USX Corp. v. Prime Leasing Inc.

• Decision Date: 05 March 1993
• Docket Number: No. 92-3414,92-3414
• Citation: 988 F.2d 433
• Parties: USX CORPORATION, Appellant, v. PRIME LEASING INC. v. Robert L. CLARKE, United States Comptroller of the Currency, The Federal Deposit Insurance Corporation, The Deposit Insurance Bridge Bank, N.A. and Bank One, Texas, N.A.
• Court: U.S. Court of Appeals — Third Circuit

Page 433

988 F.2d 433

USX CORPORATION, Appellant, v. PRIME LEASING INC. v. Robert L. CLARKE, United States Comptroller of the Currency,

The Federal Deposit Insurance Corporation, The

Deposit Insurance Bridge Bank, N.A. and

Bank One, Texas, N.A.

No. 92-3414.

United States Court of Appeals Third Circuit.

Argued Jan. 28, 1993.

Decided March 5, 1993.

Eric A. Schaffer (argued), Sean M. Coleman, Reed Smith Shaw & McClay, Pittsburgh, PA, for appellant.

Charles F. Bennett (argued), Apple & Apple, P.C., Pittsburgh, PA, George D. Maurides, Bishoff, Maurides & Swabowski, Chicago, IL, for appellee.

Before: GREENBERG and ROTH, Circuit Judges, and VanARTSDALEN, District Judge ^*.

OPINION OF THE COURT

GREENBERG, Circuit Judge.

I. BACKGROUND

USX Corporation appeals the district court's grant of summary judgment to Prime Leasing, Inc. on all three counts of USX's complaint. USX's predecessor, USX Credit Corporation, ¹ had made a loan to Prime for the purchase of telecommunications equipment that Prime had leased to MBank Alamo of San Antonio, Texas. MBank later was declared insolvent, and the purchaser of its assets, Bank One, Texas, N.A., disaffirmed the equipment leases. USX then repossessed and sold the telecommunications equipment, and subsequently brought this diversity action under 28 U.S.C. § 1332 to recover the difference between the unpaid debt from the original financing transaction and the resale price of the equipment. USX predicated its claims on Prime's failure to notify it of developments concerning the MBank leases. Prime's defense, which the district court found persuasive, was that nonrecourse provisions in certain agreements between USX and Prime precluded USX from seeking any remedies beyond the repossession and resale of the leased equipment.

The facts relating to the formation of the transaction are not in dispute. On February 26 and 27, 1987, USX and Prime entered into the various agreements providing for USX's financing of Prime's purchase of the telecommunications equipment leased to MBank. The agreements between USX and Prime included a Loan Agreement, Installment Note ("Note"), Master Security Agreement and Assignment ("Security Agreement"), and two Collateral Assignments of Lease. ²

The Note and the Security Agreement both contained nonrecourse provisions. The Note provided:

This Note is made pursuant to and in connection with the [Loan] Agreement and is to be paid from payments due or to become due and judgments recovered under the Master Lease Agreement between [Prime], as Lessor, and MBank Alamo as Lessee, and in the event of default, from the remarketing proceeds of the Equipment covered thereby. All the terms, conditions and covenants of the [Loan] Agreement and Security Agreement, including a full description of the rights of the holder hereof and the definitions set forth therein, are incorporated herein by reference. The Obligations of [Prime] under this Note shall be without recourse or liability against [Prime] for payment of the Note or any related costs or expenses except as to a breach by [Prime] of any assignment, representation, covenant, or warranty described in Sections 4, 5(b) or 6 of the Security Agreement. ³

Similarly, the Security Agreement provided:

[USX] shall only have recourse with respect to the Collateral as set forth in Section 1 herein, ⁴ except that [USX] shall have recourse to the general assets of [Prime] for any representation or warranties of [Prime] which shall have been false when made and for material misrepresentations or omissions made by [Prime] in any document provided by [Prime] to [USX] in connection with this transaction.

Further, and this is the crux of USX's claims in this action, the Collateral Assignments of Lease contained provisions requiring Prime to communicate to USX certain notices pertaining to the leases:

[Prime] hereby agrees ... (iii) to notify promptly [USX] or any subsequent assignee of any default or alleged default (of which [Prime] has knowledge) by any party to the Lease or any termination or alleged termination thereof, (iv) without prior written consent of [USX] or any subsequent assignee, not to extend, amend, supplement or terminate (except as expressly permitted therein), or agree to, or permit, any modifications, waiver or other alteration of the terms thereof, and (v) to deliver to [USX] all notices or other communications received by [Prime] in connection with the Lease or any aspect thereof.

The Loan Agreement, the Note, and the Security Agreement each contained a choice-of-law clause, selecting Pennsylvania law for application to the agreement. In addition, both parties have supported their positions on this appeal with reference to Pennsylvania law and indicated during oral argument that Pennsylvania law applies.

The leased equipment was installed at MBank. Subsequently, on March 28, 1989, the United States Comptroller of the Currency declared MBank insolvent and appointed the Federal Deposit Insurance Corporation as its receiver. Most of the assets of MBank later were sold by the FDIC to Bank One. In December 1989, Bank One decided to replace the leased equipment and requested Prime to remove it by February 1, 1990. USX, as holder of the security interest in the equipment, foreclosed, took possession, and ultimately resold most of the telecommunications systems, but for substantially less than the payments USX would have collected under its financing agreements with Prime.

In March 1990, USX filed this action, contending that Prime had known throughout 1989 that the FDIC and Bank One wanted to disaffirm the leasing agreement, and that Prime had been negotiating with them, without disclosing such negotiations to USX, about restructuring the leases. USX claims that Prime's failure to disclose negotiations with, and notices from, the FDIC and Bank One constituted a breach of the notification provisions of the Collateral Assignments of Lease. In its complaint, USX alleged a first count based on breach of the specific provisions of the Collateral Assignments; a second count based on breach of the covenant of good faith and fair dealing; and a third count of tortious misrepresentation. Because USX already had taken possession of the equipment, it requested only the remedy of damages.

Following discovery, both parties moved for summary judgment, with USX requesting judgment establishing Prime's liability for breach of the specific notification provisions of the Collateral Assignments; and Prime requesting summary judgment in its favor on all three counts. The motions were referred to a magistrate judge whose report, dated February 4, 1992, recommended that summary judgment should be granted for Prime on Counts I and II of the Amended Complaint. The magistrate judge further noted that although Prime also had requested summary judgment on Count III, it had not made a legal argument on that point; therefore, the magistrate judge did not recommend at that time any particular disposition of that claim. By order dated February 26, 1992, the district court adopted the report and entered summary judgment in favor of Prime on Counts I and II. Prime again moved for summary judgment on Count III; by report dated June 5, 1992, the magistrate judge recommended summary judgment for Prime on that Count, reasoning that USX could not manufacture a tort out of a contract claim. On June 24, 1992, the district court adopted the report and granted summary judgment for Prime on Count III, thus completing disposition of the entire case. ⁵ USX then appealed. We have jurisdiction pursuant to 28 U.S.C. § 1291.

II. DISCUSSION

The main dispute of the parties in the summary judgment motions before the district court and on this appeal involves the construction of the nonrecourse provisions of the Note and the Security Agreement, and whether the nonrecourse provisions preclude this action by USX based on Prime's alleged breach of the notice provisions of the Collateral Assignments. In granting summary judgment for Prime, the district court implicitly determined that there was no dispute of material facts, and that the legal construction of the parties' agreements could lead to only one conclusion, i.e., that the nonrecourse provisions precluded any recovery of damages for breach of the notice provisions. Our review of this determination is plenary. J.F. Feeser, Inc. v. Serv-A-Portion, Inc., 909 F.2d 1524, 1530 (3d Cir.1990), cert. denied, --- U.S. ----, 111 S.Ct. 1313, 113 L.Ed.2d 246 (1991). Plenary review is also required because, unlike the fact questions inherent in determination of the intent of the contracting parties, construction of a contract necessarily involves a question of law. Compare Vanguard Telecommunications, Inc. v. Southern New England Tel. Co., 900 F.2d 645, 650 (3d Cir.1990) (construction of contract is question of law subject to plenary review) with Painewebber, Inc. v. Hartmann, 921 F.2d 507, 510 (3d Cir.1990) (questions of contractual intent are questions of fact reviewed under clearly erroneous standard).

We also point out that the parties in their briefs do not point to any aliunde evidence of intent, but rather base their arguments on contrary readings of the plain language of the agreements. Accordingly, we review the case as they have presented it and predicate our conclusion on the relationship among the various contractual provisions.

Based on this review, we disagree with the district court's conclusion that the nonrecourse provisions of the Note and the Security Agreement should be imported into the separate Collateral Assignments. We therefore will reverse the grant of summary judgment in favor of Prime on Count I. However, we will affirm the grant of summary judgment to Prime on Counts II and III. We find that the allegation of breach of implied covenant in Count II is incompatible with Count I's allegations of breach of express covenants governing the same subject matter, i.e., Prime's duty to...