Opinion
01 Civ. 9274
January 15, 2003
OPINION ORDER
Alan G. Stevens a/k/a Stevens Financial Service ("plaintiff" or "Stevens") brought this action against Mad River Holdings, LLC ("Mad River"), Mad River Acquisitions, Inc., North Peak Resorts, LLC, Richard Deutsch ("Deutsch"), Stephen Mueller ("Mueller"), Clyde Perfect, Jr. ("Perfect"), and Timothy Boyd ("Boyd") (collectively, "defendants") for a judgment in the amount of $100,000 plus interest thereon from September 30, 2001, together with costs and attorney's fees, for defaulting on their loan agreement (the "loan agreement") with Business Loan Express ("BLE"). The $100,000 was required under the authorization agreement (the "authorization agreement") entered into on February 17, 2001. On January 17, 2002, defendants' motion to dismiss for lack of personal jurisdiction and improper venue, or, in the alternative, to transfer the action to the Eastern District of Missouri, became sub judice. By opinion and order dated May 1, 2002, I denied defendants' motion and scheduled a bench trial, which was held on October 22 and October 23, 2002. Post-trial memoranda of law were filed on November 20, 2002 and the case was sub judice. For the reasons detailed below, the plaintiff has failed to prove, by a preponderance of the evidence, that it is entitled to collect $100,000 plus interest under the terms of the parties' authorization agreement.
I. BACKGROUND
A factual summary of this case can be found in Stevens v. Mad River, 2002 WL 826959 (S.D.N.Y. May 1, 2002), and familiarity therewith is assumed. The following facts were derived from testimony and evidence adduced at trial.
Defendant Mad River acquired the Mad River Mountain ski area in December 2000, partly through financing supplied by Peoples' Trust in Indiana. (Tr. 157-58). At the time this acquisition took place, Mad River's plan was to merge with the properties held by Peak Resorts, Inc. As Mueller, a member of Mad River and an officer and Chief Financial Officer of Peak Resorts, Inc., testified:
Q: What was the business plan, if you will, sir, of Mad River Holdings LLC at the time that it acquired the Mad River Mountain ski area?
A: Well, it was to operate those assets, and later we developed a business plan that talked about taking Peak Resorts, Inc., which had four properties in it already, and along with the assets of Mad River Holdings LLC, put them together and try to create an entity that could go out and buy more [ sic] what we call day ski areas, areas that really have no lodging involved, just an in and out during the day. (Tr. 159).
In other words, Mad River and North Peak Resorts were At that same time considering a merger into a company called Mad River Acquisitions, which is now a subsidiary of Peak Resorts — the parent or holding company. Following the acquisition of the Mad River Mountain ski area in December 2000, Mad River needed refinancing as part of its plan to merge with the North Peak Resorts. (Tr. 160). It was for this reason that Mad River approached Stevens to inquire about the possibility of obtaining a mortgage loan.
On or about February 17, 2001, Deutsche, acting in his capacity as a member of Mad River, entered into a written authorization agreement retaining Stevens' services as a broker to obtain a mortgage commitment on the resort. (Pl.'s Ex. B). Under the terms of the authorization agreement, Stevens was to negotiate and obtain, on behalf of Mad River, as the owner of Mad River Mountain Ski Resort, a loan commitment from Allied Capital, or its subsidiary, Business Loan Express ("BLE"), a lender that provided loans guaranteed by the United States Department of Agriculture ("USDA"). (Id.). The authorization agreement provided that, upon the closing of any loan conforming substantially to the specifications in the loan commitment, Stevens was to receive a fee equal to two percent (2%) of the transaction amount out of the closing proceeds (a total of $100,000 in this particular case) and further stated that
[i]f after accepting a commitment/contract, the borrower/seller fails to close because of defects, defaults or misrepresentations by the borrower/seller, then the fee shall be immediately payable to Alan G. Steven. If the loan/sale does not close because of lender/buyer failure, no such fee shall be earned or payable. (Id.).
By letter dated May 23, 2001, BLE extended a loan commitment to Mad River, which was contingent upon the following: (1) issuance by the USDA of an 80% guarantee of the loan under its Business and Industry ("BI") loan program; and (2) all terms of the commitment letter. (Pl.'s Ex. C). This letter specifically provided that a loan agreement would be prepared by attorneys for BLE; that BLE's obligation to close and fund the loan was contingent upon "execution of loan documentation . . . that shall incorporate the above terms and conditions . . . and other terms and conditions to be negotiated between [BLE] and the borrower/guarantors; and [BLE's] receipt of a Loan Note Guarantee . . . issued by the [USDA], under its [BI] loan guarantee program of not less than 80% of the permanent loan." (Id.). The parties understood that all loan documents were to be prepared by BLE's counsel, Vicki Gunning ("Gunning"), and approved by the USDA. Gunning informed counsel for Mad River, David Jones ("Jones"), by letter dated July 30, 2001, that she would only begin preparing loan documents after receipt of the USDA's commitment to guarantee the loan. (Defs' Ex. 8; Tr. 125).
Mueller testified that in early August 2001, prior to receiving the commitment agreement from BLE, Mad River and Michael Sandusky, Senior Vice President of BLE, exchanged a number of faxes and letters in which Mad River provided BLE with information with respect to certain matters that needed to take place prior to closing. (Tr. 164). Specifically, Mueller testified that Mad River was particularly concerned with the timing of the transaction because it was at that time planning a merger of Mad River into Mad River Acquisitions (a corporate entity yet to be formed) and ultimately to merge Mad River Acquisitions into Peak Resorts (Tr. 166), and that BLE was well aware of the proposed merger of Mad River into Peak Resorts as early as August 2001.
Q: And did you have occasion at any time to express [your] concerns to anyone at Business Loan Express?
A: In early August, Mr. Deutsch and I were in conversation, telephone conversation with Mr. Sandusky checking on the progress of the loan application, where it was, and at that time we did tell him that we wanted to merge Mad River into Peak Resorts.
Q: And during that conversation, did Mr. Sandusky indicate that that would be unacceptable or inappropriate or —THE COURT: What did he say?
A: He said he thought it was very doable, it could get done. (Tr. 166; see also Tr. 167).
By early September 2001, a conditional commitment had not yet been received from the USDA; nor had draft loan documents been prepared or submitted by BLE to Mad River's counsel. Nevertheless, the closing on the mortgage loan was scheduled for September 28, 2001. Witnesses for Mad River testified that it was important for the closing to take place on or about September 28, 2001 because Mad River wanted to complete the closing before the merger, "and we wanted to try to get the merger done before we got embroiled in the ski season, which could start anywhere from Thanksgiving onward." (Tr. 168). In addition, the closing date was also selected to ensure that the loan would close before the end of the USDA's fiscal year as BLE recognized that, effective October 1st of each calendar year, the USDA would go into another budget cycle and ". . . things [were] in disarray for the first few months on continuing resolutions . . . ." (Tr. 123). For these reasons it was important, in Mad River's view, to have the loan with BLE close as soon as possible and then to conclude the merger of Mad River into Mad River Acquisitions and Peak Resorts, Inc. (Tr. 165).
As of September 18, 2001, BLE had still not received the USDA's conditional commitment; however, Gunning nonetheless proceeded to prepare the loan agreement documents. On September 18, the draft documents were received by Jones, Mad River's attorney, and over the course of the next several days Jones and Gunning negotiated the terms of the loan documents. (Tr. 220). Significantly, Jones noted that the proposed loan agreement would prohibit the merger of Mad River into Mad River Acquisitions and Peak Resorts, Inc., despite the fact that such a merger had been openly discussed with BLE in early August 2001. Jones discussed with Gunning Mad River's need for restructuring, and neither Gunning nor BLE had any objection to revising the loan agreement to permit the merger of Mad River into Mad River Acquisitions and Peak Resorts, Inc. subsequent to the date of closing. Thereafter, BLE and Mad River agreed upon a final loan agreement. (Defs' Ex. 14; Tr. 127). Paragraph 5.6 of the agreement specifically provided that Mad River was permitted to merge into Mad River Acquisitions, Inc., subsequent to the date of the closing. That paragraph stated, in part, that
[u]ntil payment in full of and satisfaction of all Obligations, Borrower shall not, without prior express written consent of Lender:
. . .
5.6 Mergers, Consolidations, Dispositions, Acquisitions, Investments. Liquidate or dissolve; form any new subsidiary or merge or consolidate with any corporation or other entity, or sell, lease, assign, transfer or otherwise dispose of (whether in one transaction or a series of transactions) all or substantially all of its assets, whether now owned or hereafter acquired; or acquire by purchase or otherwise, all or substantially all of the assets of any corporation or other entity or make any investment in the assets of any corporation or other entity or business venture or allow any changes in the current equity ownership of Borrower or any entity Guarantor.
. . .
Provided, however, so long as an Event of Default has not occurred and is continuing, nothing contained in this Agreement shall prevent Borrower from distributing its assets and liabilities to its members, who will immediately contribute those assets to MAD RIVER ACQUISITIONS, INC. ("MRA") who will assume only the then outstanding liabilities of Borrower (including, without limitation, the Loan) followed by the shareholder of MRA exchanging their stock in MRA for shares of stock in Peak Resorts, Inc. ("PR") with the ultimate result being that MRA will be a wholly owned subsidiary of PR . . . . (Defs' Ex. 14, ¶ 5.6, emphasis added).
At trial, Mueller testified that the language of paragraph 5.6 was important for the following reasons:
Q: Was that paragraph important to Mad River Holdings, LLC, the borrowers?
A: Yes, it was. That was the language that allowed us to consummate or to go through with the merger that we anticipated.
Q: What was the reaction of Business Loan Express to that language being contained in this agreement, sir?A: They accepted this language. (Tr. 165).
On September 27, 2001, Mueller met with Jones for the express purpose of completing all obligations of the borrowers and guarantors in anticipation of the closing that was scheduled for the following day. In conformity with paragraph 2.5 of the loan agreement, Mad River obtained two $250,000 certificates of deposit and pledged them as additional security to BLE. (Defs' Exs. 15 16). As a result, $500,000 of Mad River's liquid assets was tied up. In addition, Mad River and the guarantors executed all loan documents that were required pursuant to the loan agreement. (Tr. 174-76). On September 27, Jones forwarded all loan documents by Federal Express to Gunning to be held in escrow pending closing the following day.
However, late in the afternoon of September 27, 2001, Gunning received a draft of the USDA conditional commitment and request for obligation of funds. (Defs' Ex. 36; Tr. 126). Paragraph 10(vii) of the "Conditions and Requirements" provided, in part, that "[t]he Loan Agreement must contain the following provisions: . . . vii. Restrictions concerning consolidations, mergers or other circumstances." (Defs' Ex. 36). Mueller testified that the USDA's draft of the conditional commitment caused much concern with Mad River, particularly because it contained language prohibiting mergers that directly conflicted with the language of the loan agreement (paragraph 5.6) that explicitly provided for the merger between Mad River and Mad River Acquisitions, Inc.:
Q: Did that document cause you any concerns?
A: Yes. This document prohibited us from merging with, merging Mad River Holdings LLC as we intended to.
Q: Was that acceptable to Mad River Holdings LLC as of September 27, 2001?A: No, it was not.
Q: And why not, sir?
A: Because, again, we needed to consummate — we wanted to consummate this merger into Peak Resorts and in doing that without permission we would have immediately been in default of the agreement.Q: And how would you have been in default in that agreement?
A: Because we would have merged contrary to the documentation in the loan agreement, which is an event of default. (Tr. 178-79).
Jones similarly testified that the language in paragraph 5.6 was of absolute importance to defendants because of the corporate restructuring that was scheduled to occur in the latter part of 2001. (Tr. 222).
Q: Now I would like you to take a look please, sir, not only of Exhibit 14, but Defendant's Exhibits 15 through 34.
I will ask you what that group of exhibits represent [ sic].
A: The loan closing documents.
Q: Did you review all of those documents with Mr. Mueller on September 27 of 2001?A: Yes, I did.
Q: Did there come a point during the afternoon of September 27, 2001 when a problem became apparent?A: Yes, there was.
Q: And can you tell us approximately what time that occurred and what the nature of the problem was?
A: Sometime early afternoon it became apparent that the USDA was not going to accept the loan agreement as it was drafted with the merger language. (Tr. 224).
After learning immediately prior to closing that the merger was going to be prohibited under the loan agreement, Mad River decided that it could not go forward under these conditions and needed "the language [of paragraph 5.6] that would allow us to do this merger." (Tr. 167). In BLE's view, paragraph 5.6 of the loan agreement represented a minor issue to which the USDA would not object. As Sandusky testified on cross-examination:
Q: In fact, you felt that the USDA's concerns regarding paragraph 5.6 on the afternoon of September 27, 2001 was a matter of splitting hairs by the United States Department of Agriculture?A: Splitting hairs?
Q: Yes, sir.
A: I felt like it was a minor issue and once the USDA was aware of what Mad River Holdings wanted to do they would be fine with it. (Tr. 132).
Counsel to Mad River, Jones, informed Gunning, counsel to BLE, and Sandusky, the Vice President of BLE, on September 27 that the prohibition of the merger in the conditional commitment from the USDA was unacceptable to Mad River. (Tr. 227). Accordingly, Sandusky, Jones, and Gunning reviewed the regulations of the USDA to try to find a way to work around the problem. (Tr. 228). Jones testified that he also discussed this problem with Randy Monhemius, a representative from the USDA. (Tr. 227). Although Jones informed Mr. Monhemius that the language in the commitment letter would need to be redrafted before Mad River could accept it, Jones got the sense after his conversation with Monhemius that the language in 5.6 would not be approved by the USDA. (Tr. 231). Gunning informed Jones that same day that the USDA had offered a few suggestions with respect to the problematic language in the agreement. First, Mad River could close on the loan without the language in paragraph 5.6 and later request approval of the merger from the USDA in a formal written request. (Tr. 234). Jones testified that this was unacceptable to Mad River for the following reason:
Q: Was that acceptable to the borrowers after your discussions with them?A: No, it was not.
Q: Can you tell us why not?
A: Again, it's very critical in the timing issue for the tax and for the merger and also I couldn't advise a client knowing full well that they were going to be in default within 30 to 45 days upon — to sign a loan that they were going to go in default. I wouldn't have advised them to sign it.Q: How would they have gone in default?
A: They would have merged and the document prohibited a merger in the consolidation. (Tr. 234-35).
In the alternative, Gunning informed Mad River that the USDA would allow it to resubmit the application in the name of the newly merged entity, Mad River Acquisitions, Inc. However, as with the first alternative, the second alternative was also unacceptable.
Q: Was that acceptable, sir?
A: Not, it was not.
Q: Why was that not acceptable?
A: There was no guarantee that they would get that done in the time frame that we were looking at.
Q: Sir, there has been some suggestion that perhaps that could have been accomplished, that is, resubmitted in the name of Mad River Acquisitions, Inc. within a two week period of time.
THE COURT: And it would be approved within a two week period of time.A: The merger could not have occurred within a two week period of time.
Q: Why not?
A: Just you have [sic] state documents to file. I was not doing the merger, I didn't represent that portion of it, but you had certain merger documents, stock would have to be transferred, your assets would have to have been transferred. It could have taken, you know, [ sic] substantial amount of time.Q: Sir, is that work you typically do in the course of your practice?
A: Yes, it is.
Q: Can you tell us approximately how long that might have taken had you been doing that transaction?A: Probably four to eight weeks.
Q: Was that suggestion acceptable?
A: No, it was not.
Q: To the borrowers?
A: No. (Tr. 235-36).
In other words, neither option was consistent with the loan agreement between Mad River and BLE. Deleting paragraph 5.6 did not address Mad River's merger expectations. Mueller testified that if the USDA did not approve of the language in paragraph 5.6 and Mad River continued nonetheless with the merger process, it "would have had to refinance the USDA loan at that stage, which had a five percent prepayment penalty in it." (Tr. 183). Submitting a loan application for issuance of a USDA commitment was also unacceptable because it would require in advance the formation of Mad River Acquisitions; consummation of the merger between Mad River Holdings, LLC and Mad River Acquisitions, Inc.; and submission of an application for a conditional commitment to the USDA with a reconstituted balance sheet.
On the morning of September 28, 2001, the USDA issued its conditional commitment, which, like the draft commitment, prohibited consolidations, mergers or other similar circumstances. (Defs' Ex. 40). The scheduled closing did not take place. On the fax cover sheet to the conditional commitment that was addressed to Jones, Sandusky indicated that the USDA would consider the additional mergers/consolidation language and that they would contact BLE the following week with their decision. (Id.). However, on October 5, 2001, Monhemius forwarded an e-mail to Sandusky in which he stated that "the loan agreement that was forwarded to [the USDA]is not acceptable as it reads due to the paragraph concerning the transfer of assets to Mad River Acquisitions [paragraph 5.6] after loan closing." (Pl.'s Ex. 11).
At trial, plaintiff did not share Mad River's view with respect to the latter's reasons for not going through with the loan agreement with BLE. Specifically, it is plaintiffs theory that Mad River defaulted on its loan agreement in order to save money by getting a more favorable loan through Allegient Bank. As Mueller testified on cross-examination:
Q: You subsequently did obtain financing, didn't you?
A: Yes, we did.
Q: And when was that?
A: I think we closed on that loan on December 1 of 2001. the 5th, I'm sorry. It was either December 1 through the 5 somewhere in that time frame, I believe, we closed.Q: Was that a USDA guaranteed loan?
A: No, it was not.
Q: It was a conventional loan?
A: Yes, it was.
Q: And is it fair to say that by closing on the loan that you did in between December 1 or December 5, that you saved $80,000 which would have been a fee payable to the USDA in connection with this loan, isn't that fair to say?
A: We did not pay that high a fee to close a conventional loan, yes. (Tr. 190-91).
Plaintiff also pointed out that Mad River did not pay "an origination fee of $62,000 payable to Business Loan Express." (Tr. 192).
Q: Would it be fair to say that by not closing on this USDA loan with Business Loan Express, you and your group of borrowers saved approximately $250,000?A: Okay.
Q: Correct?
A: I agree. (Id.).
Mad River countered that it did indeed incur an origination fee with Allegient, and that the terms of that loan were in fact not as favorable as were the terms of the loan with BLE As Mueller testified on redirect:
Q: The loan terms with Allegient Bank, were they as favorable as those that you had [ sic] if the loan with [BLE] had gone through?
A: The term would not have been [as favorable] because the term was only a three year term even though we have 25 year amortization. The [BLE] term was a fixed term.Q: Did Allegient Bank provide as much money?
A: No, they did not. (Tr. 205).
II. ANALYSIS
Plaintiff maintains that defendants breached the parties' agreement by refusing to close on the loan after discovering that the language in paragraph 5.6 (of the draft loan agreement) with respect to mergers would be unacceptable to the USDA. It is plaintiff's view that the USDA presented Mad River with two viable options but that Mad River rejected both options outright in order to procure a different loan with a better rate. In a nutshell, plaintiff argues that Mad River breached its authorization agreement with Stevens by failing to close on the loan agreement with BLE.
Mad River counters that the parties' agreement expressly provides that "[i]f the loan/sale does not close because of lender/buyer failure, no such fee shall be earned or payable," and that the above-quoted language unambiguously states that lender/buyer, in this case plaintiff, is not entitled to its fee. Here, closing never took place because BLE was unable to obtain a conditional commitment from the USDA consistent with BLE and Mad River's May 23, 2001 loan commitment letter. Nevertheless, plaintiffs argument assumes that the loan failed to close because of "defects, defaults or misrepresentations" by Mad River — all of which, pursuant to the authorization agreement, would render the $100,000 fee immediately payable to Stevens.
However, Mad River agues, and I agree, that there were no defects attributable to Mad River that prevented the deal from closing; nor did Mad River make any misrepresentations that thwarted the deal. Based on the evidence and testimony adduced at trial, Mad River was upfront and candid with BLE with respect to its plan to merge into Mad River Acquisitions, Inc. (Tr. 166). The only other way for the fee to be payable to Stevens under the authorization agreement would be if Mad River defaulted on its loan agreement with BLE.
Mad River contends that plaintiff cannot demonstrate that Mad River breached its loan agreement with BLE — and therefore defaulted on its authorization agreement with plaintiff — because the May 23, 2001 commitment letter between BLE and Mad River expressly stated that the loan agreement between BLE and Mad River would become effective only upon the satisfaction of the following two conditions: (1) the execution of a mutually acceptable loan agreement; and (2) issuance by the USDA of an 80% guarantee on the loan:
We are pleased to inform you that Business Loan Express has approved a loan to Mad River Holdings, LLC, (hereinafter, Borrower) subject to all terms of this Commitment Letter and subject to issuance by the United States Department of Agriculture (USDA) of an 80% guarantee of the loan under its Business Industry (BI) Loan Program. (Pl.'s Ex. C, emphasis added).
Although BLE and Mad River were able to satisfy the first condition precedent, they were unable to satisfy the second condition insofar as the USDA refused to permit a post closing merger between Mad River and Mad River Acquisitions, Inc. Simply put, Mad River asserts that the lender, not Mad River, failed to obtain the loan guarantee from the USDA, and that the loan failed to close through no fault of Mad River.
The pivotal question in this case is therefore whether Mad River, as borrower, failed to close with BLE because of "defects, defaults or misrepresentations" of its own; if so, then under the terms of the authorization agreement between Mad River and plaintiff, a fee in the amount of $100,000.00 would become immediately payable by Mad River to Stevens. (Pl.'s Ex. B). Such is not the case here. Evidence and testimony adduced at trial indisputably show that the loan agreement between BLE and Mad River failed because BLE could not satisfy a condition precedent, namely, the 80% guarantee on the loan by the USDA. Indeed, the testimony leaves no doubt that BLE was well aware of Mad River's need to integrate paragraph 5.6 into the loan agreement — which included language that permitted Mad River's anticipated merger with Mad River Acquisitions, Inc. — from as early as August 2001. (Tr. 166, 167). Further, the final draft of Mad River and BLE's agreement — dated September 28, 2001 — expressly includes this language with respect to the imminent merger. (Defs' Ex. 14). It was not until September 27, 2001, after Gunning forwarded to Jones a draft of the USDA conditional commitment that expressly placed "[r]estrictions concerning consolidations, mergers or other circumstances" (Defs' Ex. 36) on the loan, that Mad River realized that the language of the loan agreement — allowing for such mergers — would be unacceptable to the USDA. In other words, while I agree with plaintiff that the loan agreement between Mad River and BLE was never consummated, I also find that this failure was through no fault or "default" of Mad River. Obtaining the USDA guarantee was clearly a written condition precedent to consummating the loan between BLE and Mad River, that is, a condition that "must occur before a duty to perform a promise in the agreement arises. Preferred Mortgage Brokers, Inc. v. Byfield, 282 A.D.2d 589, 590 (2d Dep't 2001) (citations omitted). Further, I agree with Mad River that neither of the two options that the USDA proposed were consistent with the loan agreement language Mad River had insisted upon and consequently Mad River did not default by failing to accept either of the proffered options.
III. CONCLUSION
For the foregoing reasons, plaintiff's complaint is dismissed in its entirety, and the clerk of the court is instructed to remove this case and any outstanding motions from my docket.