CORSAIR v. ENGINEERED FRAMING SYS., INC.

• Decision Date: 16 March 2010
• Docket Number: Case No. PWG-09-1201.
• Citation: 694 F. Supp.2d 449
• Parties: CORSAIR SPECIAL SITUATIONS FUND, L.P., Plaintiff, v. ENGINEERED FRAMING SYS., INC., Defendants.
• Court: U.S. District Court — District of Maryland

694 F. Supp.2d 449

CORSAIR SPECIAL SITUATIONS FUND, L.P., Plaintiff, v. ENGINEERED FRAMING SYS., INC., Defendants.

Case No. PWG-09-1201.

United States District Court, D. Maryland, Northern Division.

March 16, 2010.

Robert Scott Brennen, Miles and Stockbridge PC, Baltimore, MD, Jessica A. Duhoffmann, Matthew S. Sturtz, Miles and Stockbridge PC, Towson, MD, for Plaintiff.

Edward W. Chang, Thomas Vecchio, Dilworth Paxson LLP, Philadelphia, PA, for Defendants.

MEMORANDUM AND ORDER

PAUL W. GRIMM, United States Magistrate Judge.

This Memorandum and Order addresses the Motion for Summary Judgment and Memorandum in Support of Motion for Summary Judgment, Paper Nos. 25 & 25-1, that Plaintiff Corsair Special Situations Fund, L.P ("Corsair") filed on September 29, 2009; Defendants' Amended Response to Plaintiff's Motion for Summary Judgment and Defendants' Amended Memorandum of Law in Opposition to Plaintiff's Motion for Summary Judgment, Paper Nos. 32 & 32-1, that Defendants Engineered Framing Systems, Inc. ("Engineered"), EFS Structures, Inc. ("EFS"), John J. Hildreth, and Marie N. Hildreth, filed on December 23, 2009; and Plaintiff's Supplemental Reply Memorandum in Support of Motion for Summary Judgment, Paper No. 33, filed on January 11, 2010.¹ I find that a hearing is unnecessary in this case. See Local Rule 105.6. For the reasons stated below, Plaintiff's Motion for Summary Judgment is GRANTED IN PART and DENIED IN PART. This Order disposes of Paper Nos. 25, 32, and 33.

I. BACKGROUND

In an earlier action commenced on August 10, 2006, Plaintiff filed a Complaint against Defendants, alleging that they defaulted on a commercial loan that Plaintiff had provided. Pl.'s Mem. 2; Corsair Special Situations Fund, L.P. v. Engineered Framing Sys., Inc., No. WDQ-06-cv-2081 (D.Md. 2006) (the "Note Action"). On May 8, 2007, the parties settled the Note Action with a Settlement Agreement and General Release ("Settlement Agreement") that provided that Defendants would pay Plaintiff a total of $5,000,000, in four installations. Settlement Agreement 1, 3, Pl.s' Mem. Ex. B, Paper No. 25-3. On January 9, 2008, because Defendants were delayed in their final two payments, totaling $4,875,000, the parties entered into a First Amendment to Settlement Agreement and General Release ("First Amendment" or "1st Am."), which extended the deadlines for Defendants' outstanding payments, reduced the final payment, and added interim payments. 1st Am. 2 ¶ 1(a), Pl.'s Mem. Ex. C, Paper No. 25-4. As amended, payments of $75,000 were due at the end of each month from January 2008 through May 2008, and a payment of $4,500,000 was due on June 30, 2008, for a total of $4,875,000. Id.

In addition, Defendants "agreed to produce to Corsair a bona fide commitment letter from a third-party lender or investor on or before 3/31/08, reflecting a commitment on the part of the third-party lender or investor to fund, at a minimum, the final payment due under the First Amendment," and "to produce draft loan documents or documents reflecting a binding agreement to invest in Engineered or EFS on or before 4/30/08." 1st Am. 5 ¶ 10. The First Amendment stated that failure to produce these documents would be a default of the First Amendment. It also provided that, if Defendants did not make their payments, Plaintiff would notify Defendants in writing, and upon receiving notice, Defendants would "have ten (10) business days from the date of receipt to cure said non-payment," or Plaintiff would "be entitled to declare Default." Id. at 4 ¶ 5(a).

In addition, in exchange for "additional collateral security," Plaintiff agreed "to provide a subordination of their position against the assets of EFS Structure to an interim lender...."² Id. at 1 ¶ 5. With regard to the additional security, the First Amendment identified Patent No. 7,299,596 (the "Patent"), which Defendant John Hildreth had received on November 27, 2007. Id. at 3 ¶ 2. The First Amendment provided:

a. For good, valuable and sufficient consideration, John J. Hildreth hereby grants to Corsair a security interest in all rights, title and interest in and to the Patent and to any and all inventions and improvements described or claimed in the Patent, any and all foreign applications or filings of the Patent, all licenses, royalties, damages, claims and payments now or hereafter due and/or payable under or with respect to the Patent including, without limitation, damages and payments for past and future infringements of the Patent (the "Intellectual Property") as collateral security for prompt payment of Engineered's present indebtedness as defined in the Settlement Agreement all as more fully set forth in a Patent Security Agreement of even date herewith from John J. Hildreth in favor of Corsair, a copy of which is set forth on Exhibit A which shall be executed simultaneously with this Agreement.

b. The foregoing security interest is a present grant of a security interest and only upon the occurrence of the non-payment of any of the settlement amounts due under the Settlement Agreement as amended hereby, or any other default under the Settlement Agreement shall the security interest become an absolute assignment to Corsair or others, and Corsair is hereby granted an irrevocable power of attorney to so designate such absolute assignment on the records of the U.S. Patent and Trademark Office upon any such default.

1st Am. 3 ¶ 2(a)-(b). Also, the First Amendment provided that Defendant John Hildreth had not used and would not use "the Patent or other Intellectual Property as collateral or security for any loan, financial obligation, or any other purpose without Corsair's express written consent, which shall not be unreasonably withheld." Id. at 3 ¶ 4. Further, even with consent, Hildreth would only use the Patent to secure a loan to "be used, at least in part, to satisfy the payment obligations set forth in the First Amendment." Id. The Patent Security Agreement, dated December 20, 2007, provided:

The Borrower i.e., John Hildreth hereby irrevocably pledges and assigns to, and grants the Secured Party i.e., Corsair a security interest (the "Security Interest") with power of sale to the extent permitted by law, in the Patents whether or not registered with the U.S. Patent and Trademark Office to secure payment of the Obligations i.e., debts that Defendants owed Plaintiff. As set forth in the Settlement Agreement, the Security Interest is coupled with a security interest in substantially all of the personal property of the Borrower. This Agreement grants only the Security Interest herein described, is not intended to and does not affect any present transfer of title of any patent or application.

1st Am. Ex. A at 2 ¶ 2.

As for subordination of Plaintiff's "position against the assets of EFS Structure," 1st Am. 1 ¶ 5, the First Amendment provided:

Corsair agrees to subordinate its lien position from time to time on terms which shall be fully satisfactory to Corsair in its sole discretion, which agreement will not be unreasonably withheld, to enable EFS to obtain receivable/factoring financing expressly provided that, Corsair will receive ten (10) percent on the initial receivable/factoring financing and twenty-five (25) percent of the proceeds obtained by EFS from any subsequent receivable/factoring financing (the "New Loan Proceeds Payments") to which Corsair agrees to subordinate (the "New Loan"). EFS shall use the balance of the proceeds from the New Loan for working capital for its business to stabilize the company and permit long term replacement financing in order to pay off Corsair and other creditors....

1st Am. 2 ¶ 1(b) (emphasis added).

EFS indeed sought to obtain Corsair's agreement to subordinate its lien to enable EFS to obtain receivable factoring financing. Shlomit Ophir-Harel, Chief General Counsel for Platinum Funding Services, LLC ("Platinum"), a third-party lender, e-mailed Paul Hahn, counsel for Corsair on January 8, 2008:

Attached are the factoring agreement and the purchase and sale agreement, which were forwarded to EFS, for execution. Kindly forward me the executed settlement agreement between Corsair and EFS. Once you advise me that Corsair is willing to subordinate the accounts receivable to Platinum, I will forward you a subordination agreement.

Defs.' Am. Mem. Ex. B, Paper No. 32-8. Although the e-mail does not appear to have had any attachments, see id., Ronald Buck and Charles Cheever, managing members of Corsair Holdings, LLC, the General Partner of Corsair, acknowledged that Platinum sent an unsigned factoring agreement to Corsair in early 2008. Aff. of Ronald J. Buck ¶ 12, Pl.'s Mem. Ex. A, Paper No. 25-2; Charles Cheever Dep. 39:7-9, 15-16, Nov. 17, 2009, Defs.' Am. Mem. Ex. C, Paper No. 32-9; see Defs.' Am. Mem. Ex. 5 to Ex. A ("Factoring Agreement"), Paper No. 32-7. The Factoring Agreement stated that EFS "will tender to Platinum certain of Seller's i.e., EFS's invoices to be rendered to Seller's customers ('Account Debtors') with respect to goods sold and delivered to, or services performed for, such Account Debtors by Seller (individually, an `Account Receivable' and collectively, the `Accounts Receivable')," and "Platinum ... will notify Seller as to which of the individual Accounts Receivable so tendered, if any, Platinum elects to purchase." Factoring Agreement 1. Corsair did not respond to the Factoring Agreement or the e-mail. Cheever Dep. 40:4-6.

On April 11, 2008, Plaintiff's counsel informed Defense counsel in writing that Defendants were "in material breach of the Settlement Agreement for, among other things, failure to make payment to Plaintiff and failure to deliver a bona fide commitment letter from a third-party lender or investor." Pl.'s Mem. Ex. D, Paper No. 25-5. Defendants did not cure the alleged breach within ten days of the notice, and Plaintiff declared Defendants in default. Pl.'s Mem. 11 & Ex. E, Paper No. 25-6. Plaintiff filed an Assignment...