixed rent of $ 149,225 per year. Complaint, at P6. Article 52 of the Lease initially provided, in relevant part, as follows:

 Tenant's liability under this lease shall be limited as follows: $ 500,000 from the date hereof and during the first lease year, $ 450,000 during the second lease year, $ 400,000 during the third lease year, $ 350,000 during the fourth lease year, $ 300,000 during the fifth lease year and $ 250,000 from and during the sixth lease year until the termination of Tenant's obligations under this lease. The limitations on Tenant's liability set forth in this Article shall not apply to any damage or loss for which Tenant is liable under the lease and (i) for which casualty and/or public liability and property damage insurance is obtainable by or available to Tenant through stanard policies or (ii) which is caused by the gross negligence or wilful misconduct of Tenant.

 Complaint, at P7.

 On or about January 28, 1977, during the second lease year, GSY and Colt entered into an Amendment of Lease Agreement (the "First Amendment") which, among other things, expanded the amount of space subject to the Lease, increased the fixed rent to $ 231,301 per year effective March 1, 1977, and amended Article 52 to provide, in pertinent part, as follows:

 Tenant's liability in the event of any default under this lease shall be limited as follows: $ 500,000 *fn2" from the date hereof and during the first lease year, $ 684,000 during the second lease year, $ 608,000 during the third lease year, $ 532,000 during the fourth lease year, $ 456,000 during the fifth lease year and $ 380,000 from and during the sixth lease year until the termination of Tenant's obligations under this lease. The limitations on Tenant's liability set forth in this Article shall not apply to any damage or loss for which Tenant is liable under the lease and (i) for which casualty and/or public liability and property damage insurance is obtainable by or available to Tenant through standard policies or (ii) which is caused by the gross negligence or wilful misconduct of Tenant.

 Complaint, at P8.

 In or about February 1981, the Bank succeeded to Colt's interests as landlord under the Lease, and on or about November 2, 1984, GSY and the Bank entered into a Second Amendment of Lease Agreement (the "Second Amendment"). The Second Amendment, among other things, extended the Lease to October 31, 1990 and increased the fixed rent to $ 975,000 per year effective November 1, 1985. Complaint, at P10. The Second Amendment did not amend Article 52. In fact, paragraph 9 of the Second Amendment stated as follows:

 On or about September 1, 1986, GSY and the Bank entered into a Third Amendment of Lease Agreement (the "Third Amendment") which, among other things, expanded the amount of space subject to the Lease, extended the term of the Lease to October 31, 1996, and increased the fixed rent to $ 1,339,850 per year effective November 1, 1986, and to $ 1,593,850 per year effective November 1, 1991. Complaint, at P12. The Third Amendment did not effect Article 52, but rather provided in P12 as follows:

 The parties agree that the Lease, as hereby amended, is and shall remain in full force and effect.

 Complaint, at P13.

 GSY alleges that because of the decline in the value of commercial office space in Manhattan, the rentals provided in the Lease have become excessive in relation to the market for such space. Complaint, at P16. GSY also claims that Article 52 specifically provides that if GSY ever defaults under the Lease by vacating the premises and ceasing to make further rental payments to the Bank, its liability would be limited to $ 380,000. Complaint, at P14. As such, before the $ 254,000 per annum increase took effect on November 1, 1991, GSY advised the Bank that:

 [it] is considering vacating the Premises prior to the expiration of the term of the Lease, making no further rental payments to the Bank after such vacation of the Premises, and after such default, paying the Bank no more than $ 380,000, as provided under Article 52 for any default.

 Complaint, at P17.

 The Bank disagrees with GSY's interpretation of Article 52 of the Lease. It is the Bank's position that Article 52 will not limit GSY's liability to $ 380,000 if it vacates the premises prior to the expiration of the term of the Lease and makes no further rental payments to the Bank. Rather, according to the Bank, GSY's liability to the Bank will amount "to no less than approximately $ 8,000,000 minus whatever rental payment the Bank may obtain from a successor tenant of the premises for the balance of the term of the Lease." Complaint, at P18.

 GSY and the Bank conducted discussions concerning GSY's liabilities under the Lease, but were "completely unable to reconcile their different interpretations regarding the applicability and legal effect of Article 52." Complaint, at P19. Thus, GSY seeks a judicial declaration, pursuant to 28 U.S.C. §§ 2201 and 2202, that its liability to the Bank will be limited to a maximum of $ 380,000 if GSY defaults and makes no further rental payments to the bank.

 GSY maintains that the Court has jurisdiction over this action pursuant to 28 U.S.C. § 1332(a)(2) in that the matter in controversy exceeds the sum of $ 50,000 exclusive of interest and costs, and is between a citizen of two states and a citizen of a foreign state. GSY also claims that the dispute as to GSY's maximum liability for default under the Lease is an "actual controversy" within the jurisdiction of this Court as required by 28 U.S.C. § 2201, and may be determined by a judgment of this Court.

 The Bank moves to dismiss GSY's complaint pursuant to Rule 12(b)(1) and 12(c) on the ground that it does not present an "actual controversy" within the jurisdiction of this Court. Since GSY alleges only that it is considering walking out on the Lease before it expires without making further rental payments, the Bank contends that GSY's request for a declaratory judgment is a classic request for an advisory opinion, which the Court is not empowered to render because the Constitution limits the jurisdiction of the federal courts to "cases and controversies." Defendant's Memorandum In Support Of Its Motion For Judgment On The Pleadings ("Def. Mem. in Support"), at 1-2. GSY opposes the Bank's motion to dismiss and, pursuant to Rule 15(a) of the Federal Rules of Civil Procedure, has filed a cross-motion for leave to amend its complaint, together with a proposed amended complaint, on the ground that there are additional allegations relevant to the existence of an "actual controversy" that should be before the Court.

 Comparison of the complaint and the proposed amended complaint indicates that the amended complaint primarily seeks to expand and clarify the allegations set forth in the original complaint so that the Court can more easily find the existence of an "actual controversy." For example, the proposed complaint details the efforts GSY made to find new office space, Proposed Amended Complaint, at P19, 20, 30, 32, and the unsuccessful negotiations between the Bank and GSY concerning a possible rent reduction. Proposed Amended Complaint, at PP20-31. It also sets out more completely the parties disagreement over the effect of Article 52 of the Lease. Proposed Amended Complaint, at PP21, 22, 24, 25, 26, 31, 35, 36.

 The proposed amended complaint, however, does contain three significant changes. First, the proposed complaint has new language about GSY's intentions with respect to vacating the premises. In the original complaint, GSY asserted that it was "considering vacating the premises prior to the expiration of the term of the Lease, making no further rental payments to the Bank . . . and after such default, paying the Bank no more than $ 380,000 . . . ," Complaint, at P17, whereas in its proposed pleading, GSY avers that at a meeting of the ...


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