Opinion
8:02CV339
February 20, 2004
MEMORANDUM AND ORDER
This is a declaratory judgment action involving a lease agreement. This court has jurisdiction pursuant to 28 U.S.C. § 1332 (diversity of citizenship) and 28 U.S.C. § 2201 (a) (declaratory judgment). Plaintiff Fitzgerald Railcar Services of Omaha, Inc. ("Fitzgerald") is a tenant under a lease agreement for commercial property and defendant Chief Transportation, Inc. ("Chief") is the landlord. Fitzgerald seeks a declaration that its lease agreement is valid and enforceable and has not been breached. Defendant Chief counterclaims, seeking a declaration of breach and an order of forcible entry and detainer as a remedy for the breach. This matter was tried to the court on November 12, 2003. Pursuant to Fed.R.Civ.P. 52(a), the following are the court's findings of fact and conclusions of law.
I. Findings of Fact
The evidence adduced at trial shows that plaintiff Fitzgerald and defendant Chief are, respectively, lessor and lessee under an Industrial Building Lease. See Trial Exhibit ("T. Ex.") 1. Fitzgerald succeeded to the interest of the original lessee under the lease, which had been transferred to a bankruptcy trustee, on or about April 15, 2001, and Chief acquired the interest of the original lessor under the lease, through purchase at a bankruptcy auction on May 31, 2001. The original lessor, Railcar Specialties, Inc. ("Railcar"), and the original lessee, R Repair Kar, Inc. ("RRK"), entered into the lease on Februarys, 2001, forthe term from January 1, 2001, through October 31, 2004, with a renewal option of up to twelve years. See id., ¶¶ 1, 33. The lease agreement provided for rental of approximately one-third of a 14-acre parcel of land located at 13810 "L" Street, Omaha, Nebraska, including part of a manufacturing facility, a separate painting facility, an office facility and railroad trackage. It provided for monthly rent in the amount of $12,500 for January 2001 through June 2001, and $15,000 per month for July 2001 through December 2001. Id., ¶ 3. The lease further provided that lessor and lessee would each pay proportionate shares of taxes, utilities, guard service and insurance. Id., ¶¶ 11-14.
Both the original lessor, Railcar, and original lessee, RRK, filed bankruptcy. Chief Industries, Inc., the parent corporation of defendant Chief, entered into an agreement to purchase substantially all of Railcar's assets. See T. Ex. 101. The agreement was executed on May 31, 2001, and generally included accounts receivable. Id., ¶ 2(c). However, "[a]ll amounts due seller under non-residential leases of real property, including rent and expense reimbursements, prior to closing" were specifically excluded. Id., ¶ 1(b); id., Ex. A (listing exclusions). The agreement further provided that all executory contracts, including the lease at issue, were purchased under Bankruptcy Code §§ 105 and 365 and were subject to bankruptcy court approval. Id., ¶ 1(b); id., Ex. B, ¶ 18.
Chief Industries, Inc. has assigned it interests in this matter to its subsidiary, Chief Transportation, and the two entities will collectively be referred to as "Chief." See T. Ex. 103.
Donald Dunn, Executive Vice-president of and General Counsel for Chief, testified that he conducted a "due diligence" investigation prior to the transaction. Dunn testified that he reviewed the property and the lease before the purchase and had conversations with William Howard of Railcar. He stated, however, that those conversations did not involve allocations of payments between old and new parties to the lease. Documentary evidence shows that the real property at issue was purchased subject to and encumbered by Railcar's lease agreement with RRK. T. Ex. 101, Ex. D, ¶ 9.
Fitzgerald succeeded to the interest of the trustee in bankruptcy of RRK on April 15, 2001, and began to occupy the property. Pursuant to the lease agreement, the landlord's consent was required before the tenant could assign the lease to another party. T. Ex. 1, ¶ 6. The lease agreement also provided that the lease was subject to the approval of the United States Bankruptcy Court for the Northern District of Oklahoma and that the lease could be assigned pursuant to an order of the United States Bankruptcy Court for that district, "so long as any such assignee agrees to assume the terms and conditions of this lease as written." Id., ¶ 37(f) and (g). Donald Dunn testified that Chief had consented to the assignment from RRK to Fitzgerald. There is no evidence that Fitzgerald assumed any liabilities of RRK when it assumed the lease. In fact, correspondence between William Howard, an employee of Railcar, and Jeff Berg, then an employee of Fitzgerald, in connection with allocations of payments under the lease, shows that the intention of RRK and Fitzgerald was for each party to pay its own rent and associated costs under the lease for the time period that each party occupied the premises. See T. Ex. 4 (referring to allocations of payments before and after April 15, 2001). David Rhoades, the trustee in bankruptcy for RRK, was copied in on this correspondence. Id.
On July 12, 2001, Chiefs Executive Vice-president and General Counsel, Donald Dunn, wrote to Rhoades concerning a proposed amendment to the lease. T. Ex. 5. On that same date, Dunn wrote another letter to Rhoades, with a copy delivered to Fitzgerald, stating that "Chief deems you in violation of the terms and conditions of the Lease" for failure to comply with certain environmental conditions and proof-of-insurance requirements under the lease. T. Ex. 6. Dunn further stated that the lease would be terminated within ten days. Id. Dunn testified that the violations were subsequently cured.
Dunn testified that in July 2001, he began dealing directly with Jeff Berg at Fitzgerald, instead of the trustee in bankruptcy. Dunn wrote to Berg on July 23, 2001, in connection with a discussion with one of Fitzgerald's lenders. T. Ex. 7. There is no mention of any rent arrearage or any other payments due in that letter. Id. In a letter dated Augusts, 2001, Dunn again wrote to Berg, attempting to terminate the lease for failure to pay rent. T. Ex. 8. In response, Berg wrote that a rent check in the amount of $15,000 for August rent had been mailed to Chief on August 7, 2001, and also notified Chief of its intent to cure the default. T. Ex. 9. Berg wrote to Dunn again on September 16, 2001, expressing pleasure with an earlier conversation and with Dunn's "reaffirmation of Chiefs desire to honor the lease and all its terms." T. Ex. 10. Berg also referred to "expenses that we are responsible for," noted that he had not received invoices for the expenses, and requested the invoices. Id.
On November 6, 2001, Chief and its predecessor, Railcar, executed an amendment to the Asset Purchase Agreement that they had signed in May 2001. T. Ex. 104. In the amendment, the parties agreed that Chief had "paid for an asset that had not been transferred to it, that being a rent receivable in the amount of $67,174.63 owed Railcar Specialities, Inc. by the tenant of certain nonresidential real estate . . . ." Id. The amendment transferred that receivable to Chief. Id. Dunn testified that the amount of the receivable was determined by Railcar and was confirmed by the presumed approval of the amount by the bankruptcy court. Dunn testified that he did not inquire or investigate as to the validity of the amount. He testified he relied on Railcar's representation that the amount was valid to the bankruptcy court, which would have been made under oath. No records of any bankruptcy court proceedings were introduced in evidence.
Shortly thereafter, on November 12, 2001, Chief sent a letter to both Rhoades and Berg notifying them of default under the lease and stating that Chief would terminate the lease in ten days. T. Ex. 11. Citing the amendment to the asset purchase agreement, Chief noted that Railcar had assigned to Chief "all rent due [Railcar] pursuant to the certain non-residential property real estate lease with [RRK], which was assigned to Fitzgerald Railcar." Id. Chief stated that the amount of unpaid rent due was $67,174.63 and stated "[a]s between the two of you, I am not sure who is obligated to pay this rent; however, I am certain that it is due and payable and constitutes a breach of the lease." Id. Rhoades responded that he was "confused as to the amount that Chief is alleging for the unpaid rent," noting that "Fitzgerald says they are current since April 15, and RRK was only in for three months prior to April, which would not even add to the amount outstanding. . . ." T. Ex. 12. He asked that "someone familiar with the account" contact them as soon as possible and assured that "we will pay any valid amount due and owing as soon as practicable after the account is reconciled." Id. The parties continued to correspond regarding the validity of the amount during November 2001. See T. Exs. 14, 15, 16.
Chief continued to accept rent payments from Fitzgerald and in fact raised Fitzgerald's rent, pursuant to the terms of the lease, in April 2002 and in April 2003. T. Ex. 2, 31. Dunn wrote to Rhoades again in April 2001, again stating that over $67,000 was owed and had not been paid, this time attaching invoices for the amounts allegedly owing. T. Ex. 15. Rhoades, Berg and Dunn continued to correspond regarding the amounts throughout May, June and July 2002. See T. Exs. 16, 17, 18, 19, 20, 21. The record shows considerable confusion regarding amounts and allocations of utility bills and taxes. See T. Exs. 15, 17, 19, and 20. Correspondence for Chief dated May 24, 2002, can be characterized as a negotiation concerning the amount due under the lease. T. Ex.21. In that letter, Dunn acknowledges that Fitzgerald has a "legitimate question" regarding the billing for $7,500 in taxes. Id. Also, Dunn stated in that letter that the amount owing was $24,508, but he testified at trial that the outstanding total was $38,211.55.
The evidence also shows that it became clear in May 2002, that a check intended to cover May 2001 rent had been misdirected. In May 2001, Fitzgerald's parent corporation, Fitzgerald of Georgia, had mailed a check in the amount of $12,500 to cover rent for May 2001 to Fitzgerald for forwarding to its landlord, then Railcar. See T. Exs. 2, 16. The check was mistakenly deposited into Fitzgerald's own account and was never forwarded to Railcar. T. Ex. 16. The record shows that Fitzgerald paid Chief forthe "lost" May 2001 rent payment in June 2002. Fitzgerald also attempted to tender a payment in the amount of $4,044.36 for Fitzgerald's share of the utility bills. T. Ex. 26. Chief has never cashed the check, contending that it is Chiefs position that "the lease is in default," "has been breached" and "has been terminated." T. Ex. 29.
Larry Balkan, Fitzgerald's Chief Operating Officer, testified that, according to his reconstruction of the events, Fitzgerald had, in fact, overpaid Chief by $1,976.52. He explained that Nebraska real estate taxes become delinquent in April and August of the year after the year for which they are assessed. Under Balkan's scenario, Fitzgerald was billed for, and paid, proportional amounts due for taxes that covered the time period before it occupied the property. Balkan contends that RRK continues to owe over $7,000 under the lease. Fitzgerald has already tendered over $24,000 to Chief to satisfy the claim.
II. Conclusions of Law
Chief contends that the evidence shows that Fitzgerald was in material breach of the lease on November 12, 2001, and that it did not "cure" the breach within ten days, as required under the lease. Chief therefore contends that it is entitled to possession of the property. Fitzgerald contends that the breach was not material and that Chief has waived its right to possession by continuing to accept rent payments.
In the action for declaratory relief, the court must first determine whether the lease has been breached. A "breach" is a nonperformance of a duty. Phipps v. Skyview Farms, Inc., 610 N.W.2d 723, 730 (Neb. 2000). Whether or not a breach is material and important is a question of degree which must be answered by weighing the consequences of the breach in light of the actual custom of persons in the performance of contracts similar to the one involved in the specific case. Id. Substantial performance may be established as long as any deviations from the contract are relatively minor and unimportant. Id. Materiality, by definition, is largely a question of fact. Id.
The court finds that Chief has not shown a material breach by Fitzgerald. Fitzgerald began to occupy the property in April 2001. It did not assume the debts of its predecessor tenant, RRK. Fitzgerald has presented credible evidence that certain amounts that Chief contends that Fitzgerald owes are for the period of time when RRK occupied the property. Correspondence between the parties shows that attempts were made to sort out the varying liabilities of the predecessor and successor parties.
Chief has not shown that amounts that are still owed to it can be allocated to Fitzgerald as opposed to RRK. Whatever amounts were due and owing on November 12, 2001, were the subject of a legitimate dispute, as shown by Fitzgerald's requests for documentation and itemization and chiefs responses thereto.
Significantly, although Chief notified Fitzgerald that it breached the lease agreement in failing to make a timely payment for August 2001 rent, the notice did not refer to any other outstanding debts. Chief first notified Fitzgerald in November 2001 that Fitzgerald owed unpaid rent, utilities and taxes in an amount in excess of $67,000. At that time, Chief had not itemized the amount or provided any documentation to substantiate the validity of the amount. The court finds it reasonable for Fitzgerald to dispute the amount in such circumstances.
Fitzgerald has shown that it tendered payments, albeit late, in significant amounts. Clearly, the misdirected payment for May 2001 rent contributed to the confusion surrounding the outstanding debts. There is no evidence of bad faith in connection with that missed payment, however. Although payment of rent would ordinarily be a material component of an agreement to lease property, under the convoluted factual circumstances of this case, the court finds the lease has not been materially breached.
Even with a showing of a technical breach, the court would find that forfeiture of the lease would not be an appropriate remedy. When the right to terminate a lease on notice is reserved with the actual knowledge and consent of all parties to the agreement, and without any fraud or mistake, it is valid and enforceable, unless enforcement would be manifestly contrary to equity and good conscience. McCombs Realty, Inc. Western Auto Supply Co., 641 N.W.2d 77, 81 (Neb.App. 2002). The forcible entry and detainer statutes, and the general stipulations for forfeiture in a lease, are considered in equity as securing payment of the rent, and not for forfeiting the lease, when the tenant acts in good faith and pays promptly on demand. See id. (referring to Neb. Rev. Stat. §§ 25-21, 219 to 25-21, 235 (Reissue 1995)). A tenant will be relieved from the technical forfeiture with a showing of good faith when the circumstances call for the exercise of equitable principles on his or her behalf to prevent gross injustice. See id. Where gross injustice would follow when a failure to pay rent has not been shown to be willful or to be the result of such culpable neglect that it amounts to willfulness, a court has the power, in equity, to relieve against a forfeiture of a lease for nonpayment of rent at the time it was due. See id.
As noted, the record in this case shows considerable confusion regarding the amounts of rent and utilities due and the allocation of those amounts between the present and former parties to the lease. There is evidence that an innocent clerical error caused a rent check to be paid to the wrong party. All alleged nonpayment of rent that can be attributed to Fitzgerald's tenancy arose in the confusing period immediately following the transfers of ownership to the parties. On learning that Chief had not received the misdirected payment, Fitzgerald made a good faith attempt to correct the problem expeditiously. The record also shows several attempts by Fitzgerald to obtain an accurate accounting and reliable allocation of amounts that were owed. There is no evidence that Fitzgerald's failure to pay the unsubstantiated amounts demanded by Chief was willful or was a result of culpable neglect. On the other hand the evidence shows, and Donald Dunn admitted, that he wanted Fitzgerald off the property. The court finds that it would be manifestly contrary to equity and good conscience to enforce the lease's forfeiture provision and to require Fitzgerald to vacate the premises and likely close its business simply for failure to pay a disputed amount by a certain time. Fitzgerald has presented credible evidence that it is no longer in default and has otherwise complied with the terms of the lease.
Neither side has shown to the court's satisfaction what amounts, if any, are owed under the lease.
Moreover, in an action under the forcible entry and detainer statute, strict compliance with the statute is required. See I.P. Homeowners, Inc. v. Morrow, 668 N.W.2d 515, 522 (Neb.App. 2003). The statute requires service of a notice to quit. Neb. Rev. Stat. § 25-21, 221. "By statute as well as long practice, a notice to leave or quit is necessary in a forcible entry and detainer action." I.P. Homeowners, 668 N.W.2d at 522. The three-day notice to quit is a separate and distinct requirement from a notice of lease termination. Id. A notice to quit directs the tenants to leave the premises. Id. The letters at issue, by their terms, cannot function as both terminations of tenancy and notices to quit. See id. Accordingly, the court finds that Chief has not shown it is entitled to the remedy of possession, and will deny the writ of restitution.
Moreover, even if the lease had been breached, Chief has not shown it is entitled to possession of the property. The breaches at issue occurred, at the latest, in May 2001 and June 2001, and some may have pre-dated Fitzgerald's tenancy. In November 2001, Chief acquired Railcar's rent receivable. In acquiring that receivable, Chief acquired only the right to collect the amounts owed, not the retroactive right to possession of the property, which is akin to specific performance. See, e.g., Folgers Architects, Ltd., v. Kerns, 633 N.W.2d 114, 126 (Neb. 2001) (holding that assigning an interest in a lease directly affects the parties' actual performance, whereas assignment of a right to collect damages for a breach of contract does not). Although Chief may have a right to collect past due rent that can be attributed to Fitzgerald, it does not follow that Chief has the right to evict a tenant for a breach that occurred before it acquired the right to collect the past-due rents. Through the amendment to the asset purchase agreement, Chief acquired only the asset, not a possessory interest it could retroactively enforce.
Chief has neither pleaded nor proved that it is entitled to a judgment for money damages. The court is unable to award such damages in a forcible entry and detainer action. Cummins Mgmt, L.P., v. Gilroy, 667 N.W.2d 538, 542-43 (Neb. 2003). Forcible entry and detainer is a special statutory proceeding designed to provide a speedy and summary method by which the owner of real estate can regain possession of it. Id. Because it is summary in nature, the Legislature has narrowed the issues that can be tried in a forcible entry and detainer action to the right of possession and statutorily designated incidents thereto. Id.; Neb.Rev. Stat. § 25-21, 219. Thus, "the only finding of fact that can be lawfully made in the trial of a forcible detainer case is whether or not the [tenant] is guilty of forcibly detaining the premises, and the only judgment that can be pronounced in such case is that the [landlord] have restitution of the premises sued for, or that the [landlord's] action be dismissed and that the [tenant] go hence without day." (quoting Stover v. Hazelbaker, 42 Neb. 393, 60 N.W. 597, 598 (1894)). Accordingly, the court finds Chief is not entitled to possession of the premises. Any disputed amounts remaining must be the subject of another action.
IT IS HEREBY ORDERED:
1) On the parties' actions for declaratory judgment, the court finds that the subject lease is valid and has not been breached;
2) Chief Transportation's claim for forcible entry and detainer is dismissed.