U.S. v. Bedford Associates

Decision Date31 March 1981
Docket NumberD,Nos. 267,377,s. 267
Citation657 F.2d 1300
PartiesUNITED STATES of America, Plaintiff-Appellant, v. BEDFORD ASSOCIATES, a Partnership, Doris K. Carver and Samuel Ades, individually and as partners of Bedford Associates, and Amcar Management Corp., Defendants-Appellees, and The Bowery Savings Bank, Intervenor-Appellee. The BOWERY SAVINGS BANK, Plaintiff-Appellee, v. BEDFORD ASSOCIATES, a Partnership, Doris K. Carver and Samuel Ades, individually and as partners of Bedford Associates, Defendants-Appellees, and United States of America, Defendant-Appellant. ockets 80-6105, 80-6107.
CourtU.S. Court of Appeals — Second Circuit

Harvey J. Wolkoff, Asst. U. S. Atty., New York City (John S. Martin, Jr., U. S. Atty., S. D. N. Y., William J. Brennan, Michael H. Dolinger, Asst. U. S. Attys., New York City, on the brief), for plaintiff-appellant.

Frank H. Wohl, New York City (Ronald Jay Litchman, Douglas J. Clubok, Rosenman Colin Freund Lewis & Cohen, New York City, on the brief), for defendants-appellees Bedford Associates et al.

Terence F. Gilheany, New York City (Howard R. Hawkins, Jr., Terrence J. Connolly, Cadwalader, Wickersham & Taft, New York City, on the brief), for plaintiff-appellee Bowery Savings Bank.

Before MOORE, MULLIGAN, and KEARSE, Circuit Judges.

KEARSE, Circuit Judge:

These consolidated appeals, now before us for the second time, require us to determine the rights and liabilities of three parties interested in a 21-story office building located at 120 Church Street in New York City. Bedford Associates 1 owns the building; The Bowery Savings Bank ("Bowery") holds a consolidated first mortgage on it; and the United States Internal Revenue Service ("IRS") has occupied the building as its Manhattan District Headquarters since shortly after construction in 1962. The lease under which the IRS formerly occupied the building expired on October 31, 1978. This litigation commenced in March 1979, when the government sued Bedford for specific performance of, and damages under, a new lease it contended had been concluded through negotiations between Bedford and the General Services Administration ("GSA"). Bedford denied that these negotiations had produced a valid lease and counterclaimed for damages arising from the government's continued occupancy after the old lease had expired. At about the same time, Bowery brought an action to quiet title to the premises in itself and to foreclose its mortgage against the interests of Bedford and the government. Proceedings in the two actions were later consolidated.

The district court denied the government's motion to dismiss Bowery's foreclosure action, 491 F.Supp. 848 (S.D.N.Y.1980), and, after a bench trial, entered final judgments denying all relief to the government, awarding substantial damages to Bedford and Bowery, foreclosing Bowery's mortgage against Bedford and the government, and ordering the government to pay rent to Bowery. 491 F.Supp. 851 (S.D.N.Y.1980). In the present appeal, 2 the government renews its contention that the district court lacked jurisdiction to adjudicate Bowery's mortgage foreclosure action and assails the final judgment entered against it. We affirm in part, reverse in part, and remand for further proceedings.

A. The Relations Among the Parties

The relationship between Bedford and the government commenced in 1962, when GSA and Bedford executed the initial lease of 120 Church Street. The 1962 agreement provided for an initial ten year term, commencing November 1, 1963, at an annual rental of $1,949,500. The agreement gave the government two five-year renewal options, with the annual rental set at $2,115,499 during the first renewal term, and at $2,226,194 during the second. The government exercised the first renewal option in 1973, and the IRS occupied the building under the old lease through October 31, 1978. The government did not exercise its second renewal option, and the old lease expired on October 31, 1978.

Relations between Bedford and the government were never perfectly smooth. Bedford periodically complained that it was losing money under the lease; one point of contention was the government's responsibility for certain excess electricity costs, not provided for in the original agreement, that resulted from IRS's increasing use of electrical office machines. The government, for its part, often sought changes in the building's physical plant. Although the parties were able to resolve many of their differences through supplemental agreements amending the lease, their relationship was becoming rather strained toward the end of the first renewal period. Bedford complained that its losses were mounting under the old lease, while the government had determined that 120 Church Street no longer met the IRS's needs. By early 1977, the government had decided to seek improved space.

In June 1977, GSA solicited several prospective lessors, including Bedford, for offers of appropriate leases. GSA's solicitation called for offers of 317,000 square feet of space on contiguous floors, plus an option on 8000 additional square feet, with the premises to be ready for occupancy by November 1, 1978. By August 15, 1977, when the solicitation period closed, GSA had received three offers, including an offer from Bedford for the 120 Church Street building. Bedford offered 350,000 square feet at an annual rental of $3,073,000, and proposed renovations that it estimated would cost it about $1 million. GSA deemed the proposed renovations insufficient, and the offer was, on its face, for more space than the solicitation requested. The two other offers, however, were also deficient in various respects. By December 1977, GSA had rejected those offers, leaving as its only alternatives Bedford's new offer and the second renewal option under the old lease. The renewal option, for 369,000 square feet at an annual rent of $2,226,194, did not include the renovations needed by IRS.

After extensive negotiations, the rocky progress of which is recounted in detail below, and after considerable delay in processing Bedford's offer, GSA delivered to Bedford, on October 30, 1978, an award letter purporting to accept Bedford's offer, as amended through the negotiations. On December 13, 1978, GSA presented Bedford a proposed lease for execution. Under this lease, Bedford was to be paid rent at the second renewal option rate of $2,226,194 per year until renovations were completed, at which time the rent would rise to $2,902,160 per year. Bedford rejected the proposed lease by letters dated December 15, 1978, claiming that the lease did not conform with the solicitation and award and pointing out the substantial cost increases that had occurred during the year.

The parties resumed negotiations after Bedford's rejection, but no progress was made. Bedford asserted that its losses had become enormous and that the delay in commencing the proposed renovations had rendered them infeasible. The government paid rent at the second renewal option rate in November and December 1978, and then decided to deduct utilities payments in January and February 1979. On March 8, 1979, Bedford demanded additional rent and utilities payments from the government. Apparently, the government did not respond to this letter. On March 20, 1979, Bedford notified GSA that it would close the building and terminate services to it on March 23, 1979, unless the government paid "a reasonable and fair rent" for its occupancy.

B. The Lawsuits

On March 22, 1979, the government filed suit against Bedford. As interim relief, the government sought a temporary restraining order and preliminary injunction against Bedford's threatened "lockout." For permanent relief, it sought specific performance of the new lease it said had been created through its negotiations with Bedford, including a permanent injunction against interference with its access to the building. The government also sought damages for Bedford's breach of the alleged new lease. Bedford consented to entry of a temporary restraining order against the lockout. Bowery was allowed to intervene in the action.

In the meantime, Bowery's mortgage on the building had fallen into default through Bedford's failure to pay real estate taxes and its failure to pay interest and late charges to Bowery. On March 19, Bowery demanded of Bedford an assignment of rents, and two days later filed suit against Bedford and the government. Bowery sought a declaratory judgment quieting title to the building, foreclosure of its mortgage against Bedford's and the government's interests, and an assignment of rents.

After an evidentiary hearing, the district court granted the government's motion for a preliminary injunction. The court's decree forbade Bedford to interfere with the government's occupancy of 120 Church Street, ordered the government to pay rent to Bowery at the second renewal option rate, and ordered the government to pay all utilities expenses, without setoff from its rental payments. Dissatisfied with the terms of its victory, the government appealed, arguing principally that the provision of the decree requiring it to bear utilities costs violated principles of sovereign immunity. After concluding that we had jurisdiction of the government's appeal, we affirmed the district court's imposition of the disputed term upon the United States as a condition of awarding equitable relief. We remanded the order, however, for modification of the amount of rent to be paid to Bowery and of the proportion of utilities costs to be borne by the government. United States v. Bedford Associates, 618 F.2d 904 (2d Cir. 1980).

Shortly after the preliminary injunction was entered, Bedford filed its answer to the government's complaint. Bedford denied that its negotiations with GSA had produced a lease agreement and, alternatively, argued that any agreement formed was unenforceable on grounds of...

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