CHRISTOPHER S. SONTCHI, Bankruptcy Judge.
Before this Court is the defendants' motion to dismiss related to an action filed by Six Flags, Inc. The adversary action asserts causes of action for (i) turnover pursuant to 11 U.S.C. § 542(b) (Count I); (ii) breach of contract (Counts II and III); and (iii) declaratory judgment pursuant to 28 U.S.C. §§ 2201 and 2202 (Count IV). The Complaint seeks turnover of property of the estate, damages, and declaratory relief resulting from the defendant's alleged breach of an unsecured promissory note. For the reasons set forth below, the Court grants the motion to dismiss Counts II and IV; and grants, without prejudice, the motion to dismiss Counts I and III.
This Court has jurisdiction over this adversary proceeding pursuant to 28 U.S.C. §§ 157 and 1334(b). This is a core proceeding under 28 U.S.C. § 157(b)(2). Venue is proper pursuant to 28 U.S.C. § 1409.
In June 2009, Six Flags, Inc. ("Six Flags")
Plaintiff, Six Flags, is a Delaware corporation with its principal place of business in New York, New York. Six Flags owns and operates amusement parks throughout the United States.
Defendants, Parc Management, LLC and Parc 7F-Operations Corporation, are both incorporated and have principal places of business in Florida. The remaining Parc subsidiaries are similarly incorporated as Florida limited liability companies. Through its family of companies, Parc owns and operates amusement parks and family entertainment venues across North America.
In April 2007, Parc acquired nine amusement parks from Six Flags for $312 million. Parc paid $275 million of the purchase
The dispute between the parties involves the first paragraph of the Note (the "Contested Provision"). This operative provision of the Note, outlining the payment schedule specifically states:
More simply, the Contested Provision provides that interest payments are due monthly, while principal payments are due annually, and the remainder of the principal will be paid in a balloon payment on the maturity date of the Note. However, the Contested Provision provides for a deferral of principal and interest payments. The Contested Provision states that Parc may defer payments of principal up to a maximum amount of approximately $10 million (the "Deferred Amount"). Per the calculation set forth in the Contested Provision, as of April, 2007, the Limited Rent Guarantee was $0. Thus, as of the date the Note was entered, the Deferred Amount was $9,999,999.00. Therefore, principal and interest payments were deferred until such amounts actually deferred (the "Accrued Deferred Payments") equaled the Deferred Amount ("Equalization").
Furthermore, the Deferred Amount was subject to three particular reductions: (1) $1 million each January 1st, (2) the value of any guaranteed rent paid by Six Flags under the Limited Rent Guaranty, and (3) the amount of net proceeds from an Equity Event.
The Note designates that the laws of New York shall apply in the event of a dispute between the parties.
The Note contemplated that Parc would enter into a working capital facility with another lender and, in the case of default under this working capital facility, payments under the Note would be subordinated to payments under the working capital facility.
Section IV further provides that "nothing contained in [the] Note shall impair or otherwise affect the obligation of the Obligors to make regular monthly payments of interest and annual payments of principal as provided in the first paragraph."
Parc entered into a working capital facility with SunTrust Bank ("SunTrust"). Accordingly, on April 15, 2008, Parc, Six Flags, and SunTrust entered into a subordination and intercreditor agreement (the "Subordination Agreement"). Under the Subordination Agreement, until Parc paid SunTrust in full, the only payments Parc could make to Six Flags were "Permitted Subordinated Debt Payments."
The Subordination Agreement designates that the laws of Florida shall apply in the event of a dispute between the parties.
As set forth above, upon the Note's inception, the Deferred Amount was $9,999,999. The Deferred Amount was subsequently reduced by two events: (i) $1,000,000 on January 1, 2008, an annual reduction; and (ii) $4,999,999 by the occurrence of an Equity Event in January 2008. Thus, in January 2008, the Deferred Amount was $4,000,000.
At the same time, deferred principal and interest payments were accumulating. Consequently, when the February 2008 interest payment was deferred, the scales tipped making the Accrued Deferred Payments exceed the Deferred Amount ($4,001,875 > $4,000,000).
Therefore, Six Flags notified Parc that it was in default and demanded payment of the Excess Amount.
On January 1, 2010, pursuant to the terms of the Note, Six Flags asserts that the Deferred Amount was again reduced by $1,000,000, resulting in the Accrued Deferred Payments exceeding the Deferred Amount by an additional $1,000,000 (now, the Excess Amount totaled $2,001,875 ($1,001,875 + $1,000,000)). Thus, Six Flags alleges that Parc owes Six Flags a total of $2,001,875 as of January 1, 2010.
Shortly after Parc refused to pay the alleged Excess Amounts owed on January 1, 2010, Six Flags filed the Complaint with this Court. In the Complaint, Six Flags claims that as a result of Parc's refusal to pay the $1,001,875 on January 1, 2009 and $1,000,000 on January 1, 2010, it is entitled
Parc filed a motion to dismiss all counts of the Complaint. The motion alleges that the complaint failed to state breach of contract claims because at Equalization the Deferred Amount is added to the balloon payment and is no longer subject to reduction, creating a "one-time" Excess Amount at Equalization. Parc next argues that even if the Court were to agree with Six Flags' interpretation of the Contested Provision, the Excess Amounts were not permitted by the Subordination Agreement.
A motion under Rule 12(b)(6)
In Iqbal, the Supreme Court makes clear that the Twombly "facial plausibility" pleading requirement applies to all civil
After Iqbal, the Third Circuit has instructed this Court to "conduct a two-part analysis. First the factual and legal elements of a claim should be separated. The [court] must accept all of the complaint's well-pleaded facts as true, but may disregard any legal conclusions."
The threshold disputes presented before the Court are (i) the timing of payment of an Excess Amount, if any; and (ii) whether it is plausible that the Deferred Amount (the amount actually deferred by Parc, $4 million) continued to be reduced creating additional Excess Amounts due; as opposed to adding the Deferred Amount, at Equalization, to the balloon payment subject to no further reductions.
Counts II and III of the Complaint are breach of contract claims. Count II seeks damages of $2,001,875 for Parc's alleged failure to pay Excess Amounts due under the Contested Provision of the Note. Count III seeks damages claiming that the failure to pay the Excess Amounts was a termination event under the Note which triggers additional interest (4%) which was allegedly owed since January 30, 2009.
Parc's motion to dismiss argues that the terms of the Note do not warrant payment of the Excess Amounts allegedly owed in the Complaint. Claiming that the Note is unambiguous, Parc interprets the Contested Provision as stating that, upon Equalization, the Deferred Amount is added to the balloon payment, and no further reductions to the Deferred Amount occur. They contend that a balloon payment, by definition, is made at maturity and cannot be prepaid. Furthermore, Parc argues that even if the Note allows further reductions to the Deferred Amount, the Excess Amount payments would be prohibited payments under the terms of the Subordination Agreement.
In response, Six Flags claims that the unambiguous language of the Note provides that the Deferred Amount is subject to reductions after Equalization, therefore, entitling Six Flags to the Excess Amount payments it seeks. Six Flags also contests that the Subordination Agreement has no bearing on the alleged Excess Amount payments owed by Parc.
Parc replied that a plain reading of the Note as a whole is incongruous with Six Flag's interpretation of the Note, arguing that Six Flag's interpretation would erroneously lead to the absurd result of Parc owing far more in Excess Amounts than the amount of Accrued Deferred Payments,
For simplicity's sake the reduction to the Deferred Amount as accrual of the Accrued Deferred Payments works as follows:
------------------------------------------------------------------------------------------------------------
Principal and Maximum
interest actually deferred
Date deferred ("Accrued amount Event Explanation
Deferred ("Deferred
Amount") Amount")
------------------------------------------------------------------------------------------------------------
April 6, 2007 N/A $10 million Parc's annual
------------------------------------------------------------------------------------------------------------
January 1, 2008 $2 million $9 million $1 million annual principal payment
reduction and interest thereon
------------------------------------------------------------------------------------------------------------
January 1, 2009 $4 million $8 million $1 million annual is deferred
reduction
------------------------------------------------------------------------------------------------------------
January 1, 2010 $6 million $7 million $1 million annual
reduction
------------------------------------------------------------------------------------------------------------
January 1, 2011 $8 million $6 million $1 million annual Equalization occurs;
reduction including accrual of
an "Excess
Amount"; Parc
begins monthly
interest payments
------------------------------------------------------------------------------------------------------------
January 1, 2012 Parc begins paying annual principal, in addition to its continued obligation to make
monthly interest payments
------------------------------------------------------------------------------------------------------------
Parc argues that (in this example) the following occurs: (i) $6 million (the Deferred Amount) is added to the balloon payment, (ii) Parc pays the $2 million Excess Amount ($8 million — $6 million), and (iii) Parc pays principal and interest when due per the Note. In Parc's argument the chart would be as follows, again using the simplistic explanation:
------------------------------------------------------------------------------------------------------------
Principal and Maximum
interest actually deferred
Date deferred ("Accrued amount Event Explanation
Deferred ("Deferred
Amount") Amount")
------------------------------------------------------------------------------------------------------------
April 6, 2007 N/A $10 million Parc's annual principal
------------------------------------------------------------------------------------------------------------
January 1, 2008 $2 million $9 million $1 million payment and interest
annual thereon is deferred
reduction
------------------------------------------------------------------------------------------------------------
January 1, 2009 $4 million $8 million $1 million
annual
reduction
------------------------------------------------------------------------------------------------------------
January 1, 2010 $6 million $7 million $1 million
annual
reduction
------------------------------------------------------------------------------------------------------------
January 1, 2010 $8 million $6 million $1 million Equalization occurs;
annual including accrual of an
reduction "Excess Amount"; Parc
beings making it interest
obligation payments per
the terms of the Note
$6 million would be added to the balloon payment; Parc would pay the "Excess
Amount ($8 million - $6 million = $2 million) and Parc would begin making payments
of principal; and continue its monthly interest obligations per the terms of the Note
------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------
Principal and Maximum
interest actually deferred
Date deferred amount Event Explanation
("Accrued
Deferred ("Deferred
Amount") Amount")
------------------------------------------------------------------------------------------------------------
April 6, 2007 N/A $10 million Parc's annual principal payment
------------------------------------------------------------------------------------------------------------
January 1, 2008 $2 million $9 million $1 million and interest thereon is deferred
annual
reduction
------------------------------------------------------------------------------------------------------------
January 1, 2009 $4 million $8 million $1 million
annual
reduction
------------------------------------------------------------------------------------------------------------
January 1, 2010 $6 million $7 million $1 million
annual
reduction
------------------------------------------------------------------------------------------------------------
January 1, 2010 $8 million $6 million $1 million Equalization occurs; including
annual accrual of an "Excess Amount"
reduction
Parc begins to pay principal and
interest per the terms of the Note,
as well as, the Excess Payment ($8
million - $6 million = $2 million)
------------------------------------------------------------------------------------------------------------
January 1, 2011 $6 million $5 million $1 million In addition to principal and
annual interest per the terms of the Note,
reduction Parc would pay an additional
Excess Amount of $1 million
------------------------------------------------------------------------------------------------------------
January 1, 2012 $5 million $4 million $1 million In addition to principal and
annual interest per the terms of the Note,
reduction Parc would pay an additional
Excess Amount of $1 million
------------------------------------------------------------------------------------------------------------
January 1, 2013 $4 million $3 million $1 million In addition to principal and
annual interest per the terms of the Note,
reduction Parc would pay an additional
Excess Amount of $1 million
------------------------------------------------------------------------------------------------------------
January 1, 2014 $3 million $2 million $1 million In addition to principal and
annual interest per the terms of the Note,
reduction Excess Amount of $1 million
------------------------------------------------------------------------------------------------------------
January 1, 2015 $2 million $1 million $1 million In addition to principal and
annual interest per the terms of the Note,
reduction Parc would pay an additional
Excess Amount of $1 million
------------------------------------------------------------------------------------------------------------
January 1, 2016 $1 million $0 $1 million In addition to principal and
annual interest per the terms of the Note,
reduction Parc would pay an additional
Excess Amount of $1 million
------------------------------------------------------------------------------------------------------------
Under New York Law,
The Complaint establishes three of the breach of contract elements for Counts II and III. Existence of the agreement is provided with the attachment of the Note in an exhibit, Six Flags performed their obligation under the agreement by executing the Note and supplying seller financing to Parc, and both breach of contract claims state sufficient allegations of damages caused by Parc. The only element in dispute is the alleged breach of the Note by Parc. Because the event of the default in Count III exists only if the terms of the Note were breached under Count II, Count II is determinative of Count III.
To determine the plausibility of Parc's breach, the Court must construe the meaning of the Contested Provision and whether, in light of both parties' interpretations, the terms of the Note are ambiguous. "It is not necessarily true that a court considering a Rule 12(b)(6) motion in the context of a contract dispute must accept as true the construction of a contract proffered by the plaintiff."
"When parties set down their agreement in a clear, complete, document, their writing . . . should be enforced according to its terms. . . . [I]n the context of real property transactions, where commercial certainty is a paramount concern and where . . . the instrument was negotiated between sophisticated, counseled business people negotiating at arm's length" this principle of contractual interpretation is particularly important.
Nevertheless, a contract should be read as a whole, so that "[f]orm [does] not prevail over substance and [the] sensible meaning of words."
A court's goal should a "practical interpretation of the expressions of the parties to the end that there [is] a `realization of [their] reasonable expectations.'"
The language of the Contested Provision, notwithstanding the two interpretations proffered by the parties, is clear and unambiguous. Furthermore, both Six Flags and Parc are sophisticated business entities, who, at arm's length, executed a real property transaction.
The Note speaks to the timing for the payments of the Excess Amount:
This language appears in two places in the Contested Provision, immediately following descriptions of reductions to the Deferred Amount.
Therefore, it is plausible that Parc must pay any Excess Amount at the same time as Equalization. But, is it plausible that the Deferred Amount continues to reduce after Equalization, thereby creating continuous Excess Amounts until the Deferred Amount is paid in full?
Parc argues that once Equalization has occurred the Deferred Amount is added to the balloon payment and no further reductions to the Deferred Amount take place. Parc focuses on the following language, that upon Equalization:
This phrase supersedes the Deferred Amount reduction/payment language. Six Flags argues that the entire "provided, further however" clause applies to the whole preceding clause which describes Equalization and the clause "the Deferred Amount shall be added to the balloon payment. . . ." Arguing that the reduction language also attaches to the last phrase, thereby continually reducing the Deferred Amount.
Parc responds that adapting Six Flags' construction of the Contested Provision would lead to an absurd result. The Court agrees. If the Deferred Amount is not added to the balloon payment upon Equalization, it would write-out the contractual phrase "and the Deferred Amount shall be added to the balloon payment due hereunder."
It simply does not make sense
As the Court holds that Six Flags' position that the Deferred Amount decreases even after Equalization is not plausible. However, the Court finds that it is plausible that at Equalization the Excess Amount, alleged to be $1,875, should have been paid concurrently with Equalization. The Court believes that in the scope of this Note, $1,875 is a de minimis amount
Count III alleges that Parc's alleged failure to pay the Excess Amounts upon
Count I of the Complaint alleges that Parc owed Six Flags Excess Amounts on January 1, 2009, and January 1, 2010, under the terms of the Note, and that these Excess Amounts are matured and due and payable, therefore, subject to turnover. It further alleges that because Parc failed to pay the Excess Amounts, Six Flags is entitled to turnover of $2,001,875.
As discussed above, the only plausible Excess Payment that Six Flags alleges Parc did not pay is $1,875. As noted above, it is plausible that this alleged debt is matured and may be subject to turnover. However, as this alleged amount is de minimis, the motion to dismiss is granted, without prejudice. Six Flags' rights to plead turnover related to the alleged Excess Amount of $1,875 is hereby reserved.
As the Court has found that Six Flags' interpretation of the Contested Provision is not plausible, the Court finds that Six Flags' averments of declaratory judgment are moot. As such, the Court grants the motion to dismiss Count IV of the Complaint.
For the foregoing reasons, the Court grants, without prejudice, the motion to dismiss Count I of the Complaint for turnover of the property of the estate; grants, as set forth herein, the motion to dismiss Count II; grants, without prejudice, the motion to dismiss Count III of the Complaint for breach of contract; and grants the motion to dismiss Count IV of the Complaint for declaratory judgment.
An order will be issued.
Id. at 3.
Albany Med. Coll. v. Lobel, 296 A.D.2d 701, 745 N.Y.S.2d 250, 252 (N.Y.App.Div.2002) (citing Capital Med. Sys. v. Fuji Med. Sys. U.S.A., 239 A.D.2d 743, 658 N.Y.S.2d 475, 478 (N.Y.App.Div. 1997)). The Complaint alleges that Six Flags notified Parc of the alleged breach on January 30, 2009. Compl. at ¶ 31 [D.I. 1].
