Opinion
Civil Action No. 01-609 SECTION "T"(1)
June 5, 2001
Before this Court is a Motion to Dismiss filed on behalf of the Defendants pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure. The Defendants argue that the Plaintiff has failed to state a claim upon which relief can be granted. This cause came for hearing on April 25, 2001, with oral argument. Having studied the arguments of the parties, the legal memoranda and exhibits, the record, and the applicable law, the Court is fully advised on the premises and ready to rule.
ORDER AND REASONS
I. BACKGROUND:
The Plaintiff, Kelly Investment, Inc. ("Kelly"), filed the above-captioned declaratory judgment actions in the Civil District Court for the Parish of Orleans, State of Louisiana, against the Defendants, continental Common Corp. ("Common"), continental Poydras Corp. ("Poydras"), continental Baronne Corp. ("Baronne"), transcontinental Realty Investors, Inc. ("TRI"), and Basic Capital Management, Inc. ("BCM"), on February 6, 2001. The Defendants timely removed the three actions to this Court on the basis of diversity jurisdiction, and the actions were later consolidated. In each of the three actions, Kelly seeks a declaratory judgement with respect to the rights of itself and the Defendants under a series of written instruments connected with the financing of the acquisition and rehabilitation of three office buildings located in New Orleans, Louisiana.
On February 27, 1998, Dynex Commercial, Inc. ("Dynex") entered into a Loan Commitment agreement whereby Dynex was to loan certain amounts to three single asset entities, Common, Poydras, and Baronne. The loans were to be secured by a first mortgage on the particular property owned by each of the three entities. Additionally, the loans were to be secured by guarantees provided by BCM and a predecessor to TRI. The Loan Commitment stated that the loan term would be three years initially, but said term would be extended for an additional fifteen years upon stabilization. Furthermore, the Loan Commitment stated that the initial maturity date of the loans would be April 1, 2001.
The Loan Commitment defined stabilization as follows: "The building has reached and maintained, for a period of three (3) consecutive months, based on executed leases and verified expenses, a Net Operating Income (NOD sufficient to maintain a debt service coverage (DSC) of 125% on the Loan Amount, based on the revised fixed interest rates."Plaintiff's Motion for Declaratory Judgment, Exhibit "A," ¶ 17.
In addition to the Loan Commitment, a Promissory Note and Mortgage were executed in favor of Dynex with respect to each piece of property. The Promissory Notes were in the amount of $16,000,000.00 and were secured by a Mortgage and Security Agreement encumbering the
property at issue. Each Promissory Note ("Note") provided for an initial maturity date of April 1, 2001, however the Notes further stated that:
Upon the earlier to occur of (i) the Initial Term Maturity Date or (ii) Stabilization (as such term is defined below), Borrower shall have the right to extend the Initial Term Maturity Date for fifteen (15) years from the date of such extension (the "Extended Maturity Date"), upon the following terms and conditions:
(a) Borrower shall notify the Lender (which notice shall be irrevocable) at least thirty (30) days prior to the Initial Term Maturity Date that it desires to extend the Initial Term Maturity Date. . . .Plaintiff's Motion for Declaratory Judgment, Exhibit "B," page 4, ¶ 4.
The Promissory Notes defined Stabilization in the same manner in which said term was defined in the Loan Commitment. See Plaintiff's Motion for Declaratory Judgment. Exhibit "B," page 4, ¶ 4.
On January 8, 1999, BCM, on behalf of Common, entered into a letter agreement with Dynex whereby the parties agreed to amend and modify the various commitments and agreements between the two entities. Specifically, the letter agreement provided for a loan of $8,930,000 from Dynex to Common. That loan had a term of two (2) years, but the letter agreement provided for conversion of the loan to a permanent, ten year loan if stabilization occurred. The letter agreement referenced stabilization as the only event that would trigger an extension of the loan term.
"Upon stabilization, the loan will convert to a permanent loan."Plaintiff's Motion for Declaratory Judgment, Exhibit "D."
In July 2000, Dynex entered into a Commercial Loan Purchase and Sale Agreement (the "Sale Agreement") with Kelly wherein Dynex agreed to sell Kelly its interest in the Note, Mortgage, guarantees and related loan documents for each of the three transactions. Pursuant to this Sale Agreement, Dynex and Kelly executed an assignment of Dynex's rights under the Note,
In January 2001, Common, Baronne, and Poydras notified Kelly of their desire to extend the initial maturity date of the Note, despite the fact that stabilization has not occurred. They did so pursuant to the plain language of Paragraph Four of the Promissory Notes, which states that the Borrowers can extend the maturity date of the Note upon either stabilization or the initial maturity date, provided they give thirty days notice to the Lender of the intent to extend the Notes. Kelly, however, argues that the Notes have matured because stabilization had not occurred. Despite the language contained in Paragraph Four of the Promissory Notes, Kelly avers that the actual intent of the parties was to make stabilization a prerequisite to the extension of any of the Notes beyond the April 1, 2001 initial maturity date.
Kelly filed three Petitions for Declaratory Judgment seeking resolution of the dispute between itself and the Defendants with respect to the proper construction and interpretation of the various documents in question. Kelly seeks the following: (1) a declaration that the Notes matured on April 1, 2001; (2) a declaration that stabilization is a condition precedent to the extension of the maturity date of the Notes; (3) a declaration that Kelly is entitled to reformation of the Notes so that they may accurately reflect the true intentions of the parties that stabilization be a condition precedent to the extension of the maturity date of the Notes; (4) a declaration that it has no obligation to make advances for tenant improvements under the terms and conditions of the Loan Commitment, Note, Mortgage, and related loan documents because all of the conditions for funding of tenant improvements have not been met. Furthermore, Kelly seeks enforcement of the Notes, Mortgages, and related loan documents, as well as a declaration that BCM and TRI are solidarily liable with Common, Baronne, and Poydras with respect to the Notes.
The Defendants filed the instant Motions to Dismiss pursuant to Rule 12 (b)(6) of the Federal Rules of Civil Procedure. The Defendants claim that because the law must give effect to the plain language of an unambiguous contract, such as the Notes at issue in this case, Kelly's petitions fail to state claims upon which relief can be granted. Specifically, the Defendants argue that the plain language of the Notes, which allows for extension of the initial maturity date with at least thirty days notice upon either the initial term maturity date or stabilization, must govern because said language is clear and explicit and does not lead to any absurd consequences. The Defendants argue that since they complied with the plain and unambiguous language of the Notes by providing Kelly with at least thirty days notice of their intent to extend the maturity date of the Notes, Kelly's petition fails to state a claim upon which relief can be granted. Furthermore, the Defendants aver that "[because the intent of the parties is clear from the unambiguous language of the Note, it is manifestly improper for Kelly to attempt to use parol evidence to vary or negate specific terms contained in the Note."Defendants' Motion to Dismiss Petition for Declaratory Judgment, page 7.
Kelly, on the other hand, argues that dismissal is improper because the claims presented in said petitions raise several issues of fact. Kelly contends that despite the plain language of the Notes, the true intent of the parties was to make stabilization a condition precedent to extension of the maturity date of the loans. Kelly argues that this Court should look past the plain language of the notes and to the intent of the parties as evidenced in the totality of the documents executed in connection with the loans at issue. Kelly avers that "when the Notes and the Security Agreements are read together, the only logical and reasonable interpretation of the instruments that does not lead to absurd consequences is that Stabilization is a condition precedent" to the Defendants' right to extend the maturity date of the Notes. Plaintiff's Memorandum in Opposition to Motion to Dismiss, page 7-8. Alternatively, Kelly argues that the language in Paragraph Four of the Notes is the result of mutual error, and thus, this Court should allow for the reformation of the Notes so that they may accurately reflect the true intent of the parties.
II. LAW AND ANALYSIS:
A. Law on Motions to Dismiss:
A motion to dismiss for failure to state a claim upon which relief can be granted pursuant to Federal Rule of Civil Procedure 12(b)(6) "is viewed with disfavor and is rarely granted." Lowrey v. Texas AM Univ. System, 117 F.3d 242, 247 (5th Cir. 1997); Kaiser Aluminum Chem. Sales v. Avondale Shipyards, 677 F.2d 1045, 1050 (5th Cir. 1982). The complaint must be liberally construed in favor of the plaintiff, and all facts pleaded in the original complaint must be taken as true. Campbell v. Wells Fargo Bank, 781 F.2d 440, 442 (5th Cir. 1980). A district court may not dismiss a complaint under Rule 12(b)(6) "unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46 (1957); Blackburn v. Marshall, 42 F.3d 925, 931 (5th Cir. 1995). The Fifth Circuit defines this strict standard as "whether in the light most favorable to the plaintiff and with every doubt resolved in his behalf, the complaint states any valid claim for relief." Lowrey, 117 F.3d at 247 (citing 5 Charles A. Wright Arthur R. Miller, FEDERAL PRACTICE AND PROCEDURE § 1357, at 601 (1969)). Finally, this Court notes that in ruling on a motion to dismiss, copies of written instruments that are attached as exhibits to a petition are deemed to be part of the pleading for all purposes. See Fed.R.Civ.P. 10(c). Accordingly, this Court may rely on such instruments in determining whether the Petitions should be dismissed for failure to state a claim upon which relief can be granted.
B. Kelly's Claim for Reformation Based on Mutual Mistake:
In Louisiana, written agreements "may be reformed against the original parties and their privies to correct an error or mistake in the contract, so as to make it accurately express the true intent and agreement of the parties, provided that the rights of third parties have not intervened."M.R. Building Corp. v. Bayou Utilities, Inc., 637 So.2d 614, 616 (La.App. 2 Cir. 1994); see also Illinois Central Gulf Railroad Co. v. R.R. Land, Inc., 988 F.2d 1397, 1402 (5th Cir. 1993). "The most commonly used ground for reformation is mutual mistake of the parties." M.R. Building Corp., 637 So.2d at 616. The party seeking reformation of the instrument bears the burden of establishing the existence of a mutual mistake by clear and convincing evidence. See id. Specifically, in order to succeed on a claim of mutual mistake, the movant must prove that the mistake was shared by both parties at the time of reducing the agreement to writing.See id. That is, the movant must establish that the agreement was written in terms that violate the understanding of both parties to the agreement. See id.
While the Defendants attempt to argue otherwise, the law is clear that in proving a claim for reformation based on mutual mistake, the moving party may rely on parol evidence. See M.R. Building Corp., 637 So.2d at 616. As one court explained, "[t]he parol evidence is not offered to vary the terms of the written instrument but rather to show that the writing does not express the true intent or agreement of the parties." First State Bank Trust Co. v. Seven Gables, Inc., 501 So.2d 280, 285 (La.Ct.App. 1st. Cir. 1986). Therefore, Kelly may rely on parol evidence in proving its claim for reformation based on mutual mistake. Furthermore, such a determination is primarily a question of fact. See Phillips Oil Co. v. OKC Corp., 812 F.2d 265, 275 (5th Cir. 1987). Accordingly, such a claim, if plead adequately, should not be decided on the pleadings. See Belle Pass Terminal, Inc. v. Jolin, Inc., 634 So.2d 466, 493 (La.Ct.App. 1st Cir. 1994).
With respect to Kelly's claim for reformation of the Notes, Kelly asserts that it has presented this Court with sufficient evidence of the true intent of the parties to maintain a claim for reformation based on mutual mistake. In support of its claim, Kelly argues that it "has specifically pled facts that support its claim that the intent of the parties was that Stabilization was to be a condition precedent to extension of the maturity date of the Notes." Plaintiff's Memorandum in Opposition to Motion to Dismiss, page 13. Kelly references the Loan Commitment, the Security Agreements, and the Letter Agreement as being evidence of the parties' true intent with regard to the requirements for extension of the maturity date of the Notes. After construing the petitions liberally in favor of the Plaintiff and after taking all facts asserted in the Petitions as true, this Court is of the opinion that Kelly has stated a valid claim for reformation based on mutual mistake. Accordingly, the Defendants Motion to Dismiss Kelly's claim for reformation based on mutual mistake is DENIED.
C. Kelly's Claim based on Interpretation of the Documents as a Whole:
In addition to its reformation claim based on mutual mistake, Kelly contends that when the Notes and the Security Agreement are read together, the only logical and reasonable interpretation of the instruments that does not led to absurd consequences is that Stabilization was a condition precedent to the Defendants' right to extend the maturity date of the Notes. Kelly bases this claim on general principles of contract interpretation under Louisiana law that focus on determining the common intent of the parties. See La. Civ. Code art. 2045. Kelly argues that under Louisiana law, courts should not and "will not interpret a contract in a way that leads to unreasonable consequences or inequitable or absurd results even when the words used in the contract are fairly explicit." Texas Eastern Transmission Corp. v. Amerada Hess Corp., 145 F.3d 737, 742 (5th Cir. 1998). Additionally, Kelly cites to article 2050 of the Louisiana Civil Code, which states that "[e]ach provision in a contract must be interpreted in light of the other provision so that each is given the meaning suggested by the contract as a whole." La. Civ. Code art. 2050.
While the Defendants are correct that courts must look solely to the language of a contract to determine the intent of the parties when such language is clear and explicit, even when the contractual language is clear "courts should refrain from construing the contract in such a manner as to lead to absurd consequences." Amend v. McCabe, 664 So.2d 1183, 1187 (La. 1995). In the present case, after examining the interpretation claim in the light most favorable to Kelly and after taking all facts pleaded as true, this Court finds that Kelly has demonstrated that the relationship between the borrowers' right to extend the maturity date and Stabilization arguably is unclear in light of the conflicting provisions of the Notes and the Security Agreements. Accordingly, the Defendants' motion to dismiss Kelly's claim relating to the interpretation of the Notes and the Security Agreement is DENIED.
D. Kelly's Claim Relating to Tenant Improvements
In addition to the aforementioned claims, Kelly also seeks a declaratory judgment with respect to its obligations to fund tenant improvements under its agreement with the Defendants. However, the Defendants have not sought the dismissal of this claim in the instant Motion. Accordingly, this Court will not address such claim at the present time.
III. CONCLUSION:
For the reasons stated above, this Court concludes that after liberally construing the Petitions in favor of the Plaintiff and after taking all facts pleaded in said Petitions as true, Kelly has asserted valid claims for relief Accordingly,
IT IS ORDERED that the Defendants' Motion to Dismiss be, and the same is hereby, DENIED.
Mortgage, guarantees, and related loan documents to Kelly. The Sale Agreement contained a provision claiming that "[n]otwithstanding any actual verbiage in the Mortgage Notes to the contrary," Dynex believed that the loan commitment dated February 27, 1998, accurately reflects the intent of the parties with respect to stabilization being a prerequisite to the extension of any Mortgage Note beyond the maturity date of April 1, 2001.