Wells Fargo Bank v. Mitchell Kobernick , 454 F. App'x 307 ( 2011 )

Case: 10-20046 Document: 00511697887 Page: 1 Date Filed: 12/16/2011
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
December 16, 2011
No. 10-20046 Lyle W. Cayce
Clerk
U.S. BANK, NATIONAL ASSOCIATION,
Plaintiff–Appellee–Cross Appellant
v.
MITCHELL KOBERNICK; ALLAN KLEIN; KENSINGTON GREEN (MK)
INCORPORATED; KENSINGTON GREEN (AK) INCORPORATED,
Defendants–Appellants–Cross Appellees
Appeals from the United States District Court
for the Southern District of Texas
USDC No. 4:08-CV-1458
Before BENAVIDES and PRADO, Circuit Judges, and ALVAREZ,* District
Judge.
PER CURIAM:**
The district court granted Plaintiff’s motion for summary judgment in
part, enforcing a loan guaranty against Defendants but denying default interest.
Both parties appealed, and we affirm.
*
District Judge of the Southern District of Texas, sitting by designation.
**
Pursuant to 5TH CIR. R. 47.5, the court has determined that this opinion should not
be published and is not precedent except under the limited circumstances set forth in 5TH CIR.
R. 47.5.4.
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I. BACKGROUND
A. Factual Background
Defendants Mitchell Kobernick and Allan Klein were the sole shareholders
of, respectively, Defendants Kensington Green (MK) Incorporated (“KGMK”) and
Kensington Green (AK) Incorporated (“KGAK”). KGMK and KGAK were the
general partners of Kensington Club Apartments, Ltd. (“KCA”). KCA owned
Kensington Club I Apartments (“KCI”), an apartment complex in Houston,
Texas. KCA executed a promissory note (“Note”) for $7,150,000, payable to
Holliday Fenoglio, LP. For reasons immaterial to this appeal, Holliday Fenoglio,
LP’s rights were assigned several times prior to their final assignment to
Plaintiff U.S. Bank, National Association (“Bank”).1 As security for the Note,
KCA executed a Deed of Trust and Security Agreement (“Security Instrument”),
pledging KCI as collateral.
Under the Note’s terms, KCA had a non-recourse obligation unless certain
enumerated events occurred, at which point KCA and its general partners,
KGMK and KGAK, would become liable for the debt secured by the Note. As
relevant to this appeal, Paragraph 14(c) of the Note stated that:
[T]he agreement of Lender not to pursue recourse liability as set
forth . . . above SHALL BECOME NULL AND VOID and shall be of
no further force and effect in the event of Borrower’s default under
Sections 4.2 or 8.2 of the Security Instrument, or if the Property or
any part thereof shall become an asset in (i) a voluntary bankruptcy
or insolvency proceeding, or (ii) an involuntary bankruptcy or
insolvency proceeding (A) which is commenced by any party
controlling, controlled by or under common control with Borrower
(the “Borrowing Group”) or (B) in which any member of the
Borrowing Group objects to a motion by Lender for relief from any
stay or injunction from the foreclosure of this Security Instrument
1
For simplicity’s sake, each of the Bank’s predecessors-in-interest will be referred to
throughout as “the Bank.”
2
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or any other remedial action permitted hereunder or under the Note
or the other Loan Documents.
Section 8.2 of the Security Instrument stated that:
Borrower agrees that the sale, conveyance, mortgage, grant,
bargain, encumbrance, pledge, assignment, or other transfer of the
Property, or any part thereof, without the prior written consent of
Lender, shall constitute an event allowing Lender to declare the
entire unpaid Debt to be immediately due and payable without
notice of intention to accelerate, notice of acceleration, demand or
any other notice.
Kobernick and Klein executed a Guaranty of Recourse Obligation of Borrower
(“Guaranty”), which guaranteed KCA’s performance in the event of a default
under Section 8.2 of the Security Instrument.
In December 2003, KCA conveyed KCI to Comunidad Kensington Club I,
LLC (“Comunidad”), a Texas non-profit corporation. Kobernick was one of three
managers of Comunidad. KCI had to be transferred to Comunidad by December
31, 2003, to be eligible for a tax exemption from real estate taxes for Community
Housing Development Organizations like Comunidad. Because of the time
restraint, Kobernick did not get the written consent of the Bank prior to the
transfer, as required by Section 8.2 of the Security Instrument.
In March 2004, Kobernick wrote to the Bank to explain the transaction.
In August 2004, Kobernick again wrote to the Bank, explaining that KCI was
not generating enough cash to service the Note and maintain the property, but
by transferring KCI to Comunidad before December 31, 2003, KCI would no
longer have to pay real estate taxes. Additionally, Kobernick requested that the
Bank reevaluate the necessity of a tax escrow account for KCI because KCI
would no longer owe real estate taxes, and requested that the Bank return those
funds. The Bank complied with the request, returning the amount held in
escrow in 2004, 2005, and 2006 to Comunidad, and did not require tax escrow
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payments in 2007. Kobernick included in his August 2004 letter a legal opinion
letter from his lawyer which argued that there had been no change in the
property’s management or the involvement of the principals, that “control of the
property and the revenue associated with such property was retained by the
seller,” and that therefore the existing borrowers could be “characterized as the
current and continuing owners of the property.”
On October 2, 2004, Kobernick wrote to the Bank a third time. In this
letter, Kobernick again referenced the legal opinion letter, and summarized its
reasoning as to why the transfer of KCI from KCA to Comunidad should not be
considered a change in ownership. Kobernick emphasized that he was
“personally one of the three managers of [Comunidad], and [was] a key principal
of the borrower,” and that Comunidad regulations “allow[ed him] to block any
sale by [Comunidad], or bankruptcy filing, making the entity bankruptcy
remote.” Kobernick admitted, however, that he “underst[ood] that a strict
interpretation of the loan documents could allow [the Bank] to treat this
proposed transaction as a sale and/or transfer of ownership,” but he “request[ed]
that [the Bank] view the transaction more broadly.” On October 4, 2004, the
Bank acknowledged that it had received KCA’s request to approve the transfer,
but noted that its acknowledgment was not consent.
In January 2008, the Bank sent a Notice of Default, Acceleration and
Revocation of License to Receive and Collect Rents notifying KCA, and
Kobernick, Klein, KGMK, and KGAK (collectively, “Defendants”) that the Note
was in default and that all amounts due on the Note and Security Instrument
were immediately due and payable. This notice stated that default was due to
KCA’s conveyance of KCI to Comunidad without prior written approval. A
foreclosure sale of the property was noticed for April 1, 2008.
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One day before the foreclosure sale, on March 31, 2008, Comunidad filed
a voluntary petition under Chapter Eleven of the Bankruptcy Code. This
petition was signed by Kobernick in his capacity as a manager of Comunidad.
B. Procedural Background
In April 2008, the Bank filed this lawsuit in Texas state court, arguing
that Defendants’ default triggered recourse liability under the Note’s terms, and
seeking to recover from Defendants the principal indebtedness on the Note,
accrued and unpaid interest, late fees, default interest, attorney’s fees, costs of
collection and any other amounts due and payable under the Note, Security
Instrument, and Guaranty. Defendants removed to federal court, arguing that
the case fell within 28 U.S.C. § 1334(b)’s grant of jurisdiction to United States
District Courts for civil actions “arising under Title 11, or arising in or related
to cases under Title 11.” In June 2008, the Bank filed a separate, involuntary
petition of bankruptcy against KCA under Chapter Eleven of the Bankruptcy
Code, and KCA was later dismissed from this case upon the Bank’s unopposed
motion. In October 2008, the Bank filed an amended complaint asserting
another basis for federal jurisdiction: diversity jurisdiction under 28 U.S.C.
§ 1332, because Defendants were all citizens of Texas and the Bank was a citizen
of South Dakota.2
In September 2008 the Bank moved for summary judgment, which it
supplemented in October 2008 and February 2009. In its motions for summary
judgment, the Bank urged two arguments relevant to this appeal: first,
Comunidad’s voluntary bankruptcy made KCI an asset in a bankruptcy
proceeding commenced by a member of the Borrowing Group in violation of
2
Capital Markets, LLC brought this suit on behalf of Wells Fargo Bank Minnesota,
N.A., Trustee for the Registered Holders of First Union-Lehman Brothers-Bank of America
Commercial Mortgage Trust, Commercial Mortgage Pass-Through Certificates, Series 1998-
C2, who at the time of the lawsuit was the assignee of the Note, Security Instrument, and
Guaranty.
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Paragraph 14(c) of the Note; and second, Defendants violated Section 8.2 of the
Security Instrument by transferring KCI to Comunidad without the Bank’s prior
written consent. Defendants argued in response to the Bank’s first argument
that Kobernick was not a member of the “Borrowing Group,” nor did he
“commence” Comunidad’s voluntary bankruptcy. With respect to the Bank’s
second argument, Defendants argued that the Bank had waived its right to
declare a default based on the sale of KCI to Comunidad without written consent
by refunding Defendants’ monthly tax escrow payments.
The district court granted the Bank’s motion in May 2009, determining
that Kobernick was a member of the “Borrowing Group,” that he commenced
Comunidad’s voluntary bankruptcy, and that therefore recourse liability was
triggered. The district court rejected the Bank’s second argument, agreeing with
Defendants that the Bank had waived its right to declare a default based on the
transfer of KCI because it had refunded the escrow money for four years
following the property transfer.
In June 2009, the Bank moved for an entry of final judgment and
attorney’s fees. After a hearing, the district court granted in part the Bank’s
motion for attorney’s fees in August 2009. Pursuant to that order, the district
court awarded the Bank $126,460.97 in fees incurred in litigating this matter.
Defendants moved for a new trial, reiterating their argument that the
Comunidad bankruptcy was not “commenced” by a member of the “Borrowing
Group.” The district court denied this motion in December 2009. In March
2010, the district court granted the Bank $343,080.31 in attorney’s fees incurred
while litigating the related voluntary (Comunidad) and involuntary (KCA)
bankruptcies. An amended final judgment was entered in September 2010.
Later in September, Defendants filed a motion to alter the judgment, arguing
that public policy should have prevented the district court from enforcing what
Defendants call the “springing guaranty” provisions in Paragraph 14(c) of the
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Note. In October 2010, Defendants filed a supplemental motion to amend the
judgment, arguing that the district court should have waited to enter attorney’s
fees until a separate, state-court action determined the value of KCI, which the
Bank had foreclosed upon. Defendants argued that the amount of attorney’s fees
awarded should take into account the total value of the award on the Note, and
the award on the Note should be offset by the value of KCI as determined in the
state-court action. The district court denied this motion on November 15, 2010.
II. DISCUSSION
Defendants raise two issues on appeal: whether the district court erred in
determining that Defendants have recourse liability due to Kobernick’s
commencement of the Comunidad bankruptcy, and whether we should remand
for reconsideration the district court’s allegedly premature grant of attorney’s
fees. The Bank cross-appeals, raising a single issue: whether the district court
erred in determining that because the Bank waived its right to claim a default
due to KCA’s transfer of KCI to Comunidad without its written consent, it had
also waived its right to default interest.
A. Standard of Review and Applicable Law
We review a district court’s grant of summary judgment de novo, applying
the same standards as the district court. Kujanek v. Hous. Poly Bag I, Ltd., 658
F.3d 483, 487 (5th Cir. 2011). “A summary judgment motion is properly granted
only when, viewing the evidence in the light most favorable to the nonmoving
party, the record indicates that there is no genuine issue as to any material fact
and that the moving party is entitled to judgment as a matter of law.” Barker
v. Halliburton Co., 645 F.3d 297, 299 (5th Cir. 2011) (citation and internal
quotation marks omitted).
Under Texas contract law, which governs this dispute, “[i]f the written
instrument is so worded that it can be given a certain or definite legal meaning
or interpretation, then it is not ambiguous and the court will construe the
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contract as a matter of law.” Enter. Leasing Co. of Hous. v. Barrios, 156 S.W.3d
547, 549 (Tex. 2004).
B. Recourse Liability
1. Public Policy
Defendants’ overarching argument against recourse liability is that the so-
called springing recourse provisions in Paragraph 14(c) of the Note, which
trigger recourse liability upon KCI’s becoming an asset in a bankruptcy or
insolvency proceeding, are unenforceable because they conflict with the public
policy prohibition on penalties stemming from the filing of a bankruptcy petition.
Defendants rely principally on In re Huang, 275 F.3d 1173 (9th Cir. 2002), which
held that “[i]t is against public policy for a debtor to waive the prepetition
protection of the Bankruptcy Code.” Id. at 1177.3 Huang is distinguishable,
however, because here Defendants did not waive their right to file a bankruptcy
petition. This case is instead analogous to FDIC v. Prince George Corp., 58 F.3d
1041 (4th Cir. 1995), where the Fourth Circuit enforced the “clear terms” of a
promissory note which stated that the debtor was “not entitled to escape liability
for a deficiency judgment if it ‘voluntarily’ becomes part of a case, action, suit or
proceeding which suspends, reduces or impairs FDIC’s rights of recourse to the
property.” Id. at 1046. Rejecting the debtor’s public policy challenge, the Prince
George court reasoned that “the note did not prohibit [the debtor] from resorting
to bankruptcy; it merely provided that if [the debtor] took certain actions it
would forfeit its exemption from liability for any deficiency.” Id. That reasoning
applies with equal force here: the Note did not prohibit KCI from becoming an
3
Defendants also cite ING Real Estate Finance (USA) LLC v. Park Avenue Hotel
Acquisition LLC, 907 N.Y.S.2d 437 (N.Y. Sup. Ct. N.Y. Cty. 2010) (unreported table decision),
arguing that it invalidated a springing guaranty triggered by a bankruptcy filing. To the
contrary, however, that case held that “immediate liability for the entire debt” was an
unenforceable liquidated damages provision, not that it was unenforceable because it was
triggered by the filing of a bankruptcy petition. Id. at *5.
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asset in a bankruptcy proceeding; it merely stated that if that event occurred,
the loan would convert to a fully recourse loan. Accordingly, we decline to hold
that springing guaranty provisions triggered by the filing of a bankruptcy
petition are against public policy.
2. Comunidad Bankruptcy
Defendants argue that under Paragraph 14(c) of the Note, recourse
liability is triggered only if two conditions occur: first, that Kobernick was a
member of a Borrowing Group; and second, that Kobernick “commenced” the
Comunidad bankruptcy. Defendants further argue that the district court erred
in determining that each condition was met. The Bank disputes, initially,
whether those conditions apply to voluntary bankruptcies—as opposed to
involuntary bankruptcies—under the terms of the Note. Moreover, the Bank
argues, even if the conditions applied the district court correctly found that they
had been met.
The Bank’s interpretation of the Note as set forth in its motion for
summary judgment is different than the interpretation it urges on appeal, and
the district court’s order granting the Bank summary judgment analyzed
Paragraph 14(c) as if the conditions applied. However, we review the district
court’s interpretation de novo, UNC Lear Servs., Inc. v. Kingdom of Saudi
Arabia, 581 F.3d 210, 216 (5th Cir. 2009), and we may affirm for any reason
supported by the record, United States v. Gonzalez, 592 F.3d 675, 681 (5th Cir.
2009). The parties’ disagreement about whether the conditions apply is easily
resolved in the Bank’s favor. The conditions following “(A)” in Paragraph 14(c)
of the Note unambiguously apply only to an involuntary bankruptcy proceeding.
Unless some difference in treatment was intended, there would have been no
reason to separate voluntary from involuntary bankruptcies into subsections “(i)”
and “(ii)”; the Note could have stated that the debt owed would become recourse
debt “if the Property or any part thereof shall become an asset in a voluntary or
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involuntary bankruptcy or insolvency proceeding (A) which is commenced by any
member of the Borrowing Group.” Moreover, if no difference in treatment was
intended between a voluntary and an involuntary bankruptcy, those modifiers
could have been left out altogether—“in a bankruptcy or insolvency proceeding”
would have been all that was necessary. We therefore affirm the district court’s
order granting the Bank summary judgment on the ground that under
Paragraph 14(c) of the Note, recourse liability was triggered when KCI became
an asset in the Comunidad voluntary bankruptcy.
C. Attorney’s Fees
The district court’s amended final judgment awarded the Bank
$7,509,771.30, including $503,624.89 in attorney’s fees. Defendants argued
below that the award was premature because the fair market value of KCI,
which an affiliate of the Bank bought at a foreclosure sale for $500,000, had not
yet been determined. While this appeal was pending, Kobernick and Klein
brought an action in Texas state court to place a fair market value on KCI; the
jury in that case has since returned a verdict for $8,015,000. Kobernick v. Wells
Fargo Bank, N.A., No. 2010-17974 (269th Dist. Ct., Harris County, Tex. May 27,
2011). Relying on that state court verdict, which is subject to appeal,
Defendants urge us to remand this case so the district court can reconsider its
attorney’s fees award.
Defendants first argue that the Bank is not entitled to any attorney’s fees
because the fair market value of KCI was greater than the principal, interest
and all other charges owed on the Note as of the foreclosure date. Defendants
rely on Intercontinental Group Partnership v. KB Home Lone Star L.P., 295
S.W.3d 650 (Tex. 2009), which they read as holding that no amount of attorney’s
fees can be awarded to a party that is not a “prevailing party,” even under the
terms of a contract provision for attorney’s fees. The contract provision at issue
in KB Home Lone Star, however, is distinguishable from the provisions at issue
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in this case. In KB Home Lone Star, the contract stated that if either party
brought an action to enforce the contract, “the prevailing party in any such
action, on trial or appeal, shall be entitled to his reasonable attorney’s fees to be
paid by the losing party as fixed by the court.” Id. at 652 (emphasis added).
Here, however, the Note and Security Instrument state that the Bank is entitled
to attorney’s fees incurred in collecting the debt without limitation.
Defendants next argue that because the district court’s judgment should
be reduced by the fair market value of KCI and one of the factors in determining
reasonable attorney’s fees is “the amount involved and the results obtained,” see
Arthur Andersen & Co. v. Perry, 945 S.W.2d 812, 818 (Tex. 1997), we should
remand for the district court to reconsider its award of attorney’s fees in light of
the lesser result obtained. The Security Instrument, however, stated that the
“debt” secured by KCI included any and all fees incurred by the Bank in its
efforts to collect the debt, and the Guaranty stated that the term “debt” includes
all “sums other than principal or interest which may or shall become due and
payable pursuant to the provisions of the Note, the Security Instrument, or the
other Loan Documents.” The attorney’s fees awarded by the district court are
therefore part of the debt owed by Defendants pursuant to the Note, Security
Instrument, and Guaranty. While Defendants may be entitled to reduce the
judgment against them by the fair market value of KCI, such a reduction has no
bearing on the amount of attorney’s fees awarded by the district court.
Accordingly, we decline to remand for the district court to reconsider its
attorney’s fees award.
D. The Bank’s Cross-Appeal: Default Interest
The district court determined that under the unambiguous terms of the
Note and Section 8.2 of the Security Instrument, KCA’s transfer of KCI to
Comunidad without the Bank’s written consent constituted a default; however,
the Bank waived its right to declare a default under these provisions by
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refunding KCA’s tax escrow money for four years after receiving notice of the
transfer. The Bank argues that the district court erred in finding waiver because
the transfer was a self-executing default event triggering full recourse liability,
and no later action could un-trigger recourse liability. In support, the Bank cites
two state trial-level cases holding that a debtor cannot avoid recourse liability
by curing a default which had triggered recourse liability. See CSFB 2001-CP-4
Princeton Park Corp. Ctr., LLC v. SB Rental I, LLC, 980 A.2d 1, 6–7 (N.J. App.
Div. 2009); First Nationwide Bank v. Brookhaven Realty Assocs., 637 N.Y.S.2d
418, 421 (2d Dep’t 1996). The Bank further argues that the Security Instrument
contains a non-waiver clause which states that “[t]he failure of Lender to insist
upon strict performance of any term thereof shall not be deemed a waiver of any
term of this security Instrument.”
“Waiver is the intentional relinquishment of a right actually known, or
intentional conduct inconsistent with claiming that right.” Ulico Cas. Co. v.
Allied Pilots Ass’n, 262 S.W.3d 773, 778 (Tex. 2008). “The elements of waiver
include (1) an existing right, benefit, or advantage held by a party; (2) the party’s
actual knowledge of its existence; and (3) the party’s actual intent to relinquish
the right, or intentional conduct inconsistent with the right.” Id. Each element
of waiver is present here: the Bank had the right to declare a default if KCI was
transferred without its written consent; it knew it had that right; and its
intentional conduct in withholding written consent, but refunding tax escrow
payments as if it had approved the conveyance to the tax-exempt Comunidad for
four years before declaring a default, was inconsistent with its right to declare
a default. See Straus v. Kirby Court Corp., 909 S.W.2d 105, 108 (Tex. App.—
Houston [14th Dist.] 1995, writ denied) (“[A] nonwaiver clause may, in some
circumstances, be waived.”). The cases cited by the Bank are inapposite because
they stand for the proposition that a default triggering a springing guaranty
provision cannot be cured, which is not at issue. Accordingly, the district court
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did not err in determining that the Bank waived its right to declare a default
based on the transfer of KCI, and for the same reasons did not err in
determining that the Bank is not entitled to default interest dating from the
time of the transfer.
III. CONCLUSION
For the foregoing reasons, the district court’s order granting summary
judgment is AFFIRMED.
13