Club Associates, In re

• Decision Date: 28 January 1992
• Docket Number: No. 90-9056,90-9056
• Citation: 951 F.2d 1223
• Parties: Bankr. L. Rep. P 74,438 In re CLUB ASSOCIATES, Debtor. CLUB ASSOCIATES, Plaintiff-Appellant, v. CONSOLIDATED CAPITAL REALTY INVESTORS and First Union Real Estate Equity and Mortgage Investments, Defendants-Appellees, Consolidated Capital Equities Corporation, Defendant.
• Court: U.S. Court of Appeals — Eleventh Circuit

Page 1223

951 F.2d 1223

Bankr. L. Rep. P 74,438

In re CLUB ASSOCIATES, Debtor CLUB ASSOCIATES, Plaintiff-Appellant, v. CONSOLIDATED CAPITAL REALTY INVESTORS and First Union Real Estate Equity and Mortgage Investments, Defendants-Appellees Consolidated Capital Equities Corporation, Defendant.

No. 90-9056.

United States Court of Appeals Eleventh Circuit.

Jan. 28, 1992.

Phillip A. Bradley, J. James Johnson, Steven J. Lawrence, Long, Aldridge & Norman, Atlanta, Ga., for plaintiff-appellant.

J. Scott Jacobson, Frank X. Moore, Holt, Ney, Zatcoff & Wasserman, C. Richard McQueen, William D. Matthews, Daniel A. Angelo, Greene, Buckley, Jones & McQueen, Atlanta, Ga., for defendants-appellees.

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

Before FAY and COX, Circuit Judges, and MORGAN, Senior Circuit Judge.

MORGAN, Senior Circuit Judge:

This bankruptcy appeal presents the question of whether an hypothecation or pledge of a note and security deed as collateral for a loan is equivalent to a sale sufficient to trigger the right of first refusal in the security deed. Respectively granting summary judgment, both the bankruptcy court and the district court concluded that neither the decision to sell nor a sale was evidenced. After thoroughly reviewing the record, we affirm.

I. FACTUAL AND PROCEDURAL BACKGROUND

In November, 1984, debtor-appellant Club Associates (Club), a Georgia limited partnership, ¹ purchased the Tahoe Club Apartments in Dekalb County, Georgia, from appellee Consolidated Capital Realty Investors (CCRI), a California business trust, presently known as Vinland Property Trust. The apartment purchase was financed principally by a ten-year wraparound purchase money note from Club to Consolidated Capital in the amount of $22,000,000. ² As security for the note, Club gave CCRI an All-Inclusive Deed to Secure Debt, Assignment of Rents and Security Agreement (security deed), the terms of which were negotiated by experienced commercial real estate attorneys representing Club and CCRI.

Club negotiated and received a right of first refusal to purchase the note before CCRI could sell the note. ³ Drafted by Club's counsel, ⁴ the first refusal right in the security deed provides:

Grantee hereby grants to Grantor a right of first refusal to purchase the Note and this Deed to Secure as hereinafter described. At such time as Grantee shall desire to sell the Note and this Deed to Secure Debt, Grantee shall determine the then current market discount rate which would be applicable to the Note and this Deed to Secure Debt, and Grantee shall give written notice to Grantor of its intention to sell the Note and this Deed to Secure Debt and shall offer Grantor a right to purchase the Note and this Deed to Secure Debt at a market price based upon the then current market discount rate. Grantor shall have thirty (30) days after receipt from Grantee of such written notice in which to inform Grantee of its intention with respect to the exercise of this right of first refusal to purchase the Note and this Deed to Secure Debt. In the event Grantor notifies Grantee that it does intend to purchase the Note and this Deed to Secure Debt at the price set forth by Grantee in its notice, Grantor shall have a total of ninety (90) days after its receipt from Grantee of the foregoing written notice in which to close the purchase of the Note and this Deed to Secure Debt. In the event Grantor declines to exercise its right of first refusal to purchase the Note and this Deed to Secure Debt, Grantor may within thirty (30) days after receipt of the foregoing written notice from Grantee make a counter-offer to Grantee to purchase the Note and this Deed to Secure Debt at such price as Grantor determines to be based on the then current market discount rate. In the event Grantor has made such a counter-offer to Grantee within such thirty (30)-day period, Grantee shall be prohibited from selling the Note and this Deed to Secure Debt within sixty (60) days after receipt of written notice of such counter-offer except on terms more favorable to Grantee than those contained in said counter-offer.

App. 2-56-21 (emphasis added). In connection with previous transfers of property interests, Club's counsel explained that he had drafted broad restrictive provisions, encompassing sales as well as the assignment of a security interest. R8-43 (Deposition of Donald Kennicott).

Following the closing on the Tahoe Club Apartments in 1984, CCRI subsequently needed to generate funds for operating cash. Although CCRI decided to use its real estate and loan assets to raise working capital, its financial consultants, defendant Consolidated Capital Equities Corporation (CCEC), advised against the sale of these securities because of tax consequences and the regulations applicable to CCRI as a real estate investment trust (REIT). ⁵ CCEC also determined that the Club note would not be salable unless it was refinanced, but that it could be used as collateral for a loan. Because CCRI is a California business trust, the authority to sell or to pledge any part of the trust estate resides in the trustees. The trustees clearly did want to raise operating capital. The record, however, does not evidence any act by the CCRI trustees revealing a decision to sell the Club note.

After exploring many financing possibilities, CCRI ultimately decided upon a series of loans, using apartment properties as collateral, with First Union Real Estate Equity and Mortgage Investments (First Union), an Ohio business trust. These loans closed on March 21, 1986. For the loan involving the Tahoe Club Apartments, CCRI borrowed $6,000,000 from First Union. CCRI entered into a security agreement with First Union, and gave First Union a collateral assignment of Club's note and security deed, including the conditional assignment of rents and leases, and a UCC-1.

CCRI paid a commitment fee for its loan from First Union. The First Union commitment letter references the three loan transactions as "hypothecation loans," and states that it confirms First Union's agreement to make and CCRI's agreement to accept "a loan ... in regard to the pledge and collateral assignment of certain promissory notes, deeds to secure debt, mortgages and other loan documents in the amount and upon the terms and conditions hereinafter set forth." R3-40-1. The loan commitment recites the interest rate schedule that CCRI agreed to pay First Union for the loan and includes a prepayment penalty.

Club's general partners, David Baker and Collins Powell, testified concerning their substantial experience in the acquisition and administration of sophisticated real estate syndications. Baker explained that it was common practice to pledge a note as collateral for a loan. ⁶ He clarified that the fact that a note is "tied to real estate in some way does not, should not have any bearing on" determining whether a pledge or a sale has occurred. R8-83 (Deposition of David Baker).

Baker conceded that CCRI received a valuable, monthly cash flow in the Club note in excess of the amount applied to the First Union loan, and that CCRI owned a sizable residual interest in Club's balloon payment under the wraparound note. ⁷ Id. at 86-87. Regarding possession of the note, he acknowledged that an investor note pledge involved relinquishing the right to possession of the note, and that CCRI could recover possession of the wraparound note if it elected to prepay the First Union obligation, despite the prepayment penalty. Id. at 93, 100. Baker also admitted that he had participated in transactions involving pledges of investor notes, when payments on an investor note would go directly to a new lender, and that he did not consider such a note to have been sold to the new lender. Id. at 97. Moreover, Baker acknowledged that CCRI had not approached him or Powell with an offer to sell the note in accordance with the terms of the security deed, rather CCRI repeatedly had represented to Club that the note could not be sold to Club or to anyone else because of tax consequences. Id. at 48. Significantly, Baker explained that he did not "think [CCRI's that] discussion [of the possibility of selling Club's note] is the same thing as desire [to sell]." Id. at 108.

In conjunction with its subsequent Chapter 11 bankruptcy case, Club filed in the bankruptcy court an adversary proceeding alleging that CCRI breached its contract with Club by violating the right of first refusal in the Club security deed in its transaction with First Union, and that First Union tortiously interfered with this first refusal right. On cross motions for summary judgment, the bankruptcy court granted summary judgment to CCRI and First Union because the sale or desire to sell the note and security deed was not evidenced:

The terms of the security agreement between CCRI and First Union show that CCRI did not convey all of its rights to First Union. In classic property law terminology, CCRI held a bundle of ownership rights of which it gave up some, conditioned some and retained some. Specifically, CCRI gave up the right to possession of the Club loan documents for as long as the obligation to First Union is outstanding but retained its rights to proceed as holder of the Club note and deed to secure debt upon default by Club. CCRI retained its right to sell the note conditioned on its duty to obtain First Union's consent. CCRI retained its rights to payments on the note by Club subject to its assignment of a portion of the payments to First Union. At maturity of the Club note, CCRI rather than First Union will receive a balloon payment of approximately $4 million. The CCRI-First Union agreement contains standard terms included in a security deed--e.g. power of sale upon default and a "due-on-sale" clause (grantor cannot sell without the written consent of grantee). The main differences are that First Union took physical possession of the...