First Bank Nat. Ass'n v. FDIC, Civ. A. No. 94-2197.
| Decision Date | 20 April 1995 |
| Docket Number | Civ. A. No. 94-2197. |
| Parties | FIRST BANK NATIONAL ASSOCIATION, Trustee v. FEDERAL DEPOSIT INSURANCE CORPORATION, Receiver for Meritor Savings Bank. |
| Court | U.S. District Court — Eastern District of Pennsylvania |
Brian P. Flaherty, Wolf, Block, Schorr & Solis-Cohen, Philadelphia, PA, for plaintiff.
Veronica Winter-Saltz, Miles H. Shore, Saul, Ewing, Remick & Saul, Philadelphia, PA, for defendant.
FINDINGS OF FACT AND CONCLUSIONS OF LAW
Plaintiff, First Bank National Association, Trustee ("First Bank"), brought this action for breach of contract against the defendant, the Federal Deposit Insurance Corporation ("FDIC"), pursuant to the Federal Deposit Insurance Act, 12 U.S.C. § 1811 et seq., as amended by the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA"). First Bank alleges that the FDIC, as receiver for Meritor Savings Bank ("Meritor"), is liable for sums due under a sublease of the landmark PSFS building Meritor once occupied at 12 South 12th Street, Philadelphia, Pennsylvania (the "PSFS building"). Jurisdiction arises pursuant to 12 U.S.C. §§ 1819(b)(2)(A) and 1821(d)(6).
The case was tried before the court without a jury on April 5 and 6, 1995. The following constitutes this court's findings of fact and conclusions of law pursuant to Rule 52 of the Federal Rules of Civil Procedure.
Meritor, the owner of the PSFS building, entered into a complex series of lease and sublease agreements with First Bank and various other entities1 during the 1980's. Meritor apparently made these agreements as part of an arrangement to obtain loans. As a result of this series of agreements, First Bank became Meritor's landlord with respect to the PSFS building. The sublease was to run until December 31, 2006, with options to renew the sublease until December 31, 2036.
The Secretary of Banking of the Commonwealth of Pennsylvania declared Meritor to be in an unsafe and unsound condition on December 11, 1992. On the same day, the FDIC was appointed Meritor's receiver. On March 31, 1993, the FDIC disaffirmed Meritor's sublease of the PSFS building pursuant to 12 U.S.C. § 1821(e)(1). From the date of the FDIC's appointment as receiver until the date of the disaffirmance, the FDIC was bound by the terms of the sublease. § 1821(e)(4).
The FDIC concedes liability for the amounts First Bank claims for Meritor's unpaid "fixed quarterly rent" and for taxes, but contests the other items.
The court, of course, must interpret the term "contractual rent" under § 1821(e)(4)(B) of FIRREA as a matter of federal statutory law, not as the parties may define it by contract. They may not limit or expand the recovery of "contractual rent" simply by the word formulation they employ. Otherwise, the intent of the federal law could be undermined. Consequently, we must look behind the words of the lease to the purpose for which the lessee is to pay consideration. We must then determine whether the obligation falls under the statutory rubric of "contractual rent."
While FIRREA does not define "contractual rent," the term "rent" has traditionally meant consideration paid by the lessee for the use and occupancy of the leased property. See Black's Law Dictionary 1297 (6th ed. 1990). The lease sometimes commits the lessee, in return for the use and occupancy of the property, to the payment of periodic lump sums with the lessor paying for other items such as property taxes and maintenance costs. See, e.g., H.K.H. Co. v. American Mortg. Ins. Co., 685 F.2d 315, 317 n. 1 (9th Cir.1982). On the other hand, sometimes the lessee's obligation to the lessor is broken down into periodic payments plus a separate commitment to pay such particulars as taxes and maintenance. See, e.g., H.K.H. Co., 685 F.2d at 316; Woods v. Callahan, 172 F.2d 179, 182 (1st Cir.1948). Any number of other variations may and commonly do occur. Whether in periodic lump sums or divided into several components, the payments to or on behalf of the lessor are all made in consideration of the use and occupancy of the leased property. We have found nothing to suggest that Congress intended the FDIC's liability for "contractual rent" to depend on which type of arrangement existed between the contracting parties so long as the lessee had a contractual obligation to pay. Under FIRREA, we conclude that "contractual rent" includes a lessee's responsibility under a lease for taxes and maintenance. See Pioneer Bank & Trust Co. v. Resolution Trust Corp., 793 F.Supp. 828, 830 n. 8 (N.D.Ill. 1992).
Nonetheless, we do not believe that Congress meant to include in the term "contractual rent" any contractual obligation on the part of a lessee to make capital expenditures or improvements. They are different in kind from ordinary repairs or maintenance. Capital expenditures have been defined as "any amount paid out for new buildings or for permanent improvements or betterments made to increase the value of any property or estate." I.R.C. § 263. Such improvements by their nature generally have a value to the lessor far beyond the value to the lessee. We have discovered no case or other authority in which such outlays have ever been considered to be "rent." Nor has anything been called to our attention that suggests it is customary or usual for lessees to make separate payments for capital improvements under a lease. Without any contrary indication from Congress, we conclude that capital outlays are not part of "contractual rent."4
First Bank claims that Meritor should be held liable under paragraph 9(a) of the sublease for its failure to correct water infiltration problems which developed in the building before the date of the disaffirmance. This paragraph went far beyond ordinary repair and maintenance. As noted above, it required Meritor to "make all structural and non-structural, foreseen and unforeseen and ordinary and extraordinary changes and repairs which may be required to keep all parts of the Premises in good repair and condition...."
Water infiltration through the north facade of the PSFS building during severe rainstorms became a recurrent problem years before the disaffirmance. This problem resulted from the original construction of the building in the 1930's. No flashing, or metal panning, was installed between the frames of the windows and the masonry around them. This allowed water to enter the building through rusted areas which eventually developed in the window frames. Moreover, the building was designed without allowances for the expansion and contraction of the brick facade which occurs with temperature changes. While Meritor patched leaks as they occurred by smearing caulk under the windows and on cracks in the brick, these steps failed to prevent the leakage problems from recurring.
First Bank claims that Meritor should have resolved the building's water infiltration problem by installing flashing under the windows and inserting vertical joints in the facade to allow for brick movement. The FDIC argues, however, that such steps exceeded Meritor's obligations under the sublease. The FDIC contends that Meritor "cannot be held liable for omissions in the original design and/or construction" of the building, and that Meritor was not required to "take affirmative steps to improve or rebuild the Premises." The FDIC bases its argument on a provision in paragraph 10 of the sublease stating that Meritor "may, at its expense, make additions to and alterations of' the building. (Emphasis added.) The FDIC maintains that the permissive rather than mandatory nature of this provision permits Meritor to decide whether to undertake changes such as those required to remedy the building's water leakage problem.
This court disagrees. Paragraph 9(a) of the sublease required Meritor to "maintain all parts of the Premises in good repair and condition" even...
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First Bank Nat. Ass'n v. F.D.I.C.
...into a complex series of lease and sublease agreements with First Bank and other entities during the 1980s. First Bank Nat'l Ass'n v. FDIC, 885 F.Supp. 117, 118 (E.D.Pa.1995). As a result, First Bank became Meritor's landlord under a sublease for the space Meritor occupied in the building, ......