any such Scheduled payment and immediately after giving effect thereto, no default . . . shall have occurred and be continuing; provided however, that if [MECCO] does not receive three consecutive Scheduled Interest Payments or three consecutive Principal payments . . . notwithstanding that the Bank has not declared the Senior Obligations to be immediately due and payable, [MECCO] may, upon giving ten days prior written notice to the Bank, accelerate the [Note]. (emphasis added).
On June 12, 1991, after more than three defaults, MECCO notified Chemical of its intention pursuant to P 2(b) to accelerate the Note. On June 24, 1991, MECCO sent Jackson notice that it was exercising its right to acceleration. Chemical, in a letter also dated June 24, 1991, asked MECCO "to refrain from taking any action with regard to the Subordinated Obligations . . ."
MECCO seeks a judgment on the full accelerated amount of the Note, plus costs and attorneys' fees, as provided for in the Note. Because Chemical has informed MECCO that Jackson is also in default on his senior debt to Chemical, MECCO seeks only to secure a judgment against Jackson, not to collect funds from him or to execute that judgment.
Jackson seeks a judgment arguing that this action is in violation of PP 2(a) and (b) of the Subordination Agreement because while MECCO has a right to accelerate the debt the Subordination Agreement does not provide MECCO with a right to sue. He further demands that MECCO be sanctioned pursuant to Fed. R. Civ. P. 11 since, he alleges, MECCO was well aware that this action violated the Subordination Agreement.
The purpose of a subordination agreement is set out the relative positions of lenders in respect to their right to receive payments from the borrower. The use of subordination agreements is common where the senior creditor, usually a bank, is interested in taking a low risk with respect to repayment. The subordinate creditor, however, usually a non-bank lending institution, takes a higher risk with respect to repayment in the hope that the yield will be greater. See e.g., Charles W. and Ruby W. Norton, Inc. v. Leadville Corp., 570 F.2d 911, 912-13 (10th Cir. 1978).
It is undisputed that Jackson failed to make at least three consecutive payments. MECCO also sent Chemical notice of their intent to accelerate the Note more than ten days prior to acceleration. Furthermore, Chemical, during the relevant time period, had not declared Jackson's debt immediately due and payable. Thus, under the unambiguous terms of the Subordination Agreement, while a default by Jackson on his senior debt to Chemical may preclude MECCO from collecting regular, scheduled payments from Jackson, it in no way prevents MECCO from accelerating the Note if Jackson had missed three payments and if proper notice was given to Chemical. Accordingly, MECCO properly accelerated the Note.
MECCO contends that its right to sue while not specifically stated in P 2(b) of the Subordination Agreement is clearly implied from P 2(a) of the integrated agreement. The Court agrees. Paragraph 2(a) states in part: "Except as provided in paragraph (b) hereof, [MECCO] will not ask, demand for, sue for . . .". While it is true P 2(b) which immediately proceeds P 2(a) does not restate MECCO's right to "ask", "demand for" or "sue for", clearly the parties intended to provide MECCO with the rights listed in P 2(a) if the conditions in P 2(b) were satisfied. Because it is undisputed by the parties that the conditions in P 2(b) did occur, under the clear and unambiguous terms of P 2(a) and (b) MECCO has every right to accelerate Jackson's debt and sue for a judgment thereon.
Accordingly, judgment is granted in favor of MECCO, collection on the judgment however is deferred until Jackson has paid his debt to Chemical as mandated under P 2(a) of the Subordination Agreement. See, e.g., Wisnouse v. Telsey, 367 F. Supp. 855 (S.D.N.Y. 1973) (Wienfield, J.,) (judgment awarded despite the fact that collection was forestalled pending determination of assets and liabilities of brokerage firm); Charles W. and Ruby W. Norton, Inc. v. Leadville Corp., 570 F.2d 911 (10th Cir. 1978) (judgment entered for the subordinated creditor but judgment reflected senior creditor's right to first collect its debt); Kornfeld v. NRX Technologies, Inc., 93 A.D.2d 772, 773, 461 N.Y.S.2d 342, 343 (1st Dep't 1983), aff'd, 62 N.Y.2d 686, 465 N.E.2d 30, 476 N.Y.S.2d 523 (1984) ("Any question in terms of priority as to the rights of the plaintiffs as against other creditors has no bearing upon the plaintiffs's right to judgment as against the [defendants]."); Selick v. Wood & Selick, Inc., 119 N.Y.S. 2d 913 (Sup. Ct. N.Y. Co. 1953) ("nothing prevents a present action at law" for a judgment by the subordinated creditor).
Finally, although P 3(e) of the Subordination Agreement states that "[MECCO] shall not take any action to impair or otherwise adversely affect the foreclosure of, or other realization of [Chemical's] rights under the Senior Obligation Documents . . . ," Jackson has not demonstrated that Chemical would be negatively affected by a judgment. Admittedly, Jackson submits a letter from Chemical asking MECCO "to refrain from taking any action with regard to the Subordinated Obligations" because an acceleration of the Subordinated Note would be "adverse to Chemical Bank's interest as a creditor of Mr. Jackson."
However, a judgment which merely declares that MECCO has the right to the full accelerated amount of the Note as well as court costs and reasonable attorney's fees as provided for in the note, does not preclude Chemical from collecting its debt ahead of MECCO.
In sum, the clear and unambiguous terms of the Subordination Agreement allowed MECCO to accelerate the Note and sue for a judgment thereon upon the occurrences of certain conditions: three missed payments and a ten day notice to Chemical of its intent to accelerate the Note. However, pursuant to PP 2(a) and 3(a)(1) of the Subordination Agreement, collection on this judgment shall be deferred until Jackson has fulfilled his obligations to Chemical.
For the foregoing reasons, because there is no genuine issue of material fact in dispute, MECCO's motion is granted. MECCO is directed to submit a judgment consistent with this opinion no later than 20 days from the date of this opinion.
Dated: New York, New York
September 9, 1992
LOUIS J. FREEH, U.S.D.J.