Warner v. Central Trust Co., s. 85-3032
| Decision Date | 11 August 1986 |
| Docket Number | Nos. 85-3032,85-3489 and 85-3490,s. 85-3032 |
| Parties | Marvin L. WARNER, Plaintiff-Appellant (85-3032), Plaintiff-Appellee, Cross-Appellant (85-3489/90). v. The CENTRAL TRUST COMPANY, et al., Defendants, Federal Deposit Insurance Corp., Receiver of Penn Square Bank, N.A., Defendant-Appellee (85-3032), Defendant-Appellant, Cross-Appellee (85-3489/90). |
| Court | U.S. Court of Appeals — Sixth Circuit |
Louis F. Gilligan (argued), Cincinnati, Ohio, for appellant.
W. Stuart Dornette (argued), Cincinnati, Ohio, for appellee.
Before LIVELY, Chief Judge, and MERRITT and JONES, Circuit Judges.
In July 1982, the Federal Deposit Insurance Corporation ("FDIC") closed and took over as receiver of the insolvent Penn Square Bank of Oklahoma City. One of the bank's assets was a letter of credit issued to Penn Square by the Central Trust Company of Cincinnati on the account of Marvin Warner, which the FDIC has since collected. Warner appeals the district court's ruling that the FDIC was entitled to collect on the letter of credit. The FDIC appeals the court's method of calculating the interest due it from Warner. For the reasons stated below we reverse and remand for further consideration.
The background facts are largely conceded. The letter of credit was issued to Penn Square as part of a complex financing scheme that surrounded Warner's investment in a limited partnership called High Plains Drilling Partners 1980-II (the "Partnership"). The Partnership was formed under Oklahoma law; its purpose was to purchase oil drilling rigs from the general partner, High Plains Drilling Company ("High Plains"), and lease them to drillers. Carl Swan, the owner of High Plains, was also a director of Penn Square.
Warner's total investment was $498,150. He paid half in cash; the other half was financed by a note from Warner to the Partnership for $249,075. Because the Partnership needed the full investment in cash to begin operations, it arranged to borrow from Penn Square the amount of all the limited partners' financed indebtedness. This transaction became known as the "Equity Loan." Warner and the Partnership signed an "Equity Loan Assumption Agreement" wherein Warner agreed to assume the Partnership's obligations on the Equity Loan up to the amount of his financed investment and agreed to furnish a letter of credit in that amount, which was to be transferred to Penn Square as collateral for the Equity Loan. The Partnership and Penn Square then executed a promissory note for the Equity Loan and a "Secured Term Loan Agreement." The Equity Loan was a no-recourse loan--that is, on default, neither the Partnership nor any partner could be held personally liable on the note and Penn Square could look only to the letters of credit it had received from the various limited partners, including Warner, for satisfaction of the debt. When these documents were finally executed there were discrepancies between the terms of the Equity Loan as set out in the Equity Loan Assumption Agreement between Warner and the Partnership and as set out in the Promissory Note and Secured Term Loan Agreement between the Partnership and Penn Square. These discrepancies, which will be described further below, form the basis of Warner's claim against the FDIC.
These agreements were entered into in 1980, and the Partnership prospered initially. By 1982, however, the oil industry had collapsed, which precipitated two events. First, the Partnership, unable to lease its oil rigs, could not meet its debts to Penn Square. Second, Penn Square, with heavy investments in the oil industry, became insolvent and was taken over by the FDIC. The Partnership's note to Penn Square matured shortly thereafter. The FDIC refused an extension and gave notice that it would collect on the letters of credit. Warner brought suit in Hamilton County Court of Common Pleas to enjoin collection of his letter, claiming fraud by Penn Square, High Plains, and Carl Swan, and raising a contract claim on the validity of the transactions. The case was removed to the federal district court. That court denied Warner's motion for a preliminary injunction, and this court affirmed. See Warner v. Central Trust Co., 715 F.2d 1121 (6th Cir.1983). The letter of credit was collected and the case proceeded to trial on the merits. All defendants but the FDIC were voluntarily dismissed. The district court ruled against Warner on both the fraud and contract claims; only the contract claim is appealed.
In addition to the Equity Loan, the Partnership had also obtained a Working Capital Loan from Penn Square of which Warner had assumed a pro rata share by a separate agreement. The Partnership defaulted on this loan as well. Warner did not contest his obligation to pay on that debt. The FDIC was awarded interest and attorneys fees in connection with the collection on both loans. The FDIC's appeal concerns the manner in which those awards should be calculated.
While Warner presented both fraud and contract claims in the district court, he raises only the contract issue on appeal. The gist of his argument is that, because the terms of the Equity Loan executed between Penn Square and the Partnership were materially different than the terms of the loan he agreed to assume in his contract with the Partnership, he is entitled to release from the assumption and return of the collateral--the letter of credit.
The original intended structure of the Equity Loan from Penn Square to the Partnership was set out in the Equity Loan Assumption Agreement executed by Warner and the Partnership. The Equity Loan was to be for four years. The principal was to be paid by the Partnership to Penn Square in sixteen equal quarterly installments, which were to coincide with the installments Warner was to pay to the Partnership under the Warner/Partnership note. As security to Penn Square, Warner was to assume a pro rata share of the Equity Loan and supply a letter of credit which would be transferred to Penn Square as collateral. The letter of credit was also to have a term of four years, and was to be in the amount of 110% of Warner's share of the loan. The extra 10% was to secure interest payments, which were assumed by the Partnership.
The original structure for these transactions proved impracticable. Some banks refused to extend letters of credit for four years, and the Partnership notified Warner and the other limited partners that they could submit letters with terms of two years, renewable for another two years, and for only 100% of the financed amount. (Warner thereafter submitted a letter issued by Central Trust with a twenty-one month term, renewable for one year.) Because the security provided by the letters of credit would be for only two years, the Partnership and Penn Square restructured the Equity Loan. As executed, the loan matured in August 1982 rather than June 1985. Interest was to be paid quarterly (and was two percent less than originally planned), but no principal was due until maturity. According to the Secured Term Loan Agreement, the principal would be paid from the letters of credit. In the paragraph of this agreement titled "Security," the Partnership agreed to assign the letters of credit to Penn Square, and the Equity Loan Assumption Agreements made with each limited partner were incorporated. The district court found that there was "an understanding among the parties" (presumably the Partnership and Penn Square) "that the Equity Loan would be rolled over for another two years at the end of its initial term." J.App. Vol. I at 78. Warner claims he was never informed of the changes in the terms of the Equity Loan. He was, however, informed of the change in the letter of credit requirements and, since the Partnership was not required to make quarterly principal payments on the Equity Loan, the Partnership told him he did not need to make such payments to the Partnership as required by the Equity Loan Assumption Agreement.
Warner was not a party to the Equity Loan or the Secured Term Loan Agreement. Penn Square was not a party to the Equity Loan Assumption Agreement. Thus, Warner cannot complain that Penn Square, or, in its shoes, the FDIC, breached any agreement between them. However, Warner argued below that he was a surety or guarantor of the Partnership's obligation to...
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