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Reilly v. Firestone Tire and Rubber Co.

June 10, 1985

CHARLES M. REILLY, APPELLANT
v.
THE FIRESTONE TIRE AND RUBBER COMPANY, APPELLEE



On Appeal from the United States District Court for the Middle District of Pennsylvania (D.C. Civil No. 83-0326).

Gibbons and Becker, Circuit Judges, and Katz, District Judge.*fn*

Author: Becker

Opinion OF THE COURT

BECKER, Circuit Judge.

This appeal is an ejectment case, in which our jurisdiction is founded upon diversity of citizenship, 28 U.S.C. ยง 1332, concerns the ongoing validity of a long term commercial lease. The terms of the lease are extremely favorable to appellee, Firestone Tire and Rubber Company (Firestone), and are correspondingly unfavorable to appellant, Charles M. Reilly (Reilly), who purchased the property subject to the lease from the Small Business Administration (SBA). SBA had, in turn, purchased the property at a foreclosure sale under several mortgages it had taken as security for loans advanced to the prior owner. Reilly contends that the lease was discharged because the foreclosure was founded, at least in part, on pre-lease mortgages, and denies that his predecessor, SBA, affirmed the lease by its conduct or writings either before or after the judicial sale. Reilly also argues that, in any event, only post-sale conduct can operate to affirm a lease. Firestone rejoins that SBA, whose own mortgages post-dated the lease, procured assignment of the pre-lease mortgages solely with the intent of ousting Firestone as tenant, and that such conduct is improper and thus without effect under Pennsylvania law. Firestone also submits that SBA affirmed the lease both before and after the foreclosure sale.

The district court granted summary judgment in favor of Firestone, concluding that, under Pennsylvania law, the lease was not discharged because of the circumstances under which SBA had acquired the pre-lease mortgages, and that SBA had, in any case, affirmed the lease by its pre-sale conduct. We conclude, to the contrary, that the manner of SBA's acquisition of the pre-lease mortgages does not justify application of Pennsylvania's extremely narrow exception to the rules governing discharge of leases; we thus hold that, unless it was affirmed, the lease was discharged as a matter of law. On the latter point, we conclude that Pennsylvania law recognizes the possibility that a mortgagee in possession may affirm a lease both before and after a judicial sale, but that there are genuine issues of material fact regarding the issue of affirmance. Accordingly, we will vacate the judgment and remand the case for further proceedings consistent with this opinion.

I.

A.

The relevant facts are quite involved. In 1957, Roddy Realty, Inc. (Roddy) purchased improved premises located at 486 Northhampton Street, Edwardsville, Luzerne County, Pennsylvania. At the time of purchase, Roddy mortgaged the property to the Miners National Bank (Miners mortgage). In March 1960, Roddy took a second mortgage on the property, this time with Wyoming National Bank (Wyoming mortgage). On July 23, 1965, Roddy leased a portion of the property to Firestone for use as an automobile service center. The lease ran for a term of twenty years, with the option to renew for a series of five-year terms in favor of the tenant. thereafter, in February 1966, Roddy once again mortgaged the property, this time to the Susquehanna Savings and Loan Association (Susquehanna I mortgage). At the same time, Miners and Wyoming assigned to Susquehanna their respective rights, title, and interest in the Miners and Wyoming mortgages.

Roddy continued to borrow against and mortgage the property as its value increased in May 1970, Roddy took a second mortgage with Susquehanna (Susquehanna II mortgage). In January 1973, Roddy mortgaged in the property to the United States Small Business Administration (SBA I mortgage). Shortly thereafter, Susquehanna assigned to SBA its rights under the Susquhanna [Susquehanna ] II mortgage. Two years later, in March 1975, Roddy once again mortgaged the property SBA (SBA II mortgage).

As partial security for the the SBA II mortgage, Roddy assigned to SBA its interest in the Firestone lease. The assignment provided that in the event of default on the mortgage, SBA at its option, could "enter in and upon the premises and take possession thereof, and collect rents and profits thereof...." IT further provided that "upon curing all defaults the Assignor [Roddy], its successors or assigns, shall again be entitled to collect and retain the rents under the aforesaid lease" and that "upon payment of the aforesaid mortgage debt this assignment shall be rendered null and void and the said lease or leases shall be reassigned to the then owner.... In addition, the document contained the following language respecting the obligations of SBA as assignee:

The undersigned Lessee of the above-mentioned leasehold consents to and agrees to be bound by the above Assignment of Lease with the understanding that Lessee's lease will be recognized by Assignee, its successors and assigns so long as Lessee is not in default under the terms of its lease.

Appendix at 22(b). Only Firestone and Roddy we signatories to the assignment. On June 30, 1976, SBA notified Firestone that SBA was accepting the lease assignment and requested that all monthly rental payments be transmitted directly to SBA. SBA thereafter accepted rent payments as mortagee/assignee.

On October 31, 1977, Susquehanna assigned to SBA the Miners, Wyoming, and Susquehanna I mortgages. Soon after obtaining these assignments, SBA initiated foreclosure proceedings against Roddy in the United States District Court for the Middle District of Pennsylvania. SBA's amended complaint, filed on December 14, 1977, recited that Roddy had defaulted on all of the mortgages in SBA's possession: Miners, Wyoming, Susquehanna I, Susquehanna II, SBA I, and SBA II. each of these mortgages was open and unsatisfied as of record at the time of the foreclosure proceedings. SBA claimed that the amount owned by Roddy on the mortgages was $983,336.97. ON January 17, 1978, SBA secured a default ...


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