Appeal from a judgment of the United States District Court for the Southern District of New York, affirming the bankruptcy court's order that a sale-leaseback arrangement between debtor PCH Associates and Liona Corporation, N.V. is not an unexpired lease of nonresidential property within the meaning of the Bankruptcy Reform Act of 1978, as amended, No. 1663, Affirmed.
Pratt and Miner, Circuit Judges, Re, Chief Judge, U.s. Court of International Trade, sitting by designation.
Liona Corporation, N.V. ("Liona") appeals from a judgment of the United States District Court for the Southern District of New York (Tenney, J.) affirming an order of the bankruptcy court (Lifland, J.) in favor of debtor PCH Associates ("PCH"). The District Court held that the sale-leaseback arrangement between Liona and PCH was a joint venture agreement rather than a non-residential lease subject to the provisions of section 365(d)(3), (4) of the Bankruptcy Reform Act of 1978, as amended by the Bankruptcy Amendments and Federal Judgeship Act of 1984, 11 U.S.C. § 365(d)(3), (4) (Supp. III 1985) ("Bankruptcy Code" or "Code"). We affirm the judgment of the district court on the ground that the sale-leaseback arrangement is not an unexpired nonresidential lease within the contemplation of the Code.
This dispute centers around the true nature of a transaction that was "sharply tailored by sophisticated parties," PCH Associates v. Liona Corporation N.V., 55 Bankr. 273, 274 (Bankr. S.D.N.Y. 1985), and was admittedly structured as a sale-leaseback arrangement for tax and investment advantages. PCH, a Pennsylvania limited partnership formed in 1976 and formerly known as Simon Associates ("Simon"), owns and operates the Philadelphia Centre Hotel ("hotel"). Prior to September 1981 and the transaction at issue on this appeal, PCH's predecessor, Simon, held title to both the hotel and the land upon which it is situated. In 1980, Richard Bernstein, an experienced real estate operator and investor, learned that the hotel was for sale. In addition to existing mortgages and seller-provided financing, he determined that $9,000,000 was needed to acquire, renovate, and provide working capital for the hotel. Bernstein located a group of United States investors willing to supply $4,000,000 as new limited partners of PCH. He then approached Fidinam, a consortium of financial service companies, to place the remaining $5,000,000 investment.
Bernstein required a structure that would allocate all the tax benefits of depreciation of the hotel to PCH. Fidinam, in turn, required an investment for its client that would be evidenced by ownership of a tangible asset and would guarantee a 12% fixed annual rate of return, with an additional share contingent on the hotel's cash flow. Fidinam did not want its client involved in the daily management of the hotel. Upon reaching agreement, the parties' lawyers structured the transaction to encompass Bernstein's and Fidinam's requirements. Ultimately, Liona, a Netherlands Antilles corporation, became the beneficiary of Fidinam's negotiations.
In September 1981, the requirements of the parties were fulfilled through a "Sale-Leaseback Agreement" and a "Ground Lease" whereby the land owned by PCH, but not the hotel, was sold to Purchase Estates, Ltd. and immediately leased back to PCH.*fn1 Ultimately, the land interest of Purchase Estates, Ltd. was assigned to Liona. Thus, Liona held title to the land and leased it to PCH, which owned and managed the hotel.
Section 1.01 of the Ground Lease provided for an initial term of 33 years, renewable for four terms under section 42.01, for a total of 165 years. Rent was set at a minimum annual rate of $600,000 in section 3.01, with a percentage rental based upon a percentage of increases in the hotel's gross revenues provided in section 3.02. Section 3.04 provided for an adjustment of the annual rent if the "Landlord's Investment" fell below $5,000,000. In such instance, the annual rent would be reduced to 12% of the "Landlord's Investment."
Section 3.10 of the Ground Lease further provided that:
It is understood and agreed that the amount herein provided paid to Landlord in addition to the minimum net annual rental, although based upon a percentage of Tenant's revenue during each year, is rent, and Landlord shall in no event be construed or held to be a partner or associate of Tenant in the conduct of its business, nor shall Landlord be liable for any debts incurred by Tenant in the conduct of said business or otherwise, but it is understood and agreed that the relationship between the parties hereto is, and at all times shall remain, that of Landlord and Tenant.
Appellant's App. at 142 (emphasis supplied).
Article 34 of the Ground Lease also provided that:
This Lease contains all the promises, agreements, conditions, inducements and understandings between Landlord and Tenant relative to the Premises and there are no promises, agreements, conditions, understandings, inducements, warranties or representations, oral or written, expressed or ...