Ninety-Five Madison Co. v. Active Health Mgt., 2007 NY Slip Op 51765(U) (N.Y. Civ. Ct. 6/22/2007)
| Decision Date | 22 June 2007 |
| Docket Number | L&T 69865/2006. |
| Citation | 2007 NY Slip Op 51765 |
| Parties | NINETY-FIVE MADISON COMPANY, Petitioner-Landlord, v. ACTIVE HEALTH MANAGEMENT, Respondent-Tenant, "JOHN DOE" AND "JANE DOE", Respondent-Undertenants. |
| Court | New York Civil Court |
A bench trial was held before me on January 23, 24, 25, 30, and 31, 2007, in this commercial holdover proceeding on petitioner's action to recover possession of the 13th and 14th of 15 floors at 95 Madison Avenue, New York, New York, located between 28th and 29th Streets, and to recover past rent. Testifying for petitioner were Rita Sklar and Michael McDermott; testifying for respondent were Arthur Halper, Michael Hudson, John Bridge, James Starr, and Professor Jeffrey Gordon. For the following reasons, the petition is granted.
Petitioner, a partnership of two general partners, one of whom is Sklar, and respondent, a medical management innovator which was privately held, entered into a commercial lease dated October 26, 1999 for two floors at the subject premises. Subsequently, the parties entered into negotiations with a view toward respondent renting additional space in the building. Shortly after the negotiations broke down, respondent entered into a reverse triangular merger agreement with insurance giant Aetna Inc., after which negotiations resumed. Also discussed during the course of the negotiations was petitioner's possible waiver of any default arising from respondent's failure to obtain its consent to an alleged deemed assignment under the lease or provide petitioner with documentation allegedly required under the lease as a result of the transaction with Aetna Inc. When the negotiations again terminated, petitioner served respondent with a notice to cure. In response, respondent proffered to petitioner an assignment of the lease to Aetna Life Insurance Company (Aetna Life) which, unlike Aetna Inc., is licensed to do business in New York.
The issues thus presented here are: 1) whether respondent's transaction with Aetna Inc. constituted a transfer to Aetna Inc. in excess of 25 percent of respondent's stock or interest; 2) whether the transaction effected the transfer of respondent's equity interests and if so, whether respondent failed to provide petitioner with documentation required under the lease; and 3) whether petitioner waived respondent's default by accepting rent during the period of the default and/or by engaging in negotiations with a view toward waiving the default. The parties submit these issues in advance of a hearing as to damages, if necessary.
In negotiating the lease, the parties utilized petitioner's standard form, which they modified to their requirements. Article 11 of the lease prohibits an assignment of the lease without petitioner's prior written consent. (Joint Trial Exhibits Binder 1 [Binder 1], tab 1). The parties further agreed that if the lease be assigned, petitioner may, after respondent's default, collect rent from the assignee and apply it to the rent reserved, although in such an event, the assignment will not be deemed a waiver of Article 11. (Id.). In Article 25, the parties agreed that petitioner's receipt 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 be waived by [petitioner] unless such waiver be in writing by [petitioner]." (Id.).
Article 64 of the rider to the lease supplements Article 11 and sets forth lengthy and detailed rules regarding assignments. (Id.). Although respondent construes the testimony of McDermott, respondent's Chief Financial Officer at the time of the lease negotiations, as evidence that Article 64 was not negotiated, I find, to the contrary, that Article 64 was negotiated by McDermott and Sklar, two sophisticated individuals who paid careful attention to its numerous terms.
Pursuant to Article 64(K) of the rider, "the transfer, assignment or hypothecation of any stock or interest in [respondent] in the aggregate, whether in one or more transactions, in excess of twenty-five (25%) percent shall be deemed an assignment within the meaning of the provisions of this Article 64." (Id.). The parties also agreed, pursuant to Article 64(O[Y]), that in the event of "any transfer of the equity interests in [respondent], whether in a public offering or a private transaction," petitioner would not have the right to terminate the lease and its consent to a proposed assignment would not be required:
provided [respondent] furnishes [petitioner] with written proof satisfactory to [petitioner] regarding such transactions(s), including proof satisfactory to [petitioner] that the proposed assignee or subtenant has a financial strength equal to or greater than [respondent] . . . and delivers to [petitioner] duplicate originals of the fully executed instrument of assignment pursuant to subdivision (F) of this Article 64 or duplicate originals of the fully executed sublease pursuant to subdivisions (H) or (I) of this Article 64 . . .
(Id.). Thus, where the transaction does not constitute a deemed assignment under Article 64(K), respondent must establish that its proposed assignee, e.g., the transferee of respondent's stock, is of equal or greater financial strength. As Article 64(O[Y]) is reasonably read as a corollary to Article 64(K), respondent's assertion that the assignee need not be the transferee lacks merit.
Moreover, the transaction must have been:
effected in good faith . . . for the bona fide business purposes of [respondent] other than the transfer of this leasehold [and] that such transaction does not result in a substantial increase (as determined by [petitioner] in its reasonable discretion) of the number of persons utilizing the demised premises and/or the number of visitors to the Building, or a change in the character (as determined by [petitioner] in its reasonable discretion) of the persons utilizing the demised premises and/or visitors to the Building.
(Id.).
Respondent provided petitioner with security in the form of two letters of credit, each in the amount of $1,000,000. (Joint Trial Exhibits Binder 2 [Binder 2], tab 86). The parties agreed in Article 82(B, C) that if respondent was not in monetary defaultbeyond any grace and cure periods provided for in the lease, then one of the letters of credit would be reduced by $250,000 on April 2, 2005 and again, on April 2, 2006, and by $272,030 on April 2, 2007. (Binder 1, tab 1). However, the parties also agreed, pursuant to Article 82(D), that if respondent was in monetary default beyond any grace and cure periods provided for in the lease on any date on which a reduction pursuant to Article 82(B, C) was scheduled, then the reduction "shall be delayed for a period of one (1) year and in such case each subsequent reduction provided for herein shall also be delayed by one (1) additional year" (Id.). Moreover, in the event of a failure to cure any default in a timely fashion or if "for any reason, [respondent] fails to surrender to [petitioner] possession of the demised premises at the expiration or sooner termination" of the lease pursuant to Article 82(I, I), petitioner is given the option under Article 82 (I, M) of drawing on all or part of the security. (Id.).
In 2004, due to its rapid growth, respondent sought to lease additional space in the building. The parties attempted to negotiate respondent's use of the 15th floor pending the reconfiguration of the 13th and 14th floors. According to Halper, respondent's then President and Chief Executive Officer, the negotiations with Sklar were difficult and extended, resulting in respondent's agreement to not only pay above market rent, but to pay for all improvements and roll them into the lease as a deduction. It also agreed to advance money to petitioner to upgrade the lobby and replace the elevator. Respondent's broker was involved in the negotiations.
By letter of April 11, 2005, respondent asked that petitioner acknowledge that it was not in monetary default within the meaning of Article 82, and that the first $1 million security deposit be reduced to $750,000. (Id., tab 2). Sklar denied receiving the letter. At the time, respondent was in arrears for $70,329. Unbeknownst to Sklar, respondent withdrew $250,000 from the security deposit. By check dated April 29, 2005, respondent paid petitioner the $70,329 arrears. (Binder 2, tab 84). Starr, then respondent's Chief Financial Officer, denied that respondent drew from the security to cover the rent arrears. Having failed to establish that respondent withdrew from the security deposit with knowledge of its monetary default, I do not consider this evidence in reaching my decision.
Although acknowledging respondent's impressive innovations in the medical industry, Sklar was unwilling to rent it additional space, believing that its net operating income was insufficient to meet its obligations and that it was seeking new financing. Respondent thus leased additional space at 102 Madison Avenue.
On May 27, 2005, Aetna Inc. and respondent entered into a "reverse triangular merger" agreement whereby respondent's shareholders, pursuant to a majority vote, tendered their shares to respondent in exchange for cash from Arizona Acquisitions Corporation (Arizona), an Aetna Inc. subsidiary specially formed for this transaction. Respondent's shares were thus converted into rights to receive the cash consideration, upon which they were cancelled and retired; the dissenting shareholders received the right to receive an appraisal. Arizona's shares were then "converted" into respondent's shares, which became Aetna Inc.'s, and Arizona was extinguished. Respondent survived the transaction and became a wholly-owned subsidiary of Aetna Inc. Respondent's directors resigned from respondent in order to allow for the change in control. (Id., tabs 4, 7; Binder 2,...
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