City of Covington v. Covington Landing Ltd. Partnership
| Citation | 71 F.3d 1221 |
| Decision Date | 22 December 1995 |
| Docket Number | No. 94-6038,94-6038 |
| Parties | , Bankr. L. Rep. P 76,734 CITY OF COVINGTON, Plaintiff-Appellant, v. COVINGTON LANDING LIMITED PARTNERSHIP, Defendant-Appellee. |
| Court | United States Courts of Appeals. United States Court of Appeals (6th Circuit) |
Dennis R. Williams (argued and briefed), Adams, Brooking, Stepner, Woltermann & Dusing, Florence, KY, Joseph T. Condit, Condit, McDermott & Stewart, Covington, KY, for plaintiff-appellant.
John S. Sawyer (argued and briefed), Susan J. Hoffmann, Nicholas R. Glancy, Greenbaum, Doll & McDonald, Lexington, KY, for defendant-appellee.
Before: MERRITT, Chief Judge; KENNEDY, Circuit Judge; JOINER, District Judge. *
This case arises out of the Chapter 11 bankruptcy of Covington Landing Limited Partnership (the "partnership"), the entity that operates vessels on the riverfront in Covington, Kentucky, which house restaurants, bars and retail shops. The premises on which these facilities are located have been leased from the City of Covington since 1988. Due to the sale of one of the two original vessels operated by the partnership, the bankruptcy court modified the lease between the City and the partnership. The City appeals, contending that it did not consent to the bankruptcy court's ability to modify the lease, and that, absent its consent, the bankruptcy court lacked the power to order the modifications. The City further contends that it did not agree to the specific modifications made by the court. We affirm.
Covington Landing is a limited partnership with one general partner. Prior to the bankruptcy, the partnership owned and operated two adjacent barge vessels anchored in the Ohio River. One vessel, the Wharf, consisted of multiple levels of restaurants and retail enterprises operated by third parties under lease arrangements with the partnership. The other vessel, the Spirit of America, was a replica of a river steamboat and contained a large restaurant with seating for 550 patrons. The entire complex is located on riverfront property leased by the City of Covington to the partnership in 1988, pursuant to what the parties call the Mooring lease.
The development of the riverfront complex was expensive for both the City and the partnership. The City built docking and adjoining parking facilities at a cost of several million dollars, and the partnership borrowed over $12 million to create the complex. The facilities were in operation for several years, and the partnership found that it generated enough income to meet operational expenses, but insufficient income to service its debts.
The partnership filed a voluntary Chapter 11 petition in October 1992, and began investigating the possibility of selling one of the two vessels. The Sahara Resorts offered to purchase the Spirit for $7.8 million, planning to operate the vessel as a gambling casino in Missouri. The proposed sale presented two hurdles, however. First, it was necessary for the bankruptcy court to approve the sale because it was outside the ordinary course of business. Second, sale of the Spirit affected the partnership's rights to the riverfront property in question, because the Mooring lease obligated the partnership to operate "Floating Restaurant Facility(ies) with not less than 550 seats." On April 12, 1993, the bankruptcy court held a hearing on the proposed sale, at which both secured and unsecured creditors voiced their support. The ensuing colloquy between the court and the attorneys representing the City, the partnership and the limited partners committee reflected that the parties were chiefly concerned with whether the sale would be considered a breach of the Mooring lease and whether the partnership would retain rights to the property after the sale of the Spirit.
The partnership explained that, while the sale proceeds would permit it to formulate and carry out its plan of reorganization, it was essential that the City not declare the sale to be a material breach of the lease such that the partnership would lose its rights to operate the Wharf facility. The partnership also was concerned, as was the partners committee, regarding the future rights to the space to be vacated by the Spirit. The partners committee reported the City's agreement to allow the partnership eighteen months to utilize the space vacated by the Spirit, provided, however, that if the City received a bid from another company, the partnership would have a right of first refusal for a period of thirty days. The partners committee questioned whether the partnership could meet these deadlines.
The City approved the sale, both as lessor and as a creditor, stating that it would not view the sale as a breach of the Mooring lease, and that it did not want the partnership to lose its rights to the Wharf area. The City acknowledged the uncertainties resulting from the sale of the Spirit and the type of facility that would be brought in to replace it, and committed to negotiate in good faith with the partnership regarding all of these issues.
The parties informed the court that they were negotiating an agreed order, the initial draft of which was prepared by the attorney for the partnership, to address the effect of the Spirit's sale on the Mooring lease. The hearing was adjourned for two hours to permit the parties to negotiate the terms of the draft more fully, resulting in the deletion and modification of many of the original terms of the draft. As negotiated, the agreed order states that the sale of the Spirit does not constitute a breach "such as will result in the Debtor losing its rights under the Mooring Lease with regard to the Wharf and its operation." The agreed order establishes the base rental payments for the Wharf area alone at $3000 per month, an increase over the Mooring lease rent applicable to the Wharf. The parties' dispute in this case centers on paragraph three of the agreed order:
The City and the Debtor have agreed that they will negotiate, in good faith, to reach by June 30, 1993, an amended and restated Mooring Lease modified to reflect the sale and removal of the [Spirit]. Any amended and restated Mooring Lease shall be subject to approval by the Court. In the event no agreement is reached by June 30, 1993 as to an amended and restated Mooring Lease, the City and Debtor reserve all rights to such appropriate relief from the Court with regard to the ongoing terms of the Mooring Lease relative to the space formerly occupied by the [Spirit] and its relationship to the space leased by the Debtor for the Wharf.
After the amendments to the agreed order were set forth on the record, the partners committee again expressed its concern that the order clearly state that the sale not be considered a breach of the lease. The City replied:
The City's position is that we didn't want to stand in the way of the sale of the [Spirit] this morning and did not want to interfere with the rights of the partnership to continue to operate the wharf operation. However, we are not in agreement with that very valuable space to remain open forever and Mr. Williams' [another City attorney] comment this morning that we didn't object to the sale was in the context that we would give them 18 months to find something else for that boat's space. That is still our position. We believe the language as drafted is acceptable but we are going to negotiate to try to give them a reasonable time but we are not going to give them forever.
(Emphasis added.)
In the weeks following entry of the agreed order, the parties negotiated amendments to the Mooring lease but could not reach an agreement. The City then filed a motion requesting the court to require the partnership to assume or reject the Mooring lease, taking the position that the partnership was entitled to a lease for the Wharf facilities only, and that the partnership had no rights to the river frontage vacated by the Spirit. The bankruptcy court denied the City's motion in October 1993. In determining whether the partnership retained any rights to occupy the space vacated by the Spirit, the bankruptcy court stated:
[T]he Debtor should be entitled to rely upon not only the specific language of the Agreed Order but the remarks of counsel for the City made upon the record in open court. Those remarks included the City's acquiescence to a period of 18 months for the Debtor "to find something else for the boat's space." Clearly the Debtor relied upon these and other statements in securing this Court's permission to sell the Spirit and they became part of the entire transaction. The City is bound by the terms it agreed to the same as the Debtor.
The bankruptcy court held that the partnership was entitled to eighteen months from April 12, 1988, to make use of the vacant space.
After an evidentiary hearing to determine appropriate rental terms, the court divided the Mooring lease into two separate leases, one pertaining to the Wharf area, and the other pertaining to the area formerly occupied by the Spirit. The Spirit lease has a use provision similar to that in the Mooring lease, which obligates the partnership to use the premises "for the purpose of docking a floating restaurant facility with not less than 550 seats and such purposes related thereto, or such other use as may be approved by the City in the exercise of its reasonable discretion[.]" The bankruptcy court modified the rent schedule, increasing the base rentals for the first ten years under the lease, decreasing it for the ensuing years, but increasing the rent based on gross sales. The court approved both leases in its January 1994 order...
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