In re PCH Associates, Bankruptcy No. 84 B 11540

• Decision Date: 25 November 1985
• Docket Number: Adv. No. 85-5025A.,Bankruptcy No. 84 B 11540
• Citation: 55 BR 273
• Parties: In re PCH ASSOCIATES, f/k/a Simon Associates, Debtor. PCH ASSOCIATES, Plaintiff, v. LIONA CORPORATION N.V., Defendant.
• Court: U.S. Bankruptcy Court — Southern District of New York

55 B.R. 273 (1985)

In re PCH ASSOCIATES, f/k/a Simon Associates, Debtor PCH ASSOCIATES, Plaintiff, v. LIONA CORPORATION N.V., Defendant.

Bankruptcy No. 84 B 11540, Adv. No. 85-5025A.

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

November 25, 1985.

Levin, Weintraub & Crames, and Gelberg & Abrams, New York City, for debtor; Andrew Kress, Marc S. Kirschner and Darren H. Goldstein, New York City, of counsel.

Wolf, Block, Schorr & Solis-Cohen, Philadelphia, Pa., Winick & Rich, New York

City, for Liona Corp.; Michael L. Temin, Philadelphia, Pa., and Jeffrey Rich, New York City, of counsel.

Stroock, Stroock & Lavan, New York City, for Creditors Committee; Barbara Kaplan, New York City, of counsel.

DECISION AND ORDER ON DEBTOR'S MOTION FOR DECLARATORY JUDGMENT

BURTON R. LIFLAND, Bankruptcy Judge.

This adversary proceeding in the form of a request for declaratory relief was instituted to obtain a judicial determination of the nature of, and the obligations created under, an agreement that was sharply tailored by sophisticated parties to achieve their various real estate taxation and investment goals. In short, a real estate deal was conceived and structured to acquire the land and building of what is described as the largest hotel in Philadelphia, Pennsylvania, from its sole owner.

Procedural Posture

PCH Associates, the debtor herein ("PCH" or "the debtor") filed a petition for reorganization on November 2, 1984, under § 301 of the Bankruptcy Reform Act of 1978 ("the Code"), as amended by the Bankruptcy Amendments and Federal Judgeship Act of 1984. The debtor has continued to operate its business as a debtor in possession pursuant to Code §§ 1107 and 1108. The instant action seeking a declaratory judgment arose against the backdrop of an application made by Liona Corporation, N.V. ("Liona") seeking an order directing PCH to perform its obligations as required by Code §§ 365(d)(3) and (4) under an agreement denominated a "Ground Lease," and for adequate protection under Code § 363(e). Less than one month after Liona made its application, PCH commenced this adversary proceeding seeking a judgment decreeing that the Ground Lease is not an unexpired lease under which PCH is a tenant within the scope of Code § 365.¹ Instead, PCH urged the court to find that the Ground Lease is a joint venture agreement or a subordinated financing agreement and to determine the nature of PCH's obligations under the Ground Lease. Because Liona's initial motion and PCH's adversary proceeding raise "common questions of law or fact," this court is considering Liona's motion and PCH's declaratory judgment action in tandem.

Factual Background

The following facts were established at trial:²

PCH is a Pennsylvania limited partnership formed in 1976 under the name Simon Associates. Prior to September 24, 1981, PCH owned and operated the Philadelphia Centre Hotel in Philadelphia ("the Hotel") and held title to the land and to the improvements thereon. The current general partner of PCH is a Delaware corporation, Bernturn Corp. ("Bernturn"). The president of Bernturn is Mr. Richard Bernstein ("Bernstein"), a nationally known real estate operator and investor. At some time in 1980, Bernstein was advised that the Hotel was for sale. Bernstein analyzed the feasibility of purchasing the Hotel and determined that he would have to raise $9,000,000 in addition to existing mortgages and seller provided financing, to acquire, renovate and refurbish the Hotel, and for working capital. After they were approached by Bernstein, a group of United States investors agreed to supply $4,000,000 for the project. These investors ultimately became the new limited partners of PCH ("New Limited Partners"). Because he sought to retain all the tax benefits of depreciation of the Hotel building, Bernstein determined that the remaining $5,000,000 investment would have to come from investors who were not interested in the tax benefits that property ownership allows. Bernstein approached Fidinam, a group of financial service companies with which he was familiar, to place the investment.

At an initial meeting between Bernstein and a representative of Fidinam, the parties made their specific requirements known. Bernstein wanted to enter into a joint venture or partnership structured in a way that would allocate all tax benefits to his limited partnership. Fidinam wanted an investment that would not require its client to be involved in the management of the Hotel, that would guarantee a 12% fixed annual rate of return on its investment plus a share contingent upon the Hotel's cash flow, and that would be evidenced by ownership of tangible assets rather than paper. After ascertaining that their respective requirements and goals could be fulfilled, the parties permitted their lawyers to determine the form of the vehicle or vehicles to be used for the transaction.

The acquisition of the Hotel was divided into two parts. First, the New Limited Partners agreed to acquire all of the former general and limited partnership interests of Simon Associates, which was accomplished via an Agreement of Sale dated December 18, 1980 and amended March 25, 1981 ("the Simon Agreement"). Under the Simon Agreement, Bernstein caused Jenbrad Realty Corp., a New York corporation owned by Bernstein ("Jenbrad"), to agree to purchase the interests of the former general and limited partners of Simon Associates ("Former Partners"). Jenbrad assigned the Simon Agreement to the New Limited Partners. At the closing under the Simon Agreement on September 24, 1981, the New Limited Partners consummated the Simon Agreement by purchasing interests of the Former Partners for $7,919,365 over the existing first and second mortgages, which totalled $7,610,309. As part of the purchase price, the Former Partners took back a third mortgage through Simon-Tye Associates and 135 Ventures, Inc.

The second part of the acquisition plan required Bernstein to cause Jenbrad to enter into an agreement of sale dated August 25, 1981 ("the Sale-Leaseback Agreement") with Purchase Estates, Ltd., a New York corporation acting on behalf of Fidinam. The Sale-Leaseback Agreement provides that the land owned by Simon Associates, but not the Hotel, would be sold to Purchase Estates, Ltd. (whose interest ultimately was assigned to Liona) and immediately leased back to Simon Associates under the agreement denominated a Ground Lease dated September 24, 1981 ("the Ground Lease").

Contentions of the Parties

Each of the parties in egocentric fashion has highlighted provisions in the two agreements in support of its characterization of the transaction. The language used in the following provisions of the Sale-Leaseback Agreement and the Ground Lease exemplifies how the documents, like a Chinese menu, pick and choose, mix and match phraseology and legal concepts with seeming abandon. The result is a compact that defies neat pigeonholing. For purposes of organization, the parties' contentions will be listed following each of the provisions below. PCH presented credible expert testimony that stands unrebutted by Liona that the following provisions described in paragraphs a. through h. of the Sale-Leaseback Agreement are not usually found to support a true land sale agreement. Liona, while not disputing the essential facts, argues that the agreements cannot be construed, for any purpose, except as they are formally labeled.

Sale-Leaseback Provisions

a. Under the Sale-Leaseback Agreement, the purchase price for the land was up to $6,000,000. Of this amount, $1,000,000 was paid as brokers' commissions. The remaining amount, $5,000,000 was defined as the "Landlord's Investment." It represented the remainder of the $9,000,000 that Bernstein had determined was necessary to accomplish the acquisition, renovation, operation and ultimate sale of the Hotel, after deducting PCH's $4,000,000 investment. 5/13/85 Tr. at 97; 5/15/85 Tr. at 349-50; 6/17/85 Tr. at 24-26. Thus Liona's investment constituted five-ninths of the total price and PCH's investment, four-ninths. The amount of Liona's investment was not related to the value of the land. 5/13/85 Tr. 97; 5/15/85 Tr. 349-50; 6/17/85 Tr. 24-26. Liona used the predetermined return on the investment in the Hotel, not the value of the property, to evaluate the value assigned to the land for purposes of the sale-leaseback transaction. 5/13/85 Tr. 99; 5/15/85 Tr. 357-58; 6/17/85 Tr. 27-28, 52. This is the opposite of a normal land sale agreement, in which an investor analyzes the purchase price based upon market conditions. 5/13/85 Tr. 99-100; 5/15/85 Tr. 351-52, 354.

b. Under certain circumstances, the purchase price and thus the amount of Liona's investment would be reduced. For example, section 6 of the Sale-Leaseback Agreement provided that if the New Limited Partners under the Simon Agreement recovered any money from the Former Partners of Simon Associates for any damages, Liona's investment, the price of the land, would be reduced by five-ninths of that amount. Section 6 also provided that any savings in PCH's anticipated costs of renovating and refurbishing the Hotel would be shared by Liona and PCH, by deducting five-ninths and four-ninths, respectively, of that amount from the amount of each party's investment. 5/13/85 Tr. at 104, 109. Although PCH asserts that these provisions are more indicative of an intent to form a joint venture than a landlord-tenant relationship, Liona contends that the language of the agreement clearly demonstrates the parties' intent to enter into a bona fide sale-leaseback arrangement.

c. Articles 4 and 10 of the Sale-Leaseback Agreement mandate that "Bernstein or a corporation controlled by him . . . be a general partner" at the time the Sale-Leaseback Agreement closed. 5/13/85 Tr. at 105. PCH believes that these provisions strongly suggest that a joint venture was intended because of the requirement of Bernstein's personal involvement. Liona asserts...