Compagnie Financiere v. Lynch

• Decision Date: 01 August 2000
• Docket Number: Docket No. 00-7171
• Citation: 232 F.3d 153
• Parties: (2nd Cir. 2000) COMPAGNIE FINANCIERE DE CIC ET DE L'UNION EUROPEENNE; MANAGEMENT INVESTMENT FUNDING LIMITED, Plaintiffs-Appellants, v. MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED, Defendant-Interpleader-Plaintiff-Appellee, CALEX LTD., Interpleader-Defendant-Appellee
• Court: U.S. Court of Appeals — Second Circuit

Page 153

232 F.3d 153 (2nd Cir. 2000)

COMPAGNIE FINANCIERE DE CIC ET DE L'UNION EUROPEENNE; MANAGEMENT INVESTMENT FUNDING LIMITED, Plaintiffs-Appellants, v. MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED, Defendant-Interpleader-Plaintiff-Appellee, CALEX LTD., Interpleader-Defendant-Appellee.

Docket No. 00-7171

August Term, 2000

UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT

Argued: September 29, 2000

Decided: November 17, 2000

Plaintiffs-appellants appeal from a grant of summary judgment by the United States District Court for the Southern District of New York (Sand, J.) in favor of interpleader-defendant-appellee in this contract dispute. We reverse and direct that judgment be entered in favor of plaintiffs-appellants.

Reversed and remanded with instructions.

[Copyrighted Material Omitted]

STEPHEN G. RINEHART, New York, NY, for plaintiffs-appellants.

KEVIN J. FEE, New York, NY (Daniel J. Kornstein and Ina R. Bort, on the brief), for interpleader-defendant-appellee.

Before: McLAUGHLIN, LEVAL, and SOTOMAYOR, Circuit Judges.

SOTOMAYOR, Circuit Judge:

Plaintiffs-appellants Compagnie Financiere de CIC et de L'Union Europeenne ("CFC") and Management Investment Funding Limited ("MIF") (collectively "plaintiffs") appeal from a grant of summary judgment entered on February 14, 2000, in the United States District Court for the Southern District of New York (Sand, J.) in favor of interpleader-defendant-appellee Calex Ltd. ("Calex"). The district court determined that the parties' agreement securing a guarantee of a loan is governed by the termination provision of a related document, which provides that the obligations under the guarantee terminate upon "payment in full" by the debtor of its obligations under the loan agreement. The district court determined that the termination provision is unambiguous and clearly includes release of the debtor without actual repayment of the outstanding principal and interest on the loan. We disagree and find that the language of the termination provision of the agreement is ambiguous. We are able, however, to interpret the termination provision of the security agreement as a matter of law because the overwhelming weight of the extrinsic evidence, including the natural and ordinary usage of the phrase "payment in full" in the termination provision of a related document, supports plaintiffs' contention that the parties intended the agreement to expire only upon actual repayment of the principal and interest outstanding on the loan. We reverse and remand with instructions for the district court to enter judgment in favor of plaintiffs.

BACKGROUND

This Court has previously described the details of the series of agreements between these parties, with which familiarity is assumed, in Compagnie Financiere v. Merrill Lynch, Pierce, Fenner & Smith Inc., 188 F.3d 31 (2d Cir. 1999). We set forth here only the facts relevant to this appeal.

On July 23, 1990, CFC (then known as Banque de L'Union Europeenne or "BUE") loaned Prodipe, Inc. ("Prodipe") $2.5 million. This loan was jointly and severally guaranteed by each of Prodipe's principals - J. Alejandro Weinstock, Alfredo Balli, and Patrick Mery-Sanson (the "Guarantee"). Prior to making the loan, CFC expressed concern about whether the guarantors had sufficient assets to fulfill the Guarantee, if necessary. In response, Weinstock represented to CFC that Calex, a corporation of which he was the sole shareholder, held $20 million in marketable securities in an account with defendant-interpleader-plaintiff-appellee Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"). Merrill Lynch confirmed this in a letter to CFC dated June 29, 1990. On July 2, 1990, Weinstock sent a letter to CFC explaining that the June 29, 1990 letter had been provided "in connection with that Guarantee of Patrick Mery-Sanson, Mr. Alfredo Balli and me, which Guarantee is given to you in connection with your credit of US$2,500,000 to Prodipe, Inc."

At the request of CFC, Weinstock, acting on behalf of Calex, arranged to maintain a minimum value of $2.5 million in Calex's Merrill Lynch account. On July 5, 1990, Weinstock implemented this arrangement with an instruction letter to Merrill Lynch (the "Weinstock Instruction Letter") that provided in relevant part:

On behalf of Calex, Ltd., I hereby instruct you, at the request of and for the benefit of Banque de L'Union Europeenne ("BUE"), not to sell, trade, transfer or otherwise dispose of any readily marketable securities held for the account of Calex Ltd. if such sale, trade, transfer or other disposition (individually or in the aggregate) would result in reduction in the value of the Calex Ltd. account maintained with you below the amount of $2,500,000 unless you first receive a letter or telecopy from BUE authorizing such a sale, transfer, or other disposition.

This letter is delivered at the request of BUE to induce it to enter into that certain Loan Agreement between Prodipe, Inc. ("Prodipe") and BUE providing for a loan of $2,500,000 to BUE (the "Loan Agreement"). In no event shall this letter of instruction have any further force or effect following payment in full by Prodipe of its obligations under the Loan Agreement.

(emphasis added). This instruction letter was countersigned by Merrill Lynch and forwarded to CFC.¹ Merrill Lynch confirmed the arrangement in a July 13, 1990 letter to CFC (the "Letter Agreement"):

In accordance with the instructions of Calex, we irrevocably agree that we shall not release any funds or securities available in the Investment Account . . . which would cause the total value . . . to fall below $2,500,000 until receipt by us of written notice from you releasing this restriction. . . . We understand that you are relying on our compliance with the above-described instructions from Calex and we hereby agree to comply with them.

Prodipe defaulted on its loan when it became due on December 31, 1991. By a letter dated August 19, 1992, CFC demanded repayment from the guarantors without result. At that time, CFC also attempted to confirm that Merrill Lynch would continue to abide by the Letter Agreement. By a letter dated October 1, 1992, CFC informed Merrill Lynch that it believed that Calex's investment account "constitutes collateral security" for the Guarantee and that it considered Merrill Lynch to be contractually bound by the Letter Agreement. Merrill Lynch denied any contractual obligation to CFC.

On April 30, 1993, CFC filed this action against Merrill Lynch, seeking a declaratory judgment that Merrill Lynch remained contractually obligated to maintain at least $2.5 million in Calex's account. Merrill Lynch answered and filed a counterclaim for interpleader, requesting that the district court determine whether CFC or Calex was entitled to the assets in dispute.

In 1993, CFC acquired control of 99.97% of the shares of Prodipe. On April 12, 1996, MIF, a corporation controlled by Mery-Sanson (one of the guarantors of the Prodipe Loan), purchased all of CFC's rights with respect to the Prodipe loan, the Guarantee, the arrangement with Merrill Lynch, and this litigation, and also acquired voting control of Prodipe. At the same time, CFC and MIF released Prodipe and Mery-Sanson from their obligations under the loan. MIF was allowed to intervene as a plaintiff in this case.

The district court held a bench trial on June 15, 1998. In September 1998, the district court entered judgment for Merrill Lynch and Calex on the ground that plaintiffs' release of Prodipe from its loan obligations simultaneously released the guarantors from their obligations. See Management Investment Funding Ltd. v. Merrill Lynch, Pierce, Fenner & Smith Inc., 19 F. Supp. 2d 129, 135-38 (S.D.N.Y. 1998). This Court reversed the district court, holding that the general waiver of defenses included in the Guarantee prevented the guarantors' obligations from being discharged by the lender's release of the principal debtor. See Compagnie Financiere v. Merrill Lynch, Pierce, Fenner & Smith Inc., 188 F.3d 31, 37-38 (2d Cir. 1999). This Court remanded for consideration of any other applicable defenses. See id. at 38.

On remand, Calex moved for summary judgment, arguing that the following defenses to enforcement of the Letter Agreement entitled it to judgment as a matter of law: (1) the release terminated the Letter Agreement; (2) the Letter Agreement was not backed by consideration; and (3) plaintiffs lacked standing to enforce the Letter Agreement. The district court rejected Calex's arguments regarding its second and third defenses, a holding that Calex does not appeal. In regard to Calex's first defense, however, the district court found that the release extinguished the obligations under the Letter Agreement.

Specifically, the district court determined that the termination provision in the Weinstock Instruction Letter, which states in relevant part that "[i]n no event shall this letter . . . have any further force or effect following payment in full by Prodipe of its obligations under the Loan Agreement," was unambiguous and conveyed a "'definite and precise meaning' that Prodipe's release terminates the Letter Agreement." The district court rejected plaintiffs' argument that summary judgment was inappropriate because material issues of fact existed regarding whether the Weinstock Instruction Letter was part of the parties' agreement and whether Calex's suggested reading of the termination provision in the instruction letter was inconsistent with the Letter Agreement's fundamental purpose such that Calex's interpretation could not be indicative of the parties' intent. The district court held that the Letter Agreement incorporated the Weinstock Instruction Letter by reference and stated that it was "not convinced, in light of the limited nature of the security provided by the Letter Agreement, that it is necessarily inconsistent for the parties to have also agreed that the...