Boulevard Associates v. Sovereign Hotels, Inc., 90 Civ. 351 (TFGD).

• Decision Date: 07 April 1994
• Docket Number: No. 90 Civ. 351 (TFGD).,90 Civ. 351 (TFGD).
• Citation: 852 F. Supp. 127
• Court: U.S. District Court — District of Connecticut
• Parties: BOULEVARD ASSOCIATES, a General Partnership, Plaintiff, v. SOVEREIGN HOTELS, INC., Daka, Inc., and Daka International, Inc., Defendants.

852 F. Supp. 127

BOULEVARD ASSOCIATES, a General Partnership, Plaintiff, v. SOVEREIGN HOTELS, INC., Daka, Inc., and Daka International, Inc., Defendants.

No. 90 Civ. 351 (TFGD).

United States District Court, D. Connecticut.

April 7, 1994.

COPYRIGHT MATERIAL OMITTED

Cohen & Wolf, Frederick S. Gold, Daniel F. Wolf, for plaintiff.

Coyne & Gottlieb, John E. Coyne, for defendants.

FINDINGS OF FACT AND CONCLUSIONS OF LAW

MOTLEY, District Judge (by designation).

This matter arises from a dispute concerning a commercial lease. Plaintiff Boulevard Associates seeks damages from defendant Sovereign Hotels for the willful breach of a commercial lease that the parties entered into in 1985. Plaintiff also seeks damages from defendant Daka, Inc. as a guarantor of Sovereign's liabilities under the lease. Finally, plaintiff seeks damages from defendant Daka International, Inc. for its tortious interference with the lease agreement.

The jurisdiction of this court is based on 28 U.S.C. § 1332(a)(1) because the parties are residents of different states and the amount in controversy exceeds $50,000. For the reasons stated below, this court finds that defendants are jointly and severally liable to plaintiff for their willful breach of the lease agreement and tortious interference with the relationship between plaintiff and Sovereign. Therefore, plaintiff is entitled to submit additional evidence to this court in support of its claim for damages.

FACTS

Plaintiff Boulevard Associates ("Boulevard"), a Connecticut general partnership, owned certain land and improvements located at 225 Lordship Boulevard, Stratford, Connecticut. In April 1985, Boulevard entered into a commercial lease agreement with defendant Sovereign Hotels, Inc. ("Sovereign"), a Massachusetts corporation, whereby Boulevard agreed to build a hotel on the property that Sovereign would manage. Comp. ¶ 3, 4, 7 & 8.

Pursuant to the lease, Boulevard was responsible for obtaining the financing for the hotel and actually constructing the premises. In turn, Sovereign agreed to manage the property as a Best Western hotel. Comp. ¶ 12. Shortly after entering the lease, Boulevard obtained a construction mortgage loan from Union Trust Company ("UTC" or "Union Trust") in the amount of eight million dollars. Plaintiff, thereafter, tendered to UTC a construction monthly payment term loan note for eight million dollars which represented a first lien on the property. According to plaintiff, it used the entire proceeds from the mortgage to finance construction of the hotel in addition to investing over one million dollars of the partnership's funds. Comp. ¶¶ 15-16, Pl.'s Trial Memo Supp.Judg. Against All Def.'s, 6.

In return for Boulevard's promise to build the hotel, Sovereign agreed to pay "minimum rent," "additional rent," and "percentage rent" to plaintiff commencing upon the public opening of the hotel. The minimum rent consisted of the amount necessary to pay principal and interest (i.e., "debt service") on the UTC mortgage. Thus, Sovereign was required to pay the entire debt service payments on the mortgage, regardless of whether the hotel generated sufficient revenues to cover the payments. Sovereign also agreed to pay additional rent which consisted of all taxes, assessments and government levies upon the property. Finally, the parties agreed that fifty percent (50%) of any excess cash flow from the property would be paid to Boulevard as percentage rents. Comp. ¶¶ 13(a)-(c).

Sovereign is a wholly-owned subsidiary of parent Daka, Inc. ("Daka"), a Massachusetts corporation which operated a successful food service company. Tr., 7. When Boulevard and Sovereign entered the lease, Daka simultaneously executed a guaranty of all of Sovereign's liabilities under the lease agreement in favor of both Boulevard and Union Trust. Most importantly, Daka guaranteed Sovereign's liability for the minimum rent payments representing the debt service on the UTC mortgage. Comp. ¶¶ 16-17.

In April 1986, Sovereign took possession of the property and began managing the hotel. From April 1986 until May 1989, Sovereign made all minimum rent payments as required under the lease agreement.¹ However, shortly after opening the hotel, the Connecticut real estate market deteriorated and the hotel became unprofitable. It quickly became apparent that the hotel could not generate enough revenue to cover even the minimum rent payments. Thus, from 1987 until it stopped paying rent in May 1989, Sovereign actually had to pay additional cash from its own reserves so it could fulfill its obligation to cover the debt service payments on the UTC mortgage.

In the fall of 1988, Daka merged with Fuddruckers, a corporation which operates a chain of well-known restaurants throughout the United States. Tr., 9. As a result of that merger, the entities created Daka International, Inc. ("Daka International"), a new holding company which became the parent corporation of Daka and Sovereign. Also in connection with the merger, several senior executives of Fuddruckers became the senior management of Daka International, among them William Baumhauer, who became President and Chief Operating Officer of Daka International. Tr., 9-10, 71-72.

It is undisputed that in May 1989, Daka International, as a substantial and controlling shareholder of Daka and Sovereign, approached plaintiff in an attempt to renegotiate the lease agreement. Comp. ¶ 36. After unsuccessful attempts to renegotiate the bank loan with Union Trust, Sovereign ceased making rent payments as required under the lease. After plaintiff gave Sovereign a notice of default, it conveyed its interest in the property to UTC by quitclaim deed in lieu of foreclosure. Def.'s Prop. F/F, ¶ 11. Following plaintiff's conveyance of the property and termination of the lease, defendants entered into a management agreement with Union Trust that allowed them to continue to manage the hotel for a management fee. Any profits derived from the operation of the hotel were used to reduce the outstanding mortgage on the property. Tr., 33-34.

In addition to transferring its property interest, plaintiff assigned to UTC its claim to any unpaid rents owed by defendants prior to the conveyance but separately reserved the right to pursue all causes of action that resulted from the breach of the lease agreement. Ex. 34. Following the assignment, UTC filed a complaint in this court seeking: 1) all unpaid rent due under the lease; and 2) an accounting of all revenues earned and expenses incurred by Sovereign during its period of management. Second C & L Holdings, Inc., et. al v. Sovereign Hotels, Inc., et al., 90 Civ. 009 (TFGD) (February 9, 1990) at 5-6. After reaching a settlement, the parties filed a stipulation of dismissal which was signed by Judge Daly of this court on June 1, 1992. Tr., 19; Def.'s Post-Trial Br., Ex. 1.

The essential dispute in this case revolves around the status of plaintiff's rights after the property conveyance to UTC. Plaintiff claims that when it conveyed its interest in the property to the bank, it expressly reserved the right to sue Sovereign and Daka for damages resulting from their willful breach of the lease. Thus, Boulevard did not assign its "right to sue defendants for consequential and incidental damages; the loss of its investment in the property, and the loss of its expectation interest." Tr., 18. Defendants, on the other hand, argue that by conveying the property by quitclaim deed, plaintiff relinquished any remaining claims it had under the lease. Defendants claim that the language contained in the quitclaim deed unequivocally transferred plaintiff's ownership interest in the property to the bank and "assigned UTC all rights whatsoever in the property," including the right to recover monetary damages for breach of the lease agreement. Tr., 34-36.

DISCUSSION

It is a basic tenant of property law that a lease is both a conveyance and a contract. See generally, 49 Am.Jur.2d § 176 at 200 (1993); I American Law of Property § 3.11 (1952); Clean Corp. v. Foston, 33 Conn.App. 197, 201, 634 A.2d 1200, 1202 (1993). A lease is "both the conveyance of a protected possessory interest to the tenant and a contract specifying numerous rights and duties of the parties...." 2 Richard R. Powell, Powell on Real Property, ¶ 221(2) at 16-11 (rev. ed. 1993). Accordingly, a lease agreement gives rise to two separate and distinct legal rights: property rights and contract rights. A lessor's property rights include: 1) the right to receive or sue a tenant for unpaid rents; and 2) a reversionary right in the leased property after the lease is terminated. I American Law of Property § 3.59. More importantly, the lessor's contract rights include: 1) the right to sue for the breach of various express and implied covenants in the lease; and 2) the right to damages resulting from the breach of the lease contract. 2 Powell on Real Property ¶ 246ai at 17-8.

Where a tenant breaches a lease by ceasing to pay rent, the landlord has two legal options: it may continue the tenancy and sue the tenant for the unpaid rent or it may terminate the lease agreement and sue for resulting damages as in any contract action. Rokalor, Inc. v. Connecticut Eating Enterprises, Inc., 18 Conn.App. 384, 388, 558 A.2d 265, 268 (1989). While Connecticut courts have not discussed at length the consequences to the mortgagor of conveying a property interest by deed in lieu of foreclosure, it has been noted that the deed, absent a contrary agreement, effectively extinguishes the borrower's right of redemption, including the borrower's attendant rights to possess the property and to collect any income from the property. I American Law of Property § 3.63.² As a result, defendants have correctly noted that plaintiff no longer retains any property rights in the above-mentioned property that would allow him to sue to recover rents.

However, the single faulty premise that leads to defendants' erroneous...