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Wells Fargo Bank, National Bank, National Association v. Dauphin County General Authority Appeal of Saybrook Capital

March 16, 2011


The opinion of the court was delivered by: Dan Pellegrini, Judge

Submitted: February 4, 2011



Saybrook Capital, LLC (Saybrook) and Wells Fargo Bank, National Association (Trustee) appeal the decision of the Court of Common Pleas of Dauphin County (trial court) denying their motion made pursuant to the Declaratory Judgment Act, 42 Pa. C.S. §§7531-7541, to approve the proposed disposition of property known as Forum Place because the transaction did not constitute a sale or other disposition as contemplated in the Fourth Amendment of the parties' Trust Indenture.

The facts of this case are not in dispute. Forum Place is a real estate development project located in the City of Harrisburg consisting of parking facilities and a multi-story office building. It is owned by the Dauphin County General Authority (DCGA) subject to the rights of the bondholders. Saybrook is the controlling bondholder because it is the beneficial owner of not less than 66 2/3% of the aggregate principal amount of the 1998 A Bonds currently outstanding (Forum Place bonds) on the Forum Place project. DCGA defaulted in the payment of principal and interest on the Forum Place bonds, which total nearly $90 million in aggregate principal amount. Therefore, in 2003 the previous trustee*fn1 filed a complaint against DCGA and the parties stipulated that Robert Chernicoff, Esquire (Receiver) would be appointed as receiver.

Over the next several years, several amendments were made to the Trust Indenture between DCGA and the Trustee. The amendment at issue in this case is the Fourth Amendment dated February 1, 2007. The Fourth Amendment added a new section to the Trust Indenture, Section 8.03A entitled "Sale of Facilities," which provides in pertinent part as follows:

Upon the happening and during the continuance of any Event of Default specified in Section 8.01 hereof, then in every such case, the Trustee shall, upon the written request of the Registered Owners of not less than 66 2/3% of the aggregate principal amount of the 1998 A Bonds and Additional Bonds then Outstanding request in writing that the Authority sell or otherwise dispose of all or substantially all of the Facilities, or any portion thereof, to such persons or entities, and with such terms and conditions affecting the Authority as shall be reasonably acceptable to the Authority, as the Trustee shall designate in accordance with the written request or approval of such requesting Registered Holders. The Authority covenants and agrees that if any such request is made, the Authority will do all things necessary or required to cause the Facilities, or any portion thereof, to be sold or disposed of. . .

(Reproduced Record (R.R.) at 363a). (Emphasis added).

On September 19, 2007, Saybrook made a written request to the Trustee pursuant to Section 8.03A to direct DCGA to enter into an agreement of sale of Forum Place to Rubenstein Partners Acquisitions, LLC (Rubenstein). That same day, the Trustee made such a written request to DCGA. While DCGA approved the agreement of purchase and sale, Rubenstein later exercised its termination right, and the deal fell through. In 2007 and 2008, Saybrook's counsel and the Receiver pursued a master lease strategy for Forum Place in which the Commonwealth would lease the entire building. DCGA approved a lease agreement for this transaction.

In April 2010, Saybrook initiated another proposed transaction which it claimed would dispose of substantially all of the Forum Place office and parking facilities by selling them to the Pennsylvania Economic Development Financing Authority (PEDFA). Pursuant to Section 8.03A, Saybrook sent a written request regarding the proposed transaction to the Trustee, who in turn made a written request to DCGA. Under the proposed transaction, PEDFA would issue revenue bonds (PEDFA bonds) and would pay the proceeds of the PEDFA bonds to DCGA as the acquisition price for Forum Place. The proceeds would retire the Forum Place bonds and PEDFA would take legal title to Forum Place. PEDFA would then sell Forum Place back to DCGA pursuant to an installment sales agreement, with installment payments made solely out of revenues from Forum Place. According to Saybrook, the installment payments would be structured so as to permit full and timely payment of the principal and interest due on the PEDFA bonds. Once the installment sales contract has been completed and all bondholders have been paid, which Saybrook admits will not be until some point in excess of 20 years, legal title to Forum Place would be reconveyed to DCGA, free of all liens.

DCGA did not take any formal action on Saybrook's request. In a letter to the trial court, DCGA indicated it was not opposed to the sale of Forum Place but that it considered the proposed transaction a refinancing mechanism rather than a true sale. Therefore, on July 13, 2010, Saybrook filed a motion to approve the proposed disposition of Forum Place pursuant to the Declaratory Judgment Act requesting that the trial court compel DCGA "to execute any and all documents necessary to effect [sic] the PEDFA Restructuring." (R.R. at 19a).

Both the Trustee and the Receiver joined in this motion, and they all maintained that the proposed transaction qualified under the Fourth Amendment as a sale or disposition of all or substantially all of the Forum Place facilities.

The trial court held an evidentiary hearing on Saybrook's motion on August 19, 2010. At that hearing, Jeff Wilson (Mr. Wilson), a shareholder in Saybrook Capital, testified on behalf of Saybrook that DCGA owed a little over two million dollars in arrears and the principal was somewhere between eight and 10 million dollars. Mr. Wilson testified that by approving the proposed transaction, DCGA would be absolved of any liability on a going-forward basis with respect to the defaulted bonds, meaning it would be relieved of roughly 10 million dollars in current liability owed to the bondholders. According to Mr. Wilson, DCGA would not be liable for the PEDFA bonds and that after all the bondholders were paid under the proposed transaction, DCGA would own Forum Place free and clear of any liability. On cross-examination, Mr. Wilson admitted that under the proposed transaction DCGA would still have a stake in the ultimate outcome of the property because it would regain title to Forum Place and would regain management responsibility for the facilities. He also admitted that the statement that DCGA would end up with title free and clear of all liens was based on the assumption that there would be sufficient revenue from the parking and office facilities to pay off the PEDFA bonds. Mr. Wilson admitted that he had no idea what condition the facilities would be in when DCGA finally regained title some 20 years in the future and until that time DCGA would have no control or input as to the operation of the facilities.

Donna Kreiser, Esquire (Attorney Kreiser), a municipal finance attorney, testified on behalf of DCGA. Attorney Kreiser testified that she reviewed the proposed transaction and term sheet at the request of DCGA and that in her opinion the proposed project was a refinancing of the existing bonds through an installment sales agreement. (R.R. at 241a). She testified that DCGA would be required to make installment sales payments ...

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