Case 2:11-cv-01165-BSJ Document 737 Filed 11/30/12 Page 1 of 11
Jeremy M. Hoffman (5290)
YOUNG HOFFMAN, LLC
170 South Main Street, Suite 1125
Salt Lake City, Utah 84101-1639
Telephone: (801) 359-1900
Facsimile: (801) 359-1980
Email: jmhoffman@yahlaw.com
Robert S. Glass (10824)
Robert P. Skeith (16307)
Philip D. Hixon (19121)
R. Charles Wilkin III (19491)
GLASS WILKIN, PC
1515 South Utica, Suite 250
Tulsa, Oklahoma 74104
RGlass@glasswilkin.com
RSkeith@glasswilkin.com
PHixon@glasswilkin.com
Cwilkin@glasswilkin.com
Pro Hac Vice
Attorneys for Intervenor, Arvest Bank
IN THE UNITED STATES DISTRICT COURT
DISTRICT OF UTAH, CENTRAL DIVISION
SECURITIES AND EXCHANGE
COMMISSION,
INTERVENOR ARVEST BANK’S REPLY
IN SUPPORT OF MOTION FOR RELIEF
FROM RECEIVERSHIP ORDER
Plaintiff,
vs.
MANAGEMENT SOLUTIONS, INC., a
Texas Corporation; WENDELL A
JACOBSON; ALLEN R. JACOBSON,
Civil No. 2:11-CV-01165
Honorable Bruce S. Jenkins
Defendant.
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Intervenor Arvest Bank (“Arvest”), respectfully submits its Reply in Support of its
Motion for Relief from Receivership Order (Docket No.’s 578 and 5791), requesting,
alternatively, that the Court: (1) require the Receiver to relinquish certain property demanded
from Pryor Creek Apartments, LLC (“Pryor Creek”), but belonging to Arvest, held in an
account at Arvest (“Disputed Property”); (2) enjoin the Receiver from moving, dissipating, or
commingling the Disputed Property or future rents from the Pryor Creek Apartments until such
time as the Court has determined ownership of the Disputed Property; and/or (3) enforce the
settlement terms previously agreed to by the Receiver; and/or (4) lift the stay imposed by the
Receivership Order, allowing Arvest to initiate foreclosure proceedings against Pryor Creek’s
real property to protect Arvest’s certain property, including adjudication of ownership thereof,
and its perfected security interests in Pryor Creek’s real property.
A.
Arvest is Entitled to Receive Rents
The Receiver contends that Arvest has no interest in any of the Pryor Creek Funds
obtained prior to its demand for rents. The Receiver’s argument is not supported by the language
of the applicable loan documents and is contrary to Oklahoma law, which controls in this case.
First, the Assignment of Rents expressly grants Arvest ownership in the rents whereby the
borrower merely had a license to collect the rents until default occurred. Under this provision,
Arvest had the immediate right to the rents upon execution of the assignment. This right is
independent of Arvest’s possession of the property or any demand for turnover of the rents. See
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The primary Memorandum filed by Arvest Bank in Support of this Motion is now docketed as No. 734.
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Teachers Ins. & Annuity Assoc. of America v. Oklahoma Tower Assoc. Ltd. Partnersip, 1990 OK
97, 798 P.2d 618, 622.2
Likewise, the two mortgages filed on January 12, 2001 and February 4, 2002 (Exhibits B
and D, Affidavit of Cary Utz, Docket No. 525), expressly provide as follows: “The Mortgagor
irrevocably appoints the Mortgagee its lawful attorney in fact, with Power of Attorney in its
name and stead to collect any income, rents, issues and profits arising from or accruing at any
time that are due under each of the leases, contracts and agreements, written or oral, now existing
or existing in the future with reference to the Mortgaged Property …” See Exhibits B-2 and D2. This appointment of the right of collection was not contingent upon a subsequent default by
the Mortgagee. Thus, the Mortgagor (now Arvest) was granted the present right to collect all
rents derived from the property at the time the Mortgages were filed. Under the holding in
Teachers, Arvest’s right to receive the rents derived from the property is wholly independent of
any demand for the rents or default of the Mortgagee. Cases from other jurisdictions applying
other state’s laws are simply inapplicable
B.
None of the Notes Have Been Extinguished
The Assignment of Rents secures repayment of “the loan evidenced by the promissory
note or credit agreement described [in the assignment].” See Exhibit E-1. The note described in
the Assignment of Rents is a $1,880,000 Multipurpose Note and Security Agreement dated
February 4, 2002. See Exhibit C. The express terms of this Note provide that the same may be
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Notably, on January 19, 2012, Arvest made written demand upon the Receiver for turnover of
rents and advised that it is the owner of rents derived from the subject property. See Exhibit Q.
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renewed or the maturity date extended without affecting the rights of the lender on any lien upon
any property given as collateral for the Note. See Exhibit C-2, ¶2.
The Receiver asserts that the balance of the Note secured by the Assignment of Rents has
been reduced to zero and the note has been extinguished. However, in reality, the note has
simply been extended and renewed, with the balance owing thereon having been combined with
the balance due on another note. Under the terms of the Debt Modification Agreement dated
February 27, 2008 the $1,881,049.53 balance of this note was merely combined with the balance
due on the first note dated January 12, 2001. See Exhibit N.
Notably, the lender did not and has not released the Assignment of Rents nor has it
released any of its other security for repayment of any of the indebtedness.
This fact is
irrefutable evidence of the parties’ unequivocal intent for the lender to maintain all of its security
for repayment of all the outstanding indebtedness. The Receiver’s argument to the contrary is
not supported by the law. “Whether a new note and mortgage operates as a renewal or payment
depends upon the agreement of the parties, and where no receipt is given for the amount of the
debt, and no release or satisfaction of the mortgage is executed, the presumption is that the later
note and mortgage were not intended to pay and discharge the earlier. Instead of a presumption
of payment or settlement of the original mortgage indebtedness by the execution of a renewal
note, and thereby a release of the security, the presumption is that upon the execution of the new
note or bond, the same security is available for its payment.” 55 AM.JUR.2d Mortgages, §351
(2012); See also Oil Field Gas Co. v. International Supply Co., 1940 OK 250, 103 P.2d 91 (fact
that debt was restated in new form, old note was not surrendered, and lack of agreement to
discharge old note established that old note not discharged).
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C.
The Receiver and Arvest Have Entered into a Binding Settlement Agreement
As shown by the Points of Discussion Memorandum and the Affidavit of Cary Utz,
Arvest and the Receiver reached agreement as to all material terms of a Forbearance Agreement.
The Receiver submitted no admissible evidence to dispute the facts properly established by
Arvest Bank’s submission. Thus, the undisputed evidence of record demonstrates that the only
thing left to do for the parties was to complete the formal written settlement agreement and
execute it. According to the factually unsupported Response filed by the Receiver, after the
forbearance terms were agreed upon, “[T]he Receiver later determined that the Forbearance
Agreement was not in the best interests of the Receivership estate, and it notified Arvest that it
would not enter the Forbearance Agreement. This decision was prompted by the Receiver’s
decision to pursue instead a prospective bulk sale of Receivership assets.” Receiver’s Response,
¶28.
Taking this argument at face value, it clearly appears that the Receiver merely changed
his mind about the settlement agreement terms he had committed to and implies that his
agreement to enter into the Forbearance Agreement was conditioned on the Receivership Estate
not receiving a better deal in the interim. However, no such condition was negotiated by the
Receiver with Arvest and no such condition can be implied into the terms of the parties’
agreement.
A construction of a contract which would impose a condition upon a party’s
performance or upon the existence of a contract is purposefully avoided by the Courts. Before a
condition can be found, it must be unambiguously expressed and agreed upon by the parties.
The law on this point is well established: “A construction which will make a contract dependent
upon future contingencies is not favored and courts will not construe contract stipulations as
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conditions precedent unless required to do so by the plain, unambiguous language of the
contract.” In the Matter of Dillon’s Estate, 575 P.2d 127, 131 (Okl.App. 1977); See also Byler v.
Great American Ins. Co., 395 F.2d 273, 276 (10th Cir. 1968); Kasishke v. Baker, 146 F.2d 113,
115 (10th Cir. 1944).
As stated by the Court in Consarc Corp. v. Marine Midland Bank, N.A., 996 F.2d 568,
575 (2d Cir. (N.Y.) 1993):
[W]here the parties reach an agreement through correspondence, intending that
the agreement shall be subsequently expressed formally in a single paper or
document, which, when signed, should be the evidence of what had been agreed
upon, the obligatory character of the agreement cannot ordinarily be defeated by
the failure of either party to sign the formal contract. If the Court can see from
the writings or correspondence that the minds of the parties have met, that a
proposal has been submitted by one party which has been accepted by the other,
and that the terms of the contract have been in all respects definitely agreed upon,
one of the parties cannot evade or escape from his obligation by refusing to sign
the formal contract, which the parties understood was subsequently to be drawn
and executed.
[Emphasis supplied]
It is immaterial what intent a contracting party claims he may have had if a reasonable
person would have understood his words as importing a promise to do something if given a
requested exchange. “The meeting of the minds, which is essential to the formation of a
contract, is not determined by the secret intentions of the parties but by their expressed or
manifested intentions, which may be wholly at variance with the former.” 17A AM. JUR. 2D
Contracts §28; See also, Howell v. Smith, 128 S.E.2d 144, 146 (N.C. 1962); First Valley Leasing,
Inc. v. Goushy, 795 F. Supp. 693, 6966-697 (D.N.J. 1992); Barry v. Barry, 172 F.3d 1011 (8th
Cir. 1999) (a party’s private, unexpressed thoughts cannot alter the meaning of the words
uttered); Slade v. Phelps, 446 S.W.2d 931, 933 (Tex.App. 1969).
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Further, once a contract is formed, a party cannot simply change its mind and refuse to
proceed. Contracts are determined under a standard of whether the parties have manifested an
“objective” intent to be bound. As held by Judge Learned Hand in his often quoted opinion:
A contract has, strictly speaking, nothing to do with personal, or individual, intent
of the parties. A contract is an obligation attached by the mere force of law to
certain acts of the parties, usually words, which ordinarily accompany and
represent known intent. If, however, it were proved by twenty bishops that either
party when he used the words intended something else than the usual meaning
which the law imposes on them, he would still be held, unless there were mutual
mistake or something of the sort.
Hotchkiss v. National City Bank, 200 F. 287, 293 (S.D.N.Y. 1911); See also E. ALLEN
FARNSWORTH, CONTRACTS, §3.6 (2d ed. 1990) (“Victory of objective theory”)
The only relevant inquiry with respect to the terms of a contract are those terms which
were communicated between the parties. If this were not the rule of law, any contract could be
disavowed at the whim of either party. The mere fact that one party may have had a “different
subjective idea” than what was expressed does not prevent the formation of a contract. Leitner v.
Braen, 143 A.2d 256, 260 (1958). If a party’s words and acts, judged by a reasonable person,
show an intent to agree, the party’s real, but unexpressed, state of mind is not relevant. Lucy v.
Zehmer, 84 S.E.2d 516, 522 (Va. 1954); Gibson v. City of Cranston, 37 F.3d 731, 737 (1st Cir.
1994); Barnes v. Treece, 549 P.2d 1152, 1155 (Wash.App. 1976).
Further, “[I]t is universally agreed that a contract may be made to make a future
contract.” Fry v. Foster, 65 P.2d 1224, 1225 (Okla. 1937). Indeed, the very definition of the
word “contract” supports this conclusion: “A contract is an agreement to do or not to do a
certain thing.” OKLA. STAT. ANN. tit. 15, §1. The Receiver’s agreement to proceed with the
Forbearance Agreement is an agreement to “do a certain thing.”
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See also, East Central
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Oklahoma Elec. Co-op., Inc. v. Oklahoma Gas & Elec. Co., 505 P.2d 1324, 1328 -1329 (Okla.
1973) (an agreement to make and execute a written agreement is as valid as the written contract
itself would be if executed); quoting, Western Bank v. Morrill, 420 P.2d 119 (Or. 1966) (an
action at law will lie for breach of an agreement to execute a written agreement); See also,
Western Contracting Corp. v. Sooner Const. Co., 256 F.Supp. 163 (W.D.Okla. 1966); Sanders v.
Pottlitzer Bros. Fruit Co., 39 N.E. 75 (N.Y. 1894); RESTATEMENT (SECOND) OF
CONTRACTS, §27
The Receiver cannot now escape his legal obligations by his own act of refusing to
proceed to sign an agreement which he became contractually bound to sign. This tactic has been
tried by many defendants before with poor results. Accord, Pravorne v. McLeod, 383 P.2d 855
(Nev. 1963) (specific performance ordered when party agreed to sign contract and subsequently
failed to do so); Consarc Corp. v. Marine Midland Bank, N.A., 996 F.2d 568, 575 (2d Cir. (N.Y.)
1993) (party cannot evade her obligation by refusing to sign formal contract); Dohrman v.
Sullivan, 220 S.W.2d 973 (Ky. 1949) (failure of seller to sign formal contract for sale of land
after agreement already reached through correspondence); East Central Oklahoma Elec. Co-op.,
Inc. v. Oklahoma Gas & Elec. Co., 505 P.2d 1324, 1328 -1329 (Okla. 1973) (parties may have a
binding contract even if they have an understanding that an agreement should be formally
drawn). The correspondence exchanged by counsel for the parties clearly demonstrates an
agreement was reached at least on all material points, and the Receiver has submitted no
admissible evidence to the contrary. The Court should summarily enforce this Agreement.
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D.
There is Insufficient Equity in The Property to Allow for Distributions to Investors
The appraisals received by the Receiver and Arvest obviously vary significantly.
Notably, the Receiver has failed to disclose the actual purchase price allocated for the subject
property in the bulk sale agreement that is pending. The Receiver has not established that, as of
the closing date, the purchase price for the subject property (net of sale costs) will be sufficient to
pay the indebtedness owed to Arvest in full (inclusive of default interest, late fees and other
charges Arvest is contractually entitled to recover). Nor has the Receiver established that he will
have sufficient net sale proceeds left over to provide a return to the investors that would justify
the Receiver’s efforts to retain the property. Moreover, the Receiver has recently indicated that
the bulk sale process may not be the appropriate resolution of this receivership and has sought
direction from the Court with respect to how it should proceed.
During the pendency of the Receivership (which has been proceeding for nearly a full
year), Arvest has not received any of the rents from the property and has not received a single
interest or principal payment on the notes. The Receiver has had plenty of time to determine the
best course of action for this property but has not made any real progress. Arvest has over
$6,000,000 tied up in the subject property. Instead of dealing with Arvest in a fair and balanced
manner, the Receiver has taken all the rents, agreed to forbearance terms and then backed out,
refused to make any payment of interest or principal, and otherwise failed to make any
concession to Arvest. The Receiver of course desires to retain the status quo. But, from Arvest’s
viewpoint (and apparently the viewpoint of numerous other secured creditors) this is not a status
quo worthy of preservation.
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The Court in SEC v. Vescor Capital Corp., 599 P.3d 1189 (10th Cir. 2010) certainly did
not intend to give a receiver an unlimited amount of time to “investigate” claims. Indeed, the
facts involving this piece of real estate are not at all complex and have been fully vetted in the
few briefs filed by Arvest and the Receiver. Most all the funds utilized to acquire and improve
the property were provided or committed by Arvest long before the alleged Ponzi scheme
became involved with the property. The Receiver has not shown it can sell the property for more
than is owed Arvest. As a result, there will be nothing available for distribution to the investors
from the sale of the property and the Court should enter its Order granting Arvest relief from the
stay imposed by the Receivership Order.
WHEREFORE, Arvest Bank moves the Court to: (1) require the Receiver to relinquish
certain property demanded from Pryor Creek Apartments, LLC (“Pryor Creek”), but belonging
to Arvest, held in an account at Arvest (“Disputed Property”); (2) enjoin the Receiver from
moving, dissipating, or commingling the Disputed Property and future rent until such time as the
Court has determined ownership of the Disputed Property; and/or (3) enforce the settlement
terms previously agreed to by the Receiver; and/or (4) lift the stay imposed by the Receivership
Order, allowing Arvest to initiate foreclosure proceedings against Pryor Creek’s real property to
protect Arvest’s certain property, including adjudication of ownership thereof, and its perfected
security interests in Pryor Creek’s real property, and granting Arvest all other relief to which it
may be entitled under law or equity.
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Respectfully submitted,
By:___________/s/____________________
Jeremy M. Hoffman (5290)
YOUNG HOFFMAN, LLC
170 South Main Street, Suite 1125
Salt Lake City, Utah 84101-1639
Telephone: (801) 359-1900
Facsimile: (801) 359-1980
Email: jmhoffman@yahlaw.com
Attorneys for Intervenor, Arvest Bank
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