Syufy Enterprises v. City of Oakland

• Decision Date: 20 December 2002
• Docket Number: No. A097471.,A097471.
• Citation: 128 Cal.Rptr.2d 808,104 Cal.App.4th 869
• Court: California Court of Appeals Court of Appeals
• Parties: SYUFY ENTERPRISES, L.P., Plaintiff and Appellant, v. CITY OF OAKLAND, Defendant and Respondent.

128 Cal.Rptr.2d 808

104 Cal.App.4th 869

SYUFY ENTERPRISES, L.P., Plaintiff and Appellant, v. CITY OF OAKLAND, Defendant and Respondent.

No. A097471.

Court of Appeal, First District, Division 3.

December 20, 2002.

Rehearing Denied January 21, 2003.

Review Denied March 19, 2003.

Miller, Starr & Regalia, Menlo Park, Marvin B. Starr, Walnut Creek, Basil S. Shiber, for Appellant Syufy Enterprises, L.P.

Andrew A. August, John L. Fitzgerald, Pinnacle Law Group LLP, San Francisco, David L. Alexander, Vivian M. O'Neal, Office of the Port Attorney, Port of Oakland, City of Oakland, for Respondent City of Oakland.

PARRILLI, J.

After a master tenant rejects a nonresidential real estate lease in bankruptcy, does a subtenant who is an intended beneficiary of the lease have a right to remain in possession of the property? The trial court in this case decided the answer is "no." Accordingly, the court granted a nonsuit and dismissed all claims by Syufy Enterprises, L.P. (Syufy) against the City of Oakland arising from Syufy's eviction from a property near the Oakland Airport, where Syufy had operated a movie theater. The court found Syufy lost its right to possession of the property, which Syufy occupied under a sublease, after the primary lease was "deemed rejected" by the sublessor tenant in the sublessor's bankruptcy proceedings. In a companion unlawful detainer action, an appellate division of the superior court had previously decided the legal issue concerning the effect of a "deemed rejection" in Syufy's favor; therefore, Syufy contends the trial court erred in failing to give this decision preclusive effect. Syufy also claims the court's decision was substantively wrong because Syufy was entitled to possession as a third-party beneficiary of the primary lease. We conclude the litigation was not procedurally barred and the trial court correctly resolved the substantive legal issue. Therefore, we affirm.

BACKGROUND

In 1960, the Port of Oakland (Port) leased a 10-acre parcel of land to Transwestern Hotels for the construction of a hotel. They signed a lease (which the parties call the Master Lease) with a 50-year term, commencing in 1960 and ending in 2010. The Port later agreed to several assignments of the lease.

In 1968, the Port and the current lessee, Security Savings and Loan Association, executed an amendment to the Master Lease titled the "Fifth Supplemental Agreement." In this document, the Port agreed to lease the tenant an adjoining parcel of land for the immediate construction of a motion picture theater. Two provisions are of particular significance to this appeal. In paragraph three of the Fifth Supplemental Agreement, the parties agreed that the Master Lease would be amended to include, among other things, the statement: "It is understood and agreed by the parties hereto that Lessee intends to cause said improvements to be constructed by its sublessee, SYUFY ENTERPRISES, INC...." The parties amended another section of the Master Lease to state: "Notwithstanding the provisions of this Paragraph 10 [concerning requirements for subleases and assignments], it is understood and agreed that Lessee may sublease Parcel Two to SYUFY ENTERPRISES, INC...." The Fifth Supplemental Agreement again specified a term ending in June 2010. In August 1968, the Port passed a resolution expressly consenting to Syufy's tenancy on the property.

Syufy subleased the theater parcel from Security Savings and Loan Association in June 1968, for a term of 15 years with an option to extend the sublease until June 2010. In the sublease agreement, Syufy agreed to assume, perform and be bound by all covenants in the Master Lease except those concerning operation of the hotel. Syufy then built and operated a theater on the site and timely exercised its option to extend the sublease through 2010. By the early 1980s, Syufy had divided its single theater into four auditoriums, and in 1988 Syufy added more auditoriums and substantially remodeled the facility. The Port consulted with Syufy and approved all of these expansions.

During Syufy's tenancy, the Master Lease was assigned to several different hotel lessees, with the Port expressly consenting to the assignment each time. In November 1990, the current lessee assigned its rights under the Master Lease to the Oakland Airport Hotel Corporation (OAHC). Disputes soon arose between the Port and OAHC about how the hotel was operated. Beginning in 1991, the Port served OAHC several notices of default under the Master Lease, referencing OAHC's alleged failure to operate a "first class" hotel on the site. Syufy received copies of two such notices and contacted the Port, but a representative of the Port assured Syufy no action was necessary and the Port did not intend to disturb Syufy's tenancy. The Port never directed a notice of default against Syufy or alleged any default by Syufy.

In January 1994, the Port filed an unlawful detainer action against OAHC. The complaint did not name Syufy, nor was it served on Syufy. OAHC failed to answer the complaint and, after the Port obtained a default judgment against it, OAHC filed a petition under Chapter 11 of the Bankruptcy Code. The OAHC trustee filed a motion to assume the Master Lease, but the bankruptcy court denied this motion.¹ OAHC's motion for reconsideration was denied, and its appeal from the ruling was dismissed. On July 15, 1994, the bankruptcy court ordered OAHC to vacate the premises it had leased from the Port. The order did not mention Syufy, and Syufy received no notice of the order.

Syufy remained unaware of the OAHC bankruptcy proceedings until August 1994, when the Port sent Syufy a letter explaining that a United States Bankruptcy Court had ordered OAHC to vacate the hotel property. The Port stated: "As a result of the court's orders, the lease between the Port and the Hotel has been terminated. In addition, as Syufy is a subtenant under the Hotel lease, the court's orders effectively terminates [sic] Syufy Enterprises's sublease with the Hotel." However, the Port went on to assure Syufy that on August 9, 1994 the Board of Port Commissioners had approved a resolution "to allow Syufy to continue its occupancy of the premises on a month-to-month basis upon the same terms and conditions of the sublease between Syufy Enterprises and the Hotel," after Syufy provided proof of insurance and a plan for making security patrols of the property. The Port's letter concluded by requesting that Syufy sign the letter to indicate its desire to enter "a month-to-month agreement" with the Port on the stated terms. When it received this letter, Syufy contacted the Port and was told the Port did not intend to disturb Syufy's tenancy. The Port explained it wanted to formalize a new lease with Syufy to avoid any possible claim by the OAHC bankruptcy trustee that Syufy's rent payments to the Port were assets of the bankruptcy estate. The Port's director of commercial real estate told Syufy the Port wished to enter a direct lease with Syufy through June 2010 or longer. After these discussions, Syufy's president signed the Port's letter.

Syufy continued to operate the theater, although the Port did not prepare a new lease for Syufy and the parties signed no new agreements. The Port operated the hotel itself, through a management company, until 1996. In late 1996 or early 1997, the Port decided to market the site for a new commercial development and so demolished the hotel. In May 1998, Syufy notified the Port of its desire to extend the lease through June 2010. But on October 19, 1998, the Port sent Syufy a notice of termination of tenancy, ordering Syufy to vacate the theater premises within 30 days. The Port had made no effort to evict Syufy before this October 1998 notice.

In response to the notice of termination, on December 10,1998, Syufy sued the Port in the Alameda County Superior Court for declaratory relief and damages. The following month, the Port filed an unlawful detainer action against Syufy in the Alameda County Municipal Court. The parties stipulated to consolidate the two actions for discovery and case management purposes. They further agreed to stay all discovery regarding damages pending resolution of the unlawful detainer case. The Port then filed a motion in the unlawful detainer action for summary adjudication of Syufy's thirteenth affirmative defense, which alleged that OAHC's "deemed rejection" of the Master Lease in the bankruptcy proceedings did not terminate Syufy's rights under the sublease or the Master Lease as a matter of law. The parties understood resolution of this issue could effectively determine the outcome of the unlawful detainer case because the Port stipulated that (1) Syufy had committed no breach of its sublease agreement, and (2) the Port's eviction of Syufy was based solely on its position that the deemed rejection of OAHC's Master Lease in bankruptcy terminated Syufy's rights under the sublease, resulting in a month-to-month tenancy. The municipal court agreed with the Port's position and granted the motion. The parties filed competing motions for summary judgment and, based on its earlier ruling, the court granted the Port's motion, concluding the Port was entitled to regain possession of the premises from Syufy.

Syufy filed a notice of appeal from the unlawful detainer judgment in the Appellate Division of the Alameda County Superior Court (Appellate Division), and the parties agreed to stay proceedings in Syufy's superior court action against the Port pending resolution of the appeal. Syufy also sought a stay of execution of the unlawful detainer judgment, but this request was denied and Syufy surrendered possession of the theater on April 1, 2000. Syufy did not petition the appellate division for writ review of the denial of its motion for a stay, nor did Syufy amend its previously filed appeal to address this issue. In August or September of 2000, while Syufy's appeal was pending, the Port...