Theodore N. Lerner signed an agreement with Lord & Taylor
40 years ago for a department store that helped turn his new mall on Rockville Pike into an almost overnight success.
Decades later, that deal became the final obstacle to Lerner’s plans to convert the retail center into an open-air town center aimed at attracting a new generation of shoppers.
On Friday, six jurors in federal court awarded Lord & Taylor, the last holdout in the now closed and half-demolished White Flint Mall, $31 million — after deciding that Lerner’s company reneged on a contract to keep an “enclosed mall” open until at least 2042.
The verdict delivered a public defeat to Lerner, head of the mall’s ownership group and majority owner of the Washington Nationals baseball team, and it could leave Montgomery County with a series of abandoned lots along a prominent stretch of Rockville Pike for years to come. A Lerner attorney said the judgment could affect the economic viability of plans to convert the property into a bustling mix of apartments, shops, hotels and more.
The fight over White Flint comes as shoppers abandon many malls in favor of more lively retail experiences and cheap buys online. Experts said that from the mid-1950s to 2005 about 1,500 malls were built in the United States, but as many as
500 to 1,000 could fail or be redeveloped, while dominant players such as the Tysons malls continue to thrive.
Both sides in the dispute over White Flint agreed that the mall’s fortunes faded years before. Competition grew from nearby Montgomery Mall in Bethesda — now owned by Westfield and just four miles away — after it added Nordstrom, and White Flint had been in a slow decline, first losing an upscale department store called I. Magnin then, years later, Bloomingdale’s.
Lerner Enterprises said it was time to move on. Lord & Taylor disagreed.
“We are gratified that the defendant, White Flint/Lerner, is starting to be held accountable for not honoring its word and intentionally breaching its contract,” said Lord & Taylor attorney Michelle D. Gambino, of the firm Greenberg Traurig, after the verdict. “We want to express our appreciation to our thousands of employees and millions of customers who have supported this store through thick and thin.”
During the mall’s heyday, smaller shops fed off the customers that came for the collection of upscale department stores, unmatched in the region. In 1986, Fouad Khoury opened a store there to sell his distinctly crafted jewelry. The space was the size of a living room, but it put him in the center of crowds drawn to the mall’s grand water features, modern glass elevators and department stores.
“At the time, it was the best mall in the area,” he said.
Khoury Bros. Fine Jewelers grew into a go-to place for Washingtonians and visitors. Khoury doubled the size of his store, then doubled it again.
Even though he estimates that the mall’s closure cost him hundreds of thousands of dollars, Khoury said he thinks Lerner made the right decision. He has a store in Tysons Galleria in McLean but said he hopes that when Lerner and his family reconstitute White Flint in coming years, they will welcome him back.
“He will not lead us astray,” Khoury said.
Others disagree. Although Lord & Taylor was the last to remain open, it wasn’t alone in fighting the mall’s redevelopment and the alleged hardball tactics Lerner Enterprises used in emptying storefronts.
As early as 2009, according to court documents, Lerner Enterprises began negotiating to get shop owners to leave. The mall’s owners spent at least $14 million buying out tenants, in increments of $20,000, up to as much as $2 million.
By the time Bloomingdale’s closed, it was clear that Lerner had moved on. That year, Montgomery County initially approved the company’s plans to build a series of new shops, apartments, hotels and office buildings.
“In the end, it was terrible,” said Danny Sayag, who owned and operated Rainbow Salon near the food court for more than 10 years. Sayag said entry gates would sometimes not open on time, and management was unresponsive to requests. He complained about paying full rent and says he was threatened with legal action.
“It was like, ‘We just want your money, we want to suck your blood,’ ” he said.
The mall’s longtime manager, Desharri Bell, testified during the trial that Lerner Enterprises continued to professionally manage the center to the end.
Dave & Buster’s, the family restaurant and game room, also went to court over the redevelopment. But Lerner Enterprises argued that a Dave & Buster’s in Anne Arundel County had already violated the White Flint lease, which barred the company from opening additional locations nearby. A judge dismissed the restaurant’s complaint.
That left only Lord & Taylor, now owned by Canadian firm Hudson’s Bay Co. The store, at which designer Donna Karan attended its black-tie opening, still enjoys a prominent location on Rockville Pike, and intends to stay, but now the stretch looks like the set of a zombie movie.
Outside the store on a morning during the trial, the hedges were being trimmed and the sidewalks swept, even if few were there to notice.
The entrance where P.F. Chang’s and Dave & Buster’s once hosted birthday parties had
softball-size holes in its windows. Behind it, empty lots were scattered with rubble.
Inside, clerks helped about a dozen shoppers. One customer found three pairs of shoes for $80. Another said she never missed a sale.
“It’s my favorite store,” said Lynne Goss of Gaithersburg. “I think it’s amazing they’ve been able to keep up such good customer service. I worry about whether it is going to be able to make it.”
Still, business has fallen sharply. The company’s attorneys said only 300,000 visits from customers are expected this year, down from about 1.2 million last year. Sales are down almost 50 percent from last year.
Lord & Taylor’s attorneys argued that when Bloomingdale’s announced in 2011 that it would close, Lerner Enterprises should have found another anchor but was too busy forcing out tenants and pushing redevelopment.
They requested $35.4 million to upgrade the store to fit its new surroundings and $31 million for lost business but were awarded about half.
“Was it impossible for them to run a mall? Absolutely not. They just didn’t want to,” argued Gambino, the Lord & Taylor attorney.
Lerner did not testify but said in a deposition, from which attorneys read in court, that it was“not practical” to revive the mall.
“We tried very hard to lease it and to continue to lease it,” jurors were told Lerner said.
His attorneys argued that the company could not have saved White Flint, pulling back the curtains on the mall’s finances to show how badly it was suffering. Bloomingdale’s sales fell by a third from 2007 to 2008. The mall, which made $9 million in profit in 2003, made $6 million in 2010. By 2013, when Lerner was buying out tenants, the mall was losing $500,000 a year.
Barry Kaufman, a former Lord & Taylor executive paid more than $600 an hour by Lerner to serve as an expert witness, testified that once Bloomingdale’s closed there was “no future, no viability for White Flint as an enclosed mall” because other traditional anchors, such as Sears and J.C. Penney, had either ceased opening new stores or already opened elsewhere nearby.
“When Bloomie’s closed its store, the mall was dead. Period,” Kaufman said.
An attorney for Lerner Enterprises — Scott Morrison of the firm Katten Muchin Rosenman — said the company plans to appeal. He said that demolition of the mall is expected to be complete by January or February but that the damage award “affects the entire profit profile” of the town center project.
“We are very disappointed. It’s going to badly hinder White Flint’s efforts to redevelop the White Flint Mall,” Morrison said.
Estimates at trial of how long it would take for the first phase of White Flint to be built ranged from 3
Wegmans, the popular grocer, was in extensive negotiations to open at White Flint, according to court documents, and still could.
Sayag, the salon owner, will not be joining it. By the time he closed Rainbow Salon, in January 2014, he said he had the only business left in the entire wing of the mall. The next day, Sayag opened a new place — New Wave Salon — nearby.
“It was the best thing I ever did,” he said.