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August 6, 2003


The opinion of the court was delivered by: Gerard E. Lynch, District Judge


This is an appeal from an order and judgment entered by the United States Bankruptcy Court in the Southern District of New York (Prudence Carter Beatty, B.J.) on September 5, 2002, denying defendant-appellant's motion for summary judgment, granting plaintiff-appellee's [ Page 2]

cross-motion for summary judgment, and directing defendant-appellant to return to plaintiff-appellee the sum of $155,538.00 in overpaid rent, as well as pre-judgment interest of nine percent per annum, in the amount of $67,759.56. For the reasons set forth below, the order of the Bankruptcy Court will be affirmed as to the amount of overpaid rent. The award of pre-judgment interest is vacated, and the issue of pre-judgment interest is remanded to the Bankruptcy Court for further proceedings. Plaintiff-appellee's request for attorneys' fees is denied.


Master Lease

The above-captioned adversary proceeding concerns a disputed commercial lease for a restaurant space located at the Cross County Shopping Center in Yonkers, New York. The lease in question ("Master Lease") was executed on April 12, 1991. by Horn & Hardart Realty Company ("H & H" or "Tenant") as tenant, and Defendant-Appellant Marx Realty and Improvement Co. ("Marx" or "Landlord") acting as agent for the landlord. Plaintiff-Appellee Hanover Direct, Inc. ("Hanover" or "Tenant") is H & H's successor-in-interest.*fn1 Article I of the Master Lease, entitled "Fundamental Lease Provisions," provides under Sections 1.1(h) and (i) that the fixed minimum rent per annum is $140,000, plus a percentage rent rate of seven percent. Under Article X of the Master Lease, entitled "Bankruptcy of Tenant, Defaults by Tenant and Remedies of Landlord," Section 10.5 provides that:

In the event Tenant remains in possession of the Leased Premises after the expiration of the tenancy created hereunder, and without [ Page 3]
the execution of a new lease, Tenant, at the option of Landlord, shall be deemed to be occupying said Leased Premises as a tenant from month to month, at twice the Fixed Minimum Rent and Percentage Rent, subject to all the other conditions, provisions, and obligations of this lease insofar as the same are applicable to a month-to-month tenancy.
The term of the Master Lease was from April 12, 1991, through January 31, 1996, with an option to renew for an additional 21 years.


Nine months after execution of the Master Lease, on January 6, 1992, H & H entered into a sublease ("Sublease") for the restaurant space with now-bankrupt T.R. Acquisition Corp. ("T.R."), which operated a Tony Roma's restaurant franchise. The initial term of the Sublease was four years, commencing January 6, 1992, and expiring January 30, 1996. The Sublease contained an option to renew for an additional 21 years. In order to exercise the renewal option, T.R. was required by the Sublease to give timely notice to H & H of its intent to renew, provided that it was not in default under other provisions of the Sublease.

T.R. purported to exercise the renewal option in the Sublease by letter to H & H dated March 31, 1995. H & H rejected the attempt to exercise the renewal option because it claimed that the notice was untimely and that T.R. was already in default.

Bankruptcy and First Adversary Proceeding

One day earlier, on March 30, 1995, T.R. had filed a petition for bankruptcy under Chapter 11 of the United States Bankruptcy Code, thus initiating the automatic stay under Section 362 of the Bankruptcy Code. 11 U.S.C. § 362(a). On that date, T.R. also commenced an adversary proceeding against H & H (as its landlord) and Marx (as the master landlord), seeking, [ Page 4]

inter alia, a determination as to whether its intent to exercise the renewal option under the Sublease was valid ("First Adversary Proceeding"). T.R. continued to pay rent to H & H during the pendency of the First Adversary Proceeding, and H & H continued to pay rent to Marx, as the master landlord. Marx accepted those rent payments, and did not demand double rent payments or mention Section 10.5 of the Master Lease, even after the expiration of the Master Lease in January 1996.*fn2

The Bankruptcy Court granted summary judgment in the First Adversary Proceeding in favor of Marx by Order and Judgment dated April 10, 1997. (Order and Judgment dated Apr. 10, 1997, App. Ex. S ("1997 Order").) The Bankruptcy Court held that the Subtenant was in default under the Sublease, had forfeited its right to renew the lease, and that H & H as sublandlord had no legal duty to renew the Sublease. Furthermore, the Bankruptcy Court ruled that the Master Lease had expired on January 31, 1996, the Sublease had expired on January 30, 1996, and the Subtenant became a holdover tenant after January 30, 1996. The Bankruptcy Court accordingly ordered that Marx was entitled to immediate possession of the premises.

At the April 10, 1997, hearing, Marx argued that under the Master Lease it was entitled to double rent from T.R. for each month T.R. held over its tenancy past the expiration of the Master Lease. The Bankruptcy Court rejected from the bench the argument that Marx was entitled to any payments directly from T.R., because T.R. had never signed any lease with Marx, and had paid rent only to H & H as H & H's tenant pursuant to the Sublease. (App. Ex. R at 3, 10.) The Bankruptcy Court also noted that "a mere provision [in a Master Lease] that fixes the holdover [ Page 5]

rent at twice the rent reserved . . . doesn't mirror the state law at all. The state law rule is [that] you fix [holdover payments] as use and occupation based upon fair market rental." (App. Ex. R at 3-4.)*fn3

T.R. Vacates Premises and Ceases Making Rent Payments

Following the ruling in the First Adversary Proceeding on April 10, 1997, T.R. vacated the premises by July 1, 1997 (Joint Stmt of Facts at ¶ 8, App. Ex. KK), and ceased paying rent to H & H. H & H's parent, Hanover, however, continued to pay the fixed minimum rent and other charges to Marx. Hanover claims that the rent payments to Marx were due to an internal bookkeeping error, because its bookkeeper was never directed to stop paying rent to Marx after T.R. vacated the premises and stopped paying rent to H & H. (Reply Affidavit of Lisa Green, sworn to June 24, 2002, ¶¶ 6-12, App. Ex. JJ ("Green Reply Aff.").)

Tenant Continues to Make Rent Payments After Premises are Vacated

Marx continued to accept the rent payments from Tenant, even after July 1997, when Marx leased the premises to a third party, Cross County Apple, LLC ("Applebee's"), owners of an Applebee's restaurant franchise.*fn4 Marx does not claim that it had ever demanded that Tenant continue pay rent after T.R. had vacated the premises. There is no evidence that Marx ever advised Tenant that it was continuing to receive rent from Tenant for premises that had been leased to a third party. This situation continued for nine months. [ Page 6]

In March 1998, Hanover stopped making rent payments to Marx because, Hanover claims, it had finally discovered the bookkeeping error. The parties have stipulated that the total amount of rent Tenant paid to Marx between May 1997 and March 1998 was $155,538. (Joint Stmt. of Facts at ΒΆ 15, App. Ex. KK.) On April 8, 1998, Tenant demanded by letter than Marx return the overpayments. Marx refused to return the ...

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