Shel-Al Corporation v. American National Insurance Co.

• Citation: 492 F.2d 87
• Decision Date: 08 May 1974
• Docket Number: No. 73-1965.,73-1965.
• Parties: SHEL-AL CORPORATION, Plaintiff-Appellant, v. AMERICAN NATIONAL INSURANCE COMPANY and Exchange Security Bank, Defendants-Appellees.
• Court: U.S. Court of Appeals — Fifth Circuit

492 F.2d 87 (1974)

SHEL-AL CORPORATION, Plaintiff-Appellant, v. AMERICAN NATIONAL INSURANCE COMPANY and Exchange Security Bank, Defendants-Appellees.

No. 73-1965.

United States Court of Appeals, Fifth Circuit.

March 25, 1974.

April 8, 1974.

Rehearing Denied May 8, 1974.

William M. Acker, Jr., Ferris S. Ritchey, Jr., Birmingham, Ala., for plaintiff-appellant.

William A. Major, Jr., Drayton Nabers, Jr., Birmingham, Ala., for American National.

C. John Holditch, Birmingham, Ala., for Exchange Security Bank.

Before TUTTLE, GEWIN and RONEY, Circuit Judges.

TUTTLE, Circuit Judge:

This appeal stems from the failure of American National, a provider of permanent financing, and Shel-Al, a developer of an office building, to consummate a loan agreement. Appellant Shel-Al Corporation, an Alabama corporation, instituted this action in Alabama state court to recover a $24,000 cash deposit made to American National Insurance Company, a Texas corporation, and to enjoin the honoring of a $24,000 irrevocable letter of credit payable to American National by the Exchange-Security Bank, an Alabama banking association. The state court issued a temporary injunction prohibiting payment of the letter of credit. American National filed a removal petition in federal court, alleging that the co-defendant, Exchange-Security Bank, was a mere nominal party.

The district court granted summary judgment in favor of Exchange-Security Bank and dissolved the temporary injunction, thus permitting the letter of credit to be honored. American National also interposed a claim for interest on the letter of credit. The $24,000 cash deposit and the $24,000 letter of credit were a stand-by deposit fee paid to American National at the time American National and Shel-Al entered into a loan agreement, totalling $1,600,000.

The trial court entered judgment for American National on Shel-Al's claim which allowed American National to retain the $48,000 stand-by deposit fee and for American National in the sum of $1,872 on its counterclaim for interest on the letter of credit. Appellant Shel-Al argued that American National failed to perform its commitment to furnish permanent financing and in the alternative that the $48,000 deposit constituted a penalty and not liquidated damages, thereby entitling Shel-Al to a refund of its $48,000. American National contended, and the district court agreed, that the reservation of coal and other minerals and a covenant to save a prior owner harmless for damages resulting from mining in a deed in the chain of title of Shel-Al were material defects impairing the marketability of the land, that American National had requested a cure which Shel-Al had not furnished, that Shel-Al needing additional $200,000 mortgage money was unsatisfied with the original $1,600,000 financing plan, and that, therefore, American National was entitled to retain the $48,000 stand-by fee as liquidated damages. We affirm.

I. FACTS

The financing arrangement in controversy was to be executed through a sale-lease back transaction whereby American National would purchase developed real estate from Shel-Al for $150,000, and lease it back to Shel-Al and lend Shel-Al $1,450,000 secured by a mortgage of the leasehold estate. For simplicity, this transaction is referred to herein in the singular as the commitment.¹

The tract in question was originally owned by U. S. Steel. In 1965, Basenberg purchased 6.5 acres of this land from U. S. Steel. In the deed of conveyance to Basenberg, U. S. Steel reserved the title to those minerals lying beneath the property but without the right to use the surface of the land conveyed and the deed included a damage release provision in favor of grantor for harm caused by future mining.² Contemplating construction of an office building at this site, Dube and Leider, the sole stockholders of Shel-Al, purchased 3.1 acres of the Basenberg tract and proceeded with development plans. When it became necessary to obtain permanent financing, Shel-Al engaged a mortgage broker, Mortgage Corporation of America (MCA), for a fee of 1 per cent of the total amount of the mortgage money that MCA might procure. MCA approached American National, as well as other mortgage companies. American National and MCA officials met and inspected the proposed building site.

On November 19, 1969, American National issued the purchase and loan commitment documents to Dube and Leider who accepted on behalf of Shel-Al. Certain amendments to these commitment documents were negotiated by correspondence in early December, 1969, which modified the manner in which the deposit was made ($24,000 cash and $24,000 letter of credit to become due if transaction not consummated, rather than $48,000 cash) and allowed 240 days for completion of the foundation rather than 180. At the time these modifications regarding the terms of the commitment were prepared, Shel-Al did not request modifications based on the problems relating to mineral reservation in the title. Although allegedly inexperienced real estate investors, Dube and Leider did have an attorney negotiate these other amendments to the commitment documents. The district court determined that the Shel-Al attorney was aware of the title defect at this time, but found that "it may or may not be that the principals Dube and Leider were aware of the title defect." Although American National had invested substantially in a shopping center less than one mile from the proposed building site and the chain of title to that property contained a similar reservation of mineral rights, the district court concluded that American National had no knowledge of the mineral reservation in Shel-Al's chain of title at this stage in the negotiations.

The purchase commitment document provided that in consideration of $150,000 to be paid on or before November 30, 1970, Shel-Al would convey to American National the land on which the building would be erected. The commitment recited that Shel-Al must convey to American National "good and merchantable fee simple title" by a general warranty deed. (Emphasis supplied). After this conveyance, American National was to lease back the property and building to Shel-Al for a net rental of $18,000 per year. Shel-Al made a $4,500 refundable deposit with American National. A clause in this agreement provided that if all conditions of the commitment were not met, the deposit should be retained by American National as "liquidated damages."³ This sale and lease-back in the purchase commitment were to be consummated concurrently with the closing of the loan.

The loan commitment document contemplated a closing date of November 30, 1970. As security for the loan and as a condition of closing, Shel-Al was to complete the building and obtain a sublease to Pennsylvania Life Insurance Company for a period of 27 years.⁴ Upon the signing of the loan commitment, Shel-Al gave American National a deposit of $43,500, which in addition to the $4,500 deposit on the purchase commitment, made the total deposit $48,000. The loan commitment contained numerous requirements, including the requirement that Shel-Al have a valid leasehold estate in the premises. This condition could be complied with only if American National consummated the purchase and then leased back the building to Shel-Al. Similar to the purchase agreement, the loan document provided that if all conditions were not met, the $43,500 deposit could be retained by American National as "liquidated damages."⁵

Following the execution of these purchase and loan commitments between American National and Shel-Al, construction of the office building was commenced. In April, 1970, Shel-Al sought interim or construction loans, which were to be paid off by the permanent financing of American National. A title binder was sent by a prospective interim lender to American National for approval, so that the interim lender could be assured of being paid when the building was completed. This title binder reflected the reserved mineral rights and the damage release clause in the U. S. Steel conveyance. American National through MCA advised Shel-Al that these mineral exceptions presented a problem. The district court found that this was the first time American National was aware of the mineral reservation and damage clause. Shel-Al explained that U. S. Steel had reserved mineral rights extensively in Jefferson County, the location of the building site. After further correspondence, American National suggested three solutions: (1) Shel-Al should obtain a release or modification of the mineral reservations; (2) Shel-Al should obtain clear title insurance or casualty insurance; (3) American National might waive any objection to the reservation of mineral rights. American National officials informed Shel-Al that the final decision must be made by American National's Executive Committee.

All three possibilities were pursued by Shel-Al and MCA. There were negotiations to obtain a release from U. S. Steel from the last of April until the first of August, 1970. Shel-Al explored the likelihood of acquiring insurance, but concluded that the premium was exhorbitant. Hoping to prompt a waiver by American National, Shel-Al submitted a geologist's report reflecting that mining operations in the area had ceased. Shel-Al also sent American National some evidence of the custom and practice of lenders in the area concerning outstanding mineral reservations and damage release clauses.

Contemporaneously with the title controversy, Shel-Al considered the feasibility of adding another floor to the proposed five-story building. Shel-Al applied to American National for a $200,000 increase in the commitment. On May 22, 1970, American National took this issue of supplemental commitment money to its Executive Committee, which agreed to lend the additional amount. Another set of commitment documents was issued by American National which granted a $200,000 increase on the mortgage loan...