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Gladstone Business Loan, LLC v. Randa Corp.

December 8, 2010

GLADSTONE BUSINESS LOAN, LLC,
SUCCESSOR-IN-INTEREST TO GLADSTONE CAPITAL CORPORATION, PLAINTIFF,
v.
RANDA CORP., ET AL., DEFENDANTS.



The opinion of the court was delivered by: McKENNA, D.J.

MEMORANDUM AND ORDER

Plaintiff Gladstone Business Loan, LLC ("Gladstone") filed this action seeking to recover sums allegedly due under a Capital Call Agreement between Gladstone and Defendant Randa Corp. ("Randa"). Gladstone and Randa filed cross-motions for summary judgment pursuant to Rule 56 of the Federal Rules of Civil Procedure. For the reasons set forth below, Gladstone's and Randa's motions are denied.

Background

A. Statement of Facts

Gladstone and CapitalSource Finance LLC ("CapSource") are specialty finance companies that provide commercial lending services. Randa is a manufacturer, distributor and marketer of neckwear. Randa Luggage1 is an affiliate of Randa that manufactures, distributes, and markets luggage, bags, backpacks and cases.

On January 24, 2007, Randa Luggage entered into a credit agreement with Gladstone (the "Credit Agreement") by which Gladstone agreed to lend up to $17,500,000 to Randa Luggage. (Gladstone's Rule 56.1 Statement ¶ 1; Randa's Rule 56.1 Counterstatement ¶ 1.) At the same time, CapSource agreed to lend Randa Luggage up to $42,625,000. (Id.) The CapSource loan was senior to the Gladstone loan. (Id.)

In April 2008, Adnar Finance LLC ("Adnar"), an affiliate of Randa, acquired the CapSource loan. (Gladstone's Rule 56.1 Statement ¶ 2; Randa's Rule 56.1 Counterstatement ¶ 2.) As a result, Adnar stepped into CapSource's shoes as senior lender.

On June 30, 2008, Randa and Gladstone entered the Capital Call Agreement. (Gladstone's Rule 56.1 Statement ¶¶ 2, 4; Randa's Rule 56.1 Counterstatement ¶¶ 2, 4; Decl. of John Hastings in Supp. of Randa's Mot. for Summ. J., Jun. 29, 2010, ("Hasting Decl.") Ex. C.) Section 1(a) of the Capital Call Agreement obligated Randa to pay up to $1,250,000 (the "Capital Call Amount") to Randa Luggage upon occurrence of a "Capital Call Event," defined as Randa Luggage's failure to comply with Section 4.3 of the Credit Agreement, which set out various financial covenants and financial ratios that Randa Luggage had to comply with each quarter. (Hasting Decl. Ex. C § 1(a)-(b).) Under Section 1(a), Randa could pay the Capital Call Amount as either cash equity contributions or subordinated loans. (Hasting Decl. Ex. C § 1(a).) If Randa elected the latter, it was required to complete paperwork in the form of exhibits attached to the Capital Call Agreement. (Id.) Payment of the Capital Call Amount was due to Randa Luggage no later than five calendar days after Randa received notice that a Capital Call Event had occurred. (Id.) If, however, there was an Event of Default under Section 6.1 of the Credit Agreement, defined as Randa's failure to make timely installment or interest payments to Gladstone, at the time a Capital Call Amount was otherwise due, then Section 1(c) of the Capital Call Agreement obligated Randa to pay Gladstone, instead of Randa Luggage, the Capital Call Amount in cash. (Hasting Decl. Ex. C 1(c).)

1 This Memorandum and Order's reference to Randa Luggage encompasses Randa Luggage Inc., Randa Luggage Holdings Corp., and Badanco Acquisition, LLC.

On October 29, 2008, Randa Luggage notified Randa that it had defaulted under Section 4.3 of the Credit Agreement and thus, a Capital Call Event had occurred. (Gladstone's Rule 56.1 Statement ¶¶ 8-9; Randa's Rule 56.1 Counterstatement ¶¶ 8-9; Decl. of Corey Delaney in Supp. of Gladstone's Mot. for Summ. J., Jun. 30, 2010, ("Delaney Decl.") Ex. 3.)

On October 30, October 31, and November 3, 2008, Randa transferred $1,600,000 to Randa Luggage. (See Hastings Decl. Exs. E, F, & G.) These transfers were recorded by Randa Luggage, Randa, and Adnar on their respective books as advances under Randa Luggage's line of credit with Adnar. (Hastings Decl. ¶ 11.)

On January 16, 2009, Gladstone notified Randa that Randa Luggage had failed to make an interest payment due to Gladstone as of January 1, 2009 and thus, an Event of Default had occurred under Section 6.1 of the Credit Agreement. (Gladstone's Rule 56.1 Statement ¶ 20; Randa's Rule 56.1 Counterstatement ¶ 20; Delaney Decl. Ex. 7.)

On January 26, 2009, Randa made an adjusting journal entry that reclassified $1,250,000 of the money transferred to Randa Luggage in October and November 2008 that was initially recorded as loan advances from Adnar to equity. (Gladstone's Rule 56.1 Statement ¶ 24; Randa's rule 56.1 Counterstatement ¶ 24; Decl. of John Karch in Opp. to Gladstone's Mot. for Summ. J. ("Karch Decl.") Ex. F.)

On January 27, 2009, Gladstone sought payment of $1,250,000 from Randa pursuant to Section 1(c) of the Capital Call Agreement, asserting that an Event of Default under Section 6.1 of the Credit Agreement had occurred while the Capital Call Amount was otherwise due. (Delaney Decl. Ex. 8.) In response, Randa asserted that an Event of Default had not occurred at the time a Capital Call Amount was due because Randa had already satisfied its obligation under Section 1(a) of the Capital Call ...


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