Webster Capital Finance, Inc v. Newby et al

Filing 62

MEMORANDUM AND ORDER granting 48 Motion for Summary Judgment. Signed by District Judge Eric F. Melgren on 8/2/2013. (aa)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF KANSAS

WEBSTER CAPITAL FINANCE, INC.,
f/k/a CENTER CAPITAL CORPORATION,
Plaintiff,

vs.

Case No. 12-2290-EFM

DANIEL NEWBY, et. al.,
Defendant.

MEMORANDUM AND ORDER
In this action, Plaintiff Webster Capital Finance, Inc. f/k/a Center Capital Corporation
(“Webster Capital”) seeks to enforce personal loan guaranties against Defendants Daniel Newby
and Thomacine Newby. This case comes before the Court on Plaintiff’s Motion for Summary
Judgment (Doc. 48). For the reasons stated below, the Court grants Webster Capital’s motion.
I.

Factual and Procedural Background1

Webster Capital is a Connecticut corporation that provides financing to various business
ventures. Defendants Daniel Newby and Thomacine Newby are residents of Kansas City,
Missouri, who operate Ottawa Bus Service, Inc. (“Ottawa Bus”), a Kansas corporation. On
February 19, 2002, Webster Capital and Ottawa Bus entered into Master Loan and Security

1

In accordance with summary judgment procedures, the Court has set forth the uncontroverted facts, and
they are related in the light most favorable to the non-moving party.

Agreement No. 31505 (the “Master Loan Agreement”), which provided the terms under which
Webster Capital would extend credit and financing to Ottawa Bus. Section 6 of the Master Loan
Agreement provides nine disjunctive paragraphs describing various events of default, including:
(i)

The failure to pay any installment(s) due hereunder or under one or more
of the Schedules on the due date therefor;

(ii)

The breach of any term covenant, warranty or representation contained in
this Agreement which is required to be performed or observed by
Borrower and which failure is nor cured to Lender’s reasonable
satisfaction within the (10) days after the giving of notice by Lender to
Borrower of such failure;

....
(iv)

With respect to the Borrower, the Equipment or a substantial part of
Borrower’s assets: . . . (B) a petition in Bankruptcy or under any similar
law is filed.2

This section also provides that “[u]pon the occurrence of an Event of Default, the Obligations
under any or all Schedules may, at the option of Lender and without demand, notice, or legal
process of any kind, be accelerated, and shall immediately become due and payable.”3
To secure payment under the Master Loan Agreement and the various loan schedules,
Defendants each executed a Continuing Guaranty on February 26, 2002 (the “Continuing
Guaranties”).4 In these documents, Defendants personally guaranteed Ottawa Bus’s “prompt
payment of all indebtedness, including, but not limited to, principal, accrued interest, costs, late
charges, out of pocket expenses, and attorneys’ fees”5 due under the Master Loan Agreement or

2

Master Loan Agreement, Pl.’s Ex. A, Doc. 49-2, at ¶ 6.

3

Id.

4

Defendants issued their Continuing Guaranties in favor of Center Capital Corporation, Webster Capital’s
predecessor.
5

Daniel Newby Continuing Guaranty, Pl.’s Ex. M, Doc. 49-14, at 1; Thomacine Newby Continuing
Guaranty, Pl.’s Ex. N, Doc. 49-15, at 1.

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any related obligations. Defendants’ guaranties gave rise to “an absolute and unlimited guaranty
of payment and performance, not a guaranty of collection, and Guarantor agrees to pay and/or
reimburse [Webster Capital] for any attorney’s fees and out of pocket costs incurred in
connection with the collection on or enforcement of this Guaranty.”6
Pursuant to the Master Loan Agreement, Ottawa Bus entered into at least six loan
schedules, whereby Webster Capital financed the purchase of equipment and took a purchase
money security interest in the collateral. Each of these loan schedules required Ottawa Bus to
pay the indebtedness in monthly installments. In July, August, and September of 2010, Ottawa
Bus failed to pay monthly installments as required by the Master Loan Agreement and the loan
schedules. On September 2, 2010, Webster Capital sent Defendants a Notice of Default, which
provided:
The Borrowers and/or Guarantors are currently in default by reason of their
failure to pay the monthly installments due July 1, 2010 through September 1,
2010 and accrued late fees as provided for in the Agreement. Accordingly,
[Webster Capital] is accelerating the indebtedness pursuant to the terms of the
Agreement. [Webster Capital] hereby demands payment of such accelerated
balance, together with any and all applicable sales tax and late fees due from the
Borrowers and/or Guarantors.7
Defendants allege that after receiving the Notice of Default, they paid the installments due for
July, August, and September or 2010.
On November 22, 2010, Ottawa Bus filed a voluntary petition for bankruptcy relief under
Chapter 11. Webster Capital filed this action on May 15, 2012, asserting that Defendants
improperly refused to honor their Continuing Guaranties upon Ottawa Bus’s default and
bankruptcy.
6

Id.

7

Notice of Default, Pl.’s Ex. O, Doc. 49-16, at 1.

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II.

Legal Standard

A. Local Rules for Summary Judgment
Summary judgment is appropriate if the moving party demonstrates that there is no
genuine issue of material fact and the movant is entitled to judgment as a matter of law.8 A fact is
material when it is essential to the claim, and issues of fact are genuine if the proffered evidence
permits a reasonable jury to decide the issue in either party’s favor.9 The movant bears the initial
burden of proof and must show the lack of evidence on an essential element of the claim.10 The
nonmovant must then bring forth specific facts showing a genuine issue for trial.11 These facts
must be clearly identified through affidavits, deposition transcripts, or incorporated exhibits—
conclusory allegations alone cannot survive a motion for summary judgment.12 The court views
all evidence and reasonable inferences in the light most favorable to the party opposing summary
judgment.13 Although neither party complied with local rules regarding dispositive motions, the
Court will consider the pending motion and response to preserve judicial resources associated
with trial.14

8

Fed. R. Civ. P. 56(a).

9

Haynes v. Level 3 Communications, LLC, 456 F.3d 1215, 1219 (10th Cir. 2006).

10

Thom v. Bristol-Myers Squibb Co., 353 F.3d 848, 851 (10th Cir. 2003) (citing Celotex Corp. v. Catrett,
477 U.S. 317, 322–23 (1986)).
11

Garrison v. Gambro, Inc., 428 F.3d 933, 935 (10th Cir. 2005).

12

Mitchell v. City of Moore, Okla., 218 F.3d 1190, 1197 (10th Cir. 2000) (citing Adler v. Wal-Mart Stores,
Inc., 144 F.3d 664, 670 (10th Cir. 1998)).
13

LifeWise Master Funding v. Telebank, 374 F.3d 917, 927 (10th Cir. 2004).

14

The requirements regarding motions for summary judgment in the District of Kansas are set forth in D.
Kan. Rule 56.1. Under that rule, memoranda or briefs in support of a motion for, or in opposition to, summary
judgment “must begin with a section that contains a concise statement of material facts as to which the movant
contends no genuine issue exists. The facts must be numbered and must refer with particularity to those portions of
the record upon which movant relies.” D. Kan. Rule 56.1. Neither party’s memoranda complied with this rule.
Rather, Webster Capital’s memorandum in support of its motion provided a lengthy narrative statement of facts and

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B. Controlling Law
“A federal court sitting in diversity applies federal procedural law and the substantive law
that would be applied by the forum state.”15 “[W]here a contract contains a choice-of-law clause,
the court will apply the forum state’s choice-of-law rules.”16 “Under Kansas law, parties to a
contract may select the law that will govern interpretation of their agreement, and Kansas courts
will generally honor that choice.”17 Here, the Continuing Guaranties contain a choice-of-law
provision, which states that the parties’ agreement shall be governed by Connecticut law.
Because this case arises under this Court’s diversity jurisdiction pursuant to 28 U.S.C. §
1332(a)(1), substantive issues are governed by Connecticut law while federal law governs
procedural issues.18
III.

Analysis

Webster Capital alleges that Defendants breached their contractual obligations under the
Continuing Guaranties. Under Connecticut law, a guaranty is a type of contract.19 “The elements
of a breach of contract action are the formation of an agreement, performance by one party,

contained no numbered paragraphs. As not to be outdone in non-compliance, Defendants, in their memorandum in
opposition to Webster Capital’s motion, appear to have copied and pasted Webster Capital’s statement of facts. But
on closer examination of Defendants’ statement of facts, where it serves their cause, Defendants omit, insert, or
change key words within Webster Capital’s narrative. The Court disapproves of each party’s failure to comply with
local rules, and admonishes both parties to examine the relevant local rules before filing documents with this Court.
15

Evans v. Orion Ethanol, Inc., 2011 WL 2516929, *1 (D. Kan. June 23, 2011) (citing Burnham v.
Humphrey Hospitality REIT Trust, Inc., 403 F.3d 709, 712 (10th Cir. 2005)).
16

Id. (citing MidAmerica Constr. Mgmt., Inc. v. MasTec N. Am., Inc., 436 F.3d 1257, 1260 (10th Cir.

17

Id. (citing Pepsi-Cola Bottling Co. of Pittsburg, Inc. v. PepsiCo, Inc., 431 F.3d 1241, 1255 (10th Cir.

18

Hanna v. Plumer, 380 U.S. 460, 465 (1965).

19

Garofalo v. Squillante, 760 A.2d 1271, 1275 (Conn. Ct. App. 2000).

2006)).
2005)).

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breach of the agreement by the other party and damages.”20 Neither party disputes that the
Continuing Guaranties constitute valid contracts or that Webster Capital adequately performed
its obligations by extending credit and financing. However, the parties dispute whether Ottawa
Bus defaulted under the Master Loan Agreement and loan schedules, thereby giving rise to
Defendants’ liability under their guaranties.
A. Ottawa Bus’s Default
Webster Capital argues that Ottawa Bus failed to pay various monthly installments,
giving rise to an event of default that invoked Defendants’ liability under the Continuing
Guaranties. Section 6(i) of the Master Loan Agreement expressly provides that “failure to pay
any installment(s) due hereunder or under one or more of the Schedules on the due date
therefor”21 constitutes an event of default. It is uncontroverted that Ottawa Bus failed to pay
Webster Capital monthly installments due in July, August, and September of 2010. Accordingly,
the Court finds that Ottawa Bus’s failure to pay these monthly installments constitutes an event
of default under the plain language found in Section 6(i) of the Master Loan Agreement.
Webster Capital also argues that Ottawa Bus’s bankruptcy filing constitutes a second
event of default that is independently sufficient to invoke Defendants’ liability under the
Continuing Guaranties.

The Continuing Guaranties and Section 6(iv) of the Master Loan

Agreement both provide that any bankruptcy filing by Ottawa Bus shall constitute an event of
default.
Defendants assert that these provisions are unenforceable, arguing that 11 U.S.C.
§ 365(e)(1) invalidates ipso facto clauses that terminate or modify a contract upon bankruptcy
20

Seligson v. Brower, 952 A.2d 1274, 1277 (Conn. Ct. App. 2008).

21

Master Loan Agreement, Pl.’s Ex. A, Doc. 49-2, at ¶ 6(i).

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filing. However, Congress expressly limited the scope of 11 U.S.C. § 365(e)(1) to “an executory
contract or unexpired lease,”22 neither of which apply in this case. Additionally, the prohibition
of ipso facto clauses relates to their enforcement against bankruptcy debtors like Ottawa Bus, not
against third-party guarantors like Defendants.23 Therefore, the Court finds that Ottawa Bus’s
bankruptcy filing gave rise to a second event of default under the Continuing Guaranties and
Section 6(iv) of the Master Loan Agreement.
The Master Loan Agreement provides that in the event of default, Webster Capital may
accelerate any and all obligations, such that the obligations “immediately become, due and
payable.”24 Webster Capital argues that it exercised that option on September 2, 2010, when it
sent its Notice of Default to Ottawa Bus. Defendants argue that the Notice of Default did not
operate to accelerate the obligations, but merely threatened acceleration if Ottawa Bus failed to
make the requisite payments. A plain reading of the Notice of Default refutes Defendants’
assertion.

The notice explicitly states that Ottawa Bus is “currently in default,” and

“[a]ccordingly, [Webster Capital] is accelerating the indebtedness.”25 Therefore, having found
that Ottawa Bus’s failure to pay monthly installments gave rise to an event of default, the Court
finds that Webster Capital properly exercised its right to accelerate the indebtedness when it sent
the Notice of Default on September 2, 2010.

22

11 U.S.C. § 365(e)(1)(B) (“[A]n executory contract or unexpired lease of the debtor may not be
terminated or modified . . . solely because of a provision in such contract or lease that is conditioned on . . . the
commencement of a case under this title.”).
23

See Days Inn of Am., Inc. v. Hotel Group, Inc., 739 A.2d 280, 282-83 (Conn. Ct. App. 1999).

24

Master Loan Agreement, Pl.’s Ex. A, Doc. 49-2, at ¶ 6.

25

Notice of Default, Pl.’s Ex. O, Doc. 49-16 (emphasis added).

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Defendants argue that Webster Capital’s allegations of default and acceleration are
misplaced because Ottawa Bus cured any alleged default when it paid past-due installments after
receiving Webster Capital’s Notice of Default. The Court rejects Defendants’ argument for two
reasons. First, the Court finds that Ottawa Bus’s bankruptcy filing constitutes an event of default
that is independently sufficient to invoke Defendants’ Continuing Guaranties regardless of
whether Ottawa Bus paid its monthly installments.

Second, the Master Loan Agreement

includes no provision granting Ottawa Bus an unqualified right to cure delinquent payments.
While Defendants point to a ten-day notice provision under Section 6(ii) and a sixty-day notice
provision under Section 6(iv), these sections relate to events of default that are distinct from the
one articulated in Section 6(i). These provisions are listed with a disjunctive posture, and the
Master Loan Agreement provides that “[t]he occurrence of any one or more of the following
shall constitute an ‘Event of Default.’ ”26 For these reasons, the Court finds that Ottawa Bus did
not cure the two events of default by paying the past-due installments it owed for July, August,
and September of 2010.
Having found that Ottawa Bus defaulted under the Master Loan Agreement, that
Webster Capital properly accelerated the indebtedness, and that Ottawa Bus’s past-due payments
were insufficient to satisfy its then-accelerated obligations, the Court examines Defendants’
corresponding liability as guarantors.

The Continuing Guaranties provide that Defendants

guarantee the “prompt payment of all [Ottawa Bus’s] indebtedness.”27 Additionally, the
guaranties provide that, in the event of default by Ottawa Bus, Webster Capital need not proceed

26

Master Loan Agreement, Pl.’s Ex. A, Doc. 49-2, at ¶ 6.

27

Daniel Newby Continuing Guaranty, Pl.’s Ex. M, Doc. 49-14, at 2; Thomacine Newby Continuing
Guaranty, Pl.’s Ex. N, Doc. 49-15, at 2.

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against Ottawa Bus before seeking direct recovery from Defendants. Therefore, when Ottawa
Bus defaulted by failing to pay monthly installments and by filing a petition for bankruptcy
protection, Defendants became personally liable for the accelerated balance of Ottawa Bus’s
obligations to Webster Capital. The record reveals that Webster Capital made a demand for
payment, but that Defendants have not satisfied Ottawa Capital’s obligations to Webster Capital.
Defendants’ refusal to make prompt payment of Ottawa Bus’s accelerated indebtedness
constitutes a breach of Defendants’ Continuing Guaranties. Because the uncontroverted facts
demonstrate that Webster Capital is entitled to judgment as a matter of law with respect to its
claims for breach of guaranty, the Court grants Webster Capital’s motion for summary judgment.
B. Webster Capital’s Damages
Webster Capital alleges that it is entitled to damages in a total amount of $425,834.69,
less any and all Plan payments made in Ottawa Bus’s bankruptcy after May 3, 2013, the date that
Webster Capital filed its dispositive motion.

According to Webster Capital, this figure

represents principal and interest, late charges, miscellaneous operating fees, and attorneys’ fees
owed by Defendants. The Court will analyze each category of damages in turn.
First, Webster Capital claims that Ottawa Bus has not yet paid the principal and interest
amounts due under the relevant loan schedules.28 Through amortization tables and the sworn
testimony of its Vice President, Amy Levy, Webster Capital demonstrates that Defendants’
principal and interest obligations were $345,306.07, as of May 3, 2013. Defendants do not
present any evidence to controvert this fact, and instead reiterate their unsuccessful argument that

28

The relevant loan schedules provide that in the event of default, interest on the outstanding principal
balance shall be recalculated at a rate of eighteen percent per annum. See, e.g., Loan Schedule No. 5, Pl.’s Ex. E,
Doc. 49-6, at 2.

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Ottawa Bus cured any alleged default. Accordingly, upon review of the record, the Court finds
that Webster Capital is entitled to damages for principal and interest payments in the amount of
$345,306.07, less any amounts paid through the bankruptcy Plan after May 3, 2013.
Second, Webster Capital requests an award of $21,188.78, consisting of miscellaneous
operating fees in an amount of $267.00, and late charges in an amount of $20,921.78. The
Continuing Guaranties expressly provide that, in the event of default, Defendants shall be liable
for the “prompt payment of all indebtedness, including, but not limited to, principal, accrued
interest, costs, late charges, out of pocket expenses, and attorneys’ fees, now due or hereafter
becoming due to [Webster Capital] in connection with the Instruments or collection thereon.”29
In support of its claim, Webster Capital submits sworn testimony and refers to its itemized Proof
of Claim submitted in the Ottawa Bus bankruptcy. Defendants provide no evidence or argument
to controvert Webster Capital’s calculation or entitlement to damages. Accordingly, the Court
finds that Webster Capital is entitled to an award of $21,188.78 relating to late charges and fees.
Third and finally, Webster Capital argues that it is entitled to attorneys’ fees. “The
general rule of law known as the ‘American rule’ is that attorney’s fees and ordinary expenses
and burdens of litigation are not allowed to the successful party absent a contractual or statutory
exception.”30 Connecticut generally adheres to the American rule,31 but maintains an exception
for specific contractual terms providing for the recovery of attorney’s fees and costs.32 Because
the Continuing Guaranties unambiguously provide that Defendants will be liable for the
29

Daniel Newby Continuing Guaranty, Pl.’s Ex. M, Doc. 49-14, at 2; Thomacine Newby Continuing
Guaranty, Pl.’s Ex. N, Doc. 49-15, at 2.
30

Rizzo Pool Co. v. Del Grosso, 689 A.2d 1097, 1105 (Conn. 1997).

31

Id.

32

Id.

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attorneys’ fees incurred in collecting the indebtedness due to Webster Capital, the Court finds
that Webster Capital is entitled to an award for attorneys’ fees reasonably incurred in this action.
Webster Capital has provided sworn testimony and invoices from its attorneys indicating
that as of May 3, 2013, it incurred legal fees in an amount of $59,339.84. Because the Court
anticipates that Webster Capital will seek to recover attorneys’ fees incurred after May 3, 2013,
and because Fed. R. Civ. P. 54(d) provides that claims for attorneys’ fees shall be made by
motion after judgment is entered,33 the Court refrains from awarding any specific amount of
attorneys’ fees at this time. The Court directs Webster Capital to submit its motion for attorneys’
fees pursuant to Fed. R. Civ. P. 54(d)(2)(B).
IT IS ACCORDINGLY ORDERED this 2nd day of August, 2013, that Plaintiff’s
Motion for Summary Judgment (Doc. 48) is hereby GRANTED.
IT IS SO ORDERED.

ERIC F. MELGREN
UNITED STATES DISTRICT JUDGE

33

Fed. R. Civ. P. 54(d)(2)(B)(i) (providing that motions for attorneys’ fees shall be filed no later than
fourteen days after the entry of judgment).

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