Pirani v. Baharia (In Re Pirani)

Case: 15-40538 Document: 00513524628 Page: 1 Date Filed: 05/27/2016
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
United States Court of Appeals
Fifth Circuit
No. 15-40538 FILED
May 27, 2016
Lyle W. Cayce
In the Matter of: ABDUL KARIM PIRANI Clerk
Debtor
_____________________________
ABDUL KARIM PIRANI,
Appellant
v.
MALIK BAHARIA; ABDUL HAMID GILANI; NADIRSHAH LALANI; HMN
PARTNERS, L.L.C.,
Appellees
Appeal from the United States District Court
for the Eastern District of Texas
Before HIGGINBOTHAM, SOUTHWICK, and HIGGINSON, Circuit Judges.
STEPHEN A. HIGGINSON, Circuit Judge:
This is an appeal from a district court’s order affirming a bankruptcy
court judgment rendered after trial in an adversary action. The adversary
action comprises the claims, counterclaims, and affirmative defenses between
two sides of a business scheme to buy, renovate, and operate a Days Inn in
Sherman, Texas. Abdul Karim Pirani—appellant here—and his brother,
Nasim Aziz, formed the plan to buy the hotel. Appellees are the investors that
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the brothers convinced to buy a fifty-percent stake in the scheme—Malik
Baharia, Abdul Hamid Gilani, and Nadirshah Lalani—and the company that
the three investors formed to hold their membership interest.
I.
In 2008, two brothers, Pirani and Aziz, decided to buy and renovate a
Days Inn in Sherman, Texas. They formed a purchasing entity for the hotel,
Circle Sherman, LLC, and looked for investors. Eventually, they recruited
three individuals—Baharia, Gilani, and Lalani—who agreed to buy a fifty-
percent stake in Circle Sherman. The three investors formed HNM Partners,
LLC, to hold their membership interest.
In February 2009, the brothers and the investors borrowed close to $2.5
million for the project. To receive the loan, both brothers and all three investors
signed three documents in favor of their lender, One World Bank: (1) a note,
which set out the terms of the loan; (2) a deed of trust, which secured the loan
with a lien on the hotel; and (3) a guaranty agreement, in which they agreed
to guarantee, “jointly and severally,” full payment of the loan in the event of a
default on the note. The two brothers signed the guaranty agreement in their
individual capacities. The three investors signed for their company, HNM, and
also in their individual capacities.
Almost immediately after obtaining the loan, the two sides fell out over
the planned renovations of the hotel. By April, HNM had sued the brothers in
state court. By August, the parties had settled, having agreed that Circle
Sherman would buy back HNM’s fifty-percent stake in the company, with the
brothers promising to personally guarantee the purchase price.
The settlement agreement also contains a promise that Gilani, Baharia,
and Lalani would be released from their personal guaranties under the
guaranty agreement with One World Bank. Specifically, section 3.2 of the
settlement agreement provides:
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In the event that the Company obtains a third party investor for
the purpose of purchasing HNM’s Membership Interest, the
Company shall in good faith make best efforts to have the Bank
release Gilani, Baharia and Lalani from their personal guaranties
of the Loan. If the Company is unable to obtain a release from the
Bank of the guaranties, Gilani, Baharia and Lalani agree to
continue to be guarantors of the Loan until July 9, 2012 at which
time they shall be released either through the Company’s
refinancing of the Loan or sale of the Hotel.
“Company” is defined four different ways in the agreement. First, the opening
paragraph of the settlement agreement defines the parties as follows:
“Baharia . . . Gilani . . . [and] Lalani . . . for themselves individually and on
behalf of HNM Partners, LLC (collectively ‘HNM’) on the one hand” and
“Aziz . . . [and] Pirani, for themselves and on behalf of Circle Sherman, LLC
(collectively the ‘Company’) on the other.” Second, section 3.1(a) of the
agreement provides: “Nasim Aziz, Abdul Karim Pirani and HNM Partners
LLC are the sole members of Circle Sherman LLC (‘the Company’).” Finally,
sections 4.1 and 4.2, which govern the parties’ respective litigation releases,
provide two more definitions.
Shortly thereafter, Circle Sherman defaulted on the note. One World
Bank demanded payment from each of the guarantors and eventually sued all
of the guarantors in Texas state court. Thereafter, it foreclosed on the hotel,
which sold for $2,350,000, leaving a deficiency of $828,190.13. The brothers
and the investors raised a no-deficiency affirmative defense to One World
Bank’s demand for payment, arguing that the hotel was worth significantly
more than it sold for at foreclosure.
Within the bank litigation, Baharia, Gilani, Lalani, and HNM filed three
breach-of-contract crossclaims against Circle Sherman and the brothers. First,
they claimed that Circle Sherman and the brothers had breached their
settlement agreement by failing to buy back HNM’s membership interest (the
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“payment claim”). Second, they claimed that Circle Sherman and the brothers
had breached the settlement agreement by failing to secure the release of
Baharia, Gilani, and Lalani from the guaranty agreement (the “release claim”).
Finally, they claimed that Circle Sherman and the brothers had breached the
settlement agreement by defaulting on the note. The state court granted
summary judgment in favor of HNM on the payment claim.
The state court set a date for trial on the brothers’ and investors’ common
no-deficiency defense against One World Bank’s demand for payment. On the
(literal) eve of trial, One World Bank, Pirani, and Aziz notified the court that
they had “settled” with each other, and the next day they did not appear in
court. Only the three members of HNM showed up for trial.
Under One World Bank’s settlement agreement with Pirani and Aziz,
One World Bank assigned the note, the guaranty agreement, and all of the
bank’s claims against HNM to a third-party entity—owned by Pirani—that
later transferred the note, guaranty agreement, and claims to Pirani. In
exchange, Pirani—through the third-party—paid One World Bank $300,000.
After One World Bank and the brothers notified the court of their
settlement and failed to appear at trial, the court dismissed, without prejudice,
the bank’s claim against HNM and the three investors. It then severed HNM’s
payment crossclaim against the brothers, on which it had already granted
summary judgment in favor of HNM, into a separate suit, and dismissed,
without prejudice, Baharia, Gilani, Lalani, and HNM’s remaining crossclaims
against Circle Sherman and the brothers, on the ground that the remaining
crossclaims were “derivative of and subject to the [bank]’s claim” against HNM.
In the severed case containing only the payment claim, the court issued an
agreed final judgment in favor of Baharia, Gilani, Lalani, and HNM for
$616,181.16: the amount that Circle Sherman had promised to pay to buy back
HNM’s fifty-percent membership interest, plus interest.
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In July 2012, Pirani filed for bankruptcy. In the bankruptcy proceeding,
HNM filed a proof of claim against Pirani’s bankruptcy estate based on the
state-court agreed final judgment on the payment claim. Pirani then initiated
this adversary proceeding, bringing a claim against HNM and Baharia, Gilani,
and Lalani for breach of the guaranty agreement that had been assigned to
him by the bank. He sought to recover $828,190.13—the full amount of the
alleged deficiency on the note. As an affirmative defense against Pirani’s
guaranty claim, HNM and the three investors asserted that no deficiency
existed with respect to the note, because the hotel’s fair market value at the
time of foreclosure exceeded the foreclosure sale price by more than the alleged
deficiency. They also counterclaimed for breach of the settlement agreement
and breach of fiduciary duty. Pirani argued that the counterclaims were barred
by res judicata.
After a trial in the adversary proceeding, the bankruptcy court issued
findings of fact and conclusions of law, in which it held that Baharia, Gilani,
Lalani, and HNM’s counterclaim for breach of the settlement agreement was
not barred by res judicata; that Pirani was bound by and had breached the
settlement agreement; that Pirani’s claim for breach of the guaranty
agreement was barred by his breach of the settlement agreement; and that the
HNM parties were entitled to attorney’s fees and costs on the basis of their
successful claim for breach of the settlement agreement. The district court
affirmed the bankruptcy court judgment, and this appeal followed.
II.
We review the bankruptcy court’s findings of fact for clear error and its
conclusions of law de novo. See In re Bayhi, 528 F.3d 393, 402 (5th Cir. 2008).
When, as here, a district court has affirmed the bankruptcy court’s factual
findings, we will reverse only if we are left with the definite and firm conviction
that an error has been made. See id.
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III.
A.
Pirani first challenges the district court’s affirmance of the bankruptcy
court’s holding that res judicata did not bar Baharia, Gilani, and Lalani’s
breach-of-contract counterclaim. Baharia, Gilani, and Lalani contend that
Pirani promised in the settlement agreement to secure their release from their
personal guaranties under the guaranty agreement, and that he breached the
agreement by failing to do so. Pirani argues that the counterclaim is based on
the same contract—the settlement agreement—that formed the basis of
Baharia, Gilani, Lalani, and HNM’s claim for payment that went to final
judgment in the severed state-court action. As a result, he contends, Baharia,
Gilani, and Lalani, should not be able to bring a claim that they could have
brought in the earlier state-court action.
To determine the preclusive effect of an earlier state-court judgment,
federal courts apply the preclusion law of the state that rendered the judgment.
See Weaver v. Tex. Capital Bank N.A., 660 F.3d 900, 906 (5th Cir. 2011). The
agreed final judgment at issue here was issued by a Texas state court. Thus,
Texas preclusion law applies.
In Texas, claim preclusion, or res judicata, bars a party from bringing a
claim in a later case when: “(1) there is a prior final judgment on the
merits . . . ; (2) the parties in the second action are the same or in privity with
those in the first action; and (3) the second action is based on the same claims
as were raised or could have been raised in the first action.” Id. (citing Igal v.
Brightstar Info. Tech. Grp., Inc., 250 S.W.3d 78, 86 (Tex. 2008)). The Texas
Supreme Court follows the transactional approach to res judicata. See Barr v.
Resolution Tr. Corp., 837 S.W.2d 627, 631 (Tex. 1992). Under the transactional
approach, res judicata precludes relitigation of claims that arise out of the
same subject matter as an earlier suit and that, “through the exercise of
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diligence,” could have been litigated in the earlier suit between the parties. Id.
When “there is a legal relationship, such as [ ] a lease or contract, all claims
arising from that relationship will arise from the same subject matter and be
subject to res judicata.” Weaver, 660 F.3d at 907 (quoting Sanders v.
Blockbuster, Inc., 127 S.W.3d 382, 386 (Tex. Ct. App. 2004)); see also id. at 907
& n.8 (collecting cases). Thus, res judicata will preclude litigation of claims
arising out of a contract that were or could have been litigated in an earlier
action concerning that same contract.
Nonetheless, a “logical corollary” to the rule that res judicata bars claims
that “could have been litigated in an earlier action,” is that res judicata “cannot
preclude litigation of claims that a trial court explicitly separates or severs
from that action.” Van Dyke v. Boswell, O’Toole, Davis & Pickering, 697 S.W.2d
381, 384 (Tex. 1985). For example, in Ingersoll-Rand Co. v. Valero Energy
Corp., 997 S.W.2d 203, 205 (Tex. 1999), Valero sued two defendants, Ingersoll
and Kellogg, for malfunctioning equipment. Kellogg defended on the basis of
an indemnification agreement, and the district court granted partial summary
judgment for Kellogg on the basis of the agreement. Id. After Kellogg won
summary judgment on indemnification—and nearly five years after Valero
initiated the lawsuit—Kellogg filed a claim for attorney’s fees, also under the
indemnification agreement. Id. at 206. Thereafter, the trial court severed the
payment claim from the other claims in the case so that Valero could appeal
the decision. Id. at 205. The court of appeals affirmed, and the summary
judgment became final. Id. Valero then moved for summary judgment on the
attorney’s fees issue in the original action, arguing that the claim for fees was
barred by res judicata. Id. The Texas Supreme Court held that the claims were
not barred: “Kellogg filed its claim one month before severance in the original
action while summary judgment was still interlocutory. As such, the claim was
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properly preserved through the severance order for later adjudication, and res
judicata does not bar it.” Id. at 211.
Here, in the state-court action brought by the bank, Baharia, Gilani,
Lalani, and HNM filed the release claim as a crossclaim against Pirani. The
state court granted partial summary judgment in favor of Baharia, Gilani,
Lalani, and HNM on another of their crossclaims, the payment claim. Then,
like the trial court in Ingersoll-Rand, the trial court severed the payment claim
on which it had already granted summary judgment. Thus, as in Ingersoll-
Rand, the release claim was filed “in the original action while summary
judgment was still interlocutory.” Id. This means that “the claim was properly
preserved through the severance order for later adjudication, and res judicata
does not bar it.” Id. Hence Pirani’s res judicata argument fails.
B.
Pirani next challenges the district court’s affirmance of the bankruptcy
court’s judgment that Pirani breached his settlement agreement with Baharia,
Gilani, and Lalani. The bankruptcy court held that Pirani had agreed in the
settlement agreement to secure the release of the three investors from their
personal guaranties of the note, and that he had breached the settlement
agreement by failing to do so. Pirani responds in two ways.
1.
Pirani first argues that he was not personally bound by the promise to
release Baharia, Gilani, and Lalani from their personal guaranties. Under
Texas law, a party breaches a contract by failing or refusing to do something
he has promised to do. Mays v. Pierce, 203 S.W.3d 564, 575 (Tex. Ct. App. 2006).
Here, Pirani contends that he never personally promised to secure the release
of Gilani, Baharia, and Lalani from their personal guaranties. Instead, he
contends that section 3.2 of the settlement agreement, the section promising
the releases, bound only Circle Sherman. That section provides:
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In the event that the Company obtains a third party investor for
the purpose of purchasing HNM’s Membership Interest, the
Company shall in good faith make best efforts to have the Bank
release Gilani, Baharia and Lalani from their personal guaranties
of the Loan. If the Company is unable to obtain a release from the
Bank of the guaranties, Gilani, Baharia and Lalani agree to
continue to be guarantors of the Loan until July 9, 2012 at which
time they shall be released either through the Company’s
refinancing of the Loan or sale of the Hotel.
Pirani points out that only “the Company” is directly named in the section;
neither he nor Aziz are mentioned by name. Thus, he reasons, only “the
Company”—which he contends refers to only Circle Sherman—promised to
secure the releases. In contrast, Baharia, Gilani, and Lalani contend—and
both the bankruptcy court and district court held—that Pirani is included in
the meaning of the phrase “the Company” in section 3.2 of the settlement
agreement, and thus is bound by the promise to secure the releases. 1 The
question presented, therefore, is whether Pirani is part of “the Company” for
the purposes of section 3.2.
i.
The settlement agreement provides that it is to be interpreted according
to Texas law. When construing a written contract under Texas law, a court
must “ascertain the true intentions of the parties as expressed in the writing
1 As a preliminary matter, Baharia, Gilani, and Lalani contend, consistent with the
district court’s analysis, that Pirani is estopped from arguing for his proposed definition of
“the Company” because he stipulated in the parties’ joint pretrial order that “[t]he Settlement
Agreement defines . . . all of [Pirani], Aziz and Circle Sherman as ‘the Company.’” “It is a
well-settled rule[] that a joint pretrial order signed by both parties supersedes all pleadings
and governs the issues and evidence to be presented at trial.” Kona Tech. Corp. v. S. Pac.
Transp. Co., 225 F.3d 595, 604 (5th Cir. 2000) (quoting McGehee v. Certainteed Corp., 101
F.3d 1078, 1080 (5th Cir. 1996)). The pretrial order controls the scope and course of the trial,
Fed. R. Civ. P. 16, and a party waives an issue not included the order, Kona Tech., 225 F.3d
at 604. Although Pirani’s stipulation in the pretrial order as to the definition of “the
Company” further reinforces our analysis, we do not rely on it to the extent that the
stipulation addresses a question of law. See In re El Paso Refinery, L P, 171 F.3d 249, 257
(5th Cir. 1999) (noting that the proper interpretation of a contract is a question of law).
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itself.” Kachina Pipeline Co., Inc. v. Lillis, 471 S.W.3d 445, 450 (Tex. 2015)
(quoting Italian Cowboy Partners, Ltd. v. Prudential Ins. Co. of Am., 341
S.W.3d 323, 333 (Tex. 2011)). To achieve this goal, courts should “examine and
consider the entire writing in an effort to harmonize and give effect to all the
provisions of the contract so that none will be rendered meaningless.” In re
Serv. Corp. Int’l, 355 S.W.3d 655, 661 (Tex. 2011) (quoting Seagull Energy E &
P, Inc. v. Eland Energy, Inc., 207 S.W.3d 342, 345 (Tex. 2006)). The court can
also consider “the facts and circumstances surrounding a contract, including
‘the commercial or other setting in which the contract was negotiated and other
objectively determinable factors that give context to the parties’ transaction.’”
Kachina Pipeline, 471 S.W.3d at 450 (quoting Americo Life, Inc. v. Myer, 440
S.W.3d 18, 22 (Tex. 2014)). “No single provision taken alone will be given
controlling effect[.]” Id. (quoting Tawes v. Barnes, 340 S.W.3d 419, 425 (Tex.
2011)). Absent ambiguity, the writing alone is deemed to express the intention
of the parties. See In re El Paso Refinery, L P, 171 F.3d 249, 257 (5th Cir. 1999)
(applying Texas law).
Whether a contract is ambiguous is a question of law for the court. See
Progressive Cty. Mut. Ins. Co. v. Kelley, 284 S.W.3d 805, 808 (Tex. 2009). If the
contract can be given a “certain or definite legal meaning or interpretation,
then it is not ambiguous.” Lenape Res. Corp. v. Tenn. Gas Pipeline Co., 925
S.W.2d 565, 574 (Tex. 1996). Nor is a contract ambiguous “merely because the
parties disagree on its meaning.” Seagull Energy, 207 S.W.3d at 345. Rather,
ambiguity exists only if the contract’s “meaning is uncertain,” Lenape, 925
S.W.2d at 574, or if the language is “susceptible to two or more reasonable
interpretations,” Seagull Energy, 207 S.W.3d at 345.
When contractual provisions arguably conflict, Texas courts employ
canons of construction as tools to harmonize them. See G.T. Leach Builders,
LLC v. Sapphire V.P., LP, 458 S.W.3d 502, 532 (Tex. 2015). Those canons
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include the rules that (1) specific provisions control over general provisions, see
Forbau v. Aetna Life Ins. Co., 876 S.W.2d 132, 133–34 (Tex. 1994); (2)
provisions stated earlier in an agreement are favored over subsequent
provisions, see Coker v. Coker, 650 S.W.2d 391, 393 (Tex. 1983); and (3) the
interpretation of an agreement should not render any material terms
meaningless, see Kachina Pipeline, 471 S.W.3d at 450.
ii.
The issue is whether Pirani is personally bound by promises made by
“the Company” in section 3.2. “When contracting parties set forth their own
definitions of the terms they employ, the courts are not at liberty to disregard
these definitions and substitute other meanings.” Healthcare Cable Sys., Inc.
v. Good Shepherd Hosp., Inc., 180 S.W.3d 787, 791 (Tex. Ct. App. 2005). Here,
the parties chose and set forth a definition of the term “the Company” in the
opening paragraph of their agreement. That paragraph defines the parties as
“Baharia . . . Gilani . . . [and] Lalani . . . for themselves individually and on
behalf of HNM Partners, LLC (collectively ‘HNM’) on the one hand” and
“Aziz . . . [and] Pirani, for themselves and on behalf of Circle Sherman, LLC
(collectively the ‘Company’) on the other.” Per this definition, “the Company”
includes Pirani.
Pirani argues that this definition should not apply to section 3.2, relying
on a second mention of “the Company” that appears in subsection 3.1(a). 2
Subsection 3.1(a) provides that “Nasim Aziz, Abdul Karim Pirani and HNM
Partners LLC are the sole members of Circle Sherman LLC (‘the Company’).”
Working with this definition, Pirani contends that the “the Company” in
subsection 3.1(a) refers to only Circle Sherman, the entity listed last in the
Sections 4.1 and 4.2, which govern the parties’ respective litigation releases, provide
2
two more definitions of “the Company,” but those sections are not relevant to the analysis
here.
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sentence, rather than to all of the parties listed (which would include him). 3
From there, he argues that his proposed “Circle Sherman” definition of “the
Company” should be read to apply to all of article 3—that is, to sections 3.1
through 3.5 4—and thus, to section 3.2. He contends that this approach is
supported by the canon of construction that “a specific contractual provision
controls over [a] general provision concerning the same issue,” Exxon Corp. v.
Emerald Oil & Gas Co., L.C., 348 S.W.3d 194, 215 (Tex. 2011). Thus, he
reasons, the court should read the definition of “the Company” provided in the
opening paragraph as a “general rule” and the definition provided by
subsection 3.1(a) as an “exception” applicable to all of article 3. See NuStar
Energy, L.P. v. Diamond Offshore Co., 402 S.W.3d 461, 466 (Tex. Ct. App. 2013)
(“[P]arties may choose to set out a general rule in one provision and exceptions
to that rule in other provisions.”).
In response, HNM argues that subsection 3.1(a)’s definition of “the
Company” applies only within section 3.1. We agree. The full text of section 3.1
provides:
3.1 Until the Purchase Price (including any interest and
sales profit) is paid in full to HNM, HNM shall retain its
Membership Interest in the Company. Notwithstanding the
foregoing, HNM shall not be liable for any losses incurred by the
Company nor be entitled to any profits of the company and shall
not be subject to any capital calls by the Company. The Parties
agree that the following provisions of the order of the Court signed
3 The district court rejected this contention. We share the district court’s skepticism
as to Pirani’s reading of subsection 3.1(a), but ultimately reject Pirani’s argument for a
different reason and thus need not decide the issue. See Healthcare Cable, 180 S.W.3d at 792
(concluding that a parenthetically defined term was ambiguous because the court was “aware
of no rule of construction, grammar, or punctuation that [would] permit [it] to determine
precisely to what portion of the preceding sentence or other portion of a document [the]
parenthetically-defined term refers”).
4 The section that should be labeled “3.5”—the one after section 3.4—is labeled “3.2”
in the agreement. This appears to be a clerical error.
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on or about May 1, 2009 in the Litigation shall govern the
relationship of the Company’s Members:
a. Nasim Aziz, Abdul Karim Pirani, and HNM Partners LLC
are the sole members of Circle Sherman LLC (“the Company”);
b. The Company is a member-managed Company, and each
of the foregoing members has an equal vote in the management of
the business and affairs of the Company, and the affirmative vote
of a majority of the members of the Company constitutes an act of
the governing authority and is valid and binding on the Company;
c. Nasim Aziz has had the sole and exclusive authority to
manage both the renovation and operations of the Hotel since
December 2008. That authority shall continue as a result of this
Agreement, and the Parties hereby ratify the prior resolutions of
the Company in this respect;
d. HNM Partners, LLC or its representatives shall not take
any action to impede Nasim Aziz in the proper carrying out of his
authority to manage both the renovation and operations of the
Hotel.
The italicized text states in clear terms the scope and function of the provisions
that follow: those provisions (that is, subsections 3.1(a)–(d)) set out principles
governing the relationship between the members of Circle Sherman with
respect to the management and government of Circle Sherman until HNM
receives the purchase price for its membership interest. A straightforward
reading of section 3.1 provides no reason to apply those provisions outside of
section 3.1. Cf. Antonin Scalia and Bryan A. Garner, Reading Law 156 (2012)
(explaining scope-of-subparts canon, according to which material within an
indented subpart relates only to that subpart). Thus, subsection 3.1(a)’s
definition does not apply to section 3.2. Hence we apply the overall definition
from the opening paragraph, which includes Pirani. See Healthcare Cable, 180
S.W.3d at 791; see also Coker, 650 S.W.2d at 393 (restating rule that provisions
stated earlier in an agreement are favored over subsequent provisions). Pirani
is bound by the promise to secure the releases.
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The overall context of the agreement also supports this result. Under
Texas law, courts are expressly permitted to take into account the “objectively
determinable” “facts and circumstances surrounding [the] contract” that “give
context to the parties’ transaction.” Kachina Pipeline, 471 S.W.3d at 450
(citation omitted). Here, the most critical relevant circumstance is that the
contract is a settlement agreement, drafted and entered into for the purpose of
settling claims between two sides to a dispute. Those two sides are defined in
the opening paragraph, with “the Company” encompassing all parties on the
brothers’ side of the dispute. In the context of a settlement agreement, section
3.2 makes the most sense if the promise to secure releases for Gilani, Baharia,
and Lalani is binding all of the parties on the other side of the dispute.
Pirani responds that his preferred definition of “the Company” must
nonetheless apply to all of article 3 because the term “the Company” makes
more sense elsewhere in article 3 if it is read to mean only Circle Sherman and
not also Aziz and Pirani. For example, in section 3.3, the agreement addresses
“HNM’s membership interest in the Company.” HNM does not have a
“membership interest” in Aziz or Pirani. The problem with this argument is
that other articles of the contract contain similar examples. In article 2, for
instance, subsection 2.1(c) sets forth obligations that will be triggered “[i]n the
event that the Company defaults on any of its debt obligations,” and subsection
2.1(d) discusses the payment of “all valid liabilities of the Company.” It does
not make sense for the settlement agreement to include provisions relating to
Aziz or Pirani’s personal “debt obligations” or “valid liabilities.” Hence the
phrase “the Company” in these provisions would read more logically if taken
to mean only Circle Sherman. And yet these subsections are found in article 2,
which no one argues should be governed by the definition of “the Company”
found in subsection 3.1(a).
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As stated above, we are “not at liberty to disregard [the] definitions” set
forth by the parties. Healthcare Cable, 180 S.W.3d at 791. Here, the parties
chose and set forth a definition of the term “the Company” in the opening
paragraph of their agreement. That the parties drafted later provisions of the
contract with inattention to the definition they chose does not give us license
to rewrite section 3.2 by applying subsection 3.1(a) beyond its specified purpose
and scope. “The Company” in section 3.2 includes Pirani.
2.
Second, Pirani argues that, even if he is personally bound by section 3.2’s
promise to release, that promise was subject to unfulfilled conditions
precedent. Again, section 3.2 provides:
In the event that the Company obtains a third party investor for
the purpose of purchasing HNM’s Membership Interest, the
Company shall in good faith make best efforts to have the Bank
release Gilani, Baharia and Lalani from their personal guaranties
of the Loan. If the Company is unable to obtain a release from the
Bank of the guaranties, Gilani, Baharia and Lalani agree to
continue to be guarantors of the Loan until July 9, 2012 at which
time they shall be released either through the Company’s
refinancing of the Loan or sale of the Hotel.
The bankruptcy court relied on the second sentence, italicized above, to hold
that
Pirani agreed . . . to release the defendants no later than July 9,
2012, through the sale of the Hotel or the refinancing of Circle
Sherman’s indebtedness to [One World Bank (“OWB”)]. Pirani did
not have the ability to release the defendants at the time of the
Settlement Agreement, but he obtained that ability when he
acquired the Note and guarantees from OWB in March 2012. He
failed to do so. Instead, he has pursued the defendants, embroiling
them in years of litigation and the attendant expenses, for what he
claims they should have paid to OWB under the guaranty
agreement.
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Pirani argues that this holding was error, because the last portion of section
3.2’s second sentence, which specifies how the investors will be released
(“either through the Company’s refinancing of the Loan or sale of the Hotel”)
establishes conditions precedent to the promise. He asserts that both
“refinancing” or “sale” of the hotel were “physically impossible” as of August
2011, when One World Bank foreclosed on the hotel. Thus, he reasons, the
conditions could not be fulfilled, and the promise was never triggered. Pirani
briefed this issue below, but the district court did not directly address it.
In response, HNM argues that the second sentence constitutes an
unconditional promise that the individual members of HNM “would be
released no later than July 9, 2012.” HNM contends that the language about
“refinancing” or “sale” of the hotel should be read not as a condition but as an
additional covenant.
Under Texas law, “[c]onditions precedent to an obligation to perform are
those acts or events, which occur subsequently to the making of a contract, that
must occur before there is a right to immediate performance and before there
is a breach of contractual duty.” Hohenberg Bros. Co. v. George E. Gibbons &
Co., 537 S.W.2d 1, 3 (Tex. 1976). “Because of their harshness in operation,
conditions are not favorites of the law.” Id. (quoting Sirtex Oil Indust., Inc. v.
Erigan, 403 S.W.2d 784 (Tex. 1966)). When “the intent of the parties is doubtful
or where a condition would impose an absured [sic] or impossible result[,] then
the agreement will be interpreted as creating a covenant rather than a
condition.” Id. Similarly, “[s]ince forfeitures are not favored, courts are inclined
to construe the provisions in a contract as covenants rather than as conditions.
If the terms of a contract are fairly susceptible of an interpretation which will
prevent a forfeiture, they will be so construed.” Id. (quoting Henshaw v. Texas
Nat. Res. Found., 147 Tex. 436, 444, 216 S.W.2d 566, 570 (1949)).
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Texas courts look for particular language when evaluating whether a
term constitutes a condition precedent. See Criswell v. European Crossroads
Shopping Ctr., Ltd., 792 S.W.2d 945, 948 (Tex. 1990). In particular, “a term
such as ‘if,’ ‘provided that,’ ‘on condition that,’ or some similar phrase of
conditional language must normally be included. If no such language is used,
the terms will be construed as a covenant in order to prevent a forfeiture.” Id.
This is not because there is a strict “requirement that such phrases be utilized,”
but because “their absence is probative of the parties intention that a promise
be made, rather than a condition imposed.” Id.
Here, the contested language reads: “If the Company is unable to obtain
a release from the Bank of the guaranties, Gilani, Baharia and Lalani agree to
continue to be guarantors of the Loan until July 9, 2012 at which time they
shall be released either through the Company’s refinancing of the Loan or sale
of the Hotel.” The language that we have italicized indicates that the parties
drafted this sentence as a mandatory provision; Gilani, Baharia, and Lalani
agreed to remain guarantors only “until” July 9, 2012, after which point they
expected to be released. The sentence employs the mandatory term “shall.”
Moreover, the sentence lacks conditional language such as “if,” “provided that,”
or “on condition that,” before the phrase “through the Company’s refinancing
of the Loan or sale of the Hotel.” Thus, the sentence does not express a clear
intention to impose a condition on the promise to secure the release. Hence we
hold that the “refinancing” and “sale” language constituted a covenant, not a
condition precedent. Pirani was bound by the promise to release Gilani,
Baharia, and Lalani from their personal guaranties. He did not do so. Thus,
the district court did not err in affirming the bankruptcy court judgment that
Pirani breached the settlement agreement.
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C.
Pirani next challenges the district court’s affirmance of the bankruptcy
court’s dismissal of his breach-of-guaranty claim against Gilani, Baharia,
Lalani, and HNM. The bankruptcy court dismissed the breach-of-guaranty
claim on the ground that Pirani should not be permitted to sue the defendants
for breach of a guaranty agreement from which he had promised to have them
released. This result was correct with respect to Gilani, Baharia, and Lalani.
As shown above, Pirani promised to have them released from their personal
guaranties—a promise he had the power to fulfill as soon as he received title
to the note and guaranty agreement. He cannot “profit from [his] own breach,”
Berryman’s S. Fork, Inc. v. J. Baxter Brinkmann Int’l Corp., 418 S.W.3d 172,
186 (Tex. App. 2013), by suing them under a guarantee agreement that he had
the obligation and power to release them from. This logic does not extend to
HNM, however, because the settlement agreement does not include a promise
to release HNM from its guaranty obligations; it promises to release only
Gilani, Baharia, and Lalani from their personal guaranties. Hence Pirani’s
claim for breach-of-guaranty may go forward against HNM.
Pirani seeks to recover HNM’s contributive share of the full amount of
the post-foreclosure deficiency, which he asserts was $828,190.13. HNM
responds in two ways.
1.
First, HNM argues, as an affirmative defense, that there was no
deficiency on the note. Pirani responds that bankruptcy court never made a
finding on the deficiency issue. Thus, he contends, the issue is not properly
before this court on appeal. Under Texas law, any party against whom a
deficiency action is brought can “by motion . . . request that the court in which
the action is pending determine the fair market value of the real property as
of the date of the foreclosure sale.” Tex. Prop. Code § 51.003(b). “If the court
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determines that the fair market value is greater than the sale price of the real
property at the foreclosure sale, then the persons against whom recovery of the
deficiency is sought are entitled to an offset against the deficiency” for the
amount that the fair market value exceeded the sale price. Id. § 51.003(c). The
property code provides that the fair market value “shall be determined by the
finder of fact after the introduction by the parties of competent evidence of the
value.” Id. § 51.003(b). HNM bears the burden of proof on the issue of fair
market value. See Cabot Capital Corp. v. USDR, Inc., 346 S.W.3d 634, 639
(Tex. Ct. App. 2009).
Here, the bankruptcy court never issued findings of fact with respect to
fair market value. On appeal, HNM cites to “market value evidence” in the
record: (1) documents filed by Pirani in the bank case, including a motion for
partial summary judgment, an affidavit from Circle Sherman’s real estate
agent, and the parties’ motion for determination of fair market value; (2) the
“Schedule A” that Pirani filed in the bankruptcy proceeding; (3) Pirani’s 2011
tax return; and (4) an appraisal by Will Galbraith. In addition to these
documents, the record also contains the transcript of Galbraith’s testimony in
the bankruptcy court trial. Even so, the Texas Property Code specifies that fair
market value is a question of fact for the fact-finder. Tex. Prop. Code
§ 51.003(b). Also, as a “general rule,” federal appellate court typically do not
consider an issue not passed upon below. Shanks v. AlliedSignal, Inc., 169 F.3d
988, 993 n.6 (5th Cir. 1999). In addition, although this court has the transcript
of Galbraith’s testimony, the bankruptcy court is the court that heard the
testimony live. For these reasons, we decline to make a factual determination
with respect to fair market value in the first instance and leave it to the
bankruptcy court on remand to make a factual finding as to the fair market
value of the hotel at the time of foreclosure.
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2.
Second, HNM argues that, even if there is a deficiency, the bankruptcy
court correctly held that Pirani cannot sue for the full amount of that
deficiency, but rather, is limited to HNM’s contributive share of $300,000—the
amount that Pirani paid to the bank for the note and guaranty. The guaranty
agreement, by its terms, is governed by Texas law. To determine Texas law on
the scope of recovery available to a guarantor who purchases an underlying
note and sues his coguarantors as an assignee, this court should first look to
final decisions of the Texas Supreme Court. See Howe ex rel. Howe v. Scottsdale
Ins. Co., 204 F.3d 624, 627 (5th Cir. 2000). Here, no decision of the Texas
Supreme Court answers the question, so the court must make an “Erie guess”
and “determine as best it can” how the Texas Supreme Court would decide the
issue. Id. (citing Krieser v. Hobbs, 166 F.3d 736, 738 (5th Cir. 1999)). In making
its Erie guess, this court may look to the decisions of Texas intermediate
appellate courts, which provide “a datum for ascertaining state law which is
not to be disregarded by a federal court unless it is convinced by other
persuasive data that the highest court of the state would decide otherwise.” Id.
(quoting Labiche v. Legal Sec. Life Ins. Co., 31 F.3d 350, 352 (5th Cir. 1994)).
Texas law permits a guarantor to purchase an underlying note and
guaranty agreement and assert, as assignee, a cause of action against his
coguarantors. See Byrd v. Estate of Nelms, 154 S.W.3d 149, 163 (Tex. Ct. App.
2004). In that situation, the guarantor’s right to sue as an assignee on the note
and guaranty agreement is “limited as a matter of law to the contributive share
of its co-guarantors.” Id. at 165. Contributive shares are calculated by taking
the total amount of liability and dividing by the number of coguarantors. See
id. Here, there were six guarantors: Aziz and Pirani; Gilani, Baharia and
Lalani; and HNM. Thus, from each coguarantor, Pirani would be able to
recover one-sixth of the amount for which he can make a claim for under the
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note and guaranty. See id. (“There are six guarantors; therefore, Byrd’s
contributive share would be one-sixth of the note.”).
That leaves the question of what amount should form the basis for
calculating the contributive shares. Pirani wants to base the calculation on the
full amount of the alleged deficiency. He contends that he should be able to sue
for the full deficiency because he is suing not as a coguarantor for contribution
but as the assignee of the bank. Pirani’s position is not supported by Texas law.
In Byrd, six coguarantors personally guaranteed a note. See id. at 153−54.
Thereafter, the property securing the note was sold, leaving a roughly $1
million balance on the note. See id. at 154. The Nelms Partnership and another
coguarantor together paid off the note completely, each paying half of the
amount due. 5 See id. The Nelms Partnership sued the four other coguarantors
on the note and guaranty. See id. The court calculated the contributive shares
that its coguarantors owed it based on the amount that it had paid—one half
of the note—not on the full amount of the note. See id. at 165. This was a
straightforward application of the principle that “there can be no recover until
after payment by the party seeking contribution.” McGehee v. Hagan, 367
S.W.3d 848, 853 (Tex. Ct. App. 2012) (emphasis added); see also Lavender v.
Bunch, 216 S.W.3d 548, 554 (Tex. App. 2007) (“For well over a hundred years,
it has been a ‘general and familiar rule of law’ that, as among coguarantors,
each will bear his proportional part of the burden to the effect that should one
of them pay more than his proportional part, the others will contribute equally
5 There is a slight discrepancy in the numbers in Byrd. The opinion states that the full
amount due on the note was $1,052,758. Byrd, 154 S.W.3d at 154. It also states that the
Nelms Partnership paid half that balance, which would be $526,379. Id. Later, though, the
opinion states that the Nelms Partnership paid $525,061.47 on the note. Id. at 165. The court
based the amount that the Nelms Partnership could recover from its coguarantors on the
latter figure. Id.
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to indemnify him for any amount in excess of his proportional part.” (emphasis
added)). In short, “[t]he assignment of an underlying note and guaranty
agreement to a guarantor does not change the status of the guarantor in
relation to his co-guarantors.” Byrd, 154 S.W.3d at 164.
The Byrd court also cited approvingly Mandolfo v. Chudy, 573 N.W.2d
135, 139 (Neb. 1998), in which the Nebraska Supreme Court held that
“assignment does not alter [parties’] status as coguarantors of [a] note.” In that
case, the intermediate court of appeals had reasoned persuasively as to why a
guarantor can sue his coguarantors only for contribution, regardless of having
obtained an “assignment” from a creditor. As the court of appeals explained:
Calling [the transaction with the creditor] a purchase and hiring a
lawyer to draft papers to label the transaction as a purchase does
not make it such; the reality is that it is a payment of the debt . . . .
No matter how many times a farmer calls his cow a horse, it is still
a cow. Regardless of labels, be it purchase or payment, cow or
horse, the [guarantor is] still limited in [its] rights against [its
coguarantor] by the law which operates between coguarantors.
Mandolfo v. Chudy, 564 N.W.2d 266, 272 (Neb. Ct. App. 1997). In keeping with
that logic, the Byrd court held that “as a matter of law, the relationship
between guarantors restricts recovery to their contributive share.” Byrd, 154
S.W.3d at 164. Contribution is based on what a co-guarantor paid. See
McGehee, 367 S.W.3d at 853; Lavender, 216 S.W.3d at 554. Thus, if HNM fails
to prove its no-deficiency defense, then Pirani’s recovery should be limited to
HNM’s contributive share of the $300,000 that Pirani paid for the note and
guaranty—that is, $50,000.
D.
Finally, Pirani challenges the district court’s affirmance of the
bankruptcy court’s award of $100,000 in attorney’s fees and $10,000 in costs to
Gilani, Baharia, Lalani, and HNM. In Texas, attorney’s fees are recoverable
only when authorized by statute or contract. See Tony Gullo Motors I, L.P. v.
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Chapa, 212 S.W.3d 299, 310–11 (Tex. 2006). Texas statute provides that a
prevailing party on a contract claim “may recover reasonable attorney’s
fees . . . in addition to the amount of a valid claim and costs.” Tex. Civ. Prac. &
Rem. Code § 38.001(8). 6 Here, the bankruptcy court made the attorney’s fee
award under that statute, on the basis of Gilani, Baharia, and Lalani’s
successful claim for breach of the settlement agreement. Pirani argues that the
award should be reversed for two reasons.
First, Pirani argues that the award was not supported by legally
sufficient evidence. He cites Long v. Griffin, 442 S.W.3d 253, 255 (Tex. 2014),
for the proposition that, under Texas law, “sufficient evidence” consists of, “at
a minimum,” evidence of “services performed, who performed them and at what
hourly rate, when they were performed, and how much time the work
required.” Pirani mistakes the method under which the bankruptcy court
awarded the fees. The decision in Long concerned the proof required under the
lodestar method. Id. It is true that “a party choosing the lodestar method of
proving attorney’s fees must provide evidence of the time expended on specific
tasks to enable the fact finder to meaningfully review the fee application.” Id.
at 253. Here, however, the court awarded the fees according to the “traditional
method,” which applies to breach-of-contract claims, and under which
“documentary evidence is not a prerequisite.” Metroplex Mailing Servs., LLC
v. RR Donnelley & Sons Co., 410 S.W.3d 889, 900 (Tex. Ct. App. 2013). Instead,
under the traditional approach, Texas courts have “consistently . . . held that
an attorney’s testimony about his experience, the total amount of fees, and the
reasonableness of the fees charged is sufficient to support an award.” Id. Here,
Gilani, Baharia, and Lalani’s attorney, Collin Porterfield, testified before the
6 The settlement agreement also provides that the “prevailing party in any action or
proceeding brought to enforce any term or provision of [the agreement] shall be entitled to
reasonable attorney’s fees and expenses[.]”
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bankruptcy court about his experience, the time he had to take from other work
to work on the case, the total amount of fees, and his opinion as to the
reasonableness of the fees. Porterfield’s testimony is enough to support an
attorney’s fee award under the traditional method.
Second, Pirani argues that the evidence produced by Gilani, Baharia,
and Lalani failed to adequately segregate the fees attributable to claims for
which fees are recoverable under Texas law from those attributable to claims
for which they are not. Even under the traditional approach, “if any attorney’s
fees relate solely to a claim for which such fees are unrecoverable, a claimant
must segregate recoverable from unrecoverable fees.” Tony Gullo Motors, 212
S.W.3d at 313. The only exception to that rule occurs when “discrete legal
services advance both a recoverable and unrecoverablee claim.” Id. at 313−14.
In that situation, the fees are considered to be “so intertwined that they need
not be segregated.” Id. at 314.
Here, Porterfield began billing on a flat-fee, rather than an hourly, basis
starting in November 2011. He testified that, after that point, he stopped
tracking his hours. He also testified that he had not segregated the hours he
spent on the breach-of-contract crossclaim from the other claims in the state-
court case brought by One World Bank, nor had he segregated the hours spent
on the breach-of-contract counterclaim from the other claims in the bankruptcy
proceeding. Nonetheless, the bankruptcy court stated:
The issue of whether Pirani had breached the Settlement
Agreement was central to the parties’ dispute and intertwined
with the parties’ various claims and counterclaims. Most of the
work done by the defendants’ attorney would have been necessary
even if they had not asserted other counterclaims and defenses.
This was error. Texas law does not require Porterfield to “keep separate time
records” of when he worked on particular claims; instead, an “opinion would
have sufficed” stating the percentage of time that would have been necessary
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even in the absence of the other claims. Id. Here, though, Porterfield provided
no such opinion in his testimony. It is “often . . . impossible to state as a matter
of law the extent to which certain claims can or cannot be segregated; the issue
is more a mixed question of law and fact” for the fact-finder. Id. at 313. Thus,
“an unsegregated damages award requires a remand.” Id. at 314. The
bankruptcy court on remand should take additional testimony with respect to
what percentage of the attorney’s fees were attributable to the breach-of-
contract claim on which Gilani, Baharia, and Lalani prevailed, or were for work
that, while focused on a claim for which fees are not recoverable, also
“advanced” the breach-of-contract claim. Id. at 313.
IV.
The order of the district court is affirmed in part and vacated in part. We
remand for additional proceedings consistent with this opinion.
25