167 F.3d 1354 (11th Cir. 1999), 96-4570, Western Group Nurseries, Inc. v. Ergas

Docket Nº:96-4570.
Citation:167 F.3d 1354
Party Name:WESTERN GROUP NURSERIES, INC., an Arizona corporation; Western United Nurseries, Inc., an Arizona corporation, Plaintiffs-Appellants, v. Martin ERGAS, World Nurseries, Inc., a Delaware corporation, Defendants-Appellees.
Case Date:February 12, 1999
Court:United States Courts of Appeals, Court of Appeals for the Eleventh Circuit

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167 F.3d 1354 (11th Cir. 1999)

WESTERN GROUP NURSERIES, INC., an Arizona corporation;

Western United Nurseries, Inc., an Arizona

corporation, Plaintiffs-Appellants,


Martin ERGAS, World Nurseries, Inc., a Delaware corporation,


No. 96-4570.

United States Court of Appeals, Eleventh Circuit

February 12, 1999

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[Copyrighted Material Omitted]

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Howard Kelly Coates, Jr., Proskauer, Rose, Goetz & Mendelsohn, Boca Raton, FL, Joel D. Eaton, Podhurst, Orseck & Josefsberg, Miami, FL, for Plaintiffs-Appellants.

Neil Jay Berman, Berman, Wolfe & Rennert, Miami, FL, for Defendants-Appellees.

Appeal from the United States District Court for the Southern District of Florida.

Before COX and BARKETT, Circuit Judges, and SMITH [*], Senior Circuit Judge.

EDWARD S. SMITH, Senior Circuit Judge:

Western Group Nurseries, Inc. ("Western Group") appeals the May 18, 1995 order of the District Court for the Southern District of Florida, entering summary judgment for defendant Martin Ergas ("Ergas"). Western Group sued Ergas, a limited partner of a tax shelter partnership, to force him to pay his pro rata share of a promissory note entered into by the partnership. Ergas defended on the ground that, as part of a related transaction, Western Group had agreed not to sue the limited partners. The District Court held the disputed contract language to be an unambiguous covenant not to sue and granted summary judgment to Ergas. We hold that the contract language at issue is ambiguous when viewed in the proper context and therefore reverse and remand for its interpretation in light of extrinsic evidence.


This case arises out of a complex series of transactions in which nursery owners sold their properties to a tax shelter syndicator, who in turn sold the properties to a limited partnership as a tax shelter.

At the end of 1984, thirteen Arizona nursery owners ("Sellers") contracted to sell their nursery businesses and properties to World Nurseries, Inc. ("Syndicator"), a tax shelter promoter. Of the $22.1 million purchase price, $3 million dollars was to be paid in cash at closing, $17 million was to be paid pursuant to a promissory note from Syndicator, and $2.1 million was contingent on the sale of certain nursery stock.

In a separate transaction contemplated by the Sellers/Syndicator agreement, Syndicator immediately sold the nursery assets to Arizona World Nurseries Limited Partnership ("Partnership") for $33 million. The increased purchase price reflected the additional value of the tax benefits to the limited partners. 1 Partnership paid $6.57 million of the purchase price in cash and promised to pay the remaining $26.43 million pursuant to a promissory note. Partnership's note (referred to as the "Wraparound Note") was nonrecourse as to the partnership itself, 2 but the limited partners were liable for $260,000 per unit purchased. Partnership conveyed a purchase money security interest (PMSI) in the nursery assets to Syndicator to secure the Wraparound Note.

To secure payment of its note to Sellers, Syndicator conveyed a PMSI in the nursery assets to Sellers. As additional collateral for its debt to Sellers, Syndicator conveyed the Wraparound Note to Sellers. The note was nonrecourse as to Syndicator.

Paragraph 1 of the Sellers/Syndicator security agreement established the Sellers' security interest in the Wraparound Note and reads, in pertinent part:

Security Interest. To secure the timely payment of the Purchase Price, including but not limited to the timely payments of principal and interest under the [Syndicator's] Note, the payment of the Additional Purchase Price and the payment and performance of all obligations and liabilities of Debtor [Syndicator] to Secured Party [Sellers] under the Maintenance Contracts, the Note, the Purchase Agreement ... and this Security Agreement (such payments

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under the Note and the payment and performance of such obligations and liabilities are hereinafter referred to, collectively, as the "Obligations"), Debtor shall, and hereby does, grant, convey, assign, pledge and transfer to Secured Party, a purchase money security interest in and to the Properties and the [Wraparound] Note (except that Secured Party shall not have the right to sue the Limited Partners or General Partners of the Partnership personally thereon other than to the extent of payments made to them by the Partnership )

(emphasis added). The intended effect of the emphasized parenthetical phrase is disputed by the parties and is the critical issue in this case.

After barely a year, Partnership found itself unable to make payments on its promissory note to Syndicator. Consequently, Syndicator could not make its payments to Sellers. Sellers declared Syndicator in default and filed suit in Arizona for foreclosure. In October 1986, the trial court ordered foreclosure. The Arizona Court of Appeals affirmed.

On December 1, 1986, Western United Nurseries, Inc. ("Western United"), which obtained judgment in its name as representative of Sellers, assigned part of its judgment against Syndicator to Sellers' newly formed entity, Western Group Nurseries, Inc. ("Western Group"), to bid at the Arizona sheriff's sale of Syndicator's collateral securing its debt on December 2, 1986. Western Group purchased the Wraparound Note at the sale. Western Group's efforts to collect on this note have led to a string of lawsuits including the instant case.


After Western Group purchased the Wraparound Note, it sued Partnership and its limited partners (including Ergas) in Arizona state court. The limited partners were dismissed for lack of personal jurisdiction. The court entered judgment against Partnership accelerating the entire principal balance and interest accrued on the Wraparound Note. Western Group then sued the limited partners individually to collect the partners' pro rata shares of the amount due under the note. 3

Western Group filed suit against Ergas in 1989 in a Florida circuit court. After Ergas filed a motion to dismiss, Western Group filed a notice of voluntary dismissal. Ergas moved for attorney's fees under a Florida statute which allows sanctions for filing suits in which "the court finds that there was a complete absence of a justiciable issue of either law or fact...

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