Mellon Bank, N.A. v. United Bank Corp. of New York

• Decision Date: 09 August 1994
• Docket Number: D,No. 1752,1752
• Citation: 31 F.3d 113
• Parties: MELLON BANK, N.A., Plaintiff-Appellee, v. UNITED BANK CORPORATION OF NEW YORK; Subsidiaries Employee Stock Ownership Trust, United Bank Corporation of New York; Michael A. Jacobs, Defendants-Appellants. ocket 93-9358.
• Court: U.S. Court of Appeals — Second Circuit

Page 113

31 F.3d 113

MELLON BANK, N.A., Plaintiff-Appellee, v. UNITED BANK CORPORATION OF NEW YORK; Subsidiaries Employee Stock Ownership Trust, United Bank Corporation of New York; Michael A. Jacobs Defendants-Appellants.

No. 1752, Docket 93-9358.

United States Court of Appeals Second Circuit.

Argued May 27, 1994.

Decided Aug. 9, 1994.

James M. Reilly, Albany, NY (Herzog, Engstrom & Koplovitz, of counsel), for plaintiff-appellee.

J. Lawson Brown, Jr., Albany, NY (Harris, Beach & Wilcox, of counsel), for defendants-appellants.

Before: VAN GRAAFEILAND, WINTER and ALTIMARI, Circuit Judges.

ALTIMARI, Circuit Judge:

This appeal concerns the interpretation of a clause of a loan agreement between plaintiff-appellee Mellon Bank, N.A. ("Mellon") and defendants-appellants United Bank Corporation of New York ("UBC") and Subsidiaries Employee Stock Ownership Trust ("ESOT") (collectively herein "Defendants"). The loan agreement provides for acceleration of the balance of the loan by Mellon in the case of certain "Events of Default" by Defendants. At issue is whether the default of a financial covenant by Defendants falls within the loan agreement's definition of "Events of Default" which can trigger acceleration of the loan. The district court granted summary judgment for Mellon, finding that the definitional section in question unambiguously includes the default of the financial covenant. For the reasons discussed below, we conclude that summary judgment was improperly granted and remand for further proceedings.

BACKGROUND

The loan transaction underlying this appeal involves various agreements between Mellon, UBC, and ESOT. For purposes of this appeal, however, all that is important is that Mellon lent ESOT two million dollars and that loan was guaranteed by UBC. The actual promissory note between Mellon and ESOT will be referred to as the Loan Agreement, and all the documents relating to the transaction will be referred to collectively as the Loan Documents.

Beginning in November 1989, UBC reported to Mellon that UBC was not in compliance with Article 4.2(a) of the Loan Agreement. That section requires that UBC not allow its nonperforming assets to exceed 4.0% of its total loans ("bad-debt ratio covenant"). After a period of negotiations concerning the default, Mellon notified the Defendants that it was invoking Article 6.2 of the Loan Agreement, permitting it to accelerate the balance of the Loan after an occurrence of an "Event of Default."

Defendants failed to pay the accelerated principal balance, and Mellon commenced an action in the Northern District of New York seeking, among other things, to recover against ESOT pursuant to the promissory note and to recover against UBC pursuant to the guarantee. The district court (McCurn, J.) granted summary judgment in favor of Mellon. The court found that it was clear that Defendants had breached the Loan Agreement, and that the agreement unambiguously Defendants now appeal.

provides that such breach constitutes an "Event of Default" entitling Mellon to accelerate the loan.

DISCUSSION

A. Contract Interpretation

Neither party disputes that a breach of Article 4.2 of the Loan Agreement has occurred. Rather, the question on appeal is whether Defendants' breach of the financial covenant constitutes an "Event of Default" under Article 6.1 of the agreement. If it does, Article 6.2 permits acceleration of the loan by Mellon.

Article 6.1 provides in pertinent part,

An Event of Default shall mean the occurrence of one or more of the following described events: ...

(d) The Borrower, the Guarantor or any other member of the Controlled Group shall default in the performance of any other covenant, condition, obligation or provision under any Loan Document and such default shall constitute an Event of Default under such Loan Document; ...

The district court concluded that this provision unambiguously includes the default of the financial covenant and granted summary judgment for Mellon. "Our review of such a grant is de novo, employing the same tests as those applied at the district court." Sayers v. Rochester Tel. Corp., 7 F.3d 1091, 1094 (2d Cir.1993) (citation omitted). Summary judgment is only proper in contract disputes if the language of the contract is " 'wholly unambiguous.' " Wards Co. v. Stamford Ridgeway Assocs., 761 F.2d 117, 120 (2d Cir.1985) (quoting Heyman v. Commerce & Indus. Ins. Co., 524 F.2d 1317, 1320 (2d Cir.1975)); see also Williams & Sons Erectors v. South Carolina Steel, 983 F.2d 1176, 1183 (2d Cir.1993) ("Summary judgment may be granted when the provisions of a contract convey a definite and precise meaning, absent any ambiguity.") (citations omitted). The question of whether a contract is clear or ambiguous is to be decided by the court as a matter of law. See Sayers, 7 F.3d at 1094 (citations omitted).

Each party claims that the provision unambiguously supports its position. Mellon claims that because Article 4.2 is a covenant under the Loan Agreement, it falls within the language of Article 6.1(d) which includes "any other covenant ... under any Loan Document," and its breach therefore clearly constitutes an "Event of Default." The district court agreed, finding any other interpretation of the language of Article 6.1(d) would lead to the unreasonable conclusion that the financial covenants listed in Article 4 have no meaning.

Defendants claim that the above interpretation is counter to the plain language of the section. According to them, Article 6.1(d) provides for a two-part test: (1) Defendants must default in performance of a covenant under a Loan Document, and (2) this default must be defined as an Event of Default under that particular Loan Document. Because the Loan Agreement does not specifically define the default of Article 4.2 as an Event of Default, Defendants claim that the two part test has not been met.

In reviewing the two interpretations, "we need not determine which is the more likely interpretation; we need merely decide whether [each] ... is sufficiently reasonable to render the clause ambiguous." Wards Co., 761 F.2d at 121. Defendants' interpretation gives "literal effect" to all the words of the clause, see Rothenberg v. Lincoln Farm Camp, Inc., 755 F.2d 1017, 1019 (2d Cir.1985), and is quite logical when read in the context of all the Loan Documents. It seems that the purpose of the second clause of paragraph (d) may have been to include in the definition of Events of Default of the Loan Agreement, Events of Default labeled as such in the other Loan Documents, i.e., the guarantee or pledge agreement. Given that the clause uses the term Loan Documents, however, it includes the Loan Agreement itself. Consequently, because the Loan Agreement does not specifically define a default of the bad-debt ratio covenant as an Event of Default, such default is not an Event of Default.

On the other hand, although Mellon's explanation strays somewhat from the plain meaning of the words used in the second Given the two conflicting reasonable interpretations, we find the contract ambiguous. See Sayers, 7 F.3d at 1095; Williams & Sons, 983 F.2d at 1184. As a general matter, we have held that when a contract is ambiguous, its interpretation becomes a question of fact and summary judgment is inappropriate. See, e.g., Walk-In Med. Center, Inc. v. Breuer...