Boulevard Associates v. Sovereign Hotels, Inc.

• Decision Date: 15 December 1995
• Docket Number: D,257,Nos. 42,s. 42
• Citation: 72 F.3d 1029
• Parties: BOULEVARD ASSOCIATES, A General Partnership, Plaintiff-Appellee-Cross-Appellant, v. SOVEREIGN HOTELS, INC., Daka, Inc. and Daka International, Inc., Defendants-Appellants-Cross-Appellees. ocket 94-9020, 94-9090.
• Court: U.S. Court of Appeals — Second Circuit

Page 1029

72 F.3d 1029

BOULEVARD ASSOCIATES, A General Partnership Plaintiff-Appellee-Cross-Appellant, v. SOVEREIGN HOTELS, INC., Daka, Inc. and Daka International Inc., Defendants-Appellants-Cross-Appellees.

Nos. 42, 257, Docket 94-9020, 94-9090.

United States Court of Appeals Second Circuit.

Argued Aug. 30, 1995.

Decided Dec. 15, 1995.

John E. Coyne, Menard, Murphy & Walsh, Boston, Mass. (Clifford Thau, Squadron, Ellenoff, Pleasent, Sheinfeld & Sorkin, New York City, on the brief), for defendants-appellants-cross-appellees.

Frederick S. Gold, Cohen & Wolf, P.C., Stamford, Conn. (Daniel F. Wolf, Cohen & Wolf, P.C., on the brief), for plaintiff-appellee-cross-appellant.

Before: CARDAMONE, MINER, and CALABRESI, Circuit Judges.

CALABRESI, Circuit Judge:

The legal relationship between landlords and tenants is a strange hybrid of contract and property law. When a tenant fails to pay rent, Connecticut law, recognizing the hybrid, allows the landlord to choose either a contract remedy or a property remedy--but does not permit both. The landlord can terminate the lease and sue for damages based on the contract relationship. Or, the landlord can opt to maintain the lease and, based on the property relationship, demand back rent.

In this case, defendant Sovereign Hotels, Inc. ("Sovereign") stopped paying rent to its landlord, plaintiff Boulevard Associates ("Boulevard"). Instead of terminating the lease, Boulevard conveyed the lease to a third party and purported to reserve its contract remedy against Sovereign--at least for consequential damages arising from the tenant's failure to pay rent. The district court held that the landlord had indeed reserved its right to seek such damages because the lease included an indemnification clause, which allowed it to sue Sovereign regardless of whether the landlord had terminated the lease. Boulevard Assocs. v. Sovereign Hotels, Inc., 852 F.Supp. 127, 132 (D.Conn.1994) (finding liability); 861 F.Supp. 1132, 1136-40 (D.Conn.1994) (awarding damages); 868 F.Supp. 70, 71-74 (S.D.N.Y.1994) (awarding attorneys' fees). Because permitting Boulevard to bring this suit does not comport with Connecticut's carefully crafted balance between property and contract remedies, we reverse.

I. BACKGROUND

In 1985, Boulevard leased a parcel of property in Stratford, Connecticut, to Sovereign for ten years. As part of the lease, Boulevard agreed to build a hotel that would be managed by Sovereign. Boulevard subsequently obtained an $8 million mortgage from the Union Trust Company ("Union Trust") and built the hotel. Sovereign, in turn, agreed to pay rent covering, among other things, debt service on the Union Trust mortgage. Daka, Inc. ("Daka"), Sovereign's parent company, guaranteed all of Sovereign's liabilities under the lease, including the obligation to pay rent.

Unfortunately, the hotel turned out to be a failure. Because the venture never generated enough revenue to cover its expenses, Sovereign had to draw on its own reserves to pay the rent through May 1989. At that point, when the agreement called for the monthly rent to increase by approximately $20,000 to cover principal due under the Union Trust mortgage, representatives from Daka International, Inc. ("Daka International"), the parent company of Daka, approached Boulevard in an attempt to renegotiate the lease. (According to testimony by William Baumhauer, the Chairman and CEO of Daka International, he was trying to extricate Sovereign from a number of ventures out of concern for its financial condition.) At a meeting with Boulevard representatives in May 1989, Baumhauer stated that Sovereign would stop paying rent unless Boulevard agreed to reduce Sovereign's payments under the lease. Baumhauer subsequently memorialized his position in a letter to Boulevard. When Boulevard was unable to refinance the mortgage with Union Trust, these efforts to renegotiate the lease fell through and Sovereign stopped paying rent.

In August 1989, Union Trust informed Boulevard that unless the property was deeded over to the bank, Union Trust would start foreclosure proceedings. On September 5, 1989, Boulevard conveyed the hotel, land, and lease to Union Trust's designee. Although the deed provided that it was "an absolute conveyance of all of [Boulevard's] right, title, and interest in and to the Property, including but not limited to any lease or leases in respect of the Property," Boulevard stated in an accompanying letter that it reserved all rights and causes of action against Sovereign that had already arisen. In return for these conveyances, Union Trust released Boulevard from its obligation to repay the $8 million mortgage. But, consonant with Boulevard's letter, the release also stated that Boulevard's existing rights against Sovereign were to be unaffected by the release.

Union Trust's designee subsequently terminated the lease and entered into a new lease with Sovereign. The designee later sued Sovereign in contract for damages measured by the unpaid pre-assignment rent. ¹ This suit was eventually settled by the parties out of court.

In July 1990, Boulevard brought this action against Sovereign, Daka, and Daka International in the United States District Court for the District of Connecticut (Constance Baker Motley, Senior District Judge, sitting by designation ). The district court held a bench trial in two phases, the first dealing with liability, the second with damages. In the first phase the court found that Sovereign had breached the lease and was liable for contract damages, 852 F.Supp. at 131-32; that Daka was jointly and severally liable for those damages as the guarantor of Sovereign's obligations under the lease, id. at 132; that Daka International had tortiously interfered with the lease by directing Sovereign to stop paying rent, id. at 132-34; and that all of the defendants had violated the Connecticut Unfair Trade Practices Act ("CUTPA"), Conn.Gen.Stat. Secs. 42-110a to 42-110q, by willfully breaching the lease, 852 F.Supp. at 134-35.

In the damages phase of the trial, the court found that there was insufficient evidence about the current value of the hotel to calculate expectation damages under Connecticut law. 861 F.Supp. at 1138. It did, however, award reliance damages of $1,134,497, plus interest, jointly and severally against the defendants, based on the amount of money Boulevard had invested in the hotel minus the $8 million in debt relief it received by conveying the property to Union Trust's designee. Id. at 1138-39 (reliance damages), 1140-41 (interest). Finally, the court awarded $300,000 in punitive damages, plus attorneys' fees, against Daka International for tortiously interfering with the lease and for violating CUTPA. Id. at 1139-40; 868 F.Supp. at 71-74 (fixing amount of attorneys' fees jointly and severally against all defendants).

The defendants raise four issues on appeal. First, they argue that Boulevard is not entitled to maintain a breach of contract claim because it did not terminate the lease, but instead conveyed it to a third party. In this regard, they also contend that the indemnification clause in the lease was only meant to protect Boulevard from claims asserted by third parties, and not from consequential damages arising from Sovereign's failure to pay rent. Second, they argue that Daka International did not tortiously interfere with the lease because, as Sovereign's parent company, it was entitled to direct its subsidiary to stop paying rent. And in any event, they claim that Daka International did not engage in intimidating or otherwise improper behavior. Third, they maintain that Boulevard has failed to allege that the defendants engaged in aggravating conduct, beyond breaching the lease, that would constitute an unfair action in violation of CUTPA. And finally, they challenge the court's award of reliance damages.

Boulevard cross-appeals, arguing that the district court erred in awarding reliance damages rather than expectation damages.

II. DISCUSSION

A. Breach of the Lease

Sovereign argues that Boulevard is not permitted to bring a breach of contract action because, instead of terminating the lease, it conveyed the lease to a third party. The district court rejected this argument on two grounds. The court noted that when Boulevard conveyed the lease to Union Trust's designee, it expressly reserved its contractual right to sue Sovereign for "any and all consequential and incidental damages" arising from breach of the lease. 861 F.Supp. at 1136. The court, moreover, held that Boulevard had in fact "manifest[ed] an intention to terminate the lease" by filing the present lawsuit; and that this sufficed to permit an action to be brought for damages. Id. (citing Danpar Assocs. v. Somersville Mills Sales Room, Inc., 182 Conn. 444, 445-46, 438 A.2d 708, 709-10 (1980) (where "the plaintiff [chooses] to bring an action for damages for breach of the lease, [such action] manifest[s] an intention to terminate the lease")).

We disagree with both of the district court's conclusions. Connecticut has expressly chosen to give a landlord two mutually exclusive remedies when a tenant fails to pay rent: the landlord can either terminate the lease and sue for contractual damages, or continue the lease and sue for back rent. Rokalor, Inc. v. Connecticut Eating Enters., 18 Conn.App. 384, 388-89, 558 A.2d 265, 268 (1989). The district court correctly observed that under Connecticut law, a landlord can manifest an intention to terminate the lease by filing a lawsuit seeking damages for the tenant's breach of the lease. 861 F.Supp. at 1136. But Boulevard was no longer the landlord when it filed the present lawsuit in July 1990; it had conveyed the lease to Union Trust's designee more than ten months earlier. Accordingly, Boulevard no longer had any right to terminate the lease--and never having terminated the lease, it cannot now maintain an action for contractual damages against its former...