Smith v. HBE Corp.

• Decision Date: 18 April 1986
• Docket Number: No. 85-662-CIV-5.,85-662-CIV-5.
• Court: U.S. District Court — Eastern District of North Carolina
• Parties: Lee C. SMITH and wife, Adele H. Smith, et al., Plaintiffs, v. HBE CORPORATION, Defendant.

655 F. Supp. 59

Lee C. SMITH and wife, Adele H. Smith, et al., Plaintiffs, v. HBE CORPORATION, Defendant.

No. 85-662-CIV-5.

United States District Court, E.D. North Carolina, Raleigh Division.

April 18, 1986.

Michael E. Weddington, James G. Billings, James K. Dorsett, III, Smith, Anderson, Blount, Dorsett, Mitchell & Jernigan, Raleigh, N.C., for plaintiffs.

Charles C. Meeker, Cynthia Leigh Wittmer, Sanford, Adams, McCullough & Beard, Raleigh, N.C., William A. Richter, Peper, Martin, Jensen, Maichel & Hetlage, St. Louis, Mo., for defendant.

ORDER

JAMES C. FOX, District Judge.

STATEMENT OF THE CASE

Plaintiffs instituted this action for declaratory relief pursuant to N.C.Gen.Stat. § 1-253, et seq., by filing a verified complaint in the Superior Court of Wake County, North Carolina, on March 29, 1985. On April 26, 1985, the defendant filed with this court a verified petition for removal and supporting papers stating that the action was removable pursuant to 28 U.S.C. § 1441 and that "this court has original jurisdiction of this cause pursuant to 28 U.S.C. § 1332." On April 26, 1985, plaintiffs filed a motion to remand the action to the Superior Court of Wake County, North Carolina. The defendant filed an answer to the complaint with this court on May 15, 1985. By order dated September 3, 1985, plaintiffs' motion to remand was denied.

Thereafter, on October 9, 1985, an order was entered providing that no time would be allowed for discovery on the ground that there was no basis for a discovery period. Such order also provided that all motions of the parties should be filed with the court within forty-five (45) days from the date of the order. By consent order, this period was extended to December 9, 1985.

This matter is presently before the court on the parties' cross-motions for summary judgment made pursuant to Rule 56 of the Federal Rules of Civil Procedure. The motions have been briefed thoroughly, and on January 8, 1986, the court heard oral argument thereon. Accordingly, this matter is now ripe for disposition.

STATEMENT OF FACTS

The undisputed facts appear to be as follows:

The fifteen individual plaintiffs are residents of the State of North Carolina and the corporate plaintiff, Wachovia Bank and Trust Company, N.A., is a national banking association headquartered in Winston-Salem, North Carolina. The defendant HBE Corporation ("HBE") is a Delaware corporation which is headquartered in Missouri.

On December 5, 1983, the Fairfax Corporation ("Fairfax"), a subsidiary of the Cameron-Brown Company ("Cameron-Brown"), entered into certain agreements with plaintiffs relating to real property known as the Cameron-Brown Building ("C-B property"), located in Charlotte, North Carolina. Under these agreements, Fairfax sold the C-B property to plaintiffs, and gave plaintiffs an easement over an adjoining tract of land used for parking. Also, on December 5, 1973, plaintiffs entered into a Lease Agreement ("Lease"), whereby plaintiffs leased the C-B property back to Fairfax for a period of twenty-five (25) years. The agreements contemplated a return of possession of the property to plaintiffs on December 5, 1998, the end of the lease term. During the period from December 5, 1973, to June 27, 1984, the relationship between Fairfax and plaintiffs remained unchanged; Fairfax was the lessee of the property, and plaintiffs were the lessors thereof.

On June 27, 1984, the relations among the parties in connection with the C-B property changed drastically. What previously had been a mere twenty-five year lease of the C-B property from plaintiffs to Fairfax was changed to a five year lease of the property to HBE, an irrevocable and binding agreement by plaintiffs to sell the property at the end of the lease term to a third party, and an option to purchase the property from the third party by HBE. This new transaction was effected through several agreements executed on June 27, 1984. Three of the agreements are important to the matter presently before the court.

First, on June 27, 1984, plaintiffs and defendant HBE entered into an agreement entitled "Consent to Transfer and Lease Modification Agreement" ("Lease Modification"). Under the Lease Modification, Fairfax, with the consent of plaintiffs, sold and assigned its interests and responsibilities under the lease to HBE, permitting HBE to become the tenant under the 1973 lease as substitute lessee. Plaintiffs then leased the property to HBE under the same terms it had leased the property to Fairfax. The term of the lease, however, was reduced so that it terminates on January 3, 1989 (rather than the original date December 5, 1998).

Second, on June 27, 1984, the plaintiffs entered into an Agreement of Purchase and Sale ("Purchase Agreement"), whereby plaintiffs agreed to sell the C-B Building to Cameron-Brown and First Union Corporation (hereinafter collectively referred to as "Cameron-Brown") on January 3, 1989, for a purchase price of $13,000,000, in addition to the then outstanding balance on the mortgage of approximately $3,265,000. Pending closing, plaintiffs transferred legal title to the property to a separate trustee.

Finally on June 27, 1984, HBE and Cameron-Brown entered into an agreement entitled "Option for the Purchase and Sale of Real Estate" ("Option to Purchase"), pursuant to which HBE acquired an option to purchase the C-B Building from Cameron-Brown. HBE has the right to exercise this option at any time.

Sometime after June 27, 1984, HBE received advice from its tax advisors that as owners of the leasehold interest, with an option to purchase the property, HBE might, upon exercise of the option, be deemed owner of the property for purposes of federal taxation. A written opinion of HBE's accountants concluded that, "the Internal Revenue Service could contend that the position of the parties was so changed by a series of agreements related to the office building that the ownership for tax purposes has also shifted." In September, 1984, HBE informed plaintiffs of its tax advisors' conclusion with regard to the June 27, 1984, agreements and of its intention to seek a Private Letter Ruling from the Internal Revenue Service ("IRS") regarding the "tax ownership" of the C-B property.

Plaintiffs brought this action against HBE in response to its plans to obtain a ruling from the IRS regarding tax ownership. Plaintiffs seek a declaratory judgment (1) to uphold the validity of the lease agreements by declaring the rights and remedies of plaintiffs as owners and landlords of the C-B property, and by declaring the duties and obligations of HBE as tenant and lessee of the property; (2) to uphold the validity of the contract between plaintiffs and Cameron-Brown for the future sale of the C-B property, and (3) to declare that no present sale of the property has occurred.

DISCUSSION

The law of North Carolina, including the Declaratory Judgment Act, N.C.Gen.Stat. §§ 1-253-267, is determinative in this action. Walker v. Armco Steel Corp., 446 U.S. 740, 100 S.Ct. 1978, 64 L.Ed.2d 659 (1980). The purpose of the North Carolina Declaratory Judgment Act is to "settle and afford relief from uncertainty concerning rights, status, and other legal regulations" between parties. North Carolina Consumers Power, Inc. v. Duke Power Co., 285 N.C. 434, 446, 206 S.E.2d 178, 186 (1974).

The court has jurisdiction to render a declaratory judgment where:

It appears from the allegations of the complaint ... (1) that a real controversy exists between or among the parties to the action; (2) that such controversy arises out of opposing contentions of the parties, made in good faith, as to the validity or construction of a deed, will or contract in writing ...; and, (3) that the parties to the action have or may have legal rights, or are or may be under legal liabilities which are involved in the controversy, and may be determined by a judgment or decree in the action....

Carolina Power and Light Co. v. Iseley, 203 N.C. 811, 820, 167 S.E. 56, 60 (1933). "When jurisdiction exists, a contract may be construed either before or after there has been a breach of it." Nationwide Mutual Ins. Co. v. Roberts, 261 N.C. 285, 287, 134 S.E.2d 654, 657 (1964). The North Carolina Supreme Court has confirmed that:

The Act recognizes the need of society "for officially stabilizing legal relations by adjudicating disputes before they ripen into violence and destruction of the status quo."

Lide v. Mears, 231 N.C. 111, 117-18, 56 S.E.2d 404, 409 (1949) (citation omitted). For the court to enter a declaratory judgment, it must appear that, in the absence of a declaration of rights, litigation between the parties is inevitable. North Carolina Consumers Power, Inc., supra; Pilot Title Ins. Co. v. Northwestern Bank, 11 N.C. App. 444, 181 S.E.2d 799, 802-03 (1971).

The Declaratory Judgment Act is particularly appropriate for determining the rights and status of parties with respect to real property. Hubbard v. Josey, 267 N.C. 651, 148 S.E.2d 638 (1966); Charlotte Park & Recreation Commission v. Barringer, 242 N.C. 311, 88 S.E.2d 114 (1955), cert. denied, sub. nom. Leeper v. Charlotte Park & Recreation Commission, 350 U.S. 983, 76 S.Ct. 469, 100 L.Ed. 851 (1956); York v. Newman, 2 N.C.App. 484, 163 S.E.2d 282 (1968). Further, a declaratory judgment "is appropriate for the determination of the validity or construction and operation of a lease." 26 C.J.S. "Declaratory Judgment," § 74.

Summary judgment is appropriate in a declaratory judgment action when there is no genuine issue as to any material fact and a party is entitled to judgment as a matter of law. Blades v. City of Raleigh, 280 N.C. 531, 187 S.E.2d 35, 43 (1972); Threatte v. Threatte, 59 N.C.App. 292, 296 S.E.2d 521 (1982), aff'd, 308 N.C. 384, 302 S.E.2d 226 (1983). The propriety of summary judgment in a declaratory judgment action is governed by the same considerations applicable to any other action and therefore may be entered when there is...