Mellon Bank v. Aetna Business Credit Corp.

619 F.2d 1001 (3rd Cir. 1980)

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Nature of the Case

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Facts

Three parties were joint venturers in the development of an office complex in Atlanta. The project was known as Kensington square. The estimated cost of the project was $2.5 million. Aetna extended a permanent loan to the borrowers in the amount of $2.5 million in May 1974. Mellon extended the short-term construction loan to finance the actual construction of the buildings. Mellon’s loan eventually reached $2,241,489 at the time the contractor had substantially completed the buildings. In July 1974, Mellon, Aetna, and the borrowers executed a tripartite Buy-Sell agreement, which obligated Aetna subject to certain conditions to purchase the construction loan from Mellon. In 1975, there was a precipitous decline in the Atlanta real estate marketplace, and only 7 percent of the new complex was leased. In August 1975, Mellon presented the necessary documents to Aetna to activate Aetna’s duty to purchase the loan and Aetna refused. Aetna claimed that the bankruptcy or insolvency provision of the Borrower meant that Aetna’s obligation to perform was negated. Aetna contends that the borrowers were not solvent at the time and Mellon disagrees. The project was sold in foreclosure for $1,150,000 which was the true market value at that time. Aetna contends that they are entitled to judgment on the record as a matter of law. Aetna contends that the test of insolvency is well established in law and as a commercial standard, a party is insolvent when their liabilities exceed their assets, or they are unable to pay their debts as they come due (Larrimer). Mellon contends that insolvency must be applied without reference to the liabilities or assets of the borrowers which accrue from the project. Mellon contends that its test properly reflects the intent of the parties and is required for a rational interpretation of the agreement. Aetna counters that Mellon’s standard is an impermissible rewriting of the words of the contract. The district court held that the agreement should be interpreted to exclude reference to assets or liabilities related to the project and that this interpretation was required under the clear allocation of lending risks between Mellon and Aetna. The basis for this holding was extrinsic evidence. The court found that Aetna’s loan officer recognized its principal risk to be whether the office park could reach 90% occupancy and that Aetna did not consider the borrowers’ cash flow and did not condition its obligation upon any occupancy level. The trial court held that Aetna recognized that the financial transaction in question was not a basis for finding insolvency. The lower court did not cite any document or wording in the clause for its conclusion. This appeal resulted.