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ZIONS FIRST NATL. BANK v. UNITED HEALTH CLUBS

March 5, 1982

ZIONS FIRST NATIONAL BANK, N/A
v.
UNITED HEALTH CLUBS, INC., Chu Liquidating Corp. and Financial Enterprises of America, Inc.; UNITED HEALTH CLUBS, INC. v. ZIONS FIRST NATIONAL BANK, N/A Chu Liquidating Corp



The opinion of the court was delivered by: LUONGO

SUR PLEADINGS AND PROOF

These consolidated diversity actions involve the validity of a leasehold mortgage given to Zions First National Bank (Zions) by CHU Liquidating Corporation, formerly United Health Clubs, Inc. (hereinafter referred to as Old United), as security for a debt owed to Zions by Financial Enterprises of America, Inc. (FEA), the parent corporation of Old United. Upon FEA's and Old United's default in payment on the debt to Zions, Zions commenced this action seeking a judgment on the debt instrument and also an order of foreclosure on the leasehold estate now occupied by Old United's assignee, United Health Clubs, Inc., formerly UHC, Inc. (hereinafter referred to as New United). Subsequently, New United commenced a quiet title action against Zions and Old United in the Court of Common Pleas for Philadelphia County, seeking a declaration that Zions' mortgage was invalid because, when it was given, the leasehold interest which the mortgage secured had already been terminated by the execution of a superseding lease between the landlord and Old United. Zions removed the quiet title action to this court. On January 28, 1981, the foreclosure action and the quiet title action were consolidated for all purposes. In August, 1981, I permitted New United to amend its complaint against Zions to add a claim for defamation of credit and interference with business opportunity.

 The case was tried on October 13-14, 1981. Thereafter the parties submitted requests for findings of fact and conclusions of law, together with memoranda of law. On pleadings, proof, and the written submissions of the parties, I make the following

 FINDINGS OF FACT

 A. The Foreclosure and Quiet Title Claims

 1. Zions First National Bank, N/A (Zions), plaintiff in the foreclosure action and defendant in the quiet title action, is a national banking association with its principal place of business at One South Main Street, Salt Lake City, Utah 84111 (T.13).

 2. United Health Clubs, Inc., formerly UHC, Inc. (hereinafter New United), defendant in the foreclosure action and plaintiff in the quiet title action, is a corporation organized and existing under the laws of the Commonwealth of Pennsylvania with its principal place of business at 4600 City Line Avenue, Philadelphia, Pennsylvania 19131 (T.13).

 3. CHU Liquidating Corporation, formerly United Health Clubs, Inc. (hereinafter Old United), defendant in both the foreclosure action and the quiet title action, *fn1" is a corporation organized and existing under the laws of the Commonwealth of Pennsylvania with its principal place of business at Union Hills Building, West Conshohocken, Pennsylvania 19428 (T.14).

 4. Financial Enterprises of America, Inc. (FEA), defendant in the foreclosure action, is a corporation organized and existing under the laws of the State of Colorado, registered to do business in Pennsylvania, with its principal place of business at Union Hills Building, West Conshohocken, Pennsylvania 19428 (T.14). FEA is the parent corporation of Old United (T.14).

 5. The premises which are the subject of this action are located at 4600 City Line Avenue, Philadelphia, Pennsylvania (T.14). More particularly, the premises are described as follows:

 
ALL THAT CERTAIN lot or piece of ground, SITUATE in the 52nd Ward of the City of Philadelphia described as follows, to wit: BEGINNING at a point on the Southeasterly side of City Avenue (as laid out 80 feet wide) at the distance of 592,950 feet Southwestwardly from the Westerly side of Belmont Avenue (100 feet wide) thence extending Southeastwardly at right angles to the said City Avenue the distance of 227,531 feet to a point, thence South 84 degrees 34 minutes 58 seconds East 32.140 feet to a point on the Northerly side of Overbrook Avenue (50 feet wide), thence Westwardly and Southwestwardly along the Northerly and Northwesterly side of said Overbrook Avenue on the arc of a circle curving to the left having a radius of 176,224 feet the arc distance of 210.225 feet to a point thence Northwestwardly at right angles to the said City Avenue crossing the Southeasterly side of City Avenue (80 feet wide) 258.320 feet to a point on the Southeasterly side of City Avenue (50 feet wide) thence Northeastwardly along the Southeasterly side of City Avenue (50 feet wide) said line being parallel with and 15 feet Northwestwardly from the Southeasterly side of City Avenue (80 feet wide); 171.605 feet to a point, thence Southeastwardly at right angles to the said City Avenue a distance of 15 feet to a point on the Southeasterly side of City Avenue (80 feet wide) being the first mentioned point and place of beginning. No. 4600 City Line Avenue.

 (Exhibit A to Complaint in 80-3283).

 6. The premises are owned by 4600 City Line Corporation (City Line), which is not a party to this lawsuit (T.14).

 7. Germantown Savings Bank (GSB) holds a first mortgage on City Line's fee interest in the premises (T.45). As a condition of the mortgage agreement between City Line and GSB, City Line agreed to obtain GSB's permission before leasing or otherwise transferring the premises to any individual, corporation or association having a net worth of less than $ 350,000 (T.45, Z-26).

 8. By agreement of lease dated October 4, 1967 (the 1967 lease), City Line leased the premises to Spa Health Clubs, Inc. for a 20 year term commencing January 1, 1969, with monthly rental payments of $ 3,000 (Z-1).

 9. The 1967 lease agreement contained several provisions, but for purposes of this action, only two are pertinent:

 (a) Paragraph 14(c) provided, inter alia, that the lessor retained the right to relet the premises in the event of a default by the lessee in the payment of rent (Z-1, P 14(c)).

 (b) Paragraph 27(a) gave the lessee the right to assign its interest, without the consent of the lessor, so long as the assignee had a net worth of at least $ 350,000 (Z-1, P 27(a)). This paragraph was apparently included in the lease to prevent any problems between City Line and GSB (see Finding 7).

 10. On February 28, 1968, City Line and Spa Health Clubs, Inc. agreed to amend the 1967 lease (Z-2), and a memorandum of the 1967 lease, as amended, was recorded with the Department of Records of Philadelphia on December 17, 1970 (Z-3).

 11. In 1971, Lee Schoonmaker and a small group of investors established FEA. Schoonmaker became FEA's president (T.163-64).

 12. FEA was essentially a financing company; its operations consisted of purchasing installment sales contracts for health spa services from health spa operators. These contracts were purchased at discount and on a full recourse basis. Thus, if a spa member defaulted under his membership contract, FEA could seek payment directly from the spa operator that sold it the contract (T.163-64).

 13. FEA's operations required large amounts of cash. In 1972 FEA began borrowing substantial sums from Zions to meet its funding needs. By March, 1973, FEA had a $ 1 million line of credit with Zions (T.165).

 14. Spa Health Clubs, Inc., the named lessee under the 1967 lease agreement (see Finding 8), was one of the health spas from which FEA purchased membership contracts (T.165).

 15. In early 1974, Spa Health Clubs, Inc. encountered financial difficulties, and its president, Don Parry, defaulted on the agreement with FEA to reimburse FEA for those contracts purchased by FEA that had gone bad. See Finding 12. (T.166-67).

 16. On February 4, 1974, City Line's rental agent, I. David Pincus, notified Don Parry by letter that (1) Spa Health Clubs, Inc. was delinquent with its rental payments for January and February of 1974 and (2) the landlord would institute legal proceedings if immediate payment were not forthcoming (U-1).

 17. If Spa Health Clubs, Inc. stopped offering services to its members, those contracts which FEA had purchased from Spa Health Clubs, Inc. would be worthless. On February 15, 1974, to protect its investment, FEA exercised a right in its agreement with Spa Health Clubs, Inc. to assume operations of the four spas then owned by Spa Health Clubs, Inc., including the spa located at 4600 City Line Avenue in Philadelphia (T.166-67).

 19. On March 6, 1974, City Line notified Spa Health Clubs, Inc. that it was exercising its rights under paragraph 14(c) of the 1967 lease (U-2).

 20. Shortly after assuming management of the four spas, FEA transferred operation of the 4600 City Line Avenue spa to Old United, its wholly-owned subsidiary (T.169-70).

 21. In June or July 1974, Don Parry brought suit against FEA, Old United and others in the Court of Common Pleas of Philadelphia, seeking to regain the premises. This suit was settled by an agreement dated August 9, 1974 (Z-46). As part of the settlement, Spa Health Clubs, Inc. assigned all of its right, title and interest in the 1967 lease to Old United (T.170).

 22. The written assignment dated August 8, 1974, of the 1967 lease (Z-4) could not be recorded by Old United because it had not been properly notarized (U-10A).

 23. As contemplated by the March 5, 1974 interim lease agreement between FEA and City Line (see Finding 18), a new lease, also dated March 5, 1974 (the 1974 lease) (U-4, Z-5), was executed by Old United and City Line on September 13, 1974 (T.16, 169). The 1974 lease contained the same terms as the 1967 lease, including the $ 3,000 per month rental and the termination date of January 1, 1989. (Compare U-4 with Z-1).

 24. The 1974 lease was not recorded until December 22, 1977, after Old United had assigned its interest under the 1974 lease to New United (see Finding 57 infra). Old United did not record the 1974 lease because it feared that GSB, whose consent to the lease had not been obtained as required under the mortgage from City Line (see Finding 7), would foreclose if it learned of the lease to Old United (T.60-63) (U-10A).

 25. As of September 13, 1974, Old United could trace its interest in the premises at 4600 City Line Avenue to (1) the agreement of lease dated October 10, 1967 between Spa Health Clubs, Inc. and City Line, which had been assigned to Old United by Spa Health Clubs, Inc. on or about August 8, 1974 (see Findings 8 & 21), and (2) the 1974 lease between itself and City Line (see Finding 23).

 26. In 1974, FEA was named as one of several defendants in a large securities litigation in United States District Court in Utah. The defense of this suit substantially depleted FEA's resources and caused it to fall behind on its payment of principal and interest to Zions (T.171-75).

 27. On November 26, 1975, FEA gave Zions a renewal note for $ 375,000 payable on demand or on November 25, 1976 (T.205).

 28. On June 21, 1976, Old United mortgaged its interest under the 1967 lease to Zions to secure the debt owed to Zions by its parent corporation, FEA, under the 1975 note. (Z-6). The mortgage had been drafted by Old United's counsel (T.179).

 29. At the time the mortgage was given:

 (a) FEA was in default on its obligation under the 1975 note to make quarterly interest payments to Zions (T.170-72).

 (b) FEA was indebted to Zions for the principal amount of $ 277,000 plus interest (T.193).

 (c) Old United was indebted to FEA in the amount of $ 499,311 (T.193).

 30. In exchange for the leasehold mortgage from Old United, Zions agreed to defer quarterly interest payments on the 1975 note from FEA (T.71-72) (Z-19, p.5).

 31. At the time Old United gave Zions the mortgage on its 1967 leasehold interest, Lee Schoonmaker, Old United's president, was aware of the existence of the 1974 lease. Nevertheless, Schoonmaker intended that Zions would have a valid lien (T.217-18).

 32. Since the original leasehold mortgage was in the possession of Old United, Zions could not record the mortgage, and despite Zions' repeated pleas, Old United did not record the mortgage until January 12, 1977 (T.77-78) (Z-25).

 33. In late summer of 1976, Angus Belliston, a vice president in Zions' commercial loan department, assumed responsibility over the loan to FEA, replacing Jerry Holyoak who had been transferred to another position within the bank. On September 30, 1976, Belliston had his first real contact with the loan to FEA when he met with Schoonmaker at Holyoak's office in Salt Lake City, Utah. The purpose of this meeting was to acquaint Belliston with Schoonmaker and to discuss the status of the FEA loan. Also discussed at this meeting was FEA's failure to record the leasehold mortgage as it had promised to do. Schoonmaker gave assurances that he would see that the mortgage was ...


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