FILED: NEW YORK COUNTY CLERK 10/27/2015 09:00 PM INDEX NO. 651992/2015 NYSCEF DOC. NO. 66 RECEIVED NYSCEF: 10/27/2015 SUPREME COURT OF THE STATE OF NEW YORK NEW YORK COUNTY -----------------------------------------------------------------------X GENERAL ELECTRIC CAPITAL CORPORATION, Plaintiff, Index No.: 651992/2015 -against- DAVID M. CUTLER and 611 SOUTH OCEAN BOULEVARD, LLC, Defendants. -----------------------------------------------------------------------X PLAINTIFF S REPLY MEMORANDUM OF LAW IN FURTHER SUPPORT OF ITS MOTION FOR PARTIAL SUMMARY JUDGMENT AS TO (A) DEFENDANTS LIABILITY ON A NOTE AND GUARANTY AND (B) UNDISPUTED AMOUNTS DUE McCARTER & ENGLISH, LLP 245 Park Avenue, 27 th Floor New York, New York 10167 (212) 609-6800 -and- Four Gateway Center 100 Mulberry Street Newark, New Jersey 07102 (973) 639-2066 Attorneys for Plaintiff, General Electric Capital Corporation On the Brief: Lisa S. Bonsall, Esq. Peter M. Knob, Esq. Return Date: October 28, 2015
TABLE OF CONTENTS Page TABLE OF AUTHORITIES... ii PRELIMINARY STATEMENT...1 LEGAL ARGUMENT...3 POINT I. PARTIAL SUMMARY JUDGMENT SHOULD BE ENTERED AS TO THE OBLIGORS LIABILITY ON THE RESTATED NOTE AND RESTATED GUARANTY...3 A. The Obligors Do Not Dispute the Loan, Restated Note, Restated Guaranty, Maturity or Nonpayment, and Plaintiff is Therefore Entitled to Judgment on Liability...3 B. Any Dispute About the Disposition of Collateral Relates Solely to Damages And Is Legally Irrelevant to the Obligors Liability on the Restated Note and Restated Guaranty...4 C. The Obligors Challenge to the Reasonableness of Costs Does Not Place the Entire Amount of Debt in Dispute...7 POINT II. PLAINTIFF SHOULD BE GRANTED SUMMARY JUDGMENT AS TO UNDISPUTED AMOUNTS DUE...9 CONCLUSION...11 i
TABLE OF AUTHORITIES STATE CASES Page(s) Commerce Commercial Leasing, LLC v. PIO Enterprises, Inc., 78 A.D.3d 1105 (2d Dep t 2010)...3, 6 European Am. Bank v. Kahn, 175 A.D.2d 704 (1st Dep t 1991)...4, 5 Ford Motor Credit Co. v. Racwell Const., Inc., 24 A.D.3d 500 (2d Dep t 2005)...6 Gen. Trading Co. v. A & D Food Corp., 292 A.D.2d 266 (1st Dep t 2002)...4, 5 NatWest Bank N.A. v. Grauberd, 228 A.D.2d 337 (1st Dep t 1996)...5 STATE STATUTES UCC 9-626...9, 11 ii
PRELIMINARY STATEMENT Plaintiff s motion for summary judgment sought judgment on the defendant Obligors liability on a Restated Note that became due at maturity and remains unpaid, and a Restated Guaranty in the face amount of $8.8 million. 1 The Obligors opposition conceded the validity of the documents and does not dispute that the note remains unpaid. Accordingly, Plaintiff is entitled to summary judgment against both Obligors on liability. The Obligors opposition claims that summary judgment cannot be granted because Plaintiff s disposition of the Aircraft collateral has been challenged. Case law, however, is to the contrary. A challenge to the commercial reasonableness of collateral disposition goes to damages, not liability, and accordingly judgment on liability is appropriate under the controlling cases. Plaintiff also sought summary judgment on the undisputed amount due under the Note, assuming the facts alleged in the Counterclaims to be true and crediting the full sale price of the Aircraft for purposes of the motion. The Obligors respond by essentially arguing that a challenge to the reasonableness of any part of the disposition automatically places the entire amount of the debt in dispute. That is not the law. The Obligors have never challenged the sale price of the Aircraft, and cannot fairly bootstrap their complaints regarding costs to deny the portion of the debt that is indisputably due and payable. No one has ever suggested (much less pled) that the Aircraft was worth more than $4.0 million. In any event, this argument does not go to liability, but damages. Finally, much of the Obligors opposition is devoted to mis-direction as to the undisputed (and indisputable) facts and mischaracterization of the arguments, all of which should not matter 1 Capitalized terms are as defined in Plaintiff s moving brief. 1
on this motion because they are preserved for discovery and trial. The Obligors arguments regarding the conduct of the sale and Plaintiff s costs for repairs, transportation, marketing, etc., are fully preserved. But those arguments do not dispute that money was borrowed and never paid back. Liability is therefore undisputed and judgment should be granted. Nor have Obligors defenses and counterclaims placed in issue anything other than the amount of time and money spent by Plaintiff to sell the Aircraft collateral. Since the motion concedes these issues for purposes of establishing Obligors minimum liability, judgment should therefore be granted for the amount owed if the Obligors challenges succeed. 2
LEGAL ARGUMENT POINT I PARTIAL SUMMARY JUDGMENT SHOULD BE ENTERED AS TO THE OBLIGORS LIABILITY ON THE RESTATED NOTE AND RESTATED GUARANTY A. The Obligors Do Not Dispute the Loan, Restated Note, Restated Guaranty, Maturity or Nonpayment, and Plaintiff is Therefore Entitled to Judgment on Liability At the outset, the Obligors do not dispute that (a) the underlying Loan was made (Defendant s response to Plaintiff s statement of material undisputed facts [NYSCEF Doc. No. 54] ( Response to SMUF ), 2), (b) the Obligors executed the Restated Note and Restated Guaranty (id. at 3, 5), and (c) the Restated Note by its terms matured on June 1, 2015 (id. at 3). Accordingly, Plaintiff is entitled to judgment as a matter of law on the issue of liability. See Commerce Commercial Leasing, LLC v. PIO Enterprises, Inc., 78 A.D.3d 1105, 1106-1107 (2d Dep t 2010) (citing cases). 2 The only dispute raised by the Obligors is with respect to the disposition of the Aircraft. Response to SMUF, 7, 12. As set forth below, any such dispute relates to damages only. The Obligors failed to raise a question of material fact or a bona fide defense as to liability on the Restated Note and Restated Guaranty, and therefore partial summary judgment should be granted in favor of Plaintiff and against the Obligors for their liability on the Restated Note and Restated Guaranty. 2 The plaintiff demonstrated its prima facie entitled to judgment as a matter of law on the issue of liability. (see Key Equip. Fin., Inc. v. South Shore Imagin, Inc., 39 A.D.3d 595, 596, 835 N.Y.S.2d 268; Advanta Leasing Servs. v.. Laurel Way Spur Petroleum Corp., 11 A.D. 3d 571,571, 782 N.Y.S.2d 677; Terminal Mktg. Co. v. Murphy, 296 A.D.2d 399, 400, 745 N.Y.S.2d 443; see also Ford Motor Credit Co., Inc. v. Racwell Constr., Inc., 24 A.D.3d 500,501, 808 N.Y.S.2d 294). 3
B. Any Dispute About the Disposition of Collateral Relates Solely to Damages And Is Legally Irrelevant to the Obligors Liability on the Restated Note and Restated Guaranty The Obligors argue that where a factual question remains on whether the plaintiff disposed of the collateral in a commercially reasonable way, summary judgment is inappropriate even on the issue of liability. Opp. Br. 5. That argument is flatly contrary to controlling law. The cases relied on by the Obligors simply do not support their position. The First Department long ago rejected the Obligors very argument. In European Am. Bank v. Kahn, 175 A.D.2d 704, 707 (1st Dep t 1991) (a case cited in Plaintiff s moving brief) the First Department held that compliance with the commercial reasonableness requirements of the UCC bears upon the assessment of damages but does not as a matter of law bar the grant of summary judgment as to liability upon the facts herein. Id. at 708. Accordingly, the court in that case affirmed the grant of summary judgment on liability; the obligors counterclaim alleging the lender had failed to dispose of collateral in a commercially reasonable manner (which had been dismissed by the lower court), was restored by the First Department but as a partial affirmative defense only in mitigation of damages upon an assessment thereof. Id. at 705 (emphasis added). The Obligors do not even attempt to challenge the holding of Kahn in their opposition. Nor can they. The First Department affirmed the holding in Kahn approximately a decade later in Gen. Trading Co. v. A & D Food Corp., 292 A.D.2d 266 (1st Dep t 2002): Defendants argument, that summary judgment as to liability should be denied because there are triable issues as to whether the sale of the collateral given as security for the loan guaranteed by them was conducted in a commercially reasonable manner, is unavailing. Whether defendants are liable upon their guarantee is an issue which may be resolved apart from and in advance of any determination as to whether the sale of the collateral was conducted in commercially reasonable fashion, the latter being relevant in the present litigation only to the determination of damages (see, European Am. Bank v. Kahn, 175 A.D.2d 704, 708, 573 N.Y.S.2d 274). 4
Id. at 267 (emphasis added). Thus, the Obligors argument (Opp. Br. 5) that liability and damages are inextricably intertwined is simply inapplicable here: 3 liability is wholly separate from damages and a grant of summary judgment as to liability alone is entirely appropriate. The only case from the First Department the Obligors cite to support their argument that summary judgment cannot be granted as to liability is NatWest Bank N.A. v. Grauberd, 228 A.D.2d 337, 337 (1st Dep t 1996) ( Grauberd ), but that case says no such thing. Grauberd did not address summary judgment on liability; the lower court granted summary judgment against the defendant-guarantor for damages in the amount $13,616,705. 4 The First Department reversed as to the amount of [the] damage due to plaintiff s conduct. Id. at 338. Nothing in the case suggests that issues of fact as to damages preclude partial summary judgment as to liability. In short, there is no law from the First Department that supports the Obligors argument, and no way of escaping the clear holding of Kahn and Gen. Trading Co. that judgment on liability alone is appropriate. Second Department cases have also recently held that issues regarding commercial reasonableness of the disposition of collateral do not bar entry of summary judgment on liability: 3 The cases cited in Defendants brief (p. 5) are simply inapposite. None of them deal with the disposition of collateral under the UCC. See John Treiber Agency, Inc. v. Spartan Concrete Corp., 268 A.D.2d 506 (2d Dep t 2000) (breach of contract); Garvey v. St. Paul Fire & Marine Ins. Co., 58 A.D.2d 992 (4th Dep t 1977) (legal services rendered); Calcano v. Rodriguez, 91 A.D.3d 468 (1st Dep t 2012) (negligence related to a motor vehicle accident). 4 The Obligors reliance on National Bank of Delaware County v. Gregory, 85 A.D.2d 839 (3d Dep t 1981) is misplaced for the same reason -- while the Third Department held that issues of fact regarding commercial reasonableness of the disposition of collateral created triable issues, nothing in that case suggests that the damages issues impaired summary judgment as to liability only. 5
In opposition, [defendants] failed to raise a triable issue of fact as to liability. Instead, their arguments were limited to issues concerning the alleged commercial reasonableness of the equipment and sale, and deficiencies in the notice of disposition of the equipment relative to the subject sale, both of which are relevant only to the issue of damages. Commerce Commercial Leasing, LLC v. PIO Enterprises, Inc., 78 A.D.3d 1105, 1107 (2d Dep t 2010) (emphasis added; citations omitted). [T]he Supreme Court properly granted Ford summary judgment on the issue of liability, [but] it erred in granting that branch of Ford s motion which was for summary judgment on the issue of damages.... * * * There are issues of fact as to whether the sale of the vehicle was done in a commercially reasonable manner and whether the notice of sale was reasonable. Thus, the matter must be remitted to the Supreme Court... for a trial on the issue of damages.... Ford Motor Credit Co. v. Racwell Const., Inc., 24 A.D.3d 500, 501 (2d Dep t 2005) (emphasis added; citations omitted). 5 In short, the Obligors argument that partial summary judgment cannot be entered as to liability when a dispute is raised as to the disposition of collateral should be rejected, as controlling and compelling law in the First Department Second Department is simply to the contrary. 5 The older cases relied on by the Obligors would appear to be effectively overruled by the more recent cases cited in text. See MTI Sys. Corp. v. Hatziemanuel, 151 A.D.2d 649 (2d Dep t 1989); 108th St. Owners Corp. v. Overseas Commodities Ltd., 238 A.D.2d 324 (2d Dep t 1997); and Lincoln First Bank N.A. v. Salvaterra, 106 Misc. 2d 51 (City Ct., Syracuse 1980). In any event, these cases contain no analysis as to why a question on damages should impair the ability to obtain judgment on liability. 6
C. The Obligors Challenge to the Reasonableness of Costs Does Not Place the Entire Amount of Debt in Dispute When the Obligors failed to sell the Aircraft and surrendered it to Plaintiff in December 2013, they acknowledged under the Second Restructure Agreement that the Aircraft had declined in value so much that it secured less than a third of the approximately $12.6 million outstanding debt. Yang Aff., Ex. F, at p. 1 and p. 4 at 3(e). The Obligors have never challenged the sale price of the Aircraft and do not credibly argue that the 10 year old Aircraft (purchased for $16+ million) could have been sold to pay anywhere near the full debt of approximately $12.6 million. Opp. Br. 2. Instead, they argue that because they challenge the reasonableness of the time and costs of readying the Aircraft for sale, the reasonableness of the entire sale is at issue, and therefore the sale price is at issue, and thus there is no way of knowing whether there would have been a deficiency. Therefore, the argument goes, there is no undisputed amount and summary judgment must be denied. But the entire argument assumes that the sale price has been placed at issue, when in fact it has not. The Obligors answer and counterclaims do not challenge the sale price of the Aircraft, just the time and costs of readying the Aircraft for sale. The Obligors were advised that the Aircraft would be sold by notice in November 2014 and it was not sold until April 2015. They had every opportunity to sell the Aircraft, to bid or bring bidders to buy it, to inquire as to the sale price and to complain about it, but they did not do so either before, in, or after their answer and counterclaims were filed. The sale price of the Aircraft (apart from the time and costs in readying the Aircraft for sale) simply was not placed in issue by the pleadings in this case. Whether or not the sale price has been placed in dispute, the Obligors do not seriously argue that the Aircraft could have been sold to satisfy the $12.6 million debt. Nor could they. 7
They do not and cannot allege that an Aircraft purchased for $16+ million in 2005 could conceivably sell for 75% of its purchase price ($12.6 million) ten years later. Indeed, the Obligors acknowledged that the Aircraft had declined in value to approximately $4 million when they abandoned it to Plaintiff and increased the Guaranty and Mortgage to cover the decline in value in December 2013. 6 The Obligors argument is nothing more than another challenge to damages. They do not seriously dispute that they owe money or that there will be a deficiency. The Loan Documents, admissions, pleadings and law support granting summary judgment on liability on the Restated Note and Restated Guaranty. 6 The Obligors acknowledged that the indebtedness was $12,611,046.25 and that the Guarantor was increasing its liability under the Mortgage and Guaranty (previously capped at $6.5 million) to $8.8 million to reflect the decline in the value of the Aircraft. Id., Ex. F [Second Restructuring Agreement], p. 2 at 2(a) and p. 4 at 3(e). The Obligors essentially agreed that the Aircraft value was approximately $3.8 million -- the $12,611,046.25 indebtedness less the $8.8 million guaranty to cover the collateral shortfall. The parties even contemplated that the sale of the Aircraft might yield even less than the $3.8 million anticipated, and the Guarantor agreed to further increase the Mortgage and Guaranty to cover and secure any additional deficiency that may exist after the sale of the Aircraft and application of the net sale proceeds to the Obligations. Id., Ex. F, p. 4 at 3(e) (emphasis added) 8
POINT II PLAINTIFF SHOULD BE GRANTED SUMMARY JUDGMENT AS TO UNDISPUTED AMOUNTS DUE U.C.C. 9-626(a)(2) shifts the burden of proof to the secured creditor to demonstrate its compliance with the commercial reasonableness requirements of the UCC if placed in issue. Here, the only matter truly placed into issue is Plaintiff s costs in readying the Aircraft for sale. Plaintiff s motion for partial summary judgment does not seek to recover any of those disputed repair costs. As such, partial summary judgment should be entered in favor of Plaintiff as to the undisputed damages. While the Obligors devote much of their opposition to the standard on summary judgment and for disposition of collateral, these are legal standards that are not in dispute. The only factual dispute created by the Obligors in their answer and counterclaim is their allegation that Plaintiff spent too much time and money on repairs for the Aircraft. Although the Obligors contend they have raised a dispute regarding the ultimate sale, the pleadings only do so in the context of challenging the repair costs. Answer at 65. There is no challenge to the sale itself. Indeed, the Obligors acknowledge in their brief that they have no grounds to complain about the sale itself. Opp. Br. 2 ( what happened next with the Aircraft is largely a mystery to Defendants and they also do not know... any information about the sale itself. ). The Obligors essentially acknowledge they have no good faith basis for asserting that the Aircraft was sold in a commercially unreasonable manner, other than their challenge to the costs, and any extrapolation from there is completely speculative and conclusory. When the Obligors pleadings are stripped of conclusory legal assertions, the only factual basis that remains for the Obligors defenses and counterclaims is their assertion that the dollar amount spent on the repairs (in relation to the sale price) was too much. The Obligors 9
acknowledged as much in the parties joint letter to the Federal Court, which stated that Defendants contend that Plaintiff did not act commercially reasonable in connection with the repairs to the aircraft, and that as a result Plaintiff breached the covenant of good faith and fair dealing. Based on their defense and counterclaims challenging the reasonableness of the aircraft repairs, Defendants dispute the amounts owed under the loan. SDNY Case No. 15-4420, letter dated July 27, 2015 [Dkt. No. 10], p. 1 (emphasis added). The Obligors do not claim the $4.2 million credit is insufficient, or even address it at all. Instead, they assert that, Shockingly, GECC purports to credit Defendants with only $766,565 from the sale of the Aircraft (Opp. Br. 2), ignoring that the Motion gives them a full credit of $4.2 million for all the repair costs. 8 Simply put, the Obligors failed to dispute that the $4.2 million credit moots the issues raised in their pleadings. Notably, such a credit exceeds the approximately $3.8 million value that the parties ascribed to the Aircraft under the Second Debt Restructure Agreement (supra, n. 6). 9 Nor do the Obligors articulate any basis to deny summary judgment for lack of discovery. They are entitled to and will get discovery on the matters placed in issue by their answer and counterclaims, which is everything associated with the sale (repair, transportation, storage, marketing) of the Aircraft. 10 Because Plaintiff credited the full $4.2 million sale price without 8 Plaintiff reserves the right to recover all sums due under the Loan Documents. 9 Given the parties recognition of the decline in value of the Aircraft under the Second Debt Restructure Agreement in December 2013, the Obligors argument (Opp. Br. 7) that the sale price bears scrutiny based on the original purchase price of the Aircraft in 2005 lacks merit. 10 Additionally, the Obligors pleadings asserted that they did not receive notice of the sale, but that allegation also appears to have been asserted in error. Plaintiff did provide such notice, and provided proof thereof in its moving papers. Yang Aff., Ex. K. The Obligors appear to recognize as much, as they have dropped the issue in their opposition papers. 10
charging back to the Obligors any of these costs, partial summary judgment on the undisputed amount should be granted. Plaintiff recognizes that UCC 9-626 provides a burden-shifting procedure whereby a secured creditor bears the burden of proof when compliance with the UCC is placed in issue. Here, the only bona fide issue of compliance placed in issue is the reasonableness of the costs associated with the disposition of the Aircraft, but that issue has been mooted on this motion because Plaintiff seeks partial summary judgment only on the amount that would be due if none of the Aircraft repair costs were considered to be reasonable. CONCLUSION There is no dispute that the Obligors are liable under the Restated Note and Restated Guaranty, and partial summary judgment should be entered as to their liability. Further, partial summary judgment should be entered as to the undisputed amount due (the acknowledged principal less sale proceeds) as set forth in its moving brief. McCARTER & ENGLISH, LLP Dated: October 27, 2015 New York, New York By: /s Peter M. Knob Peter M. Knob Lisa S. Bonsall 245 Park Avenue, 27 th Floor New York, New York 10167 (212) 609-6800 -and- Four Gateway Center 100 Mulberry Street Newark, New Jersey 07102 (973) 639-2066 Attorneys for Plaintiff, General Electric Capital Corporation 11