Al Baraka Bancorp (Chicago), Inc. v. Hilweh

• Decision Date: 16 December 1994
• Docket Number: No. 93-593,93-593
• Citation: 656 A.2d 197,163 Vt. 148
• Parties: AL BARAKA BANCORP (CHICAGO), INC. v. Munhib HILWEH, the Hilweh Enterprises Corp., and Norstar Bank of Upstate New York, Inc.
• Court: Vermont Supreme Court

Page 197

656 A.2d 197

163 Vt. 148

AL BARAKA BANCORP (CHICAGO), INC. v. Munhib HILWEH, the Hilweh Enterprises Corp., and Norstar

Bank of Upstate New York, Inc.

No. 93-593.

Supreme Court of Vermont.

Dec. 16, 1994.

Motion for Reargument Denied

Jan. 5, 1995.

Donald J. Rendall, Jr. of Sheehey Brue Gray & Furlong P.C., Burlington, and Jeffrey B. Lieberman and John J. Sikora, Jr. of Barak, Ferrazzano, Kirschbaum & Perlman, Chicago, IL, for plaintiff-appellant.

George A. Michak of Eckert Seamans Cherin & Mellott, Harrisburg, PA, Gregory S. Mertz of McCormick, Fitzpatrick & Mertz, P.C., Burlington, and David J. Wukitsch of McNamee, Lochner, Titus & Williams, P.C., Albany, NY, for defendant-appellee.

Before ALLEN, C.J., and GIBSON, DOOLEY, MORSE and JOHNSON, JJ.

DOOLEY, Justice.

This is a mortgage foreclosure action in which two competing mortgagees--Al Baraka Bancorp (Chicago), Inc., plaintiff, and Norstar Bank of Upstate New York, Inc., defendant--are seeking to reach mortgaged property in Colchester, Vermont. The mortgagor, The Hilweh Enterprises Corp. (HEC) of Plattsburg, New York, did not contest foreclosure and has not appeared here. Plaintiff initiated this action, relying on HEC's default in making payments pursuant to an agreement, bond, and mortgage and named defendant as an inferior mortgagee. Defendant filed an answer, counterclaim, and cross-claim for foreclosure, arguing in part that plaintiff's mortgage is unenforceable because it does not secure lawful indebtedness. The trial court granted defendant's motion for summary judgment on the counterclaim, awarding it a foreclosure judgment, and dismissed plaintiff's foreclosure complaint. Plaintiff has appealed. We affirm.

Plaintiff and HEC entered into two financial agreements, each evidenced by three documents: the Agreement, the Bond, and the Mortgage. In the first in October 1989, plaintiff provided HEC $1,400,000. In the second in October 1990, plaintiff increased the amount paid to HEC by $217,000 to a total of $1,617,000. The documents in the second transaction are modifications of those in the first agreement to reflect the additional amount of money. It is appropriate to treat the agreements together as one transaction.

In the Agreement, plaintiff agreed to tender a total of $1,617,000 in exchange for 231 shares of nonparticipatory preferred shares in HEC, and a non-interest-bearing bond in the amount of $1,617,000, secured by a mortgage on Vermont property. The shares entitled plaintiff to receive cumulative dividends at a rate of 14% out of any surplus or net profits of the corporation before common shareholders could receive dividends. Although the preferred stock did not generally confer voting rights, approval of a majority of preferred shareholders (consisting only of plaintiff) is required for selling assets outside the normal course of business, issuing additional stock, borrowing funds, and making loans and like transactions. HEC had the right to redeem the preferred shares at $7,000 per share at any time if funds were available. It was obligated to redeem all the preferred shares by October 4, 1991 (at a total redemption value of $1,617,000) and to pay all dividends that had accumulated until that time. By mutual written agreement, the redemption period could be extended another two years. The Agreement also included an "equity kicker" allowing plaintiff to convert its preferred shares to common shares on a one-for-one basis. If shares were converted or redeemed, the principal amount would decrease $7000 per share; thus, if all 231 preferred shares were either converted or redeemed, the principal would be reduced to zero ¹.

The Bond, which is expressly subject to the terms of the Agreement, obligated HEC to pay to plaintiff the full sum of $1,617,000 on or anytime before October 6, 1991, two days after the deadline for redemption of the preferred stock. The Bond is subject to the terms of the agreement. It authorizes HEC to prepay "the indebtedness" in whole or in part provided that dividends under the Agreement had been paid in full through the date of prepayment. An acceleration clause in the Bond states that the full sum plus dividends would become due, at plaintiff's option, if HEC defaulted in the payment of any installment of principal or dividend due under the Agreement.

The Mortgage states that HEC is "justly indebted" to plaintiff under the Agreement for "indebtedness" in the amount of $1,617,000, as evidenced by the Bond. The Mortgage secures the payment of the principal sum and dividends pursuant to the Agreement and the Bond, the performance of covenants and agreements, and any "other indebtedness" of HEC to plaintiff.

There is no dispute about the documents comprising the arrangement between plaintiff and HEC; only their proper interpretation is at issue. Although there was some initial skirmishing about the fact, we also take it as undisputed that HEC is insolvent. ²

Defendant argues from the documents and the fact of HEC's insolvency that there is no longer an obligation for HEC to pay plaintiff and, therefore, the Mortgage cannot be enforced. Defendant's argument is based primarily on § 513(a) of the New York Business Corporation Law, which allows a corporation to "redeem its redeemable shares ... except when currently the corporation is insolvent or would thereby be made insolvent." N.Y.Bus.Corp.Law § 513(a) (McKinney 1986). It views the statute as simply an application of the basic principle that a stockholder, as opposed to a creditor, is owed nothing when the corporation becomes insolvent. It argues that plaintiff is a stockholder not a creditor, whose only enforceable right under the Agreement was to have the preferred stock redeemed, and this right was extinguished on insolvency.

Plaintiff disputes defendant's claims for the arrangement between it and HEC, characterizing it as a loan rather than an equity investment. Thus, it views HEC's insolvency as irrelevant to the existence of an underlying "debt" which can be enforced by mortgage foreclosure.

On defendant's motion for summary judgment, based on the undisputed transaction documents and certain affidavits described below, the trial court granted judgment to defendant, concluding that plaintiff was a stockholder in HEC, not a creditor, and no debt existed to be enforced by the Mortgage.

Before we reach the heart of the matter, we dispose of three collateral issues if only to note their existence or indicate why they are not determinative. The first is the question of which state's law applies to this dispute. The Mortgage Security Agreement between plaintiff and HEC attempted to answer that in part by providing that the Mortgage and Agreement "shall be construed, interpreted and governed by the laws of the State of Illinois," except where the mortgaged premises are located in another state "the enforcement hereof against the premises ... and remedies therefor, shall be governed by the laws of the jurisdiction in which the premises ... are located." We interpret this to mean that questions of the interpretation of the documents between plaintiff and HEC are to be determined under Illinois law and issues related to mortgage foreclosure are to be determined by Vermont law. We see no reason why this provision is invalid. See Restatement (Second) of Conflict of Laws § 187 (1971). The parties have not indicated how Illinois law bearing on contract interpretation is different from that of Vermont. Thus, we have relied on Vermont contract law where indicated.

The determinative questions in this case, however, actually relate to a different area of the law, not addressed in the Agreement, that is, the powers and duties of a business corporation. The parties agree that New York law controls these questions because HEC is a New York corporation. This conclusion is consistent with choice of law principles. See id. §§ 302(2), 303.

Second, the trial court accepted defendant's argument that it could stand in HEC's position for purposes of contesting the obligation to pay plaintiff and the validity of the mortgage, and plaintiff has not challenged this conclusion. Thus, once the trial court concluded there was no longer a debt upon which plaintiff could predicate an action for foreclosure, it assumed that the proper remedy was to dismiss plaintiff's foreclosure action. Retrovest Assocs. v. Bryant, 153 Vt. 493, 500, 573 A.2d 281, 285 (1990). We have not reexamined this assumption.

Third, in opposition to the motion for summary judgment, plaintiff submitted affidavits of its employees stating that plaintiff intended the transaction with HEC to be a loan. For example, the affidavit of Chari Aweidah, Vice-President of plaintiff, states that the transaction with HEC was a loan of money but was structured differently because plaintiff, a subsidiary of a Saudi Arabian partnership, must comply with Islamic law, which forbids the charging of interest. Plaintiff argues that at a minimum these affidavits should defeat summary judgment because they show the real intent of the contracting parties.

The requirements for summary judgment are familiar. It is appropriate where there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law, after giving the benefit of all reasonable doubts and inferences to the nonmoving party. See State v. Delaney, 157 Vt. 247, 252, 598 A.2d 138, 141 (1991); V.R.C.P. 56(c). There is no genuine issue for trial, however, " '[w]here the record taken as a whole could not lead a rational trier of fact to find for the nonmoving party.' " Kelly v. Town of Barnard, 155 Vt. 296, 305 n. 5, 583 A.2d 614, 619 n. 5 (1990) (quoting Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S.Ct. 1348, 1356, 89 L.Ed.2d 538 (1986)). The standard on review by this Court is the same as the standard applied by the trial court in ruling on the motion. See Cavanaugh v. Abbott Lab., 145 Vt. 516,...