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March 31, 1986

First Union Real Estate Equity and Mortgage Investments, Plaintiff
Crown American Corporation, Wyoming Valley Mall, Inc., and Middletown Mall, Inc., Defendants

Richard P. Conaboy, United States District Judge.

The opinion of the court was delivered by: CONABOY


I. Background

 Richard P. Conaboy, United States District Judge

 This is an action on a contract brought by Plaintiff First Union Real Estate Equity and Mortgage Investments (hereinafter First Union) against Defendants Crown American Corporation; Wyoming Valley Mall, Incorporated; and Middletown Mall, Incorporated (hereinafter Crown, WVM, and MM respectively). First Union owns a 50% interest in both the Wyoming Valley Mall and the Middletown Mall -- shopping centers which were constructed by Crown. Crown has retained a 50% interest in both malls. The contractual relationship between First Union and Crown came into being when the former advanced funds to the latter to enable the latter to complete construction of these projects.

 The contract (actually a series of lease agreements rather than a single, integrated document) between and among these parties contemplated that WVM and MM -- wholly owned subsidiaries of Crown which were created to collect the revenues these malls would generate and to distribute said revenues to First Union and Crown -- would pay First Union a stated guaranteed rent and 25% of the "gross rents" over a specified breakpoint. The deal was structured in that fashion because First Union wanted to make certain that its status as a real estate investment trust would not be jeopardized in any way. This might have been the case under the Internal Revenue Code if First Union were perceived as being actively engaged in the management of real estate.

 First Union seeks payment of its share of common area charges (CAM's), Sunday and holiday charges, lease termination payments, proceeds from restrooms and telephone booths, etc. to which it claims it is entitled because a clause of its contract with Crown -- paragraph 3.02(b) -- mandates that such charges should be incorporated into the category of "gross rents". Crown argues that such charges were not contemplated to be sums to which First Union has any claim at the time the contract was being negotiated. Crown also asserts a counterclaim against First Union for money it has expended to replace a roof at the Wyoming Valley Mall and to upgrade and expand the sewage treatment plant at Middletown Mall.

 On February 21, 1985, we denied a motion for summary judgment brought by First Union. Although it seemed apparent that Crown was withholding monies from First Union in derogation of their contract, we rejected an inclination to grant summary judgment in First Union's favor in deference to Crown's argument that live testimony would show that a crucial section of their contract, the aforementioned paragraph 3.02(b), should not be given the expansive interpretation urged by First Union. Thereafter, by consent of the parties, we proceeded to a non jury trial pursuant to Rule 39(b) of the Federal Rules of Civil Procedure which was held August 6 and 7, 1985. Following the trial, counsel submitted appropriate briefs and requests for findings of fact and conclusions of law. For trial purposes, counsel narrowed the issues very thoroughly and the matters tried to the Court generally went to the dispute surrounding the interpretation of the terminology in the contracts (lease agreements) particularly as it relates to rents and items known or described as gross rents, and to the validity of the Defendants' counterclaim.

 We then had the opportunity to listen to the testimony of some of the attorneys who had participated in the negotiations leading up to the agreements which delineate the rights and obligations of the parties. Afterward, we instructed the parties to submit proposed findings of fact and conclusions of law pursuant to Rule 52 of the Federal Rules of Civil Procedure. On the twin bases of our judgment as to the relative credibility of the witnesses whose testimony we heard and our review of this case file, we now conclude that the preponderance of the evidence presented dictates a Verdict in favor of Plaintiff First Union.

 II. Findings of Fact


1. First Union is, indeed, a real estate investment trust (A REIT) as defined in Section 856 of the Internal Revenue Code.


2. Crown sold First Union an undivided 50% interest in the Middletown Mall in 1970 and an undivided 50% interest in the Wyoming Valley Mall in 1972.


3. By agreement of the parties, Crown formed two subsidiaries, WVM and MM, to which First Union and Crown leased their separate interests in these shopping centers.


4. By agreement of the parties, Crown was designated to act as the managing agent for both malls since, as a REIT, First Union would lose tax advantages if actively involved in managing real estate.


5. By virtue of the lease agreements among these parties, First Union was entitled to receive a "fixed rental" as well as additional rent of 25% of any amount above a specified "breakpoint".


6. The 25% of "amounts" collected above the "breakpoint" was to be calculated from the total of "gross rents" actually collected.


7. Section 3.02(b) of the pertinent lease agreements states:


As used herein, the term "Gross Rents" shall mean the rentals and all other amounts actually received in any lease year by tenant from sublessees of all or any portion of the Premises, but excluding payments by any sublessee to Tenant with respect to escalation charges for real estate or other taxes and any other charges which, as to Landlord, would not qualify as "rents from real property" for purposes of Section 856 of the Internal Revenue Code, or any amendments thereto. Tenant agrees that if any separate charges for Tenant's services are made in its leases with sublessees of the Property, such charges shall not exceed the reasonable value of the services. In the event of any dispute as to whether or not any rentals do or do not qualify as "rents from real property" under Section 856 of the Internal Revenue Code, the determination by counsel for the Landlord shall be determinative and binding on Landlord and Tenant. As used herein, the term "Lease Year" shall mean the 12 month period commencing on the first day of the month subsequent to the month in which this Agreement is executed and delivered, and each subsequent 12 month period during the term of the lease.


8. Section 3.02(b), as well as the entirety of all agreements and leases consummated between these parties, was arrived at after lengthy and deliberate negotiations conducted by skilled lawyers for both parties.


9. Each side had the opportunity and, in fact, did review all of the elements of the various leases and agreements and these leases and agreements describe and define a deliberate meeting of the minds.


10. At the time these agreements were entered into, First Union was concerned over a proper return on investment and was also concerned that the amounts it would receive as rents would in no way violate the laws which govern the types of income which REIT's are allowed to receive without exposure to normal taxation.


11. During the lease years ending June 30, 1979 through June 30, 1985, WVM received certain amounts from tenants which it did not include in the gross rents it reported to First Union and WVM did not pay any proportion of this income to First Union.


12. The amounts received and not reported as gross rents by WVM and the purposes for which they were received are as follows:

  A. Sunday and holiday charges $ 304,450.00 B. Increase in insurance premiums $ 26,542.98 C. Standby water service $ 38,193.52 D. Lease terminations $ 35,000.00 E. Kiosks (temporary tenants) $ 261,280.18 F. Restroom locks $ 18,520.88 G. Copy machines $ 10,329.50 H. Telephone commissions $ 23,900.34


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