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Pine River Master Fund Ltd. v. Amur Finance Company, Inc.

Court of Chancery of Delaware

September 13, 2017

PINE RIVER MASTER FUND LTD. AND PINE RIVER FIXED INCOME MASTER FUND LTD., Plaintiffs,
v.
AMUR FINANCE COMPANY, INC. AND AMUR FINANCE IV LLC, Defendants.

          Submitted: July 10, 2017

          C. Barr Flinn, Esquire, Emily V. Burton, Esquire, Lakshmi A. Muthu, Esquire and Meryem Y. Dede, Esquire of Young Conaway Stargatt & Taylor, LLP, Wilmington, Delaware and Michael M. Krauss, Esquire, Jane E. Maschka, Esquire and Michael F. Doty, Esquire of Faegre Baker Daniels LLP, Minneapolis, Minnesota, Attorneys for Plaintiffs.

          Garrett B. Moritz, Esquire and Nicholas D. Mozal, Esquire of Ross Aronstam & Moritz LLP, Wilmington, Delaware and Christopher D. Kercher, Esquire, Andrew M. Berdon, Esquire, Julia M. Beskin, Esquire and Marlo A. Pecora, Esquire of Quinn Emanuel Urquhart & Sullivan, LLP, New York, New York, Attorneys for Defendants.

          MEMORANDUM OPINION

          SLIGHTS, VICE CHANCELLOR

         Plaintiffs, Pine River Master Fund Ltd. and Pine River Fixed Income Master Fund Ltd. (collectively, "Pine River"), have brought a litany of claims against Defendants, Amur Finance Company, Inc. ("AFC"), Amur Finance IV LLC ("Amur IV"), Amur Aviation LLC, PMC Aviation 2012-1 LLC, and Mostafiz ShahMohammed (collectively, "Amur"), arising from an allegedly failed lender/borrower relationship. In happier times, Pine River and Amur entered into a Secured Revolving Credit Agreement (the "Credit Agreement") whereby Pine River made loans to Amur that Amur, in turn, used to make investments in various operating companies. Needless to say, that relationship has since broken down, and Pine River has brought claims against Amur for various breaches of the Credit Agreement, fraud, indemnification, unjust enrichment and tortious interference with contract.

         This decision addresses Pine River's motion for partial summary judgment with respect to one aspect of the parties' broader dispute: whether Amur has breached certain provisions of the Credit Agreement by using loaned funds to pay legal fees incurred by various Amur-related entities with regard to litigation in which Amur is involved, and whether such payments constitute an Event of Default under related provisions of the Credit Agreement. For the reasons explained below, I find that Amur has breached the Credit Agreement by making these indemnity payments, but the payments do not constitute an Event of Default.

         I. BACKGROUND[1]

         The facts are drawn from the parties' pleadings and the evidence and affidavits gathered in appendices to the parties' briefs submitted in connection with their cross-motions for summary judgment.[2]

         A. Relevant Parties

         Plaintiff, Pine River, is a global alternative investment firm that is headquartered in Minnetonka, Minnesota.[3] Pine River extended credit to Amur IV pursuant to the Credit Agreement, as described in more detail below.

         Defendant, AFC, is a Delaware corporation with its principal place of business in White Plains, New York.[4] It is a diversified investment company that has investments and operations in several sectors, including aviation, general equipment, energy, shipping and logistics, and industrials.[5]

         Defendant, Amur IV, is a Delaware limited liability company with its principal place of business in White Plains, New York.[6] It is a special purpose vehicle that was created by AFC to make loans to, and investments in, businesses and assets in the transportation and commercial equipment financing and leasing industries.[7]

         Defendant, Mostafiz ShahMohammed, is an individual residing in Putnam Valley, New York.[8] He is alleged to control the management of AFC and Amur IV and was personally involved in the negotiation of the Credit Agreement.[9]

         B. The Credit Agreement

         The Credit Agreement, dated August 5, 2013, was executed by Amur IV as Borrower, AFC as Administrative Agent, Deutsche Bank Trust Company Americas as Collateral Agent and Pine River as Lender.[10] The loan balance currently stands at approximately $150 million, [11] with a maturity date in August, 2023.[12] As provided for in the Credit Agreement, Amur IV was to use the loaned funds to make investments in operating companies (the "Operating Companies").[13]

         The Credit Agreement provides that the interest rate to be paid on the loans will be based on the weighted yield of Amur IV's investments in the Operating Companies.[14] The interest is divided between Cash Interest Accrual, which is "immediately payable in cash" on every Payment Date, and pay-in-kind interest (or "PIK Accrual"), which is added to the outstanding principal.[15] Both are included in the Credit Agreement's definition of "Interest."[16]

         As noted, Amur IV's sole purpose is to make investments in the Operating Companies using funds it receives from the credit facility and then to receive certain designated distributions from the Operating Companies.[17] Pursuant to the Credit Agreement, Amur IV will then take the payments it receives from the Operating Companies and deposit them into the Collections Account.[18] All funds in the Collections Account are then to be distributed by the Administrative Agent on the Payment Date in accordance with a waterfall of priority payments set out in Section 6.04 of the Credit Agreement (the "Waterfall").[19]

         Section 7.01(a) of the Credit Agreement provides that an Event of Default occurs when "the Borrower shall fail to pay any Interest on any Loan when and as the same shall become due and payable, and such failure shall continue unremedied for a period of sixty (60) days."[20] Section 7.01(b) provides that an Event of Default will also be declared when "the Borrower shall fail to pay any Interest on any Loan when and as the same shall become due and payable (without giving effect to any grace period provided under Section 7.01(a)) on two or more Payment Dates."[21]

         C. The Administrative Agent

         The parties to the Credit Agreement appointed AFC to serve as the initial Administrative Agent for the Lender.[22] The Administrative Agent is charged with the power to "take such action on [Pine River's] behalf under the Operative Agreements and to exercise such powers and perform such duties as expressly are delegated to them [sic] by the Operative Agreements, together with such powers as are reasonably incidental thereto."[23] The Credit Agreement provides that the Administrative Agent shall not "have duties or responsibilities, except those expressly set forth herein or in any other Operative Agreement."[24]

         As among its designated roles, the Administrative Agent is responsible for calculating the distributions under the Waterfall set out in Section 6.04 and then directing those distributions through its issuance of an Administrator Report.[25] The Administrator Report is due on the Determination Date, which the Credit Agreement defines as the third business day prior to the Payment Date.[26] The Administrative Agent is then required to distribute the amounts paid into the Collections Account in accordance with the Waterfall set forth in Section 6.04.[27]

         The Credit Agreement provides for indemnification of the Administrative Agent for certain expenses incurred in connection with its role as Administrative Agent under the Credit Agreement and the Operative Agreements.[28] Specifically, Section 9.03(b) of the Credit Agreement provides that:

The Borrower shall pay all reasonable (A) expenses incurred by the Administrative Agent and the Collateral Agent, including the reasonable fees, charges and disbursements of counsel for the Administrative Agent and the Collateral Agent, in connection with the administration of this Agreement and each other Operative Agreement or any amendments, modifications or waivers of the provisions hereof or thereof, and (B) reasonable fees and expenses incurred by the Administrative Agent, the Collateral Agent and the Lenders, including the fees, charges and disbursements of any counsel for the Administrative Agent, the Collateral Agent or the Lenders, in connection with the enforcement or protection of its rights in connection with this Agreement or any other Operative Agreement, including its rights under this Section, or in connection with the Loans made, including all such expenses incurred during any workout, restructuring or negotiations in respect of such Loans.[29]

         This right to indemnification "continue[s] to inure to [the former administrative agent's] benefit as to any actions taken or omitted or to be taken by the [former administrative agent] hereunder."[30] Payments under this provision are to be made under the Second priority of the Waterfall.[31]

         D. The Operating Company Lawsuits

         In late 2015 and early 2016, Amur caused various Operating Companies and other Amur-affiliated entities to either commence or defend litigation in Virginia, New York and Delaware (the "Operating Company Lawsuits").[32] AFC is a named party in only one action in New York and, in that action, AFC is named only in its capacity as a party to a servicing agreement to one of the Operating Companies.[33]In the remainder of the lawsuits, Amur IV and PMC, of which Amur IV is a managing member, are the named parties in the suit.[34] According to Amur, AFC caused these lawsuits to be brought or defended in its capacity as Administrative Agent under the Credit Agreement in order to "protect Pine River's investment as a Lender, because any recoveries from the Operating Company Lawsuits will flow into the Collections Account for distribution, through the Credit Agreement's Waterfall and on to Pine River (after payment of expenses)."[35] Pine River disagrees and maintains that the lawsuits are not authorized by, nor subject to indemnification under, any provision of the Credit Agreement.

         The legal bills in these four cases have, to date, totaled approximately $7 million.[36] Between November 2016 and February 2017, Amur-affiliated entities received $3, 118, 009.97 from the Collections Account under the Second priority of the Waterfall for purported indemnities of the Administrative Agent under Section 9.03 of the Credit Agreement.[37] The undisputed record evidence reveals that the expenses were incurred to pay the legal fees of counsel for Amur IV and other Amur affiliates, but not AFC itself.[38] These indemnity payments decreased the amount of PIK Accrual paid under the Eighth priority of the Waterfall, thereby increasing the outstanding principal under the Credit Agreement.[39]

         E. Pine River Removes AFC as Administrative Agent under the Credit Agreement

         Pine River has the power under the Credit Agreement to remove and replace the Administrative Agent in its sole discretion.[40] It exercised this power on November 22, 2016, and replaced AFC as Administrative Agent with Lighthouse Management Group, Inc.[41] The effective date of the replacement was agreed to be January 20, 2017, meaning that Lighthouse was to act as Administrative Agent for the February 2017 Payment Date.[42] After assuming the role as Administrative Agent, it is alleged that Lighthouse failed to provide an Administrator Report when due for the February 2017 Payment Date.[43] When no report was forthcoming, AFC feared that the Borrower would be unable to make the required payments under the Waterfall since the calculation of these payments was to have occurred in the Administrator Report. Accordingly, it took on that responsibility (including the calculation of the Waterfall payments) to prevent Pine River from declaring an Event of Default.[44] Amur IV made its February 2017 payments from the Collections Account in accordance with the calculations set forth in AFC's February Administrator Report.[45]

         F. Procedural Posture

         On February 23, 2017, Plaintiffs, Pine River Master Fund Ltd. and Pine River Fixed Income Master Fund Ltd., filed their Verified Complaint (the "Original Complaint") seeking a declaratory judgment as to various alleged breaches of the Credit Agreement by Amur, injunctive relief to prevent future breaches and money damages. The parties later resolved Pine River's request for a temporary restraining order by various stipulations, the most recent of which was entered on March 30, 2017.[46] Amur filed a motion to dismiss the Original Complaint on March 16, 2017. Pine River then sought a preliminary injunction, which was set to be heard on June 13, 2017.[47]

         On March 31, 2017, Pine River filed the present motion for partial summary judgment on Counts II and VI of its Original Complaint for breach of contract due to AFC's payment of counsel fees in the Operating Company Lawsuits under the Second priority of the Waterfall and for a declaration that an Event of Default had occurred due to the failure to pay interest that was "due and payable" under Section 7.01(a) and (b) of the Credit Agreement. On April 25, 2017, the Court entered a Stipulation and Order Resolving Pine River's Anticipated Motion for a Preliminary Injunction. Amur filed a cross-motion for partial summary judgment as to Counts II and VI of the Original Complaint on May 1, 2017. The Court heard Oral Argument on the cross-motions on July 10, 2017.

         On August 22, 2017, Pine River filed Plaintiffs' Verified Supplemental and Amended Complaint (the "Amended Complaint"). At the Court's request, the parties advised the Court by letter dated August 30, 2017, that the Amended Complaint did not affect the submitted cross-motions for summary judgment, except that the claim for Event of Default under Section 7.01(a) and (b) of the Credit Agreement under Count VI of the Original Complaint is now set forth in Count II of the Amended Complaint along with the breach of contract claims relating to the payment of indemnification for counsel fees incurred by Amur-affiliated entities.[48]

         II. ANALYSIS

         For the reasons that follow, I find that Amur breached Section 6.04 of the Credit Agreement through the payment of indemnities for the Operating Company Lawsuits, but this breach did not constitute an Event of Default under Section 7.01(a) and (b). I explain these findings below after first addressing the standard of review.

         A. Standard of Review on Summary Judgment

         Pursuant to Court of Chancery Rule 56(c), summary judgment will be granted where "there are no questions of material fact and the moving party is entitled to judgment as a matter of law."[49] When considering a motion for summary judgment, "the burden is on the movant, and the Court reviews all of the evidence in the light most favorable to the non-moving party."[50] When a party seeks summary judgment based on its proffered construction of a contract, the court must remain mindful that:

A contract may be enforced summarily where its terms are unambiguous. Whether a contract is ambiguous is a question of law[, ] and extrinsic evidence may not be considered unless the document itself is ambiguous. Furthermore, extrinsic and parol evidence is not admissible to create an ambiguity in a written agreement which is complete and clear and unambiguous on its face.[51]

         If the language in a contract is ambiguous, however, the court will not resolve the ambiguity on summary judgment.[52] When cross-motions for summary judgment are filed and neither party has presented an argument leaving material facts in dispute, Court of Chancery Rule 56(h) provides that "the Court shall deem the motions to be the equivalent of a stipulation for decision on the merits based on the record submitted with the motions."[53] If, however, a material factual dispute does exist, the Court must deny summary judgment.[54]

         B. Amur has Breached Section 6.04 of the Credit Agreement through the Indemnification of Legal Fees for the Operating Company Lawsuits

         Amur contends that, as Administrative Agent, AFC was entitled to indemnification under the Second priority of the Waterfall set forth in Section 6.04 for the payment of the legal expenses incurred through the enforcement or protection of the rights of Amur IV (the Borrower) in connection with the Operative Agreements. Specifically, Amur invokes Section 9.03(b)(B), which provides:

The Borrower shall pay all . . . (B) reasonable fees and expenses incurred by the Administrative Agent, the Collateral Agent and the Lenders, including the fees, charges and disbursements of any counsel for the Administrative Agent, the Collateral Agent, or the Lenders, in connection with the enforcement or protection of its rights in connection with this Agreement or any other Operative Agreement, including its rights under this Section, or in connection with the Loans made, including all such expenses incurred during any workout, restructuring or negotiations in respect of such Loans.[55]

         Amur's reliance upon this provision of the Credit Agreement to justify the payment of legal fees begs the fundamental question: who does "its" refer to - i.e. whose rights may the Administrative Agent seek to enforce or protect subject to the Borrower's obligation to pay fees and expenses? Pine River contends that "its" refers to the Administrative Agent, the Collateral Agent or the Lenders; Amur contends that "its" refers to the Borrower. Pine River cites to Garner's Modern American Usage for the proposition that "its" should refer to the nearest referent- in this case, "the Administrative Agent, the Collateral Agent and the Lenders."[56]Amur counters that Garner's actually supports its construction of Section 9.03(b)(B) because "a relative pronoun [in this case "its"] is supposed to agree with its antecedent in both number and person."[57]

         While, in isolation, these competing views of the proper construction of "its" may portend ambiguity, any notion of ambiguity falls away when Section 9.03(b)(B) is considered in the context of the entire agreement. It is, of course, a central tenant of contract construction that a contract must be read as a whole, and "all portions of a contract should be read together to determine its meaning."[58] Indeed, "[t]he entire contract must be reviewed and '[p]articular words should be considered, not as if isolated from the ...


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