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APARTMENT INVESTMENT AND MANAGEMENT CO. v. NATIONAL LOAN INVESTORS



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APARTMENT INVESTMENT AND
MANAGEMENT CO.

v.

NATIONAL LOAN INVESTORS


September 17, 1999

Record No. 982474

 

APARTMENT INVESTMENT AND MANAGEMENT COMPANY

v.

NATIONAL LOAN INVESTORS, L.P.

 

FROM THE CIRCUIT COURT FOR THE CITY OF RICHMOND

Melvin R. Hughes, Jr., Judge

Present: All the Justices

OPINION BY JUSTICE BARBARA MILANO KEENAN


September 17, 1999

Record No. 982475

 

WINTHROP MANAGEMENT, ET AL.

v.

NATIONAL LOAN INVESTORS, L.P.

 

FROM THE CIRCUIT COURT FOR THE CITY OF RICHMOND

Melvin R. Hughes, Jr., Judge

Present: All the Justices

OPINION BY JUSTICE BARBARA MILANO KEENAN


In this appeal, we consider whether the trial
court erred in awarding judgment based on a promissory note,
which was assigned without the consent of the maker in violation
of a requirement stated in the note.

This appeal arises from financial transactions
involving various related business entities in the commercial
real estate industry. The parent organization is Winthrop
Financial Associates, L.P. (Winthrop Financial), which is the
sole shareholder of First Winthrop Corporation (First Winthrop).
First Winthrop, in turn, holds interests in various partnerships
and corporations involved in the acquisition and management of
commercial property. First Winthrop primarily manages its
commercial properties through Winthrop Management, a
Massachusetts general partnership in which First Winthrop owns a
99% interest.

The property acquisition affiliate of First
Winthrop involved in this appeal is Eight Winthrop Properties,
Inc. (Eight Winthrop), which is the general partner of Winthrop
Southeast, L.P. (Winthrop Southeast). Eight Winthrop and Winthrop
Southeast were formed in 1991 for the purpose of acquiring eight
apartment complexes located in Virginia, North Carolina, and
South Carolina (the Apartments). Winthrop Southeast is the
general partner of the two limited partnerships which own the
Apartments, Southeastern Income Properties I and Southeastern
Income Properties II (SIP-I and SIP-II). The limited partners of
SIP-I and SIP-II are about 4,000 individual investors.

As part of the acquisition of the Apartments in
August 1991, Winthrop Southeast borrowed about $1,161,000 from
Investors Savings Bank, F.S.B (Investors Bank), a federally
chartered savings bank in Richmond. In the promissory note
executed by Winthrop Southeast to Investors Bank (the Note),
Winthrop Southeast agreed to repay the loan in installments
beginning in February 1993.

The Note, which defined the term
"Noteholder" to include the successors and assigns of
Investors Bank, provided that "this Note may not be
transferred or assigned by Noteholder without the prior written
consent of [Winthrop Southeast]." The Note also contained a
non-recourse provision that essentially provided as the sole
remedy on default two security agreements, one of which is
relevant to this appeal (the Security Agreement).

In the Security Agreement, Winthrop Management
pledged to Investors Bank, as collateral for Winthrop Southeast’s
loan, a security interest in the income, fees, and profits that
Winthrop Management received under contracts for managing the
Apartments. The Security Agreement contained a non-recourse
provision in favor of Winthrop Management and Winthrop Southeast
that was virtually identical to the non-recourse provision in the
Note.

No payments were ever made on the Note or
pursuant to the Security Agreement. In December 1991, the
Resolution Trust Corporation (RTC) was appointed receiver for
Investors Bank. An agent acting on behalf of RTC notified
Winthrop Southeast in writing that the loan was in default in
July 1994. In August 1995, RTC assigned its interest in the Note
and Security Agreement to RTC Commercial Loan Trust 1995-NP1A
(the Loan Trust), a Delaware business trust. The parties to this
appeal agree that the Loan Trust is not part of the RTC.

In February 1996, the Loan Trust filed an
action against Winthrop Management in the United States District
Court for the Eastern District of Virginia. The Loan Trust asked
that a receiver be appointed to assume control of Winthrop
Management’s administration of the Apartments and to collect and
pay over to the Loan Trust "all income" derived from
that source. While the action was pending, Winthrop Southeast,
acting as the general partner of SIP-I and SIP-II, terminated the
management agreements for the Apartments with Winthrop
Management. Three days later, Winthrop Southeast executed new
management agreements with Insignia Management Corporation
(Insignia).
[1] Soon thereafter,
Insignia transferred the management of six other, unrelated
apartment complexes to Winthrop Management.

The action in the federal district court was
later dismissed for lack of jurisdiction. RTC Commercial Loan
Trust 1995-NP1A v. Winthrop Management
, 923 F.Supp. 83
(E.D.Va. 1996). The Loan Trust then brought this action in the
trial court, naming as defendants Winthrop Management, First
Winthrop Corporation, Winthrop Southeast, SIP-I, SIP-II, Eight
Winthrop, and Insignia.
[2]

Prior to trial, RMA Partners, L.P., on behalf
of the Loan Trust and without the prior written consent of
Winthrop Southeast, assigned its interest in the Note and the
Security Agreement to National Loan Investors, L.P. (NLI). The
Loan Trust also assigned to NLI its interest in "those
causes of action for damages to property" arising under the
Note and the Security Agreement. NLI later was substituted as
plaintiff in place of the Loan Trust.

The trial court heard evidence in a bench trial
on ten counts of an amended bill of complaint, five of which are
the subject of this appeal.
[3] Those five counts included
various allegations by NLI against Winthrop Management, First
Winthrop, Winthrop Southeast, and Insignia. NLI alleged that
Winthrop Management transferred the income, fees, and profits
from its management of the Apartments to First Winthrop with the
intent to hinder and delay creditors in their efforts to obtain
payment under the Security Agreement for the Note. NLI sought an
order setting aside those transfers, as well as a judgment in the
amount of the funds conveyed.

NLI also alleged that Winthrop Management and
Insignia entered into an "exchange of management
rights" with intent to hinder, delay, or defraud the holder
of the Security Agreement. NLI sought the imposition of a
constructive trust "over all income, fees, and profits"
from the Apartments then being managed by Insignia, as well as a
personal judgment against Insignia.

Finally, NLI sought a judgment against Winthrop
Southeast for the full amount due under the Note. NLI alleged
that Winthrop Southeast remained liable on the Note based on an
exception in the Note’s non-recourse provision, which provided
that Winthrop Southeast would be liable for losses resulting from
any fraudulent acts or material misrepresentations made by
Winthrop Southeast or its partners.

At trial, NLI asserted that an "Event of
Default" occurred under the Note in July 1994, 15 days after
the RTC gave Winthrop Southeast written notice that the loan was
in default. After hearing evidence on the amended bill of
complaint, the trial court awarded judgment in favor of NLI on
the counts included in this appeal. The court found that the
total amount due on the Note was $2,085,045.82, including
attorneys’ fees and costs, and entered judgment in that amount,
plus interest, against Winthrop Southeast. The court also entered
judgment in lesser amounts against Winthrop Management, First
Winthrop, and Insignia on the four other counts involved in this
appeal. The court’s order provided that sums recovered under
those other counts "be considered as a payment towards the
satisfaction of the judgment [on the Note]."

On appeal, Winthrop Management, First Winthrop,
Winthrop Southeast, Eight Winthrop, and Insignia (collectively,
the defendants) first argue that the trial court erred in
awarding judgment in favor of NLI, because the entire judgment
was predicated on NLI’s purported status as holder of the Note.
The defendants assert that since the evidence was uncontested
that Winthrop Southeast did not give prior written consent to the
assignment from the Loan Trust to NLI as required by the terms of
the Note, NLI failed to establish that it was a valid holder by
assignment. Thus, the defendants contend that they should have
been awarded judgment on all counts of the amended bill of
complaint.

In response, NLI agrees that the counts
involved in this appeal are based exclusively on the Note and the
collateral securing the Note. However, NLI contends that,
although the Note provided that assignments be made with Winthrop
Southeast’s prior written consent, the Note did not explicitly
prohibit or invalidate assignments made without such consent. At
most, NLI argues, the assignment from the Loan Trust to NLI
without Winthrop Southeast’s consent constituted a breach of the
Note. NLI also asserts that since Winthrop Southeast first
breached the terms of the Note by its default, Winthrop Southeast
cannot rely on the consent requirement in defense of its
nonpayment. We disagree with NLI.

In Paragraph 17 of the Note, the term
"Noteholder" is defined to include Investors Bank, as
well as the "successors and assigns" of Investors Bank.
However, Paragraph 17 also provides that "this Note may not
be transferred or assigned by Noteholder without the prior
written consent of the Maker [Winthrop Southeast]."

The evidence was uncontested that Winthrop
Southeast did not give prior written consent to the assignment of
the Note from the Loan Trust to NLI. William Carter Smith, vice
president of NLI, conceded this fact when he testified that
neither NLI nor the Loan Trust sought such prior written consent
before NLI acquired the Note.

NLI’s failure to obtain written consent to an
assignment of this non-recourse obligation was not merely a
breach of the Note’s terms. Prior written consent was a condition
precedent to assignment of the Note and, since such consent was
not obtained, the Loan Trust’s purported assignment to NLI was
invalid. Thus, NLI was not entitled to maintain the present
causes of action, which are all predicated on NLI’s incorrect
assertion that it was a valid "Noteholder."

We find no merit in NLI’s contention that our
decision in Hurley v. Bennett, 163 Va. 241, 176 S.E. 171
(1934), requires a different result. Quoting Hurley, NLI
contends that "[t]he party who commits the first breach of a
contract, is not entitled to enforce it . . . against
the other party for his subsequent failure to perform." 163
Va. at 253, 176 S.E. at 175; see also Federal
Ins. Co. v. Starr Elec. Co.
, 242 Va. 459, 468, 410 S.E.2d
684, 688-89 (1991). NLI argues that under this principle, the
defendants cannot attack NLI’s status as a purported
"Noteholder" because Winthrop Southeast committed the
first breach of contract in failing to make payment on the note
in 1993. We disagree.

NLI’s argument effectively asks us to allow a
stranger to the Note, NLI, to enforce the Note against a party to
the Note, Winthrop Southeast, because that party is in default.
As we explained above, Winthrop Southeast’s failure to consent to
the assignment of the Note to NLI precluded the establishment of
a contractual relationship between NLI and the Note’s maker,
Winthrop Southeast. Thus, NLI’s failure to obtain this consent
was not a subsequent failure of performance of a contract under
the rule stated in Hurley, but was an unsatisfied
precondition to the formation of a valid contract between the
parties. Accordingly, Winthrop Southeast’s initial breach of the
Note did not preclude it from asserting that NLI failed to
establish itself as a "Noteholder" entitled to assert
the present causes of action.
[4]

NLI argues, nevertheless, that the Note’s
restriction on assignment is preempted by 12 U.S.C.
? 1821(d)(2)(G)(i)(II), which provides in relevant part
that the RTC may "transfer any asset or liability of the
institution in default . . . without any approval,
assignment, or consent with respect to such transfer." NLI
contends that it was entitled to the benefit of this provision,
because the Loan Trust was a holder in due course, and that NLI,
as the transferee of a holder in due course, obtained the same
statutory right to receive an assignment of the Note without the
prior written consent of Winthrop Southeast. We disagree.

While the RTC’s assignment of the Note to the
Loan Trust without the consent of Winthrop Southeast was
permitted under the above statute, that assignment did not confer
on the Loan Trust the status of a holder in due course of a
negotiable instrument. The Loan Trust was not a holder in due
course because, among other things, the Note was not a negotiable
instrument. As a non-recourse obligation, the Note lacked
negotiability because it did not constitute an unconditional
promise to pay a fixed amount of money. See Code
? 8.3A-104; United Nat’l Bank of Miami v. Airport Plaza
Ltd. Partnership
, 537 So.2d 608, 610 (Fla.App. 1988). A
promissory note is rendered conditional when it provides that the
borrower will not be liable personally for payment in the event
of default and limits recourse for payment to certain tangible
property or other collateral. See id. Thus, since
the Note was not a negotiable instrument, neither NLI nor the
Loan Trust could assert any right that a holder in due course may
have had to rely on in the statutory provision at issue. See
Code ? 8.3A-302; Levin v. Virginia Nat’l Bank, 220
Va. 1087, 1091, 265 S.E.2d 758, 760 (1980); Brantley v. Karas,
220 Va. 489, 493, 260 S.E.2d 189, 192 (1979).
[5]

For these reasons, we will reverse the trial
court’s judgment and enter final judgment for the defendants.

Reversed and final judgment.

 

FOOTNOTES:

[1] While this appeal was pending,
Apartment Investment and Management Company became the successor
in interest to Insignia and was substituted as a party in this
appeal. We will continue to refer to this party as Insignia in
this opinion.

[2] The trial court dismissed or
nonsuited all claims against SIP-I and SIP-II.

[3] In its final order, the trial
court initially awarded judgment in favor of NLI on an additional
count, Count IX, but later in the order stated: "On Count
IX, the Court does not enter judgment for plaintiff because, in
light of the relief granted under Counts VII and VIII, the relief
sought under Count IX is unnecessary." Since final judgment
was not entered on Count IX, we will not address it in this
appeal.

[4] We also find no merit in NLI’s
unsupported contention that Winthrop Southeast’s failure to
object to prior assignments of the Note in which its written
consent was not obtained bars the defendants from asserting that
defense here.

[5] Since NLI’s failure to establish that it was a
"Noteholder" is dispositive of this appeal, we need not
address the defendants’ remaining assignments of error.

 

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