Court Opinion

ID: 1059945
Source: CourtListenerOpinion
Date Created: 2013-10-09 18:40:53.33223+00
Date Added: 2024-06-11T12:36:29.370585
License: Public Domain

PRESENT:   All the Justices

ROY J. BUCHOLTZ, P.C.
                                              OPINION BY
v.   Record No. 970361             JUSTICE LAWRENCE L. KOONTZ, JR.
                                          February 27, 1998
COMPUTER BASED SYSTEMS, INC.

               FROM THE CIRCUIT COURT OF FAIRFAX COUNTY
                        Jane Marum Roush, Judge

      This appeal involves a lease dispute between the tenant of

office space in a building formerly owned by a bankrupt

partnership and the subsequent purchaser of that property at a

foreclosure sale.    Specifically, we consider whether the lease

permitted the tenant to set off debts the tenant alleged were

owed it by the partnership against rents owed to the new owner

of the property.    We further consider the effect of a provision

in the lease for an extension of its term at “market rates.”

      We recite only the facts necessary to our resolution of

this appeal.    Prior to a foreclosure sale in the summer of 1995,

the building in question was the property of Old Reston Limited

Partnership (Old Reston).     Roy J. Bucholtz and Harold O. Miller,

partners in a professional corporation for the practice of law,

were the general partners of Old Reston and leased space for

their law practice in the building.    In June 1992, Miller left

the practice of law in Virginia and relocated to Florida.

Bucholtz formed Roy J. Bucholtz, P.C., a new professional
corporation, and continued his law practice in the same

location.

     Bucholtz alleges that after Miller moved to Florida

Bucholtz discovered that Miller had improperly withdrawn funds

from Old Reston.      In order to “equalize” the alleged imbalance

in the Old Reston account resulting from Miller’s actions,

Bucholtz, as general partner of Old Reston and principal of Roy

J. Bucholtz, P.C., entered into a new lease between these two

entities for the office space used for Bucholtz's law practice.

In pertinent part, the lease included the following provision:

     Lessee and/or Roy J. Bucholtz or heirs, successors or
     assigns shall have the right of setoff and deduction
     from money owed by Lessor to Lessee and/or Roy J.
     Bucholtz or heirs, successors or assigns.

(Emphasis added.) *

     The term of the lease was from April 1, 1993 to March 31,

1996 at a monthly rental rate of $2,227.50.     A further provision

in the lease permitted Bucholtz to renew the lease for two

consecutive three-year terms “at market rates” upon specified

notice to the lessor.

     *
      Apparently because of the emphasized language, the parties
have not drawn a distinction between the rights and obligations of
Roy J. Bucholtz, P.C., the actual lessee, and Roy J. Bucholtz
individually. Accordingly, hereafter we will simply refer to
“Bucholtz” to mean either depending upon the context in which the
reference is made.

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     In December 1994, Old Reston filed for bankruptcy.    During

the period prior to the bankruptcy, Bucholtz paid no rent to Old

Reston.   Instead, payment was made by the professional

corporation to Bucholtz individually and “credited as if it was

rents paid to Old Reston” so as to reduce the amount of the

“debt” Bucholtz alleged was owed him by Old Reston.   Bucholtz

maintained that he received these payments in his capacity as a

general partner of Old Reston.

     Computer Based Systems, Inc. (CBSI) purchased the building

owned by Old Reston in a foreclosure sale in July 1995.   CBSI

acknowledged that the purchase was subject to the existing lease

with Bucholtz.   However, CBSI disputed any obligation to honor

the setoff provision in the lease, and thereafter Bucholtz paid

rent, “under protest,” in accord with the terms of the lease

into an escrow account for the benefit of CBSI.   CBSI

subsequently sought to terminate the lease at the conclusion of

its original three-year term.    Bucholtz responded to the notice

of termination by giving notice of its intent to exercise the

first three-year extension of the lease.

     On April 9, 1996, Bucholtz filed a petition against CBSI,

seeking a declaratory judgment that under the terms of the lease

it was entitled to continue setting off rent against amounts

still alleged to be owed Bucholtz individually by Old Reston.

The petition further sought a declaration that the option for

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the first three-year extension of the lease had been properly

exercised.

     CBSI filed an answer, grounds of defense, and counterclaim,

asserting that it had given Bucholtz notice of its intention not

to renew the lease, which voided the tenant's option to extend

the lease.   In the alternative, CBSI asserted that Bucholtz's

current rental payments were less than “market rates” as called

for in the lease, thus placing Bucholtz in default.   Finally,

CBSI sought judgment for possession of the office space and for

rent from March 31, 1996 at “reasonable market value.”

     Following a two-day hearing, the chancellor orally ruled

that the lease was valid, CBSI had “ratified and affirmed” it

subsequent to the foreclosure sale, and Bucholtz was entitled to

exercise the extension option and had properly done so.   The

chancellor further ruled, in a subsequent decree, that Bucholtz

was not entitled to exercise the setoff provision of the lease

“because there is no money owed by the former Lessor,” Old

Reston, to Bucholtz.   Although Miller had testified that he had

not made any improper withdrawals of partnership assets from Old

Reston, the chancellor found this testimony “to be wholly

incredible and . . . that Mr. Miller looted this partnership.”

Thus, the chancellor found that Bucholtz's claims were against

Miller personally.

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     The chancellor's rulings were incorporated into a decree

entered on November 15, 1996.   The decree further ordered that

the parties seek an agreement on the appropriate rental at

“market rates” for the renewal term or, in the alternative, that

a panel of real estate brokers be selected by the parties to

determine the appropriate rate “all to be completed within

ninety days.”

     Twenty-one days later, on December 6, 1996, the chancellor

denied a motion to stay the November 15, 1996 decree, which then

became final.   We awarded an appeal to Bucholtz challenging

those portions of the final decree which denied the right to

setoff under the terms of the lease and the establishment of a

panel of real estate brokers to determine market rates after the

court no longer had jurisdiction over the matter.    CBSI by

assignment of cross-error also appeals the manner in which the

chancellor sought to determine the “market rates.”

     Bucholtz first contends that the chancellor erred in ruling

that Old Reston was not indebted to Bucholtz and, therefore,

that CBSI was not bound to honor the setoff provision of the

lease.   We disagree.

     The chancellor found, and CBSI does not dispute, that CBSI

accepted the lease as part of its acquisition of the building.

Indeed, CBSI asserted the right to receive rent from Bucholtz

under the lease.   Nonetheless, CBSI asserts that the setoff

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provision is not enforceable as a matter of law, because it

would permit Bucholtz, a partner of Old Reston, to favor himself

over the other creditors of that partnership.   We need not reach

this issue because we agree with the chancellor that the

evidence does not establish that Old Reston was indebted to

Bucholtz.

     It is fundamental and well settled that “in the absence of

an agreement, express or implied, between partners in respect to

their shares in the profits and losses of the business, they are

to share equally.”    Legum Furniture Corp. v. Levine, 217 Va.
782, 787, 232 S.E.2d 782, 786 (1977).    Moreover, “the interest

of a partner in the partnership assets, real and personal, is

his share of the profits and surplus after the payment of all

partnership debts.”    Savings and Loan Corp. v. Bear, 155 Va.
312, 331, 154 S.E. 587, 593 (1930).   Thus, Bucholtz was entitled

to an equal share of the profits, if any, of Old Reston and to

have any lawful debts owed him by the partnership paid to him.

     In this context, Bucholtz asserts that he was attempting to

“equalize” the “payments” by Old Reston to Miller through the

provision for the setoff in the lease.   Yet Bucholtz himself

concedes, and the chancellor found, that the funds taken by

Miller were not proper partnership draws of profit, but amounted

to embezzlement of partnership assets to the detriment of the

partnership and its creditors.   Miller's acts clearly did not

                                  6
create a debt of the partnership in favor of Bucholtz or permit

Bucholtz, the remaining partner, to compound the malfeasance by

“equalizing” the amount wrongly taken by another partner.

Accordingly, assuming, without deciding, that the liability

imposed by the setoff clause was applicable to CBSI as the

“Lessor” under that clause, we hold there was ample evidence to

sustain the chancellor’s finding that no outstanding debt of Old

Reston to Bucholtz ever existed against which the setoff could

be applied.

     We turn now to the remaining issues in this case.      Neither

party challenges the chancellor's finding that Bucholtz properly

exercised the option to extend the term of the lease for three

years.    Accordingly, that finding is conclusive and binding on

appeal.   Both parties, however, challenge aspects of the

chancellor's ruling concerning the lease provision that the

extension would be at “market rates.”   Both parties contend that

the chancellor erred in delegating the determination of an

appropriate market rate to a panel of real estate brokers

without providing for continuing control of the court over the

issue.    We agree.

     Initially, we note that despite the broad power to do full

justice usually afforded to a court sitting in equity, we are

unaware of any authority, by statute or in common law, that

permits the chancellor to delegate the issue before the court in

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this case to an independent panel of real estate brokers.

Although an equity court may from time to time refer matters to

commissioners in chancery or special masters, we are not

persuaded that such a panel of real estate brokers as that

appointed here is encompassed within that authority.   Moreover,

here the chancellor lost jurisdiction over the case twenty-one

days after entry of the November 15, 1996 decree, Rule 1:1, and,

yet, the panel, which had not acted within that period, was

expressly given a period of ninety days to reach a

determination.   Under these circumstances, the chancellor

clearly erred by permitting the panel to act on the issue after

the court would no longer have had jurisdiction over the matter.

     We are left then to consider what action the chancellor

should have taken with respect to the issue of the proper

“market rates” of rental.   Based upon the evidence produced,

Bucholtz contends that the chancellor erred in failing to find

that the original rental rate in the lease was the appropriate

rental rate for the extension period.   We agree.

     It is axiomatic that the failure to produce evidence on an

issue is held against the party having the burden of proof, not

against the party that does not have the burden of proof.      See

Ransom v. Watson's Adm., 145 Va. 669, 679, 134 S.E. 707, 710

(1926); Brothers Construction Co. v. VEC, 26 Va. App. 286, 298,

494 S.E.2d 478, 484 (1998).   Here, the sole evidence in the

                                 8
record concerning “market rates” for the office space was that

following the extension Bucholtz continued to pay, and CBSI

accepted into the escrow account, the same rent Bucholtz had

paid under the original term of the lease.    CBSI had the burden

of producing evidence that this was not the “market rates”

contemplated by the extension provision of the lease for the

space.    Under these circumstances, the chancellor erred in not

finding that the original lease rate was an appropriate market

rate.

        For these reasons, we will affirm that portion of the final

decree which found that Bucholtz was not entitled to apply the

setoff provision of the lease against CBSI, thus entitling CBSI

to the funds in the escrow account and all other rents due under

the lease.    We will reverse that portion of the decree which

would have submitted the determination of market rates of rental

for the extension period to a panel of real estate brokers, and

enter final judgment for Bucholtz declaring that the original

lease rate is the rental rate for the first extension period.

                                                   Affirmed in part,
                                                   reversed in part,
                                                 and final judgment.

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