Julep Beauty, Inc. v. James J. Pallotta ( 2020 )

IN THE COURT OF APPEALS OF THE STATE OF WASHINGTON
JAMES J. PALLOTTA, No. 80011-6-1
Appellant, DIVISION ONE
v. UNPUBLISHED OPINION
JULEP BEAUTY, INC., a Washington
for-profit corporation,
Respondent.
Hazelrigg, J. — James Pallotta seeks reversal of summary judgment in
favor of Julep Beauty, Inc., arguing that he was owed a premium payment on his
investment before Julep merged with Glansaol Management, Inc. Because a
majority in interest of investors successfully amended all of the promissory notes
to waive the premium, Pallotta was not entitled to the premium payment. We
affirm.
FACTS
James Pallotta is an investor who operates in part through Raptor Holdings
LP. An employee of Pallotta's, Joshua Langsam, testified that investments were
sometimes made under Pallotta's name and sometimes made under the name of
Raptor but "[t]he two are largely one [and] the same." In his individual capacity,
Citations and pinpoint citations are based on the Westlaw online version of the cited material.
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Pallotta first invested in Julep Beauty, Inc., a Washington company founded by
Jane Park, in 2010.
In 2015, Julep required additional financing and imposed a "pay to play
provision" on professional investors who held preferred stock in the company.
These investors would be required to choose between an additional contribution
of a pro rata share relative to their preferred equity stake or conversion of their
preferred shares to common stock. Pallotta was identified as a professional
investor and chose to invest additional funding. In July 2015, Pallotta executed a
Note Purchase Agreement ("the Agreement") with Julep, agreeing to purchase a
subordinated convertible promissory note ("the Note") from Julep.
The Note provided that Julep promised to pay Pallotta $234,288.01 plus
"interest ... on the unpaid principal balance at a rate equal to 5% per annum,
computed on the basis of the actual number of days elapsed and a year of 365
days." The unpaid principal, accrued interest, and "other amounts payable
hereunder" would be due and payable on the earlier of the date of maturity, July
14, 2016, or when declared or made automatically due and payable on an "Event
of Default." The Note listed the occurrences that would constitute such an event,
including "Failure to Pay:"
The Company shall fail to pay (i) when due any principal
payment on the due date hereunder or (ii) any interest payment or
other payment required under the terms of this Note or any other
Transaction Document on the date due and such payment shall not
have been made within five (5) business days of the Company's
receipt of written notice to the Company of such failure to pay."
If an event of default other than bankruptcy or insolvency proceedings occurred,
the investor would have the right to declare all outstanding obligations due and
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payable by written notice to Julep and with the written consent of a majority in
interest of investors. In addition, "[djuring any period in which an Event of Default
has occurred and is continuing, the Company shall pay interest on the unpaid
principal balance hereof at a rate per annum equal to the rate otherwise applicable
hereunder plus ten percent."
The section of the Note entitled "Payments" contained three subsections:
interest, voluntary prepayment, and mandatory prepayment. The interest
subsection simply stated that "[ajccrued interest on this Note shall be payable at
maturity." Section 1(c) provided for a mandatory prepayment before the date of
maturity in one specific circumstance:
In the event of a Liquidation Transaction, the outstanding
principal amount of this Note, plus all accrued and unpaid interest, in
each case that has not otherwise been converted into equity
securities pursuant to Section 4, shall be due and payable
immediately prior to the closing of such Liquidation Transaction,
together with a premium equal to 100% of the outstanding principal
amount to be prepaid.
The Note contained a provision allowing changes under certain
circumstances:
"Any provision of this Note may be amended, waived or
modified upon the written consent of the Company and a Majority in
Interest of Investors; provided, however, that no such amendment,
waiver or consent shall (i) reduce the principal amount of this Note
without Investor's written consent, or (ii) reduce the rate of interest of
this Note without Investor's written consent."
A "Majority in Interest of Investors" was defined as "Investors holding more than
50% of the aggregate outstanding principal amount of the Notes." The Agreement
contained a nearly identical waiver and amendment provision allowing a change
to "this Agreement and the Notes" under the aforementioned conditions. It
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contained one additional sentence stating that "[a]ny amendment or waiver
effected in accordance with this paragraph shall be binding upon all of the parties
hereto."
The Note also contained a "pari passu" provision guaranteeing equal
treatment among the noteholders:
Investor acknowledges and agrees that the payment of all or
any portion of the outstanding principal amount of this Note and all
interest hereon shall be pari passu in right of payment and in all other
respects to any other Notes. In the event Investor receives payments
in excess of its pro rata share of the Company's payments to the
holders of all of the Notes, then Investor shall hold in trust all such
excess payments for the benefit of the holders of the other Notes and
shall pay such amounts held in trust to such other holders upon
demand by such holders.
(Emphasis omitted).
The parties extended the maturity date of the Note past the original July 14,
2016 date. Julep again encountered financial difficulties and began to explore
possible merger opportunities in late 2016. In advance of a potential acquisition,
Julep distributed a Note Cancellation Agreement to each of the noteholders,
including Pallotta. The Note Cancellation Agreement provided that Julep would
pay the noteholder the outstanding principal balance on their Note and interest
accrued through September 30, 2016 "[ujpon the closing of the Merger." Under
the Note Cancellation Agreement, the noteholder agreed that this payment would
satisfy all obligations owed to them by Julep and waived "any right to additional
payment with respect to the Note, including but not limited to pursuant to Section
1(c) thereof." On December 16, 2016, Julep entered into Note Cancellation
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Agreements with 26 of the 27 noteholders. Pallotta did not sign his Note
Cancellation Agreement.
On December 20, 2016, Julep and four of the noteholders, who represented
a majority in interest of the investors, executed an "Amendment to Subordinated
Convertible Promissory Notes" ("the Amendment"). This document amended each
of the Notes issued under the July 14, 2015 Agreements to delete section 1(c), the
provision that obligated Julep to pay a premium in the event of a liquidation
transaction. The Amendment stated that it was effective "as of closing of the
merger." Pallotta was not a signatory to the Amendment. The articles of merger
were filed with the Secretary of State later that day.
On January 6, 2017, Pallotta sent a letter to Park asserting that the
Amendment was ineffective as to his Note and demanding payment of the
outstanding principal, accrued interest of 5 percent through the maturity date,
default interest of 15 percent from the maturity date to the date of the letter, and
the premium of 100 percent of the outstanding principal amount. Pallotta was paid
100 percent of the principal on the Note and the accrued interest through
December 20, 2016. He also "received his share of the merger consideration
relating to his equity holdings."
Because Pallotta maintained that he was owed further payment, Julep
sought a declaratory judgment in King County Superior Court. The parties agreed
that there were no material facts in dispute and each filed motions for summary
judgment. The court granted summary judgment in favor of Julep. The court
determined that "Pallotta is owed no Premium, additional interest, default interest
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under the Pallotta Note, or payment of any kind under the Pallotta Note." The court
also found that Pallotta would have to hold 96.7 percent of any additional payout
under his Note in trust for fellow noteholders. Pallotta appealed.
ANALYSIS
We review an appeal of summary judgment de novo, performing the same
inquiry as the trial court and viewing all facts and reasonable inferences therefrom
most favorably toward the nonmoving party. Lvbbert v. Grant County, 141 Wn.2d
29, 34, 1 P.3d 1124 (2000). "Summary judgment is proper only where there is no
genuine issue of material fact and the moving party is entitled to judgment as a
matter of law." Int'l Marine Underwriters v. ABCD Marine, LLC, 179 Wn.2d 274,
281, 313 P.3d 395 (2013); See also CR 56(c). A fact is material if the outcome of
the litigation depends on it in whole or in part. Kries v. WA-SPOK Primary Care,
LLC, 190Wn.App. 98, 117, 362 P.3d 974 (2015).
I. Meaning of "Rate of Interest"
Pallotta contends that the Amendment did not waive his right to receive the
premium because the premium constituted interest under the Note, the rate of
which could not be reduced without his individual consent. When interpreting a
contract, we are "'giv[ing] a meaning to the symbols of expression used by another
person.'" Berg v. Hudesman, 115 Wn.2d 657, 663, 801 P.2d 222 (1990) (quoting
3 A. Corbin, Contracts § 532 (1960)) (alterations in original). The purpose of
contract interpretation is to ascertain the intent of the contracting parties, jd. To
do so, we consider "the contract as a whole, the subject matter and objective of
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the contract, all the circumstances surrounding the making of the contract, the
subsequent acts and conduct of the parties to the contract, and the
reasonableness of respective interpretations advocated by the parties." id. at 667
(quoting Stender v. Twin City Foods. Inc.. 82 Wn.2d 250, 254, 510 P.2d 221(1973)). Extrinsic evidence may be used only to elucidate the meaning of the
words in a contract, not to add to, modify, or contradict the terms of the contract to
comport with what the parties intended to write. Confederated Tribes of Chehalis
Reservation v. Johnson. 135 Wn.2d 734, 752, 958 P.2d 260 (1998).
"Summary judgment on an issue of contract interpretation is proper when
the parties' written contract, viewed in light of the parties' other objective
manifestations, has only one reasonable meaning." Kries, 190 Wn. App. at 119. If
two or more meanings are reasonable, the meaning of the provision is a question
of fact. GMAC v. Everett Chevrolet. Inc.. 179 Wn. App. 126, 135, 317 P.3d 1074(2014). "We generally give words in a contract their ordinary, usual, and popular
meaning unless the entirety of the agreement clearly demonstrates a contrary
intent." Hearst Commc'ns, Inc. v. Seattle Times Co.. 154 Wn.2d 493, 504, 115
P.3d 262 (2005). When terms are used separately and consistently throughout a
contract, they are presumed to have separate meanings. See Bellevue Sch. Dist.
No. 405 v. Bentlev, 38 Wn. App. 152, 159, 684 P.2d 793 (1984).
Pallotta contends that the trial court erred in interpreting the term "interest"
as used in the Note not to include the premium. "Interest" and "rate of interest" are
not defined in the Note. Pallotta argues that the premium falls under the following
dictionary definition of "interest:" "[t]he compensation fixed by agreement or
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allowed by law for the use or detention of money, or for the loss of money by one
who is entitled to its use; especially], the amount owed to a lender in return for the
use of borrowed money." Black's Law Dictionary (10th ed. 2014). "Interest" is
also defined as "the price paid for borrowing money generally expressed as a
percentage of the amount borrowed paid in one year." Webster's Third New
International Dictionary 1178 (2002). Similarly, an "interest rate" is defined as
"[t]he percentage that a borrower of money must pay to the lender in return for the
use of the money, usu[ally] expressed as a percentage of the principal payable for
a one-year period. — Often shortened to rate." Black's Law Dictionary (10th ed.
2014) (emphasis omitted). A "premium" is "[a] sum of money paid in addition to a
regular price, salary, or other amount; a supplemental amount of money above the
normal or standard rate." Black's Law Dictionary (10th ed. 2014).
The Note provides that the "rate of interest of this Note" may not be reduced
without the individual investor's consent. Pallotta contends that the premium
"applies a rate, expressed as a percentage applied to the outstanding principal^]
and requires that Julep pay the rate as a condition of Pallotta's promise to lend
Julep Pallotta's money." However, this is not true in every instance. Under the
terms of the Note, payment of the premium is not necessarily required in return for
allowing Julep to use Pallotta's money. The premium only becomes due in the
event of a liquidation transaction. Additionally, although the amount of the
premium is expressed as a percentage of the outstanding principal, it is not tied to
any unit of time. The premium is a supplemental payment owed in addition to the
outstanding principal and accrued interest in the event of a liquidation transaction.
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The premium is referenced few times in the Note, presumably because of
the limited circumstance in which it would arise. However, in the Note's
"Definitions" section, the meaning of "Senior Indebtedness" includes the phrasing:
"the principal of (and premium, if any), unpaid interest on and amounts
reimbursable, fees, expenses, costs of enforcement and other amounts due."
Although apparently not referencing the premium set out under this Note, the
distinction between a premium and interest indicates that the parties understood
these terms to reference two separate categories of payment.
Even viewing all facts in favor of Pallotta, the only reasonable interpretation
of the term "interest" in the Note does not include the premium due in the event of
a liquidation transaction. Because waiving the premium did not reduce the rate of
interest on the Note, Pallotta's individual consent was not required to waive the
provision.
II. Effectiveness of Waiver
We next consider whether Pallotta's right to receive the premium was
effectively waived. Julep argues that the execution of the Note Cancellation
Agreements and the Amendment by a majority in interest of the investors were a
"belt and suspenders" approach to his intransigence and were each sufficient to
waive Pallotta's entitlement to the premium.
We need not address the effect of the Note Cancellation Agreements on
Pallotta's Note because the Amendment effectively waived Pallotta's contractual
right to the premium. As noted above, because the premium was not "interest"
under the terms of the Note, Pallotta's individual consent was not required to
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amend, waive, or modify the prevision for the premium if Julep and a majority in
interest of investors consented in writing to the change. The parties agree that the
written Amendment waiving the premium for all noteholders was signed by Park
as CEO of Julep and by a majority in interest of investors.
Pallotta contends that the waiver of the premium failed because the
premium became due before the Amendment became effective. Under the terms
of the Note, the premium became due "immediately prior to closing" of a liquidation
transaction. By the terms of the Amendment, the section of the Note providing for
the premium was deleted "as of closing" of the merger.
Under the plain language of the Note, the requirement to pay the premium
"immediately prior to closing" meant that Julep had up until the moment of closing
to make the payment and was not in breach until the moment of closing. The
Amendment became effective at the moment of closing. At the moment that the
merger closed, when Julep would have breached the mandatory prepayment
provision, that provision was simultaneously removed from the contract. A party
cannot breach a provision that does not exist. Additionally, as Julep points out,
Pallotta does not give any reason that the premium could not be waived after it
became due.
Because a majority in interest of the investors successfully amended all of
the Notes to delete the provision requiring the premium, Pallotta is not owed the
premium even though he did not individually consent to the Amendment. The trial
court did not err in granting summary judgment for Julep.1
1 Pallotta also assigns error to the trial court's order that he could be required to hold 96.7
percent of any additional payment in trust for the other noteholders, but he does not argue this
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No. 80011-6-1/11
Affirmed.
WE CONCUR:
,>L^Au^r ^.c.1
assignment in his opening brief. "A party that offers no argument in its opening brief on a claimed
assignment of error waives the assignment." Brown v. Vail. 169 Wn.2d 318, 336 n. 11, 237 P.3d
263 (2010). Accordingly, to the extent that it is distinct from the trial court's grant of summary
judgment, we decline to address this alleged error.
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