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Center 48 Limited Partnership v. May Department Stores Co.

December 05, 2002


On appeal from Superior Court of New Jersey, Law Division, Morris County, MRS-L-2806-99.

Before Judges Eichen, Fall and Weissbard.

The opinion of the court was delivered by: Weissbard, J.A.D.


Argued September 25, 2002

In this suit to enforce a guaranty of a lease agreement, we are called upon to decide whether a modification of the underlying lease -- whereby the lessor became a long term leaseholder rather than fee owner -- operates to discharge the guarantor. We conclude that in order to effect a discharge of the guarantor, an alteration or modification of the underlying lease must either injure the guarantor or actually increase the guarantor's risk or liability. Since we determine that the modification in this case neither injured the guarantor nor increased its risk or liability under the contract of guaranty, we affirm the judgment entered against the guarantor. We also affirm an award of attorney's fees pursuant to the frivolous litigation statute. N.J.S.A. 2A:15- 59.1.

On July 31, 1985, Caldor, Inc. (as tenant) entered into a lease with Robert C. Baker, individually and as trustee under the Robert C. Baker Family Trust dated March 15, 1984 (Baker), and Harvey B. Oshins (collectively as landlord), for premises in the Voorhees Shopping Plaza on Haddonfield-Berlin Road in Camden County. The terms "landlord" and "tenant" as used in the lease included successors and assigns of both parties.

The landlord warranted and represented to Caldor, "upon which warranties and representations [Caldor] has relied in executing and delivering this lease," that it was the owner in fee simple of the leased premises. Possession of the premises was to be delivered to Caldor "free and clear of all restrictions and encumbrances" except as otherwise noted in the lease agreement. Upon Caldor's paying the rent and performing and observing all required agreements and conditions, it "shall and may peaceably and quietly have, hold and enjoy the demised premises and all rights of Tenant hereunder during the term of this lease without any manner of hindrance or molestations, subject, however, to the terms, covenants and conditions of this lease."

The original term of the lease was for twenty-five years, with options to renew. Annual rent was $491,592 per year, plus a certain percentage of Caldor's gross sales.

In the event Caldor defaulted in the payment of rent and did not cure such default, the landlord could terminate the lease provided certain notice requirements were met. In the case of such termination, Caldor agreed to indemnify the landlord against all loss of rent for the period of time between termination and the date for expiration of the lease, and Caldor agreed to be responsible for any expenses incurred in the landlord's obtaining possession of the premises and reletting.

In the event of a Chapter 11 bankruptcy proceeding by Caldor, the bankruptcy trustee had to elect to assume the lease within a certain time frame or be deemed to have rejected it. In the event Caldor was declared insolvent, the landlord had the right to terminate the lease.

On July 31, 1985, the same date as this lease was executed, Associated Dry Goods Corporation (Associated) executed a guarantee agreement in consideration of the landlord's having executed the lease at the request of Associated. Caldor was a wholly-owned subsidiary of Associated, although Caldor operated separate and apart from Associated. According to this guarantee agreement,

Associated hereby unconditionally guarantees to Landlord the payment of the rents provided for in said Lease and the payment, performance and observance of all agreements and conditions contained in said Lease on the part of Tenant to be paid, performed or observed. Any assignment of the Lease or any subletting of the Demised Premises or any modification of the Lease, or waiver of the performance thereunder, or the giving by Landlord of any extensions of time for the performance of any of the obligations of Tenant, or any acceptance of rent after any default of Tenant, or any forbearance on the part of Landlord, or any failure by Landlord to enforce any of its rights under the Lease, or this Guaranty, or any failure by Associated to receive notice of any such actions or in-actions, shall not in any way release Associated from liability hereunder, or terminate, affect or diminish the validity of this Guaranty, except to the same extent, but only to such extent, that the liability or obligation of Tenant is so released, terminated, affected or diminished. Notice to Associated of acceptance of this Guaranty, or any such modification, waiver, extension, forbearance or failure or of any default by Tenant is hereby expressly waived.

The provisions of this Guaranty shall be binding upon Associated and its successors and assigns and shall inure to the benefit of Landlord and its heirs, legal representatives, successors and assigns. [emphasis supplied] On August 1, 1986, Caldor (as tenant) and Baker, Oshins, Gregory J. Stepic, John G. Orrico, Marc Golden and Michael Plaskon (collectively as landlord), entered into a modification of the July 31, 1985, lease, whereby the demised premises were changed to certain property situated in the Boroughs of Somerdale and Magnolia, on Evesham Avenue and White Horse Pike, in Camden County. The modification was approved and accepted (and separately executed) by Associated as guarantor, and the guarantee agreement was "hereby ratified, confirmed, dated and deemed applicable to the Lease as modified by the within Modification of Lease."

On March 23, 1987, the same parties entered into a second lease modification, which merely substituted a new lease plan attachment for the prior one. In all other respects, the provisions of the original lease continued in full force and effect. This modification was not separately acknowledged or signed by Associated.

In 1980, Baker started a company known as National Realty Development Company, which developed and managed commercial real estate, primarily strip shopping centers. National Realty was the managing agent for the shopping center in which Caldor leased its store. Baker was involved in, and had relationships with, various entities and family trusts in addition to National Realty. This is why the definitions of "landlord" under the Caldor lease, the first modification to the lease, and the second modification to the lease, differed from one another. That is, at various times, Baker gave different individuals, such as Plaskon, Stepic, Orrico, and Golden, interests in properties he owned and/or managed.

Although the Caldor lease was signed in 1985, Caldor did not actually take occupancy until 1987 or 1988 because the shopping center had to be constructed. Baker explained that, at one point, either National Realty, or a related entity, had been under contract to buy the Voorhees property which was the subject matter of the original Caldor lease. However, because zoning approvals could not be obtained, a new site was found nearby, the one referred to in Caldor's lease modification of August 1, 1986. Hence, Caldor never operated out of the Voorhees site.

At some point, National Realty's transaction with the owner of the property changed from a sale to a land lease due to capital gain considerations. That is, on December 30, 1986, a company known as National Holding Corp., of which Baker was the major shareholder, entered into a thirty-year ground lease (with eight successive options to renew, for additional terms of ten years per option) with Somerdale Realty Co., Inc., the actual owner of the property. No one at National Realty or in the Baker family trust had any ownership interest in Somerdale Realty.

At the time Caldor signed the original lease on July 1, 1985, and again at the time it signed the lease modification of August 1, 1986, Somerdale Realty owned the underlying land. The "Baker entities," as landlord on the Caldor lease, then leased the premises to Caldor without actually owning the land.

According to the terms of the ground lease between Somerdale and National Holding, National Holding was allowed to use the premises as if it were the owner, and had the right to construct a shopping center on the premises and to sublease the premises. Any sublease was to be subordinate to the ground lease. All terms of the ground lease between Somerdale and National Holding ran with the land and inured to the benefit of and were binding upon the successors and assigns of each party.

Baker claimed that both Caldor and Associated knew that the Baker entities never took ownership to the land because Baker was in constant communication with Alan Kuller, a senior vice president of Caldor. According to a certification of Kuller dated August 19, 2000, Kuller did not remember Baker telling him that the Baker entities did not own the property and that Caldor's lease was actually a sublease. If he had known, Kuller would have insisted on a non-disturbance agreement with the owner of the land.

However, four days later, on August 23, 2000, Kuller executed another certification after recalling certain conversations he had with Baker. In this certification, Kuller stated that Baker did tell him that his company was going to enter into a long-term ground lease with the owner rather than purchase the property. This information was entirely acceptable to Caldor. That is, Caldor knew that the "landlord" under its lease was itself a lessee of the ground and owned only the improvements thereon.

According to Arthur O'Day, Associated's then vice president, he did not remember either Baker or Kuller telling him that the landlord under the Caldor lease did not own the property. To the best of O'Day's knowledge, Baker did not tell anyone else at Associated of this fact. Baker admitted that he did not talk to anyone at Associated, and he did not personally know whether anyone at Associated was told that the sale of the land had changed to a ground lease.

In October 1986, defendant, The May Department Stores, acquired all of the stock of Associated and Associated became a wholly owned subsidiary of defendant. In November 1989, defendant sold Caldor, Inc., and Caldor, Inc. became a wholly owned subsidiary of Caldor Corp. On March 28, 1990, John M. Manos, then Associated's vice-president, wrote to National Realty in conjunction with National Realty's seeking of permanent financing on the ...

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