Warnaco, Inc. v. Farkas
| Citation | 664 F. Supp. 738 |
| Decision Date | 13 April 1987 |
| Docket Number | No. 85 Civ. 2917 (RLC).,85 Civ. 2917 (RLC). |
| Parties | WARNACO, INC., Plaintiff, v. Harold FARKAS, Wake Warthen and Morton S. Robson, Defendants. |
| Court | U.S. District Court — Southern District of New York |
Kramer, Coleman & Rhine, New York City, for plaintiff; Howard I. Rhine, R. Jeffrey Moore, of counsel.
Cooper Cohen Singer Ecker & Shainswit, New York City, for defendant Morton S. Robson; Morton S. Robson, Kenneth N. Miller, of counsel.
Berger & Steingut, New York City, for defendant Harold Farkas.
Plaintiff Warnaco, Inc. ("Warnaco"), a Connecticut corporation, brought this diversity action for payment on a guarantee. Named as guarantor-defendants are three individuals, Harold Farkas, Morton S. Robson, and Wake Warthen, all citizens of the State of New York.
Warnaco has moved for summary judgment on the guarantee. In addition, Farkas has cross-moved for summary judgment against co-defendant Robson, seeking indemnification for Farkas's liability, if any, on the guarantee.
This action arose in the aftermath of changes in the ownership of Jerry Silverman, Inc., a manufacturer of designer dresses, and its affiliate, Jerry Silverman Sport Inc. (collectively "JSI"). The pertinent facts converge around two major transactions.
On June 1, 1981, Warnaco sold all of the stock in JSI to Farowa, Inc. ("Farowa"), a corporation wholly owned by defendants and formed for the purpose of acquiring JSI. Farkas owned 50 percent of the Farowa stock, while Robson and Warthen each held 25 percent. In return for the equity in JSI, Farowa tendered $750,000 in cash and executed a promissory note ("the Note") pledging an additional $750,000. The Note provided for yearly payments of $50,000 due on June 1 of the years 1982 through 1987, a final principal payment of $450,000 due on June 1, 1988, and quarterly interest payments during the term of the Note. It also provided for acceleration of the unpaid principal and interest upon default by Farowa, as well as an increased rate of interest after default.
Annexed to the Note is the guarantee ("the Guarantee") on which Warnaco bases its claim. By the terms of the Guarantee, Farkas, Warthen, and Robson jointly and severally pledge "due and punctual" payment of the Note, without condition, except for a limitation on liability of 20 percent of the amount owing on the Note.1
The agreement providing for the transfer of the JSI stock also incorporated a licensing agreement ("the License"). This latter agreement authorized Farowa's use of a number of JSI trademarks. It also provided, however, for termination of the License, at Warnaco's option, upon Farowa's default on the Note.
Farowa defaulted in 1983. Upon the default, Warnaco opted to terminate the License. Although Farowa has since made four interest payments of $10,000 each, it remains in default on the balance of the outstanding principal and interest.
When Farowa took ownership of JSI, Farkas assumed full responsibility for JSI's day-to-day operations and management. Robson and Warthen provided only occasional consulting and assistance in financing.
JSI's financial condition soon worsened. Within a few months of Farowa's initial default on its obligation to Warnaco, Robson solicited the services of Princess Katalin zu Windisch-Graetz, a talented designer of evening gowns. Katalin was to take over for Farkas as president of JSI, overseeing design, production, marketing, and sales, while Farkas would remain in charge of financial matters. Farkas first assented to this arrangement. Later, however, he changed his mind and refused to allow Katalin to take his place unless Robson would agree to buy out his share of JSI.
With a deadline for garment designs imminent, Farkas and Robson reached a second, conclusive agreement. Farkas gave up control of JSI, selling all of his Farowa stock to Robson for $20,000, and Robson indemnified Farkas against, inter alia, liability on the Guarantee.2
Once in control of JSI, Robson invested an additional $100,000 in the company. Nevertheless, JSI's liabilities proved too large to overcome and within about five months of the Farkas-Robson agreement, JSI's operations came to a close.
Warnaco's motion for summary judgment may be granted if no material fact is genuinely at issue and Warnaco is entitled to judgment as a matter of law. Rule 56(c), F.R.Civ.P.; Knight v. U.S. Fire Insurance Co., 804 F.2d 9, 11 (2d Cir.1986). Ambiguities must be resolved, and reasonable inferences drawn, against the moving party in determining whether there are factual issues which must be tried. Id. However, if the only facts at issue are not material to the claims before the court, they will not defeat the motion for summary judgment. Id. at 11-12.
Robson and Warthen make two arguments in opposition to Warnaco's motion for summary judgment.3 They argue first that when Warnaco terminated the License it effectively retained the JSI trademarks as collateral in satisfaction of defendants' obligations on the Guarantee. In addition, they contend that even if defendants' obligations remain unsatisfied, their liability should be limited in accordance with the understanding of the parties at the time the Guarantee was executed. Neither argument raises any issue of material fact.
Addressing the latter argument first, any supposed understanding between the parties which they failed to include in the clear language of the Note and Guarantee is for present purposes irrelevant. In particular, Robson and Warthen would have the court construe the limiting terms "twenty percent (20%) of the amount due under this Note" to mean that the guarantors are liable only up to $150,000.4 They also argue that all monies paid on the Note by Farowa reduce pro tanto their current obligation on the Guarantee. They urge that negotiations leading up to the Warnaco-Farowa agreement reveal that this is what the limitation on liability was understood to mean.
Under Connecticut law,5 however, the court may not second-guess the clear language of a contract. Contemporaneous oral agreements or understandings are inadmissible to contradict the terms of the Guarantee because its language is unequivocal. See Conn.Gen.Stat. § 42a-2-202;6 accord Maier v. Arsenault, 140 Conn. 364, 100 A.2d 403, 404 (1953).
Were there any doubt that the Guarantee means what it says, the court would look to such extrinsic evidence as might explain the parties' intent. Panaroni v. Johnson, 158 Conn. 92, 256 A.2d 246, 255 (1969) (). Here, however, the alternative interpretation suggested by Robson and Warthen is far-fetched to say the least. Had the guarantors wanted to limit their liability to $150,000, they could have said so directly. Instead, they chose equally direct but very different terms. The clear import of the terms they did choose is controlling. See Fairfield Lease Corp. v. Eastern Sportswear Co., 6 Conn.Cir.Ct. 347, 273 A.2d 300, 302 (1970) (). Thus, although Robson and Warthen have raised a factual issue as to oral agreements reached prior to or at the same time as the signing of the Note and Guarantee, that issue is immaterial to Warnaco's claim and ineffective to overcome the motion for summary judgment. See Knight, supra, 804 F.2d at 11-12.
Robson and Warthen also argue that Warnaco's termination of Farowa's rights under the License constituted retention of collateral in satisfaction of the guarantors' obligations, as authorized by Conn.Gen. Stat. § 42a-9-505(2).7 The parties confine their argument to the legal consequences of Warnaco's termination of the License without disputing any of the surrounding facts.
It is unclear that Farowa's right to use JSI trademarks was "collateral" as the term is used in section 42a-9-505(2). More plausibly, it was simply a contractual right subject to a condition subsequent. See, e.g., Robinson v. Weitz, 171 Conn. 545, 370 A.2d 1066, 1069 (1976); Dolak v. Sullivan, 145 Conn. 497, 144 A.2d 312, 315-16 (1958). Nonetheless, assuming as the parties do for purposes of this motion that the licensed use of the trademarks was collateral, Warnaco's termination of that use does not impair its right of recovery on the Guarantee.
More is required to retain collateral in satisfaction of a debt under section 42a-9-505(2). The statute provides that a debt is discharged only after the secured party has proposed in writing to retain the collateral in satisfaction of the obligation and no interested party objects in writing within 30 days. Id. These explicit, formal requirements preclude the court from finding that the conduct of the parties impliedly provided notice. Accord Szelega v. Farega Realty Corp., 97 A.D.2d 874, 469 N.Y.S.2d 271, 273 (3d Dep't 1983) (); S.M. Flickinger Co. v. 18 Genesee Corp., 71 A.D.2d 382, 423 N.Y.S.2d 73, 76 (4th Dep't 1979) (same). See generally Caulkins v. Petrillo, 200 Conn. 713, 716-20, 513 A.2d 43, 45-47 (1986) (). Absent proof of written notice that Warnaco intended to release Farowa from liability, discharge of the debtor's obligation may not be inferred. Defendants do not allege that they received such notice. The court finds, therefore, that the obligations of Farowa and defendants have not been discharged.
The remaining question is whether Warnaco may proceed to collect on the Guarantee without first disposing of the putative collateral. The answer is dictated by section 42a-9-501(1).8
The statute, which provides generally for a secured party's remedies upon default, expressly makes those remedies "c...
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Warnaco, Inc. v. Farkas
...the debt under Article 9 of the Uniform Commercial Code ("U.C.C."), Conn.Gen.Stat. Secs. 42a-9-101 et seq. (1988); Warnaco, Inc. v. Farkas, 664 F.Supp. 738 (S.D.N.Y.1987). The appeal from judgment after trial involves a cross-claim by Farkas against Robson based on an indemnification agreem......