Reilly v. Firestone Tire and Rubber Co.

• Decision Date: 10 June 1985
• Docket Number: No. 84-5232,84-5232
• Citation: 764 F.2d 167
• Parties: Charles M. REILLY, Appellant, v. The FIRESTONE TIRE AND RUBBER COMPANY, Appellee.
• Court: U.S. Court of Appeals — Third Circuit

Page 167

764 F.2d 167

Charles M. REILLY, Appellant, v. The FIRESTONE TIRE AND RUBBER COMPANY, Appellee.

No. 84-5232.

United States Court of Appeals Third Circuit.

Argued Oct. 25, 1984.

Decided June 10, 1985.

George A. Spohrer (Argued), Hourigan, Kluger, Spohrer & Quinn, Wilkes-Barre, Pa., for appellant.

Ralph E. Kates, III (Argued), Francis G. Wenzel, Jr., Griffith, Aponick & Musto, Wilkes-Barre, Pa., for appellee.

Before GIBBONS and BECKER, Circuit Judges, and KATZ, District Judge ^*.

OPINION OF THE COURT

BECKER, Circuit Judge.

This appeal in an ejectment case, in which our jurisdiction is founded upon diversity of citizenship, 28 U.S.C. Sec. 1332, concerns the ongoing validity of a long term commercial lease. The terms of the lease are extremely favorable to appellee, Firestone Tire and Rubber Company (Firestone), and are correspondingly unfavorable to appellant, Charles M. Reilly (Reilly), who purchased the property subject to the lease from the Small Business Administration (SBA). SBA had, in turn, purchased the property at a foreclosure sale under several mortgages it had taken as security for loans advanced to the prior owner. Reilly contends that the lease was discharged because the foreclosure was founded, at least in part, on pre-lease mortgages, and denies that his predecessor, SBA, affirmed the lease by its conduct or writings either before or after the judicial sale. Reilly also argues that, in any event, only post-sale conduct can operate to affirm a lease. Firestone rejoins that SBA, whose own mortgages post-dated the lease, procured assignment of the pre-lease mortgages solely with the intent of ousting Firestone as tenant, and that such conduct is improper and thus without effect under Pennsylvania law. Firestone also submits that SBA affirmed the lease both before and after the foreclosure sale.

The district court granted summary judgment in favor of Firestone, concluding that, under Pennsylvania law, the lease was not discharged because of the circumstances under which SBA had acquired the pre-lease mortgages, and that SBA had, in any case, affirmed the lease by its pre-sale conduct. We conclude, to the contrary, that the manner of SBA's acquisition of the pre-lease mortgages does not justify application of Pennsylvania's extremely narrow exception to the rules governing discharge of leases; we thus hold that, unless it was affirmed, the lease was discharged as a matter of law. On the latter point, we conclude that Pennsylvania law recognizes the possibility that a mortgagee in possession may affirm a lease both before and after a judicial sale, but that there are genuine issues of material fact regarding the issue of affirmance. Accordingly, we will vacate the judgment and remand the case for further proceedings consistent with this opinion.

I.

A.

The relevant facts are quite involved. In 1957, Roddy Realty, Inc. (Roddy) purchased improved premises located at 486 Northampton Street, Edwardsville, Luzerne County, Pennsylvania. At the time of purchase, Roddy mortgaged the property to the Miners National Bank (Miners mortgage). In March 1960, Roddy took a second mortgage on the property, this time with Wyoming National Bank (Wyoming mortgage). On July 23, 1965, Roddy leased a portion of the property to Firestone for use as an automobile service center. The lease ran for a term of twenty years, with the option to renew for a series of five-year terms in favor of the tenant. Thereafter, in February 1966, Roddy once again mortgaged the property, this time to the Susquehanna Savings and Loan Association (Susquehanna I mortgage). At the same time, Miners and Wyoming assigned to Susquehanna their respective rights, title, and interest in the Miners and Wyoming mortgages.

Roddy continued to borrow against and mortgage the property as its value increased. In May 1970, Roddy took a second mortgage with Susquehanna (Susquehanna II mortgage). In January 1973, Roddy mortgaged the property to the United States Small Business Administration (SBA I mortgage). Shortly thereafter, Susquehanna assigned to SBA its rights under the Susquehanna II mortgage. Two years later, in March 1975, Roddy once again mortgaged the property to SBA (SBA II mortgage).

As partial security for the SBA II mortgage, Roddy assigned to SBA its interest in the Firestone lease. The assignment provided that in the event of default on the mortgage, SBA, at its option, could "enter in and upon the premises and take possession thereof, and collect rents and profits thereof...." It further provided that "upon curing all defaults the Assignor [Roddy], its successors or assigns, shall again be entitled to collect and retain the rents under the aforesaid lease" and that "upon payment of the aforesaid mortgage debt this assignment shall be rendered null and void and the said lease or leases shall be reassigned to the then owner...." In addition, the document contained the following language respecting the obligations of SBA as assignee:

The undersigned Lessee of the above-mentioned leasehold consents to and agrees to be bound by the above Assignment of Lease with the understanding that Lessee's lease will be recognized by Assignee, its successors and assigns so long as Lessee is not in default under the terms of its lease.

Appendix at 22(b). Only Firestone and Roddy were signatories to the assignment. On June 30, 1976, SBA notified Firestone that SBA was accepting the lease assignment and requested that all monthly rental payments be transmitted directly to SBA. SBA thereafter accepted rent payments as mortgagee/assignee.

On October 31, 1977, Susquehanna assigned to SBA the Miners, Wyoming, and Susquehanna I mortgages. Soon after obtaining these assignments, SBA initiated foreclosure proceedings against Roddy in the United States District Court for the Middle District of Pennsylvania. SBA's amended complaint, filed on December 14, 1977, recited that Roddy had defaulted on all of the mortgages in SBA's possession: Miners, Wyoming, Susquehanna I, Susquehanna II, SBA I, and SBA II. Each of these mortgages was open and unsatisfied as of record at the time of the foreclosure proceedings. SBA claimed that the amount owed by Roddy on the mortgages was $983,336.97. On January 17, 1978, SBA secured a default judgment against Roddy. A judicial sale was held on May 3, 1978, and the United States Marshal transferred the property to SBA (the highest bidder) through a quitclaim deed.

During the foreclosure proceedings but prior to the judicial sale, SBA had notified Firestone that, as a result of the Miners and Wyoming assignments, SBA considered its lien position superior to Firestone's lease. After becoming owner of the premises, SBA reiterated in a series of letters to Firestone its belief that, because SBA had foreclosed on the two pre-lease mortgages, the sale had divested Firestone of its lease. Specifically, on July 20, 1978, SBA wrote to Firestone and set forth in great detail the facts and legal theories on which SBA supported its claim that its ownership of the property was not subject to the Firestone lease. In letters dated September 28, 1978, and October 13, 1978, SBA warned Firestone that it was refraining from bringing an action for ejectment solely because SBA was awaiting a response to an earlier offer by SBA to sell the property to Firestone. SBA also refused to accept rent checks from Firestone until it was assured that the acceptance of rent would not prejudice its legal position.

When it became clear that Firestone was not interested in purchasing the property, SBA began looking for other buyers. Eventually, SBA notified various realtors in the Wilkes-Barre vicinity, including the Kinsman Agency (Kinsman), that the property was for sale. Kinsman contacted Reilly to see if he would be interested in acquiring it. On August 7, 1980, Reilly entered into an agreement with Kinsman for purchase of the property. This agreement of sale specifically recited that Parcel I was leased to Firestone, and Reilly was given a copy of the Firestone lease before he signed the agreement. ¹ On November 28, 1980, SBA transferred the property to Reilly by execution and delivery of a quitclaim deed.

B.

On June 16, 1981, Reilly filed a complaint in ejectment against Firestone in the Court of Common Pleas of Luzerne County. On July 2, 1982, Firestone joined SBA as an additional defendant. SBA petitioned for removal of the action to the United States District Court for the Middle District of Pennsylvania on March 11, 1983, and the case was thereupon removed. Jurisdiction in federal court was predicated on 28 U.S.C. Sec. 1346, which governs actions wherein the United States is a defendant. On September 6, 1983, summary judgment was entered against Firestone and in favor of SBA. ² Shortly thereafter, the remaining parties, Reilly and Firestone, agreed to a stipulation of facts and the court ordered them to submit cross motions for summary judgment.

Reilly contended in connection with his summary judgment motion that, as purchaser of a quitclaim deed from the SBA, he acquired all of SBA's rights in the property. He thereupon argued that, by foreclosing on pre-lease mortgages, SBA divested Firestone of its lease under Pennsylvania law, and that SBA did not affirm the lease but specifically disaffirmed it in post-sale correspondence between SBA and Firestone. In response, Firestone argued that SBA, having become Firestone's "landlord" as a result of the lease assignment, could not, under Pennsylvania law, acquire pre-lease mortgages with the intent to use them to oust Firestone after the judicial sale. Firestone further argued that, even if SBA as assignee of the lease could terminate it through foreclosure, the statement in the assignment that "the lease will be recognized by Assignee ... so long as Lessee is not in default" constituted an affirmance of the lease requiring SBA (and thus Reilly) to honor it in the absence of default. Firestone...