Sunoco, Inc. v. Makol

• Decision Date: 10 June 2004
• Docket Number: No. 03-1780.,03-1780.
• Court: U.S. Court of Appeals — First Circuit
• Parties: SUNOCO, INC. (R & M), Plaintiff, Appellant, v. Naif MAKOL, Jr., and Makol Family Limited Partnership, Defendants, Appellees.

372 F.3d 31

SUNOCO, INC. (R & M), Plaintiff, Appellant, v. Naif MAKOL, Jr., and Makol Family Limited Partnership, Defendants, Appellees.

No. 03-1780.

United States Court of Appeals, First Circuit.

Heard March 4, 2004.

Decided June 10, 2004.

George J. Krueger with whom John B. Reilly and John Reilly & Associates were on brief, for appellant.

Keith A. Minoff with whom Robinson Donovan, P.C. was on brief, for appellees.

Before BOUDIN, Chief Judge, LYNCH and HOWARD, Circuit Judges.

BOUDIN, Chief Judge.

This is an appeal by the plaintiff-appellant, Sunoco, Inc. (R & M) ("Sunoco") from a grant of summary judgment in favor of defendants-appellees, Naif Makol, Jr., and the associated Makol Family Limited Partnership (collectively, "Makol"). The dispute centers on the proper interpretation of a lease agreement governing a gas station and car wash in West Springfield, Massachusetts. The origin is a set of transactions involving Makol and a third party — F.L. Roberts & Co. ("Roberts").

In the early 1990s, Makol and Roberts owned adjacent parcels of property in West Springfield. Roberts leased Makol's lot and operated a gas station, convenience store, car wash, and ATM on the joint parcels — it is not entirely clear what was on which lot, but nothing turns on this. Roberts began renovating the gas station complex in 1993, but encountered problems with West Springfield's complex zoning regulations — specifically, a "mixed ownership" restriction prohibiting any business in the relevant area from being operated on land owned by two different parties.

To solve the zoning problem, Roberts and Makol executed three agreements: a conveyance, a long-term lease, and an option to purchase. Roberts first conveyed the title to his parcel to Makol for nominal consideration. Then, on May 5, 1993, Makol leased both parcels back to Roberts for a period of 21 years (the "lease agreement"). On the same day, the parties signed a third document (the "option agreement") giving Roberts the right to purchase both properties for $1.75 million, provided that he was not in default under the lease agreement and that he informed Makol in writing between March and September 2000. If Roberts did not exercise the option during that period, his original plot would still revert back to him in 2014, at the end of the 21 year lease — assuming he was not "in default" under the lease agreement. In 1994, Naif Makol assigned all his interests to Makol Family Limited Partnership.

At the heart of this case is section 10 of the lease agreement, which governs subleases and assignments. It provides (we emphasize key language):

(a) Provided that the Lessee is not in default hereunder, the Lessee shall be entitled to assign this Lease or make a sublease for the whole of the Premises as follows. The right to assign or sublease shall be restricted to an assignment or sublease in favor of Sun Company, Inc. (R & M), or another major national oil company (the "Assignee") whereby the Assignee, by written agreement entered into with the Lessor assumes all obligations and liabilities of the Lessee under this Lease. Notwithstanding any such assignment or sublease, the Lessee shall remain additionally liable to perform all of the obligations of the Lessee under this Lease. The Lessee agrees to provide the Lessor with written notice of any such assignment or sublease thirty (30) days in advance of the effective date thereof.

(b) Any attempted assignment or sublease which does not fully comply with Paragraph 10(a) shall be deemed a default hereunder, at the option of the Lessor, and shall be null and void and have no effect with regard to the Lessor.

A month and a half after signing the lease and option agreements, on June 21, 1993, Roberts assigned all of his rights in the premises to Sunoco (we use Sun Company's current name), the company mentioned in the lease. All parties agree this was a valid assignment of the whole premises — proper notice was given to Makol, Sunoco agreed in writing to be directly liable to Makol on all lease obligations, and Roberts still remained liable as well. Roberts also assigned Sunoco the option to purchase the entire property between March and September 2000. Sunoco thus stepped into the shoes of Roberts and became the "lessee" under the lease agreement, consenting to be bound by its terms.

Two days later, on June 23, 1993, Sunoco and Roberts entered into a three-year agreement under which Sunoco would sublease back to Roberts the car wash facility — a portion of the premises Roberts had just assigned to Sunoco. The parties dispute whether Makol knew or should have known of this arrangement, but assuredly Makol did not formally consent to the sublease. Indeed, while all three parties had signed notarized forms consenting to the Roberts-Sunoco assignment two days before, only Roberts and Sunoco were parties to the car wash sublease.

It is also undisputed that the sublease did not comply with the formal procedure for assigning the premises detailed in section 10(a) of the lease agreement. The sublease was not a lease "for the whole of the premises"; it was not to a major national oil company; and proper 30-day notice was not given to Makol. The crucial question is whether the car wash sublease was nevertheless permissible under the Makol-Roberts lease agreement. If not, the sublease would not be valid and — more important to the parties — the attempt to sublease would constitute a default under section 10(b), posing a threat to Sunoco's assigned right to purchase under the option contract.

The sublease agreement gave complete control over the car wash facility to Roberts; the contract specified that Sunoco did not have any right "to exercise any control over, or to direct in any respect the management or conduct of [Robert's] car wash business," and it said that Roberts would be responsible for all operating costs, taxes, and insurance. The first three-year sublease was renewed for another three years in 1996, and three more in 1999, on substantially the same terms as the first sublease.

In the summer of 1999, Sunoco submitted a plan for expansion of the gas station complex to the town zoning board, but withdrew the plan in November 1999 after the town's building commissioner suggested that the existing business complex might be in violation of the town zoning ordinances. The main zoning problem seems to have been that the car wash was a "second independent business" leased and operated by a separate company on the same parcel of land as the primary gas station complex. To get around this problem, Roberts and Sunoco executed a "management agreement" under which Roberts would operate the car wash as an "agent" of Sunoco (although a separate side-letter agreement made clear that nothing about the parties' relationship would actually change). The town's building commissioner dropped the zoning issue, at least temporarily — he later expressed doubts about the legitimacy of the arrangement when he learned about the side-letter agreement.

Several months later, by letter dated November 23, 1999, Makol informed Sunoco that both the car wash sublease and the zoning violations constituted breaches of the lease agreement, and the option to buy the premises was consequently terminated as a result of the defaults. The original lease agreement provided that breach of any of its "provisions, covenants or obligations" would, if not cured within 30 days after notice, constitute a default of the entire lease. The option agreement provided that a breach of any terms of either the lease or option agreement would constitute a default of the option.

Sunoco responded in writing by denying any default, but made no additional effort to cure the alleged zoning violations. Then, in June 2000, Sunoco wrote to Makol attempting to exercise its option under the Makol-Roberts option agreement (assigned by Roberts to Sunoco) to purchase the entire property for $1.75 million. Makol declined to proceed with the sale. In March 2001, Sunoco brought this diversity suit in federal court seeking declaratory and injunctive relief requiring Makol to convey the premises to Sunoco under the terms of the option agreement. Makol counterclaimed, requesting damages for Sunoco's breach of contract and arguing that Sunoco had committed unfair acts or practices in violation of Mass. Gen. Laws ch. 93A.

The district court rejected Makol's 93A claim but granted summary judgment to Makol on the breach of contract issue, ruling that the undisputed evidence established that Sunoco breached the lease agreement by entering into a car wash sublease with Roberts. Since the lease was breached, Sunoco lost the option to purchase both properties, and the only remaining question was the damage caused to Makol by Sunoco's prohibited sublease to Roberts. The parties presented this damages issue to a jury, which awarded $231,000 to Makol — a sum that represented half of all money that Sunoco had received from Roberts under the car wash sublease.

Sunoco now appeals, raising numerous objections to the district court's interpretation of the lease agreement as well as objections to the damages award. The damages issue depends on whether there was evidence sufficient to permit a rational jury to make the award and raises a related issue of admissibility of evidence. We begin with the central contractual interpretation question. Our review of the summary judgment ruling in favor of Makol is de novo. Rankin v. Allstate Ins. Co., 336 F.3d 8, 11 (1st Cir.2003).

The most straightforward reading of section 10 readily supports a grant of summary judgment against Sunoco. Subsection (a) permits the Lessee to "make a sublease for the whole of the Premises" on certain conditions. Subsection (b) bars "[a]ny... sublease which does not fully comply" with subsection (a). Sunoco (after assuming the lease) unquestionably subleased the car wash premises back to Roberts, and that sublease unquestionably does...