Gulf Union Industries, Inc. v. Formation Sec., Inc., 87-1137

• Decision Date: 19 April 1988
• Docket Number: No. 87-1137,87-1137
• Citation: 842 F.2d 762
• Parties: GULF UNION INDUSTRIES, INC., Plaintiff-Appellee, v. FORMATION SECURITY, INC., Defendant-Appellant, v. PANHANDLE BANK & TRUST CO., Defendant-Appellee. FORMATION SECURITY, INC., Plaintiff-Appellant, v. GULF UNION INDUSTRIES, INC., Defendant-Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 762

842 F.2d 762

GULF UNION INDUSTRIES, INC., Plaintiff-Appellee, v.FORMATION SECURITY, INC., Defendant-Appellant, v.PANHANDLE BANK & TRUST CO., Defendant-Appellee.

FORMATION SECURITY, INC., Plaintiff-Appellant, v.GULF UNION INDUSTRIES, INC., Defendant-Appellee.

No. 87-1137.

United States Court of Appeals Fifth Circuit.

April 19, 1988.

John Tull, Jr., Tabolowsky, Prager & Schlinger, Page & Addison, Carol E. Farquhar, Dallas, Tex., for Formation Sec., Inc.

Jeffrey L. Hart, Austin, Tex., for Gulf Union.

S. Leon Mitchell, Borger, Tex., for Panhandle Bank & Trust Co.

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

Before WILLIAMS and HIGGINBOTHAM, Circuit Judges, and BUCHMEYER^*, District Judge.

JERRE S. WILLIAMS, Circuit Judge:

AppelleeGulf Union Industries, Inc.("Gulf Union") delivered a bank cashiers check and a promissory note, both in the amount of $50,000, to Panhandle Bank & Trust Company pursuant to a Stock Purchase Agreement with AppellantFormation Industries, Inc.("Formation").Gulf Union later terminated the Agreement and demanded return of its escrow deposits.This case decides the ownership of those deposits.

Based upon diversity of citizenship, Gulf Union sued Formation and Panhandle Bank and Trust in federal district court in Texas.¹The court granted summary judgment in favor of Gulf Union, ordering Formation to return the deposits and pay Gulf Union's attorney's fees in the amount of $22,006.92.The district court ordered that Panhandle Bank & Trust's attorney's fees be paid out of the escrow deposits.Formation appeals the order of summary judgment and contests Gulf Union's attorney's fees.

I.Facts

Formation and Gulf Union entered into a Stock Purchase Agreement dated June 20, 1985, and an Addendum dated July 15, 1985.The Agreement provided for Formation to sell to Gulf Union 100 percent of the outstanding shares of First Savings & Loan Association of Borger, Texas ("First Savings").Upon execution of the Agreement and in accordance with its terms, Gulf Union delivered to trustee Panhandle Bank & Trust a $50,000 cashier's check and a $50,000 promissory note.The check and note were made as good faith deposits, to be returned to Gulf Union on certain conditions set out in the Agreement.

Paragraph 7.0(a)(ii) of the Agreement provides for return of the escrow deposits if regulatory approval "is diligently pursued ... but not obtained."²The propriety of summary judgment in this case rests upon there being no genuine issue of material fact as to whether Gulf Union diligently pursued regulatory approval.

In order to obtain regulatory approval, Gulf Union needed to file an application with the Federal Home Loan Bank ("FHLB") of Dallas.Gulf Union, however, did not file an application with FHLB.Rather, it determined that filing an application would be futile based upon a meeting with William Churchill, Supervisory Agent of FHLB.Mr. Churchill informed Gulf Union that he would not recommend regulatory approval, for two reasons: (1) the Securities Exchange Commission had entered a consent decree against Roger LeBlanc, a director, officer, and principal beneficial shareholder of Gulf Union, and (2) Gulf Union had requested that FHLB waive certain Generally Accepted Accounting Procedure ("GAAP") requirements.³

The meeting between Gulf Union and Mr. Churchill occurred on August 12, 1985.Two weeks later on August 26, 1985, Gulf Union sent a letter to Formation in which it said it was terminating the Agreement pursuant to the thirty-day "free look" provision of paragraph 8.0.⁴In fact, the thirty-day termination period had already expired on July 20, 1985.Thus, Gulf Union does not assert on appeal that termination occurred within the thirty-day "free look" provision.Gulf Union maintains only that it is entitled to summary judgment as a matter of law, because paragraph 7.0(a)(ii) of the Agreement provides for the return of escrow deposits if regulatory approval is diligently pursued but not obtained.

II.Summary Judgment

Under Rule 56(c) of the Federal Rules of Civil Procedure, summary judgment is proper when "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law."Fed.R.Civ.P. 56(c).In bringing this appeal, Formation urges that the district court erred in granting Gulf Union's motion for summary judgment, because genuine issues of material fact remain to be settled.These alleged fact issues include: (1) waiver of the deposits by Gulf Union, (2) fraud-like behavior on the part of Gulf Union, and (3) lack of diligence in Gulf Union's pursuit of regulatory approval.The third assertion is by far the most meritorious, but we consider each of them in turn.

A.Waiver

We promptly dispose of Formation's contention that Gulf Union waived its right to the return of the deposits.Formation claims that Gulf Union waived the return of the funds under paragraph 7.0, by referring only to paragraphs 8.0 and 8.1 in the letter of termination, and by unilaterally making regulatory approval impossible to obtain.Formation, however, failed to raise waiver in any pleading at the district court level.Consequently, the defense is now unavailable.Affirmative defenses cannot be raised for the first time on appeal.SeeGolden Oil Co. Inc. v. Exxon Co. U.S.A., 543 F.2d 548, 551 n. 3(5th Cir.1976).

B.Fraud and Bad Faith

Formation claims that the circumstances of this case indicate bad faith or fraud on the part of Gulf Union.It claims that Gulf Union created the "sham" of a regulatory approval obstacle because it was unsuccessful in extending the thirty day "free look" period of paragraph 8.0.Formation claims Gulf Union contrived this obstacle to escape its obligations under the Agreement.

Regardless of the merit of this theory, we are unable to consider it.Formation failed to raise the allegations before the district court, and this omission cannot be cured now.Factual assertions that defeat a summary judgment must be presented to the district court, not introduced for the first time at the appellate level.DeBardeleben v. Cummings, 453 F.2d 320, 324(5th Cir.1972).

C.Diligence

Formation argues that summary judgment is improper because a genuine issue of material fact exists as to whether Gulf Union diligently pursued regulatory approval.Formation contends that because Gulf Union failed to file an application with FHLB, diligent pursuit was not carried out as required under paragraph 7.0.Paragraph 6.0 of the Agreement purports to require Gulf Union to file such an application.⁵Gulf Union claims that because FHLB supervisory agent Churchill had already pointed out a virtually absolute obstacle to his recommending regulatory approval, filing the application would have been futile and wasteful.⁶

We agree with the district court that paragraph 6.0 of the Agreement is merely a covenant assigning to Gulf Union the expense of filing applications.Paragraph 6.0 is not a condition of the Agreement, nor does it define due diligence under paragraph 7.0.Termination of the Agreement excused performance under paragraph 6.0.Thus, we find that the failure of Gulf Union to file applications does not in and of itself constitute a lack of diligence in its pursuit of regulatory approval.Indeed, Formation admits in its brief that regulatory approval was impossible to obtain under the circumstances of LeBlanc's SEC consent decree and the requested GAAP waivers.Formation urges, however, that the consent decree and the requested GAAP waivers were obstacles to regulatory approval that could have been cured through diligence on the part of Gulf Union.

We acknowledge that Gulf Union could have retracted its request of GAAP waivers.Such action, however, would not have ensured regulatory approval, because it would have had no effect on the consent decree against Mr. LeBlanc.Formation urges that Gulf Union should have removed Mr. LeBlanc as a control person of Gulf Union.It asserts that diligence under paragraph 7.0(a)(ii) required such a sacrifice.There is nothing in the contract which would require the principal owner of the business to sell it to enable the regulatory approval of the business.The parties contracted with the tacit understanding that the business ownership would continue as it was.Whether or not the resignation and sale by Mr. LeBlanc would have secured regulatory approval, such a step clearly was not contemplated by the parties at the time of formation.It does not present a material fact issue now.

III.Attorney's Fees

The standard of review for an award of attorney's fees is that of abuse of discretion.Johnson v. Georgia Highway Express, Inc., 488 F.2d 714, 717(5th Cir.1974).As the prevailing party, Gulf Union was awarded $22,006.92 in attorney's fees, pursuant to TEX.CIV.PRAC. & REM.CODE ANN. Sec. 38.001(8)(Vernon 1986).The Texas statute is applicable because this is a diversity action and attorney's fees, as an element of damages, are a matter of substantive state law.Shelak v. White Motor Co., 636 F.2d 1069, 1072(5th Cir.1981).

In support of its request for attorney's fees, Gulf Union submitted to the district court an initial affidavit describing 219 hours spent on this case by four attorneys and several law clerks.The affidavit also provided a breakdown of expenses (witness fees, bond fee, copies, postage, long-distance telephone calls, and travel), totalling $1,709.92.Formation countered Gulf Union's affidavit with an affidavit of its own, and a brief in support of its affidavit.Formation's responses allege that the amount claimed by Gulf Union is unreasonable, excessive, unnecessary, not comparable to fees and expenses in similar cases, and not reasonably related to the amount in controversy.Formation also objected to the...