Summary
holding that ambiguity in a lease should be construed against its drafter
Summary of this case from KFC National Management Co. v. KontokostaOpinion
Argued December 12, 1983
Decided January 12, 1984
Appeal from the Appellate Division of the Supreme Court in the First Judicial Department, ARTHUR E. BLYN, J.
Douglas A. Cooper and Steven S. Fass for appellant.
Michael B. Goldsmith for Printsiples Fabric Corp., respondent.
Robert W. Corcoran for Futterman-Schlang Industries, Ltd., respondent.
MEMORANDUM.
The order of the Appellate Division should be affirmed, with costs.
In this ejectment action, the majority at the Appellate Division properly applied the rule that where there is an ambiguity as to the meaning of a provision of a lease, prepared by the landlord, the ambiguity should be resolved in favor of the tenant.
In September, 1975, landlord 151 West Associates leased certain premises to tenant Printsiples Fabric Corp. for a term of 10 years. In August, 1978, the tenant sublet to Futterman-Schlang Industries, Ltd., subject to the terms of the main lease with the approval of the landlord. Shortly thereafter, the tenant encountered serious financial difficulties, a committee of its creditors was formed, and in April, 1980, the creditors entered into an agreement with a third party, Norcnote Associates, wherein the latter purchased all of their claims against the tenant, subject to certain conditions, and took from them an assignment of those claims. The tenant, although not a party to the agreement, consented to be bound by its terms.
In July, 1980, the landlord informed both tenant and subtenant Futterman of its intention to terminate the main lease pursuant to the "Bankruptcy" clause therein, which provided: "Bankruptcy: 16. (a) If at the date fixed as the commencement of the term of this lease or if at any time during the term hereby demised there shall be filed by or against Tenant in any court pursuant to any statute either of the United States or of any state, a petition in bankruptcy or insolvency or for reorganization or for the appointment of a receiver or trustee of all or a portion of Tenant's property, and within 60 days thereof, Tenant fails to secure a dismissal thereof, or if Tenant make an assignment for the benefit of creditors or petition for or enter into an arrangement, this lease, at the option of Landlord, exercised within a reasonable time after notice of the happening of any one or more of such events, may be cancelled and terminated by written notice to the Tenant (but if any of such events occur prior to the commencement date, this lease shall be ipso facto cancelled and terminated)". (Emphasis added.) This ejectment action ensued.
The specific issue to be resolved is the meaning of the term "arrangement" as used in the lease. While the "Bankruptcy" clause expressly authorizes the landlord to cancel the lease should tenant "petition for or enter into an arrangement", the nature of such an "arrangement" within the contemplation of the parties is nowhere explained. The landlord contends that the agreement between tenant's creditors and Norcnote Associates constituted an "arrangement" which triggered the cancellation provisions in the "Bankruptcy" clause of the lease. The majority at the Appellate Division held otherwise and we agree.
It has long been the rule that ambiguities in a contractual instrument will be resolved contra proferentem, against the party who prepared or presented it. ( Taylor v United States Cas. Co., 269 N.Y. 360, 364.) Moreover, unless the terms of a lease are clear, no additional requirements or liabilities will be imposed upon a tenant. ( 67 Wall St. Co. v Franklin Nat. Bank, 37 N.Y.2d 245, 249; 455 Seventh Ave. v Hussey Realty Corp., 295 N.Y. 166, 172.) Consequently, here, where there is uncertainty in the lease as to the meaning of "arrangement", the ambiguity should be resolved against the landlord.
Indeed, to the extent that the "Bankruptcy" clause in the lease can be reasonably construed, its provisions do not favor the landlord. In light of both the "Bankruptcy" title of the clause and the nature of the other provisions contained therein, the phrase "petition for or enter into an arrangement" makes sense only with reference to the Bankruptcy Act of 1938 in effect at the time the lease was entered. The provisions of that now replaced statute explicitly addressed and defined "arrangements" and "petitions" therefor in chapter 11, entitled "Arrangements". (US Code, tit 11, former §§ 701-799.) Under its provisions, an arrangement required a petition to be filed in a pending bankruptcy proceeding, or, if none were pending, with the court which would have jurisdiction of a bankruptcy adjudication. (US Code, tit 11, former §§ 721, 722.)
In this case, there has been neither a petition filed nor a bankruptcy or separate arrangement proceeding commenced. Clearly, tenant did not "petition for or enter into an arrangement" within the meaning of the old Bankruptcy Act. Consequently, the termination provision of the "Bankruptcy" clause was never triggered.
We disagree with the contention in the dissenting opinion that the mere use of the same word "arrangement" in the agreement between Norcnote and the tenant's creditors is dispositive of the meaning of that term as employed in the expressly entitled "Bankruptcy" clause of the lease. Not only were the instruments written and entered into by different parties, but also the former explicitly refers to a " nonjudicial arrangement or settlement" (emphasis added), while the latter speaks of the tenant "petition[ing] for or enter[ing] into an arrangement", clearly referring to a judicial proceeding within the contemplation of the old Bankruptcy Act which was no longer in effect at the time of the agreement between Norcnote and the tenant's creditors.
Chief Judge COOKE and Judges JASEN, JONES, MEYER and KAYE concur; Judge SIMONS dissents and votes to reverse in an opinion in which Judge WACHTLER concurs.
Order affirmed, with costs, in a memorandum.
I would reverse and grant plaintiff summary judgment evicting defendants for reasons stated in the dissent of Justice SULLIVAN at the Appellate Division ( 92 A.D.2d 76, 81).
As did he, I find that the conduct of the tenant, Printsiples Fabric Corporation, came well within the language of paragraph 16 (a) of the lease entitling plaintiff to relief. Although hopelessly insolvent, Printsiples remained in business by delaying payment of its debts and eventually satisfying them by the payment of 16 1/2% of the sums due. Either act, delaying payment or the composition of creditors, was an arrangement sufficient to bring paragraph 16 (a) into play.
That Printsiples operated through Norcnote, who on the one hand took Printsiples stock thereby becoming in effect the debtor and on the other took assignments of the creditor's claims against Printsiples thereby becoming the creditor, added nothing to the transaction as far as the landlord was concerned. It was left with a tenant who had neither credit nor control of its assets. Nor does the fact that the subtenant remained answerable for the debt add anything to the case. The landlord leased the property to the tenant based upon the tenant's credit and with the understanding it could cancel the lease if the tenant became insolvent. Presumably, it consented to the sublease, not because it relied on the subtenant's credit, but quite the opposite, because it still had the security of the original tenant and the remedy of paragraph 16 (a) if Printsiples suffered financial distress.
Printsiples' present financial condition is precisely the risk paragraph 16 (a) was designed to protect against and the language the parties used for the purpose is clear and unambiguous. The first portion of that paragraph condemns as conduct sufficient to trigger termination of the lease the filing by or against the tenant pursuant to a Federal or State statute, a petition in bankruptcy or insolvency or for the reorganization or for the appointment of a receiver or trustee. The words condemn formal insolvency proceedings. The second clause of the paragraph refers to less formal actions relating to an obviously insolvent tenant, an assignment for the benefit of creditors or a petition for or the mere entering into an arrangement.
The meaning of the words can be found in a law dictionary but any question of what the parties meant by an arrangement can best be found by the parties' own perception of what it meant. Thus, the tenant as a party to the Norcnote/Printsiples/creditors transactions understood the word arrangement in precisely the sense urged by plaintiff here. In the agreement between Norcnote and its creditors which was "approved by [Printsiples by] separate rider", the tenant equated the word "arrangement" to a settlement among the creditors affecting the debtor. The pertinent part of the agreement reads as follows: "It is understood that all other claims shall be subordinated to the claims of the Purchaser with respect to such inventory purchased with fund [ sic] provided by the Purchaser (and its associates) and the proceeds of the sale thereof, in the event of any bankruptcy or state insolvency proceeding, or any assignment for the benefit of creditors or any other nonjudicial arrangement or settlement among creditors affecting the Debtor" (emphasis added).
The parties' language tracked the language of paragraph 16 (a) precisely. First, the parties referred to a bankruptcy or State insolvency proceeding and thereafter they referred to an assignment for the benefit of creditors or any other nonjudicial arrangement or settlement. Since the only definition which the term arrangement could possibly have other than the one referred to in Black's Law Dictionary was the bankruptcy arrangement contained in chapter 11 of the old Bankruptcy Act which was a judicial proceeding, the parties' reference to a nonjudicial arrangement or settlement must, by any fair reading of the language of the paragraph and the intent of the parties, be deemed to encompass the very transaction which Printsiples entered into here.
The majority, disregarding this evidence of intent construe paragraph 16 (a) as if the quoted language was conjunctive, not disjunctive. But the tenant agreed that the lease could be canceled if the tenant became bankrupt " or if Tenant make an assignment for the benefit of creditors or petition for or enter into an arrangement". Manifestly, under this provision formal proceedings are not required to trigger the landlord's rights; the broad language of the lease contemplates and encompasses precisely the type of scheme devised here and there is no justification to excise the words "enter into an arrangement" or to construe the phrase as a redundancy referring to formal proceedings.
The general rule is that "[a]bsent some element of fraud, exploitive overreaching or unconscionable conduct on the part of the landlord to exploit a technical breach, there is no warrant, either in law or equity, for a court to refuse enforcement of the agreement of the parties" ( Fifty States Mgt. Corp. v Pioneer Auto Parks, 46 N.Y.2d 573, 577). There being no proof of such conduct by the landlord here, it is not for the court to undo the language of a solemn lease agreement and destabilize the rights of the parties (see W.F.M. Rest. v Austern, 35 N.Y.2d 610). The tenant's "arrangement" to stave off bankruptcy may have been different from that commonly used but it still was an arrangement necessitated by the insolvency of the tenant and plaintiff was entitled to evict it.