Opinion
CASE No. 90-52369-RBK, CHAPTER 11, ADVERSARY No. 00-5196-RBK
April 26, 2001
FINDINGS OF FACT AND CONCLUSIONS OF LAW
In connection with the Judgment rendered in this adversary proceeding, the Court hereby makes the following Findings of Fact and Conclusions of Law pursuant to Rule 7052 of the Federal Rules of Bankruptcy Procedure:
FINDINGS OF FACT
Plaintiff, Aldridge Nursery, Inc. ("Aldridge") filed this Chapter 11 case in 1990 and obtained confirmation of its Chapter 11 plan of reorganization in 1991. Defendant, Gerald Brannan Self-Directed IRA ("Brannan"), is currently the lessor under a Lease Agreement dated August 1, 1991 ("Lease Agreement"), and Aldridge is the lessee. The lease covers approximately 175 acres. The Lease Agreement provided for a ten year term with monthly rental payment of $6,000 or total payments of $720,000. The Lease Agreement granted Aldridge the option to purchase the premises for the sum of $780,000. Pursuant to the Lease Agreement, Aldridge received a credit toward the $780,000 option price for each monthly lease payment it made. When all lease payments were made ($720,000), a residuary sum of $60,000 remained which must be paid at the time of the exercise of the option.
After commencement of the lease term, differences arose that led to the filing of Adversary Proceeding No. 96-5007 in this Court. An Agreed Judgment was entered in the adversary proceeding on September 30, 1996 ("Agreed Judgment").
The original lessors under the Lease Agreement were Richard and Meredith Aldridge, who were formally released in writing ("Mutual Release") on September 25, 1996. Brannan became substituted as lessor. At that time, Brannan agreed to a reduction in the outstanding lease arrearage. On September 25, 1996, this agreement was reduced to writing ("Arrearage Note"). The Arrearage Note was executed simultaneously with a modification of the original lease ("Modification Agreement").
The Arrearage Note provided for a reduction in the outstanding lease arrearage to $190,000 in monthly installments of $2,000 beginning September 1, 1996, with simple interest accruing at nine percent (9%) per annum on the outstanding balance of the lease arrearage with a balloon payment at the end of the original ten year lease term on July 31, 2001. The Arrearage Note provided that matured unpaid principal and interest bore interest at the rate of twelve percent (12%) per annum.
The Modification Agreement incorporated the Lease Agreement by reference. The Modification Agreement stated that the rental payment remained $6,000 per month, but supplied no due date for each payment. The Lease Agreement, on the other hand, provided that payments were due on the first day of each month. Under the lease, interest accrued at the rate of twelve percent (12%) per annum on late payments received from the day they were due until actually paid. Thus, when read together, the Lease Agreement and the Modification Agreement provided for twelve percent (12%) past due interest on late rental payments received (after the first day of each month). None of the documents, however, stated that failure to pay the past due interest on rent amounts would be an event of default.
Despite the fact that rental payments were due on the first of each month, Brannan neither made a demand for interest on late rental payments nor requested twelve percent (12%) matured interest on the Arrearage Note. Long after the Modification Agreement was executed, Aldridge expressed its desire to exercise the option to purchase. Brannan stated that it wanted past due interest, but did not request a specific amount.
From the time that the Modification Agreement went into effect, Brannan accepted monthly payments of rent ($6,000) and payments on the Arrearage Note ($2,000). Although no payments were made on or before the first day of each month, at no time were these installments more than ninety (90) days past due.
The Modification Agreement stated in paragraph four:
In the event of any default hereunder, or the lease, or in the payment in the note referred to above, such default continuing for 90 days, shall automatically terminate and be extinguished the right to purchase the premises identified in the lease agreement. No written or other notice shall be necessary to advise lessee of the delinquency or arrearage in order that the right to purchase the demised premises be extinguished.
The evidence indicates that no default by Aldridge continued for more than ninety (90) days. Similarly, no default in payments on the Arrearage Note continued for more than ninety (90) days. Therefore, Aldridge's right to purchase the demised premises was not extinguished by an event of default.
The Lease Agreement further provided:
If the Lessee defaults in complying with the payment of the lease payments due hereunder, Lessor may serve a written notice upon the Lessee requiring Lessee to cure the default with thirty (30) days after the service of the notice of the default of the lease payment. Copies of said Notice of Default shall be served upon the Farm Credit Bank of Texas and the Farmers Home Administration.
No such notice requiring cure of default was ever made by Brannan.
Under the Lease Agreement, the option to purchase had to be exercised within the original ten year lease term. Written consent by the Farm Credit Bank of Texas and the Farmers Home Administration was required to exercise the option to purchase. Based on the evidence, the Court finds that Aldridge properly obtained consent and properly exercised the option to purchase within the original ten year lease term.
After lengthy negotiations, Aldridge and Brannan were unable to agree on the correct option price. Paragraph five of the Modification Agreement provided that the price to purchase the demised premises included all rental payments remaining due (11 payments times $6,000 = $66,000), plus all payments remaining due under the Arrearage Note ($164,860.16), plus a residuary sum ($60,000). Hence, the option purchase price is $290,860.16.
CONCLUSIONS OF LAW
A. Jurisdiction and Venue
The Court has jurisdiction over this proceeding pursuant to 28 U.S.C. § 157 (a), 1334 (1993 Supp. 2000) and the Standing Orders of Reference of the district court. The Court may enter a final order in this core proceeding. 28 U.S.C. § 157(b)(1), (b)(2)(I) (1993 Supp. 2000).
Venue is proper in this Court under 28 U.S.C. § 1409 (1993 Supp. 2000).
B. Discussion
The primary rule when interpreting a contract is to ascertain the intention of the parties and give effect to this intent as expressed in the instrument. See Fuller v. Phillips Petroleum Co., 872 F.2d 655, 657 (5th Cir. 1989). Under general rules of contract construction, absent ambiguity, the intent of the parties is gleaned from the four corners of the document. In re Stratford v. Texas, Inc., 635 F.2d 365, 368 (5th Cir. 1981). Objective, not subjective, intent controls, and in the absence of an allegation of ambiguity as to the contract language, the instrument alone will be deemed to express the intent of the parties. Id . at 657. Whether an ambiguity exists is a question of law for the court. RP Enterprises v. LaGuarta Kirk, Inc., 596 S.W.2d 517, 518 (Tex. 1980).
Various bankruptcy courts have also recognized that the general rule of construction provides that instruments that are conditionally dependent upon one another are to be read and interpreted as one agreement. In re Independent American Real Estate, Inc., 146 B.R. 546. 550-51 (Bankr. N.D. Tex. 1992). In construing a contract, a writing is interpreted as a whole, and all writings forming part of the same transaction are interpreted together. Houston v. Holder (In re Omni Video, Inc.), 60 F.3d 230, 233 (5th Cir. 1995); Banco Urban Renewal Corp. V. Housing Authority of the City of Atlantic City, 674 F.2d 1001, 1009 (3rd Cir. 1982) (citing Restatement (2nd) of Contracts 202(2)(1981)).
Because the Lease Agreement was subsequently modified, the Court must read these documents together with the Lease Agreement to determine their meaning. Thus, the Lease Agreement and Modification Agreement should be read together to determine the time of payment of rent. Although the Modification Agreement stated that "the rental payment shall remain at $6,000 per month," it provided no specific date for payment. The Modification Agreement, read by itself, indicated that rent could be paid at any time during the month. On the other hand, the Lease Agreement stated that rent was due on the first day of each month, even after the Modification Agreement was executed. Thus, when read together, the latter reading of the two writings is the unambiguous interpretation of the documents. It manifests their intent that rent should be paid on the first of each month.
With respect to the Arrearage Note, none of the documents stated that the payments on the Arrearage Note were due on the first day of each month. Instead, the Arrearage Note required "[m]onthly installments of principal and interest." There was no specific date indicated, except that the installments be paid "monthly." The evidence before the Court indicates that monthly payments were made, and therefore, no "past due interest" on the Arrearage Note accrued.
A party can waive its rights to insist upon the timely payment of installments, however, so as to estop it from relying on such default. Vaughan v. Crown Plumbing Sewer Serv., 523 S.W.2d 72, 75 (Tex.Civ.App.--Houston [1st Dist.] 1975, writ ref'd n.r.e.) (citing Diamond v. Hodges, 58 S.W.2d 187, 188 (Tex.Civ.App.--Dallas 1933, no writ)). It is only necessary that each should act so as to justify the other in believing that the effect of the failure to timely pay an installment was to be disregarded and that the contract should stand as if there had been no default. Id . at 75. This is the principle of estoppel by waiver. Id .
No demand was ever made by Brannan for "past due interest" on the Lease Agreement or the Arrearage Note. This implies waiver of Brannan's right to "past due interest," even if it was owed.
Brannan waived its right to require timely payments by repeatedly accepting late payments of rent. The principle of estoppel by waiver applies to Brannan' s right to collect past due interest on late rent installments. Brannan never demanded past due interest until after Aldridge expressed its intention to exercise the purchase option. Moreover, it remains unclear how to determine what amount of default interest would be due, if in fact it were owed. For example, one reading of the Lease Agreement leads one to conclude that interest on late rent continues to accumulate until rent is paid; another reading leads to the conclusion that interest on late rent continues to accumulate even after the rent is paid (i.e., interest on past due interest). Brannan has yet to state a specific amount that is due.
The question of precisely when the waiver of past due interest or untimely rent occurred cannot be answered with any certainty by this Court. Nevertheless, this is a classic case of waiver. See e.g., Vaughan v. Crown Plumbing Sewer Serv., 523 S.W.2d 72, 75 (Tex.Civ.App.--Houston [1st Dist.] 1975, writ ref'd n.r.e.). Although the acceptance of one late payment did not amount to waiver, certainly by the time Brannan had accepted fifty-one late payments of rent, waiver occurred. Compounding this effect was the fact that Brannan did not make any demand for past due interest or notify Aldridge of any default. Under these circumstances, it is reasonable to apply the equitable remedy of estoppel.
In Vaughan, the mortgagee waived its optional right of acceleration by permitting prior monthly payments to be made late without objection. Vaughan, 523 S.W.2d at 73-74. Even though Vaughan concerned payments only on a promissory note, and this case concerns payments on both a lease and and a promissory note, the same principles of waiver and equitable estoppel apply.
Despite these principles of equity, Brannan argues that the Modification Agreement did not require it to give any notice of default or notice of termination of the option. Courts do not favor forfeitures, however, unless compelled to do so by language that will admit to no other construction. G.C. Murphy Co. v. Lack, 404 S.W.2d 853, 858 (Tex.Civ.App.-Corpus Christi 1966, writ ref'd n.r.e.). Any doubt as to meaning of language in a lease will be resolved against the landlord to prevent a forfeiture. Id . at 856-57. Because the law abhors forfeiture, Aldridge should not be forced to surrender its option to purchase the property.
C. Conclusion
In conclusion, the Court finds that BraAnan waived its right to insist upon the timely payment of rent installments and note payments. Aldridge properly exercised the option to purchase. The exercise price is $290,860.16. No past due interest on late rent or the Arrearage Note payments is owed or necessary to exercise the option to purchase.
Any Finding of Fact which should more appropriately be characterized as a Conclusion of Law shall be considered a Conclusion of Law herein. Similarly, any Conclusion of Law which should more appropriately be characterized as a Finding of Fact shall be considered a Finding of Fact herein.