Multimedia 2000, Inc v. Attard

• Court: Court of Appeals for the Sixth Circuit
• Decided: July 1, 2004
• Docket: 03-5033
• Status: Published

Opinion

RECOMMENDED FOR FULL-TEXT PUBLICATION Pursuant to Sixth Circuit Rule 206 2 Multimedia 2000 et al. v. Attard et al. No. 03-5033 ELECTRONIC CITATION: 2004 FED App. 0206P (6th Cir.) File Name: 04a0206p.06 _________________ COUNSEL UNITED STATES COURT OF APPEALS ARGUED: Christopher E. Thorsen, BOULT, CUMMINGS, FOR THE SIXTH CIRCUIT CONNERS & BERRY, Nashville, Tennessee, for Appellant. _________________ Robert L. Sullivan, LOEB & LOEB, Nashville, Tennessee, for Appellee. ON BRIEF: Christopher E. Thorsen, Thor Y. MULTIMEDIA 2000, INC., X Urness, BOULT, CUMMINGS, CONNERS & BERRY, Plaintiff, - Nashville, Tennessee, for Appellant. Robert L. Sullivan, - LOEB & LOEB, Nashville, Tennessee, for Appellee. - No. 03-5033 FINOVA MEZZANINE CAPITAL, - GILMAN, J., delivered the opinion of the court in which INC., > GUY, J. (p. 11), concurred in the decision to reverse the grant , of summary judgment to the defendants, but for the reasons Plaintiff-Appellant, - set forth in his separate concurrence/dissent. COOK, J. - (p. 12), filed a separate dissenting opinion. v. - - _________________ TAMARA L. ATTARD , PAUL G. - - OPINION ATTARD , and MULTICOM - _________________ PUBLISHING , INC., - Defendants-Appellees. - RONALD LEE GILMAN, Circuit Judge. To secure a loan - to their company—Multicom Publishing, Inc.—Tamara and N Paul Attard granted a security interest in all of their Multicom Appeal from the United States District Court stock to the lender, Finova Mezzanine Capital, Inc. (FMC). for the Middle District of Tennessee at Nashville. The Attards also executed a guaranty agreement promising to No. 00-01182—Aleta A. Trauger, District Judge. absolutely assign their stock to FMC free of all claims in the event of Multicom’s default, failing which they agreed to be Argued: April 29, 2004 personally liable for the debt. When FMC subsequently notified the Attards that Multicom was in default and Decided and Filed: July 1, 2004 demanded the assignment of their stock, the Attards signed the appropriate assignment form, but included a letter stating Before: GUY, GILMAN, and COOK, Circuit Judges. that the assignment was executed under duress. FMC filed suit, claiming that, by virtue of the duress letter, the Attards had not unconditionally assigned their stock and were therefore personally liable for the balance of the

1 No. 03-5033 Multimedia 2000 et al. v. Attard et al. 3 4 Multimedia 2000 et al. v. Attard et al. No. 03-5033

Multicom debt pursuant to the guaranty agreement. The In the event that the Attards failed to comply with Section district court granted summary judgment in favor of the Five’s absolute assignment of Multicom stock, the Guaranty Attards. For the reasons set forth below, we REVERSE the provided that they would become personally obligated, both judgment of the district court and REMAND for further jointly and severally, for Muticom’s debt to FMC. Section proceedings consistent with this opinion. Six of the Guaranty specifically stated that “[s]hould either of the Attards fail to comply fully with their obligations in . . . I. BACKGROUND Section 5 above, . . . the Attards hereby jointly and severally guarantee to lender the timely payment and performance of all A. Factual background of the obligations.” The Attards founded Multicom, a multimedia publishing FMC sent a letter to the Attards on November 11, 1997, company, in 1994. Multicom entered into a $3 million loan advising them that Multicom had defaulted on its obligations agreement with a predecessor of FMC in 1996. As part of the to FMC and demanding “the immediate, absolute conveyance loan transaction, Multicom granted FMC a security interest in of the Pledged Stock to [FMC].” The letter also stated that if substantially all of Mutlicom’s assets. the Attards failed to convey the pledged stock by November 18, then they would become personally liable for Multicom’s As further security for the loan, the Attards signed a Stock obligations. FMC followed up on November 12 with a form Pledge Agreement (Pledge Agreement) on October 3, 1997 titled “Absolute Assignment of Stock.” On November 17, the that granted FMC a security interest in their Multicom stock, Attards tendered to FMC the completed Absolute Assignment which was perfected by FMC’s possession of the stock of Stock form, but accompanied the signed form with a letter certificates. The Attards also executed a Conditional from their counsel expressly reserving certain of the Attards’ Continuing Guaranty and Assurance (Guaranty), wherein they rights against FMC. The letter stated, in pertinent part: agreed that if Multicom defaulted on its obligations to FMC, the Attards would “absolutely assign” all of their Multicom Please be advised that my clients forward this document stock to FMC within two days following a written demand by under duress, in order to mitigate their damages, and with FMC. Section Five of the Guaranty provided that the Attards full and absolute reservation of all of their rights at law and in equity. These rights include, without any agree that if a Designated Default occurs, then, within limitation whatsoever, the right to challenge as null and two (2) calendar days following the written demand of void the underlying documents pursuant to which [FMC] Lender, the Attards shall absolutely assign to Lender or purports to proceed; the right to challenge the alleged its designee, pursuant to ordinary instruments of default asserted by [FMC]; and the right to challenge the assignment to be prepared by Lender, all of the stock of activities of [FMC] and Multicom in pursuing Borrower [Multicom] that is then [] pledged to Lender to foreclosure of the subject shares of stock . . . . secure the Obligations. This conveyance will vest title in the transferee free of any claim of the Attards and free of FMC initially responded with a letter dated November 18, any other encumbrance, and without reduction in the 1997, informing the Attards that FMC was also reserving all Obligations that Borrower then owes to Lender. of its rights against them. The next significant event was on February 2, 1998, when FMC sold all of the assets of Multicom to Multimedia 2000, Inc. for $2 million. Eight No. 03-5033 Multimedia 2000 et al. v. Attard et al. 5 6 Multimedia 2000 et al. v. Attard et al. No. 03-5033

days later, on February 10, 1998, FMC wrote the Attards to B. The effect of the duress letter on the assignment of the inform them that the duress letter caused their assignment of Attards’ stock to FMC Multicom’s stock to not be free of all claims, thus subjecting them to personal liability under the Guaranty. On appeal, the key issue is whether the Attards fully complied with their obligations under the Guaranty to B. Procedural background “absolutely assign” all of the stock that they had pledged to FMC under the Pledge Agreement. The Guaranty explicitly In April of 2001, FMC sued the Attards for breach of states that “[t]his conveyance will vest title in the transferee contract based upon the Attards’ refusal to pay FMC the free of any claim of the Attards and free of any other balance of Multicom’s loan obligations according to the terms encumbrance . . . .” (Emphasis added.) FMC argues that the of the Guaranty. FMC moved for summary judgment on its Attards’ claim of duress in their November 17, 1997 letter, in breach-of-contract claim in February of 2002. The district addition to their “full and absolute reservation of all their court denied FMC’s motion and sua sponte granted summary rights at law and equity,” does not represent an assignment judgment to the Attards. After the district court denied “free of any claim of the Attards.” The Attards respond that FMC’s motion for reconsideration or, in the alternative, to the Guaranty did not include or require any disclaimer of alter or amend the judgment, FMC appealed. duress or other legal or equitable rights. They also contend that the November 17 letter did not create an “adverse claim” II. ANALYSIS rendering the assignment ineffective. A. Summary judgment standard The Guaranty states, and the parties do not contest, that it shall be interpreted in accordance with Tennessee law. Under We review a district court’s grant of summary judgment de Tennessee law, “[a] contract signed under economic duress is novo. Therma-Scan, Inc. v. Thermoscan, Inc. 295 F.3d 623, voidable by the victim, not void.” Cumberland & Ohio Co. of 629 (6th Cir. 2002). Summary judgment is proper where Texas v. First Am. Nat’l Bank, 936 F.2d 846, 850 (6th Cir. there exists no genuine issue of material fact and the moving 1991); United States Fidelity & Guar. Co. v. Cassel Bros., party is entitled to judgment as a matter of law. Fed. R. Civ. Inc. (In re McNeil), 22 B.R. 408, 414 (Bankr. E.D. Tenn. P. 56(c). In considering a motion for summary judgment, the 1982) (“A contract or other instrument is voidable under district court must construe all reasonable inferences in favor Tennessee law on the basis of duress . . . .”) “A voidable of the nonmoving party. Matsushita Elec. Indus. Co. v. contract is one where one or more parties have the power, by Zenith Radio Corp., 475 U.S. 574, 587 (1986). The central a manifestation of election to do so, to avoid the legal issue is “whether the evidence presents a sufficient relations created by the contract, or by ratification of the disagreement to require submission to a jury or whether it is contract to extinguish the power of avoidance.” Restatement so one-sided that one party must prevail as a matter of law.” (Second) of Contracts § 7 (1981). Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 251-52 (1986). The district court recognized that by claiming duress, the Attards had informed FMC that the Assignment was voidable under Tennessee law. According to the district court, however, merely asserting duress, as opposed to actually rescinding the Assignment, did not constitute a claim on the No. 03-5033 Multimedia 2000 et al. v. Attard et al. 7 8 Multimedia 2000 et al. v. Attard et al. No. 03-5033

stock that made the Assignment invalid. We respectfully adverse claim appears to describe the instant situation. The disagree. By claiming that they executed the Assignment Official Comment plainly states that an adverse claim may be under duress, the Attards put FMC on notice that they were based upon the right “to rescind a transaction in which retaining the right to rescind the assignment of their stock. securities were transferred.” This is precisely what happened Their letter in effect materially modified the terms of the in the present case. By claiming that they completed the Assignment. See Restatement (Second) of Contracts, Absolute Assignment of Stock under duress, the Attards have § 202(2) (1981) (“A writing is interpreted as a whole, and all reserved their right to rescind the transaction. Accordingly, writings that are part of the same transaction are interpreted under UCC § 8-102(a)(1), their claim of duress impinged together.”). upon FMC’s freedom to alienate the stock, because the existence of an adverse claim means “that it is a violation of FMC supports its argument that the Attards’ letter the rights of the claimant for another person to hold, transfer, constituted a claim in violation of the Guaranty by relying or deal with the financial asset.” UCC § 8-102(a)(1). upon the definition of an “adverse claim” in Tenn. Code Ann. § 47-8-102(a)(1) (hereinafter referred to as UCC § 8- The Attards’ duress letter thus clouded title to the stock that 102(a)(1)). Section 8-102(a)(1) defines an adverse claim as they purported to transfer absolutely to FMC, contrary to the “a claim that a claimant has a property interest in a financial Guaranty’s requirement that the stock be assigned “free of asset and that it is a violation of the rights of the claimant for any claim of the Attards and free of any other encumbrance another person to hold, transfer, or deal with the financial . . . .” Even though FMC could have theoretically given good asset.” The Official Comment to this section explains that the title to a “protected purchaser” of the Attards’ stock by not definition of an adverse claim is comprised of two parts: disclosing their claim of duress, see UCC § 8-303 (defining the term “protected purchaser”), FMC would have been First, the term refers only to property interests. Second, unable to warrant that the stock was being conveyed free of the term means not merely that a person has a property all claims. And a truthful disclosure of the Attards’ claim interest in a financial asset but that it is a violation of the would of course have prevented any buyer from having claimant’s property interest for the other person to hold protected-purchaser status. FMC’s contractual right to the or transfer the security or other financial asset. . . . The stock free and unencumbered was therefore thwarted by the term adverse claim is not, of course, limited to ownership Attards’ duress letter. rights, but extends to other property interests established by other law. . . . An adverse claim might . . . be based C. The Attards’ personal liability upon principles of equitable remedies that give rise to property claims. It would, for example, cover a right As previously set forth, Section Six of the Guaranty established by other law to rescind a transaction in provided that the Attards’ failure to assign their Multicom which securities were transferred. stock free and clear of all claims would result in the Attards becoming personally liable for the Multicom debt. Their (Emphasis added.) action in clouding title may well have been an unwise decision on their part, because FMC had the right to sell all of Although FMC has not cited any cases—and we have Multicom’s assets under a separate security agreement that found none—that apply § 8-102(a)(1) to a factual situation was not dependent upon the Attards’ personal guaranty. This analogous to the present case, the very definition of an in fact was precisely what FMC did on February 2, 1998. No. 03-5033 Multimedia 2000 et al. v. Attard et al. 9 10 Multimedia 2000 et al. v. Attard et al. No. 03-5033

Perhaps an earlier sale of Multicom’s stock would have “It is a well established rule in Tennessee that the party yielded no more than the $2 million that FMC eventually injured by the wrongful act of another has a legal duty to received from the sale of Multicom’s assets in February of exercise reasonable and ordinary care under these 1998. But the Attards knew that they had a choice under the circumstances to prevent and diminish the damages. One is Guaranty to either assign their stock free of all claims or, by not required, however, to make extraordinary efforts. The not doing so, become personally liable for the balance due burden of showing that losses could have been avoided by the FMC. The fact that they may have made a poor choice is not plaintiff by a reasonable effort to mitigate damages after a basis to disregard the contractual consequences of their defendant's breach of contract is on the defendant who action. Courts are not permitted to rewrite contracts, Perez v. breached the contract.” ACG, Inc. v. Southeast Elevator, Inc., Aetna Life Ins. Co., 150 F.3d 550, 557 (6th Cir. 1998), and 912 S.W.2d 163, 169 (Tenn.App. 1995); see also 24 Samuel each party must be given the benefit of his bargain. Bucyrus- Williston and Richard A. Lord, Williston on Contracts Erie Co. v. General Products Corp., 643 F.2d 413, 421 (6th § 64:27 (4th ed. 2002) (“[T]he principle of mitigation of Cir. 1981). damages . . . frequently involves a determination as to whether the [injured party] acted reasonably under the In sum, I believe that the Attards are bound by the bargain circumstances. . . . What is a reasonable effort to avoid the they made and the actions they took. Thus, in my opinion, injurious consequences of a breach is a question of fact.”). they are personally liable to FMC for the balance of the The application of these principles and of any other defenses Multicom debt, subject to any affirmative defenses available that the Attards might have to their personal liability, to them. This conclusion, however, is not shared by either of including waiver and estoppel, is left for development in the my judicial colleagues, and therefore is not the holding of this district court upon remand. court. III. CONCLUSION D. Potential affirmative defenses For all of the reasons set forth above, we REVERSE the My conclusion that the Attards have exposed themselves to judgment of the district court and REMAND for further personal liability for Multicom’s debt does not preclude their proceedings consistent with this opinion. right on remand to present any affirmative defenses that may be available to them. FMC, for example, had a duty to mitigate its damages. The record evidence shows that the Attards sent the Absolute Assignment of Stock form, accompanied by the duress letter, in November of 1997. FMC waited until February of 1998, however, to advise the Attards that their assignment of the Multicom stock was not “sufficient performance” and that FMC was exercising “its right to declare the Attards to be personally jointly and severally liable for all obligations of Multicom.” Whether this delay constituted a failure on the part of FMC to mitigate its damages is an open question that has yet to be developed. No. 03-5033 Multimedia 2000 et al. v. Attard et al. 11 12 Multimedia 2000 et al. v. Attard et al. No. 03-5033

_____________________________________________ ______________

CONCURRING IN PART, DISSENTING IN PART DISSENT _____________________________________________ ______________

GUY, Circuit Judge, concurring in part and dissenting in COOK, Circuit Judge, dissenting. Because I disagree with part. I concur in the decision to reverse the summary the conclusion that the Attards failed to assign their stock“free judgment that was entered in favor of the defendants. I do not of all claims,” I respectfully dissent. The Attards signed the believe on the record that was before the district judge that it stock assignment exactly as Multimedia drafted. The letter was appropriate to rule, as a matter of law, that the Attards the Attards sent with the assignment, complaining that they did not breach the guaranty agreement. I also believe, were executing the assignment under conditions of economic however, for the same reason, that it is inappropriate for this duress, does not meet any legal definition of a “claim” against court to decide the breach issue in favor of the plaintiffs at the stock. Thus, the district court correctly concluded that the this juncture. Once that decision is made the Attards are Attards fulfilled their contractual obligations to Multimedia. limited to affirmative defenses that would impact only the amount of the judgment plaintiffs might obtain.1 I would therefore affirm the district court’s judgment, for the reasons stated in that court’s memoranda of April 26, By holding that the letter accompanying the assignment did 2002 and May 23, 2002. not constitute a breach of the duty to make the assignment free of all claims, the district court apparently felt no need to consider other defenses the Attards may have that would impact upon their liability including waiver by the plaintiffs to proceed under the assignment. As the record now stands before this court, it appears the plaintiffs proceeded to realize all of the monetary value possible from the failed company by the sale of its assets and now seeks what amounts to a deficiency judgment for the balance of the debt. By relying on the claim that the Attards breached the assignment agreement, the plaintiffs arguably put themselves in a better position than they would have been had there been an unqualified assignment. This seems to me to be anomalous, and I would remand for further development of the record and trial if necessary.

1 I agree with Judge Gilman’s conclusion that the Attards may assert affirmative defenses on remand. I do not agree, however, that they are limited to defenses o nly as to damag es.