First South Bank v. Bank of the Ozarks ( 2013 )

UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 12-2154
FIRST SOUTH BANK,
Plaintiff – Appellee,
v.
BANK OF THE OZARKS,
Defendant – Appellant.
No. 12-2185
FIRST SOUTH BANK,
Plaintiff – Appellee,
v.
BANK OF THE OZARKS,
Defendant – Appellant.
Appeals from the United States District Court for the District
of South Carolina, at Beaufort. Richard M. Gergel, District
Judge. (9:11-cv-02587-RMG)
Argued: September 17, 2013 Decided: October 18, 2013
Before KING, SHEDD, and THACKER, Circuit Judges.
Affirmed by unpublished per curiam opinion.
ARGUED: John Coffman Lindley, III, JOHNSTON, ALLISON & HORD, PA,
Charlotte, North Carolina, for Appellant. Alice F. Paylor,
ROSEN, ROSEN & HAGOOD, LLC, Charleston, South Carolina, for
Appellee. ON BRIEF: Elizabeth J. Palmer, ROSEN, ROSEN & HAGOOD,
LLC, Charleston, South Carolina, for Appellee.
Unpublished opinions are not binding precedent in this circuit.
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PER CURIAM:
Bank of the Ozarks appeals the district court’s judgment in
favor of First South Bank in this breach of contract action.
For the following reasons, we affirm.
I.
In June 2010, Woodlands Bank agreed to issue a $7.1 million
development loan to Lakeside Development, LLC (the Borrower or
Lakeside). Seeking another bank to help fund the loan,
Woodlands approached First South Bank, and the banks eventually
entered into a Participation Agreement (the Agreement), whereby
First South Bank agreed to fund up to $4.15 million of the
development loan. During negotiations, First South Bank
demanded that Woodlands be responsible for all expenses arising
from servicing the loan and would not have entered into the
Agreement without this promise.
To that end, the Agreement specifically discussed the
handling of expenses, providing as follows in Paragraph 4:
4. EXPENSES. Seller [Woodlands] may at its discretion
make additional advances for taxes, insurance premiums
and other items deemed necessary by [Woodlands] to
collect, enforce, or protect the Loan and any Property
securing the Loan including, but not limited to,
attorneys’ fees, court costs and disbursements
(Expenses). Purchaser’s [First South Bank’s]
percentage of Expenses is:
A. {X} No Shared Expenses. [Woodlands] will bear all
expenses.
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Barb. {} Shared Expenses. _______ percent of Expenses,
or if no percentage is indicated, that percentage of
Expenses which [First South Bank’s] unreimbursed
investment is of the principal amount of the Loan
outstanding on the date Expenses are incurred. All
Expenses will be shared in the proportion indicated on
the date Expenses are incurred. [First South Bank]
will pay to [Woodlands] on demand [First South Bank’s]
share of Expenses. [Woodlands] will remit to [First
South Bank’s] share of Expenses recovered by
[Woodlands].
(J.A. 25). The banks selected option A, indicating by marking
with an X that Woodlands was responsible for all expenses.
In addition to expenses, the Agreement also addressed
“Payments,” providing in Paragraph 3 that “[Woodlands] will
receive all Payments and apply them to Borrower’s account,” and
that “[First South Bank’s] percentage of all Payments is . . .
[First South Bank] First Out: 100 percent of Payments before
Default until such time as [First South Bank] has received
[First South Bank’s] Investment plus interest thereon.” (J.A.
25). “Payments” are defined in Paragraph 9 as “principal,
interest, and other charges received by [Woodlands] with respect
to the Loan from whatever source derived.” (J.A. 26).
Finally, Paragraph 19 addressed what would happen in the
event Lakeside defaulted on the underlying development loan:
19. DEFAULT AND LIQUIDATION OF LOAN. Notwithstanding
any payment terms to the contrary, in the event of
default, or if [Woodlands] in its sole discretion
should otherwise accelerate and liquidate the Loan,
all Payments collected and received by [Woodlands]
will be applied ratably as follows: first, to
Expenses; second, to the unpaid principal amount of
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the Loan in proportion to the respective unpaid
investments of [Woodlands] and [First South Bank] in
the Loan at the time of Default; and third, to the
respective accrued interest and other charges of
[Woodlands] and [First South Bank]. Upon Borrower’s
Default, all Payments and Borrower Fees received from
Borrower, whether designated for repayment of the loan
or undesignated, will be deemed intended for the
repayment of the Loan in accordance with this
Agreement.
(J.A. 26). Paragraph 19 does not define “payment terms,”
“Payments,” or “Expenses.”
Shortly after signing the Agreement, Woodlands entered
receivership under the Federal Deposit Insurance Corporation,
and Bank of the Ozarks purchased the loan to Lakeside
Development and became Woodlands’ successor in interest to the
Agreement. Thereafter, Lakeside defaulted on the loan. Bank of
the Ozarks began collecting the loan from Lakeside’s assets,
including liquidating one of Lakeside’s trust accounts that had
secured the initial loan. Bank of the Ozarks then deducted all
of its expenses—$81,452.39—before paying First South Bank its
58.041% share of the remaining assets.
First South Bank responded by suing Bank of the Ozarks in
federal district court, alleging breach of contract for
deducting expenses before paying First South Bank’s share of the
recovery. Bank of the Ozarks moved for judgment on the
pleadings, attaching the Agreement and arguing that Paragraph 19
permitted it to deduct expenses incurred after a default. First
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South Bank filed a cross-motion for summary judgment, arguing
that Paragraph 4 unambiguously required Bank of the Ozarks to
bear all expenses. The district court denied both motions,
concluding “as a matter of law that the Participation Agreement
is ambiguous with regard to the issue raised in this action.”
(J.A. 53-54). Thereafter, the court held a bench trial during
which both parties presented extrinsic evidence regarding their
understanding of the Agreement. At the close of evidence, the
court ruled in favor of First South Bank and ordered Bank of the
Ozarks to pay $47,275.78. First South Bank v. Bank of the
Ozarks, 2012 WL 3597665 (D.S.C. Aug. 12, 2012). The court
expounded upon its earlier ruling concerning the ambiguity of
the Agreement, explaining that “[w]hile Paragraph 4 plainly and
without qualification states that [Bank of the Ozarks] is to
bear all Expenses, paragraph 19 appears to permit [Bank of the
Ozarks], after default, to pay Expenses out of the proceeds that
it receives.” Id. at *6. The court found that it could not
“reconcile these two provisions” and that the Agreement was thus
ambiguous. Id. By separate order, the court later granted
attorneys’ fees and costs in the amount of $41,668.95.
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II.
Bank of the Ozarks now appeals, contending that the court
erred in denying its motion for judgment on the pleadings. * We
review this ruling de novo, Butler v. United States, 702 F.3d
749, 751-52 (4th Cir. 2012). Under South Carolina law, which
applies here, an agreement is ambiguous if it is “susceptible to
more than one interpretation or its meaning is unclear.” Miles
v. Miles, 711 S.E.2d 880, 883 (S.C. 2011). “Whether a contract
is ambiguous is to be determined from the entire contract and
not from isolated portions of the contract.” Farr v. Duke Power
Co., 218 S.E.2d 431, 433 (S.C. 1975). A contract may be
ambiguous because of “indefiniteness of expression,” internal
inconsistency, or inclusion of “words that have a double
meaning.” Crystal Pines Homeowners Ass’n v. Phillips, 716
S.E.2d 682, 685 (S.C. Ct. App. 2011) (internal quotation marks
omitted).
Bank of the Ozarks argues that the Agreement, specifically
Paragraph 19, unambiguously provides that, in event of a
*
Because Bank of the Ozarks is only appealing this pretrial
order, we requested that the parties file supplemental briefs
addressing whether, under Varghese v. Honeywell Int’l, Inc., 424
F.3d 411, 420-23 (4th Cir. 2005), Bank of the Ozarks was
precluded from arguing that the contract was unambiguous.
Having reviewed the supplemental briefs and the responses of the
parties at oral argument, we are satisfied that, under the
particular facts of this case, Bank of the Ozarks preserved its
argument.
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default, expenses are shared. Bank of the Ozarks rests its
argument on the first sentence of Paragraph 19, which provides
“[n]otwithstanding any payment terms to the contrary, in the
event of default” Bank of the Ozarks could apply all “Payments”
first to “Expenses.” (J.A. 26). In Bank of the Ozarks’ view,
Paragraph 4, which defines expenses, is a “payment term” swept
aside by Paragraph 19. And, because Paragraph 19 permits Bank
of the Ozarks to apply recovered sums first to expenses, Bank of
the Ozarks contends that it was authorized to deduct its
expenses prior to paying First South’s share.
In response, First South Bank contends that “payment terms”
in Paragraph 19 refer only to Paragraph 3, which addresses
“Payments.” First South Bank notes that, while Paragraph 4 has
no limiting language suggesting that expenses are handled
differently in the event of a default, Paragraph 3 specifically
mentions that First South Bank is entitled to “100 percent of
Payments before default.” (J.A. 25). Thus, in First South
Bank’s view, Paragraph 19 simply reaffirms what is stated in
Paragraph 3 regarding what occurs to “payments” after default
and has no impact on Paragraph 4 and Bank of the Ozarks’ duty to
shoulder all expenses.
We agree with the district court that the contract is
ambiguous. As First South Bank notes, “payment terms” in
Paragraph 19 are not defined by the contract, and they can
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reasonably be read as limited to Paragraph 3. Under that
reading, Paragraph 19 simply reinforces the reference to default
in Paragraph 3. “Payment terms” certainly could encompass a
broader section of the Agreement, but, critically, the fact that
the phrase could be read in such a way confirms its ambiguity.
Because “payment terms” could be read in several different
manners, Bank of the Ozarks is incorrect that the phrase
unambiguously sweeps aside Paragraph 4’s rule for expenses.
Accordingly, we agree with the district court that the Agreement
is internally inconsistent and thus ambiguous.
III.
For the foregoing reasons, we affirm the district court’s
denial of Bank of the Ozarks’ motion for judgment on the
pleadings.
AFFIRMED
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