U.S.A. v. Ponnapula

• Decision Date: 20 September 2000
• Docket Number: 99-5190,Nos. 98-6678,99-5192,s. 98-6678
• Citation: 246 F.3d 576
• Parties: (6th Cir. 2001) United States of America, Plaintiff-Appellee, First South Bank, formerly known as Hardeman County Bank, Plaintiff, v. Venkat Ponnapula, Defendant-Appellant, State Bank of India, The New York Branch; Tracey Malone, Defendants-Appellees. United States of America; First South Bank, formerly known as Hardeman County Bank, Plaintiffs, v. Venkat Ponnapula, Defendant-Appellant/Cross-Appellee, State Bank of India, The New York Branch, Defendant-Appellee/Cross-Appellant, Tracey Malone, Defendant-Appellee. United States of America, Plaintiff-Appellee/Cross-Appellant, First South Bank, formerly know as Hardeman County. Argued:
• Court: U.S. Court of Appeals — Sixth Circuit

Page 576

246 F.3d 576 (6th Cir. 2001)

United States of America, Plaintiff-Appellee, First South Bank, formerly known as Hardeman County Bank, Plaintiff, v. Venkat Ponnapula, Defendant-Appellant, State Bank of India, The New York Branch; Tracey Malone, Defendants-Appellees.

United States of America; First South Bank, formerly known as Hardeman County Bank, Plaintiffs, v. Venkat Ponnapula, Defendant-Appellant/Cross-Appellee, State Bank of India, The New York Branch, Defendant-Appellee/Cross-Appellant, Tracey Malone, Defendant-Appellee.

United States of America, Plaintiff-Appellee/Cross-Appellant,

First South Bank, formerly know as Hardeman County.

Nos. 98-6678, 99-5190, 99-5192.

UNITED STATES COURT OF APPEALS FOR THE SIXTH CIRCUIT

Argued: September 20, 2000

Decided and Filed: April 4, 2001

Appeal from the United States District Court for the Western District of Tennessee at Memphis. No. 95-02643, Bernice B. Donald, District Judge. [Copyrighted Material Omitted] Sidney P. Alexander, Asst. U.S. Attorney, Memphis, TN, William Kanter, Frank A. Rosenfeld, UNITED STATES DEPARTMENT OF JUSTICE, CIVIL DIVISION, Washington, D.C., for Appellees.

Craig V. Morton, II, MORTON, BREAKSTONE & GERMANY, Memphis, Tennessee, for Appellant.

Paul A. Matthews, ARMSTRONG, ALLEN, PREWITT, GENTRY, JOHNSTONE & HOLMES, Memphis, Tennessee,

Eugene J. Podesta, Jr., BAKER, DONELSON, BEARMAN & CALDWELL, Memphis, Tennessee,

Before: BOGGS, SUHRHEINRICH, and GIBSON, Circuit Judges^*.

OPINION

JOHN R. GIBSON, Circuit Judge.

Both sides appeal from the declaratory judgment entered in this interpleader action, brought to determine the owner of an earnest money deposit paid at a foreclosure auction. After a bench trial, the district court entered a judgment awarding roughly half the deposit to the lienholders (the State Bank of India and the United States, on behalf of the Small Business Administration) and the rest to Venkat Ponnapula, the bidder who made the deposit. Ponnapula argues that the district court erred in holding that the auction sale resulted in an enforceable contract. He also contends that the contract was unenforceable because it was made in violation of federal conflict of interest laws. The SBA and the State Bank of India argue that the district court erred in failing to award the entire amount of the deposit as liquidated damages. The State Bank of India contends that the district court abused its discretion in failing to rule on the Bank's motion for sanctions against Ponnapula. We reverse and remand with instructions to award the entire amount to the lienholders and to rule on the State Bank of India's motion for sanctions.

When the owner of a Memphis motel defaulted on its two mortgages, the SBA, as first lienholder,¹ arranged for the hotel to be sold at auction. The SBA hired Memphis attorney Tracey Malone to act as substitute trustee in handling the foreclosure sale. Malone's duties as substitute trustee included sending notices of sale to the parties entitled to such notice, publishing the notices of sale, conducting the sale, and examining the title. The notices stated that the sale was "subject to validly liened ad valorem taxes, if any, which may be outstanding."

After Venkat Ponnapula expressed an interest in buying the motel, he received from Greg Hamilton, an SBA representative, a letter that stated, "In addition to putting 15% down at closing, you will be required to pay the real estate taxes owing on the property prior to closing." Murali Ponnapula, Venkat's brother and his agent in this transaction, contacted Malone's secretary many times inquiring about the amount of back taxes. When the secretary was finally able to inform Murali Ponnapula of the amount of back taxes, he thanked her with a gift of candy.

Before the auction Malone accepted a $5,000 "retainer" in cash from Murali and Venkat Ponnapula, which would be payment for future legal work related to the motel property in the event Venkat Ponnapula was the high bidder, although she refunded it ten days later. The same day she accepted the retainer, Malone decided she ought not to have done so, and she called Murali Ponnapula and asked him to retrieve the payment. He said he was too busy to come by her office that afternoon. Malone offered to bring the money to the foreclosure auction the next day, but Murali urged her not to do so, leaving her with the understanding that he would retrieve it later. Malone was thus in possession of the money on the date of the auction, although she later refunded it.

The day of the sale, Malone, Hamilton, and the auctioneer all announced that the sale was subject to taxes owed, and Hamilton announced that the back taxes were about $196,000. The terms of sale, announced before the bidding began, were that a purchaser who desired SBA financing would be required to pay a 15 percent earnest money deposit.

Venkat Ponnapula was the successful bidder at the auction with a bid of $1,110,000. There was confusion about whether the bid was $1,115,000 or $1,110,000, and Ponnapula agreed to sign a Memorandum of Sale stating the price as $1,115,000, with the understanding that the Memorandum would be corrected if the lesser amount were determined to be the actual sale price². Malone made the Memorandum of Sale from a preprinted SBA form and gave Ponnapula a duplicate original. The Memorandum provided, in Malone's handwritten notation, "Purchaser to pay taxes current at closing through 1994." (Emphasis added.)

The Memorandum of Sale also provided that if Ponnapula failed to consummate the sale, the SBA had the option of retaining his earnest money deposit as liquidated damages. Because Ponnapula wanted SBA financing, the SBA required that he make an earnest money deposit of 15 percent of the purchase price, or $167,250 (based on the erroneous $1,115,000 figure) on the day of the sale. Ponnapula actually deposited $200,000, and the SBA refunded to him the excess over the required $167,250.

The day after the sale, Murali Ponnapula went to Malone's office and told her that Venkat had bid too much for the property. Therefore, the brothers wanted to cancel the sale and get the earnest money back. Venkat Ponnapula refused to close the sale, so the SBA sold the motel to the second highest bidder for $65,000 less than Ponnapula had bid.

The United States, on behalf of the SBA, brought this interpleader and declaratory judgment action to determine the rights of the United States, First South Bank, and the State Bank of India in the earnest money³ and to declare the Memorandum of Sale to be a binding contract. Ponnapula answered and counterclaimed, alleging that both Malone and the auctioneer told him before the sale that the back taxes were to be paid by the SBA and that Malone wrote on the Memorandum of Sale that the seller was to pay the taxes. He alleged that the SBA's copy of the Memorandum of Sale, stating that the purchaser would pay the taxes, had been altered after he signed it. Ponnapula produced a copy of the Memorandum with a handwritten note that the seller would pay the taxes. He therefore contended that there was no meeting of the minds sufficient to form a contract and asked for a return of the earnest money and interest on it. The State Bank of India joined Malone and asserted a claim against her for failing to pay the Bank its share of the sale proceeds.

In their depositions, Venkat and Murali Ponnapula testified that they paid Malone $5,000 cash for helping them with the sale transaction. Based on this testimony, the State Bank of India then asserted claims against Malone for breach of fiduciary duty, negligent misrepresentation, and fraud.

After a bench trial, the district court found that Venkat Ponnapula had actual knowledge before the sale that the purchaser would be liable for the back taxes and that Ponnapula or someone acting at his direction had changed Ponnapula's copy of the Memorandum after it was executed to say that the seller would pay the taxes. Therefore, the court found the auction sale created a contract. However, the court next considered the effect of 18 U.S.C. § 208 (1994), a criminal conflict of interest statute. Relying on United States v. Mississippi Valley Generating Co., 364 U.S. 520 (1961), the court held that a contract would be voided where a government employee was (1) an officer or agent of the government for the transaction of business, (2) was directly or indirectly financially interested in the transaction, and (3) played a personal and substantial role in the transaction. The court found that the third element of a section 208 violation did not exist: "Ms. Malone's actions, [sic] may be considered on the threshold of personal, but are not substantial."

Next, the district court concluded that the SBA could be precluded from enforcing the liquidated damages clause of its contract because of unclean hands:

[B]ecause of the actions of the Government's agent Tracy [sic] Malone an appearance of impropriety was created. The actions of Ms. Malone was [sic] attributed to the Government in this case. As such, it would be fundamentally unfair to allow the Government the full benefit of its contract by enforcing the liquidated damages provision of the contract.

Despite having just found that one of the elements of a section 208 violation was lacking, the court fashioned a remedy awarding the SBA its actual damages, in order to compensate it for its losses, while still imposing on the SBA a "penalty for the Section 208 violation." The court declined to enforce the liquidated damages clause on the ground that damages in the full amount of the earnest money deposit were excessive in relation to the SBA's actual damages and so constituted an impermissible penalty. Therefore, the court awarded the SBA and the State Bank of India their actual damages from the breach, $84,447.34.

The court further found that Ponnapula had unclean hands as well, but awarded him the balance of the deposit not...