Wisconsin justices to consider lease dispute

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Appellate court rules in favor of contracts’ ‘clear language’

When landlord Anthony Gagliano & Co. Inc. tried to enforce terms of a lease against a remote tenant for a commercial space in downtown Milwaukee eight years after the lease was signed, tenant Quad Graphics asserted that 150 years of Wisconsin case law suggested the effort should fail.

Quad Graphics only had occupied the space on Jefferson Avenue in Milwaukee for four months, and had taken what it believed to be a sublease from the now financially insolvent earlier assignee. Gagliano was trying to hold Quad Graphics and guarantor Robert Kraft responsible for more than two years left on a four-year lease extension.

Milwaukee County Circuit Judge Dennis Moroney found that Gagliano’s claim was too remote, lacked privity and was contrary to Wisconsin law. The 1st District appellate court reversed, and the matter is now before the Wisconsin Supreme Court in Anthony Gagliano & Co. v. Openfirst LLC, et al., 2012 AP 122. Oral arguments took place Dec. 18.

Case history

In 2000, Robert Kraft was the CEO and primary shareholder of data processing company Electronic Printing Systems. Kraft entered into a series of lease agreements with Anthony Gagliano & Co. to find enough working room for EPS.

In the original leases of 2000-02, Kraft had individually signed leases as guarantor, which included language saying that “this obligation to act as guarantor would not lapse due to later assignment, transfer or any other change in tenancy, but would survive.”

The 13-page lease signed by Kraft contained an unusual landlord extension clause on page 4. Section 2.14 gave Gagliano the right to extend the lease another four years after the initial six-year lease term expired, as long as he gave notice before the June 2006 expiration.

In 2002, the assets of Old EPS and Openfirst LLC were sold to a new company, New EPS, which also was tied to Kraft.

The intermediary bank required that parties sign a “Landlord’s Consent and Agreement” stating that there had been an assignment of leases from Old EPS and Openfirst LLC to New EPS.

To approve the new deal, Gagliano added certain language that said if the interests or rights of New EPS systems “shall be transferred to or otherwise acquired by … any other party pursuant to collateral assignment, or otherwise, the … third party shall assume and become liable for the obligations under and pursuant to the leases.”

The original group of leases signed in 2000 through 2002 was set to expire in June 2006. On Dec. 29, 2005, Gagliano invoked the leases’ “Landlord’s Option” which extended the lease terms another four years, and sent notice to all parties at the Jefferson Avenue in Milwaukee address.

Six months later, in the middle of 2006, Quad obtained “indirect ownership” of New EPS. In the deal, Quad agreed to infuse New EPS with $16 million in capital in a renewed effort to get the sluggish company on its feet.

It didn’t work, and less than two years later, Quad decided to shut down New EPS and wind down the business. As part of this winding down process, Quad entered into a subtenant agreement with New EPS for a four-month sublease. That lease specifically denied that Quad agreed to assume any lease obligation or responsibility.

Quad would use New EPS’ more than 80,000 square feet to continue its printing jobs and processes while everything was being transitioned to a new facility.

Terms of the original 2000 lease compelled any new agreement with an assignee or subtenant to be approved by Gagliano.

New EPS notified Gagliano on Sept. 1, 2008, that it was vacating the premises no later than Oct. 31, 2008. All New EPS and Quad printing technology, equipment and other machinery, and the entire printing operation was shut down and moved to a new location by that later date.

In court

Quad now asserts to the Wisconsin Supreme Court that because it undertook less than 100 percent of New EPS’ leasehold interest, and because 150 years of case law supports the idea that when less than 100 percent of a leasehold interest is given, then Quad would be a subtenant, and not an assignee.

Gagliano countered that Quad should have known about the lease extension term, and was bound by it, and also that any interest retained by New EPS was illusory, in that Quad was the corporate “alter ego” of New EPS and Openfirst LLC.

The trial court gave little weight to Gagliano’s arguments, dismissing Quad Graphics in summary judgment and the other defendants on a directed verdict after trial.

Judge Moroney ruled that Gagliano should have “[found] out who the heck they’re really doing business with … [and] could have negotiated additional security with whoever is going to be the next operation in there.”

As stated in his opinion, “There is absolutely no indication that Quad Graphics agreed to any of this.”

The trial court also found that the most recent tenant had not been an assignee, and refused to find Quad responsible for the two years unpaid rent which remained in the lease term.

The appellate court attached great weight to the fact that this sublease was not approved by Gagliano.

It reversed Moroney’s decision and agreed with Gagliano. If upheld, that could have important ramifications on whether distant assignees or subtenants to a lease contract with no real privity with the landlord could be held accountable for obligations binding an assignee, or even just a subtenant.

Essentially, the appellate court said that the parties have to live with the “clear language of contracts as it reads.”

The appellate court reasoned that language in the 2000-02 leases specifically held that guarantors and all future assignees would be responsible for terms of the lease. The ability of the landlord to extend the lease was written in plain sight, on page 4, titled “Landlord’s Right To Extension.” Quad Graphics easily could have seen the clause when they decided to undertake an interest in New EPS.

Because this information was available for review, Quad Graphics can’t use ignorance as an excuse.

Quad Graphics also benefitted from its business connection with New EPS, which had a large existing workspace of more than 80,000 square feet in 2006 and other assets which could help Quad continue to expand, the appellate court noted in its opinion.

After accepting such benefits, “a party that accepts a contract’s benefits is bound by its burdens,” the Court of Appeals wrote, quoting Meyers. v. Wells, 252 Wis. 352 (1948).

Counsel for Quad Graphics contends in its Supreme Court brief that the appellate court got its decision wrong in almost every way possible. The cases cited by the appellate court were not on point, from different jurisdictions without persuasive authority, and did not address any privity issues or Quad Graphics’ status as a subtenant or assignee, “which had to be addressed.”

Kraft suggested that in 2000 he was hoodwinked into signing the lease with a landlord extension, which he assumed at the time would be written as a tenant option for extension. He never would have signed the agreement, Kraft testified, if he knew the final draft was a landlord option to extend.

Kraft also took issue with the legal standard of review applied by the court, as well as the fact that the appellate court addressed issues and suggested factual findings on matters that were not even appealed by Gagliano, and never decided by the trial judge or jury.

The trial court had dismissed two of the three claims against Kraft, and the third was later dismissed after the jury verdict. Furthermore, the court had ordered Gagliano to pay Kraft costs totaling almost $7,500.

When the appellate court reached conclusions on matters of fact that were never decided at the trial level, some of which reflected unfavorably on Kraft, the court was going outside of its appellate role, according to counsel for Kraft’s brief.

Now, the Wisconsin Supreme Court must sort out the interests of Gagliano and the myriad individuals and corporate defendants he sued to collect rent on two years of an unfinished lease term and for other damages. A decision from the court is expected later this term.