Opinion
Civil No. 99-1601 (JRT/RLE)
September 25, 2001
Frederick A. Dudderar, Jr. and R. Thomas Torgerson, HANFT FRIDE P.A., Duluth, Minnesota, for plaintiff.
James F. Harrington and Mary Sue Anderson, RUDER, WARE MICHLER, A LIMITED LIABILITY S.C., Wausau, WI, and Michael W. Haag, MAGIE, ANDRESEN, HAGG, PACIOTTI BUTTERWORTH, P.A., Duluth, MN, for defendant.
MEMORANDUM OPINION AND ORDER
Plaintiff Duluth Lighthouse for the Blind brings this action against defendant Bretting Manufacturing, Inc., alleging that defendant breached various express and implied warranties in connection with plaintiff's purchase of a tissue rewinder from defendant. Defendant counterclaims, alleging in Count I that plaintiff breached the Purchase Agreement governing the sale of the tissue rewinder. In Count II, defendant alleges that plaintiff breached a Financing and Security Agreement executed between the parties to finance plaintiff's purchase of the rewinder.
By order dated September 19, 2000, the Court granted defendant's motion for summary judgment as to plaintiff's claim for breach of express and implied warranties of fitness (Count II) and plaintiff's claim for breach of implied warranty of merchantability (Count III) of its complaint, but denied defendant's motion as to plaintiff's claim for breach of express warranties pursuant to paragraph 7.01(b) of the Purchase Agreement (Count I).
This matter is now before the Court on plaintiff's motion for entry of summary judgment against defendant on Counts I and II of defendant's counterclaim against plaintiff. For the reasons that follow, plaintiff's motion is granted in part and denied in part.
BACKGROUND
Duluth Lighthouse, a Minnesota non-profit corporation, carries on an industrial operation to provide job training and employment opportunities for blind and visually impaired individuals. Historically, plaintiff produced one-ply toilet tissue for the General Services Administration. After experiencing some financial difficulties in the mid-1990s, the Board of Directors of the Lighthouse undertook to develop a strategic plan to create greater financial stability for its organization.
In 1998, defendant approached plaintiff about developing a state-of-the art tissue rewinder for plaintiff's business. The new rewinder would allow plaintiff to upgrade to production of two-ply tissue, thus allowing it to expand its tissue production beyond governmental contracts and into commercial and consumer tissue paper markets.
Following extensive negotiations, the parties entered into a Purchase Agreement for the purchase of the rewinder. This agreement sets out the various terms and conditions of the sale and provides that the "validity, construction, interpretation and performance of [the] Agreement shall be governed by the internal laws of the state of Wisconsin, including the Uniform Commercial Code as adopted by the State of Wisconsin." Purchase Agreement ¶ 17.02.
To facilitate plaintiff's acquisition of the rewinder, defendant agreed to extend seller financing to plaintiff in the amount of $1,700,000. To accomplish this, the parties executed a Financing and Security Agreement. This agreement sets out the terms of the loan, including plaintiff's repayment obligations, the property plaintiff pledged as security for the loan and the various obligations that flow from one party to the other. The agreement also includes a nonrecourse provision, which provides in its entirety:
Repayment of the loan is structured as follows: 1) $700,000 is payable by plaintiff upon sale of its three used rewinders, or on August 1, 1999, whichever occurs first; 2) $500,000 is payable, along with interest of 9.5% per annum, in $3,958.33 monthly payments for 60 months with a principal balloon on August 1, 2003; and 3) the remaining $500,000 is made payable in full, without interest, on August 1, 2003.
Except with respect to the Company's obligation to reimburse Bretting for maintenance costs pursuant to paragraph 7 of this agreement, notwithstanding any other provision to the contrary contained in this Agreement, in the event of a default by the Company under this Agreement, Bretting's sole remedy shall be to proceed against, and enforce its security interest in, the Collateral, it being understood and agreed that the payment obligations of the Company to Bretting under this Agreement shall be non-recourse to the Company.
Financing and Security Agreement, ¶ 14. Unlike the Purchase Agreement, Minnesota law governs the construction of this agreement and the rights and duties of the parties. Id. at ¶ 16.
Two additional agreements were entered into in connection with this transaction, but are not the focus of this motion. The Guardian Loan Agreement provided for a $1,500,000 loan from Guardian to plaintiff. It too contained a non-recourse provision in paragraph 14 of the agreement. The final agreement, the Intercreditor Agreement, was executed between Guardian Capital and defendant in order to address their interests as secured creditors vis a vis each other in the event of a default by plaintiff.
The tissue rewinder was installed under defendant's supervision in September 1998. Thereafter, it began experiencing performance problems. These problems included, among other things, concerns over the rewinder's production speed, inadequate performance of the Auto-Split Thread-Up System for splicing parent tissue rolls, and inconsistent application of the rewinder's transfer glue system.
On September 27, 1999, plaintiff delivered a written notice to defendant indicating its intention to reject the rewinder pursuant to Wis. Stat. § 402.601(1) and § 402.602. Shortly thereafter, plaintiff commenced this action against defendant. On October 1, 1999, plaintiff discontinued its monthly interest payments to defendant under the parties' Financing and Security Agreement.
Wis. Stat. § 402.601(1) provides, in relevant part, that "if the goods or tender of delivery fail in any respect to conform to the contract, the buyer may: (1) reject the whole." Wis. Stat. § 402.602 provides, in relevant part, that "(1) Rejection of goods must be within a reasonable time after their delivery or tender. It is ineffective unless the buyer seasonably notifies the seller."
ANALYSIS
In its amended complaint, plaintiff claims it is entitled to recover damages pursuant to Wis. Stat. § 402.714 and pursuant to the Purchase Agreement for defendant's alleged breach of express and implied warranties under that agreement. Plaintiff also claims it is entitled to recover damages under Wis. Stat. § 402.711 and pursuant to the Purchase Agreement for its rightful rejection, or alternatively, its rightful revocation of acceptance of the rewinder. In its answer to plaintiff's amended complaint, defendant counterclaims, alleging in Count 1 that it is entitled to remedies pursuant to Wis. Stat. § 402.703 as a result of plaintiff's wrongful rejection, or alternatively, its wrongful revocation of acceptance of the rewinder and for its failure to make payments under the agreement. In Count II, defendant alleges that plaintiff is in default of the Financing and Security Agreement, thus entitling it to the remedies set forth in paragraphs 10 and 11 of that agreement.
Plaintiff now moves for summary judgment against defendant on the basis that the breach of contract claims alleged in Counts I and II of defendant's counterclaim are precluded by the nonrecourse provision in paragraph 14 of the Financing and Security Agreement. In its responsive brief and in its argument at the hearing, defendant conceded that the Financing and Security Agreement is nonrecourse as to plaintiff's payment obligations under that agreement. Defendant thus agrees that, pursuant to paragraph 14, its remedy for plaintiff's default under the Financing and Security Agreement is to proceed as a secured creditor against the collateral pledged in the agreement. The Court accordingly grants this portion of plaintiff's motion. Dismissal of Count II thus leaves only one question before the Court for purposes of this motion: Does the nonrecourse provision contained in paragraph 14 of the Financing and Security Agreement also apply to the Purchase Agreement so as to preclude liability for a breach of the Purchase Agreement?
Quite plainly, the answer to that question requires the Court to interpret the two contracts. The construction of a contract is a question of law. Brookfield Trade Ctr. Inv. v. County of Ramsey, 584 N.W.2d 390, 394 (Minn. 1998). "In interpreting a contract, the language is to be given its plain and ordinary meaning." Id. A contract is ambiguous if its language is reasonably susceptible to more than one interpretation. Current Tech. Concepts, Inc. v. Irie Enters., Inc., 530 N.W.2d 539, 543 (Minn. 1995); Employers Mut. Liab. Ins. Co. v. Eagles Lodge, 165 N.W.2d 554, 556 (Minn. 1969). If the contract is ambiguous, extrinsic evidence may be consulted, and the interpretation of the contract is a question for the trier of fact. Porous Media Corp. v. Midland Brake, Inc., 220 F.3d 954, 959 (8th Cir. 2000).
The central provision at issue in this motion is the nonrecourse provision contained in the Financing and Security Agreement:
Except with respect to the Company's obligation to reimburse Bretting for maintenance costs pursuant to paragraph 7 of this agreement, notwithstanding any other provision to the contrary contained in this Agreement, in the event of a default by the Company under this Agreement, Bretting's sole remedy shall be to proceed against, and enforce its security interest in, the Collateral, it being understood and agreed that the payment obligations of the Company to Bretting under this Agreement shall be non-recourse to the Company.
Plaintiff argues that the nonrecourse provision applies to both the Financing and Security Agreement and the Purchase Agreement, thus limiting defendant's remedies under both agreements to pursuing the collateral pledged in the Financing and Security Agreement. To support this argument, plaintiff emphasizes that the nonrecourse provision is triggered "in the event of a default by [plaintiff] under this Agreement." (Emphasis added.) Paragraph 9 of the Financing and Security Agreement defines default to include a "fail[ure] to pay when due any amounts due and payable hereunder or due and payable to Bretting under any other agreement." (Emphasis added.) Plaintiff thus maintains that paragraph 9's reference to payment obligations "under any other agreement" quite obviously refers to the Purchase Agreement. Any other interpretation, plaintiff argues, permits defendant a double recovery.
Defendant maintains that the nonrecourse provision is limited to repayment of the indebtedness obligations created by the Financing and Security Agreement. To support this interpretation, defendant emphasizes that not only does the nonrecourse provision consistently and repeatedly refer to "this agreement," but the final sentence clearly and unambiguously states that "the payment obligations of the Company to Bretting under this Agreement shall be non-recourse to the Company." (Emphasis added.) Consequently, the nonrecourse provision does not preclude liability for breach of the Purchase Agreement for wrongful rejection or wrongful revocation.
The Court agrees with defendant's interpretation of the nonrecourse provision. As defendant emphasizes, the provision makes repeated references to "this Agreement," that is, the Financing and Security Agreement. Moreover, although the provision at one point speaks generally to a default under the Agreement, that clause is then followed by the more specific provision contained in the final sentence, which states that "the payment obligations of the Company to Bretting under this Agreement shall be non-recourse to the Company." Burgi v. Eckes, 354 N.W.2d 514, 518 (Minn.Ct.App. 1984) (applying the "rule of construction that the specific in a writing governs over the general"); In re Welfare of J.M., J.M., and M.M., 574 N.W.2d 717, 721 (Minn. 1991) ("When the court construes a statute that contains both specific and general provisions, canons of statutory construction dictate that specific provisions prevail over general provisions"). The Court thus finds that the nonrecourse provision is limited to plaintiff's payment obligations under the Financing and Security Agreement.
This interpretation is consistent with the legal definition and purpose of nonrecourse provisions generally. In a typical secured transaction, a lender can proceed against both the property pledged as security for the loan as well as the borrower personally. A nonrecourse provision limits a lender's remedies to recourse against the collateral only, thus protecting the borrower against personal liability. Black's Law Dictionary 730 (6th ed. 1991) (defining "nonrecourse debt" a "debt secured by the property that it used to purchase. The purchaser of the property is not personally liable for the debt upon default. Rather, the creditor's recourse is to repossess the related property. Nonrecourse debt generally does not increase the purchaser's at-risk amount."); id. (defining "nonrecourse loan" as a "[t]ype of security loan which bars the lender from action against other assets of the borrower if the security value of the specified collateral for the loan falls below the amount required to repay the loan").
Case law interpreting the scope and effect of a nonrecourse provision vis a vis a separate but related agreement also supports the conclusion that paragraph 14 does not preclude liability for a breach under the Purchase Agreement. See USX Corp. v. Prime Leasing, Inc., 988 F.2d 433 (3d Cir. 1993); People's Heritage Sav. Bank v. Recoll Mgmt. Inc., 988 F.2d 433 (D.Me. 1993). In USX, the defendant-borrower argued that a nonrecourse provision contained in a note and security agreement to finance defendant's purchase of some telecommunications equipment precluded the plaintiff-lender from recovering general damages against the borrower for any of the borrower's alleged breaches of its notice obligations under a separate but related agreement. Id. at 434-35. The Third Circuit rejected that argument. It held that the non-recourse provisions in the note and security agreements were limited to breaches under the agreements in which they appear and that neither provision applied more broadly to breaches of the notice obligations in the collateral agreements:
It is plain that neither of these nonrecourse provisions should be construed as limiting USX's remedies for Prime's breach of its obligations in the Collateral Assignments. Therefore, the nonrecourse provisions do not preclude U.S.C. from recovering damages against Prime for any of Prime's alleged breaches of the notice requirements of the Collateral Assignments.
Id. at 438. Similarly, in People's Heritage, the court found that a nonrecourse provision applied only to the underlying debt obligation and did not preclude plaintiff from asserting alleged breaches for other contractual obligations under the same agreement. In reaching this conclusion, the court relied on the legal definition of the term "nonrecourse" as limiting a holder or lender's ability to hold the borrower or seller liable on the debt:
Thus, in its common usage, exemplified both by the legal dictionary and the language of the courts, "nonrecourse" does not mean that the purchaser cannot pursue the seller in the event that the seller has other contractual or common law obligations which have been breached. This Court holds, therefore, that the nonrecourse language in Section 12 upon which Defendant relies applies only to the underlying indebtedness, not to the contractual and legal obligations regarding the servicing and collection of the loan specifically expressed in the Agreement.
Id. at 163.
Finally, it bears noting that these two agreements, although related to the same transaction, serve very different purposes. The Purchase Agreement governs the sale of the tissue rewinder from defendant to plaintiff and focuses on the obligations of the parties with respect to the sale of goods under Article II, Chapter 402 of the Wisconsin statutes. Indeed, the Purchase Agreement itself contains its own remedies section. ¶ 7.02. The Financing and Security Agreement, on the other hand, pertains to the financing of the tissue rewinder and unlike the Purchase Agreement, is governed by the laws of Minnesota. These differences further confirm that the nonrecourse provision is limited to the agreement in which it appears.
The Court concludes that the nonrecourse provision in the Financing and Security Agreement does not preclude liability for breach of contract under the Purchase Agreement. Accordingly, plaintiff's motion for summary judgment is denied as to Count 1 of defendant's counterclaim.
ORDER
Based upon the foregoing, the submissions of the parties, the arguments of counsel and the entire file and proceedings herein, IT IS HEREBY ORDERED that plaintiff's motion for summary judgment [Docket No. 45] is GRANTED in part and DENIED in part as follows:
1. Plaintiff's motion is GRANTED as to Count II of defendant's counterclaim [Docket No. 24]. Count II of defendant's counterclaim is DISMISSED WITH PREJUDICE;
2. Plaintiff's motion is DENIED as to Count I of defendant's counterclaim [Docket No. 24].