## Facts

- PCH Associates, a limited partnership, owned and operated the Philadelphia Centre Hotel and initially held both the hotel and underlying land.
- To finance acquisition, renovation, and working capital, PCH raised about $4 million from U.S. investors and sought an additional $5 million from an offshore investor that wanted a fixed return plus a contingent return tied to hotel cash flow without managing operations.
- The parties implemented a sale-leaseback structure through a Sale-Leaseback Agreement and a long-term Ground Lease.
- PCH conveyed title to the land (not the hotel improvements) to an entity that ultimately resulted in Liona Corporation holding title, and the land was immediately leased back to PCH.
- The Ground Lease required fixed annual payments (about $600,000) plus additional payments based on a percentage of hotel gross revenues; PCH also bore taxes, insurance, and operational responsibilities and sought to retain depreciation-related tax benefits.
- In 1984, PCH filed for Chapter 11 and continued operating as debtor-in-possession.
- Liona sought relief under 11 U.S.C. § 365(d)(3) and (d)(4), asserting the Ground Lease was an unexpired nonresidential real property lease requiring post-petition performance and prompt assumption or rejection.
- PCH contended the arrangement was not a “lease” under the Bankruptcy Code but instead functioned as an investment/financing relationship (and was characterized below as a joint venture), making § 365(d)(3)–(4) inapplicable.

## Issues

1. Whether the sale-leaseback/ground-lease transaction constituted an “unexpired nonresidential lease” under 11 U.S.C. § 365(d)(3) and (d)(4).
2. If not a true lease, whether Liona could nevertheless invoke § 365 to compel assumption/rejection and performance of post-petition “rent” obligations.

## Decision

- The Second Circuit affirmed the judgment for PCH.
- The court held the transaction was not an “unexpired nonresidential lease” within the contemplation of § 365(d)(3)–(4).
- Because the agreement was not a lease for § 365 purposes, Liona was not entitled to the statutory protections given to nonresidential landlords (including compelling assumption/rejection on the asserted timetable).
- The court affirmed on the narrower ground that the agreement was not a lease under the Code, without finally resolving whether the relationship should be classified as a joint venture for all purposes.

## Legal Principles

- Whether an agreement is a “lease” under Bankruptcy Code § 365 is a federal bankruptcy question that turns on substance rather than the parties’ labels or state-law formalisms.
- A purported lease that allocates risk and return in a manner resembling an investment or financing device—such as providing a fixed return plus profit-based participation—may fall outside § 365’s concept of a “true lease.”
- Section 365(d)(3)–(4) is intended to protect conventional nonresidential landlords from the burdens of a debtor’s continued occupancy without timely performance; it should not be extended to confer similar priority-like treatment on parties whose economic position is closer to that of financiers or equity participants.
- In evaluating “true lease” status for § 365, courts may consider indicators such as unusually long terms, revenue-sharing payment structures, and the extent to which the “lessee” retains operational control and tax benefits.

## Conclusion

The Second Circuit concluded that the parties’ sale-leaseback ground-lease arrangement did not constitute a true nonresidential real property lease under § 365(d)(3)–(4), so the debtor was not required to assume or reject it under those provisions and the investor could not claim landlord status for purposes of § 365’s special protections.


Liona Corp. v. PCH Assocs., 804 F.2d 193 (2d Cir. 1986)