HCG Mezzanine Dev. Fund, L.P. v Jreck Holdings, LLC

[*1] HCG Mezzanine Dev. Fund, L.P. v Jreck Holdings, LLC 2012 NY Slip Op 52072(U) Decided on October 26, 2012 Supreme Court, New York County Kornreich, J. Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431. This opinion is uncorrected and will not be published in the printed Official Reports.

Decided on October 26, 2012
Supreme Court, New York County

HCG Mezzanine Development Fund, L.P., Plaintiff,

against

Jreck Holdings, LLC, JRECK OPERATING COMPANY, LLC, JRECK FRANCHISING COMPANY, LLC, CHRISTOPHER SWARTZ, and ERIC T. SWARTZ AS TRUSTEE OF THE SWARTZ FAMILY TRUST u.i.d. January 1, 1999, Defendants.



652797/2011



Bleakley Platt & Schmidt, LLP for the plaintiff.

Sugarman Law Firm, LLP for the defendants.

Shirley Werner Kornreich, J.

Plaintiff HCG Mezzanine Development Fund, L.P. (HCG) moves, pursuant to CPLR 3213, for summary judgment in lieu of complaint against defendants Jreck Holdings, LLC (Jreck Holdings), Jreck Operating Company, LLC (Jreck Operating), Jreck Franchising Company, LLC (Jreck Franchising) (collectively, Jreck Defendants), Christopher Swartz (Swartz), and the Swartz Family Trust. By Order dated December 22, 2011, the court stayed the action against and severed out the Swartz Family Trust due to its bankruptcy filing in Florida. The action was continued as to the remaining defendants.

HCG seeks entry of judgment against the Jreck Defendants, jointly and severally, in the amount of $754,592.54, plus accruing interest at the rate of 15% from October 7, 2011, to the date of the final payment, and reasonable attorneys' fees. HCG also seeks judgment against Swartz and the Jreck Defendants, jointly and severally, in the amount of $163,658.51, plus accruing interest at the rate of 15% from October 7, 2011, to the date of the final payment, and reasonable attorneys' fees. HCG's motion is granted in part and denied in part for the reasons discussed below.

I.Background

A.The Parties

HCG is a Delaware limited partnership, and its General Partner is HCG Development Fund LLC. Affidavit of James W. Donaghy (Donaghy Aff.) ¶ 5.[FN1] Jreck Holdings is a franchiser and operator of Jreck Subs, a chain of sandwich restaurants. Affidavit of Swartz (Swartz Aff.) ¶ 5; Exh. A (operating agreement).[FN2] Jreck Operating and Jreck Franchising are subsidiaries of [*2]Jreck Holdings. Id. According to Swartz, the Chief Executive Officer of Jreck Holdings and President of the Jreck subsidiaries, all of the parties are investors in the Jreck brand of fast food products and services. HCG is an affiliate of Holding Capital Group, Inc. (Capital Group), also an investor in the Jreck brand.

B.Promissory Notes, Guarantees and Security Agreements

Note 1

On or about January 7, 2009, Jreck Holdings executed and delivered a $500,000 promissory note (Note 1) in favor of HCG. Donaghy Aff., ¶ 9 & Exh. A. Under Note 1, Jreck Holdings agreed to pay HCG 12% interest per year, commencing January 7, 2009, payable in monthly installments of $5,000, with a maturity date of December 31, 2013. Note 1 had an acceleration clause, which in the event of default, permitted HCG to demand the principle and interest due, and increase the interest rate on the principal balance to 15% from the date of the default. Id.

Note 2

On or about July 1, 2010, Jreck Holdings executed and delivered a $60,000 promissory

note (Note 2) in favor of HCG. Donaghy Aff., ¶ 20 & Exh. E. Note 2 was identical to Note 1

with respect to interest and default provisions. The first payment was due on August 15, 2010, and the maturity date was December 31, 2010.

Note 3

On or about July 28, 2010, Jreck Holdings executed and delivered a $79,000 promissory note (Note 3) in favor of HCG. Donaghy Aff., ¶ 32 & Ex I. Note 3 was identical to Note 1 and Note 2 with respect to interest and default provisions. Id. Like Note 2, the first payment on Note 3 was due on August 15, 2010, and the maturity date was December 31, 2010.

Guarantees

Simultaneously with the execution of Note 1, Jreck Operating executed a Subsidiary Guaranty, "irrevocably, absolutely and unconditionally" guaranteeing "full and prompt payment of all obligations of Jreck Holdings pursuant to the terms of [Note 1]...including all fees, expenses and reasonable attorneys' fees incurred in connection with any suit...to enforce or protect rights of HCG...." Donaghy Aff. ¶¶ 18-19 & Exh. C. The guaranty included a waiver of all defenses. In addition, it explicitly precluded any amendment, waiver, modification, discharge or termination of, or consent to any departure by the guarantor, "unless in writing signed by [the] Guaranteed Party." Id. §§ 3, 10.

Further, with the execution of Note 2, Swartz executed a personal guaranty in which he "personally and unconditionally guaranteed the performance of all of Jreck Holdings' obligations under [Note 2]...." Donaghy Aff. , ¶ 29 & Exh. G. The terms were the same as those in the Jreck Operating Guaranty. Likewise, with the execution of Note 3, Swartz executed a personal guaranty, in which he "personally and unconditionally guaranteed the performance of all of Jreck Holdings' obligations under [Note 2] and [Note 3]." Donaghy Aff., ¶ 39. Also, concurrent with the third note execution, Jreck Operating and Jreck Franchising each executed subsidiary guarantees of Jreck Holdings' performance under all three notes.

Pledge and Security Agreements

Jreck Holdings executed a Loan, Pledge and Security Agreement (Pledge Agreement)

securing its performance under Note 1. Donaghy Aff. ¶¶ 14-15 & Ex. B. The Pledge Agreement granted HCG a security interest in certain collateral listed in Schedule A, including, inter alia, all accounts, all goods and equipment, all receivables, all notes, all chattel paper, and all shares of Jreck Franchising held by Jreck Holdings. The Agreement was amended to include Notes 2 and 3. Ex. F (First Amended Pledge Agreement), Exh. J (Second Amended Pledge Agreement).

Jreck Operating executed a Subsidiary Security Agreement securing its Subsidiary Guaranty of Note 1. Ex. D. Collateral for this agreement was listed in Schedule A.

C.Payment and Default

Jreck Holdings made payments on Note 1 until January 2010. Donaghy Aff., ¶ 45. [*3]Payments ceased after April 2010, but began again in 2011in an amount less than $5,000. Id. Jreck Holdings never made a payment on Note 2and paid no interest on Note 3. Donaghy Aff.¶ 46. & Exh. Q. The notes provided that the failure to pay constituted an event of default, and by written notice dated September 15, 2011, HCG advised Jreck Holdings of the defaults and acceleration of debt.[FN3] Donaghy Aff. ¶¶ 48-49. HCG sent similar notices to the guarantors of the notes. Donaghy Aff. ¶¶ 50-52. The debt remains uncured. Donaghy Aff. ¶¶ 49-52.

D.Defendants' Opposition

Swartz confirms that the notes at issue were properly executed and acknowledges that they are in arrears. Swartz Aff. ¶¶ 3, 7. However, he attests that HCG: had an active presence in the development of the business; was effectively party to every decision to forestall payment on the notes; and instructed Swartz to pay business consultants and hire a Chief Financial Officer rather than pay off the indebtedness. Swartz Aff. ¶¶ 5, 7.

The Jreck sub shops performed poorly and Jreck Holdings incurred substantial losses. Stores that lost money were shut, and others were sold to franchisees. ¶ 5. Swartz explains that in June 2011, he advised HCG that Jreck Holdings would begin paying down the debt. The company made payments in July, but HCG insisted the payments go toward the short term notes. ¶ 8. In September 2011, Swartz was told HCG wanted to replace him as President of Jreck Holdings. ¶ 9. In response, Swartz advised those at the meeting that he would like to buy out any interest plaintiff had in Jreck Holdings. Shortly after, HCG filed this motion for summary judgment in lieu of complaint. Id.

II.Discussion

CPLR 3213 permits a plaintiff to move for summary judgment in lieu of complaint upon an instrument for payment of money only. A guaranty has been held to be an instrument for the payment of money only. Mfrs. Hanover Trust Co. v Green, 95 AD2d 737, 737 (1st Dept 1983).A prima facie case for summary judgement in lieu of complaint is established by proof of an outstanding note and a failure to make payments called for therein. Warburg, Pincus Equity Partners, L.P. v O'Neill, 11 AD3d 327 (1st Dept 2004). Although an instrument is ineligible for summary judgment under CPLR 3213 if extrinsic evidence is required, "simple proof of nonpayment or similar de minis deviation from the face of the document" does not disqualify an instrument. Lawrence v Kennedy, 95 AD3d 955, 957 (2d Dept 2012); see Chase Manhattan Bank, N.A. v Marcovitz, 56 AD2d 763 (1st Dept 1977) (instrument with provision requiring computation of "costs, expenses, and attorneys' fees" held eligible for CPLR 3213 accelerated judgment). Moreover, merely because an instrument is secured by collateral does not necessarily mean CPLR 3213 is unavailable. See Smith v Shields Sales Corp., 22 AD3d 942, 944 (3d Dept 2005) (". . . references to the other agreements between [the parties] do not qualify or alter [their] obligations to pay on the note[s], nor do references in the note[s] to those agreements."); Solanki v Pandya, 269 AD2d 189, 189 (1st Dept 2000) ("[t]hat the note was secured by a 100% share in a business owned by defendant does not alter its essential character as an instrument for the payment of money only . . ."). So long as an instrument creates an unambiguous and unconditional obligation to pay a specified sum, such instrument can serve as the basis for invoking CPLR 3213. See Smith, supra at 944.

Once a plaintiff has established a prima facie case under CPLR 3213, he is entitled to summary judgment, unless defendant raises a triable issue of fact. See Northport Car Wash, Inc. v Northport Car Care, LLC, 52 AD3d 794 (2d Dept 2008). In the event that defendant does raise a defense, it must be more than conclusory or speculative. See Gateway State Bank v Shangri-La Private Club for Women, 113 AD2d 791, 792 (2d Dept 1985).

Here, HCG has established a prima facie case. It has submitted proof of the three notes, the three guarantees and non-payment. Indeed, defendants do not contest the existence of the [*4]instruments or that money is owed on those instruments.[FN4] See Swartz Aff. at 1. Instead, defendants argue that summary judgment in lieu of complaint is improper because plaintiff also requests enforcement of the Pledge and Security Agreements and delivery of the collateral the shares of Jreck Franchising. However, the additional security obligation does not negate the obligation to pay under the notes. See Solanki, supra at 189. As observed in Solanki, although the notes are secured by stock, the obligation to pay on the notes and the right to enforce the security interest are independent of each other. HCG may use CPLR 3213 to enforce the Guarantees and the Note and, then, if payment is still not forthcoming, HCG may move separately against the collateral.[FN5]

Defendants next argue that issues of material fact exist. They contend that HCG somehow relieved defendants of their payment obligations under the Notes and Guarantees by influencing Swartz's decision to repay the debt. Swartz Aff., at 2. Even if established this argument fails. Defendants agreed in writing that any alteration, waiver, discharge or modification of the terms of their agreements had to be in writing. Exs. A - O. This clause of the contract required a signed writing to modify the agreements. See GOL 15-301(1); Rose v Spa Realty Assocs., 42 NY2d 338 (1977). Defendants have not presented a writing to support their claim of modification.

There are exceptions to GOL 15-301(1), but none apply here. Those exceptions are addressed by the Court in Rose, id. Thus, "[p]artial performance of an oral agreement to modify a written contract, if unequivocally referable to the modification, avoids the [GOL 15-301(1)] statutory requirement of a writing." [emphasis added] Rose at 341. Additionally, "when a party's conduct induces another's significant and substantial reliance on the agreement to modify, albeit oral, that party may be estopped form disputing the modification notwithstanding the statute." Id. Alternatively, a party that "has induced another's significant and substantial reliance upon an oral modification . . ." may be estopped from asserting that the modification must be in writing. Id. "Comparable to the requirement that partial performance be unequivocally referable to the oral modification, so, too, conduct relied upon to establish estoppel must not otherwise be compatible with the agreement as written." Id. at 344; see also Anostario v Vicinanzo, 59 NY2d 662, 664 (1983)(discussing the comparable standard of unequivocally referable, "the actions alone must be unintelligible or at least extraordinary,' explainable only with reference to the oral agreement.")

Under each of the two aforementioned theories, there must be an oral statement showing some sort of change to the written agreement. See Chemical Bank v Sepler, 60 NY2d 289, n2 (1983)("In the absence of such oral notice, mere conduct is unavailing."). In Rose, all communications discussed had to do with the underlying transaction in the case, the development of the land. Id. at 344. Here, defendants allege that some relationship exists between HCG and Capital Group and through this relationship, HCG urged Jreck Holdings to utilize its funds to do things aside from paying the indebtedness. Specifically, defendants allege that, at some meeting, HCG wanted Jreck Holdings to hire certain consultants and an executive after being told of Swartz's wish to pay down the debt. Unlike the communications in Rose, this instruction to hire personnel was not relevant to the agreement to pay off the debt. It could, perhaps, be used to show there was a business relationship between the parties, but this oral communication fails to show that it was meant to modify, waive, or even affect the notes. As such, it cannot be the basis for circumventing the writing requirement. [*5]

Even in the event that there was an oral communication, this defense would fail under a partial performance theory. Not only must an oral communication be partially-performed to circumvent the writing requirement, but the partial performance must be "unequivocally referable" to the oral modification. Rose, supra at 343. "Unequivocally referable" implies that the modification is incompatible with anything in the written agreement. Id. In Rose, in a contract with several variable options, the parties used an option that was not listed. Id. The court there found that this was unequivocally referable to the oral modification as it was not compatible with any option. Id. Here, the conduct defendants point to are typical of a company doing business. Since the conduct was consistent with the instruments as written, defendants cannot use it to circumvent the writing requirement.

Nor is an estoppel theory demonstrated here. The estoppel defense requires that the party to be estopped must have "induced another's significant and substantial reliance upon an oral modification. . . ." Id. In Rose, the Court found that estoppel was appropriate as the party to be estopped was actively working within the new modifications and planning with them in mind. Id. Here, nothing suggests that HCG had begun to work under an understanding of changed terms on the notes. Further, as noted above, HCG's actions were compatible with the agreements as written and not explainable only with reference to the alleged oral modification. Hence, defendants cannot use the estoppel theory to circumvent the writings requirement. In sum, defendants have failed to establish a triable issue of fact. Accordingly, it is

ORDERED that the motion for summary judgment in lieu of complaint by HCG

Mezzanine Development Fund, L.P. is granted as to payment on the promissory notes and the guarantees in the amounts of $754,592.54 with interest accruing at the rate of 15% from October 7, 2011 as to Jreck Holdings, LLC, Jreck Operating Company, LLC, and Jreck Franchising, LLC, and $163,658.51 with interest accruing at the rate of 15% from October 7, 2011 as to Christopher Swartz, and denied as to enforcement of the security agreements; and it is further

ORDERED that the amount of reasonable attorney's fees and costs due under the notes and guarantees, is referred to a Special Referee to hear and report with recommendations, except that, in the event of and upon filing of a stipulation of the parties, as permitted by CPLR 4317, the Special Referee, or another person designated by the parties to serve as referee, shall determine the aforesaid issue; and it is further

ORDERED that a copy of this order with notice of entry shall be served on the Clerk of the Reference Part (Room 119) to arrange for a date for the reference to a Special Referee and the Clerk shall notify all parties, including defendants, of the date of the hearing; and it is further

ORDERED that the Clerk shall enter judgment accordingly.

Dated: October 26, 2012ENTER:

_____________________________

J.S.C. Footnotes

Footnote 1:

Donaghy attests that he is the Vice President of HCG Development Fund LLC. The Loan, Pledge and Security Agreement between HCG and Jreck Holdings, Ex. B, is executed by the Managing Director of "HCG Mezzanine Development, LLC [as] General Partner For: HCG Mezzanine Development Fund, L.P."

Footnote 2:

Swartz also asserts that HCG is an "alter ego" of Holding Capital Group, Inc., but provides no supporting facts. ¶5.

Footnote 3:

Plaintiff also mentions that stock is to be transferred upon a default in certain situations. This, however, is not properly sought in a motion pursuant to CPLR 3213.

Footnote 4:HCG also is seeking attorney's fees and collection costs in the amount of $25,000, or in the alternative, for a court ordered hearing to determine such costs.

Footnote 5:It is true that HCG had asked for foreclosure on the shares of Jreck Franchising in its motion. Donaghy Aff. at 17. The court cannot grant that form of relief in a motion pursuant to CPLR 3213. However, the mere request of improper relief in addition to seeking otherwise proper CPLR relief should not defeat the whole motion.