Bank of Nova Scotia v. St. Croix Drive-In Theatre

• Decision Date: 16 December 1982
• Docket Number: Civ. No. 80/88.
• Citation: 552 F. Supp. 1244
• Parties: BANK OF NOVA SCOTIA, Plaintiff, v. ST. CROIX DRIVE-IN THEATRE, INC., Marvin Mahan, St. Thomas Drive-In Theatre, Inc. and H.E. Lockhart Development Corp., Defendants.
• Court: U.S. District Court — Virgin Islands

552 F. Supp. 1244

BANK OF NOVA SCOTIA, Plaintiff, v. ST. CROIX DRIVE-IN THEATRE, INC., Marvin Mahan, St. Thomas Drive-In Theatre, Inc. and H.E. Lockhart Development Corp., Defendants.

Civ. No. 80/88.

District Court, Virgin Islands, D. St. Croix.

December 16, 1982.

Warren B. Cole, Christiansted, St. Croix, V.I., for plaintiff.

Joel H. Holt, Christiansted, St. Croix, V.I., for defendants Mahan, St. Croix Drive-In, Inc. and St. Thomas Drive-In, Inc.

John G. Short, Charlotte Amalie, St. Thomas, V.I., for defendant Lockhart Development Corp.

ACTION FOR DEBT AND FORECLOSURE OF MORTGAGE

O'BRIEN, District Judge.

MEMORANDUM OPINION AND JUDGMENT

The genesis of this action is a debt incurred by several of the defendants for which another defendant agreed, in part, to act as surety. The trial was held on July 20, 1982. The plethora of memoranda submitted by the respective parties, both before and after the trial, constitute a monument to the problems inherent in complex financial dealings when the intent of the parties is not clearly defined.

I. FINDINGS OF FACT

The St. Croix Drive-In, Inc. ("St. Croix Drive-In") was pleased with the success of its theatre operation, and decided to expand to St. Thomas. At the same time, it wanted to improve its St. Croix facility. It needed money to accomplish both objectives. In December, 1971, the Bank of Nova Scotia ("BNS") agreed to supply the funds. A loan agreement was signed among the bank, St. Croix Drive-In, St. Thomas Drive-In, Inc. ("St. Thomas Drive-In"), which was the subsidiary corporation created by St. Croix Drive-In to build and operate the St. Thomas facility, and certain individuals. By the terms of that agreement, the bank was to lend St. Croix Drive-In $400,000. Of that sum, St. Croix Drive-In would advance $250,000 to St. Thomas Drive-In. Various mortgages, guaranties and other instruments of debt and security were agreed upon.

The money was loaned by the bank, the specific advance was made by St. Croix Drive-In to St. Thomas Drive-In, the drive-in theatre on St. Thomas was built, and it commenced operations. The St. Thomas Drive-In was situated on land leased from H.E. Lockhart Development Co. ("Lockhart"), for a ten year term with renewal options.

The actual instruments creating the debt to BNS were five promissory notes of varying amounts, but totaling $400,000, which coincided with the dates the funds were placed in the St. Croix Drive-In account by BNS. The last note, for $68,000, was dated May 12, 1972. All other instruments of debt as between all parties and the bank were either superfluous, or were security instruments and guaranties.

When all the paperwork, superfluous or otherwise, was completed, St. Croix Drive-In was in debt to BNS in the amount of $400,000. That payment was guarantied by St. Thomas Drive-In, and the two principals in the theatre corporations, Louis Principe and Marvin Mahan. There was also a mortgage on the St. Croix Drive-In property on St. Croix, and a leasehold mortgage on St. Thomas Drive-In's property on St. Thomas leased from Lockhart.

And, finally, there was one other document of importance. Designated a "stipulation", it provided that, under certain conditions, Lockhart would be required to assume and pay the $250,000 leasehold mortgage. The parties to the stipulation (whose draftsmanship is of uncertain origin) were: BNS, St. Thomas Drive-In, and Lockhart. Its essential paragraph stated:

IT IS HEREBY AGREED that Landlord will not cancel the lease of Tenant without first serving notice on the Bank in writing of its intention to do so and granting Bank fifteen (15) days from the date of said notice to cure any defects on behalf of Tenant. Landlord further agrees that in the event Tenant shall for any reason default in said mortgage and as a result of such default mortgagee shall declare the mortgage due and payable in full, or shall default in terms of the aforesaid lease to the extent that Landlord shall avail itself of the remedy of cancellation while the premises are still encumbered by the said mortgage, Landlord will exercise the right of cancellation provided for at paragraph 12 of said lease, and upon cancellation thereof, will assume the remaining unpaid principal balance of the mortgage and any accrued interest thereon in all respects as though Landlord had originally executed said mortgage and mortgage note accompanying the same and will henceforth be deemed the mortgagor. This agreement, however, shall be limited to the amount due on the mortgage not exceeding TWO HUNDRED FIFTY THOUSAND DOLLARS ($250,000.00) and Landlord shall under no circumstances be responsible for a greater principal amount than the aforesaid $250,000.00.

While at all times the instruments of debt were called "demand" loans, as between the bank and St. Croix Drive-In, payments were structured under an agreed-upon system by which there would be monthly payments of interest as it accrued, and monthly payments of $5,555.56 toward the principal. The loan under that agreement would be retired in six years, before expiration of the ten year lease term. Lockhart believed that the loan was to be retired by installment payments, but did not know what the monthly payments were to be.

In 1972 and through March, 1973, the payments were made according to the agreement. The bank had set the $400,000 loan up as, in fact, two loans to St. Croix Drive-In: one for $150,000 for the St. Croix facility, and one for $250,000 for the St. Thomas facility operated through its subsidiary. As payments of interest were made during that 1972-73 period, the payments were credited to the interest due on the entire amount. However, the $5,555.56 payments, when made, were credited only to the $150,000 and were reflected on the separate ledger card kept for that amount. Because of the result reached herein, we do not determine the efficacy of this arrangement as to Lockhart.

Problems of repayment on the described installment plan arose in early 1973, however. An internal bank memorandum dated May 18, 1973, describes the loan as four months in arrears. Rather than invoke all of its rights under the multitude of debt and security instruments, however, the bank agreed to the St. Croix Drive-In's request for a six-month moratorium on principal payments, which eventually stretched into a year. Even later, BNS agreed to modify the payment schedule and monthly payments were to be made which provided for interest as it accrued, and a small payment toward principal.

On May 8, 1974, the bank made its first contact with Lockhart. A letter was dispatched by a bank official advising that the loan was in default. It was giving such notice, the bank said, "in the event we choose to declare the mortgage due and payable in full in the lite (sic) of the stipulation dated November 11, 1971."

The record is clear that upon receipt of the letter, Herbert Lockhart called the bank and discovered that, after 2½ years, no payments had been credited on the $250,000.00 allocated to St. Thomas Drive-In. He expressed surprise. The bank initiated only three other contacts with Lockhart. All were letters from the bank's counsel, dated January 16, 1975, November 3, 1976 and March 2, 1981 respectively. All demanded that Lockhart make good on the $250,000 plus accrued interest. All requests were ignored. Mr. Lockhart, as president of Lockhart, represented his corporation in all dealings with the parties.

Lockhart also refused to attend any meetings with the bank designed to resolve the default. Lockhart was not a participant, nor did it have any knowledge of, the moratorium or other modifications to the loan. Lockhart did know that efforts were being made to work things out, and did nothing to impede those efforts. In fact, as landlord, Lockhart reduced the St. Thomas Drive-In monthly rent, and acceded to Mahan's request to be patient while attempts were made to sell the asset and pay the debts. A sub-lease of the St. Thomas facility was made without Lockhart's knowledge or consent.

The situation did not improve, and in May, 1979, Mahan pressed the bank to take action against Lockhart. Obviously, he considered that if this was done, at least $250,000 of the loan would be paid by someone other than himself, and St. Croix Drive-In would rid itself of a major headache. Mahan testified that the bank promised action within two weeks.

The two weeks stretched to nearly a year, and it was not until April 18, 1980 that the bank filed an action in debt and foreclosure against both the St. Croix Drive-In and the leasehold on St. Thomas. Curiously, the bank did not seek anything against Lockhart in this action, but named Lockhart only as an entity with an interest in the St. Thomas leasehold property sought to be foreclosed, under 28 V.I.C. § 532.

On March 26, 1981, the bank, in a separate action, sought to recover $250,000 plus accrued interest from Lockhart in an action in debt.

The lease between St. Thomas Drive-In and Lockhart expired in late 1981, the option to extend its initial ten-year term having never been exercised.

Both actions were consolidated for trial, and the proceeding took place before the Court on July 20, 1982. The bank filed an amended complaint in the consolidated action, seeking judgment in debt for the full amount owing from St. Croix Drive-In and its guarantor, St. Thomas Drive-In. It seeks judgment against Lockhart for $250,000 of the debt owing plus interest accrued against that amount. And, it seeks foreclosure of the St. Croix Drive-In mortgage on St. Croix, and full foreclosure of the leasehold mortgage against Lockhart, claiming that since Lockhart was to take over the mortgage and debt, the fee ownership of that property is now fully subject to foreclosure.

Not sought at this juncture is any relief from any other individual guarantors of any of the obligations, or persons ostensibly providing security for the loans, such as Louise Augenstein or Dorothy Principe.

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