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BUCHOLTZ v. COMPUTER BASED SYSTEMS, INC. (59952)


BUCHOLTZ v. COMPUTER
BASED SYSTEMS, INC.


February 27, 1998
Record No. 970361

ROY J. BUCHOLTZ, P.C.

v.

COMPUTER BASED SYSTEMS, INC.

OPINION BY JUSTICE LAWRENCE L. KOONTZ, JR.
FROM THE CIRCUIT COURT OF FAIRFAX COUNTY

PRESENT: All the Justices

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discovered that Miller had improperly withdrawn funds from Old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.)[1]

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.

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 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.

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
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 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
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 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
.

 

 

 

 

FOOTNOTES:

[1]
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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