Nichols v. Stone, III et al
Filing
73
MEMORANDUM OPINION. Signed by Magistrate Judge William Connelly on 9/15/11. [c/m 9/15/11] (cms, Deputy Clerk)
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MARYLAND
____________________________________
ROBERT L. NICHOLS
)
)
Plaintiff,
)
)
v.
)
)
LOUIS P. STONE, III, et al.
)
)
Defendants.
)
____________________________________)
Civil Action No. WGC-07-3389
MEMORANDUM OPINION
In the Order of March 31, 2010 (Document No. 54), the Court entered judgment as to
Counts I – VIII of the Complaint in favor of Defendants and against Plaintiff, entered judgment
as to Count X of the Complaint in favor of Plaintiff and against Defendants, and held in
abeyance judgment as to Count IX (Preliminary and Permanent Injunction against [Louis P.]
Stone [III]). In the Order of August 12, 2010 (Document No. 63), the Court approved the
selection of Regis A. Johnston, Esquire, as the special fiscal agent, and Martha Rymer, CPA, as
the accountant, to perform the duties set forth in the Court’s Memorandum Opinion of March 31,
2010 (Document No. 53 ¶¶ 188 – 190, 197, 209 – 211).
The Court received Ms. Rymer’s accounting report dated February 4, 2011. The Court
thereafter provided copies of that report to Mr. Nichols (pro se) and Ms. Palmer, counsel for
Defendants. In the letter of February 24, 2011 Ms. Palmer, on behalf of her clients, identified
two issues with respect to Ms. Rymer’s report. In an e-mail of March 9, 2011 Mr. Nichols
responded to Ms. Palmer’s February 24, 2011 letter.
The Court received a February 28, 2011 interim report, a June 8, 2011 final report and a
June 24, 2011 letter with attachments from Mr. Johnston, the special fiscal agent. Having
1
received the required reports, on July 7, 2011 the Court scheduled a motions hearing for August
29, 2011. See Document No. 67. The Court permitted any party to file objections or challenges
to Ms. Rymer’s report and/or Mr. Johnston’s reports by August 12, 2011. The parties filed
responses to the reports. See Document Nos. 68-69. On August 29, 2011 the Court heard
arguments of the parties. In light of the parties’ written responses and oral arguments, the Court
addresses the challenges and/or objections to the reports.
Ms. Rymer’s Accounting Report:
Mr. Nichols has not raised any issues concerning Ms. Rymer’s report. Mr. Nichols
characterizes Ms. Rymer’s report as consistent with his trial expert.
Defendants Broomes Island Yacht Club, Inc. (“BIYC”), the General Partner of PAR,
Louis P. Stone, III (“Mr. Stone”) and Stoney’s Seafood House, Inc. (“Stoney’s”) (collectively
“Defendants”) raise two issues with respect to Ms. Rymer’s report. Defendants assert Ms.
Rymer improperly allocated all expenses associated with the reconstruction after Hurricane
Isabel in the Fall of 2003 to Stoney’s. Defendants claim the reconstruction expenses were and
should properly be borne by the partnership, PAR Limited Partnership (“PAR”).
With a
corrected allocation of such expenses, Mr. Stone’s capital account balance should be readjusted
to $1,006,585.00. Second, Defendants claim Ms. Rymer improperly reclassified all expenses of
PAR property as the responsibility of Stoney’s.
A.
Hurricane Damage Expenses
In her February 4, 2011 report to the Court, under “Findings,” Ms. Rymer wrote, “[i]n
our review of the lease agreement, dated June 28th 1995, we interpreted the document to read that
. . . if the tenant makes any improvements or alterations, the tenant will make those
improvements at its own expense.” Report from Rymer, CPA to Judge Connelly of 2/4/11 at 3.
2
In accordance with this finding, Ms. Rymer reclassified all improvements as the obligation of the
Tenant, Stoney’s. Id.
In support of their argument that Ms. Rymer’s misallocated reconstruction expenses
attributable to Hurricane Isabel damage, Defendants direct the Court’s attention to Paragraphs 14
and 15 of the 1995 Lease which state,
14.
In case of the total destruction of said premises1 by fire, the
elements or other cause, or of such damage thereto as shall render
the same totally unfit for occupancy by the Tenant, this Lease,
upon surrender and delivery to the Landlord of the said premises,
together with the payment of the rent then due and a proportionate
part thereof to the date of surrender, shall terminate and be at an
end.
15.
If any cause mentioned in Paragraph 14 shall render the
leased premises partly untenantable, the Landlord shall, at its own
expense, restore said premises with all reasonable diligence and the
rent shall be abated proportionately for the period of
untenantability and the part of the premises untenantable until said
improvements shall have been fully restored, provided, that if
neither said premises nor any part therefor shall be rendered either
wholly or partly untenantable, the Landlord shall, at its own
expense, restore the premises with all reasonable diligence, but the
rent shall not be abated to any extent whatsoever.
Pl.’s Trial Ex. 9. Pursuant to the 1995 Lease, Stoney’s is the Tenant and Broomes Island Marina,
(subsequently BIYC, the General Partner of PAR) is the Landlord.
Based on testimony presented during the four day bench trial in August of 2009, it is
undisputed that the premises were not totally destroyed and therefore Paragraph 14 is not
controlling. In the Memorandum Opinion of March 31, 2010, under “Findings of Fact” the
Court found in pertinent part, “In September 2003 Hurricane Isabel caused significant damage to
1
The June 28, 1995 lease defines the “premises” in paragraph 7 as follows: “(A) Stoney’s Restaurant at 3938
Oyster House Road, Broomes Island, Maryland. (B) Apartments A & B (top and bottom) of house at 3946 Oyster
House Road, Broomes Island, Maryland. (C) Former Marina Office at 3942 Oyster House Road, Broomes Island,
Maryland. (D) House at 3939 Oyster House Road, Broomes Island, Maryland, exclusive of the bath and shower
facilities at the rear of the building. (E) Slips No. 8-15 at the Broomes Island Marina.” Pl.’s Trial Ex. 9 at 1-3.
3
the PAR property on Broomes Island. . .The damage caused by Hurricane Isabel was repaired by
Stone and the facilities were significantly improved and enlarged.” Document No. 53 at 11 (¶
22). In the discussion regarding Count IV, Tortious Interference with Prospective Advantage
against Stone and BIYC, under “Conclusions of Law”, the Court noted, “It is undisputed that
after Hurricane Isabel severely damaged PAR property on Broomes Island, Stone repaired the
property. The facilities on Broomes Island were significantly improved and enlarged.” Id. at 30
(¶ 61). Because the premises were not totally destroyed, the Court turns to Paragraph 15.
According to Paragraph 15, if a cause mentioned in Paragraph 14 (fire, elements or other
cause) renders the leased premises partly untenantable, the Landlord, i.e., PAR, at its own
expense, shall restore the premises with all reasonable diligence. While the premises are partly
untenantable, rent is abated proportionately for the period of untenantability.
During the four day bench trial evidence was presented that, despite the untenantability of
Stoney’s, the rent was not abated and thus PAR, as the Landlord, continued to receive rent. That
testimony was substantiated by the following memorandum from Mr. Stone to Mr. Nichols
regarding PAR’s 2003 Income and Profit. The relevant portion of the memorandum states,
As you are well aware Broomes Island was hit relatively hard by
the hurricane and thus suffered substantial damage, some of which
was not covered under insurance since it was flooding. Stoney’s
was forced to close for the season, 1 ½ month earlier, as a result of
the damage. Please note that all rent for Stoney’s was credited in
full even though all operations had stopped.
Pl.’s Trial Ex. 13 at 6 (PAR Lmtd. 2003 Income and Profit).
Stoney’s operates six months a year. According to Jeannie Stone’s trial testimony, as a
result of Hurricane Isabel, the building for Stoney’s could not be occupied and thus the building
could not be used as a restaurant. Jeannie Stone asserted the building had to be totally redone.
With regard to specific damage resulting from Hurricane Isabel, Jeannie Stone testified
4
that the flooring on the porch of the restaurant building had to be replaced. At another point
during her testimony Jeannie Stone stated there was no floor at Stoney’s after the hurricane and
thus the floor had to be replaced. Also, Jeannie Stone testified that the roof of the main building
(Stoney’s) was totally torn off in parts and there were no windows left. The two outbuildings
were totally damaged, as noted by both Jeannie Stone and Mary Stone.
Jeannie Stone took photographs of PAR property after the hurricane. Defendants’ Trial
Exhibit 23a is a photograph showing a view of the lower deck area over the water in front of the
tikki bar which was obliterated. The small pier area was totally wiped out as well as the area for
outside seating. Defendants’ Trial Exhibit 23e is a photograph depicting the devastated lower
decks and two outbuildings.
Jeannie Stone also took multiple photographs of Broomes Island during the Winter of
2007-2008. Defendants’ Trial Exhibit 6f depicts the front of the main dining room, connected to
the older building (defined by the door and two sliding glass door windows). This older building
housing Stoney’s restaurant has been re-sited or relocated since it was originally constructed.
There was major renovation done to the older part of the structure, i.e., the older building.
Defendants’ Trial Exhibit 6h is very similar to Defendants’ Trial Exhibit 6f and shows the front
entrance of the new restaurant facing the water as well as the old building. Defendants’ Trial
Exhibit 6i shows two old buildings that have been refurbished. Defendants’ Trial Exhibit 6l
shows the opposite side of the existing old restaurant, from a vantage point across the way on the
long pier, looking at the restaurant as it sits above the water and on the dock. Defendants’ Trial
Exhibit 6m shows the back side of the original restaurant. Defendants’ Trial Exhibit 6n shows
the side view of the original restaurant. The original restaurant has been refurbished and reshingled so it looks rather new. Defendants’ Trial Exhibit 6o shows the back side of the original
5
restaurant. Defendants’ Trial Exhibit 6p shows the other side (or opposite viewpoint compared
to Defendants’ Trial Exhibit 6f) of the back side of the original restaurant, showing the restaurant
sitting all over the water. From this viewpoint one is looking at the short pier. Defendants’ Trial
Exhibit 6p is taken from the same vantage point as Defendants’ Trial Exhibit 6l.
Part of the new construction post-Hurricane Isabel is the new bathroom built for women
as seen in Defendants’ Trial Exhibit 6q. Pre-Hurricane Isabel there was one, unisex restroom.
Defendants’ Trial Exhibit 6r depicts the lower deck over the water, outside seating, which was
rebuilt after Hurricane Isabel. Defendants’ Trial Exhibit 6u depicts the tikki bar, the lower deck
area and the upper deck area adjacent to the tikki bar. Defendants’ Trial Exhibit 6y shows the
additional deck with the new kitchen. Defendants’ Trial Exhibit 6c, the very far left, shows the
beginning of the main building and the new restaurant’s dining room (has a Stoney’s sign on it
and air conditioning units adjacent to the building). Defendants’ Trial Exhibit 6d shows the side
view of the main dining room (new restaurant).
Defendants’ Trial Exhibits 8a and 8b show both the long pier and the short pier.
Defendants’ Trial Exhibits 8c through 8d show the long pier. These photographs were taken by
Jeannie Stone during the Winter of 2007–2008. The short pier was destroyed by Hurricane
Isabel and was rebuilt.
As noted in the March 31, 2010 Memorandum Opinion, under the partnership agreement
Mr. Stone has multiple responsibilities. “Stone is a tenant of PAR (as owner of Stoney’s), a
limited partner of PAR, and the managing member of BIYC, the general partner of PAR.
Nichols consented to this arrangement.” Document No. 53 ¶ 10. Because Mr. Nichols was an
absentee partner, Mr. Stone was making all of the decisions on behalf of PAR. During the four
day bench trial uncontroverted evidence was presented that Mr. Stone paid to rebuild Stoney’s
6
building, as well as other facilities damaged or destroyed by Hurricane Isabel without any
contribution by Mr. Nichols.
During the third day of the bench trial, August 27, 2009, Mr. Nichols’ counsel questioned
Jeannie Stone about the costs of rebuilding after Hurricane Isabel. The following colloquy
occurred.
Q:
..
Wasn’t there an investment of $200,000 or so to repair the .
A:
We rebuilt it back so it would be better and so we wouldn’t
have these problems again if the storm did arise. We raised it up
above the flood line elevation.
Q:
So a large portion of that is improvement to the property in
terms of, hoping that it is not subject to the same kind of flooding
in the future?
A:
Wouldn’t you rather protect your property in that way
rather than replace it with what was there that’s going to get
washed away again?
Q:
Well I’m asking . . .
A:
That’s why I am saying that was a decision to be made; it’s
definitely a leasehold improvement to the property, to both
partners.
Q:
And those improvements were charged against the, they
were charged to PAR, were they not?
A:
Right.
Q:
There’s an entry in Mr. Stone’s capital account which
ultimately comes out of the PAR, the PAR property?
A:
way.
Correct. It increased the value of PAR by doing it that
August 27, 2009 (12:40:59 – 12:41:57).2
2
Neither side requested a transcript of the four day bench trial. The Court therefore uses as a citation the recording
of time as listed on FTR Gold, the Court’s digital recording system.
7
As revealed during the course of the four day bench trial, the expenses for repairing and
improving after Hurricane Isabel occurred in 2004 but were not recorded until 2007. Plaintiff’s
counsel questioned Mary Stone of Mullen, Sondberg, Wimbish & Stone, P.A., the accountant for
Mr. Stone, Stoney’s and PAR, regarding the unusual delay in recording the capital
improvements.
Q:
Were you being directed by management to put these costs
[$324,749 from 2004] on the PAR schedule?
A:
Well, what happened was [Jeannie Stone] had forgotten
with rebuilding the restaurant that all these, not rebuilding the
restaurant but the additional new structures because this was new
structure costs, that had gone on Broomes Island improvements.
And so she said, oh heck, you know, I forgot that that really, to tell
you that was PAR. So she actually instructed us to do, to put it on
PAR.
Q:
Okay. And when, do you remember when this occurred?
A:
I think 2007, by 2007, 2008, 2008, maybe 2007.
Q:
Okay. At some point in 2007 or 2008, you are instructed to
put this series of 2004 costs onto the PAR schedule.
A:
That’s correct.
Q:
Do you know if they were all put on as improvements or
would they have been allocated to improvements or repairs?
A:
No, they were all improvements. I actually went back and
looked at our records on this. They were on Stoney’s books and
broken down pretty detailed. So, that amount was there and did
exist. The actual expenses did exist.
*
*
*
A:
I did pull a tax return schedule off of Stoney’s Broomes
Island that shows the numbers. Because I think there is confusion
that some of Oyster House3 might be commingled and it is not.
‘Cause based on what was filed with the tax return, I did add up, it
was $323,216. And hers, it was close.
3
Property individually owned by Mr. Stone, located on land (Warren Denton property) adjacent to PAR property.
8
Jeannie went and gave me stuff that she found after the
fact. But we had produced this back in 2004 on the actual records
of the improvements. So that was sitting on the tax return. So it
was the correct amount. And then there was [sic] some Oyster
House expenses. ‘Cause I think there’s confusion whether Oyster,
Oyster House is separate. We keep those separate.
August 27, 2009 (4:16:45 – 4:17:59, 4:18:18 – 4:19:05).
During the August 29, 2011 hearing counsel for Defendants asserted that Mr. Nichols’
own accounting expert, Philip R. Baker, did not challenge the allocations of these expenses as
capital improvements during the bench trial.
Counsel for Defendants cites Mr. Baker’s
“acceptance” of the capital improvements allocation in contending that Ms. Rymer’s lack of
understanding about the facts and circumstances of the capital improvements resulted in Ms.
Rymer’s February 4, 2011 recommendation that those expenses be reallocated against Mr.
Stone’s capital account.
The Court has reviewed Mr. Baker’s testimony. The recollection of Mr. Baker’s opinion
by Defendants’ counsel is inconsistent with Mr. Baker’s testimony. The following colloquy
occurred between Mr. Baker and counsel for Defendants.
Q:
You agree that there should be no reallocation of the
building improvements, right? That was not a line item you made
any adjustments to.
A:
I was not asked to go back through the building
improvements and make any comments regarding it. I did not
have invoices of what all that documented. . .
Q:
But that’s accepted.
A:
It was not in what I was asked to do.
Q:
By the definition of the instructions given to you, the
building improvement line is accepted?
A:
There was no acceptance or non-acceptance. I was not
9
asked to go and reallocate building improvements — whether they
were building improvements or expenses — because I had no
invoices to look at and no documents to look at that would tell me
what the building improvements were.
Q:
I understand that. I’m just saying, from the marching
orders given to you, building improvements are accepted, yes or
no?
A:
Not accepted. They were not in the realm of what I was
asked to do.
August 27, 2009 (10:20:43 - 10:21:55).
On direct examination Mr. Baker noted the capital improvements occurred in 2004, as
noted on the depreciation schedule, but were recorded for the first time in 2007. Mr. Baker
characterized this as “a little odd.” He explained the normal accounting practice is that one
records the improvements in the year they are incurred.
Should the capital improvements in 2003-2004, post-Hurricane Isabel, be borne by the
partnership PAR? The Court begins its analysis by reviewing the Lease of June 28, 1995.
According to the 1995 Lease, any improvements to the premises is a financial burden of
the Tenant as outlined in Paragraph 9 which states in pertinent part,
That the Tenant will not make any alterations to said premises
without the written consent of the Landlord. If the Tenant shall
desire to make any such alterations, the same shall first be
submitted to and approved by the Landlord, and shall be done by
the Tenant at its own expense, and the Tenant agrees that all such
work shall be done in a good and workmanlike manner, that the
structural integrity of the building shall not be impaired, and that
liens shall attach to the premises by reason thereof.
Pl.’s Trial Ex. 9.
Based on the evidence of record, it is without question that some of the capital
improvements, resulting from the damage caused by Hurricane Isabel, restored the premises as
they existed pre-Hurricane Isabel. These capital improvements were essentially replacements.
10
It is further without question that some of the capital improvements, such as the restaurant,
constituted significant enhancements to the property. Paragraph 15 of the 1995 Lease clearly
places the financial responsibility for restoring the premises on the Landlord, i.e., PAR. But how
does the 1995 Lease treat repairs or replacements that do not merely restore destroyed or
untenantable premises, but significantly enhances the original premises?
After reviewing the 1995 Lease, the Court finds no provision which specifically
addresses this scenario.
Nevertheless the Court finds Paragraph 15 explicitly limits the
Landlord’s financial responsibility to restoring any damaged or destroyed premise that is wholly
or partially untenantable. Paragraph 15 states in pertinent part, “the Landlord shall, at its own
expense, restore said premises with all reasonable diligence and the rent shall be abated
proportionately for the period of untenantability and the part of the premises untenantable until
said improvements shall have been fully restored[.]” Pl.’s Trial Ex. 9 (emphasis added).
By using the word restore the Court finds the Landlord intended and the Tenant agreed
that the Landlord shall be responsible for returning the premises to the conditions which existed
before any destruction or damage by fire, the elements or other cause. According to Webster’s
New Universal Unabridged Dictionary, the word restore has six definitions. The Court finds the
first two definitions are pertinent to the 1995 Lease: “1. to bring back into existence, use, or the
like; reestablish: to restore order. 2. to bring back to a former, original, or normal condition, as a
building, statute or painting.” Webster’s New Universal Unabridged Dictionary 1641 (1996).
Because the significant improvement and expansion of the building housing Stoney’s restaurant
is beyond a mere restoration, the Court finds the Tenant, i.e., Stoney’s, is financial responsible
for the expenses associated with this improvement and enlargement.
imposes on the Tenant the expense for any alteration to the premises.
11
Paragraph 9 clearly
The Court is well aware that Mr. Stone wore multiple hats, namely, as a tenant of PAR
(as owner of Stoney’s), a limited partner of PAR, and the managing member of BIYC, the
general partner of PAR. The interests of these three entities did not always coincide. As Mr.
Stone failed to maintain a separate bank account and financial records for PAR and had PAR
funds commingled with Stoney’s, likewise Mr. Stone failed to segregate PAR’s restoration
responsibility of the premises from Stoney’s desire to have a significantly larger and improved
dining facility and other accommodations.
The Court has reviewed Plaintiff’s Trial Exhibit 24, consisting of 33 pages4 of Register
Quick Report printouts, purportedly Hurricane Isabel reconstruction costs. Very few of the
entries on the Register Quick Report identify the work as “repairs” or “equipment replaced.”
The vast majority of the entries are identified as “leasehold improvement.” The Court has also
listened to the testimony of Jeannie Stone where Plaintiff’s counsel questions Jeannie Stone
about the vast majority of the Register Quick Reports.
One example of an alteration or capital improvement is the bathroom. As Jeannie Stone
testified, before Hurricane Isabel, there was one facility, a unisex bathroom. After Hurricane
Isabel, Mr. Stone and/or an agent or employee of Mr. Stone, decided to have a new bathroom
built for women. Having separate facilities for men and women is a feature valued by customers.
However the building of a separate bathroom is a capital improvement since it did not exist
before Hurricane Isabel. This expense must be borne by the Tenant.
Another example of an alteration or capital improvement is the elevation of the restaurant
about the flood plain. The Court does not dispute that this decision was prudent from a business
perspective, to avoid similar damage in the future. Nevertheless, by the terms of the 1995 Lease,
4
For two of the Register Quick Report printouts, three copies each of these two printouts are part of Plaintiff’s Trial
Exhibit 24.
12
PAR, as the Landlord, is financial responsible for restoring the restaurant to pre-Hurricane Isabel
conditions, not for any improvements.
Therefore, the costs associated with elevating the
restaurant is a capital improvement or alteration to be borne by the Tenant.
After a careful review of the Register Quick Reports (Plaintiff’s Trial Exhibit 24), the
testimony of Jeannie Stone, the testimony of Mary Stone and the photographs (Defendants’ Trial
Exhibits 6, 8 and 23), the Court finds more than half of the funds expended after Hurricane
Isabel applied to capital improvements or alterations. These expenses are the responsibility of
the Tenant solely, consistent with Paragraph 9 of the 1995 Lease. The remaining expenses are
attributable to the Landlord, PAR. Numerically, the Court finds 60% of the expenses are capital
improvements and 40% are for restoration.
For the period ending June 1, 2007 Ms. Rymer identifies $324,749.005 as improvements.
According to Jeannie Stone the total amount Mr. Stone spent after Hurricane Isabel was
$324,790.00. The Court finds 60% or $194,849.40 consists of capital improvements and is
therefore an obligation of the Tenant (Stoney’s). The remaining 40% or $129,899.60 consists of
repair or replacement and is therefore an obligation of the Landlord (PAR).
The capital
accounts6 of Mr. Nichols and Mr. Stone must be adjusted accordingly by the accountant for
5
In Defendants’ Memorandum Concerning Final Resolution of Counts IX and X of Plaintiff’s Complaint,
Defendants assert “the expenses that Ms. Rymer assigns as improvements totaling $383,051.00 on the last page of
her report are all the reported construction costs that resulted from the devastation caused by Hurricane Isabel.”
Document No. 68 at 5. This assertion is incorrect. On the last page of her report, concerning improvements, Ms.
Rymer lists the following: [a] “Leasehold improvements — 6/1/2007 — $16,866.00”, [b] “Improvements —
[6/1/2007] — $324,749.00”, [c] “Improvements — 6/1/2008 — $18,995.00” and [d] “Improvements — 6/1/2008 —
$22,441.00[.]” These four amounts total $383,051.00 which Ms. Rymer labeled as a tenant expense. The alleged
total cost of reconstruction after Hurricane Isabel is $324,749.00 (the second amount listed by Ms. Rymer on the last
page of her report and the amount reported as the total reconstruction cost by Jeannie Stone at the bench trial), not
$383,051.00.
6
The Court notes that Ms. Rymer reallocated the capital balance for Mr. Stone, Mr. Nichols and BIYC as of
December 31, 2009. “An evaluation of the capital account to date cannot be determined until all expenses of PAR
have been accounted for and summarized by the bookkeeper for 2010.” Report from Ms. Rymer, CPA to Judge
Connelly of 2/4/11 at 1. Because the Court has not adopted Ms. Rymer’s reallocation of all Hurricane Isabel
Reconstruction Expenses of 2007 as the responsibility of the tenant, the accountant for PAR must not rely on Ms.
13
PAR.
Besides the above adjustment to Mr. Nichols’ and Mr. Stone’s capital accounts, there are
three additional adjustments to these capital accounts that the accountant for PAR must make.
First, as a result of Hurricane Isabel, Stoney’s closed 1 ½ months early. Under Paragraph 15 of
the 1995 Lease, Stoney’s had the right to abate rent until the Landlord, PAR, restored the
premises. Stoney’s did not abate the rent. During this period Stoney’s paid $6,000.00 per month
as rent. Thus Stoney’s should be credited for 1 ½ months of rent or $9,000.00.
Second, Stoney’s continued to pay rent throughout the Winter/early Spring of 2003 and
2004 while Mr. Stone and his staff oversaw reconstruction at Broomes Island. In accordance
with Paragraph 15, Stoney’s had the right to abate rent until the Landlord, PAR, restored the
premises. The rent during this six month period was $6,000.00 per month. Thus Stoney’s
should be credited for six months of rent or $36,000.00.
Finally, to pay for the cost of the services of Ms. Rymer and Mr. Johnston as accountant
and special fiscal agent respectively, the Court directed Mr. Nichols, individually, and the
Defendants (Mr. Stone, Stoney’s and BIYC), jointly, to each deposit $10,000.00 with the
Registry of the Court.
Mr. Stone deposited $10,000.00 as ordered; however, Mr. Nichols
deposited $5,000.00 only. The total cost of services for Ms. Rymer and Mr. Johnston was
$10,705.41. Mr. Stone has paid more than 50% for the services of Ms. Rymer and Mr. Johnston.
The Court intended that the cost of the services be divided equally between Plaintiff and
Defendants. By separate Order the Court has directed the Clerk of the Court to disperse from the
Registry of the Court the sum of $4,294.59 (plus any interest) to Mr. Stone. See Document No.
72. To place Mr. Stone and Mr. Nichols on an equal financial footing, the Court directs the
accountant for PAR to credit Mr. Stone’s capital accountant in the amount of $352.71.
Rymer’s reallocation but adjust the capital accounts in accordance with this Memorandum Opinion.
14
B.
Ms. Rymer’s reclassification of expenses
In her February 4, 2011 report Ms. Rymer made the following finding: “In our review of
the lease agreement, dated June 28th 1995, we interpreted the document to read that the tenant,
Stoney’s Seafood House, Inc. was responsible to pay for all fuel, telephone, electricity[,] water
and sewer.” Report from Rymer, CPA to Judge Connelly of 2/4/11 at 3. Accordingly Ms.
Rymer reclassified “all utilities, repairs and maintenance [and] insurance . . . as the obligation of
the tenant, Stoney’s Seafood House, Inc.” Id. Defendants contend Ms. Rymer misinterpreted
the 1995 Lease. Ms. Rymer did not realize that some of the premises were PAR property, and
thus the responsibility of PAR, and other premises were the responsibility of the Tenant.
The 1995 Lease states in pertinent part:
THE TENANT COVENANTS AND AGREES WITH THE
LANDLORD AS FOLLOWS:
*
*
*
2.
To use and occupy the leased premises solely in
connection with the operation of a restaurant business and related
businesses.
*
*
*
THE PARTIES HERETO FURTHER COVENANT AND AGREE
WITH EACH OTHER AS FOLLOWS:
7.
The premises being leased consists of the property:
(A)
Stoney’s Restaurant at 3938 Oyster House Road,
Broomes Island, Maryland.
(B)
Apartments A & B (top and bottom) of house at
3946 Oyster House Road, Broomes Island, Maryland.
(C)
Former Marina Office at 3942 Oyster House Road,
Broomes Island, Maryland.
(D)
House at 3939 Oyster House Road, Broomes Island,
15
Maryland, exclusive of the bath and shower facilities at the rear of
the building.
(E)
Slips No. 8 – 15 at the Broomes Island Marina.
Pl.’s Trial Ex. 9 at 1-3.
Defendants assert “[t]he leased premises . . . never included the new apartments and the
new marina. These remained PAR property.” Letter from Palmer, Esq. to Judge Connelly of
2/24/11 at 2. Based on the clear and unambiguous language of the 1995 Lease, the premises to
be used and occupied by the Tenant, in fact, included the apartments and the marina. If the
parties’ course of conduct was contrary to the clear and unambiguous language of the 1995
Lease, this is not surprising in light of the evidence presented during the four day bench trial.
Thus the Court finds, based on the clear and unambiguous language of 1995 Lease, Ms. Rymer’s
interpretation is correct.
In her report Ms. Rymer made the following findings regarding the 2001 Lease:
In January 2001 a lease was also signed that did not supersede the
June 1995 lease but added provisions that stated the tenant would
be also responsible for septic charges and that the partnership
would get rental income from the slips and residential properties
paid to the landlord.
Report from Rymer, CPA to Judge Connelly of 2/4/11 at 3.
Defendants challenge Ms. Rymer’s findings concerning the 2001 Lease.
The 2001 document does not re-define the leased premises. The
new apartments and the full new marina are not included as part of
the leased premises in any documentation. The 2001 document
clearly states that the rental income from the marina slips and
rental properties was to go directly to PAR. In all respects, the
new apartments and the new marina were consistently treated as
outside of the 1995 Lease.
Letter from Palmer, Esq. to Judge Connelly of 2/24/11 at 2.
The 2001 Lease states in pertinent part:
16
The parties covenant and agree as follows:
1.
The rent for January 2001 shall be due ten (10) days
after this Lease is signed.
2.
Landlord.
All rental income from the slips shall be paid to the
3.
All rental income from the residential properties
shall be paid to the Landlord.
4.
The Tenant shall pay all septic charges.
5.
All terms of a lease made June 28, 1995 between
Robert L. Nichols, t/a Broomes Island Marin[a], and Stoney’s
Seafood House, Inc. t/a Stoney’s Seafood, to the extent they are
not inconsistent with the above terms, are incorporated herein by
reference.
Pl.’s Trial Ex. 11.
If the residential properties and the slips were always PAR property, why would the 2001
Lease need to specify that all rental income from the slips and from the residential properties
shall be paid to the Landlord? The Court finds Ms. Rymer’s findings with regard to the 2001
Lease are accurate.
The Court notes that whether the residential properties and the slips7 were always PAR
property or were not classified as PAR property until 2001 is not relevant to the unresolved
7
In support of the Court’s reading of the unambiguous language of the 1995 Lease, the lease identified as part of the
premises eight slips, specifically Slips No. 8 – 15. In his August 12, 2011 response to the Court about the reports of
Ms. Rymer and Mr. Johnston, Mr. Nichols questions why Mr. Johnston’s report fails to note that the “[l]eases do not
recognize rent to the Partnership for any of the forty-eight (48) boat slips.” Document No. 69 at 1. Furthermore with
regard to the June 1, 2011 Commercial Lease Agreement for Stoney’s Seafood, Exhibit B, Mr. Nichols claims there
is “[n]o justification granting Phil Stone the free use of the remaining eight (8) boat slips. Boat slips are fully
occupied during the boating season, indicating a definite strong market for rental. The PAR Ltd. Partnership should
realize the income.” Id. at 2. The June 1, 2011 Commercial Lease Agreement, Exhibit B (Description of Buildings)
between PAR Limited Partnership (Landlord) and Stoney’s Seafood House, Inc. (Tenant) defines buildings to
include “(b) All decks, walkways, piers, boat slips and accessory buildings and structures currently being utilized by
Stoney’s Seafood House, Inc. in connection with its said restaurant facility. Specifically this includes the pier and
floating dock of the restaurant, eight slips on the south side of the long pier, the outdoor bar, detached restroom,
outdoor bar and storage building with walk-in boxes.” Letter from Johnston, Esq. to Judge Connelly of 6/24/11, Ex.
4 (emphasis added). In short, the issue of the slips, whether all are PAR property or whether eight (8) slips are
assigned to Stoney’s and the remainder are PAR property remains unresolved.
17
issues because Ms. Rymer’s task was to evaluate the financial records of the PAR Limited
Partnership from January 1, 2005 to the present.
The Court agrees with Defendants that since PAR, as the Landlord, receives all rental
income, PAR, as the Landlord, is financially responsible for all expenses except septic (as noted
in the 2001 Lease). “All other costs for the marina and the apartments were treated as outside of
the lease and solely as PAR income, and PAR expenditures.”
Document No. 68 at 8.
Defendants acknowledge the septic charges were improperly allocated to PAR. Defendants
assert “[a] septic Account Adjustment of $7,860.60 is necessary for both Nichols and Stone.” Id.
Because Ms. Rymer reclassified these expenses as the responsibility of Stoney’s contrary to the
2001 Lease and further because Stoney’s is financially responsible for septic charges only and
PAR for the remaining expenditures consistent with the 2001 Lease, the Court directs the
accountant for PAR determine the amount of the septic account adjustment for both Mr. Nichols
and Mr. Stone.
Mr. Johnston’s Special Fiscal Agent Reports:
Defendants have no objections to Mr. Johnston’s reports. Mr. Nichols raises several
issues. The Court addresses certain issues below.
First, Mr. Nichols asserts,
Commercial Property Management and Exclusive Rental
Agreement produced by Regis A. Johnston appears to be an
agreement between PAR and O’Brien Realty. However, the
Agreement does not state a subject property address, is signed by
Jean[n]ie Cousineaux (who has no ownership interest in PAR), and
is not ratified by a representative of O’Brien Realty.
Document No. 69 at 1.
At the August 29, 2011 hearing counsel for Defendants informed the Court that a
representative from O’Brien Realty has ratified the agreement. Second, Mr. Nichols is correct
18
that the June 1, 2011 Commercial Property Management and Exclusive Rental Agreement
between O’Brien Realty and PAR Limited Partnership does not include an address of the
property. Third, it is undisputed that Jeannie Cousineaux Stone is not a partner of PAR. She
nonetheless signed the June 1, 2011 Commercial Property Management and Exclusive Rental
Property as an owner. See Letter from Johnston, Esq. to Judge Connelly of 6/24/11, Ex. 1. This
is an error. The Court directs O’Brien Realty, specifically Michael O’Brien, to re-execute the
June 1, 2011 Commercial Property Management and Exclusive Rental Agreement by (a)
including an address for the property and (b) obtaining the signature of Mr. Stone as an owner.
Second, Mr. Nichols claims “3939 Oyster House Road is being operated as a Commercial
establishment; therefore, a residential lease is not appropriate.” Document No. 69 at 2. During
the bench trial Jeannie Stone was shown several photographs including Defendants’ Trial
Exhibits 7m through 7p. Jeannie Stone described these photographs as depicting the larger
house, now being used as a bed and breakfast. The four photographs displayed the front, side
and rear views of the bed and breakfast. The other house is divided into two residential rentals.
In his June 24, 2011 letter to the Court Mr. Johnston enclosed five documents including
“The Residential Lease for Apts 1 & 2 at 3935 Oyster House Road” and “The Residential Lease
for the house at 3939 Oyste[r] House Road.” Letter from Johnston, Esq. to Judge Connelly of
6/24/11, Exs. 2–3. In 2009 the house at 3939 Oyster House Road was being operated as a bed
and breakfast. The Court lacks information whether the property continues to be utilized as a
bed and breakfast or is strictly a residential rental property. The Court located the website for
Stoney’s at Broomes Island. The website indicates that Broomes Island Inn “is available for rent
by the night and has two kitchens, four bedrooms, two laundry rooms, and generous living
19
space.”8 If the property at 3939 Oyster House Road is, in fact, a bed and breakfast, the Court
directs O’Brien Realty to execute a commercial lease.
Third, Mr. Nichols contends the “[d]raft lease provided to me for review and comment
listed the Restaurant rental of One Hundred Eight Thousand Dollars ($108,000). See Exhibit
‘A.’ The Lease in the final report states, Seventy-Two Thousand Dollars ($72,000). See Exhibit
‘B[.]’” Document No. 69 at 2. This difference in amount was explained by counsel for
Defendants at the August 29, 2011 hearing. When the lease was originally drafted, the monthly
rental income was approximately $9,000. That figure included rental income from Stoney’s
restaurant as well as rental income from the two houses at Broomes Island.
However,
subsequently, the two “residential” properties were segregated from Stoney’s restaurant. The
“residential” properties now have their own independent leases.
The rents on the two
“residential” properties are $2,000 per month and $1,500 per month respectively. A decision
was made to have the Tenant for the two “residential” properties be a separate entity, The Money
Pit, LLC. Under this structure, PAR and Mr. Nichols (as a limited partner of PAR) have a
guaranteed annual rent. PAR Limited Partnership, as the owner, has retained O’Brien Realty to
manage the two “residential” properties. The annual rent from Stoney’s totals $72,000.00 and
the annual rents for the two “residential” properties are $18,000.00 and $24,000.00 respectively,
for a total annual rent of $114,000.00
Fourth, Mr. Nichols contends there is “[n]o justification granting Phil Stone the free use
of the remaining eight (8) boat slips. Boat slips are fully occupied during the boating season,
indicating a definite strong market for rental. The PAR Ltd. Partnership should realize the
income.” Document No. 69 at 2. The Court has reviewed the June 1, 2011 Commercial Lease
Agreement between PAR Limited Partnership and Stoney’s Seafood House, Inc., particularly
8
Broomes Island, http://www.stoneysseafoodhouse.com/broomes_island.php (last visited Sept. 8, 2011).
20
Exhibit B. See Letter from Johnston, Esq. to Judge Connelly of 6/24/11, Ex. 4. Those eight (8)
boat slips are listed as part of the property under lease to Stoney’s. In a footnote supra the Court
noted this issue has not been resolved, namely, whether all slips are PAR property entitling PAR
to the rental income or whether eight of the slips are assigned to Stoney’s. The parties will need
to come to some resolution on this matter.
Fifth, Mr. Nichols asks the Court to direct that the Agreement between PAR and Stoney’s
be a “triple net lease.” If the Court declines to so direct, then the Court should “order Mr. Philip
Stone be removed from management of the PAR Ltd. Partnership assets, and appoint O’Brien
Real Estate or another mutually agreed to third party with no bias or agenda who would
consistently act in the best interest of the Partnership.” Document No. 69 at 4. Mr. Johnston, the
special fiscal agent, reviewed the Lease Agreements, suggested some changes, which were made,
and is satisfied that the agreements are “proper commercially acceptable agreements.” Letter
from Johnston, Esq. to Judge Connelly of 6/8/11. The Court declines to mandate a triple net
lease. The Court further declines to remove Mr. Stone from management of PAR Limited
Partnership. With the Commercial Property Management and Exclusive Rental Agreement
between PAR Limited Partnership and O’Brien Realty-Michael O’Brien and further with the
creation of a separate entity, The Money Pit, LLC, for the two “residential” properties which
O’Brien Realty will manage, procedures have been established to keep the functions of Stoney’s
separate and apart from the management of other PAR property. Mr. Stone is no longer handling
the day-to-day operations of both Stoney’s and PAR, whose interests do not necessarily coincide.
A separate bank account has been established for PAR, as verified by Mr. Johnston. Finally, Mr.
Johnston has verified a procedure exists to ensure no commingling of funds.9
9
“There was a concern on my part that there should be a separate agreement not to com[m]ingle funds. After my
conversation with counsel and review of the final Property Management Agreement, I believe this is satisfied with
21
Sixth, Mr. Nichols asks the Court to “[r]equire Ms. Mary Stone to relinquish her role as
PAR Ltd. Partnership Accountant and designate Ms. Martha Rymer, CPA, her successor[.]”
Document No. 69 at 4. The lack of trust between PAR the partners —Mr. Nichols and Mr. Stone
— is all too apparent. The retention of Mary Stone of Mullen, Sondberg, Wimbish & Stone,
P.A., Mr. Stone’s sister-in-law, as PAR’s accountant, enhances Mr. Nichols’ anxiety about any
alleged undermining of his interest in PAR because he presumes Mary Stone, as the accountant,
is bias in favor of Mr. Stone. The Court finds no basis for such an assumption. Nevertheless at
this stage the Court agrees it is prudent for Mary Stone to discontinue as the CPA for PAR and
for another accountant to be selected. Rather than the Court selecting the accountant, the Court
finds this responsibility should be exercised by the Property Manager, O’Brien Realty.
Finally, one other outstanding matter is the lack of a manager for the marina. The Court
encourages the parties and O’Brien Realty to identify and retain a marina manager as soon as
possible. The Court presumes the management of the marina would include the slips not
presently assigned to Stoney’s. It is the Court’s understanding, based on its reading of the 2001
Lease, that the rental income from these slips shall be paid to the Landlord, i.e., PAR. In the
interim, since Mr. Nichols does not appear incline to personally manage any PAR property, the
Court suggests Jeannie Cousineaux Stone act as interim manager of the marina.
An Order will be entered separately.
September 15, 2011
/s/
____________________________________
WILLIAM CONNELLY
UNITED STATES MAGISTRATE JUDGE
the requirement of the manager who will see that com[m]ingling of funds does not occur.” Letter from Johnston,
Esq. to Judge Connelly of 6/8/11 at 1.
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