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Herrick Group & Associates LLC v. K.J.T.

August 25, 2009

THE HERRICK GROUP & ASSOCIATES LLC, PLAINTIFF
v.
K.J.T., L.P., DEFENDANT



The opinion of the court was delivered by: Timothy R. Rice U.S. Magistrate Judge

FINDINGS OF FACTS AND CONCLUSIONS OF LAW

Resolution of this commercial real estate dispute primarily rests on whether the seller, K.J.T., L.P. ("KJT"), secured from the buyer, the Herrick Group & Assoc. LLC ("Herrick") an oral modification to a written purchase and sale agreement. KJT claims the modification guaranteed lease payments from its two commercial tenants who had prematurely terminated their leasehold before the scheduled real estate closing with Herrick. If, as KJT claims, parol evidence establishes the purchase and sale agreement was modified by the parties to guarantee the lease payments, Herrick breached the sales contract, forfeited its $325,000 deposit, and is liable for liquidated damages. However, absent an enforceable oral amendment on the lease guarantees, KJT is the breaching party.

A four-day trial commenced on May 27, 2009*fn1 to present evidence of which party is responsible for the failed November, 2005 sale of Washington Towers, a $6.5 million building in the heart of the Reading, Pennsylvania business district. KJT claims the deal failed when Herrick's plan to resell, or "flip," the property to a third entity, NR Properties ("NR"), unraveled after NR's bank refused to provide necessary mortgage financing. See DefendantCounterclaimant K.J.T., L.P.'s Proposed Findings of Fact and Conclusions of Law at ¶ A.107-17, The Herrick Group & Assoc. LLC., v. K.J.T., L.P., No. 07-0628 (E.D. Pa. filed June 29, 2009) [hereinafter Defendant's Findings of Fact]. Although NR initially sued Herrick in New York over the botched deal, the two parties joined forces through a litigation agreement*fn2 to pursue Herrick's claim against KJT. See Defendant's Exhibit 91.*fn3 Herrick and NR now allege KJT attempted to conceal the loss of the building's commercial tenants and then failed to secure Herrick's oral agreement to address the loss of rental income Herrick had planned to receive as part of its purchase.*fn4 See Proposed Findings of Fact and Conclusions of Law Submitted by the Plaintiff, the Herrick Group, LLC at 31, at ¶24, The Herrick Group & Assoc. LLC v. K.J.T., L.P., No. 07-628 (E.D. Pa. filed June 29, 2009).

Based on the findings of fact and conclusions law set forth below, I will enter judgment in favor of Herrick because KJT breached the Purchase and Sale Agreement. Although it is a close question whether KJT secured from Herrick a binding oral modification to guarantee the lease payments, KJT's evidence of the modification falls short of the "clear, precise, and convincing evidence" required to prove such amendments. See Brinich v. Jencka, 757 A.2d 388, 399 (Pa. Super. Ct. 2000) (quoting Somerset Comm. Hosp. v. Allan B. Mitchell & Assoc., Inc., 685 A.2d 141, 146 (Pa. Super. Ct. 1996)). KJT may have subjectively believed it had addressed Herrick's concerns on the eve of closing, but the relevant correspondence among the parties establishes the topic of lease guarantees remained a disputed issue until negotiations ended. See Plaintiff's Exhibit 54, Silberberg November 15, 2005 Letter to Heller; Plaintiff's Exhibit 56, Heller Reply Letter to Silberberg dated November 21, 2005; Defendant's Exhibit 71, November 21 email chain.

This case features significant credibility questions and self-interest on both sides, and I have relied on the documentary corroboration to resolve the conflicting testimony. Given the importance of the lease issue and the significant impact rental income had on the purchase price, I find KJT would have memorialized--in writing--an amendment concerning the lease guarantees. Accordingly, I discredit the testimony of KJT's witnesses on this issue.

KJT failed to avail itself of ample opportunities to obtain a written amendment. For example, on November 15, 2005, the eve of the scheduled closing date, Herrick's attorney, Michael Silberberg, Esquire, cited the lease guarantee as an ongoing dispute. See Plaintiff's Exhibit 54. In response, on November 21, 2005, when the parties were attempting to resurrect the November 16, 2005 or November 17, 2005 closing, Mervin Heller, Esquire, KJT's attorney, sent a letter to Silberberg discussing myriad other issues but failing to allege the existence of the alleged oral modification on the lease issue. See Plaintiff's Exhibit 56. Therefore, I credit the testimony of witnesses representing Herrick and NR who stated KJT merely offered lease guarantees. See May 27 Transcript at 104:16-21, 119:14-16; May 28 Transcript at 97:7-13, 101:1-9, 102:6-12, 105-107. Their testimony is corroborated by written correspondence. To the extent Heller claims Silberberg admitted he wrote the November 15, 2005 letter only as a pretext to protect Herrick's legal position, I discredit Heller. As an experienced real estate practitioner, Heller would have taken the necessary steps to remedy such a tactic, or at the least, objected and cited the existence of the pivotal oral agreement he claims the parties already had reached.

I. Findings of Fact

A. KJT and Washington Towers

1. KJT owns a property located in Reading, Pennsylvania commonly known as Washington Towers. Timo, Inc. is the general partner of KJT and Kevin Timochenko is the president of Timo, Inc. See May 29 Transcript at 3:18-25, 6:21-25, 7:1-5.

2. Washington Towers consists of commercial space and 92 residential apartment units. See id. at 126:1-2. KJT purchased Washington Towers in 1997, id. at 126:14-15, and thereafter invested an additional $500,000 to $600,000 for improvements, id. at 126:19-21.

3. Metropolitan Management Group Inc. ("MMG") is an affiliate of KJT and manages Washington Towers.

4. City-Mart Stores, LLC ("City-Mart") was a grocery store that entered into a five-year lease for commercial space at Washington Towers commencing on March 1, 2005. See Plaintiff's Exhibit 16, Lease Agreement for Commercial Office Space in Washington Towers dated March 1, 2005 and executed by KJT as landlord and City-Mart as tenant [hereinafter City-Mart Lease].

5. A second commercial tenant, Integral Wireless Solutions Inc. ("Integral"), leased two commercial spaces at Washington Towers. The lease on the first space ran from February 1, 2002 through April 3, 2007. See Plaintiff's Exhibit 26, Lease Agreement for Commercial Office Space in Washington Towers dated February 1, 2002, and executed by KJT as landlord and Integral as tenant at ¶ 2 [hereinafter 2002 Integral Lease]. The lease on the second space ran from November 1, 2003 through April 31, 2007. See Plaintiff's Exhibit 27, Lease Agreement for Commercial Office Space in Washington Towers dated November 3, 2003 and executed by KJT as landlord and Integral as tenant at ¶ 2 [hereinafter 2003 Integral Lease].

B. Herrick, Bruce Graeber, Jacob Elbogen, and Michael Silberberg, Esq.

6. Herrick is a Nevada limited liability company with a principal place of business at 445 Central Avenue, Cedarhurst, New York 11516. See Plaintiff's Exhibit 46, Articles of Organization of The Herrick Group LLC filed with the Secretary of State of Nevada on January 25, 2001; May 27 Transcript at 12:18-21; Stipulated Facts at ¶ 1, The Herrick Group & Assoc. LLC v. K.J.T., L.P. No. 07-0628 (E.D. Pa. filed May 27, 2009) [hereinafter Stipulated Facts].

7. Bruce Graeber is the sole member of Herrick. See May 27 Transcript at 21:2-3; Stipulated Facts at ¶ 2.

8. Graeber and Jacob Elbogen are business partners who buy and sell commercial real estate, often engaging in what are commonly referred to as "flip transactions." See May 27 Transcript at 32:13-23; 23:14-18, 60:7-12.

9. Third Party Defendant Silberberg served as Graeber's attorney in commercial real estate transactions, and represented Graeber, Elbogen, and Herrick in this matter. See May 27 Transcript at 118:6-7.*fn5

10. Both parties to the Washington Towers deal are sophisticated and experienced real estate professionals.

C. The Purchase and Sale Agreement

11. An agreement of sale concerning Washington Towers was negotiated and executed on June 23, 2005 by KJT as seller and Herrick as purchaser. See Plaintiff's Exhibit 2 and Defendant's Exhibit 4, Purchase and Sale Agreement dated June 23, 2005, by KJT as seller, and Herrick as purchaser [hereinafter Purchase and Sale Agreement]; see also May 27 Transcript at 34:2-7; Stipulated Facts at ¶10.

12. Herrick's place of incorporation was erroneously listed as New York. See Transcript at 34:24-25, 35:1-4, 52:7-19.

13. The error was not intended to mislead KJT. See May 27 Transcript at 29:14-20; May 29 Transcript at 14:13-16.

14. The error was not material and the state of Herrick's incorporation was never an issue for Timochenko, nor a matter he investigated. See May 29 Transcript at 115:12-18.

When it agreed to sell Washington Towers, KJT represented that:

15. "Every person having the right to occupy any portion of the Property (each a "Tenant"), has such right pursuant to a written Lease. All of the Leases are in full force and effect, [KJT] has received no notice of any claim under any Lease and [KJT] has no knowledge of any breach of any Lease." See Purchase and Sale Agreement, supra ¶ 11, at ¶ 4(b).

16. "Each Tenant is in actual possession of its leased premises." Id.

17. As to each tenant lease, "the Lease is valid and in full force and effect strictly in accordance with its terms and has not been modified, in writing or otherwise; . . . there has been no default or event which, with the giving of notice or the lapse of time, or both, would constitute a default, on the part of the Tenant or the lessor thereunder, and the Tenant has not asserted and has no defense to offset or claim against, its Rent or the performance of its other obligations under the Lease; . . . [KJT] has no reason to believe that the Tenant or any guarantor of a Lease is or may become unable or unwilling to perform any of its obligations under the Lease for any reason . . . ." Id.

18. It has "good and marketable title to the Property to be insured as such by a reputable title insurer . . . at standard rates, free and clear of all mortgages, liens, claims, judgments, encumbrances . . . and any other matters affecting title . . . ," and that KJT would be able to convey and transfer such title at closing. Id.

19. "All water, sewer, gas, electric, telephone, and other public utilities . . . are installed, connected and operating, in good condition, with all installation and connection charges paid in full . . . ," and that "[n]o moratorium, proceeding or other fact or condition exists which threatens to impair continued furnishing of such services to the Land at regular rates and fees . . . ." Id.

20. The above referenced covenants, representations and warranties of KJT were certified as true both at the time of the signing of the Purchase and Sale Agreement and at the time of the closing of the proposed sale. Id.

21. KJT promised "[f]rom and after the Effective Sale until the Closing . . . [KJT] will promptly notify [Herrick] in writing of any litigation or governmental proceeding to which [KJT] becomes a party or which affects the Property or any part thereof." See Purchase and Sale Agreement, supra ¶ 11, at ¶4(c); see also May 28 Transcript at 157:2-6; 159:11-23.

22. The Purchase and Sale Agreement also placed Herrick on notice it could not rely on any disclosures concerning gas usage at the property. Specifically, paragraph 20(p) of the Purchase and Sale Agreement advised Herrick the gas company had taken the position "that gas usage has been understated, and that in fact there is a higher usage at the Premises than was indicated on the metering system contained at the Premises. Seller makes no representation or warranty as to actual gas usage . . . ." See Purchase & Sale Agreement, supra ¶ 11, at ¶ 20(p).*fn6

23. The Purchase and Sale Agreement also provided: "This Agreement, including all exhibits attached hereto and documents to be delivered pursuant hereto, shall constitute the entire agreement and understanding of the parties, and there are no other prior or contemporaneous written or oral agreements, undertakings, promises, warranties, or covenants not contained herein." See id. ¶ 20(a).

24. The Purchase and Sale Agreement Sale also provided: "This Agreement may be amended only by a written memorandum subsequently executed by all of the parties hereto." See id. ¶ 20(b); see also May 28 Transcript at 24:19-24, 155:9-25, 156:6-14.

25. Paragraph 21 of the Purchase and Sale Agreement provides in pertinent part:

ESTOPPEL

(a) [KJT] shall use its best efforts to deliver to [Herrick] at least ten (10) days prior to the Closing Date, Estoppel Letters*fn7 dated not more than thirty (30) days prior to the Closing Date with respect to the Commercial Leases at the Premises (the "Estoppel Letters"). If [KJT] has failed to deliver such Commercial Estoppel Letters, then [Herrick] shall either (i) accept the Estoppel Letters delivered, and the parties shall proceed to Closing without abatement in the Purchase Price subject and pursuant to the other terms of this Agreement, or (ii) notify [KJT] in writing not less than three (3) days prior to the Closing Date of such insufficiency, thereupon [KJT] shall have ten (10) days after receipt of such notice to deliver such Estoppel Letters, and Closing shall be extended to the extent necessary. If [KJT] fails to deliver the Estoppel Letters within such ten (10) day period, then, unless [KJT] delivers the Estoppel Letter's (sic) executed by [KJT] to [Herrick] which Estoppel Letters shall be guaranteed by principals of [KJT]. [sic] [Herrick] shall have the right to terminate this Agreement by giving written notice to [KJT] on or before such Closing Date as so extended. If [Herrick] duly exercises such right of termination, Escrow Agent shall return the Deposit including all interest thereon to [Herrick] and this Agreement shall be null and void . . . . If [Herrick] does not exercise such right to terminate this Agreement [Herrick] shall be deemed to have waived its right to do so and Closing shall occur as described in this Agreement . . . .

The Estoppel Letters referred to hereinabove (including [KJT's] Estoppel Letters) shall confirm that the Lease is unmodified (or state the modification) and in full force and effect, subordinate to any present and/or future financing covering the Premises, the dates to which rent and other charges ...


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