Rayman v. American Charter Federal Savings & Loan Ass'n

___________
No. 95-1086
No. 95-1088
___________
Steven M. Rayman; Springfield *
Properties Holding, Inc., *
*
Plaintiffs - Appellees/ * Appeals from the United States
Cross-Appellant, * District Court for the
* District of Nebraska.
v. *
*
American Charter Federal *
Savings & Loan Association, *
*
Defendant - Appellant/ *
Cross-Appellee. *
___________
Submitted: September 11, 1995
Filed: January 29, 1996
___________
Before WOLLMAN, LOKEN, and MORRIS SHEPPARD ARNOLD, Circuit Judges.
___________
LOKEN, Circuit Judge.
In July 1991, American Charter Federal Savings & Loan
Association ("American Charter") held the first mortgage on an
apartment building in Springfield, Missouri (the "Property").
Steven M. Rayman held the junior, wraparound ("wrap") mortgage on
that building. When American Charter refused Rayman's attempt to
cure the borrower's default, Rayman foreclosed his wrap mortgage,
sold the Property to a third party, paid off American Charter's
first mortgage, and sued American Charter for breach of contract
and illegal tying practices. American Charter now appeals the jury
verdict awarding Rayman $726,180 in general and special damages for
American Charter's breach of contract. Rayman cross-appeals the
district court's judgment denying treble damages and attorney's
fees for the tying violations found by the jury. We reverse the
judgment on the contract claim, concluding that the district court
erred in construing the contract and in its damage instructions.
We affirm the dismissal of Rayman's anti-tying claims.
I. Background.
On September 26, 1985, Crest Mortgage Corporation, an entity
then owned by Rayman, loaned $1,850,000 to the owners of the
Property. The transaction consisted of two loans, a $1,000,000
loan secured by a first mortgage on the Property, and a $1,850,000
loan secured by a wrap mortgage on the Property.1 The wrap
mortgage required the borrower to make all principal and interest
payments to the holder of the wrap mortgage, who in turn paid
amounts owing to the holder of the first mortgage. In essence, the
wrap mortgage represented a junior lien on $850,000 of the total
$1,850,000 debt.2
The next day, Crest Mortgage sold the $1,000,000 first
mortgage loan to American Charter, a savings and loan association
in Lincoln, Nebraska, pursuant to a written Participation and
Servicing Agreement (the "Participation Agreement"). The
Participation Agreement provided that Crest Savings, a struggling
financial institution also owned by Rayman, would "service" the
1
Like the parties, we use the term "mortgage" for
simplicity. Both mortgages consisted of deeds of trust, security
agreements, and assignments of leases and rents.
2
As in most wrap mortgage transactions, the wrap loan was
made at a higher interest rate than the first mortgage loan, and
the wrap lender received that higher rate on the total amount
owing on both loans. See generally 3 Richard R. Powell & Patrick
J. Rohan, Powell on Real Property ¶¶ 475.7 - 475.9 (3d ed. 1994).
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Participation Loan by collecting amounts due under the first
mortgage and remitting them to American Charter. At the same time
but in a separate transaction, Crest Mortgage sold its interest in
the wrap mortgage loan to Palm Beach FSB, another financial
institution controlled by Rayman. Palm Beach later assigned its
interest in the wrap mortgage loan to Rayman, with American
Charter's consent.
In 1988, the borrower sought Chapter 11 bankruptcy protection.
Crest Savings as servicer intervened in the bankruptcy and made
sure that payments to American Charter on the first mortgage loan
remained current. Apparently, American Charter was not even aware
of the bankruptcy until the borrower petitioned for approval of a
third amended plan of reorganization, which was approved by the
bankruptcy court over American Charter's objection in mid-1989.
In May 1990, Crest Savings stopped servicing mortgages and
proposed to American Charter that Rayman take over this function
under the Participation Agreement. American Charter objected that
Rayman was not an authorized substitute servicer under Paragraph 9
of the Participation Agreement:
In the event . . . Crest [Savings] . . . ceases to
service the Participation Loan, Crest [Savings] agrees
that servicing shall be transferred to either a
subsidiary of [Crest Mortgage] or a financial institution
insured by the FSLIC, or a wholly-owned subsidiary
thereof. The substituted servicing institution, unless
such substituted servicer is a subsidiary of Crest
[Savings] or [Crest Mortgage], shall be acceptable to
both Crest [Savings] and [American Charter] and approved
in writing by [American Charter].
(Emphasis added.) American Charter proposed to service the
Participation Loan. Rayman informally agreed that American Charter
would perform the servicing for a fee of one-eighth of a point.
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In June 1991, the borrower stopped making payments on both
mortgage loans. When Rayman learned of the default, he tendered
payment of the amount past-due on American Charter's first mortgage
loan and commenced to foreclose the wrap mortgage. On July 25,
1991, American Charter refused this tender and served the borrower
with a notice of default, advising that the first mortgage loan
would be accelerated. Rayman and American Charter then agreed that
American Charter would not foreclose the first mortgage while
Rayman proceeded to foreclose the wrap mortgage.
In August 1991, Rayman completed foreclosure, acquiring title
to the Property in the name of a corporation formed for that
purpose, plaintiff Springfield Properties Holding, Inc. ("SPH").
SPH then tendered to American Charter all amounts owing under the
first mortgage loan. American Charter again refused the tender.
Fearing that American Charter would now foreclose its first
mortgage, SPH sold the Property in September 1991 for $1,750,000.
It paid American Charter's first mortgage in full, keeping the
balance of approximately $750,000.
SPH and Rayman then commenced this action against American
Charter, seeking damages for breach of contract and for two alleged
violations of the anti-tying provisions of the Home Owners' Loan
Act of 1933 ("HOLA"), 12 U.S.C. § 1464(q). The jury returned a
verdict in favor of SPH on all its claims for the full amount of
contract damages sought, $726,180. The district court denied SPH
treble damages and attorney's fees under HOLA on the ground that
American Charter's violations were not the proximate cause of SPH's
injury. However, the court upheld the jury's verdict on the breach
of contract claims. See Rayman v. American Charter Fed. Sav. &
Loan Ass'n, 866 F. Supp. 1252 (D. Neb. 1994). Both sides appeal.
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II. Breach of Contract Claims.
Rayman and SPH contend that the wrap mortgage holder had a
right to cure the borrower's defaults and therefore American
Charter breached the Participation Agreement when it rejected
Rayman's pre-foreclosure tender of amounts owing under the first
mortgage loan, and when it rejected SPH's post-foreclosure tender.
In this rather unusual situation, these claims raise difficult
issues regarding contract liability and damages.
A. Did Rayman or SPH Have a Right To Cure?
In the district court's view, the wrap mortgage holder's right
to cure, either before or after foreclosure of the wrap mortgage,
is governed by the default provisions of the Participation
Agreement. There are two relevant paragraphs:
11. Default. In the event of a default under a
Participation Loan, Crest [Savings] shall promptly notify
[American Charter] . . . and Crest [Savings], [American
Charter] and any other participant in the Participation
Loan shall promptly . . . attempt to reach an agreement
as to the remedies or actions to be taken subject to the
rights of the Wrap Mortgage holder as defined hereinafter
in paragraph 23. If all of such participants cannot
agree on a particular action to be taken within a
reasonable time . . . then, if the participants owning
not less than two-thirds (2/3) of the Participation Loan
can agree on an action to be taken, which action shall be
reasonable . . . such majority decision shall be
controlling and [Crest Mortgage] [sic3] shall proceed in
accordance therewith. In the event that agreement as set
forth above cannot be reached, then Crest [Savings] shall
proceed promptly to foreclose . . . . [A]fter acquisition
of the Mortgaged Premises by means of foreclosure . . .
3
Almost certainly, this should have been a reference to the
servicer, Crest Savings. One of the problems in construing the
Participation Agreement is that Rayman's drafters repeatedly
confused the roles of Crest Mortgage and Crest Savings. The
obvious inference is that they did a poor job of conforming a
Rayman enterprise form to the facts of this transaction.
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Crest [Savings] may, unless otherwise directed by a
majority decision, manage, maintain or dispose of the
Mortgaged Premises . . . . If at any time Crest [Savings]
does not agree with any majority decision, Crest
[Savings] may purchase [American Charter's] interest in
the Participation Loan for the then-current principal
balance plus accrued yield to [American Charter].
Nothing contained herein shall limit [Crest Mortgage]
[sic] from taking or refraining from taking any action it
deems reasonably necessary in the exercise of its
servicing obligations . . . .
* * * * *
23. [American Charter] acknowledges the second lien
position of Palm Beach Federal Savings Bank . . . an
affiliate of Crest [Savings] and [Crest Mortgage], as the
holder of a Wrap Mortgage . . . . [American Charter]
agrees that in the event of default, if Palm Beach or its
affiliate takes title to the property through foreclosure
. . . it shall not be an Event of Default under [American
Charter's] first mortgage loan of $1,000,000, nor shall
a subsequent sale . . . which is acceptable to [American
Charter]. In that event [Crest Mortgage] [sic] shall
continue to service [American Charter's] loan.
(Emphasis added.) Focusing only on Paragraph 23, the district
court held that the Participation Agreement was ambiguous on the
question whether the wrap mortgage holder had a right to cure
borrower defaults under the first mortgage. The court allowed
extrinsic evidence on this issue to determine the parties' intent,
consisting of testimony outside the jury's presence by Rayman and
American Charter's former employee who negotiated the Participation
Agreement. Relying on this testimony, the court instructed the
jury that Paragraph 23 gave the wrap mortgage holder a right to
cure both before and after foreclosure.4
Under Nebraska law, which governs the Participation Agreement,
if the terms of a contract are not ambiguous, "the intent of the
4
On appeal, Rayman argues that we should affirm because SPH
had a post-foreclosure right to cure under Missouri law of
foreclosure. However, we decline to consider a theory that the
district court did not submit to the jury.
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parties must be determined from the contents of the contract, and
the contract must be enforced according to its terms." New Light
Co. v. Wells Fargo Alarm Servs., 525 N.W.2d 25, 31 (Neb. 1994).
Construing an unambiguous contract is a question of law for the
court, and "[t]here is a strong presumption that a written
instrument correctly expresses the intention of the parties to it."
Artex, Inc. v. Omaha Edible Oils, Inc., 436 N.W.2d 146, 150 (Neb.
1989). However, if the contract is ambiguous -- that is, if it may
objectively be understood in more than one sense -- then extrinsic
evidence is admissible, and the parties' intent is a question of
fact for the jury. See Luschen Bldg. Ass'n v. Fleming Cos., 415
N.W.2d 453, 458-59 (Neb. 1987); Lauritzen v. Davis, 335 N.W.2d 520,
527 (Neb. 1983).
The district court implied a right to cure from Paragraph 23
of the Participation Agreement. That provision unambiguously
granted the wrap mortgage holder one specific right, to foreclose
the wrap mortgage and to sell the Property without triggering an
"Event of Default" under the first mortgage. Paragraph 23 says
nothing about a right to cure, that is, a right of the wrap
mortgage holder to prevent unwanted foreclosure by the first
mortgage holder by keeping first mortgage loan payments current.
Thus, American Charter argues, a right to cure may not be implied
from the silence of Paragraph 23. "That constitutes a void but not
an ambiguity." T.V. Transmission, Inc. v. City of Lincoln, 374
N.W.2d 49, 53 (Neb. 1985). See also Master Labs. v. Chesnut, 59
N.W.2d 571, 575 (Neb. 1953). If the contract documents and the
situation were less complex, we would agree. In our view Paragraph
11 of the Participation Agreement does contain what the Supreme
Court of Nebraska has called a "latent ambiguity." Younker Bros.,
Inc. v. Westroads, Inc., 241 N.W.2d 679, 684 (Neb. 1976). But this
ambiguity is of no help to Rayman.
As Rayman testified, an essential feature of the wrap mortgage
financing device is placing control of loan servicing in the hands
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of the wrap mortgage holder. That reduces loan costs for the
senior lender, and it gives the junior lender control over the
process, so that it can act quickly to protect its less secure
investment. Beyond control over servicing, the wrap mortgage
lender may obtain two more safeguards if the first mortgage holder
agrees -- first, the right to prepay the first mortgage loan, and
second, the right, but not the obligation, to cure any borrower
defaults under the first mortgage loan. These safeguards permit
the wrap mortgage holder to protect its position against first
mortgage foreclosure by increasing its stake in the distressed
loan. However, there are corresponding disadvantages for the
senior lienholder -- the right to prepay may prevent the senior
lender from staying in a desirable, well secured loan, whereas the
right to cure allows the wrap mortgage holder to hold the senior
lender in place on a loan that it would prefer to accelerate and
foreclose. See 3 Powell & Rohan ¶¶ 475.9, 475.12.
The Participation Agreement in this case was drafted by the
Rayman interests and reflects these tensions. A Rayman entity,
Crest Savings, was made the servicer. Paragraph 9 allowed Rayman
to transfer that function to a Crest Savings affiliate without
American Charter's consent. Paragraph 11, the comprehensive
default provision, required attempted cooperation by participating
lenders and gave a dominant remedial role to the servicer,
including the absolute right to prepay the first mortgage loan.
Although Paragraph 11, like Paragraph 23, was silent on the right
to cure, Crest Savings in fact cured earlier defaults during the
borrower's bankruptcy. Thus, it is fair to infer the servicer's
right to cure from the structure and language of Paragraphs 9 and
11, from the parties' prior conduct, and from the trial testimony
of the Participation Agreement negotiators.5 In our view,
5
We would expect a benefit as important as the right to cure
to be explicitly granted in wrap mortgage documents drafted by
the junior lender, so it is a close question whether the
Participation Agreement should be construed as unambiguously
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Paragraph 23 is virtually irrelevant to all this; its limited
function was to answer one important question in the event the wrap
mortgage should be foreclosed during a period in which the servicer
was curing the borrower's failure to make first mortgage loan
payments.
The complexity here arose because Rayman allowed the servicing
function to be taken over by the first mortgage holder, American
Charter.6 This inverted the lenders' normal roles in a wrap
mortgage transaction. There was no written agreement reflecting
this role reversal because Rayman refused to sign a written
servicing agreement drafted by American Charter. In these
circumstances, the question is whether the right to cure first
mortgage loan defaults and the right to prepay the first mortgage
loan -- rights given to the servicer in the Participation Agreement
-- remained with the servicer entity or were transferred to Rayman
when the now-unfriendly lenders agreed to transfer the servicing
function to American Charter in June 1990. Thus, in deciding the
right to cure issue, both plaintiffs and the district court focused
on the wrong agreement. Plaintiffs only claimed a right to cure
arising from the Participation Agreement, an agreement which
granted that right to the servicer. Plaintiffs did not claim that
American Charter agreed to transfer the right to cure to the wrap
mortgage holder when American Charter assumed the role of servicer,
contrary to Rayman's contention. See Artex, 436 N.W.2d at 150-
51. On the other hand, the complex default provisions in
Paragraph 11 do not seem workable unless they include the
servicer's right to cure defaults while the lenders decide how to
deal with a troubled borrower. Thus, we are satisfied that the
contract is ambiguous in this regard and that the evidence
establishes the servicer's implied right to cure.
6
Rayman may have lost effective control over the servicing
function before Crest Savings withdrew as servicer, when he sold
his interest in Crest Savings without renegotiating the
successor-servicer provisions of Paragraph 9 of the Participation
Agreement. But if so, that misstep was not American Charter's
fault.
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with Rayman's consent. Thus, it is apparent that neither Rayman
nor SPH had the claimed right to cure, and American Charter is
entitled to judgment as a matter of law dismissing their contract
claims.
B. Damages for Breach of Contract.
Even if plaintiffs could recover from American Charter on
their contract claims, we would reverse the district court's
judgment in their favor because of two damage instruction errors.
1. Rayman's contract damage theory is that American Charter's
breach of the right to cure forced SPH to sell the Property for
$188,000 less than its fair market value, causing SPH to lose an
additional $359,180 in future income and $179,000 in future
appreciation. The jury awarded the entire amount requested,
$726,180, and the district court upheld this award. American
Charter argues that the court should have applied the principle
that damages for breach of a contract to lend money are limited to
the cost of substitute financing, absent proof of special damages.
We agree.
The district court rejected this contention because "Rayman
and SPH were creditors just like American Charter." That ignores
Rayman's trial testimony:
Q [The Participation Agreement] says that [the wrap
mortgage holder] has to maintain the 10% ownership
interest in the wrap at all times. Is that true?
A That's what it says, yes.
Q And when the wrap disappears [through foreclosure],
can that provision be complied with?
* * * * *
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A Well . . . [w]e wouldn't have the mortgage. We would
be the owner.
Q The first mortgage is still there, isn't it?
A You bet. We would be your borrower.
(Emphasis added.) That testimony simply reflects economic reality.
Once Rayman through SPH bought the Property in foreclosure, SPH
owed American Charter $1,000,000. American Charter wanted out of
the credit, so it rejected SPH's attempt to cure and accelerated
the first mortgage loan. If that action breached the contract,
Rayman could maintain SPH's investment by either investing or
borrowing an additional $1,000,000 to repay American Charter. It
is undisputed that Rayman had the financial ability to do that.
Therefore, SPH's injury is simple to measure -- the fair market
cost of alternative financing. Given Rayman's financial strength
and experience in such transactions, American Charter had no reason
to foresee that any special damages would be incurred. Therefore,
Nebraska law limits SPH's damages to the difference between the
contract interest rate and the increased interest rate and costs of
obtaining alternative financing. Rubin v. Pioneer Fed. Sav. & Loan
Ass'n, 334 N.W.2d 424, 428 (Neb. 1983); Shurtleff v. Occidental
Bldg. & Loan Ass'n, 181 N.W. 374, 375 (Neb. 1921). The district
court erred in failing to instruct the jury accordingly.
2. The district court also erred by allowing the jury to award
not only the difference between the Property's fair market value
and SPH's sale price, but also lost future profit and appreciation.
Fair market value of an income-producing property "by definition
reflect[s] a market estimation of future profits . . . ."
Whitehead Oil Co. v. City of Lincoln, 515 N.W.2d 401, 411 (Neb.
1994), quoting Wheeler v. City of Pleasant Grove, 833 F.2d 267, 271
(11th Cir. 1987). Therefore, if SPH had a right to special damages
for forced sale, those special damages would be limited to
$188,000.
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III. The Tying Claims.
In 1982, Congress amended HOLA by enacting anti-tying and
antireciprocity restrictions previously imposed on commercial banks
under the Bank Holding Company Act. See Integon Life Ins. Corp. v.
Browning, 989 F.2d 1143, 1149 (11th Cir. 1993). Those provisions
as amended provide in relevant part:
12 U.S.C. § 1464(q) - Tying Arrangements
(1) A savings association may not in any manner extend
credit, lease, or sell property of any kind, or furnish
any service, or fix or vary the consideration for any of
the foregoing, on the condition or requirement--
(A) that the customer shall obtain additional
credit, property, or service from such savings
association, or from any service corporation or affiliate
of such association, other than a loan, discount,
deposit, or trust service;
(B) that the customer provide additional credit,
property, or service to such association, or to any
service corporation or affiliate of such association,
other than those related to and usually provided in
connection with a similar loan, discount, deposit or
trust service . . . .
The statute provides a treble damage remedy. See 12 U.S.C.
§ 1464(q)(3). These are antitrust restraints specific to the field
of commercial banking and therefore must be applied in a manner
consistent with Sherman Act and Clayton Act principles. See Davis
v. First Nat'l Bank of Westville, 868 F.2d 206, 208 (7th Cir.),
cert. denied, 493 U.S. 816 (1989). We construe the anti-tying
restraints as requiring proof that a challenged banking practice
"was unusual in the banking industry; resulted in an anti-
competitive tying arrangement; and benefitted the bank." Alpine
Elec. Co. v. Union Bank, 979 F.2d 133, 135 (8th Cir. 1992).
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In this case, Rayman alleges two anticompetitive tying
practices. First, he contends that American Charter violated
§ 1464(q)(1)(A) when it demanded that Rayman allow American Charter
to service the Participation Loan for a fee after Crest Savings
withdrew from its role as servicer. This contention is without
merit for many reasons. (1) The challenged practice is a "loan
service" expressly excluded from subsection (1)(A). (2) The
challenged practice did not link "two separate product markets," as
required by Jefferson Parish Hosp. Dist. No. 2 v. Hyde, 466 U.S. 2,
21 (1984). American Charter purchased one product, a participation
loan; who serviced that loan was a term of the transaction, not a
separate product. Cf. Mid-State Fertilizer Co. v. Exchange Nat'l
Bank of Chicago, 877 F.2d 1333, 1338 (7th Cir. 1989) (no separate
market for the "lock box" used in an asset-backed loan). (3)
Because Rayman had voluntarily relinquished an absolute right to
transfer servicing to an entity he controlled, his decision to
accept American Charter as servicer was not the product of the
coercion necessary to prove an unlawful tying arrangement. (4)
Rayman's assault on the fee "extracted" by American Charter for
servicing the Participation Loan is unpersuasive. The initial
agreement provided that Crest Savings would service the first
mortgage loan at no charge to American Charter; obviously, American
Charter would expect to be paid a fee for taking over an obligation
that the wrap mortgage holder customarily performs.
Second, Rayman alleges that American Charter violated
§ 1464(q)(1)(B) after foreclosure of the wrap mortgage, when it
offered to let SPH assume the first mortgage in exchange for Rayman
releasing all of his claims against American Charter. This theory,
too, is without merit. American Charter's proposal to resolve a
troubled loan did not link two separate product markets. Nor was
there the requisite coercion. Rayman's admitted financial strength
gave him many options: insist on SPH's right to cure, litigating
foreclosure by American Charter if necessary; insist that Paragraph
11 of the Participation Agreement gave him an absolute right to
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prepay the first mortgage, without a release; and, if all else
failed, yield to American Charter's desire to be out of the credit
by refinancing the first mortgage through another lender and then
sue American Charter to recover those costs. Finally, there is no
credible evidence that this proposal was "unusual in the banking
industry."7 To the contrary, a prudent bank can be expected to
want a release when it resolves a complex dispute of this nature.
To recover treble damages under § 1464(q), plaintiff's injury
must be a direct consequence of the illegal tie. See Sundance Land
Corp. v. Community First Fed. Sav. & Loan Ass'n, 840 F.2d 653, 660
(9th Cir. 1988); Campbell v. Wells Fargo Bank, 781 F.2d 440, 443
(5th Cir.), cert. denied, 476 U.S. 1159 (1986). The district court
held that neither anti-tying violation was the proximate cause of
Rayman's damages. Rayman, 866 F. Supp. at 1265-66. We agree. But
in addition, we conclude that it was reversible error to admit
"expert" testimony that American Charter's actions were
anticompetitive and then to submit the anti-tying claims to the
jury, thereby suggesting that American Charter may have been guilty
of a federal statutory tort. This was a legitimate breach-of-
contract case but an illegitimate antitrust case.
We reverse the judgment of the district court on plaintiffs'
breach of contract claims, affirm the dismissal of plaintiffs'
claims under 12 U.S.C. § 1464(q), and remand with instructions to
enter judgment in favor of American Charter.
A true copy.
Attest:
7
There was no foundation for the so-called expert opinions
offered at the trial by a Maryland banking consultant. We reject
those opinions as neither credible nor rational.
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CLERK, U. S. COURT OF APPEALS, EIGHTH CIRCUIT.
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