Opinion
No. 601199/2010.
2012-06-20
ARROWHEAD CAPITAL FINANCE, LTD., Plaintiffs, v. SEVEN ARTS PICTURES PLC, Seven Arts Filmed Entertainment, Ltd., Deal Investments, LLC, Deal Productions, LLC, Seven Arts Pictures, Inc., Seven Arts Future Flows I, Rectifier Productions, and Pool Hall Productions, LLC, Defendants.
Id., § 4.3. As previously noted, “Senior Debt” means “all of Cheyne's rights to repayment of the Indebtedness pursuant to the Cheyne Note”. Id., 4.1.1. Indebtedness is not a defined term in the Master Agreement or the Cheyne Note, which means that the definition in the Pool Hall Loan Agreements govern. The Pool Hall Loan Agreement defines “Indebtedness” as: Pool Hall Loan Agreement, Hoffman Aff, Ex C, § 1.21. The Pool Hall Loan Agreement provides that “The Note shall be marked canceled' and returned to Borrower when Borrower has indefeasibly paid the Indebtedness in full.” Id., § 2.6.3. No amendment to that provision appears in the Master Agreement.
SHIRLEY WERNER KORNREICH, J.
Plaintiff, Arrowhead Capital Finance, Ltd. (Arrowhead or plaintiff), brought this action to recover principal, interest, attorneys' fees and costs, allegedly due under a subordinated note (Arrowhead Note), collateral pledged as security for the Arrowhead Note, and damages for conversion. Defendant-borrowers Seven Arts Pictures PLC (Seven Arts), Seven Arts Filmed Entertainment, Ltd. (SAFE), Deal Investments, LLC (Deal Investments), Deal Productions, LLC (Deal Productions), Seven Arts Pictures, Inc. (SAP), Rectifier Productions, LLC (Rectifier) and Pool Hall Productions, LLC (Pool Hall, and collectively with Seven Arts, SAFE, Deal Investments, Deal Productions, SAP and Rectifier, Borrowers), and defendant Seven Arts Future Flows I (FFI, and collectively with Borrower, defendants) move, pursuant to CPLR 3212, for an order granting summary judgment dismissing the complaint. Plaintiff cross-moves for summary judgment.
The complaint contains five causes of action, numbered here as they are in the complaint: 1) judgment for the unpaid principal balance and interest due under the Arrowhead Note, 2) an order of replevin directing delivery to plaintiff of Collateral (as defined by this opinion below) securing the Arrowhead Note, 3) foreclosure of all of plaintiff's security interests in the Collateral, 4) attorneys' fees and costs due under the Arrowhead Note, and 5) damages for conversion.
For the reasons that follow, defendants' motion is denied, and plaintiff's cross-motion is granted on liability as to the first and fourth causes of action against the Borrowers and on liability as to the third cause of action against all defendants. The cross-motion is denied as to the second and fifth causes of action.
Background
On December 3, 2004, defendant Pool Hall and non-party Mercantile National Bank (Mercantile) entered into a Loan and Security Agreement for the purpose of financing the production of a motion picture entitled Pool Hall Prophets (Pool Hall Loan Agreement). Hoffman Affidavit, Doc 12 (Hoffman Aff), Ex C. On May 4, 2006, defendants Deal Investments, Deal Productions, SAP and FFI entered into a Financing and Security Agreement with Arrowhead Consulting Group, LLC (ACG), plaintiff's predecessor in interest, for the purpose of financing the production of a motion picture entitled Deal (Deal Loan Agreement). Hoffman Aff, Ex D. On May 16, 2006, defendants Rectifier, SAP and FFI entered into a Financing and Security Agreement with Arrowhead Target Fund Ltd (Arrowhead Target) for the purpose of financing the production of a motion picture entitled Noise (Noise Loan Agreement, and together with Pool Hall Loan Agreement and Deal Loan Agreement, Loan Agreements). Hoffman Aff, Ex E. Pool Hall Prophets, Deal and Noise are hereinafter referred to as the Financed Pictures. The Pool Hall Loan Agreement defines “Loan Documents” to mean “the Pool Hall Loan Agreement, the Note and each and every document, instrument and agreement required to be delivered hereunder or thereunder or contemplated hereby or thereby.” Pool Hall Loan Agreement, § 1.27. However, other than the Pool Hall Loan Agreement, the other documents and instruments required to be delivered or contemplated, are not in the record.
On December 22, 2006, defendants, non-party Cheyne Specialty Finance Fund L.P. (Cheyne), and ACG, executed a Master Agreement, which was an amendment to the Pool Hall Loan Agreement. Affidavit of William F. Dahill in Opposition to Defendants' Motion for Summary Judgment, (Dahill Opp Aff), Ex. 4, p 1. Pursuant to the Master Agreement, Cheyne and ACG agreed to loan the Borrowers $7,500,000, defined as the “Additional Loan”. Master Agreement, § 1.4. Specifically, Cheyne advanced $6,500,000 in exchange for a senior promissory note, defined in the Master Agreement as the “Cheyne Note” or “Senior Note”, and ACG advanced $1,000,000 in exchange for a subordinated promissory note, referred to in the Master Agreement as the “Arrowhead Note” or the “Subordinated Note”, and collectively as the “Additional Notes”. Id., § 3. The Master Agreement requires defendants to reimburse ACG for any “reasonable out-of-pocket expenses of ACG (including, without limitation, fees and disbursements of external counsel) incurred in connection with the enforcement of any of its rights and remedies arising hereunder ... promptly after demand.” Id., § 8. The Master Agreement says that all references to the “Note” in the Pool Hall Loan Agreement were deemed to refer to the Additional Notes. Id., § 1.30.
The proceeds of the Additional Loan were to be used to pay the notes executed in connection with the Deal and Noise Loan Agreements, after which the Deal Loan Documents and Noise Loan Documents were terminated. Master Agreement, § 2.4. Hence, the only remaining Loan Documents are the Pool Hall Loan Documents, of which only one, the Pool Hall Loan Agreement is in the record.
The Arrowhead and Cheyne Notes appear in the record, respectively, as Dahill Opp Aff Exs 3 & 6.
The Master Agreement provides that its terms trump the Pool Hall Loan Documents in the event of any inconsistency. Id., § 2. In addition, undefined, capitalized terms in the Master Agreement have the meaning ascribed to them in the “Pool Hall Loan Agreements”. Id. Although the plural “Agreements” is used, only one Agreement is in the record. The Cheyne Note incorporates all of the terms and conditions of the Master Agreement and also provides that undefined, capitalized terms have the meaning ascribed to them by the Master Agreement.
As security for the monies advanced to the Borrowers' under the Loan Agreements, Cheyne and ACG were assigned collateral (Original Collateral). Hoffman Aff, Ex C, § § 1.21, 4.1 & 4.2; Ex D, § 8.1 and Schedule II; and Ex E, § 8.1 and Schedule II. The Master Agreement amends the definition of “Collateral” under the Pool Hall Loan Agreement to include the additional collateral under the Master Agreement, the Deal Loan Documents and the Noise Loan Documents. Master Agreement, § § 2.7.1 through 2.7.4. The Senior Note and the Subordinated Note were secured by the Collateral, which by definition includes the Original Collateral under the Pool, Deal and Noise Loan Documents, and new collateral, including revenue from two other motion pictures produced by defendants, a security interest in defendants' film library subordinated to Arrowhead Target's interest, and 8,100,000 shares of Seven Arts stock belonging to SAP. The court will use the term “Collateral” in this opinion to mean the Original Collateral and the additional collateral granted to Cheyne and ACG under the Master Agreement.
The subordination clause in the Master Agreement contains the following definitions applicable to paragraph 4, entitled “Subordination”:
4.1.1 “Senior Debt” means all of Cheyne's rights to repayment of the Indebtedness pursuant to the Cheyne Note.
4.1.2 “Senior Liens” means all liens, security interests and assignments with respect to the Collateral securing payment or performance of the Borrowers' obligations to Cheyne for Senior Debt.
4.1.3 “Subordinated Debt” means all of Arrowhead's rights to repayment of the Indebtedness pursuant to the Arrowhead Note.
4.1.4 “Subordinated Liens” means all liens, security interests and assignments with respect to the Collateral securing payment or performance of the Borrowers' obligations to Arrowhead for Subordinated Debt.
The Master Agreement provides that Cheyne's consent is required to enforce the Arrowhead Note prior to full payment of the Indebtedness under the Cheyne Note:
Unless and until all of the Senior Debt has been fully paid and satisfied, [ACG] will not (i) ask, demand, sue for, take or receive, or retain, from the Borrowers ... payment of all or any part of the Subordinated Debt, or (ii) declare the Subordinated Debt due and payable by reason of default or for any other reason....
Id., § 4.3. As previously noted, “Senior Debt” means “all of Cheyne's rights to repayment of the Indebtedness pursuant to the Cheyne Note”. Id., 4.1.1. Indebtedness is not a defined term in the Master Agreement or the Cheyne Note, which means that the definition in the Pool Hall Loan Agreements govern. The Pool Hall Loan Agreement defines “Indebtedness” as:
all of Borrower's monetary obligations to the Bank [Mercantile] hereunder under the Note and under the other documents, instruments and agreements to be executed by Borrower pursuant hereto....
Pool Hall Loan Agreement, Hoffman Aff, Ex C, § 1.21. The Pool Hall Loan Agreement provides that “The Note shall be marked canceled' and returned to Borrower when Borrower has indefeasibly paid the Indebtedness in full.” Id., § 2.6.3. No amendment to that provision appears in the Master Agreement.
The Master Agreement amended the definition of Bank to mean Cheyne and ACG, with the proviso that, so long as any amount remained “due and owing” under the Cheyne Note, the term “Bank” would mean “the Senior Lender acting for itself and as agent for the Subordinated Lender,” and all rights of the Bank under the Pool Hall Loan Documents, would “inure solely to the Senior Lender until the Senior Debt as defined herein has been repaid in full, subject to the Subordinated Lender's continuing lien thereon and rights described therein.” Master Agreement, § 2.2.
The Cheyne Note says at the top “Amount: $6,5000,000”. Dahill Opp Aff, Ex 6. It further provides that:
This Secured Term Loan Promissory Note (“Note”) is the “Cheyne Note” issued in connection with, [sic] further evidences the Undersigned's obligation to repay that certain Additional Loan created under, ... and is delivered pursuant to that certain Agreement bearing even date herewith,
among Lender [Cheyne] and the Undersigned
Id. The Undersigned includes all of the defendants, except FFI. Id. Although the Cheyne Note also gives Cheyne all of the benefits and security of the Master Agreement,
The copy of the Cheyne Note in the record is dated December 2006, without a day, but it clearly refers to the $6,500,000 loan from Cheyne pursuant to the Master Agreement.
it does not reflect monetary obligations other than the $6,500,000 loan. Once the Cheyne Note is paid in full, The Pool Hall Loan Agreement, as amended by the Master Agreement, does not reflect further monetary obligations or “Indebtedness” to Cheyne.
For example, while the Cheyne Note remains unpaid, Cheyne has the right to receive payments made to distributors and sub-distributors for distribution of the Financed Pictures and other films.
The Master Agreement provides that Cheyne had certain obligations to protect plaintiff's interests. It states that “[u]pon payment in full of the Senior Debt held by Cheyne, Cheyne shall provide Arrowhead [ACG] all the benefits of a secured party with respect to the Collateral.” Id., § 4.7. Cheyne had no right to amend or modify the terms of the Cheyne Note or the Senior Liens without ACG's prior written consent. Id., § 4.2. The Master Agreement provides that so long as any balance remained due on the Senior Note, Cheyne would act not only for itself, but also as agent for ACG. Id., § 2.2.
With respect to plaintiff's right to enforce its Subordinate Liens on Collateral, the Master Agreement requires Cheyne's consent to enforce them, but not to institute an action for equitable or injunctive relief:
[ACG] will not take any action to enforce the Subordinate Liens without Cheyne's prior written consent, provided that nothing in this Agreement shall at any time prevent Arrowhead [ACG], solely in its capacity as a secured creditor subordinated to Cheyne, from initiating legal proceedings against the Borrowers to enforce the provisions of the Subordinated Note and related security agreements by injunction or other equitable relief or in the context of any bankruptcy, reorganization or insolvency proceedings. All amounts ... recovered with respect to any property of the Borrowers which is subject to the Subordinate Liens by the enforcement of the Subordinate Liens shall be paid over and delivered to Cheyne immediately upon [ACG]'s receipt thereof....
Id., § 4.4 (emphasis added).
Both the Cheyne Note and the Arrowhead Note were due for repayment on June 30, 2007. Defendants exercised their right to seek a three-month extension of the maturity date through September 30, 2007. As a result, the interest rate on the Arrowhead Note increased from 19% per annum to 23% per annum. Master Agreement, § 2.9. It is undisputed that defendants failed to honor the extended maturity date, which constituted an “Event of Default” under the Master Agreement.
On April 22, 2008, Cheyne entered into an Assignment Agreement (2008 Assignment Agreement) with defendants and Peter Hoffman, pursuant to which Cheyne, as Seller, purported to assign to defendant SAFE, as Purchaser, all of Cheyne's rights, title and interest in the “Loan Documents” referred to in the “Assignment Agreements” dated as of December 26, 2006 (2006 Assignment Agreements). The 2008 Assignment Agreement recites that:
A. Pursuant to the Assignment Agreements dated as of December 26, 2006 (“Assignment Agreements”) relating to the financing of the pre-production and production of these certain motion pictures currently entitled Noise, Pool Hall Prophets and Deal (“Pictures”), Seller has acquired certain “Loan Document Rights” relating to the Pictures as defined in the Assignment Agreements.
B. The Purchaser wishes to Purchase from the Seller and the Seller desires to sell to the Purchaser all of the Seller's right, title and interest in, to and under the “Loan Documents” as referred [sic] in the Assignment Agreements upon and subject to the terms set forth herein.
Dahill Opp Aff, Ex 9, Recitals A and B. In return for the 2008 Assignment Agreement, SAFE paid Cheyne $6,458,272.47. Id., § 1.3. The 2008 Assignment Agreement was executed on behalf of all defendants by Seven Arts' CEO, Peter Hoffman (Mr. Hoffman). Dahill Opp Aff, Ex 8 (Hoffman Dep.) at 68. Mr. Hoffman acted as both attorney and principal. Id.
The 2008 Assignment Agreement provides that:
Pursuant to this Agreement, all obligations owed to the Seller under the Loan Documents will be deemed paid in full and this Agreement is without prejudice to any other party under the Loan Documents.
Id., § 1.6. Cheyne nor did not obtain ACG's prior written consent to the 2008 Assignment Agreement. Hoffman Dep. at 81. As previously noted, the Master Agreement requires ACG's prior written consent to any change in the Senior Debt or Senior Liens. Master Agreement, § 4.2.
On October 22, 2008, ACG made a demand for repayment of the Arrowhead Note. Hoffman Aff, Ex F (Demand Letter). Defendants refused to pay.
Defendants did not put the 2006 Assignment Agreements in this record, leaving their definition of the “Loan Documents” assigned to them shrouded in mystery. Nevertheless, defendants oppose summary judgment relying on the meaning of “Loan Documents” as defined in the missing 2006 Assignment Agreements. Defendants contend that because the amount they paid pursuant to the 2008 Assignment Agreement was less than the full amount owed to Cheyne under the Master Agreement, Cheyne's rights to the Collateral under the Master Agreement, excluding the Original Collateral,
are still enforceable by Cheyne, whose rights are senior to Arrowhead's.
Defendants admit that the Original Collateral now belongs to SAFE. Defendants' Memorandum of Law in Support at 7.
However, Mr. Hoffman testified at his deposition that Seven Arts, his shorthand for the related defendant entities, does not owe Cheyne any money. Hoffman Dep. at 62. When asked what the 2008 Assignment Agreement meant when it said that all of defendants' obligations to Cheyne under the “Loan Documents will be deemed repaid in full,” he explained that:
since they knew they weren't being fully paid and satisfied that they were taking a substantial haircut on the loan, they nevertheless agreed by this clause that they couldn't come back and sue us on the senior note.
Id. at 69 (emphasis added). He elaborated:
It says shall be deemed repaid in full. And the word “deemed” usually means that's because they weren't really paid in full but they're treated as having no further liabilities.
Id. at 70. He also agreed with this statement:
Cheyne has no right to sue any of the Seven Arts entities for any amount of haircut that they took.
Id. at 72.
Other evidence in the record supports the conclusion that Cheyne accepted $6,458,272.47, the amount it received pursuant to the 2008 Assignment Agreement, in full settlement of the Cheyne Note and then assigned to SAFE all of the Collateral securing it. For example, on page 20 of Seven Arts' recent Form–6K SEC filing,
there is a list of all “Film and production loans.” The outstanding obligation to ACG in the amount of $1,879,877 is listed.
The same form also includes a statement by Seven Arts that the Subordinated Note “debt will never be paid due to its subordination to the [Senior Note].” Dahill Opp Aff, Ex 20.
The one to Cheyne, which defendants claim still exists, is not. Dahill Opp Aff, Ex 20, p 23.
This amount represents $1 million in principal, plus interest through December 31, 2010.
Although Mr. Hoffman's affidavit tries to draw a distinction between the Loan Documents assigned by the 2008 Assignment Agreement and Cheyne's rights under the Master Agreement, the SEC filing states that Cheyne's $6,500,000 loan was assigned to SAFE. Id. at Note 10. Further, in a letter to plaintiff's counsel, Mr. Hoffman stated that SAFE, as assignee under the 2008 Assignment Agreement, “is entitled to all of the benefits of the Master Agreement including, without limitation, the provisions regarding subordination in Paragraph 4 of the Master Agreement.” Dahill Opp Aff, Ex 18. Also, in response to interrogatory 55, defendants swore that “SAFE as assignee has all the rights of Cheyne pursuant to the Master Agreement, including all subordination rights in the Master Agreement.” Dahill Opp Aff, Ex 19. Mr. Hoffman verified defendants' interrogatory responses. Id.
On January 30, 2008, ACG assigned its interest under the Master Agreement to plaintiff Arrowhead pursuant to a Consent Order entered by Justice Herman Cahn of this court, confirmed by a subsequent Consent Judgment and Permanent Injunction entered by Justice Cahn on December 23, 2008. See Dahill Opp Aff, Exs. 15 and 16.
On January 13, 2009, Arrowhead went into liquidation and Windsor William Ashburnham Woods was appointed as Arrowhead's sole liquidator (Mr. Woods). Affidavit of William Woods, Doc 39 & EBT of William Woods (Woods Dep.) at 8. Mr. Woods commenced this action on behalf of Arrowhead on May 10, 2010, without obtaining Cheyne's written consent. Woods Dep. at 42–44. The court notes that the parties sought neither to join Cheyne in this litigation nor to seek discovery from it. Reply Memorandum of Law in Further Support of Defendant's Motion for Summary Judgment at 10.
Discussion
To prevail on a motion for summary judgment pursuant to CPLR 3212, the moving party must “make a prima facie showing of entitlement to judgment as a matter of law, tendering sufficient evidence to eliminate any material issues of fact from the case.” Winegard v. New York Univ. Med. Ctr., 64 N.Y.2d 851, 853, 487 N.Y.S.2d 316, 476 N.E.2d 642 (1985). Failure to make such a showing requires denial of the motion, regardless of the sufficiency of the opposing papers. Id. The court must view the evidence in the light most favorable to the party opposing the motion, and must give that party the benefit of every favorable inference. Myers v. Fir Cab Corp., 64 N.Y.2d 805, 486 N.Y.S.2d 921, 476 N.E.2d 320 (1985). Once this showing has been made, the burden shifts to the party opposing the motion to demonstrate by admissible evidence the existence of a factual issue requiring a trial, or an acceptable excuse for failing to do so. GTF Marketing, Inc., v. Colonial Aluminum Sales, Ins., 66 N.Y.2d 965, 968, 498 N.Y.S.2d 786, 489 N.E.2d 755 (1986); Zuckerman v. City of New York, 49 N.Y.2d 557, 562, 427 N.Y.S.2d 595, 404 N.E.2d 718 (1980). A party cannot defeat summary judgment with bald conclusory allegations, even if they are believable, that create only a shadowy semblance of an issue. Polanco v. City of New York, 244 A.D.2d 322, 665 N.Y.S.2d 534 (2d Dept 1997), citing S.J. Capelin v. Globe, 34 N.Y.2d 338, 357 N.Y.S.2d 478, 313 N.E.2d 776 (1974).
Plaintiff had the right to demand and sue for repayment of the Arrowhead Note, without Cheyne's consent, once the Senior Debt was paid in full. Section 4.3 of the Master Agreement provides that plaintiff cannot sue for payment of the Subordinated Debt “unless and until all of the Senior Debt has been fully paid.” In section 4.1.1 of the Master Agreement, Senior Debt is defined as “all Cheyne's rights to repayment of the Indebtedness pursuant to the Cheyne Note.” Defendants have admitted that Cheyne cannot sue defendants under the Cheyne Note.
Thus, plaintiff has established a prima facie right to recovery by submitting proof of the promissory note sued upon and defendant's failure to make payment by September 30, 2007. Silver v. Silver, 17 A.D.3d 281, 792 N.Y.S.2d 900 (1st Dept 2005); Boland v. Indah Kiat Fin. (IV) Mauritius Ltd., 291 A.D.2d 342, 343, 739 N.Y.S.2d 122 (1st Dept 2002). Cheyne's acceptance of payment pursuant to the 2008 Assignment Agreement constituted an accord and satisfaction of the Cheyne Note. Merill Lynch Realty/Carll Burr, Inc. v. Skinner, 63 N.Y.2d 590, 596, 483 N.Y.S.2d 979, 473 N.E.2d 229 (1984) ( “[A]cceptance of a check in full settlement of a disputed or unliquidated claim operates as an accord and satisfaction .... when the person receiving the check has been clearly informed that acceptance of the amount offered will settle or discharge a legitimately disputed unliquidated claim.”); Photos v. Arverne Houses, Inc., 269 A.D.2d 377, 702 N.Y.S.2d 392 (2d Dept 2000). The record demonstrates that Cheyne agreed not to pursue further recovery on the Cheyne Note after receipt of payment under the 2008 Assignment Agreement, which states that Cheyne is deemed paid in full.
Defendants failed to present evidence that raises an issue of fact as to any Indebtedness due under the Cheyne Note and offered no excuse for their failure to do so. They did not come forward with admissible evidence that Cheyne has further rights to enforce the Loan Documents referred to in the 2006 Assignment Agreements, documents in their control, which they chose not to put before the court. Nor have they demonstrated that there is outstanding “Indebtedness” to Cheyne, as defined in the Pool Hall Loan Agreements or in “other documents, instruments and agreements”. No document in the record supports Mr. Hoffman's conclusory statement that Cheyne remains unpaid or has additional rights, and there is no excuse offered for the failure to produce documents that are clearly within defendants' control. Having failed to come forward with these documents, upon which defendants' arguments are premised, the court is permitted to draw the inference that they would have supported plaintiff. Noce v. Kaufman, 2 N.Y.2d 347, 353, 161 N.Y.S.2d 1, 141 N.E.2d 529 (1957)( “where an adversary withholds evidence in his possession or control that would be likely to support his version of the case, the strongest inferences may be drawn against him which the opposing evidence in the record permits”).
In addition, Mr. Hoffman's affidavit contradicts his prior statements and contains inadmissible hearsay. His deposition testimony, his letter to plaintiff's counsel and his interrogatory response state that Cheyne agreed not to sue defendants, and SAFE received an assignment of all of Cheyne's rights under the Master Agreement. Thus, the affidavit is insufficient to raise an issue of fact. Joe v. Orbit Indus., 269 A.D.2d 121, 122, 703 N.Y.S.2d 14 (1st Dept 2000) (“plaintiff's] self-serving affidavit opposing the motion [for summary judgment] cannot be relied upon to contradict her prior testimony”), citing Kistoo v. City of New York, 195 A.D.2d 403, 404, 600 N.Y.S.2d 693[1st Dept 1993). To the extent that Mr. Hoffman's affidavit states what Cheyne insisted upon entering into the 2008 Assignment Agreement, it is hearsay.
Turning to the third cause of action to foreclose security interests in the Collateral, section 4.4 of the Master Agreement required Cheyne's consent to enforce the Collateral, but not to initiate legal proceedings against defendants. Defendants urge that Cheyne's consent is excused only with respect to insolvency, reorganization or bankruptcy proceedings. This is a misreading of the Master Agreement. It says that nothing prevents ACG from initiating legal proceedings to enforce its rights to the Collateral “by injunction or other equitable relief or in the context of any bankruptcy, reorganization or insolvency proceedings.” Defendants' construction ignores the disjunctive pronoun. Therefore, while plaintiff may have needed Cheyne's consent, it was consent to enforcement of the Collateral and did not limit plaintiff's right to initiate this action.
While defendants now claim that, pursuant to the 2008 Assignment Agreement, Cheyne assigned only the Original Collateral and not the additional collateral under the Master Agreement, they have failed to present the 2006 Assignment Agreement that contains the definition of the assigned “Loan Documents”. Again, the court will draw an adverse inference from defendants' failure to produce documents over which they have control and upon which they rely. As previously noted, various admissions establish that the 2008 Assignment Agreement gave SAFE the same rights as Cheyne under the Master Agreement.
Furthermore, Cheyne's consent is not required before plaintiff enforces its rights to the Collateral because requesting consent would be futile. The reality here is that SAFE is the assignee of Cheyne's rights, including its right to consent. Once it becomes clear that one party will not live up to a contract, the aggrieved party is relieved from the performance of futile acts, such as conditions precedent. J. Petrocelli Constr., Inc. v. Realm Elec. Contrs., Inc., 15 A.D.3d 444, 446, 790 N.Y.S.2d 197 (2d Dept 2005). Here, defendants orchestrated the assignment to SAFE of Cheyne's rights, have steadfastly denied that their obligation to Cheyne is satisfied, and, as a result, SAFE clearly would not consent to plaintiff's enforcement of its rights against the Collateral. Hence, requesting consent would be futile.
Importantly, Cheyne only could invade the Collateral if it is owed money, and it is not. The Master Agreement provides that until the Cheyne Note is paid in full, the term Bank means Cheyne acting for itself and as agent for ACG and that any rights that inure to the Bank, inure to Cheyne, subject to ACG's continuing lien and rights. Master Agreement, § 2.2. It follows that once money is no longer owed under the Cheyne Note, the benefits should inure to ACG. In addition, now that the Cheyne Note is paid, SAFE, as Cheyne's assignee, must provide plaintiff, as ACG's assignee, “all the benefits of a secured party with respect to the Collateral.” Master Agreement, § 4.7.
Lastly, in violation of the Master Agreement, defendants did not obtain ACG's written consent to the substitution of SAFE for Cheyne as the lender, allegedly giving SAFE the right to collect the Original Collateral while Arrowhead gets nothing. A court of law cannot sanction such a result. Deeply rooted in our jurisprudence, and equally applicable to cases in law and equity, is the truism that a wrongdoer should not profit from his wrong. General Stencils, Inc. v. Chiappa, 18 N.Y.2d 125, 127, 272 N.Y.S.2d 337, 219 N.E.2d 169 (1966); Kytel Intl. Group, Inc. v. Total–Tel Carrier Servs., Inc., 47 A.D.3d 448, 851 N.Y.S.2d 5 (1st Dept 2008)(basic tenet of our jurisprudence is that no man may take advantage of his own wrong). In effect, SAFE as assignee is asserting the right to prevent the collection of money allegedly owed to Cheyne, after Cheyne accepted a settlement of the Cheyne Note and transferred its rights to SAFE, one of the Borrowers. It would offend notions of fairness and justice to allow a debtor to step into the shoes of a senior lender to which it owed money and use that position to indefinitely refuse to pay monies owed to a junior lender. While this seems to be an issue of first impression under these circumstances, there are the bankruptcy cases that support the court's conclusion by analogy. In re Robbins Int'l Inc. ., 275 B.R. 456, 471 (S.D.N.Y.2002), aff'd,2003 U.S. App LEXIS 2502, 55 Fed Appx 71 (2d Cir2003) (nor) (“It is well established that one who makes a payment that is the primary obligation of the payor, as distinguished from a payment of the debt of another, is not entitled to subrogation.”); In re GREENWALD, 114 B.R. 410, 413 (Bankr.S.D.N.Y.1990)(one cannot seek subrogation for paying one's own debts); In re Innovative Communication Corp., 2010 Bankr.LEXIS 1141, at *29, 2010 WL 1728536 (Bankr.DVI April 27, 2010), 53 Bankr.Ct. Dec. 52(nor) (“Only when the payment is made by one who is not already obligated will there be an assignment rather than satisfaction of the debt.”).
Here, SAFE is not seeking to assert its rights to a fund in bankruptcy. However, it pretends to protect Cheyne's rights to collect security for a debt Cheyne cannot enforce, while preventing plaintiff from obtaining the Collateral that was intended to secure the Arrowhead Note once Cheyne was paid. Defendants wrongly obtained the 2008 Assignment Agreement without notice to ACG, in breach of the Master Agreement. While defendants claim that no change was made to the Master Agreement terms, the effect was to put the fox in charge of the hen house.
In sum, plaintiff's cross-motion for summary judgment is granted on liability against defendants other than FFI as to the first and fourth causes of action, which seek recovery of the principal and interest under the Arrowhead Note, and attorneys' fees and costs incurred in enforcing plaintiff's rights. Plaintiff also has established its right to foreclosure of the Collateral securing the amounts due under the Arrowhead Note, as prayed for in the third cause of action. The court refers to a Special Referee the issues of the amount of principal and interest due under the Arrowhead Note, the amount of reasonable attorneys' fees and costs plaintiff incurred in enforcing its rights under the Master Agreement, the nature and whereabouts of the Collateral subject to foreclosure pursuant to the Master Agreement, and the relative priority of the rights of plaintiff and Arrowhead Target to Collateral.
The motion and cross-motion are denied with respect to the second and fifth causes of action, respectively, replevin and conversion. Neither party has addressed them in their moving papers.
The remaining contentions of the parties have been considered by the court and have been found either unnecessary to the decision or lacking in merit. Accordingly, it is
ORDERED that defendants' motion for summary judgment dismissing the complaint is denied; and it is further
ORDERED that cross-motion for summary judgment of plaintiff Arrowhead Capital Finance, Ltd., is granted on liability on the first and fourth cause of action against defendants Seven Arts Pictures PLC, Seven Arts Filmed Entertainment, Ltd., Deal Investments, LLC, Deal Productions, LLC, Seven Arts Pictures, Inc., Rectifier Productions, LLC and Pool Hall Productions, LLC, and is granted on liability third cause of action against said defendants and Seven Arts Future Flows I; and is denied as to second and fifth causes of action; and it is further
ORDERED that the court refers to a Special Referee to hear and report, or if the parties consent, to hear and determine, the issues of the amount of principal and interest due plaintiff under the Arrowhead Note, the amount of reasonable attorneys' fees and costs plaintiff incurred in enforcing its rights under the Master Agreement, the nature and whereabouts of the Collateral (as defined in this opinion) subject to foreclosure pursuant to the Master Agreement, and the relative priority of the rights of plaintiff and Arrowhead Target to Collateral; and it is further
ORDERED that counsel for plaintiff Arrowhead Capital Finance, Ltd ., shall within 30 days from the date of this order, serve a copy of this order with notice of entry, together with a completed Information Sheet,
upon the Special Referee Clerk in the Motion Support Office (Room 119M), who is directed to place this matter on the calendar of the Special Referee's Part for the earliest convenient date.