Country World Casinos v. Tommyknocker Casino, 98-1342

• Decision Date: 23 June 1999
• Docket Number: No. 98-1342,98-1342
• Citation: 181 F.3d 1146
• Parties: (10th Cir. 1999) IN RE: COUNTRY WORLD CASINOS, INC., FORMERLY KNOWN AS MONOLITE INDUSTRIES, INC., FORMERLY KNOWN AS INNOVATIVE MEDICAL TECHNOLOGY, INC., A NEVADA CORPORATION, DEBTOR. COUNTRY WORLD CASINOS, INC., APPELLANT, v. TOMMYKNOCKER CASINO CORPORATION, APPELLEE
• Court: U.S. Court of Appeals — Tenth Circuit

Page 1146

181 F.3d 1146 (10th Cir. 1999)

IN RE: COUNTRY WORLD CASINOS, INC., FORMERLY KNOWN AS MONOLITE INDUSTRIES, INC., FORMERLY KNOWN AS INNOVATIVE MEDICAL TECHNOLOGY, INC., A NEVADA CORPORATION, DEBTOR.

COUNTRY WORLD CASINOS, INC., APPELLANT, v. TOMMYKNOCKER CASINO CORPORATION, APPELLEE.

No. 98-1342

U.S. Court of Appeals, Tenth Circuit

June 23, 1999

APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLORADO. D.C. No. 96-M-2823

[Copyrighted Material Omitted] Gary S. Cohen, Denver, Colorado (Arthur Lindquist-Kleissler, Lindquist-Kleissler & Cooper, L.l.c., Denver, Colorado, with him on the briefs) for Appellant.

Michael E. Romero (Kathryn A. Wingard, with him on the briefs), Pendleton, Friedberg, Wilson & Hennessey, P.C., Denver, Colorado, for Appellee.

Before Anderson, Tacha, and Kelly, Circuit Judges.

Kelly, Circuit Judge.

Debtor Country World Casinos, Inc. ("Country World") appeals from a district court order affirming a bankruptcy Judge's order for payment of the secured claim of Tommyknocker Casino Corp. ("Tommyknocker") and denial of Country World's claim of offset in a Chapter 11 proceeding in the bankruptcy court. Our jurisdiction arises under 28 U.S.C. §§ 159(d) and 1291, and we affirm in part and reverse in part.

Background

This case arises out of the sale of real property in Black Hawk, Colorado from Tommyknocker to Country World. The property was acquired by New Allied Development Company ("NADC") in 1990. NADC hired architects and engineers to design a casino on the property and entered into a consent agreement in 1992 with the Environmental Protection Agency ("EPA") to remove contaminated soil from the property. NADC then transferred title to the property to Tommyknocker, its wholly-owned subsidiary. To avoid the filing of mechanics' liens for the amount owed to the architects and engineers for their services, Tommyknocker and NADC issued a promissory note to those parties for $475,000 in March of 1993, secured by a deed of trust on the property. This deed of trust is referred to as the Semple Brown Deed of Trust. The note provided that the indebtedness was due upon sale of the property.

On July 29, 1993, NADC and Tommyknocker entered into a written contract to sell the property to Monolite Industries, which later changed its name to Country World. The purchase price of $11,492,500 was to be paid as follows: $600,000 in cash at closing; a promissory note ("Note") for $3,450,000, secured by a second deed of trust on the property; and 2,250,000 shares of Country World preferred stock valued at $3.33 per share. Closing took place on August 6, 1993. As noted above, the Semple Brown parties held a first deed of trust on the property. Because Tommyknocker did not then have enough funds to pay off the Semple Brown note, the Semple Brown parties agreed to waive the due-on-sale requirement. In their July 29 acquisition agreement, Tommyknocker and Country World provided that "[u]pon payment of at least $725,000 as a principal reduction," Tommyknocker would pay off the Semple Brown note and the land would be unencumbered by the Semple Brown Deed of Trust. Aplt. App. at 134. This obligation was also reflected in the Note:

Notwithstanding the foregoing, in the event that Holder receives from Maker a minimum of SEVEN HUNDRED TWENTY-FIVE THOUSAND DOLLARS ($725,000) as the Accelerated Principal and Interest Payment, Holder shall immediately secure the release of the lien of that certain Deed of Trust and Security Agreement currently encumbering the Property....

Aplt. App. at 149.

Tommyknocker received the amount necessary to trigger its obligation by January of 1995, but failed to secure the release of the Semple Brown Deed of Trust. Country World made its monthly payments of $33,184.30 on the Note in February, March, and April of 1995, but suspended payment in May of 1995. Tommyknocker then began foreclosure proceedings in state court, and Country World filed its bankruptcy petition in October of 1995. As part of its reorganization, Country World obtained financing in May of 1996 from a third party in order to pay off the Note. Because there was a dispute about the amount owed to Tommyknocker, Country World paid the undisputed amounts owed and deposited the balance in an escrow account, pending the bankruptcy court's secured claim hearing.

At the time Tommyknocker transferred title of the property to Country World, it had not performed the environmental cleanup as required by the 1992 consent agreement with the EPA. However, Tommyknocker arranged for the remediation after Country World took possession of the property, and Country World reimbursed Tommyknocker for its costs, approximately $650,000.

After a three-day hearing in September of 1996, the bankruptcy court issued its findings of facts and Conclusions of law as to the parties' liability under the Note and Country World's claimed offset for the costs of the environmental remediation. Both parties appealed to the district court, which affirmed the order of the bankruptcy court. However, the district court reversed the bankruptcy court's finding of simultaneous defaults under the Note, holding that "the failure by Tommyknocker to use the money it received on January 13, 1995, to retire the indebtedness due to Semple Brown and release that deed of trust was a failure to perform a condition precedent to [Country World's] monthly payments." In re Country World Casinos, Inc., 223 B.R. 809, 812 (D. Colo. 1998). Thus, the court found that Country World was justified in withholding its monthly payments beginning in May of 1995. Nonetheless, the court upheld the bankruptcy court's refusal to suspend interest on the Note during the time that Country World withheld monthly payments. Further, the district court upheld the bankruptcy court's denial of a $650,000 offset for Country World's payments to Tommyknocker for the environmental remediation.

In this appeal, Country World contends that the district court erred by (1) holding that Country World was required to pay interest on the Note during the time that it justifiably withheld monthly payments; (2) failing to award attorney fees, costs and expenses to Country World as the "prevailing party" in litigation related to the note; and (3) holding that the environmental contamination on the property did not constitute an encumbrance, and thus denying Country World an offset for the amount it paid for remediation.

Discussion

"In reviewing the decision of a bankruptcy court pursuant to 28 U.S.C. § 158(a) and (d), the district court and the court of appeals apply the same standards of review that govern appellate review in other cases. We therefore review the bankruptcy court's legal determinations de novo and its factual findings for clear error." In re Hedged-Investments Assocs., Inc., 84 F.3d 1267, 1268 (10th Cir. 1996).

A. Interest on the Note

The district court held that, because Country World had bargained for transfer of marketable title, securing the release of the Semple Brown Deed of Trust was a condition precedent to Country World's monthly payments. Tommyknocker did not satisfy this condition in January of 1995, and thus the court found that Country World was justified in withholding monthly payments. Neither party appeals from this decision, although Tommyknocker argues in its brief that the court erred in its interpretation of the contract, stating that we must review the issue de novo. However, because Tommyknocker did not file a cross-appeal, we may not consider this issue. See Roe v. Cheyenne Mountain Conference Resort, Inc., 124 F.3d 1221, 1227 (10th Cir. 1997).

Given this district court finding, the question remains whether the court erred in holding that Tommyknocker was entitled to interest on the Note during the time that Country World justifiably withheld its monthly payments. Country World presents two arguments that Tommyknocker was not entitled to interest, one based upon the language of the Note itself and the second based upon equitable principles.

Country World first argues that the Note expressly provides that the interest would be suspended upon default of one of the parties: Tommyknocker was to receive "interest on the Indebtedness at eight percent (8%) per annum (`Interest') for so long as there exists no default under this Note." Aplt. App. at 148. The district court found that, based on its reading of the remainder of the Note, this provision refers solely to potential default by Country World and thus does not authorize a suspension of interest upon default by Tommyknocker. We agree. Each of the "Events of Default" identified in the Note concern Country World, and the Note provides remedies for Tommyknocker upon default by Country World. See id. at 149-151. Thus, the above-quoted provision does not provide Country World the relief it seeks.

However, we find persuasive Country World's equitable argument for suspending interest. Although the cases cited by both parties do not provide a clear answer, except when a creditor's improper acts or omissions prevent a debtor from paying, we ultimately decide the issue based on the principle that "a party to a contract cannot claim its benefits where he is the first to violate its terms." Western Plains Serv. Corp. v. Ponderosa Dev. Corp., 769 F.2d 654, 657 (10th Cir. 1985).

Liberty State Bank & Trust v. Hemisphere Dev. Group, Inc., 296 N.W.2d 241 (Mich. Ct. App. 1980), relied upon by Country World, is not applicable to the facts of this case. There the court stated that "if the failure to make payment on a note is due to any improper act or omission of the creditor, or to any conduct on behalf of the creditor that prevents the debtor from complying with his obligation to pay, accrual of interest on the note is suspended." Id. at 244 (citing Michaels v. Mellish, 222 N.W.2d 247 (Mich. Ct. App. 1974)) (emphasis added). Country World reads the emphasized disjunctive "or" as distinguishing between an...