Meijer et al v. Thompson, No. 1:2008cv00673 - Document 66 (E.D. Va. 2009)
Court Description: MEMORANDUM OPINION Re: the Parties' cross-motions for summary judgment and the pltfs motion to dismiss the deft's indemnity counterclaim and corresponding defenses. Signed by District Judge Leonie M. Brinkema on 09/04/09. (pmil)
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IN THE UNITED STATES DISTRICT COURT FOR T EASTERN DISTRICT OF VIRGINIA Alexandria Division ELZE T. MEIJER and MARCEL WINDT, ) solely in their capacity as CLERK, U.S. DISTRICT COURT ) Trustees ) in Bankruptcy for KPNQwest, N.V., a Dutch corporation, and Global Telesystems Europe Holdings, B.V., a Dutch corporation, ALEXANDRIA. VIRGINIA ) ) ) l:08cv673 (LMB/TRJ) ) ) ) ) Plaintiffs, v. ) ) H. BRIAN THOMPSON ) Defendant. ) ) MEMORANDUM OPINION" Plaintiffs Elze T. Meijer and Marcel Windt, capacity as bankruptcy trustees, defendant H. note. Brian Thompson, have brought this action against seeking collection of a promissory Before the Court are the parties' summary judgment and the plaintiffs' defendant's For discussed below, for motion to dismiss the plaintiffs' defendant's motion will be denied, entered in the plaintiffs' motions will be and judgment will be favor. I. A. cross-motions indemnity counterclaim and corresponding defenses. the reasons granted, in their Background The Note. On April a resident 1, 1999, defendant H. of Alexandria, ("Employment Agreement") Virginia, to serve as Brian Thompson ("Thompson"), entered into a contract Chairman and CEO of Global TeleSystems Agreement, Group, Inc. ("GTS"). As part of the Employment Thompson agreed to enter into a separate contract purchase $20 million of stock in GTS. $20 million to GTS in cash. Thompson paid half of The other half of the Note on April 6, 1999. repayment of The Note required that from GTS,2 (2) together withTaTiT Thompson's "Termination Date," "Date of Termination" the occurrence of certain acceleration conditions,3 or (3) executed, April i.e.. the loan. be paid on the (1) Thompson never which were held as the principaT, accrued and unpaid interest, the earliest of in the Thompson executed Note f 7. actually received the shares of stock, defined as {"Note") It was secured by the shares Thompson purchased with the loan proceeds. security pending his the the stock purchase was covered by a full recourse1 promissory note amount of $10 million from Thompson to GTS. to six years from the date the Note was 6, 2005. Id. I 1. The Note is governed by Employment Agreement described the Note as "full recourse," Emp. Agr. § 5(d)(ii), and the Note itself contains no restrictions on GTS's ability to collect when payment is due. Thompson also testified that he understood that the Note was full recourse. Thompson Dep. 75:11-13, 80:13-20. 2"Date of Termination" is defined as the date of Thompson's actual termination. Emp. Agr. f 1(m). "Termination Date" refers to the earliest of three possible maturity dates for the Note, one of which is the "Date of Termination." Note 3[ 1. 3These conditions included, among others, Thompson's failure to make an interest payment, followed by failure to cure such lack of payment within 5 business days of written notice. Note 9[ 3 (a) . -2- Virginia law. Id. SI 20. The Note also mandated that no waiver or modification of the Note would be valid or binding forth in a writing specifically referring to by a duly authorized officer of extent specifically set B. [GTS], forth therein." GTS's stock plummeted. terminate Thompson. Id. employment was Thompson and GTS Agreement 5 12. In the except relevant to Agreement, this fall of 2000, 2000, entered into a General Sev. under which "supercede[d] to 2000, all prior the subject regarding stock options not Agr. S[ 10. which is governed by Delaware law, employment, to Thompson and GTS On December 4, Parties with respect litigation. decided Release and Severance which for certain matters terminated Thompson's GTS ("Preliminary Agreement") ("Severance Agreement"), matter," the value of GTS's throughout the year terminated immediately. agreements between the g[ However, On September 18, entered into an agreement id. this Note and signed The General Release and Severance Agreement. stock would increase in value. his set and then only to the Both Thompson and GTS anticipated that 2000, "unless The Severance id. f 24, effective September 18, 2000, 1. A number of provisions of relevant to this case. Loan Secured by Stock"), the Severance Agreement are These include Paragraph 5, which specifically mandated [t]hat certain Promissory Note made April payable to ("Repayment of the order of the Company by -3- 6, 1999 [Thompson] and . . . shall continue to be enforceable accordance with its (a) terms in all except waive any provision of that respects [GTS] in agrees to such Note that requires [Thompson] to repay such Note solely by virtue and at the time of his termination of employment with [GTS] hereunder and (b) postpone the due date of the interest payment otherwise due on April 6, 2000 until December 1, 2000[,] and Paragraph 9 ("Release of Claims by the Company"), which released Thompson from any and all claims, debts, demands, accounts, judgments, rights, causes of action, equitable relief, damages, costs, charges, complaints, obligations, promises, agreements, controversies, suits, expenses, compensation, responsibility and liability of every kind and character whatsoever . . . which [GTS] has or may have had against [Thompson] limitation any and all [Thompson's] claims . . including without arising out employment with [GTS] thereof provided, or with respect status at any time as a holder of or the of termination to [Thompson's] any securities of [GTS]. This release bound GTS and any of entities. Id. SI 9. Paragraph 9 above release only two arising from criminal assumed under a present, of claims: claims activity by Thompson, 6 and 7, or future specifically excluded from the and relating to or "any obligation this Agreement by any Party hereto." Under Paragraphs services types its past, Id. Thompson agreed to provide to GTS pursuant to two separate incorporated agreements, "Consulting Agreement" and an "Investment Banking Agreement." Under the Consulting Agreement, certain consulting services him in an amount equal to Thompson agreed to provide to GTS, which agreed to compensate "the interest payments due under the -4- xNote' 2005. (as defined in the Cons. Agr. f 3. [Severance Agreement])'' until April 6, Under the Investment Banking Agreement, the parties agreed that if GTS entered into a "strategic transaction," transaction, such as a sale, merger, buyout, within two years of Thompson's or similar termination, it would pay Thompson $3.5 million plus $300,000 for each dollar by which the per-share price of GTS's stock exceeded $12 at the time of the strategic transaction. Inv. Bank. Agr. g[S[ 3 (a), 5. Thompson's compensation from the Investment Banking Agreement would be applied "to reduce any balance of principal outstanding on the 'Note' (as defined in the Severance Agreement)" with any remainder to be paid in cash. Id. f 5. Obviously, share price of GTS's stock were high enough, if the per- the balance of the Note could be reduced to nothing. Lastly, Paragraph 20 of the Severance Agreement stated that there were "no representations, promises, [GTS] and [Thompson] or agreements between other than those expressly set forth herein," and that Thompson "had an adequate opportunity to consult with competent legal counsel of his choosing" while negotiating and executing the Severance Agreement. Sev. Agr. SI 20. C. Bankruptcy of GTS and Acquisition of Note. By November 2001, November 11, 2001, GTS was about to declare bankruptcy. On GTS sold the Note and the right of repayment -5- to Global TeleSystems Dutch company, for Europe Holdings N.V. $5.4 million. All of ("GTS Holdings"), the shares of a GTS Holdings were later acquired by KPNQwest N.V. ("KPNQwest")/ another Dutch company. GTS On November bankruptcy. KPNQwest May 31, and August 2002 and GTS 2, bankruptcy trustees On July 28, Thompson, 2001, Holdings were 2002, Elze Meijer and Marcel Windt 14, declared bankrupt on respectively. ("the Trustees"), The plaintiffs, were appointed as for KPNQwest and GTS Holdings. 2003, counsel for the Trustees sent a notice to informing him that because he had defaulted by failing to pay any interest on the Noter~£n~~2TODTO, the Note's acceleration clause, principal filed for he was and all accrued interest. under required to pay the Thompson objected to demand on August 28, 2003 predicates . satisfied . [because] . the claims Consulting Agreement and the became an integral part of letter arguing that the acceleration and demand have not been for by a 2001,ancT20~CF2, of Mr. Thompson under the [Investment Banking] the Note amounts accruing or due hereunder." . "the . . Agreement and have satisfied any On May 7, 2008, the Trustees sent Thompson a second notice of default.4 4After the initial exchange of letters in 2003, the Trustees sent two follow-up letters on December 18, 2 003 and February 19, 2004, and the parties had some limited conversations during that time frame. See Def.'s Mot. S.J. Exs. 42, 43. The record is silent as to any other communications until 2008. -6- On June 30, 2008, the Trustees breach of promissory note, filed this for demanding damages of not less than $6.5 million, plus interest and attorneys' fees.6 have since conceded that they are owed at most principal, lawsuit5 The Trustees $6.5 million in and that they are not entitled to any interest before the Note's due date, April 6, 2005.7 See PL's Mem. S.J. 30. Thompson filed a Motion to Dismiss for Failure to State a Claim, which was denied (Dkt. No. 21), and a motion to add a counterclaim and defense for indemnity, No. 40). which was granted {Dkt Both parties have now moved for summary judgment on whether Thompson is liable under the Note, and the Trustees have moved to dismiss Thompson's indemnity counterclaim and defense. II. A. Cross-Motions for Summary judgment. Standard of Review. Summary judgment is appropriate when, on the basis of the 5The matter is in federal court under diversity jurisdiction, as the amount in controversy well and the plaintiffs, Dutch citizens, defendant, a citizen of Virginia. are diverse exceeds $75,000, from the 6The Note requires Thompson to pay all collection costs, including reasonable attorney's fees, amounts . . . when due." Note f if he "fails to pay any 8. 7The Trustees concluded that the sale of GTS in bankruptcy qualified as a "strategic transaction" that resulted in the reduction of the principal owed on the Note by the minimum amount specified in the Investment Banking Agreement, $3.5 million. See Pis.' Mem. S.J. 3. They also concluded that Thompson satisfied his obligations under the Consulting Agreement, which entitled him to payments equivalent to any interest on the Note until it became due. See id. n. 2. -7- pleadings and evidence, there is no genuine issue of material fact and the moving party is entitled to a of law. 56(c); See Fed. U.S. 317, most favorable Co. v. 322-23 R. Civ. P. (1986). judgment as Celotex Corp. v. a matter Catrett, 477 Evidence must be viewed in the light to the nonmoving party. Zenith Radio Corp.. 475 U.S. Matsushita Elec. 574, 587 (1986). Indus. The party opposing summary judgment may not rely on mere allegations or denials in its pleadings. nonmoving party must, depositions, designate specific for trial." colorable" answers "by to R. [its] Civ. showing 477 U.S. 477 that B. there at 324. 242, 249-50 Rather, is on file, a genuine Evidence is the or by the and admissions "not significantly probative" U.S. 56(e). own affidavits, overcome a summary judgment motion. Inc.. P. interrogatories, facts Celotex. or Fed. that is issue "merely insufficient Anderson v. to Liberty Lobby, (1986). Discussion. The Note at issue obligates Thompson to pay the principal upon the Termination Date, only issues, therefore, which has indisputably passed. are whether any of Thompson's The defenses to payment have merit. Thompson has argued, barred, personal a that alternatively, that the Note is time- the Severance Agreement released him from any obligation to repay the Note, failure of consideration, that the Note and that the Trustees -8- is void for cannot enforce the Note because they materially breached their own obligations. All of these arguments are affirmative defenses. Answer 5-8; see also Fed. limitations, defenses); 697, release, (E.D. Va. affirmative defense). prove them. 330, 336 v. 2006) 2006). P. 8(c)(1) Acstar Ins. (listing statute of Co.. 448 F. Supp. 2d {describing material breach as an Accordingly, See Monahan v. {Va. Civ. and failure of consideration as affirmative Centex Constr. 715-16 R. See Def.'s Am. Thompson bears the burden to Obici Med. Mom't Servs.. 628 For the reasons discussed below, S.E.2d the Court finds that Thompson has failed to meet that burden for any affirmative defense, obligation, and that the Note remains a vaTTd enforceable against Thompson. Accordingly, summary judgment will be granted to the Trustees. 1. Rule of Construction. The parties agree that the two key documents underlying this dispute are the Note and the Severance Agreement. argues that the Court should construe any ambiguities Severance Agreement in his proferentem. 513 favor pursuant in the to the canon of contra under which ambiguous contractual terms are construed against States. Thompson the drafter. F.3d 418, 423 Maersk Line. (4th Cir. Ltd. v. United 2008). The Trustees correctly argue that the rule of contra proferentem is inapplicable here. When an agreement negotiated and drafted by both parties, -9- is this rule does not apply. See Silicon Image. 2d 840, 850 indicates (E.D. Inc. Va. that GTS's Severance Agreement modifications, Brown, v. Genesis Microchip, 2003). Inc.. and integrating any mutually agreed-upon Alvin were involved in revising the termination in September 2000 until finalized in December. During this period, counsel, the Executive Compensation Department at drafts and negotiating changes over three months, Agreement was Supp. lawyers were responsible for drafting the Simpson Thacher & Bartlett LLP, Thompson's F. Although the evidence in the record it also shows that Thompson and his the head of 271 starting from the Severance See Brown Dep. 39:24-40:25. the parties exchanged at least seven drafts, and numerous changes were proposed and made to GTS's proposed language. See id. Finally, in signing the Severance Agreement, Thompson expressly represented that he "had an adequate opportunity to consult with competent legal counsel of his choosing." Sev. In short, Agr. f 20. Thompson was an experienced businessman, represented by an experienced lawyer. He "[did] not suffer from lack of legal sophistication or a relative lack of bargaining power, and ... it is clear that [the Severance Agreement] actually negotiated and jointly drafted." Superior Court. the Court 799 P.2d 1253, 1265 (Cal. AIU Ins. 1990). "need not go so far in protecting ambiguous or highly technical drafting." -10- Co. v. Accordingly, [Thompson] id. was from Thompson cannot claim shelter in the protection of a rule designed to protect an unsuspecting party who plays a little or no role in the drafting of contract. 2. Statute of Limitations. Although Thompson has because it is time-barred, mature until April regardless 6, argued that the Note is unenforceable the Court finds 2005, of whether it is that the Note did not and accordingly is not time-barred, characterized as a negotiable instrument or as a written contract. i. The Note limitation. Trustees, due date. is Governing Statute of Limitations. subject to one of two possible statutes of If it is a negotiable instrument, the statute of See Va. limitations Code Ann. negotiable instrument, § runs for six years 8.3A-118{a). as Thompson asserts, five year statute of limitations If it to run when the cause of action accrues. Ann. 8.01-246(2). June 30, 2008. Thus, limitations defense, 30, 2003 The complaint in this is not a subject to the See Va. action was which Code filed on it must have been due no earlier than June and no earlier than June 30, if it is a negotiable instrument. the Trustees' is from the for the Note to survive a statute of if it is a contract, matured in 2000, it for written contracts, begins § as argued by the when he was Thompson argues terminated. 2002 that the Note Under that position, action would be time-barred under either statute of -11- limitations. April 6, The Trustees 2005, argue that the Note became due on which would place the filing of this complaint well within either limitations period. ii. Contract Language. The Note specified that it was due on the earliest of alternative dates: GTS; (2) April 6, (1) the date of Thompson's termination from the occurrence of an acceleration condition; 2005. Note 1 1. Thompson's September that date, complaint would now be under Paragraph 5 of 2000. or (3) effective date of termination was this 18, three If the Note had matured on time-barred. the Severance Agreement, waive any provision of such Note that requires "[GTS] However, agree[d] [Thompson] to to repay such Note solely by virtue and at the time of his termination of employment with The parties dispute [GTS]." the effect of Paragraph 5. The Trustees argue that it modified the Note such that it was no longer due on the date of Thompson's of termination, i.e.. it eliminated the first the three alternative dates of the Note's maturity. Conversely, nwaive[d]" Thompson argues its right that under Paragraph 5, to collect payment GTS only on the date of Thompson's termination, but did not actually amend the maturity date, meaning that the Note matured, began running, on September The Trustees' argument 18, and the statute of limitations 2000. is persuasive. -12- Notwithstanding the word "waive," Paragraph 5 modified the Note. A waiver of a right to payment under a note is distinguishable from a modification or amendment of that note in that a waiver is a unilateral act, not require consideration, party's pleasure, does and can be withdrawn at the waiving whereas a modification is a bilateral act, requires consideration, and is binding. See David V. Snyder, Law of Contract and the Concept of Chancre: Public and Private Attempts and Estoppel, The Wis. L. to Regulate Modification. Rev. 607, 626-27 (1999). Waiver, 1999 Paragraph 5 was part of a bilateral contract signed by both parties, numerous obligations as consideration. Accordingly, free to withdraw the "waiver" at any time; binding modification to the Note, each of whom undertook rather, GTS was not it was a and not a unilateral act by GTS. Thompson's position relies primarily on the use of the word "waive," arguing that when a term has a definite legal significance, See Smith v. it is Smith. (citing Nve v. to be construed according to that meaning. 423 S.E.2d 851, Lovitt. 24 S.E. 345, 853 (Va. Ct. App. 346 (Va. 1896). 1992) However, this argument ignores the factors identified above that clearly indicate that this was not a waiver, Thompson's reliance on Carter v. 1890), is misplaced. In Carter, but a modification. Noland. 10 S.E. 605 (Va. which has been cited in Virginia -13- courts only once,8 the payee of a bond that was payable on demand, and had already been partially collected, endorsed the bond with a promise not to demand any further payment until a certain marble quarry was operating successfully. Supreme Court held that this did not for the maturity of a defense of waiver. Carter is immediately. that Carter, id. at In addition, the S.E. was merely at 605-06. The bond at issue in Carter was and therefore became due endorsement was a unilateral signed^onTy~by the payee. the payee's promise, matured, 10 605, "change or alter the period but merely provided the payor with distinguishable. payable on demand, promise, the bond," The Virginia AccbrdingTyT the court held necessarily made after the bond had "an engagement on the part of the obligee to postpone or defer the exercise of a right already accrued," did not change the bond's maturity date. Id. at 605. and The Note Thompson signed had not matured because when Thompson was terminated on September 18, 2000, bilateral Preliminary Agreement, "waive[] right Three months the parties entered into a under which GTS agreed to to repayment of $10M note on Date of Termination." later, under the Severance Agreement superseded the Preliminary Agreement), consideration, again agreed to postpone "See Nottingham v. (citing, Ackiss. and distinguishing, 57 S.E. Carter). -14- GTS, (which in exchange for the Note's due date. 592, 593 (Va. 1907) At no time had GTS's right to repayment ever "accrued." Moreover, the Severance Agreement was a binding obligation on both parties, not a mere promise by GTS. Finally, the holding in Carter concerned the plaintiff's pleading requirements; it did not address, limitations. For case all in any way, of the above reasons, Carter is not dispositive of the at bar. Finally, v. the running of a statute of Wilson. Thompson argues, 161 S.E. 237, 239 Agreement does not manifest statute of limitations Under Paragraph 5, citing Union Cent. (Va. a Co. that the Severance "clear and distinct" defense. GTS, 1931), Life Ins. waiver of a This argument misses the point. which otherwise would have been entitled to demand immediate payment of the Note due to Thompson's termination, agreed to postpone the due date. Obviously, the running of the statute of limitations was postponed as well. was not necessary for the parties It to make a second explicit agreement under which Thompson would waive a statute of limitations defense, because he had no such defense available to him until the Note itself would mature. iii. Extrinsic Evidence. Although the Court has Paragraph 5 establishes enforce the Note, found that the plain language of that GTS did not waive its right to the Court has also considered Thompson's arguments based on extrinsic evidence. -15- Citing a draft that GTS "[w]aives right to Termination Date repayment of $10M note (i.e. S.J. Ex. is term sheet that included language stating note 14, evidence due in 6 years Thompson argues that Note's due date. the final This as per that in terms)," the rejection of Severance Agreement argument there is absolutely no evidence language its is this language did not modify the entirely speculative because that the choice of the final the Severance Agreement reflected a substantive rejection of the proposed draft In fact, language. the only evidence is General Counsel, Grier Raclin, to the contrary. GTS's former who was^involved in drafting and negotiating Thompson's Severance Agreement, his co-counsel "didn't think that change proposed draft language] 99:17-100:5. Def.'s Mot. testified simply that [i.e., was necessary." using the Raclin Dep. The draft language can just as easily be interpreted as evidence that the final version of Paragraph 5 was intended to embody the statement in the draft that the Note would be "due in 6 years as per its terms." This latter interpretation is supported by Raclin's express testimony that the intent of the language was to modify the Note's maturity date, and that the word "waive" was used to be concise and to eliminate the need to reissue the Note. See id. 167:23-68:10 ("It was just easier to do it in a paragraph here rather than issue a new note waiving it accomplished the same thing -16- . . . . . . with a phrase rather than a paragraph that goes into paragraph X, Y, Z of the note is hereby replaced and restated with the following or whatever."). In contrast, there is absolutely no testimony from either Thompson or his attorney regarding their understanding as to the intent or meaning of the term "waive" at the time the Severance Agreement was signed.9 Thompson also argues that the Severance Agreement did not modify the Note because the Note was never formally revised and restated. However, the Note expressly provided for modification by "a writing specifically referring to this Note," Note S[ 12, and^Paragraph^5 of^the Severance Agreement clearly saEis"fies~tEis requirement. Accordingly, no formal revision of the Note was necessary. In short, even if the "waive" Agreement were ambiguous, language in the Severance Thompson has provided no evidence to support his argument that the Severance Agreement did not alter the Note's maturity date. On the other hand, the extrinsic evidence fully supports the Trustees' position. Accordingly, the 9r 9Thompson has testified only that it is his current belief that the Note is time-barred. Thompson Dep. 206:20-22. This testimony is irrelevant; the only relevant issue is the parties' intent when the Severance Agreement was signed. Indeed, given Thompson's extensive testimony regarding his contemporaneous understanding of other aspects of the Note and Severance Agreement, discussed infra, the lack of such testimony regarding the "waiver" provision further indicates that neither party intended for this provision to have the strained meaning that Thompson now advocates. -17- Court rejects Thompson's argument that the statute of limitations on the Note began to run on September 18, evidence shows 2000. that it began to run on April 6, Rather, 2005, the when the Note matured on the last of the three original alternative due dates.10 2008, Because the Trustees a little over by either of the filed their complaint on June 30, three years later, two possible statutes the action is not barred of limitations. 3. Thompson's Personal Obligation to Repay the Note. Thompson has raised an affirmative defense of release, arguing that even if Agreement Note, the Note is not time-barred, released him from any personal effectively converting his non-recourse obligation. the contract language or i. Paragraphs this issue. be for the from a postponement of full-recourse argument is unsupported, the extrinsic to a either by evidence. Contract Language. 5, 6, and 7 in all of respects "waiver" Note on the date of his 2000 until obligation to repay the the Severance Agreement Paragraph 5 states that the Note enforceable except" This debt the Severance "shall continue to in accordance with of Thompson's termination, 1, 2000. its terms requirement to repay the discussed supra, the date of one interest payment December control Paragraphs 6 and 7 and the from April 6, incorporate the 10Both parties agree that the Note did not become due based on the second alternative, condition. the occurrence -18- of an acceleration Consulting and Investment Banking Agreements, which impose certain obligations on Thompson and tie his compensation directly to "the interest payments due under the of principal outstanding on the these three paragraphs is xNote.'" 'Note' and "any balance The clear import of that the Note would remain "enforceable in all respects" with only the two exceptions described in Paragraph 5, and that Thompson, if he complied with the terms of the Consulting Agreement and the Investment Banking Agreement, would be entitled to certain offsets to the principal and interest. Thompson argues that the Note is no longer enforceable against him personally as a result of the releases in Paragraph 9, which provides a general release of GTS's claims against Thompson for all claims, debts, demands, causes of action, accounts, judgments, equitable relief, damages, rights, costs, charges, complaints, obligations, promises, agreements, controversies, suits, expenses, compensation, responsibility and liability of every kind and character whatsoever . . . including without limitation any and all claims . . . with respect to [Thompson's] status at any time as a holder of any securities of [GTS]. Sev. Agr. I 9. categories: It excludes from the release two specific claims related to criminal activity by Thompson and "any obligation assumed under this Agreement by any Party hereto." id. Thompson argues that the release encompassed his personal -19- obligation under the Note because the Note was a debt "with respect to [Thompson's] securities of status . . . as a holder of any [GTS]," and it was a preexisting obligation that was not "assumed" under the Severance Agreement and therefore was not excluded from the general release. that when Paragraphs 5, 6, 7, In sum, Thompson argues and 9 are read together, they release him from any personal obligation to pay the Note, which remained enforceable only against the shares of GTS stock pledged as security and his obligations under the Consulting and Investment Banking Agreements. Thompson also maintains that the incorporation of the Consulting and Investment "Banking Agreements into the Severance Agreement establishes that these agreements replaced his personal obligation to repay the Note. Thompson's reading of the Severance Agreement is unreasonable. First, it is a basic canon of contract law that specific language is given greater weight than general provisions. 498 See Burain v. (4th Cir. 1997). Office of Pers. Mamt.. 120 F.3d 494, Paragraph 5 explicitly addresses the Note, affirming that it would "continue to be enforceable in all respects" but two, obligation to pay. neither of which removes Thompson's personal Paragraphs 6 and 7 incorporate the Consulting and Investment Banking Agreements, which explicitly tie Thompson's compensation to payments due on the Note. 9, conversely, Paragraph is a general release that contains no explicit -20- reference to the Note. Paragraphs 5, 6, and 7 over the general language in Paragraph 9, therefore control which would effectively nullify these provisions if it released Thompson from the Note completely. 281, 287 See O'Brien v. (Del. 2001) Progressive N. Co.. 785 A.2d ("Contracts are to be interpreted in a way that does not render any provisions Second, Ins. "illusory or meaningless.'"). the Note cannot be modified by a general release. The Note provides that K[n]o waiver or modification of any of the terms of this Note shall be valid or binding unless set forth in a writing specifically referring to this Note to the extent specifically set forth therein." . . . and then only Note 3 12. language makes clear that the Note cannot be modified, conversion from full recourse to non-recourse, explicitly. Paragraph 5 meets referencing the Note. This such as by unless done this requirement by specifically Paragraph 9, on the other hand, does not mention the Note.11 Third, Thompson's debt under the Note was excluded from the release in Paragraph 9 because it was an "obligationf] assumed "Thompson's argument that Paragraph 9 specifically references the Note by releasing Thompson from any claims respect [Thompson's] to status . . . "with as a holder of any securities of [GTS]" is unpersuasive. Given the Severance Agreement's clear references to the Note in Paragraph 5, had the parties intended to reference the Note in Paragraph 9, they could have done so explicitly. Moreover, the Note itself, although it was incurred so that Thompson could purchase stock in GTS, was not an obligation "with respect to [Thompson's] status ... as a holder of any securities of [GTS];" it was a personal obligation to pay $10 million. -21- under [the Severance] Agreement." the Severance Agreement, Although the Note pre-dated Paragraph 5 of the Severance Agreement explicitly reaffirmed the Note and modified its conditions. It was accordingly excepted from the general release in Paragraph 9. Thompson's assertion that his obligations under the Consulting and Investment Banking Agreements replaced his personal liability on the Note is meritless. that Thompson's Nothing in those agreements suggests personal obligations were released. To the contrary, remained. Had Thompson been released from personal liability, they show that his obligations there would have been no reason to expressly link his compensation under the Consulting and Investment Banking Agreements to the remaining payments due on the Note. Rather, the Note's continued enforceability served both as a meaningful guarantee that Thompson would perform his agreements, obligations under these and in the case of the Investment Banking Agreement, as an incentive for him to find a buyer for GTS. Moreover, Thompson's new duties under these agreements did not replace his liability on the Note in a financial sense, because his compensation under the agreements was not identical obligations under the Note. to his His compensation from the Consulting Agreement mirrored the Note's interest payments only until April 6, 2005, the Note's new due date, but not beyond. His compensation from the Investment Banking Agreement was not the -22- Note's entire principal, but only $3.5 million plus each dollar by which the sale price of GTS's $12, enough price, Thompson's Under the right had GTS been sold within two years for a high rather than the bankruptcy that actually occurred, obligations under satisfied as a result of Severance Agreement Finally, the phrase Thompson's personal recourse note, the Note could have been completely the Severance Agreement. But the certainly did not guarantee that outcome. Severance Agreement. but for shares would exceed and only if GTS was sold within two years. circumstances, $300,000 If "non-recourse" the parties appears nowhere in the had truly intended to cancel liability on what was unambiguously a full" they could have done so with a few simple words, they did not. Accordingly, Agreement left the Court finds that the text of the Severance the Note fully enforceable against Thompson. It provided Thompson with a postponement of the due date and a means of earning off all pre-default of principal. interest and a considerable amount It did not convert the Note into a non-recourse obligation. ii. Extrinsic Evidence. This interpretation of the plain meaning of the Note and Severance Agreement is developed in consistent with the extrinsic evidence the case. a. Prior Versions and Negotiations Severance Agreement. -23- of the Both parties have cited to prior drafts and revisions of the Severance Agreement to agreement. this evidence the final None of support their is probative of Severance Agreement because in the record as interpretations there is of the the meaning of simply no evidence to why specific revisions were, or were not, made.12 Thompson has also was not required to argued that because he believed that he repay the Note at agreed to any severance agreement such an obligation.. all, he would not have that would have left him with The evidence^ however, belies As Thompson and GTS negotiated the outlines agreement, Note, Rather, original he to become immediately due upon his told Raclin Adam Solomon, to repay the Note if to repay the termination. that when he negotiated and signed the Employment Agreement and Note in 1999, board members, argument. of a severance Thompson maintained that he did not have which was this one of GTS's had told him that he would not have the value of GTS's stock declined. 12This conclusion applies with considerable force to Thompson's assertions regarding the phrase in Paragraph 9, "[claims] with respect to the Executive's status at any time as a holder of any securities of the Company." Citing evidence that this phrase was added to the release shortly before the agreement was executed, Thompson argues refers to the Note, which was that this shows that the phrase a contentious issue during the negotiations. See Def.'s Mem. S.J. 8. Such a conclusion is purely speculative and cannot overcome the much simpler point that had the parties meant to include the Note in the release, they could have done so explicitly as -24- they did in Paragraph 5. According to Raclin, contention, Solomon adamantly denied Thompson's see Raclin Dep. 88:20-23,13 and Robert Amman, board member who later succeeded Thompson as CEO, a GTS testified that Solomon would have lacked the authority to make such a representation. See Amman Dep. 43:2-43:11. Regardless of whether Solomon made such a representation in 1999, Thompson maintained in 2000 that he was not required to repay the Note. was the deal See PL's Mot. S.J. Ex. 7 ("Brian thinks that [that he would not have to repay the loan if the stock price declined] and Adam Conversely, GTS's position was the Note [Solomon] says it wasn't."). full. in Thompson claims the Note, he was that Thompson was required to pay that because he adamantly opposed repaying he never would have agreed to a resolution under which still personally liable. of his negotiating position, He has cited extrinsic evidence particularly contemporaneous, handwritten notes by GTS's counsel, the Note to be forgiven, "won't move more" These notes, stating that Thompson wanted including one note stating that Thompson on the subject. however, See Def.'s Mot. S.J. Ex. 26. only indicate that Thompson took a particular negotiating posture. Moreover, other notes indicate that GTS's counsel considered Thompson's position to be "weak" this "Solomon is now deceased and therefore was not deposed for action. -25- and contain the outlines of a compromise on the Note similar to what was contained in the Severance Agreement. S.J. 7. Ex. In fact, the evidence of the parties' undermines Thompson's argument. terminate him, written, Thompson's negotiating positions As GTS was preparing to only defense to an unambiguously full-recourse Note was a supposed uncorroborated side agreement with Solomon. Moreover, Thompson's position that the Note would not have tantamount as GTS recognized at to an admission of securities Thompson had signed GTS's SEC filings, for 1999, securities of fraud. the time, to be repaid was As CEO of GTS, including GTS's Form XO-K which stated explicitly that he had purchased "using the proceeds $10 Million from of six years." state, See Pi.'s Mot. [GTS]," PL's Mot. and that S.J. or give any indication, repaid if GTS's of a loan in the principal Ex. that the 6. "loan" had a amount "maturity Nowhere did the Form 10-K the Note would not have stock declined in value, to be a condition that clearly would have had an impact on the Note's value as an asset and should have been disclosed. As Raclin recognized at the time, if Thompson had held steadfast in his position that the Note did not have liability for to be repaid, securities fraud. he could have See PL's Mot. faced potential S.J. In light of the relative positions Thompson began their negotiations of -26- Ex. 7. from which GTS and the Severance Agreement, the compromise that Thompson claims was reached, one that would have left him with absolutely no liability on the Note, implausible. was reached, Conversely, the compromise that the Trustees assert and the one consistent with the text of the Severance Agreement, Agreement, is completely makes complete sense. Thompson received some, Under the Severance but not complete, Note's due date was postponed to 2005, relief; the and Thompson would be forgiven for all of the interest through the maturity date, could avoid paying some or all of the principal, and if he performed his obligations under the Consulting and Investment Banking Agreemenfs~e~ffectfiveIy. Accordingly, the extrinsic evidence cited by both parties only reinforces the Trustees' claim and weakens Thompson's affirmative defense. b. The Parties' Actions Following the Severance Agreement. Actions by both GTS and Thompson after they signed the Severance Agreement provide additional support for the Trustees' position that the Note remained enforceable against Thompson, and undermine Thompson's argument that the Severance Agreement released him from personal liability. In April 2001, months after the Severance Agreement was signed, K filing for 2000, a only four GTS made its 10- in which it continued to describe the Note as "loan" of $10 million provided to Thompson to purchase stock. See PL's Mot. S.J. Ex. 17. The 10-K described the Consulting and Investment Banking Agreements, -27- stated that the Severance Agreement "amended" the amended, Finally, the terms of interest-bearing loan was GTS later sold the Note, GTS Holdings for $5.4 million. clear, the loan, and made due on April against Thompson, In addition, Hildebrand, signed, 6, 2005. id. to All of these actions manifest a least the Note had value and was consistent with the Trustees' from the fully enforceable position. according to Thompson's accountant, in late 2001, that and the right of repayment, contemporaneous understanding that at perspective of GTS, it clear Carl well after the Severance Agreement was Thompson contacted Hildebrand to inform him that GTS was considering forgiving the Note, and to asKThim about the relevant^ tax implications Hildebrand Dep. if it did so. 40-41.14 Hildebrand's uncontroverted testimony is evidence that even Thompson understood that the Severance Agreement had not forgiven his personal obligation under the Note; 2001, rather, even in late the matter was merely something GTS was considering. c. Finally, Deposition Testimony. deposition testimony by attorneys and principals refutes Thompson's position. Raclin, GTS's former General "Hildebrand responded with a memorandum opening with a statement that the Note was "payable in a lump-sum payment in 2006," and describing the relevant issue as, "If. the company forgives the note ... is this ordinary income to [Thompson] as discharge of indebtedness income?" Pi.'s Mot. S.J. Ex. 19 (emphasis added). There is no evidence that Thompson ever told Hildebrand that his personal obligation had already been forgiven. -28- Counsel, who supervised the drafting of the Severance Agreement, Jed Brickner, as CEO, its outside counsel, Robert Schriesheim, and Arnold Dean, securities GTS's filings, GTS's Amman, who succeeded Thompson former CFO and a board member, former Deputy General Counsel have all testified, for unequivocally, that GTS never intended to release Thompson from his obligations under the Note. Indeed, Raclin testified that Severance Agreement was specifically to make enforceable because of Thompson's to repay it, see Raclin Dep. in Paragraph 9 was not 121:21-123:7, Thompson's Paragraph 5 was put in the 71:1-7, that and that the general intended to incTude~the Note, 171:4-15. It is release see id. also noteworthy that Alvin Brown, lawyer when the Severance Agreement was provided no the Note claim that he did not have being deposed for two and a half hours, 8:6, it clear see Tr. drafted, S.J. testimony whatsoever regarding his after Hr'g 7:21understanding of the Severance Agreement.15 The most compelling extrinsic evidence in from Thompson himself, that this action comes who effectively admitted in his the Severance Agreement did not liability under the Note. relieve him of personal In Thompson's own words, 15Brown testified that he "attempted to clarify in discussions with [Raclin] and deposition [Brickner] [his] that the Note would not have to be repaid by Mr. Thompson." Brown Dep. 42:10-13. However, the record contains no testimony by Brown regarding his understanding of Paragraphs 5 and 9 of the Severance Agreement, and a number of questions to Brown were apparently objected to by the defendant on privilege grounds. See Tr. S.J. Hr'g 8:4-6. -29- The original the agreement for the treatment time of my departure was that of the note at rather than my being responsible for paying back the note, which was called for under the terms of the note at the time of my termination, that the substitute for my responsibility would be incorporated in two agreements, one of which was an Investment Banking Agreement and the other which was a Consulting Agreement. The note was to have been . . . expunged by the value of the shares that were held in custody, the terms of the Investment Banking Agreement and the terms of the Consulting Agreement. If there were any overages or underages, if that occurred and when that occurred, that it would be the the company's responsibility working with me that the transaction expunged the note. forgiven. - to assure The note would be Thompson Dep. 24:12-25:7 (emphasis added). Similarly, Thompson testified, [T]he understanding when I left the company was that . . . the credits for the note would come from three sources so that company [sic] could take the note off its books. The first was whatever the value was of the Investment Banking Agreement . . . and it could have been the full amount or less, the actual shares themselves that were held, and the interest payments that would come from ... a Consulting Agreement. . . ¢ It was also anticipated that any transaction that fell short of the 10 million that the company and I would work together to make party forgave the balance Id. 114:6-115:2 the purchasing those notes. (emphasis added). What Thompson's testimony clearly establishes Severance Agreement was not debt or converted it and GTS sure that of "anticipated" an agreement to non-recourse. that that Rather, is that forgave Thompson's it shows they "would work together" if the total value of that he in the future to ensure that any remaining balance of the Note forgiven" the "would be the Consulting and Investment -30- Banking Agreements, than $10 million. hoped that GTS's could be sold at plus the value of Thompson's Apparently, a price remaining differences. Unfortunately, they did in such that less 1999, the company and then anticipated working out any But an anticipation is not a contract, had no contract the parties' to forgive Thompson's hopes were not The Note's realized, and GTS bankruptcy obligation to together" with Thompson to forgive the Note. every benefit of debt. current owners, are fiduciaries who are under no giving Thompson was that would allow the Note's balance to ultimately went bankrupt. trustees, as stock would attain a value be significantly offset, and the parties the parties, shares, the doubt, Accordingly, neither nor extrinsic evidence supports his position, overwhelming evidence, including Thompson's supports "work even the intrinsic and the position. the Trustees' 4. Failure of Consideration and Material Breach. Thompson's claim that own testimony, remaining arguments merit little attention. His the Note is not enforceable for failure of consideration because he never actually received the shares of stock, and was never able cancelled when GTS went to trade or sell into bankruptcy, them before they were is meritless. Thompson never took possession of the actual shares because they were pledged as a security for the Note, Pledge and Security Agreement in accordance with signed by -31- the terms the parties. See of Def.'s Mot. ability to S.J. 10 5151 trade or sell agreement. shares Ex. See id. % 7. than one who owns interest does not mean for his 9. The restrictions on Thompson's the shares were also part of this That Thompson had fewer rights to the stock free and clear of a security that Thompson received value, exchange 2, there was a failure of consideration. albeit with certain restrictions, obligation to repay the Note. Moreover, in that the shares became almost worthless and were ultimately cancelled in bankruptcy purchaser of is irrelevant. corporate stock could attempt If this that any eventually became worthless to void the original purchase for failure of consideration. That the shares ultimately became worthless not make them retroactively worthless purchased argument prevailed, at the does time Thompson them. Thompson also argues that the plaintiffs materially breached their obligations under the Consulting and Investment Banking Agreements breaches and therefore cannot enforce the Note. occurred when GTS Holdings, and later The alleged the Trustees, failed to credit Thompson for his work under these agreements by reducing the amount of interest and principal owed on the Note.16 Although a party that materially breaches 16As evidence, a contract cannot Thompson cites the failure of GTS Holdings and the Trustees to send him "1099" tax forms for his earnings, as well as the Trustees' initial demand for $10 million plus interest, which ignored the offsets that Thompson had earned under the Consulting and Investment Banking Agreements. -32- later attempt to 200, 1997), 203 (Va. enforce it, this collecting on the Note. see Horton v. doctrine does First, Horton, not the Note is bar 487 the trustees interest Note. failed to Second, the plaintiffs fulfill any of or "a their obligations under the there was no material breach of failure to do something that contract that the failure essential purpose of and there their predecessors-in- Consulting or Investment Banking Agreements. is from separate and distinct from the Consulting and Investment Banking Agreements, is no evidence that S.E.2d is so to perform that the contract. " Id. either the A material breach fundamental to the obligation defeats at 2(T4T. an ThlTlnere failure of GTS Holdings and the Trustees to credit Thompson in their internal books, Thompson was not to to what he owed on purpose of under a compensation arrangement where receive any actual payments the Note, the contract." would not but only offsets "defeat[] an essential The only possible damages Thompson has suffered are any expenses he has incurred to prove that he fulfilled his obligations under the Consulting and Investment Banking Agreements. damages, His remedy for such expenses would be and not excuse from performance. have since recognized that Thompson's by $3.5 million, pursuant to pre-default the Moreover, the Trustees liability should be reduced because a "strategic transaction" occurred Investment Banking Agreement, interest, pursuant and that he owes no to the Consulting Agreement, -33- and the Trustees therefore now seek only default interest. Accordingly, $6.5 million plus post- the plaintiffs under the material breach doctrine under are not barred from pursuing their claims the Note. III. Motion to Dismiss Counterclaim for Indemnity. Plaintiffs have moved to dismiss Thompson's which he alleges balance of counterclaim, in that even if he is personally liable for the the Note, the Trustees' claim is subject to a provision of his original Employment Agreement under which GTS agreed to indemnify him for certain claims concerning his purchase of A. the company's stock. Standard of Review. To survive a Motion to Dismiss a pleading true, "must contain sufficient to state a claim to relief Ashcroft v. Iabal. this burden "when court 129 [it] S.Ct. for Failure to State a Claim, factual matter, that 1937, accepted as is plausible on its 1949 (2009). A party meets pleads factual content that allows to draw the reasonable inference liable for the misconduct alleged." that Id. the defendant Thus, consistent with a the is a complaint or counterclaim must raise "more than a sheer possibility" party is liable, face." that the and go beyond pleading facts that are "merely [party's] liability." Id. contains well-pleaded factual allegations, When the pleading "a court should assume their veracity and then determine whether they plausibly give -34- rise to an entitlement to relief." hand, allegations Id. Id. " [determining whether a complaint plausible claim for relief . . . at 1949. [is] Id. Ultimately, [or counterclaim] states a a context-specific task the reviewing court to draw on its experience and common sense." B. On the other that merely recite elements of a cause of action are not assumed to be true. that requires at 1950. judicial at 1950. Discussion. Thompson's indemnity counterclaim relies primarily on Section 5{d)(ii) of his original Employment Agreement, which references a separate contract to purchase $20 million in GTS stock. Referring to that separate contract, Agreement, the Employment which is governed by Delaware law, stated: Such contract shall also provide that [GTS] shall agree to indemnify and hold [Thompson] harmless from all costs, charges and expenses ... of any action, suit, proceeding or other claim {other than the Executive's income or other tax liability relating to his purchase or sale of the Purchase Stock) arising in connection with the sale by [GTS] to [Thompson] of the Purchased Stock, except to the extent such indemnity is prohibited by law. Thompson argues that this provision applies effort to collect on the Note. Under Delaware law, it is illegal for a company to prospectively indemnify an employee against the right of the corporation." Similarly, to the Trustees' Del. "an action by or in Code Ann. tit. 8 § 145(a). Delaware law states that "no indemnification shall be -35- made in respect of any claim, corporate officer, director, issue or matter as to which or employee] adjudged liable to the corporation." prohibition in § 145(b) if a court determines such person is [a shall have been IcL. § 145(b). Although the contains an exception allowing indemnity "in view of all the circumstances [that] fairly and reasonably entitled to indemnity," this exception only applies if the defendant is sued "by reason of the fact that the person is or was a director, agent of the corporation." officer, When a corporate officer is sued for a debt on a promissory note to the corporation, such a debt is a personart debt and-this- exception does not applyr^ Corp. v. Cochran. conclusion employee or 809 A.2d 555, 562 (Del. 2002) [allowing indemnity in such a case] See Strirel^Fin.- (noting that "a would render the officer's duty to perform his side of a contract in many ways illusory"). Thus, the Employment Agreement, barred any indemnity prohibited by law, which explicitly could not provide a basis for indemnification of Thompson against claims on the Note by GTS or its successors. Moreover, Thompson's suggested reading of the indemnity clause is simply not 1949. "plausible on its face." labal. 129 S.Ct. at The section of the Employment Agreement that contains the indemnity provision, Thompson's § 5{d)(ii), also explicitly references "full recourse promissory note." Thompson's suggested interpretation of the indemnity clause would render this -36- provision, and the Note, A.2d at 287, "illusory or meaningless," O'Brien, 785 and must therefore be rejected as implausible.17 Finally, Thompson has also cited Section 21 of the Severance Agreement, which indemnified him "for liability for claims or acts arising out [GTS]." [of] his services as a director or officer of This provision also does not apply to Thompson's debt under the Note because, as in Stifel,18 Thompson's obligation to pay back the Note was a personal one and did not arise out of his work for GTS in an official capacity. IV. For the~above reasons, Conclusion. the"plaintiffs"' Motion for~ Summary Judgment and Motion to Dismiss Defendant's Indemnity Counterclaim and Corresponding Defenses will be granted, 17Coadv v. Strategic Resources, Inc.. and the defendant's 515 S.E.2d 273 (Va. 1999), a case cited by Thompson in which the Virginia Supreme Court appeared to give effect to a circular interpretation of an indemnity clause such as the one Thompson advocates, is not on point because the Employment Agreement is governed by Delaware, not Virginia, law, and because Coadv concerned indemnity for attorney's fees, not for the entire underlying obligation. Thompson also cites to a memorandum written by Raclin, expressing concern that the indemnity provision "could be read" to encompass the Note. Def.'s Opp. Mot. to Dismiss Ex. C. This memo is in no way dispositive of the provision's actual meaning. To the contrary, this memorandum reflects a concern by Raclin that a court might erroneously read the clause to include the Note. 18The Severance Agreement, like the Employment Agreement, governed by Delaware law, authority. and Stifel -37- is therefore binding is Motion for Summary Judgment will be denied, by an Order to be issued with this Memorandum Opinion. Entered this _L_ day of September, Alexandria, 2009. Virginia LeonieM.Briakema United States District Judge -38-
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