Circuit City Stores, Inc. v. Rockville Pike Joint Venture Ltd. Partnership

WILNER, Judge. This is a dispute between the owner of a shopping center, Rockville Pike Joint Venture Limited Partnership (Rockville), and one of its former tenants, Circuit City Stores, Inc. (Circuit City). The substance of the dispute, litigated in the Circuit Court for Montgomery County, arose from a default by Circuit City on its lease and the subsequent demolition of the leased premises and erection of a larger building, which Rockville found necessary in order to attract a replacement tenant. Rockville won its case in the first round of litigation in 1999 but then had the victory snatched from it two years later through the granting of a motion to vacate or modify the initial judgment.

That produced a secondary procedural issue of whether the Circuit Court had any authority to modify the judgment. The Court of Special Appeals reversed the latter ruling, holding that, even if the Circuit Court had authority to modify ³³⁴ the 1999 judgment, it erred in doing so. We shall conclude that (1) the trial court had no authority to reopen and modify its judgment, (2) it erred substantively in concluding that, as a result of the demolition of the premises, Circuit City had no further obligation under its lease, but (3) Circuit City is entitled to litigate any dispute over the amount of credit to which it may be entitled against that obligation. In order to give effect to that third conclusion, we shall direct that the case be remanded for further proceedings in the Circuit Court.

BACKGROUND In July, 1987, the parties entered into a 20-year lease of approximately 28,500 square feet of retail space in the Wintergreen Plaza Shopping Center, located on Rockville Pike in Montgomery County. Rockville regarded Circuit City as an “anchor” tenant for the shopping center. Three provisions in the lease are of special relevance: (1) In Rider 2 to the lease, Circuit City agreed that it would “continuously operate its business at the Demised Premises” throughout the term of the lease, except for customary retail holidays, reasonable periods for taking inventory, and periods not to exceed 60 days in order to accomplish a permitted assignment or subletting. (2) Paragraph 20 of the lease prohibited Circuit City from assigning the lease or subletting the leased premises without the prior written consent of Rockville, which consent was not to be unreasonably withheld or delayed.

The paragraph required Circuit City, with respect to any proposed transfer of all or substantial part of the premises, to submit certain information to Rockville regarding the transfer and gave Rockville specified time periods in which to approve or disapprove the transfer. If the transfer was approved, Rockville could elect either to release Circuit City from further liability under the lease and receive all of the rend paid by the transferee or to divide equally with Circuit City any rent to be paid by the transferee that was in excess of the rent due by ³³⁵ Circuit City under the lease, until the amount paid to Circuit City reimbursed it for tenant improvements it had made. Subject to those provisions, Circuit City was not relieved of any liability under the lease by reason of an assignment or subletting. (3) Paragraph 24, captioned “Landlord’s Remedies,” provided, among other things, that if Circuit City failed to observe any of the material terms and covenants in the lease, failed to cure a default within 30 days after receipt of written notice from Rockville, and, as a result, the covenants to be performed by Circuit City were not being performed, Rockville had the right to terminate the lease and, immediately and without demand or notice, enter the premises, repossess it, and expel Circuit City.

The paragraph provided that, notwithstanding any entry by Rockville, whether by termination or otherwise, Circuit City remained liable for and agreed to pay amounts equal to the installments of rent and other charges reserved in the lease, as if the lease had not been terminated, whether or not the premises remained vacant. If the property was re-let by Rockville, Circuit City would be entitled to a credit equal to the net amount of rent received by Rockville, after deduction of all actual and reasonable expenses incurred in the re-letting, including any remodeling costs. In the summer of 1995, Circuit City decided to relocate its store to a different shopping center. Among the reasons cited for that decision were that the store was too small and that sales were not meeting the company’s expectations.

Circuit City did not inform Rockville of its decision until January, 1996. Rockville was then in the process of attempting to refinance the center. In September, 1996, it offered to expand the leased premises to 45,000 square feet and asked Circuit City to reconsider its decision, but Circuit City rejected that offer. Circuit City retained a broker to assist in finding a replacement tenant and apparently submitted a number of proposals to Rockville, which found none of them suitable for the space.

One of the proposed replacement tenants was MARS, Inc., a retailer of musical instruments, equipment, and accessories. ³³⁶ On October 21, 1997, without having found a replacement tenant acceptable to Rockville and with more than 10 years remaining on the lease, Circuit City closed the store and vacated the premises. Two days later, Rockville declared Circuit City in violation of the continuous operation requirement and therefore in default. In December, 1997, Circuit City again proposed MARS, Inc. as a subtenant, and, indeed, in January, 1998, it entered into a sublease with that company. On February 3, Rockville rejected the sublease, however, explaining that it regarded Circuit City as an anchor tenant and expressing its belief that MARS could not fulfill that role.

Rockville noted that Circuit City had a very large customer base, that its store averaged nearly $17 million in annual sales, and that it drew a substantial number of customers to the shopping center. MARS, it said, had a limited customer base and would not attract a large number of customers to the center. Its projected annual sales were only half those of Circuit City and it was not an anchor tenant in any other shopping center. The sublease, moreover, obligated MARS to remain for only six months, and, even though Circuit City would remain liable, Rockville was not willing to risk another vacancy in such a large area of the shopping center.

Rockville noted that Mars was a start-up company that was heavily in debt and that the private placement memorandum produced as part of its effort to raise capital warned that its stock was speculative and involved a high degree of risk. Circuit City responded two weeks later with an action for a declaratory judgment that Rockville’s rejection of the MARS sublease was arbitrary, unreasonable, contrary to fair dealing, and thus in violation of the lease and that Circuit City was therefore relieved of any further obligation under the lease. That produced a dual reaction on Rockville’s part. On March 31, 1998, it gave formal notice that it was terminating the lease.

It declared Circuit City in default by publicly announcing its decision to vacate the property without first having obtained an approved subtenant or assignee, by failing to operate its business continuously throughout the lease term, and by failing to maintain fire insurance. By reason of that ³³⁷ default, Rockville advised that it had reentered and repossessed the premises, that Circuit City had no further authority to enter on or convey any interest in the premises, and that Circuit City remained liable for the payment of amounts equal to the rent and other charges due. Contemporaneously with that notice, Rockville filed a counterclaim for breach of contract. In addition to seeking damages for the amount of rent due during the remaining term of the lease, Rockville claimed that the breach frustrated its attempt to refinance the shopping center and that further actions by Circuit City had prevented it from finding a replacement tenant.

Both parties subsequently amended their initial pleadings, Circuit City to seek damages and Rockville to seek a declaratory judgment. While the litigation was pending, Rockville found a prospective new tenant — Magruder’s Grocery, a subsidiary or affiliate of Richfood Holdings, Inc. — but, prior to signing a lease, Richfood insisted on written confirmation from Circuit City that it had no claim of possessory interest in the property and would not interfere with Magruder’s possession and use of the premises. In furtherance of that demand, Rockville requested that Circuit City sign a Consent to Lease, which Circuit City refused to do absent a complete release of liability by Rock-ville. In response to that refusal, which it treated as impairing its ability to find a new tenant, Rockville filed a motion for partial summary judgment on the issue of liability — that Circuit City breached its lease obligations, that the lease had been terminated, and that Circuit City had no present posses-sory interest in the property.

On August 20,1998, following a hearing, the court granted that motion, declaring from the bench that Circuit City had vacated the property and that Rockville had the right “to relet the premises free from claims by Circuit City.” To that point, Circuit City had been paying the amount of rent it was obligated to pay under the lease. Beginning in August, 1998, however, it reduced that amount by at least $27,000 per month — the amount that MARS would have been ³³⁸ obliged to pay had the sublease been approved by Rockville— apparently on the theory that the sublease was wrongfully rejected and that Circuit City was entitled to a credit for the amount that Rockville would have received under that sublease. 1 In June, 1998, the court entered a scheduling order that, among other things, required discovery to be completed by November 30, 1998. Throughout parts of 1998, Rockville apparently had engaged in discussions with another food store, Food Lion, Inc., but, until May, 1999, those discussions were not fruitful. On May 11, 1999, Rockville and Food Lion entered into a 20-year lease for 40,000+ square feet at the location formerly leased to Circuit City.

In order to provide the building and certain accessory areas for Food Lion, it was necessary to demolish the existing structure that Circuit City had occupied, along with structures occupied by three other tenants, and to construct a new facility. The lease required Food Lion to do that work at its own expense. The base rent began at $344,000 per annum, increasing incrementally after the fifth, tenth, and fifteenth years of the lease. Within two days after the signing of the lease, Rockville provided a copy of it to Circuit City which, several weeks later, moved to amend the scheduling order to permit further discovery.

Circuit City noted Rockville’s contention that Circuit City remained liable for all amounts due under its lease, less credit for sums received from any re-letting of the premises, and urged that, in order to be able to calculate the credit, it was entitled to know what the overall economic benefit of the new lease with Food Lion would be. Circuit City sought, as additional discovery, (1) all documents relating to the Food Lion lease and its negotiation and all documents relating to the additional economic information concerning the shopping center, which Circuit City considered necessary for one of its experts to perform a discounted cash flow comparative analysis, (2) reopening of one deposition for questioning concerning ³³⁹ the Food Lion lease, and (3) four new depositions concerning that lease. At the hearing on the motion, Circuit City contended that information regarding the negotiations with Food Lion was critical to its being able to show that the rejection of the MARS sublease was pretextual, done in order that Rock-ville could make a better deal with Food Lion. After a hearing, the court denied that motion, agreeing with Rockville that information regarding the amount of credit to which Circuit City might be entitled was not relevant to the issues at trial.

The court explained that the issue at trial, as to damages, was only those damages accrued as of the date of trial and that the motives with respect to the Food Lion lease “are not relevant.” Two issues were tried and submitted to the jury: (1) whether Rockville proved that Circuit City committed an unexcused or unwaived material breach of the lease provision concerning continuous operation; and (2) whether Circuit City proved that Rockville breached its lease obligations by unreasonably withholding consent to the proposed sublease with MARS. The Food Lion lease was admitted into evidence, and its supposed impact on Rockville’s decision not to approve the MARS sublease was argued. In special verdicts, the jury answered the first question in the affirmative and the second in the negative, the effect of which was to establish liability on the part of Circuit City. The parties stipulated that the amount of rent and other charges due and owing under the Circuit City lease through the date of trial was $488,236.

Remaining at issue, with respect to damages, were only prejudgment interest and attorneys’ fees. Rider Four to the lease provided for late charges at the rate of 1.5% per month but Circuit City contested the validity of that provision. Paragraph 42 of the lease provided for “reasonable attorneys’ fees” for the prevailing party in any litigation to enforce the terms of the lease, and, in the absence of an agreement, it became necessary for the court to determine that amount. Based upon the jury verdicts and the stipulation, the court, on August 27, 1999, entered a multi-part “Judgment Order.” ³⁴⁰ In the first part of the order, the court found the late fee provision in the lease valid, calculated what a reasonable attorneys’ fee would be, and, based on those determinations, entered judgment in favor of Rockville on Count I of its Second Amended Counterclaim in the amount of $488,236, plus $44,262 in pre-judgment interest, $166,346 in attorneys’ fees, and court costs.

It also ordered Circuit City to pay to Rockville post-judgment interest at the rate of 10% per annum on the unpaid amount of the judgment. Finally, in this first part of the judgment order, the court ordered Circuit City to pay to Rockville, on the days originally fixed in the lease, amounts equal to the installments of rent and other charges reserved in the lease, as if the lease had not been terminated, provided that, if the premises were re-let, Circuit City was entitled to a credit equal to the amount of rent received by Rockville, after deduction for all actual and reasonable expenses incurred in re-letting the premises, including remodeling costs and brokerage fees, together with interest at the rate of 1.5% per month from the date those payments became due. Pursuant to Rockville’s request for a declaratory judgment in its Second Amended Counterclaim and consistently with the jury’s verdicts, the court declared that (1) Circuit City breached its lease obligations by vacating the premises in violation of the continuous operation provision; (2) Rockville had not excused or waived the benefit of that provision; (3) Circuit City’s breach constituted a material breach of the lease that discharged Rockville from any further duty of performance under the lease; (4) Rockville therefore had no contractual or legal obligation to consent to the proposed MARS sublease presented in December, 1997; (5) Rockville’s refusal to consent to that sublease did not constitute a material breach of the lease; (6) Rockville did not unreasonably withhold consent to the sublease; (7) Rockville terminated the lease on March 31, 1998, and Circuit City had no obligation to provide fire insurance after that date; and (8) Circuit City remained liable, pursuant to the lease, to pay amounts equivalent to the installments of rent and other charges reserved in the lease as ³⁴¹ if the lease had not been terminated, less a credit equal to the net amount of rent received by Rockville, after deduction for all actual and reasonable expenses incurred in re-letting the premises. In its declaratory judgment, the court stated that it was not attempting to define the term “net amount of rent” and was not precluding the parties from later contesting the meaning of that term.

It also stated that, as damages had been awarded under Count I of the Second Amended Counterclaim, it was not necessary to enter a monetary judgment under Count II. Finally, in furtherance of its determination that Circuit City would be entitled to a credit against its continuing obligation, the court directed that Rockville notify Circuit City and the court when it first commenced to receive rent or other consideration arising from a re-letting of the premises, after which the court would, if necessary, determine the amount of credit to which Circuit City was entitled. Perhaps in the belief that, due to the prospect of a further order being entered with respect to any credits, the judgment order did not finally dispose of all issues, the court made an express determination that there was no just reason for delay and thus entered the judgments set forth in the order as final under Maryland Rule 2 — 602(b). No appeal was taken from the judgment order.

Circuit City paid, in full, the amount then required of it ($698,846) and received a partial satisfaction of the judgment. It then resumed payment of the monthly amounts that it would have been required to pay under the lease. In February, 2000, Food Lion began demolition of the building in preparation for the construction of its new facility. In September of that year, Circuit City, informed that the Food Lion store was nearing completion and was due to open in November, wrote to Rockville seeking information regarding the rent commencement date and the amount of credit Rockville believed was appropriate.

Rockville responded with a letter and attached exhibits showing (1) an amount due under the lease for rent and other costs, through the end of the lease term, of $4,327,547, (2) rent and costs to be collected from Food Lion ³⁴² during that period of $1,960,120, (3) a net amount of rent and other costs due by Circuit City, after crediting the amounts to be collected from Food Lion, of $2,367,426, (4) $1,889,125 in costs of re-letting, and (5) $17,390 in miscellaneous reimbursable costs. It is evident that Circuit City did not accept that position, and it informed the court of the need for a “status conference.” The court scheduled a hearing for January 19, 2001, presumably to consider what, if any, credits were due to Circuit City against its continuing obligation. The day before that hearing was to occur, however, Circuit City filed a motion to modify or vacate the August, 1997 judgment and to require Rockville to refund all payments made by Circuit City following demolition of the building formerly occupied by Circuit City. The gravamen of the motion was that, upon terminating the lease and reentering the premises, Rockville assumed a duty to mitigate its damages, notwithstanding the “survival” clause in the lease, that, when it caused or allowed the demised premises to be demolished, it acted for its own benefit, rather than that of Circuit City, and thereby effected a surrender of the lease, and that the effect of the surrender was to excuse Circuit City from all further obligation under the lease.

Alternatively, Circuit City averred that demolition of the building and cancellation of three adjoining leases made it impossible to calculate damages. In a subsequent memorandum, Circuit City also contended that the judgment should be set aside under Maryland Rule 2-535(b) for fraud. The fraud, it claimed, arose from Rockville’s failure to produce in discovery certain documents that, in Circuit City’s view, indicated that Rockville’s rejection of the MARS sublease was, indeed, pretextual. Rockville contested the motion on two grounds: one, that the court had no authority to modify or vacate an enrolled judgment on the grounds asserted; and two, that there was no merit to the motion in any event.

The court rejected those defenses and granted the relief requested by Circuit City. In an order entered July 2, 2001, the court, citing the part of its 1999 judgment directing Rockville to notify Circuit City and ³⁴³ the court when it first began to receive rent and positing the prospect of a further hearing to determine the amount of net credit to which Circuit City may be entitled, found that it did have the authority to modify or vacate the judgment. On the merits, the court concluded that a tenant’s obligation to pay rent or damages for vacating the premises ceases when the landlord substantially alters the demised premises, even where a survival clause exists. Accordingly, it found that, when Rockville allowed Food Lion to demolish the building previously occupied by Circuit City, Rockville accepted a surrender of the lease, and that Circuit City was excused from making any payments thereafter.

It granted Circuit City’s motion and ordered Rockville to refund all payments made by Circuit City after February, 2000 — the date the demised premises were demolished. Rockville appealed, arguing that (1) the 1999 judgment acted as res judicata as to all defenses that could have been raised at trial and that it could not be vacated based on a new defense theory asserted 17 months later, (2) the 1999 judgment could not be vacated under the guise of exercising a limited retained jurisdiction to calculate a credit due to the judgment debtor for payments made by a third party, and (3) the court erred by applying a principle of landlord-tenant law to strike an enrolled judgment awarding contract damages. The Court of Special Appeals found merit in the third argument and, as a result, never addressed the authority of the trial court to vacate or modify the initial judgment. The intermediate appellate court concluded that the parties had a dual relationship — a landlord-tenant relationship founded on property law and a contractual relationship governed by contract law.

It held that, although a surrender of the lease terminates the leasehold estate and the obligations associated with that estate under principles of property law, the survival clause, obligating Circuit City to continue payment of amounts that otherwise would have been due as rent during the full lease term, is enforceable under contract law, notwithstanding the termination of the leasehold estate. The court also concluded that, although the amount of credit to which Circuit ³⁴⁴ City is entitled by reason of payments to Rockville under the Food Lion lease may be difficult to determine if credit is due for any of the money expended by Food Lion for construction of the budding, that was not a reason to terminate the obligation. Because, in its view, the Circuit Court erred in concluding otherwise and, as a result of its erroneous ruling, in terminating Circuit City’s continuing obligation, the appellate court found it unnecessary to determine whether the 1999 judgment was even subject to modification. DISCUSSION Introduction Three issues are raised by the parties: (1) whether the 1999 judgment was final; (2) if so, whether it was subject to being reopened and modified on the ground of fraud; and (3) if the judgment was subject to being reopened, whether the trial court erred in determining that demolition of the building, by effecting a surrender of the lease, terminated Circuit City’s obligation for further payment of rent damages.

We shall conclude that the 1999 judgment was final, that there was no fraud on Rockville’s part that would justify a reopening of that judgment, and that the trial court therefore erred in considering, in the context of a motion to vacate or modify that judgment, whether demolition of the building terminated Circuit City’s contractual obligation to pay rent damages. That does not end the matter, however. It is clear under the lease that Circuit City is entitled to credit against its continuing obligation for amounts received by Rockville pursuant to its lease with Food Lion, and, to the extent there is a dispute as to the amount of credit to which Circuit City is entitled, that Circuit City is entitled to a judicial determination of that dispute. Although the 1999 judgment may not be reopened, and there is no reason to reopen it, Circuit City is not precluded from seeking post-judgment relief in the Circuit Court to resolve the dispute over the amount of credit to which it is entitled. ³⁴⁵ Because it is clear that there is such a dispute, we shall, pursuant to Maryland Rule 8-604(d), remand that aspect of the case for further proceedings and, for the guidance of the court on remand, shall make clear our view that, although demolition of the building by Food Lion, pursuant to its lease, did not serve to terminate Circuit City’s obligation to continue payment of rent damages, the court, in determining the proper credit to be applied against that obligation, must consider the full net economic benefit to Rockville from the Food Lion lease, in accordance with Paragraph 24 of the Rockville-Circuit City lease.

Nature and Modifiability of 1999 Judgment Rockville’s first complaint about what the Circuit Court did in 2001 is that the court had no authority to modify the 1999 judgment. That judgment, according to Rockville, was final when entered. It became enrolled thirty days later, in default of any appeal or timely motion to revise it, and, in the absence of fraud, mistake, or irregularity, which Rockville denies exists, the court had no jurisdiction thereafter to modify it. Circuit City, of course, has a different view.

It claims (1) that the 1999 judgment was not final and thus never became enrolled, and (2) that, even if the judgment was final, it was procured by fraud and therefore was subject to reopening under Maryland Rule 2-535(b). In support of its first claim, Circuit City treats this case as having been bifurcated for trial, with the first phase involving the issues of (1) whether Circuit City breached the lease by vacating the premises and failing to maintain fire insurance, (2) whether Rockville breached the lease by arbitrarily and wrongfully refusing to approve the MARS sublease, and (3) if those issues were decided in Rockville’s favor, what damages were due to Rock-ville through the date of trial. If that first phase resulted in liability on Circuit City’s part under the survival clause for the continued payment of rent damages, the second phase would determine the amount of credit to be applied to that continuing obligation. The fact that the judgment order entered by the Circuit Court in 1999 expressly reserved jurisdiction to ³⁴⁶ resolve any dispute over such credits establishes, in Circuit City’s view, that the 1999 judgment was not final but was interlocutory in nature.

The claim of fraud arises from Circuit City’s assertion that Rockville wrongfully failed to disclose, in response to discovery, certain documents that, in Circuit City’s view, established that Rockville’s refusal to approve the MARS sublease was pretextual, which was a critical issue in the first proceeding. Circuit City charges that the deliberate non-disclosure of those documents constituted extrinsic fraud, which is a ground for reopening an enrolled judgment, that, if the non-disclosure did not constitute extrinsic fraud, it constituted intrinsic fraud, and that this Court should abandon its long-held view that intrinsic fraud is not a basis to reopen an enrolled judgment. The requisite of finality for a judgment has multiple significance. 2 If not final, either intrinsically or pursuant to a direction under Maryland Rule 2-602(b), the ruling is ordinarily not appealable, will not be indexed, does not become a lien on land, does not carry post-judgment interest, and remains subject to revision by the court until a final judgment is entered. If final, it is subject to a motion to revise and to appeal, but the time limits for those avenues of relief begin to ³⁴⁷ run from the date of entry.

If final, it may not