Opinion
No. COA02-1390
Filed 21 October 2003 This case not for publication
Appeal by plaintiff from judgment entered 7 March 2002 by Judge William Z. Wood in Forsyth County Superior Court. Heard in the Court of Appeals 11 June 2003.
Gerrans, Foster Sargeant, P.A., by William W. Gerrans, and Seufert Professional Association, by Christopher J. Seufert, for plaintiff-appellant. Bell, Davis Pitt, P.A., by James R. Fox and D. Anderson Carmen, for defendants-appellees. Brooks, Pierce, McLendon, Humphrey Leonard, L.L.P., by David W. Sar, for The Provident Bank.
Forsyth County No. 01 CVS 5929.
On 15 January 1999, defendant Universal Solutions International, Inc. and several of its subsidiaries (collectively, "USI" or "defendants") acquired all of the issued and outstanding shares of common stock of The Ballantine Group, Inc., 40% of which were owned by Katherine Tjarks ("plaintiff"). Defendants paid plaintiff for her stock with proceeds obtained in part through a loan from intervenor, The Provident Bank ("Provident"), an Ohio banking corporation. The terms of Provident's loan to defendants were set forth in an Amended and Restated Credit Agreement ("Credit Agreement").
These subsidiaries were each named, along with USI, as defendants in this litigation and are parties to the instant appeal. They include: Universal Rx Solutions, Inc., a dissolved North Carolina corporation; Supermarket Information Systems, Inc. (now Universal Solutions of North Carolina, Inc.), a North Carolina corporation; Pharmacy Solutions, Inc. (now Universal Rx Solutions of Georgia, Inc.), a Georgia corporation; and Ballantine Solutions, Inc. (now Universal Rx Solutions of New Jersey, Inc.), a New Jersey corporation. For simplicity, we will refer to the several defendants collectively as "USI" or "defendants."
Provident was initially a party to the instant appeal, but its Notice and Motion to Withdraw from Case was allowed by this Court's order entered 24 January 2003.
In addition to cash, plaintiff also received promises of certain future payments from defendants in exchange for her stock. These promises of future payments were set forth in three documents, entitled "Employment Agreement," "Stock Purchase Agreement," and "Subordinated Promissory Note." The Employment Agreement provided that USI would employ plaintiff for eighteen months following the sale at an annual salary of $200,000.00, with the possibility of plaintiff earning additional compensation ("earn-out compensation") up to a maximum of $800,000.00, based on USI's revenues during plaintiff's employment. Pursuant to a non-compete provision in the Stock Purchase Agreement, plaintiff was entitled to receive a total of $400,000.00, payable in five annual $80,000.00 installments beginning 15 January 2000. The Subordinated Promissory Note was in the principal amount of $1,400,000.00, payable in monthly installments plus interest with the outstanding principal balance due on 15 January 2001. Pursuant to the Credit Agreement and Subordinated Promissory Note, as well as the Subordination Agreement discussed below, plaintiff agreed to subordinate her right to receive these promised future payments to the due and punctual payment in full of defendants' indebtedness to Provident.
In addition to the foregoing documents, plaintiff, defendants, and Provident also executed a document entitled "Subordination Agreement" as part of the transaction. The Subordination Agreement, which is at the heart of the instant appeal, provides in pertinent part as follows:
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RECITALS
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B. [Provident is] unwilling to enter into the [Credit Agreement] unless [plaintiff] executes this [Subordination] Agreement.
C. As an inducement to [Provident] to enter into the [Credit Agreement], [defendants] and [plaintiff] have agreed to subordinate, in the manner herein set forth, the Subordinated Obligations (as hereinafter defined) to the due and punctual payment in full of all the indebtedness now or hereafter owed by [defendants] to [Provident] arising under [Provident's loan to defendants].
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3. Certain Definitions. As used in this Agreement, the following terms shall have the following meanings:
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(g) "Senior Indebtedness" shall be defined as the principal of (and premium, if any) and interest on and fees and other amounts payable with respect to (i) all debt or obligations of [defendants] . . . now or hereafter arising or existing under the [Credit Agreement] . . ., (ii) all other indebtedness now or hereafter extended by [Provident] to [defendants] . . ., and (iii) all amendments, renewals, extensions, modifications and refinancings of any such debts or obligations; provided, that (A) in no event shall the outstanding principal amount of the Senior Indebtedness exceed at any time Thirty Million and 00/100 Dollars ($30,000,000.00), and (B) in no event shall the sum of the outstanding principal amount of Senior Indebtedness and all other Indebtedness . . . exceed five (5) times the consolidated EBITDA of [defendants] (for the fiscal year ending December 31, 1999) or four (4) times the consolidated EBITDA of [defendants] (for each fiscal year thereafter).
(h) "Subordinated Obligations" shall mean (i) the obligations and indebtedness of [defendants] due [plaintiff] under the Subordinated Promissory Note . . . in the original principal amount of One Million Four Hundred Thousand and 00/100 Dollars ($1,400,000.00), (ii) the obligations and indebtedness of [defendants] . . . due [plaintiff] under [the non-compete clause] of the Stock Purchase Agreement . . ., and (iii) the obligations of [defendants] . . . to pay the Earn-Out Compensation (as defined in the Employment Agreement. . . .)
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4. Subordination and Permitted Payments.
(a) [Plaintiff] agrees that payment of the Subordinated Obligations is expressly subordinate to the prior payment in full of all Senior Indebtedness and, that, except as permitted by Section 4(b) hereof, unless and until the Senior Indebtedness shall have been fully paid and satisfied and all financing arrangements between [defendants] and [Provident] pursuant to the [Credit Agreement] or otherwise have been terminated, [plaintiff] will not: (i) accelerate, ask, demand, sue for, take or receive from or on behalf of [defendants] . . . the whole or any part of any monies which may now or hereafter be owing to [plaintiff] on the Subordinated Obligations;(ii) initiate or participate with others in any suit, action or proceeding against [defendants] . . . to collect the whole or any part of the Subordinated Obligations . . .; (iii) make any payment on account of the Subordinated Obligations, other than under Clause (iii) of the definition of Subordinated Obligations, unless a Payment Default [on defendants' obligations to Provident] shall have occurred and is continuing (assuming the amortization of the Senior Indebtedness to the extent in effect on the date hereof);. . . .
(b) Notwithstanding the foregoing, [plaintiff] may receive and [defendants] may make the regularly scheduled payments . . . due on the Subordinated Obligations if, at the time of such payment and immediately after giving effect thereto (i) there shall not exist any Event of Default [on defendants' obligations to Provident] . . ., or (ii) such payment would itself not constitute, or with notice or lapse of time or both constitute, an Event of Default [on defendants' obligations to Provident], unless and until such Event of Default shall have been cured or waived or cease to exist;. . . .
(c) If [plaintiff] in violation of this Agreement shall commence, prosecute or participate in any suit, action or proceeding against [defendants] . . . or shall take or attempt to enforce, foreclose or realize upon any security for the Subordinated Obligations, [defendants] or [Provident] . . . may interpose as a defense or plea the making of this Agreement. . . .
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11. Term. . . . This Agreement shall be irrevocable by [plaintiff] until all of the Senior Indebtedness shall have been paid and fully satisfied and all financing arrangements between [defendants] and [Provident] have been fully terminated in writing, or until the Subordinated Obligations shall have been paid and fully satisfied, whichever first occurs.
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20. Governing Law. This Agreement shall be interpreted, and the rights and liabilities of the parties hereto determined, in accordance with the laws and decisions of the State of Ohio.
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According to the affidavits of Emily G. Neese, USI's Chief Operating Officer, and Alan R. Henning, a Vice President of Provident, defendants defaulted on their obligations to Provident in September 2000, and remained in default at all times between commencement of this case and the entry of summary judgment herein. During the period when defendants were in default of their obligations to Provident, defendants also ceased making the future payments promised to plaintiff under the Employment Agreement, Subordinated Promissory Note, and Stock Purchase Agreement.
On or about 22 November 2002, defendants' liabilities to Provident were paid in full and all financing arrangements between defendants and Provident were terminated. On 26 November 2002, defendants paid plaintiff $2,750,340.51, a sum which included amounts agreed upon by defendants and plaintiff as due on the Subordinated Promissory Note, the Employment Agreement, and the Stock Purchase Agreement. In the instant appeal, plaintiff is asking this Court to determine that entry of summary judgment in defendants' favor was improper, which would impact plaintiff's assertion that defendants still owe her attorney's fees in the approximate amount of $300,000.00, as well as certain additional sums assessed as penalties.
On 12 January 2001, plaintiff brought an action against defendants alleging breach of the Employment Agreement and Subordinated Promissory Note, asserting that defendants had defaulted on the following payments to plaintiff: (1) $600,000.00 of earn-out compensation, pursuant to the Employment Agreement; (2) $1,400,000.00, representing the balance of the principal amount secured by the Subordinated Promissory Note; and (3) $320,000.00, representing the remaining payments due plaintiff under the non-compete provision of the Stock Purchase Agreement. On 4 September 2001, the parties entered a consent order allowing Provident to intervene. Defendants and Provident answered, pleading, inter alia, the Subordination Agreement in bar of plaintiff's suit. Defendants and Provident also asserted counterclaims against plaintiff. On 25 February 2002, defendants' and Provident's joint motion for summary judgment was heard, and on 7 March 2002, the trial court entered an order granting summary judgment in favor of defendants and Provident on plaintiff's claims. From this order, plaintiff appeals.
Defendants and Provident filed voluntary dismissals of their respective counterclaims following entry of summary judgment in their favor on plaintiff's claims.
The sole issue presented by this appeal is whether the trial court correctly entered summary judgment in favor of defendants and Provident on plaintiff's claims. For the reasons stated herein, we affirm the trial court's order.
Summary judgment is appropriate where there is no genuine issue as to any material fact and any party is entitled to judgment as a matter of law. N.C. Gen. Stat. § 1A-1, Rule 56(c) (2001); Weeks v. N.C. Dept. of Nat. Resources and Comm. Development, 97 N.C. App. 215, 224, 388 S.E.2d 228, 233, disc. review denied, 326 N.C. 601, 393 S.E.2d 890 (1990). Summary judgment is appropriately entered "to foreclose the need for a trial when, based upon the pleadings and supporting materials, the trial court determines that only questions of law, not fact, are to be decided." Robertson v. Hartman, 90 N.C. App. 250, 252, 368 S.E.2d 199, 200 (1988).
The parties agree that this case turns on the interpretation of the Subordination Agreement, which defendants contend on its face relegates plaintiff to junior creditor status and prevents plaintiff from being paid by, or bringing suit against, defendants as long as defendants are in default on the "senior indebtedness," i.e., defendants' loan from Provident. Plaintiff, however, contends that subsection 3(g) of the Subordination Agreement is ambiguous and could reasonably be interpreted as providing that Provident loses its senior-creditor status relative to plaintiff if the outstanding principal amount of the senior indebtedness exceeds certain limits. Plaintiff contends that interpretation of subsection 3(g) in this manner creates a genuine issue of material fact, such that judgment as a matter of law is improper. We disagree with plaintiff's contentions.
At the outset, we note that pursuant to its express terms, the Subordination Agreement must be interpreted in accordance with Ohio law. A subordination agreement "provides that the subordinated creditor's right to payment and collection will be subordinate to the rights of another claimant." In re Lantana Motel, 124 B.R. 252, 255 (Bankr.S.D.Ohio 1990). "Under Ohio law, subordination agreements are `to be interpreted in accordance with ordinary contract principles . . . When a contract is unambiguous, the parties['] rights are governed exclusively by the contract.'" In re Kobak, 280 B.R. 164, 169 (Bankr.N.D.Ohio 2002) (quoting In re Perrysburg Marketplace Co., 208 B.R. 148, 160 (Bankr.N.D.Ohio 1997)). Where a contract's terms are clear and unambiguous, an appellate court cannot in effect create a new contract by finding an intent not expressed in the clear language employed by the parties. Long Beach Assn., Inc. v. Jones, 82 Ohio St.3d 574, 577, 697 N.E.2d 208, 210 (1998).
In the case sub judice, we agree with the trial court's determination that the four corners of the Subordination Agreement clearly and unambiguously evidence the parties' intent to subordinate plaintiff's right to receive the promised future payments from defendants to Provident's right to receive due and punctual payment in full of defendants' indebtedness to it. This intent is expressly set forth in paragraph "C" of the Subordination Agreement's "Recitals" section, with the additional provision in paragraph "B" that Provident is "unwilling to enter into the [loan with defendants] unless [plaintiff] executes this [Subordination Agreement]." Section 4 of the Subordination Agreement sets forth precisely how this subordination of plaintiff's right to payment from defendants vis-á-vis that of Provident is to be accomplished, providing in subsection 4(a) that "payment of [the future payments promised from defendants to plaintiff] is expressly subordinate to the prior payment in full of all Senior Indebtedness" and that plaintiff will not sue to collect any payments owed to her by defendants "unless and until the Senior Indebtedness shall have been fully paid and satisfied and all financing arrangements between [defendants] and [Provident] . . . have been terminated[.]" Moreover, subsection 4(c) expressly provides that defendants "may interpose as a defense or plea the making of this [Subordination] Agreement" should plaintiff "commence, prosecute, or participate in any suit, action or proceeding" seeking to enforce her right to receive the promised future payments before defendants have satisfied in full their Senior Indebtedness to Provident.
After careful examination of the Subordination Agreement, pleadings, affidavits, and other record evidence, we are not persuaded by plaintiff's assertion that the Subordination Agreement's subsection 3(g) creates a genuine issue of material fact as to whether Provident's senior-creditor status relative to plaintiff terminates when defendants' borrowing exceeds certain limits. Plaintiff contends that subsection 3(g)(B), which provides that "in no event shall the outstanding principal amount of the Senior Indebtedness . . . exceed five (5) times the consolidated EBITDA of [defendants] (for the fiscal year ending December 31, 1999) or four (4) times the consolidated EBITDA of [defendants] (for each fiscal year thereafter)" could reasonably be interpreted as providing that plaintiff's right to payment from defendants is no longer subordinated to that of Provident when these limits are exceeded. Plaintiff presented evidence that the Senior Indebtedness exceeded these limits in fiscal years 1999 and 2000, arguing that subsection 3(g)(B)'s ambiguity as to whether the Subordination Agreement terminates under these circumstances created a genuine issue of material fact rendering summary judgment inappropriate.
In considering plaintiff's argument, we are mindful that the Ohio appellate courts have stated "[t]he cardinal purpose for judicial examination of any written instrument is to ascertain and give effect to the intent of the parties." Foster Wheeler Enviresponse v. Cty Convention, 78 Ohio St.3d 353, 361, 678 N.E.2d 519, 526 (1997). Moreover, "[t]he intent of the parties to a contract is presumed to reside in the language they chose to employ in the agreement." Kelly v. Medical Life Ins. Co., 31 Ohio St.3d 130, 132, 509 N.E.2d 411, 413 (1987). With these principles in mind, we conclude that, when considered in light of the instrument as a whole, subsection 3(g)(B) does not support a "reasonable construction" of the Subordination Agreement in the manner urged by plaintiff. Nowhere in the Subordination Agreement does any language appear stating that the Subordination Agreement is invalidated or that Provident loses its status as defendants' senior creditor relative to plaintiff if the Senior Indebtedness exceeds the subsection 3(g)(B) limits. By contrast, section 11 of the Subordination Agreement, entitled "Term," expressly provides that the Subordination Agreement "shall be irrevocable by [plaintiff] until all of the Senior Indebtedness shall have been paid and fully satisfied and all financing arrangements between [defendants] and [Provident] have been terminated in writing, or until [defendants' promises of future payment to plaintiff] shall have been paid and fully satisfied, whichever first occurs." Thus, by its express terms, the Subordination Agreement is to remain in full force and effect as long as there is any Senior Indebtedness outstanding, regardless of its amount. Significantly, rather than being found in the "Term" section of the Subordination Agreement, the section 3(g)(B) limitations are contained in the instrument's "Definitions" section, where they are part of the language used by the parties to define "Senior Indebtedness." In examining, as we must, Id., the Subordination Agreement's language in order to ascertain and give effect to the parties' intent, we conclude (1) that the parties did not intend to invalidate the Subordination Agreement should the Senior Indebtedness exceed the limits set forth in subsection 3(g)(B), and (2) that subsection 3(g)(B) did not create a genuine issue of material fact.
In sum, we agree with the trial court's conclusion that the parties "signed a contract and it's clear within its four corners . . . [that] the intent . . . of the parties was to subordinate the plaintiff's claim [to promised future payments from defendants] to the bank's claim [to payments from defendants on the loan]." In the absence of any genuine issue of material fact, the trial court's order is
Affirmed.
Judges TIMMONS-GOODSON and HUNTER concur.
Report per Rule 30(e).