Woods Corporate Assoc. v. Signet Star Holdings, Civil Action No. 95-646 (AMW).

• Decision Date: 21 December 1995
• Docket Number: Civil Action No. 95-646 (AMW).
• Citation: 910 F. Supp. 1019
• Parties: WOODS CORPORATE ASSOCIATES, a joint venture, New Jersey Partnership, Damon G. Douglas Company, a New Jersey Corporation, and GRC Management Company, a New Jersey Corporation, Plaintiffs, v. SIGNET STAR HOLDINGS, INC., and Penn Mutual Life Insurance Company, a Pennsylvania Corporation, Defendants.
• Court: U.S. District Court — District of New Jersey

910 F. Supp. 1019

WOODS CORPORATE ASSOCIATES, a joint venture, New Jersey Partnership, Damon G. Douglas Company, a New Jersey Corporation, and GRC Management Company, a New Jersey Corporation, Plaintiffs, v. SIGNET STAR HOLDINGS, INC., and Penn Mutual Life Insurance Company, a Pennsylvania Corporation, Defendants.

Civil Action No. 95-646 (AMW).

United States District Court, D. New Jersey.

December 21, 1995.

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James A. Scarpone, Hellring, Lindeman, Goldstein & Siegel, Esqs., Newark NJ, for plaintiffs.

Donald A. Robinson, Robinson St. John & Wayne, Newark, NJ, for Signet Star Holdings, Inc.

Jonathan I. Epstein, Drinker, Biddle & Reath, Princeton, NJ, for Penn Mutual Life Insurance Company.

OPINION

PISANO, United States Magistrate Judge:

Presently before the Court are the motions of defendants Signet Star Holdings, Inc. and Penn Mutual Life Insurance Company for summary judgment and the cross-motion of plaintiffs Woods Corporate Associates, Damon G. Douglas, and GRC Management Company to abstain from exercising its jurisdiction and remand this action to state court. On May 16, 1995, the parties consented to the jurisdiction of the undersigned to decide these dispositive motions, pursuant to 28 U.S.C. § 636(c)(1).

The Court did not hear oral argument and has decided these motions based upon the written submissions of the parties, pursuant to Federal Rule of Civil Procedure 78. For the reasons stated herein, the Court denies the motion of plaintiffs to abstain or remand the action to state court and grants both defendants' motions for summary judgment.

BACKGROUND

This action arises out of financing transactions surrounding the construction of a two-story office building in Bernards Township, New Jersey. Plaintiff Woods Corporate Plaza Associates ("Woods") is a joint venture New Jersey partnership comprised of 911 Associates, a New Jersey general partnership, and plaintiff Damon G. Douglas ("Damon Douglas"), the fee owner of the real property involved in this dispute. Plaintiffs filed their Complaint in Superior Court in Morris County, New Jersey, and defendant Signet Star Holdings, Inc. ("Signet") subsequently removed the action to this Court.

I. Factual Background

In 1985, Damon Douglas leased the Bernards Township property to Woods for a term of seventy-five years, and plaintiff GRC received the right to manage the property on behalf of Damon Douglas and Woods.

Following execution of its lease of the property, Woods constructed the two-story office building that is at the center of this litigation (the "Premises"). In order to finance the construction, Woods borrowed $3,550,000 from defendant Penn Mutual Life Insurance Company ("Penn Mutual") through a non-recourse loan evidenced by a promissory note set to mature on December 1, 1992. As security for the repayment of the loan, Woods and Damon Douglas gave Penn Mutual a mortgage on the property (the "Mortgage"), and Woods executed and delivered to Penn Mutual a Collateral Assignment of Rents and Leases (the "Assignment").

In December, 1989, Woods leased to defendant Signet the entire second floor of the Premises for a term ending in 1998. The agreement expressly stated that the lease ("the Signet Lease") was to be subordinate to the Mortgage. The Lease also provided that any mortgagee of Woods would not disturb Signet's leasehold in the event of a foreclosure and Signet's attornment to the mortgagee.

On December 1, 1992, Penn Mutual's loan to Woods came due, and Woods failed to pay the principal and interest then owing under the note. By letter of January 6, 1993, Penn Mutual notified Signet that Woods had defaulted on the Mortgage and directed Signet to attorn to and tender all rents directly to Penn Mutual as landlord. Also, Penn Mutual initiated a foreclosure action in Superior Court in Somerset County, New Jersey in which it named Woods, 911 Associates, Damon Douglas, and Signet as defendants. All of the defendants, including Signet, answered the Complaint and admitted the validity of the Mortgage and its priority over the Signet Lease.

Woods, 911 Associates, GRC, and Penn Mutual entered into a Consent Order providing for the appointment of a receiver of the Premises during the pendency of the foreclosure action.¹ After the appointment of the receiver, Woods and Penn Mutual commenced negotiations to restructure the loan. The negotiations contemplated an extension of the term of the Mortgage if Woods were able to lease the vacant first floor of the building. Penn Mutual and Woods communicated through a series of Letters of Intent in which the terms of the proposed loan restructuring were discussed. The Letters of Intent, however, contained express statements recognizing that they did not constitute binding modifications of the debt.

As envisaged in the final Letter of Intent, dated August 2, 1993, the proposed restructuring of the Mortgage was conditioned upon the execution by Signet of a Lessee's Statement. The statement was to provide that there had been no modifications or changes to the Lease, that there were no current defaults by either party to the Lease, and that Signet had consented to Woods assigning the Lease to Penn Mutual. Signet declined to sign the Lessee Statement, contending that its tenancy had been destroyed by virtue of its being named as a defendant in Penn Mutual's foreclosure action. Signet's position was that the Lease had been extinguished by Penn Mutual's complaint, which demanded that Signet relinquish possession of the Premises, and therefore, Signet advised Penn Mutual of its intention to vacate the premises on November 1, 1993.

II. Plaintiffs' Claims Against Signet

Counts One and Two of Woods' Complaint seek recovery from Signet and arise out of the Signet Lease. Immediately following Woods' default on the loan, Penn Mutual gave notice to Signet to attorn to Penn Mutual as landlord and tender all rents to Penn Mutual, and Signet did so. Three months later, Penn Mutual instituted the foreclosure action, named Signet as a defendant, and demanded possession of the Premises. In Signet's answer to Penn Mutual's complaint, it admitted the validity of the Mortgage and its priority over the Signet Lease. Damon Douglas and Woods similarly filed an answer in the foreclosure action, both admitting that Penn Mutual was entitled to possession over Signet. Following the appointment of a receiver, Penn Mutual moved for summary judgment on all counts of its Complaint in the foreclosure action. Woods and Damon Douglas did not oppose the motion, believing to be imminent a restructuring agreement that would render the foreclosure action moot. Similarly, Signet did not oppose the motion. By Order dated July 23, 1993, Judge Diana of the New Jersey Superior Court, Chancery Division struck the answers of Woods, 911 Associates, and Damon Douglas and remanded the case to that Court's foreclosure unit to proceed as an uncontested action.

Meanwhile, Penn Mutual and Woods had been exchanging the Letters of Intent in pursuit of an agreement to restructure the defaulted loan. The restructuring arrangement was contingent upon the lease of both floors of the Premises. Woods had been negotiating with AT & T for a lease on the first floor of the building, and AT & T had entered the building and begun making improvements to the first floor space. As alleged by Woods in the Complaint, the restructuring deal was contingent upon the continuation of the Signet Lease and the execution by Signet of a Lessee's Agreement.

Signet maintains the position that its lease had been terminated by virtue of its being named as a defendant in Penn Mutual's foreclosure action. Acting upon this belief, Signet notified Woods and Penn Mutual by letter of September 1, 1993 that it would be vacating the Premises on November 1, 1993, and it eventually did so. Woods argues that the Signet Lease was neither extinguished nor affected by Penn Mutual's demand for possession against Signet, and therefore, Signet's act of vacating the Premises was a breach of the Lease.

In the Complaint in this action, Woods alleges that Signet never expressed its position that the Lease had been terminated until it was presented with the Lessee's Statement that was required as part of the loan restructuring between Penn Mutual and Woods. As a result, Woods alleges, Signet frustrated the loan restructuring negotiations taking place between Woods and Penn Mutual. Woods claims that Signet was aware of the negotiations and the circulation of the Letters of Intent between Woods and Penn Mutual. Thus, Signet knew that by vacating the Lease it could prevent the execution of the restructuring agreement contemplated by the August 2, 1993 Letter of Intent. As a direct result of Signet's breach of the Lease, Woods alleges that it was unable to meet its obligations under the proposed restructuring agreement with Penn Mutual, and Penn Mutual foreclosed on the Woods' interest in the Premises. In addition to Woods losing the value of its interest in the Premises, Damon Douglas lost its interest in the real property and the value of the ground lease, and GRC lost the value of its management contract.

In Count I of the Complaint, Woods asserts a breach of lease claim against Signet, seeking to recover the rent differential between the rent paid under the Signet Lease and the much lower rent paid by AT & T as the successor tenant occupying the Signet space. Woods also seeks to recover consequential damages, including the loss of its net equity in the Premises, and punitive damages.

Additionally, in Count II of the Complaint plaintiffs Damon Douglas and GRC allege that Signet breached the Lease and vacated the Premises with full knowledge that its actions would render consummation of the loan restructuring deal between Woods and Penn Mutual impossible, thereby destroying both Damon Douglas' interest in the property and GRC's...