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In re Great Atlantic & Pacific Tea Co., Inc.

United States District Court, S.D. New York

March 31, 2014

In re: THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC., Debtor; MBB REALTY LIMITED PARTNERSHIP, Appellant,
v.
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC., Appellee

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[Copyrighted Material Omitted]

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For Debtor-Appellee: Jeffrey Meyers, Esq., Sarah Schindler-Williams, Esq., Ballard Spahr LLP, Philadelphia, PA.

For Appellant: Patrick J. Troy, Esq., Sirlin, Lesser & Benson, PC, Philadelphia, PA.

OPINION

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OPINION AND ORDER

KENNETH M. KARAS, UNITED STATES DISTRICT JUDGE.

Appellant MBB Realty Limited Partnership (" MBB" ) appeals from a final Order of the United States Bankruptcy Court for the Southern District of New York (" the Bankruptcy Court" ) dated April 5, 2013, in which the Bankruptcy Court denied summary judgment for MBB, but granted summary judgment for Debtor-Appellee The Great Atlantic & Pacific Tea Company, Inc. (" A& P" ). For the reasons given herein, the judgment of the Bankruptcy Court is affirmed.

I. Background

A. Factual Background

On September 3, 1999, MBB and Super Fresh Food Markets, Inc. (" Super Fresh" ), signed a commercial lease (" the Lease" ) for property located on Frankford Avenue in the 57th Ward of Philadelphia, Pennsylvania (" the Demised Premises" ). ( See Appellant's Designation of Items To Be Included in the R. on Appeal, Item No. 10, Joint Exs. 1-56 in Supp. of Cross-Mots. for Summ. J. (" Joint Exs." ), Lease By and Between MBB and Super Fresh, Sept. 3, 1999 (" Ex. 9" ), at 1, 43, 46.) Super Fresh is a wholly owned subsidiary of A& P. ( See Joint Exs., Janet Sides Dep. Tr., Nov. 16, 2010 (" Ex. 2" ) 8:11-15.) Nine days earlier, on August 25, 1999, " in order to induce" MBB into signing the Lease, A& P had guaranteed " the due and punctual payment and performance by [Super Fresh] of all of its [lease] obligations." (Joint Exs., Guaranty of MBB, Sept. 3, 1999 (" Ex. 10" ), at 1.) For the sake of convenience, the Court will refer to Super Fresh and A& P jointly as " A& P" throughout this Opinion.

Article 7(B)(iii) of the Lease obligated A& P to " diligently pursue the construction of a building . . . on the Demised Premises . . . which building shall contain approximately [55,853] square feet of ground floor area . . . ." (Joint Exs., Ex. 9, at 11.) Under Article 6(A), A& P " agree[d] to open the Demised Premises for business as a fully stocked and operational supermarket," although " subsequent to [A& P's] opening [as such], [A& P] [was not] obligated to conduct or to remain open for the conduct of any business . . . ." ( Id. at 6.) The Demised Premises were to be " used and occupied only for the operation of a supermarket, drugstore, automated teller machine, bank and/or for any other

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lawful retail or service purpose or purposes or for any office or warehouse use incidental to a permitted use . . . ." ( Id. at 5-6.)

Article 20 covered assignment and subletting, and stated that, " [p]rovided that the use does not violate the terms and provisions of Article 6 hereinabove, [A& P] may sublet all or any part of the Demised Premises, or license the use of any portion thereof or assign this Lease, but [A& P] shall nevertheless continue to remain liable hereunder." ( Id. at 25.)

Titled " Alterations," Article 15 read in relevant part as follows:

The Tenant may at its own expense from time to time, during the term hereof, make such alterations, additions, improvements and changes, structural or otherwise . . . in and to the Demised Premises which it may deem necessary or desirable, provided such alterations shall not increase or decrease the footprint nor impair the structural integrity of the Demised Premises; provided, however, that in the event the Tenant wishes to make an Alteration to the exterior of Tenant's building (other than to sign faces) Tenant shall first obtain Landlord's consent thereto, which consent shall not be unreasonably withheld, conditioned or delayed.

( Id. at 23.)

Under Articles 3(A) and 5, the lease term was to run for 20 years, during which time the fixed annual rent that Tenant would owe Landlord would be $800,250 for years one-ten, $855,250 for years 11-15, and $910,250 for years 16-20. ( See id. at 3, 4.) Article 35 mandated that the rights and obligations of the Parties under the Lease were to be interpreted and construed in accordance with Pennsylvania law, while Article 50 provided that, " [i]n any event of any ambiguity, controversy, dispute or disagreement over the interpretation, validity or enforceability of this Lease or any of its covenants, terms or conditions, no inference, presumption or conclusion whatsoever shall be drawn against Tenant by virtue of Tenant's having drafted this Lease." ( Id. at 40.)

Article 39 contained an integration clause, and also laid out the process by which the Parties could alter the Lease:

This Lease contains the entire agreement between the parties and cannot be changed, modified or amended unless such change, modification or amendment is in writing and executed by the party against which the enforcement of the change, modification or amendment is sought. Any document, notice or consent including, without limitation, this Lease, any amendment thereto or extensions thereof or any notice given under Article 7 shall only be binding upon Tenant if executed by a corporate officer duly authorized to do so or by such other party authorized in writing by the Board of Directors of Tenant to execute documents on behalf of Tenant. Any such notice, document or extension not so executed may be ratified by Tenant.

( Id. at 36.)

The Parties altered the Lease a number of times. On June 11, 2002, at least in part in an effort to resolve " litigation concerning disputes over the Lease" pending in the Pennsylvania Court of Common Pleas, the Parties executed the " Fourth Amendment to Lease Agreement" (" the Fourth Amendment" ). (Joint Exs., Fourth Amendment to Lease Agreement, June 11, 2002 (" Ex. 13" ), at 1, 9-12.) The Fourth Amendment modified the Lease in a number of ways, the most important of which were the following:

1) The Fourth Amendment's Article 5(C)(iii) replaced the Lease's Article 7(B)(iii), downsizing the building Tenant

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was required to " diligently pursue the construction of" from 55,853 to 48,131 square feet of ground-floor area. ( Id. at 6.)

2) The Fourth Amendment's Article 4 replaced the Lease's Article 6(A), such that the Lease's provision regarding use and occupancy thereafter read as follows:

The Demised Premises may be used and occupied only for the operation of a supermarket, drugstore, automated teller machine, bank and/or for any other lawful retail or service purpose or purposes or for any office or warehouse use incidental to a permitted use, unless restricted pursuant to the Cross Easements as set forth in Exhibit 'I'. Tenant agrees to open the Demised Premises for business as a fully stocked and operational supermarket within one (1) year following the date of the Fourth Amendment to the Lease Agreement. Notwithstanding anything to the contrary contained in this Lease, subsequent to Tenant's opening of the Demised Premises for business as a fully stocked and operational supermarket, Tenant shall not be obligated to conduct or to remain open for the conduct of any business in the Demised Premises, but Tenant may, in its sole discretion, elect to operate up to and including twenty-four (24) hours a day. ( Id. at 4.)

3) The Fourth Amendment's Article 3 also replaced the Lease's Article 5, lowering the fixed annual rent Tenant owed Landlord for years one-ten from $800,250 to $663,223.61; for years 11-15 from $855,250 to $718,223.61; and for years 16-20 from $910,250 to $773,223.61. ( See id. at 3.)

4) The Fourth Amendment's Exhibit L introduced " percentage payments" into the agreement for the first time. According to Exhibit L:

[I]n addition to fixed annual rent, Tenant shall make annually, as an additional Charge, a percentage of sales payment . . . in an amount equal to [2.5%] . . . of all Sales . . . in excess of the Sales Base . . . made by Tenant in and from the Demised Premises for each Lease Year. (Ex. 13, at Ex. L.)

Exhibit L defined the Sales Base as $22,100,000 for the Lease's first twenty years, and also contained the following disclaimer:

Tenant makes no representation or warranty that the business in the Demised Premises will amount to any specified volume. Except as specifically provided in the Lease, nothing herein contained shall be deemed to require that the Demised Premises be opened or remain open for any business. Landlord and Tenant agree that Tenant has no fiduciary relationship with Landlord and Landlord shall not hereby acquire any interest in Tenant's business.

( Id. at Ex. L.)

When A& P signed the Fourth Amendment in 2002, it expected to open a " Superfresh" store in the building that it had contracted to construct. ( See Joint Exs., Timothy Huttleston Dep. Tr., Dec. 8, 2010 (" Ex. 4" ) 18:6-9.) However, by the summer of 2006, A& P instead had decided to open a smaller " Food Basics" store in the building. ( See id . at 18:6-9.) In furtherance of this objective, A& P planned to erect a demising wall separating the Food Basics store from approximately 9,000-11,000 square feet in the building that the store would not require for its operation. ( See id . at 22:22-24, 23:1-5; Joint Exs., Michael Willner Dep. Tr., Oct. 20, 2011 (" Ex. 5" ) 85:4-24, 86:1-24, 87:1.) A& P's " ultimate intention" was to sublease this excess floor space to subtenants. (Joint Exs., Ex. 4, at 24:8-13; see also Joint Exs., Ex. 5, at 85:1-13.)

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Once A& P had settled on this course of action, it " put together a design and a budget" and moved forward with its downsizing plan, at which point the contractor that A& P had hired " went to the City of Philadelphia to get . . . approval for [building] permits," and was told that " a zoning application . . . needed to be applied for first before permits were issued and that the landlord would have to sign that application." (Joint Exs., John Majczan Dep. Tr., Nov. 18, 2010 (" Ex. 3" ) 122:10-24; see also Joint Exs., Memorandum from Janet Sides, June 19, 2009, with E-Mails Among Timothy Huttleston, Janet Sides, and John Majczan, July 19-20, 2009 (" Ex. 31" ).) Accordingly, A& P contacted Michael Willner (" Willner" ), president of MBB's general partner, in order to secure " a letter to the city for A& P's permit to downsize the store," which initiated a series of communications at the core of the instant dispute. (Joint Exs., Ex. 5, at 83:4-8.)

On June 21, 2006, Janet Sides (" Sides" ), A& P's real estate manager, emailed Willner with a " self-explanatory [letter] for [his] signature concerning the permit process for [the Demised Premises]." (Joint Exs., E-mail Chain Between John Majczan, Timothy Huttleston, Michael Willner, Janet Sides, and David Pope, June 21, 2006 (" Ex. 16" ).) She informed Willner that he would also be receiving further correspondence from A& P's corporate-construction department, which would consist of " sign changes that need[ed] [his] approval for both the front of the building and the pylons." ( Id.) Willner responded to Sides by email on the same day, noting that he was in receipt of her correspondence as well as correspondence from corporate construction. ( Id.) He wrote that he would be " happy" to work with Sides to " make some changes" to the Demised Premises, but that " [p]rior to approving [her] changes," he had " concerns" that he wanted to discuss, which included the following:

1. The zoning approval for the site provides approval for a supermarket and a certain number of other retail stores (I think 5). Prior to dividing your space, you need to obtain zoning approval for more retail uses at the site. I think we should obtain approval for up to 10 stores at the site, excluding the Hollywood Video building.
2. When we renegotiated the Lease when you originally downsized the store, percentage rent was a big part of the negotiations. By downsizing again, you are damaging my chances of receiving percentage rent. We need to discuss this issue . . . .
4. In terms of your new signs, I recommend that we obtain approval for an additional box for signs on the pylon on Academy Road. We should obtain an additional box with at least 6 panels. You can utilize a panel for the tenant you obtain for the 9000 sf space. Any potential new tenant will desire a pylon panel.
5. Lastly, I am concerned about the quality of the tenant going in the 9000 sf space. I have spent a lot of effort trying to keep the center occupied by 1st class tenants. I am not interested in a local dollar store. Additionally, I believe that a dollar store will hurt your sales and cost me more $ in % rent."

( Id.)

On July 12, 2006, Sides sent Willner a letter from John Majczan (" Majczan" ), A& P's director of real estate development, which Majczan described as a " follow up to our recent meeting, emails and telephone conversations regarding A& P/Food Basics desire to erect a demising wall in order to allow the downsizing of the sales area" at the Demised Premises. (Joint Exs., E-Mail from Janet Sides to Michael

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Willner, July 12, 2006, with Attached Letter from John Majczan to Michael Willner, July 12, 2006 (" Ex. 27" ).) In his letter, Majczan proposed " an outline of modifications to the Lease addressing [Willner's] concerns which [Majczan] would be willing to submit to Corporate for approval . . . ." ( Id.) Regarding modifications to the Lease's percentage-rent provisions, Majczan proposed 1% of annual sales over a sales base of $18,000,000, 1.5% over $19,000,000, and 2% over $20,000,000, as well as retention of the original 2.5% over $22,100,000 that the Fourth Amendment had set approximately four years earlier. ( See id .) The primary effect of Majczan's proposed modifications in this regard would thus have been to lower the amount of money in annual sales that A& P would have had to generate from the Demised Premises in order to trigger MBB's entitlement to a percentage of those sales.

Regarding " the quality of tenants occupying the space available after the modifications were complete," Majczan offered to have A& P pay rent on the space for six months, after which time A& P would pay MBB $100,000 and MBB would " take the space back." ( Id.) However, if MBB was " not receptive" to that approach, Majczan proposed that A& P " would have the right to sublease to any use allowable under the Lease, however, [A& P] would not sublease to a Dollar Store plus agree to sublease to a regional or national tenant." ( Id.)

" Addressing [Willner's] other concerns," Majczan wrote that A& P would also " go to the City of Philadelphia for a zoning application and . . . use good faith efforts to attempt to obtain approval for additional retail spaces as outlined in [Willner's] June 21, 2006 email." ( Id.) Further, A& P would " apply through zoning and attempt to obtain an additional tenant box for signs on the pylon . . . for at least [six] panels or an amount to be clarified and . . . use commercially reasonable efforts to obtain the same." ( Id.) Majczan noted that " timing [was] of the essence to perform the construction work and have the Grand Re-opening prior to a competitor opening so that [A& P's] customers [could] become acclimated to the new format," and requested that Willner execute the letter " so that a representative of [A& P] [could] go to the City of Philadelphia to apply for a zoning application that [was] needed before a building permit [could] be issued." ( Id.) In the letter's final paragraph, Majczan wrote that the letter would " not be binding until an executed letter [was] submitted to [A& P's] Corporate Executive Management Committee for final approval and full execution of any necessary legal documents by all parties." ( Id.)

Willner emailed back the next day with what was essentially a counteroffer. As to percentage rent, he wrote:

The original lease call[ed] for percentage rent (2.5%) to kick in if sales are greater than $459.16 [per square foot]. Based on this number, the new % rent breakpoint for the smaller store (37,031 [square feet]) should be ...

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