Mellon Bank, N.A. v. Aetna Business Credit, Inc.
| Decision Date | 31 March 1980 |
| Docket Number | No. 79-1092,79-1092 |
| Citation | 619 F.2d 1001 |
| Parties | MELLON BANK, N.A. v. AETNA BUSINESS CREDIT, INC., Appellant. |
| Court | U.S. Court of Appeals — Third Circuit |
Thomas McGanney (argued), White & Case, New York City, William C. O'Neil, David G. Ries, Thorp, Reed & Armstrong, Pittsburgh, Pa., for appellant.
Thomas R. Johnson (argued), Kirkpatrick, Lockhart, Johnson & Hutchison, Pittsburgh, Pa., for appellee.
Before ALDISERT and HUNTER, Circuit Judges and CAHN, * District Judge.
This diversity case, tried under Pennsylvania law, 1 involves a contractual dispute between Mellon Bank, N.A., of Pittsburgh, Pennsylvania (Mellon), and Aetna Business Credit, Inc., of East Hartford, Connecticut (Aetna). Both parties are commercial lending institutions. In the context of this case, Mellon is the construction lender and Aetna is the permanent or "take out" lender. 2 Mellon sued Aetna averring that Aetna breached a written contract by refusing to purchase the construction loan held by Mellon. In a nonjury proceeding the district court found Aetna in breach and awarded Mellon damages in the amount of $1,165,731, representing Mellon's loss following foreclosure on the construction loan. Aetna has appealed to this court from the final judgment entered below. The facts, in greater detail, are as follows.
Messrs. Opp, Elgin and Wise (the borrowers) were joint venturers in the development and construction of an office complex in the suburbs of Atlanta, Georgia. The project, known as Kensington Square, was to consist of six two-story office buildings. The estimated total cost of the project was $2,500,000.
In May of 1974 Aetna extended to the borrowers a permanent loan commitment in the amount of $2,500,000. The borrowers paid a $50,000 fee to Aetna to bind the commitment which was to remain in force until August 1, 1975. Under the terms of the commitment the borrowers could obtain a six month extension for an additional fee of $25,000.
In June of 1974 Mellon issued a construction loan commitment to the borrowers. In July of 1974 the borrowers, Mellon, and Aetna executed a tripartite Buy-Sell Agreement and related instruments. Upon completion of the project, the Buy-Sell Agreement obligated Aetna, subject to certain conditions, to purchase the construction loan from Mellon. By August 1, 1975, the borrowers' contractor had substantially completed the project and Mellon had advanced $2,241,489 under the construction loan. The work which remained unfinished involved the completion of individual suites to the specifications of prospective tenants. However, earlier in 1975 there had been a precipitous decline in the Atlanta real estate market and the project was only seven percent leased, which placed its economic feasibility in jeopardy.
On August 1, 1975, a Mellon representative met with Aetna's special counsel in Atlanta and delivered closing documents to him. In a letter to Mellon dated August 15 1975, Aetna stated that upon Aetna's receipt of sworn statements from the borrowers, representing that they are solvent, "we (Aetna) shall be in a position to fund this loan." On August 27, 1975, Aetna received the executed affidavits of solvency. Two days later Aetna gave notice to Mellon that it would not purchase the construction loan.
The borrowers defaulted on their obligation on September 1, 1975. On October 3, 1975, Mellon declared the construction loan in default. On November 3, 1975, Kensington Square was sold at a foreclosure sale for $1,150,000. Thereafter, Mellon obtained an order from the Superior Court, DeKalb County, Georgia, confirming that the property was sold for its true market value.
Mellon brought suit against Aetna on November 12, 1975, in the United States District Court for the Western District of Pennsylvania. In its complaint Mellon alleged that Aetna had breached the Buy-Sell Agreement by refusing to purchase the construction loan. Mellon claimed damages measured by the difference between the $2,241,489 advanced to the borrowers under the construction loan and the confirmed foreclosure sale price of $1,150,000 plus prejudgment interest and costs.
Aetna's answer denied that all conditions precedent to its take-out commitment had occurred or been performed. Aetna alleged that as a condition precedent to its obligation to purchase the construction loan it was required that the borrowers be solvent. The Buy-Sell Agreement in Section 4 provided that:
(I)n the event of bankruptcy or insolvency of Borrower the provisions of paragraph 3 of the Permanent Commitment relating thereto shall be applicable.
Aetna drafted paragraph 3 of the Permanent Commitment, insisted that it be incorporated by reference in the Buy-Sell Agreement, and rejected Mellon's attempt to negotiate its deletion. Paragraph 3 stated:
We (Aetna) shall have no obligation to acquire the construction loan from the construction lender in the event of bankruptcy or insolvency of the Borrower.
Aetna contended that the borrowers were not solvent at the time it was to purchase the construction loan from Mellon. Also Aetna alleged that there had been material adverse change in the borrowers' condition which negated Aetna's duty to fund the loan. The Permanent Commitment stated:
(The borrowers) will furnish evidence satisfactory to you (Aetna) at the date of funding that there has been no material adverse change in our financial or other condition . . . from that presented to you (Aetna) for the purpose of considering the loan. 3
Mellon maintained that the borrowers were not insolvent and that there was no material adverse change in the borrowers' financial condition. Further, Mellon urged that Aetna was not only in breach of the Buy-Sell Agreement, but in breach of a promise contained in the letter of August 15, 1975. That letter stated:
(W)e agreed to purchase the captioned loan from you upon compliance with all terms and conditions of our commitment. One such condition states that we shall have no obligation to purchase in the event of bankruptcy or insolvency of the borrower. Our funding is, therefore, conditioned upon your submission of sworn statements (in form attached hereto) of each borrower, that each is presently in a solvent condition. Upon receipt of these statements, we shall be in a position to fund this loan.
Record at 336a. The letter was signed by John J. Gillies, an attorney for Aetna. The executed affidavits represented that the borrowers were Record at 341a-344a. However, a cover letter from the borrowers' attorneys returned with the affidavits stated:
This will further confirm conversation held in your office on August 8, 1975, wherein Mr. Opp advised members of your organization that the current cash flow from his other endeavors would not carry the payments on the Kensington operation until the same is leased. He further advised that the other individuals in the joint venture do not have sufficient cash flow to carry the amount of the loan payments until tenants are acquired.
Record at 339a. The letter also noted that Mr. Opp faced certain contingent liabilities from litigation then pending against him.
The district court, after a bench trial, first found that:
Aetna's defense in reality boils down to a very thin thread, that is, the issue of whether on August 1, 1975, the borrowers were insolvent. That was an affirmative defense, which Aetna was required to prove by a fair preponderance and has failed to do so.
Record at 75a. Second, the district court concluded that in determining whether or not the borrowers were insolvent the assets and liabilities of the Kensington Square project should be disregarded. Record at 78a. Third, the district court decided that Aetna's failure to purchase the construction loan was in breach of a promise set forth in its letter of August 15, 1975. Finally, the district court held that the act of the borrowers' furnishing evidence to Aetna of no material adverse financial change on their part was not a condition precedent to Aetna's obligation to purchase the construction loan, but merely a promise of the borrower, and that in any event the promise or condition had been fulfilled. The district court entered judgment for Mellon against Aetna in the sum of $1,165,731, which included prejudgment interest.
We determine that the district court incorrectly placed the burden of proof on Aetna to establish the insolvency of the borrowers. Also, the district court should have considered the assets and liabilities of the Kensington Square project in calculating whether or not the borrowers were insolvent. The district court erred in interpreting Aetna's August 15 letter and the return of the borrowers' affidavits either as a separate contractual obligation to purchase the construction loan or as a waiver of the condition that the borrowers not be insolvent. The district court correctly construed the clause in the Permanent Commitment requiring the borrowers to furnish evidence of "no material adverse change in our financial or other condition" to be a promise of the borrowers and not a condition precedent to Aetna's obligation. The case will be remanded for further proceedings in accordance with this opinion.
The generally accepted rule is that the burden of proof in regard to a condition precedent is on the party alleging the breach of the conditional promise. 4 Standard Alliance Industries v. Black Clawson Co., 587 F.2d 813, 823 (6th Cir. 1978), cert. denied, 441 U.S. 923, 99 S.Ct. 2032, 60 L.Ed.2d 396 (1979); Ziman v. Employers Fire Insurance Co., 493 F.2d 196, 199 (2d Cir. 1974); Aetna Casualty and Surety Co. v. Harris, 218 Va. 571, 239 S.E.2d 84, 88 (1977); Allis Chalmers Manufacturing Co. v. Malan Construction Corp., 30 N.Y.2d...
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