United States v. Bedford Associates

Decision Date24 May 1980
Docket NumberNo. 79 Civ. 1522 (HFW),79 Civ. 1482 (HFW).,79 Civ. 1522 (HFW)
PartiesUNITED STATES of America, Plaintiff, v. BEDFORD ASSOCIATES, a Partnership, Doris K. Carver and Samuel Ades, Individually and as partners of Bedford Associates, and Amcar Management Corp., Defendants, and The Bowery Savings Bank, Intervenor. The BOWERY SAVINGS BANK, Plaintiff, v. BEDFORD ASSOCIATES, a Partnership, Doris K. Carver and Samuel Ades, Individually and as partners of Bedford Associates, and United States of America, Defendants.
CourtU.S. District Court — Southern District of New York

COPYRIGHT MATERIAL OMITTED

William M. Tendy, U. S. Atty., S.D.N.Y., New York City, for the U. S.; William J. Brennan, Harvey J. Wolkoff, Asst. U. S. Attys., New York City, of counsel.

Rosenman, Colin, Freund, Lewis & Cohen, New York City, for Bedford defendants; Frank H. Wohl, Eugene Zemp Du-Bose, Jr., New York City, of counsel.

Cadwalader, Wickersham & Taft, New York City, for Bowery; Terence F. Gilheany, Howard R. Hawkins, Jr., New York City, of counsel.

OPINION

WERKER, District Judge.

These two consolidated actions arise from the Internal Revenue Service's (the "IRS") occupancy of a 21-story office building located at 120 Church Street owned by the defendant Bedford Associates.1 The plaintiff-intervenor Bowery Savings Bank ("Bowery") is the holder of a consolidated first mortgage on the premises. These actions having been tried on the merits before the Court on March 17-20 and 24-26, 1980, and all of the evidence having been duly considered, judgment is rendered in favor of Bedford in action no. 79 Civ. 1522 and in favor of Bowery in action no. 79 Civ. 1482. Pursuant to Fed.R.Civ.P. 52(a), my findings of fact and conclusions of law follow.

FACTS

In 1962, the United States General Services Administration ("GSA") executed a lease of the premises with Bedford for a ten-year term commencing on November 1, 1963, with two five-year renewal options. The IRS remained in continuous occupancy of the building for the initial ten-year period. On October 25, 1973, the Government exercised its first renewal, subject to the approval of Congress, which was obtained for both the first and second renewal options in December 1973. The IRS remained in continuous occupancy under the first renewal option through October 31, 1978. The Government did not exercise its second renewal option, and the lease expired on October 31, 1978. PTO, Agreed Findings 4-6.2

A. The Solicitation for Offers

During the course of the first five-year renewal period, the Government determined that 120 Church Street no longer met the needs of the IRS and determined to lease improved space. PTO, Agreed Finding 6. After conducting market surveys, on June 28, 1977 GSA sent a Solicitation For Offers (the "Solicitation") to 12 prospective lessors, including Bedford. The Solicitation provided, inter alia, that all offers with an annual rent in excess of $500,000 were required to remain open for 240 days from the last date of receipt of offers by GSA. PTO, Agreed Finding 7; HX 12 (A. 722). The Solicitation called for offers of 317,000 net usable square feet, plus an option on an additional 8,000 net usable square feet, which space was to be contiguous. HX 12 (A. 734). A method for computing net usable square feet was set forth in the Solicitation. Id. (A. 788).

B. The Negotiations

On August 15, 1977, the last date for receipt of offers, GSA received three offers in response to the Solicitation, one of which was from Bedford. PTO, Agreed Finding 8. The other two offers were submitted by the Port Authority of New York and New Jersey (the "Port Authority") for space in the World Trade Center and by the Prudential Insurance Company of America ("Prudential") for space at 100 Church Street. See HX 186 (A. 1234); HX 188 (A. 1276). Thereafter, GSA entered into negotiations with the three offerors concerning their respective offers. HXs 187, 189, 190 (A. 1268, 1333, 1345).

(1) Bedford's Offer and the Purported Competition

Bedford's original offer in response to the solicitation was economically viable when made and was made in good faith with the expectation that Bedford would retain ownership of the building. Tr. 373, 381, 412-13 (D. Carver); tr. 628, 651-52 (M. Madonick); tr. 812-19 (C. Madonick).3 Bedford offered the entire building, plus an additional 8,873 square feet at 110 Church Street, for a total of 350,024 square feet at $3,073,210.72 per year, including electricity, or approximately $8.78 per square foot. HXs 15, 16 (A. 799-811); DX 275. The offer also included approximately $1 million worth of construction. A. 223 (M. Madonick). See HX 16 (A. 811); HX 18 (A. 814-16).

The Port Authority and Prudential offers called for rents substantially higher than that provided for in the Bedford offer. The Port Authority offer was for noncontiguous space at $14.41 per square foot, substantially excluding electricity. The Prudential offer was for 317,000 square feet at $12.07 per square foot, excluding electricity, and exceeded the limitation set forth in the Economy Act. HX 119 (A. 1032); tr. 64 (Beck). The space referred to in these two offers may have been more attractive than 120 Church Street; however, because of the noncontiguous space of the Port Authority offer, the violation of the Economy Act of the Prudential offer, and the comparatively high rents of both, these offers were not competitive with the Bedford offer.

The Solicitation provided that there would be no public opening of bids and that all offers would be kept strictly confidential until an award was made. HX 12 (A. 722). GSA did not disclose the identities of the other offerors to Bedford during the negotiations. However, GSA did represent to Bedford that there was competition and used the existence of other offers as leverage in its negotiations with Bedford. See HX 190 (A. 1350, 1351) (memorandum of 11/2/77 meeting: GSA "stressed need to be competitive," "noted the competition . . that is actively and strenuously after this lease"), (1352-53) (memorandum of 11/7/77 meeting), (1354) (memorandum of 11/9/77 meeting), (1358) (11/28/77 memorandum). See also A. 406 (M. Carver); tr. 82-83 (Beck) (GSA wanted to give the impression that the other bids were competitive). As late as November 28, 1977, after GSA had determined to recommend the Bedford offer, and after it had become clear that the other offers were not competitive, GSA was still referring to "other offers" in its negotiations. HX 190 (A. 1358). The Prudential representatives had advised GSA on November 22, 1977 that Prudential's best offer had been made, that its offer could not be reduced to meet the Economy Act limitation. In fact, the Prudential representatives at that meeting asked to be notified "as soon as possible as to when Prudential could be released from its offer." HX 189 (A. 1342).

Although the Prudential offer was net of utilities and the Port Authority offer was substantially net of utilities, GSA advised Bedford that it could not and would not consider offers net of utilities. A. 287, 321-23 (M. Madonick). GSA also told Bedford during the course of negotiations that the other offerors were offering new ceilings and persuaded Bedford to offer new ceilings as well. A. 96 (Margolin); A. 232 (M. Madonick); HX 18 (A. 816).

(2) Rent During Construction

At the time GSA commenced its search for improved space, it anticipated that the entire process of negotiating, obtaining congressional approval and making an award would be completed by April 1978. Because the IRS was supposed to be relocated by November 1, 1978, it was important that this schedule be met. DX 208; tr. 138-39 (LeDuc). Although Bedford was told by GSA on a number of occasions that no one could predict with certainty when congressional approval would be obtained or when an award would be made, tr. 45-46 (Beck); tr. 127 (LeDuc); A. 78-79 (Margolin), Bedford reasonably believed that an award under the Solicitation would be made by the end of 1977 or within the first few months of 1978. The Solicitation called for occupancy by November 1, 1978, HX 12 (A. 734), and Bedford knew that the Government wanted the new space by that date. A. 401-04 (M. Carver); tr. 618-19 (M. Madonick). Bedford's offer in response to the Solicitation included a construction package, and it had planned on beginning construction by early 1978. Tr. 620 (M. Madonick); tr. 337-39 (M. Carver). The Government was aware of the fact that Bedford wanted to start construction early in 1978. A. 234, 363-64 (M. Madonick); see also HX 21 (A. 823).

On November 18, 1977, Bedford wrote to GSA that it anticipated that a number of floors would be completely renovated prior to "the November 1st, 1978 commencement date of the new lease." HX 21 (A. 823).4 Bedford proposed that in the event floors were not renovated by November 1, 1978, the Government would pay the rent called for under the second renewal option to the 1962 lease for all unrenovated floors on a pro rata basis. HX 21 (A. 823). As the delays in the processing of the proposed lease occurred, it became apparent to Bedford that the renovations were not going to proceed as quickly as anticipated and that consequently the rent it would be receiving after November 1, 1978 under the November 18, 1977 proposal would be much lower than it had anticipated. See A. 406-07, 411 (M. Carver); A. 431 (D. Carver). The delay in the making of an award threw the construction schedule off, and the resultant increases in construction costs rendered Bedford's bid no longer viable. A. 411-13 (M. Carver); tr. 617-20 (M. Madonick); HXs 30-35 (A. 836-41).

On March 2, 1978, Bedford proposed in writing to GSA that it pay the first renewal option rent and all utilities until the completion of construction or 18 months after the execution of the new lease, whichever came first, with the rent under the new lease to begin then. HX 25 (A. 830). Although GSA privately decided to reject this proposal, HX 175 (A....

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