Court Opinion

ID: 9459885
Source: CourtListenerOpinion
Date Created: 2023-08-04 21:34:24.53604+00
Date Added: 2024-06-11T17:36:22.717251
License: Public Domain

STEVENS, Circuit Judge
(dissenting).
Both the language of the instruments and the character of the underlying transaction persuade me that interest was not payable when either note was surrendered in exchange for a conveyance of property.
I.
Each of the two notes recites that it was issued pursuant to the agreement of December 29, 1967, and expressly states that it “is subject to all of the terms and conditions thereof.” That agreement recited that the parties had decided to attempt to obtain a buyer for the property, and provided for the allocation of the proceeds of sale if a buyer was found. Putting to one side the differences which different dates of sale would create, the basic alternatives covered in the agreement were (1) that IMC would find a buyer; (2) that Husky would find a buyer; or (3) that there would be no sale prior to the expiration of the agreement.
IMC’s ultimate control of £he property was assured by the last section of the agreement which gave it an unrestricted right, upon 90 days’ notice, to demand a conveyance from Husky of its then remaining interest in the leaseholds.1 Following such a conveyance, Husky would have no further interest in the property or the proceeds of any sale by IMC unless Husky thereafter found an acceptable purchaser.2 Under the plain language of the agreement, a conveyance by Husky pursuant to IMC’s demand would have discharged Husky’s entire obligation under the notes, for interest as well as principal, and entitled it to a surrender of any outstanding note.3 In short, *162the conveyance of property would have paid whichever note was then outstanding in full and required its surrender.
If a buyer had been procured by Husky, Husky would share in the proceeds of sale, provided that the purchase price was in excess of $3,000,000, plus interest on the note.4 In the event of such a sale, the agreement plainly stated that the note would be payable out of the proceeds of sale, and that such a cash payment would include interest as well as principal.
As events developed, neither party found a buyer. That contingency was covered in the agreement by language, which, as I read it, simply provides that in exchange for a conveyance of property from Husky to IMC, IMC shall surrender the note then outstanding.5 There is no express reference to the payment of interest, in addition to the conveyance of property. I do not think the agreement can properly be read to imply either (a) that IMC’s obligation to surrender the note was conditioned on the receipt of a cash payment equal to file amount of interest that had accrued; or (b) that a right to receive interest was intended to survive the surrender of the note. In short, I think the reference to a surrender of the note in exchange for the assignment of property was the equivalent of a statement that the assignment would constitute payment in full.
II.
What I view as the plain meaning of the agreement of December 29, 1967, is entirely consistent with the underlying transaction which gave rise to that agreement.
It is true, of course, that the basic agreement entered into in 1961 created a somewhat unique debtor-creditor relationship. I believe, however, that this relationship can be better understood by emphasizing the fact that Husky was a seller and IMC a purchaser of a valuable asset. Quite obviously, in 1961, when they negotiated the basic agreement, the parties were convinced that the phosphate leases had a value of at least *163$3,000,000, and probably more if properly developed. In essence, in 1961 Husky transferred control of those leases to IMC for a price of $3,000,000 plus an additional contingent benefit — sometimes described as a “kicker” or “bonus.”
Pending receipt of its contingent bonus, Husky retained legal title to the property — no doubt for security purposes — but the significant indicia of ownership were all transferred to IMC when the original agreement was executed in 1961. IMC assumed the burdens of ownership, such as the obligation to pay real estate taxes, minimum royalties, minimal rentals, and all responsibility for such mandatory prospective or development work as might be necessary, and it acquired the same rights to use and develop the property as would an outright owner.
Depending on the results of IMC’s exploration and development, the bonus for Husky would have been payable in different ways. For example, if IMC determined that it could successfully mine and work the phosphate, it might offer Husky a minority interest in a joint venture program6 but Husky was not required to participate. If Husky accepted such an offer, the minority interest in the joint venture would represent its bonus or, in effect, the payment of the balance of the original purchase price. If Husky rejected such an offer, and if the appraised value of the properties then exceeded $3,000,000, Husky was entitled to an amount equal to 50% of that excess. Of course, if the appraised value was less than $3,000,000, and if Husky did not elect to participate in a joint venture, Husky would receive no bonus.
If IMC did not submit a joint venture proposal to Husky, Husky had two options. It could reacquire control of 75% of the property for a price of $3,000,000;7 quite obviously it would not make that election unless it appraised the property as worth at least $4,000,000. Alternatively, it could simply assign title to the leaseholds to IMC. The former option was described in the agreement as a repayment of the loan in cash; the latter as a payment of the loan in property. In sum, if the property should be worth less than $3,000,000, there would be no justification for any bonus for Husky and the final closing of the transaction would simply involve the release of Husky’s security interest in the property and its retention of the $3,000,000 payment which had been made by IMC in 1961; the original $3,000,000 “interest free loan” would then constitute the entire purchase price and IMC would have unencumbered ownership of the property.
As events turned out, the parties decided that neither wanted to undertake development of the property. On December 29, 1967, Husky was unquestionably entitled to transfer the leaseholds to IMC in exchange for a surrender of the $3,000,000 note. No interest would then have been payable. Instead of exercising that right, however, Husky requested, and IMC agreed, to divide the assignment as well as the surrender of the note into three parts in order to avoid a distortion of its annual earnings and presumably to spread the tax consequences of the transaction over a three-year period. If the 1967 agreement is regarded as primarily designed to provide for the method of repaying an existing debt, it is quite reasonable to con-*164elude — -as the majority does — that an implied obligation to pay interest arose to compensate the lender for the delay in receiving payment of the principal. But if the 1967 agreement is viewed as prescribing the final steps to be taken in the wind-up of a somewhat complex sales transaction in which the original $3,000,000 payment represented the minimum purchase price for the transferred assets, no reasonable justification for an interest charge is apparent.8
The postponement of the final conveyance of Husky’s legal title did not interfere in any way with IMC’s right either to use the property or to sell it to a third party. IMC already possessed all significant indicia of ownership and had an unqualified right to demand a full conveyance on 90 days’ notice. Moreover, as the agreement plainly stated, the postponement also gave IMC the benefit of having Husky cooperate in the attempt to procure a purchaser.
I find it hard to believe that Husky would agree to pay the amount of interest claimed in order to obtain the benefit of spreading its capital gain over a three-year period; after all, the value of the use of the money needed to pay the tax is obviously only a fraction of the total purchase price.9 On the other hand, since the postponement really cost IMC nothing, I find it hard to credit its claim that the right to receive interest motivated its acceptance of Husky’s proposal.
In sum, I think the agreement which simply provides that the note shall be surrendered in exchange for an assignment of the leases means exactly what it says.10 I respectfully dissent.

. More precisely, IMC could make sucli a demand any time later than 17 days after the execution of the agreement. The first sentence of section 7 stated:
“At any time subsequent to January 15, 1968, and during the term of this agreement, International is granted the unconditional right and option, upon 90 days’ advance written notice, to demand a conveyance from Husky of all of Husky’s then remaining undivided interest in and to the Leases.”

. The last paragraph of the agreement stated :
“At any time following such a conveyance by nusky to Intel-national of the full interest in the Leases, but prior to January 10, 1969, and so long as International continues to hold such full title, Husky may continue to attempt to obtain a buyer for sucli properties. If a sale is arranged during such period in accordance with Article 2 above solely through the efforts of Husky, the credits, payments and percentages provided in Articles 1. and 2. above shall apply. However, it is expressly understood and agreed that nothing in this Article 7. shall be construed to restrict in any way International’s absolute ownership and control of the Leases following a conveyance under the terms of this Article 7.”

. The portion of Article 7 not quoted in the above footnotes provided:
“If such a demand is made by International and a conveyance tendered by Husky prior to June 30, 1968, International shall, on June 30, 1968 (i) credit Husky’s Note account in the amount of $1,200,000.00 plus interest accrued on such amount, and (ii) on January 10, 1969, International shall issue an additional credit to Husky in the amount of $1,050,000.00 plus interest. Upon such credits being issued, International shall surrender to Husky on January 10, 1969, its promissory note dated December 29, 1967, in the principal amount of $2,250,000.00,
*162‘Tf the demand is made by International and the conveyance tendered by Husky after June 30, 1968, International shall surrender to Husky, on its due date, the Husky promissory note then outstanding.”
IMC places considerable emphasis on the fact that this provision indicated that the parties intended that interest would continue to accrue until the note was surrendered. But, of course, the accrual of interest on IMC’s books was a matter of complete indifference to Husky unless Husky was required to pay that interest. And the only contingency under which any obligation to pay such interest is mentioned in the December 29, 1967 agreement is the unlikely event that the parties found a buyer at such a favorable price that the payment of interest would merely reduce the amount of a profit which Husky did not actually anticipate receiving. In other words, Husky merely agreed to have an amount of interest paid with a third party’s cash — not with its own.

. I recognize that the agreement refers to a mutually acceptable sale arranged “by either party,” and therefore would entitle Husky to share in the proceeds in the unlikely event that IMC procured the purchaser and did not exercise its right to acquire title on 90 days’ notice. Presumably, however, the provisions of tlie agreement giving Husky an interest in the proceeds contemplated a sale which Husky helped to arrange.

. Paragraph 3 of the agreement reads as follows :
“If a mutually acceptable sale has not been obtained on or before January 10, 1969, Husky shall thereupon convey to International all of Husky’s remaining undivided interest in and to the Leases; and, upon such conveyance, International shall surrender Husky’s note of June 30, 1968, in the amount of $1,050,000.00.”
The preceding paragraph, dealing with the exchange that was required on June 30, 1968, if an acceptable sale had not yet been made, was identical except that the surrender of the then outstanding note was in exchange for property interests, including (a) a new note, and (b) a partial assignment of the leasehold interest. In neither paragraph 2 nor paragraph 3 was there any reference to the payment of interest in connection with a surrender of a note in exchange for property. Instead, the language was parallel to that used in paragraph 1 when admittedly the surrender of the original $3,000,000 note in exchange for a new note in a lesser amount and a partial assignment of the leases did not contemplate any interest payment.

. Article V, (1) provided in part:
“Upon the execution of the Joint Venture Agreement and the making of all required capital contributions International shall participate 60% and Husky shall participate 40% in the profits and losses of the Joint Venture and all additional capital contributions thereafter shall be made 60% by International and 40% by Husky.”

. It was authorized “to repay the Loan in cash . . . [and] concurrently with such repayment assign to International good and merchantable title to an undivided 25% interest in the leaseholds created by the Leases.”

. Under the agreement, the only way in which IMC could recover its original $3,000,000 payment (other than by developing the property) was by way of a sale at a higher price, either to a third party or through a repurchase by Husky (see note 7, supra). Since it appears that the property could not be sold for more than the $3,000,000, it seems unrealistic to treat the purchaser’s retention of the basic purchase price as justifying an interest payment to compensate for the use of that money.

. I recognize that the record indicates that tax consequences did not play any part in Husky’s motivation and that Husky merely desired to avoid a distortion of its 1969 earnings. If that be the fact, it is particularly hard to understand why Husky would elect to pay $115,000 in interest to avoid the cost or the consequences of an explanatory footnote in its annual statement.

. I do not contend that the use of the term “surrender” necessarily implies that no interest was due and payable. I do contend that an obligation to surrender a note in exchange for a conveyance of property unaccompanied by any cash payment is inconsistent with a claim that an obligation to pay interest survived the surrender of the note or a claim that the note did not have to be surrendered in response to a tender of the property. As I read the entire 1967 agreement, every time the word “surrender” is used, it has exactly the same meaning. Only in the event of a sale to a third party is IMO’s obligation to surrender the note conditioned on the payment of any cash whatsoever.