One Step Up, Ltd v. Webster Bus. Credit Corp., 601807/09
| Decision Date | 14 June 2011 |
| Docket Number | 601807/09,4100 |
| Parties | One Step Up, Ltd., Plaintiff-Appellant, v. Webster Business Credit Corporation, Defendant-Respondent. |
| Court | New York Supreme Court — Appellate Division |
David B. Saxe, J.P.
Karla Moskowitz
Rosalyn H. Richter
Sallie Manzanet-Daniels
Plaintiff appeals from an order of the Supreme Court,New York County (Bernard J. Fried, J.), entered December 22, 2009, which granted defendant's motion to dismiss the complaint.
Lazarus & Lazarus, P.C., New York (Harlan M. Lazarus of counsel), for appellant.
Kravet & Vogel, LLP, New York (Joseph A. Vogel of counsel), for respondent.
Plaintiff brought this action seeking the return of $250,000 that defendant obtained when it drew on a standby letter of credit. Plaintiff had opened the letter of credit with HSBC, naming defendant as beneficiary, to provide additional collateral for defendant's extension of further financing to nonparty Luxury Ventures, LLC d/b/a Henricks Jewelers (Henricks). Despite plaintiff's creative theories, the plain wording of the letter of credit and underlying documents precludes recovery. In particular, plaintiff cannot use breach of warranty under Uniform Commercial Code § 5-110 to convert the legitimate exercise of contractual rights into a cause of action. Indeed, defendant's actions were permissible, even expected, under the financing documents involved in this case. Plaintiff, a sophisticated business entity and an affiliate of the company that borrowed money from defendant, should have understood the risks when it applied for the letter of credit and took a subordinated junior participation interest in advances that defendant made to the borrower. Accordingly, it was appropriate to dismiss this case at the pre-answer stage.
Defendant provides secured loans and cash management services in the form of revolving credit and asset-based financing. One of its borrowers was Henricks, a retail jewelry business that operated in Florida. Defendant and Henricks entered into a secured revolving credit agreement with a $5 million limit on February 28, 2005. In 2007, Henricks filed a Chapter 11 bankruptcy petition with the United States Bankruptcy Court for the Middle District of Florida. As part of Henricks's confirmed plan of reorganization, defendant agreed to provide exit financing to Henricks. Accordingly, defendant and Henricks entered into an Amended and Restated Loan and Security Agreement, dated August 1, 2008 (the Loan Agreement).
As the Loan Agreement was in the nature of a secured revolving credit agreement, the amount Henricks could borrow depended on a formula tied to underlying collateral:
"Lender agrees to make advances (Advances') to Borrower in an amount at any one time outstanding not to exceed an amount equal to the lesser of (i) the Maximum Revolver Amount less the Letter of Credit Usage, or (ii) the Borrowing Base less the Letter of Credit Usage."
Henricks's Borrowing Base was calculated according to the following formula:
"90% of the Eligible Accounts Receivable, plus 40% of the Cost value of Eligible Inventory [if before December 31, 2008] or 85% of the Net Liquidation Value of Eligible Inventory as set forth in the daily collateral reports delivered to Lender, [minus] the aggregate amount of Availability Reserves, if any, established by Lender under Section 2.1(a)(ii)."
Thus, the calculations underlying the Borrowing Base tied Henricks's assets to the amount Henricks could borrow.
Section 2.1(a)(ii) of the Loan Agreement regarding "Availability Reserves" provided that:
"during the period commencing on January 1, 2009, through the Maturity Date, Lender shall have the right to establish reserves in such amounts, and with respect to such matters, as Lender in its Permitted Discretion shall deem necessary or appropriate . . ."
The Loan Agreement defined "Availability Reserves" as "such reserves as the Lender from time to time determines in its Permitted Discretion as being appropriate to reflect the impediments to the Lender's ability to realize upon the Collateral." The Loan Agreement defined "Permitted Discretion" as "a determination made in good faith and in the exercise of reasonable (from the perspective of a secured asset-based lender) business judgment."
The Loan Agreement also anticipated deviation from the formula set forth in section 2.1(a)(ii). Section 2.4 anticipated "Overadvances":
"If at any time or for any reason, the amount of Obligations (other than Bank Product Obligations) owed by Borrower to Lender pursuant to Sections 2.1 and 2.11 [] is greater than either the Dollar or percentage limitations set forth in Sections 2.1 or 2.11, (an "Overadvance"), Borrower immediately shall pay to Lender, in cash, the amount of such excess . . ."
Nevertheless, the Loan Agreement capped the amount Henricks could borrow regardless of its underlying assets. This amount, that the parties termed the "Maximum Revolver Amount," "for the period commencing on the Closing Date through December 31, 2008 " was $1.5 million. "[F]or the period commencing on January 1, 2009, through the Maturity Date [April 30, 2012]," the Maximum Revolver Amount increased to $2.5 million.
In October 2008, three months after Henricks and defendant entered into the Loan Agreement, Henricks foresaw that it might experience seasonal cash flow problems during the upcoming holiday selling season. It therefore requested defendant's consent to fund its cash shortfall through the end of the year. However, because this would result in a section 2.4 Overadvance, that would trigger certain immediate repayment obligations on Henricks's part, the parties executed Amendment No. 1 to the Loan Agreement on October 31, 2008. AmendmentNo. 1 added new section 4.9 to the Loan Agreement. That section called for the letter of credit that Henricks arranged through plaintiff to provide additional collateral for defendant (the Kairos L/C). The Kairos L/C was in the principal amount of not less than $250,000 and was set to expire on January 31, 2009, a date shortly after the holiday selling season ended. Section 4.9 provided that defendant could draw on the Kairos L/C in an amount that would be "equal to any Overadvance then existing, calculated as if the Seasonal Amount was $0) (the "Determined Overadvance")." Amendment No. 1 defined "Seasonal Amount" as "a sum equal to the outstanding undrawn principal amount of the Kairos L/C" (i.e., $250,000). Thus, a Determined Overadvance meant the amount of the existing Overadvance (Loan Agreement section 2.4), with the collateral value of the Kairos L/C set at $0. This meant that the Kairos L/C could not count as an asset to reduce the amount of the Determined Overadvance. The parties do not dispute that defendant could draw upon the Kairos L/C any time after January 15, 2009 and before the Kairos L/C expired on January 31, 2009, provided that a Determined Overadvance existed on that date.
In October 2008, simultaneously with its entry into Amendment No. 1 with Henricks, defendant entered into a letter agreement with plaintiff whereby plaintiff took a subordinated junior participation in the right to collateral for the advance under the Loan Agreements in the maximum amount of $250,000 (the Junior Participation Agreement). Plaintiff's rights under this agreement were expressly without recourse to defendant. Moreover, defendant's liability to plaintiff was expressly limited to its own willful misconduct or gross negligence.
On November 3, 2008, as planned in Amendment No. 1 and upon plaintiff's application, HSBC Bank issued a $250,000 irrevocable standby letter of credit with defendant as beneficiary. The letter of credit was payable upon defendant's certification that: (1) a "draw event" had occurred under section 4.9 of Amendment No. 1 and (2) the amount of the drawing did not exceed the Determined Overadvance.
On December 31, 2008, Henricks failed to make a scheduled $100,000 payment to defendant. On January 1, 2009, by the terms of the Loan Agreement, the Maximum Revolver Amount automatically increased, by $1 million, to $2.5 million. By notice dated January 9, 2009, defendant advised Henricks of various defaults under the Loan Agreement, including: (1) Henricks's failure to make the $100,000 installment payment that was due on December 31, 2008; (2) Henricks's failure to turn credit card payments from Henricks's customers over to defendant; (3) Henricks's failure to provide a copy of its current business plan; (4) Henricks's failure "to have caused each depository of Borrower to be subject to a Control Agreement by November 7, 2008"; and that actual sales were "less favorable" than Henricks had projected. The notice further advised that, although defendant had not taken action to stop the Maximum Revolver Amount from increasing to $2.5 million, it had established an initial $900,000 reserve against the Borrowing Base pursuant to section 2.1(a)(ii) of the Loan Agreement (giving defendant "the right to establish reserves in such amounts, and with respect to such matters, as Lender in its Permitted Discretion shall deem necessary or appropriate"). In addition, defendant offered to enter into a "forbearance agreement" whereby "Lender and Borrower could agree to Lender's forbearance on other than a day-to-day basis," provided that Henricks cured the defaults, including by making the $100,000 payment immediately.
On January 20, 2009, defendant certified to HSBC that a draw event had occurred and that the amount Henricks sought to draw on the Kairos L/C did not exceed the Determined Overadvance. The "Borrowing Base Certificate" that Henricks subsequently certified on January 22, 2009 confirmed Henricks's financial situation as of January 20, 2009. It is undisputed that this Borrowing Base Certificate reported that Henricks was in an Overadvance position of $183,880 on January 20, 2009, including the value of the Kairos L/C....
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