Acequia v. Prudentail Insurance Co. of Americ

• Decision Date: 01 September 2000
• Docket Number: No. 99-4051,99-4051
• Citation: 226 F.3d 798
• Parties: (7th Cir. 2000) Acequia, Inc., Plaintiff-Appellant, v. Prudential Insurance Company of America, Defendant-Appellee
• Court: U.S. Court of Appeals — Seventh Circuit

Page 798

226 F.3d 798 (7th Cir. 2000)

Acequia, Inc., Plaintiff-Appellant, v. Prudential Insurance Company of America, Defendant-Appellee.

No. 99-4051

In the United States Court of Appeals For the Seventh Circuit

Argued May 15, 2000

Decided September 1, 2000

Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 98 C 1100--Elaine E. Bucklo, Judge.

Before Flaum, Chief Judge, and Cudahy and Evans, Circuit Judges.

Cudahy, Circuit Judge.

Acequia, Inc., an Idaho family farming operation, obtained a $4 million loan from Prudential in 1977. The security for the loan was Acequia's 7,600 acres of farm property. The note was to mature on March 15, 1992. In 1981, Acequia defaulted on the loan. Prudential began foreclosure proceedings, but Acequia filed for bankruptcy protection. For the next two years, Acequia worked on a reorganization plan; Prudential approved this Bankruptcy Plan (the Plan) and the bankruptcy court confirmed it in 1984. But the two companies continued feuding, and in 1987, Acequia sued Prudential in Idaho state court because of a dispute regarding the terms of the promissory note required by the Plan. This dispute ended in a 1989 Settlement Agreement, under which Prudential and Acequia agreed to extend the deadline for Acequia to repay Prudential. The Settlement Agreement called for the parties to execute an amended and restated promissory note, which they did. Prudential maintains that as part of the Settlement Agreement, it agreed to transform the loan into a non-recourse loan secured only by the land. Under the Settlement Agreement parcels of land could be sold by Acequia, but only at minimum prices and under other prescribed conditions. It is unclear from the record exactly what recourse Prudential originally had against Acequia, but there is no dispute that under the new Settlement Agreement, Prudential does not have in personam recourse against Acequia for the unpaid portion of the loan.

The parties are again in court because Acequia contends that Prudential has improperly allocated the proceeds of its land sales to Acequia's debt, and that due to the misapplication of funds, Prudential's books show Acequia owing too large an amount. Consequently, because the Settlement Agreement sets a minimum sale price for the farm parcels based on the amount of remaining debt, Acequia maintains that Prudential is asking it to sell the parcels for unreasonably high prices that the market will not bear. The basis for Acequia's charge of improper accounting is language in the Bankruptcy Plan directing the application of farmland proceeds. That language is not identical to the provision governing the application of proceeds in the subsequent Settlement Agreement. Acequia has labelled its complaint "breach of contract," and both parties treat the Settlement Agreement as a contract. See Appellant's Br. at 14; Appellee's Br. at 17. They debate the question whether the Settlement Agreement must be read in conjunction with the Bankruptcy Plan "as a single contract." See Appellant's Br. at 14. Notably, the Settlement Agreement was hammered out independent of the bankruptcy court, but the bankruptcy court later approved it after it had been challenged by an equity security holder. See In re Acequia, 996 F.2d 1223 (9th Cir. 1993) (table), 1993 WL 219865, *2. While in other contexts, plans and agreements adopted pursuant to a declaration of bankruptcy might be viewed as something other than contracts, we agree with the parties that it is reasonable to treat them as contracts here, where they capture a negotiated agreement between two parties which fixes the rights and obligations of each. Our task, therefore, is one of contract interpretation. We must decide how to read the two provisions and whether based on that reading Prudential has acted improperly in applying the terms of the Settlement Agreement.

There is one other issue namely, whether the court erred in granting summary judgment for Prudential on all eight of Acequia's claims even though Prudential's motion for summary judgment asked for a resolution only of "the accounting issue." The court determined that none of Acequia's claims was viable in light of its favorable ruling for Prudential on the accounting issue. It therefore granted summary judgment on all of the claims.

I. Breach of Contract

The key issue in this case is what to make of apparently conflicting language in the Bankruptcy Plan and the Settlement Agreement. In order to understand the language, we must review the structure of the Settlement Agreement. As of 1989, when the parties entered that agreement, Acequia owed $3.5 million in principal and $1 million in interest to Prudential. The Settlement Agreement states that

Acequia's existing Plan indebtedness will be set at $4,500,000 as of July 1, 1989, (representing a liquidated, principal balance of $3,500,000 and a liquidated accrued but unpaid interest balance of $1,000,000 under the existing Plan as of June 30, 1989), with interest to be earned thereon from and after July 1, 1989 (the "Loan"). As used hereinafter in this Agreement, "principal" shall refer to all or any portion of the Loan balance, as the case may be, and "interest" shall refer to interest accruing on the Loan balance from and after July 1, 1989.

Appellee's App., Tab 1 at 1.

The amended note executed pursuant to the Settlement Agreement specifically states that "[t]he indebtedness evidenced by this Amended Note represents a liquidated principal balance of $3,500,000 and a liquidated accrued but unpaid interest balance of $1,000,000 under the Original Note, under the Plan as of July 1, 1989 (collectively the "Loan Balance")." See Appellee's App., Tab 2 at 1. The Settlement Agreement defined the $3.5 million principal balance as "Segment A" of what had become the loan balance and the $1 million interest portion as "Segment B" of the loan balance.

Additionally, it is important to understand the Settlement Agreement's terms regarding the sale of Acequia's farm land. The Agreement permits Acequia to voluntarily sell farm land, but requires the company to secure a minimum price for each parcel. The minimum price is defined in the Settlement Agreement. It consists of two components. The first, "Release Value," is a fixed amount the parties agreed to. The second, "Release Interest Component" is the "proportional share of current and accrued interest allocable to that Release Value." Appellee's App., Tab 1 at 4. Consequently, the more interest has accrued on Acequia's total indebtedness, the higher the Release Interest Component on any parcel of farm land, and the higher the Total Release Price.

This background brings us to the contract dispute. Acequia contends that Prudential should have been applying more of the proceeds of its farm land sales to interest than it has been. The dispute came to a head in 1995 and 1996. Acequia missed its scheduled June 1995 payment of $425,000. It then stated that it intended to sell several parcels of land. Prudential approved the sales, they were completed in 1996, and Acequia netted $1.4 million. Acequia contended the money should be devoted first to cure the default, then to satisfy the 1996 annual payment and then to prepay sums thereafter coming due. Instead, Prudential applied the entire $1.4 million to the Segment A or Segment B debts and the associated interest, as called for in the Settlement Agreement. It applied none of the funds to the 1995 or 1996 annual payments, meaning that Acequia's accrued interest continued to rise. Acequia then complained that Prudential had been improperly applying land sale proceeds since 1990, during a period when annual payments consisted of interest only. As a result, Acequia charges that over the years, the total interest on its indebtedness had been improperly inflated, impermissibly driving up the Release Interest Component and ultimately the Total Release Price for every parcel of land it wishes to sell. Because Acequia has been unable to fetch these "inflated" prices for the land, Prudential has not approved the land sales. See Appellant's Reply Br. at 3. Acequia concluded that Prudential was thereby throwing up a roadblock to its repayment of the debt.

While it may seem to a casual observer that Prudential's allocation method is designed merely to prolong Acequia's indebtedness, Prudential maintains that the Settlement Agreement did not permit it to apply the sale proceeds to Acequia's defaults. And Prudential seems to defend the Settlement Agreement as the only way to prevent Acequia from squandering the land--Prudential's only collateral--to meet immediate obligations and then running out of funds when remote principal payments start coming due. See Appellee's Br. at 13. Prudential also refutes Acequia's contention that the Settlement Agreement did not permit it to meet the demands for annual payments with the land sale proceeds. According to Prudential, Acequia was free to use any proceeds in excess of the Total Release Price of the land to meet its annual obligations. See Appellee's Br. at 25.

In order to determine whether Prudential has improperly applied the proceeds of the farm land sales, we must review the two provisions that arguably apply to this question. Section 4.01 of the Bankruptcy Plan, entitled "Sales of Land" states that "[t]he funds required to implement the Plan will be derived from rental income and from sales of land presently owned by the Debtor." It then specifies that

As long as there remains unpaid any Interest Arrearage owed to Prudential as part of the Prudential Secured Claim, the entire amount of Net Proceeds from any sales of property subject to Prudential's mortgage will be paid over to Prudential and applied against the Interest Arrearage. . . . Once the Interest Arrearage has been satisfied . . . [p]ayments made to Prudential shall be applied first to unpaid accrued interest on the Prudential Note...