Opinion
CASE NO. 1:12-CV-2866
12-13-2013
BAY VENTURE ELYRIA, LLC, PLAINTIFF, v. ADVANCED PLASTICS RECLAIMING, LLC, et al., DEFENDANTS.
JUDGE SARA LIOI
MEMORANDUM OPINION
In this diversity action, plaintiff Bay Venture Elyria ("plaintiff" or "BVE") seeks to recover $2,275,688.40, plus interest and associated costs and fees incurred on a loan. This case is presently before the Court for disposition of plaintiff's motion under Federal Rule of Civil Procedure 56 for summary judgment on plaintiff's contract and warranty claims. (Doc. No. 29.) Plaintiff originally filed a motion for judgment on the pleadings as to these claims (Doc. No. 19), to which defendants responded (Doc. No. 22), and plaintiff replied. (Doc. No. 25.) On June 25, 2013, the Court advised the parties that it would convert plaintiff's motion for judgment on the pleadings to one for summary judgment, and that it would afford the parties an opportunity to supplement their briefs with supporting materials. (Minute Order, dated June 25, 2013.) The present summary judgment motion represents plaintiff's supplement. Defendants filed their own supplement in opposition (Doc. No. 31), and plaintiff filed a supplemental reply. (Doc. No. 34.) The summary judgment motion is now fully briefed. For the reasons set forth below, plaintiff's motion for partial summary judgment is granted.
In a minute entry, dated September 6, 2013, the Court indicated that it would consider the arguments previously raised in connection with plaintiff's motion for partial judgment on the pleadings and subsequently incorporated into the briefing on summary judgment when it resolved plaintiff's motion for partial summary judgment. The Court has reviewed and considered the arguments previously offered by the parties.
I. BACKGROUND
All of the following facts are either undisputed or taken in the light most favorable to defendants as the non-moving parties. MTD America Ltd. ("MTD") and defendant Broadview Group, LLC ("Broadview") are each in the recycling business. (Doc. No. 29-1, Declaration of John Camozzi, at ¶ 4.) Broadview is a consulting engineering company, which had developed a hydro-gravity recycling process for separating plastics from other materials. It utilized this process, first in a small plant in Westlake, Ohio beginning in September 2005, and later in a plant in Elyria, Ohio beginning in May 2009. (Doc. No. 31-2, Affidavit of Joseph Bork, at ¶¶ 2-6.) In 2006, defendant Advanced Plastics Reclaiming, LLC ("APR") was formed to be the operating entity to administer Broadview's hydro-gravity recycling process. Broadview, in turn, provided management services to APR. (Id. at ¶¶ 7-8.) When Broadview moved its operations from Westlake to Elyria, it leased a building that was owned by Paspek Leasing, LLC, whose single member was defendant Stephen Paspek. Paspek, Joseph Bork, and Alan Schroeder are principals in Broadview. (Id. at ¶ 9; Doc. No. 29-1 at ¶ 3.)
The Parties' Joint Business Projects
In fall 2007, MTD entered into a non-binding term-sheet agreement with Broadview to develop certain technologies associated with the separation and reclamation of recyclable materials. (Doc. No. 29-1 at ¶ 7.) Pursuant to the term-sheet agreement, on November 16, 2007, MTD and Broadview entered into a consulting services agreement, in which Broadview agreed to consult with MTD regarding the use of the hydro-gravity technology at MTD's joint venture processing facility in Toledo, Ohio. Under the consulting agreement, Broadview assigned to MTD its patentable or copyrightable work product. (Id. at ¶ 8 [citing Doc. No. 29-2].) In July 2008, MTD and another company, Rewest, formed BVE for the purpose of interacting with defendants, and BVE became the assignee of MTD. (Id. at ¶ 19.)
On November 16, 2007, Broadview and MTD also entered into an exclusive licensing agreement, whereby Broadview licensed to MTD certain Broadview proprietary technology. (Doc. No. 29 -1 at ¶ 10 [citing Doc. No. 29-3, Licensing Agreement].)
Also in July 2008, BVE and Broadview entered into a bullet-point agreement, which related to a new venture to convert Broadview's Elyria plant into a facility for the processing of post-industrial and post-consumer polyethylene material into recyclable polyethylene terephthalate ("PET") flakes. The process to be used in the modified Elyria plant was a new application, and the principals from Broadview discussed with MTD and BVE the risks associated with this new production system. (Doc. No. 29-1 at ¶ 20; Doc. No. 31-2 at ¶¶ 18-21.)
Defendants actually represent that "each party understood the risks involved with a new production system." (Doc. No. 31-2 at ¶ 19.) While defendants do not indicate how they know what plaintiff or MTD understood, it is presumed that defendants are representing that the discussions they allude to in their supporting materials provided the basis for this understanding. (See id. at ¶¶ 14-20.)
Defendants suggest that, at the time, the pairing seemed ideal, as "Broadview and Paspek had ideas and MTD and its associates had capital." (Doc. No. 31 at 555.) Indeed, the business seemed destined to flourish. The redesigned Elyria plant initially operated at full capacity, running five to six days per week, three shifts per day. However, it appears from the record that the relationship between BVE and defendants quickly soured. In October 2008, Thomas Valerio, one of BVE's principals, reduced production to one shift per day, five days a week. In a meeting held November 3, 2008 in Florida with Bork and Paspek, Valerio ordered that the Elyria plant be closed. (Doc. No. 31-2 at ¶¶ 31-34.)
BVE does not dispute these representations, but merely indicates that, following the execution of the Bullet-Point Agreement, "[a] series of disputes developed with each party making claims against the other." (Doc. No. 29 at 330; see also Doc. No. 29-1 at ¶ 21.)
The Settlement and the Resulting Agreements
In January 2009, in the wake of the failed Elyria business venture, the parties entered into a settlement agreement, which, among other things, released the parties from past claims and required the parties to enter into a series of new agreements setting forth the parties' mutual rights and duties going forward. Two of these agreements are especially relevant to the present litigation. (Doc. No. 29-1 at ¶ 21; Doc. No. 29-6, Settlement Agreement.)
First, on February 9, 2009, APR, as maker, executed a promissory note ("the Note"), payable to BVE, as holder, in the amount of $2,255,705.33, payable with interest in 2019. (Doc. No. 29-7, Promissory Note.) The Note provided for an acceleration of payment when an "Event of Default" occurred. According to the Note, an "Event of Default" can occur when "the holder [BVE] in good faith believes that the prospects of payment or performance by any APR Party hereunder or under any other agreement between Holder and such APR Party have been impaired." (Id . at 454.) The Note also provided that "[i]n the event the indebtedness evidenced by this Note is collected by legal action or through an attorney-at-law, the Holder shall be entitled to recover from the Maker all costs of collection, including, without limitation, fifteen percent (15%) of the outstanding principal and earned interest as reasonable attorneys' fees if collected through an attorney-at-law." (Id.) Finally, the Note stated that "[t]he Maker [APR] and all endorsers waive presentment, notice of dishonor and protest." (Id.)
Second, also on February 9, 2009, the parties entered into a Limited Recourse Guaranty and Security Agreement. (Doc. No. 29-8, Guaranty.) Both Paspek and Broadview signed the Guaranty, wherein each "guarantees to the extent provided herein to [BVE] . . . the prompt payment at maturity, or whenever they may become due in accordance with any of their terms, of all now existing and hereafter arising liabilities, indebtedness and obligations of [APR] to [BVE], whenever and however arising or acquired by [BVE], whether direct or indirect, absolute or contingent[.]" (Id. at 456.) As part of the agreement, Paspek and Broadview agreed that their liability to pay the Note "shall be direct, immediate, absolute, continuing, unconditional and unlimited and not conditional or contingent upon the pursuit by [BVE] of whatever remedies it may have against [APR] . . . ." (Id. at 457.) While the Guaranty was limited recourse, it provided that both Paspek and Broadview "SHALL BE LIABLE WITHOUT LIMITATION AS TO RECOURSE IF THE ASSET REPRESENTATION OR ANY OTHER MATERIAL REPRESENTATION OR WARRANTY OF THE UNDERSIGNED IS UNTRUE IN ANY RESPECT AS OF THE DATE WHEN MADE." (Id. at 458) (capitalization in original).
The Asset Representation, in turn, was attached to the Guaranty and included numerous schedules, including Schedule B that listed three of Broadview's patent applications. (Doc. No. 29-8 at 461.) Broadview warranted that it did not own any patent applications other than those listed on Schedule B. (Id. at 457.) In the Guaranty, Broadview acknowledged and agreed that "the Asset Representation is a material representation upon which [BVE] is relying in making the financial accommodations available to [Broadview] . . . ." (Id.)
Also in connection with the Guaranty, Broadview executed a Collateral Assignment and Security Agreement, by which Broadview conveyed to BVE a security interest in all of the patent applications listed in Schedule I attached to the agreement. (Doc. No. 29-9.) Schedule 1, in turn, included the same three patent applications identified in Schedule B of the Guaranty. (Id. at 467.) Plaintiff's Request for Assurance
BVE represents, and defendants do not dispute, that on August 23, 2010, Broadview sent BVE notice that it was liquidating certain equipment. (Doc. No. 29-1 at ¶ 34.) While the parties dispute whether the equipment was ever owned by APR, there appears to be no dispute that the manager of BVE, John Camozzi, wrote to William Hunt, APR's counsel, on August 30, 2010, requesting certain information and supporting documentation to assist BVE in determining whether the liquidation of the equipment had impaired the prospect of payment on the Note. According to BVE, attorney Hunt's response, dated September 7, 2010, did not address any of the requests or questions enumerated in the August 30, 2010 letter. (Id. at ¶ 37.) Defendants concede that, in December 2010, APR closed the Elyria plant and sold equipment at auction and the proceeds were used to pay existing APR Elyria obligations. (Doc. No. 31-2 at ¶ 48.)
Plaintiff represents that the equipment in question was covered by the Guaranty. (Doc. No. 29-1 at ¶ 34.) Defendants, on the other hand, insist that the equipment used at the Elyria facility was owned for most of the relevant period by Paspek Leasing, and that—with the exception of a ten-day period wherein Paspek Leasing transferred all of the equipment to APR—APR did not own any equipment. (Doc. No. 31-2 at ¶¶ 41-47.) Defendants also suggest that this arrangement was "well known" to BVE "throughout the entire relationship[,]" though fail to indicate how it is that they possess personal knowledge as to what BVE knew or did not know. (Doc. No. 31-2 at ¶¶ 43, 47.)
It appears from the record that BVE took no further action to accelerate payment on the Note for more than eighteen months. On March 8, 2012, counsel for BVE and MTD, Peter Silverman, wrote to attorney Hunt and advised that BVE had become concerned that the prospects of payment or performance by APR had become impaired. (Doc. No. 29-11.) Attorney Silverman reiterated Camozzi's prior request for information and documentation.
Under the heading of "Other concerns," Silverman stated that BVE also believed that Broadview and its principals concealed from BVE the existence of two patent applications in contravention to the Asset Representation contained in the Guaranty: (1) United States Patent Application 12/264,977 (filed Nov. 5, 2008) (the " '977" application); and (2) United States Patent Application 12/250,200 (filed October 13, 2008) (the " '200" application). (Doc. No. 29-11 at 474.)
On March 16, 2012, attorney Hunt responded, suggesting that the representations and warranties given by defendants in the agreement were true and not misleading, and that there was no default on the Note or the Guaranty. (Doc. No. 92-12 at 477.) As for the "other concerns" (relating to the non-disclosed applications), Hunt represented that the '977 and '200 patent applications had been abandoned after Valerio refused to continue funding their prosecution. (Id. at 478.) According to defendants, the parties reached an oral agreement—three months before they entered into the settlement agreement—to let these applications "die a natural death." (Doc. No. 31 at 556 n.7 [quoting Doc. No. 22-1, Affidavit of Steven C. Paspek, at ¶¶ 6-11].)
On March 22, 2012, Silverman wrote to Hunt with some "follow-up issues[,]" which included an inquiry into the parties' nondisclosure agreement. (Doc. No. 29-13 at 480.) Silverman also asked for "objective assurances that there is no Event of Default within the meaning of the Promissory Note[,]" and requested copies of tax returns and certain financial documents. Silverman also asked Hunt for documents relating to the withdrawal of financing from APR by Diefenthal Holdings—the company that had agreed to finance defendants' operations after BVE withdrew its financial support. (Id.) Silverman did not mention, or inquire further into, the alleged failure to disclose the '200 and '977 patent applications.
On March 30, 2012, Silverman wrote to Hunt advising that BVE believed in good faith that the prospect of payment on the Note had been impaired, citing the fact that Diefenthal Holdings was no longer funding defendants' projects. (Doc. No. 29-14.) Silverman wrote that BVE was granting defendants a limited window—until April 6, 2012—to demonstrate that BVE's good faith belief of impairment was misplaced.
Attorney Hunt responded by the April 6, 2012 deadline, insisting that whether BVE possessed a good faith belief as to the impairment of the Note was a matter for the courts to determine, and underscoring the fact that the Note still had seven years to run before it was due. (Doc. No. 29-15.) Importantly, however, Hunt conceded Diefenthal Holdings was no longer involved with Broadview. Still, Hunt urged BVE to continue to forebear acceleration of the Note, representing that Bork, Paspek and Schroeder "continue[d] to be engaged in activities that may well provide funding for the resumption of APR's operations and hence, funds to pay your client's note." (Id . at 486.) In connection with his response, attorney Hunt provided tax returns for Broadview and APR for 2008, 2009, and 2010 that showed losses for these years. (Doc. No. 29-1 at ¶ 43 [citing Doc. No. 29-16].)
Hunt explained that Diefenthal Holdings "never 'funded' Broadview Group. Broadview Group did provide management services to APRE [sic], for which Diefenthal did provide capital." (Id. at 485.) Defendants do not deny that this capitalization was eventually withdrawn.
BVE filed the present lawsuit on November 16, 2012. In its complaint, BVE brought claims for breach of contract, breach of warranty, and fraud. The present summary judgment motion is limited to plaintiff's contract claim (Count One) and itswarranty claim (Count Two).
Plaintiff suggests that its motion for partial summary judgment merely seeks judgment as to Count One of the complaint. However, Count One is limited to the alleged breach of the Note. Count Two, sounding in breach of warranty, addresses the alleged misrepresentations relating to the Guaranty. It is clear from plaintiff's motion that it seeks summary judgment on both the contract and the warranty claims, and the parties have fully briefed the issues relating to both claims.
II. SUMMARY JUDGMENT STANDARD AND GOVERNING LAW
Under Fed. R. Civ. P. 56(a), when a motion for summary judgment is properly made and supported, it shall be granted "if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law."
An opposing party may not rely merely on allegations or denials in its own pleading; rather, by affidavits or by materials in the record, the opposing party must set out specific facts showing a genuine issue for trial. Fed. R. Civ. P. 56(c)(1). Affidavits or declarations filed in support of or in opposition to a motion for summary judgment "must be made on personal knowledge, set out facts that would be admissible in evidence, and show that the affiant or declarant is competent to testify on the matters stated." Fed. R. Civ. P. 56(c)(4). A movant is not required to file affidavits or other similar materials negating a claim on which its opponent bears the burden of proof, so long as the movant relies upon the absence of the essential element in the pleadings, depositions, answers to interrogatories, and admissions on file. Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986).
In reviewing summary judgment motions, this Court must view the evidence in a light most favorable to the non-moving party to determine whether a genuine issue of material fact exists. Adickes v. S.H. Kress & Co., 398 U.S. 144, 157 (1970); White v. Turfway Park Racing Ass'n., 909 F.2d 941, 943-44 (6th Cir. 1990), impliedly overruled on other grounds by Salve Regina College v. Russell, 499 U.S. 225 (1991). A fact is "material" only if its resolution will affect the outcome of the lawsuit. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). Determination of whether a factual issue is "genuine" requires consideration of the applicable evidentiary standards. Thus, in most civil cases the Court must decide "whether reasonable jurors could find by a preponderance of the evidence that the [non-moving party] is entitled to a verdict[.]" Id. at 252.
Summary judgment is appropriate whenever the non-moving party fails to make a showing sufficient to establish the existence of an element essential to that party's case and on which that party will bear the burden of proof at trial. Celotex, 477 U.S. at 322. Moreover, "[t]he trial court no longer has the duty to search the entire record to establish that it is bereft of a genuine issue of material fact." Street v. J.C. Bradford & Co., 886 F.2d 1472, 1479-80 (6th Cir. 1989) (citing Frito-Lay, Inc. v. Willoughby, 863 F.2d 1029, 1034 (D.C. Cir. 1988)). The non-moving party is under an affirmative duty to point out specific facts in the record as it has been established that create a genuine issue of material fact. Fulson v. City of Columbus, 801 F. Supp. 1, 4 (S.D. Ohio 1992). The non-movant must show more than a scintilla of evidence to overcome summary judgment; it is not enough for the non-moving party to show that there is some metaphysical doubt as to material facts. Id.
Both the Note and the Guaranty provide that any disputes as to the legality or enforceability of these documents are to be decided on the basis of New York law. (Doc. No. 29-7 at 454; Doc. No. 29-8 at 458.) As such, the parties agree that New York law governs the Court's consideration of plaintiff's dispositive motion.
III. DISCUSSION
BVE's summary judgment motion asks the Court to answer two questions: (1) did BVE have a good faith belief that APR's ability to pay the Note was impaired, thus allowing for acceleration; and (2) did Broadview and Paspek default on the Guaranty by failing to list two (or more) patent applications in their Asset Representation?
A. APR's Default and BVE's Good Faith Belief
Under New York law, a party seeking to enforce a promissory note establishes a prima facie case by offering proof of the promissory note and the debtor's failure to make payments in accordance with its terms. See Bank of America, N.A. Ass'n W.M. v. Schmidt Co., Inc., No. 10 Civ. 4926 (NRB), 2011 WL 1334844, at *4 (S.D.N.Y. Mar. 25, 2011); Coniglio v. Regan, 186 A.D. 2d 709, 710, 588 N.Y.S.2d 888 (N.Y. App. Div. 2d Dep't 1992). "[T]he holder of a promissory note is entitled to judgment as a matter of law upon a showing of execution and default, unless the obligor demonstrates the existence of a triable issue of fact." Novick v. AXA Nnnatietwork, LLC, No. 07 Civ. 7767 (AKH), 2009 WL 2753201, at *1 (S.D.N.Y. Aug. 27, 2009); see Barclays Bus. Credit, Inc. v. Inter Urban Broad. of Cincinnati, Inc., 90 CIV. 2272 (MJL), 1991 WL 258751, at *4 (S.D.N.Y. Nov. 27, 1991). Here, there is no dispute as to the existence of the settlement agreement and the execution of a promissory note as part of that agreement. The parties further agree that, by its terms, the Note did not come due until 2019. The point of contention lies in whether APR defaulted on the Note, entitling BVE to seek acceleration of payment.
"Acceleration clauses are quite common and are generally enforced according to their terms." Arrowood Indem. Co. v. Gibson & Behman, P.C., No. 08 Civ. 6227 (JCF), 2011 WL 1796045, at *2 (S.D.N.Y. Apr. 29, 2011) (quoting Key Intern. Mfg., Inc. v. Stillman, 103 A.D.2d 475, 477, 480 N.Y.S.2d 528 (N.Y. Div. 2d Dep't 1984), aff'd in relevant part, 66 N.Y.2d 924, 489 N.E.2d 764 (1985)). According to New York law, an acceleration clause is properly invoked if it is done in "good faith." N.Y. U.C.C. § 1-208 (McKinney 2013).
Under the New York Uniform Commercial Code, "good faith" means "honesty in fact in the conduct or transaction concerned." N.Y. U.C.C. § 1-201(19) (McKinney 2001); see Lawyers' Fund for Client Protection of State of N.Y. v. Gateway State Bank, 273 A.D.2d 565, 567, 709 N.Y.S.2d 243 (N.Y. App. Div. 3d Dep't 2000). Section 1-208 of the New York Uniform Commercial Code states:
A term providing that one party or his successor in interest may accelerate payment or performance or require collateral or additional collateral "at will" or "when he deems himself insecure" or words of similar import shall be construed to mean that he shall have power to do so only if he in good faith believes that the prospect of payment or performance is impaired. The burden of establishing lack of good faith is on the party against whom the power has been exercised.N.Y. U.C.C. § 1-208 (McKinney 2013). "The test of good faith under [N.Y.] UCC § 1-208 'is a matter of the creditor's actual mental state and this is not negatived by showing there is no basis for the creditor's belief . . . and it is immaterial whether the information upon which the creditor based his determination was in fact not true . . . .'" Citibank, N.A. v. Singer Co., 684 F. Supp. 382, 385 (S.D.N.Y. 1988) (quoting Blaine v. G.M.A.C., 82 Misc. 2d 653, 370 N.Y.S.2d 323 (N.Y. County Ct. 1975)). Thus, the criterion for acceleration under N.Y. U.C.C. § 1-208 involves the elements of whether (1) a reasonable person would have accelerated the debt under the circumstances, and (2) whether the creditor acted in good faith. See Blaine, 82 Misc. 2d at 655; Canterbury Realty & Equip. Corp. v. Poughkeepsie Sav. Bank, 135 A.D.2d 102, 108, 524 N.Y.S.2d 531 (N.Y. App. Div. 3d Dep't 1988).
"Typically, the question of whether the lender has invoked the [acceleration] clause in good faith is a question of fact[.]" Canterbury, 135 A.D.2d at 109; see French American Banking Corp. v. Flota Mercante Grancolobiana, S.A., 609 F. Supp. 1352, 1359 (S.D.N.Y. 1985) ("Summary judgment is generally inappropriate when the outstanding issue or question involves intent or motive.") However, summary judgment is appropriate where undisputed facts demonstrate that the lender deemed the risk of non-payment to have increased. See, e.g., Coniglio v. Regan, 186 A.D.2d 709, 710-11, 588 N.Y.S.2d 888 (N.Y. App. Div. 2d Dep't 1992).
In Coniglio, the holder of a promissory note brought suit against the maker to collect on the note, claiming that the maker had defaulted by failing to pay the required interest. While the court observed that the maker had raised questions of fact regarding whether the holder refused to accept the note, the court ruled that summary judgment for the holder was warranted because the maker failed to respond to the holder's request for financial statements to demonstrate that the note was secure; thus, failing to challenge the holder's expressed belief that the risk that the note would not be repaid had increased. 186 A.D.2d at 710. It is plaintiff's position that defendants have likewise failed to challenge its good faith belief that the prospect of payment on the Note had become impaired.
1. A Reasonable Person Would Find the Debt at Risk
Plaintiff argues that the undisputed facts demonstrate that a reasonable person would have accelerated the Note under the circumstances. In support, BVE cites tax returns demonstrating substantial cumulative losses between 2008 and 2010 approaching five million dollars, defendants' lack of candor in response to plaintiff's inquiries regarding their business, the liquidation of certain assets essential to APR's business activities, and the fact that APR had lost funding.
Defendants contend that there are disputed facts which preclude summary judgment, noting that 90% of the losses highlighted by plaintiff came before the settlement agreement and the execution of the Note, and positing that it is unreasonable to rely upon losses that existed before the loan was made to demonstrate a good faith belief. (Doc. No. 31 at 563-64.) They also emphasize the fact that the record does not support a finding that the liquidated assets belonged to APR, and assert that, in any event, APR's "ownership of equipment has nothing to do with its prospect for success." (Id. at 563.)
To be sure, defendants have identified disputed facts relating to how and why defendants' business ventures failed, and who ultimately owned the assets associated with these ventures. However, even when all of these disputed facts are viewed in the light most favorable to defendants, they do not change the undisputed facts that—after the execution of the Note—APR lost the capital support of Diefenthal Holdings, and had liquidated the equipment and other assets connected with the Elyria plant and ceased operations there. Any reasonable creditor would react to the announcement that a debtor had lost its funding, and had liquidated assets associated with its business operations, with trepidation. Further, the debtor's empty assurances that it was seeking alternative funding would have done little to assuage this feeling of insecurity. Indeed, defendants concede that "[t]he Promissory Note is nearly worthless at this point in time in the absence of some scheme to get to the Limited Recourse Guaranty and Dr. Paspek's personal assets." (Doc. No. 31 at 563.) Based upon these undisputed facts, the Court finds that, as a matter of law, a reasonable creditor would have believed that the prospect of payment on the Note had been impaired.
In opposition to summary judgment, defendants represent that they have spoken to certain businesses about moving a carpet recycling operation into the Elyria plant. (Doc. No. 31-2 at ¶ 52.) There is no evidence in the record that would suggest that defendants ever shared this information—which the Court finds entirely speculative—with plaintiff. Of course, it is only plaintiff's good faith belief, at the time of acceleration, that is relevant, and it does not matter whether the good faith belief is correct. See Singer, 684 F. Supp. at 385.
2. Plaintiff's Actual Good Faith Belief
Defendants also insist that the lack of changed circumstances counsels against a finding that plaintiff had an actual good faith belief that payment prospects were impaired. (Doc. No. 31 at 553; see Doc. No. 22 at 252-253.) While defendants suggest that it is unclear what prompted plaintiff's renewed interest in 2012 in seeking assurance from defendants that the prospect of payment on the Note was not unduly impaired, they suggest that plaintiff's prior forbearance weighs against a finding of actual good faith.
Defendants' belief that nothing has changed is not supported by the record. Both the sale of the equipment and the loss of funding or capitalization are two significant changes plaintiff alleges that it relied upon in accelerating payment on the Note.
In their brief in opposition to plaintiff's prior motion for judgment on the pleadings, defendants suggest, in conclusory fashion, that BVE's anxiety over the alleged increased impairment of defendants' prospects of the repayment of the Note "must have waned." (Doc. No. 22 at 252.)
As plaintiff correctly observes, the Note contains a "no waiver" provision whereby the "[f]ailure or forbearance of [BVE] to exercise any right . . . otherwise granted by law, shall not affect or release the obligation of [APR] . . . , and shall not constitute a waiver of such right unless so stated by [BVE] in writing[.]" (Doc. No. 29-7 at 454.) Under New York law, "no waiver" clauses, like the one found in the Note, preclude a debtor from relying on past forbearance to block the acceleration of a promissory note. See Flushing Unique Homes, LLC v. Brooklyn Fed. Sav. Bank, 100 A.D.3d 956, 957, 954 N.Y.S.2d 606 (N.Y. App. Div. 2d Dep't 2012); see, e.g., Town of Hempstead v. Incorp. Vil. of Freeport, 15 A.D.3d 567, 569, 798 N.Y.S.2d 518 (N.Y. App. Div. 2d Dep't 2005) (debtor could not argue that it justifiably relied on plaintiff's forbearance in asserting its right under the Note where the instrument contained a "no waiver" provision); BDG Oceanside, LLC v. RAD Term. Corp., 14 A.D.3d 472, 473-74, 787 N.Y.S.2d 388 (N.Y. App. Div. 2d Dep't 2005) (fact that the creditor continued to take certain steps outlined in the Note was not enough, in and of itself, to establish waiver).
Defendants further propose that "waiting is a sign of good faith—giving the [d]efendants time to see if they can proceed beyond a hope and a prayer. To rule otherwise would be to send a message to creditors to bring suit at the first good faith whiff of impairment rather than trying to work with debtors and give them time to show that the prospect of payment is reasonable." (Doc. No. 29 at 347.) Of course, there were more than mere "whiffs" of impairment, as defendants' capital supply had dried up and assets liquidated. Moreover, defendants' policy arguments do not displace the parties' bargained for acceleration clause.
Defendants' reliance on the denial of summary judgment in Canterbury is unavailing. There, the debtor raised questions of fact as to whether the bank's own fraudulent misconduct caused the default which set off the acceleration clause. According to the court, this alleged misconduct called into question the bank's good faith. See Canterbury, 135 A.D.2d at 109. While defendants have offered evidence that Valerio's efforts may have contributed to the demise of the parties' joint ventures, defendants have not even suggested, let alone offered any proof, that plaintiff engaged in wrong-doing that led to the decision of Diefenthal Holdings to withdraw its capital support and BVE's resulting decision to seek acceleration. New York federal and state courts have repeatedly distinguished Canterbury in situations where the creditor did not directly contribute to the default on a loan. (See Doc. No. 34 at 604, n.9 (collecting cases).)
Defendants assert that Valerio was directly responsible for the decision to abandon the '200 and '977 patent applications. However, as will be discussed in detail infra, defendants do not allege that plaintiff directly caused the default on the Note or the alleged misrepresentation in the Guaranty.
Defendants further argue that Valerio knew various facts relating to the '200 and '977 patent applications when BVE first responded to APR's notice that it was liquidating certain assets, including: the existence of the '200 and '977 patent applications; that the parties agreed that the patent applications should be abandoned; that there were no funds to prosecute them; and that they were not listed on the Guaranty. (Doc. No. 31 at 562-63.) While defendants concede that they do not know the mind of Valerio in February 2009, they suggest that his knowledge of the status of the '200 and '977 patent applications precludes BVE from using the failure to list these two applications in the Asset Representation as a basis for a good faith belief that the underlying Note was impaired. (Id. at 563.)
According to plaintiff, the Court may not consider this evidence, as it is barred by the parol evidence rule. However, plaintiff has confused the issues by importing a legal principle that only finds application with respect to the Guaranty. The Court believes that the confusion comes from the fact that defendants attempt to rely on Valerio's knowledge and understanding as to the '200 and '977 patent applications both to defeat plaintiff's good faith belief under the Note, and to defend their own actions under the Guaranty. The parol evidence rule "applies . . . to attempts to modify . . . a [written] contract by parol." Mitchill v. Lath, 247 N.Y. 377, 379, 160 N.E. 646 (1928); see Imperator Realty Co., Inc. v. Tull, 228 N.Y. 447, 451 (1920) ("Where a contract is reduced to writing and appears to include the entire agreement of the parties . . . oral evidence will not be received . . . for the purpose of varying, modifying, reducing or extending the terms thereof.") So while, as discussed infra, this extraneous evidence may not be available to modify the terms of the Guaranty, it remains competent evidence with respect to plaintiff's actual "honesty-in-fact" good faith belief that the prospect of payment of the Note had been impaired.
Once again, defendants have identified issues, this time involving plaintiff's understanding of the status of the '200 and '977 patent applications. However, these issues are not material to the question of acceleration because plaintiff did not rely on the omission of the patent applications in forming its good faith belief that the prospects of payment had been compromised. While the omission may have been one fact that triggered plaintiff's request for assurance, the undisputed record (including the letters between the parties and counsel and the affidavits offered in support of and in opposition to the present summary judgment motion) demonstrates that the foundation for plaintiff's asserted good faith belief was the loss of funding and the liquidation of assets. (See Doc. No. 29-11 at 473; Doc. No. 29-13 at 480; Doc. No. 29-14 at 483; see also Doc. No. 1, Complaint, at ¶¶ 50-52.)
Even this is not entirely supported by the record, as the only mention of the omitted patent applications by plaintiff came under the heading of "Other concerns" in attorney Silverman's March 8, 2012 letter to attorney Hunt. (See Doc. No. 29-11 at 474.) That same letter emphasized that the liquidation of assets was the impetus for BVE's request for assurance. According to the March 8 letter, the omission of the '200 and '977 patent applications implicated defendants' obligations under the Guaranty. (Id. at 473-75.)
Of course, even if Valerio's purported knowledge of the status of the '200 and '977 patents created a question of fact as to plaintiff's actual (or subjective) good faith belief, plaintiff would still be entitled to summary judgment on the contract claim because defendants failed to offer any evidence to challenge plaintiff's stated reasonable (or objective) good faith belief. Because defendants bore the burden of establishing both prongs, this defense fails as a matter of law. See N.Y. U.C.C. § 1-208.
Finally, defendants suggest that the acceleration clause should not be enforced because the failure to list the '200 and '977 patent applications on Schedule B of the Guaranty was "inconsequential." As support, defendants look to Federal Home Loan Mortg. Corp. v. Bronx New Dawn Renaissance VII, LP, 93 CIV. 7970 (CSH), 1995 WL 412399 (S.D.N.Y. July 11, 1995). Setting aside the fact that Bronx dealt with an equitable claim of foreclosure, and not a contract claim as is before this Court, the treatment of the debtor's default fails to support defendants' position.
In Bronx, after a fire destroyed the mortgagor's property, and the insurance proceeds were not immediately forthcoming, the mortgagor decided to dedicate certain funds to other financial obligations, leaving it unable to make its monthly mortgage payments. While acknowledging the rule that unconscionable overreaching will be found where a mortgagee insists on acceleration when the default was inadvertent and inconsequential, the court determined that the mortgagor's default was not "inadvertent." Bronx, 1995 WL 412399, at *1-*2. Observing that "the very purpose of an acceleration clause is to provide the mortgagee with additional protection in the event the mortgagor's financial situation imperils its ability to meet its obligations[,]" the court found that the mortgagee was not "required to forego protecting its own rights simply because [the mortgagor] was having financial troubles." Id. at *2.
Critically, defendants overlook the fact that the omission of the patent applications was not offered as support for plaintiff's good faith belief. However, even if the omission was relevant and could be considered inconsequential (which as discussed infra is contradicted by the specific provisions of the Guaranty), the facts that defendants had lost their source of on-going capital investment and were forced to liquidate assets were not inconsequential. Plaintiff was under no obligation to wait, as defendants suggest, for "APR's fortunes to turn around[.]" (Doc. No. 31 at 551.) The acceleration clause was designed for just such a contingency, and plaintiff is entitled to invoke it here, where undisputed facts support a finding that plaintiff had a good faith belief that the prospects of payment on the Note had become impaired. Under these circumstances, there is no evidence of overreaching on the part of BVE.
Ultimately, the Court must conclude that defendants have failed to carry their burden, even on summary judgment, to demonstrate that plaintiff lacked a good faith belief as to the impairment of the debt. While the good faith inquiry is fact intensive, defendants fail to offer evidence that, if believed, challenge any of plaintiff's stated reasons for finding the debt to be insecure. Even with respect to APR's losses, which defendants point out were largely incurred before the execution of the Note, defendants do not deny that APR continued to sustain losses in 2009 and 2010—after the Guaranty was executed. Further, defendants' hopes that APR's fortunes may turn around, or that unidentified business leads may ripen into solid opportunities, represent less than a mere scintilla of evidence, and are woefully insufficient to withstand plaintiff's properly supported summary judgment motion.
For all of the foregoing reasons, plaintiff is entitled to summary judgment on the first cause of action—breach of contract—as it pertains to the acceleration of the Note.
B. Defendants' Omissions and the Triggering of the Guaranty
Having determined that plaintiff had a good faith belief that there had been a default of the Note, entitling it to accelerate payment thereon, the Court must consider whether plaintiff is entitled to summary judgment on the Guaranty. In its second cause of action—breach of warranty—plaintiff seeks to hold Broadview and Paspek "jointly and severally liable with APR for the full amount of the Note . . . and for all costs and expenses of collection, including reasonable attorneys' fees." (Doc. No. 1 at ¶ 63) (internal quotation omitted). As support for this claim, plaintiff cites to the fact that defendants failed to list the aforementioned '200 and '977 patent applications in Schedule B of the Guaranty that listed Broadview's various patent applications. Plaintiff represents that, subsequent to the filing of the present action, it has discovered that defendants also failed to list six other patent applications on Schedule B.
Defendants concede that the eight patent applications referenced by plaintiff were not listed on Schedule B, and further acknowledge that the Guaranty imposed liability upon defendants in the event that a "MATERIAL REPRESENTATION OR WARRANTY . . . IS UNTRUE IN ANY RESPECT AS OF THE DATE WHEN MADE." (See Doc. No. 29-8 at 458) (capitalization in original). However, they argue that the omission did not render the Asset Representation untrue because the patent applications in question were either abandoned or otherwise valueless to defendants. In support, defendants offer the affidavit of Paspek, who averred that the '200 and '977 patent applications were abandoned at Valerio's instructions. (Doc. No. 22-1 at ¶¶ 6-8.) With respect to the other six omitted patent applications, defendants offer the affidavit of Joseph Bork, who averred that these patent applications were either sold, subsumed within other applications that were disclosed, abandoned, or never owned by Broadview. (Doc. No. 31-2 at ¶¶ 53-70.) Defendants also argue that the omissions were not material under the Guaranty because the existence of abandoned or otherwise valueless applications would not have affected the decision of BVE, as the lender, to go forward with the loan. (See Doc. No. 31 at 560; Doc. No. 22 at 261-64.)
It is plaintiff's position that this parol evidence cannot be used to modify the clear terms of the Guaranty. As the Court previously intimated, under the parol evidence rule, extrinsic evidence of prior or contemporaneous events cannot be used to vary or add to the terms of a written contract if such contract is complete and unambiguous on its face. See Imperator Realty Co., 228 N.Y. at 451. Thus, in order to establish that the parol evidence rule applies, the party opposing the admission of the parol evidence must demonstrate that "[1] the final, written, contract is an integrated agreement, [2] the language of the written contract is clear and unambiguous, and [3] there has been a breach of contract." Morgan Stanley High Yield Sec., Inc. v. Seven Circle Gaming Corp., 269 F. Supp. 2d 206, 213 (S.D.N.Y. 2003) (citing, among authorities, Investors Ins. Co. v. Dorinco Reinsurance Co., 917 F.2d 100, 103-05 (2d Cir. 1990)).
"The first step in the application of the parol evidence rule is to determine whether the contract is integrated. 'An integrated agreement is one which represents the entire understanding of the parties to the transaction. Under New York law a contract which appears complete on its face is an integrated agreement as a matter of law.'" Morgan Stanley High Yield Sec., 269 F. Supp. 2d at 214 (quoting Wayland Inv. Fund, LLC v. Millennium Seacarriers, Inc., 111 F. Supp. 2d 450, 454 (S.D.N.Y. 2000)). The Guaranty contains an integration clause, which provides that "[t]his agreement contains the entire agreement of the parties with respect to the subject matter thereof." (Doc. No. 29-8 at 458.) New York courts generally treat such clauses as evidence of the integration of a contract for purposes of the parol evidence rule. See Dujardin v. Liberty Media Corp., 359 F. Supp. 2d 337, 357 (S.D.N.Y. 2005) ("the purpose of an integration clause is to require full application of the parol evidence rule in order to bar the introduction of extrinsic evidence to vary or contradict the terms of the writing") (internal quotation and citation omitted); Schron v. Troutman Saunders LLP, 97 A.D.3d 87, 93, 945 N.Y.S.2d 25 (N.Y. App. Div. 1st Dep't 2012) (rejecting parol evidence where the written option agreement contained an integration clause).
Even without the integration clause, the Guaranty appears to be complete on its face. It specifies the identity of the parties, the consideration offered and given, and how and under what circumstances the guaranty would be invoked. See, generally, Morgan Stanley, 269 F. Supp. 2d at 215.
The next step is to determine if the agreement is ambiguous. "Determining whether 'the language of a contract is clear or ambiguous is a question of law to be decided by the court.'" Ocean Partners, LLC v. North River Ins. Co., 546 F. Supp. 2d 101, 104 (S.D.N.Y. 2008) (quoting Compagnie Financiere de CIC et de L'Union Euopeenne v. Merrill Lynch, 232 F.3d 153, 157-58 (2d Cir. 2000)). To the extent that defendants argue that the term "patent application" is in need of further explanation because the term would seem to cover abandoned patents (see Doc. No. 22 at 265; Doc. No. 31 at 565-66), the Court notes that the term "patent" is specifically defined in both the Guaranty and the Collateral Assignment and Security Agreement as including "all applications for letters patent . . . ." (Doc. No. 29-8 at 456; Doc. No. 29-9 at 464) (emphasis added). No provision is made for patents that have been abandoned, or have otherwise been rendered valueless. As such, the Court cannot find that the term is ambiguous or in need of further explanation.
The final step requires demonstration of a breach. Defendants concede that they failed to list several patent applications on Schedule B. While they argue that the omission was not material, the Guaranty emphasized that "the Asset Representation is a material representation upon which [BVE] is relying in making the financial accommodations available to [APR] . . . ." (Doc. No. 29-8 at 457.) Additionally, the Guaranty provided that Paspek and Broadview "SHALL BE LIABLE WITHOUT LIMITATION AS TO RECOURSE IF THE ASSET REPRESENTATION OR ANY OTHER MATERIAL REPRESENTATION OR WARRANTY OF THE UNDERSIGNED IS UNTRUE IN ANY RESPECT . . . ." (Id. at 458) (capitalization in original). By the very terms of the Guaranty, defendants' failure to list these patent applications constituted a material breach.
To avoid enforcement of the Guaranty, defendants argue that the record supports a finding of an independent collateral agreement made at the time of the execution of the Note and Guaranty not to include the '200 and '977 patent applications. The essential elements in proving an oral collateral agreement are: "(1) the agreement must be collateral; (2) it must not contradict the expressed or implied provisions of the written agreement; [and] (3) it must be one that the parties would not ordinarily be expected to embody in the writing." Binney & Smith, Inc. v. 41 East 42nd St. Realty Co., 147 N.Y.S.2d 243, 246 (N.Y. Sup. Ct. 1955) (citing Mitchill, 247 N.Y. at 381.) "In general, an oral agreement may be provided only if it is 'not so clearly connected with the principal transaction as to be part and parcel of it.'" Id. (quoting, among authority, Fogelson v. Rackfay Const. Co., 300 N.Y. 334, 338, 90 N.E.2d 881 (1950)).
None of these conditions are met. First, the alleged oral agreement is not collateral. An agreement is collateral if it is "one which is 'separate and complete . . . although relating to the same object.'" Lee v. Joseph E. Seagram & Sons, Inc., 413 F. Supp. 693, 701 (S.D.N.Y. 1976), aff'd, 522 F.2d 447 (2d Cir. 1977) (quoting Thomas v. Scutt, 127 N.Y. 133, 140-41, 27 N.E. 961 (1891)); see, e.g., Folgelson, 300 N.Y. at 33839 (oral promise of landlord to supply tenants free bus transportation to subway and public schools went to the heart of the landlord-tenant relationship, so reasonable to assume that it would be contained in the lease); Mitchill, 247 N.Y. at 381-82 (oral promise to remove ice house from property was not collateral to land sale contract where the written agreement set forth all rights and obligations with respect to the land). The alleged oral agreement not to include the abandoned patent applications goes to the very core of the Guaranty, which provided that the Asset Representation was a material representation. (Doc. No. 29-8 at 457.) It, therefore, was reasonable to assume that any exception to the requirement to list all patent applications would have been written into the Guaranty.
Second, the oral agreement not to include certain patent applications directly contradicts the written Guaranty, which required Broadview and Paspek to warrant that they did not own any patent applications other than those listed on Schedule B. Third, because the Guaranty specially addressed defendants' duty to identify all patent applications as a material representation that served as an inducement for the execution of the Note, it is reasonable to conclude that any exceptions would have been spelled out in the Guaranty. Defendants, therefore, have failed to satisfy the necessary elements in proof of a collateral oral agreement. See, e.g., Binney & Smith, 147 N.Y.S.2d at 246-47 (where the alleged oral argument would have been considered part of the inducement for the execution of the written agreement, it would have been reasonable for the parties to include it in the written agreement).
Defendants also raise the affirmative defenses of waiver and estoppel to block the enforcement of the Guaranty. They argue that plaintiff agreed to the abandonment of the '200 and '977 patent applications, and should not be permitted to "deny them now." (Doc. No. 31 at 567.)
Defendants waived these affirmative defenses in the Guaranty by agreeing that "[t]he undersigned [Broadview and Paspek] also waives the right to assert in any action or proceeding upon this [G]uaranty any defenses, offsets or counterclaims which the undersigned may now or hereafter have." (Doc. No. 29-8 at 458.) The seminal New York case on the issue of waivers in guarantees is Plapinger, wherein the court upheld a waiver in a guaranty and refused to recognize the equitable defense of fraudulent inducement, emphasizing that the guaranty and its attendant waiver were the result of extended negotiations by sophisticated business people. Citibank, N.A. v. Plapinger, 66 N.Y.2d 90, 95, 485 N.E.2d 974 (1985).
Following Plapinger, New York courts have upheld waivers containing language similar to the present Guaranty to foreclose equitable defenses to the enforcement of guarantees. See, e.g., UBS Ag, Stamford Branch v. HealthSouth Corp., 645 F. Supp. 2d 135, 142 (S.D.N.Y. 2008) (waiver in guaranty precluded defense of lack of agency); Nat'l Westminster Bank PLC v. Empire Energy Mgt. Sys., Inc., No. 93 CIV. 5331 (WK), 1998 WL 47830, at *3 (S.D.N.Y. Feb. 5, 1998) (language waiving the "existence of any claim, setoff, defense, or other right which the Construction Guarantor may have" sufficient to waive claim of fraudulently inducement). A similar result is appropriate here. By the Guaranty's clear language, defendants waived any and all claims and defenses against enforcement. The agreement was made "between sophisticated business people," and plaintiff is entitled to have its terms given effect. See Plapinger, 66 N.Y. 2d at 95. Therefore, the Court finds that, as a matter of law, defendants have waived the defenses of waiver and estoppel, and penalty.
Even if the Court were to consider the defenses of estoppel and waiver on the merits, plaintiff would still be entitled to judgment as a matter of law. In support of these defenses, defendants suggest that the "basic essence of this case is eerily analogous to the New York case of Imperator Realty Company, Inc. v. Tull, 228 N.Y. 447, 127 N.E. 263 (1920)." (Doc. No. 22 at 270.) Defendants are mistaken. In fact, Imperator Realty dealt with the entirely different issue of whether an oral agreement to modify a written agreement subsequent to .the execution of a written agreement was effective. See Imperator Realty, 228 N.Y at 451.
The court distinguished situations, such as the present case, wherein the "oral evidence will not be received of conversations or transactions leading up to the making of a contract or in connection with the execution thereof for the purpose of varying, modifying, reducing or extending the terms thereof." Id.
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Likewise, because the Guaranty was made "between sophisticated business people", and is unambiguous on its face, the Court may not rewrite the terms of the Guaranty merely because it questions the wisdom of the agreement, or because enforcement now appears to be unfavorable to Broadview and Paspek. See Wastemasters, Inc. v. Disversified Investors Servs. of N. Am., Inc., 159 F.3d 76, 79 (2d Cir. 1998) ("[C]ourts should not rewrite the contracts before them to conform to their own conception of business equity."); United States v. 0.35 of an Acre of Land, Westchester Cnty., 706 F. Supp. 1064, 1070 (S.D.N.Y. 1988) (applying New York law and observing that "where the language chosen contains no inherent ambiguity or uncertainty courts are hesitant, under the guise of judicial construction, to imply additional requirements to relieve a party from an asserted disadvantage following from the terms used"). Rather, the Court is constrained to give force to the parties' terms as they appear in this agreement.
For all the foregoing reasons, plaintiff is entitled to summary judgment on the Guaranty (Count Two).
IV. CONCLUSION
Plaintiff's motion for partial summary judgment (Doc. No. 29) is granted, and judgment is entered in plaintiff's favor on Count One and Count Two of the complaint. As for Count Three (Fraud), the Court doubts whether this tort claim seeks damages for an injury that is separate and apart from the injuries resulting from the contractual breaches. Still, because plaintiff did not seek summary judgment on this claim, and the parties have not briefed the merits of the claim, the Court will withhold ruling on it for the present time. Instead, within 10 days of the date of this Memorandum Opinion, plaintiff shall advise the Court, in writing, as to whether it plans to pursue the remaining fraud claim, and provide the Court with a proposed judgment entry setting forth precisely what plaintiff believes it is entitled to consistent with the Court's ruling on its summary judgment motion.
IT IS SO ORDERED.
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HONORABLE SARA LIOI
UNITED STATES DISTRICT JUDGE