Sight Resource Corporation v. Blinn

UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF OHIO
WESTERN DIVISION
In Re
SIGHT RESOURCE
CORPORATION
Debtor-in-Possession
SIGHT RESOURCE
CORPORATION
Plaintiff
vs.
STEPHEN M. BLINN
Defendant
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Case No. 04-14987
Chapter 11
Judge Hopkins
Adversary Case No. 04-1393
This document has been electronically entered in the records of the United
States Bankruptcy Court for the Southern District of Ohio.
IT IS SO ORDERED.
Dated: August 19, 2005
____________________________________________________________
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Case No. 04-14987
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MEMORANDUM OF DECISION ON ORDER GRANTING
CROSS-MOTION FOR SUMMARY JUDGMENT AND
DENYING MOTION FOR SUMMARY JUDGMENT
The Plaintiff, Sight Resource Corporation ("SRC"), initiated this action with
a complaint to compel turnover of property of the estate. SRC seeks to collect from
the Defendant, Steven M. Blinn ("Blinn"), an alleged debt in the amount of
$594,110.80 plus interest. Presently before the Court is a summary judgment
motion ("Motion") (Doc. 8) filed by Blinn, and a cross-motion for summary
judgment ("Cross-Motion") (Doc. 10) filed by SRC. This is a core proceeding in
conformity with 28 U.S.C. § 157(b)(2)(E), and the Court has jurisdiction pursuant
to 28 U.S.C. § 1334(b).
STANDARD OF REVIEW
A motion for summary judgment should be granted "if the pleadings,
depositions, answers to interrogatories, and admissions on file, together with the
affidavits, if any, show that there is no genuine issue of material fact and that the
moving party is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(c),
made applicable in bankruptcy by Fed. R. Bankr. P. 7056. The moving party bears
the initial burden of showing that there is no genuine issue of material fact. Celotex
Corp. v. Catrett, 477 U.S. 317, 323-324 (1986).
The standards the Court must use to evaluate motions for summary judgment
are no different when the parties submit cross-motions. Taft Broadcasting v. United
States, 929 F.2d 240, 248 (6th Cir. 1991). Submission of cross-motions for
summary judgment does not necessarily result in the court granting summary
judgment to one of the parties. Id. The court must review the evidence for genuine
issues of material fact and "evaluate each party's motion on its own merits, taking
care in each instance to draw all reasonable inferences against the party whose
motion is under consideration." Id. (quoting Mingus Constructors, Inc. v. United
States, 812 F.2d 1387, 1391 (Fed. Cir. 1987)).
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Case No. 04-14987
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1An "Event of Default" is defined as follows:
This Note shall, at the option of the Lender, become immediately due and payable upon notice or
demand upon the occurrence of any of the following events (each, an "Event of Default"):
(a) Borrower shall fail to make any payment when due which failure continues for five days
after written receipt of notice from the Lender; or
(b) the occurrence of any of the following with respect to the Borrower: the admission in
writing of his inability, or the general inability, to pay his debts as they become due,
appointment of a receiver for any part of the property of, legal or equitable assignment,
conveyance or transfer of property for the benefit of creditors by, or the commencement
of any proceedings under any bankruptcy or insolvency laws by or against, the Borrower,
provided that it shall not be an Event of Default hereunder if a proceeding under any
bankruptcy or insolvency laws commenced against the Borrower is dismissed within ninety
(90) days.
3
SUMMARY OF FACTS
The facts presented by this case are largely uncomplicated and not in dispute.
Blinn formerly served as a director and Executive Vice President and Chief
Operating Officer of SRC. Blinn borrowed the funds alleged in the complaint to
purchase common stock of SRC pursuant to a September 2, 1997 promissory note
("the Note") he executed in favor of SRC. Since borrowing those funds, Blinn has
made no payments of either principal or interest to SRC on the Note.
The Note provides that the principal, $594,110.80, is due "on the Maturity
Date." The "Maturity Date" is defined as the earlier of: (a) September 2, 2007; or
(b) the date when Blinn receives the proceeds of the sale of not less than 20,000
shares of SRC stock. It is undisputed that Blinn never sold 20,000 or more shares
of SRC stock prior to SRC's bankruptcy filing. Nevertheless, SRC contends that an
"Event of Default" has occurred. SRC argues that Blinn's failure to make interest
payments semi-annually since signing the Note in 1997 constitutes an event of default
which triggered an acceleration clause in the Note so as to make the entire balance
due.1
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Blinn counters that he is not in default. Under Blinn's construction of the
Note, no payment of principal or interest is due until September 2, 2007. In support
of his argument, Blinn relies upon the following provision:
Interest shall accrue on the outstanding principal balance hereof commencing
on the date hereof until maturity (whether as stated, by acceleration or
otherwise) at a rate of six and fifty-five hundredths percent (6.55%) per
annum, compounding annually, and shall be payable semi-annually on the
earlier of the Maturity Date or the occurrence of an ‘Event of Default’ (as
hereinafter defined).
(emphasis added.) In reliance upon the highlighted clause above (hereafter "the
Interest Clause"), Blinn contends that he has not defaulted on the Note because no
interest payments are due until September 2, 2007 or after Blinn sold at least 20,000
shares of stock.
SRC alleges that the Note contains a scrivener's error. According to SRC,
the parties intended to include the word "or" in the Interest Clause, such that the
Note when read correctly states the following: "[Interest] shall be payable semi-
annually or on the earlier of the Maturity Date or the occurrence of an ‘Event of
Default.’" (emphasis added.) Under SRC’s interpretation, Blinn was required to
pay interest on a semi-annual basis during the term of the Note and to make a final
interest payment along with full payment of the principal balance on either the
Maturity Date or an earlier Event of Default. Because Blinn failed to make semi-
annual interest payments, SRC contends that it was authorized to accelerate Blinn’s
entire obligation under the Note.
What this case boils down to, therefore, is a dispute over the proper
interpretation of the Note. The resolution of this dispute hinges upon whether the
Court should interpret the Note as if the parties intended to include the word "or"
in the Interest Clause or leave it out as currently appears on the face of the Note.
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Case No. 04-14987
Adv. Case No. 04-1393
2 Judge Clark, in Briggs Electrical Contracting Servs., Inc. v. Elder-Beerman Stores Corp.
(In re Elder-Beerman Stores Corp.), 221 B.R. 404, 408 (Bankr. S.D. Ohio 1998), ruled that the forum
state's choice of law rules are to be applied when questions of this kind arise in bankruptcy. Ohio courts
follow the Restatement (Second) of the Law of Conflicts, Ohayon v. Safeco Ins. Co. of Ill., 91 Ohio
St.3d 474 (2001), which provides that the rights and duties of the parties are determined by the laws of
the state with "the most significant relationship to the transaction and the parties.” Restatement (Second)
of the Law of Conflicts § 188(1). Even though SRC filed for bankruptcy in the Southern District Ohio and
had its principal place of business here, other factors suggest that the substantive law of Massachusetts
should govern the interpretation of the Note. Apparently, Massachusetts was the location of the parties
at all times relevant to the events giving rise to this dispute and, importantly, the Note calls for
Massachusetts law to govern. The Court is obliged to apply the law chosen by the parties, which in this
case, is Massachusetts contract law. See Elder-Beerman, 221 B.R. at 407.
5
ANALYSIS
The Note appears to have been signed in Massachusetts. Moreover, the Note
states unequivocally that it "shall be governed by and construed in accordance with
the laws of the Commonwealth of Massachusetts." Accordingly, this Court will
apply Massachusetts law when interpreting the terms of the Note.2
Under Massachusetts law, courts have discretion to interpret a contract in a
way so as to give it effect as a rational business instrument and in a manner which
will carry out the intention of the parties. New York Cent. R. R. Co. v. New
England Merchants Nat. Bank, Mass., 183 N.E.2d 852, 855 (Mass. 1962);
McMahon v. Monarch Life Ins. Co., 186 N.E.2d 827, 830 (Mass. 1962). Contract
interpretation is guided by justice, common sense and the probable intention of the
parties. City of Haverhill v. George Brox, Inc., 716 N.E.2d 138, 141 (Mass. App.
Ct. 1999). Ostensibly, the goal of the court, when interpreting a legal instrument,
is to ascertain and effectuate the intent of the parties as manifested by the words
used. MacDonald v. Gough, 93 N.E.2d 260, 262 (Mass. 1950). One must construe
a contract "as a whole, in a reasonable and practical way, consistent with its
language, background, and purpose." USM Corp. v. Arthur D. Little Systems, Inc.,
546 N.E.2d 888, 893 (Mass. App. Ct. 1989). "The intent of the parties must be
gathered from a fair construction of the contract as a whole and not by special
emphasis upon any one part." Ucello v. Cosentino, 235 N.E.2d 44, 47 (Mass.
1968).
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The Interest Clause in the Note provides that interest "shall be payable semi-
annually on the earlier of the Maturity Date or the occurrence of an ‘Event of
Default.’" Read literally, as proposed by Blinn, this means that the interest, as well
as the principal, is due on the earlier of: (a) September 2, 2007; (b) the date upon
which Blinn receives the proceeds of the sale of 20,000 shares of stock; or (c) upon
the occurrence of one of two events of default. In essence, Blinn asks the Court to
read the Note in such a way that renders one of the default provisions meaningless.
The Note states that there is an Event of Default when the "[b]orrower shall fail to
make any payment when due." Under Blinn’s interpretation of the Note, there can
never be a failure to make a payment before the Maturity Date because nothing is
due until that Date.
It is a well established cannon of contract interpretation that "every word and
phrase must be presumed to have been employed with a purpose, and must be given
a meaning and effect whenever reasonably possible." Clark v. State St. Trust Co.,
169 N.E. 897, 904 (Mass. 1930). A contract should be construed in such a way that
no word or phrase is made meaningless by interpretation of another word or phrase,
because the interpretation should favor a valid and enforceable contract rather than
one of no force or effect. Lexington Ins. Co. v. All Regions Chemical Labs, Inc.,
647 N.E.2d 399, 400 (Mass. 1995). The Court concludes that the parties would not
have agreed upon separate events of default, nor would they have included terms
calling for semi-annual interest payments in the Note if they did not intend to give
effect to each.
SRC argues that there is an obvious typographical error in the Note; that the
word "or" was omitted from the Interest Clause after the word "semi-annually."
This Court agrees with that interpretation. Obvious omissions will be supplied by
the Court. Pacific Surety Co. of California v. Toye, 112 N.E. 653, 653 (Mass.
1916). When it is evident from the context that words were omitted by a scrivener’s
error, the instrument is to be construed as if such words were inserted. Lynn Tucker
Sales, Inc., v. Le Blanc, 84 N.E.2d 127, 128 (Mass. 1949). In this case, without
insertion of the term "or" in the Interest Clause, the Note does not give effect to all
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its terms. The Note's requirement that Blinn make semi-annual interest payments
would result in a nullity were it interpreted to mean that he was not obligated to
begin making those payments until after the Maturity Date. Such a reading of the
Note would render an important portion of the acceleration clause entirely
ineffective.
Finally, Blinn's argument that the Court should consider extrinsic evidence is
without merit. Extrinsic evidence may only be considered by the court to ascertain
the true intention of the parties when the written agreement is in any way uncertain
or equivocal in meaning. Robert Indust. Inc., v. Spence, 291 N.E.2d 407, 409
(Mass. 1973). However, "[a]n ambiguity is not created simply because a
controversy exists between parties, each favoring an interpretation contrary to the
other's." Jefferson Ins. Co. v. Holyoke, 503 N.E.2d 474, 476 (Mass. App. Ct.
1987). Moreover, "the words themselves remain the most important evidence of
intention." National City Bank v. Goess, 130 F.2d 376, 390 (2d Cir. 1942).
The Court concludes, after looking at the contract as a whole, that the Interest
Clause of the Note should be interpreted to include the omitted term "or" after the
word "semi-annually." For consistency and practical reasons, the Note must be
construed to mean that Blinn's failure to make semi-annual interest payments
constitutes an event of default which authorized SRC to accelerate the debt and
demand immediate payment of the full amount of the principal and interest due. The
Court believes that this interpretation offers the more reasonable and practical
approach towards the legal standard of ascertaining the true intent of the parties.
Likewise, it leads to a fairer construction of the Note as a whole and does not place
undue emphasis upon any one part of the agreement.
CONCLUSION
For the foregoing reasons, the Cross-Motion filed by SRC will be
GRANTED and the Motion filed by Blinn will be DENIED. Blinn shall be
ordered to turnover the sum of $594,110.80 to the debtor in possession together with
accrued interest. A judgment entry to this effect will be entered.
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Copies to:
Louis F. Solimine, Esq.
louis.solimine@thompsonhine.com
Jennifer L. Maffett, Esq.
THDaytonECF@thompsonhine.com
Stephen M. Blinn
14 Upham Road
Amherst, MA 03031
U.S. Trustee
ustpregion09.ci.ecf@usdoj.gov
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