In re Eastern Systems, Inc.

• Decision Date: 19 July 1989
• Docket Number: Adv. No. 87-6305A.,Bankruptcy No. 87B-12551 (HCB)
• Citation: 105 BR 219
• Parties: In re EASTERN SYSTEMS, INC., Debtor. EASTERN SYSTEMS, INC., Plaintiff, v. WEST 45TH STREET INDUSTRIAL CONDOMINIUMS, INC. and New York State Urban Development Corporation, Defendants.
• Court: U.S. Bankruptcy Court — Southern District of New York

105 B.R. 219 (1989)

In re EASTERN SYSTEMS, INC., Debtor EASTERN SYSTEMS, INC., Plaintiff, v. WEST 45TH STREET INDUSTRIAL CONDOMINIUMS, INC. and New York State Urban Development Corporation, Defendants.

Bankruptcy No. 87B-12551 (HCB), Adv. No. 87-6305A.

United States Bankruptcy Court, S.D. New York.

July 19, 1989.

COPYRIGHT MATERIAL OMITTED

Morrison Cohen & Singer, New York City, by Malcolm I. Lewin, for plaintiff.

Wood, Williams, Rafalsky & Harris, New York City, by Paul T. Williams, Jr., for defendants.

DECISION AND ORDER

HOWARD C. BUSCHMAN III, Bankruptcy Judge.

Eastern Systems, Inc., Debtor and Plaintiff herein, commenced this adversary proceeding against West 45th Street Industrial Condominiums, Inc. and New York Urban Development Corporation, Defendants herein, seeking, inter alia, specific performance of the sale of two floors of commercial real estate pursuant to the exercise of two purchase options held by the Debtor as lessee of said realty. A trial on this matter was held before this Court on March 8, 9 and 10 of 1989. Post-Trial submissions were completed on June 1, 1989. Because the evidence shows that the Debtor was in substantial default in its rental payments at the time it sought to exercise the options, we find that Defendants' rejection of that exercise was proper.

I

Eastern Systems, Inc. ("Eastern", "Debtor" or "Plaintiff") is a New York corporation that manufactures business forms and accessories. On January 1, 1978, it entered into two lease agreements (the "Leases") with West 45th Street Industrial Condominiums, Inc. ("West 45th Street"), a corporate governmental agency of New York State and a wholly-owned subsidiary of New York State Urban Development Corporation ("UDC"). Under the Leases, Eastern agreed to lease as Tenant and West 45th Street agreed to rent as Landlord the entire sixth floor and part of the seventh floor of an industrial building located at 545-555 West 45th Street in Manhattan (the "Premises"). Plaintiff's Trial Exhibit 1.¹ By their own terms, the Leases were for a ten year period, expiring on December 31, 1987. Id.

The rent for the entire sixth floor ("Unit 6") under the lease was $22,500 per annum or $1,875 per month. Id. The rent for part of the seventh floor ("Unit 7") was $11,500 per annum or $958.33 per month. Id. The Lease for Unit 7 also provided that additional space on the seventh floor would be leased to Eastern commencing January 1, 1980, at which time the rent would be increased annually by $11,000. Id. Unit 7 Lease, Article 45.

Hence, before January 1, 1980, the cumulative rent under both Leases was $34,000 per annum or $2,833.33 per month. With the rental of additional space on the seventh floor commencing January 1, 1980, that figure would increase to $45,000 per annum or $3,750 per month. Id. From the inception of the Leases up until the date the Debtor sought to exercise the options described infra, December 31, 1981 (the "Option Date"), Eastern's rental bills were sent on a monthly basis in the amount of $2,833.33 for both Units 6 and 7. Pre-Trial Order, Undisputed Facts # 5(d). Thus, as of the Option Date, Eastern was not billed for additional space on the seventh floor, as provided in Article 45 of the Lease for Unit 7, for the years 1980 and 1981. Plaintiff's Trial Exhibit 39. In addition, in June of 1978, UDC granted rent credits to Eastern of $17,812.50 and $9,104.14, for a total of $26,916.64. Pre-Trial Order, Undisputed Facts # 5(e).

Each of the Leases contained a "Non Waiver" clause. Plaintiff's Trial Exhibit 1. That clause, set forth in Article 24 of both Leases states, inter alia,

The failure of Landlord to seek redress for violation of, or to insist upon the strict performance of any covenant or condition of this lease or of any of the Rules or Regulations set forth or hereafter adopted by Landlord, shall not prevent a subsequent act which would have originally constituted a violation from having all the force and effect of an original violation. The receipt by Landlord of rent with knowledge of the breach of any covenant of this lease shall not be deemed a waiver of such breach and no provision of this lease shall be deemed to have been waived by Landlord unless such waiver be in writing signed by Landlord. No payment by Tenant or receipt by Landlord of a lesser amount than the monthly rent herein stipulated shall be deemed to be other than on account of the earliest stipulated rent, nor shall any endorsement or statement of any check or any letter accompanying any check of payment as rent be deemed an accord and satisfaction and Landlord may accept such check or payment without prejudice to Landlord\'s right to recover the balance of such rent or pursue any other remedy in this lease provided.

Id.

The Leases also contained default provisions, set forth in Article 17. That Article stated, inter alia.

If tenant shall make default in the payment of the rent reserved herein or any item of additional rent herein mentioned or any part of either or in making any other payment herein required (for more than five days (5) after notice of such default) then and in any of such events Landlord may without notice, enter the demised premises either by force or otherwise, and dispossess Tenant by summary proceedings or otherwise. . . .

Plaintiff's Trial Exhibit 1, Article 17 (parenthetical clause indicates language added by parties to the "Standard Form of Loft Lease.")

On the same day that the Leases were executed, Eastern and West 45th Street entered into two separate option agreements whereby West 45th Street, as Seller, granted to Eastern, as Purchaser, the option to purchase Units 6 and 7 (the "Options" or "Option Agreements"). Plaintiff's Trial Exhibit 2. Two separate purchase agreements, to be executed upon the exercise of the Options, accompanied the Option Agreements (the "Purchase Agreements"). Id. The purchase prices for Unit 6 and Unit 7 under the Purchase Agreements were $130,000 and $125,000, respectively. Id. Under the terms of the Options, they were exercisable at any time on or before December 31, 1981 by the Purchaser giving written notice to the Seller of its intention to exercise the Options. Id. Options ¶ 2. Notice of the exercise of each Option, for Units 6 and 7, was to be accompanied by the Purchase Agreements executed by Eastern along with a ten per cent down payment for each unit. Id. Options ¶ 3. Pertinent to the dispute before us, the Options were exercisable pursuant to the terms mentioned "provided Purchaser shall not then be in default under any of the terms, covenants or conditions of either of the Leases on Purchaser's part to be observed or performed. . . ." Id. Options ¶ 2 (emphasis added). While the Options were signed by both West 45th Street and Eastern, the Purchase Agreements were signed only by Eastern. Id.

Eastern timely exercised both Options on December 31, 1981, in a letter signed by its president, L. James Leyton and accompanied by two checks in the total amount of $25,500 as down payment. Plaintiff's Trial Exhibit 33. The record indicates that at the time the checks were tendered on December 31, 1981 and for a period of twelve consecutive days thereafter, Eastern lacked sufficient funds in its bank account to cover the amount of the checks. Defendants' Trial Exhibit TT; Transcript 436-37. On January 25, 1982, Clifford Stein, Esq. of the New York State Mortgage Loan Enforcement and Administration Corporation ("MLC"), a UDC subsidiary which handled legal matters for the UDC, responded in writing to Eastern's attempted exercise of the Options. Plaintiff's Trial Exhibit 45. The Stein letter, in essence, notified Mr. Leyton that, as of December 3, 1981, Eastern was in arrears in the amount of $12,133.94 for Unit 6 and part of Unit 7. In addition, $22,000 was due for the additional space rented in Unit 7 pursuant to Article 45 of Unit 7 Lease. The letter also stated that the Options could be exercised only if those items were satisfied within a reasonable time. Id. Eastern failed to make the payments and, in a letter dated April 19, 1982 from Peter Pellegrino, Vice President of West 45th Street, Eastern was notified that the Options had expired as of December 31, 1981 and were "null and void and of no force and effect." Plaintiff's Trial Exhibit 50.

The facts as set forth thus far are undisputed by the parties. What is disputed is (i) whether Eastern was in default at the time of the Option exercise and (ii) if Eastern was in default, whether that default was waived by UDC both prior to and after December 31, 1981. We shall analyze the disputed facts in a bifurcated fashion. First, we will examine the rental relationship between Eastern and West 45th Street prior to December 31, 1981 and assess the arrearages, if any, prior to that date. In addition, we will look to see whether any default was waived prior to the Option Date. Second, we will look to the parties' relationship after December 31, 1981 and determine those same issues.

The evidence demonstrates that prior to December 31, 1981, Eastern had a history of arrearages in its rental payments. For example, on June 9, 1980, Nancy O'Brien, Loan Administrator for MLC, wrote to Mr. Leyton notifying him that as of May 1, 1980 $31,163.00 was due and owing, covering eleven monthly payments of $2,833 per month. Plaintiff's Trial Exhibit 14. Leyton responded in a letter dated June 30, 1980 setting forth a schedule whereby Eastern could become current under its obligations to UDC. Plaintiff's Trial Exhibit 15. Under that schedule, $31,163.00 in "total catchup payments," would be completed by June 15, 1981. Id. In a July 7, 1980 letter to O'Brien, Leyton acknowledged that the amount past due had increased to $33,996 and that Eastern would undertake to pay that amount by March 31, 1981. Plaintiff's Trial Exhibit 16. Leyton's schedule of payments provided that beginning with July's base rental payments, Eastern would add an amount of at least...