Equitable concepts and considerations frequently play a significant role in disputes tried before a bankruptcy court. Moreover, such litigation is sometimes conducted on a somewhat less formal basis than that which might occur in other venues. As a result, litigants may view this as an opportunity to introduce evidence and arguments that might otherwise not be considered outside of a court of equity. Such equitable considerations can, on occasion, impact the predictability of a particular outcome.

Recently, however, a New York bankruptcy court refused to insert these equitable concepts into an otherwise straightforward contract dispute, much to the chagrin of the debtor, in In re New York Skyline, 2013 Bankr. 106840/11 (Bankr. S.D.N.Y. Feb. 22, 2013). In New York Skyline, U.S. Bankruptcy Judge Stuart M. Bernstein of the Southern District of New York ruled that the debtor would be strictly held to the terms of its agreement, notwithstanding the fact that it required the calculation of payments due thereunder in a manner that was not the most accurate or arguably, the most reasonable.

The basic facts in the case are straightforward. Prior to its bankruptcy, the debtor, New York Skyline Inc., entered into certain lease and license agreements with its landlord, Empire State Building Co. (ESB), for space in the Empire State Building to operate a tourist attraction. Multiple adversary proceedings were initiated arising from alleged breaches of the lease and license agreements.

One of the primary disputes before the court pertained to whether ESB overcharged Skyline for electricity. The lease provisions controlling the computation for electrical charges included multiple detailed and complicated technical terms and concepts. The court therefore, ordered a separate trial on those provisions. At trial, the court permitted the introduction of parol evidence to assist in understanding the technical terms and provisions at issue. Although complex, the court found that the parol evidence sufficiently clarified the ambiguities regarding the computation methodology for the electrical charges. Interestingly, while parol evidence was permitted to clarify the parties’ agreement by explaining the technical terms, the court refused to admit parol evidence for purposes of contradicting the terms of the lease itself, due to the existence of a merger clause contained within the lease. As a result, evidence suggesting that the parties had reached a contradictory agreement governing the methodology for calculating the base electrical rate during lease negotiations was not admitted into evidence or otherwise considered.

Under the terms of the lease, the amount charged for electricity was not based upon the actual level of electricity used, but rather, calculated utilizing an assumed amount of electricity Skyline would have used if it had run its ordinary equipment for 50 hours per week. The lease also provided a mechanism by which ESB could hire an electrical consultant to survey the premises and revise the base charge using the results of the survey.

The lease, however, contained specific procedures for resolving disputes relating to those electrical surveys. Skyline was required to dispute a survey within 15 days of receipt from ESB. If Skyline failed to timely contest the survey results and the electrical charges to be incurred thereunder, the survey became "binding and conclusive" on both parties. If a timely challenge was lodged, Skyline was required to hire its own electrical consultant to conduct a second survey. The two consultants would then attempt to reach agreement, but if they could not, a third consultant was to be chosen who would then make his or her own determination, and the third consultant’s determination would be controlling.

In accordance with the lease, ESB performed multiple electrical surveys and provided those surveys to Skyline. Skyline apparently failed to challenge whether ESB properly set the base electric rate. In fact, the evidence at trial confirmed that Skyline never protested ESB’s surveys in the manner required under the lease. Rather, Skyline’s post-bankruptcy challenge to the electric charges was based upon the premise that the lease methodology failed to accurately estimate electricity consumption, which resulted in overcharges, while ignoring other, more accurate ways to measure use.

The court, after exhaustive analysis of the various computational methodologies for setting the base electric rate, found that even if more reasonable ways to do so existed, the issue was governed by the explicit terms of the lease. Thus, Skyline was strictly bound by the agreement it made with ESB. Skyline’s request for additional information regarding the surveys through two letters sent to ESB, a general reservation of rights, and even an indication that a challenge might be forthcoming were simply insufficient under the explicit terms of the lease and could not operate to preserve Skyline’s right to challenge the surveys beyond the 15-day period. Accordingly, the court granted ESB’s motion for judgment on partial findings and dismissed the claim.

While the New York Skyline decision itself is not monumental, it serves as an important reminder to bankruptcy practitioners that while litigation before a court of equity is sometimes a bit more informal and may even allow for consideration of evidence that in other circumstances might not be admitted, strict interpretation and enforcement of contractual terms, even against a debtor, remains a very real, and maybe even likely outcome. •

Francis J. Lawall, a partner in the Philadelphia office of Pepper Hamilton, concentrates his practice in national bankruptcy and reorganization matters. He routinely lectures to various creditor groups concerning general bankruptcy issues, including preferences, reclamation, the role of creditors committees and related issues.

John Henry Schanne II is an associate in the firm’s Wilmington, Del., office, where he concentrates his practice in national bankruptcy and reorganization matters.