ENTIN DEVELOPMENT, LP v. ADVANCE REALTY GROUP LLC

NOT FOR PUBLICATION WITHOUT THE

APPROVAL OF THE APPELLATE DIVISION

SUPERIOR COURT OF NEW JERSEY

APPELLATE DIVISION

DOCKET NO. A-0

ENTIN DEVELOPMENT, LP,

Plaintiff-Appellant,

v.

ADVANCE REALTY GROUP, LLC,

Defendant-Respondent.

________________________________________________________________

January 14, 2014

Submitted September 10, 2013 Decided

Before Judges Fisher and Espinosa.

On appeal from Superior Court of New Jersey, Law Division, Hunterdon County, Docket No. L-367-12.

William J. Groble, attorney for appellant.

Gibbons P.C., attorneys for respondent (Christopher Walsh and Jason R. Halpin, on the brief).

PER CURIAM

Plaintiff Entin Development, LP (Entin) appeals from an order that granted summary judgment1 to defendant Advance Realty Group, LLC (ARG), dismissing its complaint. We affirm, substantially for the reasons set forth in the written decision of Judge Peter A. Buchsbaum.

Entin was a minority member of ARG for approximately seven years. On September 30, 2008, the parties entered into a Redemption Agreement (the Agreement). In exchange for Entin's withdrawal, ARG agreed to redeem Entin's ARG units by making an initial cash payment of $2,102,125.52, and executing a promissory note in the principal amount of $5,701,655.52 (the Note). The Note, which was attached to the Agreement, provided that the principal amount would be paid by ARG in five equal installments on every December 31 in the years 2009 through 2013. In addition, all accrued and unpaid interest was to be paid on the scheduled payment dates. At the top of the first page of the Note, the following is set forth, all in capital letters:

PAYMENTS ON ACCOUNT OF THE INDEBTEDNESS EVIDENCED BY THIS PROMISSORY NOTE . . . AND THE EXERCISE OF REMEDIES HEREUNDER ARE SUBORDINATED AS SET FORTH IN THIS NOTE.

[Emphasis added.]

The nature of the subordination is described in Paragraph 7(a) of the Note, which provides, in part,

By acceptance of this Note, [Entin] agrees that the indebtedness evidenced by this Note shall be subordinate and subject in right of payment, to the extent and in the manner set forth herein, to the prior payment in full of the Senior Indebtedness.

[Emphasis added.]

"Senior Indebtedness" is a defined term in the Note, and includes "any Indebtedness of [ARG] . . . to any Senior Holder, including, without limitation, the Senior Indebtedness set forth on Schedule B attached hereto and any Indebtedness designated by [ARG's] Board of Managers as Senior Indebtedness following the date hereof."

Paragraph 7(f) further provides that, "while any Senior Indebtedness is outstanding," Entin "shall not . . . institute any . . . actions or proceedings to enforce its rights or . . . commence or maintain any . . . legal or equitable proceeding against [ARG]" unless permitted by ARG. The only exception to these prohibitions is that provided by Paragraph 9, which outlines Events of Default, and authorizes Entin to take the following action when an Event of Default occurs:

If any Event of Default shall occur and be continuing, [Entin] may, (i) by notice to [ARG], declare the entire unpaid principal amount of this Note, all interest accrued and unpaid hereon and all other amounts payable hereunder to be forthwith due and payable, whereupon all unpaid principal under this Note, all such accrued interest and all such other amounts shall become and be forthwith due and payable, without presentment, demand, protest or further notice of any kind, all of which are hereby expressly waived by [ARG], provided that upon the occurrence of an actual or deemed entry of an order for relief with respect to [ARG] under the Bankruptcy Code, the result which would otherwise occur only upon giving of notice by [Entin] to the Maker as specified above shall occur automatically, without the giving of any such notice; and (ii) whether or not the actions referred to in clause (i) have been taken, proceed to enforce all other rights and remedies available to [Entin] under applicable law.

[Paragraph 9(b).]

After making the initial payment when the Agreement was reached, ARG made only one scheduled payment on the Note, in December 2009. In December 2010, ARG sent Entin a letter, requesting an extension for its scheduled December 2010 payment. The letter explained ARG was negotiating with its most senior corporate creditor to restructure its $60 million debt and that it could not make the December 2010 payment or any future payments to Entin before reaching an agreement with the senior creditor and obtaining its consent to make payments to more junior creditors. The letter stated, "Given the subordination provisions of the Note, ARG believes that a mutually agreed upon extension is in our collective best interest[,]" as, pursuant to the terms of the Note, "any efforts [by Entin] to accelerate and collect on the Note would redound only to the benefit of" ARG's senior creditors.2 (Emphasis added.) ARG offered to pay an extension fee of two percent of the outstanding principal amount in exchange for Entin's agreement to the extension. By letter dated January 21, 2011, Entin agreed to the extension and set June 30, 2011, as the new due date for the December 2010 payment. ARG paid the agreed-upon extension fee.

However, on the new due date, ARG remained unable to pay the December 2010 payment. By letter dated June 30, 2011, ARG advised Entin it was still engaged in negotiations with the senior creditor and unable to make any payments to Entin. ARG asked for another extension until an agreement was reached with the senior creditor that would permit ARG to make the "December 31, 2010 payment and continuing payments pursuant to the terms of the Note." ARG referred to the subordination provision of the Note again, stating it "leaves a second extension as the best option for all." ARG offered to pay Entin the interest on the principal amount that had accrued from January 1, 2010 to June 30, 2011. Entin agreed to a six-month extension and ARG paid the agreed-upon extension fee.

ARG was unable to reach an agreement with the senior creditor. By letter dated December 15, 2011, ARG advised Entin of this failure and that, as a result, it was "precluded from making any distributions" to any junior creditors, including Entin. Entin responded that ARG's failure to make the payment constituted an Event of Default under the Note; that it was declaring that all unpaid amounts were immediately due and payable; and that the total amount due to Entin was the principal amount of $4,561,324.52, plus interest of $442,220.02. Entin further stated it would proceed with legal action if ARG failed to make payment by February 10, 2012. ARG made no additional payments to Entin.

In June 2012, Entin filed a one-count complaint, alleging ARG defaulted on its payment obligations under the agreements, and seeking the entry of a judgment against ARG for the entire unpaid principal amount and all accrued interest, which totaled $5,003,544.54. In lieu of an answer, ARG filed a motion to dismiss, R. 4:6-2(e), or in the alternative, for summary judgment, relying upon Paragraph 7(f)(iii) of the Note, which, subject to Paragraph 9, prohibits Entin from commencing an action against ARG as long as any Senior Indebtedness is outstanding.

Following oral argument, Judge Buchsbaum issued an order, dated September 14, 2012, granting ARG's motion for summary judgment and set forth his reasons in a written decision. Although the judge found dismissal pursuant to Rule 4:6-2(e) inappropriate, he did find that summary judgment was proper. Focusing on Paragraphs 7(f) and 9(b) of the Note, he stated,

When read in full, the terms of the Note unambiguously bar [Entin's] ability to bring this action while there is outstanding Senior Indebtedness, unless [Entin] has obtained [ARG's] permission. [Entin] asserts that the proviso in Paragraph 7(h)[3] mandates that Paragraph 9(b) control when examining [ARG's] default and thus provides plaintiff with this right to sue. However, nothing in Paragraph 9(b) negates the language in Paragraph 7(f)(iii). . . . Paragraph 9(b) simply provides that in the event of a default, [Entin] may declare all unpaid principal and interest due and payable.

This section does not provide [Entin] with the right to seek legal action against [ARG] in direct defiance of the language in Paragraph 7(f)(iii). Rather the proviso in 9(b) is limited to a right to institute a collection action in circumstances in which there is the "occurrence of an action or order for relief with respect to [ARG] under the Bankruptcy Code." This proviso is consistent with the conclusion of 7(f) which allows collection actions "if any proceedings as to insolvency, bankruptcy . . . shall have been commenced against [ARG] by the Senior Holder or any person other than [Entin]." These coordinated provisions ensure that [Entin] can commence collection proceedings where there is a bankruptcy or any other insolvency proceeding but excludes other proceedings where [ARG] is still a viable entity.

They are therefore consistent with the notion that [Entin] may establish the right to relief at any time in the event of any default, but [Entin] cannot proceed with a collection action since such action could affect any Senior Holder. Notwithstanding [Entin's] assertions, these provisions are also consistent with 7(d) which likewise ensures that Holders['] interests may be protected in any insolvency type of proceeding or in a bankruptcy setting where all assets have to be considered.[4]

[Emphasis added.]

Citing the well-established principle that "the language of an unambiguous contract must be given its plain meaning and no further interpretation is necessary," see Kampf v. Franklin Life Ins. Co., 33 N.J. 36, 43 (1960), Judge Buchsbaum stated, "the plain language of Paragraph 7(f)(iii) limits [Entin's] ability to sue when there is outstanding Senior Indebtedness. There is no ambiguity in the language and no need to look further into the intent of the parties for purposes of summary judgment."

In conclusion, the judge stated,

Given that [the] limitation [of Paragraph 7(f)(iii)] applies, the Note demands that [Entin] either establish the absence of all outstanding Senior Indebtedness or seek permission from [ARG] before bringing a legal cause of action. Since [Entin] has failed to complete either requirement, and in fact cannot complete the first requirement since there exists outstanding Senior Indebtedness, it is barred from bringing forth this claim under the plain language of the contract.

Entin filed a motion for reconsideration of the September 14 order, which was denied. In its appeal, Entin argues that the trial court erred in finding the Agreement provided for "complete" subordination; that the alleged subordination is not enforceable; and that the trial court further erred in: (1) creating a promissory note without a definite time for payment, (2) its interpretation of the plain meaning of the language in the Agreement, (3) not considering the intent, circumstances, and subsequent acts of the parties, (4) applying the summary judgment standard, and (5) granting summary judgment before discovery was conducted.

In reviewing an order granting summary judgment, we apply the same standard as the trial court, viewing the facts in the light most favorable to the non-moving party, Bauer v. Nesbitt, 198 N.J. 601, 605 n.1 (2009) (citing R. 4:46-2(c); Brill v. Guardian Life Ins. Co. of Am., 142 N.J. 520, 540 (1995)), to determine whether the record demonstrates that "there is no genuine issue as to any material fact challenged and that the moving party is entitled to a judgment or order as a matter of law." Burnett v. Gloucester Cty. Bd. of Chosen Freeholders, 409 N.J. Super. 219, 228 (App. Div. 2009) (quoting R. 4:46-2(c)). Because the interpretation of the agreement here presents a question of law, we apply a de novo standard of review in which the trial court's determination is accorded no deference. Selective Ins. Co. of Am. v. Hudson E. Pain Mgmt. Osteopathic Med. & Physical Therapy, 210 N.J. 597, 605 (2012) (citing Kieffer v. Best Buy, 205 N.J. 213, 222-23 (2011)); see also Fastenberg v. Prudential Ins. Co. of Am., 309 N.J. Super. 415, 420 (App. Div. 1998) ("Interpretation and construction of a contract is a matter of law for the court subject to de novo review.").

When a court construes a contract, its "role is to consider what is written in the context of the circumstances at the time of drafting and to apply a rational meaning in keeping with the expressed general purpose." Sachau v. Sachau, 206 N.J. 1, 5-6 (2011) (internal quotation marks omitted). "If contract terms are unspecific or vague, extrinsic evidence may be used to shed light on the mutual understanding of the parties[,]" Hall v. Bd. of Educ., 125 N.J. 299, 305 (1991); however, in deciding whether contract terms are ambiguous, "[t]he court should examine the document as a whole and . . . should not torture the language of [a contract] to create ambiguity." Schor v. FMS Fin. Corp., 357 N.J. Super. 185, 191 (App. Div. 2002) (second alteration in original) (internal citations and quotation marks omitted). "Absent ambiguity, the intention of the parties is to be ascertained by the language of the contract." CSFB 2001-CP-4 Princeton Park Corporate Ctr., LLC v. SB Rental I, LLC, 410 N.J. Super. 114, 120 (App. Div. 2009); see also E. Brunswick Sewerage Auth. v. E. Mill Assocs., 365 N.J. Super. 120, 125 (App. Div. 2004) (stating that if the "terms of a contract are clear, the court must enforce them as written").

In interpreting the subordination agreement here, we are informed by the basic and "simple" concept of a subordination agreement:

It is the subordination of the right to receive payment of certain indebtedness (the subordinated debt) to the prior payment of certain other indebtedness (the senior debt) of the same debtor. . . . [I]n the circumstances specified in the subordination agreement, the senior debt must be paid in full before payment may be made on the subordinated debt and retained by the subordinating creditor.

[Dee Martin Calligar, Subordination Agreements, 70 Yale L.J. 376, 376 (1961)]

Entin argues that Judge Buchsbaum erred in interpreting the agreement here because the Note was no more than an "inchoate" subordination agreement in which the subordination provision does not become operative until a specific event, specified in the agreement, such as bankruptcy or insolvency, triggers the subordination. See UPIC & Co. v. Kinder-Care Learning Ctrs., 793 F. Supp. 448, 452 n.4 (S.D.N.Y. 1992); see also Calligar, supra, 70 Yale L.J. at 377-78. Entin distinguishes the agreement here from a "complete" subordination agreement, in which "no payment of principal or interest on the subordinated debt is permitted so long as the debtor is obligated to the senior creditor, or so long as a specifically identified senior debt remains unpaid."5 See UPIC, supra, 793 F. Supp. at 452 n.4.

To maintain this argument, Entin contends that the first sentence of Paragraph 7(a), stating, "[Entin] agrees that the indebtedness evidenced by [the] Note shall be subordinate and subject in right of payment, to the extent and in the manner set forth herein, to the prior payment in full of the Senior Indebtedness[,]" is "not a substantive subordination provision but only [a signal] that a subordination trigger exists in the document." Entin states that subordination is applicable only in the circumstances described in the "trigger paragraph," Paragraph 7(d) (upon dissolution, winding up, etc. related to bankruptcy, insolvency, etc.).

ARG agrees that the Note is "inchoate," as it permitted ARG to make payments to Entin according to the schedule in the Note while senior indebtedness was outstanding.6 However, ARG argues that, pursuant to Paragraphs 7(a) and 7(f)(iii) of the Note, "Entin is not entitled to bring this action while Senior Indebtedness remains outstanding."

Paragraph 7(f)(iii) expressly and unambiguously provides that "while any Senior Indebtedness is outstanding, [Entin] shall not, unless permitted by [ARG], . . . commence or maintain any action, suit or any other legal or equitable proceeding against [ARG] or any of [ARG's] officers or directors." No other provisions of the Note invalidate this language. As Judge Buchsbaum stated, the clear and unambiguous language in the Note requires Entin to show either that there is no outstanding Senior Indebtedness or that ARG has consented to suit before it may bring a legal cause of action. It is undisputed that neither of those conditions exists here. Therefore, the clear language of the Note bars Entin from bringing this action.

This interpretation is supported by the context provided by other provisions in the agreement. The subsections of Paragraph 7 clearly state Entin's right to repayment, though enforceable, is subordinate to that of ARG's senior creditors. If the subordination provisions were triggered only in the event of bankruptcy or insolvency, then only Paragraph 7(d) would be necessary, and the rest of the subordination provisions would be superfluous. Further, if, as Entin argues, Paragraph 9 superseded Paragraph 7, the collection actions contemplated and prohibited by Paragraph 7 would be appropriate only in the event of a default. Accordingly, as the trial court stated, when Paragraph 7 and Paragraph 9 are read in tandem, they provide that Entin "may establish the right to relief . . . in the event of any default, but . . . cannot proceed with a collection action since such action could affect any Senior Holder." It would render the subordination provisions of the Note meaningless if Entin, a junior creditor, could bring an action to collect on the Note prior to the satisfaction of Senior Indebtedness, in effect subordinating the rights of senior creditors to its own. Moreover, we cannot overlook the utter futility of allowing Entin to receive payments before all Senior Indebtedness is paid. Pursuant to Paragraph 7(b), all such payments would be "held in trust for the benefit of the Senior Holders and . . . paid over or delivered to the Senior Holders for application to the payment in full of all Senior Indebtedness remaining unpaid to the extent necessary to give effect to the subordination provisions contained in [the] Note."

Entin's remaining arguments lack sufficient merit to warrant discussion in a written opinion. R. 2:11-3(e)(1)(E).

1 In its notice of appeal, Entin stated it was also appealing from the denial of its motion for reconsideration. However, because Entin did not address the motion for reconsideration in its merits brief, this issue is deemed waived. See Drinker

Biddle & Reath LLP v. N.J. Dep't of Law & Pub. Safety, 421 N.J. Super. 489, 496 n.5 (App. Div. 2011); Pressler & Verniero, Current N.J. Court Rules, comment 4 on R. 2:6-2 (2014).

2 Pursuant to Paragraph 7(b) of the Note, if Entin received payment before all Senior Indebtedness is paid, all such payments would be "held in trust for the benefit of the Senior Holders and . . . paid over or delivered to the Senior Holders for application to the payment in full of all Senior Indebtedness remaining unpaid to the extent necessary to give effect to the subordination provisions contained in [the] Note."

3 Paragraph 7(h) provides, "The subordination provisions of this Note are intended solely for the purpose of defining the relative rights against [ARG], on the one hand, and the Senior Holders, on the other hand. Nothing contained herein shall (i) impair, as between [ARG] and [Entin], the obligation of [ARG] to pay the principal of or interest on this Note as and when the same shall become due and payable in accordance with the terms thereof, or (ii) otherwise affect the relative rights against [ARG] or the creditors of [ARG] (other than the Senior Holders)." (Emphasis added).

4 Paragraph 7(d) states, "In the event of any payment or distribution of assets of [ARG] . . . upon the dissolution, winding up or total or partial liquidation or reorganization, readjustment, arrangement or similar proceeding relating to [ARG] or its property, whether voluntary or involuntary or in bankruptcy, insolvency, receivership, arrangement or similar proceedings . . . (i) all amounts owing on account of the Senior Indebtedness shall first be paid in full before any payment of amounts due hereunder is made; and (ii) to the extent permitted by applicable law, any payment of amounts due hereunder to which [Entin] would be entitled except for the provisions hereof, shall be paid or delivered by the trustee in bankruptcy . . . directly to the Senior Holders for application to the payment of the Senior Indebtedness in accordance with clause (i) above, after giving effect to any concurrent payment or distribution or provision therefor to the Senior Holders in respect of such Senior Indebtedness."

5 "When subordination is 'inchoate,' payment of the subordinated debt is not restricted unless and until the triggering event occurs. In contrast, a 'complete' subordination permits no payment to be made on the subordinated debt at any time while the senior debt remains outstanding. In other words, a 'complete' subordination is effective immediately." UPIC, supra, 793 F. Supp. at 452 n.4.

6

Paragraph 7(h) states,

Nothing contained herein shall (i) impair, as between [ARG] and [Entin], the obligation of [ARG] to pay the principal of or interest on this Note as and when the same shall become due and payable in accordance with the terms thereof, or (ii) otherwise affect the relative rights against [ARG] of [Entin.]