Federal Sav. and Loan Ins. Corp. v. Two Rivers Associates, Inc.

Citation880 F.2d 1267
Decision Date21 August 1989
Docket NumberNo. 88-5580,88-5580
PartiesFEDERAL SAVINGS AND LOAN INSURANCE CORPORATION, as Receiver for Sunrise Savings and Loan Association, a Federal Savings and Loan Association, Plaintiff-Appellee, v. TWO RIVERS ASSOCIATES, INC., et al., Defendants, Robert H. Smith, Defendant-Appellant.
CourtUnited States Courts of Appeals. United States Court of Appeals (11th Circuit)

Elizabeth T. Maass, Alley, Maass, Rogers, Lindsay & Chauncey, Paul B. Erickson, Palm Beach, Fla., for defendant-appellant.

Cary A. Woodfield, Squire, Sanders & Dempsey, Palm Beach, Fla., for plaintiff-appellee.

Appeal from the United States District Court for the Southern District of Florida.

Before CLARK and COX, Circuit Judges, and HENDERSON, Senior Circuit Judge.

CLARK, Circuit Judge:

This is an appeal from an order granting summary judgment of foreclosure in favor of the Federal Savings and Loan Insurance Corporation (FSLIC). The mortgages were executed by Two Rivers Associates ("Two Rivers") in favor of Sunrise Savings and Loan Association. Robert H. Smith, whose purchase money mortgage was subordinated to the mortgages owned by Sunrise, opposed the motion in the district court. Smith now appeals. We affirm.

A. Facts

Two Rivers, a Florida corporation, was formed to develop the Schooner Oaks Project, a proposed condominium development in Martin County, Florida. The project initially was designed for 82 units, but was later expanded to 86 units. The principal officers of Two Rivers were Charles H. Pope and Fred W. Pearce. The land on which the project was to be built was sold to Two Rivers for $650,000 by Smith who accepted as consideration a promissory note in that amount secured by a purchase money mortgage.

In October 1982, Two Rivers received a commitment from Concordia Federal Savings and Loan Association to loan approximately $8 million to develop and construct the project. Despite this commitment, Two Rivers continued to negotiate with other institutions to gain financing under more favorable terms. Two Rivers approached Sunrise and Loan Association of Florida ("Old Sunrise") and requested that it provide acquisition, construction, and development financing for the Project.

A series of meetings with Old Sunrise culminated in the issuance of a Commitment Letter on June 13, 1983. Old Sunrise agreed to provide Two Rivers with a development and construction loan in the amount of $2.5 million. Two Rivers requested funding for the entire project in the amount of $10 million but the president of Old Sunrise, William Frame, told the principals of Two Rivers it would be easier for Old Sunrise to approve several smaller loans rather than one large loan. Pope affidavit, Record, Vol. 4, Tab 82, at 3. According to Pope, Pearce, and the loan officer of Old Sunrise, Joseph Zambruski, both parties agreed that Old Sunrise would fund the entire Schooner Oaks project. Id.; Pearce affidavit, Record, Vol. 3, Tab 69, Exh. 9; Zambruski affidavit, Vol. 3, Tab 81, Exh. 2.

That same day, Two Rivers sent a letter to Old Sunrise accepting the loan commitment, subject to several changes it requested. This "Letter of Clarification" stated that Two Rivers' acceptance of the commitment was conditioned on Old Sunrise's agreement to fund the entire Project. 1 Two Rivers also sought clarification of the provision in the Commitment Letter entitling Old Sunrise to $4000 profit from every unit sold; Two Rivers wanted Old Sunrise limited to profit from units which it financed. The parties thereafter signed a document entitled "First Amendment to the Mortgage Commitment Letter Dated June 13, 1983." The "First Amendment" stated that it superceded "all terms and conditions contained in the Original Commitment which conflict with the Amendment." Record, Vol. 4, Tab 82, Exh. 5. The Amendment does not explicitly state that Old Sunrise agreed to fund the entire project. In addition, the Amendment rejected Two River's view of the profit participation plan and provided that Old Sunrise was entitled to the $4000 profit on the sale of all condominium units regardless of whether it financed the construction.

The Amendment also required Smith's lien to be reduced to a purchase money mortgage in the amount of $400,000 with the remaining $250,000 to be evidenced by a corporate note and for the mortgage to be subordinated to Old Sunrise's mortgage and any future loans. Smith states in his affidavit that he was induced to subordinate his loans to Old Sunrise by its promise to fund the entire Schooner Oaks project. Record, Vol. 3, Tab 81, Exh. 1. Although he was not present at the meetings, his attorney Stephen Fraiser was and communicated Old Sunrise's promise to Smith. See Fraiser affidavit, Record, Vol. 3, Tab 81, Exh. 3; Pope affidavit, Record, Vol. 4, Tab 82.

In June 1983, therefore, Two Rivers closed on the initial loan of $2.5 million and executed a promissory note and mortgage ("The First Mortgage") which was duly filed. The mortgage contained a $10 million future advance clause. It also provided that any future loans would be cross-secured. In addition, the mortgage required Two Rivers to obtain Old Sunrise's consent before seeking other secured financing. As required, Smith reduced his purchase money mortgage to $400,000 and executed a written subordination agreement that gave a first lien to the Old Sunrise mortgage. It is significant that Smith did not require the subordination agreement to include the alleged promise by Old Sunrise "to fund the entire Schooner Oaks project." The subordination agreement, recorded in the public records, failed to notify the public and any interested party of the oral promise that Smith now relies upon in challenging FSLIC's mortgage foreclosure proceeding.

On January 4, 1984, the Old Sunrise loan committee approved an $800,000 future advance under this mortgage because of unanticipated costs. At this time, Old Sunrise also increased its profit participation requirement from $4000 to $4500 per unit sold. Smith again subordinated his purchase money mortgage to the Old Sunrise Future Advance. Record, Vol. 3, Tab 82, Exh. 10, 11.

In March 1984, Two Rivers requested loans for the construction of two more buildings. Old Sunrise submitted a Commitment Letter for a loan of $1.15 million. Due to a dispute over title insurance and the need for an updated appraisal, Old Sunrise refused to close under that Commitment Letter. However in October 1984, after receiving additional title insurance and submission of a new appraisal, Old Sunrise agreed to close on a $919,500 loan. Two Rivers executed a mortgage ("Second Mortgage") which was duly recorded. During the delay Smith loaned Two Rivers $7,000 to meet operating expenses; this loan was unsecured. Smith affidavit, Record, Vol. 3, Tab 81, Exh. 1. In February 1985, pursuant to a request for additional funds, Two Rivers executed a third mortgage ("Third Mortgage") for $1.471 million which was recorded. Both mortgages contained cross-default provisions. Smith subordinated his mortgage to both the Second and Third Mortgages.

Finally, in March 1985, Two Rivers applied to Old Sunrise for the funding of two additional buildings. By letter dated May 6, 1985, however, Zambruski notified Two Rivers that its interest reserve accounts with the Bank were near depletion and that Old Sunrise would neither advance more funds nor renegotiate the terms of the existing loans. Pope affidavit, Record Vol. 4, Tab 82. 2 Old Sunrise advanced no additional funds after that date. After this point, Smith loaned Two Rivers an additional $30,000 to meet expenses. That loan was also unsecured. Smith affidavit, Record, Vol. 3, Tab 81, Exh. 1.

Two months thereafter the Federal Home Loan Bank Board ("Bank Board") and the Florida Department of Banking declared Old Sunrise to be insolvent and in an unsafe and unsound condition to transact business. The FSLIC was appointed as a receiver and reorganized Old Sunrise into the Sunrise Savings and Loan Association ("New Sunrise") and transferred all of Old Sunrise's assets and liabilities to that institution. Among the assets were those related to the transactions with Two Rivers.

Two Rivers defaulted on the original loan by failing to make payments due August 1, 1985 and all subsequent payments. Two Rivers defaulted on the second loan by failing to make payment due September 1, 1985 and all subsequent payments. Finally, Two Rivers defaulted on the third loan pursuant to the cross-default provision.

B. Procedural History

On March 3, 1986, New Sunrise commenced an action in the Circuit Court for Martin County, Florida, to enforce the promissory notes and foreclose the mortgages. By order dated June 27, 1986, the state court granted New Sunrise's motion for partial summary judgment finding the notes and mortgages to be valid, in default, and superior to any other claims. The court directed a public sale of the properties if the debt of $5,499,899.19 was not satisfied within three days. Record, Vol. 3, Tab 69, Exh. 12. The court also granted Two Rivers, Pearce, Pope, and Smith's motions to amend their answers on the condition that the amendment address issues not disposed of by the court's summary judgment of foreclosure. Id., Exh. 11.

Two Rivers, Pearce, and Pope filed amended answers asserting affirmative defenses and counterclaims relating to Old Sunrise's failure to fund the entire project; Smith's amended answer only raised defenses based on this agreement. In addition, all the defendants moved for reconsideration of the motion granting summary judgment. The circuit court subsequently stayed the foreclosure sale and set a briefing schedule on the motion for reconsideration of summary judgment. Id., Exh. 22. The defendants initially filed a notice of appeal to the Fourth District Court of Appeals but the appellate court relinquished jurisdiction to the lower court for forty-five days for a ruling on the motion to reconsider. Id., Exh. 24.

During that time, however, the Bank Board...

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