PCH Associates, In re
| Decision Date | 27 October 1986 |
| Docket Number | No. 86-5036,No. 1663,D,1663,86-5036 |
| Citation | 804 F.2d 193 |
| Parties | , Bankr. L. Rep. P 71,517 In re PCH ASSOCIATES, f/k/a Simon Associates, Debtor. LIONA CORPORATION, N.V., Plaintiff-Appellant, v. PCH ASSOCIATES, Defendant-Appellee. ocket |
| Court | U.S. Court of Appeals — Second Circuit |
Michael L. Temin, Philadelphia, Pa. (Wolf, Block, Schorr & Solis-Cohen and Patrick Matusky, Philadelphia, Pa., Winick & Rich, P.C. and Jeffrey N. Rich, New York City, of counsel) for plaintiff-appellant. Kotite Kaplan Bodian & Eames and David T. Eames and Gary P. Kaplan, New York City for amicus curiae, Mobiliaria Agricola y Financiera Internacional S.A. in support of plaintiff-appellant.
Marc S. Kirschner, New York City (Gelberg & Abrams and Darren H. Goldstein, New York City, of counsel) for defendant-appellee. Stroock & Stroock & Lavan and Barbara G. Kaplan, New York City for amicus curiae, Official Unsecured Creditors' Committee of PCH Associates in support of defendant-appellee.
Before PRATT and MINER, Circuit Judges, RE, Chief Judge, U.S. Court of International Trade, sitting by designation.
Liona Corporation, N.V. ("Liona") appeals from a judgment of the United States District Court for the Southern District of New York (Tenney, J.) affirming an order of the bankruptcy court (Lifland, J.) in favor of debtor PCH Associates ("PCH"). The District Court held that the sale-leaseback arrangement between Liona and PCH was a joint venture agreement rather than a non-residential lease subject to the provisions of section 365(d)(3), (4) of the Bankruptcy Reform Act of 1978, as amended by the Bankruptcy Amendments and Federal Judgeship Act of 1984, 11 U.S.C. Sec. 365(d)(3), (4) (Supp.III 1985) ("Bankruptcy Code" or "Code"). We affirm the judgment of the district court on the ground that the sale-leaseback arrangement is not an unexpired nonresidential lease within the contemplation of the Code.
This dispute centers around the true nature of a transaction that was "sharply tailored by sophisticated parties," PCH Associates v. Liona Corporation N.V., 55 B.R. 273, 274 (Bankr.S.D.N.Y.1985), and was admittedly structured as a sale-leaseback arrangement for tax and investment advantages. PCH, a Pennsylvania limited partnership formed in 1976 and formerly known as Simon Associates ("Simon"), owns and operates the Philadelphia Centre Hotel ("hotel"). Prior to September 1981 and the transaction at issue on this appeal, PCH's predecessor, Simon, held title to both the hotel and the land upon which it is situated. In 1980, Richard Bernstein, an experienced real estate operator and investor, learned that the hotel was for sale. In addition to existing mortgages and seller-provided financing, he determined that $9,000,000 was needed to acquire, renovate, and provide working capital for the hotel. Bernstein located a group of United States investors willing to supply $4,000,000 as new limited partners of PCH. He then approached Fidinam, a consortium of financial service companies, to place the remaining $5,000,000 investment.
Bernstein required a structure that would allocate all the tax benefits of depreciation of the hotel to PCH. Fidinam, in turn, required an investment for its client that would be evidenced by ownership of a tangible asset and would guarantee a 12% fixed annual rate of return, with an additional share contingent on the hotel's cash flow. Fidinam did not want its client involved in the daily management of the hotel. Upon reaching agreement, the parties' lawyers structured the transaction to encompass Bernstein's and Fidinam's requirements. Ultimately, Liona, a Netherlands Antilles corporation, became the beneficiary of Fidinam's negotiations.
In September 1981, the requirements of the parties were fulfilled through a "Sale-Leaseback Agreement" and a "Ground Lease" whereby the land owned by PCH, but not the hotel, was sold to Purchase Estates, Ltd. and immediately leased back to PCH. 1 Ultimately, the land interest of Purchase Estates, Ltd. was assigned to Liona. Thus, Liona held title to the land and leased it to PCH, which owned and managed the hotel.
Section 1.01 of the Ground Lease provided for an initial term of 33 years, renewable for four terms under section 42.01, for a total of 165 years. Rent was set at a minimum annual rate of $600,000 in section 3.01, with a percentage rental based upon a percentage of increases in the hotel's gross revenues provided in section 3.02. Section 3.04 provided for an adjustment of the annual rent if the "Landlord's Investment" fell below $5,000,000. In such instance, the annual rent would be reduced to 12% of the "Landlord's Investment."
Section 3.10 of the Ground Lease further provided that:
It is understood and agreed that the amount herein provided paid to Landlord in addition to the minimum net annual rental, although based upon a percentage of Tenant's revenue during each year, is rent, and Landlord shall in no event be construed or held to be a partner or associate of Tenant in the conduct of its business, nor shall Landlord be liable for any debts incurred by Tenant in the conduct of said business or otherwise, but it is understood and agreed that the relationship between the parties hereto is, and at all times shall remain, that of Landlord and Tenant.
Appellant's App. at 142 (emphasis supplied).
Article 34 of the Ground Lease also provided that:
This Lease contains all the promises, agreements, conditions, inducements and understandings between Landlord and Tenant relative to the Premises and there are no promises, agreements, conditions, understandings, inducements, warranties or representations, oral or written, expressed or implied, between them other than as set forth herein or in the Contract.
In November of 1984, PCH filed for reorganization under section 301 of the Bankruptcy Reform Act of 1978. Since that date, PCH has operated the hotel as a debtor-in-possession under sections 1107 and 1108 of the Code. On December 21, 1981, pursuant to section 365(d)(3), (4) of the Code, Liona filed an application with the bankruptcy court seeking an order directing PCH to continue paying rent to Liona according to the terms of the Ground Lease. PCH subsequently instituted an adversary proceeding seeking a declaration that the Ground Lease was not an unexpired nonresidential lease within the scope of section 365(d)(3), (4) of the Code, but rather constituted a joint venture or a subordinate financing scheme.
The bankruptcy court found for PCH, concluding that, even though the transaction was labeled a sale and a lease, the true nature of the arrangement was that of a joint venture and therefore no landlord/tenant relationship existed. PCH Associates v. Liona Corporation, N.V., 55 B.R. 273, 283 (Bankr.S.D.N.Y.1985). As a The district court affirmed the bankruptcy court's conclusions, holding that: (1) it was not error to permit parol evidence to clarify the terms of the agreements, Liona Corporation, N.V. v. PCH Associates, 60 B.R. 870, 874 (S.D.N.Y.1986); (2) it was not error to permit Bernstein, now president of the general partner of PCH, to testify as to his understanding of the parties' intentions and as an expert regarding what terms are usual in such agreements, id. at 875; and (3) the elements of a joint venture were present, id. at 876-78.
result, the court held that Liona was not entitled to collect rent from PCH under section 365 of the Code. Relying on Bernstein's expert testimony, the bankruptcy court pointed to a number of items in the arrangement considered unusual in an actual sale agreement, 2 and in a true lease. 3 55 B.R. at 276-78. Finding the terms of the contracts ambiguous, the court relied on extrinsic evidence of the parties' intent in formulating the transaction as a sale and leaseback, also provided by Bernstein in part, to determine the true nature of the transaction. 55 B.R. at 281-83
Liona appeals from the district court's affirmance of the bankruptcy court's order.
DISCUSSION
Two issues are presented on this appeal: First, whether the bankruptcy and district courts, under Pennsylvania law, properly considered parol evidence of the parties' intent to determine the true nature of the documents, and second, whether the Ground Lease is a lease within the meaning of section 365(d)(3), (4) of the Bankruptcy Code.
As recognized by both the district court and the bankruptcy court, and as agreed by The bankruptcy judge concluded that the Sale-Leaseback Agreement and the Ground Lease were ambiguous because they were reasonably susceptible to more than one interpretation. 55 B.R. at 280. Liona counters that the form in which the parties chose to construct their agreement is controlling and therefore no ambiguity existed. However, the district court disposed of this argument because it found a conflict between the caption and form of the Ground Lease and Sale-Leaseback Agreement, and the provisions contained within those contracts. Merely by labeling a transaction a "lease," when its contents spoke of some other transaction, did not remove all ambiguity. 4 60 B.R. at 874. Thus, the district court concluded that extrinsic evidence was properly admitted to clarify what exactly the parties intended to create.
the parties, Pennsylvania law controls the question of the admissibility of parol evidence. Pennsylvania law permits the use of parol evidence to explain the parties' intent when the true nature of the contract is at issue or when the contract is ambiguous. Waldman v. Shoemaker, 367 Pa. 587, 591, 80 A.2d 776, 777 (1951); Biddle v. Biddle, 363 Pa. 426, 429-30, 70 A.2d 281, 283 (1950); Howell v. Wheelock, 115 Pa.Super. 599, 602-03, 176 A. 252, 253 (1934)
The district court was correct in looking beyond the form of the Sale-Leaseback Agreement and Ground Lease for clarification of the true nature of the...
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