Summary
finding diversity present in a breach of contract claim brought by an indenture trustee against two foreign corporations
Summary of this case from Manufacturers & Traders Trust Co. v. HSBC Bank USA, N.A.Opinion
No. 01 Civ. 9104 (LTS)(DFE)
April 25, 2003
ORRICK, HERRINGTON SUTCLIFFE, L.L.P., By: Michael B. Carlinsky, Esq., Gino D. Vissicchio, Esq., WHITE CASE, L.L.P., By: C. Randolph Fishburn, Esq., New York, New York, Attorneys for Plaintiff
KRONISH, LIEB, WEINER HELLMAN, L.L.P. By: William J. Schwartz, Esq., Stephen A. Wieder, Esq. New York, New York, Attorneys for Defendant
OPINION AND ORDER
Plaintiff The Bank of New York ("BNY"), in its capacity as the Trustee under the Indenture (as defined below), asserts a breach of contract claim against defendants Tri Polyta Finance B.V. ("TP Finance") and Pt. Tri Polyta Indonesia TBK ("TP Indonesia") (collectively "Defendants"), arising from Defendants' default with respect to guaranteed secured bonds having an aggregate principal value of $185 million, issued pursuant to an Indenture dated November 25, 1996 (the "Indenture") among TP Finance, as Issuer, defendant TP Indonesia, as Guarantor, and BNY, as Trustee (the "Indenture"). Before the Court is Plaintiff's motion for summary judgment pursuant to Federal Rule of Civil Procedure 56(a). The Court has subject matter jurisdiction pursuant to 28 U.S.C. § 1332(a)(2) based upon diversity of citizenship among the parties. Plaintiff is a New York banking corporation with its principal place of business in New York City. Compl. ¶ 3. The Indenture and TP Indonesia's Annual Report indicate that defendant TP Indonesia is a corporation organized under the laws of the Republic of Indonesia, and that the company's principal executive offices and principal place of business are in the Republic of Indonesia. Indenture at 1, Aff. of Vissicchio, Ex. A; Annual Report at 1, 9-10, F-8, Aff. of Vissicchio, Ex. B. According to the Indenture and TP Indonesia's Annual Report, TP Finance is a private liability company organized under the laws of The Kingdom of the Netherlands. Indenture at 1, Aff. of Vissicchio, Ex. A; Annual Report at F-9; Aff. of Vissicchio, Ex. B. TP Indonesia is the sole shareholder, and therefore sole member, of TP Finance. Annual Report at F-9, Aff. of Vissicchio, Ex. B. It is undisputed that the amount in controversy exceeds $75,000, exclusive of interests and costs.
The Court has considered thoroughly all submissions related to this motion. For the following reasons, Plaintiff's motion for summary judgment is granted with respect the issue 2 of liability as to Defendants' obligation to pay the $185,000,000 in principal in question, plus interest and default interest calculated in accordance with the Indenture.
FACTUAL BACKGROUND
The following facts are undisputed except as otherwise noted. TP Finance, TP Indonesia and BNY, as Trustee, are parties to an Indenture dated November 25, 1996. Pursuant to the Indenture, TP Finance issued guaranteed secured notes in an aggregate principal amount of $185 million, scheduled to mature on December 1, 2003 (the "Notes"). The Notes bear an interest rate of 11 3/8% per annum, payable on a semi-annual basis on June 1st and December 1st of each year. TP Indonesia is the guarantor under the Notes and, in that capacity, irrevocably and unconditionally guaranteed to each Note holder and to the Trustee (on behalf of each holder) the due and punctual payment of the principal, premium (if any), interest, and all other amounts payable under the Notes. Indenture, Ex. A to Aff. of Vissicchio, at Sections 101 and 204. As guarantor under the Notes, TP Indonesia's obligations are as if it were the principal debtor, and are absolute and unconditional. Indenture at Section 204. The Notes are absolute and unconditional secured obligations of TP Finance and TP Indonesia. Indenture at Sections 203. The amount of interest due to the Note holders under the Indenture on June 1 and December 1 of each year during the term of the Indenture is $10,521,875, based on the amount outstanding and the interest rate under the Notes. Siegel Aff. at ¶ 9.
TP Finance failed to make the scheduled interest payments that were due to the Note holders from June 1, 1999 to December 1, 2001. Id. at ¶ 10. TP Indonesia failed to make any of the aforementioned interest payments missed by TP Finance despite its guarantee under 3 the Notes. Id. The failure to make the scheduled interest payments that were due between June 1, 1999 and June 1, 2001, which nonpayment continued for at least 30 days, constitutes an Event of Default by the Defendants with respect to each missed payment under the Indenture. Id. at ¶ 14. The total unpaid interest on the aggregate principal that was due and owed the Note holders was, as of December 1, 2001, $63,131,250. Id. at ¶ 12.
Additional interest has continued to accrue on the principal since December 1, 2001. Id. at ¶ 11. As a result of the defaults by the defendants under the Notes, interest has also accrued on the scheduled amounts that were not paid ("Defaulted Interest"), at the same rate as interest accruing with respect to the principal. Id. at ¶ 13.
The Indenture provides that, if there is an Event of Default, BNY may accelerate the maturity of the bonds by declaring the principal, premium (if any), and accrued interest on the Notes to be due and payable immediately. Id. at ¶ 15. Based on the defaults by TP Finance and TP Indonesia, and pursuant to its rights and obligations under the Indenture, by letter dated July 26, 2001, BNY declared the entire principal, premium (if any), and accrued interest on the Notes to be due and payable immediately, and demanded immediate payment of the same from TP Finance and TP Indonesia. Id. at ¶ 18. Defendants failed to make the payments demanded by BNY upon acceleration of the Notes. Id. at ¶ 19.
According to Plaintiff, the total amount owed by the defendants upon their default to the holders of the Notes, as of December 1, 2001, was $257,818,144, representing the following: $185,000,000 in principal; $63,131,250 in interest on the principal; and $9,686,894 in Default Interest. Id. at ¶ 33. Of the foregoing amounts, only the Default Interest is in dispute.
Defendants assert that it should be excused from performance on the grounds of 4 impossibility of performance, alleging the following facts in support of their affirmative defense. TP Indonesia is the largest manufacturer of polypropylene resins in Indonesia, and produces these resins primarily for the domestic market's use in consumer and industrial products. See Defs.' Rule 56.1 Stmt at 1. At the time the Notes were issued in late 1996, the Indonesian economy, like many other economies in Asia, was in the midst of a period of prosperity and rapid growth fueled by huge investments of foreign capital. Id. at 3. Beginning in the summer of 1997, Asia experienced a catastrophic economic collapse and the Asian region was plunged into a severe economic crisis of unprecedented proportions. Id. at 5. As a result of this crisis, demand for polypropylene with Indonesia — TP Indonesia's primary market — significantly decreased, with a more than 50% drop in domestic sales from 1996 to 1998. Id. at 10. According to Defendants, TP Indonesia's sales of polypropylene — which were intended to generate the cash flow to service the debt on the Notes — are incapable of generating that cash flow, and TP Indonesia is now unable to service the debt on the Notes. Id. at 12.
DISCUSSION
Summary judgment shall be granted in favor of a moving party where 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 any material fact and that the moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c). The moving party bears the burden of establishing the absence of any genuine issue of material fact. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 256 (1986). The non-moving party then must meet a burden of coming forward with "specific facts showing that there is a genuine issue for trial," Fed.R.Civ.P. 56(e), by "a showing sufficient to establish the existence of [every] 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). See also Western World Ins. Co. v. Stack Oil, Inc., 922 F.2d 118, 121 (2d Cir. 1990), quoting Fed.R.Civ.P. 56(e); National Union Fire Ins. Co. v. Turtur, 892 F.2d 199, 203 (2d Cir. 1989). A court faced with a summary judgment motion does not make credibility determinations or weigh the evidence; all inferences must be construed in the light most favorable to the nonmoving party. Anderson, 477 U.S. at 255. See Reeves v. Sanderson Plumbing Prods., Inc., 530 U.S. 133, 150 (2000); Carlton v. Mystic Transportation Inc., 202 F.3d 129, 133 (2d Cir. 2000). If there is evidence in the record as to any material fact from which an inference could be drawn in favor of the non-movant, summary judgment is inappropriate. Rattner v. Netburn, 930 F.2d 204, 209 (2d Cir. 1991). "Conclusory allegations, conjecture and speculation" will not, however, create a genuine issue of fact. Kerzer v. Kingly Manufacturing, 156 F.3d 396, 400 (2d Cir. 1998).
Breach of Contract Claim
The two elements of a breach of contract claim are that (1) a contract existed between the parties; and (2) the defendant(s) committed an act in violation of that contract. Agency Rent A Car Sys., Inc. v. Grand Rent A Car Corp., 98 F.3d 25, 31 (2d Cir. 1996). Both elements of the claim are satisfied here. There is no dispute that a contract existed between BNY and each of the defendants. See Indenture, Aff. of Vissicchio, Ex. A. The Indenture constitutes an enforceable contract among the parties and Defendants' core obligation under the contract was the guaranteed payment of interest and principal. There is also no dispute that Defendants 6 violated the contract because, TP Finance, as Issuer, and TP Indonesia, as Guarantor, acknowledge that they have breached this obligation. See Compl. at ¶¶ 15-31; Am. Ans. at ¶¶ 15-31. They failed to make six consecutive interest payments under the Indenture. Based on these defaults, BNY accelerated the Notes and demanded all principal, accrued interest and premium (if any) to be immediately due and payable, pursuant to BNY's powers and duties as Trustee under the Indenture. Defendants have failed to satisfy this demand. Defendant TP Indonesia's Annual Report (Form 20-F), for the fiscal year ending December 31, 2000 as filed with the Securities and Exchange Commission, noted that:
The Company [TP Indonesia] failed to make the June 1, 1999, December 1, 1999, June 1, 2000, December 1, 2000 and June 1, 2001 interest payments on its outstanding Secured Notes. The unpaid interest totals US $54,133,056. Under the indenture of the Secured Notes, the failure to pay constitutes an event of default and the holders of the Secured Notes can accelerate the entire US $185 million principal amount of the Secured Notes.
Annual Report at 9, Ex. B to Notice of Mot. There is thus no dispute that Defendants' breached the parties' contract.
Defendants, however, invoke an affirmative defense, asserting that the economic collapse in Asia and Indonesia has rendered Defendants' performance impossible and that such impossibility raises triable issues of fact as to whether Defendants are excused from performing under the Indenture. Under New York law, which the relevant agreements invoke, unconditional guarantees with clear and unambiguous terms "are enforceable and bar the assertion of affirmative defenses." URSA Minor Ltd. v. AON Financial Products, No. 00 Civ. 2474 (AGS), 2000 WL 1010278 at *8 (S.D.N.Y. July 21, 2000). Here, the Guarantee of the Indenture is absolute and unconditional. Section 1401(b) of the Indenture reads:
The Guarantor hereby agrees that its obligations hereunder shall be as if it were principal debtor and not merely surety, and shall be absolute and unconditional, irrespective of, and unaffected by, any invalidity, or unenforceability of any security or this Indenture. . . .
Section 101 of the Indenture defines the term "Guarantee" as:
the guarantee by which the Guarantor irrevocably and unconditionally guarantees the due and punctual payment of the principal of, premium, if any, and interest on, and all other amounts payable under, the Securities, when and as the same shall become due and payable . . .
Similarly, Section 204 recites that the Guarantor . . . "has irrevocably and unconditionally agreed . . . to indemnify the registered holder of this Note upon which this Parent Guarantee is endorsed for and against any amounts owed by the Issuer. . . ." Indenture, Aff. of Vissicchio, Ex. A. As the terms of the Guarantee are unambiguous and convey that the contract is unconditional, defendant TP Indonesia has waived any and all affirmative defenses. See Crossland Federal Savings Bank v. A. Suna Co., Inc., 935 F. Supp. 184, 192-193 (E.D.N.Y. 1996).
Even if the affirmative defense of impossibility were available, Defendants have not proffered facts sufficient to establish the defense. To succeed on an impossibility defense, Defendants must show that performance was objectively impossible, Kel Kim Corp. v. Central Markets, Inc., 70 N.Y.2d 900, 902 (1987) ("Impossibility excuses a party's performance only when the destruction of the subject matter of the contract or the means of performance makes performance objectively impossible."), and that the impossibility was produced by "an unanticipated event that could not have been foreseen or guarded against in the contract," id; see The Chase Manhattan Bank v. Traffic Stream (BVI) Infrastructure Limited, 86 F. Supp.2d 244, 259-261 (S.D.N.Y. 2000), rev'd on other grounds, 251 F.3d 344 (2d Cir. 2001), cert. granted, 534 U.S. 1074 (2002). "In general[,] impossibility may be equated with an inability to perform as promised due to intervening events, such as an act of state or destruction of the subject matter of the contract. The doctrine comes into play where (1) the contract does not expressly allocate the risk of the event's occurrence to either party, and (2) to discharge the contractual duties . . . of the party rendered incapable of performing would comport with the customary risk allocation." United States v. Gen. Douglas MacArthur Senior Village, Inc., 508 F.2d 377, 381 (2d Cir. 1974). "[F]inancial difficulty does not, in and of itself, make out an impossibility defense." Bank of American Nat'l Trust and Savings Ass'n v. Envases Venezolanos, 740 F. Supp. 260, 267 (2d Cir. 1990). "[W]here impossibility or difficulty of performance is occasioned only by financial difficulty or economic hardship, even to the extent of insolvency or bankruptcy, performance of a contract is not excused." 407 East 61st Garage, Inc. v. Savoy Fifth Ave. Corp., 23 N.Y.2d 275, 281, 244 N.E.2d 37, 41, 296 N.Y.S.2d 338, 344 (1968); see also Kel Kim Corp. v. Central Markets, Inc., 70 N.Y.2d 900, 902 (1987) (impossibility of performance has been "applied narrowly, due in part to judicial recognition that the purpose of contract law is to allocate the risks that might affect performance and that performance should be excused only in extreme circumstances").
Defendants have not made a showing of objective impossibility, as lack of funds, "even to the extent of insolvency or bankruptcy," can never excuse contractual performance. Venezolanos, 740 F. Supp. at 267 (internal quotation omitted). Were Defendants to prevail on their argument, every debtor in a country suffering economic distress could avoid its debts.
Defendants are signatories to the Indenture and are obligated to make the requisite payments, TP Finance having issued the secured notes pursuant to the Indenture and TP Indonesia having given its "absolute and unconditional" Guarantee. Under the Indenture, the failure of TP Finance and TP Indonesia to make any interest payment under the Notes within thirty days of the date such interest was due constitutes an Event of Default. Under New York law they may not avail themselves of the affirmative defense of impossibility of performance, as it is waived as a matter of law. Even if the affirmative defense were available, Defendants have not made a legally sufficient showing of impossibility. Accordingly, Plaintiff's motion for summary judgment is granted with respect to liability under the claim of breach of contract.
Damages
Finally, Defendants dispute Plaintiff's damages calculation with respect to the accrued interest on the semi-annual interest payments that have not been made, i.e. the Default Interest. The case will be referred to Magistrate Judge Eaton for a determination as to the amounts of interest owed to Plaintiff.
CONCLUSION
For the foregoing reasons, Plaintiff is entitled to judgment as a matter of law on its breach of contract claim. Plaintiff shall recover the outstanding principal of $185,000,000, plus interest and Default Interest calculated in accordance with the Indenture. The case will be referred to Magistrate Eaton for a determination as to the amounts of interest owing.