Opinion
01 Civ. 11255 (HB)
September 12, 2002
OPINION AND ORDER
Plaintiff Wells Fargo Bank Minnesota, National Association ("Wells Fargo") filed an action in New York State Supreme Court against defendants Nassau Broadcasting Partners, L.P. ("Nassau") and Louis F. Mercatanti to recover rent under an equipment lease. Defendants removed the action via a Notice of Removal filed on December 7, 2001, on the basis of federal diversity jurisdiction. A pretrial conference was held on February 28, 2002, during which it was agreed that the parties would conduct limited document discovery, and one deposition of plaintiffs witness as designated under Fed.R.Civ.P. 30(b)(6), with respect to the assignment of the lease, a condition precedent and the good faith issue. It was agreed that fully briefed summary judgment motions would be filed by April 11, 2002. Accordingly, both parties cross-moved for summary judgment. Oral argument on the motions was held July 17, 2002. For the following reasons, both motions are DENIED.
I. DISCUSSION
A. The lease agreement between Nassau and Terminal
On November 30, 2000, Nassau, a New Jersey-based company that owns and operates several radio stations, entered into a lease agreement (the "lease") with the Terminal Marketing Company, Inc. ("Terminal") to purchase radio equipment. Under the agreement, known as a "sale and leaseback" transaction, Nassau agreed to initially pay for the equipment and then sell it to Terminal for the lump sum of $621,537.00 — the amount initially paid. It was additionally agreed that Terminal would then lease the equipment back to Nassau. The terms of the lease required Nassau to make monthly rental payments to Terminal over 48 months with the option of repurchasing the equipment at the end of the term for a nominal sum. The transaction, however, did not go as planned. Nassau purchased the equipment but Terminal was never able to make the $621,537 payment to Nassau. Instead, Terminal informed Nassau that it was having difficulty obtaining funds. (Tonks Dec. ¶ 6; Battiloro Dec. ¶ 8). In January 2001, Terminal tendered to Nassau a partial reimbursement of $100,000 but never paid the rest. Approximately two months later, Nassau received a letter from Terminal directing Nassau to pay rental payments to an entity identified as Terminal Finance Corp. II ("TFC II"), a special purpose corporation that appears to have been formed to acquire the lease from Terminal, which was also the parent of TFC II. In October 2001, Nassau received a letter from Wells Fargo in which plaintiff claimed to be the new holder of the lease and demanded all past due rental payments. In response, Nassau commenced an action against Terminal in the Superior Court of New Jersey seeking to void the lease. Terminal defaulted in the action, and the New Jersey court found in favor of Nassau and declared the lease void.
B. The purported assignment of the lease to Wells Fargo
Wells Fargo claims that it was assigned the lease through what was apparently a convoluted financing transaction in which Wells Fargo stood as indenture trustee for certain investors, or noteholders. According to Wells Fargo, the noteholders lent monies to TFC II, the special purpose corporation, and TFC II then paid Terminal money to purchase the lease. Wells Fargo claims that the lease was then simultaneously sold from Terminal to TFC II and assigned from TFC II to Wells Fargo on December 11, 2000.
C. The hell or highwater provisions
The lease between Nassau and Terminal contained certain provisions that state that Nassau's obligation to make payments were "absolute and unconditional." Such a clause is commonly referred to as a "hell or highwater" provision. Specifically, the lease provides:
Lessee [Nassau] acknowledges and agrees . . . that Lessee's obligation to pay Lessor all amounts due hereunder is absolute and unconditional, and Lessee shall not be entitled to any abatement, reduction, set-off, counterclaim, defense or deduction with respect to any Rent or other sum payable hereunder.
(Mowbray Dec. Ex. A-1 at ¶ 5).
Additionally, upon receiving the equipment, Nassau signed a document called a Delivery and Acceptance Certificate ("Delivery Certificate") in connection with the lease. The Delivery Certificate similarly states that the "[l]essor has fully satisfied and performed all covenants and conditions required to be performed by the Lessor under the Lease and Lessee has no defenses, counterclaims or set-offs against the Lessor." (Mowbray Dec. Ex. B).
With respect to assignments, the lease provides that "[a]ssignee's rights or the rights of a holder of a security interest in this Lease shall be free of all defenses, setoffs or counterclaims which Lessee may be entitled to assert." (Mowbray Dec. Ex. A-1 at ¶ 5). Further, the Delivery Certificate provides:
Lessee hereby consents and agrees to Lessor's assignment of the Lease to a third party assignee ("Assignee") in reliance hereon . . . [and] Lessee's obligation to pay rent to the Assignee under the Lease shall be absolute and unconditional . . . notwithstanding any defense, setoff or counterclaim whatsoever.
(Mowbray Dec. Ex. B).
The hell or highwater provisions at issue, especially in light of the degree and specificity to which they explicitly waive Nassau's right to assert setoffs, defenses or counterclaims, are generally enforceable. See Citibank, N.A. v. Plapinger, 66 N.Y.2d 90, 94-95 (1985); see also Rhythm Hues, Inc., v. The Terminal Marketing Co., Inc., 2002 WL 1343759, at *5 (June 19, 2002) ("As a general rule, `hell or high water' leases are enforceable."); In re O.P.M. Leasing Services, Inc., 21 B.R. 993, 1006-07 (Bankr.S.D.N.Y. 1982). Wells Fargo asserts that the hell or highwater clauses necessarily warrant summary judgment in its favor. I disagree, as there is a question of fact as to whether the terms of the lease — including the force of the hell or highwater provisions — were ever triggered. For instance, as Nassau notes, the "Commencement Date" on both the lease and the Delivery Certificate is left blank. Nassau argues that the lease was only to be effective if and when Terminal provided the financing, which it never did, at least not in full. Nassau's view of the contract is supported by the declaration of John Battiloro ("Battiloro"), Terminal's former vice president, who states that "the lease was not to become effective unless and until Terminal provided funding as agreed." (Battiloro Dec. ¶ 7). This is why the Commencement Date on the Delivery Certificate was left blank, according to Battiloro. Nassau further asserts that this condition precedent — which was never satisfied — was memorialized in a letter dated November 28, 2000, with Terminal. Wells Fargo contends that the November 28 letter, which was not formally within the four corners of the lease, is barred by the parol evidence rule. I disagree and find that the letter — dated only two days before the lease — is admissible because it forms part of a single transaction. See, e.g., This is Me., Inc. v. Taylor, 157 F.3d 139, 143 (2d Cir. 1998) ("New York law requires that all writings which form part of a single transaction and are designed to effectuate the same purpose be read together, even though there were executed on different dates and were not all between the same parties.").
There is an additional question of fact as to whether Wells Fargo, assuming the terms of the lease had indeed commenced, is the proper lease holder. The circumstances surrounding the purported assignment are far from clear, specifically with respect to whether Wells Fargo complied with the necessary terms governing assignment.
The procedures under which the lease was to be assigned are detailed in a set of documents referred to by Nassau as the "Trust Documents." Wells Fargo's own witness designated under Fed.R.Civ.P. 30(b)(6), Aaron Mowbray ("Mowbray"), agreed in his deposition that the purpose of the Trust Documents is "to spell out exactly what leases can be sold to the trust, how such a sale of the leases is to take place, [and] what [the] roles of various parties are in the purchase of the leases." (Mowbray Dep. at 56:24-25 — 57:1-4). Nassau asserts and Wells Fargo does not dispute that the Trust Documents explicitly require that in order to convey "Additional Contracts," such as the lease from Terminal to TFC II, the parties must have executed a separate document called an "Amendment to Lease Acquisition Agreement for New Contracts . . . substantially in the form of Exhibit A hereto . . ." (emphasis added). A similar provision requires that a lease conveyed from TFC II to Wells Fargo required the execution of an "Amendment to the Indenture . . . substantially in the form attached . . . as Exhibit B . . ." (emphasis added). Wells Fargo concedes that it did not comply with the literal terms of the Trust Documents, i.e., that documents such as Exhibit A and B were never executed. Nassau moves for summary judgment claiming there was an invalid transfer and conveyance of the lease and therefore Wells Fargo should be precluded from asserting any rights thereunder. The issue is, however, whether a document called a "Warehouse Funding Report," and an accompanying lease schedule, both of which Wells Fargo argues are sufficient to reflect a valid assignment, are substantially in the form of' the exhibits noted in the Trust Documents. The issue presents a question of fact that defeats both summary judgment motions. Fed.R.Civ.P. 56(c); Anderson v. Liberty Lobby. Inc., 477 U.S. 242, 248 (1986) ("[S]ummary judgment will not lie if the dispute about a material fact is `genuine,' that is, if the evidence is such that a reasonable jury could return a verdict for the nonmoving party.").
The Trust Documents are comprised of an Amended and Restated Lease Acquisition Agreement dated August 1, 2000, between Terminal and TFC II, a Third Amended and Restated Indenture dated August 1, 2000 among TFC II, Terminal and Wells Fargo and a Supplement to the Indenture of the same date.
I note that Judge Schwartz, in Rhythm Hues v. The Terminal Marketing Co., a similar case involving another Terminal lease, with identical "hell or highwater" provisions, and which was purportedly assigned to Wells Fargo under analogous circumstances, denied Wells Fargo's motion for summary judgment. See Rhythm Hues, 2002 WL 1343759, at *5 (finding summary judgment inappropriate where questions of fact exist as to the validity of the assignment of the lease, and the lease was ambiguous).