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Bank of Nova Scotia v. St. Croix Drive-In Theatre Inc.

February 16, 1984

BANK OF NOVA SCOTIA
v.
ST. CROIX DRIVE-IN THEATRE, INC., ST. THOMAS DRIVE-IN THEATRE, INC., MARVIN MAHAN, AND H.E. LOCKHART DEVELOPMENT CORPORATION. BANK OF NOVA SCOTIA, APPELLANT IN NO. 83-3074 APPELLEE IN NO. 83-3055 ST. CROIX DRIVE-IN THEATRE, INC. ST. THOMAS DRIVE-IN THEATRE, INC., APPELLANTS IN NO. 83-3055 APPELLEES IN NO. 83-3074 H.E. LOCKHART DEVELOPMENT CORPORATION, APPELLEE IN NOS. 83-3055 AND 83-3074



APPEAL FROM THE DISTRICT COURT OF THE VIRGIN ISLANDS (Division of St. Croix)

Author: Weis

Before: HUNTER, WEIS and ROSENN, Circuit Judges.

Opinion OF THE COURT

WEIS, Circuit Judge.

In this Virgin Islands case, the district court held that a lessor in the real estate development business was not a compensated surety. Therefore, when the creditor granted the tenant an extension of time for repayment of a loan, the lessor/surety was discharged from its obligation under a tripartite agreement. The court also found that the parties had intended that a mortgage given to the creditor apply only to a leasehold and not the fee interest. We agree with these conclusions and will affirm.

After a bench trial, the district court entered judgment in favor of the H.E. Lockhart Development Company as surety and against the creditor, Bank of Nova Scotia. It also entered judgement in favor of the Bank against the principal debtors, St. Croix Drive-In Theatre, Inc. and St. Thomas Drive-In Theatre, Inc. 552 F. Supp. 1244 (V.I. 1982).

The case arose out of the failure of St. Croix Drive-In and St. Thomas Drive-In to repay the Bank a loan of $400,000. The funds had been advanced to St. Croix Drive-In, in part, so it could pay off some obligations. St. Croix also transferred $250,000 of the loan to its newly-formed subsidiary, St. Thomas Drive-In. That organization planned to open a theater on St. Thomas and, for that purpose, had secured a ten-year lease of property owned by the Lockhart Development Company. The subsidiary expected to grade the land and erect the structures necessary to carry out its enterprise.

Part of the financing arrangements for the new theater consisted of a mortgage on the leasehold, accompanied by a demand mortgage note in the amount of $250,000 given by St. Thomas Drive-In to the Bank. In addition, Lockhart, the Bank, and St. Thomas Drive-In executed a "stipulation" dated November 11, 1971 in which Lockhart agreed not to cancel the lease without notifying the Bank. The stipulation also provided that:

"Landlord [Lockhart] further agrees that in the event Tenant [St. Thomas Drive-In, Inc.] shall for any reason default in said mortgage and as a result . . . mortgagee [Bank] shall declare the mortgage due and payable in full . . . Landlord will exercise the right of cancellation provided for at paragraph 12 of said lease, and upon cancellation thereof, will assume the remaining unpaid principal balance of the mortgage and any accrued interest thereon in all respects as though Landlord had originally executed said mortgage and mortgage note accompanying the same and will henceforth be deemed the mortgagor."

Lockhart's potential liability was limited to a principal amount of $250,000.

In December 1971, St. Thomas Drive-In gave the mortgage to the Bank, and St. Croix Drive-In furnished guarantees of certain individuals as well as that of St. Thomas Drive-In. The Bank then paid $400,000 to St. Croix Drive-In by a series of installments, the last being made in May 1972. As each payment was made, St. Croix Drive-In and St. Thomas Drive-In gave the Bank a demand note for the amount of the installment. St. Croix Drive-In passed on $250,000 of the total sum to St. Thomas Drive-In.

The district court found that Lockhart believed the St. Thomas mortgage was to be retired by installments, but did not know the amounts of the monthly payments. St. Croix, however, had agreed to pay the Bank $5,555.56 per month toward the principal in addition to accrued interest. With this schedule, the loan would be retired in six years.

In 1972 and through May 1973, payments were made in accordance with the agreement. Unknown to Lockhart, however, the Bank allocated all the principal payments to the $150,000 principal sum not secured by the St. Thomas mortgage. When payments became delinquent in early 1973, the Bank granted a moratorium on principal payments for six months, and eventually for one year. Later, the Bank agreed to modify the installment terms to allow for the payment of accrued interest and only a small amount of the principal.

Lockhart was aware that the Drive-Ins were having financial difficulties and that efforts wree being made to work things out with the Bank.However, Lockhart had no knowledge of the moratorium or other modifications to the loan repayment. The Bank gave no notice of these arrangements; nor did Lockhart ever consent to them. For its part, Lockhart did agree to a reduction in the rents being paid it by St. Thomas Drive-In ...


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