F I L E D
United States Court of Appeals
Tenth Circuit
PUBLISH
JUN 23 1999
UNITED STATES COURT OF APPEALS
PATRICK FISHER
Clerk
TENTH CIRCUIT
In re: COUNTRY WORLD CASINOS,
INC., formerly known as Monolite
Industries, Inc., formerly known as
Innovative Medical Technology, Inc.,
a Nevada corporation, No. 98-1342
Debtor.
COUNTRY WORLD CASINOS, INC.,
Appellant,
vs.
TOMMYKNOCKER CASINO
CORPORATION,
Appellee.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLORADO
(D.C. No. 96-M-2823)
Gary S. Cohen, Denver, Colorado (Arthur Lindquist-Kleissler, Lindquist-Kleissler
& Cooper, L.L.C., Denver, Colorado, with him on the briefs) for Appellant.
Michael E. Romero (Kathryn A. Wingard, with him on the briefs), Pendleton,
Friedberg, Wilson & Hennessey, P.C., Denver, Colorado, for Appellee.
Before ANDERSON, TACHA, and KELLY, Circuit Judges.
KELLY, Circuit Judge.
Debtor Country World Casinos, Inc. (“Country World”) appeals from a
district court order affirming a bankruptcy judge’s order for payment of the
secured claim of Tommyknocker Casino Corp. (“Tommyknocker”) and denial of
Country World’s claim of offset in a Chapter 11 proceeding in the bankruptcy
court. Our jurisdiction arises under 28 U.S.C. §§ 159(d) and 1291, and we affirm
in part and reverse in part.
Background
This case arises out of the sale of real property in Black Hawk, Colorado
from Tommyknocker to Country World. The property was acquired by New
Allied Development Company (“NADC”) in 1990. NADC hired architects and
engineers to design a casino on the property and entered into a consent agreement
in 1992 with the Environmental Protection Agency (“EPA”) to remove
contaminated soil from the property. NADC then transferred title to the property
to Tommyknocker, its wholly-owned subsidiary. To avoid the filing of
mechanics’ liens for the amount owed to the architects and engineers for their
services, Tommyknocker and NADC issued a promissory note to those parties for
$475,000 in March of 1993, secured by a deed of trust on the property. This deed
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of trust is referred to as the Semple Brown Deed of Trust. The note provided that
the indebtedness was due upon sale of the property.
On July 29, 1993, NADC and Tommyknocker entered into a written
contract to sell the property to Monolite Industries, which later changed its name
to Country World. The purchase price of $11,492,500 was to be paid as follows:
$600,000 in cash at closing; a promissory note (“Note”) for $3,450,000, secured
by a second deed of trust on the property; and 2,250,000 shares of Country World
preferred stock valued at $3.33 per share. Closing took place on August 6, 1993.
As noted above, the Semple Brown parties held a first deed of trust on the
property. Because Tommyknocker did not then have enough funds to pay off the
Semple Brown note, the Semple Brown parties agreed to waive the due-on-sale
requirement. In their July 29 acquisition agreement, Tommyknocker and Country
World provided that “[u]pon payment of at least $725,000 as a principal
reduction,” Tommyknocker would pay off the Semple Brown note and the land
would be unencumbered by the Semple Brown Deed of Trust. Aplt. App. at 134.
This obligation was also reflected in the Note:
Notwithstanding the foregoing, in the event that Holder receives
from Maker a minimum of SEVEN HUNDRED TWENTY-FIVE
THOUSAND DOLLARS ($725,000) as the Accelerated Principal and
Interest Payment, Holder shall immediately secure the release of the
lien of that certain Deed of Trust and Security Agreement currently
encumbering the Property . . . .
Aplt. App. at 149.
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Tommyknocker received the amount necessary to trigger its obligation by
January of 1995, but failed to secure the release of the Semple Brown Deed of
Trust. Country World made its monthly payments of $33,184.30 on the Note in
February, March, and April of 1995, but suspended payment in May of 1995.
Tommyknocker then began foreclosure proceedings in state court, and Country
World filed its bankruptcy petition in October of 1995. As part of its
reorganization, Country World obtained financing in May of 1996 from a third
party in order to pay off the Note. Because there was a dispute about the amount
owed to Tommyknocker, Country World paid the undisputed amounts owed and
deposited the balance in an escrow account, pending the bankruptcy court’s
secured claim hearing.
At the time Tommyknocker transferred title of the property to Country
World, it had not performed the environmental cleanup as required by the 1992
consent agreement with the EPA. However, Tommyknocker arranged for the
remediation after Country World took possession of the property, and Country
World reimbursed Tommyknocker for its costs, approximately $650,000.
After a three-day hearing in September of 1996, the bankruptcy court issued
its findings of facts and conclusions of law as to the parties’ liability under the
Note and Country World’s claimed offset for the costs of the environmental
remediation. Both parties appealed to the district court, which affirmed the order
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of the bankruptcy court. However, the district court reversed the bankruptcy
court’s finding of simultaneous defaults under the Note, holding that “the failure
by Tommyknocker to use the money it received on January 13, 1995, to retire the
indebtedness due to Semple Brown and release that deed of trust was a failure to
perform a condition precedent to [Country World’s] monthly payments.” In re
Country World Casinos, Inc., 223 B.R. 809, 812 (D. Colo. 1998). Thus, the court
found that Country World was justified in withholding its monthly payments
beginning in May of 1995. Nonetheless, the court upheld the bankruptcy court’s
refusal to suspend interest on the Note during the time that Country World
withheld monthly payments. Further, the district court upheld the bankruptcy
court’s denial of a $650,000 offset for Country World’s payments to
Tommyknocker for the environmental remediation.
In this appeal, Country World contends that the district court erred by (1)
holding that Country World was required to pay interest on the Note during the
time that it justifiably withheld monthly payments; (2) failing to award attorney
fees, costs and expenses to Country World as the “prevailing party” in litigation
related to the note; and (3) holding that the environmental contamination on the
property did not constitute an encumbrance, and thus denying Country World an
offset for the amount it paid for remediation.
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Discussion
“In reviewing the decision of a bankruptcy court pursuant to 28 U.S.C. §
158(a) and (d), the district court and the court of appeals apply the same standards
of review that govern appellate review in other cases. We therefore review the
bankruptcy court’s legal determinations de novo and its factual findings for clear
error.” In re Hedged-Investments Assocs., Inc., 84 F.3d 1267, 1268 (10th Cir.
1996).
A. Interest on the Note
The district court held that, because Country World had bargained for
transfer of marketable title, securing the release of the Semple Brown Deed of
Trust was a condition precedent to Country World’s monthly payments.
Tommyknocker did not satisfy this condition in January of 1995, and thus the
court found that Country World was justified in withholding monthly payments.
Neither party appeals from this decision, although Tommyknocker argues in its
brief that the court erred in its interpretation of the contract, stating that we must
review the issue de novo. However, because Tommyknocker did not file a cross-
appeal, we may not consider this issue. See Roe v. Cheyenne Mountain
Conference Resort, Inc., 124 F.3d 1221, 1227 (10th Cir. 1997).
Given this district court finding, the question remains whether the court
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erred in holding that Tommyknocker was entitled to interest on the Note during
the time that Country World justifiably withheld its monthly payments. Country
World presents two arguments that Tommyknocker was not entitled to interest,
one based upon the language of the Note itself and the second based upon
equitable principles.
Country World first argues that the Note expressly provides that the interest
would be suspended upon default of one of the parties: Tommyknocker was to
receive “interest on the Indebtedness at eight percent (8%) per annum (‘Interest’)
for so long as there exists no default under this Note.” Aplt. App. at 148. The
district court found that, based on its reading of the remainder of the Note, this
provision refers solely to potential default by Country World and thus does not
authorize a suspension of interest upon default by Tommyknocker. We agree.
Each of the “Events of Default” identified in the Note concern Country World,
and the Note provides remedies for Tommyknocker upon default by Country
World. See id. at 149-151. Thus, the above-quoted provision does not provide
Country World the relief it seeks.
However, we find persuasive Country World’s equitable argument for
suspending interest. Although the cases cited by both parties do not provide a
clear answer, except when a creditor’s improper acts or omissions prevent a
debtor from paying, we ultimately decide the issue based on the principle that “a
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party to a contract cannot claim its benefits where he is the first to violate its
terms.” Western Plains Serv. Corp. v. Ponderosa Dev. Corp., 769 F.2d 654, 657
(10th Cir. 1985).
Liberty State Bank & Trust v. Hemisphere Dev. Group, Inc., 296 N.W.2d
241 (Mich. Ct. App. 1980), relied upon by Country World, is not applicable to the
facts of this case. There the court stated that “if the failure to make payment on a
note is due to any improper act or omission of the creditor, or to any conduct on
behalf of the creditor that prevents the debtor from complying with his obligation
to pay, accrual of interest on the note is suspended.” Id. at 244 (citing Michaels
v. Mellish, 222 N.W.2d 247 (Mich. Ct. App. 1974)) (emphasis added). Country
World reads the emphasized disjunctive “or” as distinguishing between an
improper act of the creditor and conduct which prevents the debtor from meeting
his obligation to pay. Following this reading, Country World concludes that,
because Tommyknocker’s failure to obtain a release on the Semple Brown Deed
of Trust was an “improper act,” interest on the Note should be suspended. We
disagree with Country World’s understanding of Liberty State Bank — it is clear
that the disjunctive instead distinguishes between acts or omissions of the creditor
and actions taken on behalf of the creditor by an agent. In either case, whether
the creditor or the agent acts, the debtor must be prevented from paying before
accrual of interest is suspended. An example of such a situation is provided by
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Michaels, the case cited by the Liberty State Bank court, where the creditor
repudiated the contract and informed the debtor that he would accept no further
payments. It is clear that such a situation is not present in this case —
Tommyknocker in no way repudiated the contract and otherwise did nothing to
“prevent” Country World from making its monthly payments.
Tommyknocker argues that Fisk v. Powell, 84 N.W.2d 736 (Mich. 1957),
and Bendik v. Sommer Bros. Constr. Co., 205 A.2d 692 (Pa. Super. Ct. 1964),
establish that Country World remained obligated to pay interest. In Fisk, the
Michigan Supreme Court held that the sellers’ breach of the covenant against
encumbrances did not excuse the buyers’ failure to make payments and did not
suspend the accrual of interest. See Fisk, 84 N.W.2d at 741-42. However, Fisk is
distinguishable from this case in that the district court here held that
Tommyknocker’s breach excused Country World’s suspension of monthly
payments; thus the obligations of the parties were not independent as they were in
Fisk.
Bendik is also distinguishable from this case. There, a subcontractor filed
a mechanics’ lien in violation of the contract with the defendants. See Bendik,
205 A.2d at 693. The Pennsylvania Superior Court held that, although the
defendant was not obliged to pay the amount due while the lien was on file, the
defendant was required to pay interest on this amount. See id. This was because
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the money was due when the work was completed, which was a few days prior to
the filing of the lien. The court held that, by not paying the amount when due, the
defendant breached the contract first and thus that it would have been inequitable
to suspend the accrual of interest. See id. Bendik differs from our case in that,
according to the district court, Country World did not breach the contract. Thus
the equities do not favor Tommyknocker.
Country World views Sjoberg v. Kravik, 759 P.2d 966 (Mont. 1988), as the
most factually analogous case. There the court affirmed the trial court’s finding
that, because of the defendants’ material breach, no interest would accrue on the
contract between the date of the breach and the time the defendants met their
obligation under the contract. See id. at 969-70. In that case, the defendants sold
the plaintiff some real property which was encumbered by a mortgage. Under the
contract, the defendants were to pay off the mortgage within a year, but failed to
do so for another five years. See id. at 967. As a result, the plaintiff alleged that
he was unable to obtain financing to develop the land and thus suffered
significant damages. See id. at 968. The case is unclear as to whether interest
should be suspended simply because there was a material breach, or because the
breach caused damages to the plaintiff. Not surprisingly, Tommyknocker argues
for the latter interpretation, and concludes that since Country World suffered no
damages, it must pay the accrued interest. Whether Country World suffered
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damages as a result of Tommyknocker’s breach is a factual question that the
bankruptcy court did not decide, and, because our function is not to make such
findings, we will not decide it here. 1
Although we are inclined to read Sjoberg more broadly than
Tommyknocker, we need not base our decision on that case because our language
in Western Plains Serv. Corp. v. Ponderosa Dev. Corp., 769 F.2d 654 (10th Cir.
1985), persuades us that interest should have been suspended while Country
World justifiably withheld its monthly payments. See id. at 657 (“The law is
well settled that a party to a contract cannot claim its benefits where he is the first
to violate its terms.”) (citing Navato v. Sletten, 560 F.2d 340, 346 (8th Cir.
1977)). It is clear that the eight-percent interest on Country World’s principle
indebtedness of $3,450,000 was a benefit to Tommyknocker. The Note also
provides that the principle may be prepaid at any time without penalty. See Aplt.
App. at 151. Country World prepaid the principle in May of 1996 when it
obtained financing from a third party. There is no question that by so doing,
Country World was not liable for interest that would otherwise have been due
after that date. However, to allow the accrual of interest from May of 1995, when
1
Country World filed a motion for leave to file a supplemental appendix in
order to respond to Tommyknocker’s argument that Country World suffered no
damages as a result of Tommyknocker’s breach. Because we will not address that
issue, we deny Country World’s motion.
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Country World justifiably withheld payment, until May of 1996, when Country
World prepaid the principle, would penalize Country World while benefitting
Tommyknocker. 2 Thus we hold that interest should have been suspended during
this time.
B. Attorney Fees, Costs and Expenses
Country World next argues that the district court erred in failing to award
attorney fees, costs and expenses to Country World as the “prevailing party” in
2
Although the Note does not address the payment of interest in this
situation, the nature of Tommyknocker’s breach persuades us that interest should
be suspended. The record indicates that Tommyknocker did not pay off the
Semple Brown Deed of Trust because (1) it had other past due obligations, see In
re Country World Casinos, Inc., 223 B.R. at 810, and (2) it never intended to pay
face value, see Aplt. App. 104. The bankruptcy court credited the testimony of
Tommyknocker’s president that she thought the Semple Brown parties had
charged too much and she never intended to pay them $475,000. See id. The
bankruptcy court found that she:
always intended to try and chisel them down, even after she had
signed the Semple Brown promissory note on March 5, 1993, even
after she had signed the sales contracts on July 14 and July 29, 1993,
which required pay off of Semple Brown, and even after she signed
an Amendment to the Semple Brown promissory note on August 6,
1993 . . . which provided for TKCC and NADC “to pay the entire
principal balance and all unpaid accrued interest” when TKCC had
received the $750,000 from the Debtor.
Id. Moreover, when Country World justifiably withheld its monthly payments,
Tommyknocker foreclosed, resulting in Country World filing its Chapter 11
bankruptcy petition. See In re Country World Casinos, Inc., 223 B.R. at 811.
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litigation related to the Note. Section 9 of the Tommyknocker Deed of Trust
provides that the prevailing party in any proceeding which in any way affects or
relates to the Note “shall be awarded all costs incurred, including without
limitation, reasonable attorneys’ fees.” Aplt. App. at 157.
The only dispute between the parties is whether Country World should be
considered the prevailing party. Tommyknocker asserts that because Country
World did not prevail on its interest claim and its environmental setoff claim, it
cannot be considered the prevailing party. However, in Dennis I. Spencer
Contractor, Inc. v. City of Aurora, 884 P.2d 326, 332 (Colo. 1994) (en banc), the
Colorado Supreme Court held that “where a claim exists for a violation of a
contractual obligation, the party in whose favor the decision or verdict on liability
is rendered is the prevailing party for purposes of awarding attorney fees.” This
is so regardless of whether the party who wins on the issue of liability is able to
recover any damages, unlike civil rights cases. See id. at 330, 331; Travers v.
Rainey, 888 P.2d 372, 375 (Colo. App. 1994).
In this case, the bankruptcy judge found that both parties had breached
simultaneously and thus there was no prevailing party. However, the district
court found that Tommyknocker had breached the contract and that Country
World in response justifiably withheld its monthly payments. The district court
further found that Country World was not in default and as a result was not liable
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to Tommyknocker for the eighteen-percent default interest under the Note. These
findings are not in dispute, and the predominant matter before the bankruptcy
court was liability under the Note. Thus we hold that Country World is the
prevailing party under the standard articulated in City of Aurora and Travers. As
such, Country World is entitled to reasonable attorney fees and costs pursuant to
the contract.
C. Environmental Remediation Offset
The district court held that environmental contamination is not an
encumbrance on title and thus that Country World was not entitled to a set-off for
the amount paid to Tommyknocker for remediation. Country World maintains
that the court erred in so holding and that the doctrine of merger nullifies an
alleged oral agreement whereby Country World agreed to pay for the cleanup, as
well as any agreement contained within the Acquisition Contract. The
Acquisition Contract provided:
Monolite is agreeing to purchase the Real Property upon the
assumption that NADC has received EPA general approval of a
cleanup program on the Real Property. Monolite’s obligation to
close the acquisition is subject to the condition that none of the
parties hereto shall have discovered any materially adverse
environmental problems with the Real Property or that the cost of the
currently proposed cleanup work shall not materially exceed the
present estimate of $200,000 to $250,000 to complete.
Aplt. App. at 135-36. Country World argues that there is no implied promise or
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commitment contained within this clause that it would be required to pay for the
cleanup; instead, the clause was inserted because of Country World’s concern
about Tommyknocker’s inability to pay for the cleanup. Country World’s entire
argument on this issue is premised upon its assertion that environmental
contamination is an “encumbrance” for the purposes of the covenant against
encumbrances in a warranty deed.
Black’s Law Dictionary (6th ed. 1990) defines a “covenant against
encumbrances” as “[a] stipulation against all rights to or interests in the land
which may subsist in third persons to the diminution of the value of the estate
granted.” Id. at 364. Country World quotes the following language from Feit v.
Donahue, 826 P.2d 407 (Colo. Ct. App. 1992):
An encumbrance within the meaning of the covenant is a right or
interest in the land which diminishes the value of, but is not
inconsistent with the ability to convey, fee title. It includes “any
burden resting not only on the title to the real estate, but on the real
estate itself which tends to lessen the value or interfere with its free
enjoyment.”
Id. at 410 (quoting 7 G. Thompson, Real Property § 3183 at 272 (1962)). Feit
dealt not with environmental contamination, but with an existing zoning violation
which the court held to be an encumbrance.
The broad language from Feit seems to support Country World’s assertion
that the environmental contamination also constitutes an encumbrance. Country
World also relies on Jones v. Melrose Park Nat’l Bank, 592 N.E.2d 562 (Ill. App.
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Ct. 1992), where the court held that “the presence of hazardous waste materials . .
. is sufficient to preclude defendant from tendering merchantable title to
plaintiff.” Id. at 568. In that case, the seller specifically warranted that it had
received no notice of EPA violations, despite its knowledge that there was a soil
contamination problem and that an EPA penalty had been proposed before and
after the contract was signed.
However, the majority of cases hold otherwise. In HM Holdings, Inc. v.
Rankin, 70 F.3d 933, 936 (7th Cir. 1995), the Seventh Circuit stated that “every
court that has addressed the issue has refused to expand the marketable title
doctrine to make the presence of hazardous waste an encumbrance on title,” and
opined that a buyer’s remedy in situations where environmental cleanup is
required “would have been to include an environmental contingency clause in the
contract or to insist on warranties against such conditions.” See also Donahey v.
Bogle, 987 F.2d 1250, 1254 (6th Cir. 1993), vacated on other grounds, 512 U.S.
1201 (1994) (“[A]n ‘encumbrance’ is . . . something . . . that diminishes the value
of the title to the property; environmental contaminants may diminish the value of
the realty, but they do not constitute an encumbrance because they do not affect
title.”); Cameron v. Martin Marietta Corp., 729 F. Supp. 1529, 1532 (E.D.N.C.
1990) (holding that, although defendant transferred property which was
contaminated by chemicals in violation of state and federal regulations, plaintiffs
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failed to state a claim for breach of warranty against encumbrances); United
States v. Allied Chem. Corp., 587 F. Supp. 1205, 1206 (N.D. Cal. 1984) (The
term “encumbrance” includes “only liens, easements, restrictive covenants and
other such interests in or rights to the land held by third persons”; it “does not
extend to the presence of hazardous substances.”).
The overwhelming weight of authority thus indicates that the district court
did not err in holding that the environmental contamination was not an
encumbrance. The one case to decide otherwise, Jones v. Melrose Park Nat’l
Bank, can be reconciled in that the seller specifically warranted that there were no
environmental problems on the property. See Jones, 593 N.E.2d at 564. In that
situation, the existence of hazardous waste did constitute an encumbrance. Here,
by contrast, there was no specific warranty regarding environmental conditions on
the property; in fact, Country World knew of the needed remediation and
reimbursed Tommyknocker for its costs of cleaning up the property. Furthermore,
although the acquisition agreement mentioned a $250,000 cap on remediation
costs, it clearly referred to Country World’s right to back out of the deal prior to
closing should “materially adverse environmental problems” be discovered or
estimated cleanup costs exceed $250,000. Aplt. App. at 135-36. Neither of these
conditions on acquisition was met prior to closing, and by its terms the $250,000
limit does not apply to excess costs subsequent to closing. Because the
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environmental contamination was not an encumbrance, and because the $250,000
cap did not apply to actual cleanup costs after closing, the bankruptcy court did
not err in denying an offset to Country World.
We AFFIRM the bankruptcy court’s decision as to Country World’s
claimed offset for environmental remediation costs, REVERSE the district court’s
holding that Country World was required to pay interest on the Note after May of
1995, and REMAND to the bankruptcy court to make determinations consistent
with this opinion.
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No. 98-1342, Country World Casinos v. Tommyknocker Casino
ANDERSON, Circuit Judge, dissenting in part:
I respectfully dissent from that part of the majority opinion reversing the
district court’s holding that Country World was required to pay interest on the
Note after May of 1995. The majority holds that allowing the accrual of interest
would be inequitable because it would “penalize Country World while benefitting
Tommyknocker.” Majority op. at 12. I disagree.
Denying the accrual of interest following Tommyknocker’s breach amounts
to an additional penalty on Tommyknocker, apart from any obligation it would
have to pay damages to Country World, if any had been proven, following its
breach. Moreover, it could amount to a windfall for Country World, which had
the use of the money justifiably withheld. Finally, the case upon which the
majority primarily relies for this equitable holding, Western Plains Serv. Corp. v.
Ponderosa Dev. Corp., 769 F.2d 654 (10th Cir. 1985), is factually different from
this case, and makes it clear that the analysis of whether accrued interest should
be paid following a breach is much more complicated than simply inquiring into
which party first violated the terms of the contract. In short, I think the district
court’s analysis and disposition of this issue was cogent and correct, and, for the
reasons stated in its opinion, I would affirm the district court’s judgment in its
entirety.