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May 20, 1993


The opinion of the court was delivered by: CONSTANCE BAKER MOTLEY



 This case involves a contract dispute. Defendants borrowed money from plaintiff to pay the debt on two ships that defendants owned. The parties are litigating the terms of the repayment of the loan.

 In this action, plaintiff General Electric Capital Corporation ("GECC") is seeking from defendants, Eva Armadora S.A. and Christina Armadora S.A. ("Armadora"), approximately $ 2,400,000 which it claims is due it as the balance of the Special Interest Payment of the Loan Agreement entered into by the parties on February 28, 1986 (the "Loan Agreement").

 The specific contract dispute between the parties concerns the calculation and amount of a contractually specified Special Interest Payment. Defendants Armadora rely on the language of the Loan Agreement between the parties and Addenda No. 1 and 2 thereto. Defendants contend that under the Special Interest Payment provision of the Loan Agreement as set forth in section 2.09 thereof, Armadora is entitled to certain listed deductions from the proceeds of the sale of its Vessels for purposes of computing the Special Interest payment due GECC.

 Plaintiff argues that in addition to the Loan Agreement and Addenda No. 1 and 2, this court must also look to a fourth agreement consisting of the October 27, 1987 letter from Mr. Gonzalez to Mr. Gurtler and the November 12, 1987 fax cover letter to Addendum No. 1 from Mr. Pappas to Mr. Gonzalez.

 Prior to a bench trial, defendants submitted a Motion In Limine To Exclude Certain Evidence At Trial. Plaintiff opposed this motion and submitted its own Motion In Limine To Exclude Certain Evidence At Trial. The court heard oral argument on the Motions on November 30, 1992. During the course of the hearing on the motions, both parties waived their right to a jury on the record. (See Transcript of Hearing 11/30/1992 at 108). Upon hearing the motions, this court denied both plaintiff's and defendants' motions to exclude parol evidence, concluding that section 2.09 of the Loan Agreement was ambiguous. (See Transcript of Hearing 11/30/1992 at 65).

 A bench trial commenced on January 4, 1993. At the close of the trial, the court reserved decision on all issues presented and requested the parties to submit Proposed Findings of Fact and Conclusions of Law. Based on the evidence presented at trial, the court makes the following Findings of Fact and Conclusions of Law.


 A. The Parties

 Plaintiff General Electric Capital Corporation ("GECC"), as successor in interest of General Electric Credit Corporation, is a finance company organized and existing under the laws of the State of New York with its principal place of business located in Stamford, Connecticut. (Complaint para. 2; Exh. 3, p.1).

 Defendants Eva Armadora, S.A. and Christina Armadora S.A. (collectively "Armadora") are corporations organized and existing under the laws of the Republic of Liberia. (Complaint para. 3).

 At all relevant times, defendant Eva Armadora S.A. was the owner of the Motor Tanker EVA and defendant Christina Armadora S.A. was the owner of the Motor Tanker CHRISTINA (collectively the "Vessels") each was built by the Astano Shipyard ("ASTANO") in Spain.

 T. Peter Pappas is the president and principal of Armadora. Armadora is part of the "Pappas group" of shipping and real estate companies.

 B. The Contentions of the Parties

 In this action, GECC is seeking to collect $ 2,434,554.58 which it claims is the balance due on a Special Interest Payment of $ 3,434,554.58 arising out of the Loan Agreement between by the parties on February 28, 1986 (the "Loan Agreement"). (Exh. 3).

 Under one theory, GECC relies on the Special Interest Payment provision of the Loan Agreement, section 2.09.

 Alternatively, GECC maintains that its claim concerning prepayment of the loan is supported by a new agreement between the parties, allegedly found in an exchange of letters between the parties concerning prepayment of the loan in October 1987 and November 1987.

 Armadora contends that the most it owes is $ 1,043,671. Armadora denies liability for the amount claimed by GECC, based on the Special Interest Payment provision of the Loan Agreement and the subsequently executed formal addenda to that agreement.

 C. The Agreement

 In 1979 defendants contracted with a Spanish shipyard for the building of two tankers (subsequently named EVA and CHRISTINA) for a purchase price of $ 30,000,000 per vessel. During the construction of the Vessels, defendants paid $ 5,000,000 each toward the purchase price. The balance on delivery was covered by a shipyard arranged mortgage loan with a Spanish bank for $ 25,000,000 per Vessel on a no-recourse basis. Following delivery of the Vessels the loans were paid down by Armadora from the earnings of the Vessels to $ 20,000,000 each. (Tr. 366-67).

 In 1984 the shipping market experienced a severe decline which caused Armadora to be unable to meet its debt service on the loans. (Tr. 259, 368). After the bank refused to grant a moratorium on payment of the loans as requested by Armadora, it went into default on the loans. Since the loans were on a non-recourse basis with no personal liability on Mr. Pappas's part, the bank would only have a right to foreclose on the Vessels. (Tr. 112-13, 368).

 The shipyard commenced an action against both Eva Armadora S.A. and Christina Armadora S.A. in the United States District Court for the Southern District of New York. (Tr. 419).

 In late 1985 Armadora and the bank reached an amicable settlement whereby Armadora agreed to pay $ 18,000,000 in satisfaction of the mortgages on the two Vessels, which represented the fair market value of the Vessels of $ 9,000,000 each. (Tr. 369). By this settlement the bank was able to obtain the full $ 9,000,000 market value of each Vessel without incurring any foreclosure expenses. Under this settlement agreement Armadora was to pay the $ 18,000,000 to the bank in February 1986. (Tr. 369-70).

 During 1985 and 1986 the shipping market was greatly depressed with commercial banks and other traditional sources of financing unwilling to make loans for the purchase or refinancing of vessels. (Tr. 6, 7, 371, 422).

 In order to help fund this settlement Mr. Pappas sought to obtain financing and GECC was one of the lenders contacted. Paul Gurtler, a finance broker and president of Interlink, had been retained by Armadora to assist in obtaining the financing necessary to pay ASTANO. (Tr. 340-41). In late 1985, Mr. Gurtler approached GECC seeking financing for Armadora. (Tr. 7-11).

 Mr. Gurtler met with Steven V. Gonzalez, then employed as a Marketing Manager with GECC. During that meeting Mr. Gurtler advised Mr. Gonzalez that Armadora was seeking a loan for the EVA and the CHRISTINA. (Tr. 340-41). At the conclusion of the meeting, Mr. Gurtler suggested a meeting between Mr. Pappas, the principal of Armadora, and Mr. Gonzalez. (Tr. 11).

 Mr. Pappas subsequently met with Mr. Gonzalez and other GECC employees at GECC's offices in Connecticut in January 1986. (Tr. 11, 12). Thereafter he met alone with Mr. Gonzalez in a local bar-restaurant where they spoke for another 30-40 minutes over drinks. (Tr. 123, 262, 372).

 At that meeting Mr. Pappas told Mr. Gonzalez that Armadora was in default of its obligations on the debt owed to ASTANO (Tr. 12, 13) and that Armadora was seeking financing of $ 9,000,000 for each Vessel for an aggregate loan of $ 18,000,000. (Tr. 422).

 At this time each Vessel had a market value of $ 9,000,000; thus, Armadora was seeking financing equal to 100% of the value of each of these Vessels. (Tr. 422).

 Mr. Pappas explained that in his view the market was severely depressed and that he foresaw that within the next three years the $ 9,000,000 value of each of the Vessels would appreciate by 100%. (Tr. 129, 371, 373). GECC agreed with this assessment of the market. (Tr. 372-74). Mr. Pappas further advised GECC that within the next three years he intended to sell the Vessels and capture this market rise. (Tr. 371-72, 375, 424). As an inducement to GECC for providing maximum financing, Mr. Pappas agreed to share with GECC 30% of this appreciation of the Vessels. (Tr. 222, 267). GECC concedes that this concept of speculating on the market value appreciation and a sale within the next three years was the conceptual underpinning of the profit sharing arrangement. (Tr. 13-14, 110, 127, 129, 131-32, 135, 222).

 Mr. Pappas also advised Mr. Gonzalez that Armadora had entered into bareboat charters for each Vessel with Shell France. Each charter had a term of approximately three years. (Tr. 13; Exh. J1, J2). At this meeting they also discussed the basic terms of the loans concerning which there is no dispute, including the amount, regular interest rate, duration, security, etc. (Tr. 24, 262-63). The parties offer differing views on whether, in addition to the regular interest to be paid, GECC was to receive some sort of "equity" interest in the Vessels, as claimed by Mr. Gonzalez, or merely a "profit participation," as testified to by Mr. Pappas. (Tr. 18-19, 266-67, 375-76). The parties agree that the additional payment to GECC, whether characterized as an equity interest or profit participation, is described in the Loan Agreement as a Special Interest Payment.

 Plaintiff asserts that Mr. Gonzalez explained to Mr. Pappas that, because of the high risk involved in this transaction, as evidenced by the request for financing equal to 100% of the current market value of the Vessels, the highly volatile shipping market, the existing default by Armadora on the then existing loans from ASTANO, and the fact that another vessel owned and operated by Mr. Pappas had been arrested by the Nigerian Government for an alleged theft of cargo, GECC would consider making this loan only if GECC received an "Equity Kicker" or "Equity Participation" in the Vessels. (Tr. 14, 17, 18).

 The "Equity Kicker" or "Equity Participation" required by GECC was not interest calculated on the loan nor interest on interest, but was an additional and separate payment to GECC after the principal and interest on its loan to Armadora had been fully repaid. Plaintiff alleges that this Equity Participation was given GECC in return for the risks involved in the loan and represented GECC's interest in the transaction as a whole. The Equity Participation did not give GECC an ownership interest in or legal title to the Vessels. (Tr. 14-17, 220-22).

 During that meeting Mr. Gonzalez claims that he explained to Mr. Pappas how GECC's Equity Participation would work and described several examples of an Equity Participation to Mr. Pappas. (Tr. 16-19).

 1. Pre-Loan Negotiation Documents

 In support of its claim, GECC contends that the provisions found in its proposal letter and commitment letter, sent before the Loan Agreement was negotiated or executed, should govern the parties' rights.

 Mr. Gonzalez sent a Loan Proposal Letter, dated January 16, 1986, to Armadora. (Exh. 1). The Loan Proposal Letter memorialized the terms and conditions which had been discussed by Mr. Gonzalez and Mr. Pappas during their meeting at GECC, including GECC's Equity Participation. (Tr. 26, 27).

 Upon receipt of the Loan Proposal Letter duly executed and accepted by Armadora, Mr. Gonzalez made a presentation to the Credit Committee of GECC. The Credit Committee approved the proposal based upon the terms in the Loan Proposal Letter and authorized the issuance of a Loan Commitment Letter to Armadora. (Tr. 29).

 A Loan Commitment Letter is a binding obligation by GECC to make a loan according to the terms and conditions set forth in its Loan Commitment Letter. (Tr. 29).

 The Commitment Letter provided that it was not all inclusive and was subject to the negotiation of formal loan documentation satisfactory to the parties. (Exh. 2 at 4).

 GECC issued a Loan Commitment Letter dated February 3, 1986 to Armadora which set forth the terms and conditions upon which GECC would lend $ 18,000,000 to Armadora. (Exh. 2). One of the enumerated terms and conditions was GECC's Equity Participation.

 The Equity participation, as set forth in the Loan Commitment Letter (Exh. 2 at 2), was identical to the terms and conditions of the Equity participation set forth in the Loan Proposal Letter. (Exh. 1) (Tr. 30, 31, 431, 491-92).

 The Loan Commitment Letter (Exh. 2) set forth the following relevant terms and conditions:

. A loan facility of $ 9,000,000 per Vessel, $ 18,000,000 in total;
. A loan term of three years;
. An interest rate of two and one-half percent over LIBOR for three month deposits determined quarterly, or, one and one-half percent above the prime commercial lending rate of Bankers Trust Company;
. No prepayment of the loan would be permitted during the term of the Bareboat Charters on the Vessels, i.e., ...

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