Opinion
99 Civ. 4056 (SAS)
May 10, 2000
Sarah L. Reid, Esq., Kelley Drye Warren LLP, New York, New York, for Plaintiff.
George A. Zimmerman, Esq., Shmuel Vasser, Esq., Skadden, Arps, Slate, Meagher Flom, LLP, New York, New York, for Defendant.
MEMORANDUM OPINION AND ORDER
In an Opinion and Order dated February 2, 2000, I granted summary judgment in plaintiff's favor and ordered plaintiff to foreclose on certain Collateral Accounts and to submit a request for a deficiency judgment. See The Chase Manhattan Bank v. Traffic Stream (DVI) Infrastructure Limited, 86 F. Supp.2d 244, 248, 266 (S.D.N.Y. 2000). Plaintiff has done so by submitting an Affidavit of Francis J. Grippo, Vice President of The Chase Manhattan Bank, in Support of Request for Deficiency Judgment, dated February 18, 2000 ("Grippo Aff."). Defendant does not dispute the re-calculated principal amount owed as of March 24, 1999 ($126,040,006.94), Id. ¶ 2, or the total amount foreclosed on the Collateral Accounts ($49,054,290.84), id. ¶ 4. Defendant does dispute plaintiff's calculation of interest from March 24, 1999 through the present and the treatment of other collateral consisting of shares of four of defendant's wholly-owned Hong Kong subsidiaries. See Defendant's Objection to Request for Deficiency Judgment ("Obj.") ¶¶ 14-16 and Exhibit C (letter from Thomas Foley, Vice President of The Chase Manhattan Bank, to defendant, dated July 15, 1999, regarding Mortgage of Shares).
Familiarity with the underlying facts resulting in the judgment is assumed.
In his Affidavit, Mr. Grippo explains that the total debt under the Indenture Agreement was accelerated on March 24, 1999, at which point the new principal amount became $126,040,006.94, consisting of $119,000,000 in original principal and $7,040,006.94 in accrued interest. Grippo Aff. ¶ 2. The $7,040,006.94 accrued interest was calculated as follows.First, interest for the period November 1, 1998 through January 2, 1999 was calculated at 14.75% which represents the 14.25% stated interest rate plus 0.50% in additional Special Interest resulting from defendant's failure to have its Registration Statement declared effective on or prior to the 150th day following the date of the Indenture. Id. ¶ 2 n. 1; see also Indenture, attached as Exhibit A to the Grippo Aff., at A-5.Second, interest for the period January 2, 1999 through March 24, 1999, the date of acceleration, was calculated at 15.00%, representing the 14.75% interest rate previously used plus 0.25% in additional Special Interest resulting from defendant's continued failure to have its Registration Statement declared effective. Grippo Aff. ¶ 2 n. 2; see also Indenture at A-5. This second rate was used through April 2, 1999, corresponding to the end of the first ninety-day period. Then, for the period April 2, 1999 through December 30, 1999, 15.25% was used, representing an additional 0.25% increase for defendant's failure to have its Registration Statement declared effective during the second ninety-day period. Grippo Aff. ¶ 2 n. 3; see also Indenture at A-5. Finally, from December 31, 1999 through February 19, 2000, a rate of 17.25% was used, consisting of the 15.25% rate previously calculated plus an additional 2% in Penalty Interest resulting from defendant's failure to maintain a Debt Service Coverage Ratio of 1.75 to 1. Grippo Aff. ¶ 2 n. 4; see also Indenture at A-6.
Additional Special Interest at a rate of 0.25% accrues for each consecutive ninety-day period that defendant continues to fail to have its Registration Statement declared effective, not to exceed a total of 1.00%. See Indenture at A-5.
This 15.25% rate was used beyond the second ninety-day period because the aggregate 1.00% limit on Special Interest had been reached (0.50% + 0.25% + 0.25%). See Indenture at A-5.
Defendant objects to the use of the 15.25% and 17.25% rates on the ground that as of the default and acceleration date, March 24, 1999, defendant was no longer required to maintain an effective Registration Statement or the stated Debt Service Coverage Ratio. See Obj. ¶¶ 7-8. Defendant contends that interest should continue to accrue at 15.00% because, here, the non-breaching party elected to treat the contract as terminated and sue for damages. See id. ¶ 10. According to defendant, the 1% step-up for failure to maintain an effective Registration Statement and the 2% penalty for failure to meet the Debt Service Coverage Ratio was
designed to compensate the bondholder for their (i) inability to freely sell the bonds in the public markets, in the case of the failure to maintain an effective registration statement, and (ii) increased exposure over time due to the decline in the defendant's financial condition, in the case of the failure to meet the Debt Service Coverage Ratio. But here, as of March 24, 1999 the bondholder's inability to sell the bonds in the public markets was due to the default and acceleration, not the failure to maintain an effective registration statement, and their exposure was fixed no later than March 24, 1999. On that date the defendant became liable for all unpaid principle [sic] and interest at the then applicable interest rate.
Obj. ¶ 11.
Plaintiff supports its use of the higher interest rates by citing to two sections of the Indenture Agreement. First, plaintiff cites Section 510 which states, in relevant part, that
no right or remedy herein conferred upon or reserved to the Trustee or to the Holders is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right or remedy given hereunder. . . .
Indenture at 53. See Plaintiff's Response to Defendant's Objection to Plaintiff's Request for Deficiency Judgment ("Resp.") ¶ 4. Unlike plaintiff, however, I interpret the rights or remedies "herein conferred" to mean those conferred by Article Five of the Indenture Agreement which is entitled "REMEDIES." do not construe Section 510 to cover the various interest rate triggers described on pages A-5 and A-6 of the Indenture Agreement. Accordingly, Section 510 does not support plaintiff's use of the increased rates.
Second, plaintiff cites Section 309 of the Indenture Agreement. Resp. ¶ 5. Section 309 provides that Defaulted Interest includes "Additional Interest" which is defined in Section 101 as including Special Interest and/or Penalty Interest. See Indenture at 41, 2. This citation fails to support plaintiff's argument for the higher interest calculation given that the 15.00% rate does, in fact, include 0.75% in Special Interest.
In short, defendant's obligation to plaintiff became fixed on March 24, 1999, the date of acceleration, as did the rate of interest to be applied to any unpaid amounts. As of that date, the Indenture Agreement, in effect, no longer governed the obligations of the parties except for the payment of amounts then owing. Accordingly, the interest rate increases triggered by defendant's failure to comply with certain provisions of the Indenture Agreement were no longer applicable.
In light of the above, the amount of interest, using a 15.00% interest rate, for the period March 24, 1999 through March 24, 2000 is $18,906,001.41 ($126,040,006.94 * .15 * 1). The accrued interest for the period March 24, 2000 through May 9, 2000 is $2,382,674.10 ($126,040,006.94 * .15 * 46/365). The total amount of accrued interest from March 24, 1999 to the day of judgment is $21,288,675.51.
Thus far, the deficiency judgment shall include $126,040,006.94 in outstanding principal and $21,288,675.51 in accrued interest. To this amount is added $103,590.06 in attorneys' fees and $10,371.07 in disbursements. Defendant did not object to these amounts which appear fair and reasonable. This results in a total amount due of $147,442,643.58. An offset against this amount for the foreclosed Collateral Accounts in the amount of $49,054,290.84 results in a net deficiency judgment of $98,388,352.74.
See Affidavit of Sarah L. Reid, plaintiff's attorney, in Support of Request for Attorneys [sic] Fees, dated February 18, 2000 ¶ 2 and Exhibits A (attorney time entries) and B (disbursements posted).
Against this amount, defendant seeks an offset for the value of certain additional collateral, namely pledged shares of four Hong Kong companies owned by defendant and/or its shareholders. Plaintiff states, however, that the Trustee never obtained control of these companies, nor has there been any valuation of the companies. See Resp. ¶ 7. Until these two conditions have been satisfied, specifically transfer of ownership and an adequate, independent valuation, the value of these companies will not affect the amount of the deficiency judgment entered herein. If and when these conditions are satisfied, the value of the additional collateral will be applied against the deficiency judgment.
The Judgment Clerk is hereby ordered to prepare a deficiency judgment in accordance with this Opinion.
SO ORDERED: