KeyBank, N.A. v. Matrix Development Corporation

Filing 949

OPINION AND ORDER. Signed on July 16, 2009 by Judge Anna J. Brown. (kt)

IN THE UNITED STATES D I S T R I C T COURT FOR THE D I S T R I C T OF OREGON

In re Matrix Development Corp., Debtor.

09-CV-225-BR
Bankr. Case No. 08-32798-tmbll

O P I N I O N AND ORDER KEYBANK, N . A . ,
Plaintiff-Appellant,

v.
MATRIX DEVELOPMENT CORP. ,
Defendant-Appellee.

LEE C . NUSICH MARY J O HESTON PETER D . HAWKES THOMAS W. SONDAG Lane powell/ P.C. 601 S.W. Second Ave/ S u i t e 2100 P o r t l a n d / OR 9 7 2 0 4 [phone]
Attorneys for Plaintiff-Appellant

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O P I N I O N AND ORDER

DAVID A . FORAKER SANFORD R . LANDRESS Greene & Markley, P.C. 1515 S.W. F i f t h Ave., Suite 600 P o r t l a n d , OR 9 7 2 0 1 [phone]

Attorneys for Defendant-Appellee
BROWN, J u d g e .

This matter comes before the Court on the appeal of Plaintiff-Appellant KeyBank, N.A., from a Final Order of the Bankruptcy Court for the D i s t r i c t of Oregon in a Chapter 11 proceeding. Pursuant t o 28 U.S.C. § 158(c) (1) and Local Rule

2200-2, KeyBank objected t o r e f e r r a l of t h i s matter to the Bankruptcy Appellate Panel and elected to have the appeal heard by this Court. This Court has jurisdiction over the appeal
§

pursuant t o 28 U.S.C.

158(a).

F o r t h e r e a s o n s t h a t f o l l o w , t h e C o u r t REMANDS t h i s m a t t e r to the Bankruptcy Court for further proceedings consistent with this Opinion and Order.

BACKGROUND

The p a r t i e s s t i p u l a t e d to or otherwise agree to the following facts. Between January 2005 and April 2007, KeyBank made several commercial real-estate loans to Matrix Development Corp. executed 12 deeds of t r u s t i n favor of KeyBank on separate 2 O P I N I O N AND ORDER Matrix

parcels o f r e a l e s t a t e t o s e c u r e t h e l o a n s f r o m K e y B a n k . parties stipulated the trust deeds contain the following identical language: 1 1.2 Secured Obligations. Borrower makes the grant, conveyance, transfer and assignment set forth in Section 1.1, and grants the security interest set forth in 1.2 for the purpose of securing the following obligations (the "Secured Obligations") in any order of p r i o r i t y t h a t Lender may choose:

The

***
1.2.2. Loan Documents. Payment and/or performance of each and every other obligation of Borrower under the Note, this Deed of Trust, any construction or land loan agreement executed in conjunction therewith (the "Loan Agreement"), a l l other documents evidencing, securing, or otherwise governing the Loan (specifically excluding, however, for purposes of establishing the Secured Obligations, any obligations of Borrower arising solely under any guaranty of the Secured Obligations or any indemnity agreement that by i t s terms i s not secured hereby), and any and a l l amendments, modifications, and supplements thereto (collectively the "Loan Documents"), the provisions of which are incorporated herein by this reference;

***
All of the t r u s t deeds also include Subparagraphs 1.2.3 and 1.2.4, which are set out below and are a t the heart of this matter. These subparagraphs are known as the
II

d r a g n e t II c l a u s e s .

1 Even though the p a r t i e s s t i p u l a t e d a l l 12 t r u s t deeds contain the language a t i s s u e , KeyBank notes and Matrix does not dispute only 11 of the t r u s t deeds actually contain the identical language of 1.2, 1.2.2, 1.2.3, and 1.2.4.

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OPINION AND ORDER

None o f t h e d e e d s o f t r u s t s p e c i f i c a l l y r e f e r e n c e a n y KeyBank debt o r o b l i g a t i o n o t h e r than the debt o r o b l i g a t i o n created under the corresponding promissory note specifically secured by that particular deed of trust. In addition, none of

the promissory notes or loan agreements specifically reference any of the deeds of t r u s t . On J u n e 1 0 , 2 0 0 8 , M a t r i x f i l e d a v o l u n t a r y C h a p t e r 11 bankruptcy petition. On J u l y 1 4 , 2 0 0 8 , M a t r i x f i l e d a m o t i o n f o r a u t h o r i z a t i o n t o use cash c o l l a t e r a l of KeyBank i n which Matrix proposed, among other things, to use net cash proceeds to continue i t s operations f r o m s a l e s o f o n e o f i t s c o n d o m i n i u m d e v e l o p m e n t s ( t h e Q) t h a t i s the subject of one of the trust deeds at issue. KeyBank opposed

the Motion on the ground that the language in the trust deeds, particularly Subparagraphs 1.2.3 and 1.2.4, precludes Matrix 1 s request because that language operates to cross-collateralize Matrix's obligations t o KeyBank. The alleged r e s u l t of t h i s

cross-collateralization i s that the condominium development i s c o l l a t e r a l for a l l o t h e r obligations t o KeyBank whether those obligations were incurred before or after the execution of the deed of t r u s t , and, therefore, proceeds from the Q are not available for Matrix's use. The p a r t i e s eventually s e t t l e d most

of the issues related to the motion, but reserved for the Bankruptcy Court the issue whether the trust-deed language

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O P I N I O N AND ORDER

operates t o c r o s s - c o l l a t e r a l i z e M a t r i x ' s o t h e r o b l i g a t i o n s t o KeyBank. On J u l y 3 1 / 2 0 0 8 / t h e B a n k r u p t c y C o u r t h e l d a h e a r i n g / a n d on September 10/ 2008/ the Bankruptcy Court issued a Letter Opinion in which i t held the trust-deed language does not operate to cross-collateralize Matrix's obligations with Matrix's other obligations to KeyBank. On O c t o b e r 1 7 / 2 0 0 8 , t h e B a n k r u p t c y

Court filed a final order to this effect. On O c t o b e r 2 3 / 2 0 0 8 / K e y B a n k f i l e d i t s A m e n d e d N o t i c e o f Appeal and Objection to Referral to Bankruptcy Appellate Panel, and the matter was subsequently referred to t h i s Court. The only

issue before this Court is whether the Bankruptcy Court erred when i t concluded the trust-deed language does not operate to c r o s s - c o l l a t e r a l i z e Matrix's obligations t o KeyBank.

STANDARDS

This Court reviews the Bankruptcy Court's conclusions of law de novo. Cir. 1997)

See In r e Federated Group/ I n c . , 107 F.3d 730, 732 (9th
(citation omitted).

See also In re Daniels-Head &
The Court reviews the

Assoc./ 819 F.2d 914/ 918 (9th Cir. 1987).

Bankruptcy Court's factual findings under a "clearly erroneous" standard.

See In r e Triple Star Welding/ 324 B.R. 778, 788 (9th See a l s o Fed. R. Bankr. P. 8013.

C i r . BAP 2 0 0 5 ) .

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DISCUSSION KeyBank contends the Bankruptcy Court e r r e d when i t concluded the trust-deed language did not operate to crossc o l l a t e r a l i z e e i t h e r Matrix 1 s subsequent debt t o KeyBank or Matrix 1 s antecedent debt to KeyBank. I. Standards. The p a r t i e s do not dispute Oregon law governing contract construction applies in this matter. This Court must interpret and apply Oregon law as the Oregon Supreme Court would apply i t . See S.D. Myers, Inc. v. City and (9th Cir. 2001). If

County o f San Francisco, 253 F.3d 461, 473

no decision by the Oregon Supreme Court i s available to guide the C o u r t ' s i n t e r p r e t a t i o n o f s t a t e law, t h e C o u r t must p r e d i c t how the Oregon Supreme Court would decide the issue by using intermediate appellate court decisions, decisions from other jurisdictions, statutes, treatises, and restatements as guidance. Id. I f "there i s relevant precedent from the s t a t e ' s [however,] the federal court must

intermediate appellate court,

follow the state intermediate appellate court decision unless the federal court finds convincing evidence that the s t a t e ' s supreme court likely would not follow i t . " Ryman v. Sears, Roebuck and

Co., 505 F.3d 993, 995 (9th C i r . 2007) ( c i t i n g Vestar Dev. I I , LLC v. Gen. Dynamics Corp., 249 F.3d 958, 960 (9th Cir. 2001)). Under Oregon law, an "obligation and the instrument securing

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it m u s t b e c o n s t r u e d t o g e t h e r . App. 84, 94 (1999).

II

Gorzeman v. Thompson, 162 Or.

When . · . i n t e r p r e t [ i n g ] a n y w r i t t e n instrument, [the court's] objective is to a s c e r t a i n the meaning t h a t most l i k e l y was intended by the parties that entered into it. . . . [The court] a s c e r t a i n [s] the meaning most likely intended by the parties by means of a three-step inquiry. [The court] begin[s] with the text of the disputed provision in the context of the instrument as a whole. In examining the text of the disputed provision, [the court] determine[s] whether that provision i s ambiguous, for, i f the provision according to i t s terms is unambiguous, [the court] enforce[s] the provision according to i t s terms as a matter of law. A contractual provision i s ambiguous only i f i t i s capable of more than one plausible and reasonable interpretation. If the disputed provision i s ambiguous, [the court] proceed[s] to a second step that involves examining extrinsic evidence of the contracting parties' intent. If resort to such extrinsic evidence does not resolve the ambiguity, then [the court] proceed[s] to a third and final step, namely, resort to appropriate maxims of construction. McKay'S Mkt. o f Coos Bay, Inc. v. P i c k e t t , 212 Or. App. 7, 12
(2007) (internal quotations and c i t a t i o n s omitted).

See also

Tipperman v. T s i a t s o s , 327 Or. 539, 545-46 (199B); Yogman v. Parrott, 325 Or. 358, 364 (1997). II. Subsequent debt. KeyBank contends the Bankruptcy Court e r r e d when i t concluded the trust-deed language does not operate to secure subsequent debt (also known as future debt), which i s debt incurred after the execution of the instrument. 7 O P I N I O N AND ORDER Specifically,

KeyBank a r g u e s t h e B a n k r u p t c y C o u r t i m p r o p e r l y a p p l i e d t h e m a x i m of contract construction that provides a specific provision governs over a general provision of the t r u s t deed when the Bankruptcy Court concluded the language of Subparagraph 1.2.3 on which KeyBank r e l i e s t o secure a l l subsequent debt i s limited by the language in Subparagraph 1.2.4.

A.

The Trust Deed provisions a t issue.

SUbparagraph 1.2.3 secures the following obligations:

1.2.3. Related Loan Documents. Payment and/or performance of each covenant and obligation on the part of Borrower or i t s a f f i l i a t e s to be performed pursuant to any and a l l loan documents (the "Related Loan Documents"), t h a t have been o r may be executed by Borrower or i t s a f f i l i a t e s evidencing or securing one or more present or future loans by Lender or i t s a f f i l i a t e s to Borrower or i t s affiliates (collectively, the "Related Loans"), whether now e x i s t i n g o r made i n the future, together with any and a l l modifications, extensions and renewals thereof; provided, however, that nothing contained herein shall be construed as imposing an obligation upon Lender, or as evidencing Lender's intention, to make any Related Loan to Borrower or i t s a f f i l i a t e s ;
In addition, Subparagraph 1.2.4 secures the following obligations:

1.2.4. Future Obligations. Payment to Lender of a l l future advances, indebtedness and f u r t h e r sums and/or performance of such further obligations as Borrower or the then record owner of the Project or the then owner of the balance of the C o l l a t e r a l may undertake to pay and/or perform (whether as principal, surety, or guarantor) for the benefit of Lender, i t s successors or assigns,

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(it b e i n g c o n t e m p l a t e d b y B o r r o w e r a n d L e n d e r t h a t Borrower may h e r e a f t e r become indebted t o Lender i n such f u r t h e r sum o r sums), when such borrowing and/or obligations are evidenced by a written instrument reciting that i t or they are secured by t h i s Deed of Trust.

B.

The Bankruptcy C o u r t ' s c o n c l u s i o n .

The Bankruptcy Court found the words " a l l future advances, indebtedness and f u r t h e r sums and/or performance of such further obligations" in Subparagraph 1.2.4 were broad enough to cover the same obligations as s e t forth i n Subparagraph 1 . 2 . 3 . In

addition, the Bankruptcy Court found the language requiring "a writing" in Subparagraph 1.2.4 rendered that clause more specific than Subparagraph 1.2.3, and, therefore, the Bankruptcy Court concluded future indebtedness on r e l a t e d loans from KeyBank to Matrix would only be secured by the other t r u s t deeds when evidenced by a writing. Here i t i s undisputed that no such

writings exist, and, therefore, the Bankruptcy Court concluded the trust-deed language does not operate to cross-collateralize subsequent debt on related loans.

C.

Analysis.

A s n o t e d , t h e I I t e x t o f t h e d i s p u t e d p r o v i s i o n ll m u s t b e e x a m i n e d " i n t h e c o n t e x t o f t h e i n s t r u m e n t a s a w h o l e . II
McKay's

Mkt., 212 Or. App. a t 12.

IIA c o n t r a c t u a l p r o v i s i o n i s

'ambiguous' only i f i t i s capable of more than one plausible and r e a s o n a b l e i n t e r p r e t a t i o n . II

Id.

(citing Batzer Canst., Inc. v.

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Boyer, 2 0 4 O r . A p p . 3 0 9 , 3 1 3 ( 2 0 0 6 » .
Here Subparagraph 1.2.4 i s "capable of more than one plausible and reasonable interpretation."
Id.

First, it is

capable of the interpretation the Bankruptcy Court gave i t . Second, however, the words rrthen record owner of the Project or t h e t h e n o w n e r o f t h e b a l a n c e o f t h e C o l l a t e r a l ll s u g g e s t Subparagraph 1.2.4 refers only to the property secured by that particular trust deed. Collateral i s defined in the trust deed

in terms of the real property that i s specifically secured by the trust deed, and, therefore, Subparagraph 1.2.4 could refer only to advances pertaining to the particular collateral that is specifically set forth in and i s the subject of the trust deed. Accordingly, Subparagraph 1.2.4 i s capable of two reasonable interpretations and, therefore, i t i s ambiguous. Nevertheless, a p p l i c a t i o n of the maxim t h a t the s p e c i f i c controls over the general i s improper here for two reasons: (1) I f a c o n t r a c t p r o v i s i o n i s ambiguous, the Court must, as noted, look to extrinsic evidence to ascertain i t s meaning before resorting to maxims of construction (McKay's Mkt., 212 Or. App.

a t 12) and (2) each subparagraph i s a d i s c r e t e l i s t of obligations secured by the trust deed. In effect, there is not

anything on the face of the trust deed to suggest the clauses are otherwise related to each other. In any event, even i f the extrinsic evidence supports

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KeyBank's r e a d i n g o f t h e t r u s t d e e d ,

"no m a t t e r how the clause i s

drafted, the future advances to be covered must be of the same class as the primary obligation and so related to i t that the consent of the debtor t o i t s i n c l u s i o n may be i n f e r r e d . " Community Bank v. Jones, 278 Or. 647, 666 (1977). Accordingly,

any obligation t h a t i s not of the same c l a s s as the obligation specifically secured by any particular t r u s t deed would not be cross-collateralized as a matter of Oregon law. At oral

argument, however, Matrix indicated there i s disagreement between the p a r t i e s as to whether the obligations are of the same class. The Court concludes on t h i s record t h a t the Bankruptcy Court e r r e d when i t applied the maxim t h a t the s p e c i f i c c o n t r o l s over the general to the provisions at issue and, therefore, concluded Subparagraph 1.2.4 controlled over Subparagraph 1.2.3. Accordingly, a remand i s necessary for the Bankruptcy Court to consider any extrinsic evidence and to determine whether the trust-deed language operates to cross-collateralize Matrixrs subsequent debt t o KeyBank and, i f so, to make findings as to the classes of obligation secured pursuant to Jones. Accordingly, a

remand of the matter i s necessary for the Bankruptcy Court to make those findings. III. Antecedent debt. KeyBank a l s o contends the Bankruptcy Court e r r e d when i t concluded the trust-deed language does not operate to secure

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antecedent d e b t ( a l s o k n o w n a s p a s t d e b t ) , w h i c h i s d e b t t h a t w a s incurred before the execution of the instrument.

A.

The Bankruptcy Court's conclusion.

The Bankruptcy Court found the language of Subparagraph 1.2.3 i s clear and unambiguous in i t s intent to crossc o l l a t e r a l i z e Matrix's antecedent obligations t o KeyBank. The

Bankruptcy Court, however, also concluded Subparagraph 1.2.3 is unenforceable as a matter of Oregon law.

B.

Analysis.

In reaching i t s conclusion, the Bankruptcy Court relied on In re Wollin. 249 B.R. 555 (2000). In Wollin, another

bankruptcy case, a credit union had included a dragnet clause similar to the one in t h i s case in i t s automobile loan documents for the purpose of securing the debtor's other obligations to the credit union by making the automobiles collateral for the debtors' other obligations that existed at the time the loan agreements were executed. Id. at 557. The Wollin court

concluded the antecedent debt, which was not s p e c i f i c a l l y r e f e r r e d to i n the dragnet clause, was not secured by the c o l l a t e r a l t h a t was the subject of the agreement. Id. a t 560.

As n o t e d b y t h e W o l l i n c o u r t , h o w e v e r , t h e r e i s n o t a n y Oregon authority directly on point with respect to antecedent debt. Id. Other jurisdictions handle dragnet clauses and ( 1 ) t h e " p l a i n - m e a n i n g ll

antecedent debt in one of three ways: 12 O P I N I O N AND ORDER

rule i n w h i c h t h e t e r m s o f t h e d r a g n e t c l a u s e a r e e n f o r c e d a s writteni (2) the "same-class" standard i n which the terms of the

dragnet clause are enforced as long as the obligations are of the same c l a s s i and (3) the IIspecific-reference" r u l e i n which the terms of the dragnet clause are enforced as long as the dragnet clause specifically references the antecedent debt that is to be cross-collateralized.
§

Id.

The Restatement (Third) of Property According

2.4 (1997) endorses the "specific-reference" rule.

to Matrix, the Bankruptcy Court was correct t o follow Wollin and to apply the Restatement's "specific-reference" rule because dragnet clauses are disfavored and s t r i c t l y construed. The Court, however, has not found nor have the p a r t i e s provided any authority to indicate that dragnet clauses are disfavored and s t r i c t l y construed under Oregon law. Moreover,

the Court does not find any reason to assume Oregon courts would adopt the Restatement's specific-reference rule.

See Nelsen v.

Nelsen, 174 Or. App. 252, 258 (2001) (Oregon c o u r t s lido not
literally adopt the Restatements"). In addition, the Oregon

Supreme Court has held on the subject of contract construction that lIif the provision according to i t s terms i s unambiguous, [the court] enforcers] the provision according to i t s terms as a matter of law." (1995).

Eagle Indus., Inc. v. Thompson, 321 Or. 398, 405

The Court, therefore, does not find any reason to assume

Oregon courts would apply the "same-class" rule to antecedent

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debt i n l i g h t o f t h e f a c t t h a t s u c h a r u l e i s a n e x c e p t i o n t o contract construction in Oregon that Oregon courts have only applied in the context of subsequent debt. Accordingly, this

Court does not have a basis for predicting whether Oregon courts would adopt either of these rules. The Court concludes on t h i s record t h a t the Bankruptcy Court erred when i t concluded Subparagraph 1 . 2 . 3 does not operate to c r o s s - c o l l a t e r a l i z e Matrix's antecedent debt t o KeyBank as a matter of law.

CONCLUSION

F o r t h e s e r e a s o n s , t h e C o u r t REMANDS t h i s m a t t e r t o t h e Bankruptcy Court for further proceedings consistent with this Opinion and Order. I T I S SO ORDERED. DATED t h i s 1 6 t h d a y o f J u l y , 2 0 0 9 .

ANNA J . BROWN United States District Judge

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