UNITED STATES COURT OF APPEALS
For the Fifth Circuit
No. 99-11375
PETULA ASSOCIATES, LTD.,
Plaintiff-Counter Defendant-Appellant-Cross Appellee,
VERSUS
DOLCO PACKAGING CORPORATION,
Defendant-Counter Claimant-Appellee-Cross Appellant.
Appeals from the United States District Court
for the Northern District of Texas, Dallas Division
February 12, 2001
Before DAVIS and EMILIO M. GARZA, Circuit Judges, and POGUE,
Judge*.
POGUE, Judge:
Petula Associates, Ltd. (“Petula”) appeals the district
court’s grant of final judgment and its grants of summary judgment
in favor of Dolco Packaging Corporation (“Dolco”). Petula had
filed suit in Texas state court, whereupon Dolco removed the case
to the United States District Court for the Northern District of
Texas, Dallas Division, asserting diversity jurisdiction pursuant
*
Judge of the U.S. Court of International Trade, sitting
by designation.
to 28 U.S.C. §§ 1332, 1441. The district court heard motions on
summary judgment from both parties, and ruled in favor of Dolco in
two separate opinions and orders dated February 23, 1998, and March
30, 1999. The district court entered its final judgment on
December 3, 1999, following which Petula filed a timely notice of
appeal to this Court. Dolco cross-appeals one of the district
court’s rulings. For the reasons discussed below, the Court
REVERSES-IN-PART and AFFIRMS-IN-PART, and VACATES the district
court’s award to Dolco of an equitable accounting and attorneys’
fees, WITHOUT PREJUDICE as to the attorneys’ fees. Dolco’s cross-
appeal is DISMISSED AS MOOT. This case is REMANDED for judgment
consistent with this opinion.
Factual Background
This suit arose from a dispute regarding a purchase option
contained in a lease agreement (“the lease”) on a property located
in Dallas, Texas (“the property”). In December, 1985, Petula
leased a commercial building to Dolco for a fifteen-year term. The
lease was amended twice. The lease provided both a renewal and a
purchase option for Dolco. In Paragraph 43 of the lease, Dolco was
afforded the opportunity to purchase the property for the set price
of $4,833,128.16, plus costs, during the first five years of the
lease, or for the “fair market value” during the next five years of
the lease. In November, 1990, however, the purchase option and
rental payment provisions of the lease were altered due to Dolco’s
reorganization. While the period for purchasing the property at
the set price was re-started (it now expired at 12:00 a.m. on
August 1, 1996), the “fair market value” option period was
shortened from five years to five days after the first option
expired. Further, Dolco’s rental payments were graduated, so that
Dolco would pay reduced rents in the first five years of the
amended lease, with the reduction to be made up by increased rents
thereafter.
According to both the original and the amended lease, the
“fair market value” of the property was to be determined in
accordance with the valuation procedure outlined in Paragraph 28 of
the lease. Pursuant to Paragraph 28, the parties were first
required to attempt to reach agreement on the “fair market value”
of the property. If those negotiations failed, the parties were
each required to select an appraiser to value the property; the
average of the appraisers’ estimates would constitute the “fair
market value” of the property. If, however, the appraisers’
valuations differed by more than ten percent, the appraisers were
to select a third appraiser to value the property.
In accordance with the lease purchase provision, Dolco
informed Petula on August 1, 1996, of its intent to exercise its
option to purchase the property for “fair market value.” The
parties were, however, unsuccessful in their attempt to reach an
agreement regarding the “fair market value” of the property. As a
consequence, each party hired an appraiser to value the premises.
Dolco’s appraiser determined that the property should be valued
without regard to the lease, and therefore valued the property at
$2.75 million. Petula’s appraiser determined that the term “fair
market value” should include the value of the lease, and therefore
appraised the property at $5.15 million. Because of the divergence
in the appraiser’s valuations, a third appraiser was selected. The
third appraiser, however, recused himself before valuing the
property.
After the third appraiser withdrew, Petula refused to allow
another appraiser to be appointed, and instead filed a declaratory
judgment action in Texas state court. Dolco removed the case to
federal district court, and requested summary judgment. The
questions before the court were whether Dolco caused the third
appraiser to withdraw, and whether the lease should be considered
in determining the “fair market value” of the property. The
district court held that Dolco’s actions with regard to the
appraiser did not constitute a breach of the lease, and thus that
Dolco was entitled to specific performance of the lease.1 In
addition, the district court ordered that another appraiser be
appointed, and that the factors in Paragraph 28 controlled whether
the lease should be considered in determining the fair market value
of the property. Because the lease was not listed as a factor in
Paragraph 28, the court determined that the lease should not be
included in the valuation. On June 18, 1998, a new appraiser
1
Neither party appeals this aspect of the district court’s
decision.
determined that the property was worth $3 million,2 and thereafter
Dolco requested a closing date.
Prior to the proposed closing date, Dolco informed Petula that
the lease required Petula to provide a warranty deed free of liens
or encumbrances at closing. Petula, however, argued that pursuant
to Paragraph 43(D) of the lease, it could tender the property
subject to its first lien mortgage of $3.8 million. Thereupon
Dolco filed a summary judgment motion arguing that Petula could not
encumber the property, and that Dolco should receive an equitable
accounting and attorneys’ fees. Petula filed a cross-motion for
summary judgment arguing that Paragraph 43(D) allowed the property
to be encumbered by the lien, and that because of the non-recourse
provision in the lease, Dolco was not entitled to an equitable
accounting or attorneys’ fees.
The district court held that Petula’s interpretation of
Paragraph 43(D) was incorrect, and that Petula could not transfer
the property subject to the lien because Petula did not have
positive equity in the property. Further, the district court
granted Dolco’s request for attorneys’ fees because the court found
that Paragraph 38 of the lease contemplated the assessment of
attorneys’ fees. The court also granted Dolco’s request for an
equitable accounting for the rents paid by Dolco from July 18,
1998, forward. Although Dolco had requested an accounting from
2
Although Petula complied with the court’s orders to
proceed with appraisal of the property, it reserved the right to
appeal the lower court’s determinations.
December 1, 1996, or one month after the original third appraiser
resigned, the court determined that July 18, 1998, was the
appropriate date, because that was date on which the closing should
have occurred following the June 18, 1998, appraisal.
Petula appeals three of the district court’s holdings: first,
that the lease should not be considered in determining the “fair
market value” of the property; second, that Petula may not transfer
the property to Dolco subject to the existing first lien mortgage;
and third, that Petula may be held liable to Dolco for an equitable
accounting and attorneys’ fees. Dolco appeals the district court’s
decision to start the equitable accounting period on July 18, 1998,
rather than on December 1, 1996, as Dolco had requested.
Standard of Review
This suit involves the interpretation of terms included in the
lease. Because the suit was brought under diversity jurisdiction,
the district court applied Texas law regarding contract
interpretation. Under Texas law, summary judgment may be granted
if the terms of a contract are not ambiguous, such that they “can
be given a certain or definite legal meaning or interpretation.”
Coker v. Coker, 650 S.W.2d 391, 393 (Tex. 1983). In the present
case, the district court concluded, and the parties did not
dispute, that the provisions of the lease are unambiguous. The
district court then granted summary judgment in favor of Dolco
regarding the interpretations of the phrase “fair market value,”
the provisions governing how the purchase price for the property
should be paid, and the provisions limiting Petula’s personal
liability under the lease. We review the district court’s
conclusions de novo. See EEOC v. Boeing Services Int’l, 968 F.2d
549, 553 (5th Cir. 1992).
Discussion
I. Fair Market Value
Paragraph 28 of the lease provides in relevant part:
In determining the “prevailing fair market rate” or “fair
market value” for the purposes of a provision in the
lease, such rate or value shall be the rate or value, as
the case may be, which Landlord and Tenant shall mutually
agree upon, considering like premises in the Dallas,
Texas area, of the same quality and age of the building
and also considering the length of the renewal term then
under consideration (as to fair market rate), and the
quality, utility and location of the space involved.
Texas courts have consistently defined “fair market value”
broadly to mean the price a piece of property would receive on the
open market if the seller and buyer were not compelled to enter
into the transaction. See State v. Windham, 837 S.W.2d 73, 77
(Tex. 1992)(quoting State v. Carpenter, 126 Tex. 604, 89 S.W.2d
194, 202 (Tex. 1936))(fair market value is “‘the price which the
property would bring when it is offered for sale by one who
desires, but is not obligated to sell, and is bought by one who is
under no necessity of buying it’”). Consequently, when the term
“fair market value” is used in a contract governed by Texas law, it
may be presumed that the parties intended the term to be understood
according to this meaning, absent a clear indication to the
contrary. See RESTATEMENT (SECOND) OF CONTRACTS § 202 (3)(a) (1981). As
such, we agree with the district court that the term “fair market
value” is not ambiguous.
If Texas’s definition of “fair market value” is applied, the
value of the lease should be considered. For example, in TCC
Enters. v. Estate of Erny, 149 Ariz. 257, 717 P.2d 936 (Ariz. Ct.
App. 1986), the Arizona Court of Appeals applied an identical
definition of “fair market value”3 in valuing a leased property
sold by the lessor to the lessee pursuant to a purchase option.
The court concluded that, because a buyer on the open market would
purchase the property as a leased-fee estate, the lease would
affect the value of the property, and therefore must be considered
in the property’s valuation. See TCC, 149 Ariz. at 258, 717 P.2d
at 937. Here, on August 1, 1996, what Petula had to sell was an
estate subject to a lease.4 In TCC, the effect of including the
value of the lease was to decrease the fair market value of the
property; in this instance, because of the graduated rent schedule,
3
The lease in that case used the term “current market
value,” and the court refers to, simply, “market value.” See TCC,
149 Ariz. at 258, 717 P.2d at 937 (“Market value is determined by
hypothesizing a sale; it is that price a desirous but unobligated
purchaser would pay a desirous but unobligated seller after
consideration of all uses to which the property is adapted and for
which it is capable of being used.”).
4
Because Texas law defines “fair market value” with
reference to an unobligated seller and an unobligated buyer, we
must disregard the obligations placed on Petula and Dolco by the
purchase option contained in the lease.
the effect of including the lease is to increase the fair market
value of the property. Nonetheless, fair market value must reflect
the value of that which can be sold.
The district court decided, however, that, because Paragraph
28 “requires the parties and/or appraisers to specifically consider
the . . . enumerated factors when determining the fair market value
for the property . . . the phrase ‘fair market value’ has a unique
meaning with respect to the [l]ease.” Mem. Opinion and Order (Feb.
23, 1998), at 15. We disagree. Paragraph 28 does not contain
specific language indicating that it is an exclusive list of the
factors to be relied upon in determining fair market value; rather,
the parties are to “consider” the factors listed. The language of
Paragraph 28 does not compel the parties to refrain from
considering other factors. Moreover, Paragraph 28 states that
parties should consider the value of “like premises” in determining
fair market value. Under the analysis above, “like premises” means
a property subject to a lease; thus, the lease should be included.
Finally, the parties failed to include the lease in the list of
items that are explicitly excluded from the fair market value
calculation, given that the items “have been or will be paid” by
Dolco.5 Absent explicit language indicating that the lease should
5
In TCC, the lessor pointed to similar language in the
lease that excluded the value of remodeling and improvements from
the fair market value of the property. The lessor argued there
that, because the lease allowed only these deductions, a deduction
for the lease could not be made in calculating the fair market
value. The court disagreed, explaining that the language
“indicates an intent of the parties that the lessee not pay for
something already paid for. If TCC is required to pay Erny [for
or should not be included in determining fair market value, the
district court erred in deviating from the definite and fixed
meaning given to the term “fair market value” in Texas contract
law, which would include the value of the lease.6
II. Transfer Subject to the First Lien Mortgage
Paragraph 43(D) of the lease provides in relevant part:
At [Petula’s] option, the purchase price shall be payable
either all in cash at closing or by [Dolco] accepting
title to the premises subject to any then existing first
lien mortgage indebtedness and paying the balance of the
purchase price to [Petula] in cash.
The issue is whether Paragraph 43(D) allows Petula to require Dolco
to accept Petula’s first lien mortgage debt of $3.8 million, even
if the debt amount exceeds fair market value (i.e., purchase
price). Given our decision that the value of the lease should be
included in the determination of fair market value, and that the
appraiser who included the value of the lease appraised the
property at $5.15 million, it appears unlikely that the fair market
value of the property will be less than the $3.8 million first lien
mortgage debt. Nonetheless, we address the question in the event
the fee not subject to the lease], it would pay [extra] for
something it already owned, the lease to the year 2002.” See TCC
at 149 Ariz. 258, 717 P.2d at 937. Here, application of the same
principle has a different result because of the facts of the case.
If the value of the lease is not included, Dolco would pay less for
what it owns than what it agreed to pay in the form of increased
rents during the later years of the lease.
6
Indeed, appraisal industry standards indicate that the
effect of a lease must be considered. See APPRAISAL STANDARDS BOARD,
UNIFORM STANDARDS OF PROFESSIONAL APPRAISAL PRACTICE, S.R. 1-2(c) (1996).
that the fair market value is in fact determined to be less than
$3.8 million.
The district court held that, “the language contained in
Paragraph 43(D) . . . is only available to [Petula] if there is a
[sic] positive equity in the building.” Mem. Opinion and Order
(Mar. 31, 1999), at 8. The court noted that it was required to
enforce the contract as written, and therefore it could not enlarge
the payment provision to afford Petula an unlimited right to
transfer its mortgage debt. See Hubler v. Oshman, 700 S.W.2d 694,
699 (Tex. App. Corpus Christi 1985)(stating that a “court has no
power to decree specific performance in any manner except in
keeping with the terms of the agreement made by the parties”).
We agree with the district court. Courts “must enforce the
unambiguous language in a contract as written, and the applicable
standard is ‘the objective intent’ evidenced by the language used,
rather than the subjective intent of the parties.” Clardy Mfg. Co.
v. Marine Midland Bus. Loans, 88 F.3d 347, 352 (5th Cir.
1996)(quoting Sun Oil Co. (Delaware) v. Madeley, 626 S.W.2d 726,
731 (Tex. 1981)). The language in Paragraph 43(D) is not
ambiguous; it allows Dolco to pay all in cash, or to accept
transfer of mortgage debt and pay the remainder of the purchase
price in cash. The language chosen by the parties indicates that
they intended to allow Petula to transfer mortgage debt only if the
debt does not exceed the purchase price. Petula would interpret
Paragraph 34(D) to allow it an unfettered ability to transfer
mortgage debt; the language of the provision does not, however,
support such a broad reading.
III. Equitable Accounting and Attorneys’ Fees
The district court awarded Dolco an equitable accounting and
attorneys’ fees because of Petula’s failure to close at the
purchase price of $3 million established by the June 18, 1998,
appraisal. As a consequence of our decision above that the fair
market value must include the value of the lease, the June 18,
1998, appraisal of the “then fair market value” for purposes of
Dolco’s exercise of its purchase option pursuant to Paragraph
43(A)(ii) was incorrect as a matter of law. Therefore, the July
18, 1998, “latest closing date” required by Paragraph 43(D), on
which the district court based its award of an equitable
accounting, was ineffective as a means of placing Petula in
default. Because Paragraph 18(K) of the lease gives Dolco an
“exclusive remedy . . . for damages” “[i]n the event of any default
by [Petula],” lacking any default on the part of Petula, Dolco has
no right to damages. Further, Paragraph 38 of the lease allows
Dolco to recover attorneys’ fees only if it is “the prevailing
party.” Dolco has failed to prevail on its claim that fair market
value was correctly determined by not considering the value of the
lease. Dolco has, however, prevailed on its claim that Petula was
not allowed under the lease to attempt to transfer the property
subject to the first mortgage lien, where the value of the mortgage
exceeded the equity in the property. Accordingly, we vacate the
district court’s award to Dolco of an equitable accounting and
attorneys’ fees, without prejudice to the district court’s ability
on remand to reinstate a portion of the award for attorneys’ fees
related solely to the cost of litigating the first lien mortgage
issue.7
Conclusion
The district court’s ruling that fair market value need not
include the value of the lease is REVERSED. The district court’s
ruling that Petula may not transfer the property subject to the
first lien mortgage unless the equity in the property exceeds the
value of the mortgage is AFFIRMED. The district court’s award to
Dolco of an equitable accounting and attorney’s fees is VACATED,
WITHOUT PREJUDICE as to the attorneys’ fees. Dolco’s cross-appeal
is DISMISSED AS MOOT. This case is REMANDED for judgment
consistent with this opinion.
7
Although the fair market value including the lease will
likely exceed the $3.8 million mortgage, we note that we disagree
with the district court that attorneys’ fees may exceed Petula’s
equity in the property. Paragraph 38 provides Dolco with a right
to seek attorneys’ fees; Paragraph 18(K) governs how such judgments
against Petula may be satisfied, and states explicitly that,
“Notwithstanding any other provision hereof, [Petula] shall not
have any personal liability hereunder.” (Emphasis added.) Thus, to
the extent that an award of attorneys’ fees exceeds Petula’s equity
in the property, such amount is disallowed by the plain language of
Paragraph 18(K).