Waterman and Moore, Circuit Judges, and Bonsal,*fn* District Judge.
The Trustee in Bankruptcy of Amphitheatre, Incorporated (Amphitheatre), appeals from an order of the District Court for the Eastern District of New York, reversing the Referee's decision to uphold a counterclaim by the Trustee for return of $250,000 in security against the New York World's Fair Corporation (the Fair). The Fair sought to recover possession of its building and damages. The District Court remanded the case to the Referee to determine the amount the Fair is entitled to by resort to the security, and the Trustee appeals.
An agreement between Amphitheatre and the Fair resulted from extensive negotiations between the parties in February and March, 1961, for the lease of the 1939-1940 World's Fair New York State Amphitheatre and Exhibition Building in order for Amphitheatre to present commercial entertainment during the 1964-1965 World's Fair, then in preparation. The formal contract was signed on May 5, 1961. The term was to run from January 1, 1962, through the Fair's closing date in 1965.
Pursuant to a clause in the lease contract, Amphitheatre subsequently signed a subscription agreement for Fair Corporation Notes on June 21, 1961, totalling $250,000. Payment was made by two checks dated July 24, 1961, and August 18, 1961. These Notes were retained by the Fair as security according to the terms of the lease agreement, but were to be returned to Amphitheatre at the expiration of the lease. The Notes themselves were not due until nine months later.
The Trustee contends that the clause in the lease contract providing for the purchase and retention of the Fair Notes violates Section 233 of the New York Real Property Law*fn1 (now General Obligations Law, McKinney's Consol.Laws, c. 24-A, § 7-103). The Referee, after a hearing, found that it did violate that section and held that the Fair had converted the $250,000 received from Amphitheatre in exchange for the Fair's promissory Notes, entitling the Trustee to the funds without any offset.
The District Court reversed the Referee's determination on the ground that the transaction was a legitimate loan arrangement between the parties and not within the purview of the statute. We affirm that decision for the reasons set out below.
The pertinent clause of the lease is Paragraph Forty-first, which provides:
Within sixty days after the execution of this lease * * * [Amphitheatre] shall deposit with the Fair * * * $250,000 principal amount of Fair Corporation's 6% Promissory Notes, purchased from the Fair * * * as security for the full performance of this lease * * *. After the end of the Term and upon condition that [Amphitheatre] shall then be nowise in default * * * and shall have restored the Premises as required herein, and upon written request therefor by [Amphitheatre], the Fair * * * will return the security to [Amphitheatre], less any breach or default by [Amphitheatre] under this lease.
This provision evolved, as disclosed in the hearings before the Referee, from the Fair's initial demand that Amphitheatre furnish a $750,000 surety-company bond. This being too costly, Amphitheatre countered with an offer that one of its promoters would give his personal guarantee for the proper performance of the lease.
At this same time, the Fair was diligently attempting to meet the $25,000,000 subscription requirement needed to launch the $40,000,000 Note issue and essential for the creation of the Fair. As an alternative to either a surety-company bond or a personal guarantee, the parties agreed that Amphitheatre would purchase $250,000 worth of the Fair's forthcoming issue. These Notes would then be deposited with the Fair to serve as security for the lease.
It is apparent that Amphitheatre would not have bought Fair Notes as an isolated investment and its undertaking to do so and to put them up as security under the lease was a part and, as the District Court emphasized, a substantial part, of the price paid for the lease. It is also equally clear, as noted, that the Fair was anxious to accumulate subscriptions amounting to $25,000,000 and Amphitheatre's purchase of 1% was of material assistance in reaching that goal. Furthermore, getting those with a primary interest in the Fair, such as lessees and exhibitors, to show sufficient confidence in it by purchasing Fair Notes was a good inducement for others to invest.
Paragraph Forty-first, therefore, correctly represents the agreement to which the negotiations had led. It cannot be said to be an attempt to evade the statute, nor is it a sham. In short, the Fair, seeking to issue the Notes, needed capital commitments to meet the launching requirements. Amphitheatre, desiring to produce entertainment during the Fair, found that by subscribing to Fair Notes, it could lease the Exhibition Building for that purpose.
The Trustee, however, asserts that the deposit of Notes was a deposit of money as security within the meaning of Section 233. While the deposit of the Notes was made as security for the performance of the lease, the nature of the transaction does not thereby become transformed into one for the deposit of money as security. The deposit of Fair Notes is not like cash that can be commingled with the Fair's other assets. Moreover, as is apparent from the Subscription Agreement, the money paid for the Notes was explicitly for, and limited to, preopening and construction expenses. That their purchase was a loan and not a deposit of money is additionally indicated by the fact that the Notes were not payable until nine months after the lease had expired and, although the Fair retained the Notes, interest was paid directly to Amphitheatre. The Notes and their deposit were an alternative to posting $750,000 in security, demanded in the ...