Opinion
651451/2010.
Decided March 7, 2011.
REED SMITH LLP, New York, NY, By: Christopher Lynch, Esq., Alex Terras, Esq., for the Defendants.
RICHARD A. KRASLOW, P.C., Melville, NY, By: Richard A. Kraslow, Esq.
By this motion, Plaintiff, GE Capital Commercial, Inc. ("GE Capital") seeks summary judgment in lieu of complaint, pursuant to CPLR § 3213, and appointment of a receiver, pursuant to CPLR § 5228. Defendant, Kazi Foods of New York, Inc. ("Kazi Foods"), opposes the motion for summary judgment on the grounds that Plaintiff does not have standing to bring the action, and that the instrument upon which the motion is based does not qualify as an instrument for the payment of money only. Defendant opposes the portion of the motion seeking the appointment of a receiver on the grounds that there has not been a proper evidentiary showing, and that this relief was not set forth in the notice of motion and thus should not be considered.
Familiarity with this and the related actions pending before me is presumed. Briefly, however, the events giving rise to this action are as follows. Plaintiff, GE Capital, formerly known as Citicorp Leasing, Inc., is the administrative agent for certain lenders that loaned substantial sums of money to Defendant, Kazi Foods, in connection with a restaurant business that includes 56 Kentucky Fried Chicken ("KFC") restaurant franchises in New York and New Jersey.
These related actions are GE Capital Commercial Inc. v. Kazi Foods of New York, Inc., Index No. 650737/2010, and GE Capital Commercial Inc. v. Kazi Foods of New York, Inc. and Kazi Management VI, LLC, Index No. 600833/2010.
In accordance with the loan agreement, executed in June 2006 by Kazi Foods, as Borrower, and by Citicorp Leasing, Inc., as Administrative Agent and Lender, (the "Loan Agreement"), Lender agreed to provide $33.5 million to Borrower to finance the acquisition of 50 KFC restaurants, and to provide a non-revolving line of credit of $3.5 million for capital expenditures and remodeling needs of those restaurants. The $33.5 million loan was evidenced by seven promissory notes, each dated June 26, 2006 (collectively, the "Acquisition Notes"), and the line of credit was evidenced by a single promissory note (the "LOC Note").
Citicorp Leasing, Inc. filed a Certificate of Amendment of Certificate of Incorporation on August 4, 2008, formally changing its name to GE Capital Commercial, Inc. (Vinson Aff. Ex. A.) It is clear that GE Capital is party to the Loan Agreement as Lender and Administrative Agent.
The Acquisition Notes and the LOC Note (collectively, the "Notes") define an "Event of Default" as "(i) any failure by Borrower to pay any installment of principal or interest on this Note when due, or to fail to pay any other sum owing under any of the other Loan Documents when due, or (ii) the occurrence of any Event of Default under, and as defined in, the Loan Agreement." (Vinson Aff. Ex. C at 2.)
By letter dated November 24, 2009 (the "Default Notice"), Borrower was informed that an Event of Default, as defined by Section 5.01(m) of the Loan Agreement, had occurred and was continuing, that the defaults described in previous notices had not been cured, and that Borrower had not paid the default rate interest described in prior notices of default. (Vinson Aff. Ex. E at 1-2.) The Default Notice also provided that all obligations under the Loan and $3.5 million line of credit (together, the "Loans") were "immediately due and payable, and Administrative Agent and Lenders are entitled to proceed to exercise all of the rights and remedies available to Administrative Agent and Lenders under the Loan Documents and at law or equity, all without further notice or further opportunity to cure." ( Id. at 2.)
From January, 2007 through March, 2010, Kazi Foods made payments on the Notes totaling $10,535,133.51. (Poludniak Aff. ¶ 9.) As of March 25, 2010 (the date of the last payment), the total amount due on the Notes was $32,773,514.41, plus interest of $3,362.03 per diem. ( See Vinson Aff. ¶ 16, Ex. D.) There is no dispute that Defendant has made no payments on the Notes since March 25, 2010.
Although Defendant argues that Plaintiff has not accounted for the approximately $10 million in payments it has made on the Notes, I am satisfied that these payments were, in fact, applied in accordance with the terms of the Notes. ( See Vinson Supp. Aff. ¶ 9, Ex. A.) Moreover, to the extent that there is a discrepancy of $1,271.78 between the payments recorded by Plaintiff and those listed by Defendant, Plaintiff's counsel stated at oral argument that Plaintiff would be willing to "concede" that amount. (Hr'g Tr. 3-4, January 25, 2011.) As such, any dispute as to the amount due and owing on the Notes does not give rise to a genuine issue of material fact sufficient to defeat summary judgment.
Before turning to the merits of the motion for summary judgment in lieu of complaint, I address Defendant's argument that Plaintiff lacks standing to bring this action because Citicorp Leasing, Inc. was the Lender and Administrative Agent under the Notes and Loan Agreement, and GE Capital has never pleaded any assignment of Citicorp Leasing, Inc.'s interest in the Notes to GE Capital. Since GE Capital has submitted with this motion a Certificate of Amendment of Certificate of Incorporation showing that Citicorp Leasing, Inc. has changed its name to GE Capital Commercial, Inc., this argument is without merit. ( See Vinson Aff. Ex. A; see also note 2, supra.)
Defendant further contends that Exhibit A to the Default Notice defined the current "Lenders" as "General Electric Capital Corporation and Colonial Pacific Leasing Corporation with Sovereign Bank as a Participant." ( See Vinson Aff. Ex. E at 4.) Section 6.19 of the Loan Agreement provides that, if a lender grants a participation in the Loans, "such Lender shall retain the sole right and responsibility to enforce the obligations of Borrower." (Vinson Aff. Ex. B at 26-27.) This provision also requires each Lender to notify Borrower of the sale of any participation. ( Id. at 27.) Kazi Foods argues that it was never provided notice of a participation by Sovereign Bank, pursuant to this Section, and that, furthermore, there is no documentary evidence showing that General Electric Capital Corp., Colonial Pacific Leasing Corp., or Sovereign Bank has consented to GE Capital bringing this action. ( See Opp. Mem. at 7-9.) During the hearing on this motion, Defendant expanded upon this argument, submitting a copy of a December 15, 2006 Assignment and Assumption Agreement between Citicorp Leasing, Inc. and Sovereign Bank (the "Assignment"), which was produced in discovery. The Assignment provides, inter alia, that Sovereign Bank would receive a 24% interest in the Acquisition Loan, and would also assume all of Citicorp Leasing, Inc.'s rights and obligations under the Loan Agreement. (Assignment at 1.) Since the Assignment does not affirmatively provide for enforcement by the Administrative Agent, Defendant contends that nothing contained within the Loan Documents entitles GE Capital to bring this action as plaintiff.
A copy of the Assignment has been filed with these papers.
This disjointed argument is belied, in its entirety, by the plain language of both the Loan Agreement and the Notes. Section 5.02 of the Loan Agreement provides that, in the occurrence of an Event of Default, "Administrative Agent or Lender may, without notice or demand, exercise any one or more of the following remedies," including the right to "proceed by appropriate court action to enforce the terms hereunder or recover damages for the breach hereof." (Vinson Aff. Ex. B at 19.) Similarly, the Notes are payable to Citicorp Leasing, Inc., as Administrative Agent, and they expressly provide that any action to be taken by Lenders may be taken by Administrative Agent. (Vinson Aff. Ex. C at 1, 4.) That GE Capital is the Administrative Agent is not disputed, and I am therefore satisfied that GE Capital is a proper party to bring this action.
I turn, now, to Defendant's contention that the Notes do not qualify for treatment under CPLR 3213 because extrinsic evidence is required to determine both the amount owing, and whether or not there has been an event of default. With regard to the determination of the amount due, Defendant argues that the Notes require the calculation of interest "based upon a series of complex variable factors," which means that the amount due cannot be calculated without resort to outside documents. Defendant thus asserts that this requirement is sufficient to take the Notes outside the ambit of CPLR 3213. I disagree.
A plaintiff establishes a prima facie case under CPLR 3213 by demonstrating that the instrument at issue is one that is for the payment of money only, and that the defendants failed to make payment thereunder. Seaman-Andwall Corp. v. Wright Machine Corp., 31 AD2d 136 (1st Dep't 1968), aff'd 29 NY2d 617 (1971); see also Boland v. Indah Kiat Finance (IV) Mauritius Ltd., 291 AD2d 342 (1st Dep't 2002). CPLR 3213 is not available if the instrument requires resort to outside proof, "other than simple proof of nonpayment or a similar de minimis deviation from the face of the document." Weissman v. Sinorm Deli, Inc., 88 NY2d 437, 444 (1996). However, in some cases, the necessity for reference to an external document may not "affect the availability of CPLR 3213, because it would not alter the purely monetary nature of the obligation set forth in the note." Boland, 291 AD2d at 342-43.
Here, the Notes clearly set forth the obligation of Kazi Foods to pay a total of $37,000,000, plus interest "at a rate equal to the Floating Rate plus 2.00%." (Vinson Aff. Ex. C at 1.) The "Floating Rate" is defined in Exhibit C to each of the Notes, and, although that definition contains a formula tying the interest rate to the London InterBank Offered Rate ("LIBOR"), it is clear that Exhibit C is part of the Notes, and thus not extrinsic evidence. Furthermore, there can be no dispute that reference to an external rate for the calculation of interest does not, itself, alter the purely monetary nature of the obligation set forth in the Notes, and therefore, notwithstanding Defendant's arguments to the contrary, does not render relief under CPLR 3213 improper. See Boland, 291 AD2d at 342-43; see also Manufacturers Hanover Trust Co. v. Green, 95 AD2d 737, 737-38 (summary judgment in lieu of complaint proper where plaintiff set forth in affidavit the applicable interest rate and method of computation, and where defendant's opposition "was based purely on surmise and suspicion.")
The amounts due under each of the seven Acquisition Notes were $4.9 million ("Note 1"), $4.3 million under Note 2, $3 million under Note 3, $5 million each for Notes 4, 5 and 6, and $6.3 million for Note 7, plus an additional $3.5 million for the LOC Note. ( See Vinson Aff. ¶ 9, Ex. C.)
See also Bank of America, N.A. v. Solow , 59 AD3d 304 (1st Dep't 2009), affirming grant of CPLR 3213 motion for nonpayment on a guaranty, where the interest rate set forth in the loan agreement was tied to LIBOR.
Defendant argues, next, that reference to external documents is also necessary to define an "Event of Default," and that, where the Notes are inextricably intertwined with the Loan Agreement, summary judgment in lieu of complaint must be denied. This argument is unpersuasive, first, because reference to the Loan Agreement for the purpose of defining one element of a term does not necessarily render CPLR 3213 unavailable. See Embraer Finance Ltd. V. Servicios Aereos Profesionales, S.A., 42 AD3d 380 (1st Dep't 2007); see also Boland, 291 AD2d at 342-43. And, in any event, the Notes, themselves, define an Event of Default as, "(i) any failure by Borrower to pay any installment of principal or interest on this Note when due, or to fail to pay any other sum owing under any of the other Loan Documents when due, or (ii) the occurrence of any Event of Default under, and as defined in, the Loan Agreement." (Vinson Aff. Ex. C at 2, emphasis added.)
Moreover, although the Event of Default that precipitated this action was nonpayment in accordance with the cross-default provisions contained in the Loan Agreement, there is no dispute that Defendant has not made any payments on the Notes, themselves, since March 2010. Thus, a default under the very terms of the Notes has occurred and is continuing, and the Notes adequately demonstrate Defendant's unconditional obligation to pay a sum of money and its failure to make payment according to its terms. Summary judgment pursuant to CPLR 3213 is therefore appropriate.
I have considered Defendant's argument that this relief is barred by the doctrine of res judicata, and I note that the July 29, 2010 decision of Justice Richard B. Lowe III in the actions consolidated under Index No. 600785/2010, General Electric Capital Business Asset Funding Corporation of Connecticut v. Kazi Family LLC and Kazi Foods of Annapolis, Inc., which denied Plaintiff's motion for summary judgment in lieu of complaint, involved guaranties executed in connection with Loan Agreement, and not the Notes that are at issue here. The issue of whether the Notes qualify for as an instrument for the payment of money only thus has not been addressed, and res judicata and collateral estoppel do not apply. See, e.g. Gramatan Home Investors Corp. v. Lopez, 46 NY2d 482, 485 (1979) (defining collateral estoppel and res judicata to provide that "as to the parties in a litigation and those in privity with them, a judgment on the merits by a court of competent jurisdiction is conclusive of the issues of fact and questions of law necessarily decided therein in any subsequent action.")
Finally, I turn to the portion of Plaintiff's motion seeking the appointment of a receiver pursuant to CPLR 5228. This statute provides for the appointment of a receiver to "administer, collect, improve, lease, repair or sell any real or personal property in which the judgment debtor has an interest or to do any other acts designed to satisfy the judgment." CPLR § 5228(a). The appointment of a receiver under this provision is soundly within the discretion of the court, and "should only be granted when a special reason appears to justify one. In deciding whether the appointment of a receiver is justified, courts have considered the (1) alternative remedies available to the creditor . . .; (2) the degree to which receivership will increase the likelihood of satisfaction . . .; and (3) the risk of fraud or insolvency if a receiver is not appointed." Hotel Mezz 71 Lender LLC v. Falor , 14 NY3d 303 , 317 (2010) (internal quotes and citations omitted).
Although, as Defendant points out, this relief is not set forth in the body of Plaintiff's Notice of Motion, it is included in the title block, and there can be no doubt that Defendant had notice of Plaintiff's intent to seek a receiver. Defendant is therefore not prejudiced by my consideration of this request, and I find Defendant's argument that I lack jurisdiction to consider this prong of the motion unavailing.
Here, Plaintiff seeks a receiver to assist in recovering upon the judgment which is to be entered in accordance with this decision, by operating Kazi Foods's 56 KFC restaurants pending their sale. Plaintiff argues that this relief is appropriate because Defendant has consistently failed to satisfy its obligations under the applicable agreements, and failed to comply with certain discovery obligations in the related actions. Plaintiff further argues that, since the Kazi Foods assets "lack in marketability, or would fetch a greater return for the benefit of creditors if sold as a going concern, turning property over to a sheriff to satisfy a judgment is inappropriate and the appointment of a receiver in the best interest of all." (Supp. Mem. at 10.)
Defendant opposes this prong of the motion on the basis that Plaintiff has not made the proper evidentiary showing required by CPLR 6401. Since this is a motion under CPLR 5228, I do not address this opposition.
In Hotel Mezz 71 Lender LLC v. Falor , 14 NY3d 303 , 317-318 (2010), the Court of Appeals held that the appointment of a receiver was not an abuse of discretion where there was concern about the defendant's "precarious financial condition," and where there was an "identifiable risk" that the defendant would "be unable to satisfy a future judgment." In that case, however, there was no ready market for the intangible property interests at issue, and furthermore, the receivership sought was over the "defendants' ownership/membership interests, not the day-to-day operation" of an entity. Id. at 318. The situation here is quite to the contrary: Plaintiff has not demonstrated that there is no ready market for the assets of Kazi Foods (which are far from intangible), and the receivership it seeks is one over the day-to-day operations of the restaurants, not over Defendant's ownership interests.
Moreover, unlike the parties in Hotel 71 Mezz Lender, GE Capital and Kazi Foods entered into an agreement, which expressly secured Plaintiff against the possibility of Defendant's breach by providing for the replevin of certain collateral and foreclosure upon certain real property. The Loan Agreement provides that, in the occurrence of an Event of Default, Lender and Administrative Agent have the right, inter alia, to "exercise Lenders' rights of foreclosure or of sale by private power pursuant to the Mortgages . . .;" to "secure peaceable repossession of the equipment, furniture, fixtures, machinery and other Personal Property which is the subject of the Security Agreement," to sell such equipment, and to require Guarantors and Borrower to pay any deficiency amount of indebtedness remaining after the sale. (Vinson Aff. Ex. B at 19.) When Plaintiff, a highly sophisticated commercial lender, entered into the Loan Agreement with Defendant, it demanded collateral for the Loans, anticipating that such collateral would provide adequate security. To the extent this security is insufficient, the Loan Agreement permits Plaintiff to turn to the Guarantors to satisfy the deficiency. ( Id.) Although Plaintiff now argues that exercising the remedy for which it bargained will not provide sufficient funds to satisfy its judgment, I am not persuaded that the appointment of a receiver, for that reason alone, is appropriate. Moreover, as stated above, Plaintiff has not demonstrated that the assets comprising the Collateral lack in marketability. I am therefore not convinced that the only remedy available to Plaintiff is the appointment of a receiver, nor has there been a showing that there is a substantial risk of fraud or insolvency in the absence of such an appointment. This prong of Plaintiff's motion is denied.
While this motion was sub judice, I received letters, dated February 22 and February 28, 2011, from counsel to Plaintiff, and a letter, dated February 24, 2011, from counsel to Defendant. Plaintiff's February 22 letter enclosed an Order, dated February 17, 2011, appointing a receiver in an action involving affiliated companies, filed in the Circuit Court, Seventeenth Judicial Circuit for Broward County, Florida (the "Florida Order") Plaintiff contends that the Florida Order "suggests further economic grounds requiring the appointment of a receiver . . . because a portion of the unified business enterprise conducted by Kazi has been severed."
In response, Defendant states, first, that the Florida Order was preempted by the bankruptcy filing of Kazi's Florida affiliate, and that, in any event, Kazi Foods of New York, Inc., operates independently of other Kazi-related entities.
Although Plaintiff argues to the contrary, it is not clear, on the basis of these letters, whether the Florida entity's bankruptcy filing will have any economic impact on Kazi Foods of New York, Inc., and I remain unconvinced that a receiver is warranted here.
Accordingly, it is
ORDERED that Plaintiff's motion for summary judgment in lieu of complaint and for the appointment of a receiver is DENIED in part and GRANTED in part; and it is further
ORDERED that the motion for the appointment of a receiver is DENIED; and it is further
ORDERED that the motion for summary judgment in lieu of complaint is GRANTED, as to liability; and it is further
ORDERED that the issue of damages, including calculation of the amount due and owing as of the date of entry of this Order, including interest, costs of collection, and reasonable attorneys fees, is hereby referred to a Special Referee to hear and report with recommendations, except that, in the event of and upon the filing of a stipulation of the parties, as permitted by C.P.L.R. § 4317, the Special Referee, or another person designated by the parties to serve as referee, shall determine the aforesaid issue; and it is further
ORDERED that a copy of this order with notice of entry shall be served on the Special Referee Clerk (Room 119) to arrange a date for the reference to a Special Referee.