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Conner Children's Trust #2 v. Kmart Corp.

November 14, 2007


The opinion of the court was delivered by: Judge James B. Zagel


This is a dispute regarding the proper interpretation of a lease renewal clause. During the course of its Chapter 11 bankruptcy proceedings, Kmart Corporation ("Kmart") sought to exercise its option to renew the lease for its Santa Rosa, California store. In response, Kmart's landlord, Conner Children's Trust #2 and Cleveland Avenue Associates ("Landlord"), filed a complaint, arguing, among other things, that Kmart's attempt to exercise the renewal option was too late. The bankruptcy court ultimately found for Landlord; Kmart appeals.


On August 28, 1968, Kmart's predecessor-in-interest and Landlord's predecessor-in-interest entered into a lease for a store to be built in Santa Rosa, California (the "Lease"). At the time the Lease was signed, the parties were uncertain about when the construction on the building would be completed and when the tenant could assume occupancy. This uncertainty explains the manner in which the termination clause is written. That clause, found in §2 of the Lease, provides that the Lease "shall terminate upon such date as shall be twenty-three (23) years from the last day of the month in which said date of first occupancy shall occur."

As it turned out, the "date of first occupancy" was February 26, 1970. Accordingly, the primary term expired on February 28, 1993 (i.e., twenty-three years after the last day of the month when the store was first occupied).

Section 12(a) of the Lease granted Kmart the option of extending the Lease for up to three times, at five years per extension. That section states:

Tenant shall have the option to extend the term of the Lease for an additional period of five (5) years upon the same terms and conditions of this lease, which option shall be exercised by notice to the Landlord not less than six months prior to the expiration of the term hereof.

Kmart renewed the Lease the first time via a letter dated April 27, 1992. It renewed the Lease a second time via a letter dated August 8, 1997. It is Kmart's attempt to renew its lease for a third time that is at issue here. The second renewed term was set to expire on February 28, 2003. Kmart mailed a letter seeking to renew its lease for the third time on August 29, 2002. Landlord responded to this letter shortly thereafter contending that Kmart could not renew for various reasons, including the untimeliness of its final renewal attempt. Despite Landlord's insistence that it vacate, Kmart remained in the premises and continued to pay rent at the rate specified in the Lease. Landlord initiated this case in order to remove Kmart and to obtain holdover rent.

In the proceedings below, Kmart argued that the renewal notice was not due until August 31, and thus asserted that its renewal was timely. Landlord, on the other hand, argued that the renewal notice was due August 28, and therefore, that Kmart's attempt to renew was one day late. In the context of its ruling denying Kmart's motion for summary judgment, the bankruptcy court determined that the Landlord's interpretation was correct. Thereafter, the matter went to trial. The bankruptcy court ultimately ruled that Kmart's mistaken interpretation of the renewal date was a "mistake of law." The import of that conclusion was that Kmart was not entitled to equitable relief. The court also heard expert testimony-over Kmart's objection-from Landlord's real estate broker regarding the value of the Lease property. The bankruptcy court ultimately entered a Judgment Order entitling Landlord to $4,738,824.60 in holdover rent. The court further held that Kmart would be responsible for an additional $3,623.22 per day in rent until it vacated.

Kmart appeals the bankruptcy court's interpretation of the Lease; its interpretation of California law regarding equitable excusal of late notice; its denial of Kmart's motion in limine to exclude Landlord's expert; and the bankruptcy court's conclusion regarding the fair market value of the property. For the reasons stated below, I disagree with the bankruptcy court's ruling.


A. Standard of Review

I review the bankruptcy court's findings of fact for clear error and review its conclusions of law de novo. In re Midway Airlines, Inc., 383 F.3d 663, 668 (7th Cir. 2004); see also FED. R. BANKR. P. 8013. I review a bankruptcy court's contract interpretations de novo. See ...

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