Commercial Division Denies Oral Modification and Grants Summary Judgment in Lieu of Complaint

by Sheppard Mullin Richter & Hampton LLP

In HCG Mezzanine Dev. Fund, L.P. v. Jreck Holdings, LLC, Index No. 652797/2011 (N.Y. Sup., N.Y. Cnty. Oct. 26, 2012), the New York Supreme Court (Kornreich, J.) granted Plaintiff HCG Mezzanine Development Fund, L.P.’s (HCG) motion for summary judgment in lieu of complaint against defendant Jreck Holdings LLC (“Jreck Holdings”), two of its subsidiaries, and Christopher Swartz, the CEO and President of Jreck Holdings (collectively, “defendants”). The court denied an argument that the promissory notes and guaranties in question were subject to oral modification.

Although admitting that the promissory notes were properly executed, defendants claimed that HCG (1) had an active role in the development of the Jreck business, (2) was effectively a party to every decision to forestall payments on the notes, and (3) instructed Swartz to pay business consultants and hire a CFO rather than pay off the debt. The Jreck fast food shops were performing poorly, incurring substantial losses requiring them to be closed or sold to franchisees. Swartz asserted that he advised HCG that Jreck Holdings would begin paying down the debt, but that HCG insisted that payments go toward the short term notes. Swartz learned that HCG desired to replace him as president of Jreck Holdings, and in response, announced that he intended to buy out HCG’s interest in Jreck Holdings. HCG then filed its motion for summary judgment in lieu of complaint.

Jreck Holdings, while not disputing the existence of the instruments or that money was owed on them, instead opted to argue that summary judgment in lieu of complaint was improper because HCG also sought enforcement of Jreck Holdings’ pledge and security agreements (executed simultaneously with the promissory notes) and delivery of certain collateral. The court, however, stated that such an additional security obligation did not negate the obligation to pay under the notes, and that the obligation to pay on the notes and the right to enforce the security interest were independent of each other. HCG was at liberty to use CPLR 3213 for enforcement of the notes and guaranties, and subsequently seek the collateral if payment was still not made.

Jreck Holdings further argued that because HBC had allegedly influenced Swartz’s decision regarding repayment of the debt, Jreck Holdings was relieved of its payment obligations under the notes and guaranties. Unpersuaded, the court focused on the fact that the defendants had agreed in writing that any alteration or modification of the terms of the various agreements had to be signed and in writing. The court explained that none of the exceptions to New York’s General Obligations Law 15-301(1) (which addresses when a written agreement or other instrument cannot be changed by an oral executory agreement, or discharged or terminated by oral executory agreement or oral consent or by oral notice), applied in the present matter. To satisfy the statutory exception, there needed to be an oral statement showing some sort of change to the written agreement at issue. The court reasoned that even if HCG had urged Jreck Holdings to do things aside from paying the indebtedness (i.e. hire consultants and a CFO), “this instruction to hire personnel was not relevant to the agreement to pay off the debt.” While such instruction by HCG could show there was a business relationship between the parties, such an oral communication did not show that it was meant to modify or affect the promissory notes, and thus, could not be a grounds to evade the “in-writing” modification requirement of the agreements.

CPLR 3213 permits a plaintiff to move for summary judgment in lieu of complaint “when an action is based on an instrument for the payment of money only.” The court explained that so long as the instrument creates an unambiguous and unconditional obligation to pay a specified sum, invocation of CPLR 3213 is appropriate, and that a guaranty has been held to be such an instrument. HCG had established a prima facie case by submitting proof of the three promissory notes, the three guarantees, and non-payment by Jreck Holdings. The court was careful to parse the requirements for relief under a promissory note and guaranty from those of a security agreement, treating CPLR 3213 as the “bare bones” or streamlined procedural device that it is ostensibly designed to be.


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Sheppard Mullin Richter & Hampton LLP

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