In re Hotel Syracuse, Inc.

• Decision Date: 05 February 1993
• Docket Number: Adv. No. 91-60166A.,Bankruptcy No. 90-02921
• Citation: 155 BR 824
• Parties: In re HOTEL SYRACUSE, INC., Debtor. HOTEL SYRACUSE, INC., Plaintiff, v. CITY OF SYRACUSE INDUSTRIAL DEVELOPMENT AGENCY, Manufacturers Hanover Trust Company/Central New York, Apple Bank for Savings and Syracuse Economic Development Corporation, Defendants.
• Court: U.S. Bankruptcy Court — Northern District of New York

155 B.R. 824 (1993)

In re HOTEL SYRACUSE, INC., Debtor HOTEL SYRACUSE, INC., Plaintiff, v. CITY OF SYRACUSE INDUSTRIAL DEVELOPMENT AGENCY, Manufacturers Hanover Trust Company/Central New York, Apple Bank for Savings and Syracuse Economic Development Corporation, Defendants.

Bankruptcy No. 90-02921, Adv. No. 91-60166A.

United States Bankruptcy Court, N.D. New York.

February 5, 1993.

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Shaw, Licitra, Esernio & Schwartz, P.C., Garden City, NY (Stuart I. Gordon, of counsel), for debtor.

Hiscock & Barclay, Syracuse, NY (Laura Harris, Robert Barrer, of counsel), for SIDA and SEDCO.

Menter, Rudin & Trivelpiece, P.C., Syracuse (Peter Hubbard, of counsel), Simpson, Thacher & Bartlett, New York City (Robert A. Bourque, of counsel), for Mfrs. Hanover Trust Co./Cent. New York.

Shea & Gould, New York City (Eric P. Wainer, of counsel), for Apple Bank.

MEMORANDUM-DECISION, FINDINGS OF FACT, CONCLUSIONS OF LAW AND ORDER

STEPHEN D. GERLING, Bankruptcy Judge.

Presently before the Court and considered herein is the motion by Hotel Syracuse, Inc. ("Debtor"), filed on July 30, 1992, and the cross-motion by the City of Syracuse Industrial Development Agency ("SIDA") and Syracuse Economic Development Corporation ("SEDCO"), filed on August 4, 1992, seeking summary judgment on the issue of whether an agreement dated May 2, 1982, entitled Lease Agreement ("Lease") constitutes a "true lease" for purposes of § 365(d)(4) of the Bankruptcy Code (11 U.S.C. §§ 101-1330) ("Code"). Manufacturers Hanover Trust Company ("MHTC"), predecessor-in-interest to Chemical Bank ("Chemical"),¹ filed a memorandum of law in support of the proposition that the Lease is a true lease.

At the conclusion of oral argument held in Syracuse, New York on August 11, 1992, the parties were provided the opportunity to submit memoranda of law on the issues presented. The matter was thereafter submitted for decision on September 14, 1992.

JURISDICTIONAL STATEMENT

The Court has jurisdiction over the parties and subject matter of this core proceeding pursuant to 28 U.S.C. §§ 1334 and 157(a), 157(b)(1), (b)(2)(A), (M) and (O).

FACTS

Debtor operates the Hotels at Syracuse Square ("Hotels" or "Hotel Premises"). The Hotels consist of a 725-room hotel complex, located at 500 South Warren Street in downtown Syracuse, and are comprised of the original Hotel Syracuse and a 200-room Hilton Hotel annex ("Hilton Wing") which was completed in 1982.

On October 26, 1990 Debtor filed a voluntary petition ("Petition") under Chapter 11 of the Bankruptcy Code in the Southern District of New York. On or about November 14, 1990, the venue for the case was transferred to this Court. Debtor continues in the operation of its business as a debtor-in-possession pursuant to Code §§ 1107(a) and 1108.

Debtor's sole shareholder is Joseph M. Murphy, Sr. ("Murphy"). Prior to the events giving rise to the controversy sub judice Debtor conveyed fee ownership of the original Hotel Syracuse to Ho-Syr Properties ("Ho-Syr"), a New York limited partnership. Thereafter, Ho-Syr holding title to the premises, leased same to the Debtor who has continued to operate and manage the Hotels.²

SIDA is a public benefit corporation created pursuant the "New York State Industrial Development Agency Act" (the "Act"), 1969 N.Y.Laws, ch. 1030, which is codified at Article 18-A of the New York General Municipal Law ("N.Y.Gen. Municipal Law"). As an industrial development agency ("IDA"), SIDA's statutory purpose is, among other things, to promote the economic welfare and prosperity of the inhabitants of the State of New York by assisting in the acquisition, construction and improvement of industrial, commercial and recreation facilities. See N.Y. Gen. Municipal Law § 858 (McKinney 1986). SIDA was created specifically for the benefit of the City of Syracuse and its inhabitants. See N.Y. Gen. Municipal Law § 926 (McKinney 1986).

On or about May 2, 1981, Debtor, HoSyr, the City of Syracuse, and SIDA entered into an agreement ("Agreement"), see Adv.Compl. Exhibit A, to create a financing package for the original Hotel Syracuse which was to provide substantial capital for refurbishment and expansion, specifically including the construction of the Hilton Wing.

As part of the financing package Ho-Syr agreed to convey title to the Hotel's premises to SIDA,³ who in turn agreed to lease the premises back to Ho-Syr for the annual sum of one dollar plus, inter alia, monthly payments sufficient to provide for the payment of the principal, interest, and premiums, if any, on industrial development bonds issued by SIDA in furtherance of the project. SIDA's ownership interest in the Hotels would permit it to mortgage the Hotels as security for the repayment of such bonds. Ho-Syr was also required under the Agreement to make certain additional payments in connection with the use and occupation of the premises including taxes, special assessments and payments in lieu of taxes ("Pilot Payments"). Such payments, however, would be lower than the actual taxes that would have been assessed against the Hotel Premises absent SIDA's participation.

Thus, on or about May 2, 1981, SIDA and Ho-Syr entered into the Lease. See Adv. Compl. Exhibit D. The Lease was for a term of thirty years with an option to renew, exercisable by Ho-Syr, for an additional sixty years. Under its terms, Ho-Syr was required to purchase the premises back from SIDA at the expiration or earlier termination of the Lease upon full payment of all of the bonds executed by the parties. The re-purchase price fixed under the Lease is $100.00. See Adv.Compl. Exhibit D, at § 20.1.

On or about the same date, Ho-Syr entered into a subleasing agreement with Debtor. See Adv.Compl. Exhibit E. Thereafter, on or about December 31, 1986, Ho-Syr assigned its interest in the prime lease with SIDA to Debtor. See Adv. Compl. Exhibit F.

Financing for the project came from several sources. Initially, MHTC provided the sum of $7,550,000.00 pursuant to a building loan agreement entered into by SIDA, Ho-Syr, the Debtor and MHTC.⁴ As evidence of such indebtedness, on or about May 2, 1981, SIDA, Ho-Syr and Debtor issued a $7,550,000.00 "special obligation" bond, see Adv.Compl. Exhibit B, payable to MHTC. As a special obligation, the bond provides that it is payable solely from the "rents and other sums payable by the Debtor pursuant to the Lease and `Sub-lease Agreement', the `Mortgaged Property' . . . and any other security . . . which may be given to MHTC." See id. at p. 2. Further, the bond provides that "it and the interest herein shall never constitute a debt of the State of New York nor of the City of Syracuse. . . ." See id. On or about the same date, and to collateralize the obligations under the bond, SIDA, Ho-Syr and the Debtor executed a mortgage and security agreement in favor of MHTC in, inter alia, the Hotel Premises, items of personalty located therein, including, but not limited to, furniture, fixtures, office equipment, etc., as well as the mortgagor's right, title and interest in other leases relating to the premises. See Adv.Compl. Exhibit C.

Also on or about this date, SIDA, Ho-Syr, and Debtor entered into an agreement to borrow $4,000,000.00 from SEDCO as evidenced by the special obligation bond issued in that amount and made payable to SEDCO. See Adv.Compl. Exhibit H. This obligation was secured by a second mortgage and a security agreement against the Hotels which were executed on or about the same date. See Adv. Complaint Exhibit I. On or about April 27, 1982, SEDCO assigned its interest in the bond and mortgage to MHTC, see Adv. Complaint Exhibit J, thus merging SEDCO's second mortgage with the first mortgage held by MHTC.

Also on or about May 2, 1981, SIDA borrowed $3,500,000.00 from SEDCO pursuant to a building loan agreement by and between SIDA, Ho-Syr, Debtor and SEDCO. See Adv.Compl. Exhibit O. To evidence this indebtedness, SIDA, Ho-Syr, and Debtor issued a $3,500,000.00 special obligation bond payable to SEDCO, see Adv.Compl. Exhibit O, which was secured by a mortgage and security agreement dated April 30, 1981. See Adv.Compl. Exhibit P.

On or about September 22, 1982, SIDA, Ho-Syr, Debtor and MHTC executed a document entitled "Supplemental Mortgage and Consolidation Agreement" ("Supplemental Mortgage"), see Adv.Compl. Exhibit K, to consolidate and secure the parties' previous indebtedness then totalling approximately $12,550,000.00, and to secure an additional loan made by MHTC on the same day in the amount of $1,000,000.00.

In yet another transaction, taking place on or about December 15, 1983, Ho-Syr and the Debtor executed a $5,000,000.00 promissory note payable to Security Savings and Loan Association ("Security"). See Adv.Compl. Exhibit L. Security's loan was secured by a mortgage executed by SIDA, Ho-Syr and the Debtor, see Adv. Complaint Exhibit M, which purports to be junior only to MHTC's first mortgage.⁵ See id. at § 1.15. On or about the same date, and as additional security, the parties executed an assignment of rents and leases on behalf of Security. See Adv.Compl. Exhibit N. Subsequently, Security conveyed its interests under the note and mortgage to an individual named Howard Curd ("Curd") who thereafter assigned his interests to Apple Bank for Savings ("Apple").

On or about July 27, 1990, SIDA gave notice of default under the Lease to Debtor, and demanded cure. On or about August 10, 1990, SEDCO declared a default under the SEDCO note and Mortgage.

Unsuccessful in its initial attempts to obtain new financing to eliminate the arrears on the lease payments, Debtor, on or about August 1, 1990, commenced a "Yellowstone" proceeding in state court, see First National Stores, Inc. v. Yellowstone Shopping Center, Inc., 21 N.Y.2d 630, 290 N.Y.S.2d 721, 237 N.E.2d 868 (1968), seeking preliminary injunctive relief against SIDA in its attempts to evict Debtor from the Hotels. In that...