Brechner v. Phoenix Network Solutions LLC

IN THE SUPERIOR COURT OF THE STATE OF DELAWARE
CRAIG BRECHNER,
Plaintiff,
v. C.A. NO. Nl6C-12-058 CEB
PHOENIX NETWORK
SOLUTIONS LLC, a DelaWare
limited liability company, and
PHOENIX TELECOM NC, LLC,
a North Carolina limited liability
company,
Defendants.
Submitted: August l7, 2017
Decided: December l, 2017
MEMORANDUM OPINION
Upon Consideration of
Defendants ’ Motionfor Summary Judgment.
DENIED.
Neil R. Lapinski, Esquire, GORDON FOURNARIS & MAMMARELLA, P.A.,
Wilrnington, Delaware. Attorney for Plaintiff.
Richard M. Beck, Esquire and Sean M. Brennecke, Esquire, KLEHR HARRISON
HARVEY BRANZBURG, LLP, Wilmington, Delaware. Attorneys for Defendants
Phoenix Network Solutions LLC and Phoenix Telecom NC, LLC.
BUTLER, J.
INTRODUCTION
The Court has before it a Motion for Summary Judgment filed by the
Defendants. For the reasons set forth below, Defendants’ Motion is DENIED.
FACTUAL BACKGROUND
As this controversy is somewhat convoluted, We Will begin by introducing the
parties, such as We know them at this early stage of the litigation
A. The Parties
Plaintiff Craig Brechner (“Brechner”) is the founder of Defendant Phoenix
Telecom NC, LLC, (“Telecom”). He undertook a sale of the company for Which he
received consideration that included a Subordinated Note payable by the buyers to
him. This Subordinated Note and accompanying Subordination Agreement figure
heavily into this dispute.
Defendant Phoenix Network Solutions, LLC (“Network”) is the entity that
purchased Telecom from Brechner. Counsel has characterized Network as a group
of “private equity” investors formed for the purpose of purchasing Telecom from
Brechner. Counsel Were unclear, but believe that Brechner also became a member
of NetWork as part of the purchase and sale consideration
The only other entity of note in this dispute is Scout Partners ll LLC (“Scout
Partners II”). While the papers before the Court describe this group only as “agent
for the lenders,” counsel have advised that this entity is made up of some or all of
the investors in Network.
B. The Documents
When Telecom Was sold to Network, there Were two sets of loan documents
that matter to this dispute. There Was a “Term Loan and Security Agreement”
(“Credit Agreement”) that secured the loan made by “Lenders” to NetWork and
Telecom With Scout Partners II acting as “a Lender and as Agent.” We have been
told this loan Was in the principal amount of $6 million and Was intended to provide
Working capital for the business. For Want of a better description, We can call this
the senior debt.l
The second set of documents secured a loan by Brechner to Network and
Telecom. While not terribly important, We understand this loan Was the method by
Which the parties agreed to pay Brechner at least part of the consideration for the
sale of Telecom. Thus, in this sense Brechner became a “lender” to Network and
Telecom. The papers supporting this “loan” Were l) a Subordination Agreement and
2) a Subordinated Note. These documents Were intended to set out the rights and
responsibilities of Network and Telecom to make periodic payments to Brechner in
1 While the Credit Agreement labels “THE LENDERS THAT ARE SIGNATORIES HERETO”
as the “Lenders” and Scout Partners II as “a Lender and as Agent,” Scout Partners ll is the only
signatory lender. Moreover, the Credit Agreement’s final page identifies one lender, Scout
Partners II, and lists the loan amount as $6 million.
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the principal amount of $1.8 million. Scout Partners ll was to act as “agent” for the
Brechner loan. Thus, Scout Partners ll was the lender and agent for the senior debt
of $6 million in working capital and also agent for the Brechner loan.
lt is undisputed that the Subordinated Note payable to Brechner was
subordinated to the loan obligations under the Credit Agreement and payable to
Scout Partners II as lender and agent on the senior debt.
C. The Subordinated Loan Terms
The terms of the Subordination Agreement and the Subordinated Note
payable to Brechner lie at the heart of the dispute. First among these terms is the
Subordinated Note’s boldfaced preamble setting forth that the Subordinated Note
payable to Brechner was subordinated to the senior debt. Second, the Subordination
Agreement provides that “no payments of any kind, including regularly scheduled
interest payments, shall be paid during the continuance of an Event of Default . . .
_»2
The Subordination Agreement does not define what constitutes an “Event of
Default.” Rather, that term is defined in the Subordinated Note. The Subordinated
Note defines an “Event of Default” to include, among other things, “failure of the
Borrowers to make any payment of . . . (B) interest on this [Subordinated] Note for
2 Subordination Agreement § l(c).
four consecutive fiscal quarters . . . .”3 Brechner’s claim is that the borrowers_
Network and Telecom_have not made interest payments on the Subordinated Note
for four consecutive fiscal quarters.4 Defendants do not dispute that they have not
done so.5
Section 3.4 of the Subordinated Note sets forth what happens When the
Subordinated Note goes into default for want of the periodic interest payments.
Section 3.4 states that when this happens, “so long as the Senior Indebtedness has
been Paid in Full,” Brechner may accelerate the maturity of the Subordinated Note
and demand full payment “provided, however,” that if the Senior Indebtedness has
not been Paid in Full (spoiler alert: it has not), then Brechner is prohibited from
accelerating the Subordinated Note or bringing suit for any payment whatsoever and
“provided, further,” that if there is an Event of Default under the senior loan/Credit
Agreement (spoiler alert: there is), then the provision prohibiting Brechner from
accelerating the Subordinated Note or bringing suit shall only apply if Scout Partners
II, acting as the Agent, undertakes “commercially reasonable steps to protect its
rights and the rights of the Lenders (as defined in the Credit Agreement) with respect
3 Note § 3.1.
4 Compi. 1111 io-i 1.
5 At oral argument, defense counsel raised the issue of whether Brechner called the default too
soon as four quarters had not yet elapsed. This is not Defendants’ primary argument however, as
four quarters have concededly elapsed now, and Defendants do not seek summary judgment on
this basis.
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to such Event of Default . . . .”6 The Subordinated Note is exacting in this regard:
“In determining whether the Agent’s actions are commercially reasonable in the
foregoing sentence, the Agent’s actions shall be compared to the commercially
reasonable steps an unrelated third-party lender would take with respect to such
Event of Default.”7
Defendants take the position that these latter provisions are inapplicable here.
They point to the fact that the Subordination Agreement provides that “no payments
of any kind, including regularly scheduled interest payments, shall be paid [to
Brechner] during the continuance of an Event of Default . . . .”8 Since by the terms
of the Subordination Agreement, it controls the terms of the Subordinated Note in
the event there is any disagreement in the terms, Defendants argue that the
Subordination Agreement’s provision that no payments can be made to Brechner
while the senior debt is in default effectively ends any inquiry into if the
Subordinated Note is in default and Defendants are entitled to summary judgment,
dismissing this suit.
6 Note § 3.4.
7 Id.
8 Subordination Agreement § l(c).
STANDARD OF REVIEW
The Court may grant summary judgment only where the moving party can
“show that there is no genuine issue as to any material fact and that the moving party
is entitled to judgment as a matter of law.”9 The moving party has the initial burden
of showing that no material issues of fact exist, and when that is met, the burden
shifts to the non-moving party to show that a material issue of fact does exist.10 On
a motion for summary judgment, the Court views all facts in a light most favorable
to the non-moving party.11 If a material fact is in dispute or if it seems desirable to
inquire more thoroughly into the facts in order to clarify the application of the law,
summary judgment is inappropriate.12
ANALYSIS
At the outset, we would do well to consider the meager state of the record
before us. The instant motion might be a motion to dismiss the complaint but for
the addition of a couple of affidavits vouching for the authenticity of the loan
9 Super. Ct. Civ. R. 56.
10 Moore v. Sizemore, 405 A.2d 679, 680-81 (Del. 1979).
ll See Matas v. Green, 171 A.2d 916, 918 (Del. Super. 1961).
12 Ebersole v. Lowengrub, 180 A.2d 467, 468-69 (Del. 1962).
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documents13 Depositions and other discovery have not been taken. Indeed, some
of the Court’s understanding is based upon representations by Delaware attorneys
who were not present for these negotiations and were subsequently tasked with
filling in the blanks in a record that has not been fleshed out. That alone gives the
Court pause in granting what is essentially a dismissal of the Complaint.14
In the Court’s view, the stumbling block for Defendants lies in section 3.4 of
the Subordinated Note and its rather detailed default provisions The parties remind
the Court that it must give breath to all of the provisions of the agreements: 1)
Defendants to section l(c) of the Subordination Agreement that essentially prohibits
payments to Brechner while the senior debt is in default and 2) Plaintiff to section
3.4 of the Subordinated Note that details the “commercially reasonable” steps the
Agent must take when the senior debt is in default.
Because there has been no trial and no substantial discovery, the Court is not
in a position to call itself an expert on these facts. But it seems that if it is true that
13 When a defendant moves to dismiss pursuant to Rule 12(b)(6) and submits affidavits in addition
to the pleadings, the motion is converted to_and considered by the Court as_a motion for
summary judgment Gutheim v. Viacom, Inc., 2000 WL 1211511, at *2 (Del. Super. June 30,
2000), aff'd, 765 A.2d 951 (Del. 2000).
14 See Motorola, Inc. v. Amkor Tech., Inc., 849 A.2d 931, 935 (Del. 2004) (“If material issues of
fact exist or if a court determines that it does not have sufficient facts to enable it to apply the law
to the facts before it, then summary judgment is inappropriate.”). lt is true that had Plaintiff chosen
to, he might have defended the instant Summary Judgment Motion by seeking leave to take further
discovery under Rule 56(f). And in fairness to the defense, there is not much divergence in the
factual recitations of the two parties. But the Court believes what divergence there is matters to
the outcome.
the investors in Network, the senior lenders under the Credit Agreement, and the
Agent for the Lenders_Scout Partners II-are all related somehow (a contention
that local counsel could not deny but were hesitant to confirm), then Brechner’s
attorneys would have been well served to ensure that section 3 .4 of the Subordinated
Note was included. This is so because otherwise the Borrowers_Network and
Telecom_could simply fail or refuse to make payments to the senior lender with
whom it was affiliated, thereby putting and keeping the senior debt in default and
effectively precluding Brechner from ever receiving payment under his
Subordinated Note. If that were all so, Brechner’s attorneys would certainly seek
the language to be found in section 3.4, obligating the Lenders’ Agent to exercise
commercially reasonable efforts to cure the default in the senior debt,
If the Court were to agree that on the face of the Subordination Agreement the
Defendants have no duty to make payments to Brechner because there is a default
ongoing in the senior debt, then the language in the default provision concerning the
commercially reasonable activity of the Agent when the senior debt is in default is
rendered meaningless The Court is struck by the language in the default provision
that the Agent’s efforts to cure a default in the senior debt should be “compared to
the commercially reasonable steps an unrelated third-party lender would take with
respect to such Event of Default.” This suggests that Brechner’s attorneys were
indeed concerned that Brechner would otherwise be unfairly frozen out of his right
to payment.
The Court does not here intend to favor the default language of the
Subordinated Note over the language of the Subordination Agreement, Defense
counsel made a strong argument that the requirement that the senior debt not be in
default before any payments could be made on the subordinated debt sets up a
condition precedent to payment under the subordinated debt and therefore, there can
be no default under the subordinated debt. While the Court agrees that the argument
has some appeal, it is difficult to square with the quite exacting provisions
concerning defaults and the Agent’s duties in the Subordinated Note.
Summary judgment is available to the defense only if the evidence presented,
viewed in the light most favorable to Plaintiff, the non-moving party, shows that
Defendants are entitled to judgment as a matter of law.15 There is no “right” to
summary judgment16 Rather, it should be granted only if the trial court is convinced
that there is no triable issue.17 The Court is not satisfied that there is no route to
recovery for Plaintiff and therefore cannot grant Defendants’ request for summary
15 See Mann v. Oppenheimer & Co., 517 A.2d 1056, 1060 (Del. 1986).
16 Cross v. Hair, 258 A.2d 277, 278 (Del. 1969).
17 Id
judgment.18
CONCLUSION
For the reasons set forth above, Defendants’ Motion for Summary Judgment
is DENIED.
IT IS SO ORDERED.
g%<<~<""\
Judge Charles E\Sfit-lei»/
18 If there is any reasonable hypothesis by which the non-moving party may recover, the motion
for summary judgment must be denied. Vanaman v. Milford Mem ’l Hosp., Inc., 272 A.2d 718,
720 (Del. 1970).
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