Opinion
CIVIL ACTION NO. 06-10619-RWZ.
October 30, 2007
MEMORANDUM AND ORDER
I. Introduction
Plaintiff LPP Mortgage Ltd. ("LPP") moves for summary judgment against defendant Leonard Sugarman ("Sugarman") as guarantor of the outstanding balance on a Small Business Administration ("SBA" or "Lender") loan. Sugarman has filed a cross-motion seeking summary judgment on the ground that the SBA violated the terms of a 1980 Limited Guaranty governing repayment. For the reasons below, both motions are denied.
II. Procedural and Factual Background
A. The 1980 Loan Guaranty Agreement
In 1975, the SBA loaned $4 million to Statler Industries, Ltd. ("Statler" or "Debtor"), a Maine manufacturer of paper products. The loan was secured by certain of Statler's real property and a security interest in Statler's machinery and other assets. The SBA also demanded a personal guaranty from Sugarman, then Statler's president. At the time, he agreed to a guaranty of 60% of the outstanding loan amount, which was equal to the percentage of the company's equity he owned.
On July 17, 1980, Sugarman executed a new guaranty for the 1975 loan on the SBA's standard guaranty form no. 148 (8-75). (Docket # 14, Ex. C (the "Guaranty").) The boilerplate terms of the Guaranty required Sugarman to pay the SBA "the amount due and unpaid by the Debtor . . . as if such amount constituted the direct and primary obligation of the Undersigned [Sugarman]." (Id.) In addition, Sugarman gave consent to the SBA to, without notice, "deal in any manner" with the collateral, including:
[T]he substitution, exchange, or release of all or any parts of the collateral, whether or not the collateral, if any, received by Lender upon any such substitution, exchange, or release shall be of the same or of a different character or value than the collateral surrendered by Lender.
(Id.) The boilerplate also allowed the SBA to demand payment from Sugarman without first exhausting its rights with respect to the collateral:
Lender shall not be required, prior to any such demand or payment by the Undersigned, to make any demand upon or pursue or exhaust any of its rights or remedies against the Debtor or others with respect to the payment of any of the Liabilities, or to pursue or exhaust any of its rights or remedies with respect to any part of the collateral.
(Id.)
The standard SBA form is, however, modified by the typewritten word "LIMITED" before GUARANTY in the title and the addition of two lines of text at the end:
This guaranty is limited to the deficiency existing after the sale of corporate assets securing the subject loan. The guaranty is further limited to an amount not to exceed Five Hundred Thousand Dollars.
(Id.)
B. The Loan and Guaranty Are Transferred
In late 1994, Statler failed to make its required payments on the loan. The SBA declared Statler in default and demanded from it the then outstanding balance of approximately $1.277 million plus interest. Shortly thereafter, Statler filed for bankruptcy.
With the permission of the bankruptcy court, Statler sold its assets to Tree-Free Fiber Co., LLC ("Tree-Free") in February 1996. In connection with the purchase, Tree-Free assumed Statler's obligations under the SBA loan. Sugarman executed a Consent and Reaffirmation consenting to Tree-Free's assumption of the loan and reaffirming his obligations pursuant to the Guaranty. Under the assumption agreement, Sugarman agreed that "Tree-Free may sell machinery or equipment with an aggregate value up to $25,000 per year without need to obtain SBA's prior consent." (Docket # 14, Ex. D. § 4(e).) A handwritten addition to this clause, initialed by Sugarman, allows this equipment to be sold "without accounting for the same." (Id.)
In coordination with the purchase of Statler's assets, Tree-Free obtained a $6 million loan from one of its suppliers, Thermo Fibertek, Inc. ("TFI"). This loan was secured by a security interest in certain pieces of equipment included in the Statler assets. The SBA agreed to the subordination of its first security interest in the equipment and the agreement also includes Sugarman's written consent to the subordination.
C. The SBA Subordinates Its Interest In the Collateral
In early 1997, Tree-Free sought to refinance its debt to upgrade its manufacturing capabilities. In negotiations with the SBA surrounding this financing, Tree-Free asked the SBA to share its first position on the real estate and machinery and equipment securing the 1975 loan with the proposed new lenders. Philip Proulx ("Proulx"), the SBA's Chief of Portfolio Management, noted in a letter to Tree-Free that Sugarman's guaranty was not at risk of being called as long as it was secured by the collateral, but it would be at risk if the SBA gave up its first position. Proulx's letter described a "moral obligation" to Sugarman and warned Tree-Free, "should we agree to enter agreements which place [Sugarman] at risk of personal loss, we would anticipate litigation. . . ." (Docket # 24, Ex. A, LPP01280.) Nevertheless, in July 1997, the SBA entered into an Intercreditor Agreement, apparently without Sugarman's knowledge, with KeyBank, NA ("KeyBank") and TFI. In return for loans and refinancing to Tree-Free from TFI and KeyBank, the SBA gave up its first secured position on the collateral securing the 1975 loan.
D. Sugarman's Guaranty is Called
Less than a year later, KeyBank called its loan and the Maine Superior Court placed Tree-Free into receivership. Subsequently, Tree-Free's assets were sold, with the SBA receiving only $350,000 of the proceeds. In June 2000, the SBA sought the outstanding balance of $284,688.71 plus interest from Sugarman as guarantor of the 1975 loan. In August 2000, the SBA sold the loan to LPP, the plaintiff in the instant action.
E. The Instant Action
LPP filed suit on April 7, 2006, seeking payment of the balance outstanding on the loan, accrued interest, costs and attorney's fees from Sugarman. The matter is now before me on the parties' cross motions for summary judgment. (See Docket ## 12, 16.) LPP also moves to strike the affidavit of one of Sugarman's witnesses. (Docket # 30.) Sugarman seeks to file a reply to LPP's opposition. (Docket # 32.)
III. Legal Standard
A. Legal Standard for Summary Judgment
Summary judgment is appropriate if, viewing the evidence in the light most favorable to the non-moving party and drawing all reasonable inferences in his favor, no genuine issue of material fact remains. See Fed.R.Civ.P. 56(c); Casas Office Machs., Inc. v. Mita Copystar Am., Inc., 42 F.3d 668, 684 (1st Cir. 1994). "As to issues on which the summary judgment target bears the ultimate burden of proof, she cannot rely on an absence of competent evidence, but must affirmatively point to specific facts that demonstrate the existence of an authentic dispute."Grant's Dairy-Maine, LLC v. Comm'r of Maine Dept. of Agric., Food Rural Res., 232 F.3d 8, 14 (1st Cir. 2000).
"A guaranty is a contract and is governed by the same rules of construction as other contracts." John Nagle Co. v. Gokey, 799 A.2d 1225, 1227 (Me. 2002) (quoting Kandlis v. Huotari, 678 A.2d 41, 43 (Me. 1996)); accord First Nat. Bank v. McGowan, 5 N.E.2d 5, 7 (Mass. 1936) ("The liability of a guarantor is to be ascertained from the terms of the written instrument by which the obligation is expressed, construed according to the usual rules of interpretation. . . .") (internal quotation omitted).
"When a contract is unambiguous, the trial court may decide an issue pertaining thereto by summary judgment." Fowler v. Boise Cascade Corp., 948 F.2d 49, 54 (1st Cir. 1991). "Contract language is ambiguous when it is reasonably prone to different interpretations." Id. The determination of whether a contract term is ambiguous is a question for the court. See Allen v. Adage, Inc., 967 F.2d 695, 698 (1st Cir. 1991).
Even if the contract is ambiguous, the court may still grant summary judgment when the extrinsic evidence supports only one reasonable interpretation. Adria Int'l Group, Inc. v. Ferre Dev., Inc., 241 F.3d 103, 111 (1st Cir. 2001); Adage, 967 F.2d at 698.
B. Choice of Law
The Guaranty is silent on which state's substantive law governs its interpretation. Sugarman asserts that Maine law applies because "the loan proceeds [he guaranteed] were used to make improvements to a paper plant in Augusta, Maine and were secured by a mortgage on Maine real estate and a security interest in machinery and equipment located in Maine." (Docket # 18, 8.) LPP disagrees, arguing that the operative document is the Guaranty, which was signed by Sugarman "while a resident of Massachusetts; LPP's demand was sent to Sugarman at his Massachusetts address; Sugarman is [currently] a Massachusetts resident; and all correspondence by Plaintiff with LPP originated from Massachusetts." (Docket # 27, 3 n. 1.) However, it concludes that "there does not appear to be much difference between Maine and Massachusetts law regarding the enforceability and interpretation of guaranties" and cites to both Maine and Massachusetts law in its opposition. (Id.) Because the result on the present motions is not affected by choice of law, I do not reach a decision on the issue at this time.
IV. Discussion
A. The Limitations Added to the 1980 Guaranty
The parties disagree over the meaning of the added language: "[t]his guaranty is limited to the deficiency existing after the sale of corporate assets securing the subject loan." (Guaranty.) Sugarman argues that it was intended to convert a guaranty of payment into a guaranty of collection. Because the SBA impaired its collateral when it entered into the Intercreditor Agreement, it violated the terms of the Guaranty and thereby excused Sugarman's performance.
The problem with Sugarman's interpretation is that it requires the added terms to override much of the boilerplate, even though the parties did not strike the language giving the SBA the unfettered right to manage the collateral in any way it chooses or to pursue Sugarman for payment without first exhausting its rights against the Debtor. The general rule is that interpretations that render any particular provision in a contract meaningless should be avoided. See McCarthy v. U.S.I. Corp., 678 A.2d 48, 52 (Me. 1996); Lexington Ins. Co. v. All Regions Chem. Labs, Inc., 647 N.E.2d 399, 400 (Mass. 1995). Sugarman points to no evidence that the SBA intended to give up such sweeping rights when it acquiesced to the added language.
For its part, LPP insists that the added limitation merely affects the timing of when the Lender can present Sugarman with a demand for the loan balance (i.e., "after the sale of corporate assets"). (Docket # 13, 8.) Under its interpretation, because the SBA liquidated the collateral before seeking payment on the Guaranty, "Sugarman has derived the benefit that the language contemplates," even if the proceeds from the sale were not allocated to him. (Docket # 27, 6.) Indeed, in its view, "[e]ven had the SBA simply sold the collateral for no value, as long as it did so prior to pursuing the Guaranty, then Sugarman still would have received the benefit of his bargain and all of the terms of the [G]uaranty would still have effect." (Id. at 6 n. 3.) LPP asserts that this is the only interpretation that does not create ambiguity between the boilerplate giving the SBA all rights over the value or mode of disposition of the collateral and the added text.
LPP's interpretation of the added language as merely temporal is contradicted by the words themselves. A plain reading of the words "limited to the deficiency existing after the sale of corporate assets securing the subject loan" clearly contemplates applying the proceeds of that asset sale to the outstanding balance on the loan to calculate the deficiency, if any, due under the Guaranty. (Guaranty (emphasis added).) In addition, Sugarman avers that this was his intent when he requested that this language be added to the 1980 Guaranty. While LPP asserts that the intent of the parties did not include a requirement that Sugarman consent prior to the SBA subordinating and releasing the collateral, a point that Sugarman does not contest, it does not suggest that either Sugarman or the SBA intended this addition to merely control the timing of a demand under the Guaranty.
The plain meaning of the added text, however, is in direct conflict with the boilerplate allowing the Lender to make a demand under the Guaranty without first "exhaus[ting] any of its rights or remedies with respect to any part of the collateral." (Guaranty.) Where parties have inserted text in a standard contract, the added text governs. See King Features Syndicate v. Cape Cod Broad. Co., 59 N.E.2d 481, 483 (Mass. 1945) (noting the added text is "more likely to represent the intent of the parties"); Plymouth Rubber Co., Inc. v. Ins. Co. of N. Am., Inc., 465 N.E.2d 1234, 1236 (Mass.App.Ct. 1984); Restatement (Second) of Contacts § 203. Although the inserted text is in direct conflict with the boilerplate, the parties to the guaranty agree that they intended to override the boilerplate to the extent it allowed the SBA to present a demand to Sugarman before exhausting its rights with respect to the collateral. (Compare Docket # 13, 9-10, with Docket # 18, 8-9; see also Docket # 27, 11.)
Accordingly, the language added to the 1980 Guaranty requires the Lender to apply the proceeds of the sale of any assets held as collateral to the outstanding balance of the loan. Only after all of the assets securing the loan have been sold and the proceeds deducted from the loan balance may the Lender demand payment of the deficiency from Sugarman and then only up "to an amount not to exceed Five Hundred Thousand Dollars." (Guaranty.) However, this does not mean that the Lender is required to seek Sugarman's permission prior to liquidating or otherwise managing the collateral.
While the Guaranty does not explicitly require the Lender to sell the collateral for a fair price, Massachusetts' requirement that a party to a contract act with good faith and fair dealing would preclude the Lender from liquidating the collateral for no consideration or for an unreasonably low price. See McAdams v. Mass. Mut. Life Ins. Co., 391 F.3d 287, 301 (1st Cir. 2004); UNO Rests., Inc. v. Boston Kenmore Realty Corp., 805 N.E.2d 957, 964 (Mass. 2004). Maine imposes a similar requirement in circumstances governed by specific provisions of the Uniform Commercial Code. See Haines v. Great N. Paper, Inc., 808 A.2d 1246, 1249 (Me. 2002); see also Top of the Track Assocs. v. Lewiston Raceways, 654 A.2d 1293, 1296 (Me. 1995) ("The courts have long recognized an implied covenant in contracts that neither party shall by its unilateral action destroy or injure the right of the other party to receive the fruits or benefits of the contract or render performance impossible.").
The parties' course of performance supports the interpretation that Sugarman negotiated a right to have the proceeds of any sale of collateral applied to the outstanding loan balance. When the SBA sought to allow Tree-Free to liquidate $25,000 per year of the collateral without applying the proceeds as agreed upon in the Guaranty, it first obtained Sugarman's consent. (See Docket # 14, Ex. D § 4(e).) Similarly, the SBA obtained Sugarman's consent when it sought to subordinate its rights to certain collateral in conjunction with the $6 million loan from TFI. (See Docket # 22, Ex. G.) Sugarman also asserts that on several occasions subsequent to granting his consent in these instances, Proulx asked him if he would object to Tree-Free selling additional machinery to cover operating expenses, to which he "very much objected" and stated that he would "approve of no additional exceptions." (Docket # 19 § 13.) LPP has not contested this assertion.
B. The Ambiguity Concerning the SBA's Right to Subordinate
While Sugarman added the language requiring the Lender to dispose of the collateral and apply the proceeds to the outstanding balance before demanding payment, he did not strike the boilerplate giving the Lender total discretion over the "substitution, exchange, or release of all or any parts of the collateral." (Guaranty.) Therefore, there is an ambiguity concerning the intention of the parties when the collateral is not sold, but rather is substituted, exchanged or subordinated in a way that yields no immediate monetary payment, yet reduces Sugarman's protection. The SBA acknowledged this ambiguity when Proulx warned in his letter to Tree-Free that Sugarman was likely to bring suit if the SBA gave up its secured first position in the collateral.
Unlike the direct conflict, supra, concerning the added requirement that the collateral be disposed of before a demand could be presented, this ambiguity cannot be resolved by an assumption that the parties intended the boilerplate text to be overridden. While that is one possibility, it is also conceivable that they intended the economic value of any subordination be applied to the outstanding balance of the loan, or that Sugarman would have veto power over any subordination, or that the parties would negotiate the reduction of Sugarman's liability in each instance or possibly, as Sugarman suggests, that the Guaranty would be discharged. LPP suggests another possibility, namely, that the parties intended to allow the collateral to be subordinated with no adjustment to Sugarman's liability. Therefore, the Guaranty is ambiguous because it is reasonably subject to different interpretations as to the parties' intent when the collateral was replaced or subordinated. See Fowler, 948 F.2d at 54.
While the initial course of performance suggests that the parties intended, at a minimum, to obtain Sugarman's consent prior to subordinating the collateral, Proulx's letter asserts that the SBA viewed this as a "moral obligation," not a legal one. (Docket # 24, LPP01280.) Therefore, the extrinsic evidence does not support only a single reasonable interpretation. See Adria Int'l, 241 F.3d at 111.
The interpretation of an ambiguous contract is a question for the finder of fact. Fowler, 948 F.2d at 54 (applying Maine law);Seaco Ins. Co. v. Barbosa, 761 N.E.2d 946, 951 (Mass. 2002). Accordingly, summary judgment is inappropriate where, as here, the intent of the parties when the Lender subordinates, rather than sells, the collateral is unclear.
V. Motion to Strike
LPP moves to strike the Affidavit of Harris Baseman ("Baseman"), the lawyer who represented Statler and Sugarman when the guaranties were executed, on the grounds that it contains conclusory allegations and because they were denied an opportunity to depose the witness. In particular, LPP objects to Baseman's statement that the intent of the sentence added to the 1980 Guaranty was to "override the language in the SBA's form. . . ." (Docket # 23 ¶ 5.) Baseman, however, not only was present when the negotiations concerning the Guaranty took place, he was the drafter of the text added to the document at Sugarman's request. Therefore, to the extent he is describing what he intended the language to mean, his testimony is factual, not conculsory. He is also competent to testify to any conversations he had with the SBA while negotiating the limitations to the agreement for Sugarman.
LPP's claim that it was unable to depose Baseman due to his failure to appear is unfounded. Its Subpoena Duces Tecum, commanding Baseman to appear for a deposition on January 18, 2007, is dated December 21, 2006. However, in June 2006, the court adopted the parties' proposed schedule requiring the completion of all fact discovery by December 15, 2006. (See Docket # 9 ¶ 5; see also Electronic note of court's acceptance of joint schedule, Docket, June 27, 2006.) In addition, counsel for defendant states that Baseman was identified to LPP as a potential witness by no later than July 28, 2006. Therefore, any failure by LPP to depose Baseman prior to end of fact discovery was of plaintiff's own choosing. LPP's motion to strike Baseman's affidavit is denied.
VI. Conclusion
Accordingly, the parties' cross-motions for summary judgment (Docket ## 12, 16) are DENIED. LLP's motion to strike Baseman's affidavit (Docket # 30) is DENIED. Sugarman's motion for leave to file a reply (Docket # 32) is DENIED as moot.