     Case: 13-10461   Document: 00512513442     Page: 1   Date Filed: 01/27/2014




        IN THE UNITED STATES COURT OF APPEALS
                 FOR THE FIFTH CIRCUIT
                                                                    United States Court of Appeals
                                                                             Fifth Circuit

                                                                           FILED
                                                                    January 27, 2014
                                 No. 13-10461
                                                                      Lyle W. Cayce
                                                                           Clerk
In the Matter of: DENVER MERCHANDISE MART, INC.,

                                            Debtor.


BANK OF NEW YORK MELLON, as successor to Bank of New York Global
Capital Access One, Inc., Commercial Mortgage Bonds, Series 3, care of
Berkadia Commercial Mortgage L.L.C.,

                                            Appellant,
v.

GC MERCHANDISE MART, L.L.C., DENVER MERCHANDISE MART,
INC., and HAWTHORN LAKES ASSOCIATES, LTD.,

                                            Appellees.


                Appeal from the United States District Court
                     for the Northern District of Texas



Before REAVLEY, DAVIS, and HIGGINSON, Circuit Judges.
W. EUGENE DAVIS, Circuit Judge:
      Lender-appellant Bank of New York Mellon (“Lender”) appeals the
district court’s judgment which, in relevant part, disallowed the Lender’s claim
for a contractual prepayment consideration. We affirm.
                                       I.
      This dispute arose in a complicated bankruptcy proceeding, but the
fundamental dispute is a relatively straightforward question of contract
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interpretation under Colorado law. Debtor-appellee GC Merchandise Mart,
LLC (“GCMM”) owns the Denver Merchandise Mart, a large exposition center
in Denver, Colorado. GCMM’s parent company is appellee Hawthorn Lakes
Associates, Ltd., and appellee Denver Merchandise Mart, Inc. (“DMM”) is an
affiliate of GCMM. All three companies filed petitions for voluntary Chapter
11 bankruptcy protection in March 2011.            The cases are being jointly
administered, with DMM’s case designated as the lead case.
        GCMM executed a promissory note (the “Note”) dated September 30,
1997 in favor of Dynex Commercial, Inc., a predecessor in interest to lender-
appellant Bank of New York Mellon (“Lender”) in exchange for a $30 million
loan.    The Note bore interest at a non-default rate of 8.3% and contained
several clauses, only two of which are at issue in this appeal: Article 4 (“Default
and Acceleration”) and Article 6 (“Prepayment”).
        Article 4 provides that “if any payment required in this Note is not paid
prior to the tenth (10th) day after the date when due or on the Maturity Date
or on the happening of any other default,” certain sums become immediately
due and payable, including the principal balance, interest, default interest,
“other sums, as provided in this Note,” and “all other moneys agreed or
provided to be paid by Borrower in this Note, the Security Instrument or the
Other Security Documents,” among other things. Article 6 provides that the
Borrower may prepay the Note under certain circumstances but must also pay
a Prepayment Consideration, which is essentially a penalty for prepayment.
        GCMM stopped making payments on the Note in October 2010 and thus
defaulted under its terms.      The Lender issued a notice of default, which
GCMM failed to cure. Though GCMM made two more partial payments, it
made no payment whatsoever after December 2010.             As permitted by its
security instruments, the Lender obtained an ex parte order appointing a

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                                       No. 13-10461
receiver of the Merchandise Mart, at which point GCMM and the other debtors
filed for bankruptcy. At that time, GCMM owed the Lender approximately
$24 million.
        The Lender argued that payment of the Prepayment Consideration
under Article 6, valued at $1.8 million, is required by Article 4’s acceleration
clause, notwithstanding the fact that GCMM stopped making payments under
the Note after December 2010 and never paid the Note prior to the maturity
date. The bankruptcy court disagreed on four grounds. First, it found that
some payment, whether voluntary or involuntary, must actually be made to
trigger the obligation to pay the Prepayment Consideration. Second, it found
that the rationale for requiring a Prepayment Consideration did not apply
here.    Third, it found that the cases cited by the Lender were inapposite
because in each of those cases, 1 the acceleration clause specifically provided
that acceleration of the note would trigger the obligation to pay the
prepayment consideration. Fourth and finally, the bankruptcy court noted
that it would have been easy to expressly provide for payment of the
Prepayment Consideration in the event of acceleration.
        Thus, although the bankruptcy court allowed the Lender to recover a $25
million secured claim under the Note in conjunction with confirming the
reorganization plan, 2 it disallowed the $1.8 million claim for the Prepayment
Consideration under Article 6 of the Note. 3

1 In re 400 Walnut Assocs., L.P., 461 B.R. 308 (Bankr. E.D. Pa. 2011); In re Hidden Lake Ltd.
P’ship, 247 B.R. 722 (Bankr. S.D. Ohio 2000); and In re CP Holdings, Inc., 332 B.R. 380 (W.D.
Mo. 2005).
2 The claim had increased from approximately $24 million at the time of bankruptcy to
approximately $25 million at the time of plan confirmation because of interest.
3 The bankruptcy court set the interest rate for the Lender’s claim at 6%. However, it issued
an “alternative ruling for purposes of appeal” that if it was found to have erred in excluding
the Prepayment Consideration from the Lender’s claim, then the interest rate should be set

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                                         No. 13-10461
         The Lender appealed the bankruptcy court’s order to the district court.
The district court affirmed the bankruptcy court in full. The Lender timely
appealed to this court.          The only issue the Lender presents on appeal is
whether or not GCMM became liable for the $1.8 Prepayment Consideration
upon the pre-bankruptcy acceleration of the Note.
                                               II.
         In this dispute over the disallowance of a claim in a bankruptcy
proceeding, the bankruptcy court had jurisdiction under 28 U.S.C. §§
157(b)(2)(B) and 1334(b), and the district court had jurisdiction over the appeal
from the bankruptcy court under 28 U.S.C. § 158(a)(1). We therefore have
jurisdiction over this appeal from the district court’s judgment pursuant to 28
U.S.C. §§ 158(d)(1) and 1291.
         “We review the bankruptcy court’s findings of fact for clear error and its
conclusions of law de novo, using the same standards that the bankruptcy court
and district court applied.” 4 We look to applicable state law to determine the
appropriate standard of review for interpretation of a contract. 5                     Under
Colorado law, the interpretation of a contract is a matter of law that is
reviewed de novo. 6




at 6.5% instead, to account for the “slightly riskier loan because . . . we have a higher loan-
to-value ratio.”
4 In re Homeowners Mortgage & Equity, Inc., 354 F.3d 372, 375 (5th Cir. 2003) (citing
Refinery Holding Co. v. TRMI Holdings, Inc. (In re El Paso Refinery, LP), 302 F.3d 343, 348
(5th Cir. 2002)).
5See id. (applying Texas law); and Stinnett v. Colo. Interstate Gas Co., 227 F.3d 247, 254 (5th
Cir. 2000) (same).
6   Allen v. Pacheco, 71 P.3d 375, 378 (Colo. 2003) (en banc).


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                                       No. 13-10461
                                           III.
                    A. Colorado Contract Interpretation Principles
         It is undisputed that Colorado law applies with respect to the
interpretation of this contract. The Supreme Court of Colorado, sitting en
banc, summarized Colorado’s general principles for contract interpretation as
follows:
                 We must construe the terms of the agreement in a
                 manner that allows each party to receive the benefit of
                 the bargain, and the scope of the agreement must
                 faithfully reflect the reasonable expectations of the
                 parties. In other words, we must interpret the
                 agreement in a manner that best effectuates the intent
                 of the parties. We ascertain the parties’ intent by
                 looking to the plain language of the agreement. We
                 will enforce the agreement as written unless there is
                 an ambiguity in the language; courts should neither
                 rewrite the agreement nor limit its effect by a strained
                 construction. Thus, like any contract, an arbitration
                 agreement must be given effect according to the plain
                 and ordinary meaning of its terms.

                 In determining whether an ambiguity exists, we must
                 ask whether the disputed provision is reasonably
                 susceptible on its face to more than one interpretation.
                 We also evaluate the agreement as a whole and
                 construe the language in harmony with the plain and
                 generally accepted meaning of the words employed,
                 unless the intent of the parties, as expressed in the
                 contract, indicates that an alternative interpretation
                 is intended. 7

                                B. Relevant Colorado Cases
         As the court in Planned Pethood Plus, Inc. v. KeyCorp, Inc., 228 P.3d 262,



7   Id. at 378 (citations omitted).


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264 (Colo. App. 2010), noted, “Prepayment penalties . . . have seldom been the
subject of litigation in Colorado.” Indeed, only a few Colorado cases have dealt
with prepayment penalties in any depth: Carpenter v. Winn, 566 P.2d 370
(Colo. App. 1977), Kirk v. Kitchens, 49 P.3d 1189 (Colo. App. 2002), and
Planned Pethood. Fortunately, these cases sufficiently develop the applicable
principles to resolve this dispute.
          A lender has the right to refuse early payment, 8 but the lender may
expressly waive the right by contract. If a lender does not waive the right to
refuse early payment, a borrower may not prepay the note without paying all
future interest as well. 9 If a lender does expressly waive the right to refuse
early payment, then it is not entitled to any prepayment penalty unless the
contract expressly provides for such prepayment penalty. 10
          Unless specifically provided for by contract, a lender may not assess a
prepayment penalty when the note is accelerated at the lender’s option. 11
Generally, a lender’s choice to accelerate acts as a waiver of the right to a
prepayment penalty. 12 The caveat is that a court may choose to impose the
prepayment penalty even when a lender accelerates the note at its option if
there is evidence that the borrower defaulted to avoid additional interest. 13
          Planned Pethood held that a prepayment penalty (also known as a
prepayment premium or fee) is not a remedy for breach of contract but


8    Carpenter, 566 P.2d at 370.
9    Id. at 371.
10   Kirk, 49 P.3d at 1193 (citing Burks v. Verschuur, 532 P.2d 757 (Colo. App. 1974)).
11 Id. at 1193 (citing numerous cases from other jurisdictions) and 1194 (adopting the rule
for Colorado).
12   Id. at 1194.
13   Id. at 1195.


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                                          No. 13-10461
consideration for the borrower’s right or privilege to prepay. 14 Accordingly, a
prepayment penalty is not liquidated damages and is not subject to the rules
of reasonableness for liquidated damages. 15                    Furthermore, the Planned
Pethood court reasoned that because a prepayment penalty is not properly
characterized as liquidated damages due to breach of contract, it should not
trigger application of section 506(b) of the Bankruptcy Code, 16 as In re A.J.
Lane & Co., Inc., 113 B.R. 821 (Bankr. D. Mass. 1990), had ruled under non-
Colorado law. 17
           Parties are free to contract however they wish around these general
rules, provided they do so clearly.
                           C. Applicable Provisions of the Note
           As noted above, this appeal hinges on the interpretation of Articles 4 and
6 of the Note. Article 4 (“Default and Acceleration”) provides in full:
                 (a) The whole of the principal sum of this Note, (b)
                 interest, default interest, late charges and other sums,
                 as provided in this Note, the Security Instrument or
                 the Other Security Documents (defined below), (c) all
                 other moneys agreed or provided to be paid by Borrower
                 in this Note, the Security Instrument or the Other
                 Security Documents, (d) all sums advanced pursuant
                 to the Security Instrument to protect and preserve the

14   Planned Pethood, 228 P.3d at 264-65.
15   Id.
16   Section 506(b), 11 U.S.C. § 506(b), provides:
                 (b) To the extent that an allowed secured claim is secured by
                 property the value of which, after any recovery under subsection
                 (c) of this section, is greater than the amount of such claim, there
                 shall be allowed to the holder of such claim, interest on such
                 claim, and any reasonable fees, costs, or charges provided for
                 under the agreement or State statute under which such claim
                 arose.

17   228 P.3d at 265-66.


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                                 No. 13-10461
            Property and the lien and the security interest created
            thereby, and (e) all sums advanced and costs and
            expenses incurred by Lender in connection with the
            Debt (defined below) or any part thereof, any renewal,
            extension, or change of or substitution for the Debt or
            any part thereof or the acquisition or perfection of the
            security therefor, whether made or incurred at the
            request of Borrower or Lender (all the sums referred
            to in (a) through (e) above shall collectively be referred
            to as the “Debt”) shall without notice become
            immediately due and payable at the option of Lender
            if any payment required in this Note is not paid prior
            to the tenth (10th) day after the date when due or on
            the Maturity Date or on the happening of any other
            default, after the expiration of any applicable notice
            and grace periods, herein or under the terms of the
            Security Instrument or any of the Other Security
            Documents (collectively, an “Event of Default”).
            [emphasis added]

      Article 6 (“Prepayment”) provides that the Borrower may not prepay the
Note prior to October 1, 2007 (the “Lockout Period”), or within six (6) months
from the maturity date (October 1, 2012), i.e., April 1, 2012. During the period
between October 1, 2007 and April 1, 2012, however, Article 6(A)(1) gives the
Borrower, GCMM, the “right or privilege to prepay all (but not less than all) of
the unpaid principal balance of this Note” as well as all interest to the
Prepayment Date, the interest due “to and including the first day of the
calendar month immediately following the Prepayment Date,” payment of any
other sums due under the Note and related security instruments, the Release
Fee, and, most relevantly, the Prepayment Consideration. Article 6(A)(1) also
provides the formula for calculating the Prepayment Consideration.
      Article 6(A)(1) also discusses prepayment in the event of a default:
            If a Default Prepayment (defined herein) occurs,
            Borrower shall pay to Lender the entire Debt,

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                                No. 13-10461
            including, without limitation,      the   Prepayment
            Consideration (defined below).

            For purposes of this Note, the term “Default
            Prepayment” shall mean a prepayment of the principal
            amount of this Note made during the continuance of
            any Event of Default or after an acceleration of the
            Maturity Date under any circumstances, including,
            without limitation, a prepayment occurring in
            connection with reinstatement of the Security
            Instrument provided by statute under foreclosure
            proceedings or exercise of a power of sale, any
            statutory right of redemption exercised by Borrower or
            any other party having a statutory right to redeem or
            prevent foreclosure, any sale in foreclosure or under
            exercise of a power of sale or otherwise. [emphasis
            added]

     The only other potentially relevant provision is Article 6(A)(3), which
provides:
            Borrower shall pay the Prepayment Consideration due
            hereunder whether the prepayment is voluntary or
            involuntary (including without limitation in
            connection with Lender’s acceleration of the unpaid
            principal balance of the Note) or the Security
            Instrument is satisfied or released by foreclosure
            (whether by power of sale or judicial proceeding), deed
            in lieu of foreclosure or by any other means.

                                     IV.
     Under Colorado law, it is relatively simple to decide the only issue
presented here, whether the acceleration of the Note due to GCMM’s default
by nonpayment under Article 4 triggered the obligation to pay the Prepayment
Consideration under Article 6. Article 4 of the Note, concerning acceleration
and default, provides for acceleration of principal, interest owed, and other
things. As the Lender concedes, the only language that could possibly apply


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                                  No. 13-10461
to a prepayment penalty is the acceleration of “all sums, as provided in this
Note” or “all other moneys agreed or provided to be paid by Borrower in this
Note, the Security Instrument or the Other Security Documents.” Under this
plain language, we must look elsewhere in the note to determine what “other
sums” or “other moneys” must be paid.        Logically, it cannot include every
potential payment referred to in the Note or else contract conditions would
mean nothing.
      To determine whether the Prepayment Consideration was “agreed or
provided to be paid by Borrower in this Note,” we must look to Article 6,
concerning prepayment. There are several conditions that might trigger the
obligation to pay the Prepayment Consideration, but none requires the
Borrower to pay the Prepayment Consideration absent an actual prepayment,
which did not occur here.
      First, Article 6(A)(1) gives the Borrower the “right or privilege” to prepay
“all (but not less than all) of the unpaid balance of this Note” subject to paying
the Prepayment Consideration but does not require it to do so.           Because
GCMM did not prepay, this provision cannot apply.
      Second, also under Article 6(A)(1), the Borrower is obligated to pay in the
event of a Default Prepayment, which is defined as a prepayment occurring
during a default or acceleration “under any circumstances.” Again, the plain
language requires an actual prepayment to trigger the obligation to pay the
Prepayment Consideration, and no prepayment occurred here.
      Third and finally, Article 6(A)(3) provides that “Borrower shall pay the
Prepayment Consideration due hereunder whether the prepayment is
voluntary or involuntary (including without limitation in connection with
Lender’s acceleration of the unpaid principal balance of the Note) or the
Security Instrument is satisfied or released by foreclosure (whether by power

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                                  No. 13-10461
of sale or judicial proceeding), deed in lieu of foreclosure or by any other
means.”    Again, the plain language contemplates an actual prepayment,
which did not occur here.
      Moreover, there is no language in the Note which would deem the
prepayment to have been made in the event of acceleration for any reason. It
is not difficult to achieve that goal. See, e.g., In re CP Holdings, Inc., 332 B.R.
at 382, in which the note provided, in part: “The undersigned [borrower] agrees
that if the holder of this Note [lender] accelerates the whole or any part of the
principal sum . . . the undersigned waives any right to prepay said principal
sum in whole or in part without premium and agrees to pay a prepayment
premium.” (emphasis added)). The Note here evidences no such clear intent.
      Under general Colorado law, a lender is not entitled to a prepayment
penalty when the lender chooses to accelerate the note.           Absent a clear
contractual provision to the contrary or evidence of the borrower’s bad faith in
defaulting to avoid a penalty, the lender’s decision to accelerate acts as a
waiver of a prepayment penalty. Here, that general rule controls.
      The plain language of the contract does not require the payment of the
Prepayment Consideration in the event of mere acceleration.             Quite the
opposite, in fact: the plain language plainly provides that no Prepayment
Consideration is owed unless there is an actual prepayment, whether
voluntary or involuntary.     The Lender has advanced no viable alternative
interpretation of the Note.
                                        V.
      Accordingly, we affirm.




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