Southmark Properties v. Charles House Corp.
| Decision Date | 28 September 1984 |
| Docket Number | No. 83-3546,83-3546 |
| Citation | 742 F.2d 862 |
| Parties | , 16 Fed. R. Evid. Serv. 1130 SOUTHMARK PROPERTIES and St. Charles Avenue, Inc., Plaintiffs-Appellees, v. The CHARLES HOUSE CORPORATION, et al., Defendants-Appellants. |
| Court | U.S. Court of Appeals — Fifth Circuit |
Stone, Pigman, Walther, Wittmann & Hutchinson, William E. Brown, New Orleans, La., for defendants-appellants.
Phelps, Dunbar, Marks, Claverie & Sims, Eugene R. Preaus, Mark B. Meyers, New Orleans, La., for plaintiffs-appellees.
Appeal from the United States District Court for the Eastern District of Louisiana.
Before POLITZ, WILLIAMS, and GARWOOD, Circuit Judges.
In this case, we examine the res judicata effect of the sale of property authorized by a federal district court under Chapter 10 of the Bankruptcy Act. 1
Appellant The Charles House Corporation developed and built a residential real estate development in New Orleans, Louisiana known as The Charles House. Appellant David F. Craig, Sr. (Craig) is president and a twenty-five percent stockholder of the corporation. 2 Appellee Southmark Properties (Southmark), formerly Citizens & Southern Realty Investors, was a real estate investment trust engaged in, among other things, financing the construction of residential real estate developments.
In 1972, Craig sought and received from Southmark a loan to finance construction of The Charles House. The loan was executed in December 1972, and was secured by a collateral mortgage on the project, a Craig and Southmark agreed that $192,000 of the authorized loan amount would serve as an "interest reserve" fund. The fund was not referred to in any of the loan documents, but was listed in a pro forma statement itemizing the anticipated allocation of the loan proceeds. The parties anticipated that the reserve fund would be sufficient to pay the interest due on the loan at least until the completion of the project. Interest rates, however, rose dramatically after commencement of The Charles House construction, 4 "depleting" the interest reserve faster than anyone had anticipated. The interest reserve was "exhausted" by August 1974. Although The Charles House Corporation, through Craig, at that time requested and received from Southmark an additional $100,000 loan, $45,000 of which was used to pay accrued interest, no further interest payments were made.
$1.75 million collateral mortgage note, and the personal guaranties of Craig, Flotte, and Daniel, all dated December 6, 1972. Although the collateral mortgage note, which was payable on demand, specified an interest rate of twelve percent per annum, the mortgage specified that Southmark possessed the right "to issue and re-issue the said note from time to time, as mortgagor's interest and/or convenience may require." "Hand notes" signed by The Charles House Corporation, by Craig, upon each disbursement of loan funds, each specified an interest rate of four and one-half percentage points per annum above the best commercial lending rate at Citizens & Southern Bank, "as said rate may change from time to time." 3 Each hand note reflected that it was secured by the mortgage and provided for a maturity of December 6, 1979, subject to acceleration in the event of default in any of the note payments or under the mortgage. The hand notes were guaranteed by Craig, Flotte, and Daniel. The first hand note was in the amount of $625,205.99 and was executed December 6, 1972. The collateral mortgage required in part that The Charles House Corporation "pay promptly at maturity all payments due on the Note," "pay and discharge, promptly when due, all taxes" and "not ... encumber the aforesaid property to the prejudice of this act." The mortgage stipulated that breach of the above obligations constituted default allowing the lender to declare the entire indebtedness "immediately due and payable" and to seize and sell the property under executory process. Each of the hand notes stipulated that "[i]nterest ... shall be payable monthly."
In April 1975, after The Charles House Corporation had failed to pay interest on its loan for approximately eight months, and failed to pay local taxes due in January 1975, and after approximately $106,000 in construction liens had been filed against the project, Southmark initiated proceedings in Louisiana state court to foreclose its mortgage on The Charles House property. Southmark also filed suit against the loan guarantors in state court to recover any deficiency due it beyond that covered by proceeds from the foreclosure sale. On the scheduled date of the foreclosure sale of The Charles House property, three unsecured creditors of The Charles House Corporation filed a Chapter 10 reorganization petition against the corporation in United States District Court for the Eastern District of Louisiana. The Charles House Corporation admitted the petition's allegations and acquiesced in the reorganization proceedings. The district court enjoined completion of the state foreclosure proceedings. After unsuccessfully seeking dismissal of the reorganization petition in the district court, and filing an appeal from the district court's refusal to dismiss, Southmark While the reorganization proceeding was in progress, The Charles House Corporation, through Craig, with the concurrence of Flotte and Daniel, reached an agreement with Southmark to allow Southmark to bid on The Charles House property in a reorganization trustee's sale. In return for Craig's and The Charles House Corporation's promise not to oppose such a sale, Southmark agreed to dismiss its state court suits against the corporation and the guarantors, and to dismiss its appeal challenging the reorganization proceedings. Pursuant to a petition from the reorganization trustee, the district court ordered that The Charles House property be sold at public auction, and that Southmark be allowed to bid the balance due on its mortgage debt. The order provided that the property "shall be sold free and clear of all ... claims." The property was sold at auction in November 1976 to Southmark, the only bidder, which bid the amount of its debt, surrendered its mortgage on the property, and took title and ownership of it. The sale was confirmed by an order of the district court on December 8, 1976. In accordance with its agreement with Craig, Southmark dismissed its state court actions against The Charles House Corporation, Craig, Flotte, and Daniel with prejudice and dismissed its appeal challenging the reorganization proceedings. Because the reorganization sale had disposed of the only asset of The Charles House Corporation, the reorganization petition was dismissed by the district court upon a motion of the trustee in early 1978. No appeals were taken from the order directing the sale, or that confirming it, or the 1978 order dismissing the reorganization.
asserted, without opposition, a claim as a secured creditor in the reorganization proceedings. The claim was later accepted by the trustee and the district court.
In October 1981, The Charles House Corporation filed suit in Louisiana state court against both Southmark and St. Charles Avenue, Inc., a wholly owned subsidiary of Southmark which had acquired ownership of The Charles House property from Southmark sometime after the reorganization sale. The suit alleged that Southmark had violated its construction loan agreement with The Charles House Corporation by engaging in fraudulent and extortionate activities leading to and including the initiation of the April 1975 foreclosure proceedings and the subsequent reorganization sale. The complaint also alleged that appellees had violated implicit provisions in the loan agreement with The Charles House Corporation, including the responsibility to perform the contract "in good faith." 5 The Charles House Corporation prayed for monetary damages and other relief including an amount equal to all rents, profits, and income derived from the property by appellees. Southmark subsequently filed suit in United States District Court for the Eastern District of Louisiana requesting declaratory relief pursuant to the Declaratory Judgment Act, 28 U.S.C.
Secs. 2201, et seq., that "its purchase of The Charles House was valid and that The Charles House Corporation has no valid claim against [appellees] arising out of" the reorganization sale. Appellees also asked the court to enjoin The Charles House Corporation from prosecuting pending or future claims against them predicated on actions arising from the trustee's sale. Appellant The Charles House Corporation filed a motion to dismiss based in part on the anti-injunction act, 28 U.S.C. Sec. 2283, and subsequently, joined by Craig, filed a counterclaim which was substantially identical to The Charles House Corporation's state court claim. 6
Following the filing of two motions for summary judgment by appellees, and various depositions and affidavits, the district court granted summary judgment to appellees and dismissed the counterclaim, without further elaboration. 7
Although appellees advance several grounds in support of the district court's judgment, we need reach only one. We hold that appellants' counterclaim is barred by the doctrine of res judicata, and that appellees are entitled to declaratory relief to that effect. We therefore affirm the grant of summary judgment and dismissal of the counterclaim.
Appellants assert that federal jurisdiction is lacking in this suit. It is well settled, however, that a district court possesses ancillary jurisdiction "to secure or preserve the fruits and advantages of a judgment or decree rendered" by that court. Local Loan Co. v. Hunt, 292 U.S. 234, 54 S.Ct. 695, 78 L.Ed. 1230 (1934), quoted in Matter of Mooney Aircraft, Inc., 730 F.2d 367, 374 (5th Cir.1984). This is such a case. If The Charles House Corporation were successful in its state court action, the district...
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