Great Plains Real Estate Development, L.L.C. v. Union Central Life Insurance

United States Court of Appeals
FOR THE EIGHTH CIRCUIT
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No. 07-3506
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Great Plains Real Estate Development, *
L.L.C., *
*
Appellant, *
* Appeal from the United States
v. * District Court for the
* Southern District of Iowa.
Union Central Life Insurance Company; *
Summit Investment Partners; *
Carillon Investments, Inc.; LaSalle *
Bank National Association; GMAC *
Commercial Mortgage Corporation, *
*
Appellees. *
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Submitted: May 14, 2008
Filed: August 7, 2008 (Corrected 8/21/08)
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Before RILEY, BOWMAN, and HANSEN, Circuit Judges.
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RILEY, Circuit Judge.
At issue is the enforceability of a prepayment premium provision (PPP)
contained in a promissory note. Great Plains Real Estate Development, L.L.C. (GPR),
the borrower, asserts this provision was either waived or was unenforceable under
Iowa law. The lender, Union Central Life Insurance Company (UCL), disagrees. The
district court1 granted UCL’s motion for summary judgment, finding the PPP was not
waived and was enforceable and awarding UCL attorney fees and costs under the
terms of both the promissory note and the mortgage securing the note. GPR appeals.
Finding no error, we affirm.
I. BACKGROUND
On November 17, 1989, GPR’s predecessor executed a ten-year promissory
note in the amount of $5,875,000 to UCL (Note). The Note had a maturity date of
December 1, 1999. The interest rate on the Note was fixed at 9.25% through January
1, 1995, when the rate was adjusted to 9.5%. Under the Note, GPR agreed to pay
attorney fees “incurred by the holder hereof in connection with any default or in any
proceeding to enforce any provision of this Note or any instrument by which it is
secured.” The Note contained a PPP under which GPR could fully prepay the loan
only if a payment, calculated and based on a lender lost earnings formula contained
in the Note, was made to UCL. The Note did not provide for partial prepayment.
In conjunction with the Note, GPR entered into a mortgage and security
agreement (Mortgage) securing the Note. The Mortgage encumbered Southern Square
Shopping Center in Sioux City, Iowa. Under the terms of the Mortgage, GPR agreed
to pay promptly attorney fees “incurred or expended by Mortgagee arising out of or
in connection with any action, proceeding or hearing . . . including the preparation
therefor and any appeal therefrom, in any way affecting or pertaining to th[e]
Mortgage, the Note or the Premises.”
In 1997, GPR considered refinancing the Note and solicited proposals from
potential lenders including UCL. GPR sought to restructure the loan with a reduction
in the interest rate and an extension of the maturity date. In a July 1, 1997 letter to
1
The Honorable Harold D. Vietor, United States District Judge for the Southern
District of Iowa.
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UCL, GPR’s President and CEO, Robert Jackson (Jackson), proposed a waiver of the
PPP requirement. While Jackson expressed “an aversion” to paying UCL the PPP,
Jackson acknowledged the PPP’s existence in two August 1997 letters to a mortgage
broker. UCL and GPR held discussions and, on October 16, 1997, UCL sent a letter
to GPR expressing its willingness “to modify the existing Note and offer you
financing on the loan balance on the following basic terms.” The letter specified a
principal reduction of $391,280.96, a fixed interest rate of 8%, a 16-year amortization
period, and an effective date of October 1, 1997. The letter made no mention of the
PPP.
On October 22, 1997, GPR sent a conditional acceptance to UCL by mail and
by facsimile which contained a single alteration to the terms, and did not address
waiver of the PPP. UCL accepted the proposed changes on October 27, 1997, and on
November 10, 1997, UCL accepted GPR’s payment of $391,280.96 as a partial
principal pay down in accordance with the October 16, 1997 letter.
The parties executed a written loan modification and extension agreement dated
January 15, 1998, which extended the Note’s maturity date to October 1, 2013, fixed
the mortgage interest rate at 8%, and specified “the outstanding principal balance shall
be [5.2 million] dollars, after receipt of the $391,280.96 principal pay down.” The
extension agreement further provided, “Except as expressly modified herein, all of the
terms of the Note, the Mortgage and the other Loan Documents remain in full force
and effect.” The extension agreement did not mention or “expressly modify” the PPP.
Jackson conceded, “During the negotiations of the Modification Agreement nothing
was ever discussed about a [PPP] other than what [Jackson] had set forth in [his July
1, 1997 letter].”
In 2002, GPR secured new financing at a lower interest rate and notified UCL
of its intention to pay off the Note. UCL refused to accept payment of the principal
and refused to release the mortgage unless GPR paid the applicable PPP. Reserving
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all rights and positions, in September 2004, GPR paid the outstanding principal
balance and the PPP charge of $626,992.08. UCL accepted the payment and released
the Mortgage.
GPR filed this action in Polk County (Iowa) District Court on March 16, 2005,
seeking to recover the PPP, asserting claims for declaratory judgment, breach of
contract and unjust enrichment. UCL removed the case to federal court on April 18,
2005. UCL filed a motion for summary judgment which the district court granted.
UCL then moved for an award of attorney fees pursuant to Fed. R. Civ. P. 54(d)2
based on the terms of the Note and mortgage. In its response to UCL’s fee request,
GPR mentioned seeking leave to conduct discovery and to submit adversary
submissions under Fed. R. Civ. P. 43(e),3 but never filed a separate motion to this
effect as required by the local rules. The federal district court awarded UCL its fees
and costs without any discussion of GPR’s request for discovery. This appeal follows.
II. DISCUSSION
We review de novo an order granting summary judgment. See Trinity Prods.
v. Burgess Steel, L.L.C., 486 F.3d 325, 330 (8th Cir. 2007). “In considering a motion
for summary judgment the court does not weigh the evidence, make credibility
determinations, or attempt to discern the truth of any factual issue.” Morris v. City of
Chillicothe, 512 F.3d 1013, 1018 (8th Cir. 2008) (citation omitted). Instead, “we
2
Fed. R. Civ. P. 54(d) was amended on April 30, 2007, effective December 1,
2007, after the June 19, 2007 filing date of UCL’s motion seeking attorney fees. We
apply the language of the rule in effect at the time of the proceeding in the district
court.
3
The 2007 amendment of the Federal Rules of Civil Procedure effectively
renumbered and modified the language of Rule 43. Fed. R. Civ. P. 43(e) is now found
at Fed. R. Civ. P. 43(c). We apply the language of the rule in effect at the time of the
proceeding in the district court.
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focus on whether a genuine issue of material fact exists for trial—an issue of material
fact is genuine if the evidence is sufficient to allow a reasonable jury verdict for the
nonmoving party.” Id. (citing Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248
(1986)).
A. Prepayment Premium Provision (PPP)
1. Waiver or Modification
GPR asserts sufficient evidence supported a finding UCL waived or modified
the PPP, precluding summary judgment, because “[t]he issue of waiver is generally
one of fact for the jury, in particular where acts and conduct are relied upon as the
basis for the waiver.” (quoting Scheetz v. IMT Ins. Co., 324 N.W.2d 302, 304 (Iowa
1982) (en banc) (citing Continental Casualty Co. v. G.R. Kinney Co., Iowa, 140
N.W.2d 129, 130 (Iowa 1966))).4 Waiver is defined as “‘the voluntary or intentional
relinquishment of a known right.’” Scheetz, 324 N.W.2d at 304 (quoting Travelers
Indemnity Co. v. Fields, 317 N.W.2d 176, 186 (Iowa 1982)). “The essential elements
of a waiver are the existence of a right, knowledge, actual or constructive, and an
intention to relinquish such right.” Id. (citing Perkins v. City National Bank of
Clinton, 114 N.W.2d 45, 52 (1962)). Jackson, GPR’s President and CEO, admits the
only time waiver of the PPP was ever discussed was in his July 1, 1997 letter to UCL.
UCL and GPR never negotiated specifically regarding waiver of the PPP. The PPP
was not mentioned in UCL’s refinancing offer, was not specified by GPR in its
counteroffer, and was not addressed in the ultimate written agreement between GPR
and UCL—a written agreement explicitly providing, “Except as expressly modified
herein, all of the terms of the Note, the Mortgage and the other Loan Documents
remain in full force and effect.”
4
The Note and Mortgage select Iowa law for application to the parties’
agreement.
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Where UCL never voluntarily or intentionally relinquished its right to the PPP,
no reasonable jury could find UCL waived the PPP. Where UCL never entered
discussions regarding modification of the PPP, no reasonable jury could find the PPP
was modified either by oral5 or written agreement.
2. PPP Enforceability Under Iowa Law
GPR next asserts the PPP is unenforceable under Iowa law because the PPP
constitutes an unreasonable liquidated damages provision. The Iowa legislature has
imposed restrictions on prepayment charges for agricultural land and certain family
residences. The legislature has remained silent as to commercial real estate
transactions. The district court noted Iowa follows the common law “perfect tender
in time” rule, holding a borrower has no right to pay off a mortgage before the
maturity date, absent a loan agreement provision allowing prepayment. See Lett v.
Grummer, 300 N.W.2d 147, 150 (Iowa 1981). The Note provided GPR the right to
prepay, but only if payment was tendered in full, accompanied by the PPP payment.
The district court found the PPP’s terms to be unambiguous and noted when
commercial entities, represented by counsel, agree to contractual terms, Iowa courts
will ordinarily enforce the terms. We agree.
a. PPP Not a Liquidated Damages Provision
Under Iowa law, liquidated damages are a remedy for breach of contract. See
Am. Soil Processing, Inc. v. Iowa Underground Storage Tank Fund Bd., 586 N.W.2d
325, 334 (Iowa 1998). Where a party retains control over the manner of performance,
“alternatives are not damages provisions but rather performance alternatives.” Id.
5
See Passehl Estate v. Passehl, 712 N.W.2d 408, 417 (Iowa 2006) (“A written
contract may be modified by a subsequent oral contract that has the essential elements
of a binding contract. . . . However, proof of a claimed oral contract must come from
more than loose and random conversations.” (internal citations and quotation marks
omitted)). The record does not support even loose and random conversations by UCL
to waive the PPP.
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(citing Superfos Inv. Ltd. v. FirstMiss Fertilizer, Inc., 821 F. Supp. 432, 434 (S.D.
Miss. 1993)). Here, the Note gave GPR the choice of paying according to the Note’s
terms or prepaying the Note in full and paying the PPP. When GPR elected to prepay,
GPR was not breaching the contract but was in fact acting in accordance with an
express option provided under the contract. The district court was correct in
determining the PPP was not a liquidated damages provision.
b. Payment Was Not Unreasonable
A liquidated damages charge is enforceable under Iowa law if it is “reasonable
in the light of the anticipated or actual loss caused by the breach and the difficulties
of proof of loss. A term fixing unreasonably large liquidated damages is
unenforceable on grounds of public policy as a penalty.” Rohlin Constr. Co. v.
Hinton, 476 N.W.2d 78, 80 (Iowa 1991) (quoting Restatement (Second) of Contracts,
§ 356(1) (1981)). The reasonableness of a liquidated damages provision is assessed
as of the time the agreement is made, id., and is a question of law for the court. City
of Davenport v. Shewry Corp., 674 N.W.2d 79, 85 (Iowa 2004). While at least one
court has held as unreasonable a fixed prepayment penalty, the court did so because
the penalty presumed that a loss would occur, regardless of whether interest rates rose
or fell. See In re A.J. Lane & Co., 113 B.R. 821, 829 (Bkr. D. Mass. 1990). The Lane
court suggested that “[a]ny prepayment charge should be wholly or largely dependant
upon” . . . “the difference in the interest yield between the contract rate and the market
rate at the time of prepayment, projected over the term of the loan and then discounted
to arrive at present value.” Id. The PPP did what the Lane court suggested, because
the PPP did not presume a loss and was calculated based upon prevailing market rates
in an attempt to calculate UCL’s actual loss of earnings resulting from GPR’s
prepayment. The formula used and the resulting PPP charge were reasonable at the
time the agreement was reached. Even if the PPP were treated as a liquidated
damages provision, the PPP is enforceable because it constituted a reasonable
assessment of the actual or anticipated loss caused by the breach.
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B. Attorney Fees
A district court’s award of attorney fees is reviewed for an abuse of discretion.
See Hensley v. Eckerhart, 461 U.S. 424, 437 (1983). UCL moved for an award of
attorney fees pursuant to Fed. R. Civ. P. 54(d) based upon the terms of the Note and
Mortgage. GPR asserts that UCL is not entitled to recover attorney fees because, at
the time the lawsuit was filed and attorney fees sought, UCL was no longer the
“Holder” of the Note or a “Mortgagee” under the Mortgage and the attorney fees
provisions in both the Note and the Mortgage reference fees incurred by a “Holder”
or “Mortgagee.”
Both the Note and the Mortgage reference that fees can be recovered by the
Mortgagee or Holder “arising out of or in connection with any action, proceeding or
hearing.” Both parties clearly recognized that, at the time the contract was executed,
UCL was the “Holder.” Upon a breach involving prepayment, UCL would technically
cease to be the “Holder.” Nonetheless, UCL was the envisioned “Holder,” and the
attorney fees incurred arose from GPR’s lawsuit challenging the PPP provision of the
Note. The fact the lawsuit was not brought until after the Note was satisfied and the
Mortgage released does not change the facts (1) the attorney fees incurred arose or
were in conjunction with the Note or Mortgage, and (2) the breach occurred when
UCL was “Holder.” If we were to follow GPR’s hyper-technical reading, it would
effectively render the attorney fees provision meaningless and trigger an impractical
and arguably absurd result. The district court did not err in awarding attorney fees
under the terms of the Note and Mortgage. See United States v. Barnett, 415 F.3d
690, 692 (7th Cir. 2005) (“A contract will not be interpreted literally if doing so would
produce absurd results, in the sense of results that the parties, presumed to be rational
persons pursuing rational ends, are very unlikely to have agreed to seek.” (citations
and alteration omitted)).
On the eighth page of GPR’s nine page response in opposition to UCL’s request
for attorney fees, and not in a separately filed motion, GPR alternatively requested
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“leave pursuant to Fed. R. Civ. P. 54(d)(2)(C) to conduct discovery . . . and an
opportunity for adversary submissions pursuant to Fed. R. Civ. P. 43(e).” GPR asserts
the district court erred in not granting GPR the opportunity to conduct discovery or
to submit adversary submissions in regard to UCL’s request for attorney fees.
Rule 54(d)(2)(C), at the time, provided, “On request of a party or class member,
the court shall afford an opportunity for adversary submissions with respect to the
motion in accordance with Rule 43(e) . . . .” (emphasis added). Rule 43(e) then stated,
“When a motion is based on facts not appearing of record the court may hear the
matter on affidavits presented by the respective parties, but the court may direct that
the matter be heard wholly or partly on oral testimony or deposition.” (emphasis
added).
It is questionable whether a single sentence appearing only on the eighth page
of a nine page response qualifies as a “request of a party” under Rule 54(d)(2)(C) or
a “motion” under Rule 43(e). More directly, the district court’s local rules specifically
provide “a resistance to a motion may not include a separate motion or cross motion
by the responding party.” Local Rule 7.1.e (now Local Rule 7.e). Where GPR is
barred by local rule from making its motion within the body of its response, GPR has
failed to properly make a Rule 54(d)(2)(C) motion.6
6
Even if we were to consider a motion, it appears the district court could
properly deny the motion. While the previous language of Rule 54(d)(2)(C) mandates
an opportunity to conduct discovery, the mandate is couched in reference to the
former Rule 43(e). Rule 43(e) specifically pertained to motions “based on facts not
appearing of record.” In this case, the facts were of record because the basis for
determining whether or not UCL was entitled to an award of fees was in the Note and
Mortgage which both specifically allowed for UCL to recover costs or fees incurred.
Thus, Rule 54(d)(2)(C)’s mandate does not apply to the situation here because the
facts surrounding whether or not to award UCL attorney fees and costs were “of
record.”
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GPR did challenge UCL’s entitlement to attorney fees and expenses, but never
challenged the appropriateness of the amount claimed. UCL supported its request for
fees with substantial evidence including time sheets and affidavits from other
attorneys attesting to the reasonableness of the hourly fees charged. With no
contradictory evidence from GPR, the district court did not abuse its discretion in
awarding fees and costs to UCL.
III. CONCLUSION
For the reasons stated, we affirm.
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