United States District Court, S.D. New York
OPINION AND ORDER
KATHERINE POLK FAILLA, District Judge.
This Court entered a default judgment for breach of contract against Defendant on March 7, 2013, and issued an Opinion and Order adopting the Report and Recommendation of United States Magistrate Judge Frank Maas as to damages on March 4, 2014. Both orders contemplated the appointment of a receiver.
The instant dispute concerns primarily the scope of that receiver's authority. Plaintiff Daniel Skaff ("Skaff" or "Plaintiff"), acting on behalf of the former shareholders of Vivaro Corporation ("Vivaro"), initially asked the Court to grant the receiver authority to take full control of Defendant Progress International, LLC ("Progress" or "Defendant"), effect its sale or liquidation, and apply the proceeds of the sale to satisfy the judgment. Defendant, filing for the first time in this action, objected that under the contracts at issue the receiver should have authority only over Defendant's deposit accounts. Plaintiff responded that, even if this were the case, the receiver's authority should be broader in several respects than that contemplated by Defendant's proposed order.
Both parties are correct in parts. Defendant is correct that the agreements between the parties accord relatively little authority to the receiver. Plaintiff is correct that the Court's equitable power to enforce a default judgment justifies granting the receiver substantially broader authority. Yet this Court is not inclined to assume the role of a bankruptcy court and replicate the process of sorting out competing claims through the receivership process. Accordingly, the Court authorizes the receiver to take possession of Defendant and all its assets and conduct a thorough accounting, but not to liquidate or distribute such assets - except for those explicitly identified by the agreements - absent further Court order.
A. The Prior Litigation History
The facts leading up to the Court's previous opinion in this case are more fully set forth in the R&R and in Skaff I, but the relevant details will be briefly recapped. In June 2010, Plaintiff, Vivaro, Defendant, and a subsidiary of Defendant entered into an Agreement and Plan of Merger dated June 18, 2010 (the "Merger Agreement"), under which the subsidiary merged into Vivaro, which then became a wholly-owned subsidiary of Defendant. Skaff I, 2014 WL 856521, at *1. The Merger Agreement was amended through multiple addenda, and the parties subsequently entered into a Security Agreement dated October 12, 2010 (the "Security Agreement"). (Compl. Ex. A, B).
Under the terms of the Merger Agreement, Progress was to make a series of payments totaling over $4 million to Skaff and the other shareholders. (R&R 2-3). Progress failed to make all but a single payment of $50, 000. ( Id. at 4). On December 12, 2012, Plaintiff filed suit alleging breach of contract and requesting compensatory relief and specific performance. Skaff I, 2014 WL 856521, at *2. On January 14, 2013, Plaintiff requested that the Clerk of Court enter default against Defendant, and on January 30, 2013, the Clerk of Court did so. Id. Plaintiff moved for entry of default judgment on February 19, 2013, and the Court granted the motion on March 4, 2013. Id. On March 4, 2014, the Court adopted the recommendation of Judge Maas as to damages, and entered judgment for Plaintiff against Defendant for $4, 005, 000.00 in compensatory damages; prejudgment interest on each defaulted installment payment comprising that sum calculated at the rate of 5.75% per annum from the installment due date; postjudgment interest on that sum from March 7, 2013, at the rate set forth in 28 U.S.C. § 1961(a); and $53, 976.64 in attorney's fees and expenses. Id. at *5.
B. The Instant Litigation
In the same Opinion and Order, the Court also announced its intention to appoint a receiver, and ordered Plaintiff to identify a qualified receiver and the scope of the receiver's appointment. Skaff I, 2014 WL 856521, at *6. Plaintiff did so on April 3, 2014, recommending the appointment of Jeffrey A. Compton as receiver. (Dkt. #34). Plaintiff submitted a proposed order granting broad powers to the receiver, including the authority to "[t]ake over immediate custody, possession, and control of the Judgment Debtor and collect, preserve, and liquidate all of its assets and income...." ( Id. ). By letter dated April 9, 2014, Plaintiff identified § 6.08 of the Merger Agreement as the source of his right to "all of [Defendant's] assets, " and § 6(b) of the Security Agreement as the source of his right to "the appointment of a receiver or keeper to take possession of Collateral and to enforce any of [Plaintiff's] remedies." (Dkt. #37).
On April 10, 2014, Defendant responded, objecting to Plaintiff's proposed order. (Dkt. #36). Defendant argued that because a receiver was sought and granted only pursuant to the contract, rather than to enforce the default judgment under Fed.R.Civ.P. 66, the scope of the receiver's authority must be limited, pursuant to Security Agreement § 6(b), to taking possession of the Collateral identified in the Security Agreement, viz., Defendant's bank accounts. (Dkt. #36). Defendant attached an alternative proposed order, empowering the receiver only to take possession of the bank accounts identified as Collateral by Security Agreement § 1(c). ( Id. at Ex. A).
On April 28, 2014, Plaintiff submitted an amended response to Defendant's objections. (Dkt. #41). Plaintiff first argued that Defendant was, de facto, improperly trying to set aside a final judgment, as Plaintiff had been granted a default judgment while requesting specific performance of all of Defendant's obligations under the Merger and Security Agreements. ( Id. ). Second, Plaintiff argued that the Security Agreement did not supplant the grant of collateral provided in the Merger Agreement, as the clause in the Security Agreement that purported to do so was merely a recital clause without binding effect. ( Id. ). Third, Plaintiff argued that appointment of a receiver with broad powers was appropriate in any case to enforce the default judgment under New York law. ( Id. ). Finally, Plaintiff argued that if the Court were inclined to limit the receiver's authority to that set out in the Security Agreement, it should include two other powers specified in that agreement, namely, the power of attorney found in Exhibit A and the power to "cause Progress to honor the money-funneling obligations imposed by the covenants" found in § 4. (Dkt. #41). Plaintiff submitted a revised proposed order that would so establish the receiver's authority. ( Id. at Ex. A).
On May 30, 2014, the Court held a conference with the parties to discuss the proper scope of the receiver's authority. Pursuant to the Court's direction, Plaintiff submitted on June 6, 2014, an additional memorandum of law in support of its motion for appointment of a receiver under Fed.R.Civ.P. 66 and N.Y. C.P.L.R. 5228(a). (Dkt. #48). Defendant responded in opposition on June 13, 2014. (Dkt. #52). Notably, Defendant acknowledged that "Progress has accumulated more than $30 million in debt" and "effectively ceased operation in or around March 2013, " and has had no income or revenues since shortly thereafter. ( Id. ). Defendant, however, argued and provided affidavits to demonstrate that its primary asset, a 49 percent stake in the Mexican telecommunications company Marcatel S.A. de C.V., was subject to a superior security interest held by Marcatel itself, granted in 2012 to secure a debt exceeding $31 million. ( Id. ).
C. The Terms of the Merger Agreement and the Security Agreement
Several provisions of the Merger Agreement are implicated by the parties' arguments and thus are set forth here. Of particular significance to Plaintiff's current application, § 6.08 provided, in relevant part:
§ 6.08 ("Security Documents"): [Defendant] hereby grants to [Plaintiff]... a first priority lien and security interest in and to all of its assets, including but not limited to its accounts receivable and cash and cash equivalents. [Defendant] and [Plaintiff] shall enter into a security agreement, and execute such other documents and take such further actions as [Plaintiff] shall determine are necessary or appropriate to perfect such lien and security interest....
(MA § 6.08). Further on, § 8.04 made clear that the Merger Agreement "may not be amended except by an instrument in writing signed by the parties hereto" (MA § 8.04), and § 10.07 made clear that the Merger Agreement "shall be governed by, and construed in accordance with, the laws of the State of Delaware" ( id. at § 10.07). Finally, the Merger Agreement contained a specific performance clause, pursuant to which
[t]he parties hereto agree[d] that irreparable damage would occur in the event any provision of this Agreement was not performed in accordance with the terms hereof and that the parties shall be entitled to specific performance of the terms hereof in addition to any other remedy at law or in equity.
(MA § 10.06).
The Security Agreement, by contrast, contained the following provision among its recital paragraphs:
WHEREAS, that notwithstanding the fact that in order to induce the Company to enter into the Merger Agreement, [Defendant] agreed to grant a first priority lien and security interest in and to all of its assets, including but not limited to its accounts receivable and cash and cash equivalents, [Plaintiff] has agreed with [Defendant] to substitute such lien and instead perfect a lien and security interest granting a continuing first priority Security Interest in (as hereinafter defined), and Lien (as hereinafter defined) on, the Collateral (as hereinafter defined) to secure all of the Secured Obligations (as hereinafter defined).
Section 1(b) of the Security Agreement defined "Collateral" to have "the meaning ascribed thereto in Section 2(a) hereof" (SA § 1(b)); that section, in turn, provided:
To secure the prompt and complete payment, performance and observance of all of the Secured Obligations, the [Defendant] hereby grants, assigns, conveys, mortgages, pledges, hypothecates and transfers to [Plaintiff], for itself and the benefit of the Stockholders, a first priority continuing Security Interest and Lien upon all of its right, title and interest in, to and under all Deposit Accounts, including all deposit and other bank accounts and all deposits therein, whether now owned by or owing to, or hereafter acquired by or arising in favor of the [Defendant] (including under any trade names, styles or derivations thereof), and whether owned or consigned by or to, the [Defendant], and regardless of where located (all of which being hereinafter collectively referred to as the Collateral').
(SA § 2(a)). Section 1(c) defined "Deposit Accounts" to include "all deposit accounts, ' as such term is defined in the Code, now or hereafter held in the name of the [Defendant], including but not limited to all deposit ...