AboveNet Communications, Inc. v. 1807 Faraday Court Ltd. Partnership , 162 F. App'x 264 ( 2006 )

UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 05-1398
ABOVENET COMMUNICATIONS, INCORPORATED,
Plaintiff - Appellee,
versus
1807 FARADAY COURT LIMITED PARTNERSHIP; TIGERS
XII CORPORATION,
Defendants - Appellants.
Appeal from the United States District Court for the Eastern
District of Virginia, at Alexandria. Gerald Bruce Lee, District
Judge. (CA-04-1514-1)
Argued: November 29, 2005 Decided: January 20, 2006
Before WILKINSON, MICHAEL, and MOTZ, Circuit Judges.
Affirmed by unpublished per curiam opinion.
ARGUED: David McCrory Estabrook, GORDON & ESTABROOK, R.L.L.P.,
Fairfax, Virginia, for Appellants. Robert Richardson Vieth, COOLEY
& GODWARD, L.L.P., Reston, Virginia, for Appellee. ON BRIEF:
Anthony A. Stenger, COOLEY & GODWARD, L.L.P., Reston, Virginia, for
Appellee.
Unpublished opinions are not binding precedent in this circuit.
See Local Rule 36(c).
PER CURIAM:
AboveNet Communications, Inc. entered a commercial lease
agreement with 1807 Faraday Court Limited Partnership, allowing
AboveNet to remove the mezzanine level of Faraday’s commercial
office building upon payment of a “Restoration Escrow.” AboveNet
paid the escrow and demolished the mezzanine. We must decide
whether Faraday may retain the Restoration Escrow after AboveNet
purchased the building outright. The lease specifically provided
that Faraday “shall hold the Restoration Escrow . . . and shall use
it to restore the Mezzanine to a condition similar to that in
existence immediately prior to the Tenant Improvements.” Because
AboveNet’s purchase of the building obviated the need for Faraday
to perform any restorations of the mezzanine, the very purpose of
the Restoration Escrow, we conclude that AboveNet is entitled to a
return of the escrow payment. We therefore affirm the judgment of
the district court.
I.
On June 15, 1999, AboveNet and Faraday executed a twenty-year
lease for Faraday’s multi-story commercial office building in
Reston, Virginia. AboveNet intended to use the building as a data
center, which required the installation of various generators and
electronic devices. To accommodate this equipment, the lease
specified that AboveNet would have the right to remove the
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building’s second floor mezzanine. The second floor comprised
approximately 7600 of the 28,942 square feet of rentable office
space in the building.
Eliminating the mezzanine reduced the amount of floor space
that Faraday would have to rent to future tenants. The lease thus
required AboveNet to provide a cash “Restoration Escrow” before
proceeding with any demolition. Paragraph 11(b) of the lease,
entitled “Tenant Alterations,” governs the escrow payment. In
relevant part it provides:
Landlord shall hold the Restoration Escrow without
interest payable to Tenant and shall use it to restore
the Mezzanine to a condition similar to that in existence
immediately prior to the Tenant Improvements, in addition
to the other remedies available to Landlord. However,
upon completion of the Tenant Improvements Landlord shall
promptly return the Restoration Escrow to Tenant, in
whole or in part, as follows: Landlord shall compare the
quotient (“Improvement Percentage”) of (I) the value of
the improvements installed in the Building which, in
Landlord’s reasonable determination, shall have long term
value to the Building, shall be useful to a successor
tenant, and at Landlord’s option shall remain in the
Building at the end o [sic] the Term (the “Collateral
Improvements”), divided by (ii) FOUR HUNDRED DOLLARS
($400.00), and also divided by the Removed Area; Landlord
shall return to Tenant the Improvement Percentage (not to
exceed 100%) of the Restoration Escrow.
AboveNet furnished a $761,500 Restoration Escrow pursuant to this
provision.
AboveNet thereafter commenced work on the building. From
October 1999 to March 2000, it removed the mezzanine and performed
a variety of other renovations, which included installing new
heating and cooling systems, replacing the roof, and redesigning
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the building’s interior, all at a total cost of approximately $12
million. When the renovations were complete, AboveNet requested an
early return of the Restoration Escrow. Faraday refused,
contending that AboveNet’s improvements would not “have long term
value to the Building” or be “useful to a successor tenant” within
the meaning of Paragraph 11(b). AboveNet did not agree with
Faraday’s determination, but did not immediately contest it.
AboveNet filed for bankruptcy in May 2002, but it continued to use
the building as a data center and did not default on the lease.
The lease also gave AboveNet an option to purchase the
building at a fixed price, approximately $6.5 million. On October
28, 2004, AboveNet exercised this purchase option and submitted to
Faraday a purchase agreement and the required deposit. It again
requested return of the Restoration Escrow. Faraday refused to
relinquish the $761,500 escrow and indicated that it would not
close on the sale of the building until AboveNet waived any rights
to the escrow.
AboveNet filed a diversity suit in federal district court
against Faraday and its general partner Tigers XII Corporation,
seeking specific performance of the purchase option and return of
the Restoration Escrow. The district court granted summary
judgment to AboveNet on both grounds. Faraday thereafter conveyed
the building to AboveNet, giving AboveNet a credit on the purchase
price in the amount of the Restoration Escrow. Faraday now appeals
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only the district court’s decision ordering return of the
Restoration Escrow.
II.
The lease provides that Virginia law shall govern, and the
parties agree that the $761,500 outlay was an escrow payment. In
an escrow agreement, a grantor places money or property in trust to
be transferred to a grantee only upon the satisfaction of specified
contractual conditions. See Winslow, Inc. v. Scaife, 254 S.E.2d
58, 60 (Va. 1979) (per curiam). “An escrow arrangement, like all
express trusts, is a contractual relationship, in which
disbursement by the trustee is conditioned upon the happening of a
specified occurrence.” Old Republic Nat’l Title Ins. Co. v. Tyler
(In re Dameron), 155 F.3d 718, 723 (4th Cir. 1998) (applying
Virginia law). By the same token, when the conditions specified in
the escrow arrangement are not met, the escrow must be returned to
the grantor. As we held in Dameron, “[i]t is . . . elementary that
when trust conditions are not satisfied the trustee has a duty to
return the property to the trustor.” Id.In the lease before us, Paragraph 11(b) denominates the
payment a “Restoration Escrow,” and clearly provides that Faraday
“shall hold the Restoration Escrow . . . and shall use it to
restore the Mezzanine to a condition similar to that in existence
immediately prior to the Tenant Improvements.” Faraday’s retention
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of the escrow was therefore conditioned upon its need to rebuild
the mezzanine level to recoup additional square footage for use by
future tenants. AboveNet’s decision to purchase the building
eliminated any such need, and Faraday cannot now “use [the
Restoration Escrow] to restore the Mezzanine,” as the lease
instructs. The conclusion inexorably follows that AboveNet is
entitled to a return of the escrow. It is immaterial that
Paragraph 11(b) does not specifically direct Faraday to return the
escrow in the event that restoration is unnecessary, because
restoration was the very condition on which Faraday’s retention of
the escrow was premised. See Dameron, 155 F.3d at 723 (holding
that trustee had a duty to return the property to the grantor where
applicable conditions were not met).
Faraday nonetheless argues that the purpose of the Restoration
Escrow was to provide AboveNet with the right to destroy the
mezzanine, and to protect Faraday in a transaction with a lessee of
uncertain financial stability. We disagree. While Faraday is of
course correct that the lease required AboveNet to provide a
Restoration Escrow as a condition of demolishing the mezzanine, it
does not follow that AboveNet’s destruction of the mezzanine
represented the condition for Faraday’s retention of the escrow.
Rather, as we discussed above, the plain language of Paragraph
11(b) unambiguously states that Faraday is to use the escrow to
restore the mezzanine. As AboveNet’s purchase prevented such
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restoration from ever occurring, the escrow must be returned. See
Dameron, 155 F.3d at 723.
Nor is it the case that the purpose of the escrow was to
compensate Faraday for its risk in leasing the building to a
potentially insolvent tenant, as the plain language of Paragraph
11(b) provides otherwise. The parties specifically fashioned this
part of their agreement as a “Restoration Escrow” under the heading
“Tenant Alterations,” rather than as any kind of general payment
for risk incurred. This is further borne out by the fact that the
lease already required AboveNet to provide an additional $300,000
security deposit separate and distinct from the Restoration Escrow.
Unlike the Restoration Escrow, the security deposit “shall be
security for the performance by Tenant of all of Tenant’s
obligations, covenants, conditions and agreements under this
Lease.”
Faraday lastly maintains that Paragraph 11(b)’s provision for
early return of the Restoration Escrow represents the exclusive
situation under which Faraday must refund AboveNet. While the
lease does specify that Faraday must relinquish the escrow if it
determines that AboveNet has made “Collateral Improvements,” as
defined in the lease, the entire purpose of the escrow is that
Faraday “shall use it to restore the Mezzanine.” See Lansdowne
Dev. Co. v. Xerox Realty Corp., 514 S.E.2d 157, 161 (Va. 1999)
(“[W]hen considering the meaning of any part of a contract, we will
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construe the contract as a whole.”). Faraday’s construction would
all but eliminate Paragraph 11(b)’s express requirement that it use
the escrow to rebuild the mezzanine. Moreover, when AboveNet
exercised its purchase option, the price was fixed in the lease,
and was therefore entirely unaffected by AboveNet’s alterations to
the building. Allowing Faraday to retain the $761,500 Restoration
Escrow would amount to little more than a windfall gain.
III.
For the foregoing reasons, the judgment of the district court
is
AFFIRMED.
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