In re K-Com Micrographics, Inc., Bankruptcy No. 88-00836

• Decision Date: 08 October 1993
• Docket Number: Bankruptcy No. 88-00836,Adv. No. 91-0105.
• Citation: 159 BR 61
• Court: United States Bankruptcy Courts – District of Columbia Circuit
• Parties: In re K-COM MICROGRAPHICS, INC., a/k/a Komco, Inc., Debtor. K-COM MICROGRAPHICS, INC., Plaintiff, v. NEIGHBORHOOD ECONOMIC DEVELOPMENT CORPORATION, Defendant.

159 B.R. 61 (1993)

In re K-COM MICROGRAPHICS, INC., a/k/a Komco, Inc., Debtor K-COM MICROGRAPHICS, INC., Plaintiff, v. NEIGHBORHOOD ECONOMIC DEVELOPMENT CORPORATION, Defendant.

Bankruptcy No. 88-00836, Adv. No. 91-0105.

United States Bankruptcy Court, District of Columbia.

October 8, 1993.

David A. Handzo, Jenner & Block, Washington, DC, for plaintiff.

Richard G. Wise, Greenstein DeLorme & Luchs, P.C., for defendant.

DECISION DENYING PLAINTIFF'S MOTION FOR AMENDMENT OF JUDGMENT OR FOR NEW TRIAL

S. MARTIN TEEL, Jr., Bankruptcy Judge.

In December 1992, the court tried a breach of contract claim brought by the plaintiff K-Com Micrographics, Inc. ("K-Com"). At the trial's end, the court rendered an oral decision in favor of the defendant Neighborhood Economic Development Corporation ("NEDCO"). K-Com has moved for amendment of judgment or for a new trial. The court will deny that motion because K-Com never adequately put NEDCO on notice that a condition precedent to performance by NEDCO — the execution of a suitable subordination agreement with the U.S. Small Business Administration (SBA) — had been met and, therefore, that under the contract NEDCO was obligated to perform. Alternatively, assuming such notice was given or was in fact unnecessary, the doctrines of waiver and equitable estoppel each support a holding that K-Com lost the right to require NEDCO to perform.

FACTS

As in the oral decision, the court will assume, without actually deciding the issue, the existence by fall 1989 of an oral contract with the following terms. NEDCO promised to provide K-Com $450,000.00 in funding. Of that amount, $300,000.00 was to be in the form of loan with the remaining $150,000.00 in the form of a purchase of stock. K-Com was to use the $300,000.00 to purchase equipment. That investment was to be secured by a first lien on the equipment purchased and a blanket lien on the rest of the debtor's assets.

Ensuring that NEDCO would receive a first lien on the equipment purchased, gave rise to an implied condition precedent — that is, that the SBA, then the holder of a floating blanket lien on the debtor's assets, execute a subordination agreement in favor of NEDCO. This proved a stumbling block, and while the SBA did execute one subordination agreement in November 1989 ("the subordination agreement"), a mutually acceptable subordination agreement was never executed. Nonetheless, at trial K-Com insisted that the subordination agreement did in fact fulfill the condition precedent so that NEDCO was obligated to perform under the parties' oral contract.

The court rested its oral decision on four findings of fact: (1) that K-Com never demanded performance of the alleged contract from NEDCO, (2) that K-Com acted as though it acquiesced in NEDCO's position that the subordination agreement was unsatisfactory, (3) that the amount of time that passed between entering into the contract and rejecting it was more than ample for obtaining a suitable subordination agreement, and (4) that K-Com's viability as a vehicle for investment had almost completely eroded by the time the contract was rejected. Based on these findings, the court held that NEDCO was never under a obligation to perform and that NEDCO was justified in rejecting the contract. Therefore, there was no breach of contract.

Within 10 days of entry of judgment in NEDCO's favor, K-Com moved for amendment of judgment or for a new trial under Fed.R.Civ.P. 59 and 60, made applicable in these proceedings by Fed.R.Bankr.P. 9023 and 9024. In its supporting memoranda, K-Com raises numerous arguments and seeks to introduce new evidence which, it maintains, require judgment in its favor or at least a new trial. The points raised by K-Com will be addressed below.

DISCUSSION

For the most part, in denying K-Com's motion, the court relies on its oral decision but will make additional factual findings as necessary as well as refine earlier factual findings.

I

K-Com maintains that it was under no duty to notify NEDCO that the subordination agreement fulfilled the condition precedent because NEDCO unequivocally stated that the subordination agreement was unsatisfactory. Thus, K-Com avers, providing notice would have been a futile act. K-Com also seeks to introduce evidence that NEDCO was in fact put on notice that all conditions had been met and performance was thus due.

A

From the general rules governing when a contracting party must demand performance from the other party, see generally 17A Am.Jur.2d Contracts § 610 (1991); 17A C.J.S. Contracts § 478 (1963 & Supp.1993), the common sense principle can be derived that a contracting party must provide notice or demand performance only where the other party would have no cause to perform absent such notice or demand. In the context of a condition precedent, notice must be given only when the contracting party whose performance is conditional cannot ascertain for itself whether the condition has been met.

But even where demand or notice is required, a contracting party is excused from that requirement if the other party has repudiated the contract or otherwise indicated it refuses to perform. E.g., Fargo Pub. Library v. Fargo Urban Renewal Agency, 185 N.W.2d 500, 505 (N.D.1971); Monroe v. Fetzer, 56 Wash.2d 39, 350 P.2d 1012, 1014 (1960). This rule rests on the maxim that "the law does not require the doing of a useless act." Fink v. Denbeck, 206 Neb. 462, 293 N.W.2d 398, 401 (1980); accord Fargo, 185 N.W.2d at 505.

In this case, notwithstanding NEDCO's statements that the subordination agreement was inadequate, K-Com had a duty to inform NEDCO that the subordination agreement met the contract requirements and that therefore NEDCO's performance was expected. Providing this notice would not have been a useless act. There is no evidence K-Com and NEDCO had any understanding as to what constituted an adequate subordination agreement. Thus, it was open to debate whether the subordination agreement was adequate to fulfill the condition precedent. As a result, NEDCO, believing the subordination agreement did not meet the condition precedent, refused to accept the subordination agreement and therefore had no cause to perform. NEDCO in no way repudiated the contract but remained ready, and indicated its willingness, to perform on execution of a satisfactory subordination agreement. No evidence was introduced at trial showing K-Com conveyed its belief that the subordination agreement was satisfactory. Consequently, NEDCO never understood, nor did it have any reason to understand, it was under any obligation to perform. The parties' attempts to obtain a subordination agreement acceptable to NEDCO served to validate NEDCO's belief that the subordination agreement did not fulfill the condition precedent.

This case can be distinguished from cases like Chemetron Corp. v. McLouth Steel Corp., 522 F.2d 469 (7th Cir.1975), relied on by K-Com. In that case the relevant contractual obligation was a promise to supply, on a monthly basis, a minimum amount of a product and, on written demand, to supply a further amount of the product up to a maximum amount. The obligation was straightforward and clearly spelled out in a written contract. There was never any need to resort to interpretation to delineate the parties' responsibilities under the contract. Accordingly, there was no point in demanding a performance which had been repeatedly refused and which both parties knew was not forthcoming.

In contrast here, there was no written contract provision spelling out what constituted an adequate subordination agreement. Whether the condition precedent had been met was debatable. If K-Com thought it had been met and NEDCO should therefore perform, K-Com should have let NEDCO know. Otherwise, NEDCO, who found the subordination agreement unacceptable, had no cause to perform.

B

K-Com seeks to introduce new evidence of a demand for performance. It consists of an affidavit of its bankruptcy counsel, Janet Nesse, who was involved in representing K-Com in its negotiations with NEDCO and the SBA, and a letter dated December 6, 1989, from her to Lloyd Arrington, who was handling the deal for NEDCO. (Pl.'s Mot. for Amt. of J. or for New Trial, Attach. A (letter) & B (affidavit).)

In her affidavit Nesse describes a meeting held shortly before she wrote the December 6, 1989 letter. According to Nesse, she and other K-Com representatives met with Arrington to go over a list of closing documents. At the meeting Nesse and the K-Com representatives confirmed that K-Com had supplied the necessary closing documents including the subordination agreement. They informed Arrington, Nesse continues, that K-Com believed it had fulfilled all conditions precedent to closing and, in particular, that the subordination agreement fulfilled the condition precedent of subordinating the SBA. Therefore, Nesse alleges K-Com told NEDCO that it expected NEDCO to close the deal in the very near future. Nesse further avers that in the December 6, 1989 letter to Arrington, she informed him that it was essential to settle the K-Com financing by December 10, 1989.

In the letter Nesse indicated that it was essential to settle the loan by December 10, 1989. She expressed her "understanding" that all documents requested had been supplied, noting that the SBA chose to sign the original subordination agreement. Nesse went on to address the voting trust. She reminded Arrington that "neither the complete subordination nor the voting trust were conditions of the financing commitment." Nesse concluded by expressing her "hope to hear from Arrington as soon as possible on the status of this matter."

The parties contest whether the record should be reopened under Rule 59 to admit this new evidence. The court need not decide this issue because its resolution would not affect the outcome of this case. First, the court believes that neither the affidavit nor the letter suffices to constitute a demand...