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SAUER v. XEROX CORP.

August 18, 1998

FRED SAUER, Plaintiff,
v.
XEROX CORPORATION, Defendant.



The opinion of the court was delivered by: LARIMER

DECISION AND ORDER

 This contentious case has been pending for over three years and this Decision constitutes my fifth substantive determination concerning the merits of plaintiff's claims. Because I have written previously about the factual background of the litigation, I will not reiterate all the facts discussed in my prior decisions, familiarity with which is assumed. I will discuss only those facts pertinent to the analysis of the motions presently pending before me.

 Essentially, this is a contract dispute. Sauer was the purchaser/lessor in a sale-leaseback agreement with Xerox, the seller/lessee, of equipment constituting a so-called photo receptor line. The leaseback agreement (Lease Agreement) was for an initial eight year term, extending from January of 1985 through December of 1993. *fn1" Under the terms of the Lease Agreement, Xerox had the right to renew for two additional two year periods (January 1994 - December 1995; and January 1996 - December 1997), and then purchase back the leased equipment at the end of the renewal periods. See Lease Agreement at §§ 18, 19. The rent amount for the renewal periods (Fair Market Rental Value), as well as the repurchase price (Fair Market Value), were to be determined in accordance with an appraisal procedure set forth in the Lease which, if necessary, included retention of an independent, third party appraiser selected by the AAA. Lease Agreement at p. 2. The determination of the independent appraiser was to be "binding and conclusive on the Lessor and the Lessee." Id.

 In accordance with the terms of the Lease Agreement Xerox timely exercised its right to renew for both renewal periods and also exercised its repurchase rights. However, the parties were unable to agree upon a renewal rent amount or repurchase price, and Sauer challenged many of Xerox' actions related to or arising out of the parties' efforts to establish such amounts. It is the activities surrounding the appointment of the independent appraiser and his final determination that are at the heart of this litigation. Before the appraisal process was concluded, Sauer commenced this lawsuit on July 20, 1995.

 To date, six causes of action remain pending against Xerox: two breach of contract claims (causes of action one and three) and four claims sounding in fraud (causes of action two, four, five and eight). *fn2" Xerox asserts six counterclaims against Sauer: four breach of contract claims, a tortious interference claim, and a fraud claim.

 Presently pending before me are three motions: Xerox' motion for summary judgment, Sauer's motion for partial summary judgment, and Xerox' motion to strike certain affidavits. Xerox moves for summary judgment dismissing all of Sauer's claims. Sauer cross-moves for partial summary judgment in his favor on his two breach of contract claims, and moves against all of Xerox' counterclaims. Finally, Xerox moves to strike certain affidavits submitted in support of Sauer's motion.

 For the reasons stated below, Xerox' motion for summary judgment is granted in its entirety. Sauer's motion for partial summary judgment and Xerox' motion to strike are denied in their entirety, as moot.

 I. Sauer's Breach of Contract Claims

 A. First Cause of Action - Breach of Contract for Failure to Pay Renewal Rent

 This lawsuit was commenced on July 20, 1995. In his first cause of action, Sauer alleges that Xerox breached the Lease Agreement by failing to pay any renewal rent during the period following expiration of the Lease on December 31, 1993. Sauer seeks damages equal to the Fair Market Rental Value for the period January 1, 1994 through December 31, 1995, in an amount not less than $ 3,200,000.

 Xerox moves to dismiss Sauer's first cause of action on the grounds that Sauer failed to adhere to the procedural requirements set forth the Lease Agreement -- i.e., providing notice and opportunity to cure -- prior to asserting this claim. Additionally, Xerox asserts that the cause of action must be dismissed because as of July 1995 no renewal rent amount had been established and, thus, Xerox could not be in default for failure to pay an as yet undetermined amount. Finally, Xerox asserts that it has since paid the full Fair Market Rental Value amount, plus interest.

 The Lease Agreement defines pertinent events, including a Default and an Event of Default. A Default is defined as being an event which "after the giving of notice or lapse of time, or both, would mature into an Event of Default." Lease Agreement at p. 3. For instance, with respect to renewal rent payments, an Event of Default occurs when the lessee fails to make payment within five days after receipt of notice that the payment is past due. See Lease Agreement at § 20(a).

 Upon an Event of Default, the Lease Agreement sets forth the lessor's remedies. Section 21(a) of the Lease Agreement, states that

 
"upon the occurrence of any Event of Default ... the Lessor may ... declare this Lease to be in default by written notice to such effect given to the Lessee, and at any time thereafter, the Lessor may exercise one or more of the following remedies, as the Lessor in its sole discretion shall lawfully elect:
 
(i) Proceed by appropriate court action ... to enforce performance by the Lessee of the applicable covenants of this Lease or to recover damages for the breach thereof;
 
(ii) By notice in writing terminate this Lease, whereupon all rights of the Lessee to the use of the Leased Equipment ... shall absolutely cease and terminate...." (Emphasis added)

 Thus, under Section 21(a) of the Lease Agreement the lessor is entitled either to sue to enforce the Agreement, or to terminate the Agreement, upon written notice of the lessee's Event of Default.

 In his first cause of action, for the alleged failure to pay renewal rent, Sauer clearly seeks to enforce the Agreement and recover damages pursuant to § 21(a)(i) of the Lease. No attempt is made to terminate the Lease. However, prior to asserting this claim, Sauer not only failed to give Xerox timely written notice of an alleged Event of Default, as required by § 21(a), but no Event of Default, as defined in § 20, had even occurred.

 It is undisputed that Sauer's only written notice to Xerox concerning Xerox' alleged failure to pay renewal rent came by letter dated July 21, 1995, one day after this suit was filed. In that letter Sauer notified Xerox that it had failed to make renewal rent payments for the period since January 1994, and that if not cured within five days, an Event of Default would occur. Thus, this written notice suffers from two impediments: because it was sent one day after suit was filed, it does not provide timely and proper written notice of Xerox' alleged Event of Default, as required by § 21(a) of the Lease Agreement. Moreover, as of that date no Event of Default, as defined in § 20(a) of the Lease Agreement, had yet occurred.

 The Lease language is clear. Upon an Event of Default written notice is required prior to asserting a lawsuit. In this case Sauer not only failed to wait for an Event of Default to occur with respect to the renewal rent, but he also failed to give written notice prior to asserting this lawsuit. Thus, Sauer's actions violated the clear terms of the Lease Agreement. Xerox had no reasonable opportunity to cure because it had no notice of Sauer's complaints until after he had sued.

 It is well established under New York law *fn3" that "the terms of a written agreement define the rights and obligations of the parties to the agreement" and "where the parties have agreed to conduct themselves in a accordance with the rights and duties expressed in a contract, a court should strive to give a fair and reasonable meaning to the language used." Abiele Contracting, Inc. v. New York City Sch. Constr. Auth., 91 N.Y.2d 1, 9-10, 666 N.Y.S.2d 970, 689 N.E.2d 864 (1997). Where, as here, the parties have agreed to provide notice and an opportunity to cure prior to suing for performance or asserting termination rights under a contract, those covenants must be adhered to. A party's failure to do so renders ineffective that party's rights to pursue those other remedies. See Filmline (Cross-Country) Prod. Inc. v. United Artists Corp., 865 F.2d 513, 518 (2d Cir. 1989)(where defendant failed to give timely notice and opportunity to cure, as required under agreement, subsequent attempt to terminate agreement was ineffective because it "did not conform with the Agreement")(citing General Supply and Constr. Co. v. Goelet, 241 N.Y. 28, 148 N.E. 778 (1925)); see also Consumers Power Co. v. Nuclear Fuel Serv., Inc., 509 F. Supp. 201, 211 (W.D.N.Y. 1981)(attempt to terminate contract invalidated for failure to comply with contract terms because "where the contract specifies condition precedent to the right of cancellation, the conditions must be complied with"). Based upon Sauer's failure to adhere to the notice and cure provisions set forth in the Lease Agreement I find that he is precluded from seeking remedies conditioned thereon.

 Even absent this impediment, however, Sauer's actions were particularly rash and unjustified because while it is true that Xerox had not paid any renewal rent, Xerox had made repeated attempts to obtain a renewal rent figure from Integrated but no rental amount had been established. Indeed, the parties were in the last stages of determining that amount when Sauer abandoned those contractual provisions and commenced the lawsuit.

 Xerox first notified Integrated of its interest in renewing the lease in April 1992. Van Nort Aff't at P 8. This was twenty months before the renewal term was to begin. Beginning in early 1993, nearly a year before the renewal term was to begin, Xerox sought price quotes from Integrated for a renewal rent amount. Specifically, Xerox made several written offers to pay renewal rent amounts for both lease extension periods, as well as the final buyout amount. See Affidavit of Kenneth J. Van Nort (sworn to January 11, 1996) at PP 8,9,12,15, 22; February 2, 1993 letter from Van Nort, Ex. 11 to Affidavit of John P. Coffey (sworn to January 16, 1998) (Coffey Aff't) ("Please provide me with a quote, based on fair market value, for a twenty-four (24) month lease renewal of the remaining equipment."); April 7, 1993 letter from Van Nort, Ex. 12 to Coffey Aff't. ("We propose to make a one time payment on January 1, 1994 that will both satisfy the two (2), two (2) year extension requirements and then allow us to exercise our end of lease purchase option .... In line with this proposal, please provide us with a one time price that will reflect the present value ... of all future payments ...."); Affidavit of Roland D. Nenni, Jr. (sworn to January 11, 1996) at PP 26, 31; August 3, 1994 letter from Nenni, Ex. 21 to Coffey Aff't (setting forth proposed renewal rent amounts and final buyout price).

 Unable to mutually agree on an appropriate rental rate, starting in mid-1993, both Integrated and Xerox retained independent appraisers to valuate the equipment. Affidavit of Jeffrey Brodsky (sworn to January 9, 1998) (Brodsky Aff't) at P 24; Xerox Statement of Facts at P 23. Integrated retained the firm of Marshall & Stevens, Inc. Brodsky Aff't at P 24. For reasons that are not entirely apparent, three successive Marshall & Stevens appraisers were utilized by Integrated. The first was Ken Fowler, who visited the site of the photo receptor line and examined the equipment, but apparently never prepared an appraisal because he was replaced by David Love. Love too visited the site and examined the equipment. He issued an appraisal which was provided to Xerox in April 1994. Love appraised the Fair Market Value at $ 3,144,000 and the Fair Market Rental Value at $ 212,538. On May 31st, Xerox responded with appraisal figures calculated by its appraiser, James McGowan, who estimated the Fair Market Value at $ 875,535 and the Fair Market Rental Value at $ 32,312. Integrated then provided a new appraisal, by Ralph Page, the only Marshall & Stevens appraiser who did not examine the equipment. Page issued his appraisal on or about June 20, 1994, described by Integrated as a "new update." This appraisal was provided to Xerox. Page estimated the Fair Market Value at $ 5,993,512, and the Fair Market Rental Value at $ 1,144,933.

 Because these appraisers disagreed on valuation amounts, and Integrated rejected Xerox' proposed renewal rent amount (see Exs. 21 and 22 to Coffey Aff't), the parties proceeded to the final stage of the appraisal process as required by the Lease Agreement -- appointment by AAA of an independent appraiser (Charles Land). Xerox was awaiting Land's valuation when Sauer filed and served this lawsuit in July 1995. *fn4"

 Under these circumstances, suing for nonpayment was certainly premature and appears to have been motivated by little more than anger and frustration with the appraisal process itself. Just because Sauer became disenchanted with the process, did not justify his unilateral decision to abort the procedure set forth in the Lease Agreement. See, e.g., Olympia & York OLP Co. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 214 A.D.2d 509, 511-512, 626 N.Y.S.2d 69 (1st Dep't 1995)("A party to a dispute governed by an arbitration agreement may not unilaterally evade the stipulated forum and litigate the controversy"); see also 99 Realty Co. v. Wall Street Transcript Corp., 165 Misc. 2d 454, 632 N.Y.S.2d 742 (1st Dep't 1995)(finding that parties were bound by agreement to refer disagreement to alternative dispute resolution and therefore such determination was binding on them). "Parties provide for the appointment of appraisers because they want to rely on their expertise in settling vexatious problems. They make appraisal agreements final because they want to avoid litigation." European-American Banking Corp. v. Chock Full O'Nuts Corp., 109 Misc. 2d 615, 619, 442 N.Y.S.2d 715 (1st Dep't 1981). Sauer's actions in bringing this claim were at odds with his commitment under the Lease Agreement to reach a renewal rent amount through the prescribed appraisal process.

 Finally, I note that since the date Sauer's lawsuit originally was filed, Sauer's claim has been further weakened by the fact that Xerox subsequently paid Sauer the full renewal rent amount for the 1994-1995 renewal period, as determined by the independent appraiser selected pursuant to the terms of the Lease Agreement. On December 28, 1995, Xerox paid Sauer $ 602,636.72, the sum of all past due Fair Market Rental amounts as determined by Charles Land, plus interest at 12.5%.

 Sauer opposes Xerox' motion and cross-moves for summary judgment on his first cause of action. Sauer does not contest that notice of renewal rent nonpayment was not timely made. Instead, Sauer asserts that because of Xerox' numerous defaults (nonpayment of rent, failure to report events of loss and make casualty payments, and others) Xerox' attempt to renew for the second renewal period (January 1996-December 1997) was void, pursuant to § 18 of the Lease Agreement. Thus, Sauer alleges that the Lease expired by its own terms as of December 31, 1995 and Xerox has wrongfully possessed the equipment since that time.

 This theory is totally at odds with Sauer's first cause of action. Sauer's first cause of action, for renewal rent nonpayment, seeks by its terms to enforce the Lease, not terminate it. Sauer now appears to seek a declaration that the Lease terminated by its own terms December 31, 1995, and Xerox' subsequent possession of the equipment constitutes unjust enrichment. This is wholly inconsistent with Sauer's pleadings. Nowhere in the first cause of action does Sauer seek a declaration that the Lease has been terminated or seek any remedies consistent with lease termination. Indeed, no such request is made anywhere in the Third Amended Complaint. *fn5" Thus, whether or not the Lease Agreement was terminated ...


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