Appeals from the United States District Court for the Northern District of Indiana, South Bend Division. No. 3:07-cv-00637-CAN-Christopher A. Nuechterlein, Magistrate Judge.
The opinion of the court was delivered by: Tinder, Circuit Judge.
Before BAUER, SYKES, and TINDER, Circuit Judges.
This case demonstrates that even experienced, sophisticated business entities can encounter difficulty when drafting carefully negotiated loan documents. Since July 2007, the plaintiffs and the defendant have been at loggerheads over the meaning of just a handful of lines out of several hundred in their five-page, single-spaced Note. Unfortunately, this appeal cannot bring their stalemate to an end, and more litigation lies ahead. However, while disputes over the meaning of language in loan documents can be somewhat dry, this one is more interesting than most such cases.
The plaintiffs, special purpose entities that we refer to as "Borrowers," obtained several $1 to 2 million mortgage finance loans from the defendant, or "Lender." Each of the loans required Borrowers to pay off the debt at around 10% interest over 15 to 20 years. Borrowers had the right to pay off the loans early, but subject to a "Prepayment Premium" if they prepaid before ten years into the loan terms. When Borrowers tried to prepay the loans after only eight years, the parties disagreed on how to calculate the Prepayment Premium. Their dispute led to this diversity action, in which the parties seek a declara-tory judgment as to the correct interpretation of the Prepayment Premium. The district court granted summary judgment in favor of Lender, concluding that the unambiguous contract language supported Lender's interpretation. We conclude, however, that the contract is ambiguous, making it inappropriate to resolve the meaning of the contract at the summary judgment stage. We therefore remand for a trial on the question of the parties' intended meaning of the Prepayment Premium.
Borrowers are wholly owned subsidiaries of "Quality Dining, Inc.," which owns several franchise restaurants, mostly "Chili's" and "Burger King," in several states that include Indiana, Michigan, and Pennsylvania. In 1999, Quality Dining decided to refinance a significant portion of the bank debt associated with operating these restau-rants. Borrowers negotiated with "Captec Financial" and "GE Capital" to obtain approximately $49 million in mortgage financing to pay down Quality Dining's bank debt. The total $49 million consisted of 34 separate loans of about $1 to 2 million, each secured by one of Quality Dining's restaurants. The interest rate was 9.79% for the "Burger King" loans and 9.94% for the "Chili's" loans, and the various loans had terms of either 15 or 20 years.
During the course of negotiations, Borrowers received Captec Financial's standard-form Promissory Note for its "Franchise Loan Program." The Note allowed Borrowers to pay off their loans early, but only if they paid a "Pre-payment Premium," defined as:
equal to the present value (computed at the Reinvestment Rate) of the difference between a stream of monthly payments necessary to amortize the outstanding principal balance of this Note at the Stated Rate and a stream of monthly payments necessary to amortize the outstanding principal balance of this Note at the Reinvestment Rate (the "Differential"). In the event the Differential is less than zero, the Prepayment Premium shall be deemed zero. . . .
Put another way, if interest rates fell and Borrowers decided to prepay the Note, they would have to pay a penalty equal to the difference between:
(1) the present value of the stream of monthly payments provided by the loan's amortization schedule from the date of prepayment, computed at the "Reinvestment Rate"-i.e., the U.S. Treasury rate at the date of prepayment; and
(2) the present value of the same stream of monthly payments computed at the "Stated Rate"-i.e., the stated interest rate of the loan.
Borrowers were unsatisfied with the standard-form Prepayment Premium. They wanted the right to prepay without penalty after the first ten years of the loan terms. Captec Financial agreed to this modification and redrafted the Note to define the Prepayment Premium as:
equal to the positive difference between the present value (computed at the Reinvestment Rate) of the stream of monthly payments of principal and interest under this Note from the date of the pre-payment through the tenth (10th ) anniversary of the First Full Payment Date at the Stated Rate . . . and the outstanding principal balance of this Note as of the date of the prepayment (the "Differential"). In the event the Differential is less than zero, the Prepayment Premium shall be deemed to be zero.
The revised Note also required Borrowers to provide a "Prepayment Notice" at least thirty days before exercising their right to prepay.
In August 1999, Borrowers executed thirty-four of these Notes, representing eighteen loans originating with Captec Financial and sixteen originating with GE Capital. All of the Notes contained identical language, including the revised definition of the Prepayment Premium quoted above. Captec Financial assigned five of its Notes to ...