Peppertree Apartments, Ltd. v. Peppertree Apartments

• Decision Date: 17 December 1993
• Citation: 631 So.2d 873
• Parties: 22 UCC Rep.Serv.2d 759 PEPPERTREE APARTMENTS, LTD., a limited partnership v. PEPPERTREE APARTMENTS, a general partnership. 1911227.
• Court: Alabama Supreme Court

Page 873

631 So.2d 873

22 UCC Rep.Serv.2d 759

PEPPERTREE APARTMENTS, LTD., a limited partnership v. PEPPERTREE APARTMENTS, a general partnership.

1911227.

Supreme Court of Alabama.

Dec. 17, 1993.

Ralph J. Bolen and Roy M. West of Manly & Manly, Birmingham, for appellant.

Jerry O. Lorant of Lorant & Associates, Birmingham, for appellee.

On Application for Rehearing

ALMON, Justice.

The opinion of June 4, 1993, is withdrawn and the following is substituted therefor.

Peppertree Apartments, Ltd., a limited partnership, ("Limited Partnership") appeals from a summary judgment entered in favor of the plaintiff, Peppertree Apartments, a partnership ("Peppertree"), in an action for unpaid principal and interest on a promissory note. The Limited Partnership states the issue generally as "Whether a note providing that its payment shall be made only out of a particular fund establishes general liability against the maker." It asserts that the note does not carry an unconditional promise of payment, that the plaintiff did not present substantial evidence that the Limited Partnership caused the unavailability of the funds from which payment was to be made, and that, if there was sufficient evidence as to liability, the court erred in the amount of the judgment. Pursuant to the first two assertions, the Limited Partnership argues that it is not in default on the note.

The defendant Peppertree Apartments, Ltd., is an Alabama limited partnership, whose general partners, Peppertree Apartments, Inc., and George L. Bailes, Jr., were also named as defendants. ¹ When Peppertree filed its complaint, Bailes was a partner in Peppertree and was the general partner in control of the Limited Partnership.

In August 1982, Peppertree agreed to sell to the Limited Partnership a 50-unit apartment complex in Bessemer, Alabama, called Peppertree Apartments. ² As part of the purchase price of $2,048,559, the Limited Partnership executed and delivered a $466,191 promissory note. The note provides that the Limited Partnership was to make annual or semiannual payments of principal and interest to Peppertree, according to a special term of the note:

"The principal sum of this Promissory Note shall be paid by the Maker as soon as possible in annual or semi-annual installments, with Maker to utilize in paying same (i) all capital contributions received by it from its Limited Partners pursuant to the Installment Notes executed by such Limited Partners and (ii) all 'surplus cash' (as that term is defined in Paragraph 16(f) of the Regulatory Agreement, dated October 3, 1979, between the Seller and the U.S. Department of Housing and Urban Development) remaining after the payment of the Maker's expenses of operation, until the entire principal sum of the Promissory Note shall have been paid in full."

Interest on the unpaid balance of principal was to be paid at the same time as annual or semi-annual installment payments of principal.

In October 1979, Peppertree and the United States Department of Housing and Urban Development ("HUD") entered into the "Regulatory Agreement," referred to in the promissory note, to secure construction loans insured by HUD for the construction of multi-family housing. In exchange for the loan insurance, Peppertree agreed to operate the apartment complex according to applicable federal statutes and the terms of the Regulatory Agreement. The Agreement prohibits, without prior HUD approval, the encumbrance or transfer of "any personal property of the project, including rents, or [the disbursement of] any funds except from surplus cash, except for reasonable operating expenses and necessary repairs." The Regulatory Agreement defines "surplus cash" as any cash remaining at the end of a semi-annual or annual fiscal period after payment of sums due on mortgages or notes insured by HUD, payments to special reserve funds, and maintenance of sufficient accounts to refund security deposits.

The note stipulates, as one of the grounds for default, "[t]he failure of the Maker to pay any installment of principal or interest on this Promissory Note when due." In addition, the note includes an acceleration clause providing that "[i]f Maker defaults under the terms of this Promissory Note, then the entire unpaid indebtedness shall immediately become due and payable without notice at the option of the holder hereof." When the Limited Partnership purchased Peppertree Apartments, it became subject to the terms of the Regulatory Agreement.

Peppertree has never received from the Limited Partnership any payments of either interest or principal from surplus cash, although it does appear that some payments were made from capital contributions by limited partners. For all years before 1987, regular annual audits showed that the Limited Partnership produced no surplus cash. However, according to a letter drafted by Ralph D. Ruggs, director of the Housing Management Division of HUD's Birmingham office, the Limited Partnership had "cumulative surplus available at the end of 1987, 1988, 1989, and 1990" in the following amounts:

1987 $ 9,553

1988 $25,752

1989 $40,617

1990 $75,543

Mr. Ruggs's letter, dated November 14, 1991, goes on to say, "HUD, however, does not consider this money to be available for distribution at this time." Ruggs stated that HUD would not authorize release of the surplus cash until final resolution of a lawsuit filed by the United States against Bailes and four partnerships in which Bailes was managing partner. In an earlier letter dated March 22, 1990, to John B. Bagwell, executive vice president of Royal Homes, Inc., then manager of Peppertree Apartments, ³ another HUD official had stated the need for "express approval" from HUD for any distribution of surplus cash. ⁴

The action filed by the United States was based on findings originally made by an administrative law judge in a HUD debarment proceeding initiated around May 1987. After finding that Bailes had improperly distributed a net amount of $90,311 in project funds to money market accounts in his own name between September 1983 and December 1985, an administrative law judge entered an order debarring Bailes from participation in all HUD programs for a five-year period. On these findings, the United States brought an action in May 1989 against Bailes and the four partnerships to recover under a federal statute double the amount of the funds retained. Applying the doctrine of collateral estoppel to the findings of the administrative law judge, the district court entered a summary judgment against Bailes for $180,622. ⁵

On April 4, 1989, Peppertree filed this action, alleging that the Limited Partnership had defaulted on the promissory note. Peppertree moved for a partial summary judgment, alleging that in excess of $40,000 in surplus cash was available for repayment under the note. In support of this motion, Peppertree submitted a copy of the promissory note, a statement from Royal Homes, Inc., of monies on deposit in surplus cash accounts, requests for admissions deemed admitted for failure to answer, and the Regulatory Agreement. The trial court denied this motion because of a letter from Ralph Ruggs to John Bagwell, dated June 12, 1991, stating that no surplus cash was available for distribution until certain expenses were paid. Peppertree subsequently filed a motion for summary judgment, requesting a money judgment for the accelerated amount due on the note. Peppertree supported its motion with the affidavit of Robert S. Vance (a general partner in Peppertree), a 1986 HUD audit report, the "Final Determination" of the HUD debarment proceeding, and a letter from Peppertree informing HUD of its motion for summary judgment. After initially overruling Peppertree's motion, the trial court changed its ruling, to grant the motion, stating in part:

"As this Court understands the argument made by counsel for Peppertree Apartments General Partnership in connection with its motion for reconsideration, the amount shown as surplus cash for the years 1987 through 1990 would have been available for distribution and payment to Peppertree Apartments General Partnership except for the fact that George L. Bailes, Jr., had earlier paid the money to himself without authority to do so.

"It is argued that Peppertree Apartments, Ltd., a limited partnership, and its general partner, George L. Bailes, Jr., are liable because they are in default in the payment due under the promissory note and therefore are obligated to pay the entire principal amount of the note plus interest.

"Having considered the argument made by counsel for Peppertree Apartments General Partnership, this Court is of the opinion that the motion for reconsideration is due to be granted.

"Accordingly, the motion for reconsideration is granted. The motion for summary judgment filed by Peppertree Apartments General Partnership is hereby granted. Judgment is hereby rendered in favor of Peppertree Apartments General Partnership against Peppertree Apartments, Ltd., a limited partnership, and George L. Bailes, Jr., in the amount of $553,580.44 representing principal and interest due under the promissory note.

"This Court notes, however, that this judgment is not collectable against surplus cash as defined by paragraph 16(f) of the Regulatory Agreement with HUD until such time as HUD finds that such funds are available for distribution."

The first issue is whether a genuine issue of material fact exists as to whether the Limited Partnership defaulted on the note. It argues that it presented substantial evidence that surplus cash was not available for distribution during the years 1987 through 1990 and that, thus, it did not default by failing to make payments from surplus cash. Citing People's Bank of Mobile v. Moore, 201 Ala. 411, 78 So. 789 (1918), and § 7-3-105(2)(b), Ala.Code 1975, it asserts that the note establishes only conditional liability, depending upon the availability of surplus cash, and that...