Opinion
03 Civ. 9303 (DLC)
April 20, 2004
Laurence May, Bonnie Pollack, Angel Frankel, P.C., New York, NY, for Appellants
Alan D. Halperin, Robert D. Raicht, Debra J. Cohen, Neal W. Cohen, Halperin Associates, New York, NY, for Appellee
OPINION AND ORDER
Homemaker Industries, Inc. and AM, Inc. (together, "AM") bring this appeal from a Memorandum Decision and Order of the Honorable Robert D. Drain, United States Bankruptcy Judge. The July 18, 2003 Decision ("Decision") granted summary judgment to the Official Committee of Unsecured Creditors of HMKR, Inc. (the "Committee") on its claim for declaratory judgment that HMKR, Inc. ("HMKR") retained its right in letter of credit proceeds in excess of the obligations it owed to Fireman's Fund Insurance Company ("FFIC"), the beneficiary of the letters of credit and issuer of HMKR's workmen's compensation insurance policies. The Decision also denied AM's claim for summary judgment that it acquired the excess letter of credit proceeds when it purchased substantially all of HMKR's assets pursuant to Section 363(b) of Title ll, United States Code (the bankruptcy Code"). For the reasons that follow, the Decision is affirmed.
Homemaker Industries, Inc. is the successor to AM.
Background
The facts of this case are set forth in the Decision at In re HMKR, Inc. f/k/a Homemaker Industries. Inc., 2003 WL 21696521 (ROD) (Bankr. S.D.N.Y. July 18, 2003). The following undisputed facts provide the context for the issue on appeal.
Prior to filing for relief under chapter ll of the Bankruptcy Code, HMKR purchased three workmen's compensation insurance policies from FFIC, collectively covering the period from May 1995 to May 1998 (the "Deductible Policies"). On May 24, 1995, HMKR and FFIC entered into a Security Agreement for Deductible Policy Provisions ("Security Agreement"), which states in Section I that
The Decision states that coverage began in May 1994. This date did not affect any of the Decision's analysis.
From time to time the parties may make any insurance policy issued to [HMKR] by [FFIC] subject to this Agreement by completing and executing a Declaration substantially in the form set forth as Exhibit A (a "Declaration"). The execution of a Declaration shall make any insurance policy or endorsement incident to the policy described in the Declaration subject to this Agreement.
(Emphasis supplied.) HMKR and FFIC executed Declarations on May 24, 1995, May 24, 1996, and May 24, 1997, rendering each of the Deductible Policies subject to the terms of the Security Agreement. The Security Agreement, Deductible Policies and Declaration are treated as a single, integrated agreement under Section XXII of the Security Agreement ("Section XXII"):
Entire Agreement. This Agreement, and (when executed and delivered) the Deductible Policies and the Declarations, together with the schedules, exhibits, and endorsements hereto and thereto, constitute the entire agreement among the parties hereto with respect to the Deductible Policies and the security for the payment of the premiums thereof.
(Emphasis supplied.)
HMKR was obligated under the terms of the Security Agreement to furnish a letter of credit to support its obligations under the Deductible Policies. HMKR therefore arranged for the issuance by First Union National Bank ("First Union") of three irrevocable letters of credit totaling $491,000 for the benefit of FFIC (the "Letters of Credit"). The parties' rights with respect to any Letter of Credit proceeds remaining after satisfaction of the Debtor's obligations to FFIC (the "Excess Proceeds") are governed by Section VI.5.b of the Security Agreement, which provides
[HMKR] and [FFIC] expressly agree that the Proceeds, if any, remaining in [FFIC's] possession after payment of the Obligations [to FFIC] then due . . . shall be the property of [FFIC], to be held by [FFIC] for itself and as agent for the [FFIC] Affiliates, for application to the Obligations as they become due. The Proceeds may be commingled with any other funds by [FFIC] or the [FFIC] Affiliates, applied to pay [HMKR's] Obligations as they become due . . ., and otherwise handled in any manner deemed appropriate by [FFIC]. [HMKR's] sole right with respect to the Proceeds shall be an unsecured contractual right running to [FFIC], not the Proceeds, to have the issuer of the Letter of Credit receive for the account of [HMKR] an amount equal to the excess of the proceeds over the Obligations after Final Settlement of all Deductible Policies.
The Security Agreement and this Opinion use the term "Proceeds" to refer to the amount drawn under the Letters of Credit.
This word appears to refer to the defined term "Proceeds."
(Emphasis supplied.) Section VI.5.c of the Security Agreement requires that FFIC credit HMKR with interest an any unapplied Proceeds that it holds until "Final Settlement" of the Deductible Policies.
"Final Settlement" is defined in the Security Agreement as "the date 15 days after the expiration of any Preference Period applicable to the final payment of the total Ultimate Obligation for the Deductible Policy."
On October 22, 1999, HMKR filed a petition for voluntary relief under chapter ll of the Bankruptcy Code. The United States Trustee appointed the Committee on November 5. On November 10, FFIC drew on the entire amount of the Letters of Credit, although at that time HMKR had no fixed, liquidated obligations to FFIC under the Deductible Policies.
On April 5, 2000, the Bankruptcy Court approved the sale of substantially all of HMKR's assets to AM pursuant to the Asset Purchase Agreement ("APA") executed by the parties. Section 1.1 of the APA provides that AM purchased
all of the right, title and interest of [HMKR] in and to the business, properties (real, personal, mixed, tangible and intangible), assets, goodwill and rights of [HMKR], of every kind, nature and description, owned or leased, wherever located and whether or not carried or reflected on the books and records of [HMKR], as the same shall exist on the closing date. . . .
(Emphasis supplied.) Following this general description, the APA offers a nonexhaustive list of certain types of assets purchased by AM, including
Section 1.1(i) each contract . . ., to which [HMKR] is a party or by which it is bound or under which it has any rights or is entitled to benefit. . . .
* * *
Section 1.1(1) the proceeds of any insurance, and the right to receive the proceeds of any insurance, with respect to any claims which may be asserted in connection with any of the Purchased Assets or Assumed Liabilities . . . subject to certain rights of [HMKR] with respect to any insurance claim specifically identified as an Excluded Asset or Excluded Liabilities [sic], including without limitation, proceeds of insurance with respect to any claim for personal injury, negligence, deceptive trade practice or product liability arising out of any occurrence, state of facts, or circumstances prior to the Closing Date;
* * *
Section 1.1(o) all cash and cash equivalents of [HMKR] on hand or on deposit; and all deferred charges and prepaid items, advance payments, customer advances and prepayments of [HMKR], and all right, title and interest of Seller in escrow accounts and deposits which relate to the properties, assets or business being acquired by [AM]. . . .
Most significantly for the issues presented on this appeal, the APA also provides that certain listed items are not acquired by AM under the agreement. Section 1.2(d) of the APA ("Section 1.2(d)") specifically describes as an "Excluded Asset" "all rights in and to [HMKR's] directors and officers liability insurance and any other insurance policies and rights thereunder as do not relate to the Purchased Assets or the business of [HMKR]." (Emphasis supplied.) Section 2.5(f) of the APA ("Section 2.5(f)") lists under "Excluded Liabilities" "any and all debts, liabilities and obligations of [HMKR] incurred or accrued with respect to any period, or circumstances, or state of facts or occurrences, on or prior to the Closing Date, relating to . . ., workmen's compensation."
When the APA closed on April 18, 2000, Final Settlement of the Deductible Policies had not yet occurred. On November 20, 2001, the Bankruptcy Court expunged the proof of claim filed in HMKR's Chapter ll case by FFIC, asserting a contingent unsecured claim of $1,773, 130. It was not until July 26, 2002 that FFIC resolved all workmen's compensation claims under the Deductible Policies issued to HMKR. The Excess Proceeds, including accrued interest, amounted to $400, 245 as of November 12, when the Excess Proceeds were deposited in an interest — bearing escrow account to await the Bankruptcy Court's decision.
Discussion
Jurisdiction over this appeal is invoked pursuant to Title 28, United States Code, Section 158(a)(1). A district court may "affirm, modify or reverse a bankruptcy judge's judgment, order or decree." Rule 8013, Fed.R.Bank.P. The court must review the Bankruptcy Court's findings of fact under a "clearly erroneous" standard, id., and its legal conclusions de novo. In re Robert N. Kornfield, 164 F.3d 778, 783 (2d Cir. 1999).
The Bankruptcy Court found this to be a core proceeding under Title 28, United States Code, Sections 157(b)(2)(A), (N) and (O), and applied New York law to this action. Neither party disputes this choice of governing law.
Summary judgment may not be granted unless the submissions of the parties taken together "show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Rule 56(c), Fed.R.Civ.P. (made applicable to this proceeding pursuant to Rule 7056, F.R.Bankr.P.). The moving party bears the burden of demonstrating the absence of a material factual question, and in making this determination the court must view all facts in the light most favorable to the non — moving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247 (1986); Celotex Corp, v. Catrett, 477 U.S. 317, 323 (1986). When the moving party has asserted facts showing that the non — movant's claims cannot be sustained, the opposing party must "set forth specific facts showing that there is a genuine issue for trial," and cannot rest on the "mere allegations or denials" of the movant's pleadings. Rule 56(e), Fed.R.Civ.P.; accord Burt Rigid Box, Inc. v. Travelers Property Cas. Corp., 302 F.3d 83, 91 (2d Cir. 2002).
"The proper interpretation of an unambiguous contract is a question of law for the court, and a dispute on such an issue may be properly resolved by summary judgment." Adirondack Transit Lines. Inc. v. United Transportation Union, 305 F.3d 82, 85 (2d Cir. 2002) (citation omitted). Under New York law, a contract is unambiguous when it has a "definite and precise meaning, unattended by danger of misconception in the purport of the contract itself, and concerning which there is no basis for a difference of opinion." Krumme v. West Point Stevens, 238 F.3d 133, 139 (2d Cir. 2000) (citation omitted). Unambiguous contract terms are to be given their plain meaning.Id. (citation omitted). Contract language is ambiguous if it is "capable of more than one meaning when viewed objectively by a reasonably intelligent person who has examined the context of the entire integrated agreement."Id. At the same time, "a party cannot create an ambiguity in an otherwise plain agreement merely by urging different interpretations in the litigation," and courts should take care not to strain the language of a contract beyond its reasonable and ordinary meaning. Torres v. Walker, 365 F.3d 238, 245 (2d Cir. 2004) (citation omitted).
The Bankruptcy Court correctly concluded that the Security Agreement, Deductible Policies, and Declarations are integrated under the plain language of Section XXII of the Security Agreement. An integration clause seeks to preclude the introduction of extrinsic evidence of the parties' understanding by explicitly defining the four corners of the written agreement. See, e.g., Investors Ins. Co. of America v. Dorinco Reinsurance Co., 917 F.2d 100, 104 (2d Cir. 1990). Section XXII states that the Security Agreement, Deductible Policies and Declarations Constitute the entire agreement among the parties hereto with respect to the Deductible Policies and the security for the payment of the premiums thereof." This provision unifies the three documents so that they constitute one final, complete expression of the parties' agreement concerning the insurance policy issued by FFIC, including HMKR's financial obligations thereunder.
AM contends that Section XXII of the Security Agreement was intended to eliminate the introduction of parol evidence by defining the entire understanding of the parties, but that the clause was not intended to merge the Security Agreement, Deductible Policies, and Declarations into one agreement. This argument is unavailing. An integration clause such as that found in the Security Agreement proposes to exclude extrinsic evidence precisely by delineating the boundaries of a single, unified written agreement that represents the totality of the parties' understanding with respect to a transaction. See Black's Law Dictionary 812 (7th ed. 1999) (Integration clause" is also termed a "merger clause").
AM's claim that several other provisions in the Security Agreement evidence an intent to treat the Security Agreement and Deductible Policies as separate and distinct is also unpersuasive. The Recital Paragraph's statement, for example, that the Security Agreement sets forth "arrangements for the payments of the obligations on those insurance policies which are to be covered by this Agreement," supports Section XXII's instruction that the Security Agreement, Deductible Policies, and Declarations are to be considered a single, complete agreement. Similarly, Section I of the Security Agreement, providing that the parties may make any policy subject to the Security Agreement by executing a Declaration, demonstrates the parties' intent to develop a unified understanding concerning the insurance policies and security for the payment of premiums. The Security Agreement's use of the terms "Agreement" and "policies" or "Deductible Policies" is consistent with its identification of different components of a single agreement.
AM's references to three other provisions of the Security Agreement are also misplaced. Section l's statement that "nothing in the Agreement shall modify, alter or amend any of the terms or conditions of the Deductible Policies relating to the insurance coverage provided under the Deductible Policies" is consistent with the existence of a unified agreement of which both the Security Agreement and Deductible Policies are a part, as is Section II's specification that "the purpose of this Agreement is to provide for the financing of the total unpaid Ultimate Obligation for each Deductible Policy." Section IX(1)'s directive that the "breach of any warranty, representation, covenant or provision of this Agreement or any other agreement [between HMKR and FFIC]" constitutes an event of default under the Security Agreement does not provide support for AM's argument that the Security Agreement, Deductible Policies, and Declarations are not an integrated agreement.
Since the Security Agreement, Deductible Policies, and Declarations constitute one integrated agreement "with respect to the Deductible Policies and security for the payment of the premiums thereof," HMKR's unsecured contractual right running to FFIC pursuant to Section VI.5.b of the Security Agreement arises under an insurance policy. Section 1.2(d) specifically excludes from the APA all rights to any "insurance policies and rights thereunder as do not relate to the Purchased Assets or the business of [HMKR]." When interpreting a contract, courts should avoid any construction that renders terms meaningless. Manley v. Ambase Corp., 337 F.3d 237, 250 (2d Cir. 2003) (applying New York law). In order for the exclusion of rights under policies unrelated to the business of [HMKR] to have meaning, the phrase must refer to the ongoing business of HMKR. Absent such an interpretation, all of HMKR's insurance policies could be considered somehow related to its present or past business, and no rights would be excluded under this clause of Section 1.2(d).
Since the contractual right to recover the Excess Proceeds arises under the integrated insurance policy agreement between HMKR and FFIC, it is unnecessary to determine whether the Security Agreement alone would constitute an executory contract under Section 365 of the Bankruptcy Code. See In re Ionosphere Clubs. Inc., 85 F.3d 992, 998-99 (2d Cir. 1996) (an executory contract is a "contract on which performance remains due to some extent on both sides"). It is worth noting, however, that with regard to the Security Agreement, AM did not follow the procedure required by Section 1.5 of the APA for the assignment of executory contracts.
Construing Section 1.2(d) to exclude rights under insurance policies unless they relate to the ongoing business of HMKR is reasonable, moreover, since only those policies related to ongoing business would apply to the business acquired by AM pursuant to the APA. The workmen's compensation policies issued to HMKR by FFIC expired in May 1998, over a year before its chapter ll petition and almost two years before its sale to AM. These policies did not relate to HMKR's ongoing business at the time the APA was executed and are therefore excluded assets under Section 1.2(d).
AM contends that this reading of Section 1.2(d) impermissibly broadens the category of excluded assets and is without basis. AM does not, however, provide an alternative interpretation of this provision giving meaning to the phrase "as do not relate to the Purchased Assets or business of [HMKR]." AM's only argument in this regard is that director and officer liability insurance would not relate to HMKR's business. Since director and officer liability insurance is specifically listed as excluded under Section 1.2(d), however, this example does not give meaning to the clause at issue.
AM argues that the Bankruptcy Court erred by failing to consider Section 1.2(d) in conjunction with Section 1.1(1) of the APA ("Section 1.1(1)"), which provides for AM's purchase of "the proceeds of any insurance . . . with respect to any claims which have been or may be asserted in conjunction with any of the Purchased Assets." AM's assertion that Section 1.1(1) supports its right to the Excess Proceeds, however, is off the mark. Section 1.1(1) states that AM's purchase of insurance proceeds is "subject to certain rights of [HMKR] with respect to any insurance claim specifically identified as an Excluded Asset or Excluded Liabilities."
As discussed above, rights under insurance policies unrelated to HMKR's business are Excluded Assets under Section 1.2(d). In addition, Section 2.5(f) goes on to designate any and all claims for workmen's compensation with respect to any period before the Closing Date as Excluded Liabilities. As the Bankruptcy Court correctly noted, HMKR's retention of liability for workmen's compensation claims pursuant to Section 2.5(f) strongly supports the exclusion from the APA of rights arising under the integrated Deductible Policies and Security Agreement, including the Excess Proceeds. The language of Section 1.1(1) explicitly providing that AM's purchase of any insurance proceeds be subject to HMKR's rights with respect to Excluded Liabilities, including workmen's compensation claims, further evidences the parties' intent to exclude the workmen's compensation policies — and the rights and liabilities arising thereunder — from the APA.
AM contends that the Bankruptcy Court's reliance on Section 2.5(f) is misplaced because the existence of the Excess Proceeds means that HMKR is no longer liable for any workmen's compensation claims. Section 1.1(1) provides, however, that HMKR retains "certain rights . . . with respect to any insurance claim specifically identified as an Excluded Asset or Excluded Liabilities." (Emphasis supplied.) This section does not state that HMKR retains only the right to pay liabilities related to an Excluded Asset or Excluded Liability.
Even if the Excess Proceeds are not included in the assets described in Section 1.1(1), AM claims that the Proceeds are no different than any other advance payments or security deposits made by HMKR, and are therefore covered by Section 1.1(o) of the APA ("Section 1.1(o)"). Section 1.1(o) provides for the purchase of "all cash and cash equivalents of [HMKR] on hand or on deposit; and all deferred charges and prepaid items, [and] advance payments." This argument ignores the established law that letters of credit are "unique commercial instruments" governed by distinct legal principles. Mutual Export Corp, v. Westpac Banking Corp., 983 F.2d 420, 423 (2d Cir. 1993);see also Bouzo v. Citibank, N.A., 96 F.3d 51, 56 (2d Cir. 1996); Alaska Texfile Co., Inc. v. Chase Manhattan Bank. N.A., 982 F.2d 813, 815-16 (2d Cir. 1992). Unlike advance payments or security deposits, a letter of credit involves three distinct relationships between the applicant, the issuing bank, and the beneficiary of the letter of credit.Alaska Texfile, 982 F.3d at 815. A letter of credit is independent of the performance of the underlying contract, and strict compliance with its terms is required. Id. at 815-16; see also Nassar v. Florida Fleet Sales, Inc., 79 F. Supp.2d 284, 292-93 (1999) (DLC). AM has provided no basis for the interpretation of Section 1.1(o) as referring to the unique commercial instrument of a letter of credit.
Finally, AM argues that there exists an independent obligation under general principles of commercial law for FFIC to return to HMKR the Excess Proceeds securing its obligations to FFIC and that this independent right to the Excess Proceeds was not excluded under Section 1.2(d). AM cites Section 9-615(d)(1) of the Uniform Commercial Code, which states that "[i]f the security interest under which a disposition is made secures payment or performance of an obligation, after making the payments and applications required . . . the secured party shall account to and pay a debtor for any surplus." U.C.C. § 9-615(d)(1). Traditional contract rules, however, apply to letters of credit "only to the extent that contract principles do not interfere with the unique nature of credits." Mutual Export, 983 F.2d at 423. One of the unique principles applicable to letters of credit is that their terms and conditions "must be strictly adhered to." Alaska Texfile, 982 F.2d at 816 (citation omitted).
Section IV.5.b provides that HMKR's "sole right with respect to the Proceeds shall be an unsecured contractual right running to [FFIC], not to the Proceeds" (emphasis supplied). The Security Agreement's terms provide that HMKR's unsecured contractual right running to FFIC is exclusive of any other right to the Excess Proceeds. The application of the general commercial principle suggested by AM conflicts with this express condition and therefore interferes with the unique nature of letters of credit. HMKR's only right to the Excess Proceeds is the unsecured contractual right arising under HMKR's integrated insurance policy agreement with FFIC, which was excluded from the APA pursuant to Section 1.2(d).
AM has not provided a copy of the Letters of Credit issued by First Union but has presented no evidence suggesting that the Letters of Credit do not comply with the terms provided in the Security Agreement.
Conclusion
For the reasons stated above, the Bankruptcy Court's decision is affirmed.
SO ORDERED.