ContractsProf Blog

Editor: D. A. Jeremy Telman
Valparaiso Univ. Law School

A Member of the Law Professor Blogs Network

Wednesday, August 27, 2008

Is the Word "Paid" Ambiguous?

The 8th Circuit recently addressed this question in Henning v. Mainstreet Bank. Here are the facts, as told by the 8th Circuit:

Henning was a principal and officer in several businesses that borrowed money from Mainstreet. In July 2003, Henning, those businesses, and Mainstreet consolidated and restructured the debt into a single amended and restated promissory note for $600,000 pursuant to the terms of an assumption agreement and consent of guarantors (“assumption agreement”). Dick Henning Landscape, LLC, was the primary debtor, and Henning personally guaranteed the debt. Henning presented no evidence that disputes Mainstreet's assertion that the promissory note was secured by personal and real property valued at $700,000. The real property consisted of Henning's home, which secured $250,000 of the note. The assumption agreement provided that Mainstreet would release its mortgage on the home once $200,000 of the promissory note had been paid off. The relevant portion of the assumption agreement provides:
7. Guarantors Not Released. The Guarantor hereby consents to and understands and acknowledges that the transfer of the Assets and the assumption by the Purchaser of the obligations under the Financing documents shall not release the Guarantor from any personal liability under the Guaranty Documents and that such Guaranty Documents shall remain in full force and effect.

Notwithstanding the foregoing, the Lender hereby agrees that when $200,000 of the outstanding principal balance of the Amended and Restated Note has been paid, Lender upon written request from the Guarantor, will agree to release the Mortgage. Furthermore, the Lender hereby agrees that when an additional $200,000 of the outstanding principal balance of the Amended and Restated Note has been paid, Lender upon written request from the Guarantor, will agree to release the Guarantor from his Guaranty.



(emphasis added). In July 2004, Mainstreet filed proceedings against Henning and Dick Henning Landscaping, alleging default under the terms of the promissory note. Mainstreet was able to obtain more than $200,000 in funds by foreclosing on some of the personalty that secured the loans, but Henning had not voluntarily provided Mainstreet with payments totaling $200,000 of outstanding principal on the loan. The amount of outstanding principal remaining on the promissory note was about $280,000, with Henning's home being the only collateral remaining to secure the loan. Henning and Mainstreet filed cross-motions for summary judgment on whether Mainstreet was required to release its mortgage on Henning's home. This question, in turn, depended on the interpretation of the word "paid" in paragraph 7 of the assumption agreement.

The 8th Circuit affirmed the grant of summary judgment to Mainstreet, holding that the word "paid" was unambiguous:

Henning argues that the word “paid,” as it is used in paragraph 7 of the assumption agreement, should be interpreted as meaning that the mortgage must be released if Mainstreet receives $200,000 towards the debt from any source. He bases this interpretation primarily on the language, “Notwithstanding the foregoing,” in paragraph 7, which he asserts requires us to ignore all of the rights and obligations of the parties and all provisions in the assumption agreement that precede that language.

The term “paid” is not reasonably susceptible to Henning's definition, and thus the contract is not ambiguous. Article 3 of the Uniform Commercial Code provides that “an instrument is paid to the extent payment is made by or on behalf of a party obliged to pay the instrument, and to a person entitled to enforce the instrument.” Minn.Stat. § 336.3-602(a). This is a natural and ordinary meaning of “paid,” especially in the present context, where the payments contemplated in the assumption agreement are owed on a promissory note. The bankruptcy court adopted a dictionary definition of “pay,” meaning “to satisfy (someone) for services rendered or property delivered: discharge an obligation to.” Henning v. Mainstreet Bank (In re Henning), ADV 06-4108 (BKY 05-49574), at 5 (Bankr.D.Minn. Nov. 22, 2006) (citing Webster's Third International Dictionary (Unabridged), 1659 (1976)). Although less explicit, this definition also implies that a payment must be made voluntarily in connection with the receipt of a benefit to the source of that benefit. Dick Henning Landscaping, an obligor on the promissory note, made principal payments of $124,061.10 to Mainstreet, which is entitled to enforce the instrument. No one disputes that this amount was “paid” within the meaning of paragraph 7. The purchasers who paid $140,000 for equipment at the lien foreclosure sale were not obligors on the promissory note and such purchase cannot be considered a payment made on the obligor's behalf. Thus, the $140,000 cannot be considered as having been “paid” within the meaning of paragraph 7. Nor was the $56,000 “paid” when Mainstreet exercised its lien rights in certain of Dick Henning Landscaping's accounts. Although the money came from the debtor's accounts, Mainstreet recovered the money through legal action; the transfer was not “made by or on behalf of” Dick Henning Landscaping.

Henning's definition of “paid” is contrary to the parties' clear intention that Mainstreet be made a secured creditor. The assumption agreement covers multiple facets of Mainstreet's becoming and remaining a secured creditor. The first part of paragraph 7 titled “Guarantors Not Released” makes it clear that the assumption agreement does not release Henning from his liability. The second part provides that despite Henning's continued liability, Mainstreet will release the mortgage when the principal has been reduced by $200,000, i.e., when the other collateral can fully secure the remaining debt. If the principal is reduced only because other collateral is liquidated, the continued existence of the mortgage is necessary to fully secure the remainder of the loan. Requiring the release of the mortgage upon Mainstreet's liquidation of other collateral worth more than $200,000 would render Mainstreet's security interest in the home and its status as a fully secured creditor dependent upon the order in which Mainstreet exercised its rights as a secured creditor and would thwart the parties' clear intention that Mainstreet remain fully secured for the duration of the loan.

Henning v. Mainstreet Bank, --- F.3d ----, 2008 WL 3876294 (8th Cir. Aug. 22, 2008).

[Meredith R. Miller]

http://lawprofessors.typepad.com/contractsprof_blog/2008/08/is-the-word-pai.html

Recent Cases | Permalink

TrackBack URL for this entry:

http://www.typepad.com/services/trackback/6a00d8341bfae553ef00e5548ea9818834

Listed below are links to weblogs that reference Is the Word "Paid" Ambiguous?:

Comments

Post a comment