USCA1 Opinion
UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT
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No. 95-1359
LAURA THORN, LTD.,
Plaintiff, Appellant,
v.
ALBERT J. ALLETZHAUSER,
Defendant, Appellee.
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APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Edward F. Harrington, U.S. District Judge]
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Cyr, Circuit Judge,
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Bownes, Senior Circuit Judge,
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and Boudin, Circuit Judge.
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Charles L. Glerum, with whom Roberto C. Quinones and Choate, Hall
_________________ ___________________ ____________
& Stewart were on brief for appellant.
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Harry C. Beach, with whom Leonard F. Clarkin, Paul B. Bottino and
______________ __________________ _______________
Clarkin, Sawyer & Phillips, P.C. were on brief for appellee.
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December 21, 1995
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CYR, Circuit Judge. Plaintiff Laura Thorn, Ltd.
CYR, Circuit Judge.
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("Thorn, Ltd.") appeals a summary judgment order disallowing its
claim for breach of a loan guaranty by defendant Albert J.
Alletzhauser ("Alletzhauser"). As we conclude that Alletzhauser
is not entitled to judgment pursuant to Fed. R. Civ. P. 56(c)
under Massachusetts law, we vacate the judgment and remand for
further proceedings.
I
I
BACKGROUND1
BACKGROUND1
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On April 14, 1989, an individual named Laura Thorn
loaned $250,000 to Hamilton/Thorn Research Associates ("HTRA").
At that time, Laura Thorn was the principal shareholder in Thorn,
Ltd., and Thorn, Ltd. in turn was a general partner in HTRA.
Under the terms of a Subordinated Loan Agreement ("Agreement")
and a Subordinated Promissory Note ("Note"), HTRA's loan obliga-
tion to Laura Thorn was subordinated to all existing and future
HTRA obligations to Beverly National Bank or its successors.2
On December 31, 1990, Laura Thorn assigned all her rights under
the Agreement and Note to Thorn, Ltd.
In July 1991, Thorn, Ltd. negotiated a transfer of its
general partnership interest in HTRA to Hamilton Laboratories,
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1Jurisdiction is based on 28 U.S.C. 1332(a)(2) (diversity)
and 28 U.S.C. 1291. We recount the material facts in the light
most favorable to Thorn, Ltd., the party against which summary
judgment was granted. Velez-Gomez v. SMA Life Assur. Co., 8 F.3d
___________ ___________________
873, 874 (1st Cir. 1993).
2The Note is set out in the appendix. See infra pp. i-ii.
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2
Inc. ("HLI"), a corporation partly owned by Alletzhauser. To
induce the transfer, Alletzhauser (as guarantor), HTRA (as
maker), and Thorn, Ltd. (as subordinated lender), entered into a
loan guaranty agreement ("the Guaranty") on July 11, 1991,
whereby Alletzhauser guaranteed prompt payment of HTRA's debt to
Thorn, Ltd. "when and as the Subordinated Obligations become due
and payable in accordance with their terms. . . ."3 Pursuant to
section 1 of the Note and the Guaranty, on April 8, 1994, Thorn,
Ltd. demanded full payment from Alletzhauser. HTRA and Alletz-
hauser declined on the ground that payment was not due.
In September 1994, Thorn, Ltd. commenced this action
against Alletzhauser in federal district court to enforce its
Guaranty. Alletzhauser denied liability, and asserted as an
affirmative defense that legal action on the Guaranty was "prema-
ture." Ultimately, the district court entered summary judgment
against Thorn, Ltd. on the ground that it had no present right to
enforce the Guaranty against Alletzhauser since HTRA, the primary
obligor, was not in default on its loan obligation to Thorn, Ltd.
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3The relevant Guaranty provisions are set out below:
Section 2 - Guaranty of Payment and Performance
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The Guarantor unconditionally guarantees . . . the prompt payment
by the Borrower to the Lender of the Subordinated Obligations
when and as the Subordinated Obligations become due and payable
in accordance with their terms . . . .
Section 3 - Obligations Unconditional
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. . . This Agreement shall not, however, be construed to require
____ _________ _____ ___ __ _________ __ _______
the Guarantor to make any payment . . . (b) which the Lender
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either would not be entitled to receive or would be obligated to
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hold in trust for the benefit of, or otherwise turn over to, any
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senior lender pursuant to the terms of an Intercreditor Agreement
______ ______ ________ __ ___ _____ __ __ _____________ _________
or the Subordinated Note. (Emphasis added.)
__ ___ ____________ ____
3
Thorn, Ltd. contends on appeal that the district court erred in
granting summary judgment and abused its discretion in refusing
to strike certain affidavits submitted in support of Alletz-
hauser's motion for summary judgment.
II
II
DISCUSSION4
DISCUSSION4
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Alletzhauser acknowledges the validity of the Guaranty,
but contends that the present attempt to enforce it is premature
since the loan obligation itself is not yet due. Thorn, Ltd.
responds that the loan obligation became due on April 1, 1994,
and since HTRA has not paid, Alletzhauser must honor the Guaran-
ty. The parties agree that Massachusetts law governs their
dispute.
Under Massachusetts law, a guarantor's liability is
determined by the terms of the guaranty agreement; as a general
rule, the terms of the guaranty are not construed against the
guarantor. See Merrimack Valley Nat'l Bank v. Baird, 363 N.E.2d
___ ___________________________ _____
688, 690-91 (Mass. 1977). The operative provision in the Guaran-
ty states that Alletzhauser "unconditionally guarantees . . . the
prompt payment by the Borrower to the Lender of the Subordinated
Obligations when and as the Subordinated Obligations become due
____ ___ __ ___ ____________ ___________ ______ ___
and payable in accordance with their terms . . . . " See supra
___ _______ __ __________ ____ _____ _____ ___ _____
note 3, 2 (emphasis added). No other provision in the Guaranty
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4The summary judgment ruling is reviewed de novo under the
__ ____
identical criteria incumbent upon the district court. Alexis v.
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McDonald's Restaurants of Mass., Inc., 67 F.3d 341, 346 (1st Cir.
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1995).
4
expressly states when Thorn, Ltd. may look to Alletzhauser for
payment under the Guaranty, and the parties agree that the court
must examine the Note to determine when Alletzhauser is obligated
to make good on the Guaranty.
The district court ruled that HTRA was not obligated to
repay the Note as long as senior debt remained outstanding.
Thorn, Ltd. insists that the district court misinterpreted the
plain language of the Note, which includes a payment schedule in
section 1. This provides for periodic payments by HTRA and
further provides that all outstanding principal and accrued but
unpaid interest "shall be due and payable on April 1, 1994." See
___
infra Appendix p. i, 1.
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Alletzhauser responds that the court must interpret the
Note as a whole, and that the unconditional subordination provi-
sions in section 4 plainly supersede the payment schedule set
forth in section 1.5 Section 4 contains the following subordi-
5
nation provision: "Notwithstanding any other provision of the
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5See Culp v. Tri-County Tractor, Inc., 736 P.2d 1348, 1350-
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53 (Idaho Ct. App. 1987) (ruling that subordination provisions in
notes superseded schedule for annual interest payments). Alletz-
hauser suggests that the Note provides for "complete" subordina-
tion, which is not uncommon in circumstances where the junior
lender is a parent company or an officer, director, or stockhold-
er of the borrower. Carl D. Lobell & Sharon B. Applegate,
Lending To Troubled Companies- Special Considerations: Fraudulent
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Transfers, Substantive Consolidation, Subordinated Debt Treat-
_________________________________________________________________
ment; Developing Theories of Lender Liability And Equitable
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Subordination, PLI Corp. Law & Practice Course Handbook Series,
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Apr. 1991, III.D.(1), available in Westlaw at 733 PLI/Corp.
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175; see also Culp, 736 P.2d at 1350-52 (complete subordination
___ ____ ____
of officers' loans to company). The transaction at bar involved
just such a junior loan from a corporate insider of the borrowing
company.
5
Subordinated Loan Documents,6 the Maker [HTRA], and each holder
of this note [Thorn, Ltd.] . . . agree that the Subordinated Debt
shall be subordinated as set forth in this Section 4 to all
present and future extensions of credit to the Maker by The
Beverly National Bank [or its successors]. . . ." See infra
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Appendix p. i, 4. More to the present point, subsection 4.4
expressly restricts the right of Thorn, Ltd. to enforce the Note
against HTRA. "Notwithstanding any contrary term or provision of
_______________ ___ ________ ____ __ _________ __
the Subordinated Debt Documents, (i) no Subordinated Debt shall
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become or be declared to be due and payable prior to the date on
which the Senior Debt becomes or is declared to be due and
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payable . . . ." See infra Appendix p. ii, 4.4 (emphasis
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added). Since there is no dispute that senior debt to Bank of
Boston remains outstanding, Alletzhauser argues that the district
court correctly ruled that HTRA's primary loan obligation to
Thorn, Ltd. is not yet due, and therefore, he presently has no
obligation on the Guaranty.7
Thorn, Ltd. contends that subsection 4.4 does not
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6According to section 2 of the Note, the term "Subordinated
Loan Documents" includes the Note, the Agreement, and other
security agreements related to the loan.
7At common law, the obligation of a guarantor is collateral
to the primary debt. "'[The guarantor's] obligation was based
not on the note but upon the contract expressed in the guaranty
that
[he] would pay the principal sum of the note with interest, if
the maker of the note failed to pay at maturity.'" D'Annolfo v.
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D'Annolfo Constr. Co., 654 N.E.2d 82, 83 (Mass. App. Ct. 1995)
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(quoting Charlestown Five Cents Sav. Bank v. Wolf, 36 N.E.2d 390,
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392 (Mass. 1941)). The Uniform Commercial Code does not abrogate
the common law rule here because the Guaranty is not inscribed on
the Note. D'Annolfo, 654 N.E.2d at 84.
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6
affect its right to enforce its Guaranty against Alletzhauser, as
distinguished from its rights against HTRA under the Note.
Thorn, Ltd. finds support for this contention in subsection
4.5(a):
The provisions of this Section 4 are solely for the purpose
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of defining the relative rights of the holders of Senior Debt
on the one hand, and the holders of Subordinated Debt on the
other hand, and none of such provisions shall impair as
____ __ ____ __________ _____ ______
between the Maker and any holder of Subordinated Debt the
obligation of the Maker [HTRA], which is unconditional and
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absolute, to pay to such holder of Subordinated Debt the
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principal and premium, if any, thereof and interest thereon,
and all other amounts in respect thereof, all in accordance
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with the terms thereof, nor shall any such provisions
____ ___ _____ _______
prevent any holder of Subordinated Debt from exercising all
remedies otherwise permitted by applicable law or under the
terms of such Subordinated Debt upon a default thereunder,
subject to the rights, if any, under the provisions of this
_______ __ ___ ______ __ ___ _____ ___ __________ __ ____
Section 4 of holders of Senior Debt.
_______ _ __ _______ __ ______ ____
See infra Appendix p. ii, 4.5(a) (emphasis added). Thorn, Ltd.
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insists that the subordination provisions, interpreted in light
of subsection 4.5(a), reflected the overarching concern of the
original senior lender (Beverly National Bank) that its priority
right to payments from HTRA not be jeopardized by any right
Thorn, Ltd. had to payment from HTRA; and, further, that any
attempt by Thorn, Ltd. to proceed against Alletzhauser on the
Guaranty not be permitted to affect the senior lender's right to
priority payment, nor undermine HTRA's ability to repay senior
debt according to its terms. As this lawsuit only contemplates
recovery from Alletzhauser and not HTRA, Thorn, Ltd. urges us to
disregard section 4, and instead give full effect to the April
1994 due date specified in section 1.
In addition to subsection 4.5(a), Thorn, Ltd. points
7
out that the unquestioned purpose of the Guaranty was to induce
Thorn, Ltd. to transfer its general partnership interest in HTRA
to HLI, a company partly owned by Alletzhauser. With the resul-
tant transfer of control, Thorn, Ltd. lost all ability to require
HTRA to satisfy its senior debt to Bank of Boston, as well as any
power to control the timing of its own recovery from HTRA.
Thorn, Ltd. maintains, therefore, that section 1 of the Note was
meant to offset its loss of control by prescribing a payment
schedule which would continue to govern the ongoing repayment
relationship between Thorn, Ltd. and Alletzhauser. Otherwise,
Thorn, Ltd. might never be able to collect on either the Note or
the Guaranty.
Confronted with these mutually incompatible interpreta-
tions, we conclude that neither satisfactorily reconciles the
conflicting contract language so as to enable summary judgment on
the present record. The Alletzhauser interpretation comports
with the classic construct of a loan guaranty,8 as well as with
the parties' "course of performance."9 On the other hand, the
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8Indeed, permitting recovery from Alletzhauser on the
Guaranty would result in a corresponding depletion of HTRA's
assets prior to repayment of the senior debt in the event that
Alletzhauser is entitled to indemnification from HTRA, see 38 Am.
___
Jur. 2d Guaranty 127 (1968); Restatement (Second) of Security
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104(1) (1941), notwithstanding the fact that the subordination
provisions are designed to protect senior lenders from just such
an occurrence.
9Thorn, Ltd. does not explain why it made no attempt to
enforce its rights sooner despite the fact that HTRA had not made
a single payment of interest or principal in accordance with the
payment schedule in section 1 of the Note, either before or after
Thorn, Ltd. transferred control to HLI in July 1991. See Rosen
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v. A-H Inc., 456 N.E.2d 477, 479 n.5, 480 (Mass. App. Ct. 1983)
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8
context in which the execution of the Guaranty took place gives
no indication as to why Thorn, Ltd. would permit a virtually
perpetual loan repayment extension to an enterprise it no longer
owned.10 Both parties represent that substantial negotiations
attended the drafting of the Note and Guaranty. Yet their
affidavits provide little information concerning the actual terms
of their negotiations and each party draws a different conclusion
as to their import. Were we to approve summary judgment without
more information, the result reached might well fail to reflect
the aims and intentions of the parties. See Merrimack Valley,
___ ________________
363 N.E.2d at 690 ("[W]hen a contract term is ambiguous, its
import is ascertained from the parties' intent as manifested by
the guaranty's terms and the circumstances surrounding its
creation, such as [the] relationship of the parties, actions of
the parties and established business usages.").
Normally, we would not press for further record devel-
opment absent a clearer indication that further evidence will be
forthcoming. We are convinced nonetheless that a remand for
further proceedings is appropriate here: the contract language
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(noting that junior lender's performance conformed with court's
broad construction of subordination provision in favor of senior
lenders), rev. denied, 459 N.E.2d 824 (Mass. 1984).
____ ______
10Neither the parol evidence rule nor the integration clause
in the Guaranty prevents the court from considering the circum-
stances surrounding the execution of the Guaranty. First,
extrinsic evidence may inform an ambiguity determination. See
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Robert Indus., Inc. v. Spence, 291 N.E.2d 407, 409 (Mass. 1973).
_______________ ____ ______
Second, the court need not look beyond the four corners of the
Guaranty in this appeal, since section 1 of the Guaranty itself
supplies the context to which Thorn, Ltd. adverts.
9
is in conflict; there is no public policy consideration to tip
the balance; and there is a much better prospect of resolving
this private conflict as the parties intended, if an effort is
made to discern their intentions based on their actual negotia-
tions and the events that led up to and followed the Guaranty.
10
III
III
CONCLUSION
CONCLUSION
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Given the unresolved conflict in the language of the
guaranty and loan documents and the dearth of evidence relating
to the parties' intent, we conclude that Alletzhauser failed to
establish an entitlement to summary judgment as a matter of law.
We therefore vacate the judgment and remand for pro-
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ceedings consistent with this opinion. The parties shall bear
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their own costs. SO ORDERED.
SO ORDERED
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11
APPENDIX11
APPENDIX
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1. Payment. On each October 1 and April 1 occurring while any
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principal amount of this note is outstanding, [HTRA] shall pay to
[Laura] all accrued but unpaid interest on the outstanding
principal balance of this note. Commencing April 1, 1991, [HTRA]
shall pay to [Laura] a principal payment as follows:
Date of Payment Principal Payment
_______________ _________________
April 1, 1991 $25,000
October 1, 1991 $25,000
April 1, 1992 $25,000
October 1, 1992 $25,000
April 1, 1993 $37,500
October 1, 1993 $37,500
The entire remaining outstanding principal balance of, and all
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accrued but unpaid interest on, this note shall be due and
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payable on April 1, 1994.
_______ __ _____ __ ____
. . . .
4. Subordination. Notwithstanding any other provision of the
_____________ _______________ ___ _____ _________ __ ___
Subordinated Loan Documents, [HTRA], and each holder of this note
____________ ____ _________ ____ ___
[Thorn, Ltd.] . . . agree that the Subordinated Debt shall be
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subordinated as set forth in this Section 4 to all present and
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future extensions of credit to [HTRA] by The Beverly National
______ __________ __ ______ __ ____ __ ___ _______ ________
Bank [or its successors] . . . .
____
4.2 Limitation on Payments. Payments of interest and
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principal shall be made as they become due in accordance with the
terms of the Subordinated Loan Documents. . . . So long as any
__ ____ __ ___
Senior Debt is outstanding, no payment of principal or interest
______ ____ __ ___________ __ _______ __ _________ __ ________
on this note shall be made prior to the date when due in accor-
__ ____ ____ _____ __ ____ _____ __ ___ ____ ____ ___ __ ______
dance with the terms of the Subordinated Loan Documents.
_____ ____ ___ _____ __ ___ ____________ ____ _________
4.3 Payments Held in Trust. If, notwithstanding the
________ ____ __ _____
foregoing, any payment or distribution of the assets of the Maker
of any kind or character shall be received, by set-off or other-
wise, by any holder of Subordinated Debt before all Senior Debt
is paid in full, such payment or distribution and the amount of
____ _______ __ ____________ ___ ___ ______ __
any such set-off shall be held in trust by such holder of Subor-
___ ____ _______ _____ __ ____ __ _____
dinated Debt for the benefit of the holders of Senior Debt . . .
___ ___ _______ __ ___ _______ __ ______ ____
which shall have the right . . . to the payment of all Senior
Debt remaining unpaid until all such Senior Debt shall have been
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11All brackets and emphasis in the text of the Note have
been added.
i
paid in full.
4.4 Limitation on Enforcement. No holder of Subordinated
__________ __ ___________
Debt shall, without the prior written consent of the holders of
the Senior Debt, accelerate the maturity of, or institute pro-
ceedings to enforce, any Subordinated Debt, notwithstanding any
term or provision to the contrary contained in the Subordinated
Debt Documents. . . . Notwithstanding any contrary term or
provision of the Subordinated Debt Documents, (i) no Subordinated
Debt shall become or be declared to be due and payable prior to
the date on which the Senior Debt becomes or is declared to be
due and payable . . . .
4.5 Effect of Provisions. (a) The provisions of this
______ __ __________
Section 4 are solely for the purpose of defining the relative
rights of the holders of Senior Debt on the one hand, and the
holders of Subordinated Debt on the other hand, and none of such
____ __ ____
provisions shall impair as between the Maker [HTRA] and any
__________ _____ ______ __ _______ ___ _____ ___ ___
holder of Subordinated Debt [Thorn, Ltd.] the obligation of the
______ __ ____________ ____ ___ __________ __ ___
Maker [HTRA], which is unconditional and absolute, to pay to such
_____ ____ _____ __ _____________ ___ _________ __ ___ __ ____
holder of Subordinated Debt the principal and premium, if any,
______ __ ____________ ____ ___ _________ ___ _______
thereof and interest thereon, and all other amounts in respect
___ ________ _______
thereof, all in accordance with the terms thereof, nor shall any
___ __ __________ ____ ___ _____ _______
such provisions prevent any holder of Subordinated Debt from
exercising all remedies otherwise permitted by applicable law or
under the terms of such Subordinated Debt upon a default thereun-
der, subject to the rights, if any, under the provisions of this
Section 4 of holders of Senior Debt. The Maker hereby agrees
that, during any period in which the Maker is not permitted to
make any payment by virtue of the provisions of this Section 4,
any applicable statute of limitations shall be tolled.
ii
