COURT OF APPEALS
SECOND DISTRICT OF TEXAS
FORT WORTH
NO. 02-15-00390-CV
COMPASS BANK APPELLANT
V.
JERRY DURANT APPELLEE
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FROM THE 43RD DISTRICT COURT OF PARKER COUNTY
TRIAL COURT NO. CV13-0933
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OPINION
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I. Introduction
In four issues, Appellant Compass Bank appeals the trial court’s summary
judgment for Appellee Jerry Durant in a dispute over (1) the interpretation of early
termination fee provisions contained in certain documents, including an interest
rate swap agreement, that were executed by the parties in conjunction with a
commercial loan agreement and (2) the award of attorney’s fees to Durant. We
reverse and remand.
II. Factual and Procedural Background
In 2008, Durant and Jeff Williams, a loan officer for Compass, entered into
negotiations for a loan related to an automobile dealership that Durant was
opening in Granbury. In the course of those negotiations, Durant signed both a
“swap agreement” and a note.
A. Swap Agreements
To assist in understanding the facts of this case and the issues presented
on appeal, we provide a brief background on “swaps”—interest rate swaps, in
particular, including their purpose and structure.
A financial swap is exactly what the name implies. It is a tool borrowed
from age-old bartering practices that has been adapted for use in modern-day
commercial transactions. At its fundamental core, it allows two parties, both of
whom possess something that they do not want, but each wanting something
that the other has, to trade their commodities. The swap allows a party to
receive exactly what it wants, but otherwise would not have.
Although bartering, or swapping, has been around for centuries, swaps did
not surface into financial markets until the late 1970s.1 They attracted national
1
Frederic Lau, Derivatives in Plain Words 25 (1st ed. 1997); U.S. Securities
and Exchange Commission, Derivatives, available at
https://www.sec.gov/spotlight/dodd-frank/derivatives.shtml (last visited Jan. 3,
2017).
2
attention in the wake of the home mortgage crisis of 2008, and served as part of
the impetus for the Dodd–Frank Act of 2010 which, for regulatory purposes,
expanded the definition of a security to include security-based swap agreements,
15 U.S.C.A § 78c (West Supp. 2016), and identified other types of swaps as
commodities. 7 U.S.C.A. § 1a (West Supp. 2016). Today, swaps are defined as
a type of “alternative trading system” and are highly regulated, with the
Commodity Futures Trading Commission (CFTC) serving as the primary
oversight agency providing for non-security-based swap transactions. Id. In
discharge of its duty to periodically report trading activity in the swaps market, the
CFTC publishes an online Weekly Swaps Report, which reports trillions of dollars
in swap activity in the U.S. in any given week. See id. § 2(a)(14).2
A financial swap is used in the marketplace as a type of derivative3
designed to reduce risk. Generally speaking, it manifests itself in a contract
between two parties whereby both parties promise to make payments to each
other. Lau, supra note 1, at 40. In a basic interest rate swap,4 two parties trade
2
See also Weekly Swaps Report, available at
http://www.cftc.gov/MarketReports/SwapsReports/index.htm (last visited Jan. 3,
2017).
3
A derivative is a financial instrument that derives its value from a more
basic financial instrument. Henry N. Butler, Economic Analysis for Lawyers 918
(2d ed. 1998). For example, an option on a stock (a basic form of derivative)
derives its value from the underlying stock. Id. Derivatives can be used to either
increase or decrease risk. Id.
4
Although interest rate swaps—the type of swap at issue here—are the
most common, many other types of swaps appear in the marketplace. See 7
3
a fixed-rate and variable-interest rate, agreeing to exchange interest rate
payments with one another. By entering into a swap agreement, the parties
“hedge” the risk associated with the interest rate provided for in another
transaction in which they are involved. As the court in Thrifty Oil Company v.
Bank of America National Trust & Saving Association explained,
[O]ne [party agrees] to make payments equal to the interest which
would accrue on an agreed hypothetical principal amount (“notional
amount”), during a given period, at a specified fixed interest rate.
The other [party] must pay an amount equal to the interest which
would accrue on the same notional amount, during the same period,
but at a floating interest rate. If the fixed rate paid by the first [party]
exceeds the floating rate paid by the second [party], then the first
[party] must pay an amount equal to the difference between the two
rates multiplied by the notional amount, for the specified interval.
Conversely, if the floating rate paid by the second [party] exceeds
the fixed rate paid by the first [party], the fixed-rate payor receives
payment. The agreed hypothetical or “notional” amount provides the
basis for calculating payment obligations, but does not change
hands.
322 F.3d 1039, 1042–43 (9th Cir. 2003).
Interest rate swapping is beneficial when one borrower can obtain only a
fixed-rate interest payment loan but wants a loan with a variable interest rate,
while another borrower can obtain only a variable interest rate loan but wants a
fixed-rate interest payment instead. The swap agreement allows the parties to
U.S.C.A. § 1a(47) (defining the term “swap” to include interest rate swaps, cross-
currency rate swaps, basis swaps, currency swaps, foreign exchange swaps,
total return swaps, equity index swaps, equity swaps, debt index swaps, debt
swaps, credit default swaps, credit swaps, weather swaps, energy swaps, metal
swaps, agricultural swaps, emission swaps, and commodity swaps). But swaps
can also be tailor-made to “almost anything according to the customers’ needs.”
Lau, supra note 1, at 40.
4
swap interest payments with one another, so that each one receives the
advantage—or the disadvantage—of the rate it actually wanted, rather than the
one it received from its lender.
For example, assume ABC Company wants to borrow $100,000 on a two-
year note, but—not wanting to risk that interest rates would rise during the two-
year period, yet willing to forego the benefit of interest rates falling during that
same time period—seeks a 10% fixed interest note. The bank, however, will not
agree to a fixed interest note, but instead offers ABC a floating interest rate equal
to the London Interbank Offered Rate (LIBOR).5 XYZ Company also seeks a
$100,000 loan for a two-year term, except that XYZ—who is willing to risk that
interest rates will rise for the opportunity to reap the potential benefits of an
interest rate decline during the two-year period—seeks a floating interest note.
XYZ’s lender, however, offers only a 10% fixed interest rate loan. So, ABC and
XYZ enter into an interest rate swap agreement as follows: (1) ABC agrees to
pay a 10% fixed interest rate payment on a $100,000 “notional amount” 6 to XYZ
5
LIBOR is the interest rate that international banks with high-quality credit
ratings charge each other for loans. Butler, supra note 3, at 822. It is also the
rate that was used in the swap agreement at issue here.
6
The notional amount used in a swap agreement is not traded. Thrifty Oil
Co., 322 F.3d at 1043.
5
each year for two years; (2) XYZ agrees to pay the LIBOR rate on the $100,000
notional amount each year for two years to ABC.7
In this example, at the end of the first year, LIBOR is at 9%. The net
result—after offsetting the amounts owed by each to the other—is that ABC owes
XYZ a payment of $1,000,8 an amount representing the fluctuation in the interest
rate that occurred during the payment period (1% of $100,000). At the end of the
second year, LIBOR is at 12%. This time, after offsetting the amounts due by
both parties under the terms of the swap agreement, XYZ owes a net amount of
$2,000 to ABC,9 again, an amount representing the fluctuation in the interest rate
that occurred during the payment period (2% of $100,000). See generally Thrifty
Oil Co., 322 F.3d at 1043; Butler, supra note 3, at 822.
This transaction is illustrated below:
7
Finding counterparties with identical offsetting needs complicates matters.
The use of derivatives dealers, however, solves the problem. Derivatives dealers
hedge their risks by entering into different types of swaps with numerous
counterparties and with diversity of risk, as well as through the use of futures and
options. Butler, supra note 3, at 823–24.
8
Pursuant to the terms of the swap agreement, ABC owes $10,000 to XYZ.
XYZ, in turn, owes $9,000 to ABC. Thus, the net amount due is $1,000, owed by
ABC to XYZ.
9
ABC owes $10,000 to XYZ. XYZ owes $12,000 to ABC. Thus, the net
amount due is $2,000, payable by XYZ to ABC.
6
7
As the illustration shows, by its very design, a swap is a “hedge,”10 or a zero-sum
game. What a party loses in the transaction with the lender, it gains in the swap
transaction, and vice-versa. The same is true vis-à-vis the parties in the swap
deal—one party’s loss will always be equal to the other party’s gain.11
As it turns out, in the example above, XYZ ended up paying $1,000 more
than it would have if it had simply accepted the terms as offered by its lender. 12
But XYZ lost only that which it would have lost anyway, had it received what it
wanted in the first place.
A swap transaction could also be characterized as a win-win game. If the
measure of success is whether a party gets exactly what it wants, then the swap
yielded a 100% success rate for both ABC and XYZ. The bottom line is that a
swap agreement guarantees that each party will receive the benefit of the
bargain it wanted, but was unable to make, with its lender.13
10
“Hedging” is the making of simultaneous contracts to purchase and to
sell a particular commodity at a future date with the intention that the loss on one
transaction will be offset by the gain on the other. Butler, supra note 3, at 921.
11
Only if the floating interest rate remained at the fixed rate throughout the
duration of an interest rate swap would the result end in a draw. Under that
scenario, neither party would owe the other any money in the deal.
12
Here, Durant found himself in a similar position because interest rates fell
during the duration of the note. He admitted that had he not hedged against the
LIBOR rate offered by Compass and swapped his floating interest rate for a fixed
interest rate, he would have paid less interest overall.
13
XYZ—who wanted a floating interest rate but received a fixed interest
rate—received the benefit of a floating interest rate loan by virtue of the $1,000
payment from ABC when interest rates fell 1% in the first year. But in the second
8
B. The Compass-Durant Swap Agreement and Note
During the financial negotiations, Durant expressed to Compass his desire
to borrow $6 million at a fixed-interest rate for a term of 15 years. In addition,
Durant told Williams that he wanted to be able to prepay the loan without any
termination fee or penalty. To secure the benefits of the fixed-interest rate that
Durant wanted under the floating interest note he ultimately received, Compass
and Durant entered into a 15-year interest rate swap agreement.14 To hedge its
own risk under the swap agreement with Durant, Compass entered into a counter
hedge agreement with Wells Fargo with identical terms.
Among other provisions, the swap agreement between Compass and
Durant provided for “Payments on Early Termination”—along with measures to
calculate the payment amounts that would become due if triggered—in the event
Durant defaulted on the swap agreement by paying off the note prior to the
year, when interest rates increased by 2%, the swap agreement worked to take
$2,000 out of XYZ’s pocket, which is exactly the amount XYZ would have owed
in interest if XYZ had received the floating interest rate note it sought instead of
the fixed-rate note it received.
On the other hand, in the first year ABC—who wanted a fixed interest rate
but instead received a floating interest rate—had to forego the benefits it
received under the LIBOR note it did not want. However, in the second year,
when LIBOR rose to 12%, ABC was able to recoup the money it was required to
pay to its lender but would not have otherwise owed if it had received the fixed-
rate note it sought in the first place.
14
The parties signed an “ISDA Master Agreement,” a “Schedule” to that
Master Agreement, and a “Confirmation Letter,” hereafter collectively referred to
as “the swap agreement” or “the hedge agreement.”
9
expiration of the swap agreement. Although Durant testified that he never read
the document, the summary judgment evidence shows that a “Risk Disclosure”
warning that “should you liquidate the swap contract prior to maturity, you may
realize a significant financial gain or a loss” was included as Exhibit B to the
ISDA Master Agreement.
After the swap agreement had been executed, the attorney for Compass
sent the remaining loan documents to Durant’s attorney, who noticed that the
note did not include a right to prepay without penalty. After additional
negotiations, the parties agreed to the following three-year prepayment penalty
provision in the note that was ultimately signed by Durant on May 2, 2008:
1. Prepayments. [Durant] shall be entitled to prepay the
unpaid principal balance hereof, from time to time and at any time, in
whole or in part; however, in the event that [Durant] prepays the
original principal balance hereof, then [Durant] shall also at that time
pay to [Compass] a prepayment penalty (the “Penalty Amount”).
The Penalty Amount shall be equal to (a) three percent (3%) of the
then outstanding balance hereunder if the prepayment occurs on or
before June 1, 2009; (b) two percent (2%) of the then outstanding
balance hereunder if the prepayment occurs after June 1, 2009 but
on or before June 1, 2010; and (c) one percent (1%) of the then
outstanding balance hereunder if the prepayment occurs after June
1, 2010 but on or before June 1, 2011.
The note provided for interest at the LIBOR rate for the 15-year term, but it
also contained a provision acknowledging the existence—and obligations—of the
swap agreement that had been previously executed by the parties:
18. Hedge Agreement. [Durant] acknowledges and agrees
that this note evidences [Durant’s] obligation to pay to the order of
[Compass] any and all amounts advanced from time to time under
the Loan Agreement, together with interest on the unpaid principal
10
balance from time to time outstanding hereunder. [Durant’s]
obligations hereunder and under the Loan Agreement shall also be
deemed to include all other obligations incurred by [Durant] under
any agreement between [Durant] and [Compass] or any affiliate of
[Compass], including but not limited to an ISDA Master Agreement,
whether now existing or hereafter executed, which provides for an
interest rate, currency, equity, credit or commodity swap, cap, floor
or collar, spot or foreign currency exchange transaction, cross
currency rate swap, currency option, any combination of, or option
with respect to, any of the foregoing or similar transactions, for the
purpose of hedging [Durant’s] exposure to fluctuations in interest
rates, exchange rates, currency, stock, portfolio or loan valuations or
commodity prices (each a “Hedge Agreement”). [Emphasis added.]
Three years later, Durant decided to prepay his loan and terminate the
entire transaction. At that point, Compass informed Durant that while no
prepayment penalty amount was due under paragraph 1 of the note, by paying
off the note prior to maturity, Durant would still be obligated—under the terms of
the swap agreement—to pay a termination fee of approximately $1 million to
obtain a release of the lien on the loan collateral.15
Durant disputed that he owed any termination fee, and in June 2013, he
filed suit for breach of contract and for a declaratory judgment of non-liability, i.e.,
that he was not obligated to make an early termination payment if he paid off his
loan after three years. However, in order to receive the release of the lien on the
loan collateral during the pendency of the lawsuit, on August 28, 2013, Durant
15
Compass argued at the summary judgment hearing and on appeal that
the termination fee that Compass demanded was equivalent to the liability that
Compass incurred on its counter hedge agreement with Wells Fargo.
11
paid—“under protest”—the $790,350 termination fee assessed by Compass,
along with the $5,108,343.81 balance due on the note.
The parties filed competing motions for summary judgment in a piecemeal
fashion, and the trial court ruled on the various motions during the course of
litigation.16 On June 6, 2014, the trial court signed an order granting Durant’s
motion for partial summary judgment for declaratory judgment that “Jerry Durant
had the right to prepay the amount owed under the Promissory Note without
payment of any penalty, including any fee allegedly owed under the Master
Agreement, Schedule, and Confirmation.” On October 23, 2014, the trial court
denied Compass’s traditional motion for summary judgment in its entirety. By
order dated August 25, 2015, the trial court granted “in all respects” Durant’s
second motion for partial summary judgment seeking damages, but the order did
not specify the amount of damages awarded.
In November, the trial court signed a final judgment, which incorporated
the June 6, 2014 and August 25, 2015 orders and recited
Accordingly, it is hereby ORDERED, ADJUDGED, DECREED
and DECLARED that after June 1, 2011 Jerry Durant had the right to
prepay the amount owed under the Promissory Note without
payment of any penalty or fee, including any fee claimed by
Compass under the Master Agreement, Schedule, and Confirmation.
....
16
In its motion, Compass set forth eleven grounds for summary judgment.
As will be discussed later, only the first four grounds are at issue in this appeal.
12
It is therefore ORDERED, ADJUDGED and DECREED that
Jerry Durant have and recover from Compass Bank actual damages
in the amount of $790,350.00 and prejudgment interest thereon . . . .
....
It is therefore ORDERED, ADJUDGED and DECREED that
Jerry Durant have and recover from Compass Bank reasonable and
necessary attorneys’ fees in the amount of $157,000.00 for
prosecution of his breach of contract claim, or, in the alternative, his
declaratory judgment claims . . . .
III. Standard of Review
In a summary judgment case, the issue on appeal is whether the movant
met the summary judgment burden by establishing that no genuine issue of
material fact exists and that the movant is entitled to judgment as a matter of law.
Tex. R. Civ. P. 166a(c); Mann Frankfort Stein & Lipp Advisors, Inc. v. Fielding,
289 S.W.3d 844, 848 (Tex. 2009). We review a summary judgment de novo.
Travelers Ins. Co. v. Joachim, 315 S.W.3d 860, 862 (Tex. 2010).
We take as true all evidence favorable to the nonmovant, and we indulge
every reasonable inference and resolve any doubts in the nonmovant’s favor.
20801, Inc. v. Parker, 249 S.W.3d 392, 399 (Tex. 2008); Provident Life &
Accident Ins. Co. v. Knott, 128 S.W.3d 211, 215 (Tex. 2003). The summary
judgment will be affirmed only if the record establishes that the movant has
conclusively proved all essential elements of the movant’s cause of action or
defense as a matter of law. City of Houston v. Clear Creek Basin Auth., 589
S.W.2d 671, 678 (Tex. 1979).
13
A plaintiff is entitled to summary judgment on a cause of action if it
conclusively proves all essential elements of its claim. See Tex. R. Civ. P.
166a(a), (c); MMP, Ltd. v. Jones, 710 S.W.2d 59, 60 (Tex. 1986).
A defendant who conclusively negates at least one essential element of
the plaintiff’s cause of action is entitled to summary judgment on that claim.
Frost Nat’l Bank v. Fernandez, 315 S.W.3d 494, 508 (Tex. 2010), cert. denied,
562 U.S. 1180 (2011). Once the defendant produces sufficient evidence to
establish the right to summary judgment, the burden shifts to the plaintiff to come
forward with competent controverting evidence that raises a fact issue. Van v.
Pena, 990 S.W.2d 751, 753 (Tex. 1999).
When both parties move for summary judgment and the trial court grants
one motion and denies the other, the reviewing court should review both parties’
summary judgment evidence and determine all questions presented. Mann
Frankfort, 289 S.W.3d at 848. The reviewing court should render the judgment
that the trial court should have rendered. See Myrad Props., Inc. v. LaSalle Bank
Nat’l Ass’n, 300 S.W.3d 746, 753 (Tex. 2009); Mann Frankfort, 289 S.W.3d at
848.
IV. Summary Judgment Granted on Durant’s Breach of Contract
and Declaratory Judgment Actions
In its first three issues, Compass contends that the trial court erred by
granting Durant’s summary judgment on his breach of contract action against
Compass and by declaring that Durant had the right to prepay the amount under
14
the note without the payment of any fee under the swap agreement, arguing that
the plain language of the swap agreement and related loan documents obligated
Durant to pay the early termination fee. We agree.
Durant argues that the note’s three-year prepayment penalty provision and
swap agreement’s early termination provision are inconsistent with one another
and that the note’s three-year prepayment penalty provision governs. In his first
motion for partial summary judgment, Durant argued,
[T]he Hedge Agreement, Promissory Note, and Loan Agreement are
a part of one transaction and must be interpreted together. . . .
[B]ecause the Promissory Note and Loan Agreement were executed
after execution of the Hedge Agreement, the provisions of the
Promissory Note and Loan Agreement control the inconsistency
between them and the Hedge Agreement.
Compass, on the other hand, argued that the swap agreement is a stand-alone
agreement, completely independent from the Promissory Note.
We need not decide whether the swap agreement and subsequent loan
documents are part of one transaction or whether they constitute two separate,
stand-alone transactions. As will be discussed below, the note specifically
references and incorporates the relevant swap agreement provisions into it, such
that the terms in dispute here are provided for by reference in the note itself.
Also, even assuming that all documents executed between the parties between
March and May 2008 were part of a single transaction, Durant’s argument hinges
upon the assumption that these documents are inconsistent with one another,
and we disagree with that premise.
15
So the question is not whether the agreements Durant signed constitute
one transaction or two separate, stand-alone transactions, but rather whether the
terms of the note that relate to the consequences of Durant’s early pay-off of the
loan are ambiguous. For the reasons explained below, we hold that they are not.
A. The Note
Both parties agree that paragraph 1 of the note provides that Durant was
entitled to prepay the unpaid principal balance of the note, in whole or in part, at
any time. However, the note stops short of stating that Durant could do so
without penalty. In fact, both sides agree that the note provides that Durant was
obligated to pay a “prepayment penalty” or “penalty amount” if the original
principal balance was prepaid prior to June 1, 2011.
In other words, while paragraph 1 of the note declared that Durant was
“entitled” to prepay unpaid principal balance in whole or in part, it also provided
that, depending upon timing—when Durant decided to exercise his entitlement—
he would be required to pay a penalty amount calculated by using a defined
percentage of the principal balance of the note. Neither side argues that these
two provisions create ambiguity or are in conflict with one another. Both seem to
agree that these two clauses combine to mean that while Durant could prepay
the note, such prepayment might subject him to penalty, depending upon the
timing of the prepayment.
Likewise, immediately below paragraph 1, paragraph 2 provides that an
event of default under the note would include “[a]n ‘[e]vent of [d]efault’ as such
16
term is defined in . . . any [h]edge [a]greement (defined below) involving this
note.” [Emphasis added.] By signing the note, Durant agreed to the terms of
paragraph 2 that further provided that if he defaulted under the swap agreement,
Compass had the right to “exercise any and all remedies set forth in . . . any
[h]edge [a]greement involving this note.” Durant reaffirmed his obligation to
abide by the terms of the swap agreement in paragraph 18 of the note, which
defined the “hedge agreement” and incorporated all of the obligations under it. 17
See Bob Montgomery Chevrolet, Inc. v. Dent Zone Co., 409 S.W.3d 181, 189
(Tex. App.—Dallas 2013, no pet.) (holding that once a document is incorporated
into another by reference it becomes a part of that contract and “both instruments
must be read and construed together”).
Thus, by executing the note, Durant agreed to two provisions regarding
prepayment of the note: Paragraph 1, which required that if he prepaid the
unpaid principal balance of the note, he would, depending upon timing, be
subject to a prepayment penalty under that paragraph, and Paragraph 2, which
required that prepayment would also trigger a default under the swap agreement,
further subjecting him to a “Payment[] on Early Termination” provided for in the
swap agreement. The provision for two types of penalties that would be
17
Paragraph 18 states that Durant’s obligations under the note included “all
other obligations incurred by [Durant] under any agreement between [Durant]
and [Compass] . . . including but not limited to an ISDA Master Agreement,
whether now existing or hereafter executed, which provides for an interest
rate . . . swap.” [Emphasis added.]
17
triggered in the event of prepayment of the note’s unpaid principal balance—one
under the note, the other under the swap agreement—does not constitute an
inconsistency. And the additional proviso that one, but not both, of the
prepayment penalty obligations would cease if the prepayment occurred after
June 1, 2011, does not change the equation. Coker v. Coker, 650 S.W.2d 391,
393 (Tex. 1983) (“[We] should examine and consider the entire writing in an effort
to harmonize and give effect to all the provisions of the contract so that none will
be rendered meaningless.”).
Durant argues on appeal, as he argued at trial,
[T]he subsequently negotiated Note specified the only
prepayment penalty Durant would be required to make if he prepaid.
After June 1, 2011, no prepayment penalty of any kind or amount is
specified because there was to be none.[18] Compass knew Durant
insisted upon the right to terminate the transaction early without any
penalty or fee. Hence, if Compass intended that prepayment of the
Note would generate a penalty or termination fee, including one
under the Swap, it could easily have expressed that in the
“Prepayments” paragraph in the Note.
We acknowledge that the summary judgment record includes evidence that
Durant had voiced his desire for the right to terminate the transaction early
without any penalty or fee, and that Compass knew that Durant wanted that right.
But to glean the meaning of a contract, we must look first to the instrument itself
as the written embodiment of the parties’ intent, not to the intent of the parties as
18
As mentioned above, the note contained no statement to the effect that
the prepayment penalty in paragraph 1 was the “only prepayment penalty Durant
would be required to make.”
18
subsequently asserted. Id. (stating that when contracts are so worded that they
can be given a certain or definite legal meaning or interpretation, then they are
not ambiguous, and the court will construe them as a matter of law); see Lopez v.
Muñoz, Hockema & Reed, L.L.P., 22 S.W.3d 857, 861 (Tex. 2000) (stating that
the court will enforce an unambiguous contract “as written.”).
And Durant’s argument that “[a]fter June 1, 2011, no prepayment penalty
of any kind or amount is specified,” is not accurate because it overlooks two
paragraphs in the note itself. The terms of the swap agreement, which obligated
Durant to make certain payments upon early termination of the swap agreement,
were incorporated into the note in paragraphs 2(c) and 18.
Likewise, the contention that “if Compass intended that prepayment of the
Note would generate a penalty or termination fee . . . under the Swap, it could
easily have expressed that in the ‘Prepayments’ paragraph in the [n]ote,” is
certainly true. But it ignores the fact that note did express, by reference—not in
the “prepayments” paragraph, but in the paragraph that immediately followed
entitled “Events of Default and Remedies,” and in a later paragraph entitled
“Hedge Agreement”—that Durant would be obligated to pay a termination fee
under the swap agreement in the event of early termination.19 See Bob
Montgomery Chevrolet, Inc., 409 S.W.3d at 189.
19
Perhaps more significant is what the note does not state. The note does
not state that upon prepayment, Durant would owe only the penalty provided for
under paragraph 1 and no other. Had such a statement appeared in the note,
our analysis regarding ambiguity would have been quite different.
19
B. The Swap Agreement
The Schedule to the ISDA Master Agreement provided, in part 1,
paragraphs (i) and (j), that prepayment of the note constituted an “Additional
Termination Event” and an “Additional Event[] of Default,” both of which triggered
an obligation for “Payments on Early Termination.”20 Unlike the prepayment
penalty calculation in the note, which was based upon a percentage of the
principal balance of the note, the “Payments on Early Termination” calculation in
the swap agreement is based upon market quotations and the amount of
Compass’s loss with respect to the swap agreement.
C. The Note and the Swap Agreement
Reading paragraphs 1, 2, and 18 of the note together, with regard to
prepayment of the note, Durant agreed to these essential terms: (1) If Durant
prepaid the note within the first three years, he would owe a “prepayment
penalty” under the note and a “Payment[] on Early Termination” pursuant to the
swap agreement; and (2) If Durant prepaid the note after three years, he would
owe no “prepayment penalty,” but only a “Payment[] on Early Termination”
pursuant to the swap agreement. To construe the note otherwise, as Durant
proposes, would require the striking of two full paragraphs—paragraphs 2 and
18—from the note. See Rutherford v. Randal, 593 S.W.2d 949, 952–53 (Tex.
20
Compass refers to the payment obligation under this provision in the
swap agreement as a “termination fee”; Durant refers to it as a “prepayment
penalty.” In the ISDA Master Agreement and Schedule, it is referred to as
“Payments on Early Termination.”
20
1980) (holding that in the absence of ambiguity, courts must not consider
extrinsic evidence of intent, but rather limit consideration to the provisions in the
written document itself); Rubinstein v. Lucchese, Inc., 497 S.W.3d 615, 625 (Tex.
App.—Fort Worth 2016, no pet.) (“We are not permitted to rewrite an agreement
to mean something it did not.”).
This transaction was negotiated between sophisticated parties who were
represented by counsel, who, in turn, actively negotiated changes to the note on
the very issue in dispute here. Parties to a contract are masters of their choices
and are entitled to select what terms and provisions to include in or omit from a
contract. See Lucchese, 497 S.W.3d at 625; Healthcare Cable Sys., Inc. v.
Good Shepherd Hosp., Inc., 180 S.W.3d 787, 791 (Tex. App.—Tyler 2005, no
pet.); Birnbaum v. Swepi LP, 48 S.W.3d 254, 257 (Tex. App.—San Antonio 2001,
pet. denied). Thus, we presume that the parties to a contract intend every clause
to have some effect. Heritage Res., Inc. v. NationsBank, 939 S.W.2d 118, 121
(Tex. 1996). With those principles in mind, when interpreting a contract, we must
examine the entire document and consider each part with every other part, so
that the effect and meaning of one part on any other part may be determined. Id.
So, while the record may support Durant’s contention that during the
period of negotiation both parties understood that Durant wanted to include in the
agreement the ability—after three years’ time—to pay off his note without any
penalty, fee, or additional payment of any kind, the plain language of the note—
as well as other documents he signed—provided otherwise. And, as explained
21
above, because the note and the swap agreement are not in irreconcilable
conflict, but can be read together in harmony, we must deem the unambiguous
contract to express the intention of the parties. The law has been thus for more
than half a century. See Woods v. Sims, 273 S.W.2d 617, 620–21 (Tex. 1954).
In Woods, the court stated,
Generally the parties to an instrument intend every clause to have
some effect and in some measure to evidence their agreement, and
this purpose should not be thwarted except in the plainest case of
necessary repugnance. Even where different parts of the instrument
appear to be contradictory and inconsistent with each other, the
court will, [if] possible, harmonize the parts and construe the
instrument in such way that all parts may stand and will not strike
down any portion unless there is an irreconcilable conflict wherein
one part of the instrument destroys in effect another part.
Id.; see Magee v. Hambleton, No. 02-08-00441-CV, 2009 WL 2619425, at *3
(Tex. App.—Fort Worth Aug. 25, 2009, pet. denied) (mem. op.) (citing Woods to
recite that the court attempts harmonization because “the parties to an
instrument intend every clause to have some effect”); see also Sun Oil Co.
(Delaware) v. Madeley, 626 S.W.2d 726, 727–28 (Tex. 1981) (stating that in
construing an instrument, the court’s task is to seek the parties’ intention “as that
intention is expressed” in the document).
Moreover, reading the note to embrace the terms and obligations of the
swap agreement is a construction consistent with the economic realities of the
transaction itself. The supreme court has instructed us that we should construe
contracts “from a utilitarian standpoint bearing in mind the particular business
activity sought to be served.” Frost Nat’l Bank v. L & F Dist., Ltd., 165 S.W.3d
22
310, 312 (Tex. 2005); see also Cook Composites, Inc. v. Westlake Styrene
Corp., 15 S.W.3d 124, 132 (Tex. App.—Houston [14th Dist.] 2000, pet. dism’d)
(explaining that we should consider “the purposes which the parties intended to
accomplish by entering into the contract”).
Here, Durant signed a note with a LIBOR interest rate, but because he
wanted a fixed rate loan, he entered into a swap agreement for 15 years, the life
of his loan. As it turned out, interest rates declined during the life of the loan, and
in his deposition, Durant admitted that, in hindsight, he should have entered into
the LIBOR interest rate note that Compass offered without a swap agreement to
receive fixed interest protection. Nevertheless, from 2008 until 2011, Durant
enjoyed the potential benefit of the agreement, i.e., protection against rising
interest rates that he would have been contractually obligated to pay by
swapping for a fixed interest rate payment instead.
Three years after the agreement was executed between the parties and
twelve years’ shy of the swap agreement’s termination date, Durant attempted to
unilaterally walk away from the deal. At that point, Compass was entitled to
receive the benefit of the bargain it made by entering into the swap agreement
with Durant,21 the risk of which was hedged through a counter-swap with Wells
21
As the court in Thrifty Oil explained,
A fundamental characteristic of an interest rate swap is that
the counterparties never actually loan or advance the notional
amount. The swap involves an exchange of periodic payments
calculated by reference to interest rates and a hypothetical notional
23
Fargo.22 The early termination payment, calculated on market quotations to
determine the amount of loss, if any, incurred by Compass as a result of the
default, was the contractual mechanism23 that provided compensation for such
an occurrence.24
amount . . . The amount of net periodic payments exchanged under
the swap, and the counterparty entitled to receive them, depend on
movements in short term interest rates that have no connection with
any underlying loan. The damages due upon termination of the
swap merely provide the replacement cost of the lost swap
payments . . .
322 F.3d at 1048 (emphasis added).
22
According to the summary judgment evidence in this record, Compass
counter-hedged with Wells Fargo so that it would receive the benefit of a LIBOR-
rate note after it hedged with Durant for a fixed-rate note. Except for Compass’s
demand for—and acceptance of—$790,350 from Durant as an early termination
payment, the record is silent as to what costs were actually incurred by Compass
in undoing its counter-hedge with Wells Fargo. Durant challenged not only the
validity of the obligation but also Compass’s calculation of the amount of the
obligation.
23
Some swap agreements do not permit the defaulting party to collect
termination damages. Thrifty Oil Co., 322 F.3d at 1043.
24
Whether a party is “in the money” or “out of the money” usually
determines whether damages are recoverable in the event of a default or early
termination of the agreement because “[m]ost [swap] agreements provide that, in
the event of an early termination or default, the party in the money is entitled to
collect ‘termination damages.’” Thrifty Oil Co., 322 F.3d at 1043. A party to a
swap agreement whose position is yielding a positive value under the swap is
considered “in the money” while a party with negative value is considered “out of
the money.” Id. The swap agreement between Compass and Durant embraced
this method for determining whether Durant would be required to pay Compass
an early termination payment.
Ordinarily, termination or default damages represent “the replacement cost
of the terminated swap contract.” Id. Thus, termination damages are typically
24
Exhibit B to the ISDA Master Agreement Schedule, entitled “Risk
Disclosure for Interest Rate Swaps,” provided edification to Durant on this point,
in basic terms, along with conspicuous warnings as to the potential complexity of
a swap agreement:
An interest rate swap is a legal contract between two parties
to exchange a set of cash flows over a specific period of time. In a
typical interest rate swap, a party’s floating rate payments on a loan
are exchanged, or “swapped,” for another party’s fixed rate
payments on a similar loan. Interest rate swaps, if properly selected
and structured, may be a useful tool to alter the characteristics of a
party’s interest payments or receipts. For example, swapping
floating rate payments for fixed rate payments in a time of rising
interest rates may allow a party to avoid increased interest
expense . . . .
One of the benefits of an interest rate swap is the ability to
liquidate the swap contract at any point in time. It is important to
realize, however, that should you liquidate the swap contract
prior to maturity, you may realize a significant financial gain or
a loss.
Swaps Are for Financially Sophisticated Parties. Interest
rate swap transactions are designed primarily for sophisticated
financial parties . . . . If, for any reason, you do not believe that you
have a sufficient understanding or appreciation of the risks
associated with a particular interest rate swap transaction, you
should not enter into it . . . .
You Should Consult With Your Accounting, Tax and Legal
Advisers before Entering into A Swap.
calculated “by obtaining market quotations for the cost of replacing the swap at
the time of termination.” Id. The swap agreement between Compass and Durant
also provided for this method to calculate payments on early termination.
25
Durant, however, testified that he did not review these risk disclosures prior to
executing the swap agreement.25 And although the summary judgment evidence
shows that Durant’s attorney was involved in negotiating the terms of the note,
the evidence also suggests that the attorney’s involvement began sometime after
the swap agreement had already been signed by Durant but prior to the time that
Compass signed the swap agreement.26
The economic reality of this sophisticated financial transaction must be
taken into account when construing the written documents that provide its
25
The summary judgment evidence shows that Durant signed both the
Master Agreement and the Schedule to the Master Agreement on March 24,
2008. The Risk Disclosure was Exhibit B to the Schedule to the Master
Agreement.
In Durant’s motion for partial summary judgment, he stated,
26
The three documents constituting the Hedge Agreement were
signed by Durant in March but not by Compass until on various
dates in mid-April. Before Compass signed the Hedge Agreement, it
advised Durant’s attorney, John Westhoff, that Compass was
preparing the rest of the loan documentation. When Mr. Westhoff
later received drafts of those transaction documents, he told
Compass they did not include a right to prepay the loan without
penalty.
Durant cites to Exhibit C in the summary judgment evidence, a document
identified as an “Affidavit of John Westhoff,” but no such affidavit or Exhibit C
appears in the record on appeal.
Compass attached Durant’s interrogatory responses to its summary
judgment motion, in which Durant was asked to identify “each person who was in
any way involved in the due diligence conducted by you in connection with
deciding to enter into the ISDA Master Agreement and/or Loan Documents.” As
part of his response, Durant stated, “[Durant] consulted with his attorney, John
Westhoff, before he executed the Loan Documents,” but he did not state that he
consulted John Westhoff before he executed the ISDA Master Agreement.
26
foundation. After having received written warnings about the potential for
significant financial loss upon early termination of the swap contract and having
employed an attorney to assist him in negotiating and crafting the very note that
not only acknowledged the existence of the hedge agreement and Durant’s
obligations thereunder but incorporated the swap agreement’s events of default
and the consequences thereof into the note itself, Durant cannot now ignore it.
See Heritage Res., Inc., 939 S.W.2d at 121 (“We presume that the parties to a
contract intend every clause to have some effect.”). But in declaring that “Jerry
Durant had the right to prepay the amount owed under the Promissory Note
without payment of any penalty or fee, including any fee claimed by Compass
under the Master Agreement, Schedule, and Confirmation,” the trial court
essentially allowed Durant to do just that. In effect, the trial court rewrote the
note and deleted paragraphs 2 and 18, which explicitly acknowledge and
incorporate Durant’s obligations under the Master Agreement, Schedule, and
Confirmation that provided for additional fees or payments upon early
termination.
Whether the swap agreement and the loan agreement are part of one
transaction or whether they constitute two separate, stand-alone transactions,
the note unambiguously embraces the swap agreement such that any act of
default under the swap agreement constitutes an act of default under the note as
well, entitling Compass to all remedies provided for in the swap agreement. See
Bob Montgomery Chevrolet, Inc., 409 S.W.3d at 189. For these reasons, we
27
hold that the trial court erred in granting Durant’s motion for summary judgment
on his breach of contract and declaratory judgment actions.
V. Compass’s Cross Motion for Summary Judgment
on Durant’s Breach of Contract and Declaratory Judgment Actions
Because both parties moved for summary judgment and the trial court
granted one motion and denied the other,27 we must review both parties’
summary judgment evidence, determine all questions presented and render, if
possible, the judgment that the trial court should have rendered. See Myrad
Props., Inc., 300 S.W.3d at 753; Mann Frankfort, 289 S.W.3d at 848. Having
held that the trial court should have denied Durant’s motion for summary
judgment on breach of contract and for a declaratory judgment, we now turn to
Compass’s cross-motion for summary judgment to determine whether it should
have been granted.
In its first two traditional summary judgment grounds, Compass challenged
Durant’s breach of contract action, and in its third and fourth traditional summary
judgment grounds, Compass challenged Durant’s declaratory judgment action.28
27
On October 23, 2014, the trial court signed an order denying Compass’s
traditional motion for summary judgment “in its entirety.” Although the November
19, 2015 final judgment did not explicitly incorporate the denial of Compass’s
traditional motion for summary judgment into its rulings, it did so implicitly,
stating, “All relief requested in this case and not expressly granted in partial
summary judgments incorporated herein or in this Final Judgment be and hereby
is denied. This Final Judgment finally disposes of all parties and claims in this
action and is final and appealable.”
28
In seven other grounds, Compass challenged other causes of action
originally brought by Durant, but those grounds are not at issue in this appeal.
28
A. Breach of Contract Action
In the trial court, Compass argued that it was entitled to judgment as a
matter of law on Durant’s breach of contract action because: (1) “The plain terms
of the Loan Documents establish that [Durant] was obligated to pay the Closeout
Fee to Compass if he paid off the Promissory Note prior to the expiration of its
term”; and (2) “The interpretation of the Loan Documents made the basis of
Durant’s claim for breach of contract is contrary to the plain terms of the Loan
Documents.”
In response, Durant argued that even if Compass was correct in its theory
of liability under the note and other loan documents, a fact issue existed as to
whether a breach occurred as to the actual amount that Compass could withhold
as an early termination fee under the swap agreement, and that such fact issue
precluded summary judgment. Durant included—as Exhibit “A” to his
response—his affidavit in which he stated,
Through my attorneys, I entered into an agreement with
Compass that my payment of the demanded penalty would result in
Compass’s releasing its lien on my property, but that the payment
would not waive or prejudice my right to challenge Compass’s right
to demand the penalty.
At some point on August 29th, someone who claimed to be
from Compass Bank called me to confirm that I wanted to terminate
the [swap] Agreement. On that call I confirmed that I wanted to
terminate the [swap] Agreement and acknowledged, as had been
arranged through my lawyers, that I would pay the amount of the
claimed penalty effective as of the time Compass received my
payments, though without waiving my rights in this suit. During the
call, I did not agree that, if a termination penalty was owed, the
amount would be $790,350.00 exclusive of any other amount. In
29
fact, at the time of the call from Compass on August 29th, I did not
have any actual knowledge of how Compass calculated the
termination penalty it quoted me, nor had Compass provided me
with the detailed termination statement required by the [swap]
Agreement . . . .
....
I did not agree that the amount quoted on the phone was an
accurate calculation of the penalty, or that I was waiving the right to
challenge the penalty in court.
To this day, Compass has never provided me with a statement
or other explanation describing in any detail Compass’s calculations
of the claimed termination penalty, nor has it provided any
quotations or other information supporting its August 29, 2013
calculation of the termination penalty amount.
....
. . . I lost at least $10,605.00 due to what Compass claims was
an intra-day rate change that occurred between 9:12 a.m. and the
time Compass got around to terminating the [swap] Agreement and
calculating the claimed penalty.
We agree that Durant’s summary judgment evidence as recited above raised a
fact issue that precluded the granting of Compass’s traditional motion for
summary judgment on Durant’s breach of contract action. Thus, the trial court
did not err in denying Compass’s first and second grounds for summary
judgment.
B. Declaratory Judgment Action
Regarding Durant’s declaratory judgment action, Compass argued in its
third and fourth summary judgment grounds that “there is no justiciable
controversy as to the rights and status of the parties,” and that “Durant’s
30
declaratory judgment claim is duplicative of his other claims.” To support these
grounds in its summary judgment motion, Compass exclusively relied upon
opinions from federal courts and cited only to federal district court cases involving
declaratory judgments in the context of dismissal, not summary judgment,
proceedings.
First, when federal courts are called upon to consider a declaratory
judgment action, they do not apply the Texas Declaratory Judgments Act (TDJA).
Instead, the declaratory judgment action sought is “in effect converted into one
brought under the federal Declaratory Judgment Act” when the case is removed
to federal court. See, e.g., Redwood Resort Props., LLC v. Holmes Co., No.
3:06-CV-1022-D, 2007 WL 1266060, at *4 (N.D. Tex. Apr. 30, 2007). Thus, the
grounds and law upon which Compass relied to seek summary judgment relief
regarding Durant’s declaratory judgment action do not govern actions brought
under the TDJA in Texas courts.
More to the point, however, Compass’s third and fourth summary judgment
grounds are contrary to Texas law. See MBM Fin. Corp. v. Woodlands
Operating Co., L.P., 292 S.W.3d 660, 667–70 (Tex. 2009) (holding that under the
TDJA, declarations of non-liability under a contract are permitted, both before
and after a breach, and even when a breach of contract action is available);
Reynolds v. Sw. Bell Tel., L.P., No. 02-05-00356-CV, 2006 WL 1791606, at *5
(Tex. App.—Fort Worth June 29, 2006, pet. denied) (mem. op.) (citing Bonham
State Bank v. Beadle, 907 S.W.2d 465, 467 (Tex. 1995), for the proposition that,
31
for purposes of the TDJA, a “justiciable controversy” is more than merely a
“hypothetical or contingent situation,” a “theoretical dispute,” or a question that is
“not currently essential to the decision of an actual controversy,” but, instead, is a
“real and substantial controversy” that involves “a genuine conflict of tangible
interests”). For these reasons, the trial court did not err by denying Compass’s
third and fourth grounds for summary judgment.
Therefore, we cannot render judgment on Compass’s cross-motion for
summary judgment.29
29
With regard to the third ground, in so holding we focus on the ground as
raised by Compass: “Compass is entitled to summary judgment on Durant’s
claim for declaratory judgment because there is no justiciable controversy as to
the rights and status of the parties as Compass is entitled to collect the Closeout
Fee pursuant to the parties’ agreements.” [Emphasis added.] See Tex. R. Civ.
P. 166a(c); State Farm Lloyds v. Page, 315 S.W.3d 525, 532 (Tex. 2010) (stating
that a “[s]ummary judgment may not be affirmed on appeal on a ground not
presented to the trial court in the motion”). Both in the ground as stated in
Compass’s motion and in its argument in support of that ground, Compass
claims entitlement to summary judgment because “there is no justiciable
controversy as to the rights and status of the parties.” The question of
justiciability implicates subject matter jurisdiction and standing to bring a claim
and does not turn on the merits of a particular cause of action. See Heckman v.
Williamson Cty., 369 S.W.3d 137, 162 (Tex. 2012) (discussing generally that
justiciability is a component of standing and reiterating that the Texas constitution
bars courts from deciding cases where there is no justiciable
controversy); DaimlerChrysler Corp. v. Inman, 252 S.W.3d 299, 305 (Tex. 2008)
(explaining that failure to prevail on the merits of a claim does not mean that the
party lacks standing); Patterson v. Planned Parenthood of Houston & Se. Tex.,
Inc., 971 S.W.2d 439, 442 (Tex. 1998) (stating that ripeness “implicates subject
matter jurisdiction, and like standing, emphasizes the need for a concrete injury
for a justiciable claim to be presented”) (citations omitted); Lake v. Cravens, 488
S.W.3d 867, 887–88 (Tex. App.—Fort Worth 2016, no pet.) (op. on reh’g)
(discussing the distinction between a claim’s justiciability and its merits). Thus,
notwithstanding the disposition of Durant’s breach of contract and declaratory
judgment actions on appeal, our review of the propriety of trial court’s denial of
32
VI. The Award of Attorney’s Fees to Durant on Breach of Contract
and Declaratory Judgment Actions
In its fourth issue, Compass challenges the award of attorney’s fees to
Durant under sections 37 and 38 of the Texas Civil Practice and Remedies
Code.30 See Tex. Civ. Prac. & Rem. Code Ann. § 37.009 (West 2015) (providing
that, in any proceeding under the TDJA, the trial court may award reasonable
and necessary attorney’s fees that are equitable and just), § 38.001(8) (West
2015) (providing that a party may recover reasonable attorney’s fees for a “valid”
claim under an oral or written contract).
In light of our reversal of Durant’s summary judgment related to his cause
of action for breach of contract, the award of attorney’s fees to Durant on this
cause of action must also be reversed. See Green Int’l, Inc. v. Solis, 951 S.W.2d
384, 390 (Tex. 1997) (“To recover attorney’s fees under Section 38.001, a party
must (1) prevail on a cause of action for which attorney’s fees are recoverable,
Compass’s third ground for summary judgment is limited to the question
presented to the trial court: the justiciability of the controversy, i.e., whether
Durant asserted an “actual, real controversy,” as opposed to a “future or
speculative right.” Lane v. Baxter Healthcare Corp., 905 S.W.2d 39, 41 (Tex.
App.—Houston [1st Dist.] 1995, no writ); see also Laborers’ Int’l Union of N. Am.
v. Blackwell, 482 S.W.2d 327, 329 (Tex. Civ. App.—Amarillo 1972, no writ) (“A
controversy is justiciable when there are interested parties asserting adverse
claims upon a state of facts which must have accrued wherein a legal decision is
sought or demanded.” (internal quotation omitted)).
30
In its final judgment, the trial court awarded “attorneys’ fees under
Chapter 38 of the Texas Civil Practice & Remedies Code for breach of contract,”
and, in the alternative found that “it would be equitable and just for Durant to
recover . . . reasonable and necessary attorneys’ fees associated with
prosecuting his declaratory judgment claims.”
33
and (2) recover damages.”). Therefore, we sustain this part of Compass’s fourth
issue.
However, with regard to Durant’s declaratory judgment action, an award of
attorney's fees is within the trial court's discretion and is not limited to the
prevailing party. See Tex. Civ. Prac. & Rem. Code Ann. § 37.009; Barshop v.
Medina Cty. Underground Water Conservation Dist., 925 S.W.2d 618, 637 (Tex.
1996). Therefore, we remand the issue of attorney’s fees under Chapter 37 to
the trial court so that it may have an opportunity to reconsider the award of
attorney’s fees at the appropriate time. See Edwards Aquifer Auth. v. Chem.
Lime, Ltd., 291 S.W.3d 392, 405 (Tex. 2009) (stating the trial court should have
the opportunity to reconsider its award of attorney’s fees when claimant is no
longer the prevailing party).
VII. Conclusion
Having held that the trial court erred by granting summary judgment in
favor of Durant and awarding attorney’s fees to Durant as the prevailing party
under his breach of contract action, but that the trial court did not err by denying
Compass’s cross-motion for summary judgment, we reverse the trial court’s
judgment and remand this case to the trial court for further proceedings
consistent with this opinion.
/s/ Bonnie Sudderth
BONNIE SUDDERTH
JUSTICE
34
PANEL: MEIER, GABRIEL, and SUDDERTH, JJ.
GABRIEL, J., filed a concurring and dissenting opinion.
DELIVERED: January 5, 2017
35