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MINORITY EQUITY CAPITAL CO. v. JACKSON

September 9, 1992

MINORITY EQUITY CAPITAL COMPANY, INC., Plaintiff, against EUGENE D. JACKSON, Defendant.

FREEH


The opinion of the court was delivered by: LOUIS J. FREEH

LOUIS J. FREEH, U.S.D.J.

 In this action involving a promissory note, Minority Equity Capital Company, Inc. ("MECCO") seeks summary judgment pursuant to Fed. R. Civ. P. 56 against Eugene D. Jackson ("Jackson") on the grounds that Jackson is in substantial default. Jackson opposes MECCO's motion and cross-moves for summary judgment and Rule 11 sanctions contending that under the Subordination Agreement, MECCO has no right to sue Jackson until he pays all his debts to Chemical Bank ("Chemical"), the Senior Creditor. For the reasons stated at oral argument and below, MECCO's motion is granted and Jackson's denied. *fn1"

 Facts

 The undisputed facts are as follows. On or about January 10, 1989, Jackson purchased from MECCO shares of stock in a company known as Unity Broadcasting Network. The $ 1,618,078.35 purchase price was paid by cash and promissory note. The $ 800,000.00 cash portion came from a loan by Chemical. The remaining sum was in the form of a promissory note (the "Note") from Jackson to MECCO in the amount of $ 818,078.35. Chemical, Jackson, and MECCO also entered into a Subordination Agreement whereby the debt represented by the Note would be subordinate to the debt owed by Jackson to Chemical.

 Paragraph 2(a) of the Subordination Agreement provides that MECCO may not sue Jackson until Jackson's obligations to Chemical have been paid in full:

 2.Restrictions on Payment of the Subordinated Obligations, etc. (a) Except as provided in paragraph (b) hereof, [MECCO] will not ask, demand for, sue for, take or receive, directly or indirectly, from [Jackson] or any affiliate thereof, in cash or other property, by set-off or otherwise, by exercise of any remedies or rights under the Junior Obligation Documents or by executions, garnishments, levies, attachments or by any other action relating to the [Note], or in any other manner, receive payment of, or security for, all or any part of the [Note] unless and until the Senior Obligations have been paid in full.

 Paragraph 2(b), however, contains the following exception to paragraph 2(a):

 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.

 Discussion

 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 ...


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