Opinion ID: 524998
Heading Depth: 1
Heading Rank: 3

Heading: Legal Effect of the Contract

Text: 27 Our holding mandates a complete shift from the analysis advocated by Liberty Bank and adopted by the district court. Paragraph 10 is not, as the district court held, a remedy for any breach of the payment terms of the Participation Agreement. Instead, Paragraph 10 is properly construed as an alternative promise by Talman to replace or repurchase a mortgage loan, at its option, upon default of that loan by the mortgage loan debtor. See 5A A. Corbin, Corbin on Contracts, Sec. 1213, at 435 (1964) (the parties may clearly indicate that the contract is an alternative one, giving the promisor an option between two performances.) 28 Under this interpretation, the district court erred in granting the supplemental summary judgment ordering Talman to repurchase the Warren Manor and Merrifield Estates notes because of Talman's failure to pay the stepped-up interest rate. While Talman's initial failure to pay the proper rate was a breach of the Participation Agreement, it was not occasioned by a default of the mortgage loan debtor. Paragraph 10 does not provide a remedy for this breach; Liberty's remedy is in common law damages. 7 29 In contrast to the other defaults by Talman itself under the Participation Agreement, Paragraph 10 was activated by the default of the Clifton mortgage debtor in January, 1984. The lower court concluded that Talman was required to repurchase the Clifton note on account of this default under the terms of Paragraph 10 because the option to replace the note had expired. Liberty offers two theories to support the district court's order: (1) the option to replace had expired under the terms of Paragraph 10 because ten years had passed, or (2) the option to replace was forfeited because Talman failed to elect to replace the note within 30 days. We address these contentions in turn. 30 The final clause in Paragraph 10 expressly limits Talman's replacement option, stating: [p]rovided however, the option to replace a note shall expire Ten (10) years after date hereof, and thereafter Seller must repurchase any loan remaining in default for thirty (30) days or more. The ten-year anniversary date of the Participation Agreement was April 9, 1986. Because this date had passed by the time the district court entered summary judgment, it ordered Talman to repurchase the Clifton mortgage loan. 31 The ten-year expiration date on Talman's option to replace a defaulted note destroyed the alternative nature of the contract as of April 9, 1986. See 5 Corbin on Contracts Sec. 1085. The Clifton loan default, however, occurred in January, 1984, during the time that Talman could exercise its right of replacement. Nothing in the language of the contract suggests that Talman's option was destroyed when the Clifton default occurred within the ten-year option period. Here Talman chose to contest the fact of default in court, thus suffering the delays of litigation. We decline to adopt an interpretation that eliminates the option on a default occurring before the ten-year option period expired. We conclude that it is clear from the language of Paragraph 10 that the parties intended to allow Talman to choose the replacement option for any mortgage loan default that occurred before April 9, 1986. 8 The Clifton note default falls into this category. We hold that the district court erred in deciding that Talman lost its replacement option because the ten-year expiration period was reached during the pendency of this litigation. 32 Paragraph 10 also provides that within the ten-year option period Talman was required to exercise the option to replace or repurchase a defaulted note within thirty days from the date of said default. Liberty contends that Talman relinquished its replacement option by failing to make an election within the thirty day period. In support of this proposition, however, Liberty relies on a lone case where the contract in question expressly provided that the promisor forfeited one of the alternatives in the contract by failing to elect that option within a certain time period. Gladys City Co. v. Amoco Production Co., 528 F.Supp. 624, 629 n. 5 (E.D.Tex.1981). 9 Paragraph 10 contains no such provision. 33 Liberty also relies on an 1849 case, Hemming v. Zimmerschitte, to support its contention that Talman forfeited its right to replace the defaulted note by failing to elect this option within thirty days. 4 Tex. 159 (1849). The Hemming court suggested in dicta that the options embodied in an alternative contract are lost if election is not made within the period provided for in the contract. 4 Tex. at 164. This statement does not, however, support Liberty's contention that only one alternative (the replacement option) is relinquished by Talman's failure to make a timely election, while the second option (the repurchase provision) becomes mandatory. 34 The only way to reach this result, in the absence of specific contractual language, is to conclude that the choice between the two options devolves to Liberty upon Talman's failure to make an election. This has to be the implicit assumption of Liberty's argument. But Liberty cites no cases to support this proposition. Indeed, the commentators have uniformly rejected it. See 11 S. Williston, A Treatise on the Law of Contracts Sec. 1407, at 594-96 (3d ed. 1968); 5 Corbin on Contracts Sec. 1087, at 477. 35 Thus, there is no substantial support for Liberty's contention that the option to replace the defaulted note was forfeited and the option to repurchase the loan became mandatory because Talman failed to elect either option within thirty days. Admittedly a breach of contract occurred by Talman's failure to elect in thirty days, but the issue must be damages for the breach, not damages based upon Liberty's choice of the options. 36 We conclude that the district court erred in ordering Talman to repurchase the Clifton note. At the time of the Clifton note default, Talman had the option to replace the loan. The replacement right was not lost by Talman because the expiration date was reached during the pendency of this litigation. Moreover, Talman's failure to repurchase or replace the defaulted loan within thirty days did not cause it to forfeit the replacement option.