Trident Center v. Connecticut General Life Insurance – 9th Circuit 1988
P → is a limited partnership made up of an insurance company and two major Los Angeles law firms (Manatt, Phelps used to be the lead law firm for the Democratic National Party)
D → insurance company
Deal → Connecticut General financed $56 million to Trident Center to build an office building on Olympic Blvd. in West L.A.
-Connecticut General financed the $56 million at 12 ¼ % interest for the term of 15 years & it was secured by a deed of trust on the project
-promissory note provided that Trident could not prepay the principle in whole or in part for the first 12 years
-promissory note also provided that in years 13-15 Trident could prepay, subject to a sliding prepayment fee
-note also included that in case of default in years 1-12 Connecticut General had the option of accelerating the note & adding a 10% prepayment fee
-in 1987 the interest rates dropped & Trident started to look for ways to the loan at a lower interest rate
-Connecticut General was not willing to let them, reminding them that they could not prepay for the first 12 years (1996)
-Trident brought suit in California state court seeking a declaration that it was entitled to prepay the loan now, subject to only the 10% prepayment fee
-Connecticut General removed to Federal Court (on diversity jurisdiction §1332) & motioned to dismiss claiming that the loan documents clearly & unambiguously precluded prepayment during the first 12 years
-Trident appeals, claiming the District Court erred in denying them opportunity to present evidence that the K language did not accurately reflect the parties’ intentions
1. the language of the K is ambiguous & they wish to offer evidence that would support their claim
2. in the alternative → California law allows even seemingly unambiguous K’s are subject to modification by parol evidence of extrinsic evidence
1st claim: the K is ambiguous
There is ambiguity b/c one clause in the note says that Trident can’t prepay till January 1996. Another clause of the note provides that “in the event of a prepayment resulting from a default prior to January 1996 , the prepayment fee will be 10%
→ Trident says this other clause gives it the option of prepaying the loan & only incurring the 10% fee
9th
Circuit
-Rejects Trident’s ambiguity claim b/c if their interpretation is correct, the default clause would override the no prepayment clause → court should construct a K to avoid internal conflict s
–Trident’s interpretation is wrong, but even if it weren’t it is up to Connecticut General to decide if they will make Trident do an accelerated repayment → Connecticut General has the option to make Trident pay off the balance, to make them make accelerated payments, OR to do nothing at all
-the language assigning Connecticut General the exclusive right to decide could not be clearer
-the language stating that the loan cannot be prepaid till year 13 is very clear & conclusive BUT…
-Trident can stop making
payments, which may cause Connecticut General
to declare a default & accelerate the loan, but Connecticut General doesn’t
have to do that → they can ignore
the default & go after the income, rents, royalties & profits of the
property
-defaults are messy, & by going into default Trident could risk losing the property & ruin their credit → this would prevent them from obtaining refinancing & would impair their cash flow
-this is why Trident isn’t simply going in to default → instead they are willing to go thru expensive litigation
2nd claim: extrinsic evidence should be introduced
Trident argues that even if the K isn’t ambiguous the deal that the parties actually struck is much different than what the K states → so Trident wants to offer extrinsic evidence that the parties agreed that Trident could prepay at any time w/in the first 12 years & pay only the balance owing + 10%
9th
Circuit
-under traditional K law extrinsic evidence is inadmissible to interpret, vary, or add to the terms of an unambiguous integrated written K BUT…
-California doesn’t follow the traditional rule → in 1968 the CA Supreme Court decide Pacific Gas → held that “contractual obligations flow not from the words of the K, but from the intentions of the parties → this essentially turned back the notion that a K can ever have a plain, understandable meaning w/out introducing extrinsic evidence
Pacific Gas also said that the only way to not have to introduce extrinsic/parol evidence is if it is clear by the words used in the instrument what meaning the parties gave to the words → but, each party may attach different meaning to the words, so there will always be a need to introduce extrinsic evidence whenever any party disagrees w/their rights or obligations
→ the Pacific Gas decision casts a shadow of uncertainty over all transaction executed & negotiated under California law & chips away at the foundation of the legal system. (pg 417)
*BUT… based on the holding of Pacific Gas & California law, the 9th Circuit must reverse the decision of the D.Ct & remand to allow P to introduce the extrinsic evidence as to the intention of the parties in drafting the K
(↑ is b/c of Erie → substantive law of the state applies in Fed.Ct. for diversity juris. Cases)
-since the District Courts ruling is reversed, the court must reverse the sanctions, b/c Trident has a right to pursue all remedies available under the law
-the CA. Supreme Ct. would be wise to revisit this issue & change this law