New York Miscellaneous Reports
Unpublished
WILMINGTON TRUST CO. v. STRAUSS, 601192-2003 (10-30-2006) 2006 NY Slip Op 52080(U) WILMINGTON TRUST COMPANY, as Issuer TRUSTEE OF FMAC LOAN RECEIVABLE TRUST 1997-C, FMAC LOAN RECEIVABLE TRUST 1998-A, FMAC LOAN RECEIVABLE TRUST 1998-B, FMAC LOAN RECEIVABLE TRUST 1998-C, and GMAC COMMERCIAL MORTGAGE CORPORATION, as Servicer of FMAC LOAN RECEIVABLE TRUST 1997-C, FMAC LOAN RECEIVABLE TRUST 1998-A, FMAC LOAN RECEIVABLE TRUST 1998-B, and FMAC LOAN RECEIVABLE TRUST 1998-C, Plaintiffs, v. MICHAEL L. STRAUSS, Defendant. MICHAEL L. STRAUSS, individually and as assignee of WESTWIND GROUP HOLDINGS, INC., THE WESTWIND GROUP OF OREGON, INC., WESTWIND GROUP NORTH CAROLINA, INC., and THE WESTWIND GROUP, INC., Counterclaim Plaintiff, v. BAY VIEW FRANCHISE MORTGAGE ACCEPTANCE COMPANY; FRANCHISE MORTGAGE ACCEPTANCE COMPANY; GMAC COMMERCIAL MORTGAGE CORPORATION; FMAC LOAN RECEIVABLE TRUST 1997-C; FMAC LOAN RECEIVABLE TRUST 1998-A; FMAC LOAN RECEIVABLE TRUST 1998-B; FMAC LOAN RECEIVABLE TRUST 1998-C; WILMINGTON TRUST COMPANY; JOSEPH WOLNICK; and does 1-30, inclusive, Counterclaim Defendants. 601192-2003. Supreme Court of the State of New York. New York County. Decided October 30, 2006.
[EDITOR’S NOTE: This case is unpublished as indicated by the
issuing court.] For Plaintiffs/Counterclaim, Defendants,
Arnold & Porter LLP, Attorneys at Law, New York, New York.
(H. Peter Haveles, Jr.), For Counterclaim Defendants,
Dewey Ballantine LLP, Attorneys at Law, New York, New York.
(John Collins, Jeffrey Rugg), For Defendant/Counterclaim
Plaintiff, Orans, Elsen & Lupert LLP, Attorneys at Law, New
York, New York, (Leslie Lupert, Thomas Brown).
BERNARD J. FRIED, J.
In this case, plaintiffs are Wilmington Trust Company, as
issuer-trustee (Trustee) of FMAC Loan Receivable Trust
1997-C, FMAC Loan Receivable Trust 1998-A, FMAC Loan
Receivable Trust 1998-B and FMAC Loan Receivable Trust
1998-C (collectively, the Trusts), and GMAC Commercial
Mortgage Corporation (GMACCM), as servicer of the Trusts.
In their amended complaint (Complaint) filed against
defendant Michael L. Strauss (Strauss), plaintiffs seek a
judgment directing Strauss to pay to the Trusts and GMACCM
the full amount of his obligations due and owing under two
personal guarantees, the “First Guaranty” and the “Second
Guaranty,” as such capitalized terms are hereinafter
defined.
In his answer to the Complaint, Strauss, individually and
as assignee of Westwind Group Holdings, Inc., The Westwind
Group of Oregon, Inc., Westwind Group North Carolina, Inc.,
and The Westwind Group, Inc. (collectively, Westwind),
asserts various affirmative defenses and counterclaims. The
counterclaims are asserted not only against plaintiffs, but
also against Bay View Franchise Mortgage Acceptance Company
(Bay View), Franchise Mortgage Acceptance Company (FMAC),
and Joseph Wolnick (Wolnick).
Counterclaim defendants Bay View and Wolnick filed a motion
for summary judgment (Motion Sequence Number 16), seeking
dismissal of the counterclaims asserted against them.
Defendant and counterclaim plaintiff Strauss filed a motion
for summary judgement (Motion Sequence Number 17), seeking
dismissal of plaintiffs’ claims under the First Guaranty,
as well as dismissal of the defenses of plaintiffs and
counterclaim defendants with respect to his counterclaims.
Plaintiffs Trustee and GMACCM filed a motion for partial
summary judgment (Motion Sequence Number 18) with respect
to their claims under the Second Guaranty, as well as
dismissal of defendant Strauss’ counterclaims.
Because the summary judgment motions (Sequence Numbers 16,
17 and 18) involve substantially similar background facts
and legal issues, they are consolidated herein for
disposition.
The Trustee is the issuer trustee for the Trusts, which
consist of a pool of securitized loans, including the four
loans made in 1997 by Credit Suisse First Boston Mortgage
Capital (CSFB) to Westwind. In November 2001, GMACCM
acquired servicing rights with respect to the loans from
Bay View, and in January 2002, GMACCM entered into an
agreement with Bay View to act as servicer of the loans. As
servicer for the Trusts, GMACCM is responsible for
administering the loans on behalf of the Trustee.
Strauss was an officer, director and majority owner of
Westwind Group Holdings Inc. (Westwind Holdings; a holding
company incorporated in Delaware), which in turn,
wholly-owned all of the shares of The Westwind Group of
Oregon, Inc., Westwind Group North Carolina, Inc., and
Westwind Group, Inc. These Westwind entities were
franchisees of Burger King Corporation (Burger King), and
they operated numerous Burger King restaurants in the
states of Florida, North Carolina, Oregon and Washington.
Bay View acquired FMAC in November 1999, and became
successor to FMAC with respect to certain loans and loan
servicing agreements, including the CSFB loans that were
made to Westwind and assigned to FMAC. Wolnick was a FMAC
employee, and became an executive officer of Bay View after
the 1999 acquisition. In connection with a loan
restructuring agreement (as discussed below), Wolnick, with
the alleged encouragement of Strauss, agreed to serve as a
director of Westwind Holdings.
In 1997, Westwind borrowed money from CSFB to acquire
certain assets, franchise rights, and leasehold interests
relating to the Burger King franchises, as well as to
refinance certain debts. The parties entered into a Loan
and Security Agreement dated October 15, 1997 (Loan
Agreement), pursuant to which CSFB loaned an aggregate
principal amount of $66,230,000 to Westwind.
In connection with the Loan Agreement, Strauss executed a
“control person — trigger event” guaranty (First
Guaranty), whereby he guaranteed repayment of the
outstanding liabilities owed by Westwind under the Loan
Agreement, upon the occurrence of one or more of the
so-called “trigger events” that were set forth in a
schedule annexed to the First Guaranty.
In April 2000, Westwind informed Bay View that it was
experiencing severe liquidity stress. After months of
negotiation, the parties entered into a Loan Restructuring
Agreement, dated March 28, 2001 (Restructuring Agreement),
whereby (a) Bay View, on behalf of the Trusts, agreed to
reduce the amount owed by Westwind under the Loan Agreement
from over $60 million to $43 million, and, on account of
the reduced debt, the Trusts received Westwind preferred
stock; and (b) Bay View agreed to make a $2.6 million loan
(the Special Servicing Advance) to Westwind. The
Restructuring Agreement also modified the terms concerning
the manner and priority in which Westwind’s financial
obligations would be paid and the respective
responsibilities of the various parties under the Loan
Agreement, as discussed more fully below.
In connection with the Restructuring Agreement, Strauss
also executed an Amended and Restated Guaranty (Second
Guaranty), whereby he guaranteed repayment of up to $1.8
million of the $2.6 million Special Servicing Advance.
Simultaneously, Strauss also reaffirmed the First Guaranty.
Despite entry into the Restructuring Agreement whereby
debt payment obligations were reduced, Westwind continued
to experience financial difficulties. In September 2001,
Westwind began making late payments to Burger King. On
April 5, 2002, GMACCM notified Westwind, alleging that it
had violated certain covenants of the Restructuring
Agreement, which constituted “events of default.” The
alleged violations included improper payment to a Westwind
affiliate, failure to submit financial information in a
timely manner, variances from the operating budget, and
delinquency in paying Burger King royalties. On May 8,
2002, GMACCM notified Westwind that all debt obligations
owed to the Trusts would be accelerated and immediately
payable.
In July 2002, Westwind stopped debt service payments to
the Trusts and GMACCM, and ceased paying Burger King
obligations. GMACCM and Burger King agreed with Westwind
that they would not exercise rights to foreclose or
terminate the franchise agreement, but Westwind’s assets
would have to be liquidated. In late 2002 and early 2003,
Burger King began marketing Westwind’s assets. Westwind’s
assets were subsequently either sold in bankruptcy or
transferred to Burger King, plus the assumption of certain
liabilities. The Trustee and GMACCM allegedly recovered
only approximately $3 million from the liquidation of such
assets.
Because Westwind did not repay the debts evidenced by the
Term Notes under the Special Servicing Advance, plaintiffs
made demands upon Strauss, and commenced an action against
him under the Second Guaranty. Moreover, because Westwind
did not repay the debts evidenced by the Restructured Notes
under the Restructuring Agreement, plaintiffs amended the
complaint and sought recovery against Strauss under the
First Guaranty.
In setting forth the standard for summary judgment,
pursuant to CPLR 3212, the Court of Appeals noted, in
Alvarez v. Prospect Hospital (68 NY2d 320, 324 [1986]), the
following:
As we have stated frequently, the proponent of a summary
judgment motion must make a prima facie showing of
entitlement to judgment as a matter of law, tendering
sufficient evidence to demonstrate the absence of any
material issues of fact. Failure to make such prima facie
showing requires a denial of the motion, regardless of the
sufficiency of the opposing papers. Once this showing has
been made . . . the burden shifts to the party opposing
the motion for summary judgment to produce evidentiary
support in admissible form sufficient to establish the
existence of material issues of fact which require a trial
of the action [internal citations omitted.]
Adhering to the guidance of the Court of Appeals, the
lower courts uniformly scrutinize motions for summary
judgment as well as the facts and circumstances of each
case to determine whether relief should be granted or
denied. See e.g., Martin v. Briggs, 235 AD2d 192, 196 (1st
Dept 1997) (“[i]n considering a summary judgment motion,
evidence should be analyzed in the light most favorable to
the party opposing the motion”). However, summary judgment
is generally granted in favor of the movant if there are no
material and triable issues of fact. Francis v. Basic
Metal, Inc., 144 AD2d 634 (2nd Dept 1988).
In his answer to the Complaint, the counterclaims asserted
by Strauss, individually and as assignee of Westwind,[fn1]
are (1) breach of contract; (2) breach of the implied
covenant of good faith; (3) breach of fiduciary duty; and
(4) intentional interference with contractual and business
relations. Strauss also seeks declaratory relief with
respect to the First Guaranty and the Second Guaranty.
Plaintiffs GMACCM and the Trustee, as well as counterclaim
defendants Bay View and Wolnick, all move for entry of
summary judgment dismissing such counterclaims.
Breach of Contract Counterclaim
Strauss alleges that the Trustee, GMACCM and Bay View
(collectively, Lenders) violated the payment priority
provisions of the Restructuring Agreement, by improperly
taking funds that should have been used to pay approved
budgeted expenses (which included Burger King royalties),
and used such funds to pay the Restructured Notes and the
Term Notes,[fn2] both of which are lower in payment
priority than the approved budgeted expenses. Strauss
alleges that because the Lenders took the first dollars
from Westwind’s operating income to pay themselves, they
caused a shortage of funds with which to pay Burger King,
which resulted in foreclosure of the restaurants and demise
of Westwind’s business.
Article V of the Restructuring Agreement sets forth the
priority scheme and payment mechanism that addresses the
various obligations of the Westwind borrowers.[fn3] More
specifically, section 5.1 (b) provides, in relevant part:
(b) On or prior to the Closing Date, the Borrowers shall
establish an account with a banking institution acceptable
to the Servicer . . . the “Payment Account”. . .
thereafter, during each Payment Period, income and
revenues generated from the [Borrowers’] Businesses . . .
net of Approved Budgeted Expenses that have been paid by
the Borrowers during such Payment Period, shall be
transferred by the Borrowers from the operational accounts
of the Borrowers to the Payment Account . . .
[emphasis added].
Thus, under section 5.1 (b) of the Restructuring
Agreement, Westwind must use its income and revenue to
first pay Approved Budgeted Expenses (these expenses are
defined to include Burger King royalties and other
operating expenses), and then transfer the remaining funds
(defined as “Available Funds”) in Westwind’s “operational
accounts” (an undefined term) to the Payment Account. After
Available Funds are transferred into the Payment Account,
they are to be applied, in accordance with section 5.3 (a)
through section 5.3 (k), in a specified descending order of
priority (commonly known as a “waterfall”) to various
Westwind obligations, including, among other things, the
obligations owed to Burger King under the BKC Receivables
Notes[fn4] and the BKC Construction Notes, as well as those
owed to the plaintiff-Lenders under the Restructured Notes
and the Term Notes.Plaintiffs do not dispute that the
Burger King royalties should be paid before the
Restructured Notes and the Term Notes. Instead, they point
to several key requirements or features of the
Restructuring Agreement. First, plaintiffs point out that
Westwind should have established the Payment Account as
required by the Restructuring Agreement (but the account
was never set up), instead of using the Concentration
Account under the Loan Agreement, and in doing so,
Westwind, in effect, treated the Concentration Account as
if it were the Payment Account for purpose of the
Restructuring Agreement. Notably, pursuant to the
Concentration Account Agreement executed in connection with
the Loan Agreement, all of Westwind’s operating receipts
were to be deposited into the Concentration Account, and
the Trusts were entitled to be paid before Burger King. The
Restructuring Agreement changed the payment priority, from
paying the Trusts first, to paying the Approved Budgeted
Expenses first, including the Burger King royalties, as
required by Burger King.
Plaintiffs also point out that, under the Restructuring
Agreement, Westwind was solely responsible for paying the
Burger King royalties before transferring funds to the
Payment Account, and that after the funds were deposited in
the Payment Account,[fn5] pursuant to section 5.3, the
Trusts had the absolute right to accept and apply such
funds for repayment of the debts owed by Westwind to the
Trusts, without regard to whether Westwind paid the Burger
King royalties.
Strauss contends, however, that because section 5.1 (a) of
the Restructuring Agreement requires that “the Servicer
shall continue to collect, manage and maintain funds on
deposit in the Concentration Account in accordance with
[the Loan Agreement,]” he construes that to mean all of
Westwind’s operating income should continue to be deposited
or swept into the Concentration Account. This contention
misconstrues the language of section 5.1 (a), which
addresses only what the Servicer, not what Westwind, was
required to do in respect of the Concentration Account. In
fact, section 5.1 (b) of the Restructuring Agreement
expressly requires that Westwind transfer its operating
income to the Payment Account after Westwind paid its
Approved Budgeted Expenses i.e. “net of Approved Budgeted
Expenses that have been paid by the Borrowers.”
Also, contrary to Strauss’ contention, the operating
receipts of Westwind were not automatically swept from its
various operating accounts into the Concentration Account.
Instead, the record shows that Westwind had control over
its receipts before depositing them in the Concentration
Account that was maintained at U.S. Bank, the financial
institution that agreed to serve as the depositary bank
under the Concentration Account Agreement. For example, in
a letter sent to the Lenders dated July 18, 2002, Strauss
advised that “[c]ash flow is insufficient to make both the
current payment of budgeted operating expenses (including
Burger King payments) and the debt service. This letter is
to inform you that Westwind has taken a temporary measure
to suspend payment into the concentration account for the
FMAC debt account.” Thus, Strauss acknowledged that
Westwind was not only responsible for paying Burger King,
but that Westwind also exercised control over its receipts
before depositing them in the Concentration Account.
Also, the fact that Westwind’s controller, Gary Allen, was
not involved in negotiation of the Restructuring Agreement
and was not aware of its terms, and that he continued his
practice (under the Loan Agreement) in sending Westwind’s
receipts to the Concentration Account, was not a mistake
that can be attributed to plaintiffs. Further, Strauss’
arguments that, plaintiffs should have instructed U.S. Bank
to transfer funds in the Concentration Account to Westwind
for payment of Approved Budgeted Expenses and that Allen
should have been told that plaintiffs should be paid from
the Payment Account and not the Concentration Account, are
equally without merit. Nowhere in the Restructuring
Agreement are such obligations imposed on plaintiffs.
Instead, Strauss and Westwind are bound by the acts or
omissions of their employees.
Strauss contends that plaintiffs knew that all of
Westwind’s receipts went to the Concentration Account, and
thus plaintiffs should not be permitted to keep the money
that was intended for Burger King. In support of his
contention, Strauss points to, among other things, a Larry
Rosselot e-mail and a Cabell Finch cash flow diagram (both
were plaintiffs’ employees), as well as letters from Burger
King. However, such evidence only shows Burger King’s
priority to payment (which is undisputed), it does not
address Westwind’s own responsibility of paying Burger King
first, before transferring funds to the Payment Account,
which Westwind never established. Indeed, given the
contractual language governing the payment mechanism and
priority scheme under the Restructuring Agreement, once
Westwind transferred funds to the Concentration Account,
these funds implicitly represented Available Funds (i.e.
funds net of Approved Budgeted Expenses that were paid by
Westwind) that could be applied pursuant to the “waterfall”
under section 5.3 of the Restructuring Agreement. Hence,
any contention that plaintiffs breached the Agreement, by
misappropriating funds that should have been paid to Burger
King, is without merit.
Strauss also alleges that plaintiffs breached the
Restructuring Agreement by either failing to respond or
denying Westwind’s request to close money-losing
restaurants, which caused Westwind to suffer financial
hemorrhage, aggravated its cash flow problem, and led to
its destruction. Plaintiffs counter that (1) Westwind never
requested their consent; (2) there was no evidence of any
such request, as section 14.6 of the Restructuring
Agreement requires that all communications or requests to
be in writing; and (3) even assuming that such request had
been made, plaintiffs were entitled to grant or withhold
consent in its “sole discretion, opinion and judgment,”
pursuant to section 10.2 (c) of the Restructuring
Agreement.
Based on the record, which contains conflicting witness
testimonies, it is not entirely clear as to whether (and
when) Westwind had requested plaintiffs’ consent to close
under-performing restaurants. However, in the fall of 2002,
in the reports prepared by Deloitte & Touche, which was
retained by plaintiffs to analyze restaurant closure
issues, the list of restaurants annexed to such reports
(according to Strauss and undisputed by plaintiffs) closely
matched the list of restaurants prepared by Westwind.[fn6]
Construing the facts in favor of Strauss, it appears that
Westwind might have communicated with plaintiffs about
potential restaurant closures, albeit it also appears
undisputed that such communications were not in writing.
Plaintiffs’ argument that closure requests must be in
writing, pursuant to section 14.6 of the Restructuring
Agreement, is unpersuasive for several reasons. First, that
section contains only general language that “notices and
communications under this Agreement shall be in writing.”
However, the operative provisions (section 10.2) of the
Agreement that govern “Disposition of Property,” including
restaurant or business closure, contain no requirement that
request for approval of closure (or any consent thereto)
must be in writing. In contrast, other sections of the
Restructuring Agreement expressly contain “in writing”
requirements. For example, “ALWA Releases” must be in
writing under section 7.18; Servicer’s waiver of compliance
as to “Negative Covenants” must be in writing under Article
X; and Westwind’s consent in respect of “Amendment and
Waiver” must be in writing under section 14.2. Thus, the
parties knew when written notices would be required in
specific circumstances, and they expressly specified the
“in writing” requirement in the Restructuring Agreement.
The absence of any “in writing” requirement in section 10.2
(c) with respect to restaurant closure is telling.
Moreover, Peter Humphrey, Esq., plaintiffs’ attorney who
was involved in negotiating and drafting the Restructuring
Agreement, testified that Westwind could send notices
pursuant to section 14.6, but as a practical matter, could
just call up and ask informally with respect to restaurant
closures. Based on the foregoing, I conclude that the
parties did not contemplate, nor does the Restructuring
Agreement specifically require, that restaurant closure
requests must be in writing.
However, as noted above, section 10.2 (c) provides that
the Servicer’s consent with respect to property disposition
or restaurant closures may be given in its sole discretion
or judgment. Further, that section provides, among other
things, that in respect of property dispositions or
closings, Westwind must provide to the Servicer “substitute
collateral” having a value sufficient to collateralize the
obligations of Westwind secured by such property “in form
and substance acceptable to the Servicer.” Strauss has not
alleged nor come forward with evidence that Westwind had
offered to provide substitute collateral in connection with
any restaurant closure requests. Moreover, he testified
that Westwind could not afford to pay for the costs related
to restaurant closing (which included payroll, taxes,
utilities, vendors and occupancy costs), and that, had
plaintiffs agreed to help Westwind by modifying the
Concentration Account and loan documents (such as a
moratorium on debt service payments), Westwind could have
generated the cash needed to close the money-losing
restaurants.
Based on the foregoing, and assuming that Westwind did
request consent to close restaurants but that no consent
was obtained, it does not appear that plaintiffs’ exercise
of discretion or judgment in refusing to give consent was
arbitrary or irrational. Dalton v. Educational Testing
Service, 87 NY2d 384, 392 (1995) (holding that a party must
fulfill its contractual obligation and act in good faith,
but a court “will not interfere with [the party’s]
discretionary determination unless it is performed
arbitrarily or irrationally”). Accordingly, the breach of
contract counterclaim, alleging that plaintiffs breached
the Restructuring Agreement, is dismissed.[fn7]
Breach of Implied Covenant of Good Faith Counterclaim
Strauss asserts that the central purpose of the
Restructuring Agreement is to permit Westwind to continue
its business operations until it, and Burger King, could
improve the business situation. Strauss also alleges that
plaintiffs breached the implied covenant of good faith and
fair dealing by depriving Westwind of its benefits under
the Restructuring Agreement, and driving it into bankruptcy
and ultimate destruction.
While it may be true that one of the objectives of the
Restructuring Agreement was to permit Westwind to continue
its operations (instead of shuttered via foreclosure) such
that it could achieve a turnaround of its business, another
objective was to enhance the possibility that Westwind
would repay the debts owed to the Trusts. A financial
restructuring was effected under the Restructuring
Agreement whereby Westwind’s debt owed to the Trusts was
reduced by $17 million, and Westwind received a loan of
$2.6 million under the Special Servicing Advance and used
the loan proceeds to pay off critical vendors. Thus, the
primary purpose of the Restructuring Agreement was to
restructure the debt owed by Westwind to the Trusts (as
reflected by its title), with the hope that Westwind would
achieve a viable operational restructuring, by realigning
or revamping its business operations, such that it would be
able to pay the restructured loans owed to the Trusts, as
well as the obligations owed to Burger King and third
parties.
Under New York law, “[i]mplicit in all contracts is a
covenant of good faith and fair dealing in the course of
contract performance.” Dalton, supra, at 389. The implied
covenant of good faith and fair dealing requires that “even
an explicitly discretionary contract right may not be
exercised in bad faith so as to frustrate the other party’s
right to the benefit under the agreement.” Richbell
Information Services, Inc. v. Jupiter Partners, L.P., 309
AD2d 288, 302 (1st Dept 2003). To sustain a breach of the
implied covenant claim, the claimant must allege and show
that the other party “exercised a [contractual] right
malevolently, for its own gain as a part of a purposeful
scheme designed to deprive [claimant] of the benefits”
under the contract. Id. However, the implied covenant claim
is not without limit, and no obligation can be implied or
imposed upon a party that “would be inconsistent with other
terms of the contractual relationship.” Murphy v. American
Home Products Corp., 58 NY2d 293, 304 (1983).
The record does not support Strauss’ allegation that
Westwind was deprived of its benefits under the
Restructuring Agreement. Instead, the record shows that
despite Westwind’s financial restructuring (debt reduction
and loan advance) that was achieved with the help of
plaintiffs, Westwind failed to achieve, on its own, an
operational restructuring of its business. Also, as
discussed above, because the acceptance of funds transferred
into the Concentration Account and the application of such
funds toward the repayment of debts owed to the Trusts (as
well as refusal to grant purported closure requests) were
consistent with plaintiffs’ contractual rights, the breach
of the implied covenant claim cannot be used to limit or
restrict plaintiffs’ exercise of such rights, particularly
where the record does not show that plaintiffs exercised
such rights malevolently for their own gain.
Moreover, because the breach of contract and breach of
implied covenant claims are based on the same facts and
purported acts or omissions of plaintiffs, the breach of
implied covenant claim should be dismissed as duplicative.
Empire State Building Associates v. Trump, 247 AD2d 214
(1st Dept 1998) (breach of implied covenant claim dismissed
because claimant failed to allege or establish any breach
of contract, and the implied covenant claim duplicated the
contract claim). Accordingly, Strauss’ breach of implied
covenant of good faith counterclaim is dismissed.
Breach of Fiduciary Duty Counterclaim
Strauss concedes that his breach of fiduciary duty claim
should be dismissed as to plaintiffs because it is black
letter law that there is no fiduciary relationship between
plaintiffs (as creditor) and Westwind (as debtor). See
e.g., SNS Bank, N.V. v. Citibank, N.A., 7 AD3d 352, 354
(1st Dept 2004). However, as to counterclaim defendant
Wolnick, who was allegedly encouraged by Strauss to serve
as a Westwind director in connection with the Restructuring
Agreement (which provided the Trusts with the right to
appoint a director on Westwind’s board of directors, and
Wolnick agreed to so serve as a Bay View representative),
the counterclaim alleges that Wolnick breached his
fiduciary duty to Westwind because he wore two hats at the
same time, as a director of Westwind and as an officer of
counterclaim defendant Bay View.[fn8] Specifically, Strauss
alleges that because Wolnick had the power (as a Bay View
executive) to stop the Trusts from breaching the
Restructuring Agreement but that he failed to do so, he
breached his duty of loyalty to Westwind because he favored
the interests of his employer Bay View over Westwind.
Wolnick counters that he did not breach the duty of
loyalty because (1) he did not seek or obtain personal
gain, nor did he engage in self-dealing, as he did not
benefit from the transactions among the Trusts, Bay View
and Westwind; and (2) he did not have a disqualifying
conflict of interest and, in any event, any conflict was
not material since, during his short tenure as a director,
Westwind’s board did not vote or pass any resolution.
Wolnick also contends that Strauss should be equitably
estopped because he persuaded Wolnick to join the board,
personally elected Wolnick to the board, and never objected
to Wolnick’s service as a Westwind director while knowing
that he was also employed by Bay View.
Strauss does not argue, nor has he come forward with
evidence, that Wolnick benefitted personally or engaged in
self-dealing. Relying on Strassberger v. Earley, 752 A2d
557 (Del.Ch. 2000), Strauss contends that the case stands
for the proposition that a personal benefit need not be an
element of a breach of loyalty claim, but that liability
may be imposed upon a director who favors the interest of
his employer over the interest of the corporation on whose
board he sits.[fn9] In Strassberger, a minority shareholder
commenced a derivative action, claiming that the board of
directors breached their fiduciary duty by using assets of
the corporation to repurchase its shares for the directors’
own benefit. The Delaware court found that two of the
directors (Stiska and Early) breached their duty of loyalty,
not because they obtained a personal benefit, nor was there
any evidence that they conspired with the culprit director
(Walden) who was engaged in self-dealing and used corporate
assets for his own benefit, but because they voted in favor
of the stock repurchase due to their primary loyalty to
their own employer (an entity that had decided to cash out
its equity position in the corporation), and they were
willing to subordinate the interest of the minority
shareholders of the corporation to the interest of Walden.
Id. at 581.
In Strassberger, however, the two defendant directors
affirmatively voted along with Walden (and might be deemed
to have aided and abetted Walden) in furtherance of an
improper corporate transaction that injured minority
shareholders. Here, no vote or resolution was passed by
Westwind’s board while Wolnick was a director. Also, the
two Strassberger directors’ action (voting for the
transaction even though their motive was to benefit their
own employer) was tainted by the self-dealing motive and
illegal actions of the culprit director Walden. In
contrast, Bay View’s action in applying funds against debts
owed to the Trusts were a proper exercise of contractual
rights, and its refusal to grant closure request was an
exercise of contractual discretion that was neither
irrational nor arbitrary. Because Bay View acted properly
and legally, Wolnick could not be said to have improperly
or illegally favored Bay View over Westwind.
Further, under Delaware law, when a corporation is
operating in the zone or vicinity of insolvency, its
directors’ fiduciary duty extends not only to the
corporation’s shareholders, but also to its creditors.
Credit Lyonnais Bank Nederland, N.V. v. Pathe
Communications Corp., 1991 WL 277613 (Del Ch. 1991).[fn10]
Here, it seems undisputed that Westwind was insolvent or was
in the vicinity of insolvency (during the relevant period)
in that it was unable to pay its debts when they became due
and payable. Thus, it would not have been improper for
Wolnick, as a Westwind director, to consider (assuming he
did consider) the interest of creditors of Westwind,
including the Trusts and Bay View, as to how the assets of
Westwind should be used to satisfy its various obligations.
Accordingly, the breach of fiduciary (loyalty) duty
counterclaim against Wolnick is dismissed.
With respect to Bay View, Strauss appears to concede that
his breach of fiduciary duty claim should be dismissed,
just as such claim is dismissed as against plaintiffs. Yet,
he seeks leave of this court to amend his claim to assert
that Bay View aided and abetted Wolnick’s breach of
fiduciary duty. Because I have determined that the breach
of fiduciary duty counterclaim must be dismissed as against
Wolnick, I deny Strauss’ request for leave to amend the
counterclaim as against Bay View.
In addition, Strauss alleges that the actions of Wolnick
and Bay View caused the destruction of Westwind, because
they could have prevented a shortfall of funds that
Westwind needed to pay Burger King, and their failure to so
act led Burger King to foreclose, thereby destroying
Westwind’s business. However, the record reflects (and
Strauss has not produced contrary evidence) that Westwind’s
operating revenues were insufficient to pay Burger King and
the Trusts (as well as other vendors). Failure to pay the
debts, when due, under the Restructured Notes and Term
Notes, was an event of default, which would trigger
foreclosure rights by the Trusts and Bay View under the
Restructuring Agreement. Thus, Westwind could have been
foreclosed either by Burger King or by the Trusts, and the
alleged action or inaction of Bay View and Wolnick could
not have caused Westwind’s demise.
Interference of Contractual and Business Relation
Counterclaim
Strauss alleges that plaintiffs and Bay View tortiously
interfered with the contractual and business relations
between Westwind and Burger King, by wrongfully taking
money that was earmarked for Burger King, thus rendering it
impossible for Westwind to fulfill its obligations under
the franchise agreements with Burger King to pay royalties
to Burger King, which led to Burger King’s termination of
the franchise.[fn11]
The elements of a claim based on tortious interference
with contractual or business relations are: (1) existence
of a contract between the claimant and third party; (2)
defendant’s knowledge of the contract; (3) defendant’s
intentional inducement of third party to breach or
otherwise render contract performance impossible; and (4)
damages to the claimant. Kronos, Inc. v. AVX Corp., 81 NY2d
90, 94 (1993); Bernberg v. Health Mgmt. Systems, Inc., 303
AD2d 348, 349 (2d Dept 2003). When the defendant’s conduct
is based on economic justification, it is a defense to the
claim. Collins v. E-Magine, LLC, 291 AD2d 350, 351 (1st
Dept 2002) (“[a]s a general matter, economic interest
precludes a claim for tortious interference with a contract
unless there is a showing of malice or illegality.”).
In this case, it appears that the first, second and fourth
elements of the claim have been satisfied: Westwind and
Burger King were parties to franchise agreements,
plaintiffs and Bay View were aware of such agreements, and
the agreements were terminated by Burger King for, among
other reasons, nonpayment of royalties. However, the record
does not support the allegation that plaintiffs and Bay
View intentionally induced Burger King to terminate the
franchise. Instead, it shows that plaintiffs and Bay View
exercised their contractual rights in applying the funds
(that were not earmarked) toward payment of the debts owed
to the Trusts, which constitutes an economic justification
and a defense to a tortious interference claim. While their
act of exercising a contract right might have rendered or
caused Westwind unable to perform its obligations to Burger
King, it cannot be said that plaintiffs and Bay View acted
maliciously or illegally, nor is there evidence to the
contrary.
Plaintiffs and Bay View stood to gain nothing from the
Burger King franchise termination, because that would lead
to the cessation of Westwind’s business, which in turn,
would extinguish any hope of getting repaid on the debts
that Westwind owed to the Trusts. In other words, it makes
no sense why plaintiffs and Bay View would wish for
franchise termination, as that would be tantamount to
economic suicide. Hence, the tortious interference of
contractual and business relation counterclaim is dismissed.
Summary Judgment on The Second Guaranty
In addition to moving for summary judgment to dismiss the
above counterclaims, plaintiffs also seek summary judgment
that Strauss is liable under the Second Guaranty, which, as
discussed, is in an amount up to $1.8 million of the $2.6
million Special Servicing Advance.
Opposing summary judgment, Strauss argues that because
plaintiffs breached the underlying Restructuring Agreement
with Westwind (the principal obligor), he is not liable on
the Second Guaranty (as a guarantor) with respect to
Westwind’s obligations, citing, Spancrete Northeast, Inc.
v. Travelers Indemnify Co., 112 AD2d 571, 572 (3d Dept
1985) (“As surety, defendant was entitled to assert any
defenses or counterclaims . . . that were available to [the
principal obligor]). Plaintiffs contend that because
Strauss’ obligation under the Guaranty is personal,
unconditional and absolute, and because he has expressly
waived any and all claims and defenses as to the
performance and payment of his obligation pursuant
paragraph 18 of the Second Guaranty,[fn12] he cannot assert
defenses or counterclaims of Westwind based on plaintiffs’
alleged misconduct.
Strauss responds that the boilerplate language of paragraph
18 cannot override the special language in paragraph 25 of
the Second Guaranty, which states, in relevant part, that
“notwithstanding anything to the contrary set forth in this
Guaranty, [Bay View] acknowledges that enforcement of its
rights under this Guaranty is subject to . . . the terms
and conditions of the Restructuring Agreement. . . .”
According to Strauss, paragraph 25 overrides paragraph 18,
and authorizes him to assert counterclaims and defenses of
Westwind against any liability he may have under the Second
Guaranty.
Regardless of whether Strauss may assert defenses or
counterclaims of Westwind (based on paragraph 25 or
otherwise), because I have determined that all
counterclaims (as discussed) are without merit and must be
dismissed, they are not available as defenses to Strauss’
liability under the Second Guaranty.
As a separate defense, Strauss argues that because
plaintiffs received $3 million from the bankruptcy sale of
Westwind’s assets, which is more than his $1.8 million
liability under the Second Guaranty, plaintiffs should have
applied the sale proceeds against the Second Guaranty,
reducing the liability thereunder to zero. In support of
this, Strauss contends that section 5.3 of the
Restructuring Agreement, which sets forth the waterfall
provisions, requires that Available Funds be first applied
toward payment of the Term Notes ($2.6 million) prior to
the Restructured Notes ($43 million).
However, section 5.3, a portion of which is summarized in
footnote 4, supra, provides that the waterfall is in effect
“unless the Restructured Notes have been declared due and
payable pursuant to Section 12.2 hereof.” Section 12.2 sets
forth the rights and remedies of the Servicer if any “event
of default” occurs under section 12.1 of the Restructuring
Agreement. As noted above, in April 2002, GMACCM notified
Westwind that events of default have occurred under the
Restructuring Agreement, and in May 2002, GMACCM declared
that all debts owed to the Trusts would be accelerated,
including the Restructured Notes and Term Notes. Hence,
upon GMACCM’s declaration of default pursuant to section
12.2, the waterfall under section 5.3 ceased to take
effect, and GMACCM was entitled to apply the sale proceeds,
according to its discretion, pursuant to the provisions of
the Loan Agreement.
Strauss argues that the only reason for the default was due
to Westwind’s inability to pay Burger King caused by
plaintiffs’ misappropriation of funds that were intended
for Burger King, and that the notice of default was
improper or invalid. The notice of default, however,
alleged multiple violations of the Restructuring Agreement,
including, among other things, improper payments to a
Westwind affiliate, failure to submit required financial
information, variances from operating budgets, and
delinquency in Burger King payments. The record does not
reflect that Strauss or Westwind had challenged or
contested the propriety or validity of the notice, and now
belatedly claims that the default notice is invalid. I
reject such claim because it is without merit.
Strauss’ assertion that both his testimony, and that of
Westwind’s counsel, indicated that the reference in the
Second Guaranty to section 5.3 (the waterfall) of the
Restructuring Agreement was intended to ensure that funds
be applied towards payment of the Term Notes prior to the
Restructured Notes under all circumstances, is unavailing
in this summary judgment motion. Such testimonies are
inadmissible parol evidence because they contradict the
clear and unambiguous language of section 5.3, which
specifically states that the waterfall does not apply in
the event of a default. See South Road Assocs., LLC v.
International Business Machines Corp., 4 NY3d 272, 278
(2005) (“[E]xtrinsic and parol evidence is not admissible
to create an ambiguity in a written agreement which is
complete and clear and unambiguous upon its face”).
Further, Strauss is a sophisticated businessman who was
assisted by counsel in the negotiation and drafting of the
Restructuring Agreement and Second Guaranty, and had he
intended that the waterfall remain in effect after a
default, he could have negotiated for such a clause. A
careful reading of the documents leads to the conclusion
that they have “a definite and precise meaning, unattended
by danger of misconception in the purport of the [documents
themselves], and concerning which there is no reasonable
basis for a difference of opinion.” Breed v. Insurance Co.
of North America, 46 NY2d 351, 355 (1978). Thus, Strauss’
alleged personal intent does not create an issue of fact or
ambiguity in the Guaranty.
Based on the foregoing, plaintiffs’ motion seeking summary
judgment on the Second Guaranty is granted.
Summary Judgment for Dismissal of The First Guaranty
As noted above, simultaneous with the execution of the
Loan Agreement, Strauss signed the First Guaranty, pursuant
to which he guaranteed repayment of the debts owed by
Westwind, upon the occurrence of certain “trigger events”
that are set forth in a schedule annexed to the First
Guaranty. The trigger events that are the subject of this
litigation include: (1) improper payments to a Westwind’s
affiliate; (2) granting purchase money security interests
to vendors; and (3) improper distributions to Strauss.
Strauss argues that the intent of the First Guaranty is to
prevent him from engaging in bad acts (such as theft or
fraud for his personal benefit), but the alleged acts
(which plaintiffs characterize as trigger events) were, in
some instances, business decisions made by him and Westwind
that were necessary to save Westwind from liquidation.
Hence, he contends that he is not liable under the First
Guaranty, and moves for summary judgment dismissing
plaintiffs’ claim under the First Guaranty.
(1) Improper Payment to Affiliate
The Loan Agreement prohibits Westwind from making
unauthorized transfers to its affiliate, and it is a
trigger event under the First Guaranty if distributions
made to Strauss, as guarantor, were in contravention of the
Loan Agreement. In addition to owning Westwind, Strauss
also owned a Westwind affiliate called Westwind ALWA LLC
(ALWA), which operated many Burger King franchise
restaurants in Alabama and Washington.[fn13]
Plaintiffs allege that, at Strauss’ direction, Westwind
made certain payments for the benefit of its affiliate,
ALWA, in violation of the Loan Agreement and the
Restructuring Agreement, including payment of approximately
$1 million of ALWA’s management fees and $300,00 of its
legal fees, and ALWA’s financial records indicated that
during the relevant period, ALWA had negative cash flow and
was unable to make such payments from its own
resources.[fn14]
Strauss does not dispute that Westwind made transfers to
and for the benefit of ALWA, but argues that the management
fees paid by Westwind were for its national overhead
expenses, which would have to be paid regardless of whether
ALWA existed. He also argues that the legal fees were for
restructuring work, and the services provided by counsel
had tremendous overlap due to a similarity of issues that
involved both Westwind and ALWA. Strauss further argues
that the First Guaranty only prohibits distributions to him
(as guarantor), and just because he owned ALWA, the
distributions to and for the benefit of ALWA, as well as
the fees paid to counsel on behalf of ALWA, could not and
should not be equated as distributions to him.
These arguments are unpersuasive for several reasons.
First, ALWA was an entity having its own assets,
obligations and lender. Strauss directed or authorized
Westwind to divert revenues from its operations (which were
collateral to the Trusts) to pay for the obligations of
ALWA, which was not a borrower under the Loan Agreement or
Restructuring Agreement, and did not pledge its assets to
the Trusts. The loan documents acknowledged ALWA’s
existence and prohibited Westwind from making transfers to
ALWA (for obvious reasons). In any event, ALWA was
obligated to pay for its own share of the management fees,
which cannot be deemed to constitute Westwind’s national
overhead expenses.
Second, the record shows that legal fees incurred by ALWA
were for a restructuring that was unrelated to Westwind’s
own restructuring. Indeed, the law firm that represented
both Westwind and ALWA in their respective restructuring
acknowledged that separate legal services were rendered to
ALWA, and its bills properly reflected fee allocations for
such services.
Third, the Guaranty states that distributions made to
Strauss in contravention of the Loan Agreement would be a
trigger event, and it is undisputed that Strauss owned
ALWA, the immediate beneficiary of the subject transfers,
and that he directed or caused Westwind in making such
transfers. This raises an issue of fact as to whether
Strauss was an indirect beneficiary, such that the
transfers or distributions to ALWA could be deemed
distributions to Strauss for purposes of the Guaranty, which
may be construed to cover both direct and indirect
distributions.
(2) Granting Purchase Money Security Interests to Vendors
It is a trigger event under the First Guaranty if Strauss
voluntarily encumbered any collateral of the Trusts by
granting to third parties liens that are not permitted by
the Loan Agreement. In June and July 2002 (after GMACCM had
notified Westwind of the occurrence of events of default
and accelerated all debts owed to the Trusts), Strauss
caused or authorized Westwind to grant purchase money
security interests to three vendors: Prince Castle Inc. (a
kitchen equipment supplier), as well as McCabes Quality
Food Inc. and Meadowbrook Meat Company Inc. Under the Loan
Agreement, the definition of “collateral” includes future
acquisition or purchase of property by Westwind, such as
kitchen equipment, food and meat.
Strauss contends that the granting of liens was necessary
and cannot create liability under the Guaranty. As to the
kitchen equipment liens, Strauss argues that the Burger
King franchise agreement required kitchen upgrades, and
failure to do so would be a default that could lead to
franchise termination. As to the food/meat liens, Strauss
argues that these vendors would stop deliveries unless they
were granted security interests. Strauss also contends that
all liens granted were the result of business decisions, as
they were vital to the continuation of Westwind’s
operations, and that the rule of reason, as well as the
implied covenant of good faith and fair dealing, dictate
that plaintiffs should have approved these liens.
While the granting of liens might have been a business
necessity because Westwind did not have cash to pay the
vendors, the purchase money security interests granted to
these vendors trumped or primed the Trusts’ liens, thus
impairing the rights and interests of the Trusts in
collateral. Strauss had to make a difficult choice as to
whether to grant the liens (thus exposing himself to
potential liability to the Trusts under the First Guaranty)
or to test the wills of Burger King and the vendors (thus
risking the potential of franchise termination and
cessation of food deliveries). He chose the former.
The “rule of reason” argument raised by Strauss,
contending that the Loan Agreement and the Guaranty should
be interpreted to require plaintiffs to act reasonably in
approving the grant of liens, is unpersuasive. These
documents were negotiated by sophisticated parties, and the
prohibition against the granting of liens without the
lender’s approval, without requiring the lender to act
reasonably, was meant to protect the lender. Thus, there is
no basis “to interpret an agreement as impliedly stating
something which the parties have neglected [or did not
intend] to include.” 425 Fifth Avenue Realty Associates v.
Yeshiva University, 228 AD2d 178 (1st Dept 1996). Further,
it does not appear that plaintiffs acted in bad faith in
refusing to approve the granting of liens, as they were
exercising a contractual right to protect their economic
interest and collateral. Gillman v. Chase Manhattan Bank,
N.A., 73 NY2d 1, 15 (1988) (duty of good faith cannot be
read to require a secured party to take actions that would
impair its collateral); Reda v. Eastman Kodak Company, 233
AD2d 914, 915-916 (4th Dept 1996) (“a court should not
construe a contract as implying an obligation that would be
inconsistent with other terms of the contract”).
(3) Improper Distributions to Strauss
As noted, it is a trigger event under the First Guaranty
if distributions made to Strauss contravened the Loan
Agreement. Plaintiffs allege that in addition to his salary
(which was limited to $450,000), Strauss received other
distributions from Westwind, in the form of (i) maintenance
payments for a Florida condominium that was owned and used
by Strauss and his wife; and (ii) undocumented travel
expenses reimbursed to Strauss.
Strauss argues that (a) the condominium was used for
corporate purposes and it was appropriate that Westwind
paid the maintenance charges; and (b) he was entitled to be
reimbursed for travel expenses in addition to salary, and
his expense receipts could not be located due to Westwind’s
bankruptcy and warehousing of numerous corporate files.
Further, Strauss argues that even if plaintiffs’
condominium and travel expense claim survives summary
judgment, any damages suffered by plaintiffs relating to
this claim would not exceed $44,250, and he should not be
held liable for the $43 million debt owed by Westwind. More
specifically, Strauss contends that, because the First
Guaranty states that his agreement to pay the amount of any
loss or damage suffered by plaintiffs is tied to acts or
omissions “resulting from” one or more of the trigger
events, his liability cannot exceed the actual amount of
distributions (i.e. damages) he received from
Westwind.[fn15]
However, the First Guaranty also states that Strauss’
liabilities “shall include the full payment and performance,
of all of the Obligations of the Borrowers, not paid or
performed by the Borrowers . . . arising under or in
connection with . . . any of the other Loan Documents.”
This raises an issue as to whether his liabilities, as
Strauss contends, are limited to the actual damages
suffered by plaintiffs resulting from the trigger events,
or his liabilities include all unpaid obligations owed by
Westwind to the Trusts. This issue, alone, precludes
summary judgment.
As discussed, there are other issues of fact as to whether
(1) the condominium was used for corporate purposes, as
Strauss contends, or it was used as his private residence;
(2) the distributions made to and on behalf of ALWA should
be deemed distributions to Strauss for purpose of the First
Guaranty; and (3) the granting of security interests was a
business justification that could overcome the restrictions
under the First Guaranty.
Accordingly, based on the foregoing, summary judgment
cannot be granted in favor of Strauss with respect to his
liability under the First Guaranty.
Accordingly, it is
ORDERED that the motion for summary judgment by
counterclaim defendants Bay View and Wolnick (Motion
Sequence Number 16) is hereby granted, the counterclaims
against them are hereby severed and dismissed with costs
and disbursements to defendants as taxed by the Clerk of
the Court upon the submission of an appropriate bill of
costs, and the Clerk of the Court is hereby directed to
enter judgment accordingly; and it is further
ORDERED that the motion for summary judgment by Strauss
and counterclaim plaintiff (Motion Sequence Number 17) with
respect to the First Guaranty is hereby denied; and it is
further
ORDERED that the motion for partial summary judgment by
plaintiffs and counterclaim defendants Trustee and GMACCM
(Motion Sequence Number 18) with respect to the Second
Guaranty is hereby granted and the counterclaims against
them are hereby dismissed; and it is further
ORDERED that the remainder of this action shall continue.
[fn1] Strauss acknowledges that the only claim he asserts
individually is a lost salary claim. With respect to the
claims allegedly assigned by Westwind to Strauss, although
plaintiffs do not acknowledge the validity of such
assignments, they accept the truth of Strauss’ allegation
regarding the assignment solely for the purpose of their
summary judgment motion, and reserve their right to show,
at any trial in this action, that the assigned claims are
invalid (and thus Strauss lacks standing), to the extent
the assigned claims survive summary judgment.
[fn2] The Restructured Notes evidence the debt under the
Loan Agreement, as restructured by the Restructuring
Agreement, and the Term Notes evidence the debt as to the
$2.6 million Special Servicing Advance under the
Restructuring Agreement.
[fn3] Article 4 of the Supplemental Intercreditor Agreement
among the Lenders, Burger King, Westwind and Strauss
contains, in all material respects, identical priority
provisions.
[fn4] Section 5.3 provides, in relevant part, that
“Available Funds on deposit in the Payment Account shall be
applied . . . in the following descending order of
priority” for payment of (a) the BKC Receivables Notes; (b)
pro rata, the Term Notes and BKC Construction Notes; and
(c) the Restructured Notes. Section 5.3 further provides
that, “[t]o the extent Available Funds . . . are not
sufficient to make the payments set forth in items (d)
? (i) . . . the amounts due shall be accrued and
deferred until . . . Available Funds are available to make
such payments.” In other words, payments for items (a)
? (c) are not deferrable even if Available Funds are
insufficient to pay for such items. The BKC Receivables
Notes, in item (a), represent unpaid royalties owed to
Burger King that predated the Restructuring Agreement, as
well as the BKC Construction Notes, in item (b), are not
relevant to the subject of this litigation.
[fn5] As noted, Westwind failed to set up the Payment
Account required by the Restructuring Agreement. Instead,
it continued to use the Concentration Account as if it were
the Payment Account.
[fn6] Attached to an e-mail, dated September 30, 2002, from
Jack Paul Martinchuk (a Deloitte employee) to Scott Roehr
(another Deloitte employee) and Cabell Finch (a GMACCM
employee), was a file that provided “a summary of (i)
Deloitte developed potential store closures, and (ii)
potential store closures provided by Westwind.”
[fn7] Strauss further contends that possessing discretion
does not permit plaintiffs to ignore or refuse to decide
upon requests for closure. However, Strauss also alleges
(and has testified) that, in connection with negotiating
the Restructuring Agreement, Westwind requested if
plaintiffs would allow a moratorium on debt service to
enable Westwind’s payment of closure costs, but the request
was denied. Denying a request is an exercise of business
judgment and discretion, which is not the same as ignoring
or refusing to decide upon a request.
[fn8] In his brief, Strauss indicates that the breach of
fiduciary duty counterclaim is only meant to allege a breach
of the duty of loyalty, not a breach of the duty of care.
This distinction is important because both decisional and
statutory authorities apply different standards in respect
of these duties.
[fn9] The parties cited to Delaware law because, Westwind
Holding, on whose board Wolnick sat, is a Delaware
corporation.
[fn10] New York law is similar: see New York Credit Men’s
Adjustment Bureau v. Weiss, 305 NY 1, 7 (1953) (“[i]f the
corporation was insolvent . . . directors and officers . . .
were to be considered as though trustees of the property
for the corporate creditor-beneficiaries.”); see also
Cooper v. Parsky, 1997 WL 242534 (SD NY 1997), affd, 12 Fed
Appx 28 (2d Cir 2001) (under New York law, creditors are
owed a fiduciary duty by officers and directors when the
corporation is insolvent).
[fn11] In his brief, Strauss states that this counterclaim
is not asserted against Wolnick. The brief also recasts the
claim as “tortious” interference as opposed to
“intentional” interference.
[fn12] Paragraph 18 provides, in relevant part, that
Strauss agrees to waive “any and all claims . . . and
defenses to performance and payment hereunder relating in
any way . . . to the exercise of any of the Servicer’s
rights with respect to the Special Servicing Advance . . .
the Restructuring Agreement or any of the documents related
thereto. . . .”
[fn13] Specifically, Strauss owned 95% of the equity stock
of ALWA, and Westwind Management Company, which is
wholly-owned by Strauss, owned the remaining 5%. Westwind
Management provided general corporate services to each of
the Westwind operating companies, including ALWA, and each
of them was required to pay a separate management fee to
Westwind Management for such services.
[fn14] Notably, ALWA is not indebted to the Trusts, but to
a different lender named Peachtree Franchise Finance.
[fn15] Strauss made a similar argument with respect to the
alleged improper distribution to affiliate claim ($1.3
million) and the improper granting of liens to vendors
claim ($100,000).