The opinion of the court was delivered by: Arcara, District Judge.
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,
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
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.
REPORT and RECOMMENDATION
FOSCHIO, United States Magistrate Judge.
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).
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
Plaintiff, McKinley Associates, LLC ("McKinley") is an affiliate of
Pyramid Management Group Inc. ("Pyramid"), the management company for
centers in the Northeast United States, including the Walden Galleria
Mall ("the Walden Galleria"), Jocated in Cheektowaga, New York. McKinley
is also the owner of commercial property located at 100 McKesson
Parkway, Cheektowaga, New York ("the leased premises"), which is adjacent
to the northern edge of the property on which the Walden Galleria is
located. A 90,000-square foot warehouse facility is located on the leased
premises ("the warehouse"). Defendant, McKesson HBOC, Inc., formerly known
as McKesson Corporation ("McKesson"), is engaged in the business of the
wholesale distribution of pharmaceuticals and over-the-counter products
sold in drug stores.
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.
Following execution of the Lease Termination Agreement, McKesson
commenced plans to purchase other property on which to construct a new
warehouse in preparation for vacating the leased premises. Specifically,
on August 12, 1998, McKesson
entered into a contract to purchase 13 acres of undeveloped property in
the Town of West Seneca. On August 20, 1998, McKesson entered into a
contract with a construction company to begin immediate construction of a
new warehouse facility on the property it had acquired and construction
commenced on September 3, 1998. On August 21 and October 21, 1998,
McKesson received the first two $1,250,000 installments of the Lease
Termination Fee due under the Lease Termination Agreement. On November
12, 1998, McKesson formally closed its purchase of the property. The
final occupancy permit for the new warehouse was issued on January 30,
1999 and McKesson had, by March 7, 1999, vacated the leased premises and
moved all of its personnel, equipment, and inventory to the new
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
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
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 ...