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UNITED STATES v. WALLACE & WALLACE FUEL OIL CO.

May 19, 1982

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



The opinion of the court was delivered by: DUFFY

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 2(8)(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, P 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. *fn1" 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, P 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, P 3.

 No payments were made by Wallace Fuel during the life span of the DSMA. The SBA made repeated requests for information regarding petroleum products delivered by Wallace Fuel pursuant to its 8(a) contracts in order to calculate royalties owed. Wallace Fuel's financial statements finally submitted on June 3, 1980 reflect a total sale of over 18 million gallons *fn2" of petroleum from October 1, 1979, the effective date of the DSMA, through March 1, 1980. Wallace Fuel affirmed its obligation to pay royalties on these sales in a letter written by Stroock, Stroock & Lavan on July 31, 1980. On September 25, 1980, Mr. Irizarry notified Mr. Wallace of the likelihood of acceleration of the debt if the requisite payments were not tendered. Two checks, totalling $ 113,839.99, the royalties accrued from October 1 through March 1, were sent to the SBA on October 17, 1980. One of the checks, *fn3" written in the sum of $ 105,101.86, was never honored by the defendants' bank.

 On November 14, 1980, Mr. Irizarry again wrote Mr. Wallace. Matthews Exhibit 19. This letter demanded that Wallace Fuel remit to the SBA within ten days interest payments which were suspended during the moratorium year until September 30, 1980. Pursuant to Section 4.2 of the DSA, Wallace Fuel was obligated to tender a minimum payment of accrued interest on the entire balance of its 8(a) debt equaling $ 522,276.78, plus an additional $ 35,000 to arrive at a total of $ 557,276.78. The SBA subtracted the amount reflected on the October 17, 1980 check and demanded $ 452,174.92. Wallace Fuel disputed the SBA's interpretation of the DSA, as evidenced by the November 20, 1980 letter of Stroock, Stroock & Lavan, Matthews Exhibit 20, and requested that the demand be withdrawn. No payment has since been forthcoming from Wallace Fuel. *fn4"

 The SBA notified the defendants of its default under the DSA on December 10, 1980 and again on January 6, 1981. On February 13, 1981 this action was initiated demanding the principal amount of $ 10,768,377.78 plus interest. The defendants answered on June 12, 1981 and raised eighteen affirmative defenses. After limited discovery, *fn5" the plaintiff moved for summary judgment based entirely on the DSA and its explicit obligations. The defendants opposed the plaintiff's motion and alternatively cross-moved for summary judgment.

 DISCUSSION

 A motion for summary judgment is appropriate when no genuine issues of fact are present. Fed.R.Civ.P. 56(c). The burden rests on the moving party to establish the absence of material disputed facts warranting a trial on the merits. Contemporary Mission, Inc. v. United States Postal Service, 648 F.2d 97, 107 (2d Cir. 1981). Addressing the government's summary judgment motion first, it relies entirely on the executed DSA and DSMA between the parties. The defendants do not dispute the validity of these instruments or the veracity of any of the facts recited above, but instead urge this court to go beyond the four corners of the instrument to ascertain through parol evidence the unstated terms and conditions implicitly contained in the debt structure agreements which purportedly exonerate defendants. The plaintiff vigorously opposes the admission of parol evidence and contends as a matter of law that the defendants are bound to the contractual terms, that the parol evidence rule precludes examination of the behind-the-scene negotiations before, during and after the execution of the instruments and that no genuine issue of fact remains. The SBA insists that the defendants' acknowledgment of their debt in both the DSA and the DSMA when viewed in conjunction with their continued refusal to comply with the terms of either agreement merits summary judgment.

 If any of the eighteen affirmative defenses proffered by the defendants in opposition to the plaintiff's summary judgment motion raises a genuine factual issue, summary judgment is inappropriate. To defeat plaintiff's summary judgment motion defendants must present facts to support each of their affirmative defenses.

 The heart of the defendants' opposition to summary judgment rests on their attempt to introduce extrinsic evidence manifesting the SBA's commitment to Wallace Fuel's economic revival. However, it is well settled that the terms of a validly executed contract control absent evidence manifesting ambiguity or lack of clarity. See Tokio Marine and Fire Insurance Co. Ltd. v. McDonnell Douglas Corp., 617 F.2d 936, 940 (2d Cir. 1980); Neuman v. Pike, 591 F.2d 191, 193 (2d Cir. 1979). The parol evidence rule operates to preclude the admission of extrinsic evidence outside the four corners of a contract whenever the contract is "complete, unambiguous, and valid, or there is no fraud, accident or mistake, or claim or allegation thereof, with respect to the instrument." 32A C.J.S. Evidence § 851 at 214-15 (1964); See 3 A. Corbin, Contracts § 573 (1960). This rule was developed to safeguard the sanctity of integrated writings from future attempts at contradiction. 3 A. Corbin, Contracts § 5726 (1960 & 1980 Supp.).

 Defendants allege that the contracts in question are unintegrated and ambiguous, inter alia, and therefore call for application of the parol evidence rule. The defendants argue that the government agreed to abide by certain "conditions" not expressly contained in the DSA and DSMA which provided the foundation for agreement among the parties. The conditions purportedly agreed to by the SBA are as follows: (1) continuation of the defendants in the 8(a) program in conjunction with the grant of future 8(a) contracts; (2) delivery and acceptance by the Defense Department of $ 11 million dollars worth of fuel; (3) the award of year long 8(a) contracts; (4) financing of all future 8(a) contracts through the Treasury Department line-of-credit method; (5) disbursement of $ 5.5 million in advance payments to Wallace Fuel under its 1978-79 ground fuels contract; (6) award of profitable bulk and crude oil 8(a) contracts and (7) award of all contracts at a fair market price.

 The defendants concede that none of these obligations are set forth in the instruments. They assert, however, that the written agreements are too ambiguous and incomplete to reflect the true intentions of the parties and therefore parol evidence should be admitted.

 I. Integration

 In determining whether the parol evidence rule applies to this case the first issue to be resolved is whether the written contract between the parties was integrated, i.e. whether the DSA and the DSMA represent a complete and accurate understanding of the parties. When the contract as signed represents the complete and accurate understanding of the parties, parol evidence is inadmissible to vary or modify the terms of the writing. Battery Steamship Corp. v. Refineria Panama, S. A., 513 F.2d 735, 738 (2d Cir. 1975); APLications, Inc. v. Hewlett-Packard Co., 501 F. Supp. 129, 132 (S.D.N.Y.1980).

 The DSA contains the following integration clause: "This Agreement ... contains the entire understanding of the parties hereto .... There are no restrictions, promises, warranties, convenants or undertakings, other than those expressly set forth herein or therein." Matthews Exhibit 3, Section 14 at p. 15. This clause is not modified by the DSMA and refutes the defendants' ...


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