Bank of N.Y. Mellon, Y. Global Capital Access One, Inc. v. GC Merch. Mart, L.L.C. (In re Denver Merch. Mart, Inc.)

• Citation: 740 F.3d 1052
• Decision Date: 27 January 2014
• Docket Number: No. 13–10461.,13–10461.
• Parties: In the Matter of DENVER MERCHANDISE MART, INC., Debtor. Bank of New York Mellon, as successor to Bank of New York Global Capital Access One, Inc., Commercial Mortgage Bonds, Series 3, care of Berkadia Commercial Mortgage L.L.C., Appellant, v. GC Merchandise Mart, L.L.C., Denver Merchandise Mart, Inc., and Hawthorn Lakes Associates, Ltd., Appellees.
• Court: U.S. Court of Appeals — Fifth Circuit

740 F.3d 1052

In the Matter of DENVER MERCHANDISE MART, INC., Debtor.

Bank of New York Mellon, as successor to Bank of New York Global Capital Access One, Inc., Commercial Mortgage Bonds, Series 3, care of Berkadia Commercial Mortgage L.L.C., Appellant,

v.GC Merchandise Mart, L.L.C., Denver Merchandise Mart, Inc., and Hawthorn Lakes Associates, Ltd., Appellees.

No. 13–10461.

United States Court of Appeals,Fifth Circuit.

Jan. 27, 2014.

Brian Christopher Walsh (argued), Esq., Bryan Cave, L.L.P., Saint Louis, MO, Keith Miles Aurzada, Bryan Cave, L.L.P., Dallas, TX, for Appellant.

Melissa Sue Hayward (argued), Esq., Franklin Skierski Lovall Hayward, L.L.P., Dallas, TX, for Appellees.

Appeal from the United States District Court for the Northern District of Texas.

Before REAVLEY, DAVIS, and HIGGINSON, Circuit Judges.

W. EUGENE DAVIS, Circuit Judge:

Lender-appellant Bank of New York Mellon (“Lender”) appeals the district court's judgment which, in relevant part, disallowed the Lender's claim for a contractualprepayment consideration. We affirm.

I.

This dispute arose in a complicated bankruptcy proceeding, but the fundamental dispute is a relatively straightforward question of contract interpretation under Colorado law. Debtor-appellee GC Merchandise Mart, LLC (“GCMM”) owns the Denver Merchandise Mart, a large exposition center in Denver, Colorado. GCMM's parent company is appellee Hawthorn Lakes Associates, Ltd., and appellee Denver Merchandise Mart, Inc. (“DMM”) is an affiliate of GCMM. All three companies filed petitions for voluntary Chapter 11 bankruptcy protection in March 2011. The cases are being jointly administered, with DMM's case designated as the lead case.

GCMM executed a promissory note (the “Note”) dated September 30, 1997 in favor of Dynex Commercial, Inc., a predecessor in interest to lender-appellant Bank of New York Mellon (“Lender”) in exchange for a $30 million loan. The Note bore interest at a non-default rate of 8.3% and contained several clauses, only two of which are at issue in this appeal: Article 4 (“Default and Acceleration”) and Article 6 (“Prepayment”).

Article 4 provides that “if any payment required in this Note is not paid prior to the tenth (10th) day after the date when due or on the Maturity Date or on the happening of any other default,” certain sums become immediately due and payable, including the principal balance, interest, default interest, “other sums, as provided in this Note,” and “all other moneys agreed or provided to be paid by Borrower in this Note, the Security Instrument or the Other Security Documents,” among other things. Article 6 provides that the Borrower may prepay the Note under certain circumstances but must also pay a Prepayment Consideration, which is essentially a penalty for prepayment.

GCMM stopped making payments on the Note in October 2010 and thus defaulted under its terms. The Lender issued a notice of default, which GCMM failed to cure. Though GCMM made two more partial payments, it made no payment whatsoever after December 2010. As permitted by its security instruments, the Lender obtained an ex parte order appointing a receiver of the Merchandise Mart, at which point GCMM and the other debtors filed for bankruptcy. At that time, GCMM owed the Lender approximately $24 million.

The Lender argued that payment of the Prepayment Consideration under Article 6, valued at $1.8 million, is required by Article 4's acceleration clause, notwithstanding the fact that GCMM stopped making payments under the Note after December 2010 and never paid the Note prior to the maturity date. The bankruptcy court disagreed on four grounds. First, it found that some payment, whether voluntary or involuntary, must actually be made to trigger the obligation to pay the Prepayment Consideration. Second, it found that the rationale for requiring a Prepayment Consideration did not apply here. Third, it found that the cases cited by the Lender were inapposite because in each of those cases,¹ the acceleration clause specifically provided that acceleration of the note would trigger the obligation to pay the prepayment consideration. Fourth and finally, the bankruptcy court noted that it would have been easy to expressly provide for payment of the Prepayment Consideration in the event of acceleration.

Thus, although the bankruptcy court allowed the Lender to recover a $25 million secured claim under the Note in conjunction with confirming the reorganization plan,² it disallowed the $1.8 million claim for the Prepayment Consideration under Article 6 of the Note.³

The Lender appealed the bankruptcy court's order to the district court. The district court affirmed the bankruptcy court in full. The Lender timely appealed to this court. The only issue the Lender presents on appeal is whether or not GCMM became liable for the $1.8 Prepayment Consideration upon the pre-bankruptcy acceleration of the Note.

II.

In this dispute over the disallowance of a claim in a bankruptcy proceeding, the bankruptcy court had jurisdiction under 28 U.S.C. §§ 157(b)(2)(B) and 1334(b), and the district court had jurisdiction over the appeal from the bankruptcy court under 28 U.S.C. § 158(a)(1). We therefore have jurisdiction over this appeal from the district court's judgment pursuant to 28 U.S.C. §§ 158(d)(1) and 1291.

“We review the bankruptcy court's findings of fact for clear error and its conclusions of law de novo, using the same standards that the bankruptcy court and district court applied.” ⁴ We look to applicable state law to determine the appropriate standard of review for interpretation of a contract.⁵ Under Colorado law, the interpretation of a contract is a matter of law that is reviewed de novo.⁶

III.

A. Colorado Contract Interpretation Principles

It is undisputed that Colorado law applies with respect to the interpretation of this contract. The Supreme Court of Colorado, sitting en banc, summarized Colorado's general principles for contract interpretation as follows:

We must construe the terms of the agreement in a manner that allows each party to receive the benefit of the bargain, and the scope of the agreement must faithfully reflect the reasonable expectations of the parties. In other words, we must interpret the agreement in a manner that best effectuates the intent of the parties. We ascertain the parties' intent by looking to the plain language of the agreement. We will enforce the agreement as written unless there is an ambiguity in the language; courts should neither rewrite the agreement nor limit its effect by a strained construction. Thus, like any contract, an arbitration agreement must be given effect according to the plain and ordinary meaning of its terms.

In determining whether an ambiguity exists, we must ask whether the disputed provision is reasonably susceptible on its face to more than one interpretation. We also evaluate the agreement as a whole and construe the language in harmony with the plain and generally accepted meaning of the words employed, unless the intent of the parties, as expressed in the contract, indicates that an alternative interpretation is intended.⁷

B. Relevant Colorado Cases

As the court in Planned Pethood Plus, Inc. v. KeyCorp, Inc., 228 P.3d 262, 264 (Colo.App.2010), noted, “Prepayment penalties ... have seldom been the subject of litigation in Colorado.” Indeed, only a few Colorado cases have dealt with prepayment penalties in any depth: Carpenter v. Winn, 39 Colo.App. 238, 566 P.2d 370 (1977), Kirk v. Kitchens, 49 P.3d 1189 (Colo.App.2002), and Planned Pethood. Fortunately, these cases sufficiently develop the applicable principles to resolve this dispute.

A lender has the right to refuse early payment,⁸ but the lender may expressly waive the right by contract. If a lender does not waive the right to refuse early payment, a borrower may not prepay the note without paying all future interest as well.⁹ If a lender does expressly waive the right to refuse early payment, then it is not entitled to any prepayment penalty unless the contract expressly provides for such prepayment penalty.¹⁰

Unless specifically provided for by contract, a lender may not assess a prepayment penalty when the note is accelerated at the lender's option.¹¹ Generally, a lender's choice to accelerate acts as a waiver of the right to a prepayment penalty.¹² The caveat is that a court may choose to impose the prepayment penalty even when a lender accelerates the note at its option if there is evidence that the borrower defaulted to avoid additional interest.¹³

Planned Pethood held that a prepayment penalty (also known as a prepayment premium or fee) is not a remedy for breach of contract but consideration for the borrower's right or privilege to prepay.¹⁴ Accordingly, a prepayment penalty is not liquidated damages and is not subject to the rules of reasonableness for liquidated damages.¹⁵ Furthermore, the Planned Pethood court reasoned that because a prepayment penalty is not properly characterized as liquidated damages due to breach of contract, it should not trigger application of section 506(b) of the Bankruptcy Code, ¹⁶ as In re A.J. Lane & Co., Inc., 113 B.R. 821 (Bankr.D.Mass.1990), had ruled under non-Colorado law.¹⁷

Parties are free to contract however they wish around these general rules, provided they do so clearly.

C. Applicable Provisions of the Note

As noted above, this appeal hinges on the interpretation of Articles 4 and 6 of the Note. Article 4 (“Default and Acceleration”) provides in full:

(a) The whole of the principal sum of this Note, (b) interest, default interest, late charges and other sums, as provided in this Note, the Security Instrument or the Other Security Documents (defined below), (c) all other moneys agreed or provided to be paid by Borrower in this Note, the Security Instrument or the Other Security Documents, (d) all sums advanced pursuant to the Security Instrument to protect and preserve the Property and the lien and the...