Economy Rentals, Inc. v. Garcia

• Decision Date: 24 September 1991
• Docket Number: Nos. 19135,19136,s. 19135
• Citation: 1991 NMSC 92,112 N.M. 748,819 P.2d 1306
• Parties: ECONOMY RENTALS, INC., Plaintiff-Counterdefendant-Appellant, v. Sheilah P. GARCIA, individually and as Personal Representative of the Estate of Julian N. Garcia, Deceased, Defendant-Counterclaimant- Crossclaimant-Appellee, v. AMERICAN TOYOTA, INC., and Beatriz Rivera, Defendants-Crossdefendants-Appellants.
• Court: New Mexico Supreme Court

Page 1306

819 P.2d 1306

112 N.M. 748

ECONOMY RENTALS, INC., Plaintiff-Counterdefendant-Appellant, v. Sheilah P. GARCIA, individually and as Personal

Representative of the Estate of Julian N. Garcia, Deceased, Defendant-Counterclaimant- Crossclaimant-Appellee, v. AMERICAN TOYOTA, INC., and Beatriz Rivera,

Defendants-Crossdefendants-Appellants.

Nos. 19135, 19136.

Supreme Court of New Mexico.

Sept. 24, 1991.

Rehearings Denied Oct. 21 and Nov. 21, 1991.

[112 N.M. 751] Paul A. Phillips, Albuquerque, for appellant Economy rentals.

Kemp, Smith, Duncan & Hammond, John P. Eastham, Albuquerque, for appellants American Toyota and Rivera.

The Poole Law Firm, Jason W. Kent, Alma Reyes, Albuquerque, for appellee Garcia.

OPINION

MONTGOMERY, Justice.

The principal issue on this appeal is whether Economy Rentals, Inc., a lessor of real property in Albuquerque, New Mexico, breached its lease by unreasonably withholding consent to its lessee's request for approval of a sublease and then terminating the lease when the lessee failed to cure an alleged default. Resolution of this issue requires us to articulate standards for a determination of what constitutes "reasonable" grounds for withholding consent to a lessee's proposed assignment or sublease. We hold that the trial court properly determined that the lessor's refusal to consent was unreasonable.

This resolution does not, however, dispose of this appeal. Several issues relating to the relief afforded the lessee by the trial court for the lessor's breach, and for the sublessee's concomitant breach of its obligations under the sublease, are raised by the appellants, including issues relating to the compensatory damages awarded the lessee against both the lessor and the sublessee and whether those parties could properly be held "jointly and severally" liable for those damages. In the course of our opinion, we also discuss issues relating to prejudgment interest, punitive damages, and determination of attorney's fees, along with certain other issues of which we dispose summarily. We affirm in part, reverse in part, and remand for further proceedings.

I. Facts and Issues

Effective April 1, 1977, Julian Garcia, an automobile dealer in Albuquerque, leased from Economy Rentals, Inc. ("Economy"), certain premises at 725 Wyoming Boulevard, N.E. (the "Economy property"), for a ten-year period at an escalating rent, reaching $3,000 per month from April 1982 through March 1987. Although effective in April 1977, the lease was not actually signed by Economy and Garcia until June 14, 1979. Contemporaneously with executing the lease, the parties also executed an "amendment" to the document, under which the lessee could not assign or sublet the premises without the written consent of the lessor, "which consent shall not be unreasonably withheld."

When the lease became effective and for some time before, the Economy property was occupied by American Toyota, Inc. ("American"). American had been formed in 1976 to enable Garcia to acquire a second automobile franchise from Toyota Motors; at that time Garcia already owned and operated another Toyota dealership in Albuquerque. Initially, Garcia owned 90% of the stock in American; the remaining 10% was owned by his cousin, Beatriz Rivera, who was named president and general manager. Pursuant to Toyota Motors' requirement, Rivera also held an option to acquire sufficient additional stock to become the majority stockholder.

Garcia had first acquired a lease on the Economy property in 1976 by assignment (with Economy's consent) from the previous tenant and had placed American in possession under an oral sublease at that time. Thus, when Economy and Garcia executed the new ten-year lease in 1979, American had been occupying the Economy property for at least two years, with Economy's full knowledge and consent. The parties confirmed this arrangement in writing when the lease and the amendment were executed, with Economy consenting to the subleasing of the premises to American on the understanding that Garcia was not relieved of his obligations under the lease.

In 1983 a dispute arose between Rivera and Garcia over Rivera's option to acquire control of American. The dispute apparently was protracted and bitter.¹ It was finally resolved in May 1984 by execution of a series of documents under which Rivera, through American, purchased all of Garcia's stock in American and thereby acquired full ownership of the corporation, and under which Garcia conveyed to American his interest in the Economy leasehold and a related leasehold of adjoining property to the south.² This conveyance was effected through a document entitled "Grant of Leaseholds," which provided for American to have possession of each of the two leased tracts for a period of twenty months from May 2, 1984, to December 31, 1985, with the right to extend its possessory interests for not more than an additional six months to June 30, 1986.³ In exchange for this transfer of the right to possession, American obligated itself to pay $7,500 per month, with a bonus of an additional $7,500 for the first month, for the period in which it had the right to possession, including any extension. This obligation was represented by a promissory note and provision for another note to cover the extension period. Rivera endorsed both notes as personal guarantor.

The document by which American acquired the Garcias' stock in the corporation, and which outlined the terms of the overall transaction through which the Rivera-Garcia dispute was settled in May 1984, and to which the "Grant of Leaseholds" was an exhibit, was an agreement called the "buy-sell agreement." This document contained various provisions relating to the transaction--setting forth the terms of the promissory notes, describing the Grant of Leaseholds, establishing an escrow, providing for mutual releases, and so forth--most of which are not material to this lawsuit. One paragraph of the buy-sell agreement, however, warranted that American would pay all rents due to the lessors under the Economy and Rogers leases "and will continue to perform all such other obligations of Lessee [Garcia] as are set forth in said leases as it has performed said obligations in the past." American had always paid the monthly rent (by then $3,000) to Economy under the Economy lease, as well as the $540 per month rent to Rogers under the Rogers lease. The same paragraph also warranted that American and Rivera would not compete with the Garcias if the Garcias attempted to lease or purchase at some future time the properties on which American was currently doing business. American also warranted that at the end of the sublease it would assign to the Garcias any interest it might have in a lease with the owner of a third parcel of land, called the "Janpol property," adjoining the Economy property on the north.

Several months after the May 1984 transaction had closed, Rivera advised Economy that she had become the sole stockholder of American and had obtained a written sublease of the property. Economy apparently then reviewed the Grant of Leaseholds and the buy-sell agreement and notified Garcia on November 2, 1984, that the sublease agreement constituted a breach of the primary lease since it had been entered into without Economy's consent. Three weeks before this notification, Julian Garcia died, survived by his wife and sole beneficiary of his estate, Sheilah Garcia.⁴

Sheilah Garcia responded to the notification, stating that Economy's previous written consent to American as sublessee was still effective, but also asking Economy to reconfirm that consent. Economy refused, without giving any specific reason for its nonconsent at that time. Whether the three reasons ultimately advanced by Economy at trial were reasonable bases for refusing consent is discussed below. Meanwhile, Economy and Garcia remained at loggerheads, and in February 1985 Economy advised Garcia and Rivera that the attempted sublease constituted a breach of the lease and gave Garcia thirty days to cure the alleged default. Garcia insisted that she was not in default; however, on March 13, 1985, Economy declared the lease terminated and informed American that it was in possession of the property as a tenant at sufferance.

One month later, on April 19, 1985, Economy instituted the present action by suing Garcia, American, and Rivera for a declaratory judgment that the lease had been properly terminated. Garcia counterclaimed for a declaration that the termination was wrongful and crossclaimed for damages from American and Rivera. In June 1986 Garcia amended and supplemented her answer, counterclaim, and crossclaim, seeking damages from Economy as well as American and Rivera. Shortly thereafter, Garcia filed her own action against American and Rivera in an attempt to evict American from the Rogers property and to obtain damages for American's continued occupancy of that property. The two suits were consolidated in April 1988, by which time American had long since vacated both properties and Garcia no longer claimed a right to possession beyond the April 1, 1987, termination date of the original lease.

Meanwhile, after Economy declared the lease terminated in March 1985, American established an escrow account with a local bank, into which it deposited the installment payments due under the promissory notes provided for in the buy-sell agreement as consideration for the Grant of Leaseholds. American expressed concern that it might be exposed to double liability to both Economy and Garcia, so it notified Garcia that she could withdraw the funds on deposit by obtaining Economy's written consent to the sublease. American continued to make the $7,500 monthly payments into the escrow account until June 1986. By then it had deposited a total of $112,500, representing the installments due for the fifteen months (from April 1985 to June 1986) after Economy's purported termination of the lease....