July 30, 2010
ALL METRO HEALTH CARE SERVICES, INC., ALL METRO HOME CARE SERVICES, INC., ALL METRO HOME CARE SERVICES OF NEW YORK, INC., ALL METRO HOME CARE SERVICES OF NEW JERSEY, INC., ALL METRO HOME CARE SERVICES OF MISSOURI, INC., ALL METRO EMERGENCY RESPONSE SYSTEMS, INC., CAREGIVERS ON CALL, INC., ALL METRO MEDICAL STAFFING, INC., ALL METRO MANAGEMENT AND PAYROLL SERVICES CORPORATION, ALL METRO FIELD SERVICE WORKERS PAYROLL SERVICES CORPORATION, AND THE 1818 MEZZANINE FUND II, L.P., PLAINTIFFS-APPELLANTS/CROSS-RESPONDENTS, AND CIT HEALTHCARE, LLC, PLAINTIFF/INTERVENOR,
GLENN EDWARDS, DEFENDANT-RESPONDENT/CROSS-APPELLANT.
On appeal from Superior Court of New Jersey, Chancery Division, Bergen County, No. C-334-07.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Argued May 4, 2010
Before Judges Wefing, Messano and LeWinn.
Plaintiffs appeal from a trial court order granting summary judgment to defendant. Defendant cross-appeals from a subsequent order of the trial court denying his motion for counsel fees. After reviewing the record in light of the contentions advanced on appeal, we affirm the grant of summary judgment to defendant and reverse the denial of counsel fees.
Defendant Glenn Edwards was the sole owner of All Metro Aids, Inc. ("AMA"), a home health care company. He decided to sell all the stock in AMA and thus receive the proceeds of the successful business he had developed. Scott Mixer, AMA's chief financial officer, wanted to purchase the business and incorporated defendant All Metro Health Care Services, Inc. ("All Metro") to structure the transaction. Mixer was the president, chief executive officer and chairman of All Metro, which signed a Stock Purchase Agreement setting forth the basic parameters of the transaction. That Stock Purchase Agreement was later amended by a subsequently executed Modification Agreement.
Mixer did not have the necessary funds to complete this management buy-out and turned to The 1818 Mezzanine Fund II, L.P. ("1818") and CIT Healthcare, LLC ("CIT") to advance the necessary sums. They agreed to do so, using a technique referred to as mezzanine financing, under which 1818 and CIT could elect to convert the debt owed to them into an equity interest in All Metro.
The transaction closed on December 30, 2005, for a purchase price of approximately $22,000,000, $12,000,000 of which was provided by 1818, the balance by CIT. In addition, CIT provided All Metro with a $10,000,000 revolving line of credit and a $9,000,000 loan, maturing five years after the closing. At the closing All Metro signed a loan and security agreement in favor of CIT for this debt. It also executed a senior subordinated promissory note for $9,000,000 in favor of 1818. Finally, defendant Edwards, All Metro, 1818 and CIT signed a Subordination Agreement. At the closing Edwards received $17,955,416.67 in cash, a promissory note for $4,055,000, and an acknowledgement that he would be reimbursed for the increased individual income tax liability he would incur as a result of the parties' agreement to make an election under § 338(h)(10) of the Internal Revenue Code, 26 U.S.C. § 338. One effect of the documents executed at the closing was to characterize as junior debt the balance owed to defendant Edwards as part of the purchase price while the debt All Metro owed to 1818 and CIT was characterized as senior debt. In essence, Edwards agreed that the remaining money All Metro owed to him was to be subordinated to All Metro's debts to 1818 and CIT. This Subordination Agreement contained the following provisions:
1. The payment of any and all Subordinated Debt is expressly subordinated to the Senior Debt to the extent and in the manner set forth in this Subordination Agreement. The term "Subordinated Debt" means the principal of and interest on all indebtedness, liabilities, and obligations of Borrowers, now existing or hereafter arising, to the Undersigned including but not limited to: (i) the indebtedness of Borrowers, or any of them, evidenced by that certain Junior Subordinated Promissory Note dated as of even date herewith (the "Junior Note"), payable to the order of the Undersigned in the original principal amount of $4,055,000, and (ii) any other obligations owing by Borrowers, or any of them, now or hereafter to the Undersigned . . . . The term "Senior Debt" means (i) any and all Obligations of Borrowers to Lender under, in connection with, or in any related to (including debtor-in-possession financing), the Loan and Security Agreement . . . and (ii) any and all Obligations (as defined in the Guarantee and Collateral Agreement . . .) to 1818 Fund of any kind of Borrowers under, in connection with or in any way related to . . . (emphasis added).
The parties also agreed, in Paragraph 2, that until the Senior Debt was paid, the Subordinate Debt could not be paid. The paragraph reads:
Until the Senior Debt is paid in full and all of Lenders' respective obligations to Borrower have been terminated under the Loan Agreements, Borrower shall not pay, and Undersigned shall not accept, any payments of any kind (including prepayments) associated with Subordinated Debt, provided however, that so long as (i) no Event of Default or Unmatured Event of Default under he Loan and Security Agreement and (ii) no Event of Default . . . has occurred, and if no Default Event would result from the making of any such payment(s), All Metro may pay and the Undersigned may accept scheduled principal and interest payments under the Junior Note. Notwithstanding the foregoing, upon the occurrence of a Default Event, Borrowers shall not make and the Undersigned shall not receive, any payments of interest or principal, or otherwise, on the Subordinated Debt, without prior written consent of each Lender.
The Subordination Agreement also contained an agreement to not bring a claim regarding payment of the Subordinated Debt until the Senior Debt was paid in full. The Subordination Agreement contained a choice of law provision stating that the agreement was to be governed by New Jersey law, and any action brought under the agreement was to be brought in New Jersey.
Several months after the closing, defendant's accountant notified the parties that a mathematical error in calculation at the closing resulted in Edwards receiving $455,000 less in cash than he should have. All Metro was unable at that point to pay that sum in full, and Edwards agreed upon an installment schedule of seventeen payments. All Metro made only the first two of these.
In September 2006, Edwards and All Metro filed with the Internal Revenue Service their joint election under § 338 of the tax code, the result of which was to increase the individual tax liability of Edwards by $1,526,576, plus interest and penalties. As with the shortfall in the purchase price, All Metro did not have the funds at that time to reimburse Edwards for this increased tax obligation. Edwards and All Metro therefore agreed between themselves that All Metro would pay $455,627 to the taxing authorities on behalf of Edwards, and Edwards would pay the balance directly; All Metro was to reimburse Edwards in six monthly payments of $178,491.50, beginning in November 2006.
All Metro paid the $455,627 and the first several installments to Edwards.
In February 2007, All Metro experienced a liquidity crisis and ceased payments on these installment obligations. CIT declared All Metro in default on February 23, 2007, and refused to advance any more funds on the revolving line of credit.
Section 47 of the Stock Purchase Agreement between Edwards and All Metro provided that "[a]ny dispute between or among the parties or any dispute arising from or under this Stock Purchase Agreeement or relating to its subject matter or enforcement shall be submitted to binding arbitration . . . ." Accordingly, in August 2007, Edwards filed a Demand for Arbitration seeking the balance of the money due to him. In September 2007, All Metro and 1818 (which by that point owned 99% of the common stock of All Metro) filed a declaratory judgment action, seeking a declaration that the amounts remaining to satisfy the tax obligation and the $455,000 shortfall were both part of subordinated debt and could not be paid until the senior debt was satisfied in full. After a period of discovery, and on cross-motions for summary judgment, the trial court entered judgment for defendant Edwards, finding that neither obligation was subordinated debt. After entry of that summary judgment, Edwards moved for an award of counsel fees under the fee shifting provision of the Modification Agreement to the Stock Purchase Agreement. The trial court denied that motion, finding that the dispute had arisen under the Subordination Agreement, which did not contain a fee-shifting provision, rather than the Modification Provision. This appeal followed.*fn1
We turn first to plaintiffs' appeal of the summary judgment in favor of defendant. We note the standard governing our review of this matter.
The appellate court reviews the grant of summary judgment using the same standard that the trial court applies in deciding the motion. Prudential Prop. & Cas. Ins. Co. v. Boylan, 307 N.J. Super. 162, 167 (App. Div.), certif. denied, 154 N.J. 608 (1998); Antheunisse v. Tiffany & Co., 229 N.J. Super. 399, 402 (App. Div. 1988), certif. denied, 115 N.J. 59 (1989). The appellate court first looks to whether there was a genuine issue of material fact; if there was not, the appellate court then decides if the trial court's ruling on the law was correct. Ibid. Plaintiffs' primary argument on appeal is that the contract terms are clear and unambiguous and under those terms, these two installment obligations are subordinated debt and, as a result, they contend Edwards has no right to repayment at this time. They point to that portion of the Subordination Agreement defining subordinated debt as "all indebtedness, liabilities, and obligations of Borrowers now existing or hereafter arising." This document, however, cannot be read in isolation.
To determine if a contract is ambiguous, and therefore properly subject to interpretation, the court should begin with the plain language used in the contract and consider whether it is susceptible to different meanings. 11 Williston on Contracts, § 30:5 (Lord ed. 1999). As a general rule, all writings that are part of the same transaction are interpreted together. Id. at § 30:25. Thus instruments executed at the same time, by the same parties, for the same purpose, and in the course of the same transaction will be construed as a single instrument. Anthony L. Petters Diner, Inc. v. Stellakis, 202 N.J. Super. 11, 21 (App. Div. 1985).
Further, where the execution of one contract depends upon the execution of a second contract, both must be construed together. "Where several writings are made as part of the same transaction relating to the same subject matter, they may be read together as one instrument, and the recitals in one may be explained, amplified or limited by reference to the other -- the one draws contractual sustenance from the other." Id. at 20.
See also Nester v. O'Donnell, 301 N.J. Super. 198, 210 (App. Div. 1997) (recognizing that all writings that form part of the same transaction are interpreted together). A writing should be interpreted as a whole, and in a manner that is consistent with dominant purpose of the contract. Krosnowski v. Krosnowski, 22 N.J. 376, 387 (1956). A court must keep in mind "the contractual scheme as a whole," Republic Bus. Credit Corp. v. Camhe-Marcille, 381 N.J. Super. 563, 569 (App. Div. 2005) (quoting Newark Publishers' Ass'n v. Newark Typographical Union, 22 N.J. 419, 426 (1956)), and "the objects the parties were striving to attain." Celanese Ltd. v. Essex County Improvement Auth., 404 N.J. Super. 514, 528 (App. Div. 2009).
Here, the Subordination Agreement has to be read in conjunction with the Stock Purchase Agreement and the Modification Agreement in order to discern the meaning and purpose of the transaction as a whole; they were all part of the management buy-out of December 30, 2005. The Stock Purchase Agreement, originally executed in October 2003, defined the purchase price as $12 million, plus an additional sum, not to exceed $3,955,000, as contingent commissions. The Modification Agreement, executed December 29, 2005, changed the definition of the purchase price. Under the revised definition, defendant was to receive as the purchase price $17,955,416.67 in cash at the closing and a subordinated promissory note for $4,055,000 in lieu of the contingent commissions referred to in the original Stock Purchase Agreement. The definition of the purchase price was further modified specifically to include reimbursement to defendant for his increased tax liability for the joint election under § 338(h)(10) of the Internal Revenue Code as part of the purchase price. In addition, the Modification Agreement called for that purchase price to be paid at the closing.
The trial court correctly refused to read the definition of subordinated debt in the Subordination Agreement, which includes "all indebtedness, liabilities, and obligations of [All Metro] to [defendant] now existing or hereafter arising" in isolation. The trial court, in its written opinion, appropriately quoted Judge Learned Hand: "There is no surer way to misread any document than to read it literally." Guiseppi v. Walling, 144 F.2d 608, 624 (2d Cir. 1944) (Hand, J., concurring), aff'd sub nom., Gemsco, Inc. v. Walling, 324 U.S. 244, 65 S.Ct. 605, 89 L.Ed. 921 (1945). Rather, the Subordination Agreement takes meaning and purpose from the surrounding Modification Agreement and Stock Purchase Agreement because all are part of the same transaction.
The parties' course of dealing with one another following the closing sheds additional light on the proper construction of the Subordination Agreement. Kamaratos v. Palias, 360 N.J. Super. 76, 86 (App. Div. 2003) (noting that "[t]he manner in which the parties by their conduct indicate their own understanding of their agreement is an appropriate source to which to turn to determine the scope and meaning of their agreement.")
We are satisfied the trial court was entirely correct when it rejected plaintiffs' contention that payment of the $455,000 and defendant's increased tax obligation constituted subordinated debt. When the documents are viewed as a whole, it is clear that they were part of the original purchase price; as the trial court noted, if these two items were considered subordinated debt, the $17.9 million paid to defendant at closing should equally be considered subordinated debt, an absurd result.
Plaintiffs seek to rebut this conclusion by pointing to certain items of extrinsic evidence, which they contend demonstrate the parties' intent to treat these two items as part of subordinated debt. None of the items to which they point is persuasive; they are insufficient to override the unified structure of the transaction.
We turn now to defendant's cross-appeal. Following the trial court's determination in his favor on the parties' cross-motions for summary judgment, defendant moved for counsel fees, relying on ¶ 13.0 of the Modification Agreement:
If any action at law or in equity is necessary to enforce or interpret the terms of this Agreement or to protect the rights obtained hereunder the prevailing party shall be entitled to its reasonable attorneys' fees, including attorneys' fees on appeal, costs, and disbursements in addition to any other relief to which it may be entitled.
The trial court denied defendant's request for counsel fees, concluding that defendant had acted not to vindicate his rights under the Modification Agreement but, rather, his rights under the Subordination Agreement, which did not contain a similar fee-shifting provision.
New Jersey follows the American Rule, under which the successful litigant is, as a general principle, not entitled to the payment of his or her counsel fees. N. Bergen Rex Transp., Inc. v. Trailer Leasing Co., 158 N.J. 561, 569 (1999). Contractual fee-shifting provisions are strictly construed in light of that policy. Id. at 570.
The Stock Purchase Agreement specified that it is governed by the laws of New York; the Modification Agreement provides that questions involving the rights and obligations of All Metro and its shareholders are to be governed by Delaware law; all other matters are governed by New York law.
New Jersey treats questions with respect to an award of counsel fees as matters of procedure, and the Court has applied New Jersey law even in the face of contract language specifying the law of another jurisdiction. Id. at 569. Here, there is no distinction between the law of New York and the law of New Jersey. New York follows the American Rule as well. A.G. Ship Maint. Corp. v. Lezak, 503 N.E.2d 681, 683 (N.Y. 1986). In addition, in New York's view, contracts providing for counsel fees for the prevailing party "run against the grain" of that rule and should be construed accordingly. Mid-Hudson Catskill Rural Ministry, Inc. v. Fine Host Corp., 418 F.3d 168, 177 (2d Cir. 2005) (quoting Oscar Gruss & Son, Inc. v. Hollander, 337 F.3d 186, 199 (2d Cir. 2003)).
While we acknowledge that policy in favor of strict construction, we are also satisfied that it should not be applied in such a manner as to defeat defendant's reasonable expectations. The trial court concluded that defendant was not entitled to counsel fees because he was seeking to vindicate his rights under the Subordination Agreement. In our judgment, that formulation is incorrect. Defendant was seeking to vindicate his rights under the Modification Agreement, because it was that document that contained the revised definition of "purchase price" which, in turn, supported the conclusion that the $455,000 promissory note and the tax obligation were part of the original purchase price and thus not subordinated debt.
An important limitation must be noted, however. The Modification Agreement, which contains the fee-shifting language, was signed only by defendant and All Metro. It was not signed by either 1818 or CIT. It is thus only All Metro which assumed the obligation for counsel fees.
The contract calls for "reasonable" counsel fees. The trial court never had the opportunity to address the question of a reasonable fee, and we thus remand the matter to the trial court for further proceedings on that question.
The order under review on plaintiffs' appeal is affirmed.
The order under review on defendant's cross-appeal is reversed, and the matter is remanded to the trial court for further proceedings.