Summary
stating that the contract-drafter's "strained reading is all the more suspect given that it could have clearly written its intention at the time."
Summary of this case from Roy v. ESL Fed. Credit UnionOpinion
No. 99 Civ. 9002 (NRB).
October 26, 2000.
Francis D. Landrey, Esq., New York, NY.
Glenn M. Kurtz, Esq., Sheron Korpus, Esq. New York, NY.
OPINION AND ORDER
Plaintiff Carolina First Bank ("Carolina" or "plaintiff"), a commercial bank based in Greenville, South Carolina, has brought this action for monetary and injunctive relief alleging that defendant Paribas (formerly "Banque Paribas") ("Paribas" or "defendant"), a French bank with offices worldwide, breached its contractual obligation to use its "best efforts" to replace Carolina in a syndicated loan facility. This Court has diversity jurisdiction pursuant to 28 U.S.C. § 1332. Now pending are cross-motions for summary judgment, pursuant to Fed.R.Civ.P. 56. For the reasons explained below, defendant's motion for summary judgment is granted and plaintiff's cross-motion for summary judgment is denied,
FACTS
This case concerns a syndicated loan facility. Loan syndication is a method of spreading risk exposure for large loans among lending institutions. Risk spreading enables companies to borrow much greater sums of money than they would normally be able to borrow from a single institution. Loan syndication generally works as follows. A company wishing to borrow capital will approach a large bank to organize the loan. The first bank, called the "agent bank," will evaluate and price the debt risk and offer shares in the debt to other investment institutions. Institutions choosing to participate will purchase varying amounts of the debt from the agent bank, sometimes on different terms. This series of debt arrangements is called the loan "facility." Once the loan is made, the facility is "closed" and debtholders have two options. They may either: 1) retain the debt and collect the scheduled interest payments until the debt is repaid or repurchased by the debtor, or 2) sell the debt on the open market.
The present case is a tale of two loan facilities. The first facility was a $75,000,000 loan to South Carolina-based Moovies, Inc. (the "Moovies Facility") made on march 14, 1997. Paribas was the agent bank and, along with Paribas Capital Funding LLP ("Paribas Capital"), the largest participant, with a combined commitment of $20,200,000. Carolina participated in the Moovies Facility with a commitment of $4,800,000.
Unless otherwise indicated, all facts are drawn from Plaintiff's and Defendant's Statements of Undisputed Material Facts Pursuant to Local Rule 56.1 and the undisputed exhibits attached to Plaintiff's and Defendant's Motions for summary judgment. Both parties took full advantage of their opportunity to take discovery and presented the Court with an extensive record.
Unless otherwise indicated, "Paribas'" debt refers to the combined debt held by Paribas and Paribas Capital.
By early-1998, Moovies' creditworthiness was deteriorating. Video Update, Inc. ("Video Update"), offered to acquire Moovies on the condition that the $75,000,000 Moovies Facility be replaced with a $120,000,000 facility for Video Update ("Video Update Facility"). The Video Update Facility was viewed as a superior credit risk to the Moovies Facility by all of the participating banks, including Carolina. However, no participants wanted to raise the level of their commitment. Paribas sought new commitments to cover the $45,000,000 in additional debt, but was only able to sell $30,000,000. In order to close the facility, Paribas assumed the unsold portion of the Video Update Facility. As a result, Paribas' commitment rose to $34,200,000 while Carolina's commitment decreased by $200,000 to $4,600,000.
Carolina was reluctant to participate in the Video Update Facility. In negotiations over the Video Update Facility, Carolina emphasized to Paribas that it did not typically participate in loan syndicates and wanted out as soon as feasible. See, e.g., Plaintiff's Cross-Motion for Summary Judgment, Ex. 2 (February 12, 1998 letter from Carolina first President James Terry to Ed Whalen and Donald Ercole of Paribas). Indeed, it reiterated its reluctance in the preamble to the two-page agreement governing its participation:
Carolina First does not generally participate in nationally-syndicated credits. We are involved in the existing facility only because Moovies was headquartered in Greenville, South Carolina, and we had provided its banking relationship from the time the company was formed. Now that Moovies is being acquired by a Minnesota company and the Greenville office is being closed, Carolina First no longer believes it has a role to play in the new facility.
Nevertheless, Carolina chose to join the Video Update Facility on the terms it drafted in its March 5, 1998, Agreement ("the Agreement"), which was signed by both Paribas and Paribas Capital. Three provisions in that agreement are at the heart of this case:
4) The combined commitment of Banque Paribas and Paribas Capital to the New Facility at closing will be a combined minimum of $34,200,000. Except as provided for in paragraph 5 below, any new commitments to the New Facility after closing shall be applied toward the reduction of the maximum commitments shown on Exhibit A on a pro rata basis.
5) Subsequent to closing, Banque Paribas and Paribas Capital may, on a pro rata basis as provided for in paragraph 4 above, reduce their combined minimum commitment to $20,000,000, but their post-closing minimum commitment shall not be reduced below $20,000,000 (other than regular scheduled payments outlined in their loan documents).
8) Banque Paribas acknowledges Carolina First's desire to be paid out of the New facility as quickly as possible, and Bank [sic] Paribas agrees to use its best efforts to replace Carolina First, whether in the initial sale, or in any subsequent sales of the New Facility.
Exhibit A listed the 11 participants in the Video Update Facility at the time of its closing. Carolina's share of the Video Update Facility was $4,600,000 or approximately 3.83%.
Paribas also struck side-agreements with two other Moovies Facility participants, First Source Financial, Inc. ("First Source") and PPM America ("PPM"), entitling them to some version of pro rata reduction in the event of any new commitments.
On October 2, 1998, Paribas received a new investment in the Video Update Facility of $20,000,000 from Sterling Asset management, an affiliate of Sterling Bank ("Sterling"). When Sterling told Paribas of its interest in the Video Update Facility, Paribas did not inform Sterling of Carolina's desire to sell-out its participation or notify Carolina of Sterling's interest in purchasing the debt. Indeed, plaintiff alleges even after Paribas made the $20,000,000 sale to Sterling, it did not inform any of the other Video Update Facility participants of the transaction. It simply reduced its own commitment to $14,200,000.
Carolina first learned of the Sterling sale in early 1999. Upon receiving this information, Carolina informed Paribas that it was in breach of the Agreement. In response, Paribas negotiated agreements with Carolina, First Source, and PPM on March 16, 1999, whereby it purchased from each the pro rata portion of the Sterling sale to which it was entitled under its respective agreement. In Carolina's case, the pro rata share only applied to the first $14,200,000 of the sale — it reserved the right to litigate its claim to the remaining $5,800,000 in this lawsuit. This sale reduced Carolina's exposure by $544,333.33, to $4,056,666.66, and raised Paribas' exposure from $14,200,000 to $19,174,258.
Video Update has experienced financial difficulties and is currently in bankruptcy. See Transcript of October 5, 2000 Oral Argument at 2. Carolina filed suit in this case on August 18, 1999.
ANALYSIS
A. Liability
This Court addresses the case on cross motions for summary judgment, pursuant to Fed.R.Civ.P. 56. Summary judgment is properly granted "'if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to material fact and that the moving party is entitled to judgment as a matter of law.'" R.B. Ventures. Ltd. v. Shane, 112 F.3d 54, 57 (2d Cir. 1997) (quoting Fed.R.Civ.P. 56(c)). The Federal Rules of Civil Procedure mandate the entry of summary judgment "against a party who 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 Corp. v. Catrett, 477 U.S. 317, 322 (1986)
In reviewing the record, we must assess the evidence "in the light most favorable to the non-movant and . . . draw all reasonable inferences in his favor." Delaware Hudson Ry. Co. v. Consolidated Rail Corp., 902 F.2d 174, 177 (2d Cir. 1990). The mere existence, however, of an alleged factual dispute between the parties will not defeat a motion for summary judgment. Rather, the non-moving party must affirmatively set forth facts showing that there is a genuine issue for trial. Anderson v. Liberty Lobby, Inc., 477 U.S. 242. 256 (1986). An issue is "genuine . . . if the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Id. at 248 (internal quotation omitted).
This case requires us to interpret a written contract. The interpretation of a contract is a matter of law for this Court, See K. Bell Assoc. v. Lloyd's Underwriters, 97 F.3d 632, 637 (2d Cir. 1996) (quoting Readco. Inc. v. Marine Midland Banks, 81 F.3d 295, 299 (2d Cir. 1996)); Nowak v. Ironworkers Local 6 Pension Fund, 81 F.3d 1182, 1992 (2d Cir. 1996), and where its meaning is unambiguous on the four corners of the contract, that meaning should be applied as a matter of law. See Hauser v. Western Group Nurseries, Inc., 767 F. Supp. 475, 484 (S.D.N.Y. 1991) ("Summary judgment is only appropriate when the sole issue is the interpretation of a clear and unambiguous written agreement.").
However, "[w]here contractual language is ambiguous and subject to varying reasonable interpretations, intent becomes an issue of fact and summary judgment is inappropriate." Thompson v. Gjivoje, 896 F.2d 716, 721 (2d Cir. 1990) (citing Leberman v. John Blair Co., 880 F.2d 1555, 1559 (2d Cir. 1989)). That ambiguity, the Second Circuit reminds us, must be reasonable and material. "The mere assertion of an ambiguity , does not preclude summary judgment. The nonmoving party must show that the contractual language is `susceptible of at least two fairly reasonable meanings.'" Mycak v. Honeywell. Inc., 953 F.2d 798 (2d Cir. 1992) (Quoting Wards Co. v. Stamford Ridgeway Assoc., 761 F.2d 117, 120 (2d Cir. 1985) (quoting Schering Corp. v. Home Ins. Co., 712 F.2d 4, 9 (2d Cir. 1983)). See Wards, 761 F.2d at 120 ("We stress that the meaning urged by the non-moving party must be `fairly reasonable,' for, indeed, it is the rare sentence that cannot be read in more than one way if the reader is willing either to suspend the rules of common English usage or ignore the conventions of a given commercial setting."). Thus, the issue before this Court is whether the Agreement allows of one or more reasonable interpretations.
Carolina contends that Paribas breached the Agreement when it failed to use its "best efforts" to "replace" Carolina in the Sterling sale as it contends Paribas was obligated to do under Clause Eight of the Agreement. Carolina reads the Agreement as creating a two step process governing Paribas' handling of any prospective participants in the Video Update Facility. First, Clause Eight requires Paribas to give Carolina a right-of-first-refusal on any new sale, either through brokering an agreement with the buyer to purchase Carolina's share or informing Carolina of the buyer's interest so Carolina could pursue a buyout. However, if the buyer chose not to buy from Carolina, then Clauses Four and Five governs the pro rata distribution to Carolina of the proceeds from Paribas' sale.
Paribas, in contrast, contends that Clause Eight has nothing to do with distributing proceeds — it only obligates Paribas to use its "best efforts" to sell new commitments. The distribution of proceeds from any new sales is governed exclusively by the pro rata provisions in Clauses Four and Five.
Carolina's reading of the Agreement creates an internal inconsistency and is in conflict with basic canons of contract interpretation. Although the two-step system Carolina describes in its briefs is creative, the plain language of the Agreement refutes this construction. Clause Four is the only clause to address specifically "new commitments" to the facility. It states that "[e]xcept as provided for in paragraph 5 below, new commitments to the New Facility after the closing shall be applied toward the reduction of the maximum commitments shown on Exhibit A on apro rata basis" (emphasis added). Clause Four appears to provide wholly and adequately for the distribution of any new sales generated by Paribas. The categorical description, "new commitments to the New Facility," does not accommodate the distinction Carolina seeks to draw between new commitments Paribas generated and sold, and new commitments Paribas generated but steered toward Carolina. Furthermore its explicit allowance of a single exception to its pro rata rule — Paribas' $20,000,000 minimum commitment described in Clause Five — gives rise to a strong negative inference that it was subject to no other exception.
Clause Five reads: "Subsequent to closing, Banque Paribas and Paribas Capital may, on a pro rata basis as provided for in paragraph 4 above, reduce their combined minimum commitment to $20,000,000, but their post-closing minimum commitment shall not be reduced below $20,000,000 (other than regular scheduled payments outlined in their loan documents)."
In contrast, Clause Eight makes no reference whatsoever to "new commitments" or any other term relating to how prospective sales should be handled. It neither acknowledges, nor is acknowledged by, the distribution provisions in Clauses Four and Five. Given the emphasis Carolina's construction places on Clause Eight, it is logically inconsistent for Clause Four to only except one of the two clauses to which it is supposedly subject. Thus, Clause Eight and Clauses Four and Five read as distinct obligations, with the latter pair solely governing the distribution of new sales generated by Paribas.
Clause Eight reads: "Banque Paribas acknowledges Carolina First's desire to be paid out of the New facility as quickly as possible, and Bank (sic] Paribas agrees to use its best efforts to replace Carolina First, whether in the initial sale, or in any subsequent sales of the New Facility."
Clause Four reads: "The combined commitment of Banque Paribas and Paribas Capital to the New Facility at closing will be a combined minimum of $34,200,000. Except as provided for in paragraph 5 below, any new commitments to the New Facility after closing shall be applied toward the reduction of the maximum commitments shown on Exhibit A on a pro rata basis."
Even if Clause Eight could somehow be read as creating a "best efforts" obligation in conflict with Clauses Four and Five, the latter pair's specificity would override any incompatible general obligation in Eight. It is a basic rule of contract interpretation that if a specific and a general provision of a contract conflict, the specific provision governs. See John Hancock Mut. Life Ins. Co. v. Carolina Power Light Co., 717 F.2d 664, 670 (2d Cir. 1983); Bank of Tokyo-Mitsubishi ltd. v. Kvaerner, 243 A.D.2d 1, 14, 671 N.Y.S.2d 905 (1st Dep't 1998). Even on Carolina's theory, Clause Eight is a general provision requiring Paribas to try to facilitate a sale between Carolina and a prospective buyer. In contrast, Clauses Four and Five deal specifically with the mechanism for distributing new money brought into the Facility by Paribas. Thus, to whatever extent Clause Eight alone could be construed as consistent with Carolina's position, it is trumped by Clauses Four and Five in governing the distribution of proceeds from new sales generated by Paribas.
Finally, the paucity of evidence on the Agreement's face to support Carolina's two-step theory is particularly conspicuous because Carolina drafted the Agreement. Although the general principle that ambiguity should be construed against an agreement's drafter is not directly applicable because this contract is unambiguous, see Jacobson v. Sassower, 66 N.Y.2d 991, 992 (N.Y.Ct.App. 1985) ("In cases of doubt or ambiguity, a contract must be construed most strongly against the party who prepared it, and favorably to a party who had no voice in the selection of its language"); Strauss Parer Co. Inc. v. RSA Executive Search, Inc., 260 A.D.2d 570, 688 N.Y.S.2d 641 (2nd Dep't 1999), Carolina's strained reading is all the more suspect given that it could have clearly written its intention at the time.
For the reasons discussed above, this Court finds Carolina's interpretation of the Agreement is unreasonable. The issue, therefore, is whether Paribas' interpretation of the Agreement is reasonable and, if so, whether it is the only reasonable one allowed.
The reasonableness of Paribas' interpretation turns on Clause Eight's meaning. If Clauses Four and Five alone govern distribution of proceeds from new sales generated by Paribas, what does Clause Eight mean? Since it was clear that Paribas had a strong interest in continuing to sell new commitments in order to reduce its own $34,200,000 exposure, Clause Eight might appear to be redundant. However, in light of Clause Five, Clause Eight can reasonably be seen as a necessary incentive for Paribas to continue its sales efforts once it reached its $20,000,000 minimum commitment. When Paribas' commitment reached the $20,000,000 floor, it would lose any economic incentive to continue selling because it would reap no benefit from the sales. However, Carolina would not yet have been replaced by the time Paribas' reached the $20,000,000 floor. Therefore, in light of Carolina's "desire to be paid out of the New Facility as quickly as possible," Clause Eight plays an important role by obligating Paribas to continue using its "best efforts" to sell commitments, even when it no longer has an economic interest to do so.
Although not a portrait of clarity, Paribas' interpretation of the Agreement is internally consistent and reasonable. This Court does not find any other reasonable interpretation of the Agreement and, therefore, we find that the Agreement is unambiguous as a matter of law.
B. Damages
Irrespective of the above conclusions, Paribas concedes that it is currently in breach of Clause Five because its current commitment is $19,174,258 — $825,742 below its $20,000,000 minimum commitment. Paribas has offered to remedy the breach through either: (1) specific performance, to wit, acquiring $825,742 in Video Update Facility notes on the open market in order to raise its commitment to Clause Five's $20,000,000 minimum, or (2) damages in the amount of Carolina's pro rata share of Paribas' $825,742 breach. At oral argument, Carolina's counsel stated that Carolina would prefer damages to specific performance. See Transcript at 52. Carolina's pro rata share of the Video Update Facility was originally 3.83% ($4,600,000 divided by $120,000,000). However, as Paribas' counsel stipulated, see transcript at 56, because Paribas is not permitted to reduce its own commitment below $20,000,000, it its commitment should not be counted in determining the pro rata shares once it reached the $20,000,000 floor. Accordingly, subtracting Paribas' $34,200,000 original commitment from the $120,000,000 total, makes the new denominator $85,800,000, and Carolina's pro rata share 5.36% ($4,600,000 divided by $85,800,000). Applying Carolina's 5.36% pro rata share to Paribas' $825,742 breach entitles Carolina to damages in the amount of $44,270.55.
CONCLUSION
For the foregoing reasons, plaintiff's motion for summary judgment is hereby denied and defendant's motion for summary motion is hereby granted. Defendant is ordered to pay damages in the amount of $44,270.55. The Clerk is respectfully directed to enter judgment and close the case on the docket of the Court.
IT IS SO ORDERED.