New York Bronze Powder Co

New York Bronze Powder Co., Inc. v. Benjamin Acquisition Corp.
351 Md. 8, 716 A.2d 230 (Ct. of Appeals Md. 1998)

Smith, J.

This case presents the problem of whether a provision in a contract is a condition or a promise or both. The Court of Special Appeals in an unreported opinion reversed a trial court judgment and construed as a condition precedent a provision in a non-negotiable note/contract requiring surrender of the note in order to receive payment.

The facts relevant to this decision may be briefly stated.

New York Bronze Powder Company, Inc. (New York Bronze) entered into an agreement dated March 15, 1990, with Benjamin Acquisition Corporation (Benjamin) under which Benjamin agreed to purchase from New York Bronze the assets of a business then known as Benjamin F. Rich Company (Rich) for $4.5 million, together with the assumption of certain of Rich's liabilities. Closing was to take place on April 30, 1990. Shortly prior to the closing, Benjamin expressed its concerns to New York Bronze over the valuation of certain assets. The matter was resolved by an April 30, 1990 modification of the purchase agreement (Amendment No. 1). Under Amendment No. 1 $350,000 of the $4.5 million purchase price was deferred, and Benjamin executed a non-negotiable note to New York Bronze for $350,000. Under Section 3 of Amendment No. 1 Benjamin undertook, at its expense, to have prepared a balance sheet of Rich accompanied by the opinion of a specifically named accounting firm, and Benjamin promised to use its best efforts to cause that audited balance sheet to be delivered to New York Bronze no later than June 14, 1990. To the extent that the audited balance sheet reflected a net worth of Rich that was less than $ 4.5 million, Benjamin was entitled under Section 3 of the note to a dollar for dollar credit against the $ 350,000 deferred purchase price.

The note was payable in two installments, the first due on the tenth business day after delivery of the audited balance sheet, and the second due on July 30, 1991. Thus, assuming that the audited balance sheet was prepared within the contemplated time and that it reflected Rich's net worth to be $4.5 million or more, $150,000 of the deferred purchase price would have been due and payable on or about June 28, 1990, and the balance of $200,000 would have been due and payable on July 30, 1991.

As matters unfolded following the April 30, 1990 closing under the modified asset purchase agreement, the accounting firm specified in Amendment No. 1 never opined on the audited balance sheet, and apparently never completed its audit.

Benjamin never made or tendered any cash payment on the note. In October 1993 New York Bronze sued Benjamin in the Circuit Court for Montgomery County alleging non-payment of the note and breach of the modified asset purchase agreement. After a bench trial the court entered judgment for $350,000 in favor of New York Bronze.

Benjamin appealed to the Court of Special Appeals, raising three issues, but that court found it necessary to address only one. That issue is whether the portion of Section 4.2 of the note, italicized below, should be construed as a condition precedent to payment. That section provides:

4.2 Payments. Payments of any portion of the principal of this Note shall be made by check drawn on a United States commercial bank and shall be mailed by registered mail, return receipt requested, on or prior to the date on which such payment is due, to the Noteholder at the address set forth in the Purchase Agreement. If the date on which any payment hereunder is due is not a Business Day, then such payment shall be due on the next succeeding Business Day. The Noteholder shall be required to surrender this Note for cancellation upon the maturity or prepayment in full of this Note in order to receive payment.

(Emphasis added). Section 4.4 of the note provides that it "SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK."

The Court of Special Appeals held that, under New York law, the italicized language created a condition, the non-occurrence of which extinguished Benjamin's obligation to pay the $350,000 or any part thereof. New York Bronze then petitioned this Court for the writ of certiorari, which was granted.

. . . [Editorial note: At trial, N.Y. Bronze was only able to produce a copy of the note, not the note itself. Why? After receiving the note from Benjamin and prior to maturity of the note, N.Y. Bronze delivered the note to Perpetual Savings Bank of New York as collateral for a loan from Perpetual Savings Bank to N.Y. Bronze. Thereafter, Perpetual Savings Bank of New York became insolvent and was taken over by the Federal Deposit Insurance Corporation (FDIC). As part of its bailout of Perpetual, the FDIC in turn sold some assets of Perpetual Savings Bank of New York to Crestar Financial Corporation. At trial, the CEO of N.Y. Bronze testified that he didn't know who was then holding the note.]

. . . [T]he controlling issue is whether the last sentence of Section 4.2 of the note is to be construed as a promise on the part of New York Bronze to surrender the note for cancellation, for an unsubstantial breach of which Benjamin would not be excused from performance, or whether the last sentence is a condition precedent to enforcement of Benjamin's promise to pay.

The most recent decision of the Court of Appeals of New York dealing with conditions in contracts is Oppenheimer & Co., Inc. v. Oppenheim, Appel, Dixon & Co., 86 N.Y.2d 685, 636 N.Y.S.2d 734, 660 N.E.2d 415 (1995). In that case there was an agreement concerning a proposed sublease. Oppenheimer, 636 N.Y.S.2d at 735, 660 N.E.2d at 416. The sublessee had furnished the sublessor plans for construction of a telephone communications linkage system on the premises, and the sublessor obligated itself to obtain the underlying landlord's written consent to that work and to deliver that written consent by a specified date. Id. 636 N.Y.S.2d at 735-36, 660 N.E.2d at 416-17. On the specified date the sublessor telephoned the sublessee, advising that the underlying landlord had consented. Id. 636 N.Y.S.2d at 736, 660 N.E.2d at 417. The sublessee refused to sign the proposed sublease. Id. The issue before the Court of Appeals of New York was whether the requirement for the sublessor to obtain written consent was a covenant, in which event non-performance would be subject to the doctrine of substantial performance, or whether that doctrine had no application because the provision was a condition. Id. 636 N.Y.S.2d at 735, 660 N.E.2d at 416.

The agreement in Oppenheimer stated that if the sublessee "had not received the prime landlord's written consent by the agreed date, both the agreement and the sublease were to be deemed 'null and void and of no further force and effect,' and neither party was to have 'any rights against nor obligations to the other.'" Id. 636 N.Y.S.2d at 736, 660 N.E.2d at 417. Another provision of the agreement stated that "the parties 'agree not to execute and exchange the Sublease unless and until ... the conditions set forth in [the paragraph requiring, inter alia, written consent] are timely satisfied.'" Id. The court held that this language created a condition. Id. 636 N.Y.S.2d at 737, 660 N.E.2d at 418.

The court in Oppenheimer gave guidance for interpreting whether a provision is a condition:

In determining whether a particular agreement makes an event a condition courts will interpret doubtful language as embodying a promise or constructive condition rather than an express condition. This interpretive preference is especially strong when a finding of express condition would increase the risk of forfeiture by the obligee (see, Restatement [Second] of Contracts § 227 [1]).

Other New York case law also indicates that the courts of that state employ a strict interpretation as to the type of language that creates a condition precedent. In West-Fair Electric Contractors v. Aetna Casualty & Surety Co., 87 N.Y.2d 148, 638 N.Y.S.2d 394, 661 N.E.2d 967 (1995), the Court of Appeals of New York examined whether a pay-when-paid provision of a contract between a general contractor and a subcontractor constituted a condition precedent or whether such a provision "merely fixed a time for payment, rather than placing the risk of nonpayment by the owner on the subcontractor." West-Fair, 638 N.Y.S.2d at 396, 661 N.E.2d at 969. The contract provision stated: "'IT IS SPECIFICALLY UNDERSTOOD AND AGREED THAT THE PAYMENT TO THE TRADE CONTRACTOR [plaintiff] IS DEPENDENT, AS A CONDITION PRECEDENT, UPON THE CONSTRUCTION MANAGER [the general contractor] RECEIVING CONTRACT PAYMENTS, INCLUDING RETAINER FROM THE OWNER.'" Id. Finding that the language was a condition precedent, the court noted that in Schuler-Haas Electric Co. v. Aetna Casualty & Surety Co., 40 N.Y.2d 883, 389 N.Y.S.2d 348, 357 N.E.2d1003 (1976) (mem.), it had held that a pay-when-paid provision "fixed a time for payment because the document containing the provision lacked express language imposing a condition on the general contractor's legal responsibility to pay." West-Fair, 638 N.Y.S.2d at 397, 661 N.E.2d at 970. Holding that the provision in West-Fair was different from the provision in Schuler- Haas and that the West-Fair provision constituted a condition precedent, the court stated:

In contrast [to the pay-when-paid clause in Schuler-Haas], the face of the subcontract here explicitly makes payment from the owner to the general contractor a "condition precedent" to any payment to plaintiff. Since the unambiguous language of section 3.2 places the risk of the owner's inability or failure to pay the general contractor squarely upon plaintiff, the pay-when-paid provision here cannot be construed as a time for payment clause.Id.

. . .

In addition to illustrating language that undoubtedly creates a condition, Oppenheimer evidences that the Court of Appeals of New York will look to Restatement (Second) of Contracts § 227 (1981) (Restatement) for the preferred interpretation of language argued to create a condition, as well as to Restatement § 229, dealing with excusing the non-occurrence of a condition. Here, the applicable section of the Restatement is § 227(2). In the language of that subsection, the duty to be performed is Benjamin's duty to pay the note, so that Benjamin is the "obligor;" New York Bronze is the "obligee;" and the asserted condition is the surrender of the note. Benjamin's position necessarily is that, as of the time of contract formation, surrender of the note was an event within the control of New York Bronze.

Where the above recited factors are present, the preferred interpretation is set forth in Restatement § 227(2), which reads:

Unless the contract is of a type under which only one party generally undertakes duties, when it is doubtful whether

(a) a duty is imposed on an obligee that an event occur, or

(b) the event is made a condition of the obligor's duty, or

(c) the event is made a condition of the obligor's duty and a duty is imposed on the obligee that the event occur,

the first interpretation is preferred if the event is within the obligee's control.

Comment d states the rationale for the preferred interpretation as follows:

The rule in Subsection (2) states a preference for an interpretation that merely imposes a duty on the obligee to do the act and does not make the doing of the act a condition of the obligor's duty. The preferred interpretation avoids the harsh results that might otherwise result from the non-occurrence of a condition and still gives adequate protection to the obligor under the rules ... relating to performances to be exchanged under an exchange of promises. Under those rules ... the obligee's failure to perform his duty has, if it is material, the effect of the non-occurrence of a condition of the obligor's duty. Unless the agreement makes it clear that the event is required as a condition, it is fairer to apply these more flexible rules. The obligor will, in any case, have a remedy for breach.

Turning to the interpretation of the last sentence of Section 4.2 of the note we conclude, for the reasons hereinafter set forth, that it is "doubtful" that the parties intended to create a condition. Benjamin's interpretation rests entirely on the language "in order to receive payment." Neither in the context of the contract as a whole, nor within the terms themselves, is the creation of a condition so clear that it overcomes the preference for interpretation of the language as a covenant.

The introductory paragraph of the non-negotiable note contains the promise to pay $350,000 and expresses that that promise is "subject to Sections 2 and 3 below." The former deals with subordination and the latter is the agreement concerning set offs. Had the parties intended the promise to be subject to a condition found in Section 4.2, careful drafting would have included Section 4.2 in the introduction of the note.

Section 4.2 of the note specifies how and when payments "shall be made ... and shall be mailed." This is the language of covenants. No one could seriously maintain that, if Benjamin, in some immaterial fashion, did not comply with the provisions describing the payment checks and their mailing, then a payment received by New York Bronze could be kept by it without crediting the payment against the obligation. The principal clause of the last sentence in Section 4.2 ("The Noteholder shall be required to surrender this Note for cancellation ....") similarly is the language of covenant. Thus, under Benjamin's position, the language, "in order to receive payment," must produce a substantially different legal result than do the other provisions of Section 4.2.

Under the New York cases, it would seem that more explicit language than that used is required in order to achieve that result. For example, the interpretation would be much more clear if the critical clause of the last sentence of Section 4.2 read: "and upon failure to surrender this Note [Benjamin's] obligation to pay any outstanding balance will terminate," or "be extinguished." Instead, the note uses the language, "in order to receive payment." The primary meaning of the verb "to receive" is "to take possession or delivery of," as of a gift or of a letter. Webster's Third New International Dictionary 1984 (1976). In the context of the last sentence of Section 4.2, "receive" carries a passive connotation as to the role of New York Bronze while the active role would be that of Benjamin in tendering payment in full of any outstanding balance. Interpreting Section 4.2 as promises to exchange performances is a far cry from interpreting it to provide that the failure to surrender the note causes New York Bronze to lose all rights to take an active role and enforce collection on the note through legal proceedings.

The obvious purpose of the last sentence of Section 4.2 is to protect Benjamin from the risk that the note will fall into the hands of a third party who will in some way force Benjamin to pay twice. If the critical language is interpreted as part of a covenant by New York Bronze, then Benjamin theoretically had a number of options to remedy the breach. Benjamin could take the position that the breach was substantial, thus excusing Benjamin from performance, but that result is not the situation here, as we explain below. Benjamin could demand and possibly obtain from New York Bronze proof satisfactory to Benjamin that Benjamin would not be required to pay twice. Benjamin could claim as damages for the breach the cost of a bond protecting it against double payment. Although the note is non-interest bearing, Benjamin could have utilized the breach by New York Bronze to oppose a claim for the discretionary allowance of interest on any unpaid and overdue balance on the note for the period from maturity until judgment. Further, if after having paid New York Bronze in full a third party claimed against Benjamin on the note, Benjamin could obtain damages from New York Bronze measured by the cost of defending the claim of the third party and demonstrating that payment had been made in full.

Whatever the effect of the critical language might be in an agreement involving a negotiable note, Benjamin's risk of being required to pay twice is de minimis in the instant matter because the note is non-negotiable. If we assume that Benjamin paid the full $350,000 without a surrender of the note, an assignee of New York Bronze could not be a holder in due course. That assignee would take the note subject to the defense of payment by Benjamin to New York Bronze.

Under these circumstances it is unlikely that the parties intended to create a condition entitling Benjamin to keep up to $200,000 of assets without paying the agreed consideration. Thus, we apply the preferred construction and hold that the last sentence of Section 4.2 of the note creates a covenant or contractual duty on the part of New York Bronze to surrender the note.

There are other issues which were presented to the Court of Special Appeals that have not been passed upon by an appellate court because the Court of Special Appeals saw no need to address them once it determined that Section 4.2 of the note controlled the matter. Hence, we shall remand this case to the Court of Special Appeals for consideration of the points presented.

Judgment reversed. Case remanded to the Court of Special Appeals for further proceedings not inconsistent with this opinion. Costs in this court to be paid by the respondent, Benjamin Acquisition Corporation. Costs in the Court of Special Appeals to abide the result.