In re PCH Associates
| Decision Date | 18 December 1990 |
| Docket Number | Bankruptcy No. 84-B-11540. |
| Citation | 122 BR 181 |
| Parties | In re PCH ASSOCIATES, Debtor. |
| Court | U.S. Bankruptcy Court — Southern District of New York |
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Jones, Day, Reavis & Pogue by Marc S. Kirschner, Cindy E. Tzerman, New York City, for debtor.
Saul, Ewing, Remick & Saul by Robert S. Blau, Philadelphia, Pa., and by J. Dennis Faucher, New York City, for Simon-Tye Associates and 135 Ventures, Inc.
Bodian & Eames by David T. Eames, New York City, for Liona Corp., Inc.
This case involves a dispute with Simon-Tye Associates and 135 Ventures, Inc., (the "Third Mortgagee") over a portion of the proceeds of the sale of the Philadelphia Centre Hotel (the "Hotel"), plus interest. At the closing of the sale of the Hotel, the Third Mortgagee was paid the full principal of its debt, plus an estimated sum based on the pre-default contract interest rate of 8%. A sum of $1,147,261 ("Escrowed Funds"), representing the difference between the estimated amounts of pre-default interest and the default rate of 12%, as well as amounts claimed by the Third Mortgagee under § 506(b) of the Bankruptcy Code (the "Code") for legal fees, was placed in escrow.
A trial was held on March 24 and 25, 1988 to determine the Third Mortgagee's entitlement to the Escrowed Funds. Two significant rulings were made at the conclusion of the trial:
First, this Court denied the Third Mortgagee's motion to amend its Complaint to assert that the 12% post-default rate was triggered automatically at a time prior to the filing of the petition bankruptcy. At all times prior to the trial in this case, the Third Mortgagee adopted the theory that the default rate was triggered after an acceleration of the Note which it claims took place as of November 3, 1984, after the filing of the chapter 11 Petition. The Third Mortgagee's election to accelerate the entire principal balance due on the First and Second parts under the Note was based on PCH Associates's ("PCH") failure to make the October 1, 1984 payment and on the voluntary chapter 11 filing Pretrial Order, ¶ 96 at 26.
Practically on the eve of trial, the Third Mortgagee abandoned this theory, instead claiming that the post-default interest rate was triggered as of October 25, 1984, 10 days after the date of the Notice of Default Pre-Trial Order, ¶ 92 at 24. At the trial, the Third Mortgagee voiced its desire to amend its Complaint to introduce the new theory Record at 194, but its request was denied Record at 299. The Third Mortgagee was given leave to revisit the ruling as to the applicability of default interest in its post-trial brief.
Second, the 19% bonus for legal fees was denied Record at 302-303.
This Court then directed the filing of Post-Trial Briefs with respect to the reserved issues regarding certain reductions (or credits) claimed by PCH to the interest computed at the non-default rate of 8% and the reasonableness of incurred time charges and disbursements claimed by the lawyers for the Third Mortgagee.
The following are the findings of fact based on the uncontested facts in the Joint Pre-Trial Order and the documentary and oral evidence adduced at trial:
A. Background
1. Simon-Tye Associates is a Pennsylvania general partnership, and 135 Ventures, Inc. is a Pennsylvania business corporation. Prior to September 24, 1981, they were partners in Simon Associates, a partnership that owned the real estate at 1725 J.F. Kennedy Boulevard, Philadelphia, PA, which is the land and building known as the Philadelphia Centre Hotel Pre-Trial Order, ¶ 43 at 11.
2. The Third Mortgagee sold its partnership interest in Simon Associates pursuant to an Agreement of Sale, dated December 18, 1980, and amended March 25, 1981 (the "Agreement") Pre-Trial Order, ¶ 44 at 12.
3. As part of the purchase price, on September 24, 1981, Bernturn Corp., as agent for the purchasers, executed and delivered to the Third Mortgagee a Note in the principal amount of $5,169,365 (the "Note") Pre-Trial Order, ¶ 45 at 12; Joint Exhibit Binder, Exhibit "A".
4. To secure the obligations due under the Note, the Third Mortgagee took a third mortgage and security interest on the Hotel real estate and personal property (the "Third Mortgage") Pre-Trial Order, ¶ 46 at 12; Joint Exhibit Binder, Exhibit "B".
5. The Third Mortgage was subordinate to two mortgages covering the same property; a first mortgage held by First Pennsylvania Bank N.A. ("First Mortgage") and a second mortgage held by Barclays American Business Credit, Inc. (the "Second Mortgage") Pre-Trial Order, ¶ 47 at 12.
6. Soon after the partnership was sold by the Third Mortgagee, the name of the partnership was changed from Simon Associates to PCH. Bernturn Corp., a Delaware corporation is the general partner of PCH Pre-Trial Order, ¶ 49 at 13.
7. At the time PCH bought the real estate and hotel business in September 1981, in addition to giving the First, Second and Third Mortgages, PCH entered into a transaction with Liona Corporation, Inc. ("Liona") that has been the subject of dispute and litigation between PCH and Liona regarding the characterizations of their respective interests in the Hotel land and building. The First Mortgage, Second Mortgage and Third Mortgage, each, covered the hotel land and building and were each senior and superior to the interests claimed by PCH and Liona in the Hotel Pre-Trial Order, ¶ 48 at 12-13.1
8. On April 1, 1984, PCH failed to pay an installment of principal and interest under the Note Record at 69, 228-230.
9. Sometime later, PCH paid the principal installment and interest at the pre-default contract rate of 8%, plus an additional $2,000 which PCH agreed to pay pursuant to the Third Mortgagee's request for "certain additional sums for" the late payment. It does not appear that the 12% default rate had been automatically triggered Record at 69, 228-230, 232.2
10. On October 1, 1984, PCH failed to pay another installment of principal and interest under the Note Pre-Trial Order, ¶ 50 at 13; Record at 230.
11. During the period October 1, 1984 through November 2, 1984, PCH and the Third Mortgagee had a number of discussions regarding the missed October 1, 1984 installment. During the course of those discussions, although threatening to take affirmative action against PCH, the Third Mortgagee never demanded from PCH additional interest over and above the pre-default contract rate of 8%; nor did the Third Mortgagee take any other action against PCH or accelerate or purport to accelerate the debt under the Note and Third Mortgage and declare it immediately due and payable Record at 71-72, 230-232.
12. By letter, dated October 15, 1984 (the "Notice of Default"), the Third Mortgagee warned PCH that the October 1, 1984 installment was missed and stated that if the installment payment was not made within ten (10) days, the Third Mortgagee would be entitled "to exercise the remedies provided in the Note and Third Mortgage, including acceleration of the entire indebtedness" Joint Exhibit Binder, Exhibit "C".
13. The Third Mortgagee concedes that prior to November 2, 1984, an acceleration of the debt under the Note and Third Mortgage did not occur Third Mortgagee's Memorandum, at 30-32; Record at 71-72, 293 and 299.
14. On November 2, 1984 (the "Filing Date"), PCH filed a petition for reorganization under chapter 11 of the Code. PCH continued to operate the Hotel as a debtor-in-possession pursuant to §§ 1107 and 1108 of the Code until November 30, 1986, on which date the Hotel closed Pre-Trial Order, ¶ 54 at 14.
15. On January 11, 1985, the Third Mortgagee sent a letter to PCH advising that the October 1, 1984 installment under the Note, as well as the installment due on January 1, 1985, had not yet been received. In the letter, no demand for post-default interest was made; the Third Mortgagee did not accelerate or purport to accelerate the indebtedness due under the Note; and no indication was given that a prior acceleration had occurred Joint Exhibit Binder, Exhibit "D".
16. In early February 1985, PCH filed its chapter 11 Schedules with the Bankruptcy Court. Schedule A-2 sets forth as undisputed an aggregate amount due to the Third Mortgagee of $5,107,237.40, as of the Filing Date. There were two components to that amount. The first component, $80,875.00, represented accrued interest for the period October 1, 1984 through the Filing Date calculated at the pre-default contract rate of 8% less the "reduction amounts" under the Note. The second component, $5,026,362.40, represented the principal amount of the indebtedness then outstanding Record at 233-236; PCH Exhibit Binder, Exhibit "1.
17. By Order, dated May 28, 1985 (the "Claims Bar Order"), this Court fixed June 27, 1985 (the "Bar Date") as the last date for filing of all proofs of claim. PCH Exhibit Binder, Exhibit "17".
18. The Third Mortgagee has not filed a proof of claim in these proceedings Pre-Trial Order, ¶ 80 at 22.
B. Applicable Provisions of the Note
19. Under the terms of the Note, the principal indebtedness was divided into a "First Part" and a "Second Part".
20. After applying the July 1, 1984 payment (the last regularly scheduled installment payment that was made), the balance of the First Part of principal was $4,557,665.00 and the balance of the Second Part of principal was $468,698.00 Pre-Trial Order, ¶ 74 at 20; Record at 269-270.
21. Absent acceleration based on default, the principal amount of the Second Part would not have been payable until October 1, 1987, the date specified for payment of the final installment of the First Part of principal. Note at 4; Record at 293.
22. Absent acceleration, the maturity date under the Note of both the First Part and Second Part was October 1, 1987 Note at 3-4.
23. The Note states that "the Second Part...
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