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LeRoy Adventures, Inc. v. Cafritz Harbour Group

April 18, 1994

LEROY ADVENTURES, INC., APPELLANT
v.
CAFRITZ HARBOUR GROUP, INC., ET AL, APPELLEES



Appeal from the Superior Court of the District of Columbia; (Hon. Peter H. Wolf, Trial Judge)

Before Ferren, Acting Chief Judge,* Terry, Associate Judge, and Gallagher, Senior Judge.**

The opinion of the court was delivered by: Terry

TERRY, Associate Judge: This case arises out of the bankruptcy of the Potomac restaurant and the subsequent settlement of claims which followed the closing of the restaurant. Appellant, LeRoy Adventures, Inc., contends that the trial court improperly dismissed its suit against the three appellees, Cafritz Harbour Group, Inc., IBC Realty, Inc., and Cafritz Harbour Investment Limited Partnership. LeRoy Adventures had sued these three entities individually and as general partners in Potomac Riverfront Limited Partnership ("PRLP").

PRLP owns part of a commercial real estate development in the District of Columbia known as Washington Harbour. In September 1983 Cafe Partners/Washington 1983 ("Cafe Partners") *fn1 (the tenant) leased a certain portion of Washington Harbour from Washington Harbour Associates ("WHA" or "the landlord"), the predecessor of PRLP. In the leased premises Cafe Partners owned and operated a restaurant called the Potomac, which it developed with capital obtained through two loans, one from WHA and the other from Royal Bank and Trust Company ("Royal Bank"). *fn2

Following the restaurant's failure in 1987, Royal Bank, which had a lien on the equipment and fixtures in the Potomac, released Cafe Partners from liability on the loan in exchange for ownership of the equipment and fixtures. Royal Bank immediately sold what it had just acquired to LeRoy Adventures. After representatives of LeRoy Adventures had removed some of the equipment, the landlord barred them from entering the premises to remove the remainder, specifically the heating, ventilating, and air conditioning equipment ("HVAC"). In so doing, the landlord relied on an earlier settlement agreement between Cafe Partners and WHA, which provided that any property of Cafe Partners not removed from the leased premises within sixty days would become the property of WHA. In addition, the landlord maintained that the HVAC was not the type of property that Cafe Partners, or its successor in interest LeRoy Adventures, was authorized under the lease to remove.

LeRoy Adventures then filed this suit in the Superior Court, alleging breach of contract and negligence and seeking damages and a variety of equitable remedies. Following a three-day non-jury trial, the court held that the HVAC was not removable under the terms of the original lease agreement between Cafe Partners and WHA. Alternatively, the court ruled that even if the HVAC was removable under the lease, Cafe Partners had had only sixty days from the time specified in the settlement agreement within which to remove it, and that after the sixty days had expired, the HVAC and other personal property remaining on the leased premises "belonged to the landlord." Additionally, the court concluded that Royal Bank had lost its lien on the property in the restaurant because it had failed to object to the settlement agreement between Cafe Partners and WHA, in which Cafe Partners had agreed to relinquish its rights in the property after sixty days.

The facts surrounding this controversy are complex, and the issues are difficult. Despite the trial court's exacting attention to the intricacies of the case, we hold that the court erred in ruling that Royal Bank was bound by a settlement agreement to which it was not a party. Additionally, the trial court erred in interpreting the Potomac's lease agreement so as to conclude that the HVAC was not removable property. We therefore reverse the trial court's dismissal of appellant's claim for relief and remand the case for further proceedings.

I. THE EVIDENCE AT TRIAL AND THIS COURT'S RULING

In September of 1983 Cafe Partners and WHA entered into a lease for several thousand square feet of space in Washington Harbour. WHA, the landlord, provided only the bare space, which Cafe Partners agreed to transform into a "spectacle" restaurant. Cafe Partners financed the interior work through a loan from the landlord for two million dollars and another loan from Royal Bank, also for two million dollars. As collateral for its loan, Royal Bank was given a security interest in certain tangible and intangible property, as set forth in one of the loan documents:

All accounts receivable, contract rights, goods, equipment, inventory, fixtures, furniture and farm products of the Debtor and all other personal property of every type and nature of the Debtor (including, without limiting the generality of the foregoing, all leasehold improvements now or hereafter located on Lot 102, Square 1173 in the District of Columbia), and any instruments, documents, chattel paper and general intangibles relating thereto or arising therefrom . . . and all cash and non-cash proceeds (including proceeds of insurance) and products thereof.

On the same day that Royal Bank entered into the loan agreement with Cafe Partners, Royal Bank and WHA entered into a separate agreement whereby WHA subordinated its interest in the collateral to Royal Bank. This "subordination agreement," which was signed by representatives of WHA, Cafe Partners, LeRoy Productions, Inc., and Royal Bank, explicitly made reference to the lease between WHA and Cafe Partners and stated that WHA agreed to hold a junior lien in order to induce Royal Bank to make the loan to Cafe Partners.

Despite its glitzy decor, the Potomac restaurant was a failure and closed its doors in October 1987. Cafe Partners then filed suit against the landlord (WHA), asserting that the landlord had breached the lease agreement, thereby causing the restaurant to fail. That suit was settled by a Joint Settlement Agreement ("JSA-1") entered into on December 20, 1988, by WHA, LeRoy Productions, Inc., and Cafe Partners. Under the terms of JSA-1, each of the respective parties was released from its obligations. JSA-1 also contained a provision whereby WHA "waived and relinquished" any landlord's lien or other security interest it might otherwise have in the personal property of LeRoy Productions, Inc., or Cafe Partners. Paragraph 16 of JSA-1 provides in part:

Upon the earlier of the expiration of the time to object, or the entry of a final non-appealable order of the Bankruptcy Court . . . Cafe Partners/Washington 1983, and LeRoy Productions, Inc., shall surrender actual physical possession of the Leased Premises, and shall remove as promptly as practicable any of their personal property. Cafe Partners/Washington 1983 and LeRoy Productions, Inc., shall not remove any of the equipment listed in Exhibit "B" [kitchen equipment] . . . nor shall they be deemed hereby to have any claim to, right in, or title to any of the Washington Harbour Equipment. . . . Any personal property remaining in the Leased Premises more than sixty (60) days thereafter shall be deemed to be Washington Harbour's property free of any claim by Cafe Partners/Washington 1983, or LeRoy Productions, Inc. [Emphasis added.]

Notice of JSA-1 was filed on January 12, 1989, in the bankruptcy court where proceedings relating to Cafe Partners were under way. The trial court in this case found that Royal Bank had notice of JSA-1 and held that, by not objecting to it, Royal Bank gave up its status as a ...


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