PCH Associates, In re

• Decision Date: 19 November 1991
• Docket Number: D,No. 1302,1302
• Citation: 949 F.2d 585
• Parties: 25 Collier Bankr.Cas.2d 1393, Bankr. L. Rep. P 74,350 In re PCH ASSOCIATES, formerly known as Simon Associates, Debtor. LIONA CORPORATION, INC., Plaintiff-Appellant, v. PCH ASSOCIATES, formerly known as Simon Associates, Westinghouse Electric Corporation, Nico Construction Company, Inc., Defendants, PCH Associates, formerly known as Simon Associates, Defendant-Appellee. ocket 90-5086.
• Court: U.S. Court of Appeals — Second Circuit

Page 585

949 F.2d 585

25 Collier Bankr.Cas.2d 1393, Bankr. L. Rep. P 74,350

In re PCH ASSOCIATES, formerly known as Simon Associates, Debtor.

LIONA CORPORATION, INC., Plaintiff-Appellant, v. PCH ASSOCIATES, formerly known as Simon Associates,

Westinghouse Electric Corporation, Nico

Construction Company, Inc., Defendants,

PCH Associates, formerly known as Simon Associates,

Defendant-Appellee.

No. 1302, Docket 90-5086.

United States Court of Appeals, Second Circuit.

Argued April 15, 1991.

Decided Nov. 19, 1991.

David T. Eames, New York City (Neal A. DeYoung, Bodian & Eames, of counsel), for appellant.

Marc S. Kirschner, New York City (Thomas L. Abrams, Craig S. Gatarz, Jones, Day, Reavis & Pogue, of counsel), for appellees.

Before MESKILL, PRATT and WALKER, Circuit Judges.

MESKILL, Circuit Judge:

Liona Corporation, Inc. (Liona) appeals from an unpublished order of the United States District Court for the Southern District of New York, McKenna, J., entered on December 4, 1990, 122 B.R. 7 affirming an unpublished decision of the United States Bankruptcy Court for the Southern District of New York, Blackshear, J., in favor of the debtor, PCH Associates (PCH). The district court concluded that the "law of the case" doctrine barred Liona's action to enforce its rights in certain property held by PCH. While we agree that the district court properly applied the "law of case" doctrine, we believe that our prior decision in In re PCH Assoc., 804 F.2d 193 (2d Cir.1986) (hereinafter PCH I ), did not conclusively establish the nature of the relationship between PCH and Liona. We conclude that Liona is a secured creditor that holds an equitable mortgage with respect to the land underlying the hotel and is not a joint venturer. Liona, therefore, is entitled to priority in the distribution of the proceeds from the sale of the subject property.

BACKGROUND

This dispute has a rather complex factual and procedural history. In setting forth the background, we assume familiarity with our prior decision in PCH I and with the prior decisions of the bankruptcy and district courts. Accordingly, we focus primarily on the general nature of the relationship between PCH and Liona. ¹ While at various times during the course of events that transpired between the parties to this action other entities were involved in the negotiations, the ultimate participants in the transaction at issue were PCH and Liona.

PCH, formerly known as Simon Associates (Simon), is a Pennsylvania limited partnership. In September 1981, prior to the events that underlie this appeal, Simon owned and operated the Philadelphia Centre Hotel (Hotel) located in Philadelphia, Pennsylvania. Simon also held title to the land and the improvements thereon. In 1980, Richard Bernstein (Bernstein), a real estate developer, became interested in acquiring and operating the Hotel. Bernstein determined that in addition to seller provided financing he would need $9 million to cover acquisition, renovation and startup costs. A group of domestic investors agreed to provide $4 million. These investors acquired Simon's interest in the Hotel property and became new limited partners in PCH.

Bernstein then approached the Fidinam Group (Fidinam), a Swiss based financial services organization that provides investment services for clients, to explore the possibility of securing the remaining $5 million for his venture from its clients. Negotiations ensued between the parties. Bernstein insisted that PCH retain the tax benefits associated with operating the Hotel. Fidinam wanted the deal structured to ensure that its investor group would own tangible assets and would receive a guaranteed annual rate of return. Fidinam also emphasized that its investor group did not Liona, previously a Netherlands Antilles corporation and now a Delaware corporation, was the beneficiary of these negotiations and was the entity established by the foreign investors to facilitate their participation in the transaction. Pursuant to the terms of the agreement, Liona provided PCH with the $5 million that it needed to acquire and renovate the Hotel. ² In return, Liona was to receive title to the land underlying the Hotel, a twelve percent (12%) annual return on the funds it provided and a share of the gross revenues. Liona was to have no management responsibilities. The annual return would be determined by calculating twelve percent of Liona's "Initial Investment" (the $5 million). PCH, however, had the option of repaying Liona, thereby reducing the amount of Liona's Initial Investment. In the event the amount of that Initial Investment was reduced below $5 million, Liona's annual return would be calculated at twelve percent of that reduced amount.

                want to become involved in managing the operations of the Hotel.   After much discussion, Fidinam and Bernstein eventually came to terms
                

On August 25, 1981, the parties signed a formal "Sale Agreement," which essentially provided for a sale-leaseback transaction. Pursuant to the terms of the Sale Agreement, PCH was to convey the land underlying the Hotel to Liona in return for the $5 million. PCH would continue to own the Hotel building itself. At the time of closing, PCH would enter into a "Ground Lease" with Liona, wherein PCH would lease back the land on which the Hotel was situated. This transaction closed on September 24, 1981. On September 25, 1981, Liona recorded the deed and a memorandum of the Ground Lease with the Recorder of Deeds in Philadelphia County. Liona acquired the property subject to three pre-existing mortgages.

The initial lease term was for a period of thirty-three years. PCH, however, had the option of renewing the lease for four renewal terms of thirty-three years each, making the maximum possible term of the lease 165 years. On expiration of the Ground Lease, Liona would regain not only possession of the land but also would obtain title to the Hotel and any improvements. The minimum "fixed" rent for the first twenty-four months of the lease term was $600,000 per year. Beginning in month twenty-five and ending in month thirty-six, Liona was to receive, in addition to the fixed rent, a percentage rent determined by a formula based on the Hotel's occupancy rate for the previous year. During months thirty-seven through the balance of the lease, PCH would pay only a percentage rent based on its gross revenues. Specifically, Liona was to receive twenty percent (20%) of the Hotel's increase in gross room revenue, ten percent (10%) of all increases in gross food and beverage revenues and fifteen percent (15%) of any increase in the gross revenue generated through the rental of the Hotel's commercial space.

In the event that PCH failed to make the payments required under the Ground Lease or to perform other specific obligations thereunder, Liona had the right to retake the land and the Hotel as well as any improvements thereto. Liona also had the right to examine the books and records relating to the Hotel operation, the right to approve of substantial changes to the Hotel building and the right to step in to assume control if PCH did not carry out its obligations. However, Article 3, Section 3.10 of the Ground Lease specifically provided in pertinent part: "Landlord (Liona) shall in no event be construed or held to be a partner or associate of Tenant (PCH) in the conduct of its business, nor shall Landlord be liable for any debts incurred by Tenant in the conduct of said business."

On November 2, 1984, PCH filed for bankruptcy under Chapter 11 of the Bankruptcy Code (Code). PCH continued to operate the Hotel as a debtor-in-possession pursuant to 11 U.S.C. §§ 1107-1108. However, PCH did not make the payments due under the Ground Lease to Liona as specified. Because PCH was in bankruptcy, the The bankruptcy court, Lifland, J., conducted a hearing on this issue and concluded that the arrangement was a joint venture and that section 365 was inapplicable. In re PCH Assoc., 55 B.R. 273, 283-84 (Bkrtcy. S.D.N.Y.1985). That determination was subsequently affirmed in its entirety by the district court, Tenney, J. In re PCH Assoc., 60 B.R. 870 (Bkrtcy.S.D.N.Y.1986) (hereinafter the proceedings conducted by Bankruptcy Judge Lifland and Judge Tenney and the decisions therein will be referred to as "the section 365 proceedings"). On appeal, we affirmed the determination that section 365 was inapplicable given the nature of the transaction involved. PCH I, 804 F.2d 193. Our opinion, however, specifically stated: "It is unnecessary ... to identify the transaction as a joint venture, security agreement, subordinated financing or other investment scheme. Suffice it to say that it is not a bona fide lease." Id. at 199. Indeed, we declared: "We do not reach the issue of whether the Ground Lease and Sale-Leaseback Agreement create a joint venture." Id. at 201.

                automatic stay provision, section 362(a) of the Code, precluded Liona from pursuing any of its nonbankruptcy remedies to the default.   Accordingly, by motion dated December 28, 1984, Liona moved in the bankruptcy court pursuant to section 365 of the Code for an order directing PCH to perform its obligations under the Ground Lease and for adequate protection under Code section 363(e).   Section 365 provides a landlord with a procedure for compelling a tenant to choose either to make the payments due under the lease or to reject the lease and to surrender the property to the landlord.   See 11 U.S.C. § 365(d)(3)-(4).   In response, on January 15, 1985, PCH initiated an adversary proceeding against Liona contending that the agreement was not a "true lease" but rather a "subordinated financing" or a "joint venture" agreement
                

Soon after our decision in PCH I, PCH stopped operating the Hotel. In response, the bankruptcy court granted the third mortgagee relief from the automatic stay imposed by Code section 362 and a foreclosure sale of both the land and the Hotel was scheduled for December 1986. On...