United States v. Wallace & Wallace Fuel Oil Co.

• Decision Date: 19 May 1982
• Docket Number: No. 81 Civ. 0869 (KTD).,81 Civ. 0869 (KTD).
• Citation: 540 F. Supp. 419
• Parties: UNITED STATES of America, Plaintiff, v. WALLACE & WALLACE FUEL OIL CO., INC., et al., Defendants.
• Court: U.S. District Court — Southern District of New York

540 F. Supp. 419

UNITED STATES of America, Plaintiff, v. WALLACE & WALLACE FUEL OIL CO., INC., et al., Defendants.

No. 81 Civ. 0869 (KTD).

United States District Court, S. D. New York.

May 19, 1982.

COPYRIGHT MATERIAL OMITTED

John S. Martin, Jr., U. S. Atty., S. D. N. Y., New York City, for plaintiff; Thomas D. Warren, Asst. U. S. Atty., New York City, of counsel.

Cowan, Liebowitz & Latman, P. C., New York City, for defendants; Marvin S. Cowan, J. Christopher Jensen, Louis S. Ederer, New York City, of counsel.

OPINION

KEVIN THOMAS DUFFY, District Judge:

The United States Government moves for summary judgment to enforce the acceleration clause of a debt agreement entered into between the Small Business Administration and the defendants Wallace & Wallace Fuel Oil Co., Inc. ("Wallace Fuel"), Wallace & Wallace Enterprises, Inc., Westbank Energy Co., Inc., Chaswell Realty Co., Inc. and Charles and Juanita Wallace individually. The defendants cross move for summary judgment contending, inter alia, that the plaintiff's improper demand for interest payments under the debt agreement relieves the defendants of their repayment obligations. The agreement entered into between the parties is explicit and unequivocal. Despite defendants' arguments to the contrary, the government has established the Wallace defendants' default and is thus entitled to accelerate the loans. Accordingly, plaintiff's summary judgment motion is granted.

BACKGROUND

The Small Business Administration ("SBA") is empowered, pursuant to Section 28(a) of the Small Business Act, 15 U.S.C. § 637(a), to enter into procurement contracts with agencies of the United States Government. Section 8(a) further provides that subcontracts for the performance of the procurement obligations shall be awarded to "socially and economically disadvantaged small business concerns ...." 15 U.S.C. § 637(a)(1), (c). This SBA administered program was "to provide minority businesses with an opportunity to contract with the Government." S.Rep.No.974, 96th Cong., 2d Sess. 2, reprinted in 1980 U.S. Code Cong. & Ad.News, 4953, 4954. Wallace Fuel, a black-owned oil concern, qualified for participation in the Section 8(a) program and beginning in 1970 was awarded subcontracts to supply fuel and heating oil to certain agencies of the United States Government, particularly the Defense Department. The price paid by the Defense Department to Wallace Fuel was negotiated by the SBA and at times resulted in losses to Wallace when the market price of oil exceeded the contract price. Affidavit of Charles Wallace, ¶ 9.

Two of the 8(a) subcontracts entered into by Wallace Fuel provided for advance payments to assist the defendants in meeting their financial obligations. In conjunction with the 1976-77 8(a) subcontract, the parties separately executed a modification agreement providing, as amended on March 9, 1977, for an advance by the SBA to Wallace Fuel of five million dollars. The money was placed in a Special Bank Account pending approval of its disbursement by the SBA. In addition, the agreement included a liquidation schedule to end in September, 1977. Matthews Exhibit 1. Another advance payment modification agreement was entered into with respect to the 1977-78 8(a) subcontracts. This contract provided for a disbursement of eight million dollars under the same terms and conditions as the last advance payment contract except that the liquidation schedule ended in September, 1978. Matthews Exhibit 2. These advance payments were issued at a time when the Congressional Small Business Committee felt:

It is imperative that the number of contracts and the dollar volume of awards to minority small businesses under the 8(a) program be significantly increased if minority small businesses are to have the maximum practical opportunity to develop into viable small businesses.

S.Rep.No.974, 96th Cong., 2d Sess., 2, reprinted in 1980 U.S.Code Cong. & Ad. News, 4953, 4954.

By August of 1978, the SBA had advanced Wallace Fuel $13 million and only $2.8 million had been repaid, leaving at total balance due of $10.2 million. The modification agreements, under which the money was extended to Wallace Fuel, contained provisions for the payment of any deficiency upon written demand by the SBA. In an attempt to avoid the harsh result of requiring immediate repayment, a Debt Structure Agreement ("DSA") was executed on August 9, 1978. Matthews Exhibit 3. This agreement between the SBA and Wallace Fuel recognized Wallace Fuel's present inability to repay its advances and devised a restructuring of the debt to "assist Fuel Oil Company in the performance of its 1977-78 8(a) Contract, potential 8(a) contracts with the SBA and in becoming a competitively viable operating oil marketing company." Id. at p. 2. The DSA also stated that although the SBA is not obligating itself "to any further 8(a) contracts, other assistance, or other agreements of any kind" id. (emphasis added), the SBA would exert its best efforts in facilitating Wallace Fuel's economic recovery. The instrument provided for repayment by Wallace Fuel of its entire 8(a) debt of $10.2 million. The DSA represented the "entire understanding" of the parties, id. at p. 14, and was only subject to amendment, modification, cancellation or discharge upon a supplemental written agreement by all parties. Section 4 of the DSA set forth a minimum monthly payment schedule of either a percent royalty on oil contracts or a minimum payment of accrued interest on the outstanding 8(a) debt plus $35,000 to amortize the principal, whichever was greater.¹ Section 6 of the DSA provided for acceleration of the entire 8(a) debt upon written demand of the SBA whenever Wallace Fuel failed to make Section 4 payments "promptly as they become due and payable." Id. at p. 8.

On August 9, 1978, the same day the DSA was executed, the defendants released the SBA, in writing, from all potential claims arising up until the date of this release. Matthews Exhibit 5. All the defendants, except Wallace Fuel, also executed guaranties and promissory notes on this date for the payment of Wallace's debt. Wallace Fuel's execution of the DSA rendered its signing of further guaranties unnecessary. Matthews Exhibits 6, 7. The defendants were represented at all times throughout the negotiation and execution of the release by Stroock, Stroock & Lavan. On August 9, 1978 this law firm submitted an opinion letter recognizing that "the Debt Structure Agreement has been duly and validly executed and is a valid, binding and enforceable obligation of each Wallace Company in accordance with its terms." Matthews Exhibit 8, at p. 2.

Representatives of the parties met again in the summer of 1979 in the SBA's Washington headquarters to discuss the mounting deficits under the DSA and to formulate feasible alternatives for repayment of the Wallace debt. The meeting was attended by Mr. Mauk, Deputy Administrator of the SBA, Mr. Irizarry, SBA New York Regional Administrator, Mr. Matthews, SBA New York Regional Counsel, the Wallace representatives and its attorneys, Stroock, Stroock & Lavan, and two outside consultants hired by the SBA: Milgrim, Thomajan & Jacobs, a law firm hired to draft a Debt Structure Modification Agreement ("DSMA") and John Trask, a consultant hired to help implement the new DSMA. The parties understood at that time that Wallace Fuel could not repay its outstanding debt according to the DSA terms and that Wallace Fuel had in fact incurred losses on ground fuel contracts executed under the 1977-78 agreement. As Mr. Trask testified in a deposition:

I remember it as being quite a complicated period. I can't quite remember when the Iranian crisis was, but as I recall there was some upheaval in the oil industry at the time, and one of the factors which had become clear was that at the latter part of his contract Mr. Wallace was delivering product under contract at a loss.

Trask Deposition, at p. 15. The negotiations between the parties resulted in a DSMA which was duly executed on January 4, 1980 and provided for a moratorium on the minimum monthly and interest payments agreed to in the DSA. The DSMA expired on September 30, 1980 at which time the DSA provisions were automatically reinstated. The purpose of this "moratorium year" was to give Mr. Wallace: "This one year to demonstrate what he could do, and depending on what he could do, depending on his ability, he either would or would not be able to pay the debt, continue with the debt structure agreement." Trask Deposition, at p. 70. The DSMA (i) halved the defendants' royalty payments for non crude oil petroleum, (ii) amended the total 8(a) debt to its then current figure of approximately $11.8 million, (iii) provided for acceleration upon default and (iv) specifically states that all provisions of the DSA not modified by the DSMA remain in effect. On January 4, 1980, the defendants, except Wallace Fuel, extended the guaranties and promissory notes applicable to the DSA to cover the modification agreement. Again, Wallace Fuel's execution of the DSMA made further commitments superfluous. The defendants were counselled by Stroock, Stroock & Lavan throughout the negotiation and execution of the DSMA.

The promissory note executed on January 4, 1980, Matthews Exhibit 10, provided for payment by Wallace Fuel of the balance remaining in their special SBA account from the 1978-79 8(a) contracts. Pursuant to this note, a check was tendered on January 9, 1980 to the SBA in the sum of $1,248,440.38. Benjamin Affidavit, ¶ 9. The note specially stated that all payments are first to be applied to interest and the remainder will be applied to reduce the outstanding principal. Accordingly, $195,062.86 was applied to cover all interest accrued between October 1, 1979 and January 9, 1980 and the remaining $1,053,377.52 was applied to reduce the Wallace Fuel indebtedness from $11,821,755.30 to $10,768,377.78. Declaration of James Gonyo, ¶ 3.

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