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Margaret Kinney v. HSBC Bank USA

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Pirani v. Baharia (In the Matter of Pirani)

--- F.3d ---, Case No. 15-40538 (5th Cir May 27, 2016)
Affirmed, in part, the lower courts' judgment against the debtor based on breaches of a pre-petition settlement agreement. The debtor’s payment of $300,000 for an “assignment” of the bank’s rights to collect a $828,000 deficiency from six co-guarantors did not change the debtor’s status in relation to his five co-guarantors. “No matter how many times a farmer calls his cow a horse, it is still a cow. Regardless of labels, be it purchase or payment, cow or horse, the [guarantor is] still limited in [its] rights against [its coguarantor] by law which operators between coguarantors.” It. at 22 (quoting Mandolfo v. Chudy, 564 N.W.2d 266, 276 (Neb. Ct. App. 1997)). Thus, even though the underlying deficiency was over $828,000, and despite the debtor’s label of the transaction as an “assignment,” the debtor’s rights against his co-guarantors were limited to $50,000 per co-guarantor. The Court of Appeals also held that, because the state court severed the HNM Group’s crossclaims in 2009, those claims could not be barred by res judicata. Next, the Court of Appeals determined that Pirani was bound by the 2009 Agreement, even though the agreement expressly applied to “the Company.” The operative provision of the agreement, paragraph 3.2, provided as follows: “If the Company is unable to obtain a release from the Bank of the guarantees, [the HNM Group] agree to continue to be guarantors of the Loan until July 9, 2012 at which time they shall be released either through the Company’s refinancing of the Loan or sale of the Hotel.” Despite multiple definitions of “the Company” in the agreement, the Court concluded: “[t]hat the parties drafted later provisions of the contract with inattention to the definition they chose does not give us license to rewrite section 3.2 by applying subsection 3.1(a) beyond its specified purpose and scope. ‘The Company’ in section 3.2 includes Pirani.” Next, the Court of Appeals concluded that section 3.2 contained affirmative covenants, not merely conditions precedent. Supporting this conclusion was the Court’s recognition of the absence of conditional language such as ‘if,’ ‘provided that,’ ‘on condition that,’ or similar conditional language to demonstrate that the refinancing or sale was a condition precedent. As such, the Court concluded that the agreement demonstrates a clear intent to make Pirani’s obligation to obtain bank releases for the HNM Group a mandatory covenant, which Pirani breached. Thus, he was barred from recovering from the HNM group. Finally, the Court of Appeals remanded for the lower courts to consider allocations of attorneys’ fees. While the bankruptcy court awarded $100,000 in fees and costs based on Pirani’s breach of the 2009 Agreement, there was insufficient evidence from the HNM Group’s counsel to support the allocation of his work toward the breach of contract claims. The Court of Appeals remanded for the bankruptcy court to determine “what percentage of the attorney’s fees were attributable to the breach-of-contract claim on which [the HNM Group] prevailed . . .,” pointing out that “an opinion would have sufficed.”
Procedural context:
After trial before the United States Bankruptcy Court for the Eastern District of Texas, the Bankruptcy Court entered findings of fact and conclusions of law supporting its judgment in favor of the HNM Group, concluding that: (1) the HNM Group’s counterclaims for Pirani’s breach of the 2009 Settlement were not barred by res judicata; (2) Pirani breached the 2009 Settlement by failing to obtain releases of the HNM Group’s guarantee obligations; (3) Pirani could not pursue the bank’s guarantee agreements because Pirani breached his obligations under of the 2009 Settlement; and (4) the HNM Group was entitled to attorneys’ fees and costs based on the success of their claims for breach of the 2009 Settlement. The District Court affirmed, and Pirani appealed.
The debtor, Abdul Karim Pirani, invested in a hotel with his brother and three other unrelated individuals named Gilani, Baharia and Lalani (the “HNM Group”). In February, 2009, the five investors and their companies borrowed money from a bank, and each investor personally guaranteed the debt. Shortly after taking out the loan, however, the HNM Group sued Pirani and his brother over disagreements concerning management of the hotel. The investor litigation was resolved through a settlement agreement in August, 2009 (the “2009 Settlement”), under which Pirani, his brother and their company (Circle Sherman) agreed to buy back the HNM Group’s 50% ownership for approximately $600,000 and find new investors so that the bank would release the HNM Group of their personal guarantees. The 2009 Settlement, however, was poorly drafted, and gave rise to conflicting interpretations. Ultimately, Pirani and his brother failed to pay the buy-back amount to the HNM Group, were unable to find new investors, and fell into default with the bank. The bank foreclosed on the hotel property and sued all guarantors for the $828,000 deficiency. The HNM Group filed crossclaims against Pirani and his brother for breaching the 2009 Settlement (asserting claims for failure to pay the buy-back price, and for failing to obtain releases from the bank). On the eve of trial, Pirani settled with the bank by paying $300,000 in exchange for a release and an assignment of the bank’s rights under the HNM Group’s guarantee agreements. The state court then severed the “buy-back” claims into a new preceding, and entered final judgment in favor of the HNM Group for over $616,000. However, because the bank’s claims were being settled, and the HNM Group’s other claims were derivative of the bank’s guarantee claims, the state court dismissed the HNM Group’s other claims without prejudice. Then, in 2012, Pirani filed bankruptcy. In Pirani’s bankruptcy, the HNM Group filed a proof of claim for the $616,000 judgment arising from Pirani’s breach of the 2009 Settlement. Pirani responded with a counterclaim, seeking payment of the $828,000 deficiency due under the guarantee agreements that he acquired from the bank. The HNM Group responded with counterclaims for Pirani’s failure to obtain the bank’s releases, as promised under the 2009 Settlement. Pirani argued that the latter counterclaims were barred by res judicata (because the state court dismissed them).
Higginbotham, Southwick, Higginson (opinion by Higginson)

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