Present: All the Justices
APARTMENT INVESTMENT AND
MANAGEMENT COMPANY
v. Record No. 982474
NATIONAL LOAN INVESTORS, L.P.
OPINION BY JUSTICE BARBARA MILANO KEENAN
September 17, 1999
WINTHROP MANAGEMENT, ET AL.
v. Record No. 982475
NATIONAL LOAN INVESTORS, L.P.
FROM THE CIRCUIT COURT FOR THE CITY OF RICHMOND
Melvin R. Hughes, Jr., Judge
In this appeal, we consider whether the trial court erred
in awarding judgment based on a promissory note, which was
assigned without the consent of the maker in violation of a
requirement stated in the note.
This appeal arises from financial transactions involving
various related business entities in the commercial real estate
industry. The parent organization is Winthrop Financial
Associates, L.P. (Winthrop Financial), which is the sole
shareholder of First Winthrop Corporation (First Winthrop).
First Winthrop, in turn, holds interests in various partnerships
and corporations involved in the acquisition and management of
commercial property. First Winthrop primarily manages its
commercial properties through Winthrop Management, a
Massachusetts general partnership in which First Winthrop owns a
99% interest.
The property acquisition affiliate of First Winthrop
involved in this appeal is Eight Winthrop Properties, Inc.
(Eight Winthrop), which is the general partner of Winthrop
Southeast, L.P. (Winthrop Southeast). Eight Winthrop and
Winthrop Southeast were formed in 1991 for the purpose of
acquiring eight apartment complexes located in Virginia, North
Carolina, and South Carolina (the Apartments). Winthrop
Southeast is the general partner of the two limited partnerships
which own the Apartments, Southeastern Income Properties I and
Southeastern Income Properties II (SIP-I and SIP-II). The
limited partners of SIP-I and SIP-II are about 4,000 individual
investors.
As part of the acquisition of the Apartments in August
1991, Winthrop Southeast borrowed about $1,161,000 from
Investors Savings Bank, F.S.B (Investors Bank), a federally
chartered savings bank in Richmond. In the promissory note
executed by Winthrop Southeast to Investors Bank (the Note),
Winthrop Southeast agreed to repay the loan in installments
beginning in February 1993.
The Note, which defined the term "Noteholder" to include
the successors and assigns of Investors Bank, provided that
"this Note may not be transferred or assigned by Noteholder
2
without the prior written consent of [Winthrop Southeast]." The
Note also contained a non-recourse provision that essentially
provided as the sole remedy on default two security agreements,
one of which is relevant to this appeal (the Security
Agreement).
In the Security Agreement, Winthrop Management pledged to
Investors Bank, as collateral for Winthrop Southeast's loan, a
security interest in the income, fees, and profits that Winthrop
Management received under contracts for managing the Apartments.
The Security Agreement contained a non-recourse provision in
favor of Winthrop Management and Winthrop Southeast that was
virtually identical to the non-recourse provision in the Note.
No payments were ever made on the Note or pursuant to the
Security Agreement. In December 1991, the Resolution Trust
Corporation (RTC) was appointed receiver for Investors Bank. An
agent acting on behalf of RTC notified Winthrop Southeast in
writing that the loan was in default in July 1994. In August
1995, RTC assigned its interest in the Note and Security
Agreement to RTC Commercial Loan Trust 1995-NP1A (the Loan
Trust), a Delaware business trust. The parties to this appeal
agree that the Loan Trust is not part of the RTC.
In February 1996, the Loan Trust filed an action against
Winthrop Management in the United States District Court for the
Eastern District of Virginia. The Loan Trust asked that a
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receiver be appointed to assume control of Winthrop Management's
administration of the Apartments and to collect and pay over to
the Loan Trust "all income" derived from that source. While the
action was pending, Winthrop Southeast, acting as the general
partner of SIP-I and SIP-II, terminated the management
agreements for the Apartments with Winthrop Management. Three
days later, Winthrop Southeast executed new management
agreements with Insignia Management Corporation (Insignia). 1
Soon thereafter, Insignia transferred the management of six
other, unrelated apartment complexes to Winthrop Management.
The action in the federal district court was later
dismissed for lack of jurisdiction. RTC Commercial Loan Trust
1995-NP1A v. Winthrop Management, 923 F.Supp. 83 (E.D.Va. 1996).
The Loan Trust then brought this action in the trial court,
naming as defendants Winthrop Management, First Winthrop
Corporation, Winthrop Southeast, SIP-I, SIP-II, Eight Winthrop,
and Insignia. 2
Prior to trial, RMA Partners, L.P., on behalf of the Loan
Trust and without the prior written consent of Winthrop
Southeast, assigned its interest in the Note and the Security
1
While this appeal was pending, Apartment Investment and
Management Company became the successor in interest to Insignia
and was substituted as a party in this appeal. We will continue
to refer to this party as Insignia in this opinion.
2
The trial court dismissed or nonsuited all claims against
SIP-I and SIP-II.
4
Agreement to National Loan Investors, L.P. (NLI). The Loan
Trust also assigned to NLI its interest in "those causes of
action for damages to property" arising under the Note and the
Security Agreement. NLI later was substituted as plaintiff in
place of the Loan Trust.
The trial court heard evidence in a bench trial on ten
counts of an amended bill of complaint, five of which are the
subject of this appeal. 3 Those five counts included various
allegations by NLI against Winthrop Management, First Winthrop,
Winthrop Southeast, and Insignia. NLI alleged that Winthrop
Management transferred the income, fees, and profits from its
management of the Apartments to First Winthrop with the intent
to hinder and delay creditors in their efforts to obtain payment
under the Security Agreement for the Note. NLI sought an order
setting aside those transfers, as well as a judgment in the
amount of the funds conveyed.
NLI also alleged that Winthrop Management and Insignia
entered into an "exchange of management rights" with intent to
hinder, delay, or defraud the holder of the Security Agreement.
NLI sought the imposition of a constructive trust "over all
3
In its final order, the trial court initially awarded
judgment in favor of NLI on an additional count, Count IX, but
later in the order stated: "On Count IX, the Court does not
enter judgment for plaintiff because, in light of the relief
granted under Counts VII and VIII, the relief sought under Count
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income, fees, and profits" from the Apartments then being
managed by Insignia, as well as a personal judgment against
Insignia.
Finally, NLI sought a judgment against Winthrop Southeast
for the full amount due under the Note. NLI alleged that
Winthrop Southeast remained liable on the Note based on an
exception in the Note's non-recourse provision, which provided
that Winthrop Southeast would be liable for losses resulting
from any fraudulent acts or material misrepresentations made by
Winthrop Southeast or its partners.
At trial, NLI asserted that an "Event of Default" occurred
under the Note in July 1994, 15 days after the RTC gave Winthrop
Southeast written notice that the loan was in default. After
hearing evidence on the amended bill of complaint, the trial
court awarded judgment in favor of NLI on the counts included in
this appeal. The court found that the total amount due on the
Note was $2,085,045.82, including attorneys' fees and costs, and
entered judgment in that amount, plus interest, against Winthrop
Southeast. The court also entered judgment in lesser amounts
against Winthrop Management, First Winthrop, and Insignia on the
four other counts involved in this appeal. The court's order
provided that sums recovered under those other counts "be
IX is unnecessary." Since final judgment was not entered on
Count IX, we will not address it in this appeal.
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considered as a payment towards the satisfaction of the judgment
[on the Note]."
On appeal, Winthrop Management, First Winthrop, Winthrop
Southeast, Eight Winthrop, and Insignia (collectively, the
defendants) first argue that the trial court erred in awarding
judgment in favor of NLI, because the entire judgment was
predicated on NLI's purported status as holder of the Note. The
defendants assert that since the evidence was uncontested that
Winthrop Southeast did not give prior written consent to the
assignment from the Loan Trust to NLI as required by the terms
of the Note, NLI failed to establish that it was a valid holder
by assignment. Thus, the defendants contend that they should
have been awarded judgment on all counts of the amended bill of
complaint.
In response, NLI agrees that the counts involved in this
appeal are based exclusively on the Note and the collateral
securing the Note. However, NLI contends that, although the
Note provided that assignments be made with Winthrop Southeast's
prior written consent, the Note did not explicitly prohibit or
invalidate assignments made without such consent. At most, NLI
argues, the assignment from the Loan Trust to NLI without
Winthrop Southeast's consent constituted a breach of the Note.
NLI also asserts that since Winthrop Southeast first breached
the terms of the Note by its default, Winthrop Southeast cannot
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rely on the consent requirement in defense of its nonpayment.
We disagree with NLI.
In Paragraph 17 of the Note, the term "Noteholder" is
defined to include Investors Bank, as well as the "successors
and assigns" of Investors Bank. However, Paragraph 17 also
provides that "this Note may not be transferred or assigned by
Noteholder without the prior written consent of the Maker
[Winthrop Southeast]."
The evidence was uncontested that Winthrop Southeast did
not give prior written consent to the assignment of the Note
from the Loan Trust to NLI. William Carter Smith, vice
president of NLI, conceded this fact when he testified that
neither NLI nor the Loan Trust sought such prior written consent
before NLI acquired the Note.
NLI's failure to obtain written consent to an assignment of
this non-recourse obligation was not merely a breach of the
Note's terms. Prior written consent was a condition precedent
to assignment of the Note and, since such consent was not
obtained, the Loan Trust's purported assignment to NLI was
invalid. Thus, NLI was not entitled to maintain the present
causes of action, which are all predicated on NLI's incorrect
assertion that it was a valid "Noteholder."
We find no merit in NLI's contention that our decision in
Hurley v. Bennett, 163 Va. 241, 176 S.E. 171 (1934), requires a
8
different result. Quoting Hurley, NLI contends that "[t]he
party who commits the first breach of a contract, is not
entitled to enforce it . . . against the other party for his
subsequent failure to perform." 163 Va. at 253, 176 S.E. at
175; see also Federal Ins. Co. v. Starr Elec. Co., 242 Va. 459,
468, 410 S.E.2d 684, 688-89 (1991). NLI argues that under this
principle, the defendants cannot attack NLI's status as a
purported "Noteholder" because Winthrop Southeast committed the
first breach of contract in failing to make payment on the note
in 1993. We disagree.
NLI's argument effectively asks us to allow a stranger to
the Note, NLI, to enforce the Note against a party to the Note,
Winthrop Southeast, because that party is in default. As we
explained above, Winthrop Southeast's failure to consent to the
assignment of the Note to NLI precluded the establishment of a
contractual relationship between NLI and the Note's maker,
Winthrop Southeast. Thus, NLI's failure to obtain this consent
was not a subsequent failure of performance of a contract under
the rule stated in Hurley, but was an unsatisfied precondition
to the formation of a valid contract between the parties.
Accordingly, Winthrop Southeast's initial breach of the Note did
not preclude it from asserting that NLI failed to establish
9
itself as a "Noteholder" entitled to assert the present causes
of action. 4
NLI argues, nevertheless, that the Note's restriction on
assignment is preempted by 12 U.S.C. § 1821(d)(2)(G)(i)(II),
which provides in relevant part that the RTC may "transfer any
asset or liability of the institution in default . . . without
any approval, assignment, or consent with respect to such
transfer." NLI contends that it was entitled to the benefit of
this provision, because the Loan Trust was a holder in due
course, and that NLI, as the transferee of a holder in due
course, obtained the same statutory right to receive an
assignment of the Note without the prior written consent of
Winthrop Southeast. We disagree.
While the RTC's assignment of the Note to the Loan Trust
without the consent of Winthrop Southeast was permitted under
the above statute, that assignment did not confer on the Loan
Trust the status of a holder in due course of a negotiable
instrument. The Loan Trust was not a holder in due course
because, among other things, the Note was not a negotiable
instrument. As a non-recourse obligation, the Note lacked
negotiability because it did not constitute an unconditional
4
We also find no merit in NLI's unsupported contention that
Winthrop Southeast's failure to object to prior assignments of
the Note in which its written consent was not obtained bars the
defendants from asserting that defense here.
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promise to pay a fixed amount of money. See Code § 8.3A-104;
United Nat'l Bank of Miami v. Airport Plaza Ltd. Partnership,
537 So.2d 608, 610 (Fla.App. 1988). A promissory note is
rendered conditional when it provides that the borrower will not
be liable personally for payment in the event of default and
limits recourse for payment to certain tangible property or
other collateral. See id. Thus, since the Note was not a
negotiable instrument, neither NLI nor the Loan Trust could
assert any right that a holder in due course may have had to
rely on in the statutory provision at issue. See Code § 8.3A-
302; Levin v. Virginia Nat'l Bank, 220 Va. 1087, 1091, 265
S.E.2d 758, 760 (1980); Brantley v. Karas, 220 Va. 489, 493, 260
S.E.2d 189, 192 (1979). 5
For these reasons, we will reverse the trial court's
judgment and enter final judgment for the defendants.
Reversed and final judgment.
5
Since NLI's failure to establish that it was a "Noteholder"
is dispositive of this appeal, we need not address the
defendants' remaining assignments of error.
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