Lesson. When dealing with the purchase or sale of a loan, be mindful that the borrower could pay off the loan before closing, so consider including language in the agreement to account for that contingency.
Legal issue. Whether a seller breached a loan sale agreement.
Vital facts. Buyer and Seller (and estate) entered into an agreement for the purchase and sale of a $1MM loan that was in default. The parties contemporaneously contracted for the purchase of a funeral home, which the underlying borrower operated. The borrower (as tenant) was $366k behind in its lease payments. If the deals closed, Buyer would become both a lender and a landlord with rights to recover the $1.0MM loan and the $366k lease arrearage. The probate court approved the agreements. About a week before closing, the borrower paid off the loan, so the closing on that agreement never occurred. The closing on the purchase of the property did occur, however. Buyer later collected the $366k.
Procedural history. Seller claimed Buyer was obligated to remit the lease arrearage to Seller. The trial court agreed and granted a summary judgment awarding damages to Seller for the arrearage. Buyer appealed.
Key rules. The Singleton opinion, which turned on the Court’s reading of the two agreements, spelled out Indiana’s general rules of contract interpretation (citations omitted):
The unambiguous language of a contract is conclusive upon the parties to the contract and upon the courts. Courts may not construe clear and unambiguous provisions, nor may courts add provisions not agreed upon by the parties. Unambiguous contracts must be specifically enforced as written without any additions or deletions by the court. In interpreting a written contract, the court should attempt to determine the intent of the parties at the time the contract was made as discovered by the language used to express their rights and duties. If the language of the instrument is unambiguous, the intent of the parties is determined from the four corners of that instrument. If, however, a contract is ambiguous or uncertain, its meaning is to be determined by extrinsic evidence and its construction is a matter for the fact finder. The contract is to be read as a whole when trying to ascertain the intent of the parties. The court will make all attempts to construe the language in a contract so as not to render any words, phrases, or terms ineffective or meaningless.
Holding. The Indiana Court of Appeals affirmed the trial court.
Policy/rationale. One of Buyer’s theories to retain the $366k was based on its interpretation of the loan purchase agreement. Buyer contended that Seller breached the contract despite the fact that “no amounts were owed” under the loan at the time of the scheduled closing. Nonetheless, Buyer claimed that, because the loan had a balance of over $1,000,000 when the related (but separate) property sale agreement was executed, “[$1MM was] the amount … that the parties understood and intended that [Buyer] had to recover before it would be obligated to remit the Arrearage to the [Seller].”
Seller countered that Buyer did not identify which contract term in the loan purchase agreement was allegedly breached. No language in the agreement “prevented [Seller] from accepting the amount due under the [loan] before the closing date and [nothing gave Buyer] any right to the [loan] proceeds before the closing date.” Had Buyer “wanted to prevent an early payoff … or require [the loan have] some minimum balance at the time of closing, [Buyer] could have demanded that the [agreement] include language to that effect.” Or, the agreement “could have included language reducing the purchase price … to account for any payments made … prior to the closing date[,] but it did not.” Moreover, Buyer did not tender the purchase price to Seller and did not proceed with the closing as the agreement stipulated, “thus relieving [Seller] of performing its obligations under the [loan purchase] agreement.”
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Part of my practice includes the purchase and sale of secured loans. If you need assistance with a similar matter, please call me at 317-639-6151 or email me at john.waller@dinsmore.com. Also, don’t forget that you can follow me on Twitter @JohnDWaller or on LinkedIn, or you can subscribe to posts via RSS or email as noted on my home page.