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First Bank Nat. Ass'n v. F.D.I.C.

March 22, 1996




On Appeal from the United States District Court for the Eastern District of Pennsylvania (D.C. Civil Action No. 94-2197)

BEFORE: GREENBERG, NYGAARD, and LAY, *fn* Circuit Judges

GREENBERG, Circuit Judge.

Argued February 1, 1996

(Filed: March 22, 1996)


This appeal requires us to decide a narrow issue: under what circumstances, if any, is the FDIC required to pay the cost of leasemandated structural repairs and modifications to a building when it acts as a receiver for a failed lessee-thrift and disaffirms its lease under FIRREA? To decide this issue, we must construe 12 U.S.C. Section(s) 1821(e)(4), the provision of FIRREA that sets forth the FDIC's obligations when it disaffirms leases. Because we believe that the FDIC's liability for "unpaid rent" under FIRREA includes the costs of the structural repairs mandated by the lease, if any, we will reverse the district court's order rejecting the claim for these repairs. We also will reverse the district court's order rejecting the lessor's claim for the costs of making modifications to the building to comply with the ADA (Americans with Disabilities Act), because the district court incorrectly applied the "readily achievable" standard to determine whether the liabilities had accrued. We will remand the case to the district court to determine whether the obligation of repairing the building and complying with the ADA had matured by the date the thrift went into receivership.


Plaintiff, First Bank National Association, Trustee, ("First Bank"), brought this action for breach of contract against the defendant, the Federal Deposit Insurance Corporation ("FDIC") pursuant to the Federal Deposit Insurance Act, 12 U.S.C. Section(s) 1811 et seq., as amended by the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA"). First Bank alleged that the FDIC, as receiver for Meritor Savings Bank ("Meritor"), formerly known as the Philadelphia Savings Fund Society, was liable for sums due under a sublease of the historic PSFS building Meritor occupied at 12 South 12th Street, Philadelphia, Pennsylvania. *fn1

Meritor, the owner of the PSFS building, entered into a complex series of lease and sublease agreements with First Bank and other entities during the 1980s. First Bank Nat'l Ass'n v. FDIC, 885 F. Supp. 117, 118 (E.D. Pa. 1995). As a result, First Bank became Meritor's landlord under a sublease for the space Meritor occupied in the building, with Meritor apparently retaining only nominal title to the building. App. 63. Meritor's sublease ran until December 31, 2006, but included three options to renew for ten-year terms until December 31, 2036. First Bank, 885 F. Supp. at 119.

Paragraph 4(a) of the sublease between First Bank and Meritor required Meritor initially to "pay to [First Bank] in lawful money of the United States as fixed rent for the Premises" $1,806,000 per quarter. App. 83, 137. While the sublease provided for subsequent changes in the rent, the $1,806,000 figure controlled when the FDIC became the receiver. Paragraph 6(a)(i) committed Meritor to pay "all taxes, assessments, governmental or quasi-governmental levies, fees, water and sewer rents and charges, and all other governmental charges general and special, ordinary and extraordinary, foreseen and unforeseen" imposed during the term of the sublease. App. 87.

Pursuant to paragraph 6(b) of the sublease, Meritor also was obligated to:

comply with and cause the Premises to comply with (i) all laws, ordinances and regulations, and other governmental rules, orders and determinations now or hereafter enacted, made or issued, whether or not presently contemplated . . . App. 89.

The sublease expansively required that Meritor: maintain all parts of the Premises in good repair and condition, except for ordinary wear and tear and except as expressly provided in paragraph 11(b), *fn2 and . . . take all action and . . . make all structural and non-structural, foreseen and unforeseen and ordinary and extraordinary changes and repairs which may be required to keep all parts of the Premises in good repair and condition, ordinary wear and tear excepted. Lessor shall not be required to maintain, repair or rebuild all or any part of the premises. App. 92.

Overall, it is clear that the sublease put the risks and burdens of maintaining the building on Meritor.

The Secretary of Banking of the Commonwealth of Pennsylvania declared Meritor to be in unsafe and unsound condition on December 11, 1992, and, pursuant to FIRREA, the FDIC was appointed its receiver on the same day. The FDIC disaffirmed the sublease for the PSFS building pursuant to 12 U.S.C. Section(s) 1821(e)(1), on March 31, 1993, and the disaffirmance was effective that day. *fn3

Pursuant to 12 U.S.C. Section(s) 1821(e)(4)(B), upon the disaffirmance First Bank, as lessor, was entitled to "any unpaid rent, subject to all appropriate offsets and defenses, due as of the date of the appointment. . . ." In addition, First Bank was "entitled to contractual rent" from the FDIC "accruing before . . . the disaffirmance [of the lease] . . . becomes effective." Following the disaffirmance, First Bank filed an administrative claim with the FDIC, and, after its rejection, filed this timely action on April 7, 1994, as permitted by 12 U.S.C. Section(s) 1821(d)(6). At the trial, First Bank claimed the FDIC was liable under section 1821(e)(4)(B) for:

(1) $1,404,666.67 in unpaid 'fixed quarterly rent' for the period October 1, 1992 through December 11, 1992;

(2) $224,119.68 in property taxes for the period January 1, 1993 through March 31, 1993;

(3) $285,000 for modification of the building to comply with the Americans with Disabilities Act ('ADA');

(4) $980,000 for rehabilitation of the north facade of the PSFS building;

(5) $50,000 for repair of the plumbing;

(6) $12,000 for repair of the electrical systems;

(7) $355,000 for renovation and repair of the heating, ventilating and air conditioning ('HVAC') system; and

(8) prejudgment interest on all of the above amounts.

First Bank, 885 F. Supp. at 119-20. In its opinion and judgment of April 20, 1995, the district court found that the above claims were valid except for the expenses for the modifications of the building to comply with the ADA, the cost of the structural repairs of the north facade of the building, and prejudgment interest other than that due on the rent. First Bank appeals from the denial of the costs of structural repairs to the north facade of the building and the costs of modifying the building to comply with the ADA. The district court had ...

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