Zebrowski v. Harvest Capital Credit Corporation

Background

Ross Jackson and the Gary A. Zebrowski Living Trust sued Harvest Capital Credit Corporation and Christals Acquisition, LLC for breach of contract. Plaintiffs had sold their interests in nine stores to Christals and received, in part, unsecured and subordinated promissory notes. Harvest provided Christals with a senior secured loan. Plaintiffs, Harvest, Christals, and Christals’s then-subsidiaries entered into a Subordination Agreement under which plaintiffs’ notes were subordinate to Harvest’s loan.

The Subordination Agreement allowed Harvest to deal with property securing its loan and barred Harvest from allowing Christals and its subsidiaries to incur additional debt senior to plaintiffs’ notes above $2 million, unless the Harvest loan had been paid in full. The agreement stated that it would remain in effect until the senior debt was paid in full in cash and the lending commitments ended.

In connection with Christals’s acquisition of the Peekay store chain, Christals received approximately $38 million in additional term loans. The transaction required the Harvest loan to be paid in full. Instead of using two separate gross wire transfers, Harvest and Christals used a netting transaction: Harvest received a wire payment of $1,456,280.41 and was treated as having paid $1,755,500 toward a $2 million participation in the new term loans. The court stated that the wire payment and netting transaction together paid the Harvest loan in full and extinguished it. Harvest’s liens were then released.

Christals later defaulted on plaintiffs’ promissory notes and entered bankruptcy proceedings. Plaintiffs alleged that Harvest breached the Subordination Agreement by allowing Christals to incur more than $38 million in senior debt before the Harvest loan had been paid in full in cash. Christals did not appear or respond to the complaint after filing for bankruptcy.

Issues and arguments

The parties filed cross-motions for summary judgment. Plaintiffs argued that the netting transaction did not qualify as payment in full in cash because part of the repayment was effectively made through the Term B loan participation. Harvest argued that the netting transaction satisfied the agreement, which then terminated the Subordination Agreement before Christals incurred the additional debt. Harvest also argued that plaintiffs had not established the value of their notes or shown that Harvest’s conduct proximately caused their losses.

The court also considered Harvest’s motions to exclude testimony from plaintiffs’ damages and accounting experts and plaintiffs’ motion to withdraw their jury demand and strike Harvest’s jury demand.

Court’s reasoning

The court applied New York contract law. It explained that a breach-of-contract claim requires a contract, the plaintiff’s performance, a breach, and damages caused by the breach. The court first addressed whether the Subordination Agreement’s phrase “payment in full in cash” was unambiguous.

The court held that “cash” had a definite meaning that included money or its equivalent. It found that the netting transaction qualified because plaintiffs admitted that it produced the same result as two gross wire transfers, plaintiffs’ accounting expert testified that separate gross transfers would have constituted payment in full in cash, and the agreement did not prohibit netting transactions. The court also stated that the agreement did not restrict Harvest’s use of the repayment proceeds or give plaintiffs the right to object to that use.

The court rejected plaintiffs’ argument that the transaction was a sham. It held that the parties’ written agreements were clear and that outside testimony could not change their meaning. It also reasoned that treating the payment as insufficient merely because the parties used one consolidated payment instead of two separate payments would produce an absurd and commercially unreasonable result.

Because the netting transaction satisfied the requirement for indefeasible payment in full in cash, the Subordination Agreement terminated. The court further noted that plaintiffs agreed that, if Harvest had been paid in full in cash, Harvest would not have violated the agreement by releasing its collateral and allowing Christals to incur additional debt.

Disposition

The court denied plaintiffs’ motion for summary judgment and granted Harvest’s motion for summary judgment. The opinion states that plaintiffs’ claims against Harvest were dismissed with prejudice, and the Clerk was directed to terminate Harvest as a defendant.

The court denied as moot Harvest’s motions to exclude plaintiffs’ expert testimony and plaintiffs’ motion to withdraw their jury demand and strike Harvest’s jury demand. The court stayed the action until the bankruptcy proceedings involving Christals were resolved and directed plaintiffs to inform the court when those proceedings ended or whether they wished to withdraw their claims against Christals and close the case.