Opinion
10 Civ. 2555 (CM)
October 19, 2010, Decided. October 19, 2010, Filed
For ABC, Plaintiff: Geoffrey Potter, LEAD ATTORNEY, Patterson, Belknap, Webb & Tyler LLP, New York, NY.
For American Capital Financial Services, Inc., Plaintiff: Geoffrey Potter, LEAD ATTORNEY, Anjan Mishra, Benjamin David Friedman, David Wayne Dykhouse, Jason Scott Gould, Jo Backer Laird, Patterson, Belknap, Webb & Tyler LLP, New York, NY.
For American Capital, Ltd., Plaintiff: David Wayne Dykhouse, Geoffrey Potter, LEAD ATTORNEYS, Patterson, Belknap, Webb & Tyler LLP, New York, NY.
Plaintiff American Capital Financial Services, Inc. ("Plaintiff") alleges that, as of March 19, 2010, it is owed $9,505,593.26 by Defendant Berry-Hill Galleries, Inc. ("Defendant") pursuant to a Revolving Credit and Note Purchase Agreement (the "Credit Agreement"). Plaintiff moves for summary judgment in this amount because Defendant defaulted on the loan that was made pursuant to the Credit Agreement. Plaintiff also alleges that it is entitled to judgment in the amount of $4,436.99 for every day after March 19, 2010, as well as the cost and disbursements incurred in prosecuting this action. Finally, Plaintiff seeks an order requiring that Defendant's artwork?most of which Plaintiff has already seized pursuant to an order from this Court—be released to Plaintiff so Plaintiff can sell it, as provided in the parties' Pledge and Security Agreement (the "Security Agreement") to satisfy its money judgment.
Defendant does not deny that it owes Plaintiff money. However, it disputes the amount of the debt, and opposes the entry of summary judgment on that basis.
For the reasons set forth below, the Court grants Plaintiff's motion for summary judgment, and refers this matter to the Magistrate Judge for an inquest on costs and fees.
BACKGROUND
Plaintiff—a wholly owned subsidiary of American Capital, Ltd.—is a Delaware corporation with its principal place of business in Bethesda, Maryland. (Def.' 56.1 p. 1.) Plaintiff acted as the agent for the servicing of the loan at issue in this case. (Def.' 56.1 p. 1.)
Defendant is a New York corporation with its principal place of business in New York, New York. (Def.' 56.1 p. 1.) It specializes in the sale of American fine art. (Def.' 56.1 p. 1.) James Berry Hill and his son David Hill are, respectively, the Chairman and President of Defendant, although David Hill resigned as President, effective sometime in late March or early April 2010. (Def.' 56.1 p. 1-2.)
On March 2, 2007, Defendant executed three loan agreements with Plaintiff, with the initial amount allocated as follows: (I) $11,200,000 related to a real estate loan on the "Gallery Property"; (2) $15,700,000 secured by a painting by Edward Hopper entitled "Chair Car"; and (3) $7,950,000 as part of an $8,800,000 revolving credit facility used to pay Defendant's Chapter 11 bankruptcy creditors and other fees associated with the bankruptcy proceedings from which Defendant emerged in 2007. Only the Credit Agreement—the revolving credit facility—is at issue in this case, and it has been amended on three occasions: January 15, 2008, April 17, 2008, and May 19, 2008. (Def.' 56.1 p. 2.)
Of the $8,800,000 available under the Credit Agreement's credit facility, Defendant borrowed $7,950,000. As security for this loan, Defendant granted a security interest in all of its assets, including all of its artwork (the "Art Collateral"). (Def.' 56.1 p. 2.) Upon Defendant's default, according to the Credit Agreement, Plaintiff may, by written notice to Defendant, terminate the Credit Agreement and/or declare all or any portion of the unpaid balance and accrued interest due and payable. (Def.' 56.1 p. 2-3.) Additionally, the Credit Agreement provides that after an event of default, Plaintiff is entitled to receive additional compensation of 5.0% interest on the outstanding principal of the loan—the default interest. (Def.' 56.1 p. 3.)
The Security Agreement, executed on March 2, 2007, grants Plaintiff a continuing security interest in the Art Collateral and all the proceeds arising from any sale and disposition of the Art Collateral. (Def.' 56.1 p. 3-4.) Plaintiff duly perfected its first-priority security interest in the Art Collateral on March 12, 2007, by filing a Uniform Commercial Code ("UCC") financing statement. (Def.' 56.1 p. 3.). The Security Agreement expressly permits Plaintiff to exercise the rights and remedies of a secured creditor against the collateral, and gives Plaintiff the right to "collect, receive, appropriate and realize upon the Collateral, or any part thereof, and/or may forthwith sell, lease, assign, give option or options to purchase or otherwise dispose of and deliver the Collateral . . . in one or more parcels at public or private sale or sales, at any exchange, broker's board or office of [Plaintiff] . . . or elsewhere upon such terms and conditions as it may deem advisable and at such prices as it may deem best, for cash or on credit or for future delivery . . . ." (Def.' 56.1 p. 5.) Additionally, the Security Agreement provides that Defendant must assist Plaintiff with any proposed disposition of the Art Collateral, and that Defendant pay all reasonable costs and expenses incurred in connection with this proposed disposition or "incidental to the care and safekeeping of any of the Collateral . . . including, without limitation, reasonable attorneys' fees and disbursements . . . ." (Def.' 56.1 p. 5-6)
Multiple events of default, as defined by Section 8 of the Credit Agreement, have occurred. (Def.' 56.1 p. 6.) Plaintiff notified the Defendant of this default on its loan obligation in writing on three occasions. The first such occasion was a letter sent on February 1, 2010, after numerous conversations in which Plaintiff communicated to Defendant that it was in default under the Credit Agreement. (Def.' 56.1 p. 7-8.) As detailed in Schedule 1 to the February 1, 2010 Notice of Default, Defendant's payment and covenant defaults at the time of the written notice included: (1) failing to timely pay the cash interest due on the Notes pursuant to Section 3.1; (2) failing to make Excess Cash Flow payments pursuant to Section 3.5(b); (3) failing to maintain the minimum Fixed Charge Coverage Ratio required by Section 7.3(a)(i); (4) failing to deliver Fiscal Year 2008 audited financial statements as required by Section 7.1(e)(i); (5) failing to deliver monthly written narrative reports as required by Section 7.1(e)(iii)(A); (6) incurring additional unsecured Indebtedness in violation of Sections 7.2(a)(xi) and 7.2(g); and (7) failing to pay the Administration Fee in full on the anniversary of the Closing Date as required by Section 3.13. (Def.' 56.1 p. 7.)
On February 19, 2010, Plaintiff discovered that Defendant had sold 223 works of art, some of which were Art Collateral. The proceeds of the sale were, according to the Defendant, deposited into a bank account that Plaintiff could access (Def.' 56.1 p. 8.); Plaintiff disputes that. As soon as it learned of the sales, Plaintiff sent its second written notice of default to the Defendant, on February 23, 2010. (Def.' 56.1 p. 8-9.) Plaintiff sent its third written notice of default to Defendant on March 22, 2010. (Def.' 56.1 p. 9.) In this third written notice of default, Plaintiff notified Defendant that its loan had matured on March 2, 2010 (the "Maturity Date"), that Defendant had defaulted pursuant to Section 8.1(a) by failing to make principal payments on the Maturity Date, and that the entire principal balance, plus accrued interest, fees, expenses and other charges had become immediately due and payable. (Def.' 56.1 p. 9.)
Defendant also defaulted under the Security Agreement by failing to assemble and make available the Art Collateral for Plaintiff. (Def.' 56.1 p. 11.) In early March 2010, after learning of certain violations of the Credit Agreement by Defendant, Plaintiff demanded, pursuant to Section 5.6 of the Security Agreement, that Defendant move all the Art Collateral then held in its gallery to Plaintiff's storage space at the bonded storage facility of Cirkers Fine Art Storage & Logistics ("Cirkers"). (Def.' 56.1 p. 11.) Although Defendant selected 31 of its artworks to transfer to Cirkers, Defendant never actually made the transfer, and thereby defaulted under Section 5.6 of the Security Agreement. (Def.' 56.1 p. 12.)
On March 21, 2010, Plaintiff moved for an order of seizure and a preliminary injunction. On March 30, 2010, following a hearing, this Court entered its Findings of Fact and Conclusions of Law on American Capital's Application for an Order of Seizure and Motion for a Preliminary Injunction. The Court found that as of March 19, 2010, Defendant owed Plaintiff $9,505,593.26, the entire balance of the loan under the Credit Agreement, and that this amount increases at the per diem rate of $4,436.99, plus the fees and expenses associated with this litigation. (Def.' 56.1 p. 10.)
On April 12, 2010, Plaintiff moved for summary judgment, arguing that there is no genuine issue as to any material fact relating either to Defendant's breaches of both the Credit Agreement and the Security Agreement, or the amount of damages to which it is entitled. According to Plaintiff, Defendant owes, as of March 19, 2010, $9,505,593.26. This amount includes, inter alia, (i) $3,371.64 in unused line fees; (ii) $510,148.80 in PIK interest; and (iii) $771,374.40 in default interest from March 2008. Defendant disputes each of these three.
First, Defendant argues that it should not be required to pay a 0.50% charge on the unused portion of the $8,800,000 credit limit, because Plaintiff denied it access to the credit facility. (Hill Aff. ¶ 11.) Second, Defendant argues that it was told by Plaintiff that it would not be required to pay the PIK interest after Defendant sold the "Chair Car" painting in May 2009. (Def. Br. at 7.) James Hill asserts that he was informed by Plaintiff that it would not apply this fee following the sale of this painting, but does not elaborate any further on the details of the conversation. (Hill Aff. ¶ 12.) Third, Defendant disputes the amount of default interest, arguing that Plaintiff arbitrarily, and without factual basis, selected March 2008 as the date upon which it claims Defendant defaulted on the Credit Agreement. (Def. Br. at 7.) James Hill claims that Plaintiff made various representations to Defendant that appear to contradict Plaintiff's assertion in the ongoing litigation that March 2008 was the date of default. (Hill Aff. ¶ 13-15.)
DISCUSSION
I. Standard of Review
A party is entitled to summary judgment when there is no "genuine issue of material fact" and the undisputed facts warrant judgment for the moving party as a matter of law. Fed. R. Civ. P. 56(c): Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 106 S. Ct. 2505, 91 L. Ed. 2d 202 (1986). In addressing a motion for summary judgment, "the court must view the evidence in the light most favorable to the party against whom summary judgment is sought and must draw all reasonable inferences in [its] favor." Matsushita Elec. Indus. Co. Ltd. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S. Ct. 1348, 89 L. Ed. 2d 538 (1986). Whether any disputed issue of fact exists is for the Court to determine. Balderman v. United States Veterans Admin., 870 F. 2d 57, 60 (2d Cir. 1989). The moving party has the initial burden of demonstrating the absence of a disputed issue of material fact. Celotex v. Catrett, 477 U.S. 317, 323, 106 S. Ct. 2548, 91 L. Ed. 2d 265 (1986). Once such a showing has been made, the non-moving party must present "specific facts showing that there is a genuine issue for trial." Fed. R. Civ. P. 56(e). The party opposing summary judgment "may not rely on conclusory allegations or unsubstantiated speculation." Scotto v. Almenas, 143 F.3d 105, 114 (2d Cir, 1998). Moreover, not every disputed factual issue is material in light of the substantive law that governs the case. "Only disputes over facts that might affect the outcome of the suit under the governing law will properly preclude summary judgment." Anderson, 477 U.S. at 248. Finally, the nonmoving party "must do more than simply show that there is some metaphysical doubt as to the material facts." Matsushita Elec. Industries Co., 475 U.S. at 586. To withstand a summary judgment motion, sufficient evidence must exist upon which a reasonable jury could return a verdict for the nonmovant.
II. Measure of Damages
Defendant correctly suggests that a court may not award summary judgment to a plaintiff if the defendant offers evidence that raises a factual question as to the proper measure and amount of plaintiff's damages. Generally, damages is a question of fact, and therefore not a matter for summary judgment. If, however, there is no factual dispute as to the measure of damages—as is the case when damages are liquidated or otherwise stipulated—summary judgment on the issue would be appropriate. The same is true when damages are readily calculable from undisputed facts.
The question, therefore, is whether or not Defendant has sufficiently demonstrated a factual dispute as to the Plaintiff's calculation of damages. If it is clear from the terms of the Credit Agreement that Plaintiff's calculation is accurate, then Plaintiff would be entitled to summary judgment.
As discussed earlier, Defendant disputes three charges that constitute the $9,505,593.26 Plaintiff claims to be owed: (1) the unused line fee charge, (2) the PIK Interest charge, and (3) the default interest charge. The Court will discuss Defendant's arguments challenging these charges in turn in order to determine the validity of each purported factual dispute.
A. The Unused Line Fee
Section 3.12 of the Credit Agreement entitles Plaintiff to charge the Defendant a 0.50% fee on the unused portion of the $8,800,000 available under the Credit Agreement's revolving credit facility:
"The [Defendant] shall pay to the [Plaintiff] . . . an unused commitment fee . . . in an amount . . .of one-half of one percent (0.50%) per annum calculated upon the amount by which the [$8,800,000 available under the credit facility] exceeds the average daily principal balance of the outstanding [loan advances] during the immediately preceding month . . . ."
Plaintiff calculated that this charge amounts to $3,371.64.
Defendant argues, not that the amount was incorrectly calculated, but rather that it should not have to pay it, because it was denied access to the credit facility, and that it is therefore being charged for not using what it was unable to use. This argument lacks merit.
Section 4.2(b) entitles Plaintiff to withhold making advances under the credit facility in the event of default; once the Defendant defaulted, Plaintiff had the right to deny access to the credit facility. But nothing in the Credit Agreement suspends Defendant's obligation to pay the facility fee if Plaintiff invokes its right under Section 4.2(b). It is, therefore, irrelevant, for purposes of this discussion, that Defendant was denied access to the credit facility. Defendant fails to raise a disputed issue of material fact as to this item. (I note that Defendant raises only an issue of contract construction, which presents a question of law for the Court).
B. PIK Interest
Section 1.1(c) of the First Amendment to the Note Purchase Agreement (the "First Amended Credit Agreement") provides for a 3.0% PIK. interest charge:
"[I]nterest will be payable in kind on (and thereby increase) the outstanding principal amount of the Revolving Facility Notes (as such principal amount is increased from time to lime) at a rate equal to 300 basis points per annum . . . ."
Defendant does not dispute the applicability of this provision. It also does not contend that Plaintiff's calculation of the PIK interest charge in accordance with the provision is wrong. Instead, Defendant claims that "[Plaintiff] told [Defendant] that the fee would not be charged after [Defendant] sold the Chair Car painting in May 2009." (Def. Br. at 7.) On the basis of James Hill's statements, therefore, Defendant argues that Plaintiff waived its right to charge this PIK interest fee.
Defendant fails to raise a genuine issue of fact because, according to Section 10.2 of the Credit Agreement, all modifications and amendments must be made in writing:
"The provisions of this Agreement may be modified, waived or amended, but only by a written instrument signed by the [Defendant] and by the [Plaintiff] . . . upon satisfaction of the conditions set forth in Section 9.11."
Section 9.11 provides, inter alia:
"the [Plaintiff] shall not without the prior written consent of the Purchasers . . . extend any payment date or reduce the amount of any payment due hereunder, including any interest, principal or fees . . . ."
It is evident from the plain language of the Credit Agreement that any modification or amendment to its terms—which the termination of PIK interest charges would undoubtedly be—must be made in writing. Defendant offers no evidence to the contrary. Therefore, Defendant's evidence about a conversation fails to raise a genuine issue of fact.
C. Default Interest
Section 8.2(c) of the Credit Agreement entitles Plaintiff to charge the Defendant default interest in the event of default. Default interest is calculated at the rate provided by the agreement, plus 5.0%. This charge, according to the Credit Agreement, begins to accrue upon the occurrence of an event of default, and it applies during the continuance of an event of default.
"Purchasers" as used in the Credit Agreement and for purposes of this discussion refers to the Plaintiff.
Defendant does not dispute the applicability of the charge, but contends that Plaintiff is seeking default interest for a period when none was due. Defendant argues that March 2008 was not the date it defaulted on the Credit Agreement. (Def. Br. at 7.) Defendant argues that Plaintiff arbitrarily chose this date; it even suggests that this date is contradicted by Plaintiff's own Rule 56.1 Statement of Undisputed Material Facts, which says that March 2009 was the date of default. Plaintiff argues that this was a mere typographical error, and that March 2008 was the date Defendant failed to maintain its minimum Fixed Charge Coverage Ratio, thereby defaulting on the Credit Agreement. (Pl. Br. at 6-7.)
Determining the date of default is rather straightforward. A simple calculation, based on Defendant's financial statements, reveals the date on which Defendant failed to maintain its Fixed Charge Coverage Ratio (Defendant's first default). Defendant does not dispute that it defaulted by failing to comply with this financial covenant, but simply argues that a dispute exists as to when this default occurred. However, Defendant has acknowledged that it defaulted on this financial covenant as early as April 2008; as Plaintiff points out, in an email correspondence in April 2008, Defendant admits its failure to maintain the Fixed Charge Coverage Ratio in accordance with the Credit Agreement. (Pl. Br. at 7.) That admission against interest fixes the date of first default conclusively; while it could perhaps be earlier, it cannot possibly be later.
James Hill suggests that Plaintiff's position is contradicted by representations Plaintiff made to Defendant. (Hill Aff. ¶ 13.) One such representation, according to Hill, was the February 1, 2010 Notice of Default letter Plaintiff sent to the Defendant. In that letter. Plaintiff states that, as a consequence of Defendant's default, it would begin demanding payment of default interest retroactive to July 1, 2009. This may well imply that Plaintiff once thought Defendant to have defaulted for the first time in June 2009; that, however, is irrelevant if undisputed facts reveal that Defendant was actually in default at an earlier date. The February 1, 2010 letter explains that any forbearance by the Plaintiff in exercising its rights under the Credit Agreement does not constitute a waiver of Defendant's default or of Plaintiff's rights under the agreement. If defendant defaulted in March 2008, for instance, and Plaintiff sought default interest for only a portion of the time Defendant was in default, this would not constitute a waiver of its right to collect default interest for the entire period. That is, the contents of this letter (or any of the other correspondences between Plaintiff and Defendant referred to in the James Hill affidavit) do not override the rights and remedies delineated by the Credit Agreement.
Defendant failed to maintain the requisite Fixed Charge Coverage Ratio in March 2008. It was, therefore, in default under the liberal terms of the agreement as of this date. The parties' agreement plainly allows Plaintiff to charge the default interest fee from that date until the default was cured. The default has not been cured. Defendant does not and cannot dispute any of this.
Because Plaintiff is contractually entitled to charge default interest from the date of default, there is no disputed issue of material fact as to the default interest charge.
CONCLUSION
For the reasons set forth above, the Court grants the Plaintiff's motion for summary judgment in the amount of $9,505,593.26.
This constitutes the decision and order of the Court. I also refer this matter to Magistrate Judge Ronald L, Ellis for an inquest on costs and attorneys' fees.
The Clerk is directed to remove the motion and Docket No. 37 from the Court's active motions list.
Dated: 10/19/2010
/s/ Colleen McMahon
U.S.D.J.