Court Opinion

ID: 203809
Source: CourtListenerOpinion
Date Created: 2011-02-07 06:23:35+00
Date Added: 2024-06-11T17:27:39.784867
License: Public Domain

United States Court of Appeals
                        For the First Circuit

No. 08-2134

                          LPP MORTGAGE, LTD.,

                         Plaintiff, Appellant,

                                  v.

                           LEONARD SUGARMAN,

                         Defendant, Appellee.

             APPEAL FROM THE UNITED STATES DISTRICT COURT

                   FOR THE DISTRICT OF MASSACHUSETTS

               [Hon. Rya W. Zobel, U.S. District Judge]

                                Before

                  Boudin, John R. Gibson,* and Howard,
                            Circuit Judges.

     Christopher P. Litterio with whom Michael J. Duffy and
Ruberto, Israel & Weiner, P.C. were on brief for appellant.
     Daniel J. Murphy with whom Stanley W. Wheatley and The Murphy
Law Group, LLC were on brief for appellee.

                              May 7, 2009

     *
         Of the Eighth Circuit, sitting by designation
            BOUDIN, Circuit Judge.      The facts underlying this appeal

date back to 1975, when the Small Business Administration ("SBA")

loaned $4 million, evidenced by a promissory note, to Statler

Industries,   Ltd.     ("Statler"),    an   Augusta,      Maine,    based   paper

manufacturer.      To secure the loan, the SBA received a first

priority mortgage on the Statler plant site, a first priority

security    interest    in   almost   all   the    company's     equipment   and

machinery    and   a   personal   guaranty    of    the   loan     from   Leonard

Sugarman, then Statler's president and a major shareholder.

            Sugarman's attorney, Harris Baseman, was able to modify

slightly the standard guaranty required by the SBA; with SBA's

consent the word "LIMITED" was added to the title of the preprinted

SBA form and an additional sentence--"This guaranty is limited to

60.1% of the outstanding loan balance"--was added to the bottom of

the preprinted form.         The guaranty did not require the SBA to

exhaust its collateral before turning to him; Sugarman sought

unsuccessfully to secure such a limitation but the SBA refused to

modify its boilerplate.

            In 1980, the firm's finances were in good shape, and

Sugarman not only renewed his prior request that the SBA agree to

liquidate collateral before he was held personally liable, but also

asked to have the guaranty limited to $500,000.                  With the SBA's

agreement Baseman had the following two sentences typed at the

bottom of the guaranty form before it was re-executed:

                                      -2-
           This guaranty is limited to the deficiency
           existing after sale of corporate assets
           securing the subject loan.   The guaranty is
           further limited to an amount not to exceed
           Five Hundred Thousand Dollars.

At the SBA's insistence, the preprinted language was not altered.

Thus,   inconsistent   with   the   new   first   sentence   of   the   added

language, boilerplate language in the form continued to allow the

SBA to demand payment from Sugarman without first exhausting the

collateral.

           Also left undisturbed was boilerplate language granting

the SBA "full power, in its uncontrolled discretion and without

notice to [Sugarman]" to take any action it deemed fit with respect

to the collateral.     The form provided the SBA could "deal in any

matter" with the collateral, including:

           [T]he substitution, exchange, or release of
           all or any parts of the collateral, whether or
           not the collateral, if any, received by Lender
           upon any such substitution, exchange or
           release shall be of the same or a different
           character or value than the collateral
           surrendered by Lender.

The new 1980 guaranty, executed by both sides, is agreed to have

supplanted the original guaranty.

           In 1994, Statler defaulted in its payments on the SBA

loan.   The SBA then demanded payment of the outstanding balance

($1.277 million plus interest) and, unable to pay, Statler filed

for chapter 11 bankruptcy.      In 1996, with the bankruptcy court's

assent, Statler sold its assets to Tree-Free Fiber Co., LLC., which

                                    -3-
assumed      Statler's   obligations       under    the    SBA   loan.      Sugarman

consented to the assumption, reaffirmed his guaranty, and agreed

that    "Tree-Free    [could]      sell   machinery       or   equipment    with   an

aggregate value up to $25,000 per year" without SBA consent.

              To carry out its purchase of Statler's assets, Tree-Free

received a $6 million loan from a supplier, Thermo Fibertek, Inc.

The loan was given pursuant to a subordination agreement, which

granted Thermo Fibertek the first security interest in certain

machinery and equipment that had previously been subject to the

first priority claims of the SBA.               Both the SBA and Sugarman gave

their consent to this subordination.

              The following year, Tree Free needed additional financing

to upgrade its facilities and sought a loan from KeyBank, N.A.                     To

help Tree Free to secure the loan, the SBA agreed with KeyBank that

the SBA would give up its first priority on                       certain of the

mortagaged real estate and its first priority security interest in

certain of the machinery and equipment that backed the promissory

note.    Sugarman was apparently not told of the transaction and he

did    not   give   consent   to    the    SBA's    release      of   its   priority

positions.

              At the time, Philip Proulx, then the SBA's chief of

portfolio management, expressed concern in a letter to Tree Free

executives about the proposal that the SBA enter into the release.

Proulx said that if it subordinated its position and the business

                                          -4-
were to fail, Sugarman would remain liable under the guaranty but

without the protection provided by the SBA's first claim on the

released real estate and equipment.1          Nevertheless, the SBA took

the view that it was entitled to release the collateral without

Sugarman's consent and ultimately did so.

             In December 1997, Tree Free defaulted on the loan from

KeyBank     and   the   Maine   Superior   Court   placed   Tree   Free   into

receivership.       Tree-Free's assets were sold; with its reduced

security position, the SBA received only $350,000 of the $3.5

million the sale generated.        As a result, the SBA was left with a

deficiency on its original loan to Statler in the amount of

$284,688.71, plus additional interest that had accrued.

             The SBA demanded under the 1980 guaranty that Sugarman

pay the deficiency. Sugarman denied liability, contending that the

SBA had violated its obligations to him by releasing its first

priority security interests without his consent.              The loan was

     1
         The letter stated, in relevant part:

     I would like to point out that considerations other than
     credit enter our deliberations. We currently have the
     personal guaranty of the former principal of Statler,
     which is not now at risk of being called upon, but, which
     will be if we enter the proposed pari passu arrangement
     and the business fails.      Although our documentation
     allows us to take actions we consider prudent and in the
     best interest of SBA without consent of the guarantor, we
     have a moral obligation to consider the effects of our
     action on that individual. Additionally, should we agree
     to enter agreements which place him at risk of personal
     loss, we would anticipate litigation....

                                     -5-
eventually purchased from the SBA by LPP Mortgage Ltd. ("LPP");

standing now in the SBA's shoes, LPP commenced this law suit in

federal district court in Massachusetts to recover the deficiency

remaining on the loan to Sugarman.

             In the district court, both parties moved for summary

judgment and the district court denied both motions.              In doing so,

the court found that the SBA was required under the guaranty to

exhaust whatever collateral it had before turning to Sugarman as a

guarantor. Although (as noted above) boilerplate language provided

otherwise, the district court found the typewritten sentences added

in 1980 overrode the boilerplate language in this respect.

             However, the modified guaranty by its terms only required

the SBA to exhaust its collateral ("This guaranty is limited to the

deficiency existing after sale of corporate assets securing the

subject loan.").        The district court found it less clear whether

the   SBA   was   entitled   to     release     collateral   in   1997   without

Sugarman's consent.       It therefore conducted a two day bench trial,

hearing     extrinsic    evidence    of   the    parties'    intent.     Proulx,

Sugarman and Baseman all testified.

             Proulx testified that, consistent with his letter, he

believed the typewritten text had no impact on the SBA's rights to

subordinate its collateral.          Sugarman and Baseman both testified

that they understood the language inserted in 1980 to protect

Sugarman's interest in having the collateral available and that its

                                       -6-
release   without   his   consent       was   inconsistent   with    this

understanding.      Ultimately,   the     district   court   found   that

Sugarman's consent was required and it dismissed LPP Mortgage's

claim.

          The gist of the district court's decisions--one denying

summary judgment to LPP and the other deciding against it on the

merits after trial--was as follows: that the guaranty as amended by

the additional sentences was ambiguous as to whether the SBA could

without Sugarman's consent subordinate its first priority in the

collateral so that extrinsic evidence was proper; and, based on the

testimony and the parties' dealings, Sugarman's answer--that the

SBA could not do so--was persuasive.

          LPP has appealed, urging various errors; the standard of

review in this court varies with the claim of error.            Broadly,

issues of law are reviewed de novo, Carr v. PMS Fishing Corp., 191

F.3d 1, 5 (1st Cir. 1999), and fact findings at a bench trial for

clear error, Principal Mut. Life Ins. Co. v. Racal-Datacom, Inc.,

233 F.3d 1, 3 (1st Cir. 2000); but several judgment calls arguably

fall somewhere in between these poles.         The case is not hard to

analyze but several of the issues are very close calls.

          We start with choice of law which, happily, turns out not

to matter.   In the district court, LPP claimed that Massachusetts

law governed, while Sugarman thought Maine law controlled.           They

agreed, however, that there were no substantive differences between

                                  -7-
the two states as to the relevant contract rules and the district

court applied a hybrid of the two.            Neither side complains about

this approach on appeal, and we mention it only because both sides

were probably wrong.

                Because the guaranty is a contract between a private

party and an agency of the United States, it appears likely that

federal common law governs as to contractual issues, 13 C.F.R. §

101.106(b)(2) (2009), borrowing from state law where appropriate

and consistent with federal interests. In some situations, federal

common law might give the government an edge; but often ordinary

contract principles apply and no one argues otherwise here.

              LPP argues first that the district court erred in finding

the   guaranty    ambiguous    and    conducting   a     trial   on    extrinsic

evidence; specifically, evidence of course of dealing, the context

in which the typed amendment was agreed to, and the parties'

intentions as to the overriding of boilerplate. Whether a contract

is ambiguous is a question of law and our review of the district

court's ruling on that issue is plenary.           ITT Corp. v. LTX Corp.,

926 F.2d 1258, 1261 (1st Cir. 1991).

              LPP's position is not frivolous, and 50 years ago many

courts would readily have endorsed it, at least so far as concerns

the   SBA's    right   to   dispose   of    collateral   without      Sugarman's

consent.      E.g., Burlee Dry Dock Co. v. Besse, 130 F. 444, 445-46

(1st Cir. 1904).       But the tendency of the courts has been to soften

                                      -8-
the rigor of the classic doctrine that extrinsic evidence cannot be

admitted to override plain language.                      2 Farnsworth on Contracts §

7.12,       at   314    (3d   ed.    2004);    see        also    Donoghue     v.   IBC    USA

(Publications), Inc., 70 F.3d 206, 215 (1st Cir. 1995).

                 The thin edge of the wedge was the view, now quite

common,      that      extrinsic     evidence       can    be     offered    to   show    that

seemingly        plain     language,    in     the    circumstances,           conceals     an

ambiguity.2         From there, it is not a long leap to a "peek" at

extrinsic        evidence     even    where    it    does        not   focus   directly    on

"ambiguity."           Bank v. Int'l Bus. Mach. Corp., 145 F.3d 420, 424 n.2

(1st Cir. 1998).           How far to go is not clearly settled and perhaps

cannot be reduced to formula.             See Nat'l Tax Inst., Inc., 388 F.3d

at 20 (stating that it may be permissible to look to extrinsic

evidence where "language may point only slightly in one direction

and extrinsic evidence strongly in another").

                 As it happens, the ambiguity here is in part very much on

the surface.           Compare Hunt Ltd. v. Lifschultz Fast Freight, Inc.,

889 F.2d 1274 (2d Cir. 1989).             LPP is right that the provisions on

which it relies do not in the strictest sense conflict with the

added sentences.              The former give the SBA broad authority to

        2
      Courts may look at extrinsic evidence for the "very purpose
of deciding whether the documentary expression of a contract is
ambiguous,"   Donoghue 70 F.3d at 215, for there is the real
possibility that "extrinsic evidence may in fact reveal an
ambiguity not otherwise patent." Nat'l Tax Inst., Inc. v. Topnotch
at Stowe Resort & Spa, 388 F.3d 15, 20 (1st Cir. 2004).

                                              -9-
dispose of collateral without notice to Sugarman or his consent;

the added language literally read merely requires resort first to

whatever collateral the SBA has if and when it seeks to recover

from Sugarman.

          But the added wording squarely conflicts with boilerplate

language saying that the SBA need not exhaust collateral before

turning to Sugarman, and this language was not deleted when the

addendum was added.      So something is amiss.      And, while one can

argue that the conflict is only between this latter boilerplate

provision and the added language, the provisions relating to

collateral are functionally interrelated and Sugarman now has a

plausible argument for looking behind plain wording to see just how

far the parties intended to repeal the relevant boilerplate.

          Sugarman also has two pieces of extrinsic evidence, short

of testimony about the parties' intent, that might be can openers

for direct testimony on that subject.        The first is that the SBA

did seek Sugarman's consent in 1996 when it was agreed that Tree-

Free would receive Statler's assets.      Course of conduct testimony,

for obvious reasons, troubles courts less than other testimony, and

is widely considered.       See 2 Farnsworth on Contracts § 7.13

(detailing importance of course of dealing and performance in

contract interpretation).

          The    other   piece   of   concrete   extrinsic   evidence   is

Proulx's letter expressing concerns when the SBA agreed with

                                  -10-
KeyBank to surrender SBA's first priority rights.           It is true that

Proulx was not part of the 1980 negotiations and spoke only of a

moral and not a legal commitment; but it reinforces the connection

between the exhaustion obligation and the importance of maintaining

the collateral intact.       Both the letter and the 1996 consent,

although less weighty than might appear, reinforce the court's

finding of ambiguity.

          This brings us to the merits on the premise that all of

the evidence may be considered which, as LPP framed its appeal,

present a series of issues: whether the district court misstated

the burden of proof, whether it matters, whether the evidence

supports the court's findings, whether the facts found support the

court's   ultimate   determination       that   the   SBA    breached   its

obligations, and whether Sugarman proved injury from such a breach.

The issues are curiously entangled.

          The district court arguably did, as LPP argues, misstate

the allocation of burdens of proof, due partly to a confusing

colloquy with counsel.      LPP, as the party suing on a contractual

guaranty, had to prove the guaranty, the failure to recover on the

note and the sum remaining unpaid.          Transmedia Rest. Corp. v.

Elegant Appetites, Inc., No. 243682, 2000 WL 1616462, at *3 (Mass.

App. Div. Oct. 20, 2000).    But most of this was straightforward and

Sugarman's liability turned, primarily, on whether the SBA was

                                  -11-
obliged to get his consent before releasing the collateral--which

admittedly it did not do.

           The district court said that "the parties agreed during

the trial that plaintiff bears the burden of proving the parties'

intent in 1980" and it found that while Sugarman had introduced

intent   evidence   from   him   and   Baseman;   LPP--according   to   the

district judge--"failed to meet its burden for the simple reason

that it failed to proffer any evidence of the SBA's intentions in

1980"--Proulx having not been involved in the revision and offering

only his own later view of SBA obligations.

           LPP argues persuasively that it made no such general

concession.   The pertinent exchanges confirm that LPP twice told

the district judge that it bore the burden of showing a contract

and its breach but that, to the extent that Sugarman claimed that

he was excused from performance because of a breach by SBA of an

obligation under the guaranty to get his consent, this was an

affirmative defense on which he bore the burden.3       This may well be

the better view of the law.      Cf. Fed. Deposit Ins. Corp. v. Elder

Care Servs., 82 F.3d 524, 526 (1st Cir. 1996).

           After all, Sugarman claims that the guaranty required his

consent to the SBA's disposal of collateral: he does not say that

     3
      The two exchanges, occurring at different times during the
trial, are reprinted in an addendum and, in the second one, the
district judge acknowledges that this is LPP's position.
Sugarman's brief does not effectively respond.

                                   -12-
the language explicitly required it but that it was implicit in the

amendment.      It follows that Sugarman would have to show that such

a provision implicitly existed and that the explicit boilerplate to

the contrary had been implicitly disregarded.                     Whether or not one

calls this an affirmative defense, it feels like something that

Sugarman would normally have to show--absent an LPP concession

which we think is absent.

            But,       despite    the   district       court's      "simple       reason"

statement    quoted      above,    it   is     clear   to    us    that     the   burden

allocation      made    no   difference      to     critical      factual     findings.

Sugarman and his lawyer both testified as to their understanding of

the contract and the district court credited their testimony; the

SBA   offered    no     direct    evidence     of    the    understanding         of   SBA

officials    involved        in   the   1980    adjustment;        and    the     limited

circumstantial evidence supporting Sugarman is undisputed.                             See

Restatement (Second) of Contracts § 202 cmt. g (1981) ("The parties

to an agreement know best what they mean").

            Burden might matter if no witnesses had testified or the

inferences were in perfect equipoise, but given that the district

court heard and believed Sugarman, the raw facts are simply not in

dispute.     And here the issue is readily framed but not easily

answered: is it permissible to move from a solid finding that

Sugarman and his lawyer understood the contract to embody a consent

                                        -13-
requirement to the more debatable conclusion that the contract

should be so interpreted?

            After    all,    Sugarman   did   not   claim      that   any   SBA

representative      shared   his   understanding    and   so    conceded;    he

testified that because the amended language was designed to give

him the protection of the collateral, it followed that the SBA

could not release the collateral without his consent.             This is not

necessarily an unreasonable inference on his part; but the SBA, if

it thought at all, could have thought that at most it had to behave

reasonably as to the collateral--not that it needed Sugarman's

consent.4

            But even if the SBA had one understanding and Sugarman

another on this single detail as to the necessity of consent,

modern contract law would not let either the guaranty or the

amendment fail for "lack of mutual understanding." Instead the

courts would fill the gap with a "reasonable" solution, either

attributing it to both sides' intent (conforming to what was taught

when judges were in law school) or confessing that this is what

     4
      Courts have read such a reasonableness obligation into SBA
guaranty contracts absent an agreement to the contrary, Small Bus.
Admin. v. Sotomayor-Santos, 96 F.3d 584, 585 (1st Cir. 1996) (per
curiam); United States v. Mallett, 782 F.2d 302, 304 (1st Cir.
1986), and it would certainly be the minimum that a guarantor would
claim if the issue were not addressed.     And there is reason to
believe that the insertion of the language in question here would
have created just such a requirement. See United States v. Baus,
834 F.2d 1114, 1126-27 (1st Cir. 1987).

                                    -14-
judges do.      Liberty Mut. Ins. Co. v. Nippon Sanso K.K., 331 F.3d

153, 159 (1st Cir. 2003); 2 Farnsworth On Contracts § 7.9, at 285.

              The district judge took a third course by attributing the

outcome to the burden of proof, but the result would hardly be

different if the judge were asked (in a pointless remand) to choose

the reasonable solution.              Sugarman's aim had been to get the

collateral positioned ahead of his own liability; the amendment

accepted   by    the    SBA   clearly    did   this    and,   just    as   clearly,

implicitly negated the boilerplate to the contrary. Sugarman might

reasonably think it equally implicit that the collateral could not

be disposed of without his consent.

              Although Sugarman's lawyer drafted the added sentences,

it was the SBA that insisted on retaining all of the boilerplate

including language flatly contrary to the addendum.                   Each can be

regarded as the drafter of part of the contract, so the maxim of

contra proferentem uselessly runs against both, 2 Farnsworth on

Contracts § 7.11 at 300-04; but the SBA is the main cause of the

muddle   by    accepting      the   modification      and   then   (according   to

Baseman) refusing to accept any adjustment in the boilerplate.

              Finally, we have Proulx's letter acknowledging a "moral"

obligation      not    to   release   the   collateral      and    admitting   that

Sugarman was safe if the release did not occur; the fact that the

SBA did secure Sugarman's consent in the earlier limited release of

collateral; and the failure of LPP to secure any SBA witness

                                        -15-
offering a different understanding of events.   However limited the

weight of such considerations, they are certainly not helpful to

LPP's position.

          In the end, the district court's decision as to the need

for consent is reasonable and a remand to recast slightly the

rationale would serve no purpose.     This brings us to LPP's very

brief final argument, which is that Sugarman failed to show damages

from the release of the collateral without his consent.   It might

be a nice question, not briefed by either side, whether an implicit

requirement of consent was a condition of Sugarman's liability or

merely an independent breach for which he had to show damages.

          The failure to brief the issue could be fatal to LPP but

there is a good reason why it has not devoted much attention to the

damages issue.    Proulx's letter said that Sugarman was safe just

before the collateral was released; it is fair enough to treat this

as proof that, but for the release, he would owe nothing.    This,

seemingly, is what the district court did, and to this view LPP

offers no rebuttal.

          Affirmed.

                               -16-
                              ADDENDUM

Initial exchange regarding burden of proof:

THE COURT: . . . . [W]ho has the burden of proving what?

. . .

MR. MURPHY [counsel to Sugarman]: I think the plaintiff has to

prove the intent -- not only the intent of the parties, but that

the parties lived up to their obligations under the agreement....

. . .

MR. LITTERIO [counsel to LPP]:    I think we bear the burden on the

intent of the parties, but I disagree with the affirmative

defense, which is did we breach the contract which would relieve

me of my obligations.

Second exchange regarding burden of proof:

THE COURT: . . . Did we agree that the plaintiff has the burden

of proving that they didn't violate the guaranty or that the

guaranty --

MR. MURPHY: Yes.

MR. LITERRIO:   I'm sorry.   I'm sorry.   I'm not sure what we

agreed to, because I think the defendant -- the plaintiff has the

burden of establishing that there was a contract, that there has

been a breach of that contract and what the damages are.     That's

my understanding of our burden of proof.

                                 -17-
If there's a defense that there was a breach of a term which

relieved the defendant of an obligation --

THE COURT:   That's the defendant's burden.

MR. LITTERIO: -- that's the defendant's burden.

THE COURT:   Okay . . . .

                               -18-