WBCMT 2007 C33 Office 9720, L.L.C.

Case Type:
Business
Case Status:
Reversed and Rendered
Citation:
No. 15-20086 (5th Circuit, Dec 22,2016) Published
Tag(s):
Ruling:

NNN Realty’s interpretation of “Borrower” as limited to all borrowing entities collectively creates various absurdities throughout the Guaranty—so much so that the interpretation cannot be considered a reasonable alternative interpretation of “Borrower.” The only reasonable, textually supportable interpretation of “Borrower” is that it refers to the collective entities or to each individual borrowing entity, as the context may require. “Borrower” is unambiguous as a matter of law in the Guaranty.

Fifth Circuit REVERSED and RENDERed judgment for WBCMT. 

Procedural context:

NNN Realty Advisors, Inc. (NNN Realty), defendant-appellee here, persuaded the district court that its guaranty of financing for a commercial project in Houston, Texas, was not activated despite a “part [of the Property] becoming an asset in . . . a voluntary bankruptcy or insolvency proceeding of Borrower[.]” Interpreting a complex set of financing documents, the district court held after trial that the term “Borrower” in the guaranty refers collectively to all of the numerous borrowing entities, not to each of them individually. The current noteholder, plaintiff-appellant WBCMT 2007 C33 OFFICE 9720, L.L.C. (WBCMT) challenges the adverse judgment in its breach-of-contract suit to recover on the guaranty. 

Facts:

In June 2007, Wachovia Bank loaned $17.5 million to various borrowing entities formed by investors for the sole purpose of owning tenant-in-common interests in a Houston, Texas, office building complex (the Property). Each borrowing entity is jointly and severally liable for all loan obligations. The promissory note is secured in part by two agreements: (1) a Deed of Trust, Security Agreement, and Fixture Filing, which encumbers the Property (the Security Instrument); and (2) an Indemnity and Guaranty Agreement (the Guaranty) executed by NNN Realty as Guarantor. Through various assignments, WBCMT acquired Wachovia Bank’s interests in the loan.

The Guaranty references the individual borrowing entities as follows:

WHEREAS, NNN Cypresswood Drive, LLC, NNN Cypresswood Drive 1, LLC, NNN Cypresswood Drive 3, LLC, NNN Cypresswood Drive 4, LLC, NNN Cypresswood Drive 5, LLC, NNN Cypresswood Drive 6, LLC, NNN Cypresswood Drive 7, LLC, NNN Cypresswood Drive 9, LLC, NNN Cypresswood Drive 10, LLC, NNN Cypresswood Drive 11, LLC, NNN Cypresswood Drive 12, LLC, NNN Cypresswood Drive 13, LLC, NNN Cypresswood Drive 14, LLC, NNN Cypresswood Drive 17, LLC, NNN Cypresswood Drive 18, LLC, NNN Cypresswood Drive 19, LLC, and NNN Cypresswood Drive 20, LLC, each a Delaware limited liability company (as defined in the Security Instrument), the “Borrower”), have obtained a loan (the “Loan”) in the principal amount of Seventeen Million Five Hundred Thousand and No/100 Dollars ($17,500,000.00) from [Wachovia Bank.]

Notably, this recital contains a typographical error—a missing or extra parenthesis in the phrase “(as defined in the Security Instrument), the ‘Borrower’).”

The contracting parties agreed that additional parties could obtain tenant-in-common interests in the Property and become part of “Borrower” under the loan documents. Section 2.9 of the Security Instrument governs the transfer of interests. And the Guaranty states that, upon a valid transfer under section 2.9, “the Co-Owner Transferee [the additional party that obtained an interest] shall be included in the defined term ‘Borrower’ hereunder[.]”
Pursuant to these provisions, various “NNN Cypresswood Drive” entities

acquired tenant-in-common interests in the Property and were included in the term “Borrower.” NNN Cypresswood Drive 25, LLC became one such entity when it obtained a 3.305% interest in the Property and assumed the loan obligations.

A few years later, the borrowing entities were notified that they were in default. Shortly thereafter, NNN Cypresswood Drive 25, LLC filed a voluntary Chapter 11 bankruptcy petition and listed its 3.305% tenant-in-common interest as an asset in the bankruptcy case. It is undisputed that “the Property or any part thereof” thus became an asset in the voluntary bankruptcy case. The lender then notified NNN Realty that it was “fully liable for all principal, interest and other amounts which are due and owed.” This claim was based on the penultimate paragraph of section 1 of the Guaranty, which provides in relevant part:

[NNN Realty] shall be fully liable for all principal, interest and other amounts which may be due and owning by Borrower under the Note, the Security Instrument and any other Loan Document from and after . . . the Property or any part thereof becoming [sic] an asset in (x) a voluntary bankruptcy or insolvency proceeding of Borrower[.]

In the meantime, as the default remained uncured, WBCMT foreclosed on and purchased the 96.695% interest in the Property owned by the non- bankrupt borrowing entities for $6,925,000. WBCMT then obtained a lift-stay order from the bankruptcy court and purchased NNN Cypresswood Drive 25, LLC’s 3.305% interest at foreclosure for $305,184. WBCMT now owns 100% of the Property, and the remaining deficiency at the date of foreclosures was $14,605,545.06, plus expenses.
On August 29, 2013, WBCMT sued NNN Realty, inter alia, for breach of the Guaranty. WBCMT alleged that NNN Realty’s liability to pay arose when NNN Cypresswood Drive 25, LLC’s 3.305% interest in the Property became an asset in the investor’s bankruptcy. A week later, WBCMT moved for summary judgment.

NNN Realty responded that there was a material issue of fact as to whether a liability-triggering event had occurred. Specifically, NNN Realty asserted that “Borrower” is “a term defined in the Guaranty to be the collective group of borrowers, not a single borrower,” because the word “and” connects all of the borrowing entities listed in the Guaranty’s recital. Thus, according to NNN Realty, when the Guaranty refers to “a voluntary bankruptcy . . . proceeding of Borrower,” its plain terms mean “a bankruptcy proceeding filed by all of the borrowers” collectively, not a single borrower. Consequently, the Guaranty had not been triggered.

WBCMT pointed out that the phrase “as defined in the Security Instrument” appears before “Borrower” in the Guaranty’s recital, and the Security Instrument defines the borrowing entities “individually or collectively” as “Borrower.” After the district court concluded, contrary to both parties’ contentions, that the Guaranty’s definition of “Borrower” was ambiguous, the case proceeded to a bench trial, in which the sole witness was Greg Kaliman, who represented WBCMT in seeking to enforce the Guaranty. Kaliman generally testified that interpreting “Borrower” to mean all borrowing entities collectively would make the loan almost impossible to enforce, and that no lender would make such a loan. Without relying on the testimony at trial, the district court rendered judgment for NNN Realty. The court emphasized that the use of the word “and” to connect the names of the borrowing entities “indicates that the term ‘Borrower’ refers to the full complement of entities.” The court rejected as ambiguous the parenthetical reference to the Security Instrument in the Guaranty’s recital “because it is unclear to what the parenthetical refers.” Other than observing that the parenthetical appears grammatically to relate to “Delaware limited liability company,” a term not defined in the Security Instrument, the court expressed no other possible object of the Security Instrument reference. In any event, the court concluded that the “Guaranty, construed strictly and in favor of the Guarantor, defines ‘Borrower’ as all listed NNN Cypresswood Drive entities. As a result, NNN’s liability under the Guaranty did not arise upon the bankruptcy filing by one entity[.]”
WBCMT has appealed, asserting that in the Guaranty, “Borrower” unambiguously refers to the borrowing entities either collectively or individually.

Judge(s):
JONES, DENNIS, and PRADO

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