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PSC Metals, Inc. v. Shelby Land Co., LLC

United States District Court, M.D. Tennessee, Nashville Division

February 14, 2017

PSC METALS, INC., et al., Plaintiff,
v.
SHELBY LAND COMPANY LLC, EMILY MAGID, and ELISE SMALL, Defendants.

          MEMORANDUM

          Aleta A. Trauger, Judge

         Before the court are cross-motions for partial summary judgment filed, respectively, by plaintiff PSC M s, Inc. (“PSC”) (Doc. No. 54) and defendants Shelby Land Company LLC, Emily Magid, and Elise Small (“landowners”) (Doc. No. 72). For the reasons set forth herein, the court will deny PSC's motion and grant the landowners' motion.

         I. FACTUAL AND PROCEDURAL BACKGROUND

         On August 1, 1979, Richard J. Eskind (“Original Lessor”) leased to Steiner-Liff Iron & M Company (“Original Tenant”) approximately 19.5 acres of real property and the buildings and improvements located thereon (the “Leased Premises”). (Defs.' Resp. to Pl.'s Statement of Undisp. Facts ¶ 1, Doc. No. 67; August 1, 1979 Lease (“Lease”), Doc. No. 58-1.) Through a series of assignments and mergers of various entities, the rights and obligations of the Original Lessor and Original Tenant have come to be held by PSC as tenant and the landowners as lessor. (Doc. No. 67 ¶ 2.)

         The Leased Premises are part of PSC's considerable scrap m recycling operation, which is based out of 710 South 1st Street in Nashville, Tennessee. (Id. ¶ 3.) PSC's Nashville operation covers approximately forty-five acres of land, of which roughly half are owned by PSC and three are leased to PSC by a non-party. The Leased Premises constitute the remainder. (Id. ¶ 4.) PSC's operation, including the Leased Premises, tracts leased from others, and parcels owned by PSC, is located within a triangle of land bordered on the south by the Cumberland River, on the west and northwest by Korean Veterans Boulevard and Shelby Avenue, and on the east by I-24. (See Property Map, Doc. No. 58-2.)

         The Lease defines the Leased Premises as the real property described in Exhibit A to the Lease, “[t]ogether with all buildings and improvements now on said land or placed or constructed thereon prior to the expiration of this lease.” (Lease ¶ 1, Doc. No. 58-1).) Thus, under the Lease, PSC leases “not only . . . the dirt, but all the buildings associated with operating an industrial scrap m recycling business on the property.” (Doc. No. 67 ¶ 11.) PSC is obligated under the Lease to “maintain” the Leased Premises, for the duration of the Lease term, in “as good a condition and state of repair and preservation as at the commencement of the term, ordinary wear and tear excepted.” (Lease ¶ 3.b.) The parties have never interpreted this provision to mean that PSC cannot make modifications or additions to the existing buildings and improvements or to construct new buildings and improvements. Since 2011, PSC has performed $1.5 to $2.5 million in alterations to the property it controls on the east bank of the Cumberland River, which includes the Leased Property. (Doc. No. 83 ¶ 30.) Moreover, other than requiring the maintenance and preservation of the buildings already on the property at the time of the inception of the Lease, the Lease does not limit or even address the use of the premises by the tenant. The Lease expressly authorizes the tenant to sublease the premises or assign the Lease, “upon written consent of the Lessor, which consent shall not unreasonably be withheld.” (Lease ¶ 7.)

         The “initial term” of the Lease is 45 years, from August 1, 1979 to August 1, 2024. (Lease ¶ 2.) After the expiration of the initial term, PSC will have “four (4) successive options to renew this Lease.” (Id.) The first three options are for ten-year terms and the final option is for an eleven-year term, giving PSC the exclusive right under the Lease to rent the Leased Premises until 2065. (Id.)

         For the first twenty-five years of the initial term of the Lease (1979-2004), the rent was fixed at $98, 000 per year, payable in equal monthly installments of $8, 166.67 per month. (Lease ¶ 3.) For the remaining two ten-year periods of the initial term, from August 1, 2004 through July 31, 2014 and from August 1, 2014 through July 31, 2024, “rent shall be due and payable at the greater of [$98, 000] per annum or fourteen percent (14%) of the appraised value of the leased premises as determined at the inception of each such ten-year periods [sic] respectively, and said rental [sic], when so determined, shall remain in effect for each of said two ten-year renewal terms.” (Lease ¶ 3.a (emphasis added).) Likewise, if PSC exercises its option to renew the Lease after August 2024, rent “shall be payable for each of said periods at the rate of fourteen percent (14%) of the appraised value of the leased premises determined at the inception of each such renewal term, ” but in no event less than $98, 000 per annum. (Id. ¶ 3.b.) The Lease does not prescribe a method for calculating the “appraised value” of the Leased Premises.

         In accordance with the Lease, PSC paid $98, 000 per year in rent to the landowners from 1979 to 2004. As the deadline for recalculating the rent approached, the parties presented each other with competing appraisals.[1] (Doc. No. 67 ¶ 23.) Although their appraisals were fairly far apart in value, PSC and the landowners were able to reach an agreement on rent for the ten-year term from August 1, 2004 to July 31, 2014. (Id. ¶ 24.) PSC paid rent when and as due under the Lease throughout that period. (Id. ¶ 25.)

         In 2014, when the rent was scheduled to be adjusted again for the last ten-year period of the initial term of the Lease, PSC and the landowners again exchanged competing appraisals. This time, however, they have been unable to reach an agreement as to the value of the Leased Premises or, as a result, the amount of rent PSC is required to pay. (Id. ¶ 27.) The landowner's appraisal, prepared by CBRE, Inc. (“CBRE”), valued the Leased Premises at $12, 430, 000, which would require annual rent in the amount of $1, 740, 200, or monthly rent of $145, 016.67. (Compl. ¶ 34; Answer ¶ 34.) In conducting the appraisal, CBRE concluded that the highest and best use of the Leased Premises was a mixed use and appraised the property as if it were already zoned for mixed use. (Compl. ¶ 36; Answer ¶ 36.) PSC obtained an appraisal from Philip R. Russ. Russ's appraisal concluded that the highest and best use of the Leased Premises is an industrial use, consistent with existing zoning and long-term historic use. He valued the Leased Premises at $3, 650, 000. (Compl. ¶ 43; Answer ¶ 43.) Rent calculated based on Russ's 2014 appraisal would be $511, 000 annually, or $42, 583.33 monthly. (Compl. ¶ 44; Answer ¶ 44.) Beginning August 1, 2014, PSC has paid, under protest, the rent demanded by the landowners, with the amount of rent due subject to adjustment and a “true-up” per a Rent Reconciliation Agreement once this dispute is resolved. (Compl. ¶ 46; Answer ¶ 46; Doc. No. 67 ¶ 29.)

         The Leased Premises consist of four separate tracts, only partially contiguous. (Id. ¶ 5; see also Property Map, Doc. No. 58-2.) The largest is bordered on the north by PSC's scrapyard and partially bordered on the south by the scrapyard. (Doc. No. 67 ¶ 6.) Other businesses and occupants in the immediate vicinity of PSC's operation include a storage center and warehouses, a “go kart” company, a petroleum company, and a pipeline company. Some of the parcels in the immediate vicinity are zoned as industrial and some are zoned for mixed use. (Id. ¶ 6.)

         The Leased Premises are currently zoned for industrial use. (Id. ¶ 7.) As discussed in more detail below, PSC insists that the Lease, properly construed, conveys a clear intent that the Leased Premises be maintained for industrial purposes and appraised as such. (See Pl.'s Reply to Defs.' Resp. to PSC's Statement of Undisp. Material Facts ¶ 3 at 3, Doc. No. 83.) The landowners dispute that assertion and contend that there is a reasonable likelihood that the Leased Premises could be rezoned for mixed use upon request. (Doc. No. 67 ¶ 7.) They point to Metro Nashville's plan for the neighborhood as strongly favoring a transition to mixed use. (See General Plan for Nashville & Davidson County, adopted by the Metro Planning Comm'n in June 2015 (the “General Plan”) at ¶ 72, Doc. No. 69-2, at 10 (calling the East Bank South Neighborhood a “prime location for a future mixed use neighborhood” and stating that there is a “strong preference for mid- and high-rise development within this area to buffer the effects of the interstate system”); Poore Decl. ¶ 10, Doc. No. 71 (stating that the zoning for a 10.4 acre parcel adjacent to the scrapyard (400 Davidson Street) was changed from industrial to mixed use in 2013).)[2]

         While the Leased Premises have been used for conducting a scrap m operation since the inception of the Lease, the landowners dispute that PSC has used the Leased Premises exclusively for the scrap operation. They point out that, for at least a decade, PSC has earned approximately $90, 000 to $100, 000 per year by running a parking operation on part of the property it controls on the east bank of the Cumberland River, including part of the Leased Premises, during events at the nearby Titans football stadium. (Pl.'s Resp. to Defs.' Statement of Add'l Facts ¶¶ 26, 27, Doc. No. 83.) PSC did not obtain permission from the landowners to conduct the parking operation, and neither party interprets the Lease as requiring it to ask for such permission. (Id. ¶¶ 28, 29.)

         The landowners have introduced additional evidence suggesting that PSC began thinking about trying to relocate its Nashville scrap yard in 2011, that it was still discussing that possibility internally in 2012 and 2013, and that, as late as November 2015, it was considering acquiring Southern Recycling, which would give PSC greater flexibility to vacate the Nashville scrap yard. (Pl.'s Resp. to Defs.' Statement of Add'l Facts ¶¶ 1-7, Doc. No. 83.) In a memorandum discussing this possibility, PSC provides its own “high end, ” “midpoint” and “low end” values for the Leased Premises, ranging from $35.7 million (high) to $14.2 million (low). (Id. ¶ 14 (citing Project Kingpin Memo., Doc. No. 68-4.).) The same memorandum discusses the possibility of developing the property on which PSC's business is located, including the Leased Premises, or selling to a developer. (Id. ¶¶ 11-13.) The memorandum assumes that the entire site occupied by PSC can be zoned for mixed use and acknowledges that it “has been the target of development plans by the City of Nashville for several years. (Doc. No. 68-4, at 16.)

         The landowners contend that there is at least a question of fact as to whether PSC intends to relocate its scrapyard from the Leased Premises in order to capitalized on property values on the east bank of the Cumberland River. (Doc. No. 83 ¶ 16.) PSC concedes that it considered the possibility of relocating, with the outcome of that decision dependent upon a variety of factors, including actions by third parties over whom it has no control. (Id.)

         In 2007, Tower Investments entered into an Option Agreement to purchase the Leased Premises from the landowners for $16 million. (Doc. No. 69-10.) The option expired and no purchase occurred. In 2016, Tower Investments again informed the landowners that it was interested in purchasing the Leased Premises and agreed to a price of $20 million. The parties did not reach an agreement on other terms and the sale did not occur. (Doc. No. 83 ¶ 20.)

         PSC filed this lawsuit in October 2014, seeking, among other things, a declaratory judgment that the Leased Premises must be appraised based on industrial use. (Compl. ¶ 9, Doc. No. 1.) The landowners answered, denying liability and seeking, among other things, a declaration that the Leased Premises are not required to be appraised as industrial property.

         PSC filed its Motion for Partial Summary Judgment in July 2016. The parties agreed to extend the time for the landowners to respond to the motion until December 2016. The landowners have now responded and filed their own Motion for Partial Summary Judgment. The motions have been fully briefed and are ripe for review.

         II. LEGAL STANDARD

         Rule 56 requires the court to grant a motion for summary judgment if “the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(a). To win summary judgment on a particular claim by an adverse party, the moving defendant must show that there is no genuine issue of material fact as to at least one essential element of that claim. Once the moving defendant makes its initial showing, the burden shifts to the plaintiff to provide evidence beyond the pleadings, “set[ting] forth specific facts showing that there is a genuine issue for trial.” Moldowan v. City of Warren, 578 F.3d 351, 374 (6th Cir. 2009); see also Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986). “In evaluating the evidence, the court must draw all inferences in the light most favorable to the non-moving party.” Moldowan, 578 F.3d at 374 (citing Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986)).

         At this stage, “‘the judge's function is not . . . to weigh the evidence and determine the truth of the matter, but to determine whether there is a genuine issue for trial.'” Id. (quoting Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249 (1986)). But “[t]he mere existence of a scintilla of evidence in support of the [non-moving party's] position will be insufficient, ” and the party's proof must be more than “merely colorable.” Anderson, 477 U.S. 242, at 252. An issue of fact is “genuine” only if a reasonable jury could find for the non-moving party. Moldowan, 578 F.3d at 374 (citing Anderson, 477 U.S. at 252).

         “The standard of review for cross-motions for summary judgment does not differ from the standard applied when a motion is filed by only one party to the litigation.” Ferro Corp. v. Cookson Group, PLC, 585 F.3d 946, 949 (6th Cir. 2009). “[S]ummary judgment in favor of either party is not proper if disputes remain as to material facts. Rather, the court must evaluate each party's motion on its own merits, taking care in each instance to draw all reasonable inferences against the party whose motion is under consideration.” Taft Broad. Co. v. United States, 929 F.2d 240, 248 (6th Cir. 1991) (citations omitted).

         III. ANALYSIS

         PSC's motion presents the issue of “whether, as a matter of law, any rent-determinative appraisal of the Leased Premises called for by the Lease must value the Leased Premises consistent with PSC's contractual right to decades of future industrial use.” (Doc. No. 55, at 6.) PSC argues that Tennessee law, as well as authority outside Tennessee, dictates that a property appraisal based on fair market value “must be based on the ‘use' and related encumbrances of the property at the time that such property is appraised.” (Doc. No. 55, at 8.) It argues that, because the Leased Premises have been used as industrial property for many decades, are adapted to that use, are zoned for that use, and, under the Lease, must be maintained as ...


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