United States Court of Appeals
For the First Circuit
Nos. 05-1526, 05-1588
IN RE NEW SEABURY COMPANY LIMITED PARTNERSHIP,
Debtor,
NEW SEABURY COMPANY LIMITED PARTNERSHIP,
Appellant, Cross-Appellee,
v.
NEW SEABURY PROPERTIES, LLC,
Appellee, Cross-Appellant.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Douglas P. Woodlock, U.S. District Judge]
Before
Torruella, Circuit Judge,
Campbell, Senior Circuit Judge,
and Lipez, Circuit Judge.
John J. Monaghan with whom Lynne B. Xerras, Diane N. Rallis,
Esme B. Caramello and Holland & Knight, LLP were on brief for
appellant, New Seabury Company Limited Partnership.
Daniel E. Rosenfeld with whom David M. Glynn, Robert N.
Michaelson and Kirkpatrick & Lockhart LLP were on brief for
appellee, New Seabury Properties, LLC.
June 7, 2006
CAMPBELL, Senior Circuit Judge. The parties in this case have
brought what are effectively cross-appeals from an order of
dismissal entered by the United States District Court for the
District of Massachusetts on March 23, 2005 ("2005 District
Order"), affirming the July 20, 2004 decision of the United States
Bankruptcy Court on second remand from the district court.
The dispute is between New Seabury Company Limited Partnership
(the "Debtor") and New Seabury Properties, LLC ("NSP") over the
Debtor's claim to a share of funds in the Debtor's general
operating account ("Operating Account") following the Debtor's
declaration of bankruptcy and the entry of a Stipulation between
the parties allowing the Debtor to retain the real estate brokerage
segment of the business while turning over its other assets to NSP.
Procedural Background and Facts
The Debtor filed a Chapter 11 petition on March 31, 1997
pursuant to 11 U.S.C. §§ 1101 et seq. It owned and operated a
2000-acre planned resort community in Mashpee, Massachusetts, known
as "New Seabury Resort." The Debtor's business was made up of
three interrelated divisions: the Recreation Division, the Hotel
Division, and the Real Estate Division. The funds relative to the
divisions were commingled in the Debtor's single operating account.
The functions of the three divisions were as follows:
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The Recreation Division maintained and operated two golf
courses and a golf club house, a tennis facility, a beach club, and
a swimming pool facility.
The Hotel Division managed and maintained a hotel facility
using Debtor and third-party-owned property for short term rental
by guests of the New Seabury Resort.
The Real Estate Division operated a real estate brokerage (the
"Brokerage"). The Brokerage operated one real estate company, New
Seabury Real Estate, that sold Debtor and non-Debtor property on
the New Seabury Resort and another real estate company, Sound
Realty, that brokered short-term and long-term rentals of property
for private individuals within New Seabury Resort. Commissions
provided the Brokerage's primary source of revenue. The Brokerage
was never a member of the Multiple Listing Service ("MLS") and, as
the exclusive broker, sold most of the property in New Seabury.
MLS brokers not related to the Brokerage sold a small percentage of
the property; the Brokerage and unrelated MLS brokers would share
some sales.
During the bankruptcy proceedings, the Debtor and NSP offered
competing plans for reorganization of the Debtor. On May 15, 1998,
the bankruptcy court entered an Order and Preliminary Decision
stating that the Debtor's plan was not confirmable, but NSP's was.
For two days leading up to the confirmation hearing on May 29,
1998, the Debtor and NSP engaged in negotiations to resolve the
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differences between their competing plans. Ultimately, on May 29,
the parties executed a stipulation (the "Stipulation"), pursuant to
which the Debtor withdrew its own plan for reorganization.
The Stipulation noted that NSP's plan, to which the Debtor now
consented, provided for NSP to acquire substantially all of the
Debtors' assets. So as to resolve the parties' controversy,
however, the Debtor and NSP stipulated that "certain assets of the
Debtor will not be acquired by NSP and will be retained by the
Debtor free and clear of all liens, encumbrances, claims and
interest." Thus, paragraph 9 of the Stipulation provided that
"[t]he real estate brokerage segment of the Debtor's business,
including all licenses and permits required to operate that segment
of the business, shall be retained by the Debtor." Paragraph 10 of
the Stipulation went on to state that the parties would execute on
the plan's effective date (the "Effective Date") an agreement
containing "the following provisions, and failing the execution of
such agreement the provisions as set forth herein shall constitute
such agreement."
Clauses a, b, and c of paragraph 10 then provided that the
Debtor, A + C Great Island, Inc., and Christopher Burden would
retain a non-exclusive license to use the requested trade name "New
Seabury" in connection with real estate brokerage operations
conducted by one or more of them for as long as Burden or his
family maintained a majority ownership interest or were involved in
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daily operations. The license would include the right to use the
New Seabury name in marketing materials. Additionally, the
Brokerage operations were to have access to all resort amenities,
including related pictures and information, in its marketing and
other material for viewing and touring, with specified free
membership rights to be granted to Christopher and Nancy Burden in
the New Seabury Club. Non-exclusive signage rights were also
granted to the Brokerage operations relating to real estate service
operations in NSP's post-confirmation New Seabury related property,
with various limitations spelled out as to the form and location of
the signage, its acceptability to the Debtor and NSP, and changes
desired by NSP.
Paragraph 11 of the Stipulation also contained details and
limitations relative to the retained Brokerage operation. The
Debtor would retain certain specified real property on which real
estate service operations are conducted, including the main New
Seabury real estate office and adjacent parking facilities, and
certain other parcels. On and for a two-year period following the
Effective Date, the Debtor was to allow NSP use of three desks on
one of these parcels rent-free, along with certain spelled-out
rights to install phone lines and place its own reasonable office
equipment. Properties to be retained by the Debtor were to be free
and clear of all liens, encumbrances, claims and interests with
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additional conditions specified as to a particular note held by
Burden and a mortgage on one parcel.
Paragraph 12 of the Stipulation provided for execution by the
parties of a limited non-competition agreement prohibiting NSP and
its assignees, successors, and assigns from engaging in real estate
brokerage within New Seabury, except as to its own properties, and
the Debtor, A + C Great Island and Burden from engaging in resort
operations within the boundaries of the New Seabury development and
within a three-mile radius. Nothing, however, was to prohibit NSP
from employing a broker of its choice to market its properties.
Paragraph 13 specified that "except as provided herein and
except as to the obligations of NSP under the NSP Plan," all
parties "shall be deemed to have remised, released and forever
discharged against the other any and all debts, demands,
obligations, avoidance actions, causes of action and any other"
claims, through the Effective Date of the NSP plan.
The remaining paragraphs of the Stipulation dealt with the
discharge of debts, providing, inter alia, that NSP did not release
its debts against the Debtor and that Burden released certain of
his debts.
Nothing was said in the Stipulation as to retention or
ownership of monies held in the Debtor's operating account. In
particular, there was no reference to the disposition of any sums
therein derived from real estate brokerage activities.
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At a hearing, the bankruptcy court confirmed NSP's plan and
entered a formal order on June 15, 1998 (the "Confirmation Date").
After the Confirmation Date, the Debtor continued to operate the
Brokerage.
During the preparation of the documents to close the
transaction transferring the bulk of the Debtor's assets to NSP, a
dispute arose regarding whether the Debtor was entitled to receive
and retain the net cash the Brokerage had generated through the
Effective Date of NSP's plan (the "Disputed Funds"). As noted,
revenue from the Brokerage operations was commingled with that from
the Debtor's two other divisions in a single Operating Account.
In order to complete the closing, the documents specifically
excluded the Disputed Funds pending resolution of the parties'
rights (the specific language is quoted below). The parties
executed the final closing documents on September 17, 1998 (the
"Closing"), which was also the Effective Date of the reorganization
plan. The bill of sale provided that the Debtor agreed to sell all
of the Debtor's rights and title but specifically excluded:
(i) any assets being retained by New Seabury Company
Limited Partnership pursuant to the Stipulation Relating
to Competing Plans of Reorganization, Objections to
Confirmation, Motion for Reconsideration and Motion for
Plan Partnership, entered into on May 29, 1998 (the
"Stipulation"); (ii) telephone number (508) 477-9400
pending a further determination of the Debtor's right to
retain that number; and (iii) property, assets and
rights, generated by or associated with the Seller's Real
Estate Brokerage Operations (the "Brokerage Operations")
including net cash generated by the Brokerage Operations
from January 1, 1998 through September 16, 1998 in the
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amount of $553,762.00, as estimated by the Seller which
amount shall remain in the Debtor's account in its
entirety until such time as the Court adjudicates the
rights of the Seller and NSP thereto, or until further
agreement of the parties, and any Purchased Assets
described on Schedules "B," "C," "D" and "E" hereto).
After the Closing, the Debtor retained the desks, computers,
fixtures, independent contractor agreements, marketing materials,
furniture and other equipment at the Brokerage. Pursuant to the
Stipulation, the Debtor retained the real property in which the
Brokerage conducts business.
NSP moved for an order to compel the Debtor to transfer the
Disputed Funds. The Debtor resisted, contending that the Disputed
Funds were an asset of the Brokerage which, under the terms of the
Stipulation, it was entitled to retain. It insisted that
brokerage-related revenues kept in the Operating Account went to
the Debtor by implication under paragraph 9 of the Stipulation,
which allowed the Debtor to retain "the real estate brokerage
segment of the Debtor's business." NSP responded that the
Stipulation made no reference to retention by the Debtor of any
portion of the Operating Account, hence the Disputed Funds belonged
to NSP.
A. The Bankruptcy Court's First Order
The bankruptcy court agreed that the language of paragraph 9
did not permit the Debtor to retain any portion of the Operating
Account, hence the Disputed Funds became the property of NSP. In
its March 11, 1999 Order on the case, the bankruptcy court analyzed
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paragraph 9 of the Stipulation and the Bill of Sale and concluded
that the two documents could not "be read to transfer or permit the
Debtor to retain any portion of the General Operating Account."
Paragraph 9 of the Stipulation reads:
The real estate brokerage segment of the Debtor's
business, including all licenses and permits required to
operate that segment of the business, shall be retained
by the Debtor.
The pertinent part of the subsequent Bill of Sale reads:
[T]he Purchased Assets conveyed to New Seabury
Properties, LLC shall specifically exclude (i) any assets
being retained by New Seabury Company Limited Partnership
pursuant to the Stipulation Relating to Competing Plans
of Reorganization, Objections to Confirmation, Motion for
Reconsideration and Motion for Plan Modification between
New Seabury Properties, LLC and New Seabury Company
Limited Partnership, entered into on May 29, 1998 (ii)
telephone number (508) 477-9400 pending a further
determination of the Debtor's right to retain that number
and (iii) property, assets and rights, generated by or
associated with the Debtor's Real Estate Brokerage
Operations including net cash generated by the Brokerage
Operations from January 1, 1998 through September 16,
1998 in the amount of $553,762, as estimated by the
Seller which amount shall remain in the Debtor's account
in its entirety until such time as the Court adjudicates
the rights of the Seller and NSP thereto, or until
further agreement of the parties . . . .
The bankruptcy court wrote:
3. The Bill of Sale dated September 5,
1998 . . . provides in pertinent part as follows:
[T]he Purchased Assets conveyed to New Seabury
Properties, LLC shall specifically
exclude . . . (iii) property, assets and
rights, generated by or associated with the
Debtor's Real Estate Brokerage Operations from
January 1, 1998 through September 16, 1998 in
the amount of $553,762, as estimated by the
Seller which amount shall remain the Debtor's
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account in its entirety until such time as the
Court adjudicates the rights of the Seller and
NSP thereto, or until further agreement of the
parties . . .
4. Paragraph 9 [of the Stipulation] [supra] . . . cannot
be read to transfer or to permit the Debtor to retain any
portion of the General Operating Account.
The bankruptcy court found that "[b]ased on the language of the May
29th Stipulation and the Bill of Sale, the Disputed Funds are
property of NSP and NSP is entitled to possession thereof." The
Debtor appealed to the district court from the bankruptcy court's
Order.
B. The District Court's First Order on Appeal
The district court, in its October 21, 1999 Memorandum &
Order, concurred with the bankruptcy court that the contract
documents were unambiguous1 but read the contract language as
mandating a different outcome from that reached by the bankruptcy
judge. Analogizing the situation to the construction of wills, the
district court noted that
[c]ourts have consistently concluded that a business
cannot be considered separately from the funds used to
run it . . . . I see no reason to come to a contrary
conclusion in respect of the brokerage operations here.
Its cash assets were part of the business and, as in any
business, are necessary to keep it operating.
The district judge looked to the language in paragraph 9 of the
Stipulation providing for retention of the Brokerage segment of the
1
Neither party contends that the Stipulation (or other
relevant contract document, if any) is ambiguous. We see no
occasion, therefore, to pass on that possibility, and do not do so.
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business, including all licenses and the permits required to
operate that segment, and found that the list was "an inclusive,
rather than exclusive matter." He stated that it was "improbable
that the licenses and permits were the only assets" retained by the
Debtor and that the "term brokerage operations itself indicates
that at least those assets essential to running the operations
should be retained" by the Debtor. He held that the cash assets of
the Brokerage were part of the business and were necessary to keep
the business operating, but specifically did not "reach the issue
as to whether any of the funds in the [Operating] [A]ccount were
truly attributable to the [Brokerage]." The district court's Order
remanded the case and directed the bankruptcy court "to determine
the amount of cash in the general operating account which is
attributable to the brokerage operations."
C. The Bankruptcy Court's Order on the First Remand
On remand, the bankruptcy court conducted a three-day trial.
It concluded first that the calculations of the amount in the fund
were to begin on January 1, 1998. Determination of the amount to
which each of the parties was entitled required consideration of
three elements: the total amount of Disputed Funds; the
application of real estate credits given to parties who bought real
estate through the Brokerage; and the application of certain other
costs, which are discussed below.
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In a pretrial stipulation in the bankruptcy court, entered
into prior to the hearing on remand, the parties had agreed that
the maximum amount of the Disputed Funds that the Debtor could
recover was the net revenue that the Brokerage earned from January
1, 1998 until September 18, 1998, or $479,457, and that the amount
inclusive of the Credits and Charges would be $55,670.
The Debtor offered parties that purchased real estate through
the Brokerage a "credit" (the "Credit" or the "Credits"). The
purchasers of the property could apply the Credit towards the
initiation fee required of new members to join the New Seabury
Country Club (the "Club"). The Recreation Division ran the Club.
Membership in the Club enabled a member to use its facilities,
including the golf courses. The amount of the Credit was a
percentage of the commission and could be applied towards the
initiation fee for as long as the homeowner remained a property
owner at New Seabury Resort. Credits exercised during the relevant
period totaled $298,866.
The "real estate carrying costs" (the "Charges") were costs
associated with unsold property of the Debtor such as landscaping
costs, depreciation and condo fees. The unsold properties
themselves were placed under control of the Hotel Division and used
as short term rentals. The parties agreed in the pretrial
stipulation that for the period of January 1, 1998 to September 17,
1998, the Charges totaled $124,921.
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The Debtor historically maintained consolidated financial
statements for all of its revenue producing entities, including New
Seabury Real Estate, Sound Realty, and the Club. When homeowners
utilized the Credits and joined the Club, the Debtor recorded the
total amount of the initiation fee, including the Credit, as income
to the Resort Division. The Debtor recorded the amount of the
Credit as an expense to the Real Estate Division at the time of its
exercise. The Charges were also treated as an expense of the
Brokerage. The bankruptcy court held that, treating the Brokerage
as a separate entity, the historic treatment of the Credits and
Charges was inappropriate to its determination. It adopted
testimony from expert witnesses as to applicable accounting
principles and concluded that "the Recreation Division would have
recorded both the income and expense of the Credit and, in essence,
recorded the transaction as a reduced price sale," and that the
Charges were "properly attributable to the Hotel Division for the
Charges bore no relationship to the Brokerage." The bankruptcy
court ultimately concluded that the Debtor was entitled to the
entire $479,457 of the Disputed Funds.
A second appeal to the district court followed.
D. The District Court's Second Order and Remand
In its March 5, 2004 Memorandum & Order, the district court
reaffirmed its earlier ruling that cash in the Operating Account
attributable to the Brokerage operation formed a part of the
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Brokerage segment of Debtor's business which the Debtor was allowed
to retain under the Stipulation. However, it was unsatisfied with
the accounting rationale accepted by the bankruptcy court based
upon a methodology not historically followed in the Debtor's own
consolidated financial statements. Accordingly, it remanded for
recalculation of the sums applicable to the brokerage segment, the
recalculation to be based on the original accounting methodology,
see supra. The court suggested this would lead the parties to the
$55,970 figure earlier stipulated to in the bankruptcy court or to
$83,846, the net income of the Real Estate Division reflected in
earlier accounting statements.
In once again grappling with the case, the district court also
noted its own dissatisfaction with its earlier rationale for
concluding that cash traceable to real estate brokerage operations
should be treated as a part of the retained assets to which the
Debtor was entitled. The district court wrote:
Further reflection has persuaded me that this case law
[i.e., that resting on testamentary dispositions of
businesses] is not fully sufficient to support my earlier
conclusion. Wills involve different modes of
construction than arm's-length commercial transactions,
let alone settlements in bankruptcy proceedings, because
the relationships between the parties, the ultimate goals
of the instruments, and the interpretive goals of the
court differ . . . . In sum, courts are likely to
construe a bequest generously, because the testator
manifestly sought to give something of value to a worthy
beneficiary, and because any verbal missteps in the will
are neither the beneficiary's fault, nor errors against
which the beneficiary could have protected
himself . . . . A Chapter 11 bankrupt cannot fairly
claim the benefits of this analogy; it is, after all, not
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a deserving child inheriting the family business, but
rather an insolvent permitted to remain in business for
the benefit of creditors. Nevertheless, the bankruptcy
court should treat the writings surrounding a
reorganization with an eye toward the equities of
reorganization.
The district court went on to affirm its conclusion that the term
"business" in the Stipulation necessarily included cash by
reference to other modes of analysis, including contract
interpretation, but noted that it was essentially performing a
"functional analysis of the parties' arrangement."
While it acknowledged that the relevant documents did not
explicitly mention cash as among the assets to be retained by the
Debtor and that "[a] reading of the Stipulation that excludes cash
might be consistent with the absence of a negotiated cash valuation
method, and the bankruptcy context in which the primary goal is to
pay back the Debtor's creditors," the district court nonetheless
concluded that "the loss should lie with NSP, because it was in a
better position to protect its interests by writing more detailed
contractual language, and because its theory of the limits of a
'business' does not lead to a coherent resolution." The court
additionally noted that:
[t]he general rubrics for construction of analogous
writings do not provide a full answer to the question.
Nor does general business practice. A business may be
conveyed in a variety of states -- all assets, all assets
except cash, all nonliquid assets, goodwill and
intellectual and real property only, goodwill only, and
so on -- and therefore the answer must necessarily turn
on the degree that any default position has been refined.
In this context, the Debtor draws a simple and coherent
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line: a 'business' includes all its assets unless stated
otherwise. NSP, having asserted that the line actually
falls somewhere inside the set of business assets, must
provide a logical place in which to draw it, but has not
done so.
On the issue of the proper way to account for the cash it
found Debtor was entitled to retain, the district court noted that
while historically, the Debtor had recorded the initiation fee at
the country club as income to the Recreation Division, it had
recorded the amount of the credit as a loss to the Real Estate
division. In August 1998, after the Stipulation had been executed
and the plan had been confirmed, the Debtor's principal,
Christopher Burden, told his accountant to "rework the figures for
the Real Estate Operations." The new accounting treated initiation
fee credits as losses to the Recreation Division, not the Real
Estate Division. The effect of this new accounting system was to
increase the net income of the Real Estate Division on the
consolidated financial statements.
The district court concluded that, under its new analysis
based on the parties' intent to form a contract, it was only
permissible for NSP to be found to have assented to the terms of
the bargain it could reasonably foresee. The district court
observed that NSP could not have foreseen the Debtor's change in
accounting methodology: "It is one thing for a court to hold NSP
to the reasonably foreseeable consequences of its ill-defined
bargain with the Debtor; it is quite another for the court to hold
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NSP to terms that could not possibly have been on the table." The
district court thus vacated the bankruptcy court's calculation of
the cash attributable to the Debtor and remanded for a
recalculation under the original accounting methodology.
The district court concluded:
If by March 22, 2004, the parties are unable to agree
upon a stipulated figure, I will remand to the Bankruptcy
Court to determine the amount of cash attributable to the
brokerage, using, January 1, 1998 as a start date, but
applying the accounting methodologies employed by the
Debtor on the date the Plan was confirmed. [footnote 13]
The parties shall file a status report by no later than
March 24, 2004 regarding the issues to be resolved. In
all other respects, the decision of the Bankruptcy Court
is AFFIRMED.
In the cited footnote, the district court stated:
I assume that the parties or the Bankruptcy Court will
naturally gravitate towards either the $55,670 figure in
the parties' joint pretrial stipulation, or $83,846, the
net income of the Real Estate Division reflected on
Debtor's financial statements, which treated both the
real estate credits and the carrying costs as losses to
the Real Estate Division. However, the parties and, if
necessary, the Bankruptcy Court are free to determine
the appropriate number under the former methodology
based on an independent review of the financial data.
If the parties are unable to agree, the Bankruptcy Court
may, but need not, receive new evidence beyond what has
already been presented to it.
The parties' status report indicated that:
In light of footnote 13 of the Memorandum and Order, NSP
offered to stipulate to the $55,670 figure in the
parties' join pretrial stipulation. Debtor responded
that there was no figure within the range described in
footnote 13 of the Memorandum and Order to which it would
stipulate. Debtor did not provide a figure to which it
was willing to stipulate.
E. The Bankruptcy Court's Order on Second Remand
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On remand, the bankruptcy court, "mechanically applying the
accounting principles historically used by Debtor," held that the
Debtor was entitled to $55,670 of the Disputed Funds. The district
court affirmed that order, and both parties appealed to this court.
Discussion
NSP in its cross-appeal argues that the district court erred
in reversing the bankruptcy court's initial ruling that the Debtor
was not entitled to any portion of the Operating Account, hence
could receive no part of the Disputed Funds. Understandably, the
Debtor sees no virtue in the initial bankruptcy court's rejection
of its claim to funds in the Operating Account, and asks us to
uphold its retention of $479,457 as found by the bankruptcy court
on the first remand. The Debtor urges that the district court
later erred both in altering its own analysis after the first
remand to limit recovery to the Debtor's historic accounting
principles and in suggesting the much lower range of totals from
which the bankruptcy court was to choose.
NSP responds that if we find the Debtor is owed some portion
of the cash in the operating account, it should be the lowest
possible amount.
While the issue is somewhat close, we incline towards the
bankruptcy court's original finding denying to the Debtor retention
of any of the funds in the Operating Account. The plain language
of the Stipulation and the fact that this transaction occurred in
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the context of a bankruptcy, not a traditional commercial sale,
among other reasons, support this conclusion. Accordingly, we hold
that the Debtor is not entitled to receive any portion of the
Disputed Funds.
A. Standard of Review
The bankruptcy and district courts' rulings regarding the
Debtor's entitlement under the Stipulation to the funds in the
Operating Account are matters of law reviewed de novo, and any
findings of fact made by the bankruptcy court are reviewed for
clear error. In re LaRoche, 969 F.2d 1299, 1301 (1st Cir. 1992).
This Court "'cede[s] no special deference to the district court's
initial review'" in examining a bankruptcy court's decision on
appeal. In re Merrimac Paper Co. v. Harrison, 420 F.3d 53, 58 (1st
Cir. 2005) (quoting In re Bank of New Engl. Corp., 364 F.3d 355,
361 (1st Cir. 2004)). Rather, we review directly the bankruptcy
court's determination. Id.
B. Why the Debtor may not Retain Cash from the Operating Account
Preliminary to the issue of how much money might have been due
the Debtor is whether the Debtor is due any money at all. As
noted, NSP now argues that the district court erred both in its
1999 order when, using testamentary bequest analysis, it reversed
the bankruptcy court's initial conclusion that the contract
documents between the parties could not be read to leave any money
from the operating account in the hands of the Debtor, and again in
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2004 when it reaffirmed its theory underlying its 1999 Order but
applied a "functional" analysis which concluded that NSP was more
capable of looking out for its interests than was the Debtor and
thus was required to bear the loss. NSP argues that the district
court's approach ignores the standard principles of contract
interpretation.
The Debtor, of course, agrees with the district court's
reversal of the bankruptcy court's original ruling but not with its
revised order regarding accounting. For the reasons explained
below, we agree with the bankruptcy court that, under the language
of the Stipulation and accompanying documents, the Debtor is not
entitled to any of the cash in the Operating Account.
A plan of reorganization is a binding contract between the
debtor and the creditors and is subject to the general rules of
contract construction and interpretation. See In re Sergi, 233
B.R. 586, 589 (1st Cir. 1999). Likewise, stipulations entered into
between parties are treated as contractual and are subject to the
principles of contract interpretation. Gomez v. Rodriguez, 344
F.3d 103, 121 (1st Cir. 2003); TI Fed'l Credit Union v. DelBonis,
72 F.3d 921, 928 (1st Cir. 1995).
There were four documents related to the ownership of the
funds in the Operating Account: NSP's plan, the Stipulation, the
Confirmation Order, and the Bill of Sale. As set forth in NSP's
plan as affirmed in the Confirmation Order,
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On the Effective Date the Debtor shall close the Sale
Event by conveying to NSP all of the Debtor's right,
title and interest in and to the Purchased Assets
(exclusive of the Assets to be left with the Debtor under
the Stipulation).
NSP's plan also provided that "[N]SP shall have the right not to
take title to any Asset . . . ." The language in the plan and
Confirmation Order indicates that any right the Debtor has to any
assets would be determined by reference to the Stipulation.
In support of the initial ruling of the bankruptcy court
rejecting the Debtor's claim to cash, NSP argues that the
Stipulation itself makes no provision for the Debtor to retain any
portion of the Operating Account. It is true, as the Debtor
emphasizes, that paragraph 9 of the Stipulation reads:
9. The real estate brokerage segment of the Debtor's
business, including all licenses and permits required to
operate that segment of the business, shall be retained
by the Debtor.
However, the paragraphs immediately following describe in
considerable detail what assets within the real estate brokerage
segment, beyond licenses and permits required to operate that
segment, are to be retained by the Debtor -- and nowhere, either in
paragraph 9 itself or thereafter, is reference made to any cash in
the Operating Account. Paragraphs 10 and 11 read as follows:
10. NSP and the Debtor shall, on the Effective Date of
the NSP Plan, execute an agreement in a form reasonably
acceptable to NSP and the Debtor, binding on each
parties' successors and assigns, containing the following
provisions, and failing the execution of such agreement
the provisions as set forth herein shall constitute such
agreement:
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a. The Debtor, A&C Great Island, Inc., and
Christopher Burden shall have and retain, or receive for
nominal consideration, a non-exclusive license to use the
registered trade name "New Seabury" in connection with
real estate brokerage operations conducted by one or more
of them, which license shall continue for as long as
Christopher Burden or any member of his family maintain
a majority ownership interest in or is involved in daily
operations of such business. The license shall include
a license to use the New Seabury name in marketing
material.
b. The brokerage operations will have access to all
resort amenities and may include pictures and information
regarding the resort amenities in its marketing and other
material for viewing and touring. Christopher and Nancy
Burden will be afforded full membership rights in the New
Seabury Club at no cost for as long as Mr. Burden has a
majority ownership interest in or participates in daily
operations of the brokerage operations, or for as long as
either Mr. Burden or Mrs. Burden reside at New Seabury.
c. The brokerage operations will have the non-
exclusive right to place reasonable temporary signage
(e.g. open house signs) and permanent signage relating to
real estate service operations on NSP's post-confirmation
New Seabury related property. The permanent signage
shall be where presently located and shall be in its
present form, or in a form reasonably acceptable to the
Debtor and NSP, provided however, that NSP may change the
permanent signage so long as such signage is of equal
visibility.
11. Real property on which the real estate service
operations are conducted, including and limited to, the
main New Seabury real estate office and the adjacent
parking facilities, the Popponessett Real Estate Parcel
as identified in the Debtor's Plan and the parcel at the
Mashpee Rotary on Routes 28 and 151 referred to as the
Sound Realty Parcel shall be retained by the Debtor. The
Debtor shall, on and for a two-year period following the
Effective Date, afford NSP use of three desks at the
Sound Realty location rent-free. NSP may, at its sole
option and expense, install its own phone lines and place
its own reasonable office equipment, including a
facsimile and copy machine in the Sound Realty property
for as long as it has the right to utilize that property.
Except as provided herein, the properties retained by the
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Debtor shall be free and clear of all liens,
encumbrances, claims and interests. NSP shall have no
obligation to the Debtor, Burden, or any affiliates with
respect to the Sound Realty Parcel, the New Seabury Real
Estate Office, or the Popponessett Real Estate Parcel,
including, without limitation, the note held by
Christopher Burden in the original principal, except for
the existing mortgage lien on the Popponnessett Real
Estate Parcel, which mortgage will be paid in accordance
with the NSP plan.
As noted, the Stipulation makes no reference to the retention
by Debtor of any portion of the cash held in the Debtor's Operating
Account. The Real Estate Division maintained no bank account of
its own. All the cash attributable to the three operating
divisions was held in the Debtor's single operating account, where
they were commingled. One would expect, if the parties to the
Stipulation had intended the Debtor to retain up to $500,000 from
the commingled operating account, that they would have said so.
Especially would this be expected in a Stipulation settling a
bankruptcy which specifies in detail the other real estate
Brokerage assets of significance that were to be retained by the
Debtor. The need to specify a considerable sum of cash, if it was
to be retained, would have seemed especially obvious in this
context not only because sums allocable to the real estate
Brokerage were commingled with cash from elsewhere, but because a
complicated system of credits and charges relative to real estate
commissions, implicating all three divisions, made it difficult to
ascertain what net sums were fairly attributable to the Brokerage
segment of the business. Historically, some of the credits and
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charges were treated so as to greatly reduce the sums allocated to
the real estate division on the Debtor's consolidated accounts,
although in the hearing held after the first remand, the bankruptcy
judge was persuaded by accounting experts that a methodology more
favorable to Debtor was correct.
In order to allow the Debtor to retain any of the Disputed
Funds, a court would have to resolve accounting issues that are
less than clear and read language into the Stipulation that does
not appear (language suggesting that the Debtor was entitled to
some of the funds, or giving a means of calculating the funds to
which the Debtor was entitled). Courts will not read language into
a contract where it does not appear. See Accusoft Corp. v. Palo,
237 F.3d 31, 41-42 (1st Cir. 2001) (citing Mathewson Corp. v.
Allied Marine Indus., Inc., 827 F.2d 850, 855 (1st Cir. 1987)).
The Debtor argues that the phrase "the real estate brokerage
segment of the Debtor's business," which paragraph 9 allows the
Debtor to retain, implies retention of monies belonging to that
aspect of the business. Had the Brokerage segment been more
clearly an independent business entity with, for example, its own
bank account, it would perhaps be more plausible to infer inclusion
of the latter among the retained assets. But the Brokerage
"segment" mentioned in paragraph 9 was just that--a segment of the
larger business; precisely what assets comprised that "segment" for
purposes of this bankruptcy sale was not self-evident but required
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the considerable clarification provided in the latter part of the
Stipulation, which describes in detail the various elements to be
retained.2
Debtor would have it that paragraphs 10 and 11 merely
enumerate additional assets to be retained by the Debtor.
According to the Debtor, NSP's interpretation does not give
adequate meaning to the language of paragraph 9. Debtor argues
that paragraph 9 becomes superfluous if paragraphs 10 and 11 are
read to specify the assets to be retained by the Debtor, thus
violating a common tenet of contract construction: "'every word
and phrase of an instrument is if possible to be given meaning, and
none is to be rejected as surplusage if any other course is
rationally possible.'" FDIC v. Singh, 977 F.2d 18, 22 (1st Cir.
1992) (quoting Tupper v. Hancock, 65 N.E.2d 441, 443 (Mass. 1946)).
However, paragraph 9 is not rendered meaningless by NSP's
interpretation. Paragraph 9 can be read as an introductory,
generalized characterization of the portion of the business the
Debtor was to retain, which assets (beyond the licenses and permits
expressly referenced in paragraph 9) were then more precisely
2
The district court was persuaded by the "simple and coherent
line" drawn by the Debtor, to the effect that "a 'business'
includes all its assets unless stated otherwise." See supra. It
is notable, however, that what was to be retained here was not the
Debtor's "business," as such, but rather the real estate brokerage
"segment" of the Debtor's business. It is thus largely irrelevant
that had Debtor's entire business been sold or retained, its cash
assets might be deemed to be included as part thereof.
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explicated in the following paragraphs, especially paragraphs 10
and 11.
We do not agree that the items listed in paragraphs 10 and 11
of the Stipulation can be written off merely as assets that the
Debtor received in addition to the "real estate brokerage segment."
To the contrary, most of the items later described within
paragraphs 10 and 11 would also fit under the general rubric of
"the real estate brokerage segment of the Debtor's business." The
subsequent specific descriptions in paragraphs 10 and 11 were
needed so as to explicate the parties' understanding of exactly
what items and rights were to be retained by the Debtor. In
arguing the items in paragraph 10 and 11 are mere additions, the
Debtor asserts the enumerated real estate parcels in paragraph 11
were not previously used exclusively by the Brokerage division.
They had, however, been used in some part by that division. To
show the parties' present agreement as to the precise status and
use of the parcels, as well as the extent to which they would form
a part of the retained segment, it was necessary, as was done, to
provide the specifics in paragraph 11. Much the same is true of
the cash now in dispute. It is not enough that some of the
unmentioned cash in the Operating Account may have derived from
past real estate brokerage operations. To show an intention to
include that cash as part of the retained real estate brokerage
segment, that intention needed to be stated -- and given the
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accounting uncertainties, the amount of the cash to be retained
needed to be declared -- just as all the other items were listed
and specified in paragraphs 10 and 11.
In the circumstances, we think it cannot be inferred simply
from the general language in paragraph 9 that the parties meant the
Debtor to retain any particular amount of the commingled cash. In
a bankruptcy transaction such as this, it would not be at all
unreasonable for the parties to have understood that Debtor would
receive the right to continue to operate the Brokerage segment
without being entitled to retain the cash previously generated by
brokerage operations. NSP needed cash assets to perform its
obligations to pay off the bankrupt's indebtedness. The Debtor
might be thought to benefit sufficiently from the right to operate
the real estate segment without receiving all or part of the cash
attributable to past operations of that part of the business.
Without more specific reference, it is impossible to determine that
the parties necessarily meant to permit the Debtor to retain some
portion of the Operating Account funds.
As already suggested, some of the current difficulty stems
from the fact that "the real estate brokerage segment of the
Debtor's business" was not a wholly independent business with its
own bank accounts. Precisely what assets were meant to be included
within the contours of that phrase were not self-explanatory,
making it necessary for the parties to have described with some
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reasonable degree of clarity, the particular items intended to be
retained. That description appears principally in paragraphs 10,
11 et seq.
In this respect, a further aspect of the Stipulation should be
mentioned. This is the wording at the start of paragraph 10, which
declares that NSP and the Debtor shall, on the effective date of
the NSP plan, execute a binding agreement containing the following
provisions -- provisions which themselves shall constitute such
agreement if none is executed. This indication that paragraphs 10,
11 and beyond are to be a separate agreement reinforces the notion
that they are to spell out the essential details of the real estate
brokerage segment earlier said to be retained. And, indeed,
paragraph 10 goes on to specify just such details, delineating
items such as the right of the Debtor, A+C Great Island, Inc., and
Burden to have and retain a non-exclusive license to use the
registered "New Seabury" trade name and marketing materials "in
connection with real estate brokerage operations conducted by one
or more of them," access to resort amenities and signage, and even
maintenance of membership in the New Seabury Club for Christopher
Burden and his wife. Given the extent of the detail in paragraphs
10 and 11, the omission therefrom of any reference to the cash in
the operating account is highly significant. The parties would
scarcely have overlooked mention of inclusion of a substantial
share of the commingled cash from the operating account, and the
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amount thereof, had this, too, been part of their completed
bargain, especially where it would be unclear simply from the
general language in paragraph 9 how much of an uncertain amount of
cash Debtor was to retain, if it was to retain any at all.
In addition to the lack of specific reference to the cash
associated with the Brokerage segment and absence of any declared
method to account for such cash, NSP also relies for a supplemental
argument on the maxim expressio unius est exclusio alterius, which
mandates that when parties list specific items in a document, any
document not so listed is excluded. Lohnes v. Level 3 Commc'n,
Inc., 272 F.3d 49, 61 (1st Cir. 2001). The absence of any
reference to cash when other items were delineated in paragraphs 10
and 11 indicates, according to NSP, that the cash was not intended
to be retained by the Debtor. The Debtor replies that the use of
the word "including" in paragraph 9 does not preclude the Debtor
from retaining the cash. See St. Paul Mercury Ins. Co. v.
Lexington Ins. Co., 78 F.3d 202, 206 (5th Cir. 1996) ("[W]e are not
convinced that the rule of expressio unius est exclusio alterius
applies in the instant case as the challenged list of provisions in
St. Paul's contract is prefaced by the word 'including,' which is
generally given an expansive reading, even without the additional
if not redundant language of 'without limitation.'"). NSP notes,
however, that unlike in the cases relied upon by the Debtor, the
word "including" in paragraph 9 is in a separate paragraph from the
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language in paragraphs 10 and 11, thereby limiting the relevance of
those cases in the instant situation. Paragraph 9 can be read as
an introductory paragraph referring to the licenses and permits and
then leading into the specifics of paragraphs 10 and 11 regarding
the shared property that would be retained by Debtor.
The Debtor argues that its position is supported by a review
of the associated transaction documents. In the first exhibit to
the Bill of Sale, Schedule A, the assets to be transferred from the
Debtor to NSP upon the Closing are described as "all properties,
assets and rights of [Debtor] not associated with or generated by
the Real Estate Brokerage Operations." The Debtor claims that cash
is one such asset "generated by" the Brokerage Division. Further,
Debtor argues that if it were to retain only a limited set of
assets of the Brokerage Division, rather than the entirety of the
"real estate brokerage segment," then Schedule F, which sets forth
a list of assets that were to be transferred to NSP despite being
located in the real estate Brokerage segment's offices, would have
been unnecessary. Moreover, the list of enumerated items in
Schedule F including "5 Wastebaskets," "1 Casio Calculator," and "1
Lamp" further suggests that NSP was cognizant of the need to
distinguish specific items from the all-encompassing (and thus
cash-including language) of the "real estate brokerage segment"
language in paragraph 9.
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The Debtor's arguments are not supported by the full language
and context of the Bill of Sale. The sentence cited by the Debtor
includes a parenthetical specifically noting that the distribution
of the cash will be resolved by the court. The complete language
in Schedule A provides that "in addition to any assets being
retained by [the Debtor] pursuant to the [Stipulation] . . . the
Purchased Assets shall not include any personalty located in the
real property to be retained by [the Debtor] under the Stipulation
unless set forth on Schedule F hereto . . ." (emphasis added). The
Bill of Sale recognized that the Debtor would retain only the
assets listed in the Stipulation and therefore specified in the
Schedule that the Debtor could retain the inconsequential property
inside the offices as well.
The Debtor's Schedule F argument likewise seems limited by the
fact that Schedule A provides for the retention by the Debtor of
the real estate office in which the real estate business is
conducted, so that it would have been important for NSP to identify
any objects it wished to take from that property. Such
specification does not necessarily imply that the parties assumed
that larger assets, like the cash, were included in the paragraph
9 reference to the "real estate brokerage segment."
In its reversal of the bankruptcy court's ruling that the
Debtor was not entitled to the cash, the district court noted the
traditional commercial practice of a seller's retaining the cash
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associated with the business it sells. It further observed,
however, that the instant case is complicated by the fact that it
is not a simple commercial transaction but a bankruptcy proceeding.
"The interpretation of a stipulated amendment to a bankruptcy
reorganization plan must . . . recognize certain concerns lurking
in the background: that creditors be paid; that the debtor be
rehabilitated; and that neither the debtor nor any creditor receive
a windfall." Here, NSP assumed the cost of nearly $8 million to
satisfy the Debtor's creditors. It is not unreasonable to read the
Stipulation and associated documentation to be maximizing the total
transfer of cash assets to NSP while still allowing the Debtor to
maintain the real estate Brokerage for future use. As the district
court noted, "a 'segment of . . . business' can be a valuable and
coherent asset if limited to goodwill, real property, equipment,
and intellectual property needed to operate the business, even
without cash." Additionally, "[a] reading of the Stipulation that
excludes cash might be consistent with the absence of a negotiated
cash valuation method, and the bankruptcy context in which the
primary goal is to pay back the Debtor's creditors." The district
court observed that the Debtor has been able to operate the
Brokerage for several years without the use of the Disputed Funds.
Christopher Burden put an undisclosed amount of his personal
capital into the business.
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The district court ultimately concluded that NSP should bear
the loss because it was in a better position to protect its assets
in the drafting of the Stipulation. We are unable to accept that
rationale. Both parties were represented by attorneys. If
retention of the cash was an item of importance to the Debtor, it
is not unreasonable to believe that it would have sought to
negotiate a reference thereto in the Stipulation. We see no
unfairness in holding against the Debtor in the absence of such a
reference, such absence being indicative that the parties formed no
such agreement. While doubtless the bankrupt party was in a weaker
negotiating position, that cannot justify rewriting the parties'
agreement for presumed equitable reasons.
We believe the bankruptcy court's initial conclusion (and the
district court's acknowledgment of the reasoning underlying it) was
correct. The plain language of the Stipulation and associated
documentation does not support a conclusion that the Disputed Funds
or some portion of them were intended to be retained by the Debtor.
The funds were in the Operating Account, and the Stipulation
provided neither express reference to the cash nor any reference to
a method of accounting for the Brokerage's share of the cash. By
contrast, paragraph 11 itemizes the real property to be retained by
the Debtor which had not been exclusive property of the Brokerage
division. The bankruptcy court's conclusion that the Debtor was
not entitled to retain the cash is in keeping with the plain
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language of the contract documents and also acknowledges the unique
posture of the bankruptcy proceeding which sets this case apart
from a traditional commercial transaction.
Remanded with directions to affirm the initial judgment of the
bankruptcy court and to vacate the contrary judgments of the
district court.
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