Merrill Lynch Interfunding, Inc. v. Argenti

• Decision Date: 28 August 1998
• Docket Number: Docket No. 97-9151
• Citation: 155 F.3d 113
• Parties: MERRILL LYNCH INTERFUNDING, INC., Plaintiff-Appellant, v. Patrick ARGENTI and Jean Argenti, Defendants-Counter-Claimants-Appellees.
• Court: U.S. Court of Appeals — Second Circuit

Page 113

155 F.3d 113

MERRILL LYNCH INTERFUNDING, INC., Plaintiff-Appellant, v. Patrick ARGENTI and Jean Argenti,

Defendants-Counter-Claimants-Appellees.

Docket No. 97-9151.

United States Court of Appeals, Second Circuit.

Argued April 2, 1998.

Decided Aug. 28, 1998.

Sanford S. Asher, New York, NY (Gregory E. Galterio, Jaffe and Asher, New York, NY, of counsel), for Plaintiff-Appellant.

Peter S. Herman, New York, NY (Sonya M. Kaloyanides, McLaughlin & Stern, LLP, New York, NY, of counsel), for Defendants-Appellees.

Before: McLAUGHLIN and PARKER, Circuit Judges, and EGINTON, ^* District Judge.

PARKER, Circuit Judge:

Plaintiff-Appellant Merrill Lynch Interfunding, Inc. ("MLIF") appeals from a judgment entered July 17, 1997 in the United States District Court for the Southern District of New York (Thomas P. Griesa, Chief Judge ) following a six-week bifurcated trial before the district court and a jury. MLIF also appeals from an Amended Opinion of the district court granting in part and denying in part MLIF's post-trial motions for judgment as a matter of law pursuant to Fed.R.Civ.P. 50(b), for a new trial pursuant to Fed.R.Civ.P. 59(a) or to alter or amend the judgment pursuant to Fed.R.Civ.P. 59(e).

MLIF commenced this action against Defendants-Appellees Patrick and Jean Argenti (the "Argentis") seeking payment on various promissory notes the Argentis had executed in favor of MLIF in an aggregate principal amount of $6.925 million (the "Argenti Notes"), and the Argentis subsequently interposed counterclaims against MLIF. These counterclaims alleged breach by MLIF of an oral agreement, as well as breach of fiduciary duty by MLIF. At the close of the liability phase of the trial, the district court found the Argenti Notes to be valid and enforceable as a matter of law, and accordingly sent only the Argentis' counterclaims to the jury. The jury returned verdicts in favor of the Argentis on both counterclaims, and subsequently awarded the Argentis damages on those counterclaims. This damage award served to set off a large amount of principal and accrued interest on the Argenti Notes, resulting in a net judgment of approximately $735,000 in favor of MLIF.

I. BACKGROUND

MLIF, a Delaware corporation and subsidiary of the large financial institution Merrill Lynch & Co., Inc., is engaged in the business of conducting middle-market leveraged buyouts and related transactions. As alluded to above, MLIF commenced this suit against the Argentis in April 1992, seeking payment of approximately $11 million in unpaid principal and accrued interest, together with statutory interest on interest and loan collection expenses, on the Argenti Notes. The Argenti Notes represented the personal participation of the Argentis in a series of loans made by MLIF to Argenti, Inc. (the "Company"), a now liquidated corporation, which was owned, founded and controlled by Patrick Argenti, and was engaged in the design and sale of ladies silk garments.

In November 1988, MLIF loaned the Company approximately $15 million in return for a warrant to purchase 40% of the issued and outstanding shares of common stock of the Company, at a price of $1 per share (the "1988 Buyout"). This loan consisted of a subordinated term loan of $11.5 million (the "Junior Loan") to the Company, and a $3.5 million line of credit in favor of the Company. These loans were secured by a security interest granted MLIF in substantially all the assets of the Company, pursuant to a Loan and Security Agreement (the "Corporate Security Agreement").

As part of the 1988 Buyout, MLIF and Patrick Argenti entered into a Stockholders Agreement, dated as of November 10, 1988 (the "Stockholders Agreement"), which, among other things, afforded MLIF the right to appoint two of the Company's five directors. Patrick Argenti and the Company also entered into an Employment Agreement (the "Employment Agreement") incident to the 1988 Buyout. The Corporate Security Agreement, the Employment Agreement and the Stockholders Agreement each contained a provision which sought to prevent oral modification or termination of the agreement.

In July 1990, MLIF and the Company restructured the Junior Loan into a loan for $16.541 million, which sum represented the unpaid principal and interest then outstanding on the Junior Loan. In connection with this restructuring, MLIF and the Company entered into an Amended and Restated Loan and Security Agreement (the "Amended Corporate Security Agreement"), which again contained a no oral modification or termination clause. To evidence this debt, the Company executed an Amended and Restated Term Note with a principal amount of $16.541 million (the "Junior Note"). The Junior Note stated that it was "subject to all of the agreements, terms and conditions" of the Amended Corporate Security Agreement.

MLIF loaned the Company and the Argentis additional monies between 1989 and 1991, with the parties terming these loans "Advances." In November 1989, MLIF advanced $800,000 to the Company, and Patrick Argenti advanced $1.2 million to the Company. MLIF subsequently purchased this $1.2 million advance from Patrick Argenti in July 1990, leaving MLIF as the obligee on the entire $2 million of advances made in 1989. After this purchase, the Company made a promissory note in favor of MLIF in the amount of $2.146 million, representing the principal and accrued interest on the November 1989 advances. Also in July 1990, MLIF advanced an additional $5 million to the Company. This loan was consolidated with the November 1989 advances, into a loan with principal of $7.146 million (the "Senior Loan"). The Company executed a promissory note evidencing this debt, which again was subject to the terms and conditions of the Amended Corporate Security Agreement.

As a condition of the Senior Loan, MLIF required that the Argentis purchase a 53.01% interest therein, or $3.78 million. The Argentis and MLIF entered into a Participation Agreement (the "Participation Agreement"), which memorialized this understanding. In effect, the Participation Agreement amounted to a personal guarantee by the Argentis of the payment of 53.01% of the Senior Loan. The Participation Agreement again contained a no oral modification clause. The Argentis' participation in the Senior Loan was secured by a security interest granted MLIF in certain real property and artwork owned by the Argentis, pursuant to a Security Agreement (the "Personal Security Agreement") and a Mortgage Deed (the "Mortgage Deed"). The Personal Security Agreement also contained a no oral modification clause. The Argentis executed a promissory note in favor of MLIF in the amount of $3.7 million to evidence this debt, and this constituted the first of the Argenti Notes. The original Argenti Note stated that it was "subject to all of the agreements, terms and conditions" contained in the Personal Security Agreement.

Subsequently, MLIF made four additional advances to the Company pursuant to this same structure: with the Argentis participating in the advances, and with written amendments to the operative documents. ¹ These advances were made as follows:

The amendments to the operative documents at each advance included amendments to both the Corporate and the Personal Security Agreements, as well as to the Participation Agreement. Further, with regard to the 4th Additional Argenti Note (which also deferred certain payment obligations under the previous notes), all of the previous Argenti Notes were amended in writing to reflect the same. In the aggregate, as of September 30, 1991, the Argentis personally had executed Notes with a principal amount of $6.925 million.

The need for these additional loans to the Company was caused largely by financial problems the Company began experiencing almost immediately following the 1988 Buyout. These problems were caused by, among other things, the effect of Chinese political crises on the price of silk, and the subsequent recession in the United States. In particular, the first advance (in November, 1989, in the amount of $2 million) was due to a request from CIT Group Factoring ("CIT"), the Company's factor, to make up losses suffered on account of the problems in China. CIT again asked for more money in January 1990, and this eventually led to the restructuring of the Junior Loan. This transaction, however, did not completely satisfy CIT, which Patrick Argenti understood at that time as having told the Company to find another factor.

To address the Company's ongoing problems with CIT, the Company, after discussion with MLIF, sent CIT a letter asking CIT to continue to provide interim financing to the Company until a new factor could be found. To this end, meetings with other factors were held, including one with Congress Talcott, Inc. ("Congress"). CIT, however, was not reacting favorably, and in November 1990, informed the Company that it would not extend additional credit to the Company until it posted additional cash collateral. MLIF provided the Company with cash for this purpose in the first additional advance, in which the Argentis participated. CIT made another demand for additional cash collateral in March 1991, which led to the second additional advance. Despite these increases in the Company's posted cash collateral, Congress turned the Company down on its first credit application.

MLIF advanced more funds to the Company in May 1991, again in response to a request from CIT that the Company post additional cash collateral. In September 1991, CIT wrote to the Company and formally stated that it would be best if the Company found a new factor, further stating the conditions on which it would continue to act as the Company's factor for an interim period of time. At about this same time, Congress informed the Company that it was ready to enter into an agreement with the Company, and requested a retainer so its attorneys could begin drafting the agreement. Despite this progress, CIT made...