IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

No. 98-50166

In The Matter Of: MEDWAY RANCH, INC,

also known as Medway Ranch

Debtor

BEAL BANK, S.S.B.

Appellant

versus

MEDWAY RANCH, INC

Appellee

Appeal from the United States District Court

for the Western District of Texas

March 12, 1999

Before HIGGINBOTHAM, BENAVIDES, and DENNIS, Circuit Judges.

HIGGINBOTHAM, Circuit Judge:

This bankruptcy appeal involves two notes t hat allowed for

payment on one to count also towards the other in the absence of

default on the first. We are persuaded that there was a default on

the first note that was not validly waived. We conclude then that

the secon d note has not been paid. We REVERSE the contrary

decision by the district court and REMAND for further proceedings.2 I

The two contested notes were issued in the first Chapter 11

bankruptcy of Medway Ranch and at issue in its second bankruptcy.

In the first bankruptcy, the Ranch executed and delivered the notes

to the FDIC as liquidator of Commercial State Bank in Houston. The

First Note, secured by a first lien on certain real property,

evinced a debt in the principal amount of $1,300,000, owed by the

Ranch to the FDIC. The Second Note, in a face amount of

$445,112.44, evidences unpaid, accrued interest and costs arising

from the Ranch’s obligation to the FDIC.

Today our focus will be upon Paragraph 3 of the Second Note,

which treats the crediting to the Second Note of payments made on

the First Note. It provides:

Notwithstanding the foregoing, so long as payments

ar e timely made on that certain First Lien Real Estate

N ote of even date herewith in the principal amo unt of

$1,300,000.00 payable by Debtors to the order o f FDIC

(the “First Lien Note”,

. . .) and secured by a First

L ien Deed of Trust of even date covering the pr operty

d escribed

. . . (the “Collateral”) no payments will be

required to be made on this Note apart from payments made

on the First Lien Note and every payment made on the

First Lien Note from any source (except for any credit(s)

against the First Lien Note by the FDIC or other holder

thereof who purchases all or any part of the Collateral

pursuant to foreclosure under said First Lien D eed of

Trust) shall be deemed a payment of this Note as well,

such that this Note will be paid in full through total

payments from any source, except as limited abo ve, of

$1,150,000.00 on the First Lien Note.3

This appeal involves, among other legal issues, the interpretation

of “timely,” whether the “so long as

. . .” phrase modifies the “no

payments will be re quired . . .” phrase, whether payments on the

First Note count dollar-for-dollar on the Second Note, and the

meaning of “pursuant to foreclosure.” It must also be kept in mind

that although the Second Note is only for $445,112.44, a total of

$1,150,000.00 must be paid on the First Note before the obligation

on the Second is extinguished.

Several provisions of the First Note are relevant as well.

Paragraph 2 of the First Note provided that it was “payab le in 7

semiannual payments of $5,000.00 pr incipal plus accrued interest

each commencing on the first day of the m onth next following 18

months after date hereof and continuing regularly every succeeding

six-months thereafter,” with the remainder due at maturity. Under

Paragraph 3, upon the sale of any portion of the collateral

property, the debtor would make a principal payment according to a

specified formula, and in turn would receive a partial release from

the liens. Paragraph 6 of the agreement provides that “time is of

the essence.” The next sentence provides that “[i]n the event of

default in the payment of any installment of principal or interest

when due, or in the performance of any obligation in any instrument

securing payment,” the holder could, with specified notice and an

opportunity to cure, accelerate the note.

While the FDIC remained the holder of the two notes, the Ranch

sold property, and the proceeds were applied according to the terms4

of the First Note. The Ranch did not make the third semiannual

payment described in Paragraph 2 by the specified date of December

1, 1995, but the FD IC accepted a late payment. The FDIC did not

then declare default or exercise any post-default remedies,

including acceleration of the debt.

On May 31, 1996, Loan Acceptance Corporation, a subsidiary of

Beal, purchased from the FDIC all of the FDIC’s right, title, and

interest under the First and Second Notes, as well as the

accompanying deeds of trust. The Ranch’s sales slowed, and it was

unable to make the June 1 payment. Loan Acceptance Corporation

transferred the Notes and deeds to Beal on June 6, and on July 26,

Beal notified the Ranch of default and of its intent to accelerate

the First and Second Notes. On November 12, Beal sent the debtor

a foreclosure notice stating that unless the amount owed was paid,

Beal would foreclose on the property on December 3. On December 2,

however, the Ranch filed its second Chapter 11 petition, and the

foreclosure was automatically stayed.

On December 23, the bankruptcy court heard the debtor’s motion

to sell certain property pursuant to an executed earnest money

contract. As the first lienholder, Beal objected. The bankruptcy

court conditionally approved the sale on December 30, but allowed

Beal the opportunity to purchase the property by credit bidding its

lien pursuant to 11 U.S.C. § 363(k). Beal bid $1,200,000, and on

February 24, 1997, the bankruptcy court authorized the sale, with

the bid amount to be credited against sums due on the First and5

Second Notes. The court’s sale order expressly reserved the issue

of how much was due under the Notes.

A dispute ensued as to how much was due. Beal maintained that

$54,694.08 was due on the First Note, and that $527,867.71 was due

on the Second Note, representing the entire principal of

$445,112.44 plus interest of $82,755.27. The Ranch’s position was

that because the credit bid on the property covered by the First

Note exceeded $1,150,000, this sufficed to extinguish the

obligations under the Second Note, wit hout even considering the

prepetition payments the Ranch had made.

The Ranch filed a Motion to Determine, and Beal filed a Proof

of Claim in the secured amount of $1,762,728.28. The bankruptcy

court adopted the Ranch’s position, concluding that the FDIC had

not made a demand for payment under the Second Note, and by not

demanding payment by the due dates on the First Note, the FDIC had

waived any rights on the Second Note predicated on the failure to

make untimely payments on the First Note. With respect to the June

1 payment, the bankruptcy court found that the debtor had

defaulted, thus entitling Beal to interest on that payment. The

bankruptcy co urt, however, did not find that any payment was

untimely. It ultimately concluded that only $113,218.00, plus 18%

annual interest accruing after July 8, 1997, was payable. The

district court affirmed, and this appeal followed.

II6

The Ranch contends that payments from property sales sufficed

as an alternative to the semiannual payments. Indeed , Paragraph

3(c) specifies, “Any excess shall be held in an interest bearing

account and applied when due to the next payment or payments due

under the Note.” The “excess” is the net proceeds from the property

sales less the aggregate minimum partial release prices depending

on the type and quantity of acreage sold. The record does not

i ndicate the type and quantity of acreage sold in particular

t ransactions, so we cannot determine based on arithmetic alon e

whether any excess remained after a $59,827.16 payment of principal

on January 25, 1995. The Ranch does not assert there was excess

over the $59,827.16 sufficient to cover the June 1 and December 1,

1995, payments. Rather, the Ranch accepts that there was a $5,000

payment due on December 1, 1995, and that it was not paid on that

date. Moreover, the Ranch eventually made that December 1 payment,

plus interest, without objecting that the funds had a lready been

paid through excess from proper ty sales. The bankruptcy judge’s

findings were not to the contrary.

The Ranch stresses that “timely” is ambiguous and the

bankruptcy court properly cons i dered extrinsic evidence. S ee

Tarrant Distrib. Inc. v. Heublein

, 127 F.3d 375, 377 (5th Cir.

1997). This evidence showed that the required semiannual payments,

though not made by the specified dates, were timely, because the

Ranch had been making some payments through property sales.

Determination of the parties’ intent through extrinsic evidence is7

a question of fact and thus subject to the clearly erroneous

s tandard. S ee In re Fender

, 12 F.3d 480, 485 (5th Cir. 1994).

T hus, the Ranch presses, we should uphold the conclusion t hat

timely does not mean on time.

The contract was not ambiguous. “Timely” means “by the date

specified.” The Ranch seeks to distinguish “timely” from “default,”

maintaining that even if one is in “default,” payments may still be

considered “timely.” The agreement, however, makes timeliness and

default sound like much the same thing. Paragraph 6 of the First

Note strengthens this conclusion. Not only does it speak of

“default in the payment of any installment of principal or interest

when due,” but it also declares that “time is of the essence.” By

this plain language a payment that is not timely is an event of

default.

The Ranch builds its interpretive c ase on the testimony of

Gary Miller, who indicated that Paragraph 3 of the Second Note

originally provided for double-counting “ so long as no default

exists under” the First Note. Assuming this to be true, the change

could have been merely an effort to clarify the word “default.”

The significance of the change, the Ranch argues, is that even if

there were untimely payments on the First Note, subsequent payments

on the Note still apply to the $1,150,000 due on the Second Note.

This argument ignores the words “so long as,” which remain part of

Paragraph 3 and in ordinary parlance mean roughly “until it is not

the case that.” As soon as a payment is untimel y, the provision,8

both as it currently reads and as it read before, does not permit

subsequent payments on the First Note to count towards the Second.

The Ranch also argues that “the timely provision does not

apply to ‘payments from any source’ that coun t toward the

$1,150,000.00 total payment amount that triggers forgiveness of the

Second Note.” Under this interpretation, the timely payments

relieve the debtor of the duty to make payments on the Second Note

apart from payments on the First Note , but payments on the First

Note “from any source” count toward the Second Note regardless of

when ma de. This interpretation is unsupportable. The “every

payment made on the First Lien Note from any source . . .” phrase

is preceded by an “and,” which is not in turn preceded by a comma.

A plain grammatical reading of the sentence thus shows that “so

long as

. . .” applies to “every payment

. . .”. Given the length

of the prov ision, there is no reason that the drafters would not

have split the provision into two sentences, if that accorded with

the meaning intended.

Moreover, the interpr etation fails to make sense of the

provision. Under the interpretation, an untimely payment would not

count toward the $445,112.44, but would still count toward the

$1,150,000. The bankruptcy court apparently adopted this view.

The court concluded that $1,150,000 is an “incentive number,” such

that none of the payments on the $445,112.44 would count until

$1,150,000 in total payments were reached.9

T his interpretation cannot be squared with the text of the

Note. Paragraph 3 indicates that the payments are to be credited

“such that this Not e will be paid in full through total payments

. . . of $1,150,000.” The bankruptcy court’s interpretation would

turn “suc h that” into “but . . . only”; “such that” suggests a

qualification on how the payments will be credited, not that the

payments will not be credited at all until a minimum threshold is

reached. The only interpretation that takes into account the words

“such that” treats each dollar of the $1,150,00 0 as applying

proportionately, i.e. about 39 cents, towards the $445,112.44.

The bankruptcy court rejected this possibility, b ut its

reasoning puts too much weight on the evolution of the language of

the provision. The bankruptcy court recognized that in an earlier

draft of the Second Note, the semiannual payment required was only

$1,935.27, not the $5,000 required both on the First Note and on

the final draft of the Second Note. Lo and behold, $1,935.27 is to

$5,000 as $445,112.44 is to $1,150,000. Thus, the bankruptcy court

correctly reasoned, in the original version of the Second Note,

each dollar spent on the First Note was to count proportionately.

Therefore, the bankruptcy court further inferred, payments on the

First Note would count dollar for dollar towards the $1,150,000.

This final inference does not nec essarily follow, since the

change from $1,935.27 to $5,000 may have been made simply because

it did not matter much which number was used. As long as payments

were made o n the First Note, no payments were required on the10

Second, so there was no need for the numbers to be in proportion.

Thus the history is not inherently inconsistent with the final

language, and that language leads unambiguously to the conclusion

that payments were to be applied proportionately. We thus hold

that the semiannual payments on the First Note were not “timely”

under Paragraph 3 of the Second Note, and that any payments on the

First Note after the first untimely payment did not count toward

paying off the Second Note. This includes Beal’s credit bid; even

if the bid was not “pursuant to foreclosure,” the credit bid

occurred after default and thus did not apply to the Second Note.

III

Even if the payments were untimely, the Ranch argues, the FDIC

waived timeliness by not objecting or by accepting the late

payment. To imply a waiver of a right, however, a court still must

identify conduct that is clear, unequivocal, and decisive. S ee

Estate of Blardone v. McConnico

, 604 S.W.2d 278, 282-83 (Tex. Civ.

App.--Corpus Christi 1980, writ ref’d n.r.e.). It is true that the

Texas courts occasionally have found a waiver of a right to

accelerate a note for late payment from a repeated, consistent

acceptance of late payments. S ee Highpoint of Montgomery Corp. v.

Vail

, 638 S.W.2d 624 (Tex. Civ. App.--Houston 1982, writ ref’d

n.r.e.) (finding a waiver where 120 of 132 accepted payments were

late); see also In re Marriage of Rutherford

, 573 S.W.2d 299 (Tex.

Civ. App.--Amarillo 1978, no writ) (“The holder of a note may waive

the right to foreclose as to past defaults where late payments have11

been regularly accepted and notice has not been given that future

defaults will provide the basis for foreclosure proceedings.”).

Indeed, the Highpoint court found a waiver even where, as

here, the contract included a provision indicating that acceptance

of a late payment does not prejudice the creditor’s right to

declare default and accelerate at any other time. See Highpoint

,

638 S.W.2d at 627. That provision too may be waived by repeated

acceptance of late payments. See id.

But s uch a waiver has no role here. If the issue in this

appeal were whether, on account of the FDIC’s conduct, the Bank

lost the right to accelerate the First Note, the contention would

have purchase. This appeal concerns Paragraph 3 of the S econd

Note. That provision, as we explained, provides tha t doublecounting shall stop as soon as a payment on the First Note is not

“timely.” This was a bargain for condition to non-liability on the

second note. The condition failed on a late payment. Accepting

late payments thereafter did not change the fact that the condition

had not been performed.

IV

The parties have not briefed other issues relevant to

determining exactly how much is owed on the notes, such as the date

at which the higher default interest rate specified in the notes

became effective. Rather than scour the record and make our best

guess, we leave these issues to the bankruptcy and district courts.

We REVERSE and REMAND for further proceedings to determine the12

exact amount owed under the Notes. Beal’s motion to recover legal

fees incurred in drafting its motion to strike is DENIED, and the

remaining motions are DENIED AS MOOT.

REVERSED AND REMANDED