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SNCB CORPORATE FIN. LTD. v. SCHUSTER

September 28, 1994

SNCB CORPORATE FINANCE LIMITED, Plaintiff,
v.
EUGENE IVAN SCHUSTER and VENTURE FUNDING, LTD., Defendants.


STANTON


The opinion of the court was delivered by: LOUIS L. STANTON

Plaintiff moves pursuant to Fed. R. Civ. P. 56 for summary judgment.

 BACKGROUND

 Plaintiff SNCB Corporate Finance Limited ("SNCB") seeks to enforce two guarantees made with respect to a working capital facility (the "Facility") extended in 1990 by the London branch of the National Commercial Bank ("NCB") to American Monitor (UK) Limited ("AMUK"), an English company. *fn1" Plaintiff claims that defendants guaranteed AMUK's obligations under the Facility, then refused to pay after AMUK defaulted and NCB demanded payment. Defendants assert defenses of fraudulent inducement, commercial unreasonableness and NCB's wilful misconduct.

 1. The Agreements

 In August 1990, NCB and AMUK entered into the Facility, pursuant to which NCB agreed to provide loans or issue bonds, indemnities or guarantees up to a maximum aggregate amount of $: 700,000. (Pl.'s Ex. 1, cl. 2(e).) In addition to imposing a $: 700,000 cap on advances, the Facility's borrowing formula limited the aggregate principal amount outstanding to 85% of specified accounts receivable plus 85% of certain inventory. (Pl.'s Ex. 1, cl. 2(e); Penny Aff., P 6.)

 As security for the loans contemplated by the Facility, the Parties entered into the Debenture, by which AMUK granted NCB a security interest in all of AMUK's assets (Pl.'s Ex. 2, cl. 3.01), the right to appoint a receiver in the event of AMUK's default, (Pl.'s Ex. 2, cls. 8.01, 8.02) and provided that AMUK's failure "to pay or to discharge any of its Secured Obligations or . . . to comply with any term or condition" of the Debenture would constitute a default. (Pl.'s Ex. 2, Schedule 3, P 1.) Schedule 2 to the Debenture set forth the receiver's powers, which included selling the secured assets at a public or private sale. (Pl.'s Ex. 2, Schedule 2, cl. 4.) The parties agreed that the Debenture would be governed and interpreted in accordance with English law. (Pl.'s Ex. 2, cl. 16.01.)

 As a condition of the Facility, defendants *fn2" executed separate guarantees (the "1990 Guarantees" or "Guarantees") of AMUK's obligations. (Pl.'s Exs. 3 and 4; Penny Aff., PP 10-12.) Both Guarantees provided that defendants "unconditionally and irrevocably" guaranteed payment of AMUK's obligations to NCB when due. Defendants waived all rights of objection and defenses other than fraud or "NCB's willful misconduct causing defendants material harm." (Pl.'s Exs. 3 and 4, cl. 2.1.) NCB could renew, vary, determine or increase any accommodation or credit given to AMUK without affecting defendants' liability under the Guarantees. (Pl.'s Exs. 3 and 4, cl. 6(a).) The Guarantees provided that New York law would govern the Guarantees. (Pl.'s Ex. 3, cl. 14; Pl.'s Ex. 4, cl. 15.)

 2. The Side Letter Extension

 The Facility expired by its terms on June 30, 1991. (Pl.'s Ex. 1, cl. 8.) In late May 1991, AMUK requested that NCB extend the Facility for an additional year, increase the maximum amount to $: 1,250,000, and provide an additional term loan of $: 250,000. (Pl.'s Ex. 6; Penny Aff. P 14.) After reviewing the Facility, Julie Jones, NCB's account officer on the Facility, and Simon Penny, Head of Corporate Banking, decided not to renew or increase it. (Pl.'s Ex. 7; Penny Aff. P 15.) The Credit Committee agreed and granted AMUK a limited extension. The extension allowed AMUK to borrow funds only through September 30, 1991 and required AMUK to repay all funds by December 31, 1991. (Pl.'s Ex. 8; Penny Aff. P 16.) NCB and AMUK entered into a "Side Letter" to the Facility, which set forth the terms of the extension. (Pl.'s Ex. 9; Penny Aff. P 17.)

 3. Declaration of Default and Demand for Payment

 On September 13, 1991, AMUK's management informed Simon Penny that AMUK would be unable to pay an invoice from H.M. Customs and Excise in the amount of $: 19,963.82. (Penny Aff. P 20; Pl.'s Ex. 10.) NCB paid the invoice and demanded reimbursement, but AMUK failed to repay NCB. (Penny Aff. P 20.)

 NCB notified AMUK and defendants by letter dated September 18, 1991 that AMUK's failure to reimburse NCB constituted a default under the Debenture and that NCB was under no further obligation under the Facility. (Pl.'s Ex. 11; Penny Aff. PP 22-23.) AMUK nonetheless continued to request additional funds from NCB. (Pl.'s Ex. 12, P 18; Penny Aff. P 24.) NCB's Credit Committee approved a $: 50,000 advance but informed AMUK that future requests would be denied unless AMUK agreed to certain conditions. (Pl.'s Ex. 13; Penny Aff. P 25.) NCB also paid AMUK's tax bill at the request of AMUK's controller. (Pl.'s Exs. 14 and 15; Penny Aff. PP 26-27.) In mid-October 1991, AMUK made another request for funds, which NCB denied after AMUK advised that it was unable to provide additional security. (Penny Aff. PP 27-28; Pl.'s Ex. 16.)

 By letter to AMUK dated October 31, 1991, NCB demanded payment of $: 554,299.58, the amount outstanding under the Facility. (Pl.'s Ex. 30; Penny Aff. P 30.) That same day, NCB notified defendants that the amounts under the Facility had become due and demanded payment. (Pl.'s Ex. 31; Penny Aff. P 31.) To date, neither AMUK nor defendants has paid NCB. (Penny Aff. P 32.)

 4. Receivership Sale

 NCB appointed Gareth Hughes and Margaret Mills, partners in the accounting firm Ernst & Young, as joint administrative receivers of AMUK on November 1, 1991. (Penny Aff. P 33; Pl.'s Ex. 20.) They concluded that if AMUK was sold as a going concern within a month its value could be maximized and the deterioration of its business halted. (Wollaston Aff. P 16; Pl.'s Ex. 39.) Mr. Hughes' memorandum to NCB explained that the financial difficulties being experienced by A.M. Diagnostics ("AMD"), AMUK's 100% parent company, might impede the receivers' ability to achieve a going concern sale, and identified potential purchasers, including AMUK's London management and AMD. (Pl.'s Ex. 39, PP 1(b), 3.)

 The receivers' advertisement appeared in the Financial Times of London on November 5. (Pl.'s Ex. 40.) The receivers also prepared a sales memorandum for potential purchasers. (Wollaston Aff. P 18; Pl.'s Ex. 41.) Andrew Wollaston, who worked under Mr. Hughes on the AMUK sale, (Wollaston Aff. PP 1-2), personally responded to and followed up on all inquiries, (Wollaston Aff. P 37), recording his efforts on a contemporaneous log. (Wollaston Aff. P 29; Pl.'s Ex. 42.) The receivers met with Mark Maten, Vice President and Chief Financial Officer of AMD, to determine whether AMD would be interested in bidding for AMUK, but AMD did not bid. (Wollaston Aff. PP 23-24; Pl.'s Ex. 45.)

 AMUK's London management, who formed Monitor Bioscience Limited ("MBL") for the purpose of bidding for AMUK's assets, made the only offer for AMUK. (Wollaston Aff. P 20.) MBL initially offered $: 80,000. (Pl.'s Ex. 43.) After negotiating with the receivers, MBL raised its offer. (Wollaston Aff. P 21; Pl.'s Ex. 44.) The receivers concluded that they could not hope to receive a higher offer, and on December 4, 1991 they sold most of AMUK's assets to MBL for $: 120,000. (Wollaston Aff. P 26; Pl.'s Ex. 47.)

 DISCUSSION

 1. Summary ...


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