Opinion
C.A. No. 14896.
Submitted: December 7, 2000.
Decided: February 20, 2001.
Cathy L. Reese, Esquire, BLANK ROME COMISKY McCAULEY LLP, Wilmington, Delaware, Attorneys for Plaintiff.
Jeffrey J. Clark, Esquire, SCHMITTINGER RODRIGUEZ, Dover, Delaware, Attorneys for Defendants.
MEMORANDUM OPINION
I. INTRODUCTION
Beal Bank filed this action on March 15, 1996, asserting claims against William and Amanda Lucks for amounts due under a note executed in 1985 in the amount of $410,000. Two years later, Beal amended its complaint to add Ronald and Ellen Stephens, the Inn Partnership, and others as defendants, and to assert claims for breach of a 1987 note in the amount of $1.7 million and a related guaranty. In an earlier opinion, I granted summary judgment on claims concerning the 1985 note and the 1987 guaranty. Readers are directed to the opinion captioned Beal Bank, SSB v. Lucks, et al., Del. Ch., C.A. No. 14896, Lamb, V.C. (Sept. 14, 2000), for further background. The remaining issues relating to the liability of the partnership and Ronald Stephens, as general partner, on the 1987 note were subsequently tried. This is the court's post-trial decision.
II. FACTUAL AND PROCEDURAL BACKGROUND
The Inn Partnership, is a Delaware limited partnership formed in 1986 by general partners Ronald Stephens and William Lucks. Both Stephens and Lucks held 23.75 percent of the limited partnership interest. The limited partners held the remaining 52.5 percent.
On July 1, 1987, the Inn Partnership executed and delivered a note ("1987 Note") to Second National Federal Savings Bank ("SNFSB") in exchange for a construction loan of $1.4 million to the Inn Partnership for a hotel/condominium project in Lewes, Delaware known as the Inn at Canal Square. The 1987 Note was secured by a mortgage and security agreement on the Inn at Canal Square property, as well as the general partners' and their spouses' personal guaranty. The guaranty expired in 1988.
Additional properties related to the Inn project secured the 1987 Note as well. Collectively, these are referred to as the "Inn Property."
Beal Bank, SSB v. Lucks, et al., Del. Ch., C.A. No. 14896, Lamb, V.C. (Sept. 14, 2000) (ruling that the guaranty expired in 1988).
The Inn Partnership defaulted on the 1987 Note, and, in March 1990, counsel for the Inn Partnership contacted SNFSB to suggest the possibility of structuring a work-out agreement in lieu of foreclosure. At that time, the Inn Partnership owed $1,612,205.57 on the 1987 Note ($1,375,000 plus accrued interest and late fees) but, according to its counsel, was "not in a position to pay the . . . balance due on the note and mortgage" due to its "current financial crisis."
In September 1990, the Inn Partnership outlined a work-out proposal to SNFSB. After intermittent negotiations, the parties signed the final version of this agreement on June 13, 1991 ("Settlement Agreement"). One month earlier, in contemplation of that final agreement, SNFSB brought an action scire facias sur mortgage against the Inn Partnership in the Superior Court. In accordance with the terms of the Settlement Agreement, the Inn Partnership stipulated in the Superior Court action to the entry of a judgment of foreclosure in rem in favor of SNFSB in the amount of $1,764,864.19 ($1,375,000.00 plus interest and late fees) ("Stipulated Judgment"). However, also in accordance with the terms of the 1991 Settlement Agreement, SNFSB agreed not to execute on the Stipulated Judgment so long as the Inn Partnership abided by the new repayment schedule and other terms of that contract. The Inn Partnership ceased payment under the Settlement Agreement in 1994.
Second National Federal Savings Bank v. Inn at Canal Square Limited Partnership, Del. Super., C.A. No. 91L-05-012 (1991).
On July 18, 1991, William and Amanda Lucks filed a Chapter 11 petition in U.S. Bankruptcy Court for the District of Delaware, and SNFSB filed a claim in the Luckses' bankruptcy for the principal, interest, and fees due on the 1987 Note. The Luckses and SNFSB later reached a settlement which, inter alia, carved out the Luckses' guaranty of the 1987 Note.
By December 1992, SNFSB had become insolvent, and the Office of Thrift Supervision was appointed by the Resolution Trust Corporation (RTC) as conservator of SNFSB. Thus, the RTC succeeded to SNFSB's interest in the 1987 Note, the Stipulated Judgment, and the Settlement Agreement. After a series of further transfers, plaintiff Beal Bank, a Texas state savings bank with its principal place of business in Dallas, Texas, succeeded to those interests. On January 3, 1995, Beal notified the Inn Partnership, Ronald Stephen, Ellen P. Stephens, William Lucks, and Amanda Lucks that they were in default under both the "Loan" and the "Settlement Agreement," and demanded repayment.
After receiving this notice, the Inn Partnership filed a voluntary petition for reorganization under Chapter 11 of the Bankruptcy Code on September 9, 1995. The general partners later withdrew this petition on November 22, 1995 after agreeing to transfer the Inn Property to a third party in exchange for a personal indemnification agreement (as general partners, guarantors, and individuals) for any future liability on the 1987 Note.
Beal substituted for SNFSB in the foreclosure action on May 17, 1995. The Inn Property and its furnishings were later sold at a Sheriff's sale for $950,000 and $30,000, respectively. Beal now seeks a deficiency judgment against the Inn Partnership and Ronald Stephens as general partner for the unpaid balance of the 1987 Note.
III. LEGAL ANALYSIS
In this post-trial opinion, I address three matters. First, I will examine whether Beal Bank has made out a claim against the Inn Partnership and Ronald Stephens in his capacity as general partner for the deficiency resulting from the foreclosure sale. The defendants argue that the Settlement Agreement and the Stipulated Judgment, either singly or in conjunction with each other, had the legal effect of releasing or waiving SNFSB's right to sue for a deficiency against either the Inn Partnership and/or its general partners. Defendants also contend that Beal's failure to sue William Lucks in its claim under the 1987 Note precludes any recovery against Ronald Stephens, since Lucks's and Stephens's liability as general partners is joint, and not joint and several. Second, I will consider whether Beal's claims are time-barred. Third, I will consider whether Beal has adduced sufficient proof of the amount of the alleged deficiency, and, if so, the amount of damages.
A. Can Beal maintain an action under the 1987 Note?
Plaintiff brings its claim under the 1987 Note. While the terms of the 1987 Note are not in dispute, defendants maintain that the effect of the Stipulated Judgment is to preclude Beal's suit on the 1987 Note as a matter of law. Furthermore, defendants argue that SNFSB released them from liability for the deficiency and/or waived its right to seek deficiency when it entered into the Settlement Agreement.
At the summary judgment stage, I rejected defendants' argument that "modern principles of res judicata and the policy against claim splitting required SNFSB to bring all of its claims against the Inn Partnership (including any future claim for a deficiency resulting from the foreclosure) in the same action." The general rule is that a party bringing a foreclosure action on a mortgage may proceed on a claim on the related note for a deficiency if the proceeds of the foreclosure sale are insufficient to pay off the debt. However, it is not necessary to bring a claim for deficiency at the same time as a foreclosure action. The Delaware Supreme Court expressly held in Berg v. Liberty Federal Savings Loan Association, "No implication arises from the mere taking of collateral security that a creditor will look only or primarily to the security for repayment of the loan. A creditor-mortgagee may pursue all available remedies concurrently or successively, to the extent that separate and distinct remedies are recognized at law or in the controlling instrument." Plaintiff Beal is, therefore, not precluded from pursuing a different remedy after the foreclosure action.
55 Am. Jur. 2d Mortgages § 760 (1996). "If the foreclosure sale price is less than the unpaid balance of the mortgage obligation, an action may be brought to recover a deficiency judgment against any person who is personally liable on the mortgage obligation. . . ." Restatement (Third) of Property (Mortgages) § 8.4 (1997).
A minority of states expressly require by statute that any claim for deficiency must be brought in a foreclosure proceeding. See Cal. Civ. Proc. Code § 726(a) (2001). While these "one action" rules are, of course, more protective of the mortgagor, they have been criticized as "a trap for the unwary, and often . . . draconian in [their] consequence." Restatement (Third) of Property (Mortgages) § 8.2 reporters' note (Tentative Draft No. 5, 1996).
Del. Supr., 428 A.2d 347, 349 (1981) (emphasis added) (citation omitted).
Related to this, defendants argue that the Stipulated Judgment released SNFSB's claims against the Inn Partnership. Defendants cite Guardian Capital Corp. v. District Horizon Dream, Inc., arguing that, because the Settlement Agreement was expressly incorporated into the judgment in rem, execution on personalty is forbidden. Del. Super., C.A. Nos. 91L-06-014, 91L-06-015, Graves, J. (July 2, 1993). This present action is distinguishable. In Guardian Capital, the Superior Court noted that, because the consent judgment was "general," plaintiff could proceed against personalty and not simply the property that was subject to the mortgage. Here the consent judgment was not "general" but in rem and execution on it was limited to the mortgaged property.
Defendants also argued in connection with their motion for summary judgment, and continue to argue, that the parties to the Stipulated Judgment and the Settlement Agreement intended that those agreements would eliminate SNFSB's right of recourse against the Inn Partnership (and its general partners) under the 1987 Note. They base this argument on the terms of the Stipulated Judgment, the language of certain provisions of the Settlement Agreement, and extrinsic evidence of the parties' intentions in negotiating these agreements. I turn first to the issue of using extrinsic evidence of interpreting the Settlement Agreement.
1. The use of extrinsic evidence in interpreting the Settlement Agreement.
In construing the Settlement Agreement, the court's job is to ascertain "what a reasonable person in the position of the parties would have thought [the agreement] meant." "If the contract is clear on its face, the Court should rely solely on the clear, literal meaning of the words." However, the Court may resort to extrinsic evidence if the provisions of the agreement are ambiguous. I note that provisions of an agreement are "not rendered ambiguous simply because the parties in litigation differ concerning its meaning." Rather a contract is ambiguous "only where the provisions in controversy are reasonably or fairly susceptible of different interpretations or may have two or more different meanings." "Ambiguity does not exist where the court can determine the meaning of a contract `without any other guide than a knowledge of the simple facts on which, from the nature of language in general, its meaning depends.'"
Rhone-Poulenc v. American Motorists Ins. Co., Del. Supr., 616 A.2d 1192, 1196 (1992). See also Demetree v. Commonwealth Trust Co., Del. Ch., C.A. No. 14354, mem. op. at 7-8, Allen, C. (Aug. 27, 1996).
Demetree, mem. op. at 7.
Myers v. Myers, Del. Supr., 408 A.2d 279, 280 (1979) ("In the absence of ambiguity, there is no room for interpretation or a search for the intent of the parties."). See also Nepa v. Marta, Del. Supr., 415 A.2d 470, 473 (1980).
City Investing Co. Liquidating Trust v. Continental Cas. Co., Del. Supr., 624 A.2d 1191, 1198 (1993).
Rhone Poulenc, 616 A.2d at 1196.
Id. (citing Holland v. Hannan, D.C.App., 456 A.2d 807, 815 (1983)).
Rather than determine the proper construction of the documents as a matter of law at the summary judgment stage, I permitted the parties to introduce extrinsic evidence at trial relating to the negotiation of the Settlement Agreement and the Stipulated Judgment. Thus, both sides offered evidence, including correspondence between counsel, drafts of the relevant documentation, and testimony to explain the meaning and purpose of the arrangements between the parties in 1991.
I have reviewed and considered this evidence and conclude that it does not support a construction of the Settlement Agreement and Stipulated Judgment limiting or eliminating SNFSB's (and Beal's) right to proceed against the Inn Partnership under the 1987 Note to recover a deficiency judgment. Instead, I construe the Settlement Agreement and Stipulated Judgment to be unambiguous in this regard. While the Settlement Agreement, in particular, is not a model of draftsmanship, the meaning of its relevant terms can be ascertained without resort to extrinsic evidence.
Furthermore, taken as a whole, the extrinsic evidence offered to support the parties' interpretations of the documents does not support a different reading of the Settlement Agreement. Testimony from both sides was largely self-serving, and, at least with respect to defendants' argument, conflicting. Witnesses were unable to remember critical stages of the agreements' drafting, and defendants read too much into statements made by witnesses on both sides. Quite simply, there is no direct evidence that SNFSB ever agreed to give up its right to sue on the 1987 Note. To put it differently, the defendants failed to carry their burden of proving that SNFSB ever agreed to look only to mortgaged property for repayment of its loan.
There is also an important policy rationale for rejecting an interpretation of the Settlement Agreement that implicitly limits the bank's rights. The defendants' witness testified at trial that the Stipulated Judgment and the Settlement Agreement were meant to get "rid of the note, [get] rid of the guarantee, [get] rid of the whatever." Defendants argue for this interpretation notwithstanding the fact that the Settlement Agreement repeatedly refers to the 1987 Note as a continuing obligation and nowhere expressly provides that SNFSB is giving up its right, in the event of a breach of the Settlement Agreement, to proceed against the Inn Partnership on the 1987 Note. Because this matter involves a federally insured bank, the D'Oench Duhme doctrine and U.S.C. § 1823 preclude any secret or implied "agreement which tends to diminish or defeat the interest of the [FDIC]." To be legally enforceable, all understandings between defendants and SNFSB (a federally insured bank) needed to be in writing, approved by the board of directors of the bank (with the approval documented in the minutes of the board), and maintained as part of the official records of the institution. With this in mind, I look only to the express terms of the Note, Settlement Agreement, and Stipulated Judgment in reaching my decision.
See D'Oench, Duhme Co. v. FDIC, 315 U.S. 447 (1942). "The D'Oench Duhme doctrine prohibits the maker of a promissory note from asserting a defense based on any agreement that would tend to deceive the FDIC." FDIC v. Betancourt, S.D.N.Y., 865 F. Supp. 1035, 1039-1040 (1994).
12 U.S.C. § 1823(e)(1). See also Beal Bank, SSB v. Lucks, et al., Del. Ch., C.A. No. 14896, Lamb, V.C. (Sept. 14, 2000) (providing a broader discussion of the D'Oench Duhme doctrine and its specific limitations on the parties involved).
2. Were defendants released from liability on the Note?
Defendants rely on three paragraphs of the Settlement Agreement in arguing that SNFSB gave up its right to sue the Inn Partnership for default under the 1987 Note and, instead, agreed to look only to the property subject to the Stipulated Judgment to satisfy its debt. These are paragraphs 6, 7, and 9. Principally at issue is paragraph 9. This provides as follows:
9. RELEASE OF LIABILITY. The parties hereto specifically release each other and their agents, respectively, from any liability arising or which may arise from any actions or representations (unless said actions or representations constitute fraud) occurring to the date of this agreement.
Defendants buttress their argument, stating, "The [Settlement Agreement], on its face, shows that the parties agreed and understood that the land itself sufficiently protected the bank" because the Inn Partnership promised to attempt to sell the Inn Property in paragraph 7 of the Settlement Agreement. Additionally, paragraph 6 of the Settlement Agreement assigned development rights on the Inn Property to the lender, evidencing "that the property itself was the sole contemplated recourse."
Paragraph 7 reads as follows: "Borrower shall in good faith pursue efforts to market and sell the real estate and personalty of the Borrower secured by the aforesaid Mortgage and the Financing Statements related thereto, and Borrower shall provide Lender with copies of any and all listing and sales contracts within thirty (30) days of Borrower's execution thereof."
Paragraph 6 reads as follows: "Borrower hereby assigns to Lender, or its assigns, as security for Borrower's covenants hereunder, all rights to develop any of Borrower's future condominium units."
Does the language of the limited release found in paragraph 9 bar Beal's claim under the 1987 Note? In interpreting the scope of a release, this Court seeks to ascertain "the intent of the parties as expressed in the terms of the instrument, keeping in mind the facts and circumstances surrounding the release."
Fischer v. Fischer, et al., Del. Ch., C.A. No. 16864, mem. op. at 10-11, Steele, V.C. (Nov. 4, 1999). Adams v. Jankouskas, Del. Supr., 452 A.2d 148 (1982).
The first problem encountered in reading the release as broadly as defendants' suggest is that other terms and provisions of the Settlement Agreement expressly acknowledge the continued vitality of the 1987 Note and the intention of the parties that it would remain in force (as modified by the Settlement Agreement). The 1987 Note is referred to in each of the first four recitals to the Settlement Agreement, including a reference to the fact that "Borrower is now indebted . . . with interest accruing . . . in accordance with the terms of the Note." Paragraph 1 of the Settlement Agreement defines a "default" thereunder to include "an act of default under the terms of the Note . . ., except as the payment terms may be modified herein." Paragraph 8 reflects the bank's agreement to refrain from proceeding against any of the individual obligors "under the Note" so long as "Borrower is in compliance with the terms of this Agreement."
These multiple references to the 1987 Note are wholly inconsistent with a finding that the language of release in paragraph 9 was intended to bar the bank from suing the Inn Partnership on the Note in the event of a default under the new payment schedule found in the Settlement Agreement. Rather, these references show that the 1987 Note would, so modified, continue to exist as a separate source of the partnership's obligation to the bank, indeed, the primary source of that liability.
Thus, I am unable to construe the release language found in paragraph 9 so broadly as to bar the bank from suing under the 1987 Note after the partnership breached its payment obligations, as modified by the Settlement Agreement. This same result is reached by construing the language of the release to refer only to breaches and defaults occurring before the date of the Settlement Agreement, a natural reading of the language in question.
"Ordinarily, a release covers only matters expressed in the contract that are in existence at the time of the release. Demands arising after the signing of the release are not as a rule discharged unless `expressly embraced therein or falling within the fair import of the terms employed.'" Fischer v. Fischer, mem. op. at 11 (citing 76 C.J.S. Releases § 53) (citation omitted).
No different result is suggested by the fact that SNFSB required the partnership to promise to make a good faith effort to sell the Inn Property or to assign to the bank the condominium development rights. Certainly, SNFSB wanted to recoup its money and looked to the Inn Property as the likely source of repayment. But this does not mean that SNFSB did not preserve its right, in the event of a default under the Settlement Agreement, to proceed against the partnership and (to the extent possible) against the individual obligors on the 1987 Note. As the Delaware Supreme Court has said, "No implication arises from the mere taking of collateral security that a creditor will look only or primarily to the security for repayment of the loan." No greater implication can arise from the terms of the Settlement Agreement looking toward a sale of the mortgaged premises.
Berg v. Liberty Fed. Sav. Loan Ass'n, 428 A.2d at 349.
The argument that the release language bars a claim on the 1987 Note also finds no support in the extrinsic evidence of the parties' negotiations. The initial outline of a proposal from defendants' counsel does not mention a release. Instead, the language was introduced into an early draft by counsel for the bank, who testified that he inserted it to deal with possible lender liability claims arising out of SNFSB's failure to provide permanent financing for the project. He did not use a broad form of language and testified that he did not intend to release claims on the 1987 Note for a deficiency.
3. Did SNFSB waive its right to sue on the 1987 Note?
A party may waive its right to seek a claim for deficiency; however, "[t]o constitute a waiver the right alleged to have been waived must have been known to the person to be charged therewith and his waiver thereof must have been intentional. Such intention will not be implied from slight circumstances."
See supra note 5.
Vechery v. Hartford Accident Indemnity Ins. Co., Del. Supr., 121 A.2d 681, 685 (1956).
Defendants argue that SNFSB waived its right in paragraph 15 of the Settlement Agreement to seek a claim for deficiency against the borrowers. Paragraph 15 states, as follows:
15. Lender hereby waives any breach resulting from Borrower's failure to make such payments prior to December 31, 1995 (provided that Borrower shall otherwise be in compliance with the terms of the Settlement Agreement).
Defendants argue that the agreement specifically waived " any breach, past and future, provided other obligations under this new agreement were met."
The problem encountered by this argument is that Beal's suit arises out of the fact that the partnership failed to make the payment required to be made on, not prior to, December 31, 1995. That is the payment described in paragraph 3 of the Settlement Agreement, as follows:
PAST DUE PAYMENTS. Payments which Borrower has failed to make prior to March 1, 1991, and any interest accrued thereon, shall be due and payable on December 31, 1995 and shall not accrue interest thereon from the date hereof through December 31, 1995.
When the partnership failed to make this payment, a default arose under the terms of the 1987 Note (as modified by the Settlement Agreement) and Beal had the right to sue. Nothing in paragraph 15 can be construed as having waived that right.
On the contrary, the record as a whole shows that the purpose of paragraph 15 was to ensure that the Inn Partnership would have the full benefit of the period up until December 31, 1995 to pay off the debt, even if it failed to meet the revised payment schedule. During that time, so long as the partnership abided by the terms of the Settlement Agreement (with the exception of the payment terms), the bank would not execute on the Stipulated Judgment and would not pursue its other remedies under the Note. It is clear, however, that this grace period expired on December 31, 1995, when the partnership failed to make the payment required by paragraph 3 of the Settlement Agreement. Beal did not agree, in paragraph 15, to waive any default of that obligation.
B. Can Beal sustain a claim against Stephens as general partner?
Relying on Court of Chancery Rule 19, Stephens argues that the claim against him under the 1987 Note and the Settlement Agreement should be dismissed due to Beal's failure to join Lucks, the other general partner, as a party defendant on the claim. This argument is premised on the observation that, during the relevant time, the statutory liability of general partners of Delaware limited partnerships for debts of the partnership was defined as "joint," rather than "joint and several." Stephens then cites an 1887 case dealing with joint obligors on an oral contract, for the proposition that "[a]ll general partners must be joined as necessary parties to an action when a Plaintiff seeks to hold such partners personally liable for the partnership's debts."
Defendants correctly note that until 1999, Delaware partnership law provided that "[a]ll partners are liable: . . . (2) Jointly for all other debts and obligations of the partnership." 6 Del. C. § 1515(a) (pre-1999). After the 1999 amendments, the statute reads, "[A]ll partners are liable jointly and severally for all obligations of the partnership unless otherwise agreed by the claimant or provided by law." 6 Del. C. § 15-306(a).
Reybold v. Parker, Del. Ct. of Err. and App., 32 A. 981 (1887).
I first addressed this issue during summary judgment proceedings. At the time, it appeared of record that any claim against Lucks, in his capacity as a general partner, on the 1987 Note and the Settlement Agreement had been discharged in his personal bankruptcy. For that reason, I denied the motion because the common law rule on which Stephens relied recognized, as an exception, that where the debt of one joint obligor had been discharged in bankruptcy, the creditor was entitled to proceed against the remaining joint obligor(s).
Scott v. Kay, Del. Supr., 227 A.2d 572, 574 (1967). Indeed, the exception to the common law rule for a discharge in bankruptcy is recognized in the very 1887 case cited by Stephens. Reybold v. Parker, 32 A. at 986.
At trial, Lucks testified, during his examination by defendants' counsel, that the 1987 "loan for the Ian at Canal Square was not included in my bankruptcy." Because this issue was not raised by the defendants in the pretrial order, Beal was not prepared to cross-examine Lucks on this issue. When defendants raised the issue of dismissal in post-trial briefing, Beal claimed surprise and objected to any further consideration of it. Beal later submitted documents in connection with a deposition taken after trial showing that a claim was made in Lucks's personal bankruptcy relating to the 1987 Note.
I agree with Beal that this issue was not properly a matter for trial, since it had been resolved on summary judgment and was not raised in the pretrial order. Nevertheless, even if Beal's claim on the 1987 Note and the Settlement Agreement against Lucks was not discharged in bankruptcy, I would still not dismiss the action unless I first determined pursuant to Rule 19(b) that "in equity and good conscience the action should [not] proceed among the parties before (the court]."
The oddity of this case is that Lucks was a party defendant — but only on claims arising out of (i) the 1985 Note and (ii) the 1987 Guaranty Agreement. Beal asserted this latter claim because it understood, correctly, that Lucks's personal bankruptcy did not result in a discharge of the claim on the guaranty. From this I infer that Beal certainly would have joined Lucks as a party defendant on the claim under the 1987 Note and the Settlement Agreement had it thought it possible to do so. Moreover, if Stephens is correct in asserting that Lucks's bankruptcy did not result in a discharge of that claim, it must be true that Stephens could have cross-claimed against Lucks pursuant to Rule 13(g) or, if necessary, have brought a third-party claim against him pursuant to Rule 14(a). In other words, self-help was available to Stephens under the rules to ensure that his co-obligor was a party to the claim against him.
Thus, even assuming that the claim against Lucks was not discharged in his bankruptcy, the appropriate remedy under Rule 19 would have been to join him as a party to the claim against Stephens. There would have been no basis on which to find that Lucks was an indispensable party under Rule 19(b) because he plainly was not a person who "cannot be made a party."
Stephens also argues, under Rule 19, that Beal's failure to sue the limited partners is grounds for dismissal. This argument is frivolous. Under Delaware limited partnership law, "[a] limited partner is not liable for the obligations of a limited partnership unless he or she is also a general partner or, in addition to the exercise of the rights and powers of a limited partner, he or she participates in the control of the business." Nothing in the record supports the inference that any of the limited partners acted as general partner or participated in the control of the Inn Partnership.
Defendant Stephens argues that be should only be liable for his pro rata share of the limited partnership interest, i.e., 23.75 percent. This argument requires little discussion, as it badly misconceives the concept of joint liability. As a rule, partners who are jointly or jointly and severally liable on a debt of the partnership are each liable for the whole amount.
For these reasons, I conclude that Beal may sue the Inn Partnership and, in turn, Ronald Stephens, as general partner, to recover a deficiency on the 1987 Note.
C. Is plaintiff's claim against defendants time-barred?
I turn next to defendants' affirmative defense that plaintiffs claim is time-barred. Plaintiff responds that it brought suit within the six-year limitation period under 10 Del. C. § 8109 for a promissory note or "an acknowledgment under the hand of the party of a subsisting demand." Alternatively, Beal argues that its claim is within the six-year limitation period applicable under the Financial Institutions Reform, Recovery, and Enforcement Act ("FIRREA") or the three-year limitation period applicable to contracts under 10 Del. C. § 8106. Finally, Beal argues that the 1987 Note and the Settlement Agreement were under seal and, thus, the applicable 20-year statute of limitation should apply. Because I conclude both that the provisions of § 8109 govern the claim and that the claim was brought within the six-year period prescribed in that paragraph, I find it unnecessary to analyze the alternative bases urged by Beal.
The question of whether Beal's claim against defendants is time-barred centers on Beal's fifth claim for relief, asserted in its Second Amended Complaint filed on March 6, 1998. The Inn partnership defaulted on the 1987 Note in 1990, and SNFSB could have sued on the 1987 Note at that time. Instead, SNFSB entered into the Settlement Agreement with the Inn Partnership on June 13, 1991, modifying the payment terms of the note. The Settlement Agreement plainly acknowledged the existing indebtedness of the partnership under the 1987 Note, reciting that "Borrower is now indebted as of the 1st day of March, 1991, to Lender in the amount of [$1,764,864.19]." According to the agreement, the Inn Partnership would pay quarterly installments for a five-year period, with a balloon payment of the remaining amounts due on December 31, 1995.
Beal filed a Fourth Amended Complaint on September 15, 2000, which inter alia, expanded the fifth claim for relief to include a claim under the 1991 Settlement Agreement. For limitations purposes, of course, the expanded elements of that claim relate back to the filing of the Second Amended Complaint, which included factual allegations about the Settlement Agreement but omitted to allege a claim directly under it. Ct. Ch. R. 15(c)(2).
The statutory phrase "subsisting demand" is a now archaic reference to an existing debt. See Bryan A. Gardner, A Dictionary of Modern Legal Usage, at p. 847 (2d ed., 1995) (the verb "subsist" "was formerly used regularly in the sense `to exist'"); Black's Law Dictionary (5th ed.) ("demand" defined to mean "a debt or amount due").
Under settled Delaware law, "[r]enewal of a bill or note, or extension of the time of payment postpones, between the parties, the right of action and the commencement of the running of limitation until the expiration of the period for which the extension is granted." The Lender waived breaches resulting from failure to make payments under paragraph 2 until December 31, 1995, effectively extending repayment under the 1987 Note until that date. I conclude that, as a result of the Settlement Agreements Beal's right to sue to recover the amount due on the 1987 Note did not arise until after the extension period expired. Therefore, Beal's claim under the Settlement Agreement accrued on December 31, 1995.
Cooling v. Springer, Del. Super., 30 A.2d 466, 471 (1943).
As discussed elsewhere in this opinion, paragraph 15 of the Settlement Agreement provides: "Lender hereby waives any breach resulting from Borrower's failure to make such payments prior to December 31, 1995 (provided that Borrower shall otherwise be in compliance with the terms of this Settlement Agreement)." The only evidence at trial of a material breach of the Settlement Agreement was the Inn Partnership's failure to make payments under paragraph 2 thereof after mid-1994 and its failure to make the balloon payment under paragraph 3 on December 31, 1995. Thus, in light of the waiver provisions of paragraph 15, the right to sue for the outstanding balance did not arise until December 31, 1995.
10 Del. C. § 8109 states, "When a cause of action arise from a promissory note . . . or an acknowledgment under the hand of the party of a subsisting demand, the action may be commenced at any time within 6 years from the accruing of such cause of action." Beal filed the Second Amended Complaint, suing the Inn Partnership and Stephens on the 1987 Note, on March 6, 1998, well within the six-year limitation period established under the statute.
D. Has plaintiff established a deficiency and in what amount?
Plaintiff has clearly established that it has a deficiency claim against the defendants because the sale of the Inn Property did not result in sufficient proceeds to satisfy all amounts due under the 1987 Note. I turn to the calculation of the amount owed.
According to Beal Bank's records, at the time that the Inn Partnership's loan was transferred from BEI, Inc. to Beal, the amount owed was $1,338,111.11. The records now available to the bank do not explain this calculation, but the result is lower than the parties are otherwise able to derive from known information. This is true in two respects. First, it is some $26,000 lower than can be explained by subtracting all payments known to have been made by the Inn Partnership under the Settlement Agreement ($400,000) from the starting balance as of March 1, 1991 ($1,764,864.19). Second, it does not appear to reflect any interest accrual on either the principal ($1,375,000) or the accumulated interest ($389,864.19) on the 1987 Note as of the start of the Settlement Agreement. To say that differently, it appears from the bank's records that Beal's predecessors-in-interest applied 100 percent of the payments made by the Inn Partnership under the Settlement Agreement to reduce the outstanding balance due on the Note.
Defendants challenge this figure, arguing that because plaintiff was unable to account for discrepancies in bookkeeping, defendants should be deemed to owe nothing. I disagree with defendants' reasoning. First, I note that plaintiff laid a proper foundation for the admission of this evidence. Second, as to accuracy of the amounts due, I note that a stipulation of judgment was entered against the Inn Partnership in the amount $1,764,864.19. Plaintiff does not dispute that $400,000 was paid under the Settlement Agreement before Beal took possession of the loan. Defendants argue that this means that $1,364,864.19 should be the starting principal in plaintiff's records, not the amount actually reflected in Beal's records (an amount $26,753.08 below the Inn Partnership's records). Simply because there is a discrepancy in the amounts reflected in the bookkeeping, I will not find plaintiff has failed to carry its burden in proving that some amount is owed. Therefore, I will not follow defendants' reasoning to the illogical conclusion that nothing is owed on the debt. However, I will not use the Inn Partnership's starting balance when Beal's own records reflect a lower starting balance of $1,338,111.11.
At issue is whether Beal is entitled to begin to accrue interest on the 1987 Note from the time the Inn Partnership defaulted under the Settlement Agreement in 1994 or, instead, whether I should disallow any interest accrual until December 31, 1995. The defendants point to paragraph 3 of the Settlement Agreement, which states, "Payments which Borrower has failed to make prior to March 1, 1991, and any interest accrued thereon, shall be due and payable on December 31, 1995 and shall not accrue interest thereon from the date hereof through December 31, 1995." Therefore, they argue, there can be no interest accrued on the $1,338,111.11 before December 31, 1995. This argument finds farther support in paragraph 15 of the Settlement Agreement, which states, "Lender hereby waives any breach resulting from Borrower's failure to make such payments prior to December 31, 1995. . . ."
Beal relies on language in the recitals to the Settlement Agreement that "Borrower is now indebted as of the 1st day of March, 1991, to Lender in the amount [$1,764,864.19] with interest accruing thereafter in accordance with the terms of the Note" (emphasis added). Beal's witness, Gregory Williams, counsel for SNFSB, testified that SNFSB intended that interest would accrue, "but the repayment of that interest was being changed under the Settlement Agreement. . . . [I]nstead of regular monthly payments of interest and principal, payments of [principal and interest] were to be made at certain times during the year to more accurately reflect the cash flow of the Inn." Moreover, Beal showed that SNFSB's 1992 claim in the Luckses' bankruptcy was for $471,094.23 in interest on the 1987 Note, an increase from the $383,052.37 claimed as interest on March 1, 1991. Because the Luckses did not oppose this claim, Beal relies on this as evidence that the parties believed that interest continued to accrue under the 1991 Settlement Agreement.
I am unable to agree with plaintiff's argument. The recital relied upon by Beal Bank can be understood to contradict paragraph 3 of the Settlement Agreement. It is also inconsistent with the evidence of how SNFSB and its successors-in-interest accounted for the payments made by the Inn Partnership pursuant to the Settlement Agreement. "[R]ecitals are not a necessary part of a contract and can only be used to explain some apparent doubt with respect to the intended meaning of the operation or granting part of the instrument. If the recitals are inconsistent with the operative or granting part, the latter controls." I find that the recital is inconsistent with the language of the contract providing for an abatement of interest until December 31, 1995 as interpreted, in practice, by Beal's predecessors; therefore, I will not rely on it.
New Castle County v. Crescenzo, Del. Ch., C.A. No. 7082, mem. op. at 7, Hartnett, V.C. (Feb. 11, 1985) (citation omitted).
For these reasons, Beal is entitled to the starting principal of $1,338,111.11, charging no interest through December 31, 1995. Applying these conditions, the parties will be able to arrive at the proper amount due under the Settlement Agreement.
IV. CONCLUSION
For the reasons stated in this opinion, I order judgment in favor of plaintiff Beal Bank for the amount of the deficiency, to be collected against the Inn Partnership, and then against Ronald Stephens as general partner. Counsel for Beal Bank shall submit an order, on notice, within 7 days.