Opinion ID: 574016
Heading Depth: 2
Heading Rank: 2

Heading: Hypothecation Loan or Sale?

Text: 25 To determine whether the right of first refusal was activated and resulted in a breach of contract by CCRI and tortious contractual interference by First Union, we must decide whether the CCRI-First Union transaction was included under the terms of the Club-CCRI contracted security deed. Executed in Georgia, the security deed is governed by Georgia contract law, lex loci contractus. See Ferrero v. Associated Materials Inc., 923 F.2d 1441, 1444 (11th Cir.1991). The interpretation of the language in a deed and in a contract is generally a question of law for the court unless it is so ambiguous that the ambiguity can not be resolved by the ordinary rules of construction. Hardman v. Dahlonega-Lumpkin County Chamber of Commerce, 238 Ga. 551, 233 S.E.2d 753, 755 (1977). Therefore, we must examine the first refusal language contained in the security deed in relation to the CCRI-First Union hypothecation loan to determine if that transaction actually constituted a sale triggering the preemptive right. 26 Explaining that the construction rules decided by Georgia courts are applicable in federal court when interpreting a contract controlled by Georgia law, this court instructed: 27 Under Georgia law, [t]he cardinal rule of construction is to ascertain the intention of the parties. The courts are to afford greater regard to the clear intent of the parties than to any particular words which they may have used in expressing their intent. However unskillfully prepared a particular instrument or agreement may be, the courts are to discover and give effect to the intent of the parties if possible. Similarly, words in a contract are to be construed in the sense in which they are mutually employed by contracting parties, irrespective of the proper and logical meaning those words might otherwise carry. 28 Georgia R.R. Bank & Trust Co. v. Federal Deposit Ins. Corp., 758 F.2d 1548, 1551 (11th Cir.1985) (citations omitted) (emphasis added); see Carsello v. Touchton, 231 Ga. 878, 204 S.E.2d 589, 591-92 (1974) (The paramount factor to consider in the interpretation of a contract is the true intention of the parties involved, and if that intention is clear, and it violates no established rule of law, it will be enforced, if sufficient words are utilized to express said intention.); Chelsea Corp. v. Steward, 82 Ga.App. 679, 62 S.E.2d 627, 632 (Ct.App.1950) (Words are interpreted according to their primary acceptance or usual and common signification, unless from the context of the contract and the clear intention of the parties to be collected from it, they appear to be used in a different sense.). Additionally, [i]t is the intention of the parties at the time the contract is made which governs. F & F Copiers, Inc. v. Kroger Co., 194 Ga.App. 737, 391 S.E.2d 711, 713 (Ct.App.1990) (citing O.C.G.A. § 13-2-4). 29 Where the language of a contract is clear, unambiguous, and capable of only one reasonable interpretation, no construction is necessary or even permissible. Stern's Gallery of Gifts, Inc. v. Corporate Property Investors, Inc., 176 Ga.App. 586, 337 S.E.2d 29, 35 (Ct.App.1985). [A] word or phrase is ambiguous only when it is of uncertain meaning, and may be fairly understood in more ways than one. Dorsey v. Clements, 202 Ga. 820, 44 S.E.2d 783, 787 (1947) (emphasis added); see United States Fidelity & Guar. Co. v. Gillis, 164 Ga.App. 278, 296 S.E.2d 253, 255 (Ct.App.1982) (Contract language that is capable of only one logical interpretation is accorded its literal meaning, but terms that are susceptible of more than one reasonable interpretation are uncertain of meaning or expression and, thus, ambiguous.). The existence or non-existence of ambiguity is always a question of law for the court. Stern's Gallery, 337 S.E.2d at 35. Since interpretation of unambiguous contract terms is for the court solely, the former Fifth Circuit, deciding a contract case under Georgia law, concluded that [m]erely because the parties disagree upon the meaning of contract terms will not transform the issue of law into an issue of fact. General Wholesale Beer Co. v. Theodore Hamm Co., 567 F.2d 311, 313 (5th Cir.1978) (per curiam) (emphasis added). 30 Initially, we must analyze the language of the first refusal provision contained in the security deed to determine if it is clear and susceptible to one reasonable interpretation or if any ambiguity exists. The activating language for Club's right of first refusal is the time at which CCRI shall desire to sell the Club note and security deed. Upon this occurrence, the first refusal provision specifies a detailed procedure as hereinafter described. CCRI must determine the then current market discount rate and notify Club in writing of its intention to sell the note and security deed. The first refusal right provides for certain periods of time within which Club may inform CCRI that it does intend to purchase the note and within which Club has to close the purchase. Similarly, the first refusal right provides that, if Club declines to exercise its right to purchase the note, then Club may make a counteroffer to purchase the note and security deed within a designated time. If Club makes a counteroffer, then CCRI shall be prohibited from selling the note and security deed for a delineated period except on terms more favorable to CCRI than those contained in Club's counteroffer. 31 It is apparent from the explicit procedures designating particular time periods for notification, counteroffer and closing as well as the repeated references to sell, purchase and close that a definite sale of the note and security deed is meant by the first refusal provision. Read in context of the entire provision, mere contemplation of a sale, as the word desire could suggest and Club would have us define this term, is an unworkable meaning of that word in juxtaposition with the rest of the language in the first refusal right. The dominant references to terms of sale throughout the first refusal provision outnumber the single mention of desire to sell. Furthermore, there would be no need to explain the details of the subsequent procedures, comprising the majority of the first refusal provision, if less than an intention to sell the note and security deed was described. While in this context of the entire first refusal provision, decide, rather than desire, might have been a more appropriate word, we conclude that the only reasonable interpretation must be a definite determination to sell rather than contemplation of a sale. See Rhodes v. Lane, 202 Ga. 608, 44 S.E.2d 114, 115 (1947) (The Georgia Supreme Court interpreted the language as clear and unambiguous in a partnership contract wherein wish or desire to sell property jointly owned required each partner to give the other the first option to purchase his half interest in the property should one of the partners actually decide to sell.). We find that there is no ambiguity in the first refusal provision at issue in this case. 10 It is clear that the right of first refusal, as written in its entirety, is not triggered until CCRI decides to sell the note and security deed. See Southern Fed. Sav. & Loan Ass'n v. Lyle, 249 Ga. 284, 290 S.E.2d 455, 458 (1982) (Where the contract terms are clear and unambiguous, the court will look to that alone to find the true intent of the parties.). 32 Having determined that only a sale of Club's note and security deed could trigger its first refusal right, we must decide if the CCRI-First Union transaction, denominated as an hypothecation loan, was a sale. The Georgia Supreme Court has recognized that hypothecate means to pledge property in order to borrow money, or as security for a loan. See Williamson v. Walker, 187 Ga. 603, 1 S.E.2d 718, 722 (1939) (A security deed to property was used as collateral to borrow money to pay debts.); J.J. Fowler, Inc. v. Fulton Nat'l Bank, 145 Ga.App. 220, 243 S.E.2d 642, 643 (Ct.App.1978) (A note was executed as well as a security agreement hypothecating and assigning to the bank equipment.). Georgia cases have used the term hypothecation with reference to a security agreement rather than a sale. See, e.g., Reeves v. Habersham Bank, 254 Ga. 615, 331 S.E.2d 589 (1985); Rainer v. Security Bank & Trust Co., 182 Ga.App. 171, 354 S.E.2d 882 (Ct.App.1987); Breitzman v. Heritage Bank, 180 Ga.App. 171, 348 S.E.2d 713 (Ct.App.1986); Fleming v. First American Bank & Trust Co., 171 Ga.App. 295, 319 S.E.2d 119 (Ct.App.1984); Whitmire v. Canal Ins. Co., 102 Ga.App. 611, 117 S.E.2d 348 (Ct.App.1960); see also Carbine v. Commissioner, 777 F.2d 662, 663 (11th Cir.1985); United States v. Jones, 707 F.2d 1334, 1337 (11th Cir.1983) (per curiam) (In Georgia cases, this court has used hypothecate to reference security for loans.). 33 A sale is distinguishable from a pledge or a pawn in that a sale passes title while in a pawn, possession passes, but not title.... The pledge creates a lien upon property but not title to it. Bromley v. Bromley, 106 Ga.App. 606, 127 S.E.2d 836, 838 (Ct.App.1962). A contracted right of first refusal is a burden on property and is carried with a security deed, or the security deed is subject to the right of first refusal. See Hornsby v. Holt, 257 Ga. 341, 359 S.E.2d 646, 648 (Ct.App.1987). Only a sale or an option to purchase can trigger a right of first refusal, and not the use of property as collateral for a loan. See Hasty v. Health Serv. Centers, Inc., 258 Ga. 625, 373 S.E.2d 356, 358 (1988). 34 The documentation of the CCRI-First Union transaction clearly is structured as a loan. Among the documents that CCRI gave First Union to secure the $6,000,000 loan was a collateral assignment of the Club note and security deed, including rents and leases, and a UCC-1. These documents signify a loan and not a sale. CCRI paid a commitment fee and interest to First Union as part of the transaction, additional indicia of a loan. Club's monthly payments, which would have gone to CCRI under the original agreement, were transferred to First Union. Although First Union acquired possession of the Club note and security deed used as collateral for CCRI's loan, it did not obtain title. Baker conceded that a lender's physical possession of a borrower's note and security deed, is common in commercial real estate loan transactions. 35 Significantly, CCRI retained substantial residual ownership rights. CCRI received valuable monthly funds from the Club note in excess of the amount applicable to the First Union loan, and CCRI also held a sizable interest in Club's balloon payment under the wraparound note. If Club had defaulted in its payments to First Union, then First Union's recourse would have been against CCRI. In turn, CCRI would have had recourse against Club. 36 Moreover, the undisputed facts in this case contradict the sale argument advanced by Club. CCRI received a $22,000,000 note and security deed from Club to finance Club's purchase of the Tahoe Club Apartments. CCRI subsequently needed to raise operating capital, and sought expert advice concerning methods by which it could generate these funds. Even if CCRI had considered selling Club's note and security deed, CCEC informed CCRI that it should not sell the Club note because of tax and REIT consequences, and indeed that it could not sell the note without refinancing. Club's general partner Baker testified that discussing a sale and desiring to sell are not equivalent. He went so far as to state that a desire to sell can be formulated only after there is a viable offer to buy. There is no evidence that there were any purchase offers for the Club note, or that CCRI's California trustees ever negotiated or approved a sale of the Club note and security deed. Since selling the Club note was not feasible, CCRI plainly did not make the decision to sell the Club note. 37 CCEC, however, did advise CCRI that the Club note could be used to obtain money by pledging it as collateral for a loan. Therefore, CCRI made the business decision to hypothecate Club's note or to pledge it as collateral to borrow $6,000,000 from First Union. Whereas it is not unusual for the value of collateral to exceed the loan amount, such as the $22,000,000 wraparound note pledged as security for the $6,000,000 loan in this case, a sale customarily is not transacted for less than the value of the item sold. 11 The discrepancy between these amounts after CCRI's obligation to First Union is satisfied is compelling evidence that a sale did not occur. 12 38 Under the terms of the first refusal provision, CCRI would have had to offer Club its note for purchase first if CCRI decided to sell the note, but not if it used the note as collateral for a loan. The holder of a note does not go to the maker of the note to borrow money. It is as illogical to postulate that Club, which had given CCRI a $22,000,000 wraparound note, was in a position to lend CCRI funds as it is to claim that CCRI was in a position to sell Club's note and security deed. Neither proposition makes any business sense. 39 Because CCRI could not sell Club's note and security deed, it used this asset as collateral for a loan from First Union. Club's contention that a sale occurred in this CCRI-First Union transaction belies the business realities of the situation. In context with the entire first refusal provision and in conjunction with the economic realities of the two financial transactions in this case, the desire to sell language unambiguously means a sale and withstands Club's strained interpretation encompassing a loan. Club cannot succeed in converting a loan agreement into a purchase agreement. We conclude that Club's contracted right of first refusal was not triggered by the CCRI-First Union transaction, which was a loan and not a sale. 40