Sutton Hill Associates v. Landes, 87 Civ. 8452 (PKL).

• Decision Date: 30 January 1989
• Docket Number: No. 87 Civ. 8452 (PKL).,87 Civ. 8452 (PKL).
• Citation: 705 F. Supp. 940
• Parties: SUTTON HILL ASSOCIATES, a partnership, Plaintiff, v. Michael LANDES, Albert Schwartz and RKO Cinema 5 Theatre Corporation, Defendants, James J. Cotter, Michael R. Forman, Sutcin Holding Corporation, City Cinemas Corporation and Royal Insurance Company of America, Additional Defendants on Counterclaims.
• Court: U.S. District Court — Southern District of New York

705 F. Supp. 940

SUTTON HILL ASSOCIATES, a partnership, Plaintiff, v. Michael LANDES, Albert Schwartz and RKO Cinema 5 Theatre Corporation, Defendants James J. Cotter, Michael R. Forman, Sutcin Holding Corporation, City Cinemas Corporation and Royal Insurance Company of America, Additional Defendants on Counterclaims.

No. 87 Civ. 8452 (PKL).

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

January 30, 1989.

Rosenman & Colin, New York City (Steven Wolowitz, Richard L. Claman, Jeffrey Delott, of counsel), for plaintiff.

Graubard Mollen Dannett & Horowitz, New York City (Scott E. Mollen, Jack Weinberg, Scott E. Hershman, of counsel), for defendants.

OPINION AND ORDER

LEISURE, District Judge.

This motion involves the contested right to possession of two valuable East Side Manhattan cinema properties, the Sutton Theatre ("Sutton") and the Murray Hill Theatre ("Murray Hill," collectively the "Theatres"). Plaintiff seeks partial summary judgment granting the declaratory relief sought in its complaint and reply to counterclaims, as well as dismissal of the defendants' defenses and counterclaims that relate to possession of the Theatres.¹

Defendants were tenant leaseholders of the Theatres. The lease expired by its terms on August 15, 1988. Defendants brought a preliminary injunction motion seeking to enjoin plaintiff from dispossessing them. That injunction application was denied by this Court upon oral findings made in a proceeding on July 27, 1988.² While plaintiff thus regained possession of the Theatres, the ultimate right to possession, of course, awaits the disposition of the merits in this case. In that regard, plaintiff's counsel represented that the Theatres would not be sold or leased pending this Court's determination of the merits of the claims relating to possession. Plaintiff now moves for partial summary judgment pursuant to Fed.R.Civ.P. 56.

Factual Background.

The present dispute essentially arises out of a series of business transactions and relationships that turned sour. The details and history of those business relationships, as they relate to possession rights to the Theatres, are therefore relevant.

Prior to August 16, 1985, the Theatres were owned by the Sutcin Holding Corporation ("Sutcin"). Sutcin was wholly owned, through intermediate entities, by Michael R. Forman ("Forman") and related family trusts (the "Forman Family"). Sutcin, through subsidiaries, had various interests in the Theatres and other motion picture houses that, together, comprised the Cinema 5 chain. The Forman Family had also previously controlled two other movie chains, the RKO circuit and the Brighton Theatre circuit.

Defendants Michael Landes ("Landes") and Albert Schwartz ("Schwartz") purchased the RKO and Brighton Theatre circuits from the Forman Family in 1981 and 1982. In 1985, Landes and Schwartz³ entered into negotiations with James J. Cotter ("Cotter") and discussed a multi-faceted transaction regarding the Cinema 5 chain wherein Landes and Schwartz would: lease the Theatres; purchase the interests of certain other Cinema 5 theatres from Forman and the Forman Family; and book films and perform administrative functions for the Cinema I and II theatres ("Cinema I & II"), which was another Forman Family interest.⁴

Ira S. Levin ("Levin") and attorneys from Botein Hays & Sklar, were in-house and outside counsel, respectively, for Sutcin. Extensive drafting negotiations occurred over the lease of the Theatres (the "Lease") between Sutcin representatives and Landes, Schwartz, and their counsel Daniel Krause ("Krause"). These negotiations included two face-to-face meetings, numerous telephone conversations, and review of at least six drafts of the lease. These drafting negotiations occurred simultaneously, and in conjunction with, negotiations of the purchase and booking agreements noted above.

The Lease contained a right of first refusal provision, which will be discussed in more detail below. See, Lease §§ 22.01-04, attached as Exhibit 1 to Affidavit of Steven Wolowitz, Esq., sworn to on June 17, 1988 ("Wolowitz Aff."). During the drafting of the Lease, particular attention was paid to this provision.

The Lease, along with the purchase agreement and booking agreement, was executed on August 16, 1985. On that same day, Landes and Schwartz transferred their rights under that Lease to Cinema 5, which they now wholly owned. This transfer was made with the written consent of Sutcin.

The Forman Family, through Sutcin's retained ownership of the Theatres and Cinemas I & II, maintained interests in Manhattan cinemas. The Forman Family completely divested itself of those interests through a transaction between Sutcin and the current plaintiff to this action, Sutton Hill Associates ("SHA").

SHA is a partnership comprised of Forman and Cotter. Cotter had no previous ownership interest at all in Sutcin, or the Forman Family cinema interests. The SHA partnership was formed, and the transfer of the Theatres and Cinema I & II to it effected, by instruments drafted by Levin and Botein Hays & Sklar. The transfer was characterized as a "sale" of the cinema interests, and the documents were back-dated to August 16, 1985. Thus, Forman himself (through the SHA partnership) directly acquired the Manhattan cinema interests that the Forman Family previously held (through Sutcin), and that Forman had previously held only indirectly.

The sale of the cinema interests by Sutcin to SHA was intricately structured. SHA would purchase the Theatre buildings outright, and obtain a seven-year option to purchase the underlying land. The aggregate purchase price, $10 million, reflected independent appraisals that Sutcin had previously obtained for the properties. Affidavit of Ira S. Levin, Esq., sworn to on June 17, 1988 ("Levin Aff."), ¶ 16. Payment to Sutcin was by means of a note, which called for 10% interest payments on the purchase price for seven years, and 13% for the next eight years, and then payment in full of the principal. That note was secured by a mortgage.

Defendants Landes and Schwartz were formally notified of the transfer of the landlord interests in the Theatres from Sutcin to SHA in early February, 1986.

Landes and Schwartz investigated development strategies that might enhance the profitability of the Theatres, and discussed those plans with Cotter. Specifically, Landes and Schwartz initiated investigations into plans for multiplexing the Theatres, and investigated the acquisition of contiguous and nearby properties.

On the evening of July 15, 1986, ten months after Landes and Schwartz took possession of the Murray Hill, the upper plaster ceiling of that theatre collapsed. The landlord SHA undertook the repairs of the Murray Hill, which remained completely closed for a very long period — until June 10, 1988. Landes and Schwartz had no use of, or access to, the Murray Hill during this period.

In late spring of 1986, prior to the fall of the ceiling at the Murray Hill Theatre, the Cineplex Odeon Corporation ("Cineplex") approached Landes and Schwartz with an attractive offer to buy the RKO and Cinema 5 theatre circuits, which included the Theatres. Shortly after the collapse of the Murray Hill ceiling, Landes and Schwartz entered into an agreement with Cineplex whereby Cineplex would purchase the RKO and Cinema 5 interests from Landes and Schwartz, who would then sublet or assign the Lease to Cineplex (the "Cineplex Agreement"). The Lease of the Theatres required landlord consent for any transfer or sublease to a party other than a subsidiary of Landes and/or Schwartz. Lease § 18.01. The Cineplex Agreement contained a "penalty" provision in the event that Landes and Schwartz could not secure such consent.

SHA did not consent to the sublease to Cineplex. Levin Aff. ¶ 21. Cineplex negotiated directly with Cotter to attempt to buy the Theatres from SHA outright, but the parties could not come anywhere close to agreeing on a price.

Landes and Schwartz then altered the structure of their deal with Cineplex. They assigned the rights of the Lease back from Cinema 5 to themselves personally. Cineplex was given the right to book and buy for the Theatres during the Lease term, and for any extensions that Landes and Schwartz might obtain. The modification provided that "if and when" the Murray Hill opened, Cineplex would book and buy for it, as well as for the Sutton. Until defendants were dispossessed from the Theatres, Cineplex did book and buy for the Sutton, and advertised it as part of its circuit. Notwithstanding the Cineplex Agreement's "penalty" provision for failure to obtain consent to a sub-let, the ultimate purchase price for the Cinema 5 circuit and Theatres was not altered from the amount upon which Cineplex, Landes and Schwartz originally agreed.

In 1987 SHA set out to acquire, in its own right, additional direct interests in the Manhattan cinema business. Cineplex, apparently as a result of other cinema acquisitions and consequent intervention by the Antitrust Division of the U.S. Department of Justice, divested itself of five screens. SHA acquired interests in those screens, and formed, as a subsidiary, the City Cinema Circuit ("CCC"). As of June 1988, CCC consisted of eleven screens. SHA had actual ownership interests in five of those screens, and CCC was the booking, buying, and/or managing agent for six screens owned by unrelated parties.

A newspaper article appeared on August 24, 1987 (the "article") that was based on interviews with Ralph Donnelly, an executive with the newly formed CCC. Exhibit 26, attached to Affidavit of Albert Schwartz, Esq., sworn to on July 7, 1988 ("Schwartz Aff."). That article seemed to indicate that SHA contemplated leasing the Theatres to CCC upon expiration of the Lease. Schwartz and Landes wrote to SHA, expressing their position that such an action would violate the right of first refusal provision of the Lease. SHA responded that it did not intend to "lease" the...