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MCKINLEY ASSOCIATES, LLC v. MCKESSON HBOC

June 26, 2000

MCKINLEY ASSOCIATES, LLC, PLAINTIFF,
V.
MCKESSON HBOC, INC., DEFENDANT.



The opinion of the court was delivered by: Arcara, District Judge.

ORDER

This case was referred to Magistrate Judge Leslie G. Foschio pursuant to 28 U.S.C. § 636 (b)(1), on July 22, 1999. On June 16, 1999, defendant filed a motion to dismiss or, alternatively, for summary judgment and on September 3, 1999, plaintiff filed a cross-motion for summary judgment. On May 30, 2000, Magistrate Judge Foschio filed a Report and Recommendation, recommending that defendant's motion to dismiss and alternatively, for summary judgment should be granted; and plaintiff's cross-motion for summary judgment should be denied.

Plaintiff filed objections to the Report and Recommendation on June 19, 2000 and oral argument on the objections was held on August 21, 2000.

Pursuant to 28 U.S.C. § 636 (b)(1), this Court must make a de novo determination of those portions of the Report and Recommendation to which objections have been made. Upon a de novo review of the Report and Recommendation, and after reviewing the submissions and hearing argument from the parties, the Court adopts the proposed findings of the Report and Recommendation.

Accordingly, for the reasons set forth in Magistrate Judge Foschio's thorough and well-reasoned Report and Recommendation, defendant's motion for summary judgment is granted and plaintiff's cross-motion for summary judgment is denied. The Court also grants defendant's motion for attorneys' fees. The case is hereby referred back to Magistrate Judge Foschio, pursuant to 28 U.S.C. § 636 (b)(3) and Federal Rules of Civil Procedure 54(d)(2)(D) and 72(b), for a report and recommendation on the proper amount of attorneys' fees to be awarded.

IT IS SO ORDERED.

REPORT and RECOMMENDATION

FOSCHIO, United States Magistrate Judge.

JURISDICTION

This case was referred to the undersigned by the Honorable Richard J. Arcara on July 22, 1999, for report and recommendation on all dispositive motions. The matter is presently before the court on Defendant's motion to dismiss or, alternatively, for summary judgment filed June 16, 1999 (Docket Item No. 2), and on Plaintiff's cross-motion for summary judgment filed September 3, 1999 (Docket Item No. 10).

BACKGROUND

Plaintiff, McKinley Associates, LLC, commenced this action on May 6, 1999, in New York Supreme Court, Erie County, alleging two New York common law causes of action including for money had and received and for conversion. On June 11, 1999, Defendant, McKesson HBOC, Inc., formerly known as McKesson Corporation, pursuant to 28 U.S.C. § 1446 (a), removed the action to this court on the basis of diversity jurisdiction.

On June 16, 1999, McKesson filed a motion to dismiss or, alternatively, for summary judgment. (Docket Item No. 2). Defendant's motion was supported by an Affidavit of James G. Law ("Law Affidavit"), a Memorandum of Law (Docket Item No. 3) ("Defendant's Memorandum"), and a Statement of Undisputed Facts Pursuant to Local Rule 56 (Docket Item No. 4) ("Defendant's Fact Statement").

Plaintiff, on September 3, 1999, filed a Cross-Motion for Summary Judgment. (Docket Item No. 10). In support of the cross-motion, Plaintiff filed a Counter-Statement of Undisputed Facts in Support of Cross-Motion for Summary Judgment Pursuant to Local Rule 56 (Docket Item No. 11) ("Plaintiff's Fact Statement"), the Affidavit of James L. Soos (Docket Item No. 12) ("Soos Affidavit"), the Affirmation of Thomas F. Knab, Esq. (Docket Item No. 13) ("Knab Affirmation"), and a Memorandum of Law (Docket Item No. 14) ("Plaintiff's Memorandum").

On October 1, 1999, in response to Plaintiff's cross-motion for summary judgment and in further support of Defendant's motion to dismiss or for summary judgment, Defendant filed a Memorandum of Law (Docket Item No. 16) ("Defendant's Response/Reply Memorandum"), the Reply Affidavit of James G. Law (Docket Item No. 17) ("Law Reply Affidavit"), and the Affidavit of Thomas E. Reidy (Docket Item No. 18) ("Reidy Affidavit").

Defendant filed, also on October 1, 1999, a Reply to Plaintiff's Counter-Statement of Undisputed Facts Pursuant to Local Rule 56 (Docket Item No. 19) ("Defendant's Reply to Plaintiff's Fact Statement"). On October 12, 1999, Defendant filed a Reply Memorandum (Docket Item No. 20) ("Defendant's Reply Memorandum"). Oral argument was deemed unnecessary.

For the following reasons, Defendant's motion (Docket Item No. 2) to dismiss should be GRANTED and, alternatively, for summary judgment should be GRANTED; Plaintiff's cross-motion for summary judgment (Docket Item No. 10) should be DENIED. However, should the District Judge deny Defendant's motion to dismiss and for summary judgment, summary judgment in favor of Plaintiff should not be entered as Defendant must be permitted an opportunity to serve, within 10 days of the District Judge's decision, an answer asserting counterclaims, as provided for under Fed.R.Civ.P. 12(a)(4)(A).

FACTS*fn1

Pursuant to a 25-year lease executed on December 2, 1968 ("the Lease"), McKesson's predecessor-in-interest, Foremost-McKesson, Inc., leased the premises from McKinley's predecessor-in-interest, Yattendon Corp.*fn2 The Lease required McKesson to make monthly rent payments ("Base Rent") and to pay the real property taxes on the leased premises. McKesson then commenced using the warehouse as a wholesale distribution center for a wide variety of its products.

Paragraph 5 of the lease provides that, as the lessee, McKesson was entitled to use of the leased premises, including the warehouse, for an interim term commencing on December 17, 1968 and ending on December 31, 1968, as well as for the primary term commencing on January 1, 1969 and ending on December 31, 1993. Upon the expiration of the primary term, McKesson had the option of extending the lease for six consecutive 5-year terms, with a potential final expiration date of December 31, 2023. The lease also provides McKesson with the right to assign and sublet the leased premises. Pursuant to a Lease Modification Agreement ("the Modification Agreement") executed on September 27, 1988, a portion of the leased premises was released from the lease and replaced with a new parcel of land, but the remaining Lease terms were undisturbed.*fn3

Prior to the expiration of the primary term of the Lease on December 31, 1993, McKesson exercised the first of its six consecutive 5-year extension options, thereby extending the Lease to December 31, 1998. In early 1998, James G. Law, then McKesson's Vice President for Corporate Real Estate, was contacted by James L. Soos, Walden Galleria's General Manager and a representative of both Pyramid and McKinley. Soos informed Law that McKinley had recently acquired a fee interest in the leased premises, and desired to buy out the Lease and demolish the warehouse as Pyramid then intended to expand the Walden Galleria. Law informed Soos that McKesson had intended to exercise its remaining options to extend the Lease for the foreseeable future as the Lease's terms were very favorable to McKesson. For example, in 1998, McKesson's annual rent payments were $18,524 and were expected to decrease to $14,820 in 1999. However, Law informed Soos that McKesson would consider McKinley's offer to buy out McKesson's interest in the Lease. Soos later presented Law with McKinley's offer of $2 million which McKesson rejected. Law advised Soos that McKesson was unwilling to terminate the Lease for less than $7 million. The parties eventually agreed that McKesson would sell to McKinney its interest in the Lease for $5 million.

Accordingly, on June 22, 1998 ("the Effective Date"), McKinley and McKesson executed the Lease Termination Agreement ("the Lease Termination Agreement" or "the Agreement"), requiring McKinley to pay McKesson $5 million as consideration for McKesson's termination of the Lease, including the five remaining 5-year extension options, by July 22, 1999 ("the Vacation Date").*fn4 Lease Termination Agreement, ¶ 3.a. Specifically, the $5 million lease termination fee was to be paid in three installments. Lease Termination Agreement, ¶ 3.c. and d. The first two payments, each for $1,250,000, totaled $2.5 million, denominated as the Termination Fee Deposit (the "Termination Fee Deposit" or "the Deposit"). Id., ¶ 3.c. Those installments were to be made within 60 days and 120 days, respectively, of the effective date of the Agreement. Id. The remaining $2.5 million, described as the Termination Fee Balance ("the Termination Fee Balance" or "the Balance"), was to be paid on the later of the date McKesson vacated the leased premises, or within five business days after the date McKesson notified McKinley that it would vacate such premises. Id., ¶ 3.e.

As McKinley was anxious to proceed with its plan to expand the Walden Galleria, the Lease Termination Agreement provided that the $2.5 million Termination Fee Balance would be increased by an additional $100,000, for each month that McKesson vacated the leased premises prior to July 22, 1999, to a maximum of $600,000. The Agreement further provided that McKesson was not responsible for any Base Rent otherwise due under the Lease from the Agreement's Effective Date until the Vacation Date. Lease Termination Agreement, ¶ 3.b. Accordingly, under the Agreement, McKesson could be compensated by as much as $5.6 million for early termination of the Lease.

The clause which is the subject of the instant litigation of the Lease Termination Agreement provides:

Termination Fee Deposit as Liquidated Damages. IF THE TRANSACTION CONTEMPLATED IN THIS AGREEMENT IS NOT CONSUMMATED DUE TO A DEFAULT BY LANDLORD, TENANT MAY IMMEDIATELY TERMINATE THIS AGREEMENT BY WRITTEN NOTICE TO LANDLORD AND WITHOUT FURTHER OBLIGATION TO LANDLORD UNDER THIS AGREEMENT, TENANT SHALL RETAIN THE TERMINATION FEE DEPOSIT AS LIQUIDATED DAMAGES, AND THE LEASE (INCLUDING THE EXTENSION OPTIONS) SHALL REMAIN IN FULL FORCE AND EFFECT. THE PARTIES AGREE THAT TENANT'S ACTUAL DAMAGES AS A RESULT OF LANDLORD'S DEFAULT WOULD BE DIFFICULT OR IMPOSSIBLE TO DETERMINE, AND THE TERMINATION FEE DEPOSIT IS THE BEST ESTIMATE OF THE AMOUNT OF DAMAGES TENANT WOULD SUFFER AS A RESULT OF LANDLORD'S DEFAULT. THE PAYMENT OF THE TERMINATION FEE DEPOSIT AS LIQUIDATED DAMAGES IS NOT INTENDED AS A FORFEITURE OR PENALTY, BUT IS INTENDED TO CONSTITUTE LIQUIDATED DAMAGES TO TENANT. THE PARTIES WITNESS THEIR AGREEMENT TO THIS LIQUIDATED DAMAGES PROVISION BY INITIALING THIS SECTION:

Landlord: (James Soos) Tenant: (James Law)

Lease Termination Agreement, ¶ 4 (emphasis added).

The Agreement contains no provision limiting McKinkley's remedies for money damages and equitable relief in the event of a breach by McKesson. Under ¶ 6.c of the Agreement, McKinley was also required to reimburse McKesson for any real property taxes paid by McKesson attributable to the period after the Vacation Date, within sixty days of such date.

As McKesson had vacated the leased premises more than four months before the Vacation Date, McKesson was entitled, under ¶ 3.b. of the Agreement, to $425,000 in addition to the $2.5 million Termination Fee Balance for a total of $2,925,000 which McKesson maintains was due, under the Agreement, from McKinley on March 15, 1999. However, McKinley failed to provide the payment and thus defaulted as to the Termination Fee Balance.*fn5 McKesson, on March 26, 1999, offered McKinley an additional 60 days to remit the Balance, $2,500,000 of which would be subject to interest payable at the rate of 12% per annum. When McKinley did not agree to the terms of that offer, McKesson, by letter dated April 9, 1999, notified McKinley that as a result of the default, the Lease Termination Agreement had terminated and McKesson was exercising its rights under the liquidated damages clause. Specifically, McKesson advised it would retain the $2.5 million Termination Fee Deposit and that the Lease would remain in full force and effect, although McKesson no longer had any use for the leased premises or the warehouse which, to date, remains vacant.

Since then, McKesson has tendered the Basic Rent and real property taxes due under the Lease to McKinley which has routinely refused to accept them. According to McKesson, it is currently holding those amounts in escrow.

DISCUSSION

McKinley seeks to recover the Termination Fee Deposit from McKesson under two state common law theories including for money had and received and for conversion. McKesson seeks to dismiss the Complaint for failure to state a claim under either of those two theories. Alternatively, McKesson seeks summary judgment on the basis that there is no genuine issue of material fact in dispute, that under the liquidated damages clause of the Lease Termination Agreement, McKesson is entitled to retain the $2.5 million Deposit and that the Lease remains in full force and effect. McKinley cross-moves for summary judgment arguing that there is no genuine issue of material fact in dispute, and that the liquidated damages clause is void ab initio as it seeks to compel performance and provides for damages that are disproportionate to any injury actually suffered by McKesson attributed to McKinley's default.

Whether the Complaint states a claim for either money had and received or conversion turns on whether the liquidated damages clause is valid and enforceable, or void ab initio, an issue which is before the court on summary judgment. Accordingly, although McKesson alternatively moves for summary judgment, the court first addresses the parties' summary judgment arguments.

1. Summary Judgment

Summary judgment of a claim or defense will be granted when a moving party demonstrates that there are no genuine issues as to any material fact and that a moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(a) and (b); Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986); Rattner v. Netburn, 930 F.2d 204, 209 (2d Cir. 1991). The party moving for summary judgment bears the burden of establishing the nonexistence of any genuine issue of material fact. If there is any evidence in the record based upon any source ...


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