Ability Insurance Company v. ST Paper, LLC

Background

Ability Insurance Company brought a contract action against ST Paper, LLC. It asserted claims for breach of contract, breach of the implied duty of good faith and fair dealing, and a declaration of the parties’ rights under their agreements. Ability alleged that it held rights to enforce a subordinated promissory note that ST Paper issued in 2007 and that ST Paper failed to make required payments.

The note was issued as part of ST Paper’s purchase of substantially all the assets of a Wisconsin paper mill. ST Paper also had senior debt under a 2007 credit agreement. The note and a related subordination agreement made the seller note junior to the senior debt and defined senior debt to include obligations under permitted refinancings.

In 2010, ST Paper obtained new financing from a group of lenders. ST Paper’s affiliate used that financing to purchase the senior loan from its then-holder, and the parties entered into documents that continued the 2007 credit agreement and the borrower’s obligations under it. Ability later obtained rights connected to the seller note through a series of assignments.

Motions and Standing

ST Paper moved for summary judgment, which asks whether the evidence shows that no important factual dispute requires a trial and that the moving party wins under the law. Ability filed a cross-motion for partial summary judgment.

ST Paper argued that Ability lacked standing—the legal right to bring the claim—because Ability had not shown that rights under the seller note were assigned to it. The court rejected that argument. It found sufficient evidence that Maple Bridge transferred to Ability all rights in the loan and related collateral, including the seller note. The court concluded that the 2013 transfer of rights under the note was effective.

Breach-of-Contract Claim

The court granted ST Paper summary judgment on Ability’s breach-of-contract claim. The court applied New York law, under which an unambiguous subordination agreement is enforced according to its plain language.

The court held that the 2010 transaction was a permitted refinancing under the subordination agreement and credit agreement. It reasoned that ST Paper incurred new debt, used the new financing to pay for the purchase of the senior loan, and entered into documents that preserved the prior credit agreement and related obligations. Because the transaction replaced or refinanced the senior loan in the manner contemplated by the agreements, the senior debt continued to exist.

Since the seller note remained subordinate to that senior debt, the court held that payment on the seller note was not yet due. The court rejected Ability’s argument that the refinancing should not be recognized because it could delay payment until 2040 or later, explaining that commercial reasonableness was not an issue because the contract was not ambiguous.

Good-Faith-and-Fair-Dealing Claim

The court also granted ST Paper summary judgment on Ability’s claim that ST Paper breached the implied duty of good faith and fair dealing. The court explained that this duty cannot create obligations beyond the contract’s express terms or prohibit conduct that the contract explicitly permits.

The court found that the 2010 transaction did not violate the express terms of the subordination agreement. Ability also did not identify an implied contractual term limiting ST Paper’s ability to refinance or evidence that the original note holder had negotiated for such a limitation. The court therefore held that ST Paper’s structuring of the 2010 transaction did not breach the implied duty.

Disposition

ST Paper’s motion for summary judgment dismissing Ability’s claims was GRANTED. Ability’s cross-motion for summary judgment was DENIED. The Clerk of Court was directed to close the motions.