Winmar Co. v. TEACHERS INS. & ANNUITY ASS'N

• Decision Date: 09 December 1994
• Docket Number: No. 92 Civ. 1793 (SWK).,92 Civ. 1793 (SWK).
• Citation: 870 F. Supp. 524
• Parties: WINMAR COMPANY, INC., Plaintiff, v. TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA, Defendant.
• Court: U.S. District Court — Southern District of New York

870 F. Supp. 524

WINMAR COMPANY, INC., Plaintiff, v. TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA, Defendant.

No. 92 Civ. 1793 (SWK).

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

December 9, 1994.

COPYRIGHT MATERIAL OMITTED

Satterlee Stephens Burke & Burke by Robert M. Callagy, Jan R. Uhrbach, New York City, for plaintiff.

Fried, Frank, Harris, Shriver & Jacobson by Marc P. Cherno, Honey L. Kober, David McMillin, New York City, for defendant.

MEMORANDUM OPINION AND ORDER

KRAM, District Judge.

In this dispute involving an income guaranty executed in conjunction with a real estate sale, defendant Teachers Insurance and Annuity Association of America ("Teachers") moves, pursuant to Rule 56 of the Federal Rules of Civil Procedure, for partial summary judgment dismissing plaintiff Winmar Company Inc.'s ("Winmar") First and Second Causes of Action and awarding relief on Teachers' Second Counterclaim. For the reasons set forth below, Teachers' motion is granted in part and denied in part.

BACKGROUND¹

I. The Building Sale

In 1985, Winmar owned a building located at 411 East Wisconsin Avenue in Milwaukee, Wisconsin (the "Building") through its subsidiary, Winmar of Wisconsin, Inc.² Teachers, a national pension and insurance organization, was the holder of a mortgage on the Building. In late 1985, Winmar approached Teachers with an offer for Teachers to purchase the Building. On December 23, 1986, after extensive negotiations, the parties were able to reach an agreement and the Building was sold to Teachers.

In connection with the sale, Winmar executed an Income Guaranty,³ promising that Teachers would receive a certain amount of income as owners of the Building. See Income Guaranty, annexed to Teachers' Exhibits as Exh. "PX-1," at ¶ 1. Specifically, the Income Guaranty provided, in part, that:

To induce Teachers to enter into the Agreement of Sale and to purchase the Premises, Winmar hereby represents, agrees, warrants and covenants as follows: From and after the date hereof and until and including December 31, 1989, Winmar hereby unconditionally guarantees to Teachers that Net Operating Income of the Premises will not be less than $495,000 per month.⁴

Id. The Income Guaranty provided further that:

In the event that, as of the end of any calendar month, Net Operating Income for the calendar year in which such month occurs ... is less than the product of $495,000 and the number of months elapsed in such calendar year during the term of this guaranty ... the difference between such product and the Net Operating Income amount is referred to herein as the "Shortfall" for such year. The undersigned shall pay the amount of any such Shortfall to you within ten (10) days of the receipt of written notice from you of the amount of the Shortfall.

Id. at ¶ 2 (emphasis in original). Accordingly, under this provision, Winmar was obligated to pay Teachers promptly for any shortfall in Net Operating Income in any given month, less surplus accumulated in prior months above the $495,000 per month guarantee.

At the same time, the parties entered into a Management Agreement which provided that, after the sale, Winmar would continue to manage the Building during the term of the Income Guaranty. See Complaint at ¶ 10. Under the Management Agreement, Winmar would "exercise control over the operating results" of the Building, thereby retaining control over Teachers' Net Operating Income and minimizing its potential obligations under the Income Guaranty. Id. The Management Agreement provided further that Teachers would have the right to terminate Winmar's management of the Building under certain circumstances. Id.

II. The Income Guaranty Dispute

A. Paragraph 14(a)

The Income Guaranty provided that, in the event that Teachers terminated the Management Agreement and Winmar no longer managed the Building, Net Operating Income would be re-calculated. Specifically, Paragraph 14(a) of the Income Guaranty ("Paragraph 14(a)") stated:

In the event the Management Agreement is terminated by Teachers during the term of this guaranty the liability of the undersigned hereunder shall be limited as follows: (a) With respect to the remainder of the year in which such termination occurs, for the purposes of this guaranty, Net Operating Income shall be deemed to be the lesser of actual Net Operating Income or Net Operating Income as calculated based on the Operating Budget.⁵

See Income Guaranty, annexed to Teachers' Exhibits as Exh. "PX-1," at ¶ 14(a) (emphasis added). In the complaint, Winmar alleges that Paragraph 14(a) contains a drafting error. See Complaint at ¶ 13. In brief, Winmar states that the word "lesser" should read "higher," and that Winmar was unaware of this error when it executed the contract. Id. According to Teachers, however, the parties thoroughly negotiated all aspects of the Income Guaranty and the language in Paragraph 14(a) is an accurate reflection of the agreement ultimately reached by the parties.

B. The Settlement Agreement

On February 5, 1988, after a dispute regarding the parties' obligations under the Income Guaranty, the parties entered into a settlement agreement (the "Settlement Agreement"), under which the Management Agreement was terminated and control of the Building was transferred from Winmar to Teachers. See Settlement Agreement, annexed to Teachers' Exhibits as Exh. "RX-2," at 3340. The Settlement Agreement provided further that "the Income Guaranty is in all respects ratified and confirmed and is in full force and effect as expressly modified hereby." Id. at 3347.

As a result of the Settlement Agreement and the termination of the Management Agreement, Paragraph 14(a) was triggered. Thereafter, Winmar notified Teachers of the alleged error in the language of the Income Guaranty and requested its correction to reflect the provision's intended meaning. After Teachers refused Winmar's request, Winmar commenced the present action.

C. The Draft Proposals and Mark-ups

Prior to execution of the Income Guaranty on December 23, 1986, Winmar, Teachers and their respective attorneys exchanged several drafts of the Income Guaranty. Specifically, on October 31, 1986, Teachers produced an initial draft of the Income Guaranty (the "October 31 Draft"). The October 31 Draft contained no special provision concerning Winmar's obligations in case of the termination of the Management Agreement. See October 31 Draft, annexed to Teachers' Exhibits as Exh. "PH-7," at 773.

According to Winmar, the absence of any such provision caused concern because Winmar did not want to be responsible for a shortfall at a time when it no longer exercised any control over the income and expenses of the Building. See Deposition of Thomas Brockmiller, taken on 9/24/92 ("Brockmiller Dep."), annexed to the Deposition Excerpts in Support of Teachers' Motion for Partial Summary Judgment ("Teachers' Excerpts") and Winmar's Deposition Excerpts in Opposition to Teachers' Motion for Partial Summary Judgment ("Winmar's Excerpts"), at 89, 104; Deposition of Susan Rahm, taken on 2/10/93 ("Rahm Dep."), annexed to Teachers' Excerpts, at 101. Consequently, on November 4, 1986, Winmar made several written comments on the October 31 Draft (the "November 4 Mark-up"), including the following statement: "Income guaranty terminates if management agreement terminates for any reason." See Deposition of Simon David Cices, taken on 2/9/93 ("Cices Dep."), annexed to Teachers' Excerpts, at 122: see also November 4 Mark-up, annexed to Winmar's Deposition Exhibits in Opposition to Teachers' Motion for Partial Summary Judgment ("Winmar's Exhibits") as Exh. "CX-4," at 6. This proposal was rejected, however, in oral discussions occurring some time prior to November 9, 1986. See Cices Dep. at 163-64. According to William H. Goebel ("Goebel"), an in-house lawyer for Teachers, Teachers rejected Winmar's proposal because Teachers refused to jeopardize its guaranteed $495,000 per month Net Operating Income in the event it decided to terminate the Management Agreement. See Deposition of William H. Goebel, taken on 1/12/93 ("Goebel Dep."), annexed to Winmar's Excerpts, at 97.

Despite Teachers' rejection of this proposal, Winmar continued to seek a provision that would cap its liability in the event Teachers exercised its right to terminate the Management Agreement. Specifically, Winmar next proposed that upon termination of the Management Agreement, Winmar's liability under the Income Guaranty would be limited to the lesser of actual or budgeted shortfall. See Cices Dep. at 135-36. This concept first appeared in the November 4 Mark-up, which stated: "Upon termination of management agreement — our liability is limited to lesser of actual deficit and projected deficit as of termination of management agreement." See November 4 Mark-up, annexed to Winmar's Exhibits as Exh. "CX-4," at 1. Although Winmar never sent Teachers a copy of the November 4 Mark-up, it did prepare a subsequent mark-up on November 9, 1986 (the "November 9 Mark-up") which was sent directly to Teachers' counsel. See Cices Dep. at 61. The November 9 Mark-up included a handwritten statement reading: "14. If the Management Agreement terminates for any reason, then the liability of the undersigned shall equal the lesser of actual shortfalls and projected shortfalls (this term is to be worked out)." See November 9 Mark-up, annexed to Winmar's Exhibits as Exh. "CX-8," at 8.

On November 10, 1986, Winmar sent the November 9 Mark-up to Teachers' counsel Goebel and Winmar Vice-president Thomas A. Brockmiller ("Brockmiller"). According to Winmar, it explained to Teachers that the proposed paragraph was necessary because "if the management agreement terminated, Winmar would be in the troublesome situation of having to write checks without having any control of how the money liability is determined or spent, which would be an untenable position for anybody." See Cices Dep. at 216. Nonetheless, according to ...