Prime Management Co., Inc. v. Steinegger

• Decision Date: 24 May 1990
• Docket Number: D,864,Nos. 761,s. 761
• Citation: 904 F.2d 811
• Parties: PRIME MANAGEMENT COMPANY, INCORPORATED, Plaintiff-Appellant, Cross-Appellee, v. John F. STEINEGGER and Nancy J. Steinegger, d/b/a Franz Melzer Associates, Defendants-Appellees, Cross-Appellants. ockets 89-7982, -7984.
• Court: U.S. Court of Appeals — Second Circuit

Page 811

904 F.2d 811

PRIME MANAGEMENT COMPANY, INCORPORATED, Plaintiff-Appellant Cross-Appellee, v. John F. STEINEGGER and Nancy J. Steinegger, d/b/a Franz Melzer Associates, Defendants-Appellees, Cross-Appellants.

Nos. 761, 864, Dockets 89-7982, -7984.

United States Court of Appeals Second Circuit.

Argued Feb. 1, 1990.

Decided May 24, 1990.

Kathleen C. Stone (James R. Hawkins, II, William A. Collier, Robinson & Cole, Hartford, Conn., on the brief) for plaintiff-appellant, cross-appellee.

Matthew J. Forstadt (Scott G. Grubin, Schatz & Schatz, Ribicoff & Kotkin, Stamford, Conn., on the brief) for defendants-appellees, cross-appellants.

Before OAKES, Chief Judge, and KEARSE and FLETCHER ^*, Circuit Judges.

KEARSE, Circuit Judge:

Plaintiff Prime Management Company, Incorporated ("Prime"), appeals from so much of a judgment entered in the United States District Court for the District of Connecticut after a bench trial before Ellen Bree Burns, Chief Judge, as awarded defendants John F. Steinegger and Nancy J. Steinegger, d/b/a Franz Melzer Associates (defendants and their associated business entities collectively referred to hereafter as "Steinegger"), $161,542.05 as damages on their counterclaim for Prime's underpayment of rents due under a May 1972 lease agreement (the "rent counterclaim"), plus attorney's fees. On appeal, Prime contends that the rent counterclaim should have been dismissed on grounds of res judicata. Steinegger cross-appeals from so much of the judgment as denied it prejudgment interest on the rent counterclaim, denied it attorney's fees expended for the successful defense of Prime's complaint, and dismissed its suit to evict Prime from the rented premises.

I. BACKGROUND

In May 1972, Prime Motor Inns, Inc., which was Prime's parent company, and Steinegger entered into a contract pursuant to which Steinegger was to convert a partially constructed office building in Stamford, Connecticut, into a motel. Concurrently, Prime agreed to lease from Steinegger the real property on which the building was situated.

A. The Terms of the Lease

The 1972 lease agreement ("lease") provided for an initial term of 25 years, plus two ten-year extensions. The lease required Prime to pay rent annually, consisting of a base rent

equal to the amount of money needed each year to amortize the total amount of the permanent mortgage placed on the demised premises over a period of twenty (20) years ...; in no event shall the annual rent be less than One Hundred Ninety-One Thousand ($191,000) Dollars,

plus a percentage of Prime's receipts equal to fifteen (15%) percent of gross receipts received from the rental of lodging facilities in excess of Five Hundred Eighty-Five Thousand ($585,000) Dollars per year (Sixty-Five Hundred ($6,500) Dollars per rental unit) less all applicable use and occupancy taxes.

The lease required Prime to submit to Steinegger monthly statements as to its gross receipts from the rental of lodging facilities, and to grant Steinegger access to Prime's books and accounts "at reasonable times after notification." Whenever Prime's gross room revenues exceeded $585,000, its monthly statements were to reflect the "percentage rental earned for the preceding month." The lease provided that if any question were to arise concerning the "accuracy of any statements, it shall be settled as conveniently as possible between the parties, but not so as to unreasonably interrupt the operation of Lessee's business."

The lease gave Steinegger, upon the occurrence of an event of default, the right to terminate the lease. It defined default as, inter alia, any failure on the part of the lessee to comply with any term, provision or covenant of the lease and the concomitant failure to cure such noncompliance within ten days of written notice. As discussed in Part II.B. below, the lease also provided that, in certain circumstances, a party in default would pay the other party's attorney's fees.

In January 1973, the parties agreed to an amendment to the lease in order to induce the third-party mortgagee to make a loan to Steinegger. Steinegger and Prime agreed that the May 1972 lease would be deemed amended to conform to, and be controlled by, the following provision in the mortgage:

Mortgagor will not enter into any lease, sublease, license, concession or other agreement for use, occupancy or utilization of space in the Premises which provides for a rental or other payment for such use, occupancy or utilization based in whole or in part on the income or profits derived by any person from the property leased, used, occupied or utilized, or which would require the payment of any consideration which would not be within the definition of "rents from real property" as that term is defined in Section 856(d) of the Internal Revenue Code of 1954....

B. The Mid-1970's Dispute and the Decision in "Prime I"

A certificate of occupancy for the motel was issued in July 1974, and Prime's rental obligations began on January 1, 1975. Soon thereafter, disputes arose with respect to, inter alia, the amount of rent due under the lease. Prime took the position that the 1973 amendment relieved it of any obligation to pay Steinegger any percentage of its income from room rentals. In May 1976, Prime ceased to pay any rent to Steinegger, though it did make certain payments directly to the mortgagee. In response, Steinegger sent Prime a notice to quit the premises, which is a prerequisite to summary eviction proceedings.

Prime promptly brought suit in the district court ("Prime I "), seeking an adjudication of its obligations under the lease. It asked, inter alia, that the court reform the lease to provide (a) that Prime was not required to pay Steinegger any rent above the amount Steinegger needed to pay the mortgagee, and (b) that Prime was not required to make any payment of a percentage of its gross receipts from room rentals. Steinegger counterclaimed, charging, inter alia, that Prime had improperly refused to submit monthly statements as to room rental income and to pay to Steinegger the required percentage of that income. Steinegger asked for relief in the form of "an accounting of the gross room rentals and payment of the percentage rental due," and an order from the court directing Prime to pay "the rentals in arrears."

After a bench trial in 1981, the district court, T.F. Gilroy Daly, Judge, ruled that Prime was not entitled to reformation of the lease and was required to pay Steinegger the base amount of rent plus the percentage provided in the lease. The court stated as follows:

1. The term of the Lease between the parties is twenty-five years. The rental due the lessor is that amount necessary to amortize the mortgage due [the mortgagee] over a period of twenty years payable each month at the rate of $17,701.96 per month during the first twenty years of the lease term. The rent due from the lessee during the last five years of the term is $15,916.66 per month.

2. The lessee shall also pay to the lessor during the original term of the Lease and any extensions thereof fifteen (15%) percent of gross receipts received from the rental of lodging facilities in excess of Five Hundred Eighty-Five Thousand ($585,000) Dollars per year (Sixty-Five Hundred ($6,500) Dollars per rental unit) less all applicable use and occupancy taxes.

Memorandum of Decision dated July 31, 1981 ("1981 Decision"), at 9-10. The court ordered Prime to pay Steinegger the base and percentage rents "due pursuant to paragraphs 1 and 2 above plus an amount of interest to be determined by the Court in the event the parties cannot agree." Id. at 10. The Prime I court did not order an accounting.

Judgment was entered in August 1981. Though Prime filed a notice of appeal, the matter was then settled.

C. The Present Action

In September 1981, Prime entered into an agreement with one Vashu Ramsinghani whereby Prime agreed to assign its leasehold interest in the motel to Ramsinghani. As required by the lease, Prime then sought Steinegger's consent to the assignment. Following the exchange of numerous letters with respect to, inter alia, Ramsinghani's experience and financial condition, Steinegger withheld consent on the ground that it did not have enough information on which to base a decision. In May 1982, Prime and Ramsinghani commenced the present action in Connecticut state court, contending that Steinegger's withholding of its consent was unreasonable and that Steinegger had tortiously interfered with the contract between Prime and Ramsinghani.

Steinegger removed the action to the district court. In 1985, following Prime's production of financial information in compliance with a discovery order, Steinegger filed its rent counterclaim, alleging that Prime had been underpaying the percentage rents due under the lease. Steinegger challenged the methodology Prime had used to calculate those percentages, asserting that Prime had improperly excluded rents it received for rooms that were designed to be and were delivered to Prime as guest rooms, but which were treated by Prime as public rooms; that Prime reported only 97% of its total guest room income; and that Prime improperly deducted a portion of the guest room revenues for in-room movies although guests were not charged for those movies. Steinegger sought, inter alia, damages and an accounting. Against this claim, Prime asserted as an affirmative defense, inter alia, that any claim for additional percentage rents was barred by principles of res judicata on the ground that that issue had been litigated in Prime I.

In June 1987, relying on the charges asserted in its rent counterclaim, Steinegger served on Prime a notice to quit the premises pursuant to Conn.Gen.Stat. Sec. 47a-23(a), as a precursor to eviction proceedings. Prime refused to vacate, and Steinegger commenced a summary eviction proceeding in state court in July 1987, seeking to terminate the lease and regain immediate possession of the...