## Facts

- Borrowers (Opp, Elgin, and Wise) developed the “Kensington Square” office complex near Atlanta, Georgia, with an estimated cost of $2.5 million.
- Aetna Business Credit, Inc. issued a permanent (“take-out”) loan commitment for $2.5 million (with substantial, nonrefundable commitment fees) running to August 1, 1975, with an optional extension.
- Mellon Bank, N.A. issued a construction loan commitment and advanced approximately $2,241,489 by August 1, 1975, when the project was substantially completed (remaining work involved tenant-specific suite completion).
- Mellon, Aetna, and the borrowers entered a three-party Buy-Sell Agreement under which Aetna agreed, upon completion and satisfaction of specified conditions, to purchase Mellon's construction loan.
- In 1975, the Atlanta office market declined sharply, and the project had very low leasing (about 7%), raising concerns about future occupancy.
- Aetna refused to purchase the construction loan, invoking a condition that the borrowers not be “insolvent,” and arguing “insolvent” should be given its usual commercial meaning.
- Mellon argued the insolvency condition, read in the transaction’s context, did not permit Aetna to avoid the take-out obligation based on project-driven financial deterioration.
- After a nonjury trial, the district court (applying Pennsylvania law) found Aetna in breach and awarded Mellon $1,165,731 in damages, representing Mellon's loss after foreclosure.

## Issues

1. Whether the Buy-Sell Agreement’s “insolvent” condition was ambiguous under Pennsylvania contract law.
2. Whether the court could consider extrinsic evidence to determine ambiguity and to select the intended meaning of disputed contract language in a negotiated commercial financing arrangement.
3. Whether the district court’s interpretation and related factual findings were clearly erroneous on appellate review.

## Decision

- The Third Circuit affirmed the judgment for Mellon.
- The court agreed that the relevant language, including the insolvency condition, was ambiguous in the commercial context presented.
- The court held it was proper to consider extrinsic evidence to determine ambiguity and to interpret the agreement.
- The court upheld the district court’s conclusion that Aetna breached by refusing to purchase the construction loan once the conditions, as correctly interpreted, were satisfied.
- The court sustained the damages award of $1,165,731.

## Legal Principles

- Under Pennsylvania law, contract ambiguity exists when language admits of more than one reasonable meaning, creating “intellectual uncertainty.”
- A court is not confined to a rigid “four corners” method; it may consider extrinsic evidence for the limited purpose of deciding whether contract language is ambiguous.
- When ambiguity is found, extrinsic evidence (including negotiations, drafting history, and commercial practice) may be used to determine the parties’ intent.
- In a bench trial, an appellate court reviews factual findings supporting the chosen interpretation under a clearly erroneous standard.
- In negotiated construction–permanent loan arrangements between sophisticated lenders, contractual conditions are interpreted in light of the transaction’s commercial purpose and risk allocation, not as automatic escape devices from adverse market changes.

## Conclusion

The Third Circuit affirmed that the Buy-Sell Agreement’s insolvency condition was ambiguous and, under Pennsylvania law, could be interpreted using extrinsic evidence; applying that approach and deferring to non-clearly-erroneous findings, the court upheld the determination that Aetna breached its take-out obligation and was liable for Mellon’s foreclosure-related loss.


Mellon Bank, N.A. v. Aetna Bus. Credit, Inc., 619 F.2d 1001 (3d Cir. 1980)