Genovese Drug Stores, Inc. v. Connecticut Packing Company, Inc., and Fotomat Corporation

Citations: 732 F.2d 286; 1984 U.S. App. LEXIS 23763Docket: 493

Court: Court of Appeals for the Second Circuit; April 5, 1984; Federal Appellate Court

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Fotomat Corporation appealed a preliminary injunction issued by the District Court for Connecticut, which prohibited it from operating a film processing business at a shopping center parking lot where Genovese Drug Stores, Inc. operates. The injunction was intended to enforce a restrictive covenant in Genovese's lease, which restricted competing operations. However, the court found that Fotomat had no actual or constructive notice of the restrictive covenant when it leased the area for its kiosk. Consequently, the appellate court vacated the injunction and ordered judgment in favor of Fotomat.

The underlying facts indicate that in 1947, Connecticut Packing Company, Inc. (Copaco) purchased the property where the shopping center is located. In 1970, Copaco transferred part of this property to Bercrose Associates, a partnership of some of Copaco's owners. A Joint Development Agreement between Copaco and Bercrose aimed to develop the shopping center as a single facility, preventing any party from constructing new structures without mutual consent. This agreement was recorded and referenced in the grantor index. In 1971, Bercrose leased part of the property to Genovese, which included a restrictive covenant against leasing to film processing operations such as Fotomat. Copaco's president, Irving Bercowetz, signed a statement agreeing to the lease terms for Copaco's owned portions of the shopping center.

The Consent was attached to the Bercrose-Genovese lease, and on March 10, 1972, a Memorandum of Lease was recorded in Bloomfield land records, indexed under Bercrose as grantor and Genovese as grantee. This Memorandum, required by Conn. Gen. Stat. Sec. 47-19, indicated where the lease could be found but did not mention the restrictive covenant against drive-in photo kiosks or the Consent binding Copaco to the Bercrose-Genovese lease terms. In 1982, Fotomat negotiated with Philip Johnson for leasing space at the shopping center, ultimately agreeing to place a drive-in kiosk on Copaco's property. Copaco's president, Irving Bercowetz, executed a lease for a 36-square-foot area, without disclosing the restrictive covenant. Fotomat relied on Copaco's assurance that there were no restrictions and did not conduct a title search. After placing the kiosk in September 1982, Genovese demanded its removal, leading to a lawsuit filed on November 9, 1982, against Copaco, Bercrose, and Fotomat. The kiosk has since been prohibited from operation by a series of court orders. The District Court, in issuing a preliminary injunction, concluded that Fotomat had constructive notice of the restrictive covenant, a determination that the parties agreed could be resolved based on undisputed facts, without a full trial. It was confirmed that Fotomat had no actual notice of the covenant.

The District Court concluded that Fotomat had constructive notice of the restrictive covenant in the Bercrose-Genovese lease based on two key findings. First, it determined that the Memorandum of Lease was properly recorded under Conn. Gen. Stat. Sec. 47-19, thereby providing notice of all lease terms, including the covenant. Second, the Court found that Fotomat had an obligation to examine the land records of both Copaco and Bercrose. This finding was supported by several points: the Joint Development Agreement was recorded in both chains of title and would have been located by Fotomat; knowledge of this agreement indicated that consent from both property owners was necessary for any construction in the shopping center's parking area; Fotomat failed to secure such consent; the agreement emphasized that separate ownership did not affect tenants; and the close ties between Bercrose and Copaco indicated they should not be treated as distinct entities.

The Court referenced two principles of real estate law: first, restrictive covenants aimed at limiting commercial competition are strictly construed; and second, land records should provide clear guidelines regarding the extent of searches necessary for buyer protection. While the District Court was confident in its interpretation of the law, it expressed some uncertainty about whether Connecticut courts would interpret section 47-19 to mean that a lease notice inherently provides constructive notice of a restrictive covenant affecting other properties, especially if such covenants restrict competitive activity. Other jurisdictions have required that beneficiaries of restrictive covenants record them separately and have held that lease notices only inform about terms directly affecting the leased property unless there is an interest in the property subject to the lease notice.

The court disagrees with the District Court's assertion that Fotomat had a duty to investigate the Bercrose chain of title regarding the Memorandum of Lease. Generally, a buyer or lessee is only responsible for constructive notice of encumbrances in their direct chain of title. Since Fotomat was a lessee of Copaco, it was not obligated to search beyond the Copaco chain. The fact that Fotomat initially considered placing its kiosk on Bercrose property does not impose an obligation to examine that chain. Although a search of the Copaco chain would have revealed the Joint Development Agreement, which required written consent from both property owners for any construction, it did not require Fotomat to search Bercrose’s records. Fotomat's lack of knowledge of the consent requirement and its failure to verify Bercrose's written consent exposed it to potential objections regarding construction on Copaco property. However, Fotomat was not at risk from Bercrose’s lessee based solely on the existence of the Joint Development Agreement. Genovese, aware of the necessity to protect itself from competition, secured Copaco's written agreement related to the Bercrose lease but neglected to record Copaco's restriction in its chain of title, which would have provided constructive notice to Copaco's lessees. Although the Joint Development Agreement indicated a mutual intention not to let separate ownership affect the shopping center's operations, such intentions do not create legal rights beyond the explicit terms of the agreement. Furthermore, parties cannot alter the legal requirements for constructive notice through private agreements.

The District Court's suggestion to treat Copaco and Bercrose as a single entity lacks persuasiveness. While there are similarities between the two, it would be inappropriate to consider either a sham to disregard their separate identities, especially in property ownership matters. Connecticut law does not support disregarding the distinct legal forms of corporations and partnerships for title searches. The doctrine of piercing the corporate veil is intended to prevent unjust barriers to recovery for those injured, but it does not apply here, as Copaco had a formal agreement related to the Bercrose-Genovese lease. Title searchers must rely on the identity of the grantor in deeds or leases and are not obligated to explore the relationships between different entities. Consequently, since Fotomat was not required to search the Bercrose title chain, it had no constructive notice of the restrictive covenant. Genovese, as the beneficiary of the covenant, failed to notify competitors of the restriction by not recording the agreement under Copaco's name. As a result, the court is not inclined to extend the title searcher's duty beyond the lessor's title. Fotomat is entitled to have the preliminary injunction vacated and the claims against it dismissed, referencing relevant case law.

Claims against Fotomat have been dismissed, leaving Genovese's damage claims against Bercrose and Copaco unresolved. Genovese may pursue damages from Bercrose for a breach of the lease covenant and from Copaco for failing to adhere to its Consent agreement regarding Genovese’s lease. Bercrose's lack of written consent to Fotomat does not exempt it from potential liability due to its conduct during Fotomat's lease negotiations and its relationship with Copaco. Copaco may also be liable under its Consent agreement. Relevant case law indicates that while a covenantee can seek damages for a landlord's breach of a restrictive covenant, they cannot seek injunctive relief without notice to the lessee. Genovese may also argue as a third-party beneficiary under the Joint Development Agreement for damages due to unauthorized construction in the parking area. The injunction has been vacated, and the case is remanded for further proceedings. Fotomat is entitled to recover its appeal costs. The District Court, citing state law, highlighted that federal courts must assess equitable remedies based on state law in diversity actions, particularly regarding the necessity of proving irreparable injury for injunctive relief. However, the court asserts that federal law also requires such proof before granting a preliminary injunction. The appeal decision rests on undisputed facts, with no weight given to witness testimony regarding title search law. Fotomat argues that knowledge of the Joint Development Agreement should have led it to conclude that Bercrose would not act without Copaco's consent, which may validate Fotomat's belief regarding the lack of restrictive agreements in Copaco's title chain.

Variation exists among states regarding the obligation of lessees or purchasers to investigate all title chains from a common grantor. In *Guillette v. Daly Dry Wall, Inc.*, the court mandated a search of all conveyances from a common grantor, while *Buffalo Academy of the Sacred Heart v. Boehm Bros.* allowed searching only the land records for the specific parcel. *Dick v. Sears-Roebuck Co.* suggests tenants should examine all deeds from their grantor and predecessors, though it essentially requires examining the deed from the grantor’s predecessor. This interpretation means Fotomat would not need to search Bercrose's chain, as Bercrose is not its lessor and has not contested the kiosk placement or enforced rights under the Joint Development Agreement. If the agreement had encumbered both properties with covenants, Fotomat would have had an obligation to investigate the Bercrose chain. The discussion also casts doubt on whether a search of Bercrose's chain would yield constructive notice of terms beyond the lease itself, especially regarding a third party's agreement. The document leaves unresolved whether constructive notice of a restrictive covenant would be enforceable against Copaco's lessee without prior notice of Copaco's consent. The case is deemed appropriate for resolution by state courts in future matters.