Nashville Lodging Co. v. Resolution Trust Corp.
| Decision Date | 14 September 1995 |
| Docket Number | No. 94-7020,94-7020 |
| Citation | 59 F.3d 236 |
| Parties | NASHVILLE LODGING CO., et al., Appellants v. RESOLUTION TRUST CORPORATION, et al., Appellees. |
| Court | U.S. Court of Appeals — District of Columbia Circuit |
Appeal from the United States District Court for the District of Columbia (92cv01615).
Gary A. Ahrens, argued the cause for appellants. With him on the briefs were Charles E. Raley and Timothy E. Heffernan.
P. Matthew Sutko, Counsel, Resolution Trust Corp., argued the cause for appellee RTC. With him on the brief were Bruce C Taylor, Counsel, RTC; Barbara E. Nicastro, Robert E. Craddock and William E. Long.
Hunter T. Carter, argued the cause for appellees Southeast Real Estate Operating Co., L.P., et al. With him on the brief were Howard B. Possick and Jason S. Palmer.
Before BUCKLEY, WILLIAMS and SENTELLE, Circuit Judges.
A partnership borrowed money from a thrift to finance the construction of a hotel. Because the loan required the partnership to make a large balloon repayment of principal at the end of the loan's term, the partnership secured a second agreement with the thrift by which it would refinance the balloon payment at then-prevailing interest rates. The thrift went under, and ultimately the Resolution Trust Corporation took control. The RTC repudiated the refinancing agreement and sold the original loan to outside investors. The partnership sued the RTC to recover as damages the amounts paid to secure the refinancing agreement; in addition, it sought a declaratory judgment against the outside investors entitling it to set off these amounts against its obligation to repay the original loan.
The district court granted summary judgment to all defendants on all claims. We reverse the grant of summary judgment in favor of the RTC on the damages claims and remand for further proceedings. We affirm the summary judgment against the partnership on its claims for declaratory relief.
In 1983, the predecessor-in-interest to plaintiff Nashville Lodging Company ("Nashville") borrowed $9.5 million from the Savers Federal Savings and Loan Association to finance the construction and operation of a hotel in Tennessee. The transaction was structured so that the borrower had to repay only a portion of the loan over the course of its fifteen-year term; the balance was due in a lump-sum payment at the end of the fifteen years. The parties executed a second agreement, under which the thrift agreed to refinance this lump sum at the loan's maturity at market interest rates. In consideration for the thrift's obligation to refinance, the borrower agreed to pay fees of about $7000 per month on top of its principal and interest payments for the original loan. Nashville and its predecessors paid the fees regularly through October 1991.
Savers Federal became insolvent and was taken over by the federal government in 1989. The thrift was reorganized and operated under federal conservatorship until the RTC was appointed receiver on September 20, 1991. On October 7 the RTC sent Nashville a letter telling it to make all future loan payments directly to the agency. Nashville responded a week later, on October 15, asking the RTC whether it planned to assume or repudiate the companion refinancing agreement. Nashville paid no refinancing fees while it awaited the RTC's response.
The RTC did not reply until December 19, 1991, when it repudiated the refinancing agreement. In February 1992 Nashville filed an administrative claim for damages, seeking a return of all of the fees paid under the refinancing agreement and pre-judgment interest. The RTC denied the claim three months later. In the meanwhile, the RTC sold Nashville's loan to the Southeast Real Estate Operating Company ("SREOC") as part of a larger portfolio of mortgage loans.
In July 1992 Nashville and its general partners filed suit in federal district court against the RTC, SREOC, and SREOC's shareholders. Nashville sought "direct compensatory damages" against the RTC in an amount equivalent to all of the payments made under the repudiated refinancing agreement since 1983. Complaint at 7. It also sought a declaratory judgment stating that it had the rights to recoup and set off these damages against the amount it owed on the original loan. Id. at 8-9.
The district court granted summary judgment to all defendants on all counts of the complaint. Nashville Lodging Co. v. RTC, 839 F.Supp. 58 (D.D.C.1993). It held first that Nashville was not entitled to any relief against the RTC because it had been in default under the refinancing agreement at the time the agency repudiated the contract Nashville had materially breached the agreement by failing to pay the required refinancing fees in November and December 1991. Id. at 61-62. Even if the company had not been in default, the court further held, it would still be barred from recovering damages because its rights under the refinancing agreement had not yet "vested" when the RTC became the thrift's receiver: Nashville could not have had "an unqualified right to expect performance of the refinancing agreement on the date that [the receiver] was appointed" because it had not yet made the full fifteen years' payments of refinancing fees. Id. at 62. Finally, the district court held that Nashville possessed no rights of recoupment or setoff against SREOC because the purchasers of assets from a failed thrift do not become liable for the thrift's conduct unless that liability is expressly transferred and assumed. Id.
Nashville appealed. We reverse the judgment in favor of the RTC on Nashville's claim to damages, disagreeing with both the district court's grounds, but we affirm the denial of a declaratory judgment.
The Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA") gives the receivers of failed savings and loan institutions wide-ranging powers to consolidate and liquidate those institutions. Receivers have broad authority under FIRREA to repudiate any contract or lease "(A) to which such institution is a party; (B) the performance of which the ... receiver, in [its] discretion, determines to be burdensome; and (C) the disaffirmance or repudiation of which the ... receiver determines, in [its] discretion, will promote the orderly administration of the institution's affairs." 12 U.S.C. Sec. 1821(e)(1). The receiver is liable to the non-breaching parties to these contracts for damages resulting from its repudiation; however, in the interest of maximizing the number of creditors who can recover some portion of what they are owed, see DPJ Co. Ltd. Partnership v. FDIC, 30 F.3d 247, 248 (1st Cir.1994), the receiver's liability on an individual contract is limited to "actual direct compensatory damages," 12 U.S.C. Sec. 1821(e)(3)(A), and is subject to other qualifications.
The RTC makes three arguments in support of the district court's grant of summary judgment in its favor on the claim for damages. The first two, variations on the district court's conclusions, are that Nashville was in default under the refinancing agreement when the RTC repudiated it and hence was disabled from recovering damages for the agency's breach, and that Nashville's claims were not provable and vested at the time of the repudiation. Finally, it argues that the monetary relief sought by the plaintiffs--restitution of the amounts already paid under the refinancing agreement--does not qualify as "actual direct compensatory damages" permitted by Sec. 1821(e)(3)(A). We address each argument in turn.
Nashville's last payment of refinancing fees was the installment due on October 1, 1991; it did not pay the fees for the two months between then and the RTC's December 19 repudiation of the refinancing agreement. The RTC contends that Nashville's failure to make the November and December payments constituted a material breach of the agreement, one sufficient to bar its claim for damages. In response, Nashville denies that it was in default: the company claims that it had simply exercised its right under Tennessee law, which the Refinancing Agreement explicitly selected as governing law, to suspend its performance of the agreement pending adequate assurances from the RTC that the agency would uphold its end of the bargain.
Tennessee case law on the subject is sparse, but what exists suggests that Tennessee adheres to the view that a party to an agreement who has reason to fear that his counterpart may fail to perform may demand assurances that performance will be forthcoming and may, without breaching, suspend his own performance until those assurances are received. In a dictum in Harlan v. Hardaway, 796 S.W.2d 953, 958 (Tenn.App.1990), the court said that a condominium purchaser who feared breach by the developer should have demanded assurances of the developer's future performance rather than repudiating the purchase agreement, citing the Restatement (Second) of Contracts. The relevant sections of the Restatement read as follows:
Sec. 251. When a Failure to Give Assurance May Be Treated as a Repudiation.
(1) Where reasonable grounds arise to believe that the obligor will commit a breach by non-performance that would of itself give the obligee a claim for damages for total breach ..., the obligee may demand adequate assurance of due performance and may, if reasonable, suspend any performance for which he has not already received the agreed exchange until he receives such assurance.
....
(1) Where the obligor's insolvency gives the obligee reasonable grounds to believe that the obligor will commit a breach [as above], the obligee may suspend any performance for which he has not already received the agreed exchange until he receives assurance in...
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