United States Court of Appeals
For the First Circuit
No. 08-2134
LPP MORTGAGE, LTD.,
Plaintiff, Appellant,
v.
LEONARD SUGARMAN,
Defendant, Appellee.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Rya W. Zobel, U.S. District Judge]
Before
Boudin, John R. Gibson,* and Howard,
Circuit Judges.
Christopher P. Litterio with whom Michael J. Duffy and
Ruberto, Israel & Weiner, P.C. were on brief for appellant.
Daniel J. Murphy with whom Stanley W. Wheatley and The Murphy
Law Group, LLC were on brief for appellee.
May 7, 2009
*
Of the Eighth Circuit, sitting by designation
BOUDIN, Circuit Judge. The facts underlying this appeal
date back to 1975, when the Small Business Administration ("SBA")
loaned $4 million, evidenced by a promissory note, to Statler
Industries, Ltd. ("Statler"), an Augusta, Maine, based paper
manufacturer. To secure the loan, the SBA received a first
priority mortgage on the Statler plant site, a first priority
security interest in almost all the company's equipment and
machinery and a personal guaranty of the loan from Leonard
Sugarman, then Statler's president and a major shareholder.
Sugarman's attorney, Harris Baseman, was able to modify
slightly the standard guaranty required by the SBA; with SBA's
consent the word "LIMITED" was added to the title of the preprinted
SBA form and an additional sentence--"This guaranty is limited to
60.1% of the outstanding loan balance"--was added to the bottom of
the preprinted form. The guaranty did not require the SBA to
exhaust its collateral before turning to him; Sugarman sought
unsuccessfully to secure such a limitation but the SBA refused to
modify its boilerplate.
In 1980, the firm's finances were in good shape, and
Sugarman not only renewed his prior request that the SBA agree to
liquidate collateral before he was held personally liable, but also
asked to have the guaranty limited to $500,000. With the SBA's
agreement Baseman had the following two sentences typed at the
bottom of the guaranty form before it was re-executed:
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This guaranty is limited to the deficiency
existing after sale of corporate assets
securing the subject loan. The guaranty is
further limited to an amount not to exceed
Five Hundred Thousand Dollars.
At the SBA's insistence, the preprinted language was not altered.
Thus, inconsistent with the new first sentence of the added
language, boilerplate language in the form continued to allow the
SBA to demand payment from Sugarman without first exhausting the
collateral.
Also left undisturbed was boilerplate language granting
the SBA "full power, in its uncontrolled discretion and without
notice to [Sugarman]" to take any action it deemed fit with respect
to the collateral. The form provided the SBA could "deal in any
matter" with the collateral, including:
[T]he substitution, exchange, or release of
all or any parts of the collateral, whether or
not the collateral, if any, received by Lender
upon any such substitution, exchange or
release shall be of the same or a different
character or value than the collateral
surrendered by Lender.
The new 1980 guaranty, executed by both sides, is agreed to have
supplanted the original guaranty.
In 1994, Statler defaulted in its payments on the SBA
loan. The SBA then demanded payment of the outstanding balance
($1.277 million plus interest) and, unable to pay, Statler filed
for chapter 11 bankruptcy. In 1996, with the bankruptcy court's
assent, Statler sold its assets to Tree-Free Fiber Co., LLC., which
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assumed Statler's obligations under the SBA loan. Sugarman
consented to the assumption, reaffirmed his guaranty, and agreed
that "Tree-Free [could] sell machinery or equipment with an
aggregate value up to $25,000 per year" without SBA consent.
To carry out its purchase of Statler's assets, Tree-Free
received a $6 million loan from a supplier, Thermo Fibertek, Inc.
The loan was given pursuant to a subordination agreement, which
granted Thermo Fibertek the first security interest in certain
machinery and equipment that had previously been subject to the
first priority claims of the SBA. Both the SBA and Sugarman gave
their consent to this subordination.
The following year, Tree Free needed additional financing
to upgrade its facilities and sought a loan from KeyBank, N.A. To
help Tree Free to secure the loan, the SBA agreed with KeyBank that
the SBA would give up its first priority on certain of the
mortagaged real estate and its first priority security interest in
certain of the machinery and equipment that backed the promissory
note. Sugarman was apparently not told of the transaction and he
did not give consent to the SBA's release of its priority
positions.
At the time, Philip Proulx, then the SBA's chief of
portfolio management, expressed concern in a letter to Tree Free
executives about the proposal that the SBA enter into the release.
Proulx said that if it subordinated its position and the business
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were to fail, Sugarman would remain liable under the guaranty but
without the protection provided by the SBA's first claim on the
released real estate and equipment.1 Nevertheless, the SBA took
the view that it was entitled to release the collateral without
Sugarman's consent and ultimately did so.
In December 1997, Tree Free defaulted on the loan from
KeyBank and the Maine Superior Court placed Tree Free into
receivership. Tree-Free's assets were sold; with its reduced
security position, the SBA received only $350,000 of the $3.5
million the sale generated. As a result, the SBA was left with a
deficiency on its original loan to Statler in the amount of
$284,688.71, plus additional interest that had accrued.
The SBA demanded under the 1980 guaranty that Sugarman
pay the deficiency. Sugarman denied liability, contending that the
SBA had violated its obligations to him by releasing its first
priority security interests without his consent. The loan was
1
The letter stated, in relevant part:
I would like to point out that considerations other than
credit enter our deliberations. We currently have the
personal guaranty of the former principal of Statler,
which is not now at risk of being called upon, but, which
will be if we enter the proposed pari passu arrangement
and the business fails. Although our documentation
allows us to take actions we consider prudent and in the
best interest of SBA without consent of the guarantor, we
have a moral obligation to consider the effects of our
action on that individual. Additionally, should we agree
to enter agreements which place him at risk of personal
loss, we would anticipate litigation....
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eventually purchased from the SBA by LPP Mortgage Ltd. ("LPP");
standing now in the SBA's shoes, LPP commenced this law suit in
federal district court in Massachusetts to recover the deficiency
remaining on the loan to Sugarman.
In the district court, both parties moved for summary
judgment and the district court denied both motions. In doing so,
the court found that the SBA was required under the guaranty to
exhaust whatever collateral it had before turning to Sugarman as a
guarantor. Although (as noted above) boilerplate language provided
otherwise, the district court found the typewritten sentences added
in 1980 overrode the boilerplate language in this respect.
However, the modified guaranty by its terms only required
the SBA to exhaust its collateral ("This guaranty is limited to the
deficiency existing after sale of corporate assets securing the
subject loan."). The district court found it less clear whether
the SBA was entitled to release collateral in 1997 without
Sugarman's consent. It therefore conducted a two day bench trial,
hearing extrinsic evidence of the parties' intent. Proulx,
Sugarman and Baseman all testified.
Proulx testified that, consistent with his letter, he
believed the typewritten text had no impact on the SBA's rights to
subordinate its collateral. Sugarman and Baseman both testified
that they understood the language inserted in 1980 to protect
Sugarman's interest in having the collateral available and that its
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release without his consent was inconsistent with this
understanding. Ultimately, the district court found that
Sugarman's consent was required and it dismissed LPP Mortgage's
claim.
The gist of the district court's decisions--one denying
summary judgment to LPP and the other deciding against it on the
merits after trial--was as follows: that the guaranty as amended by
the additional sentences was ambiguous as to whether the SBA could
without Sugarman's consent subordinate its first priority in the
collateral so that extrinsic evidence was proper; and, based on the
testimony and the parties' dealings, Sugarman's answer--that the
SBA could not do so--was persuasive.
LPP has appealed, urging various errors; the standard of
review in this court varies with the claim of error. Broadly,
issues of law are reviewed de novo, Carr v. PMS Fishing Corp., 191
F.3d 1, 5 (1st Cir. 1999), and fact findings at a bench trial for
clear error, Principal Mut. Life Ins. Co. v. Racal-Datacom, Inc.,
233 F.3d 1, 3 (1st Cir. 2000); but several judgment calls arguably
fall somewhere in between these poles. The case is not hard to
analyze but several of the issues are very close calls.
We start with choice of law which, happily, turns out not
to matter. In the district court, LPP claimed that Massachusetts
law governed, while Sugarman thought Maine law controlled. They
agreed, however, that there were no substantive differences between
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the two states as to the relevant contract rules and the district
court applied a hybrid of the two. Neither side complains about
this approach on appeal, and we mention it only because both sides
were probably wrong.
Because the guaranty is a contract between a private
party and an agency of the United States, it appears likely that
federal common law governs as to contractual issues, 13 C.F.R. §
101.106(b)(2) (2009), borrowing from state law where appropriate
and consistent with federal interests. In some situations, federal
common law might give the government an edge; but often ordinary
contract principles apply and no one argues otherwise here.
LPP argues first that the district court erred in finding
the guaranty ambiguous and conducting a trial on extrinsic
evidence; specifically, evidence of course of dealing, the context
in which the typed amendment was agreed to, and the parties'
intentions as to the overriding of boilerplate. Whether a contract
is ambiguous is a question of law and our review of the district
court's ruling on that issue is plenary. ITT Corp. v. LTX Corp.,
926 F.2d 1258, 1261 (1st Cir. 1991).
LPP's position is not frivolous, and 50 years ago many
courts would readily have endorsed it, at least so far as concerns
the SBA's right to dispose of collateral without Sugarman's
consent. E.g., Burlee Dry Dock Co. v. Besse, 130 F. 444, 445-46
(1st Cir. 1904). But the tendency of the courts has been to soften
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the rigor of the classic doctrine that extrinsic evidence cannot be
admitted to override plain language. 2 Farnsworth on Contracts §
7.12, at 314 (3d ed. 2004); see also Donoghue v. IBC USA
(Publications), Inc., 70 F.3d 206, 215 (1st Cir. 1995).
The thin edge of the wedge was the view, now quite
common, that extrinsic evidence can be offered to show that
seemingly plain language, in the circumstances, conceals an
ambiguity.2 From there, it is not a long leap to a "peek" at
extrinsic evidence even where it does not focus directly on
"ambiguity." Bank v. Int'l Bus. Mach. Corp., 145 F.3d 420, 424 n.2
(1st Cir. 1998). How far to go is not clearly settled and perhaps
cannot be reduced to formula. See Nat'l Tax Inst., Inc., 388 F.3d
at 20 (stating that it may be permissible to look to extrinsic
evidence where "language may point only slightly in one direction
and extrinsic evidence strongly in another").
As it happens, the ambiguity here is in part very much on
the surface. Compare Hunt Ltd. v. Lifschultz Fast Freight, Inc.,
889 F.2d 1274 (2d Cir. 1989). LPP is right that the provisions on
which it relies do not in the strictest sense conflict with the
added sentences. The former give the SBA broad authority to
2
Courts may look at extrinsic evidence for the "very purpose
of deciding whether the documentary expression of a contract is
ambiguous," Donoghue 70 F.3d at 215, for there is the real
possibility that "extrinsic evidence may in fact reveal an
ambiguity not otherwise patent." Nat'l Tax Inst., Inc. v. Topnotch
at Stowe Resort & Spa, 388 F.3d 15, 20 (1st Cir. 2004).
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dispose of collateral without notice to Sugarman or his consent;
the added language literally read merely requires resort first to
whatever collateral the SBA has if and when it seeks to recover
from Sugarman.
But the added wording squarely conflicts with boilerplate
language saying that the SBA need not exhaust collateral before
turning to Sugarman, and this language was not deleted when the
addendum was added. So something is amiss. And, while one can
argue that the conflict is only between this latter boilerplate
provision and the added language, the provisions relating to
collateral are functionally interrelated and Sugarman now has a
plausible argument for looking behind plain wording to see just how
far the parties intended to repeal the relevant boilerplate.
Sugarman also has two pieces of extrinsic evidence, short
of testimony about the parties' intent, that might be can openers
for direct testimony on that subject. The first is that the SBA
did seek Sugarman's consent in 1996 when it was agreed that Tree-
Free would receive Statler's assets. Course of conduct testimony,
for obvious reasons, troubles courts less than other testimony, and
is widely considered. See 2 Farnsworth on Contracts § 7.13
(detailing importance of course of dealing and performance in
contract interpretation).
The other piece of concrete extrinsic evidence is
Proulx's letter expressing concerns when the SBA agreed with
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KeyBank to surrender SBA's first priority rights. It is true that
Proulx was not part of the 1980 negotiations and spoke only of a
moral and not a legal commitment; but it reinforces the connection
between the exhaustion obligation and the importance of maintaining
the collateral intact. Both the letter and the 1996 consent,
although less weighty than might appear, reinforce the court's
finding of ambiguity.
This brings us to the merits on the premise that all of
the evidence may be considered which, as LPP framed its appeal,
present a series of issues: whether the district court misstated
the burden of proof, whether it matters, whether the evidence
supports the court's findings, whether the facts found support the
court's ultimate determination that the SBA breached its
obligations, and whether Sugarman proved injury from such a breach.
The issues are curiously entangled.
The district court arguably did, as LPP argues, misstate
the allocation of burdens of proof, due partly to a confusing
colloquy with counsel. LPP, as the party suing on a contractual
guaranty, had to prove the guaranty, the failure to recover on the
note and the sum remaining unpaid. Transmedia Rest. Corp. v.
Elegant Appetites, Inc., No. 243682, 2000 WL 1616462, at *3 (Mass.
App. Div. Oct. 20, 2000). But most of this was straightforward and
Sugarman's liability turned, primarily, on whether the SBA was
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obliged to get his consent before releasing the collateral--which
admittedly it did not do.
The district court said that "the parties agreed during
the trial that plaintiff bears the burden of proving the parties'
intent in 1980" and it found that while Sugarman had introduced
intent evidence from him and Baseman; LPP--according to the
district judge--"failed to meet its burden for the simple reason
that it failed to proffer any evidence of the SBA's intentions in
1980"--Proulx having not been involved in the revision and offering
only his own later view of SBA obligations.
LPP argues persuasively that it made no such general
concession. The pertinent exchanges confirm that LPP twice told
the district judge that it bore the burden of showing a contract
and its breach but that, to the extent that Sugarman claimed that
he was excused from performance because of a breach by SBA of an
obligation under the guaranty to get his consent, this was an
affirmative defense on which he bore the burden.3 This may well be
the better view of the law. Cf. Fed. Deposit Ins. Corp. v. Elder
Care Servs., 82 F.3d 524, 526 (1st Cir. 1996).
After all, Sugarman claims that the guaranty required his
consent to the SBA's disposal of collateral: he does not say that
3
The two exchanges, occurring at different times during the
trial, are reprinted in an addendum and, in the second one, the
district judge acknowledges that this is LPP's position.
Sugarman's brief does not effectively respond.
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the language explicitly required it but that it was implicit in the
amendment. It follows that Sugarman would have to show that such
a provision implicitly existed and that the explicit boilerplate to
the contrary had been implicitly disregarded. Whether or not one
calls this an affirmative defense, it feels like something that
Sugarman would normally have to show--absent an LPP concession
which we think is absent.
But, despite the district court's "simple reason"
statement quoted above, it is clear to us that the burden
allocation made no difference to critical factual findings.
Sugarman and his lawyer both testified as to their understanding of
the contract and the district court credited their testimony; the
SBA offered no direct evidence of the understanding of SBA
officials involved in the 1980 adjustment; and the limited
circumstantial evidence supporting Sugarman is undisputed. See
Restatement (Second) of Contracts § 202 cmt. g (1981) ("The parties
to an agreement know best what they mean").
Burden might matter if no witnesses had testified or the
inferences were in perfect equipoise, but given that the district
court heard and believed Sugarman, the raw facts are simply not in
dispute. And here the issue is readily framed but not easily
answered: is it permissible to move from a solid finding that
Sugarman and his lawyer understood the contract to embody a consent
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requirement to the more debatable conclusion that the contract
should be so interpreted?
After all, Sugarman did not claim that any SBA
representative shared his understanding and so conceded; he
testified that because the amended language was designed to give
him the protection of the collateral, it followed that the SBA
could not release the collateral without his consent. This is not
necessarily an unreasonable inference on his part; but the SBA, if
it thought at all, could have thought that at most it had to behave
reasonably as to the collateral--not that it needed Sugarman's
consent.4
But even if the SBA had one understanding and Sugarman
another on this single detail as to the necessity of consent,
modern contract law would not let either the guaranty or the
amendment fail for "lack of mutual understanding." Instead the
courts would fill the gap with a "reasonable" solution, either
attributing it to both sides' intent (conforming to what was taught
when judges were in law school) or confessing that this is what
4
Courts have read such a reasonableness obligation into SBA
guaranty contracts absent an agreement to the contrary, Small Bus.
Admin. v. Sotomayor-Santos, 96 F.3d 584, 585 (1st Cir. 1996) (per
curiam); United States v. Mallett, 782 F.2d 302, 304 (1st Cir.
1986), and it would certainly be the minimum that a guarantor would
claim if the issue were not addressed. And there is reason to
believe that the insertion of the language in question here would
have created just such a requirement. See United States v. Baus,
834 F.2d 1114, 1126-27 (1st Cir. 1987).
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judges do. Liberty Mut. Ins. Co. v. Nippon Sanso K.K., 331 F.3d
153, 159 (1st Cir. 2003); 2 Farnsworth On Contracts § 7.9, at 285.
The district judge took a third course by attributing the
outcome to the burden of proof, but the result would hardly be
different if the judge were asked (in a pointless remand) to choose
the reasonable solution. Sugarman's aim had been to get the
collateral positioned ahead of his own liability; the amendment
accepted by the SBA clearly did this and, just as clearly,
implicitly negated the boilerplate to the contrary. Sugarman might
reasonably think it equally implicit that the collateral could not
be disposed of without his consent.
Although Sugarman's lawyer drafted the added sentences,
it was the SBA that insisted on retaining all of the boilerplate
including language flatly contrary to the addendum. Each can be
regarded as the drafter of part of the contract, so the maxim of
contra proferentem uselessly runs against both, 2 Farnsworth on
Contracts § 7.11 at 300-04; but the SBA is the main cause of the
muddle by accepting the modification and then (according to
Baseman) refusing to accept any adjustment in the boilerplate.
Finally, we have Proulx's letter acknowledging a "moral"
obligation not to release the collateral and admitting that
Sugarman was safe if the release did not occur; the fact that the
SBA did secure Sugarman's consent in the earlier limited release of
collateral; and the failure of LPP to secure any SBA witness
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offering a different understanding of events. However limited the
weight of such considerations, they are certainly not helpful to
LPP's position.
In the end, the district court's decision as to the need
for consent is reasonable and a remand to recast slightly the
rationale would serve no purpose. This brings us to LPP's very
brief final argument, which is that Sugarman failed to show damages
from the release of the collateral without his consent. It might
be a nice question, not briefed by either side, whether an implicit
requirement of consent was a condition of Sugarman's liability or
merely an independent breach for which he had to show damages.
The failure to brief the issue could be fatal to LPP but
there is a good reason why it has not devoted much attention to the
damages issue. Proulx's letter said that Sugarman was safe just
before the collateral was released; it is fair enough to treat this
as proof that, but for the release, he would owe nothing. This,
seemingly, is what the district court did, and to this view LPP
offers no rebuttal.
Affirmed.
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ADDENDUM
Initial exchange regarding burden of proof:
THE COURT: . . . . [W]ho has the burden of proving what?
. . .
MR. MURPHY [counsel to Sugarman]: I think the plaintiff has to
prove the intent -- not only the intent of the parties, but that
the parties lived up to their obligations under the agreement....
. . .
MR. LITTERIO [counsel to LPP]: I think we bear the burden on the
intent of the parties, but I disagree with the affirmative
defense, which is did we breach the contract which would relieve
me of my obligations.
Second exchange regarding burden of proof:
THE COURT: . . . Did we agree that the plaintiff has the burden
of proving that they didn't violate the guaranty or that the
guaranty --
MR. MURPHY: Yes.
MR. LITERRIO: I'm sorry. I'm sorry. I'm not sure what we
agreed to, because I think the defendant -- the plaintiff has the
burden of establishing that there was a contract, that there has
been a breach of that contract and what the damages are. That's
my understanding of our burden of proof.
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If there's a defense that there was a breach of a term which
relieved the defendant of an obligation --
THE COURT: That's the defendant's burden.
MR. LITTERIO: -- that's the defendant's burden.
THE COURT: Okay . . . .
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LPP Mortgage, Ltd. v. Sugarman
Court: Court of Appeals for the First Circuit
Date filed: 2009-05-07
Citations: 565 F.3d 28
Copy CitationsCombined Opinion