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GFS/Morristown Limited Partnership v. Vector Whippany Associates

April 2, 2009


On appeal from the Superior Court of New Jersey, Chancery Division, Morris County, Docket No. F-3754-94 and Law Division, Morris County, Docket Nos. L-3373-94 and L-3911-94.

Per curiam.


Argued February 25, 2009

Before Judges Rodríguez, Waugh and Newman.

Defendant/third-party plaintiff-appellant, Vector Whippany Associates, (Vector), the mortgagor, appeals from a judgment of foreclosure in favor of the mortgagee, Goodman Financial Services, Inc. (GFS), formerly Balcor/Morristown, L.P. (Balcor), jointly with GFS/Balcor, plaintiff-respondent, and a judgment entered in favor of defendants-respondents Misawa Homes Co. Ltd., Tao International Co., Ltd, Tao International America, Inc., Zenro Amemiya and Masaru Hanaoka, the investors who provided the mortgage funds. Vector, as third-party plaintiff-appellant, also appeals from the judgment entered in favor of defendants, Westinghouse Electric Corp. (Westinghouse) and Schindler Elevator Corp., (Schindler) the initial and successor sole tenants of the mortgaged property.

The amount of the judgment entered on September 22, 2006, following a non-jury trial, was for $78,856,655.45 together with costs and a counsel fee of $7,500. GFS cross-appeals, claiming that any monies due to Vector for an alleged breach of lease by Schindler should be credited to GFS by virtue of the mortgage, note and other loan documents upon which Vector defaulted. We reverse as to the breach of Vector's lease by Schindler and remand for entry of an amended judgment to reflect that breach, but it does not affect the damages which have been properly credited to Vector in the foreclosure judgment calculation. In all other respects, we affirm the several judgments.


Vector was a real estate partnership with one property, the building at 20 Whippany Road in Morristown, which it acquired upon its formation in 1984. Vector paid $14,500,000 for the twenty-two-acre site, which was financed through a loan. Vector's partners were William and Joseph Lentini, as well as a group in which Arlene Shapiro was a principal. Shapiro began running the day-to-day operations in 1991. The Lentinis purchased the Shapiro interest in Vector for $15,000 in June 1994.

On March 31, 1986, Vector entered into a lease of the entire property with Westinghouse. The lease was to run for ten years, expiring on December 31, 1996. The rent was $2,286,000 per annum, or $190,500 per month, from January 1, 1987, to March 31, 1991, and then $2,857,500 per annum in $238,125 monthly installments, from April 1, 1991, until the end of 1996. The lease gave Westinghouse an option to renew for three five-year periods at its election. It further provided: "This agreement cannot be changed orally but only by an agreement in writing and signed by the party against whom enforcement of any waiver, change, modification or discharge is sought." Westinghouse spent approximately $8,000,000 on improvements.

In the spring of 1987, Vector sought to refinance its loan. On June 16, 1987, Vector and Balcor, an Illinois partnership, entered into a mortgage and security agreement, as well as a secured promissory note, for $27,000,000. Under the note, Vector was to make interest payments of 8.625 percent per annum, at the rate of $6,468.75 per day, until maturity, which was to be December 31, 1987. Vector used the loan proceeds to pay off the existing mortgage as well as its partners' investment. Balcor's sole asset was the $27,000,000 mortgage note.

In conjunction with the execution of the promissory note, the parties entered into an assignment of leases and rents agreement. This agreement provided that rents collected under any lease Vector entered into, including the Westinghouse lease, was "additional security for the payment of all sums due under the Note." Thus, Vector agreed, as an inducement for the mortgage loan, to "assign, transfer and convey to Lender . . . all of the Leases and Rents." In the event of a default, Balcor was given the discretion to do the following:

(i) Borrower's rights to use the Rents shall terminate after written notice from Lender to Borrower and any Rents then or thereafter coming into Borrower's possession are to be held in trust by Borrower for the benefit of Lender and immediately delivered to Lender; thereafter, Borrower shall have no rights to use the Rents without written consent of Lender. . . .

(ii) Lender . . . at its sole election, without notice thereof to the Borrower, and without taking possession of the Mortgaged Property, may notify any or all of the obligors under the Leases that the Leases have been assigned to Lender, and Lender . . . may direct said obligors thereafter to make all payments due from them under the Leases directly to Lender.

(iv) Lender shall have the right at any time or times thereafter, at its sole election, without notice thereof to Borrower, to enforce the terms of the Leases and obtain payment of and collect the Rents, by legal proceedings or otherwise; . . . and to make, modify, enforce, cancel or accept surrender of any of the Leases . . . .

Vector and Westinghouse signed a subordination of lease agreement. Under this agreement, the lease was made subject and subordinate to the mortgage. The agreement further provided that the tenant could not modify the lease without the landlord's consent.

In December 1987, Balcor Real Estate Finance, Inc. assigned the note, mortgage and loan to Balcor/Morristown Limited Partnership, a partnership formed out of Misawa/Tao's investment of $27,000,000. Balcor continued to manage the loan, and retained an approximately six percent interest in the partnership.

On December 15, 1987, the partnership and Vector entered into a new loan agreement and an amended and restated promissory note. Under the note, Vector was obligated to pay annual interest of 8.625 percent through mid-1992, and then 9.5 percent annual interest until the loan's maturity date, December 31, 1996, whereupon the entire principal of $27,000,000 would be due and owing. As reflected by Vector's loan application, Vector was to pay $185,625 per month for the first five years of the loan, and then $213,750 per month until maturity. Vector and Balcor agreed to divide any cash flow from the rental lease in excess of the mortgage debt service payments. Vector was also obligated to pay adjusted gross income (AGI) interest in the amount of fifty percent of the quarterly cash flow, i.e., gross receipts less expenses, fifteen days after the quarter ended. The restated note also provided for liquidated damages of a set amount if the default occurred within the first six loan years, beginning July 1, 1988. For the sixth year, the amount was $2,628,527. If the default arose from a breach of the tenant's lease with Vector, the amount was $2,000,000. Balcor had the right to accelerate the indebtedness upon default. The default rate of interest on any outstanding indebtedness was eighteen percent. A late charge could also be imposed of four cents per each dollar of delinquent payment.

The loan was a non-recourse loan, meaning that the lender could satisfy the obligation only out of the collateral securing the loan, by foreclosing on the property, not by going against the personal assets of the borrower or any of its partners. Specifically, the promissory note provided:

Notwithstanding anything to the contrary contained in this Note, the Mortgage or the Other Agreements, Lender's sole recourse and remedy shall be against the Mortgaged Property . . . to secure any sums due under this Note . . . and no deficiency or other judgment shall be sought or obtained against the Borrower or its partners . . . .

In late 1988, Westinghouse's division operating out of 20 Whippany Road was sold to Schindler. However, Westinghouse remained liable for the rent payments. The building functioned as Schindler's North American corporate headquarters.

Because of declining market rents, which began in 1988, and high vacancy rates for office space in the Morris County area in April 1992, Schindler retained E.S. Gordon Company, a real estate agent, to assess Schindler's headquarters requirement, including looking at other sites. Schindler informed Vector that the analysis was being conducted. E.S. Gordon submitted a report in September 1992, which found that Schindler could generate net present value savings of as much as $10,800,000 by relocating. After receiving the report, Schindler's focus was on staying at the existing location at a reduced rent over an extended term. In addition, Schindler sought to avoid paying E.S. Gordon's approximately $1,000,000 commission. A lesser concern of Schindler's was having Vector perform certain structural maintenance on the building. Robert Rudin, who authored the report, described the building as "functionally obsolete," and William Lentini described it as a "white elephant."

Rudin contacted Vector in the fall of 1992 with a formal proposal about extending the lease in return for a reduction in the rent. By this time, the annual rental stream Vector received from Schindler exceeded its annual interest debt service to Balcor by $300,000, of which Vector retained half. Vector, which was reluctant to embrace the proposal because it did not want to jeopardize the income stream as well as its relationship with Balcor, informed Rudin that it could not do anything unless it was given a reduction in mortgage payments by Balcor to reflect the reduced rent. Nonetheless, Vector approached Balcor about the idea and Balcor encouraged Vector to pursue the matter with Schindler. Balcor considered the loan to be "under water," with the value of the property well below the $27,000,000 mortgage. E.S. Gordon valued the property in January 1993, under the most optimistic reasonable scenario, at $7,300,000. As of the end of 1993, Arlene Shapiro believed the value of the building to be around $10,000,000.

Arlene Shapiro had a conversation with William Lentini towards the end of 1992, in which they discussed the fact that a foreclosure would have adverse and "significant" tax consequences for Vector. Although Shapiro had tax loss carry forward that would cover her exposure, the Lentinis acknowledged that they faced a nearly $3,000,000 tax recapture liability if they lost the property at the end of the lease.

Schindler made a formal proposal to modify the lease and the loan to Vector on January 7, 1993, which Vector passed on to Balcor. John Karnash, general counsel for Westinghouse, and then Schindler, was aware that a modification to the existing lease had to be in writing. Karnash also understood that in order for there to be an adjustment of the rent, Vector had to be able to restructure the underlying mortgage.

In March 1993, members of Balcor's investment research group inspected the building. An internal memo to Balcor's asset management committee from Terri Thompson, Balcor's loan asset manager, dated April 8, 1993, recommended accepting the restructuring of the lease and the loan along the lines of E.S. Gordon's proposal. Dan Duhig, one of Balcor's senior officers, wrote in the memo that Balcor should consider "tak[ing]" the building and modifying it based on his mistaken belief that Vector was then in default. The committee determined that negotiations with Vector on a possible loan modification should continue. Vector was informed by Balcor that, conceptually, Balcor agreed that the interest payments should be reduced to reflect the reduction in the rent payments.

In March or April 1993, Vector indicated to Schindler that it wanted to pursue extending the lease, and reducing the rental payments. Vector was willing to consider such a written modification of the lease only if it received a written modification of the loan, and so informed Schindler. However, Vector objected to the fixed purchase price option proposed by Schindler, as well as its request that Vector pay E.S. Gordon's commission. Discussions between Schindler and Vector continued throughout 1993. By mid-1993, Schindler had set January 1, 1994, as the target date for the rent reduction to begin. If no agreement was reached by then, Schindler intended to stay until the end of the lease, and then move elsewhere.

In May 1993, Nancy Amamura and Jill Wallace of Misawa visited the site and met with William Rafferty, Schindler's facilities engineer. According to Amamura, no negotiations took place during the visit. William Lentini stated that he was unaware of the visit.

On June 24, 1993, Rudin sent Shapiro a letter in which he indicated that Schindler remained interested in Vector's original offer of ten years with a purchase option, and expressed frustration with the length of the process. Shapiro responded by letter dated June 29, 1993, reiterating that Schindler's terms were unacceptable.

Meetings between Vector and Schindler were held in July and August 1993. Shapiro wrote a letter to Christopher Lindenmeyer, Schindler's chief financial officer, on August 4, 1993, proposing that Schindler enter into a new fifteen year lease, at a reduced rent, with Schindler being responsible for any commission due E.S. Gordon. According to Shapiro, the proposal would save Schindler approximately $1,000,000 in annual rent.

On August 18, 1993, Shapiro sent a letter to Jane Hund of Balcor informing her that Schindler had agreed to absorb the cost of the commission, and that the overall proposal, which assumed a reduction in the interest rate Vector was to pay Balcor, was acceptable to both Vector and Schindler. Hund responded by visiting the site a few weeks later to verify the information in the proposal.

In a letter dated September 16, 1993, Misawa/Tao informed Hund that they were not agreeable to the August 18 proposal, describing it as "an insult to our intelligence." This response was conveyed to Vector.

On October 12, 1993, Vector submitted another proposal to Schindler, similar to the August 4 proposal, but with a further reduction in the rent. Vector noted that it was still waiting for written confirmation of the mortgage modification from Balcor, and reiterated that it would not sign the modified lease until it received that commitment. Schindler responded on October 19, 1993, objecting to the requirement that it pay E.S. Gordon's commission. By early November, however, Schindler expressed a willingness to reduce its commission payment request by half in return for a similar reduction in the rent.

Karnash sent a letter to Vector on November 15, 1993, indicating that he wanted Vector to put pressure on Balcor to restructure the mortgage. Shortly thereafter, according to Joseph Lentini, Hund called William Lentini and requested that Vector submit a revised cash flow projection to include a $500,000 amount for the commission.

On November 18, 1993, William Lentini sent a memorandum to Karnash confirming Vector's proposal to enter into a fifteen-year lease with an annual rent of $1,597,000 for the first five years, and $1,815,000 for the remaining ten years. Karnash believed this document reflected a "deal" with Vector, subject to Balcor's and Misawa/Tao's "blessing." According to Karnash, Schindler was satisfied "that we had sufficient paper in place to establish an agreement between us." Joseph Lentini stated that Vector sent the document to inform Schindler of the proposal discussed with Hund. Schindler did not respond to confirm that it was accepting the terms set forth in the November 18 memorandum, and there was never a written lease amendment signed by Vector and Schindler.

Vector sent the November 18 memorandum to Balcor on November 24, and Joseph Lentini claimed that Hund accepted the cash flow projection and indicated she would pass it along to Misawa/Tao. Joseph Lentini also maintained that Hund indicated she would send Vector a written document confirming the terms. By November or December, Vector and Schindler had resolved their differences regarding the structural repairs.

Karnash claimed that he had a conversation on November 30 with Nicholas Jacangelo, Vector's accountant, in which Jacangelo told him to start paying the new rent as of the first of the year. Lindenmeyer claimed that during his discussions with Jacangelo, he got the "impression" that Jacangelo was more than just an accountant. On December 3, 1993, Lindenmeyer instructed Schindler's accounting department to reduce the rent payment from $238,125 to $112,150 as of January 1, 1994. Jacangelo denied telling Karnash to withhold the rent, and he claimed that he told Schindler that he did not have the authority to represent Vector regarding the proposed lease amendment. Karnash did not recall either the Lentinis or Shapiro instructing him to reduce the rent payment, and they denied doing so. In addition, Joseph Lentini denied instructing Jacangelo to do so.

On December 7, 1993, Hund transmitted Vector's proposal to Misawa/Tao. Joseph Lentini claimed that Hund told him that Tao's representatives were coming to the site to "bless" the proposal. However, Shapiro stated that Hund never told her that Balcor had approved the loan modification.

On December 13, 1993, Hund wrote to Wallace of Misawa informing her that Balcor needed to respond to Vector's loan modification proposal within a few days, and that Schindler indicated that it would relocate if an agreement was not reached immediately. Hund expressed her inclination to support the modification, noting the possibility that the building would become vacant within the ensuing three years.

On December 14, 1993, Masaru Hanoaka and Zenro Amemiya of Tao visited the 20 Whippany Road site. William Lentini believed the purpose of the visit was for Tao to give its "blessing" to the deal. Karnash believed the December 14 visit was to give the Tao representatives a chance to tour the property. Hund described it as "just a quick site visit." After taking a tour of the building, the two went into a meeting room with Karnash, Lindenmeyer, Jacangelo, and Joseph Lentini. Joseph Lentini claimed that he was able to communicate with Amemiya in English, but that conversation with Hanoaka was more difficult. Hanoaka stated that he never spoke during the meeting. He claimed that Amemiya stated that he hoped the "conflict" would be resolved amicably. However, there was no discussion of the loan modification proposal.

Karnash claimed that during a conversation with Amemiya about the proposed agreement, Amemiya said that "everything was okay." Joseph Lentini confirmed this account. Lindenmeyer stated that one of the Japanese men said, "you should have this deal," but noted that his English was not very good. Amemiya denied making this statement.

Later that evening, the Lentinis and Jacangelo had tea with Amemiya and Hanoaka. The Lentinis claimed that during tea Amemiya said the deal as submitted by Balcor was approved. William stated that Amemiya spoke English "rather well," better than Hanaoka. Amemiya denied ever discussing the proposed deal.

Karnash called Hund later that day and told her that Tao seemed in favor of the proposed mortgage modification. Hund expressed surprise and told Karnash that she would check that out and get back to him. Joseph Lentini stated that a few days later he listened in while his brother told Hund that Amemiya and Hanaoka were favorable to the deal. Hund then indicated that she would get something in writing to Vector.

Wallace sent a fax to Hund on December 17, 1993, stating that Amemiya had not agreed to the proposed deal, and that Misawa/Tao rejected the proposal; Hund so notified Shapiro on December 21, 1993. In the letter to Shaprio, Hund advised that Vector should consider a revised offer immediately in light of Schindler's impatience. Joseph Lentini expressed surprise at receiving the rejection letter. He stated that around this time he told Karnash and Rudin that Vector had not received a written mortgage modification from Balcor. Vector advised Schindler to "sit tight."

Schindler reduced its rent payment as of January 1, 1994. Schindler's January rent payment was approximately half of what it had been paying previously. Joseph Lentini was surprised to receive the reduced rent. Vector deposited the check nonetheless. Rudin believed Schindler's partial payment was a tactic to pressure Vector and Balcor to enter into a mortgage modification agreement. Shapiro stated that Vector's partners could not make up the difference because they did not have the cash to do so. Nonetheless, Vector submitted a new proposal to Balcor on January 11, 1994, increasing the interest rate it would pay and offering to contribute $50,000 to the deal.

Vector sent Schindler a notice of lease default on January 11, 1994. In response to the notice, Karnash informed Vector that the payment was sufficient because Vector and Schindler had agreed on the modified lease no later than November 1993, and that Schindler had been advised that the contingency regarding Misawa/Tao's approval of the modification had been satisfied. Vector brought an eviction action against Schindler in January 1994, which Vector dismissed the following April.

On January 12 or 13, 1994, Hund received a call from William Lentini informing her about the partial rent payment made by Schindler. Hund told him that, as with previous rent payments, Vector should send the money to Balcor. Hund also told Lentini that if Balcor did not receive funds reflecting the full rental amount from Vector, that would constitute a default under the mortgage agreement. However, William Lentini and Shapiro claimed that Hund told them not to pay attention to any mortgage default notice because it would just be a formality. Joseph Lentini stated that Duhig told him that accepting the lower rent was permissible.

At some point in the next ten days, Hund also told Vector that the approximately $32,000 AGI interest was due and should be sent. Shapiro insisted on a non-foreclosure guarantee from Balcor before making the payment. Karnash claimed that he sat in on a conversation with William Lentini on January 18, 1994, in which Lentini said there was no agreement regarding the mortgage because Misawa/Tao was looking for more money.

On January 25, 1994, Balcor sent Vector a notice of default. William Lentini stated that he was "shocked" by the default notice. He expressed his surprise in a conversation with Hund on January 27 or 28. Hund apparently replied that she would send a written loan modification if Vector sent payment of part of the principal. According to William Lentini, this resulted in a "standoff" between Vector and Balcor.

On January 25, 1994, Balcor sent Schindler a letter informing it of the mortgage default notice and directing Schindler to make its future rent payments to Balcor. In late January, Schindler forwarded to Balcor the reduced rental payment of $112,250 directly to Balcor as the monthly rent payment for February. GFS/Balcor received less than full monthly rental payments thereafter.

Also on January 25, 1994, Vector sent a letter to Schindler challenging Karnash's insistence that a lease modification agreement had been reached between the parties. William Lentini denied that he ever told anyone at Schindler to send less than the full rental amount.

On February 8, 1994, Balcor sent a letter to Schindler demanding full payment of the rent. As of February 10, 1994, Balcor was still contemplating additional discussions with Vector regarding the loan modification. William Lentini sent Hund a letter dated February 17, 1994, noting ongoing communications between the entities' attorneys.

William Lentini sent a letter to Misawa and Tao, dated February 22, 1994, indicating that Schindler would seek to vacate the premises in the event further litigation ensued. On March 17, 1994, Vector sent Balcor a new loan proposal in which it offered to contribute $150,000 to effectuate a settlement. An unsuccessful settlement meeting between Balcor and Vector was held on March 21. Even after the March 23 complaint was filed in this matter, discussions between the two entities continued on the proposed modified lease and mortgage.

On March 31, 1994, Balcor sent a letter to Schindler demanding that Schindler pay the full rent as required by the written lease between Vector and Schindler. On September 20, 1994, Balcor brought an eviction complaint against Schindler for non-payment of rent, which apparently was subsequently withdrawn.

Believing it had the right to negotiate a lease with Schindler under the Assignment of Leases and Rents and the mortgage, Balcor moved for an order declaring that it could enter into a modification and extension of the lease.

On November 18, 1994, Judge Kenneth Mackenzie ordered as follows:

ORDERED that pursuant to the provisions of Section 5(iv) of the Assignment of Leases and Rents, dated June 16, 1987, by and between plaintiff and defendant, and pursuant to the provision of Section 5.5(vii) of the Mortgage by defendant to plaintiff, Balcor has the right to negotiate a lease modification and extension, and a rental reduction, with Schindler Elevator Corporation, containing the following financial terms:

TERM: 15 years

ANNUAL NET NET NET RENTAL: Years 1 to 5, $1,897,000.00 Years 6 to 15, $1,815,000.00


CREDIT FOR BROKER COMMISSIONS: Years 1 to 2, one half the actual commission, up to ...

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