Opinion
No. 01-08-00254-CV
Opinion issued July 16, 2009.
On Appeal from the 11th District Court, Harris County, Texas, Trial Court Cause No. 2007-70095.
Byron C. Keeling, Keeling Downes, P.C., Houston, TX.
Ruth Brett Downes, Keeling Downes, P.C., Houston, TX.
David E. Harrell Jr., Locke, Lord, Bissell Liddell, L.L.P., Houston, TX.
David W. Holman, The Holman Law Firm, P.C., Houston, TX.
Christopher Benjamin Dove, Locke Lord Bissell Liddell, LLP, Houston, TX.
Lawrence C. Kulig, Holland Knight, LLP, Boston, MA.
Library Service, Lexis Nexis, Miamisburg, OH.
Panel consists of Justices JENNINGS, KEYES, and HIGLEY.
MEMORANDUM OPINION
Appellants, Cricket Hollow Partners, LP ("CHP") and Cricket Hollow Development, Inc. ("CHD"), challenge the trial court's rendition of summary judgment in favor of appellee, MMA Cricket Hollow, LLC ("MMA"), in CHD's suit against MMA seeking a declaratory judgment that MMA, pursuant to its Partnership Agreement with CHD, must pay "adequate consideration" before claiming the benefit of certain additional tax credits issued to CHP. CHD brings four issues for our review. In its first two issues, CHD contends that the trial court erred in holding that the Partnership Agreement encompasses "unforeseeable" additional tax credits that were not contemplated by the parties and in adopting "an unreasonable interpretation" of the Partnership Agreement, which results in a windfall to MMA and a forfeiture of CHP property. In its third issue, CHD contends that it "presented several reasonable interpretations" of the Partnership Agreement, which reveal "an ambiguity that precluded summary judgment." In its fourth issue, CHD contends that the trial court erred in not striking certain portions of the affidavit of Eric Bonney, MMA's vice-president, who purported to testify about the parties' intentions in negotiating the Partnership Agreement.
Although CHD and CHP are both appellants, for convenience, we will primarily refer to CHD as the appellant. As is explained further in the opinion, CHP is the name of the limited partnership entered into by CHD and MMA, and, in this case, CHD and MMA are disputing the proper interpretation of the Partnership Agreement.
We affirm.
Factual and Procedural Background
On September 30, 2004, CHD and MMA entered into a Second Amended and Restated Agreement of Limited Partnership (the "Partnership Agreement"), creating CHP, which owns the Cricket Hollow Apartments in Willis, Texas. CHD, the developer of the apartments, is the general partner of CHP, and MMA is the sole investor limited partner of CHP. Pursuant to the Partnership Agreement, MMA made a capital contribution to CHP in the amount of $7,317,000 in exchange for federal low income housing tax credits made available to the Cricket Hollow Apartments. Prior to entering into the Partnership Agreement, the estimated amount of any such tax credits "potentially available . . . over a ten year commitment period," based upon a 2004 Housing Tax Credit Commitment Notice issued by the Texas Department of Housing and Community Affairs ("TDHCA"), was $8,711,100. In the Partnership Agreement, the parties projected that MMA, which owned a 99.99% interest in CHP, would receive 99.99% of these tax credits, or $8,710,230.
This would make MMA's capital contribution equal to approximately $.84 for each $1.00 of the tax credits MMA was entitled to receive.
In its original petition, CHD alleged that, in response to the devastation caused by Hurricanes Katrina and Rita in 2005, the TDHCA "decided to issue additional tax credits for low income housing complexes to compensate for unforseen additional costs." Thus, in November 2006, the TDHCA advised CHP that the Cricket Hollow Apartments qualified for an additional $82,466 in federal tax credits per year for a ten year period beginning in 2007. The total amount of these additional tax credits is $824,660, an amount "above and beyond" the credits previously allocated by the TDHCA to the Cricket Hollow Apartments. Noting that the "market price for federal tax credits [had] increased substantially" since the hurricanes, CHD sent correspondence to MMA to discuss "the additional federal tax credits." MMA, after initially offering to purchase the additional tax credits at 2004 market prices, subsequently took the position that it, as the sole investor limited partner, could claim the additional tax credits "regardless [of] whether or not it actually [paid] any compensation or additional capital contribution to [CHP]."
As discussed in more depth, MMA's position in this case is that it is required to pay for the additional tax credits at the 2004 market rate up to $100,000, at which its additional capital contribution is capped by the Partnership Agreement.
In seeking declaratory relief, CHD, in its petition, asserted that the Partnership Agreement provided that CHD may require MMA to purchase up to $100,000 of additional tax credits at a price of $.84 for each $1.00 of credits, but the Partnership Agreement is "silent about and [does] not contemplate a situation" in which CHP could receive more than $100,000 in additional tax credits. CHD further asserted that the $.84 price specified in the Partnership Agreement reflects the market conditions that existed in 2004 and, thus, does not accurately reflect the tax credits' current market value. CHD concluded that any interpretation of the Partnership Agreement that would enable MMA to claim the $824,000 in additional tax credits, without paying any additional consideration or a price consistent with the current market rate, represents "a failure in consideration." Thus, CHD sought a declaration that MMA could not claim the benefit of the additional tax credits "without first paying adequate consideration."
MMA filed a general denial, and then, shortly thereafter, a summary judgment motion. In its summary judgment motion, MMA asserted that, under the unambiguous terms of the Partnership Agreement, MMA, as the sole investor limited partner, is required to increase its capital contribution to CHP by $100,000 and, in return, MMA is to be allocated 99.99% of the additional tax credits awarded to CHP. In support of this assertion, MMA relied primarily on section 5.2(E) of the Partnership Agreement, which provides, Federal Upward Basis Adjuster. If at any time and from time to time the Accountants shall determine or there shall be a Final Determination that the Adjusted Aggregate Federal Credit Amount properly allocable to the Investor Limited Partner during the Credit Period is greater than the Projected Aggregate Federal Credit Amount, then the Capital Contribution of the Investor Limited Partner shall be increased in the aggregate by the "Federal Increase Factor" (as hereinafter defined) for each $1.00 that the Adjusted Aggregate Federal Credit Amount properly allocable to the Investor Limited Partner during the Credit Period is greater than the Projected Aggregate Federal Credit Amount. The "Federal Increase Factor" shall be an amount equal to $0.84. In no event shall any increase in the Investor Limited Partner's Capital Contribution pursuant to this Section 5.2E exceed $100,000.
(underlined emphasis in original, italics added). MMA also relied on the definitions of the capitalized terms in section 5.2(E). Three of the terms relevant to this matter are defined in Article I of the Partnership Agreement as follows:
" Adjusted Aggregate Federal Credit Amount " means the product of (i) 99.99% and (ii) the aggregate amount of the Federal Tax Credits that is determined by the Accountants, at Cost Certification, available to the Property (and is reflected in the final IRS Form(s) 8609 for the Property) for the entire Credit Period, as such amount may be increased or decreased as a result of a subsequent determination by the Accountants, a Final Determination or a Recapture Event.
"` Cost Certification ' means the submission to, and receipt by, the Credit Agency [TDHCA] of a certified audit by the Accountants of the Partnership's development and related costs for purposes of establishing the amount of Federal Tax Credits available to the Project [Property]."
. . . .
" Credit Period " means the period described in Section 42 of the [Internal Revenue] Code [of 1986].
At a minimum, the Credit Period for the property goes through 2016.
. . . .
" Projected Aggregate Federal Credit Amount " means $8,710,230 which is the product of (i) 99.99% and (ii) the aggregate amount of Federal Tax Credits available to the Property during the Credit Period, as reflected in the Investment Assumptions.
MMA explained that the Adjusted Aggregate Federal Credit Amount, by its plain terms, is the amount of Federal Tax Credits allocable to MMA by CHP over the Credit Period, and that the term Adjusted Aggregate Federal Credit Amount expressly contemplates that this amount may increase or decrease as a result of a subsequent determination by the Accountants or a Final Determination. MMA also explained that the Projected Aggregate Federal Credit Amount is the total amount of Federal Tax Credits that was initially projected to be allocated to MMA by CHP over the Credit Period, which was derived from the original award of tax credits. MMA conceded that the Projected Aggregate Federal Credit Amount was 99.99% of $8,711,100, or $8,710,230, but MMA contended that the subsequent, additional award of tax credits caused the Adjusted Federal Credit Amount to exceed the projected amount by $824,575. MMA contended that application of section 5.2(E) entitled it to receive the additional tax credits for its additional capital contribution capped at $100,000.
MMA agreed that, but for this contribution cap, it would have been required to increase its capital contribution to CHP by $692,643.
MMA argued in its summary judgment motion that even if the parties "did not reasonably expect that [CHP] would be awarded" the additional tax credits, their subjective belief does not give rise to a latent ambiguity because section 5.2(E) plainly applies to the contingency of the award of additional tax credits. Finally, MMA argued that any claim by CHD that the parties were operating under a "mutual mistake" at the time they entered into the Partnership Agreement fails as a matter of law because the doctrine of mutual mistake is only implicated if the purported error relates to a fact in existence at the time of the making of a contract and the alleged mistake in the instant case relates to "a mere prediction that TDHCA would not award [CHP] additional Federal Tax Credits."
In its response to MMA's summary judgment motion, CHD asserted that "the parties could not have contracted with respect to additional tax credits that they had no idea could ever exist, resulting from an historic series of natural disasters they could not have foreseen would occur." CHD also asserted that the State of Texas had "authorized and allocated the 2007 tax credits for the express purpose of assisting [CHP] and other low-income housing developments in Texas coping with increased costs as a result of the devastation of the 2005 hurricane season" and that MMA, in pursing its requested windfall, sought to frustrate the governmental policy in issuing the 2007 tax credits.
CHD asserted that the Partnership Agreement is based upon specific tax credits allocated in 2004, section 5.2 does not express an intent to govern "future unforeseeable allocations" of tax credits, MMA itself had contradicted its own construction of the Partnership Agreement by previously offering to pay for all of the 2007 tax credits, and MMA's interpretation of section 5.2 is unreasonable and results in a forfeiture. Alternatively, CHD argued that the Partnership Agreement is ambiguous and that extrinsic evidence raises a fact issue as to whether section 5.2 is merely surplusage. Finally, CHD sought to strike portions of the affidavit of Eric Bonney, MMA's vice-presidnet, asserting that he lacked personal knowledge of the negotiations between CHD and MMA regarding the Partnership Agreement.
In support of this assertion, CHD cites correspondence contained in the record sent from MMA to CHD after CHD had advised MMA of the availability of the additional tax credits. In this correspondence, an MMA representative responds to the notification of the additional tax credits by stating that MMA has "capacity in the LP fund [to purchase] all the additional credits for [the Property]" and MMA proposes to pay for the credits based upon the price specified in the Partnership Agreement. In subsequent correspondence, MMA repeats its offer to buy all of the additional tax credits at the 2004 price on March 6, 2007, although it states that it believes "that the credits are already going to flow to us."
In support of its response, CHD attached the affidavit of Jeff Gannon, a person experienced in applying for low-income housing tax credits in Texas, who testified,
After the TDHCA has approved an application, the TDHCA sends the developer a "Housing Tax Credit Commitment Notice," which states the amount of tax credits that the TDHCA has allocated to the development. The developer then typically uses the TDHCA commitment notice to obtain funding for the planned project. Because the developer does not receive all the tax credits immediately . . . the developer sells the rights to the future credits in exchange for equity contributions paid during the project's construction.
To receive the tax credits and other benefits from an LIHTC [the Federal Low-Income Housing Tax Credit program] housing project, the investor must purchase an ownership interest in the low-income housing project that is entitled to the tax credits. In the limited partnership context, as here, the limited partner "buys" the tax credits for a fixed price. Then, in exchange for its limited partnership interest, the limited partner makes capital contributions to the project during construction intervals at the agreed price. The limited partner's ownership interest entitles it to claim the future tax credits and other benefits in proportion to the limited partnership's percentage of ownership.
Equity investors or syndicates like MMA typically purchase a 99.99% limited partnership interest. . . . If a low-income housing project goes as planned, then the investor will receive its desired "internal rate of return" — the full tax credits at a dollar amount exceeding the amount of the investor's discounted monetary investment, as well as the depreciation and operating loss deductions that flow from the housing project.
. . . .
The 2007 tax credits . . . do not have the normal risks associated with LIHTC tax credits, because they relate to a completed and operational housing development. . . . The absence of initial construction risks, and the immediate availability of the benefits of the 2007 tax credits, vastly increase the value of the 2007 tax credits.
. . . .
Based on my knowledge and experience, prior to the TDHCA's allocation of additional tax credits in 2007, the TDHCA had never issued additional tax credits to compensate developers for increased costs of construction. Also, based on my knowledge and experience, there was no mechanism in 2004 or 2005 for developers to approach the TDHCA for additional tax credits due to increased costs, and there was no precedent for the TDHCA to award additional tax credits due to increased construction costs. Applications for federal tax credits in a 9% deal in Texas are governed by the TDHCA's Qualified Allocation Plan (QAP). The QAP sets out in detail the procedures and requirements for applying for and receiving federal housing tax credits. The QAP contains no provision for approaching the TDHCA, after a Commitment Notice has been issued, to ask for more tax credits because a development is more expensive than anticipated. Not only is a request for increased tax credits due to increased development costs not procedurally authorized under the QAP, but it would make no sense in the context of a 9% deal.
Gannon subsequently explained that this type of deal is described in the industry as a "9% deal," and he differentiated a "9% deal" from a "bond-financed deal." Gannon explained that, in a 9% deal, "the developer receives a `binding commitment' at the outset of the project in which the TDHCA promises that the developer will receive a certain amount of tax credits." In contrast, in a "bond-financed deal," the TDHCA sends the developer a notice "stating, among other things, that the applicant has satisfied the requirements for the allocation of housing tax credits." And, although this notice "provides an initial `determination' of the amount of housing credits that may be allocated and the applicant's eligibility to claim these tax credits," the TDHCA's rules "specifically permit a developer in a 4% bond-financed deal to apply . . . for an increased credit award. . . ." Gannon noted that "[t]here is no comparable provision with respect to a `9% deal.'"
CHD also attached the affidavit of Brian Cogburn, CHD's secretary, who testified,
CHD's application [for the tax credits] included the projected development costs for building the Cricket Hollow Apartments. Along with the application, CHD submitted documents for the formation of the Partnership. . . . After receiving and determining that Cricket Hollow was competitive application to receive a tax credit award, the THDCA underwrote the total projected construction cost, applied the then-applicable federal percentage of 8.34% and recommended that Cricket Hollow receive annual available tax credits in the amount of $8,711,110.
The TDHCA issued the 2004 . . . Commitment Notice to the Partnership. . . . Based on this Commitment Notice, CHD and MMA negotiated the terms under which MMA would purchase and serve as the limited partner of [CHP]. . . .
MMA originated and prepared all drafts of the [Partnership] Agreement. All negotiations, and the ultimate [Partnership] Agreement were specifically based upon on the TDHCA's 2004 Housing Tax Credit Commitment Notice authorizing tax credits of $8,711,100. Thus, at the time the parties entered into this [Partnership] Agreement, MMA and CHD knew exactly how many 2004 tax credits were available to finance Cricket Hollow's development. . . .
Neither MMA nor CHD could have conceivably entered into this Partnership Agreement with any intent to address or assign a value to the 2007 tax credits, because the 2007 tax credits were completely unforeseeable. The cost increases experienced by developers resulting from the 2005 hurricane season were huge. The TDHCA's subsequent voluntary allocation of additional tax credits to the Cricket Hollow Apartments as well as the State of Texas's entire 2004 and 2005 allocation pool that received an award, were unknown and unforeseeable.
. . . Based on my knowledge and experience, prior to the TDHCA's allocation of additional tax credits in 2007, the TDHCA had never issued additional tax credits to compensate developers for increased costs of construction, and has no history of, or procedure for, changing the amount of tax credits promised in a Commitment Notice. . . .
When the parties negotiated the Partnership Agreement, no one ever discussed the possibility that the TDHCA might make a new allocation of additional tax credits due to increased costs. . . . The idea that TDHCA might do such a thing was simply not within our contemplation. . . .
. . . .
I recall discussing Section 5.2 with MMA's representatives during the negotiations. We discussed the fact that in a . . . transaction like the Cricket Hollow Apartments, there would be no increase in tax credits after the binding commitment, which made Section 5.2(E) irrelevant. MMA's representatives acknowledged that this was the case, and that Section 5.2(E) was a non-issue, but insisted on having a number to plug into the blank in Section 5.2(E). Because Section 5.2(E) was a non-issue, the $100,000 number was not negotiated. The $100,000 number was not selected to correspond to any price nor was it discussed to fit an eventual scenario. This was a plug number that was plucked out of thin air and used to fill in a blank.
After filing its response, CHD filed a supplemental petition, in which it asserted that section 5.2(E) of the Partnership Agreement unambiguously applies only to adjustments to the TDHCA's allocation of 2004 tax credits. CHD alternatively asserted that section 5.2(E) is ambiguous or that, even if section 5.2(E) applies to the additional 2007 tax credits, CHD and MMA were "operating under a mutual mistake as to the effect of section 5.2(E)" and that section 5.2(E) should not be applied "contrary to the parties' intent." However, CHD did not request any additional relief in this supplemental petition. The trial court granted MMA's motion for summary judgment and dismissed CHD's claims.
Standard of Review
To prevail on a summary judgment motion, a movant has the burden of proving that it is entitled to judgment as a matter of law and that there is no genuine issue of material fact. Tex. R. Civ. P. 166a(c); Cathey v. Booth, 900 S.W.2d 339, 341 (Tex. 1995). When a defendant moves for summary judgment, it must either (1) disprove at least one essential element of the plaintiff's cause of action or (2) plead and conclusively establish each essential element of its affirmative defense, thereby defeating the plaintiff's cause of action. Cathey, 900 S.W.2d at 341; Yazdchi v. Bank One, Tex., N.A., 177 S.W.3d 399, 404 (Tex.App.-Houston [1st Dist.] 2005, pet. denied). When deciding whether there is a disputed, material fact issue precluding summary judgment, evidence favorable to the non-movant will be taken as true. Nixon v. Mr. Prop. Mgmt. Co., 690 S.W.2d 546, 548-49 (Tex. 1985). Every reasonable inference must be indulged in favor of the non-movant and any doubts must be resolved in its favor. Id. at 549.
Contract Interpretation
In its first two issues, CHD argues that the trial court erred in granting MMA's summary judgment motion because the Partnership Agreement does not encompass "unforeseeable" additional tax credits not contemplated by the parties and the trial court's interpretation of the Partnership Agreement results in a windfall to MMA and a forfeiture of CHP property. CHD argues that the Partnership Agreement, on its face, shows that the parties "contracted solely with respect to the 2004 Tax Credits" because the parties defined the term "Federal Tax Credits" to confirm their "intent to encompass only tax credits for which [CHP] was eligible at the time of contracting." CHD asserts that the calculations used in the Partnership Agreement "are predicated" on the amount of tax credits allocated to CHP in the 2004 Commitment Notice. Also, citing, among other things, Brian Cogburn's affidavit testimony, CHD asserts that the "surrounding circumstances" show that the parties "contracted solely with respect to the 2004 tax credits," and CHD emphasizes that MMA's own financial analysis prepared in connection with its investment in CHP is based on the 2004 tax credits. CHD further asserts that the express language of section 5.2(E) makes clear that the section only "comes into play" when there is a "determination or redetermination" of the aggregate amount of tax credits that were the basis of the parties' assumptions at the time that the parties entered into the Partnership Agreement. CHD notes that the 2007 tax credits were issued on the basis of a "new application, new project number, and new fee." CHD contends that the trial court, with its interpretation, has "assume[d] that the parties acted unreasonably and irrationally" in concluding that section 5.2(E) applied to "future unforeseeable tax credits regardless of the market value of those credits." Finally, CHD asserts that the trial court has "effect[ed] a forfeiture" of CHP's "valuable property" and allowed CHD to exploit language that was "essentially surplusage."
In support of this assertion, CHD specifically cites Cogburn's testimony that TDHCA's "subsequent voluntary allocation of additional tax credits . . . [was] unknown and unforeseeable," "there was no precedent for the TDHCA to award additional tax credits," "no one ever discussed the possibility that the TDHCA might make a new allocation of additional tax credits," the idea "was simply not within our contemplation," and "MMA's representatives acknowledged that . . . Section 5.2(E) was a non-issue." CHD also cites Gannon's testimony that a request for additional tax credits was not "procedurally authorized" and would "make no sense" in the type of transaction at issue.
CHD, in its brief, also makes a general reference to the doctrine of mutual mistake, but CHD's brief discussion of this doctrine does not comport with CHD's primary contention that the Partnership Agreement unambiguously does not apply to the 2007 tax credits or, alternatively, that there is at least a fact issue on this point. Although CHD has not provided this Court with a substantive discussion of the doctrine of mutual mistake and how it applies to the instant case, we generally note that the Texas Supreme Court has recognized that "an error in predicting a future fact known to be uncertain is not the kind of mistake which will relieve a party from a contract." City of Austin v. Cotten, 509 S.W.2d 554, 557 (Tex. 1974); Green v. Morris, 43 S.W.3d 604, 607 (Tex.App.-Waco 2001, no pet.) (stating that "many authorities, in dealing with mistake, draw a distinction between mistakes concerning `past or present facts' and those concerning factual occurrences in the future"). CHD has not cited any authority that demonstrates that the doctrine of mutual mistake has any applicability to the facts at hand.
Our primary concern in construing a written contract is to ascertain the true intent of the parties as expressed in the instrument. Seagull Energy EP, Inc. v. Eland Energy, Inc., 207 S.W.3d 342, 345 (Tex. 2006); Valence Operating Co. v. Dorsett, 164 S.W.3d 656, 662 (Tex. 2005); Edascio, L.L.C. v. NextiraOne L.L.C., 264 S.W.3d 786, 796 (Tex.App.-Houston [1st Dist.] 2008, pet. filed); Case Funding Network, L.P. v. Anglo-Dutch Petroleum Int'l, Inc., 264 S.W.3d 38, 51 (Tex.App.-Houston [1st Dist.] 2007, pet. denied); Motiva Enters., LLC v. McCrabb, 248 S.W.3d 211, 215 (Tex.App.-Houston [1st Dist.] 2007, pet. denied). Usually, the intent of the parties can be discerned from the instrument itself. ExxonMobil Corp. v. Valence Operating Co., 174 S.W.3d 303, 312 (Tex.App.-Houston [1st Dist.] 2005, pet. denied). If a written contract is worded in such a way that it can be given a definite or certain legal meaning, then the contract is not ambiguous. SAS Inst., Inc. v. Breitenfeld, 167 S.W.3d 840, 841 (Tex. 2005). When the parties have entered into an unambiguous contract, the courts will enforce the intention of the parties as written in the instrument. Sun Oil Co. v. Madeley, 626 S.W.2d 726, 731 (Tex. 1981).
When an issue regarding the construction of a contract is presented, we are required to take the wording of the instrument, consider the surrounding circumstances at the time of the contract's formation, and apply the rules of contract construction to ascertain its meaning. ExxonMobil Corp., 174 S.W.3d at 312; see also Enter. Leasing Co. of Houston v. Barrios, 156 S.W.3d 547, 549 (Tex. 2004) (stating that to determine whether contract is ambiguous, we look at agreement as whole in light of circumstances present when parties entered into contract). The consideration of the facts and circumstances surrounding the execution of a contract is solely to aid our determination of the contract's meaning. ExxonMobil Corp., 174 S.W.3d at 312.
Moreover, we must examine and consider the entire writing in an effort to harmonize and to give effect to all the provisions of the contract so that none will be rendered meaningless. Seagull Energy EP, Inc., 207 S.W.3d at 345. Contract terms will be given their plain, ordinary, and generally accepted meanings unless the contract itself shows them to be used in a technical or different sense. Valence Operating Co., 164 S.W.3d at 662. A contract is ambiguous only if its meaning is uncertain or if it is subject to two or more reasonable interpretations. Seagull Energy EP, Inc., 207 S.W.3d at 345; Edascio, L.L.C., 264 S.W.3d at 796-97. An ambiguity does not arise simply because the parties advance conflicting interpretations of the contract. Tex. Farm Bureau Mut. Ins. Co. v. Sturrock, 146 S.W.3d 123, 126 (Tex. 2004). We may not consider extrinsic evidence to contradict or to vary the meaning of unambiguous language in a written contract in order to create an ambiguity. See Fiess v. State Farm Lloyds, 202 S.W.3d 744, 747 (Tex. 2006).
We also note that when the parties have concluded a valid, integrated agreement, the parol evidence rule precludes enforcement of a prior or contemporaneous inconsistent agreement. Edascio, L.L.C. v. NextiraOne L.L.C., 264 S.W.3d 786, 796 (Tex.App.-Houston [1st Dist.] 2008, pet. filed); Ledig v. Duke Energy Corp., 193 S.W.3d 167, 178 (Tex.App.-Houston [1st Dist.] 2006, no pet.); Baroid Equip., Inc. v. Odeco Drilling, Inc., 184 S.W.3d 1, 13 (Tex.App.-Houston [1st Dist.] 2005, pet. denied). A written instrument presumes that all prior agreements relating to the transaction have been merged into it and will be enforced as written and cannot be added to, varied, or contradicted by parol testimony. Edascio, L.L.C., 264 S.W.3d at 796. When parol evidence is determined to be inadmissible, it has no legal effect and merely constitutes proof of facts that are immaterial and inoperative. Id. Parol evidence is only admissible to show the parties' true intentions if the writing is ambiguous. Id.
Finally, we note that we interpret contracts "from a utilitarian standpoint bearing in mind the particular business activity sought to be served" and "will avoid when possible and proper a construction which is unreasonable, inequitable, and oppressive." Frost Nat'l Bank v. LF Distribs., Ltd., 165 S.W.3d 310, 312 (Tex. 2005). A reasonable interpretation of a contract is preferable to one that is unreasonable. Westwind Exploration, Inc. v. Homestate Sav. Ass'n, 696 S.W.2d 378, 382 (Tex. 1985); see also Bituminous Cas. Corp. v. Maxey, 110 S.W.3d 203, 213 (Tex.App.-Houston [1st Dist.] 2003, pet. denied).
We first turn to the language used by the parties in the Partnership Agreement. Article V of the Partnership Agreement, entitled "Capital Contributions of Investor Limited Partner," sets forth MMA's capital contribution requirements to CHP. Because this Article is the only article in the Partnership Agreement that specifically addresses MMA's contribution requirements, and because the central dispute in this case concerns what amount, if any, MMA must pay for the additional tax credits, our analysis necessarily focuses on the provisions in this article and the associated definitions. First, section 5.1(A) of article V states that MMA, the sole investor limited partner, "shall contribute as its Capital Contribution the sum of $7,317,000," payable in eight installments. Section 5.1(A) then provides a detailed payment schedule for these installments. Section 5.2 of article V, entitled "Adjustment to Capital Contributions of Investor Limited Partner," expressly contemplates that MMA's capital contribution "shall be subject to adjustment in the manner provided" in that section. Section 5.2(E), entitled "Federal Upward Basis Adjuster," specifically governs any upward adjustment of MMA's capital contribution when the Adjusted Aggregate Federal Credit Amount properly allocable to MMA during the Credit Period exceeds the Projected Aggregate Federal Credit Amount. Section 5.2(E) provides: Federal Upward Basis Adjuster. If at any time and from time to time the Accountants shall determine or there shall be a Final Determination that the Adjusted Aggregate Federal Credit Amount properly allocable to the Investor Limited Partner during the Credit Period is greater than the Projected Aggregate Federal Credit Amount, then the Capital Contribution of the Investor Limited Partner shall be increased in the aggregate by the "Federal Increase Factor" (as hereinafter defined) for each $1.00 that the Adjusted Aggregate Federal Credit Amount properly allocable to the Investor Limited Partner during the Credit Period is greater than the Projected Aggregate Federal Credit Amount. The "Federal Increase Factor" shall be an amount equal to $0.84. In no event shall any increase in the Investor Limited Partner's Capital Contribution to this Section 5.2E exceed $100,000.
Section 5.2(A) through 5.2(D) address a number of specific contingencies that do not appear relevant. For example, section 5.2(A) details the treatment of the parties if the "Adjusted Federal Credit Amount properly allocable to the Investor Limited Partner during the Credit Period for all of the Buildings in the Project is or will be less than the Projected Aggregate Federal Credit Amount. . . ."
(underlined emphasis in original, italics added).
In sum, article V details MMA's capital contribution requirements and section 5.2(E), on its face, provides an upward adjuster for MMA's capital contribution in the event that the Adjusted Aggregate Federal Credit Amount properly allocable to MMA during the Credit Period exceeds the projected amount. Accordingly, the Partnership Agreement expressly contemplates that the adjusted aggregate amount of tax credits issued to CHP during the Credit Period could in fact exceed the projected amount of tax credits, or $8,710,230, as set forth in the Partnership Agreement. Section 5.2(E) does not include any limitations or restrictions in regard to the circumstances under which the adjusted aggregate amount of tax credits could exceed the projected amount. Simply put, if the "Adjusted Aggregate Federal Credit Amount" exceeds the "Projected Aggregate Federal Credit Amount," section 5.2(E) is triggered.
We next turn to the definition of the term "Adjusted Aggregate Federal Credit Amount" to determine if the award of the 2007 tax credits could cause the "Adjusted Aggregate Federal Credit Amount" to exceed the "Projected Aggregate Federal Credit Amount" and, thus, trigger section 5.2(E). The Partnership Agreement defines the term "Adjusted Aggregate Federal Credit Amount" to be the product of "(i) 99.99% and (ii) the aggregate amount of the Federal Tax Credits that is determined by the Accountants, at Cost Certification, available to the Property . . . for the entire Credit Period, as such amount may be increased or decreased as a result of a subsequent determination by the Accountants, a Final Determination or a Recapture Event." Under the plain terms of the Partnership Agreement, the adjusted aggregate amount of tax credits includes all of those made available to the property "for the entire Credit Period."
The Partnership Agreement does not provide a fixed number, or even a range of numbers, to limit the scope or extent of the adjusted aggregate amount of tax credits, nor is there any limitation in the Partnership Agreement as to the potential cause for or circumstances under which additional tax credits could be made available to the property. In sum, the Partnership Agreement does not contain any language restricting the type or amount of tax credits that could be included in the initial or any subsequent determinations of the "Adjusted Aggregate Federal Credit Amount." In fact, the Partnership Agreement expressly contemplates that the "Adjusted Aggregate Federal Credit Amount" could be "increased or decreased as a result of a subsequent determination."
We conclude that, under the plain language of the Partnership Agreement, the tax credits made available to the property in 2007 fall within the Adjusted Aggregate Federal Credit Amount, and, because this causes the Adjusted Aggregate Federal Credit Amount to exceed the projected amount, section 5.2(E) is triggered. We further conclude that, after applying the Federal Increase Factor of $.84, which was specified in section 5.2(E), to the adjusted aggregate amount of tax credits, including the 2007 tax credits, MMA would be required to increase its capital contribution to CHP by $692,643, but for the last sentence of section 5.2(E). However, the last sentence of section 5.2(E) unambiguously sets forth a contribution cap, limiting MMA's additional capital contribution, which is triggered by the inclusion of the 2007 tax credits into the adjusted aggregate amount of tax credits, to $100,000.
Here, the Partnership Agreement defines the term "Federal Tax Credits" to mean "the tax credits for which the Project is eligible under Section 42 of the Internal Revenue Code." However, as noted by MMA, the Agreement defines "Code" as "the Internal Revenue Code of 1986, as amended from time to time, and the Treasury Regulations promulgated thereunder at the time of reference thereto." Moreover, as noted above, under the Partnership Agreement, the "Adjusted Aggregate Federal Credit Amount" is subject to being "increased or decreased" for tax credits made available to the property during the Credit Period. Section 5.2(E) also states that it applies "[i]f at any time and from time to time" the adjusted aggregate amount of tax credits available to the property exceeded the projected amount. The fact that the parties defined the term "Code" in the present tense does not create any ambiguity as to whether the additional tax credits, which were awarded subsequent to the parties' entry into the Partnership Agreement pursuant to an amendment to the Code, fall within the Partnership Agreement. The Partnership Agreement unambiguously applies to these additional tax credits.
In regard to CHD's argument that we should consider, among other things, Gannon's and Cogburn's affidavits to aid our construction of an otherwise unambiguous contract, we agree, as noted above, that we must look at the Partnership Agreement as whole in light of surrounding circumstances. See Sun Oil Co., 626 S.W.2d at 731. Thus, we conclude that, as a general proposition, we may consider evidence of the surrounding circumstances at the time the parties' entered into the Partnership Agreement, including the affidavits of Gannon and Cogburn, to the extent they contained such evidence. However, even if we were to consider some portions of Gannon's and Cogburn's affidavits, the specific testimony of Cogburn and Gannon that CHD cites in support of its interpretation of the Partnership Agreement extends well beyond any evidence of the "surrounding circumstances." For example, CHD cites Cogburn's testimony that, in negotiating the Partnership Agreement, he specifically discussed section 5.2 with MMA's representatives and that they agreed that, because "there would be no increase in tax credits after the binding commitment," the parties acknowledged that section 5.2(E) was "irrelevant" and a "non-issue." According to Cogburn, MMA merely "plucked" a number out of thin air to insert into section 5.2(E). Using this testimony from Cogburn, CHD argues that the parties regarded section 5.2(E) as mere surplusage and that the parties did not intend for this clause to have any effect.
CHD, in arguing that such testimony merely constitutes evidence of surrounding circumstances, is effectively asking us to delete section 5.2(E) from the Partnership Agreement. None of the authorities cited by CHD that address the admission of evidence on surrounding circumstances go so far as to permit an interested party to offer testimony that a contractual term has no meaning. We further note that even though Cogburn attempted to characterize section 5.2(E) as completely irrelevant, he also acknowledged that MMA "insisted" on a specific cap in section 5.2(E). CHD has not cited any case suggesting that a provision of a contract that was indisputably included at the insistence of one of the parties could ever be considered surplusage or could be disregarded by a court on the basis of surrounding circumstances evidence.
We additionally note that CHD's argument goes against well-established precedent that courts should examine and consider the entire writing of an instrument in an effort to harmonize and give effect to all the provisions of the contract so that none will be rendered meaningless. See Valence Operating Co. v. Dorsett, 164 S.W.3d 656, 662 (Tex. 2005); Coker v. Coker, 650 S.W.2d 391, 393 (Tex. 1983).
CHD also cites Gannon's testimony that a request for increased tax credits due to increased development costs was "not procedurally authorized" and "would make no sense in the context of" a transaction like the one at issue here. Similarly, CHD cites Cogburn's testimony that, prior to the TDHCA's allocation of additional tax credits in 2007, "the TDHCA had never issued additional tax credits to compensate developers for increased costs of construction, and has no history of, or procedure for, changing the amount of tax credits promised in a Commitment Notice." Whether this type of testimony, which relates to the forseeability of additional tax credits, amounts to admissible surrounding circumstances evidence presents a closer call. Unlike Cogburn's testimony that the parties did not attach any meaning to section 5.2(E), CHD argues that this testimony should be characterized as pertaining to a circumstance that existed at the time the parties entered into the Partnership Agreement, i.e, industry knowledge as to the type of tax credits available in the context of the transaction. Although the testimony of Cogburn and Gannon would place significant and material limits and restrictions on the scope of section 5.2(E), by its plain terms, section 5.2(E), applies, without limitation or restriction, to tax credits made available to the property during the "credit period." Nothing in section 5.2(E), or in the associated definitions, suggests that section 5.2(E), or the entire Partnership Agreement, applies solely to the 2004 tax credits. In sum, none of the cases cited by CHD have gone so far as to allow a party to offer testimony, even when done so under the pretext of evidence of industry knowledge or surrounding circumstances, to either delete a contractual provision or place material limitations and restrictions on a provision that otherwise plainly applies.
Finally, we conclude that interpreting the Partnership Agreement and section 5.2(E) to allow MMA to obtain the benefit of the additional tax credits in exchange for an additional, but capped, capital contribution is not unreasonable and does not result in a forfeiture. Even Cogburn testified that MMA insisted upon including a cap on any potential additional contribution. Thus, even accepting as true Cogburn's testimony that the parties did not specifically foresee the possibility of additional tax credits being issued by the TDHCA to account for hurricanes Katrina and Rita, it is undisputed that MMA insisted on the cap provision and that the contingency described in section 5.2(E) has occurred — the adjusted aggregate amount of tax credits available to the property has exceeded the projected amount. In sum, we hold that the trial court did not err in granting MMA's summary judgment motion and dismissing CHD's claims.
Although we need not directly consider this issue, we note that, if CHD was successful in its contention that section 5.2(E) is surplusage, it would seem that MMA might actually be entitled to all of the 2007 tax credits for no additional consideration. This is because there are no other provisions in the Partnership Agreement addressing MMA's capital contribution and, because the 2007 tax credits were issued to CHP and not the parties individually, it would seem that they would have to pass under the Partnership Agreement. There is no support for CHD's contention that, under the Partnership Agreement, the parties were simply "free to negotiate" a new price in order for MMA to acquire the additional tax credits. There is also no support for CHD's contention that it would be permissible under the Partnership Agreement to market the tax credits to a third party without MMA's consent.
We overrule CHD's first and second issues.
Having held that the Partnership Agreement, and section 5.2(E), unambiguously applies to the 2007 tax credits, we need not consider CHD's third issue, in which it contends that it "presented several reasonable interpretations" of the Partnership Agreement that precluded summary judgment, or its fourth issue, in which it contends that the trial court erred in failing to strike portions of Bonney's affidavit.
Conclusion
We affirm the judgment of the trial court.