The opinion of the court was delivered by: FULLAM
MEMORANDUM AND ORDER NO. 1819
In 1972, the City of New York petitioned this Court for leave to proceed under state law to condemn certain real estate owned by the Debtor. In response to that application, the present petitioner, John Dilliard, claimed to be the equitable owner of the property in question, having allegedly exercised an option to purchase the property. On May 30, 1972, without objection, I entered Order No. 737, granting the City of New York the right to proceed with condemnation, but reserving to this Court the right to determine adverse claims of ownership.
Thereafter, certain payments on account were made in the condemnation proceeding, and are being held in escrow. The case is now before the Court on the petition of Mr. Dilliard (Document No. 5769) seeking payment to him of some or all of the escrowed proceeds, and seeking an adjudication as to his rights in the property.
For purposes of exposition, Mr. Dilliard and his various predecessors in interest will be referred to herein as the "petitioner." Penn Central Transportation Company and its predecessors will be referred to as "the railroad" or "the Debtor."
On April 18, 1960, the railroad leased the property in question to the petitioner. The lease contained a "tenant's option to purchase" provision which, in relevant part reads as follows:
"$42,000 simultaneously with the exercise of this option by the tenant as herein provided, and $378,000 on the date of delivery of the deed . . .
"This option shall be exercised by the tenant only by written notice to that effect by the tenant (buyer) to the seller at 466 Lexington Avenue, New York 17, New York, at any time during the time limit hereinabove specified, and in the event of such exercise the sale and conveyance of the demised premises shall be consummated pursuant to the terms and provisions of this lease."
Thereafter, by letter modifications, the lease was extended from time to time and modified in various ways. The net effect of these modifications was to extend the period of time during which the option to purchase might be exercised until July 31, 1970.
By way of further background, it should be mentioned that the property in question is located diagonally across the street from another parcel which had previously been leased to the petitioner, with an option to purchase at a price pegged to the cost of certain improvements to be erected by the petitioner. The contemplated improvements were completed, petitioner exercised his option, and the railroad conveyed that parcel to the petitioner in 1964.
The lease of the parcel now in dispute also contemplated the construction of improvements by the petitioner, but for reasons not disclosed on the record, the improvements were never made. The principal effects of the various modifications of the original lease of this parcel seem to have been the reduction of the rental payable by the petitioner, and the extension of the term, of the lease from time to time; it appears that, under the final version, petitioner was paying rent equal to the taxes assessed against the parcel.
On June 21, 1970, the railroad entered bankruptcy. The purchase option was due to expire on July 31, 1970. The option price was $420,000, but the actual market value was then considerably in excess of that sum. On the other hand, the City of New York was known to be contemplating the condemnation of both parcels, although it is not entirely clear just how far these condemnation plans had advanced.
Under the terms of the option provisions of the lease, the petitioner would have been required to take title subject to existing judgments, and subject to liens for certain New York corporation taxes, on the strength of the railroad's agreement to indemnify against liability for payment of such judgments and tax liens.
Upon exercise of the option, the railroad was required to convey title free and clear of mortgage liens. Before bankruptcy, the parties apparently anticipated no difficulty in obtaining the necessary releases from the mortgagees. It is apparent that the petitioner was apprehensive that such releases would not be obtainable ...