Southmark Corp v. FDIC ( 1998 )

IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
No. 96-11578
SOUTHMARK CORP.,
Appellant,
versus
FEDERAL DEPOSIT INSURANCE CORPORATION,
Appellee.
Appeals from the United States District Court
for the Northern District of Texas
(3:95-CV-482-X)
April 20, 1998
Before GARWOOD, DUHÉ and DeMOSS, Circuit Judges.*
GARWOOD, Circuit Judge:
Plaintiff Harmon Envicon Associates (Harmon Envicon) brought
this adversary proceeding in bankruptcy court against debtor-
respondent-appellant Southmark Corporation (Southmark or Appellant)
during Southmark’s Chapter 11 bankruptcy, seeking a declaratory
judgment that Southmark was not entitled to the proceeds of a
particular note. Sometime thereafter, the Resolution Trust
Corporation (RTC) succeeded to Harmon Envicon’s interest, and the
*
Pursuant to 5TH CIR. R. 47.5 the Court has determined that this
opinion should not be published and is not precedent except under
the limited circumstances set forth in 5TH CIR. R. 47.5.4.
bankruptcy court granted summary judgment in favor of the RTC. The
bankruptcy court held that Southmark had relinquished its right to
receive the note proceeds when it entered into a Settlement
Agreement in an unrelated suit that contained general release
language. Pursuant to 28 U.S.C. § 158(a), Southmark appealed this
decision to the district court, which affirmed the bankruptcy
court’s grant of summary judgment. While the appeal was pending
before the district court, the Federal Deposit Insurance
Corporation (FDIC or Appellee) succeeded to the RTC’s role.
Southmark now appeals to this Court, pursuant to 28 U.S.C. §
158(d). We reverse and remand.
Facts and Proceedings Below
This is a dispute over who holds the right to receive the
proceeds of a mortgage note. In May 1981, Wilkeswood Associates,
Ltd. (Wilkeswood) issued its wraparound mortgage note (the Note)
for $7,650,000 to Unicorn Insurance Company, Inc. (Unicorn).
Wilkeswood was a New Jersey limited partnership, and executed the
note through its general partner, Berg Harquel Associates, a New
Jersey joint venture. Berg Harquel Associates later became named
Harmon Envicon Associates (Harmon Envicon). The Note was
nonrecourse and was secured by liens on an apartment complex
(Wilkeswood Apartments) located in Luzerne County, Pennsylvania,
and owned by Wilkeswood. The Note provided it could not be
assigned or transferred without Wilkeswood’s written consent so
long as Wilkeswood owned the Wilkeswood Apartments. The Note
itself was held at all times by the original payee, Unicorn.
2
Eventually, the property, encumbered by the Note, was sold and the
21.25% share of the Note net proceeds, belonging to either Harmon
Envicon or Southmark, was placed in escrow pending a determination
of the ownership of these funds.
In July 1981, effective June 30, 1981, Unicorn granted an 85%
participation interest in “the Net Cash Flow” under the Note and
mortgage to Pennsylvania Realty Consultants Company (PRC), a New
Jersey partnership in which Harmon Envicon (then known as Berg
Harquel Associates) was a 50% partner (the other 50% partner in PRC
was Emil Stavriotis).1 Appellant and Appellee both agree that
Harmon Envicon “owned” 50% of PRC and was thus entitled to 42.5% of
the net cash flow from the mortgage Note.
1
This was accomplished by a “Wraparound Mortgage Participation
Agreement” between PRC and Unicorn, which included a recital that
“the parties wish to establish the ownership of the Note and
Mortgage” and provided in part as follows:
“1. (a) As used in this document, the term ‘Net
Cash Flow’ shall mean the difference between (i) the
payments made to the holder of the Note and Mortgage or
any replacement or extension thereof and (ii) any
payments required to be made by the holder of the Note
and Mortgage under the terms thereof to the holders of
any prior liens on the property secured thereby.
(b) As used in this document the term ‘Net Cash
Flow’ shall also include any share of refinancing, or
sale proceeds, prepayment premium, fire insurance or
condemnation proceeds received by the holder of the Note
or the New Note (as defined in subparagraph (c) hereof).
(c) If the note and Mortgage is sold,
transferred or assigned and a note or letter obligation
(‘New Note’) is received by the holder thereof, then the
term ‘Net Cash Flow’ shall also mean the difference
between (i) the payments made to the holder of the New
Note and (ii) any payments required to be made by the
holder of the New Note, pursuant to the terms of the New
Note on account of any prior lien upon any property
securing the New Note.”
3
In June 1987, Southmark, a Georgia corporation, acquired all
the shares of Southern Ventures, Inc. (SVI), a New Jersey
corporation. SVI was a fifty percent co-venturer in Harmon
Envicon, and thus Southmark, through SVI, obtained a fifty percent
interest in Harmon Envicon. Southmark’s interest, however, was
subordinate to the interests of City Federal Savings Bank (City
Federal) and Empire of America Savings Bank through a Subordinated
Loan Participation and Purchase Agreement executed by Southmark.
In July 1989, Southmark filed under Chapter 11 in bankruptcy
court in Georgia; in October 1989, the bankruptcy proceeding was
transferred to the Northern District of Texas.
In late 1990, Southmark sold all its shares in SVI to Charles
Loccisano and Robert T. Harmon2 (Harmon/Loccisano), who thereby
purchased all of Southmark’s interest in Harmon Envicon. At this
time Harmon Envicon was still a partner in PRC and was thus
entitled to receive 42.5% of the Note net proceeds. However, as
consideration for the sale of SVI to Harmon/Loccisano, Harmon
Envicon, at approximately the same time, executed a “Partial
Assignment of Interest In Proceeds From A Promissory Note” dated
October 16, 1990, (the Assignment) conveying (“Assignor hereby
sells, assigns and conveys to Assignee a fifty percent (50%)
2
Robert T. Harmon, as general partner of Harquel Associates II, a
New Jersey limited partnership that was one of the joint venturers
in Berg Harquel Associates (later known as Harmon Envicon), had
executed (on behalf of Berg Harquel Associates as one of the two
PRC partners) the Wraparound Mortgage Participation Agreement
between PRC and Unicorn (see note 1, supra). Robert T. Harmon also
executed the December 1990 assignment from Harmon Envicon to
Southmark.
4
interest in Assignor’s Note Proceeds,” defined to mean Assignor’s
interest in Note net cash flow) to Southmark 50% of Harmon
Envicon’s 42.5% interest in the Note net cash flow free of liens,
interest claims, and encumbrances——giving Southmark a 21.25%
interest in the Note net cash flow. This Assignment however, was
expressly made subject to the superior security interests held by
City Federal, and other lenders, in Harmon Envicon’s partnership
interest in PRC (including the interest resulting therefrom in the
Note proceeds).
On July 12, 1991, Southmark filed in its bankruptcy proceeding
a voidable transfer action against Harmon Envicon and several
affiliated partnerships. The action was related to Southmark’s
initial acquisition of SVI, but did not involve either the
subsequent sale of SVI to Harmon/Loccisano or the Assignment. On
December 6, 1991, Southmark and Harmon Envicon entered into a
Settlement Agreement and Mutual Release (the Release) in which
Southmark agreed to release certain funds that it held related to
various partnerships it and Harmon Envicon (and related entities)
had been involved in, including Wilkeswood. The Release also
contained a broad general mutual release in which the parties
released one another from “any and all debts, claims, liabilities,
obligations, causes of action and rights, whether known or unknown,
which each party now owns or holds . . . .”
In March 1993, the Wilkeswood Apartments were sold. The
purchase price was apparently sufficient to pay off all liens on
the Wilkeswood Apartments, including the Note and lien securing it.
5
The title company held in escrow the amount allowable to the 21.25%
interest covered by the October 1990 Assignment from Harmon Envicon
to Southmark. Harmon Envicon then initiated the current adversary
action against Southmark. In the bankruptcy court below, Harmon
Envicon sought a declaratory judgment that Southmark was not
entitled to any proceeds of the Wilkeswood sale since the interest
in 21.25% of the Note net cash flow that Southmark received through
the Assignment was later released when Southmark executed the broad
Release. Southmark counterclaimed, and both parties filed motions
for summary judgment.
The bankruptcy court entered summary judgment in favor of RTC,
which had by then replaced Harmon Envicon as plaintiff. The
bankruptcy court found that the Assignment had conveyed to
Southmark a contingent right to payment, not an ownership interest
in the Note net cash flow, and because the interest was a
contingent right, it was released in the general Release that the
parties executed in conjunction with their settlement of the
voidable transfer action. Accordingly, the bankruptcy court held
that Southmark had no claim to the funds from the Wilkeswood
Apartments sale. On Southmark’s appeal to the district court, the
summary judgment was affirmed.
Southmark filed a timely notice of appeal to this Court. On
this appeal, Southmark raises two issues. First, it contends that
the general language of the Release could not operate to release
Southmark’s unrelated rights under the Assignment, and second, the
Assignment passed an ownership interest of a kind which is not
6
transferred by a mere release.
Discussion
We review a summary judgment de novo, applying the same
criteria employed by the lower court. Summary judgment is proper
if, viewing the evidence in light most favorable to the non-movant,
there is no genuine issue as to any material fact. See Fed. R.
Civ. P. 56(c); Celotex Corp. v. Catrett, 106 S.Ct. 2548, 2554
(1986). An issue is “material” if its resolution in favor of one
party will affect the outcome of the lawsuit; an issue is “genuine”
if a reasonable jury could return a verdict in favor of the non-
movant. See Anderson v. Liberty Lobby, Inc., 106 S.Ct. 2505, 2510
(1986).
I. Release
Southmark first contends that regardless of the nature of its
interest in the Note proceeds that interest was unrelated to the
particular controversies giving rise to the Release and hence, not
being specifically mentioned, was not covered by that document’s
broad and general basket clause. We disagree.
Although general releases are narrowly construed, see Duncan
v. Cessna Aircraft Co., 665 S.W.2d 414, 422 (Tex. 1984), broadly
worded general releases are enforceable as long as the claim in
question is included within the wording of the release. See, e.g.,
Shelton v. Exxon, 921 F.2d 595, 602 (5th Cir. 1991); Ingram Corp.
v. J. Ray McDermott & Co., Inc., 698 F.2d 1295, 1310-12 (5th Cir.
1983) (all enforcing broadly worded general release); cf. Victoria
7
Bank & Trust Co. v. Brady, 811 S.W.2d 931, 938 (Tex. 1991); Baker
v. City of Fort Worth, 210 S.W.2d 564, 567-68 (Tex. 1948); Vela v.
Pennzoil Producing Co., 723 S.W.2d 199, 204 (Tex. App.--San Antonio
1986, writ ref’d n.r.e.); Houston Oilers, Inc. v. Floyd, 518 S.W.2d
836, 838 (Tex. Civ. App.--Houston [1st Dist.] 1975, writ ref’d
n.r.e.) (all holding that a certain cause of action or occurrence
was outside the scope of the general release).3
If a releasing instrument does not “mention” the claim, and
the claim is not within the subject matter of a release, it cannot
be discharged by a general release. In Victoria Bank & Trust, 811
S.W.2d at 938, for example, the court found that a general release
discharging all claims or causes of action attributed to a certain
loan transaction did not discharge a claim related to a cattle
transaction. Similarly, in Vela, 723 S.W.2d at 204, the court held
that a general release related to the validity of an oil and gas
lease did not serve to discharge a cause of action for improperly
pooling the land in violation of the terms of the lease.
However, a general release that is not limited to a specific
cause of action or occurrence, and broadly releases all claims and
causes of action between two parties, is valid and enforceable. In
3
The parties have largely briefed this appeal without any explicit
discussion of choice of law issues, but apparently on the
assumption that Texas law controls (or that the law of whatever
other jurisdiction might control is not materially different). The
bankruptcy court made no clear choice of law determination. The
Release contains a clause stating it “shall be construed and
enforced in accordance with the United States Bankruptcy Code and
the laws of the State of Texas as applied to contracts made and to
be performed entirely within Texas.”
8
Ingram, 698 F.2d at 1312, this Court recognized that it must
enforce a release that discharges all, known or unknown, “past,
present, or future” claims. And in White v. Grinfas, 809 F.2d
1157, 1159 (5th Cir. 1987), this Court, applying Texas law,
enforced a release in which the parties agreed to “release and
forever discharge any claims or causes of action of whatsoever
nature which may exist among them on account of any event,
occurrence, transaction, or happening prior to the date of this
Settlement Agreement and Mutual Release.”
The Release at issue in this case, like the release in White
v. Grinfas, was broad and not limited to a specific transaction or
cause of action. Paragraph 7 of the Release states that the
parties release one another from “any and all debts, claims,
liabilities, obligations, causes of action and rights, whether
known or unknown, which each party now owns or holds, or at any
time heretofore owned or held, by reason of any act, matter, cause
whatsoever.” (emphasis added). Since the language of the Release
is not limited to the voidable transfer action that gave rise to
the dispute, we hold, as a matter of law, that this
Release——executed by sophisticated businesses represented by
counsel——is enforceable as written and discharges all debts, claims,
liabilities, obligations, causes of actions, and rights
(collectively: released interests). Although the language of the
Release is unambiguous in this respect and, in accordance with
standard rules of construction, should be construed and enforced as
written, it is ambiguous as to whether the interest in the Note net
9
proceeds falls within one of the categories of released interests.
We hold that if the Assignment, as between the parties thereto,
transferred a present ownership interest, that such interest is not
within the interests which the Release releases and that the
Release did not retransfer that interest from Southmark back to
Harmon Envicon. Obviously, “rights” as used in the Release does
not embrace——and appellee does not claim that it does——everything
Southmark then owned or, indeed, even everything Southmark had ever
acquired from Harmon Envicon (and still owned).
II. Interest in the Note Proceeds
Southmark contends that the Assignment conveyed an ownership
interest in the Note net proceeds, which could not have been
inadvertently transferred by the Settlement Agreement. The
bankruptcy court specifically held that Southmark did not obtain an
ownership interest in the Note because Southmark had no right to
collect payment directly from the payor of the Note. The
bankruptcy court found that Southmark merely had a claim, and that
that claim was released in the broad “Mutual General Release” of
the Settlement Agreement. Because there are questions of fact
concerning the parties’ intent as to the exact nature of the
interest that was conveyed by the Assignment, we reverse the
bankruptcy court’s grant of summary judgment and remand the case
for further proceedings.
The documentary evidence is not unambiguous as to what sort of
interest the parties intended to pass. The transaction was
10
labeled an assignment; under Texas law4 an assignment passes the
whole interest held by the assignor to an assignee. See Ditto
Investment Co. v. Ditto, 302 S.W.2d 692, 694 (Tex. Civ. App.--Fort
Worth 1957) rev’d on other grounds, 309 S.W.2d 219 (Tex. 1958).
However, merely labeling a transaction as an “assignment” does not
necessarily make it a true assignment. The intent of the parties
is an essential element of an assignment and, at least as between
them, takes precedence over the label attached to the transaction.
For instance, if the parties merely intend to pass a
collateral security interest, but phrase the transaction in terms
of an absolute assignment, the interest passed will be governed by
their intent and will not be considered an assignment. See, e.g.,
Olshan Lumber Co. v. Bullard, 395 S.W.2d 670 (Tex. Civ. App.--
Houston [1st Dist] 1965, n.w.h.); cf. 7 Tex. Jur. 3d § 24 (1997)
4
The Assignment was executed in Texas, and thus Texas law would
ordinarily control. See 7 Tex. Jur. 3d Assignments § 5 (1997).
However, the Assignment contains a provision stating: “This
Assignment and the legal relations between the parties relating to
the transactions described in this Assignment shall be governed by,
and construed in accordance with, the laws of the State which
governs the Note.” We assume Pennsylvania law governs the Note, as
it is a nonrecourse note stating that it is secured by the
described real property in Pennsylvania. The “Wraparound Mortgage
Participation Agreement” contains a clause stating: “This
agreement has been negotiated and entered into in the State of New
Jersey and shall be interpreted pursuant to the laws of the State
of New Jersey as to all matters, except title matters as to which
the law of the State of Pennsylvania shall apply.”
The parties in their briefing on this appeal have not
explicitly addressed these choice of law provisions or cited us to
any New Jersey or Pennsylvania cases which are on point. For
purposes of our disposition of this appeal, we will assume that
Texas law either controls or is not materially different from
either New Jersey or Pennsylvania law as to the relevant issues
concerning the Assignment.
11
(“Intent is an essential element of an assignment and, thus, not
every contract involving a transfer of interests is an
assignment.”) (citing Thurber Const. Co. v. Kemplin, 81 S.W.2d 103(Tex. Civ. App.--Austin 1935, writ dism’d)). The same is true for
an equitable assignment; in order to create an equitable
assignment, “the agreement must evidence an intent to transfer the
interest . . . .” Pape Equipment Co. v. I.C.S., Inc., 737 S.W.2d
397, 402 (Tex. App.--Houston [14th Dist.] 1987, writ ref’d n.r.e.).
In this case, the parties’ intents concerning the assignment
are unclear. The Assignment document in this respect is ambiguous
on its face and does not reveal what type of interest the parties
intended to pass.
On the one hand, the Note proceeds were assigned as
consideration for the sale of SVI to Harmon/Loccisano and, prior to
this dispute, all parties involved seem to have treated it as an
ownership interest. But the fact that the proceeds would be
filtered through Harmon Envicon, which had already pledged the Note
proceeds as a security interest to City First, may suggest that the
interest was intended to be something less than an ownership
interest. Although Southmark was to receive the Note proceeds
through Harmon Envicon, there was an unexercised provision in the
Assignment whereby Southmark could have directed Harmon Envicon to
direct PRC and the Note holder to pay the proceeds directly to
Southmark (though there is nothing said about directions to the
maker of the Note). There is no evidence of how the parties
treated the Note’s “Net Cash Flow”——or, indeed, if there was any
12
such——after the Release (or even after the Assignment) and prior to
the sale of the Wilkeswood Apartments. There is nothing in the
record to indicate whether after the Assignment and before the
Release (or, indeed, before the Wilkeswood Apartments sale) there
was (or was not) ever any dispute as to the validity of the
Assignment, or as to what was transferred thereby, or as to whether
Harmon Envicon (or anyone else) had fulfilled all its obligations
thereunder. There is nothing in the record to indicate whether or
not Harmon Envicon ever requested a return of the Assignment or a
reassignment. The case is further complicated by the fact that the
Note itself never changed hands and the original holder, Unicorn,
is uninvolved in these proceedings.
Because of the inconclusive evidence concerning the intent of
the parties and nature of the assignment, we hold that Appellee has
not met its summary judgment burden of demonstrating there are no
genuine issues of material fact as to whether Southmark had an
ownership interest in the Note net proceeds. For this reason we
remand the case to the bankruptcy court for further proceedings
concerning the intentions of the parties to the Assignment. If it
is found that the parties to the Assignment intended to pass an
ownership interest, then, as between the parties, that intent will
control the nature of the interest for purposes of the Release, and
the Release will not extend to, or retransfer to Harmon Envicon,
the interest intended to be conveyed by the Assignment.5
5
We note that what is at issue here is not any claim by Southmark
that Harmon Envicon ever——either before or after the Release——failed
13
Conclusion
We hold that, absent reformation or fraud (neither of which is
urged here), the parties’ intent as to the scope of an unambiguous
release is irrelevant and the release should be enforced as
written; however, the parties’ intent as to the ambiguous
instrument (the Assignment) to which the release is claimed to
apply is relevant and dispositive. The case is therefore remanded
so that the bankruptcy court can ascertain the intent of the
parties as to whether or not the Assignment was to convey all
ownership interest (legal or equitable).6
to pay Southmark any amounts that Southmark was (or claimed to be)
entitled to under the Assignment. Rather, the sole question is
whether the amounts currently (and apparently properly) held in
escrow by the title company which are attributable to the 21.25%
interest which was the subject of the Assignment are the property
of Southmark or of Harmon Envicon.
We observe in passing that there might be a question whether
Harmon Envicon, which was only a partner in PRC, could pass to
Southmark an interest in partnership property (the 85% interest in
Net Cash Flow of the Note). However, none of the parties have
raised this issue on appeal, and all have assumed that the
Assignment was valid and transferred to Southmark all it purports
to. Moreover, even if the issue had been raised and the Assignment
held invalid on that basis, nevertheless if Harmon Envicon and
Southmark in the Assignment treated it as conveying an ownership
interest then, absent some later dispute about that at or prior to
the Release, it would appear that it should be treated as such, as
between those two parties, for purposes of the Release.
6
The FDIC is the sole plaintiff-appellee, as it ultimately was
below. The FDIC apparently has other claims to the disputed
escrowed funds that do not depend on the Release. Neither the
bankruptcy court nor the district court ruled on such other claims,
and nothing in this opinion speaks to them. On remand, the
bankruptcy court, if it finds the FDIC is entitled to such funds
other than by virtue of the Release, may proceed on that basis
(subject, of course, to ultimate review on appeal) rather than by
determining the issue covered by our above remand.
14
REVERSED and REMANDED
15