Summary
striking the unclean hands defense because "mere pleading of the defense . . . without more is insufficient"
Summary of this case from Cartier Int'l AG v. Motion in Time, Inc.Opinion
00 Civ. 3856 (SHS)
August 28, 2002
OPINION
In this action seeking to enforce the terms of a Guaranty executed by defendant James Desnick, plaintiff now moves for summary judgment pursuant to Fed.R.Civ.P. 56 on its amended and supplemental complaint. For the reasons set forth below, that motion should be granted in its entirety.
BACKGROUND
A. Undisputed Facts
Plaintiff's assignor entered into a healthcare receivables securitization transaction in March 1997 with Dr. Desnick, MMA Funding, L.L.C. ("MMA Funding"), Doctors Hospital of Hyde Park ("Doctors Hospital"), and Medical Management of America, Inc. ("MMA"). (Pl.'s Statement of Material Facts ("PSOF") ¶ 4; Def.'s Resp. to Pl.'s Statement of Material Facts ("DSOF") ¶ 4.) This transaction included, inter alia, the Healthcare-Receivables Contribution ("RCA"), the Loan and Security Agreement ("LSA"), the Assignment of Healthcare Receivables Contribution Agreement As Colateral Security, and the Guaranty. These documents will be referred to collectively as "The Transaction documents." The Guaranty which was executed by Desnick covers certain indemnification obligations under the RCA, agrees to New York exclusive jurisdiction and waives a jury trial. (PSOF ¶¶ 4, 5; DSOF ¶¶ 4, 5.) Desnick is the director, president and principal shareholder of MMA as well as the director and principal shareholder of Doctors Hospital. (PSOF ¶ 2; DSOF ¶ 2.) Doctors Hospital held a 99% membership interest in MMA Funding with MMA holding the remaining 1% interest. (PSOF ¶ 3; DSOF ¶ 3.) Simply put, the transaction worked as follows: Doctors Hospital contributed its receivables to MMA Funding which, in turn, pledged those receivables to Daiwa in exchange for a revolving credit line used ultimately by Doctors Hospital. (Hird Decl. Ex. 25.)
In August 1997, Daiwa and MMA Funding executed the Second Amendment to the LSA — an Intercreditor Agreement with Nomura Asset Capital ("Nomura") the Doctors Hospital's affiliate's mortgage holder. That agreement provides that an "event of default" occurs under the Second Amendment when "without limitation, any `event of default' of default for monies borrowed . . . from [Nomura] and either (i) such `event of default' is continuing for a period in excess of 15 days without cure or waiver, or (ii) shall result in the acceleration of such indebtedness for borrowed money." (Hird Decl. Ex. 15, Second Amendment to the LSA § 3(i), at 3; PSOF ¶ 5; DSOF ¶ 5.) Thereafter, Daiwa was directed by Doctors Hospital and MMA Funding to remit payments pursuant to the LSA to the Nomura Cash Collateral Account. (Hird Dccl. Ex. 25; PSOF ¶ 7; DSOF ¶ 7.)
Pursuant to the Transaction documents, advances on the revolving credit line were made to Doctors Hospital upon submission of "Borrowing Base Certificates." (Hird Dccl. Ex. 2-2; PSOF ¶ 8.) These advances were secured by the receivables generated by Doctors Hospital/or services rendered to, and merchandise received by, its patients. (Hird Dccl. Ex. 22; PSOF ¶ 8.) Each "Borrowing Base Certificate" was signed by the hospital's chief financial officer ("C.F.O."), specified the amount requested for advancement, and contained a valuation of the hospital's healthcare receivables. (PSOF ¶¶ 8-9.) At any given time, the loan by Daiwa was approximately $10 million. (PSOF ¶ 10; DSOF ¶ 10.)
Audited financial statements for the fiscal year ending September 30, 1999 that were due on December 31, 1999 were not submitted to Daiwa until April 5, 2000. (PSOF ¶ 11; DSOF ¶ 11.) Although Doctors Hospital realized a $3.5 million operating profit in fiscal year 1998, the audited financial statements for the following fiscal year showed it sustaining an $11.5 million loss. (PSOF ¶ 12; DSOF ¶ 12.)
By late January 2000, the hospital owed more than $445,000 to eleven creditors who were complaining about non-payment and in some instances threatening suit. (PSOF ¶ 13; Hird Decl. Ex. 16; DSOF ¶ 13.) In addition, Doctors Hospital received demands for payment from creditors totaling more than $525,0000 and had a default judgment entered against it in the sum of $91,238.62. (PSOF ¶ 14; Hird Dccl. Exs. 30-38; DSOF ¶ 14.)
On March 10, 2000 Doctors Hospital filed with the Health Care Financing Administration ("HCFA") — now known as the Centers for Medicare Medicaid Services, see CMS/HCFA History at http://cms.hhs.gov/about/history — a signed copy of its Medicare cost report bearing an encryption date of February 29, 2000 indicating that Doctors Hospital received Medicare overpayments in excess of $1 million. (PSOF ¶ 15; Hird Decl. Ex. 17; DSOF ¶ 15.) On March 17, 2000 HCFA requested payment in the sum of $1,016,918, advising Doctors Hospital that if it could not make full remittance it may be eligible for a payment schedule, but warning that the failure to respond could result in a set-off. (PSOF ¶ 16; Hird Decl. Ex. 18; DSOF ¶ 16.) Five days later, Doctors Hospital wrote to HCFA indicating that it would be unable to make full repayment within thirty days and would be seeking a twelve-month repayment schedule. (PSOF ¶ 17; Hird Decl. Ex. 19; DSOF ¶ 17.) On that same day. Daiwa received notice from MMA of a letter dated November 24, 1999 from AMERSCO — servicing agent of the Nomura mortgage — stating that a default had occurred pursuant to the terms of the Nomura mortgage. (PSOF ¶ 18; Hird Decl. Ex. 14; DSOF ¶ 18.)
On March 28, 2000, MMA Funding's chief executive officer stated that MMA Funding was "in compliance through the date of the letter, with all the covenants and events of default of the Agreement except" for eight enumerated provisions of the Agreement and requesting "a waiver of the debt covenants . . . through October 1, 2000." (Hird Decl. Ex. 20; PSOF ¶ 21; DSOF ¶ 21.) Two days later, Daiwa notified MMA Funding that it was in default of its obligations on the LSA, declared the "Maturity Date" under the LSA to have occurred, and terminated the commitment to make "Revolving Advances" with the caveat that Daiwa would reconsider reinstating the "Revolving Advances" if the "Defaults" or "Events of Default" did not continue and that all advances were subject to Daiwa's discretion. (PSOF ¶ 22; Hird Decl. Ex. 21; DSOF ¶ 22.) Daiwa articulated — without limiting itself— two defaults: (1) pursuant to Ex. V, cl. (c) of the LSA for failure to comply with the financial reporting requirements set forth in clause (i)(iii) of Ex. IV for a period in excess of 30 days and (2) the existence and continuation of defaults pursuant to the Nomura loan which, pursuant to the Second Amendment to the LSA, constituted an "Event of Default." (PSOF ¶ 23; Hird Decl. Lx. 21; DSOF ¶ 22.)
Between March 30, 2000 and April 12, 2000, Doctor Hospital's C.F.O. issued five "Borrowing Base Certificates" requesting advances in the amounts of $4,500, $155,000, $105,000, $10,000, and $860,000. (PSOF ¶¶ 26-29, 31; Hird Decl. Lx. 22; DSOF ¶¶ 26-29, 31.) Daiwa made two wire transfers to Doctors Hospital into the account specified by the Second Amendment to the LSA, in the amounts of $400,000 and $835,000. (PSOF ¶¶ 30, 32; DSOF ¶¶ 30, 32.) Doctors Hospital filed for bankruptcy on April 17, 2000; however, the decision to do so was not made until after Daiwa had initiated the larger of the two wire transfers. (PSOF ¶¶ 33-34; DSOF ¶¶ 33-34.) Two days later, Doctors Hospital ceased all patient-care operations. (PSOF ¶ 35; DSOF ¶ 35.)
A joint motion by the parties was submitted to the bankruptcy court to hire Health Receivables Management ("HRM") to collect Doctors Hospital's outstanding receivables. (PSOF ¶¶ 36-37; DSOF ¶¶ 36-37.) Doctors Hospital entered into a contract with HRM — with court approval — which tied HRM's compensation to a percentage of the receivables it collected on Doctors Hospital's behalf. (PSOF ¶ 37; DSOF ¶ 37.) Since the bankruptcy filing, a total of $5,489,993.36 in receivables has been collected. (PSOF ¶ 38; DSOF ¶ 38.) The bankruptcy court has approved three interim orders for fees for HRM's services totaling $370,913.30. (PSOF ¶ 39.) Those orders provide, however, that such fees are "subject to adjustment at the time that a motion to pay final compensation to HRM is presented." (DSOF ¶ 38; Hird Supp. Decl. Ex. 11.)
B. Daiwa's Motion
Daiwa now moves for summary judgment in its favor on Desnick's Guaranty. Daiwa seeks summary judgment on its three claims-for relief. On its first claim, Daiwa seeks the sum of $1,042,285 constituting the amount of the Medicare set-off. On its second claim, it seeks the deficiency due on the "Revolving Advances" in the sum of $5,932,278.10. That sum includes the amounts Daiwa seeks on its first and third claims for relief with accrued interest to January 9, 2002. On its third claim, Daiwa seeks the sum of $370,913.30 as reimbursement for the compensation it paid to HRM. In addition, Daiwa seeks to dismiss Desnick's ten defenses — bad faith, impairment of collateral, unclean hands, laches, estoppel, waiver, impossibility of performance, frustration of purpose, prevention, and commercially unreasonable disposition pursuant to the New York Uniform Commercial Code ("U.C.C.") — as meritless as a matter of law.
In response, Desnick contends that Daiwa terminated the revolving credit in bad faith and Daiwa's bad faith is a complete defense to the action. Alternatively, the doctor argues that the Guaranty covers only specific indemnification obligations and that any shortfall in the collection of receivables is a consequence of HRM's incompetence for which Daiwa, not Desnick, should be liable.
DISCUSSION
A. Legal Standard
Summary judgment may be granted "only when the moving party demonstrates 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.'" Allen v. Coughlin, 64 F.3d 77, 79 (2d Cir. 1995) (quoting Fed.R.Civ.P. 56(c)); see also Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). The Court must "view the evidence in the light most favorable to the nonmoving party and draw all reasonable inferences in its favor, and may grant summary judgment only when "no reasonable trier of fact could find in favor of the nonmoving party.'" Allen, 64 F.3d at 79 (citation omitted) (quoting Lund's, Inc. v. Chemical Bank, 870 F.2d 840, 844 (2d Cir. 1989)).
Once the moving party meets its initial burden of demonstrating the absence of a genuine issue of material fact, the nonmoving party must come forward with specific facts to show there is a factual question that must be resolved at trial. Fed.R.Civ.P. 56(e); see also Legal Aid Soc'y v. City of New York, 114 F. Supp.2d 204 (S.D.N.Y. 2000). A nonmoving party must produce evidence in the record and "may not rely simply on conclusory statements or on contentions that the affidavits supporting the motion are not credible." Ying Jing Gan v. City of New York, 996 F.2d 522, 532 (2d Cir. 1993). In short, a nonmoving party must "do more than simply show there is some metaphysical doubt as to the material facts." Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986).
Summary judgment is inappropriate where "the dispute about a material fact is `genuine,' that is, if the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). "While genuineness runs to whether disputed factual issues can reasonably be resolved in favor of either party, . . . materiality runs to whether disputed matters, i.e., whether it concerns facts that can affect the outcome under the applicable substantive law. . . . A reasonably disputed, legally essential issue is both genuine and material and must be resolved at trial." McPherson v. Coombe, 174 F.3d 276. 280 (2d Cir. 1999) (quoting Graham v. Henderson, 89 F.3d 75, 79 (2d Cir., 1996)) (quoting and citing Anderson, 477 U.S. at 248-50) (internal quotations omitted).
Desnick contends that there are several disputed issues of fact and contrary contract interpretations, e.g., Daiwa's motivation for the termination of the commitment, the extent of the Guaranty, and the amount of Daiwa's recovery. The meaning of an unambiguous contract is properly determined on a motion for summary judgment. See Banco Espanol de Credito v. Security Pacific Nat'l Bank, 763 F. Supp. 36, 45 (S.D.N.Y. 1991). In determining the meaning of a contract the court looks to the plain meaning enforcing "the legal relations in accordance with the meaning ascribed by the contract." Id. That "one party may have a different interpretation of the language does not make it any less plain." Harris Trust Savings Bank v. John Hancock Mutual Life Ins. Co., 970 F.2d 1138, 1147 (2d Cir. 1992). If, however, both conflicting contractual language interpretations are sufficiently reasonable then summary judgment may be inappropriate if the "non-movant produces some `relevant extrinsic evidence of the parties' actual intent.'" Turtle Hughes, Inc. v. Browne, No. 95 Civ. 9573, 1996 WL 384895, at *2 (S.D.N.Y. July 9, 1996) (quoting Mellon Bank, N.A. v. United Bank Corp. of New York, 31 F.3d 113, 116 (2d Cir. 1994)).
B. The Alleged Defaults
Daiwa contends that the "Revolving Advance" pursuant to the LSA was properly terminated in accordance with the terms of the Transaction documents due to at least three "Events of Default" — two of which were identified in the March 30 termination. Desnick contends that there were no defaults and therefore Daiwa improperly and in bad faith terminated the commitment and that Daiwa is precluded from giving alternate reasons at this time for the March 30 termination. The Court disagrees, finding that-the common law doctrine of "mend the hold," on which Desnick relies, is inapplicable under these circumstances.
"Mend the hold" is a "nineteenth-century wrestling term, meaning to get a better grip (hold) on your opponent." Harbor Ins. Co. v. Continental Bank Corp., 922 F.2d 357, 362 (7th Cir. 1991).
The "mend the hold" doctrine was first enunciated by the U.S. Supreme Court in Railway Co. v. McCarthy and provides that "[w]here a party gives a reason for his conduct and decision touching any thing involved in a controversy, he cannot, after litigation has begun, change his ground, and put his conduct upon another and a different consideration." 96 U.S. 258, 267-68 (1877). Here, however, Daiwa explicitly reserved its right to assert additional "Defaults" or "Events of Default" and thus the doctrine of "mend the hold" is inapplicable. See Primetime 24 Joint Venture v. DirecTV, Inc., No. 99 Civ. 3307, 2000 WL 426396, at *9 (S.D.N.Y. Apr. 20, 2000). Specifically, Daiwa's March 30 "Notice of Event of Default and Termination of Commitment" stated that "Certain Events of Default exist and continue, including, without limitation, . . ." and that "(i) nothing herein shall be deemed to be a waiver of any other Default [or] Event of Default which may exist, (ii) the Lender reserves all of its rights and remedies in respect of all such Defaults and Events of Default. . . ." (Hird Decl. Ex. 21.)
Moreover, while New York law — which governs here — precludes the assertion of added reasons for the termination of a contract if a party relied on the reasons articulated or could have cured its performance had the additional grounds been disclosed earlier, that is not the case here. See Cawley v. Weiner, 236 N.Y. 357, 362, 140 N.E. 724, 725 (1923); see also Primetime 24 Joint Venture, 2000 WL 426396, at *9 No one — neither Doctors Hospital, nor MMA Funding, nor MMA, nor Desnick — could have relied on the reasons given by Daiwa for the termination of the commitment because, as discussed below, Daiwa chose not to give MMA Funding an opportunity to cure.
In addition, it is not at all certain that the "mend the hold" doctrine has retained its earlier vigor in New York jurisprudence. See Primetime 24 Joint Venture, 2000 WL 426396, at *9. The last reported New York case discussing the doctrine was a 1970 case of a high school wrestler that had precious little to do with contracts; rather, it rested on the doctrine of equitable estoppel. See O'Connor v. Board of Ed. of Central Sch. Dist. No. 1 of the Village of Ilion, 65 Misc.2d 40, 42, 316 N.Y.S.2d 799, 801 (Herkimer County 1970). Given that (1) Daiwa reserved its rights to articulate other reasons for the termination, (2) there was no reliance by the parties, and (3) the viability of the doctrine is uncertain in New York law, the Court declines to preclude Daiwa from asserting additional grounds — i.e., the lack of compliance with the 5% delinquency ratio provision — particularly because the parties had notice of the asserted reason and, in fact, employed experts to challenge the accuracy of the allegation.
Pursuant to the LSA, a "Default" is "an event, act or condition which with the giving of notice or the lapse of time, or both, would constitute an Event of Default." (Hird Decl. Ex. 11, LSA, Ex. I, at 1-4.) An "Event of Default" is "any of the events specified in Exhibit V" to the LSA including a "default in the performance or observance of any covenant, agreement or provision . . . . contained in this Agreement or any other Document." (Hird Decl. Ex. 11, LSA, Ex. I, at 1-6; LSA, Ex. V, cl. (c), at V-1.) Daiwa asserts that the defaults pursuant to the terms of the LSA were (1) the default on the Nomura mortgage loan documents that triggered a default pursuant to section 3(i) of the Second Amendment to the LSA, (2) the failure to produce audited financial reports pursuant Ex. IV, cl.(i)(iii) of the LSA within ninety days of the end of the fiscal year, and (3) failure to comply with the 5% delinquency ratio pursuant to Ex. V, cl.(o) of the LSA. The Court will examine each alleged default in turn.
1. The Nomura Default
Daiwa alleges that MMA Funding was in default of the Nomura loan and that that default triggered an "Event of Default" under the Second Amendment to the LSA. Desnick asserts that the cross-default provision was not triggered because an "Event of Default" was not declared under the Nomura loan but rather a non-monetary default, that was subsequently cured, was declared. Pursuant to the Second Amendment to the LSA an "Event of Default" occurs according to the LSA if "An `event of default' occurs under any agreement for borrowed money including, without limitation, any `event of default' for monies borrowed . . . from [Nomura] and either (i) such `event of default' is continuing for a period in excess of 15 days without cure or waiver. . . ." (Hird Decl. Ex. 15, Second Amendment to the LSA, § 3(i), at 3.)
On March 22, Daiwa received from MMA's C.F.O. Philip Robinson a copy of a letter from AMRESCO — the Nomura loan servicer — dated November 24, 1999, stating that the Nomura loan is currently in default" for failing to comply with required financial reporting pursuant to section 5.1Q and requesting that MMA "take immediate steps to cure this default. . . ." (Hird Decl. Ex. 14.) The letter itemized the financial documentation that was required to cure the default. Robinson, in the letter accompanying the copy sent to Daiwa, stated that while the 1999 year-end financials were unavailable, a package had been sent to AMERSCO and "must have included what they needed to deal with the default, because no default has been mentioned in subsequent discussions." (Hird Decl. Ex. 14.)
Although Desnick contends that MMA promptly responded to the AMERSCO letter curing the default, the evidence is to the contrary. A January 7, 2000, memo authored by Robinson describes concern by AMERSCO that MMA had not provided the information "as required by the loan documents" and "as listed in" the November 24, 1999 letter. In particular, this concern centered on the lack of "quarterly letters from [MMA] auditors that identifies any `Trigger Event' that ha[s] occurred." (Suppl. Hird Decl. Ex. 8.) Robinson wrote further that he sent a package to AMRESCO consisting of some of the documents delineated in the November 24 letter. (Suppl. Hird Decl. Ex. 8.) On February 25, 2000, Robinson wrote a memo to Desnick describing the telephone conversation he had with AMERSCO that was again inquiring as to "the status of the [year-end] audit and the quarterly ["Trigger Event'] letters from the auditors." (Suppl. Hird Dccl. Ex. 9.) Moreover, Robinson testified that he did not recall ever being informed "either in writing or orally" that the Nomura default had been cured. (Suppl. Hird Decl. Ex. 4, Robinson Dep. at 139:13-18.)
The Nomura loan documents provide that any non-monetary default under its provisions can be cured within thirty days after notice of default and that extensions may be granted if reasonably necessary to permit the borrower to cure but in no event shall the period exceed ninety days after the original notice. (Hird Dccl. Ex. 27, Nomura Agreement, § 7.1 (xv), at 100.) Moreover, the failure to cure ripens into an "Event of Default." (Hird Decl. Ex. 27, Nomura Agreement, § 7.1, at 98 ("The occurrence of one or more of the following events shall be an "Event of Default.'") (emphasis omitted.) MMA was notified of the default by letter dated November 24, 1999 and as of February 25, 2000 more than ninety days later, the default had not been cured. Additionally, it is undisputed that the year-end audited financial statements were not — completed until the beginning of April 2000. Therefore, the Nomura default had ripened into an "Event of Default" pursuant to the Nomura loan documents triggering the cross-default provisions of the Second Amendment to the LSA which, by its terms, did not require that an "Event of Default" be declared by Nomura; rather, an "Event of Default" must have occurred.
In addition, after the audited financial statements were submitted to CapMark Services — AMERSCO's successor — the quarterly "Trigger Event" letters still had not been provided and CapMark questioned why not. (Suppl. Hird Decl. Ex. 10.) Thus, the default under the Nomura loan documents was still not cured as of April 7, 2000, approximately 4 1/2 months after the original letter of default from AMERSCO. Moreover, Desnick's argument that the complaint in the Nomura loan foreclosure action — by its successor in interest, LaSalle Bank — is proof that the Nomura loan was not in default as of March 30 is unavailing. La Salle Bank's complaint states that the statements as to defaults are "not necessarily limited to" those defaults specified in the complaint. (Chorvat Decl. Ex. 18, Nomura Compl. ¶ 30).)
2. The Failure to Provide Audited Financial Reports
Daiwa alleges that MMA Funding was in default pursuant to the LSA because it failed to provide audited financial statements of Doctors Hospital within ninety days of the end of the fiscal year in accordance with LSA Ex. IV, cl. (i)(iii). While that clause — as pointed out by Desnick — does not specifically require audited financial statements, that clause must be read in conjunction with several other clauses, specifically, clause (p), Ex. V, cl. (d), RCA Ex. [V, cl. (i)(ii), RCA Ex. V, cl. (d) which provide that, pursuant to the LSA and the RCA, MMA Funding must fully comply with all provisions of the RCA and that a failure to comply will result in an "Event of Termination" pursuant to the RCA which constitutes an "Event of Default" according to the LSA. The RCA, does, in fact, require the submission of audited financial statements of MMA and balance sheets certified by the applicable chief financial officer and public accountant for Doctors Hospital — the Provider — and Doctors Hospital's subsidiaries, including MMA Funding. Therefore, the balance sheets submitted to Daiwa for Doctors Hospital with only the C.F.O. certification failed to satisfy the reporting requirements provided in the LSA and by reference, the RCA, constituting a default according to the Transaction documents.
LSA Ex. IV, cl. (i)(iii) provides that the Borrower will provide to the Lender "as soon as available and in any event within 90 days after the end of each fiscal year of the Borrower balance sheets as of, and statements of income for, such fiscal year, and accompanied by a certificate of an authorized officer-of the Borrower detailing its compliance for such fiscal period with the financial covenants contained in this Agreement." (Hird Decl. Ex. 11, at IV-3.)
LSA Ex. IV, cl.(p) provides that "The Borrower will, at its sole expense, timely and fully perform and comply with all provisions, covenants and other promises required to be observed to be observed by it under the RCA. . . ." (Hird Decl. Ex. 11, at IV-5.)
LSA Ex. V. cl. (d) provides that an "Event of Default" pursuant to the LSA occurs when "An Event of Termination shall have occurred under the RCA (without regard to waivers granted or sought)." (Hird Decl. Ex. 11, at V-I.)
RCA Ex. IV, cl. (i)(ii) provides that MMA and Doctors Hospital will provide "as soon as available and in any event within 90 days after the end of each entity's fiscal year, (x) balance sheets of each Provider and all of its Subsidiaries as at the end of such year and statements of income of each Provider and all of its Subsidiaries for such year, certified by (A) the applicable chief financial officer to be true and correct in all material respects and (B) independent public accountants acceptable to the Company and the Program Manager, (y) a copy of the financial statements . . . for MMA, audited by independent public accountants. . . ." (Hird Decl. Ex. 9, at IV-3.) Pursuant to the RCA, "`Subsidiary' means, with respect to MMA and any Provider, any corporation or entity of which at least a majority of outstanding shares of stock or other ownership interests . . . is at the time directly or indirectly owned or controlled by MMA or such Provider." (Hird Decl. Ex. 9, at 1-8.)
RCA Ex. V, cl. (d) provides that an "Event of Termination" occurs when "MMA or any Provider fails to perform or observe any other term, covenant or agreement contained in the Agreement . . . and any such failure shall remain unremedied for 30 calendar days after the earlier of (i) the discovery thereof by MMA or such Provider and (ii) written notice thereof shall have been given to MMA or such Provider by the Company." (Hird Decl. Ex. 9 at V-i.)
3. The 5% Delinquency Ratio
Daiwa alleges that MMA Funding was in default of the LSA because the "Delinquency Ratio" exceeded 5% constituting an "Event of Default" pursuant to LSA, Ex. V, cl. (o). The "Delinquency Ratio" is the ratio between the "Delinquent Receivables" and the outstanding balance of the loan. (Hird Decl. Ex. 11, LSA, Ex. I, at 1-4.) It is calculated "as of the last Business Day of each month" and is based on the "four week period immediately prior to the date of calculation." (Bird Dccl. Ex. 11, LSA, Ex. I, at 1-4.) A "Delinquent Receivable" includes by definition a "Denied Receivable" which is a receivable that is unpaid or subject to "breach of any of the representations or warranties contained" in the RCA that "materially and adversely affects the value of' the receivable. (Hird Decl. Ex. 11, LSA, Ex. I, at 1-4; Ex. 9, RCA § 4.01, Ex. I, at 1-3.)
Pursuant to 42 C.F.R. § § 413.20, 413.24, Doctors Hospital was required to submit a Medicare cost report electronically to HCFA on an annual basis. The cost report was due "on or before the last day of the fifth month" after the end of Doctors Hospital's fiscal year. See 42 C.F.R. § 413.24 (f)(2)(i). It is undisputed that the cost report was due on February 28, 2000. Although no longer required, in 2000 a hard copy was required to be filed by Doctors Hospital along with a certification by its administrator or chief financial officer. Id. § 413.24(f)(4)(iv); also Medicare Provider Reimbursement Manual-Part II, Publication 15, §§ 131, 132 at http://www.cms.hhs.gov/manuals/cmstoc.asp. It is undisputed that a hard copy bearing an encryption date of February 28, 2000 was filed on March 10, 2000 with a certification by the Executive Vice President of Finance. What is in dispute is what is the effective filing date — February 28 or March 10?
Pursuant to 42 C.F.R. § 413.24 (f)(5)(i) "[a]n acceptable cost report submission is defined as" the submission of "the required cost reporting forms, including all necessary signatures." Desnick alleges that the cost report was not deemed "received" by the agency until March 10, 2000 without citation to either the regulations or Medicare manual. However, evidence submitted by Daiwa suggests that the cost report was not timely filed on February 28. HCFA notified Doctors Hospital that it had overpaid the hospital more than $1 million, demanded repayment, and informed the hospital that interest would be assessed "from the date your cost report was due to the date the cost report was filed" and that "[p]eriods of less than 30 days will be treated as hill 30 day periods." (Hird Decl. Ex. 18.) Attached to the letter was an "Interest Calculation" indicating that the hospital would be charged one month's interest due to the filing of a "Late Cost Report." (Hird Decl. Ex. 18.) This clearly raises an inference that the cost report was not timely filed which, in turn, raises an issue of fact. Daiwa, however, argues that that issue of fact is not a material one.
Daiwa contends that even if the cost report was not filed until March 10, the default with regard to the 5% delinquency ratio would then run from March 31 rather than March 30, the date of the termination by Daiwa, and that, that one day is immaterial as a matter of law. Moreover, Daiwa posits that using the formula set forth in the LSA, as of either February 28 or March 31, the delinquency ratio exceeded 5% and was, in fact, 8.9% and 8.5% respectively. (Hosfield Decl ¶ 10 and Expert Report, Attachment A, at 28-29 and Ex. 5.) Desnick counters that those calculations are incorrect because the amount due Medicare cannot be categorized as a"Denied" or "Delinquent Receivable" because there was no "pending or threatened" set-off by HCFA; rather, the set-off did not become pending until Daiwa terminated the commitment.
The RCA provides that to be an "Eligible Receivable" a receivable cannot be "the subject of any . . . [set-off] . . . (except for statutory rights of Governmental Entities that are not pending or threatened). . . ." (Hird Dccl. Ex. 9, RCA, Ex. VII, el. (d), at VII-1.) Daiwa argues that the March 17, 2000 letter from HCFA threatened a set-off. HCFA stated that if Doctors Hospital failed "to respond within fifteen (15) days, [its] interim payments could be reduced/suspended and set off against the amount owed." (Hird Decl. Ex. 18.) Doctors Hospital responded five days later informing HCFA that it could not repay the full amount in thirty days and would be seeking a twelve-month repayment schedule. (Hird Decl. Ex. 19.) The Transaction documents do not define the word "threatened," however, the dictionary defines "threaten" as, infer alia, "To announce as intended or possible." Webster's Third Int'l Dictionary 2382 (3d. ed. 1993). HCFA clearly announced that a set-off was possible and therefore the Medicare receivables were properly categorized as "Delinquent Receivables" and properly included in the calculation of the "Delinquency Ratio" pursuant to the LSA and RCA.
Having found that the receivables were properly included in calculating whether the 5% delinquency ratio was violated and Desnick failing to contest the actual calculations performed by Daiwa's expert — Mark Hosfield — who determined that the 5% delinquency ratio was violated, the only remaining issue is whether the disputed date of filing the cost report is material. The Court finds that it is not. First, it has already been determined that there were two other defaults and either one permitted the termination of the commitment; consequently, — whether there was a third default in no way adds to or changes the analysis. Second, whether the default existed as of March 30 or March 31 does not raise a material issue of fact because there are no set of facts that would alter the fact that a default would have existed on March 31 given (1) the March 28 letter of MMA Funding's chief executive officer seeking a waiver of the 5% delinquency ratio provision, (2) the March 22 letter to HCFA from Doctors Hospital informing HCFA that it would be unable to refund the more than $1 million owed within a thirty day period and the fact that the 5% delinquency ratio is calculated based upon the preceding four week period.
C. The Termination of the "Revolving Advance" Commitment
Desnick contends that Daiwa terminated the contract in bad faith and breached the implied obligation of good faith and fair dealings by terminating the commitment on March 30 which he asserts propelled the hospital into bankruptcy. Moreover, Desnick claims that this bad faith action by Daiwa is a complete defense to this action. Desnick also argues that Daiwa's actions precipitated the hospital's bankruptcy filing which in turn impaired the value of the collateral — the receivables — and that Daiwa was fully aware that this would be the result. Finally, Desnick contends that the failure by Daiwa to give MMA Funding an opportunity to cure creates an issue of fact because the facts demonstrate that given such an opportunity, the hospital could have cured the defaults.
Daiwa, unsurprisingly, completely disagrees with Desnick's assessment. Daiwa contends that it terminated the commitment pursuant to the terms of the LSA and that that termination was not the product of its bad faith but rather, the defaults of MMA Funding. Similarly, Daiwa posits that Desnick's impairment of the collateral-defense fails because Daiwa had the right to terminate the commitment as a consequence of MMA Funding's defaults and it is, in fact, those defaults that set in motion the sequence of events that eventually led to any depreciation of the collateral, not any bad faith on Daiwa's part. Finally, Daiwa agrees that it did not give MMA Funding an opportunity to cure but it reasoned that to do so would be futile and in any event the LSA permitted cessation of advances without notice if a default had occurred and was continuing.
I. Bad Faith Defense
Desnick argues that Daiwa acted in bad faith when it terminated the commitment and that Daiwa's bad faith is a complete defense to this action. Desnick reasons that the loan was not in monetary or "other true default" and that Daiwa terminated the commitment on pretexual grounds because it wanted to sell its healthcare portfolio and the buyer did not want to purchase loans dependent on Illinois Medicaid. Desnick's proof for this assertion is that during negotiations between Daiwa and the prospective buyer — Morgan Stanley — Daiwa mistakenly believed that the maturity date of the LSA and RCA was March 31, 2000 and consequently Daiwa had planned to simply let the commitment expire. The correct maturity date was, however, March 31, 2001. It is this mistake that once realized, Desnick argues, prompted Daiwa to improperly and with bad faith terminate the commitment. Desnick's reliance on Bank of China v. Chan for that proposition is, however, misplaced. 937 F.2d 780 (2d Cir. 1991).
The egregious facts surrounding the transactions in Bank of China are not present here. In Bank of China, the bank issued "back to back" letters of credit thus putting it on both sides of the transaction. Id. at 787-88. The bank issued 3 types of letters of credit: in favor of the corporation for the contract price(master letters of credit); in favor of the Chinese customers in the event the corporation breached its contract; and in favor of the corporation's American suppliers. Id. at 787. The bank dishonored letters of credit in favor of the corporation even after proper documentation was submitted and failed to draw down the master letters of credit while permitting the Chinese customers to receive shipment of the goods. Id. at 787-88. These actions, it was alleged, caused the corporation's financial ruin preventing it from paying its debt to the bank. Id. at 788. The guarantor alleged, and the U.S. Second Circuit Court of Appeals agreed, that if the bank's actions caused the ultimate demise of the corporation it would be inequitable for it to recover. Those inequities are not present in the action before this Court.
Desnick also relies on Canterbury Realty Equip. Corp. v. Poughkeepsie Savings Bank 135 A.D.2d 102, 524 N.Y.S.2d 531 (3d Dep't 1988). Again, his reliance is misplaced. In Canterbury, the bank called the loan because the corporation had exceeded its credit line, a subject about which the parties were negotiating. 135 A.D.2d at 104-05, 524 N.Y.S.2d at 532-33. After business hours, the bank informed the corporation that it would retain all receivables and terminate its revolving line of credit. Canterbury, 135 A.D.2d at 105, 524 N.Y.S.2d at 533. Additionally, the bank refused to honor outstanding checks. Id. These actions effectively put the corporation out of business — a corporation that was "steadily improving." Id. The issue of bad faith in Canterbury arose because there existed a triable issue as to whether the acceleration clause was valid. Here, as already noted, MMA Funding was in default pursuant to the Transaction documents.
Good faith and fair dealing are implied in every contract unless to do so would be inconsistent with the express terms of the contract. See Murphy v. American Home Prods. Corp., 58 N.Y.2d 293, 304 (1983). The underlying factual similarities present in both Bank of China and Canterbury are absent in this case; here, it is plain that"Events of Default" had occurred pursuant to the terms of the LSA and by reference, the RCA. The defaults in this case were not the product of actions taken by the lender. Daiwa had a contractual right to terminate the commitment and the possibility that that termination precipitated Doctors Hospital's bankruptcy does not constitute evidence of bad faith.
Moreover, in Canterbury the lender cut off all financing, Daiwa, by contrast, distributed more than $1 million to MMA Funding after it terminated the line of credit. Daiwa cannot be faulted if those advances did nothing to improve Doctors Hospital's financial situation. The advances were deposited into the account that was prescribed by the terms of the contract.
In addition, the evidence demonstrates that Doctors Hospital was in troubled financial straits prior to Daiwa's termination despite MMA's C.F.O.'s assertion that "vendor demands did not pose a serious threat to the hospital's continued operations." (Robinson Decl. ¶ 5.) A pharmaceutical supplier stopped delivering medical supplies on more than one occasion. (Hird Decl. Ex. 8, Vasquez Dep. at 100:8-18.) Lawsuits for delinquent payments were commenced, a default judgment was entered, other lawsuits were threatened, and the financial statements show that Doctors Hospital had gone from a $3.5 million operating profit in 1998 to a $11.5 million loss in 1999. Moreover, although Desnick asserts that Doctors Hospital was improving financially in the first three months of 2000, its president testified that the hospital operated at a loss in February of 2000. (Suppl. Hird Decl. Ex. 1, Brown Dep. at 135:3-9.)
Accordingly, Desnick's bad faith defense should fail as a matter of law.
2. Impairment of Collateral Defense
For the same reasons that Desnick's bad faith defense should fail so should his impairment of the collateral defense fail. Desnick again mistakenly relies on Bank of China, suggesting that by terminating the commitment, Daiwa knew that its actions would propel Doctors Hospital into bankruptcy and making it less likely that the receivables would be collected for their full value and in some instances no collection would be made at all. In Bank of China, the impairment of the collateral resulted from the unique circumstance of the bank being on both sides of the transaction. That is not the case here. MMA Funding was in default pursuant to the contract; because of that, Daiwa chose to terminate the commitment as permitted by the contract, and the receivables were not in Daiwa's possession at the time of termination. The fact that enforcement of the terms of the contract eventually resulted in the depreciation of the collateral does not give rise to an impairment of the collateral defense. Accordingly, that defense should be dismissed.
3. Unclean Hands, Laches, and Estoppel Defenses
Desnick's defenses of unclean hands, laches and estoppel should also be dismissed. Desnick's defense of unclean hands should fail for two reasons: (1) the mere pleading of the defense — as Desnick has — without more is insufficient; and (2) an unclean hands defense requires a finding of bad faith which the Court has declined to do. See Obabueki v. Int'l Business Machines Corp., 145 F. Supp.2d 371, 401 (S.D.N.Y. 2001). Desnick's defenses of laches and estoppel should fail as a matter of law because they are equitable defenses that have no place in an action at law for enforcement of a guaranty. See Liebowitzy v. Elsevier Science, Ltd 927 F. Supp. 688, 704 (S.D.N.Y. 1996); In re Estate of Barabash, 31 N.Y.2d 76, 81, 286 N.E.2d 268, 271, 334 N.Y.S.2d 890, 894 (1972). Moreover, as with his defense of unclean hands, Desnick fails to allege any facts to support such defenses.
4. The Lack of Notice and Opportunity to Cure
It is undisputed that Daiwa did not give MMA Funding an opportunity to cure its breach pursuant to the LSA. Daiwa argues that this failure is excused due to futility, that is, even if MMA Funding had been given the opportunity to cure it would not have been able to do so. Desnick contends that that assertion is incorrect and at the very least raises a disputed issue of fact. Additionally, Daiwa asserts that pursuant to the LSA, even without the giving of notice, it was within its contractual rights to stop funding the "Revolving Advances" once a default had occurred and was continuing because a "Default," as defined by the LSA, is "an event, act or condition which the giving of notice or the lapse of time, or both, would constitute an Event of Default." (Hird Decl. Ex. 11, LSA, Ex. 1, at 1-4.)
LSA, Ex. II, cl. (2)(ii) provides that "Each Revolving Advance . . . shall be subject to the further conditions precedent [that] . . . no event has occurred and is continuing, or would result from such Revolving Advance or any actions connected therewith, that constitutes a Default or an Event of Default." (Hird Decl. Ex. 11, at 11-2-3.)
New York law requires that "conditions precedent to the right of cancellation . . . must be complied with." Bausch Lomb Inc. v. Bressler, 977 F.2d 720, 727 (2d Cir. 1992) (quoting Consumers Power Co. v. Nuclear Fuel Servs., Inc., 509 F. Supp. 201, 211 (W.D.N.Y. 1981)). Only in the rarest of circumstances does New York law excuse the failure to give notice and an opportunity to cure on the grounds of futility. Point Prods., A.G. v. Sony Music Entm't. Inc., No.
93 Civ. 4001. 2000 WL 1006236, at *3 (S.D.N.Y. July 20, 2000). It is doubtful that MMA Funding could have cured all of the defaults, particularly since it was seeking a waiver of eight default provisions, had not cured the Nomura defaults for more than 4 1/2 months and, in fact, still had not cured that default as of April 7, and could do nothing to alter the 5% delinquency ratio for the preceding four weeks. Additionally, the fact that Daiwa starting drafting the termination notice prior to the receipt of MMA Funding's request for waiver of eight default provisions does not alter the analysis because it was apparent that MMA Funding was already in default pursuant to two, if not three, provisions of the LSA and RCA by reference. Nonetheless, MMA Funding's inability to cure is not free from material dispute.
The dispute, however, becomes immaterial due to the LSA provision that permits cessation of advances while there is a default and, here, there was a default. Pursuant to the default, i.e., the failure to provide audited financial statements and the Nomura loan default, Daiwa could contractually decline to advance funds based on a "Borrowing Base Certificate" while the default continued. For the same reasons, any objections by Desnick as to the service of the notice itself — Daiwa's failure to serve MMA Funding's counsel as well as the company — are immaterial. Consequently, the lack of the opportunity to cure and the failure to serve MMA Funding's counsel with the notice of termination do not rise to a material factual dispute warranting the denial of summary judgment.
D. The Guaranty
Desnick raises several issues regarding the Guaranty. First, he urges that Daiwa's interpretation of the Guaranty is too broad and that only two limited circumstances trigger the Guaranty, (1) reimbursement amounts owed to governmental entities as a result of overpayments to the hospital, and (2) any losses resulting from a breach of a representation and warranty concerning the value of a receivable, i.e., representations that the receivables were generated for actual, bona fide services performed. (Chorvat Dccl. Ex. 28, Desnick Dep. 79:2-81:6.) Second, Desnick contends that there was no breach of warranties here such that the repurchase obligation of receivables has been triggered. Third, even if the repurchase obligation had been triggered, Daiwa's expert used the wrong figures as a basis for his calculations.
Fourth, the Guaranty obligation could never have been triggered because the receivables were never transferred to Daiwa because Daiwa failed to establish a computer interface to facilitate the transfers. Finally, Desnick argues that Daiwa's damages are grossly inflated and improperly include the advances Daiwa made subsequent to the March 30 termination which violated the terms of the agreement and constituted a waiver by Daiwa because it knew Doctors Hospital was going bankrupt.
Daiwa contests all of Desnick's claims except that it agrees with Desnick that it is entitled to enter judgment on its first claim for relief — the HFCA set-off in the sum of $1,042,285 — as there is apparently no dispute between the parties that the Guaranty covers the governmental setoff. Regarding the remainder of Desnick's contentions, Daiwa argues that pursuant to the RCA it was indemnified for any losses or costs due to a material breach of the representations and warranties with respect to the "Eligible Receivables" used as collateral and that there was a material breach of those warranties because the receivables were to be payable in an amount that was not less than its "Expected Net Value" ("ENV") as defined by the RCA. Further, in the — event that the value of a receivable was materially affected, repurchase of the receivable was immediately required. Thus, Daiwa argues, because Desnick has indemnified it through the Guaranty, he is responsible for the repurchase of the receivables which were not collected as a result of the bankruptcy.
Moreover, Daiwa contends, the figures to calculate the repurchase are explicitly defined in the RCA. Nonetheless, Daiwa suggests, Desnick's argument is meritless because even using the figures Desnick asserts are correct, Desnick would be indebted for more than $6 million for repurchase rather than the approximately $5 million Daiwa seeks in repayment. Finally, Daiwa contends that its figures are in no way inflated and that no waiver by it was made when it advanced over $1 million to MMA Funding subsequent to terminating the commitment because those advances could be made pursuant to the LSA in Daiwa's discretion and because Daiwa made the transfers prior to Doctors Hospital's decision to file for bankruptcy.
1. The Scope of the Guaranty
Desnick guarantied "the punctual payment when due of the indemnification obligations of [Doctors Hospital] set forth in Sections 4.01 and 4.02 of the RCA." (Hird Decl. Ex. 12, § 1(a).) Section 4.01 of the RCA provides that if there is a breach of representations or warranties regarding an "Eligible Receivable" thus resulting in a "Denied Receivable" then, that receivable must be immediately repurchased from Daiwa at the purchase price which is defined as "an amount equal to the Expected Net Value of such Denied Receivable minus any cash received from the Obligor." (Hird Decl. Ex. 9, at 6, 1-7.) Additionally, it is presumed "that the failure of any Eligible Receivable (or portion thereof) to be paid in an amount equal to its Expected Net Value on or after the 180th day following the Last Service Date is the result of a breach of a representation or warranty . . . unless [Daiwa has] actual knowledge to the contrary (such as, by way of example, actual knowledge of the financial inability of an Obligor to pay . . .)." (Hird Decl. Ex. 9, § 4.01(b), at 7.)
Section 1(a) of the Guaranty provides that Desnick guarantees
the punctual payment when due of the indemnification obligations of [Doctors Hospital] set forth in Sections 4.01 and 4.02 of the RCA including, without limitation, any and all costs, expenses, losses, claims, damages and liabilities to the extent resulting from any dispute, claim, offset or defense of any Obligor which is a Governmental Entity to the payment of any Transferred Receivables due to any investigation, suit, judgment or claim by such Obligor or any other Governmental Entity involving the overpayment to or for the benefit of the Guarantor or any Person in which he is a shareholder . . . and agrees to pay any and all reasonable costs and expenses (including reasonable counsel fees and expenses) paid or incurred in-enforcing any rights under this Guaranty.
(Hird Dccl. Ex. 12.)
The RCA, Schedule V, sets forth the ENV as follows:
Medicare 48% Medicaid 57% Commercial Insurers (excluding Blue Cross) 77% HMO's 58% Public Aid 90% Self Pay 35% DASA 35%
(Hird Decl. Ex. 9, at S-V.) To calculate the repurchase price, the gross unpaid amount of the receivable is multiplied by the appropriate percentage less the amount received by the obligor. (Hird Decl. Ex. 9, at 1-4.)
The "Last Service Date" is defined as "the-date set forth on the related invoice or — statement as the most recent date on which services or merchandise were provided . . . to the related patient." (Hird Decl. Ex. 9, at 1-5.)
Desnick makes three arguments here: (1) that it is his understanding that he indemnified Daiwa for government set-offs and for receivables billed but for which the services were not performed and that the repurchase obligation was not triggered because (a) there was no breach of representation or warranty and (b) the receivables were never transferred as specified in the contract as a result of Daiwa's failure to establish a computer interface; (2) the ENV percentages designated in the RCA are not representative of the parties' course of dealings; and (3) Daiwa's calculations are overstated because the contract does not limit the failure of collection of a receivable to only the inability of an obligor to pay. Rather, Daiwa had actual knowledge that its actions would make it more difficult to collect the receivables and knew HRM "bungled the collections" and the receivables should accordingly be reduced.
Desnick's arguments are not supported by the Transaction documents. The clear language of the Transaction documents demonstrates that Desnick, through his Guaranty, warranted that Daiwa would be paid for each "Eligible Receivable" that served as a predicate for an advance, an amount at least equal to the ENV and that if it was not, that receivable would then be characterized as a "Denied Receivable" subject to immediate repurchase. The Guaranty plainly references this obligation. (Hird Decl. Ex. 12 § 1(a).) In addition, because Doctors Hospital ceased operation on April 19, 2000, the presumption that any "Eligible Receivable" not paid for more than 180 days is presumed to remain unpaid as a consequence of a breach of representation or warranty applies.
Next, the failure of Daiwa to establish the computer interface does not provide an avenue for Desnick to avoid the Guaranty and thus Desnick's defenses of impossibility of performance, frustration of purpose and prevention should be dismissed. Regardless of whether the receivables were automatically transferred — as Daiwa argues — or not — as Desnick argues — Desnick indemnified Daiwa for "the failure to vest . . . a perfected ownership interest in each Eligible Receivable included in a Transferred Batch" (Hird Decl. Ex. 9, RCA § 4.02(d)) and for the failure of Daiwa "to preform its duties or obligations" (Hird Decl. Ex. 9, RCA § 4.02(f)) with respect to the "[t]racking of Contributions, Collections and other transactions pertaining to each Transferred Batch" (Hird Decl. Ex. 9, RCA § 1.05) as administered by Daiwa which included the duty to "establish a computer interface." (Hird Decl. Ex. 9, RCA, Ex. XI, cl. 1 at XI-I.) Desnick's argument that there were no transferred batches because there was no computer interface and therefore the indemnification provision was not triggered is an unreasonable interpretation of the contractual provisions because it renders the provision meaningless. In plain terms, Desnick indemnified Daiwa for any failure by it to install a computer interface. He is, therefore, liable pursuant to that guaranty.
As required by the terms of the contract Daiwa's expert did not include in his calculations of the receivables any insolvent obligor. (Hosfield Decl. ¶ 6.) Desnick posits, however, that the receivables must be reduced further because Daiwa's knowledge that the termination of the commitment would result in the receivables being reclassified as "Denied Receivables" satisfies the contractual provision that Daiwa may not recover on a receivable where it has "actual knowledge" that the receivable was not paid for reasons other than a breach of a representation or warranty. (Hird Decl. Ex. 9, RCA § 4.01(b).) Desnick's reasoning is contractually unsupported and conceptually illogical. The contract states that "actual knowledge of the financial inability of an Obligor to pay its obligations represented by such Eligible Receivable" is an example of what satisfies the "actual knowledge" requirement. (Hird Decl. Ex. 9, RCA, § 4.01(b).) It is inconceivable that this example suggests that if there is a default pursuant to the Transaction documents, the lender cannot terminate the commitment pursuant to those documents if it "knows" that doing so may in the end, precipitate the borrower's bankruptcy.
2. Deficiency v. Repurchase
Now that it has been established that (1) the Guaranty was triggered due to a breach of warranty, (2) the failure of Daiwa to establish a computer interface does not void Desnick's obligation, and (3) the repurchase amount is only reduced by obligor insolvencies, the Court turns to the dispute between the parties regarding the total due if Desnick were to repurchase the receivables.
Both parties retained experts to determine, inter alia, the "Purchase Price" for the receivables that were 180 days old or less as of April 13, 2000, the date of the last advance made by Daiwa to Doctors Hospital. The experts disagree on the methodology, the figures used, and the discounted receivables due to alleged "bungling of collections" by HRM — for which Desnick allocates blame to Daiwa. See infra § E(1). Daiwa's expert calculated the total "Purchase Price" to be $11,327,448. (Hosfield Decl. ¶ 6.) This amount excluded $90,194 due to an insolvent insurer. (Hosfield Decl. ¶ 6.)
Desnick's expert — Kevin O'Brien — objected to this calculation in two ways. First, referring to RCA section 4.01 which provides for repurchase where a breach of representation and warranty "materially and adversely affects the value" of a receivable, O'Brien opined that Daiwa should have discounted receivables whose values were not materially affected. He seemingly arbitrarily chose 10% as a materiality threshold. (Hosfield Decl. Attachment B, O'Brien Report at 17-18.) Second, O'Brien objected to the ENV percentages used by Daiwa because the parties used different ENV percentages when calculating advances. (Hosfield Decl. Attachment B, O'Brien Report at 18-19.) O'Brien did not compute the "Purchase Price" based on the figures and percentages he suggested to be accurate; rather; he stated that Hosfield overstated the amount. (Hosfield Decl. Attachment B, O'Brien Report at 4.)
Hosfield, while disagreeing with O'Brien's conclusions, used the figures O'Brien suggested and recalculated the "Purchase Price." First, using O'Brien's 10% materiality threshold he concluded that the "Purchase Price" would be reduced by $50,353 to $11,277,095. (Hosfield Decl. ¶ 8.) Second, using the ENV percentages suggested by O'Brien, Hosfield recalculated the "Purchase Price" to be $6,811,532. (Hosfield Decl. ¶ 9.) However, Daiwa's claimed actual loss is $5,932,278.10 which includes interest to January 9, 2002. (Tardogno Decl. ¶ 9.) Thus, the repurchase amount is in excess of the claimed actual loss.
Daiwa is entitled to recover interest on the debt pursuant to sections 1.05(a) and (b) which provides for the payment of interest-on the principal amount of each "Revolving Advance." (Hird Decl. Ex. II, at 2-3.)
O'Brien suggests that the "Purchase Price" should be reduced further by approximately $2.2 million — $2.7 million due to HRM's "bungled collections" yet only identifies fifteen specific accounts for which he attributes the shortfall in collections to HRM's alleged incompetence. (Hosfield Decl. Attachment B, Ex. II.) The total uncollected amounts on these fifteen accounts is $50,353. (Hosfield Decl. Attachment C at 11-12.) This amount still exceeds Daiwa's actual loss. Because Daiwa's actual loss is less than the "Purchase Price" regardless of whose methodology or set of figures is used, a material issue of fact does not exist.
3. Advances Subsequent to the Termination of Commitment
Desnick contends that his Guaranty liability must be reduced by $1,235,000 — the amount advanced by Daiwa subsequent to the commitment termination — because Daiwa (1) advanced that sum to Doctors Hospital in violation of the Transaction documents and (2) advanced the sums after it became aware of the intended bankruptcy filing by Doctors Hospital constituting a waiver of recovery by Daiwa. Daiwa argues that Desnick's interpretation of the contract is wrong and alternatively, were it correct, Daiwa is still entitled to recover of that sum because it has the power pursuant to New York law to determine the manner in which collected money is applied to the debt.
"Waiver is an intentional relinquishment of a known right and should not be lightly presumed." Gilbert Frank Corp. v. Federal Ins. Co., 70 N.Y.2d 966, 968, 520 N.E.2d 512, 514 525 N.Y.S.2d 793, 795 (1988); see also Ess Vee Acoustical Lathing Contractors. Inc. v. Prato Verde, Inc., 268 A.D.2d 332, 332, 702 N.Y.S.2d 38 (1st Dep't 2000). Waiver requires "a clear manifestation of intent by [the plaintiff] to relinquish the protection of the contractual limitations." Gilbert Frank, 70 N.Y.2d at 968, 520 N.E.2d at 514, 525 N.Y.S.2d at 795. It is true that a party with knowledge of a breach, who continues to perform according to the contract, has waived its rights to pursue the breach. National Westminster Bank. U.S.A. v. Ross, 130 B.R. 656, 675 (Bankr. S.D.N.Y. 1991). It is equally true, however, that where notice of the breach has been given to the breaching party, the non-breaching party may choose to continue to perform the contract while retaining its right to sue for the breach at a later time. Id.
Here, Daiwa gave notice of the breach and terminated the commitment with the proviso that in its discretion it may advance funds in the future which it in fact did. Daiwa's choice to make further advances did not operate as a waiver as to recovery of those advances because it had notified the breaching party of the breach. Moreover, the evidence demonstrates that Daiwa did not know of the decision to file for bankruptcy until after the wire transfers were initiated because the decision to file was made after business hours. Accordingly, Desnick's waiver defense should be dismissed.
Desnick contends next that the advances made by Daiwa subsequent to the termination were made in violation of section 3.02(b) of the LSA which he argues, required the lender to setoff the amount due against collections or any advance financed after that date during the continuance of a default. Daiwa argues that Desnick misconstrues the provision which, it argues, is to protect the rights of the lender not the borrower and, therefore, the right of set-off resides in the lender's discretion. Alternatively, Daiwa argues that pursuant to New York law, it retains the power to allocate payments first to unguarantied debts without the guarantor's consent and over his objection.
LSA § 3.02(b) provides:
Right of Set-Off. During the continuance of an Event of Default, the Borrower hereby irrevocably authorizes and instructs the Lender to set-off the full amount of the any [sic] Lender Debt due and payable against (i) any Collections, or (ii) the principal amount of any Revolving Advance to be financed on or after such date. No further notification, act or consent of any nature whatsoever is required prior to the right of the Lender to exercise such right of set-off; provided however, a member of the Lender Group shall notify the Borrower that a set-off pursuant to this Section 3.02 occurred, the amount of such set-off and a description of the Lender Debt that was due and payable.
(Hird Decl. Ex. 11, at 9 (emphasis in original).)
The plain reading of section 3.02(b) of the LSA ascribes rights to the lender in the event of a default. That is true of every provision in Article III of the LSA entitled, "Representations and Warranties; Covenants; Events of Defaults." Consequently, the right to set-off resides with the lender and not the borrower. Thus, Desnick's reading of that provision is not reasonable.
LSA § 3.01 states that the borrower agrees to "perform and observe" certain covenants. Section 3.02(a) provides that in the event of a default the lender may declare the maturity date or replace the borrower in its performance of certain covenants and specifically does not limit the lender's rights to the agreement . . . Section 3.03 states that the borrower irrevocably designates the lender as its attorney-in-fact which permits the lender to endorse the borrower's name on checks, direct insurers 40-pay the lender directly, and authorizes the lender to bring suit or settle suits in borrower's name in the lender's discretion. (Hird Decl. Ex. 11, at 8-9.)
Moreover, had Desnick's interpretation of the LSA been correct, he still would not avoid the debt stemming from the additional advances because New York law favors Daiwa here. Pursuant to the New York law of payment, "when a debtor has multiple debts to a creditor, some of which are guarantied, the creditor may apply the debtor's voluntary payments to those debts which are not guarantied, despite the guarantor's objection." Walther v. Bank of New York, 772 F. Supp. 754, 762 (S.D.N.Y. 1991); see also MTB Bank v. Federal Amored Express. Inc., 949 F. Supp. 226, 229 (S.D.N.Y. 1997) rev'd on other grounds 175 F.3d 283 (2d Cir. 1999); Harding v. Tifft, 75 N.Y. 461, 461 (1878). The creditor has the right to allocate such voluntary payments "in the manner most advantageous to it." Commercial Trading Co. v. Freidus, 114 A.D.2d 292, 295, 499 N.Y.S.2d 43, 45 (1st Dep't 1986). Therefore, assuming arguendo that Daiwa issued the advances in contravention of the LSA, it may still recover the amount owed from Desnick because the decision as to how to apply payment rests in Daiwa's discretion and not Desnick's.
E. HRM Compensation
Desnick contends that Daiwa's recovery should be reduced because Daiwa disposed of the collateral — the receivables — in a commercially unreasonable manner pursuant to the U.C.C. Specifically, he charges that Daiwa permitted HRM to "bungle" collections, thus creating a deficiency of approximately $2.2 million — $2.7 million for which Daiwa should bear responsibility. Daiwa argues that HRM properly carried out its obligation to collect the receivables and even if HRM's collection were faulty, Daiwa cannot be held responsible because HRM was not an agent of Daiwa but rather, had entered into a contract with the hospital to collect the receivables. Moreover, the RCA and the Guaranty as discussed supra provide that Desnick must indemnify Daiwa for Doctors Hospital's failure to perform its "Primary Servicer Responsibilities" which includes billing and collecting receivables. Therefore, Desnick must reimburse Daiwa the amount it paid HRM to bill and collect the receivables.
1. Commercial Reasonableness Pursuant to the U.C.C.
As noted, Desnick contends that his debt must be reduced between $2.2 million — $2.7 million due to HRM'S failure to collect receivables in a commercially reasonable manner pursuant to N.Y.U.C.C. § 9-504(3). In order for Daiwa to be liable for any alleged negligence of HRM. HRM must have been acting as Daiwa's agent. Desnick suggests that the issue of agency between HRM and Daiwa is disputed and not ripe for adjudication. He is only partially correct. Illinois law — the law that governs the HRM agreement — provides that where the facts surrounding the issue of agency are disputed, the issue is a question of fact. See Avanced Cleanroom Tech. v. Newhouse, No. 00 C 6623, 2002 WL 206960, at *3 (N.D. Ill. Feb. 11, 2002). However, if the facts are undisputed, it is an question of law. Id. Desnick's latter day protestations that the hospital and he were not agreeable to the appointment of HRM but rather, were pressured into petitioning the bankruptcy court and entering into the contract with HRM are unsupported by the record and do not raise an issue of fact.
Title 9 of the N.Y.U.C.C. references are to provisions in effect prior to the July 1, 2001 Amendment which replaced former section 9-504 with new sections 9-609, 9-610, and 9-611. Pursuant to the U.C.C., a secured party may "dispose of collateral in a commercially reasonable manner following a default." N.Y.U.C.C. § 9-610, official cmt. 2 (2001).
The predominant "consideration in determining whether an agency relationship exists is whether the principal had the right to control the activities of the agent." Knapp v. Hill, 657 N.E.2d 1068, 1071 (Ill.App.Ct. 1995). Other factors to be considered include: "the right to control the manner in which the work is performed; the right to discharge; [and] the method of payment. Avanced Cleanroom Tech., 2002 WL 206960, at *3 HRM was appointed by the bankruptcy court after a joint motion by Daiwa, Desnick, Doctors Hospital, and the Committee of Unsecured Creditors of Doctors Hospital. (Hird Decl. Ex. 23.) Doctors Hospital entered into a contract with HRM to liquidate its accounts receivable. (Hird Decl. Ex. 24.) The contract vested the right of termination in both Doctors Hospital and HRM — not Daiwa. The contract contains a merger clause that states that it constituted the entire agreement of Doctors Hospital and HRM. The contract provides that any amendment must be in writing signed by Doctors Hospital and HRM to be effective.
The only rights given to Daiwa pursuant to the contract is the right to "reasonable supervised access to patient account and other accounting information." (Hird Decl. Ex. 24 § 1(m), at 2.) This access was to be given to Desnick as well. (Hird Decl. Ex. 24 § 1(m), at 2.) The only other reference to Daiwa — which Desnick finds significant — is that the preamble states that Daiwa asserts a secured interest in the receivables. (Hird Decl. Ex. 24, at 1.) Clearly Daiwa did have a secured interest in the receivables. The determinative agency factor, however, is control. Pursuant to the terms of the contract it is evident that Doctors Hospital had the control over HRM because it is Doctors Hospital who had the power to terminate the contract as a consequence of defaults in performance or breach by HRM.
The commercial reasonableness requirement of the U.C.C. is designed to protect the debtor from an avoidable deficiency judgment or the squandering of a possible surplus through the secured party's inaction . . . [and] thus comes into play when the secured party takes possession and control of the accounts, preventing the debtor from acting on the accounts himself or when the secured party undertakes collection so as to entitle the debtor to rely on the former to protect the accounts.
Federal Deposit Ins. Corp. v. Fort Worth Aviation, 806 F.2d 575, 577 (5th Cir. 1986) (construing Tex. Bus. Coin. Code Ann. § 9-502, the Texas U.C.C. enactment); see also Federal DeDosit Ins. Corp. v. Wrapwell Corp., No. 93 Civ. 859, 2002 WL 14365, at *2 n. 4 (S.D.N.Y. Jan. 3, 2002) (noting that Tex. Bus. Corp. Code Ann. § 9-502 is virtually identical to the New York U.C.C. enactment).
Thus, the requirement to collect in a commercially reasonable manner does not arise unless the secured creditor takes control of the receivables foreclosing the debtor's ability to collect on the accounts. Wrapwell, 2002 WL 14365, at *3 The receivables were not turned over to Daiwa as the secured creditor for disposition as is typically the case where the commercially unreasonable disposition defense is available. See In re Emergency Beacon Corp., 48 B.R. 341 (Bankr. S.D.N.Y. 1985); In re Wells, 51 B.R. 563 (Bankr. D. Colo. 1985). See also Bank of China, 937 F.2d at 783. Rather, here, Doctors Hospital retained control over the collection of the receivables, its control most plainly evidenced by Doctors Hospital's right to terminate the contract with HRM. Accordingly, Desnick's defense of commercially unreasonable disposition pursuant to the U.C.C. should be dismissed.
2. HRM's Compensation
Daiwa seeks reimbursement for HRM's compensation pursuant to section 4.02(f) of the RCA which provides for indemnification for Daiwa's losses due to Doctors Hospital's failure to perform its "Primary Servicer Responsibilities" which include the billing and collection of receivables. (Hird Decl. Ex. 9, at 8.) Desnick guarantied the resultant losses to Diawa pursuant to section 1 of the Guaranty. (Hird Dccl. Ex. 12.) The contract between Doctors Hospital and HRM provides that HRM shall receive its compensation on a percentage basis of the collected receivables and that HRM's compensation shall be paid out of the amounts collected. (Hird Dccl. Ex. 24 § 3, at 2.)
Pursuant to three separate orders of the bankruptcy court, HRM's interim compensation has been approved in the sum of $370,913.30 which Daiwa was directed to pay. That sum is subject to adjustment upon submission to the bankruptcy court of a motion to pay final compensation to HRM. Pursuant to the terms of the RCA and Desnick's Guaranty, Daiwa is entitled to reimbursement of that sum.
CONCLUSION
For the foregoing reasons, Daiwa's motion for summary judgment on each of its three claims for relief should be granted in its entirety.