Clear Contract Language Is Nevertheless Ambiguous And Must Be Interpreted With The Help Of Extrinsic Evidence When Application Of The Clear Language Would Produce An Absurd Result
BKCAP, LLC v. CAPTEC FINANCIAL TRUST 2000-1 (July 13, 2009)
Quality Dining, Inc. has several subsidiaries (the "Borrowers") that own franchise restaurants, including Burger Kings, in several states. In 1999, as part of a significant refinancing initiative, the Borrowers obtain $49 million in financing in a total of 34 separate loans. One lender’s form agreement included a penalty for prepayment. At Borrowers’ insistence, the lenders modified the notes to allow a prepayment without penalty after 10 years. The notes included a formula for computing the new penalty. Eight years later, Borrowers prepaid 21 of the notes held by two of the lenders. The parties calculated the prepayment penalty as the difference between a stream of monthly payments through year 10 at the U.S. treasury rate versus at the actual rate. The Borrowers provided notice of prepayment with respect to the remaining notes, which were held by a third lender. Their notice was contingent on the lender accepting the same prepayment penalty formula. When the lender refused to so, the Borrowers filed suit seeking a declaratory judgment that their interpretation of the penalty provision was correct. The district court granted the lender's motion for summary judgment, concluding that the contract language was unambiguous and supported the lender's interpretation. The Borrowers appeal.
In their opinion, Judges Bauer, Sykes and Tinder reversed and remanded. The Court looked to state law to provide the substantive rules for resolving the contract dispute. Here, the contracts were governed by the laws of Michigan, Indiana and Pennsylvania. The Court first applied general rules of contract interpretation consistent in all the jurisdictions. The Court first looked at the plain meaning of the contract language with the goal of determining the intent of the parties. If the language is unambiguous, it would not consider extrinsic evidence. On the other hand, if the language is ambiguous, a trier of fact must examine extrinsic evidence to determine intent. Here. although the Court found the contract language clear, it also found that applying the clear language would produce absurd results. It concluded that the prepayment premium would always be negative, a result obviously not contemplated by these rational business entities. Even clear language can be ambiguous, said the Court, if it does not make economic sense. Both the lender and the Borrowers proposed interpretations that made economic sense. The Court rejected each, however, concluding that neither found support in the actual contract language. The Court concluded that the meaning of the formula is a question of fact to be determined after consideration of extrinsic evidence.
