Friday Invs., LLC v. Bally Total Fitness of the Mid-Atlantic, Inc.

IN THE COURT OF APPEALS OF NORTH CAROLINA
No. COA16-950
Filed: 1 August 2017
Mecklenburg County, No. 14 CVS 8495
FRIDAY INVESTMENTS, LLC, as Successor in Interest to Tisano Realty, Inc.,
Plaintiff,
v.
BALLY TOTAL FITNESS OF THE MID-ATLANTIC, INC. f/k/a Bally Total Fitness
of the Southeast, Inc. f/k/a Holiday Health Clubs of the Southeast, Inc., as Successor
in Interest to Bally Fitness Corporation; and BALLY TOTAL FITNESS HOLDING
CORPORATION, Defendants.
Appeal by plaintiff from order entered 9 March 2016 by Judge Forrest D.
Bridges in Mecklenburg County Superior Court. Heard in the Court of Appeals 22
March 2017.
Horack, Talley, Pharr & Lowndes, P.A., by Keith B. Nichols, and Chadbourne
& Parke, LLP, by Samuel S. Kohn, pro hac vice, for plaintiff-appellant.
Burt & Cordes, PLLC, by Stacy C. Cordes, and Knox, Knox, Brotherton &
Godfrey, by Lisa Godfrey, for defendant-appellees.
TYSON, Judge.
Friday Investments, LLC, (“Plaintiff”) appeals from the trial court’s order
granting summary judgment in favor of Defendant, Bally Total Fitness Holding
Corporation (“Bally Holding”). Genuine issues of material fact exist regarding
whether the Guaranty was “required to be maintained” or was discharged in the
FRIDAY INVS., LLC V. BALLY TOTAL FITNESS OF THE MID-ATLANTIC, INC.
Opinion of the Court
2008-2009 Bankruptcy. We reverse the trial court’s order granting summary
judgment in favor of Bally Holding and remand.
I. Factual Background
This case arises from a lease of commercial premises between Plaintiff, as
landlord and successor-in-interest to the original landlord, and Bally of the Mid-
Atlantic, as tenant and successor-in-interest to the original tenant. Bally Holding
had guaranteed the obligations of the original tenant and of the successors-in-interest
thereto. When Bally of the Mid-Atlantic defaulted on its monthly rent obligations,
Plaintiff sued to recover damages jointly and severally from Bally of the Mid-Atlantic
and Bally Holding.
A. Lease and Guaranty
On or about 14 February 2000, Tower Place Joint Venture, as landlord, and
Bally Total Fitness Corporation, as tenant, entered into a written Lease Agreement
(the “Lease”) for commercial premises located within the Tower Place Festival
Shopping Center in Charlotte. As an inducement to Tower Place Joint Venture to
enter into the Lease with Bally Total Fitness Corporation, Bally Holding guaranteed
the obligations of Bally Total Fitness Corporation. The Guaranty Agreement (the
“Guaranty”) was executed on or about 10 February 2000. In accordance with the
recitals contained in the Lease, the Guaranty is attached to the Lease as “Exhibit C.”
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Bally Total Fitness Corporation later assigned its interest in the Lease to its
subsidiary, Holiday Health Clubs of the Southeast, Inc.
B. 2007 Bankruptcy Proceedings
On 31 July 2007, Bally Holding and its subsidiaries (collectively, the “Bally
Companies”) filed a petition for Chapter 11 bankruptcy in U.S. Bankruptcy Court
(the “2007 Bankruptcy”).
In anticipation of the initial bankruptcy, Tisano Realty, Inc., as successor-in-
interest to the original landlord Tower Place Joint Venture, and Bally Total Fitness
of the Southeast, Inc. (“Bally of the Southeast”) f/k/a Holiday Health Clubs of the
Southeast, Inc., as the tenant and successor-in-interest to Bally Total Fitness
Corporation, executed an amendment to the Lease (the “First Amendment”).
The First Amendment provides for reduced base rent schedules, which would
apply in the event of tenant’s filing a Chapter 11 bankruptcy petition. The First
Amendment also stipulates: “Except as amended hereby, the Lease shall remain in
full force and effect; and, as amended hereby, the Lease is affirmed, confirmed and
ratified.” On 17 September 2007, the bankruptcy court confirmed the Bally
Companies’ Plan of Reorganization.
C. 2008-2009 Bankruptcy Proceedings
On 3 December 2008, the Bally Companies, including Bally of the Southeast,
filed a second petition for Chapter 11 bankruptcy in U.S. Bankruptcy Court for the
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Southern District of New York (the “2008-2009 Bankruptcy”). The cases were jointly
administered pursuant to Rule 1015(b) of the Federal Rules of Bankruptcy Procedure.
On 25 June 2009, after the petition had been filed, Tisano Realty, Inc. and
Bally of the Southeast executed another amendment to the Lease (the “Second
Amendment”). The Second Amendment contains site plan modifications, signage
revisions, and monthly base rent adjustments. Except as modified in the Second
Amendment, the Lease and the terms thereof not expressly amended were to continue
“in full force and effect.”
During the 2008-2009 Bankruptcy proceedings, the Bally Companies jointly
moved to assume certain unexpired real property leases pursuant to 11 U.S.C. § 365.
By order entered 29 June 2009, the bankruptcy court granted the motion and
authorized the Bally Companies to assume the unexpired leases identified in the
Assumed Lease Schedule attached to the order (the “Assumption Order”). The Lease
before us was included among those listed in the Assumed Lease Schedule.
The Bally Companies also submitted a Joint Plan of Reorganization of the
Debtors Under Chapter 11 of the Bankruptcy Code. The Joint Plan of Reorganization
was amended during the proceedings (as amended, the “Plan”). Seeking confirmation
of the Plan, William G. Fanelli, the acting chief financial officer of the Bally
Companies, submitted to the bankruptcy court a declaration in support of
confirmation (the “Fanelli Declaration”). The Fanelli Declaration provides an outline
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of the proposed reorganization and the feasibility thereof. It also offers reasons to
consolidate the Bally Companies for distribution purposes, including the following:
11. Article IV of the Plan provides that the Plan shall
“serve as, and shall be deemed to be, a motion for entry of
an order consolidating the [Debtors’] Estates” solely for
distribution purposes. The Plan explicitly limits the scope
and purpose of such consolidation to implementation of the
Plan, providing that the consolidation sought shall not
affect: (i) the legal and corporate structure of the
Reorganized Debtors; (ii) guarantees that are required to
be maintained post-Effective Date[.] (alteration and
emphasis original).
12. The Debtors propose consolidation of the Consolidated
Debtors solely to facilitate distributions under the Plan.
The Debtors do not seek to improperly enhance or impair
the recoveries of any creditors by way of the consolidation.
Indeed, the Debtors are not aware of any creditor actually
affected by the consolidation contemplated under the Plan.
The bankruptcy court confirmed the Plan by order entered 19 August 2009 (the
“Confirmation Order”). At issue in this case are two sections of the Confirmation
Order and the Plan (together, the “Consolidation Provisions”): Paragraph 3 of the
Confirmation Order, which reflects Article IV of the Plan, and Paragraph 15 of the
Confirmation Order, which reflects Article X of the Plan.
Paragraph 3 of the Confirmation Order approves the consolidation
contemplated in Article IV of the Plan. Paragraph 3 provides in pertinent part:
3. Consolidation of the Debtors.
(a) As no objections to such consolidation have been filed or
served by any party, pursuant to Article IV of the Plan the
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consolidation of the consolidated Debtors solely for the
purpose of implementing the Plan, including for purposes
of voting, confirmation and distributions to be made under
the Plan is hereby approved. Solely for purposes of
implementing the Plan, including without limitation the
making of Distributions thereunder, and for no other
purposes . . . and (vi) all guarantees of the Debtors of the
obligations of any other Debtors shall be deemed
eliminated so that any Claim against any Debtor and any
guarantee thereof executed by any other Debtor and any
joint or several liability of any of the Debtors shall be
deemed to be one obligation of the consolidated Debtors.
(b) Such consolidation (other than for the purpose of
implementing the Plan) shall not affect . . . (ii) guarantees
that are required to be maintained post-Effective Date (a)
in connection with executory contracts or unexpired leases
that were entered into during the Chapter 11 Cases or that
have been, or will hereunder be, assumed[.]
Article IV of the Plan provides in pertinent part:
Solely in connection with Distributions to be made to the
holders of Allowed Claims, the Plan is predicated upon, and
it is a condition precedent to confirmation of the Plan, that
the Court provide in the Confirmation Order for the
consolidation of the Debtors’ Estates into a single Estate
for purposes of this Plan and the Distributions hereunder.
...
Pursuant to the Confirmation Order . . . (ii) the obligations
of each Debtor will be deemed to be the obligation of the
consolidated Debtors solely for purposes of this Plan and
Distributions hereunder . . . , and (vi) all guarantees of the
Debtors of the obligations of any other Debtors shall be
deemed eliminated so that any Claim against any Debtor
and any guarantee thereof executed by any other Debtor
and any joint or several liability of any of the Debtors shall
be deemed to be one obligation of the consolidated Debtors.
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Notwithstanding the foregoing, such consolidation shall
not affect . . . (ii) guarantees that are required to be
maintained post-Effective Date (a) in connection with
executory contracts or unexpired leases that were entered
into during the Chapter 11 Cases or that have been, or will
hereunder be, assumed[.]
Paragraph 15 of the Confirmation Order approves the provisions contained in
Article X of the Plan, which addresses the assumption and rejection of executory
contracts and unexpired leases. Paragraph 15 provides in pertinent part:
15. Executory Contracts and Unexpired Leases.
(a) The executory contract and unexpired lease provisions
of Article X of the Plan are specifically approved in all
respects, are incorporated herein in their entirety and are
so ordered. The Debtors are authorized to assume, assign
and/or reject executory contracts or unexpired leases in
accordance with Article X of the Plan. In the event of an
inconsistency between the Plan and any executory contract
or unexpired lease assumed under the Plan, the provisions
of the Plan shall govern.
(b) Pursuant to Article X of the Plan, the Debtors shall be
deemed to assume each executory contract and unexpired
lease that (i) was not previously assumed, assumed and
assigned or rejected by an order of the Court, (ii) was not
rejected pursuant to Exhibit A of the Plan, (iii) did not
terminate or expire pursuant to its own terms[.]
Article X of the Plan provides in pertinent part:
To the extent not (i) assumed in the Chapter 11 Cases prior
to the Confirmation Date, (ii) rejected in the Chapter 11
Cases prior to the Confirmation Date, or (iii) specifically
rejected pursuant to this Plan, each executory contract and
unexpired lease that exists between Debtor and any Person
is specifically assumed by the Debtor that is a party to such
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executory contract or unexpired lease as of, and subject to
the occurrence of, the Effective Date pursuant to the Plan.
As previously noted, the Bally Companies specifically assumed the Lease before us
pursuant to section 365 of the Bankruptcy Code.
D. The Estoppel Certificate
On 29 September 2009, Bally of the Southeast merged into Bally Total Fitness
of the Mid-Atlantic, Inc. (“Bally of the Mid-Atlantic”), as tenant under the Lease. In
March 2011, Plaintiff purchased the property from Tisano Realty, Inc., becoming the
successor-in-interest to the original and subsequent landlords with respect to the
Lease.
Before the purchase, Ronald Siegel, an officer of Bally of the Mid-Atlantic,
executed an estoppel certificate at Plaintiff’s request. Siegel certified the Lease was
“in full force and effect” and “guaranteed by Bally Total Fitness Holding Corporation,
a Delaware corporation, Guaranty dated February 14, 2000.” By its terms, Siegel
also acknowledged that the estoppel certificate was made “as an inducement to the
Buyer to accept assignment of the Lease from the Landlord and with full knowledge
that the Buyer is relying upon the truth thereof.”
Siegel returned the signed estoppel certificate to Plaintiff with marked
revisions and deletions to several provisions in the document. The last page of the
certificate contained the following annotation:
This Estoppel Letter is being delivered to you on the
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express condition that the undersigned shall have no
liability for any matters set forth herein and that the only
use or purpose of this Estoppel Letter will be to prevent the
undersigned from making any statement or claim contrary
to any factual matters set forth herein, except to the extent
any such contrary matter is otherwise known to you prior to
the time of delivery of this Estoppel Letter. . . . (emphasis
supplied).
While Siegel was also an officer of Bally Holding, no changes were made to the
Guaranty provision in the certificate.
E. Superior Court Proceedings
On 9 May 2014, Plaintiff filed a complaint and alleged Bally of the Mid-Atlantic
had breached the Lease, and Bally Holding had breached the Guaranty, by failing to
timely pay monthly rent installments and other past due charges. Plaintiff restated
its breach of contract claim against Defendants in its first amended complaint and
alleged alternative claims for common law fraud, fraud in the inducement, negligent
misrepresentation, and unfair and deceptive trade practices.
Plaintiff moved for summary judgment against Defendants on its breach of
contract claim. Bally of the Mid-Atlantic opposed Plaintiff’s motion and argued its
affirmative defenses raised genuine issues of material fact for trial. Bally Holding
also opposed Plaintiff’s motion and moved for summary judgment on the grounds that
its liability on the Guaranty, if any, was discharged in bankruptcy.
By order entered 29 April 2015, the trial court granted partial summary
judgment in favor of Plaintiff, concluding that Bally of the Mid-Atlantic had breached
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the terms of the Lease. The court reserved for trial the issue of what damages, if any,
Plaintiff was entitled to recover from Bally of the Mid-Atlantic. The court allowed
the parties to submit additional briefs prior to ruling on whether Bally Holding was
liable on the Guaranty.
By order entered 9 March 2016, the court granted summary judgment in favor
of Bally Holding on Plaintiff’s breach of contract claim. The court characterized the
Lease and Guaranty as separate agreements, and concluded the Lease had been
assumed in the 2008-2009 Bankruptcy, but the Guaranty had been discharged by the
terms of the Plan, as follows:
2. Section 365 of the Bankruptcy Code allows a Debtor to
assume or reject executory contracts and leases within
certain time constraints and under certain conditions. As
noted by the Plaintiff, Bankruptcy Courts have ruled that
assumption of a lease or contract generally requires
assumption of the contract in its entirety, with both the
burdens and the benefits. . . .
3. On the other hand, a guaranty is not usually viewed as
an executory contract that can be assumed or rejected by a
Bankruptcy debtor. . . .
....
5. Ultimately, in determining dischargeability of a debt,
the court must first and foremost look to the provisions of
the Debtor’s confirmed Plan. In this instance, the Plan
specifically provided that all Guaranties of the Debtor of
the obligation of any other Debtor shall be deemed
eliminated except to the extent that they are required to be
maintained. There was no indication that this Guaranty
was “required to be maintained.”
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6. Pursuant to Section 1141 of the Bankruptcy Code, the
confirmation of a Chapter 11 Plan discharges the Debtor
from any debt arising before the date of confirmation
except as otherwise provided in the Plan or in the order
confirming the Plan.
7. Pursuant to Section 524 of the Bankruptcy Code, a
discharge operates as an injunction against any action to
collect any discharged debt from the Debtor.
8. In this case, the confirmation of the Debtor’s Plan and
closing of the case operated to create such discharge and
injunction unless there was some contrary provision in the
Plan.
....
10. In light of the foregoing principles of law, this court
concludes that, pursuant to provisions of the confirmed
2009 Chapter 11 Plan, the Guaranty of this lease by Bally
Holding[] was discharged by the Confirmation of the 2009
Chapter 11 Plan and the closing of the Bankruptcy case.
11. Holding is not equitably estopped under North Carolina
law from asserting that the indebtedness under the
Guaranty was discharged by the confirmation of the 2009
Chapter 11 Plan.
The trial court certified the interlocutory order for immediate appeal pursuant to
Rule 54(b) of the North Carolina Rules of Civil Procedure. Plaintiff timely appealed.
II. Jurisdiction
This Court has jurisdiction over Plaintiff’s appeal from the order granting
summary judgment in favor of Bally Holding. When an action involves multiple
parties or presents more than one claim for relief, the trial court “may enter a final
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judgment as to one or more but fewer than all of the claims or parties only if there is
no just reason for delay and it is so determined in the judgment.” N.C. Gen. Stat. §
1A-1, Rule 54(b) (2015); see DKH Corp. v. Rankin-Patterson Oil Co., 348 N.C. 583,
585, 500 S.E.2d 666, 667-68 (1998).
Such judgment is subject to immediate appellate review even though it may
not “determine the entire controversy.” Veazey v. City of Durham, 231 N.C. 357, 362,
57 S.E.2d 377, 381 (1950); see N.C. Gen. Stat. § 1A-1, Rule 54(b). If the trial court
certifies an order for immediate appeal pursuant to Rule 54(b), “appellate review is
mandatory.” Sharpe v. Worland, 351 N.C. 159, 162, 522 S.E.2d 577, 579 (1999)
(citation omitted). The court “may not, by certification, render its decree immediately
appealable if it is not a final judgment.” Id. (brackets, citations, and internal
quotation marks omitted).
The trial court granted summary judgment for Bally Holding as to all claims
raised against it in Plaintiff’s original complaint and all claims in the first cause of
action in Plaintiff’s first amended complaint—i.e., Plaintiff’s breach of contract claim.
The court made no ruling on Plaintiff’s alternative causes of action for common law
fraud, fraud in the inducement, negligent misrepresentation, and unfair and
deceptive trade practices. The order is final regarding one, but fewer than all claims
raised by Plaintiff against Bally Holding. The trial court properly certified the order
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for immediate appellate review under Rule 54(b). We address Plaintiff’s appeal on
the merits.
III. Issues
Plaintiff argues the trial court erred in granting summary judgment for Bally
Holding because (1) the Lease and Guaranty are a single agreement, which was
assumed in the 2008-2009 Bankruptcy; (2) even if the Lease and Guaranty are
separate agreements, the Guaranty was not and could not have been discharged by
the terms of the Consolidation Provisions; and (3) equitable estoppel bars Bally
Holding’s assertion that the Guaranty was discharged in the 2008-2009 Bankruptcy.
In the alternative, Plaintiff argues genuine issues of material fact exist, which
made entry of summary judgment for Bally Holding inappropriate.
IV. Standard of Review
Summary judgment is appropriate “if the pleadings, depositions, answers to
interrogatories, and admissions on file, together with the affidavits, if any, show that
there is no genuine issue as to any material fact and that any party is entitled to a
judgment as a matter of law.” N.C. Gen. Stat. § 1A-1, Rule 56(c) (2015).
“[A]n issue is material if the facts alleged would constitute a legal defense, or
would affect the result of the action, or if its resolution would prevent the party
against whom it is resolved from prevailing in the action.” Merritt, Flebotte, Wilson,
Webb & Caruso, PLLC v. Hemmings, 196 N.C. App. 600, 604, 676 S.E.2d 79, 83 (2009)
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(citations and internal quotation marks omitted). A trial court’s order granting
summary judgment is reviewed de novo. In re Will of Jones, 362 N.C. 569, 573, 669
S.E.2d 572, 576 (2008).
V. Lease and Guaranty are Separate Contracts
North Carolina contract law controls the interpretation of the Lease and
Guaranty, as required by the choice of law provision contained therein.
This Court has held that a guaranty is:
“a contract, obligation or liability . . . whereby the promisor,
or guarantor, undertakes to answer for the payment of
some debt, or the performance of some duty, in case of the
failure of another person who is himself . . . liable to such
payment or performance.” Trust Co. v. Clifton, 203 N.C.
483, 485, 166 S.E. 334, 335 (1932). The guarantor “makes
his own separate contract, . . . and is not bound to do what
his principal has contracted to do, except in so far as he has
bound himself by his separate contract[.]” Hutchins v.
Planters National Bank of Richmond, 130 N.C. 285, 286,
41 S.E. 487, 487 (1902).
Tripps Rests. of N.C., Inc. v. Showtime Enters., Inc., 164 N.C. App. 389, 391, 595
S.E.2d 765, 767 (2004).
The strict independence of the two separate contracts is “not affected by the
fact that both contracts are written on the same paper or instrument or are
contemporaneously executed.” 38 Am. Jur. 2d Guaranty § 4 (1999); see Tripps Rests.
of N.C., 164 NC. App. at 391, 595 S.E.2d at 767 (“[B]oth contracts (between creditor
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and primary obligor and between creditor and guaranty) may be contained in the
same instrument.” (citing 38 Am. Jur. 2d Guaranty § 4).
Although the Guaranty in this case was attached to the Lease as an exhibit, it
remains a wholly independent and separate contract under North Carolina law. See
id. Plaintiff’s arguments to the contrary are overruled.
VI. Summary Judgment Analysis
The trial court found the Consolidation Provisions provided “all Guarantees of
the Debtor of the obligation of any other Debtor shall be deemed eliminated except to
the extent that they are required to be maintained” and that “[t]here was no
indication that this Guaranty was ‘required to be maintained.’” Pursuant to the
Consolidation Provisions, the unexpired Lease at issue in this case was expressly
assumed by the debtor-tenant and approved by the bankruptcy court during the
Chapter 11 re-organization. However, the language of the Consolidation Provisions
and the Second Amendment raises genuine issues of material fact regarding whether
the Guaranty was “required to be maintained” or was discharged during the 2008-
2009 Bankruptcy.
A. The Consolidation Provisions
Under well-established bankruptcy law, a Chapter 11 re-organization plan is
basically a court-approved contract between the debtor and its creditors. In re
WorldCom, Inc., 352 B.R. 369, 377 (Bankr. S.D.N.Y. 2006). As a binding contract, a
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confirmed plan “must be interpreted in accordance with general contract law.” In re
Bennett Funding Grp., 220 B.R. 743, 758 (Bankr. N.D.N.Y. 1997); In re WorldCom,
352 B.R. at 377 (“The Court must interpret the provisions of [a Chapter 11 Plan] . . .
a task akin to interpreting a binding contract.”).
The Consolidation Provisions are construed under New York contract law,
which is similar to North Carolina law on this issue.
Under New York law, when parties set down their
agreement in a clear, complete document, their writing
should as a rule be enforced according to its terms. When
the terms of a written contract are ambiguous, however, a
court may turn to evidence outside the four corners of the
document to ascertain the intent of the parties. When the
language of a contract is ambiguous and there exists
relevant extrinsic evidence of the parties’ actual intent,
summary judgment is precluded. Whether or not a writing
is ambiguous is a question of law to be resolved by the
courts. If a contract is unambiguous on its face, its proper
construction is a question of law.
In re Indesco Int’l, Inc., 451 B.R. 274, 282 (Bankr. S.D.N.Y. 2011) (emphasis supplied)
(brackets, internal quotation marks, and footnotes omitted).
“Substantive consolidation treats separate legal entities as if they were merged
into a single survivor left with all the cumulative assets and liabilities (save for inter-
entity liabilities, which are erased). The result is that claims of creditors against
separate debtors morph to claims against the consolidated survivor.” In re Genesis
Health Ventures, Inc., 402 F.3d 416, 423 (3d Cir. 2005). Whereas, “[d]eemed
consolidation has been characterized as ‘a pretend consolidation[.]’” 3 Howard J.
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Steinberg, Bankruptcy Litigation § 15:52 (2d ed. 2007 & Supp. 2016) (citing In re
Owens Corning, 419 F.3d 195, 216 (3d Cir. 2005)).
In a plan of reorganization, multiple debtors or entities may be “deemed
consolidated” solely “for purposes of valuing and satisfying creditor claims, voting for
or against the [p]lan, and making distributions for allowed claims[.]” In re Owens
Corning, 419 F.3d at 202. A deemed consolidation streamlines the distribution
process, but does not affect the legal structure of the debtors or the rights of
claimholders. Steinberg, supra, § 15:52; see In re Genesis Health Ventures, 402 F.3d
at 423-24. Notably, a deemed consolidation may only be used as a shield, and not as
a sword. In re Owens Corning, 419 F.3d at 216.
Here, Paragraph 3 of the Confirmation Order provides:
(a) As no objections to such consolidation have been filed or
served by any party, pursuant to Article IV of the Plan the
consolidation of the consolidated Debtors solely for the
purpose of implementing the Plan, including for purposes
of voting, confirmation and distributions to be made under
the Plan is hereby approved. Solely for purposes of
implementing the Plan, including without limitation the
making of Distributions thereunder, and for no other
purposes . . . and (vi) all guarantees of the Debtors of the
obligations of any other Debtors shall be deemed eliminated
so that any Claim against any Debtor and any guarantee
thereof executed by any other Debtor and any joint or several
liability of any of the Debtors shall be deemed to be one
obligation of the consolidated Debtors. (emphasis supplied).
However, the Confirmation Order further provides:
(b) Such consolidation (other than for the purpose of
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implementing the Plan) shall not affect . . . (ii) guarantees
that are required to be maintained post-Effective Date (a)
in connection with executory contracts or unexpired leases
that were entered into during the Chapter 11 Cases or that
have been, or will hereunder be, assumed[.]
William Fanelli, the acting chief financial officer of the debtors and debtors in
possession, submitted a declaration in support of the proposed plan. The declaration
stated:
11. . . . The Plan explicitly limits the scope and purpose of
such consolidation to implementation of the Plan,
providing that the consolidation sought shall not affect: (i)
the legal and corporate structure of the Reorganized
Debtors; (ii) guarantees that are required to be maintained
post-Effective Date[.] (emphasis supplied).
12. The Debtors propose consolidation of the Consolidated
Debtors solely to facilitate distributions under the Plan.
The Debtors do not seek to improperly enhance or impair
the recoveries of any creditors by way of the consolidation.
Indeed, the Debtors are not aware of any creditor actually
affected by the consolidation contemplated under the Plan.
Since the debtors were consolidated “solely for the purposes of implementing
the Plan,” it appears the Consolidation Provisions contemplate a “deemed
consolidation.” Furthermore, the language of the Consolidation Provisions and the
Fanelli Declaration demonstrate not all guarantees were discharged during the 2008-
2009 Bankruptcy.
Under the language of the Consolidation Provisions, a genuine issue of
material fact exists regarding whether the Guaranty was discharged or whether it
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was “required to be maintained.” See In re Indesco Int’l, 451 B.R. at 282 (“[W]hen the
language of a contract is ambiguous and there exists relevant extrinsic evidence of
the parties’ actual intent, summary judgment is precluded.”).
B. Second Amendment
Contrary to the trial court’s holding, the Second Amendment to the Lease
raises genuine issues of material fact regarding whether the Guaranty was “required
to be maintained.”
Defendants argue the Second Amendment demonstrates the Guaranty was not
required to be maintained subsequent to the effective date of the Confirmation Plan.
Defendants assert the Second Amendment was negotiated between Tisano and Bally
of the Southeast, and did not include joinder of Bally Holding as a guarantor. Plaintiff
argues under the language of the Guaranty, the Second Amendment did not relieve
the obligations of Bally Holding as guarantor to the Lease.
The original Guaranty provided:
FOR VALUE RECEIVED, and in consideration for, and as
an inducement to Tower Place Joint Venture, as Landlord,
to enter into a Lease dated as of February 14, 2000 (the
“Lease”), for certain premises located within the property
commonly known as Tower Place Festival Shopping Center
. . . , with Bally Total Fitness Corporation, a Delaware
corporation, as Tenant, the undersigned guarantees the full
performance and observance of all the covenants, conditions
and agreements contained in the Lease to be performed and
observed by Tenant, Tenant’s successors and assigns . . . .
The undersigned further covenants and agrees that this
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Opinion of the Court
Guaranty shall remain and continue in full force and effect
as to any renewal, modification, or extension of said Lease,
provided that notice thereof is duly delivered to the
Guarantor as provided in the Lease. The undersigned
further agrees that its liability under this Guaranty shall
be primary, and that if any right or action shall accrue to
Landlord under the Lease, Landlord may, at Landlord’s
option, proceed against the undersigned without having
commenced an action against or having obtained any
judgment against Tenant. . . .
....
No subletting, assignment, or other transfer of the Lease,
or any interest therein, other than as specifically provided
herein or in the Lease, shall operate to extend or diminish
the liability of the Guarantor under this Guaranty.
Whatever reference is made to the liability of Tenant
within the Lease, such reference shall be deemed likewise
to refer to the Guarantor. It is further agreed that all of the
terms and provisions hereof shall inure to the benefit of the
successors and assigns of Landlord, and shall be binding
upon the successors and assigns of the undersigned.
(emphasis supplied).
Based upon this language, renewals, modifications, or extensions to the Lease
would not affect or release the responsibilities of the guarantor, unless the guarantor
did not receive proper notice. The Second Amendment further provides that any
terms of the Lease not expressly modified or amended remained unaltered and in full
force and effect. At minimum, this language demonstrates a genuine issue of
material fact exists regarding whether the Guaranty survived the Second
Amendment and, ultimately, whether the Guaranty was “required to be maintained”
or was discharged during the 2008-2009 Bankruptcy.
- 20 -
FRIDAY INVS., LLC V. BALLY TOTAL FITNESS OF THE MID-ATLANTIC, INC.
Opinion of the Court
VII. Conclusion
The Lease and Guaranty constitute two separate and distinct contracts under
North Carolina law. See Tripps Rests. of N.C., 164 NC. App. at 391, 595 S.E.2d at
767. Based upon our standard of review, summary judgment was inappropriate as
genuine issues of material fact exist regarding whether the Guaranty was “required
to be maintained” or was discharged during the 2008-2009 Bankruptcy.
The trial court erred by granting summary judgment for Bally Holding. We do
not address and express no opinion on damages, including attorney fees, or on
Plaintiff’s other claims against Defendants.
The trial court’s order granting summary judgment in favor of Bally Holding
is reversed and this cause is remanded for further proceedings. It is so ordered.
REVERSED AND REMANDED.
Judge DIETZ concurs.
Judge ELMORE dissents with separate opinion.
- 21 -
No. COA16-950 – Friday Invs., LLC v. Bally Total Fitness of the Mid-Atlantic, Inc.
ELMORE, Judge, dissenting.
It is a fundamental principle of bankruptcy law that a debtor-in-possession
who assumes an executory contract “assumes the contract cum onere,” NLRB v.
Bildisco & Bildisco, 465 U.S. 513, 531–32, 104 S. Ct. 1188, 1199, 79 L. Ed. 2d 482,
499 (1984) (citation omitted), in its entirety “without any diminution in its obligations
or impairment of the rights of the lessor in the present or the future,” In re Texaco
Inc., 254 B.R. 536, 550 (Bankr. S.D.N.Y. 2000) (footnote omitted). Because the
language of the Lease and Guaranty reflects a clear intention of the parties to treat
the instruments as component parts of a single executory contract, which had to be
assumed in its entirety during the 2008–2009 Bankruptcy, I respectfully dissent.
As the majority properly notes, North Carolina contract law controls the
interpretation of the Lease.1 Our rules of construction require “the court to examine
the language of the contract itself for indications of the parties’ intent at the moment
of execution.” State v. Philip Morris USA Inc. (Philip Morris I), 359 N.C. 763, 773,
618 S.E.2d 219, 225 (2005) (citation omitted). The “intent” of the parties “is derived
not from a particular contractual term but from the contract as a whole.” Id. (citation
omitted). The contract must be considered in its entirety without placing undue
emphasis on “what the separate parts mean.” Jones v. Casstevens, 222 N.C. 411, 413–
14, 23 S.E.2d 303, 305 (1942); see also Peirson v. Am. Hardware Mut. Ins. Co., 249
1 The choice-of-law provision in the Lease provides: “This Lease shall be governed by, and construed
in accordance with, the laws of the State in which the Premises are located.”
FRIDAY INVS., LLC V. BALLY TOTAL FITNESS OF THE MID-ATLANTIC, INC.
ELMORE, J., dissenting
N.C. 580, 583, 107 S.E.2d 137, 139 (1959) (“The object of interpretation should not be
to find discord in differing clauses, but to harmonize all clauses if possible.” (citations
omitted)).
If the language of the contract is “plain and unambiguous, there is no room for
construction. The contract is to be interpreted as written,” Jones, 222 N.C. at 413, 23
S.E.2d at 305 (citations omitted), and “enforce[d] . . . as the parties have made it,”
Wachovia Bank & Trust Co. v. Westchester Fire Ins. Co., 276 N.C. 348, 354, 172 S.E.2d
518, 522 (1970) (citations omitted). Ambiguity exists “only when, ‘in the opinion of
the court, the language of the [contract] is fairly and reasonably susceptible to either
of the constructions for which the parties contend.’ ” State v. Philip Morris USA Inc.
(Philip Morris II), 363 N.C. 623, 641, 685 S.E.2d 85, 96 (2009) (quoting Wachovia
Bank & Trust Co., 276 N.C. at 354, 172 S.E.2d at 522); see also Walton v. City of
Raleigh, 342 N.C. 879, 881–82, 467 S.E.2d 410, 412 (1996) (“Parties can differ as to
the interpretation of language without its being ambiguous . . . .”).
To determine the agreement undertaken, “[a]ll contemporaneously executed
written instruments between the parties, relating to the subject matter of the
contract, are to be construed together.” Yates v. Brown, 275 N.C. 634, 640, 170 S.E.2d
477, 482 (1969) (citations omitted); see also Wiles v. Mullinax, 275 N.C. 473, 480, 168
S.E.2d 366, 371 (1969) (“Two sheets, attached together as parts of a single
communication, must of course, be construed as one document.” (citations omitted));
2
FRIDAY INVS., LLC V. BALLY TOTAL FITNESS OF THE MID-ATLANTIC, INC.
ELMORE, J., dissenting
Carolina Place Joint Venture v. Flamers Charburgers, Inc., 145 N.C. App. 696, 699,
551 S.E.2d 569, 571 (2001) (concluding that franchise agreement and guarantee,
which was signed as inducement, “were merged into one document, the [f]ranchise
[a]greement”). Where a document incorporates another by reference, the latter is
construed as part of the former “as if it were set out at length therein.” Booker v.
Everhart, 294 N.C. 146, 152, 240 S.E.2d 360, 363 (1978) (citation omitted). In other
words, if “several instruments” are “executed contemporaneously” and “pertain to the
same transaction,” they “are to be considered as component parts of the
understanding between the parties” such that “the whole contract stands or falls
together.” Pure Oil Co. of the Carolinas v. Baars, 224 N.C. 612, 615, 31 S.E.2d 854,
856 (1944) (citations omitted).
If the contract is clear and unambiguous, there is no genuine issue of material
fact; rather, construction is a matter of law for the court. Carolina Place Joint
Venture, 145 N.C. App. at 699, 551 S.E.2d at 571 (citation omitted); see also Asheville
Mall, Inc. v. F.W. Woolworth Co., 76 N.C. App. 130, 132, 331 S.E.2d 772, 773–74
(1985) (“When the language of the contract is clear and unambiguous, . . . the court
cannot look beyond the terms of the contract to determine the intentions of the
parties.” (citations omitted)). If the contract is ambiguous, however, its
interpretation “is a matter for the jury.” Dockery v. Quality Plastic Custom Molding,
Inc., 144 N.C. App. 419, 422, 547 S.E.2d 850, 852 (2001); see also Whirlpool Corp. v.
3
FRIDAY INVS., LLC V. BALLY TOTAL FITNESS OF THE MID-ATLANTIC, INC.
ELMORE, J., dissenting
Dailey Constr., Inc., 110 N.C. App. 468, 471, 429 S.E.2d 748, 751 (1993) (“[I]f the
terms of the contract are ambiguous then resort to extrinsic evidence is necessary
and the question is one for the jury.” (citation omitted)).
Applying the foregoing principles, I believe the parties expressed a clear intent
to treat the Lease and Guaranty as a single contract. Bally Holding executed the
Guaranty contemporaneously with, if not prior to, the Lease as an “inducement” to
the lessor. The Guaranty, attached as Exhibit C to the Lease, is explicitly referenced
in the recitals: “WHEREAS, the performance of the obligations of Tenant under this
Lease is to be guaranteed by BALLY TOTAL FITNESS HOLDING CORPORATION
. . . pursuant to a Guaranty in the form of Exhibit C attached hereto.” The Guaranty,
likewise, references the Lease and the liability of Bally Holding thereunder:
“Whatever reference is made to the liability of Tenant with the Lease, such reference
shall be deemed likewise to refer to the Guarantor.” In addition to the cross-
references contained in the documents, the Lease expressly incorporates the
Guaranty. Article 1.1 provides: “[T]he recitals, as well as the exhibits attached to this
Lease, are hereby incorporated into this Lease in their entirety.”
Because the record plainly reveals that the Lease and Guaranty constitute a
single contract, ratified by the First and Second Amendments to Lease, the Guaranty
had to be assumed by the terms of the Assumption Order in the 2008–2009
Bankruptcy. Bally Holding could not sever the Lease, electing to avoid its obligations
4
FRIDAY INVS., LLC V. BALLY TOTAL FITNESS OF THE MID-ATLANTIC, INC.
ELMORE, J., dissenting
on the Guaranty while leaving the more favorable provisions intact. Such a
construction runs counter to the expressed intent of the parties and impairs the rights
of plaintiff to secure performance of the Lease obligations from Bally Holding. Our
treatment of guaranty agreements should not be so rigid to preclude parties from
drafting toward more suitable arrangements.
Contrary to the trial court’s conclusion, the language assented to by the parties
provides a clear indication that the Guaranty was “required to be maintained” with
the assumption of the Lease. Bally Holding remains liable on the Guaranty, which
was a component part of the Lease assumed in the 2008–2009 Bankruptcy. I would
reverse the trial court’s order and remand for entry of summary judgment in favor of
plaintiff on its breach of contract claim against Bally Holding raised in the original
complaint and in the first cause of action of the first amended complaint.
5