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Staples, Inc. v. W.J.R. Associates

March 30, 2010

STAPLES, INC., AND STAPLES THE OFFICE SUPERSTORE EAST, INC., PLAINTIFFS,
v.
W.J.R. ASSOCIATES, CARMINE EVANGELISTA, ROBERT H. KANE, PATRICIA A. REINHARDT AS EXECUTRIX OF THE ESTATE OF WILLIAM J. REINHARDT, JAMES SLUYK AND TIMOTHY D. KING, DEFENDANTS.
W.J.R. ASSOCIATES AND PATRICIA A. REINHARDT AS EXECUTRIX OF THE ESTATE OF WILLIAM J. REINHARDT, THIRD-PARTY PLAINTIFFS,
v.
REALTY EQUITY HOLDINGS 3820, LLC, NORSTRAND REALTY HOLDINGS, LLC, TIM ZISS, INDIVIDUALLY AND IN HIS CAPACITY AS MANAGING MEMBER OF REALTY EQUITY HOLDINGS 3820, LLC, MASSEY KNAKAL REALTY SERVICES, INC., AND STATE STREET BANK & TRUST COMPANY, THIRD-PARTY DEFENDANTS.



The opinion of the court was delivered by: Johnson, Senior District Judge

MEMORANDUM AND ORDER

On March 3, 2004, Plaintiffs Staples, Inc. and Staples The Office Superstore East, Inc. ("Plaintiffs" or "Staples") filed the instant action in diversity alleging breach of a commercial lease, breach of warranties made in connection with that lease, and unjust enrichment. The complaint ("Complaint") named several defendants, including W.J.R. Associates ("WJR") and some of its partners and/or former partners, including William Reinhardt ("Reinhardt"), and Timothy King ("King"). Prior orders issued in this action provide a general outline of the relationship between the parties and familiarity therewith is assumed. (Docket Nos. 208-209.) For the purpose of the instant motions, however, additional background and supplementation is in order.

WJR is a New York general partnership formed in 1988 to purchase and operate a commercial lot located on Utica Avenue in Brooklyn (the "Property"). In 1998, WJR refinanced its original $2.2 million mortgage, borrowing approximately $3.75 million from Citibank (the "Mortgage"). The mortgagee under this loan was State Street Mortgage Bank & Trust Company ("State Street" or "Mortgagee"). The following year, WJR lost both tenants to the Property, and, predictably, began to lose revenue. WJR stopped making payments and defaulted on the mortgage in November 2000. In February 2001, State Street commenced a foreclosure action in the Supreme Court of Kings County (the "State Court Action") and in connection therewith, filed a notice of pendency with the clerk of the court. The State Court appointed a receiver (the "Receivership Order") requiring a temporary receiver to collect all rents and profits of the Property during the pendency of the foreclosure action and enjoining WJR "from interfering in any manner with the property or its possession." (Rhodes Aff. Ex. J. at 3.)

The Staples Lease

On April 1, 2002, a judgment of foreclosure was entered (the "Judgment of Foreclosure"). In it, the State Court ordered, inter alia, that (1) State Street was due $4,557,857.89; (2) the Property be sold at public auction; (3) the liability of any of the individual defendants, if any, would be determined at a later hearing; and (4) the individual defendants be "forever barred and foreclosed of all rights, claim, lien, title, interest and equity of redemption in the said mortgaged premises." Notwithstanding the language in both the order appointing a receiver and the foreclosure sale and judgment, WJR began to negotiate both with State Street (mortgagee in foreclosure) and Staples. WJR sought to retain control of the Property and then lease the Property to Staples.

Drafts of the would-be lease indicate the parties' intent that WJR would "provide non-disturbance agreements, in a form satisfactory to Staples, from any existing mortgagees and/or prime landlords on or before execution of the lease." (Rodes Decl. Ex N at DX ("DX") 2 at 3.) The purpose of this non-disturbance agreement ["SNDA"] was understood to be essential to protecting "Staples' leasehold interest in the premises in the event that W.J.R. . . . was ever divested of its title to the subject property due to foreclosure." (Pl. R. 56.1 Stat. & 22.) Negotiations involved King, a WJR partner, and an in-house attorney from Staples, Robert Hirsch ("Hirsch").

On January 16, 2003, following an inquiry by Hirsch, King arranged for a report of WJR's title in the Property (the "Report") to be sent to Staples, prior to execution of the lease. The Report indicates that the Property is "Subject to a Judgment of Foreclosure filed 2/20/01." According to his deposition testimony, Hirsch did not review the Report for [t]wo reasons. One, [Staples was] getting full representations and warranties regarding title authority and financing in the lease and that there were no documents out there that conflicted with our rights under the lease and that there were no mortgages out there for which we were not going to get an SDNA. And secondly, most landlords, as soon as they get a Staples lease, which is a credit lease, refinance. (Cramer Decl. Ex. C at 40-41.) However, the SDNA was never delivered to Staples for execution. It was signed by State Street's agent and delivered to King for signature by WJR, which appears not to have happened.

The lease between WJR and Staples was signed on March 4, 2003 (the "Lease"). In it, WJR warranted, inter alia, that (1) it "ha[d] good title to the premises;" (2) "there [were] no claims, causes of action or other proceedings pending or threatened in respect to the ownership, operation or environmental condition of the Center;" and (3) "if the premises is, as of the date hereof, subject to any mortgage, trust deed or ground lease, Landlord shall provide Tenant with an agreement executed by such lien holder which shall assure Tenant's right to possession of the Premises and other rights granted under this Lease." There is no indication in the record that either the State Court or the rent receiver were aware of or approved the Lease.

State Street's "Time is of the Essence" Offer

State Street submitted an offer for the Property to the WJR partners King and Reinhart on April 1, 2003. The offer required WJR to, inter alia, remit a payment of $3,700,000 to State Street. Payment of $100,000 was due by April 3, 2003, with a closing date of no later than May 30, 2003. The offer stated that "time [was] of the essence." (DX at 59) (emphasis in original). In order to come up with the $3.7 million, WJR turned to Banco Popular. Based at least in part on WJR's lease with Staples and its concomitant anticipated revenue stream, Banco Popular became interested in and willing to lend WJR $4,000,000 specifically for use in the proposed WJR-State Street agreement.

However, notwithstanding the "time is of the essence" clauses in State Street's offer, King failed to attend two scheduled closings with Banco Popular. After the second failed attempt to close, State Street sold its interest to Realty Equity Holdings 3280, LLC, Nostrand Realty Holdings and Tim Ziss (the "Ziss Parties"). The Ziss Parties also entered into agreements with the WJR partners and King which provided, in part, that King, Reinhardt and WJR would not interfere with a foreclosure sale (the "Ziss Agreements").

Moreover, in one of the Ziss Agreements, King was promised $75,000 if the Ziss Parties were able to structure a different lease with Staples that provided for a $6 per foot rental increase over the existing one. As a result of the actions (or nonactions, as the case may be) of King following these agreements, he received a total of $215,000 from REH and/or Ziss. Following their acquisition of the Property, the Ziss Parties informed Staples by letter that they would not honor the Lease. By that time, Staples had spent almost $1,700,000 in improvements to the Property. Staples then negotiated a new lease with the Ziss Parties, containing terms less favorable to Staples than the one it entered with WJR earlier that year.

Staples filed the instant lawsuit against the WJR Defendants and King for, inter alia, breach of contract and breach of warranties. The WJR Defendants thereafter filed a third-party complaint against Ziss Parties, alleging that the Ziss Parties tortuously interfered with its contractual relations with ...


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