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Mill Creek Mall, LLC v. Fabco Shoes Mill Creek

SUPERIOR COURT OF NEW JERSEY APPELLATE DIVISION


December 26, 2007

MILL CREEK MALL, LLC., PLAINTIFF-APPELLANT,
v.
FABCO SHOES MILL CREEK, LLC, DEFENDANT, AND FABCO ENTERPRISES, INC., DEFENDANT-RESPONDENT.

On appeal from Superior Court of New Jersey, Law Division, Hudson County, L-1212-05.

Per curiam.

NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION

Argued January 24, 2007

Before Judges Collester and Lyons.

This appeal is from the entry of summary judgment in favor of defendant Fabco Enterprises, Inc. (FEI) based on the interpretation by the motion judge of a commercial lease and guaranty agreement between plaintiff Mill Creek Mall, LLC, (Mill Creek) as landlord, Fabco Shoes Mill Creek, LLC (Fabco Shoes) as tenant and FEI as guarantor of the tenant's obligations under the lease. Mill Creek is a limited liability company created by Hartz Mountain Industries, Inc. (Hartz Mountain), which is self- described as one of the largest private owners and landlords of commercial real estate in the United States. The demised premises is 3,500 square feet of floor space in a Secaucus shopping mall known as the Mall at Mill Creek, one of six major shopping malls in New Jersey owned by Hartz Mountain. Fabco Shoes is a limited liability corporation created by FEI to operate a retail shoe store in the Mall at Mill Creek by FEI, a New York corporation which operates a chain of fifty-six shoe stores in the New York and New Jersey metropolitan area. The lease agreement dates back to November 27, 1985 when it was executed by Hartz Mountain as landlord and Lechters New Jersey, Inc. (Lechters) as tenant. The lease term was extended by agreement of these parties on July 24, 1998 to run through January 31, 2009. However, on May 21, 2001 Lechters breached the lease by filing a voluntary petition under Chapter 11 of the United States Bankruptcy Code.

Sometime later David Weinman, President of FEI, learned there was a vacant store at the Mill Creek and began negotiations with Hartz Mountain for an assignment of the Lechter lease to Fabco Shoes. However, Hartz Mountain would not accept the assignment of the lease to a limited liability company that had no assets without a written guaranty from FEI. Accordingly, a guaranty agreement was signed on January 7, 2002.

It provided in pertinent part as follows:

WHEREAS, in order to induce the Landlord to consent to the assignment the Guarantor has agreed to guarantee the payment of Rent and other charges provided for in the Lease and the performance by Tenant of all of the covenants to be performed and observed on its part pursuant to the Lease for a period of three (3) years from the date of assignment.

(1) The Guarantor agrees that the obligation of the Guarantor is a primary and unconditional obligation, and the Guarantor unconditionally and absolutely guarantees the due and punctual payment of the Rent, the additional Charges and any other monies due or which may become due pursuant to the terms of the lease.*fn1

A week later on January 14, 2002, the Bankruptcy Court of the Southern District of New York approved the assignment of the lease from Lechters to Fabco Shoes. The following day, January 15, 2002, Fabco Shoes began its tenancy at the Mill Creek which was to continue under the assigned lease until January 31, 2009. The guaranty by FEI also began on January 15, 2002, but it expired in January 2005, approximately four years before the lease terminus.

It is undisputed that in the month of November 2004, Weinman called Deborah Stone, the assistant vice-president of retail leasing and marketing for Hartz Mountain, in an attempt to negotiate a rent reduction. He followed the telephone conversation with a certified letter to Ms. Stone dated December 1, 2004 in which he stated:

As I mentioned during our phone conversation several weeks ago the Guaranty on the above-referenced lease expires January 1, 2005. As of that date all obligations of Fabco Enterprises, Inc. as regards this lease will end. We agree to explore whether we could come to new terms acceptable to both parties. Since I have not heard back from you or from your office (I have left several messages) I have decided to write.

If we do not hear from you within the next two weeks we must assume you have no interest in discussing this with us and we will plan accordingly. However, for our part we would like to work out something whereby we can stay at the mall.

Ms. Stone later certified that it was obvious to her that Weinman was trying to use the guaranty expiration date as a bargaining chip to force a reduction in rent and that Weinman planned to breach the lease if the rent was not reduced. After Hartz Mountain refused to re-negotiate the rent, Ms. Stone's suspicions turned to fact as Fabco Shoes began removing inventory from the store. On January 3, 2005, Weinman sent to Ms. Stone another certified latter, this one stating:

Please be advised that we will vacate the above-referenced premises by January 15, 2005. Enclosed find a check in the amount of $5,501.40 which represents payment in full for 1/2 months rent for January 2005.

Three days later on January 6, 2005 a certified letter was addressed by the law firm representing Mill Creek to the attention of David Weinman at FEI's headquarters in Elmhurst, New York.

Pursuant to the terms and conditions of that certain Guaranty dated January 7, 2002, FABCO ENTERPRISES, INC., as Guarantor, unconditionally and absolutely guaranteed to Landlord payment of the Rent due under the above referenced lease Agreement as well as the performance of all the terms, covenants and conditions contained therein.

The Tenant has defaulted under the Lease by failing to pay Rent due thereunder (see enclosed Statement of Account), and by notifying Landlord that it intends to vacate the Premises by January 15, 2005 notwithstanding that the Term of the Lease is scheduled to expire on January 31, 2009. It appears that Tenant has already removed a majority of its inventory from the Premises. As a result of these actions, Landlord has incurred damages.

In view of the above, this letter shall serve as formal notice and demand that Guarantor immediately cure the Tenant's default, including, but not limited to, payment of all sums due and owning pursuant to the Lease and to become due and owing by reason of Tenant's wrongful termination. Failing same, we will be left with no alternative but to pursue our client's various remedies as provided by the Lease, Guaranty, and by law.

On January 10 another letter was sent to the attention of Weinman, this one by the property managing agent for Hartz Mountain on behalf of Mill Creek stating the following:

According to our records you are in default of your lease in that the items on the attached statement of account remain unpaid as of this date.

Pursuant to the terms and conditions of the subject lease, unless payment of the attached items is received by January 17, 2005, we will turn your account over to our attorney for collection, as well as pursue any other remedies that may be available to use under your lease or by law.

Please be further advised that we will charge your account for any and all legal fees and costs incurred by us in connection with the collection of these monies, as well as in the pursuit of our various legal remedies.

Weinman's only response was a letter to Ms. Stone on January 20, 2005, enclosing the keys to the store in Mill Creek and notifying her that the premises were vacated and the electric, gas, and water accounts in the name of Fabco Shoes had been closed.

Mill Creek filed suit on March 5, 2005 against Fabco Shoes as the defaulting tenant and FEI as the guarantor of the tenant's obligations under the lease. No appearance was entered on behalf of Fabco Shoes, and default was entered. FEI filed an answer along with a motion for summary judgment and dismissal of all counts of the complaint relating to its alleged liability as guarantor. Mill Creek filed opposing papers as well as a cross- motion for summary judgment against FEI. Following oral argument on August 5, 2005, the motion judge delivered an oral decision denying Mill Creek's cross-motion and granting summary judgment to FEI. The motion judge stated:

[T]his Court finds that the language of the guarantee, in conjunction with the certifications filed by the respective parties, indicate that it was the expectation of [FEI] that it would be responsible for any payment of rent or other obligations for a period of three years only. And that after the expiration of the three years, it would not be responsible for rent or any other performance. And that was not dependent upon whether the breach by the LLC occurred within the three-year period or after the three-year period. That is how the Court interprets this language.

On August 19, 2005 the motion judge supplemented his decision of two weeks earlier by stating on the record that partial summary judgment was granted to FEI for two reasons.

First, the judge found nothing in the record to indicate that Fabco Shoes breached the lease during the three-year period of the guaranty. The second reason was that the language of the guaranty agreement was ambiguous as to the consequences to FEI as guarantor after a breach of the lease by the tenant during the three-year period of the guaranty. That is, whether a breach during the three-year term imposed liability upon the guarantor only for the term of the guaranty which ended on January 14, 2004, or whether the guarantor's liability extended to the balance of the lease term through January 31, 2009. Noting that a guaranty agreement is strictly construed and that the guarantor cannot be held liable beyond the strict terms of a guaranty, the judge rejected the plaintiff's interpretation of the guaranty agreement and reaffirmed that FEI was entitled to summary judgment.

In asserting that defendant [FEI] is liable through January 31st of 2009, plaintiff relies principally upon the "due or which may become due" language. This court finds that this language does not clearly state that defendant Fabco Inc. would be liable through the end of the lease. Likewise, it does not indicate that such was the intention and/or agreement of the parties....

At the very most insofar as plaintiff's argument[s] are concerned, this language is ambiguous. It can not be said that this language precludes an objectively reasonable expectation on the part of [FEI] Inc. that its liability was limited to a three year period of the guaranty. Under the aforementioned principles utilized in interpreting guaranty's this court is constrained to [reject] the interpretation proposed by plaintiff. Accordingly, defendant Fabco Inc. is entitled to partial summary judgment dismissing the complaint as to it.

Mill Creek filed a motion for reconsideration on September 21, 2005, and attached a certification of Brett M. Lowy, Assistant General Counsel for Hartz Mountain, in which he said that it was the clear understanding of the parties prior to the execution of the guaranty that the "life" of the guaranty was for three years but the "extent" of the guaranty imposed full liability to the guarantor for the entire lease term if a default occurred within three years of the guaranty. On February 1, 2006, the motion judge granted reconsideration after determining he was incorrect in his prior conclusion that plaintiff produced no proof that Fabco Shoes breached the lease within the three year guaranty period. The judge referenced the uncontested statement in the previously submitted certification of Deborah Stone that on or about January 1, 2005, Fabco Shoes breached the lease by failing to pay the rent due. The court also reconsidered and rejected the earlier determination of an ambiguity in the language of the guaranty. The judge stated: If the language is clear and unambiguous with respect to the term of the guaranty, then there is no issue regarding the consequences of a breach during the guaranty period. The consequences of a breach are limited by the term of the guaranty.

In the instant case, the court finds that the guaranty was for a term of three years and that the consequences of a breach are limited by the three-year term of the guaranty. The guarantor's liable for all monies that become due during the three-year term of the guaranty.

The court finds no ambiguity on the face of the January 7, 2002 guaranty regarding the terms of the guaranty. The pertinent language in the agreement reads as follows: In order to induce landlord to consent to the assignment, the guaranty as agreed to guarantee payment of the rent and any other charges provided for in the lease in the performance by tenant of all the covenants to be performed and observed in its part pursuant to the lease for a period of three years from the date of the assignment. I emphasize the portion which reads for a period of three years from the date of the assignment. This court finds that the language is clear, unambiguous and direct. . . . the term of the guaranty could not be more plainly stated. The term was for three years, not for seven years. It was from 1/14/02 to 1/14/05, not to the expiration of the lease on January 31, 2009.

Plaintiff attempts to avoid this plain and unambiguous three-year period of guarantee by contending that the issue is not the term of the guarantee but rather the extent of the guaranty. Plaintiff's contention is not sound. It distorts the clear and explicit language of the agreement and violates basic principles of guaranty contract interpretation.

This court finds that the "due or which may become due" language does nothing to change, modify or decloud, the clear, unambiguous and direct language that the guaranty shall be "for a period of three years from the date of assignment." The words relied upon by plaintiff simply refer to any monies which may become due during the three-year guaranty period. Viewed most generously in favor of plaintiff, a tenuous argument might be made that the which may be come due language is ambiguous.

Nonetheless, the motion judge again rejected Mill Creek's argument and upheld his prior determination.

However, that does not help plaintiff's cause because it implicates two principles of construction which are adverse to plaintiff. The first, the principle would provide in the interpretation of guaranty contracts and ambiguous language should be construed in favor of the guarantor. The second the principle that a guarantor is not bound beyond the strict terms of its promise.

Plaintiff contends that defendant's motion to dismiss is premature because the discovery should be allowed to explore the intent of the parties. As such, discovery might be revealed in deposing the parties about their negotiations and any preliminary draft of the guaranty agreement. Plaintiff's contention is completely lacking in merit because the guaranty agreement is clear and ambiguous on its face. In such a situation, there is no need to look beyond the plain language of the document. Indeed, it is not legally permissible to do so.

[T]his court grants plaintiff's motion for reconsideration. However, upon reconsideration the court affirms it ruling that defendant Fabco, Inc.'s liability under the guaranty is limited to any monies due and owing by the tenant during the three-year guaranty term ending on January 14, 2005.

Following the entry of summary judgment to FEI, a default judgment against Fabco Shoes was entered in the amount of $568,250.96 by accelerating damages to the end of the lease term. Mill Creek appeals from the summary judgment in favor of FEI and the dismissal of the complaint.

Plaintiff's argument is that since Fabco Shoes breached the lease prior to the end of the guaranty term, FEI is liable under the guaranty agreement for rent and additional charges "which may become due" under the lease, which would equate to Fabco Shoes' liability for the entire lease term subject to plaintiff's obligation to mitigate damages. Furthermore, Mill Creek avers that the motion judge was initially correct in determining that the "Whereas" clause of the guaranty agreement was ambiguous in stating that FEI's liability under the lease was "for a period of three years from the assignment" and that the judge erred in reconsidering his interpretation to find that the language was unambiguous and capped FEI's liability. In response, FEI contends that the language of the guaranty unambiguously caps its period of liability to end on January 14, 2005 and that Mill Creek's claim that FEI is liable for rent or other charges beyond the three-year guaranty period is both illogical and violative of the plain meaning of the agreement. In considering these competing contentions, we turn to the lease itself. Article 3, Section 301 states that the tenant is to pay the fixed rent in monthly installments on the first day each calendar month. It is undisputed that Fabco Shoes did not perform its obligation, paying only part of the rent, and therefore, as tenant, it was in default as of January 1, 2005, before the expiration of the guaranty period. Section 27 of the lease sets forth that upon specified events a breach of the lease obliges the tenant to pay as damages the balance of rent and other payments due over the term of the lease. Article 27.01 reads as follows:

If this Lease is terminated under the provisions of Article 25, or if Landlord shall re-enter the Demised Premises under the provisions of Article 26, or in the event of the termination of this Lease, or of re-entry by or under any summary dispossess or other proceeding or action or any provision of law by reason of default hereunder on the part of the Tenant, the Tenant shall pay the Landlord as damages.

Article 27 of the lease sets forth what damages the landlord may collect if there is a breach, which may include additional damages consisting of the balance of the rent over the term of the lease. However, Article 27.01 conditions damages on termination of the lease under certain conditions or events. Articles 25 and 26 trigger Article 27 damages but are inapplicable to the instant case. Article 25.01 deals only with the event of insolvency or bankruptcy. Article 25.02 sets forth events constituting tenant default and provides that . then, in any of said cases . Landlord may give to Tenant a notice of intention to end the Term at the expiration of Five (5) days from the date of service of such notice of intention, and upon the expiration of said Five (5) days, whether or not the Term shall theretofore commenced, this Lease shall terminate with the same effect as if that day were the expiration date of this Lease, but Tenants shall remain liable for damages as provided in Section 27.

Following receipt of the letter of January 3, 2005 from Weinman, Mill Creek's attorney wrote to FEI, the guarantor, on January 6, 2005 stating that the tenant was in default and demanding that FEI "immediately cure" the default. On January 10, 2005, Mill Creek again wrote to FEI stating that "unless payment . is received by January 17, 2005, we will turn your account over to our attorney for collection as well as pursue any other remedies that may be available to us under your lease or by law." Finally, on January 25, 2005 a notice was sent to Fabco Shoes to the attention of Weinman stating that "tenants shall remain fully liable for all its obligations pursuant to the terms and conditions of the lease through January 31, 2009."

The letter does not set forth any notice of termination. Therefore, plaintiff cannot look to Section 25.02 for termination of the lease as required by Section 27.01 as a condition or imposition of damages. Similarly, the reference to Article 26 is of no significance to this case since there was no re-entry by the landlord on the premises. There was also no summary dispossess action or any other such proceeding. Therefore, the question under Article 27.01 of the lease is whether there was a "termination of this Lease . by . any provision of law or by reason of default hereunder on the part of the tenant ." before the date that the guaranty agreement expired. That is, whether the lease was terminated by Fabco Shoes to provide Mill Creek as landlord with a claim for damages under Article 27. Under Article 3.1 the tenant is obliged to pay the fixed rent in monthly installments on the first of the month, which was not done here. Similarly, Article 4.02 requires the tenant to continuously and uninterruptedly keep the entire demised premises open for business and fully stocked during all business hours on all business days when the stores in the mall are open for business. Once again Fabco Shoes did not comply. Furthermore, in the January 3, 2005 letter from Weinman written on behalf of Fabco Shoes, there was a positive and unequivocal intent to refuse to perform under the lease agreement after January 15, 2005. Therefore, the question arises as to whether the repudiation of Fabco's obligation to comply with the lease terms constituted an anticipatory breach prior to the expiration of the guaranty.

As defined by our Supreme Court,

[A]n anticipatory breach is a definite and unconditional declaration by a party to an executory contract -- through word or conduct -- that he will not or cannot render the agreed upon performance. If the breach is material, i.e., goes to the essence of the contract, the non-breaching party may treat the contract as terminated and refuse to render continued performance.

[Ross Systems v. Linden Dari Delight, 35 N.J. 329, 340-41 (1961).] See also Cipala v. Lincoln Technical Institute, 179 N.J. 45 (2004); Industrial Properties Inc. v. Y. C. & V. L., Inc., 100 N.J. 432, 442-44 (1985); Stopford v. Boonton Molding Co., 56 N.J. 169 (1970); Seitz v. Mark-o-Light Sign Contractors, 210 N.J. Super. 646, 664 (Law Div. 1986).

If the breach is material, the non-breaching party may treat the contract as terminated and commence suit forthwith.

As we stated in Gaglia v. Kichner,

A non-breaching party to a contract faced with the other party's anticipatory breach may choose to attempt to persuade the breaching party to retract his repudiation or to perform, though the non-breaching party is not required to do so. He is entitled to treat the other party's repudiation as terminating the contract and relieving him of any future obligation of performance.

[317 N.J. Super. 292, 299 (App. Div.), certif. denied, 160 N.J. 91 (1999).]

As noted, the non-breaching party may treat the contract as terminated and proceed to commence suit. Certainly, Mill Creek argues that it treated the lease as terminated, but the letters subsequently sent by Mill Creek or on its behalf merely requested compliance with payment of the rent and additional charges and did not state the lease was terminated. We find that a factual issue has been presented necessary for determination at trial. We therefore reverse the entry of summary judgment and remand for trial on the following issues: (1) whether there was an anticipatory breach by Fabco Shoes based on the January 3, 2005 letter and, if so, (2) whether the termination occurred prior to the expiration of the guaranty agreement executed by FEI. If the factfinder answers both questions in the affirmative, damages under Article 27.01 need to be reviewed as well as any mitigation on the part of Mill Creek as landlord. If, on the other hand, there was no termination prior to the expiration of the guaranty, then FEI's liability would be the rent for the balance of the month of January 2005 in addition to attorney fees and late charges under the lease.

Reversed and remanded for trial.


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