Opinion
Civ. No. H-98-4215.
April 1999.
MEMORANDUM AND ORDER
Pending in this civil action are the following motions:
(1) Plaintiff's motion for summary judgment (Paper No. 4);
(2) Defendant's motion to dismiss (Paper No. 6); and
(3) Defendant's motion to dismiss plaintiff's first amended complaint (Paper No. 15).
Although plaintiff's motion was filed in the Circuit Court for Anne Arundel County, it was docketed as Paper No. 4 when the case was removed to this Court.
Memoranda and exhibits in support of and in opposition to these pending motions have been filed by the parties. Following its review of the pleadings, memoranda and exhibits, the Court has concluded that no hearing is necessary for a decision on any of the pending motions. See Local Rule 105.6. For the reasons stated herein, all three motions will be denied.
I Background Facts
Plaintiff John B. Thompson ("Thompson") is here seeking payment of principal and interest on a $90,000 promissory note (the "Note"). On August 26, 1993, defendant Swan World Trade, Inc. ("Swan World") executed the Note as maker with plaintiff Thompson as the payee. The Note provided for quarterly interest payments at a rate of 8% with payment of the principal due on August 25, 1998. Paragraph 3 of the Note provided as follows:
3. All indebtedness of the maker to the payee shall be subordinate to any indebtedness the maker may have to Douglas Colkitt, M.D., Oncology Services Corporation or its subsidiaries and/or affiliates.
Defendant Swan World made interest payments to Thompson through March of 1998 but missed the quarterly payment due on June 30, 1998. The current President of Swan World is Dr. Douglas Colkitt, and, at various times between August and September of 1998, Thompson made numerous attempts by letter and telephone to contact Colkitt and obtain payment of interest and principal due on the Note. When his efforts proved unsuccessful, Thompson filed this suit in the Circuit Court for Anne Arundel County, Maryland. Asserting that diversity jurisdiction exits under 28 U.S.C. § 1332(a), defendant Swan World thereafter removed this action to this Court pursuant to 28 U.S.C. § 1441(a).
Thompson is a resident of Annapolis, Maryland. Swan World is a New York corporation with its principal place of business in State College, Pennsylvania.
II Discussion (a) Defendant's Motion to Dismiss
In its motion to dismiss the complaint filed on January 6, 1999, defendant asserts that there is a specific provision in the Note making it subordinate to certain other debt of the defendant. According to defendant, payment of the other debt is a condition precedent to payment under the Note. In seeking dismissal of the original complaint, defendant contended that the complaint fails to state a claim upon which relief may be granted because plaintiff has failed to plead the performance of this condition precedent.Although contending that the subordination clause is not a condition precedent which would defeat plaintiff's right to sue on the Note, plaintiff has in any event filed a first amended complaint. Since the first amended complaint addresses the deficiency claimed by defendant to exist in the original complaint, defendant's motion to dismiss will be denied. The Court's consideration of the other two motions will therefore be based on the allegations of the first amended complaint.
(b) Summary Judgment Principles
Although filed in the Circuit Court for Anne Arundel County, plaintiff's motion for summary judgment will be considered pursuant to the provisions of Rule 56, F.R.Civ.P. Defendant's motion to dismiss plaintiff's first amended complaint relies in part on an affidavit and certain exhibits. Accordingly, that motion will likewise be treated as one for summary judgment and disposed of as provided in Rule 56. See Rule 12(b) and Laughlin v. Metropolitan Washington Airports Auth., 149 F.3d 253, 260-61 (4th Cir. 1998).
The principles to be applied by this Court in considering a motion for summary judgment under Rule 56 are well established. A party moving for summary judgment bears the burden of showing the absence of any genuine issue of material fact and that the movant is entitled to judgment as a matter of law. Barwick v. Celotex Corp., 736 F.2d 946, 958 (4th Cir. 1984). Where, as here, the nonmoving party will bear the ultimate burden of persuasion at trial, "the burden on the moving party [at the summary judgment stage] may be discharged by `showing' — that is, pointing out to the district court — that there is an absence of evidence to support the nonmoving party's case." Celotex Corp. v. Catrett, 477 U.S. 317, 325 (1986).
In Phoenix Sav. Loan, Inc. v. Aetna Cas. Co., 381 F.2d 244, 249 (4th Cir. 1967), the Fourth Circuit Court of Appeals summarized the principles applicable under Rule 56 as follows: "It is well settled that summary judgment should not be granted unless the entire record shows a right to judgment with such clarity as to leave no room for controversy and establishes affirmatively that the adverse party cannot prevail under any circumstances."Id. Hence, the party opposing a motion for summary judgment is entitled to all favorable inferences which can be drawn from the evidence. See, e.g., Adickes v. S.H. Kress Co., 398 U.S. 144, 158-59 (1970); Cram v. Sun Life Ins. Office, Ltd., 375 F.2d 670, 674 (4th Cir. 1967).
The party moving for summary judgment has the burden of establishing that there is no genuine issue of material fact.Barwick, 736 F.2d at 958. This burden is met by consideration of affidavits exhibits, depositions and other discovery materials.Id. Nevertheless, "[t]he facts, and the inferences to be drawn from the facts, must be viewed in the light most favorable to the party opposing the motion." Ballinger v. North Carolina Agric. Extension Serv., 815 F.2d 1001, 1004-05 (4th Cir. 1987), cert. denied, 484 U.S. 897 (1987) (citing Ross v. Communications Satellite Corp., 759 F.2d 355, 364 (4th Cir. 1985)).
There has been no formal discovery in this case. Following its review of the meager record here, this Court has concluded that disputed issues of material fact arise which cannot be resolved at this early stage of the case before there has been any discovery undertaken by the parties. On the limited record before it, the Court cannot now determine the parties' disputes as a matter of law. The parties should therefore develop the facts by way of appropriate discovery procedures. Both plaintiff's motion for summary judgment and defendant's motion to dismiss the first amended complaint, treated herein as a motion for summary judgment, will be denied without prejudice to the right of either party to file a motion for summary judgment at a later date after discovery has been completed.
(c) The Disputed Issues
There are two basic types of subordination agreements. They have been defined as follows:
(a) Incomplete or inchoate. This type of subordination agreement postpones its effectiveness until a future date either when the common debtor is in default, files a bankruptcy, fails to meet certain standards, or certain other contingencies specified in the agreement have occurred.
(b) Complete type. This is by far the more common type of subordination agreement in commercial finance transactions and involves an agreement effective immediately to subordinate the payment of the junior debt to the senior debt not conditioned upon the happening of any subsequent events.
Richard J. Goldstein, Asset-Based Lending Including Commercial Finance and Acquisition Financing 1992: Third Party Problems, 597 PLI/Comm 283, 314-15 (1992); see also Jackson Nat'l Life Ins. Co. v. Ladish Co., 1993 WL 43373, *8 (S.D.N.Y.).
The parties dispute the nature and significance of the subordination clause at issue here. Although at one point in his recent reply memorandum, plaintiff suggests that the subordination clause at issue is "complete," the parties' cross motions for summary judgment vigorously contest the legal significance of the clause, irrespective of its characterization as "complete" or "inchoate."
Plaintiff argues that, while the subordination clause may affect plaintiff's ability to ultimately collect a judgment, its terms do not prevent him from suing on the Note and having judgment entered now in his favor. Defendant contends that the clause effects a complete subordination, precluding plaintiff's claim for payment as long as there is any outstanding indebtedness to senior creditors. According to defendant, there is outstanding senior indebtedness of Swan World which defeats plaintiff's right to sue on the Note.
The subordination clause itself does not specify whether it is complete or inchoate. This presents a relatively novel question which few courts have addressed. See generally Standard Brands Inc. v. Straile, 260 N.Y.S.2d 913, 916 (App.Div. 1965) ("[As of 1965,] no court has yet decided which type of subordination is intended when the parties themselves have failed to distinguish between them."); Charles W. and Ruby W. Norton, Inc. v. Leadville Corp., 570 F.2d 911, 912 (10th Cir. 1978) (observing that there is "very little case law" on the interpretation of subordination clauses generally).
In recent decisions, several courts have held that even more explicit subordination clauses than the one at issue here were ambiguous and have refused to grant motions for summary judgment. In Laura Thorn, Ltd. v. Alletzhauser, 71 F.3d 991, 993 (1st Cir. 1995), the First Circuit considered a loan guarantee agreement that contained a subordination provision stating that no subordinated debt "shall become . . . due and payable prior to the date on which the Senior Debt becomes or is declared to be due and payable. . . ." On its face, this language would appear to create a complete subordination, and the district court so held. However, the Court of Appeals reversed, citing "unresolved conflict in the language of the guaranty and loan documents and [a] dearth of evidence relating to the parties' intent." Id. at 995.
Other courts have taken a different view. See e.g., Leadville Corp., 570 F.2d at 912. However, these rulings were not made at an early stage of the litigation before any discovery had been undertaken.
Similarly, in Jackson National Life Insurance Co. v. Ladish Co., 1993 WL 43373, *8 (S.D.N.Y.), the court considered a provision subordinating "any payments under the Notes . . . `to the prior payment in full . . . of all Senior Debt.'" The court observed that the agreement implied a complete subordination, but recognized that, with additional discovery, plaintiff might be able to demonstrate a different intent. Id. Accordingly, the court denied summary judgment based on the "early stage" of the action and the "limited record" available. Id.
As a result of the parties' conflicting interpretations of the subordination clause at issue here, this Court has concluded that both plaintiff's motion for summary judgment and defendant's motion to dismiss the first amended complaint must be denied. The critical issue which must be determined relates to the intention of the parties when they included the subordination clause in the Note. The Fourth Circuit has emphasized that summary judgment is seldom appropriate in cases in which particular states of mind are decisive as elements of a claim or defense. Ballinger, 815 F.2d at 1005 (citing Charbonnages deFrance v. Smith, 597 F.2d 406, 414 (4th Cir. 1979)). To be able to decide the applicable principles, a full development of the facts is necessary. The Fourth Circuit has indicated that summary judgment should not be granted if inquiry into the facts is desirable to clarify the application of the law. See Podberesky v. Kirwan, 38 F.3d 147, 156 (4th Cir. 1994) (citing Stevens v. Howard D. Johnson Co., 181 F.3d 390, 394 (4th Cir. 1950)); see also Kirkpatrick v. Consol. Underwriters, 227 F.2d 228, 231 (4th Cir. 1955). Discovery is therefore necessary to determine what the parties had in mind when the Note was executed.
The parties also dispute the existence of and the amount of the senior indebtedness, relying on conflicting interpretations of certain corporate documents. Material, factual disputes are raised by these exhibits which preclude the entry of summary judgment. Defendant argues that its corporate records show that Swan World is "indebted" to Douglas Colkitt, Oncology Services Corporation and its subsidiaries or affiliates in the amount of $346,458.82, which is more than four times Thompson's claim. This figure consists largely of $308,505.88 which defendant claims represents intercompany payables, even though that sum was listed as a corporate "asset" for the past two years. The remaining sum of $37,952.94 consists of an outstanding $34,427.94 loan from Douglas Colkitt to Swan World, and an intercompany payable of $3,525.00.
Plaintiff claims that the $308,505.88 figure represents an asset of Swan World and that defendant's balance sheet also shows that Colkitt owes Swan World $62,645.50. According to plaintiff, there is no senior debt outstanding, and he is therefore entitled to summary judgment even if the subordination clause is found to effect a complete subordination. In the alternative, plaintiff argues that the amount of any outstanding senior debt is less than the amount owed by Swan World to him, and that, at a minimum, judgment should be entered in his favor for the difference.
It is not clear from Swan World's financial statements that this amount is owed by Colkitt directly. The financial statement in question lists a $10,000 account receivable from "DC" (presumably "Douglas Colkitt"), but the $62,645.50 figure comes from two intercompany receivables from Equimed and another company, "UTN."
These disputes of material fact cannot be resolved by way of the pending motions. The relevant facts should be developed by way of appropriate discovery procedures. The Court would note that the meager facts available at this early stage of the case raise a question concerning the close relationship between Douglas Colkitt and Swan World. The exhibits reveal a number of transactions involving the transfer of large sums of money back and forth between Colkitt and defendant Swan World. Depending upon the circumstances, the question arises whether plaintiff would be able to pierce the corporate veil and seek a recovery from Colkitt himself. No such claim has been asserted in the first amended complaint, and, depending upon the facts developed by discovery, it would be necessary for plaintiff to seek a further amendment of the complaint in order to present such a claim.
III Conclusion
For all the reasons stated, it is this ______ day of April, 1999 by the United States District Court for the District of Maryland,
ORDERED:
1. That plaintiff's motion for summary judgment is hereby denied;
2. That defendant's motion to dismiss the complaint is hereby denied; and
3. That defendant's motion to dismiss the first amended complaint, treated herein as a motion for summary judgment, is hereby denied.