Opinion
No. 01 Civ. 8947 (BSJ).
June 22, 2004
Opinion
Before the Court is an appeal of the Bankruptcy Court's ruling that Appellant was required to provide Debtor with 5 days notice and opportunity to cure prior to voting certain stock, and that the notice Appellant provided Debtor prior to voting was insufficient as a matter of law. For the reasons below, the Court reverses this ruling and remands the case for further proceedings.
BACKGROUND
1. Facts
The Debtor, 2927 Eighth Avenue Corporation ("2927"), operates a retail supermarket located at 2927 Eighth Avenue ("Supermarket"). Since 1996, 2927 purchased groceries and food products for resale from General Trading Company, Inc. ("GT"), a local wholesale grocer. In that same year, GT loaned $310,000 to Elvio Taveras, 2927's sole officer, director and shareholder, to finance the acquisition of the Supermarket. (D345-47).
On October 7, 1997, GT loaned 2927 an additional $500,000. The parties agreed to consolidate this sum with the balance of the previous loan and to refinance the debt ("1997 Refinancing").
The 1997 Refinancing was memorialized by a new Loan Agreement ("Loan Agreement"), as well as several other documents signed only by Taveras. Specifically, Taveras executed: (1) a Pledge Agreement, discussed infra, (2) a Certificate of Incumbency, confirming that he was the sole officer, director and shareholder of 2927, (see D238), and (3) a written resignation as officer and director of 2927, "effective immediately," to be held in escrow by GT's counsel in case of a default. (D335).
a. The Pledge Agreement
The Pledge Agreement secured repayment of the loans and credit advanced by GT to 2927 on October 7, 1997 "and any other obligation now or hereafter owing" by 2927 to GT. (D44, ¶ 1). Taveras secured the loan by pledging his stock in 2927, which "constitute[d] all of the issued and outstanding shares" of 2927 ("Pledged Shares"). (D44-45, ¶ 1-2).
The Pledge Agreement gave GT various rights in the event of a default on 2927's obligations, including (1) the right to assume ownership of the Pledged Shares, (2) the right to vote the Pledged Shares, (3) the right to sell the Pledged Shares, and (4) the right to accept Taveras' resignation.
The Pledged Shares, like Taveras' resignation, were delivered to GT's counsel to hold in escrow soon after the contracts were executed.
According to Paragraph 4 of the Pledge Agreement, upon the occurrence of any event of default by 2927 on its obligations to GT,
GT shall have the right to register the Shares in its own name or in the name of anyone it appoints to hold any of the Shares for it, and GT shall have (but will not be required to exercise) all of [Taveras'] rights in the Shares . . . but i[t] will only have the right to sell the Shares or to vote if one of the events referred to in paragraph 6 occurs after any applicable grace period.
(D45-46, ¶ 4) (emphasis added). Accordingly, one must turn to the language of Paragraph 6 to ascertain the "events" upon which GT may exercise its right to sell or to vote, even though the language of Paragraph 6 refers only to the right to sell.
Paragraph 6 reads:
6. Sale of Shares by GT. After five (5) days written notice and an opportunity to cure, GT may sell the Shares, or any part it chooses, if:
(a) Any amount owed by [Taveras] or 2927 to GT now or in the future is not paid when it becomes due after any grace period.
(D46, ¶ 6). Three more lettered subparagraphs follow, each describing other defaults that would trigger GT's right to sell the Pledged Shares. (D46, ¶ 6(b) — (d)).
Following the description of the four situations of default, Paragraph 6 states that "At least five (5) business days before GT sells any of the Shares, it will send me notice of the proposed sale at my current address on GT's records, by certified mail." (Id.). The Pledge Agreement does not require GT to include any specific details in the notice of proposed sale.
Along with Paragraphs 4 and 6, Paragraph 14 also provides GT with certain rights with respect to the Pledged Shares. Specifically, if 2927 did not obtain a new lease for the premises it currently occupied on or before March 31, 1999, Taveras "agree[d] that the resignation and shares being pledged herein may be turned over to GT or their nominee." (D51, ¶ 14).
The Paragraph provided, however, that upon the full payment of any monies due and owing, GT would reassign the Shares back to Taveras. (D51, ¶ 4). Therefore, it seems that GT did not have the right to sell the Shares pursuant to this Paragraph, but could exercise other rights, such as voting.
The final paragraph of the Pledge Agreement provides GT with authorization, in the event that 2927 or Taveras fails to comply with any obligations, "to take such further and other actions as it may deem appropriate in order to protect its interest and to secure the obligations owing," "notwithstanding anything" contained in the Pledge Agreement. (D52, ¶ 15).
b. Events Occurring After the Execution of the Pledge Agreement
1. Alleged Defaults Under the Pledge Agreement
GT alleges that 2927 defaulted on several of its obligations under its agreements with GT. The Court provides the details of the alleged defaults for background purposes only and not as findings of fact because the bankruptcy court explicitly declined to make findings on this issue. (D437) (Tr. of bankruptcy proceeding) ("I could, but I don't think it would be useful to get involved in the question of whether or not the Debtor actually owes General Trading any money).First, GT alleges that by the summer of 2001, 2927 was indebted to GT in the amount of $80,985.83, including amounts incurred on credit for unpaid merchandise, which was separate and apart from amounts loaned in conjunction with the 1997 Refinancing. (D257, ¶ 18). Second, GT alleges that Taveras owed it substantial debts for other companies that Taveras controlled, which were guaranteed by the terms of the Pledge Agreement. (D54). Last, GT alleges that 2927 defaulted on numerous obligations under a security agreement the parties entered into on January 26, 2000, and these defaults are actionable under the Pledge Agreement.
2927 disputes all of these contentions. Specifically, 2927 asserts that it satisfied the 1997 Refinancing debt in its entirety by October 1999. According to 2927, this extinguished the rights and obligations under the Pledge Agreement. (2927's Opp'n at 7). Although 2927 admits that it incurred additional debts to GT on later dates, it disputes the amount that it was indebted, charges GT with misapplying funds and overcharging interest, and asserts that these debts did not fall under the terms of the Pledge Agreement.
2. GT's Actions on the Alleged Defaults
On May 10, 2001, GT delivered to Taveras a notice of default stating that 2927 was in default of the Pledge Agreement ("Notice"). (D341). The Notice does not specify which obligations 2927 failed to fulfill, but advises that "This letter shall constitute written notice and an opportunity to cure the defaults as set forth in the various notices that you and your corporations have received with regard to this matter." (Id.). It also states that GT intends to "sell the shares secured by the pledge agreement" because of the alleged default. (Id.).
Sometime in May 2001, GT also issued a pro-forma notice of default to 2927 stating that it was "in default of various obligations to General Trading . . . including your loan and unpaid merchandise." It is not clear, however, who, if anyone, received this notice.
Four days later, GT noticed an auction for the sale of Taveras' stock. (D204). The auction was scheduled for May 24, 2001, but never occurred. (Id.).
On May 21, 2001, Taveras and the corporations he controlled commenced an action against GT in the Supreme Court of the State of New York, seeking to enjoin GT from, inter alia, "effecting the title, use, ownership or possession of any shares of stock" of 2927. (D168-69). The Court issued a temporary restraining order the following day, but it was lifted on June 26. GT asserts that, on that day, it took possession of the Pledged Shares.
On June 27, without notice to 2927, GT conducted a `meeting of the stockholders' and elected GT's president, Jonathan Abad, the sole director and president of 2927. (D87-88). GT then noticed a second auction sale for July 9 of the stock formerly held by Taveras. (D211). However, on July 5, Taveras filed a personal Chapter 11 bankruptcy petition, which stayed the auction of the stock. (D1-33).
2. Procedural History
a. Proceedings Before the Bankruptcy Court
On the same day that the Chapter 11 was filed, GT filed an Emergency Motion for Adequate Protection, An Order Determining Control of the Debtor, and/or Dismissal of the Case ("Emergency Motion"), arguing that Taveras did not have authority to file a Chapter 11 on behalf of 2927. GT sought a ruling that, prior to the filing of Chapter 11, (1) GT became the sole shareholder of 2927; (2) Taveras resigned or was otherwise removed as sole director and officer of 2927; and (3) Jonathan Abad was elected sole director and president of 2927. GT requested that the Court issue an order turning control of 2927 over to it and dismissing the case.
After hearing argument and receiving several rounds of briefing, the bankruptcy court made two findings. First, it stated:
It is my interpretation of the pledge agreement that under paragraph 4 . . . it was necessary to give five days prior written notice before [GT] could vote the shares, and that the reading of the phrase [`]only have the right to sell the shares or to vote if one of the . . . events . . . referred to in paragraph 6 occurs after any applicable grace period['], that reference to vote includes the reference to notice period which is contained in paragraph 6."
Second, the Court found that the Pledge obligated GT to "specif[y] the nature of the default." (D436). It continued, "I don't think there could be any question . . . that in order for the notice to be meaningful that the right to cure would require that the notice contain a precise description of what it is that has not been done." (Id.). The Court then found that GT did not provide sufficient notice. (D437).
Based on these findings, the Bankruptcy Court invalidated GT's subsequent actions of accepting Taveras' resignation and voting in a new officer and director. The Court ultimately concluded that "General Trading was not a shareholder at the time the petition was filed and the Debtor's petition was properly authorized." (D440).
The Bankruptcy Court reached this holding while expressly declining to rule on whether 2927 was still indebted to GT, (see D437), and whether the Pledge Agreement was still in effect. (D438-39). The Court also did not make any explicit findings regarding whether 2927 defaulted.
b. Proceedings Before this Court
GT appealed the Bankruptcy Court's ruling to this Court, arguing that, (1) it was not required to provide 5 days opportunity to cure prior to voting the Pledged Shares, (2) it had no obligation to provide 2927 with notice prior to voting, and (3) to the extent that [the Court finds that] GT was obligated to provide notice, the Notice GT provided was sufficiently specific. In short, while admitting that it would have been required to give notice prior to selling the Pledged Shares, GT challenges the Bankruptcy Court's reading of the Pledge Agreement to require such notice prior to merely voting the Shares.
In its opposition, 2927 argues that, as a threshold matter, the Bankruptcy Court's ruling was not a final ruling, and therefore, cannot be the subject of an interlocutory appeal. With regard to the merits of the appeal, 2927 asserts that the Bankruptcy Court's reading of the Pledge Agreement and holding that it was not provided with sufficient notice was correct.
The parties also seek rulings from this Court on issues that are not properly before it because the Bankruptcy Court did not decide them in the first instance. Specifically, this Court will not rule on: (1) whether the Pledge Agreement applied to debts other than the 1997 Refinancing; (2) whether or not, before voting the stock, General Trading was required to send notice to Taveras' attorney rather than to Taveras; (3) whether or not GT was required to engage in certain procedures, such as registering the stock, before voting on it; (4) whether or not Taveras effectively resigned before Debtor filed its Petition; and, as previously noted, (5) whether 2927 defaulted under the Pledge Agreement.
The Court received briefs from the parties and held oral arguments on the motion on April 8, 2004. For the reasons below, the Bankruptcy Court's ruling is reversed and remanded.
DISCUSSION
a. Finality
2927 argues that this Court does not have jurisdiction to hear an appeal from the bankruptcy court's ruling because it lacks finality. The Court disagrees.
District Courts have jurisdiction pursuant to 28 U.S.C. § 158(a) to hear appeals, "from final judgments, orders, and decrees." 28 U.S.C. § 158 (a). The concept of `finality' in the bankruptcy context, however, is more flexible than in ordinary civil litigation. In re Prudential Lines, Inc., 59 F.3d 327, 331 (2d Cir. 1995) (citations omitted).
A party may appeal immediately orders in bankruptcy matters that "finally dispose of discrete disputes within the larger case." In re Sonnax Indus., 907 F.2d 1280, 1283 (2d Cir. 1990) (emphasis, quotation, and citation omitted). The resolution of a "dispute" does not simply refer to the determination of a separable issue. Rather, a "dispute" in this context means an entire claim upon which relief may be granted. In re Flor, 79 F.3d 281, 283 (2d Cir. 1996).
In this case, 2927 attempts to characterize the ruling merely as a denial of a motion to dismiss. However, it is clear that the Bankruptcy Court determined several discrete and significant issues, most important of which is that Taveras, and not GT, owns and controls 2927. The Court finds that this ruling has sufficient finality to allow this Court to review it on appeal.
In addition, even if the ruling was not final, the Court nevertheless would have jurisdiction under the collateral order doctrine. This doctrine allows parties to appeal a non-final bankruptcy court ruling if it "conclusively determines a disputed question, resolves an important issue completely separable from the merits of the action, and would be effectively unreviewable on appeal from a final judgment." In re Johns-Manville Corp., 824 F.2d 176, 180 (2d Cir. 1987). A court may allow appeal under the collateral order doctrine not only when a ruling is completely unreviewable, however, but also when allowing appeal is "consonant with principles of efficiency and fairness." See In re Pan Am Corp., 16 F.3d 513, 515-16 (2d Cir. 1994) (stating that the decision to allow an appeal under the collateral order doctrine should "be guided by principles of fairness and the efficient administration of the bankruptcy case.").
It is clear that the ruling at issue here conclusively determined that Taveras rather than GT owned and controlled 2927 as of the time of the Chapter 11 filing, and that this issue is separate from the merits of the underlying bankruptcy. Additionally, the ruling would be "effectively unreviewable" after a judgment on the merits. If GT could not immediately appeal the ruling, it would be unable to challenge the fundamental issue of who owns and controls 2927 until after Taveras administered 2927 as part of his estate, proposed a plan of reorganization, and had that plan approved. A belated ruling on appeal therefore might require revisiting the reorganization plan or might come too late to have any practical effect on the reorganization. Accordingly, allowing immediate appeal, therefore, would further the fairness and efficiency of the bankruptcy proceedings.
The Court finds that it has jurisdiction over the appeal, and will now address the merits.
b. The Merits of the Appeal
1. Review of the Bankruptcy Court's Contract Interpretation
The Bankruptcy Court interpreted the Pledge Agreement as a matter of law and did not rely on parol evidence to inform its decision. Cf. W.W.W. Assoc., Inc. v. Giancontieri, 77 N.Y.2d 157, 162 (1990) (stating that unambiguous terms of a contract are enforced according to those terms and without resort to extrinsic evidence). Accordingly, this Court reviews the decision de novo. See In re Bonnanzio, 91 F.3d 296, 300 (2d Cir. 1996) (stating that, under F.R.Bankr.P. 8013, a bankruptcy court's findings of fact are reviewed for clear error while its conclusions of law are reviewed de novo).
2. GT Did Not Have to Give 2927 5 Days Notice Prior to Exercising its Right to Vote
The Bankruptcy Court ruled, based solely on the terms of the Pledge Agreement, that GT was required to provide 2927 with 5 days notice and opportunity to cure prior to voting the Pledged Shares, and held that because GT voted the Shares less than 5 days after it gave any notice, the vote was ineffective. The Bankruptcy Court reached its interpretation of the Pledge by construing the language in Paragraph 4 that provides GT with the right to vote the Shares "if one of the events referred to in paragraph 6 occurs after any applicable grace period" to incorporate the notice provision set forth in the beginning of Paragraph 6. That interpretation is clearly erroneous, however, and fails to give effect to the plain meaning of the language in the Agreement.
Paragraph 6, taken alone, applies only to selling and not to voting the Pledged Shares. Specifically, the Paragraph starts by stating that "[a]fter five (5) days' written notice and opportunity to cure, GT may sell the Shares" if one of four events of default occur. (D46) (emphasis added). The Paragraph later re-emphasizes that notice is required prior to sale, while mentioning nothing about voting: "At least five (5) business days before GT sells any of the Shares, it will send me notice of the proposed sale at my current address. . . ." (D47) (emphasis added). The balance of the Paragraph discusses the details of the conduct of the sale of the Pledged Shares. In short, there is nothing in Paragraph 6 that requires GT to provide notice prior to voting the Shares.
Looking to Paragraph 4, it provides GT with the right to vote the Shares only "if one of the events referred to in Paragraph 6 occurs after any applicable grace period occurs." This Court finds that this language was plainly intended to limit the types, or "events," of default that would trigger GT's voting rights, and was not intended to impose notice requirements. The Bankruptcy Court's reading of Paragraph 4, however, ignores the word "event." See Homemaker Indus., Inc. v. Official Comm. of Unsecured Creditors of HMKR, Inc., 2004 WL 838168, *5 (S.D.N.Y. 2004) (citing Manley v. Ambase Corp., 337 F.3d 237, 250 (2d Cir. 2003) for the proposition that "[w]hen interpreting a contract, courts should avoid any construction that renders terms meaningless."). Properly reading Paragraphs 4 and 6 together gives GT the right to vote the Shares without notice and opportunity to cure when, inter alia, "[a]ny amount owed by [Taveras] or by 2927 to GT now or in the future in not paid when it becomes due after any applicable grace period." (D46, ¶ 6(a)).
Further support for this reading can be found in the parallel language "any applicable grace period" used both in Paragraph 4 and subparagraph 6(a) — a subparagraph that specifies one type of default. Neither reference to "grace period" can reasonably be interpreted to incorporate the 5 days notice and opportunity to cure provisions of Paragraph 6, which explicitly relates only to the sale of the Shares.
Accordingly, the Court holds that Paragraphs 4 does not require GT to provide 5 days notice prior to voting the Pledged Shares upon the occurrence of an event of default set forth in Paragraph 6. The Bankruptcy Court's ruling on this issue is reversed.
3. GT Provided Sufficient Notice According to the Terms of the Pledge Agreement
It is undisputed that GT provided notice of default to Taveras. (D341) The Bankruptcy Court held, however, that because the notice did not specify the type of default, it did not meet the requirements of the Pledge Agreement and was thus ineffective. Specifically, the Bankruptcy Court, relying on its interpretation of Paragraph 4 to encompass Paragraph 6's requirement of 5 days notice and opportunity to cure, stated that there could be no meaningful "opportunity to cure" if the notice was not sufficiently detailed.
The Court does not agree. As stated supra, the language in Paragraph 4 does not include the introductory wording of Paragraph 6, and therefore, there is no requirement in either Paragraphs 4 or 6 that GT provide any notice, no less notice that specified the type of default, before GT votes the Pledged Shares.
There is also some indication that Taveras was aware of the defaults. However, this is extrinsic evidence and does not impact the Court's interpretation of the Pledge Agreement.
In addition, after a review of the entire Pledge Agreement, the Court finds no provision requiring GT to give specific notice of, or opportunity to cure, a Paragraph 6 default prior to voting the Shares. In fact, Paragraph 8 of the Pledge Agreement states that "except for the notice referred to in paragraph 6, GT will not be required to give [2927] any notice." (D49, ¶ 8).
2927 argues that GT is required by law to give notice prior to voting, regardless of whether the Pledge Agreement explicitly requires it. The cases it cites in support of this contention, however, are inapposite because in each case a contract or a statute required that notice, containing specific details, be provided. 2927 has not cited any cases holding that a notice of default, as a matter of law, must contain a precise description of the default. Cf. U.C.C. §§ 9-501(1), (3) (allowing a secured party in possession the right to use collateral for the purpose of preserving it or its value, or "in the manner and to the extent provided in the security agreement," and requiring that "reasonable notification" be given to a debtor only before the sale of the collateral).
See, e.g., In re Valley View Shopping Center, L.P., 233 B.R. 120 (D. Kan. 1999) (lease at issue required debtor be given a meaningful opportunity to cure its default); In re Hwang, 189 B.R. 786 (C.D. Cal. 1995) (California state statue provides that a notice of default must specify the type of default).
Accordingly, the Bankruptcy Court's ruling that GT's Notice was insufficient as a matter of law is reversed.
CONCLUSION
For the reasons above, the Bankruptcy Court's ruling is reversed and remanded for further proceedings to determine whether Taveras owned and controlled 2927 at the time of his filing of Chapter 11.
The Clerk of the Court is directed to close this case.