Court Opinion

ID: 8910907
Source: CourtListenerOpinion
Date Created: 2022-11-27 02:57:27.528835+00
Date Added: 2024-06-11T17:08:31.326850
License: Public Domain

REAVLEY, Circuit Judge,
dissenting:
By my reading of the agreements of these parties, Skyline is liable to Modern American for $49,643, the amount not paid to Modern American by FHA. I fail to see how the majority bases a contrary decision upon the letter of credit provision or its expiration.
These four simultaneously executed documents are to be construed together to determine the intent of the parties. This construction is purely and simply a question of law. “There is virtually unanimous acceptance of the proposition that the interpretation of a contract is a question of law, not fact, and, therefore, not restricted to review under the ‘clearly erroneous’ rule.” Makofsky v. Cunningham, 576 F.2d 1223, 1229 n.7 (5th Cir. 1978); Thornton v. Bean Contracting Co., Inc., 592 F.2d 1287, 1290 (5th Cir. 1979). The court labels these contracts as ambiguous and therefore subject to the use of extrinsic evidence for interpretation and making that interpretation susceptible to a “clearly erroneous” standard of review, although the ambiguity is never isolated nor is the value of extrinsic testimony demonstrated. However, “[mjerely because the parties disagree upon the meanings 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). *1014Each provision can be given its “reasonable, natural and probable meaning when considered in relation to the whole,” and each can be “construed with reference to every other provision so that the effect of one upon the other may be obtained.” Hennigan v. Charters Football Co., 431 F.2d 308, 315 (5th Cir. 1970).
The initial question is Skyline’s obligation to Modern American. Under the Building Loan Agreement between these two, Skyline agreed to complete its mobile home project by November 8, 1971 (¶ 2, p. 56, Appendix) and furnish to the lender (Modern American) “evidence that all work requiring inspection by municipal or other governmental authorities having jurisdiction has been duly inspected and approved . and that all requisite certificates of occupancy and other approvals have been issued.” (¶ 2(b), p. 58, Appendix). Paragraph 13 of the same document further provides that “the borrower (Skyline) shall furnish to the lender (Modern American) assurance of completion of the project in the form specified in the applicable FHA Regulations in effect on the date of this agreement.” (Appendix, p. 63).
The final project inspection report was never signed by FHA. Skyline never completed the project as required by the contract with Modern American. FHA paid Modern American’s mortgage insurance benefits except for $49,643 — which is its damages recoverable from Skyline.
The majority holds that Skyline’s obligation to Modern American terminated when Modern American chose not to complete the project and then lost the $49,643 fund which existed to indemnify the owner or the lender. Failing to examine the purpose of that fund, the majority holds that Skyline met its obligations to Modern American merely by causing its builder to provide a letter of credit to the lender equal to less than one-tenth of the total construction loan. This, mind you, was the only security for the lender because Skyline’s liability on the promissory note could be discharged by surrendering the premises. The note explicitly states: “The maker (Skyline) assumes no personal liability for the payments hereof except as set out in the Deed of Trust of even date given to secure this indebtedness.” (Appendix, p. 111). Modern American must have recourse against Skyline for the $49,643 withheld by FHA or Modern American’s security interest in the project is frustrated despite the unambiguous language of the note. “Informed and experienced parties do not ordinarily bind themselves to unreasonable obligations,” and have not done so here. Makofsky v. Cunningham, 576 F.2d at 1230.
The purpose of that fund was to protect the lender if it chose to step into owner’s shoes and take over the actual completion of the project. Lender did not have to do this. It was an option. Lender could do as it did: sue Skyline for breach of contract.
Paragraph 9 of the Building Loan Agreement (Appendix, p. 61) gives Modern American the option either of terminating the agreement with Skyline on Skyline’s breach or of taking possession of the premises and completing the project. Modern American chose the former.
Had Modern American elected to complete the project, Skyline would automatically appoint Modern American its “true and lawful attorney-in-fact, with full power of substitution in the premises, to complete the project in the name of the borrower (Skyline).” (Building Loan Agreement, ¶ 9, Appendix, pp. 61-62). Paragraph 9(d)1 of *1015the Construction Contract (between Skyline and Tucker) provides that Modern American assumes all the rights and obligations against Tucker that Skyline would have, if Modern American elects to complete the project on Skyline’s default.
In Article 6 of the Construction Contract (between Skyline and Tucker), the function of the completion fund is made explicit.
The Contractor shall furnish to the Owner assurance of completion of the work in the form of a Completion Assurance Agreement, FHA Form 2450, in the amount of $49,643.00. Such assurance of completion shall run to the Owner and the Lender as obligees and shall contain a provision whereby the surety agrees that any claim or right of action that either the Owner or Lender might have thereunder may be assigned to the Commissioner.
Appendix at 76.
This provision requires Tucker to furnish additional security to both Skyline and Modern American to insure that Tucker performs. It also provides that this fund “shall run to the Owner (Skyline) and the Lender (Modern American) as obligees . .” Skyline should be entitled to this fund if Tucker breached its contract with Skyline. Modern American would be an “obligee” and therefore entitled to the fund on Tucker’s breach if Modern American were acting as the owner. That is, if Skyline breached its contract with Modern American, the latter per 119 of the Building Loan Agreement, could step into Skyline’s shoes to complete the project. If Tucker breached his contract, Modern American would be entitled to the funds as an obligee just as Skyline would have been.
That this $49,643 fund was merely designed as additional security for Tucker’s performance, and nothing more, is reinforced by paragraphs 4 and 5 of the Completion Assurance Agreement (to which Modern, Skyline and Tucker were parties). Paragraph 4 provides that the fund is only payable if Tucker defaults. Paragraph 5 states that the fund is only designed to serve as additional security for Tucker’s performance. These provisions are reprinted below.
4. Notwithstanding any of the provisions herein contained, it is expressly understood and agreed by all parties thereto that in the event of a default by the Contractor in any of its obligations under the Construction Contract, the entire Fund or balance remaining therein may, at the option of the Lender and the Commissioner, be paid to the Commissioner together with an assignment of all rights hereunder granted to the Lender and the Owner. The Contractor and Owner hereby consent to the transfer of the rights of the Lender hereunder by assignment in case any other Lender or Lenders should become the Owner or Holder of the mortgage.
5. This Agreement shall not alter or limit the obligations and liabilities of the Contractor under the Construction Contract, but shall be deemed to be merely additional security for the performance by the Contractor of the obligations thereunder.
Appendix at 83-84.
There is no indication in either of these paragraphs or in any of these documents that limits Skyline’s obligation to Modern American to that of only insuring that this fund was provided. Skyline would be fully liable to Modern American if it breached regardless of the presence of this fund. This fund was only to serve as an inducement to Modern American to make the loan to Skyline because it helped insure that Skyline would be able to meet its obligation to Modern American even if Tucker failed to meet his obligation to Skyline. The opening paragraph of the Completion Assurance Agreement provides:
NOW THEREFORE, in consideration of the mutual promises and undertakings hereinafter contained, and for the purpose of inducing the Commissioner to insure advances of mortgage money during construction. .
Appendix at 81-82.
Modern American’s failure to maintain the fund is therefore of no relevance. Be*1016cause Modera American elected not to undertake the completion of the project, Tucker’s obligation to Modern American properly terminated under H 9(d) of the Construction Contract as the majority states in Part II. Skyline, however, should remain fully liable to Modern American for breach of the Building Loan Agreement.

. That paragraph reads as follows:
The Contractor understands that the work under this contract is to be financed by a building loan to be secured by a mortgage and insured by the Commissioner, and that the terms of said loan are set forth in a Building Loan Agreement between the Owner as Borrower and Modern American Mortgage Corporation as Lender. The Contractor further understands that said Building Loan Agreement provides that, in the event of the failure of the Owner to perform its obligations to the Lender thereunder, the Lender may, as attomey-in-fact for the Owner, undertake the completion of the project in accordance with this Contract. In the event the Lender elects not to undertake such completion, the Contractor’s obligations under this contract shall terminate.
Appendix at 77.