AWNING WINDOWS, INC

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Case:04

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INFORMATION

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IN THE UNITED sTaTEs BANKRUPTCY COURT
FOR THE DISTRICT oF PUERTO RICO

IN THE MATTER OF

AWNING WINDOWS, INC., : CASE NO, 04-05802 (SEK)
DEBTOR : CHEER Rete},
TILED © ENTERED
Watt! OCT 095 2007

CLERK
OPINION AND ORDER SANANKRUPTCY cour?
SAN TJUAN, PUERTO RIGS

Awning Windows, inc. (“Seller”), filed a “Motion Requesting
Order Directing Forfeiture of Deposit”. Advanced Windows MFG.,
Corp. (“Buyer”), Sought the return of the $75,000 deposit. After
an evidentiary hearing, the Parties submitted the contested
matter.? For reasons that follow, we deny Seller’s motion,

Factual Findings

in December 2005, the parties began negotiating the
Ssale/acquisition of Debtor’s business. Buyer lacked the capital
needed for this purchase, so it involved private investors in

these negotiations.? on April 7, 2006, Seller and Buyer executed

dite

* We have jurisdiction under 28 U.S.C. §§ 1334 § 157
{b) (1). The dispute is a core matter under 28 U.S.C. §
257 (b) (2) (A), as Debtor needed the carnest money to pay its
creditors under the confirmed plan. Mansker v. Campbell (In re
Mansker d/b/a Mount Hope Farm), 60 B.R. 803, 805 (Bankr. Mass.
1986); Cohen v. 222 Liberty Associates, (in re 222 Liberty
Associates), 99 BR. 639, 644 (Bankr. B.D.Pa. 1989),

* Buyer identified the investors as Mr. José Gonzalez Niet

and Miradero Capital Partners, acting on behalf of Puerto Rico
Entrepreneurs Fund, L.P.. While the Seller's principal denied
investor involvement in the negotiations, documents of record and

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an Option Agreement (the “contract”). As relevant, the contract
calls for the sale of a manufacturing plant that extrudes and
paints aluminum windows and doors, for the sum of $6,000,000.
The Buyer delivered $50,000, deposited in an escrow account
controlled by the Seller. The contract would have expired ten
days after our order approving the sale became final, or June 7,
2006. The earnest money would be applied to the purchase price
at closing,

if the Buyer exercises the Option in the manner
indicated herein and purchases the property as provided
herein. If the Buyer fails to exercise the Option and
close on the purchase of the property in the manner and
within the terms indicated herein for reasons not
attributable to Buyer, including but not limited to
securing adequate financing, the option deposit will be
released in favor of Buyer.
(Joint Exhibit I, paragraph 5).
The contract’s sixteenth paragraph reads: “This Agreement
constitutes the entire agreement between the parties and may only
be modified in writing, duly signed by Buyer and Seller.”
In March 2006, the Buyer applied for a loan at Firstbank.
It was not processed as the Buyer could not contribute funds for
the down payment. The parties then agreed to extend the option

term to August 30%, in exchange for Buyers paying the interest

due on a loan incurred by the Debtor in favor of Westernbank.

credible testimony of Mr. Zoilo Méndez o/b/o Miradero Capital
Partners and Mr. Héctor Reyes o/b/o of the Buyer, support this
finding.

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AW Extrusion, Inc. and Advanced Windows, Inc. represented by
Mr. Héctor Reyes as President and Shareholder, together with
another investor, applied for a $6,376,000 loan at Banco Bilbao
Vizcaya Argentaria (“BBVA”, } sometime in July, 2006. on August
30", BBVA denied the application due to the entities high level
of debt, the manufacturing plant's inability to generate
sufficient income from its Operations to service Che debt, the
Shareholders’ and investor's lack of Capital and their inability
to make the down Payment. (Advanced Window's Exs. 2a and 2B). The
parties then extended the “Option Term” to September 39th in
exchange for the Buyer depositing an additional $25, 000 in
escrow.

On September 19, 2006, Westernbank Puerto Rico denied

Advanced Windows MFG., Corp.’s application for a $7,000,000 loan,
as its income was insufficient and its working capital was
deficient. (Advanced Windows’ Ex. 3).

Mr. Reyes testified the Buyer applied for $7,000,000 under
$ 504 type loans Promoted by the Smali Business Administration,
that included Capital needed for Plant and machinery improvements
and start up costs.

On October 24 , the Seller informed the Buyer that the
option expired, and the $75,000 in escrow was forfeited due to
the Buyer’s “consecutive failures to close on agreed dates, [and

because] the Debtor has no assurance as to his commitment to buy

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the property.” (Debtor’s Exhibit A). The next day, the Buyer
acknowledged receipt of the termination letter, and requested
reimbursement of its earnest money ($75,000) under the contract's
fifth paragraph, attaching copies of loan rejections issued by
BBVA and Westernbank. (Joint Exhibit TI).

Despite the termination letter, both parties were intent on
Salvaging the deal. On October 4, 2006, Miradero Capital Partners
(“Miradero”), provided Mr. Reyes with a summary of the terms and
conditions under which Puerto Rico Entrepeneurs Fund, L.P. would
invest $1,750,000 in the Buyer. This capital investment would be
utilized to partially finance the acquisition of substantially
ali of Seller’s assets related to its operations. (Advanced
Windows Ex. 2). The offer was subject, inter alia, to the
execution of a Letter of Intent by the Buyer and the Seller
drafted by Miradero. The contents of this Letter of Intent will

be discussed elsewhere. The Buyer then filed an application for

a $4,000,000 loan with Banco Popular de PR to help finance the
purchase with its new investor. (Advanced Windows Ex. 4).
Miradero, the Seller and Buyer with their respective Counsel,
began a new round of negotiations. By letter dated November 8,
2006, Seller’s Counsel confirmed what she perceived was the
agreement resulting from these conversations: to set aside the
termination of the option agreement, extend the expiration of the

“original option” to December 26, 2006, adding that “if the sale

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does not take place on or before December 20, 2006, the complete
deposit will be forfeited.” (Debtor’s Ex. C}. Counsel also
reminded Seller of its obligation to pay interest due on its loan
with Westernbank.

Two days later, this Counsel notified Buyer and its Counsel
her “Comments to the Extension of the Option Agreement signed on
April 7, 2006". However, evidence showed these comments were the
Seller's request for changes to the Letter of Intent drafted by
Miradero, that was part and parcel of Puerto Rico Entrepreneurs
Fund, L.P.‘s offer to provide a capital investment of $1.7
million to the Buyer. The comment relevant to this dispute
concerned a substitution, so that,

[l]ast sentence shall read: ‘If the closing does not

take place on or before December 20, 2006, the good

faith deposit shall be forfeited.’”

(Advance Windows Ex. 1).

On November 21°%* , eleven days after receipt of Seller’s
proposals, the Buyer notified the Seller that it withdrew “from
all consideration related to the purchase of Awning Windows
assets. No adequate financing has been secured.” (Joint Exhibit
TIE). Seller renewed its request for reimbursement of the
$75,000 deposit under the 5* paragraph of the contract. By &
mail sent the following day, the Seller reaffirmed its position
that the $75,000 deposit was forfeited. Unable to resolve the

dispute, four months later the parties initiated this contested

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matter.
Discussion

Seller acknowledged its initial burden of showing the Buyer
forfeited the earnest money. It advanced two theories. First,
the parties negotiated and agreed to renew the contract after it
expired on September 30, with two modifications: (a) the
closing must take place by December 20, 2006, or (b) the earnest
money was forfeited. Second, the Seller claims Buyer’s two
attempts at securing financing were inadequate. The Seller argues
that the amounts in the applications were excessive, given the
outstanding cash payment of $5,450,000 due at closing. Buyer

applied for a $6,376,000 and a $7,000,000 loan. Hence, the Buyer

did not seek “adequate financing”, thus forfeiting the earnest
money pursuant to the contract.

Buyer argues it did not agree to forfeit the earnest money
if the closing was not consummated by December 20%, even though
it was amenable to the contract’s renewal and/or the Capitales’
offer with its Letter of Intent. The Buyer also stated the
Seller was aware that Capitales required Buyer and Seller to
execute the Letter of Intent it had drafted. Despite negotiations
amongst the three parties, an agreement was not reached. With
respect to forfeiture based on inadequate requests for financing,
the Buyer claims the sums sought were required to make the

business viable, as financing included capital needed for

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improvements to the machinery and equipment and start up costs.
The applications included a survey of these costs. Furthermore,
the Buyer explained it switched from Firstbank to BBVA, as the
active investor at that time, José GonzAlez Niet, did business
with BBVA. The Buyer thought this prior business relationship
would improve its chances of obtaining the loan. The Buyer
argued that it diligently pursued the financing, and any delays
were due to documents produced by third parties such as
appraisers, accountants, etc. Therefore, the Seller could not
claim the Buyer breached its duty to seek adequate financing,
thereby forfeiting the earnest money pursuant to the 5%
paragraph of the contract.

A. Meeting of the Minds After the Contract Expired.

The Seller and its Counsel both testified the Buyer verbally
agreed to renew the expired contract, and provided for the
forfeiture of the earnest money as quid pro quo for extending its
expiration to December 20, 2006. They also claimed the verbal
agreement was verified in writing by the November 8° letter
admitted as Seller’s Exhibit C. While the contract required that
all amendments be executed by the parties, in writing, the first
two extensions granted for different considerations were verbal.
Hence, Seller argued the Buyer was estopped by its previous acts
from claiming this third verbal agreement was invalid under the

16° clause of the contract.

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The record shows the Seller was always aware of the Buyer’s
need for additional capital and for financing the purchase
price.? Hence, we find it implausible that the Buyer, whose two
prior loan applications had been denied, would agree to the
forfeiture in exchange for an extension of the contract's
expiration date. Furthermore, the framework for the negotiations
that ensued upon expiration of the contract, was created by the
Capitales’ October 4 offer, notified to the Buyer and the
Seller. The offer states: ‘Please acknowledge acceptance of the
terms and conditions hereof by signing and returning to us the
enclosed copy of this letter, together with a duly executed copy
of the Letter of Intent.”! (Advanced Window’s Ex. 2, p.9) The
offer further states:

The investment contemplated herein is subject to:

(b) the negotiation and consummation of the Aluminios

Transaction pursuant to documentation satisfactory to

the Fund and on terms and conditions similar to those

outlined in the Letter of Intent.

(Advanced Window’s Ex. 2, p.10)

3 Seller’s principal denied this, but Mr. Zoilo Méndez, who

represented Capitales, emphasized that the Seller knew about
their interest, he and some engineers and accountants inspected
the plant and its finances several times as part of its duty of
due diligence. He also stated he participated with his attorney
in negotiations that took place after Capitales submitted its
Oct. 4th offer. We find his testimony credible.

4 Even though Capitales offer states it expires on October
16, the parties continued negotiations until at least November
21%*, when the Buyer informed its decision to withdraw from all
negotiations.

Ne

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Relevant portion of the Letter of Intent’s twelfth paragraph

reads as follows.

The Parties agree to negotiate in good faith the
terms and conditions of the Asset Purchase Agreement
until this Letter of Intent is terminated in accordance
with this paragraph. Except for [certain paragraphs
not relevant to the dispute] ... the parties agree that
this Letter of Intent is not intended to be a binding
agreement between the parties but merely an expression
of their intent with regard to the proposed acquisition
of the Assets by the Purchaser, and each party
covenants never to contend the contrary.

(Advanced Window’s Ex. 2, p.6 of the Letter of Intent).
The November 10° E mail demonstrates the Seller was still

suggesting changes to the Letter of Intent, albeit changes it

perceived had been accepted by the Buyer. This document was never

executed. Furthermore, assuming the parties had indeed agreed to

the December 20° cutoff and forfeiture for non consummation,

excerpts from the Letter of Intent cited above show these changes

were not binding.
Under applicable non bankruptcy law, “[t]Jhere is [no]
contract unless the following requisites exist:

(1) The consent of the contracting parties.

(2) A definite object which may the subject of the contract.

(3) The cause for the obligation which may be established.”

31 Laws of P-R. Ann. § 3391. The Supreme Court of Puerto Rico

refers to consent “as the ‘meeting’ of minds, [explained by

Manresa‘s Commentaries on the equivalent article of the Spanish

Civil Code, as]:

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The essence of consent is the agreement of the parties
to that which must constitute the contract, the
acceptance of one of the offer made by the other, it is
the concurrence mentioned by the law of the thing and
the cause which are to constitute the contract.

Gonz4lez, et al. v. Fumero, 38 P.R.R. 497, 504 (1928) (cit.

omitted); Producciones Tommy Mufiiz, Inc. v. Comité Organizador de

Los VIII Juegos Panamericanos (COPAN), 13 PR Offic. Trans. 664,

670 (1982).

“[TU]nder Puerto Rico law an agreement can be binding without
executed documentation if, inter alia, the parties have a
‘meeting of the minds expressed through the offer and the

acceptance’” (cit. omitted) YSIEM Corp. v. Commercial Net Lease

Realty, Inc., 328 F.3d 20, 23 (1s* Cir. 2003). That proposition

might apply here, had the parties merely agreed to set final
terms without any understanding that executed documentation was
essential to the formulation of the purchase agreement, and that
the Letter of Intent was not intended to be a binding agreement.
Therefore, we conclude that: Capitales was a party to the
negotiations after September 30%, these were conducted under the
framework of the Capitales October 4 offer that was not
binding, any verbal agreements reached during the negotiations
were subject to final documentation that was never executed, so
that there was no meeting of the minds with respect to the
December 20° deadline, or the forfeiture of the earnest money.

B. Forfeiture of the Harnest Money due to the Buyer’s

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inadequate requests for financing, pursuant to the April 7, 2006
Option Agreement.

Seller has the burden of showing Buyer’s applications for

Seller urges us to conclude Buyer did not seek adequate financing
Since sums to be financed exceeded the cash needed to close the
deal. Seller questions the Buyer’s need for cash to improve the
machinery and equipment by pointing out that it had inspected the
equipment, and found it acceptable. In short, the Buyer was
seeking approval of loans exceeding the cash outlay for closing
the deal by some $1,500,000, while at the same time knowing the
corporation needed an infusion of capital to conclude the
acquisition. Hence, the probability of loan approvals was
Significantly reduced.

Without a review of the complementary documents attached to
these applications that were not produced, we dismiss this theory
as speculative.

WHEREFORE, we deny Awning Windows, Inc.’s request, ordering
it to deliver the $75,000 deposit to Advanced Windows MFG., Corp.
forthwith.

SO ORDERED, in San Juan, Puerto Rico, on October 2, 2007.

SARA DE JESUS
U.S. Bankruptcy Judge