Opinion
ACTION NO. 4:00-CV-1837-Y.
April 23, 2002
OPINION ON APPEAL
Summit National Bank ("Summit") files this appeal challenging the bankruptcy court's October 16, 2000, final judgment granting Trustee John D. Spicer's ("the Trustee") cross-motion for summary judgment and denying Summit's motion for summary judgment.
Deciding one issue will control the outcome of this suit — whether Summit or the Trustee is entitled to $25,000 received by the debtor, K.L. Karnes Construction, Inc. ("Karnes"), as earnest money ("the Earnest Money") in a failed real-estate transaction. Summit claims the Earnest Money based, inter alia, on a deed of trust it has securing the property Karnes unsuccessfully attempted to sell. The Trustee, however, claims the Earnest Money is not secured by the deed of trust and therefore belongs to the bankruptcy estate. The bankruptcy court agreed with the Trustee and ordered the Earnest Money turned over to him. For the reasons stated below, the Court concludes that the bankruptcy court's decision must be reversed and judgment rendered for Summit.
I. Jurisdiction and Standard of Review
The Court has jurisdiction of this appeal under 28 U.S.C. § 158 (a). The bankruptcy court's conclusions of law are subject to de-novo review, but its factual findings may not be set aside unless they are clearly erroneous. Sequa Corp. v. Christopher, 28 F.3d 512, 514 (5th Cir. 1994).
II. Facts
On May 2, 1997, Karnes executed a promissory note payable to Summit in the principal amount of $1,609,000.00. (R. at 57-62, 334.) The note, along with all other indebtedness owed by Karnes to Summit, was secured by a lien against certain real property in Stephenville, Erath County, Texas ("the Real Property"), pursuant to a commercial Deed of Trust, Security Agreement, Financing Statement and Assignment of Rents dated May 2, 1997 ("the Deed of Trust"). (R. at 63-68, 334.)
On January 26, 1998, Karnes filed for Chapter 11 bankruptcy. (R. at 6.) On or about July 10, 1998, Karnes entered into a purchase and sale agreement ("the Purchase and Sale Agreement") with Medcare Properties, Inc. ("Medcare") to sell the Real Property, pursuant to which Medcare deposited the Earnest Money with the title company. (R. at 72-87.) Because Medcare tailed to perform its obligations under the Purchase and Sale Agreement, Karnes was entitled to terminate the sale and receive the Earnest Money. (R. at 80.) On December 1, 1999, Medcare executed a release of its claims to the Earnest Money. (R. at 111.)
On December 10, 1998, the bankruptcy court lifted the stay and allowed Summit to exercise its lien rights to the Real Property. (R. at 334.) Although Summit foreclosed on the Real Property in January 1999 (R. at 100-04, 334), it has a deficiency claim in excess of the amount of the Earnest Money. (R. at 334-35.)
On January 31, 2000, this case was converted to a Chapter 7 bankruptcy proceeding and the Trustee was appointed. (R. at 6.) On April 7, the Trustee filed an adversary proceeding against the title company seeking the turnover of the Earnest Money. (R. at 21-22.) On July 10, Summit filed a plea in intervention and counterclaim also seeking the turnover of the Earnest Money. (R. at 36-39.) Summit and the Trustee subsequently filed competing motions for summary judgment. (R. at 17, 163.) On October 16, the bankruptcy court entered a memorandum opinion holding that the Earnest Money was not subject to Summit's deed of trust lien. (R. at 4.) On that same date, the court entered final judgment granting the Trustee's cross-motion for summary judgment and directing that the Earnest Money be turned over to him. (R. at 13.) Summit filed its notice of appeal on October 25. (R. at 1.)
On October 27, 2000, the bankruptcy court entered an Agreed Judgment dismissing the title company as a party to this action. (R. at 343-48.) By agreement of the parties, the title company delivered the Earnest Money to the Trustee pending resolution of this appeal.
III. Analysis A. Issues As Framed By Parties and Bankruptcy Court
As framed by the parties and the bankruptcy court, who is entitled to the Earnest Money revolves around the meaning of the "Rents and Profits Clause" in the Deed of Trust. It provides as follows:
All of the rents, royalties, issues, profits, revenue, income and other benefits derived from the Mortgaged Premises (hereinafter called the "Rents and Profits") are hereby absolutely and unconditionally assigned, transferred, conveyed and set over to [Summit] to be applied by [Summit] in payment of the principal and interest and all other sums payable on the Secured Indebtedness.
(R. at 63.)
Summit contends that the Earnest Money unambiguously constitutes either "issues, profits, revenue, income [or] other benefits derived from the Mortgaged Premises" and is therefore secured by the Deed of Trust. The Trustee, however, contends that, that the Earnest Money is "liquidated damages" under the terms of the Purchase and Sale Agreement between Karnes and Medcare. Because the term "liquidated damages" is not included in the Rents and Profits Clause, urges the Trustee, the Earnest Money is part of the bankruptcy estate under 11 U.S.C. § 541 and not secured by Summit's Deed of Trust.
Summit does not assert that the Earnest Money constitutes rent or royalty.
Notably, while the bankruptcy court ultimately found for the Trustee, it did so seemingly on its own grounds. Namely, the bankruptcy court held that the Earnest Money was unambiguously not "issues, profits, revenue, or income" under the Rents and Profits Clause of the Deed of Trust. (R. at 8-9.) The Court further held that the other "benefits derived from the Mortgaged Premises" language of the Rents and Profits Clause was ambiguous and, on that basis, proceeded to apply the doctrine of ejusdem generis. (R. at 9-11.) Under that doctrine, "[w]here specific . . . things are followed by general words, the general words are not to be construed in their widest meaning . . . but are to be treated as limited to and applying only to . . . things of the same kind or class as those expressly mentioned." Barnett v. Aetna Life Ins. Co., 723 S.W.2d 663, 665 (Tex. 1987). The bankruptcy court then found that the Rents and Profits Clause attached only to monies generated by the operation of the real property as a senior assisted-living facility, which was Karnes' supposed, intended use of the Real Property. (R. at 11.) Because the Earnest Money was not money generated from the operation of a senior assisted-living facility, under the doctrine of ejusdem generis, the Earnest Money was not an "other benefit" under the Rents and Profits Clause. According to the bankruptcy court, the Earnest money was therefore not secured by Summit's deed of trust. Id.
B. Applicable Law and Analysis
In construing a contract, a court should give terms their plain, ordinary, and generally accepted meaning, unless the contract shows that the parties used them in a technical or different sense. Heritage Resources, Inc. v. Nations Bank, 939 S.W.2d 118, 121 (Tex. 1996). If a contract can be given a certain or definite meaning, the language is not ambiguous. DeWitt County Elec. Co-op., Inc. v. Parks, 1 S.W.3d 96, 101 (Tex. 1999); Transcontinental Gas Pipeline Corp. v. Texaco, Inc., 35 S.W.3d 658, 665 (Tex.App.-Houston [1st Dist.] 2000, cert. denied); Connelly v. Paul, 731 S.W.2d 657, 660 (Tex.App.-Houston [1st Dist.] 1987, writ ref'd n.r.e.). Whether a contract is ambiguous is a question of law. Heritage Resources, Inc., 939 S.W.2d at 121. If the contract is unambiguous, the court must enforce the contract as written. Id.
The dictionary is the logical source for the plain, ordinary, and generally accepted meaning of words. See, e.g., City of Corpus Christi v. Bayfront Assoc., Ltd., 814 S.W.2d 98, 104 (Tex.App. — Corpus Christi 1991, writ denied). "Issue" is "proceeds from a source of revenue." MERRIAM-WEBSTER's COLLEGIATE DICTIONARY 622 (10th ed. 1993). "Income" is "a gain or recurrent benefit usually measured in money that derives from capital or labor." Id. at 588. "Revenue" is "the total income produced by a given source." Id. at 1002. "Profit" is "to derive benefit." Id. at 931. "Benefit" is "to receive advantage, profit." WEBSTER'S NEW WORLD DICTIONARY 56 (3rd ed. 1994). "Derive" means "to get or receive from a source." Id. at 163.
The parties do not appear to dispute the meaning of these words. To the extent there are slight variations in their respective dictionary definitions of these terms, they are insignificant and of no consequence to the court's holding. To highlight the lack of ambiguity in the Rents and Profits clause, however, the court has used the Trustee's definitions.
As well summarized by the Trustee in his appellate brief: "All of these terms seem to have essentially similar meanings. In simplest terms, they all refer to money gained from a source." (Brief of Appellee John D. Spicer, Trustee, at 4.) Under the Rents and Profits Clause, that source is "the Mortgaged Premises," which, in turn, is clearly defined by the Deed of Trust as the Real Property. (R. at 63, 67.) In short, the Court concludes that under the plain meaning of the Rents and Profits Clause, the Earnest Money — unambiguously — constitutes either "issues, profits, revenue, income," or "other benefit derived" from the Real Property. The Earnest Money is therefore included within the scope of the Rents and Profits Clause and secured by Summit's deed of trust.
The Trustee's contention that the Earnest Money constitutes "liquidated damages" and therefore not "issues, profits, revenue, income [or] other benefits" under the Rents and Profits Clause is a red herring. While no doubt the $25,000 seemed like "damages" to Medcare, the Earnest Money was an indisputable "benefit" to Karnes that could not derive more directly from the Real Property, i.e., its attempted sale. No one denies that the proceeds from the ultimate sale of the Real Property belong solely to Summit by virtue of the Deed of Trust. Indeed, the bankruptcy court lifted the stay so that Summit could foreclose on the Real Property and sell it. (R. at 334.) Reason dictates that if Summit is entitled to the proceeds of a successful sale of the Real Property, it is entitled to the proceeds from an unsuccessful sale.
The Court further disagrees with the bankruptcy court's holding that the parties' dispute over the meaning of the Rents and Profits Clause creates an ambiguity. (R. at 9.) The mere fact that parties disagree does not make an otherwise straightforward contract ambiguous. Transcontinental Gas Pipeline Corp., 35 S.W.3d at 665. Only if a contract is subject to more than one reasonable interpretation can it be ambiguous. Id.; National Union Fire Ins. Co. v. CBI Indus., 907 S.W.2d 517, 520 (Tex. 1995) (emphasis added).
Because the Court holds that the Rents and Profits Clause is not ambiguous, the doctrine of ejusdem generis does not apply. See Hussong v. Schwan's Sales Enter., Inc., 896 S.W.2d 320, 325 (Tex.App. — Houston [1st Dist.] 1995, no writ) ("The doctrine of ejusdem generis applies only when the contract is ambiguous.") Even if ejusdem generic did apply, however, the Court concludes that the Rents and Profits Clause is not, as found by the bankruptcy court, limited to profits " generated from the actual use of the Real Property as a senior assisted living facility." (R. at 9.) (emphasis added). The Rents and Profits Clause contains no such limitation. (R. at 63.) To the contrary, the Rents and Property Clause unambiguously provides that the source of the benefits in question is the Real Property. Id. A "court is not at liberty to revise an agreement while professing to construe it." Southwestern Gas Pipeline, Inc. v. Scaling, 870 S.W.2d 180, 183 (Tex.App. — Fort Worth 1994, writ denied).
Moreover, no document or other evidence is cited for the proposition that the Real Property was to be operated by Karnes as a senior assisted-living facility. In fact, it does not appear that the Trustee even asserted this argument as a ground for summary judgment.
This Court's conclusion that the Earnest Money is secured by Summit's deed of trust is bolstered by the fact that other courts, albeit not Texas courts, have similarly so held. See, e.g., Old Stone Bank v. Tycon I Bldg. Ltd. Partnership, 946 F.2d 271 (4th Cir. 1991) (applying Virginia law) (earnest money forfeited when sale of property not consummated was secured by bank's deed of trust; notably rejecting bankruptcy estate's attempt to label earnest money as liquidated damages: "Adopting [such] approach, would enable debtors to evade valid security interests simply by the way they chose to label transactions."); In re Aldersgate Found., Inc., 878 F.2d 1326 (11th Cir. 1989) (applying Florida law) (forfeited earnest money is proceeds from sale of real property to be distributed among secured creditors only, not unencumbered assets held by trustee); In re Vandevender, 87 B.R. 59 (Bankr. S.D. Ill. 1988) (same); In re Clancy Co. Constr., 214 B.R. 387 (Bankr. D. Colo. 1997) (same).
IV. Conclusion
For the foregoing reasons, the judgment of the bankruptcy court is REVERSED. Judgment is GRANTED for Summit. The Trustee is directed to turn over the Earnest Money to Summit.