Guber et al v. Oak Rock Financial LLC et al
OPINION & ORDER: SO ORDERED that the Court has considered the parties' submissions in their entirety. For the foregoing reasons, the Order of the Bankruptcy Court is reversed as to the ZFI Alleged Participation Agreement as summary judgment sho uld have been entered in favor of ZFI and against IDB on the issue of whether ZFI has a true participation agreement, and reversed as to the Alleged Participation Agreements as the ambiguity in those Agreements precluded granting summary judgment to IDB on the issue of whether the Alleged Participation Agreements were true participations. The matter is remanded to the Bankruptcy Court for further proceedings consistent with this Order. Ordered by Judge Sandra J. Feuerstein on 3/31/2015. (Florio, Lisa)
IN CLERK'S OFFICE
U S DISTRICT COURT E D N y
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF NEW YORK
LONG ISLAND OFFICE
MAR 3 1 2015
OPINION AND ORDER
Appellants appeal from orders entered April24, 2014 (the "April24, 2014 Orders") by
the United States Bankruptcy Court for the Eastern District of New York (the "Bankruptcy
Court") which found that Appellants did not hold "true participations" and granted summary
judgment in favor oflsrael Discount Bank ofNew York ("!DB" or "Appellee").
Oak Rock Financial, LLC ("Oak Rock" or "Debtor") is a Delaware limited liability
company with its principal place of business at 3900 Veterans Highway, Suite 351, Bohemia,
New York 11716. [Adversary Proceeding 13-08709, Docket Entry No. 44
2]. Oak Rock "is an
asset-based lending company that provides financing to third parties pursuant to financing
installment contracts for the purchase of goods ranging from automotive products, furniture and
electronics to equipment and appliances." April I 0, 2014 Supplemental Findings of Fact and
Conclusions of Law ("Supplemental Findings"), at 3; [Bankruptcy Case 8:13-bk-72251
("Bankruptcy Docket"), Docket Entry No. 61 (Declaration of Clifford Zucker in Support of
Chapter II Petition and First-Day Motions ("Zucker Dec!.")~ 9)]. Oak Rock's business model
involves borrowing money from both commercial banks and private investors which it then loans
to selected dealers, who in turn use the funds to finance installment contracts for the purchase of
consumer goods or to extend small business loans. Zucker Dec!. ~ 9.
!DB is a New York State chartered, FDIC insured full-service commercial bank, with its
principal place of business located at 511 Fifth Avenue, New York, New York. [Adversary
Proceeding 13-08709, Docket Entry No. 44 ~ I]. !DB is the agent for a group of banks financing
Debtor's operations. Supplemental Findings, at 2.
Appellants are various individuals and/or entities that are parties to financing agreements
with the Debtor labeled "participation agreements." Supplemental Findings, at I. The
Appellants and the associated district court and Bankruptcy Court case numbers are provided
District Court Case No. 14-03 700/Bankruptcy Case No. 13-08079- Eric Rothenberg,
Alisse Rothenberg, Jeffrey Rapaport, Shelley Saftler, Corey M. Saftler, Corey Mr.
Saftler CGM IRA Custodian, Laura Kaplan, Arlene Saftler, Jane Doe No. I, as
custodian or trustee of Eric Jay Rothenberg Rollover IRA and Jane Doe No. 2, as
trustee of Jeffrey Rapaport M.D. Defined Benefit Profit Sharing Plan (the
District Court Case No. 14-03713/Bankruptcy Case No. 13-08102- "POS Funding"
District Court Case No. 14-03714/Bankruptcy Case No. 13-08154- Alan Guber,
Florence Guber, and Jacalyn Weidhom, (the "Guber Appellants");
District Court Case No. 14-03873/Bankruptcy Case No. 13-08103- the Brown
Family Group (together with Rose McGeever, the "Brown Appellants");
District Court Case No. 14-03874/Bankruptcy Case No. 13-08077- ZFI Endowment
Partners, L.P. ("ZFI");
District Court Case No. 14-03876/Bankruptcy Case No. 13-08078- U.S. Small
Business Administration as Receiver for Redstone Business Lenders LLC
("Redstone"), Finquest, Inc., Birnberg Group of Florida, Inc., the Birnberg
Foundation, Jack Birnberg, as trustee of the Michal Birnberg Trust, and Louise
Birnberg, as trustee for the Jack Birnberg Trust (the "Birnberg Appellants");
District Court Case No. 14-03878/Bankruptcy Case No. 13-08157- Estate of Elinor
Yagerman, James J. Gries Supplemental Trust Fund A/KIA Estate of James Gries,
Clinto~ Brown II~, John Grillo Natalie Grillo, as an individual, Natalie Grillo as
cu~tod~an for E~uly Grillo, Natalie Grillo as custodian for Christopher Grillo, Natalie
Gnllo as c~st?d1an for Matthew Grillo, Natalie Grillo as custodian for Samantha
Gnllo, ChristJ~n Garsault, Mru:ia Garsault, Elena Fischer, Robert Waynes, Margarita
Cardwell, Mmam Cardwell, L1zbeth Garcia a/k/a Lizbeth Garcia Mesa Charles
Cobb, as an individual, Jennifer Cobb, Charles Cobb as custodian for Tyler Cobb
Charles Cobb as custodian for Caitlyn Cobb, Rose McGeever, Lauren Clark, and'
William Clark (the "Yagerman Appellants");
District Court Case No. 14-03879/Bankruptcy Case No. 13-08119- Laurence and
Maureen Cox (the "Cox Appellants"); and
District Court Case No. 14-04450/Bankruptcy Case No. 13-08078- Redstone and
Oak Rock Credit Agreement
!DB, as lender and agent, various lenders and Oak Rock are parties to an Amended and
Restated Credit Agreement dated May 27, 2011 (as amended and modified, the "Credit
Agreement"). [Bankruptcy Docket, Docket Entry No. 5 (Declaration of Jerry Hertzrnan
II) and the exhibits thereto]. The lenders under the Credit Agreement
agreed to provide to Oak Rock a revolving credit facility with a maximum credit of ninety-six
million dollars ($96,000,000.00). Hertzman Dec!.~ 13. Oak Rock also executed and delivered
to !DB an Amended and Restated Security Agreement dated May 27, 2011 (the "Security
Agreement") which restates a security interest in favor ofiDB in all of Oak Rock's rights, title
and interest in, inter alia, "All Accounts, Loan Receivables and all records, documents, collateral
and other property related thereto," in addition to "all Collections and other monies due and to
become due under the Client/Dealer Loan Agreements or otherwise." Hertzrnan Dec!.
Ex. C (Security Agreement§ 3(a)(i)).
Oak Rock Dealer Loans
Part of Oak Rock's business model involved borrowing money from commercial banks
and private investors which it then loaned to selected dealers. Zucker Dec!.~ 9. In order to
secure a loan from Oak Rock, a dealer agreed to follow Oak Rock's procedures, use approved
retail contracts and was willing to personally guarantee the performance of all of the contracts
that it wrote. !d.~ I 0. Oak Rock offered dealers a revolving credit line upon execution of a
loan, security and service agreement, which explained the credit line terms and conditions and
granted Oak Rock a priority security interest in all ofthe dealer's assets. !d. The dealers also
executed personal guarantees of all obligations due to Oak Rock from the dealership. Jd
Oak Rock entered into agreements with the following dealers: (i) Patriot's Home & Auto
Outfitters, Inc.; (ii) Auto Underwriters of America, Inc. ("Auto Underwriters"); (iii) Gateway
Acceptance; (iv) M.K. Auto, Inc.; (v) Special Financing Co, LLC and Out of the Box Financing,
LLC; (vi) The College NetworkJUnited First Federal Funding Corp.; (vii) NowAuto Group, Inc.;
(viii) Earth Wind & Solar, Inc.; (ix) Magic Moments d/b/a Platinum Acceptance, (x) RAS
Group, Inc. and Century Liquidation, Inc.; (xi) North Shore Leasing and Funding Corp.; (xii)
U.S. Military Loans, Inc.; (xiii) Merchants Advance, LLC and AmeriMerchant LLC ("Merchants
Advance"); (xiv) XRIMS, LLC ("XRIMS"); (xv) The Junction, Inc., Help Me Ride, Inc.; (xvi)
EZ Auto Rental, Inc.; (xvii) Gungho Investments of Colorado Springs, Inc. d/b/a The Alternate
Source; (xviii) Nuevo Mundo Sales and Financing, LLC and Diamond Hot Rimz, LLC; (xix)
Great Lakes Financial LLC; and (xx) Allied Financial Investments (collectively, the "Dealer
Alleged Participation Agreements
Alleged Participation Agreements
Each Appellant other than ZFI (the "Alleged Participants") entered into an agreement
titled "Participation Agreement" (the "Alleged Participation Agreements") pursuant to which
each Appellant purchased a "participating interest" in varying amounts in certain of the Debtor's
financing agreements with the above-listed dealers. As noted by the Bankruptcy Court, each of
the Alleged Participation Agreements contain paragraphs with the same or similar language
including those set forth below.
There are three different variations of paragraph I:
a. Oak Rock hereby grants, bargains, sells and assigns to Participant as of this
date for$ __ a participating interest in the Agreement ..... The participating
interest shall bear interest at the rate of __ percent L_%) per annum and
shall be repayable to Participant in twenty-four equal monthly installments of
$__ commencing on __ .
b. Oak Rock hereby grants, bargains, sells and assigns to Participant as of this
date for $__ a participating interest in the Loan Agreement for a term of
__ year. The participating interest shall bear interest at the rate of __
percent($__ %) per annum and shall be repayable to the Participant at the
end of each calendar month commencing on __ .
c. Oak Rock hereby grants, bargains, sells and assigns to Participant as of this
date for $__ a participating interest in the Loan Agreement for a term of
__ year. The participating interest shall bear interest at the rate of __
L_ %) per annum. Interest due to the Participant shall be added to
Participant's participation balance at the end of each calendar month
commencing __ .
Oak Rock shall use its best efforts to conduct all transactions in accordance with sound
practice and within the terms of the underlying agreements. Both parties hereto expressly
understand and agree that no representations or warranties have been made with respect to the
validity or adequacy of any collateral and that each party hereto has no recourse whatsoever to
the other party excepting only for breach of this agreement, breach oftrust or malfeasance.
All compensatio~ for the above transactions as and when actually received shall be
diVIded between the pru:1es hereto in proportion to their respective participating interest, except
as follows: On the pnnc1pal amount of Participant's participating interest, compensation is to be
pmd at a rate per annum of _ _ %. Any and all losses shall be borne by and divided between us
in proportion to our respective participating interests.
ZFI Alleged Participation Agreement
ZFl and Oak Rock entered into an agreement (the "ZFI Alleged Participation
Agreement") on March 30,2013 whereby ZFI agreed to purchase from Oak Rock for a
renewable one-year term "without recourse, an undivided fractional interest" in Oak Rock's
dealer agreement with Merchants Advance. [Adversary Proceeding 13-8077, Docket Entry No.
61-3 (the "ZFI Alleged Participation Agreement")~ 1.2]. The parties agreed that ZFI's
participation would not "exceed the lesser of (i) One Million Dollars ($1 ,000,000.00) or (ii) three
and sixth-tenths percent (3.60%)" of the loans, advances, and other extensions of credit by Oak
Rock to Merchants Advance. !d.
Pursuant to the ZFI Alleged Participation Agreement, Oak Rock would "transmit to
[ZFI], as and when collected, as [ZFI's] share thereof, an amount equivalent to interest computed
upon Participation's outstanding investment in the Advances at the rate of thirteen percent
(13 .0%) per annum (the "Participation Rate"), payable at the end of each calendar month."
3.4. If Oak Rock made any payment to ZFI "in anticipation of the receipt of funds from
[Merchants Advance] and such funds [were] not actually received or applied by Oak Rock on the
date payment [was] due," ZFI was required, "on demand from Oak Rock, [to] forthwith return to
Oak Rock any such amounts transferred to [ZFI] by Oak Rock plus interest accrued thereon from
and including the day such amount were transferred by Oak Rock to [ZFI] but excluding the day
such amounts are returned by [ZFI], at a rate per annum equal to the Participation Rate."
3.5. If Oak Rock was "required at any time to return to [Merchants Advance] (as debtor in
possession or otherwise) or to a trustee, receiver, liquidator, custodian or other similar official
any portion of the payments made to Oak Rock," then ZFI was required, "on demand of Oak
Rock, [to] forthwith return to Oak Rock the corresponding amount of any payments transferred
to Participant hereunder, but without interest on such payments unless Oak Rock has been
required to pay interest on such amounts to the person recovering such payments." !d. These
obligations of ZFI were to "survive repayment of all amounts due under the Financing
Agreements and the termination of this Agreement." !d.
The ZFI Alleged Participation Agreement required Oak Rock to retain payments received
from ZFI "as custodian for the benefit of [ZFI]" (id.
3.6) and to provide a monthly accounting
regarding Oak Rock's disbursements to and receipts from Merchants Advance.
costs and expenses of collection were to be borne by Oak Rock, except that out-of-pocket costs
and expenses of collection by outside agencies or attorneys, court costs and the like were to be
borne by Oak Rock and Participant "pro-rata in accordance with their respective Participations."
3.7. Oak Rock was given the "right to manage, perform and enforce the terms of the
Financing Agreements and to exercise and enforce all privileges and rights exercisable or
enforceable by it thereunder according to Oak Rock's discretion and the exercise of its business
judgment including without limitation the right to renew, extend, modify, compromise or release
any obligation of Client or any guarantor, provided, however, that during the stated term of the
Financing Agreements, Oak Rock shall not, without Participant's prior written consent, which
consent shall not be unreasonably withheld or delayed, take any action which would (i) modify
the date fixed for or amount of any payment of principal, interest or extension fee; (ii) reduce
(except as required by the Financing Agreements in the ordinary course) the interest rate payable
thereunder; (iii) release (except as contemplated under the Financing Agreements in the ordinary
course) or subordinate any interest in the Specific Collateral; or (iv) release the Client or any
other party from personal liability, if any, under the Financing Agreements; but nothing herein
shall be deemed to confer upon Participant the right to bar Oak Rock from renewing or extending
the Financing Agreements at the end of the stated term thereof on such terms and conditions as
Oak Rock may elect."
4.1. Oak Rock was to "exercise the same care as it normally
exercises with respect to loans, advances or other extensions of credit in which no participation
are sold, but Oak Rock [was to] have no further responsibility to [ZFI] except as provided
[therein], except for its own willful misconduct." !d.
The ZFI Alleged Participation Agreement provided that the Participation and each
Participated Advance was "acquired by Participant without recourse to Oak Rock and for
Participant's own account and risk" (id.
4.4) and that Oak Rock "does not guarantee the
repayment of any Participated Advance and makes no representations or warranties, express or
implied, as to, and shall have no responsibility for, the due authorization, execution, or delivery
of the Financing Agreements or related documents by Client or any other person; the value,
legality, validity, sufficiency, enforceability or collectibility of any Participated Advance, the
Specific Collateral, or any other collateral or other support for the Participated Advances; any
representation or warranty made by, or the accuracy, completeness, currentness, or sufficiency of
any information provided (directly or indirectly through Oak Rock) by Client or any other
person; the performance or observance by Client or any other person of any of the provisions of
the Financing Agreements (or any of its other obligations in connection therewith); the financial
condition of Client; or (except as otherwise expressly provided herein) any other matter relating
to Client or any other person or any Participated Advances or the Financing Agreements."
4.4. ZFI represented and agreed with Oak Rock that ZFI had made its own independent credit
analysis of Merchants Advance and would continue to do so and not rely on Oak Rock to make
this credit decision or to provide documents and information sufficient for this credit analysis.
ZFI was given the right to terminate or renew the ZFI Alleged Participation Agreement
for an additional one-year term "on the one year anniversary date." Id.~ 5.1. Upon the effective
date of termination, Oak Rock was required to "repurchase from [ZFI] all of its Participations in
Advances then outstanding at a price equal to: (a) [ZFI]'s Investment in the Advances then
outstanding, plus (b) [ZFI' s] share of all charges or interest earned on the Advances to such
date." !d.~ 5.3( 1) 1• "Upon repayment by Oak Rock, [the ZFI Allegation Participation
Agreement] [shall] terminate for all purposes and except as otherwise provided in [the ZFI
Alleged Participation Agreement], each of the parties will be relieved of any liability to the other
arising from any prior transactions hereunder." !d. If Merchants Advance was in default on the
date of termination, "Oak Rock, in its sole discretion, may chose to liquidate the Participation
through the orderly liquidation of the outstanding Advances, in which case, [ZFI] will receive
from Oak Rock its proportionate share of the liquidation proceeds until such time as [ZFI] is paid
in full." Id.
The ZFI Alleged Participation Agreement provided that the "Agreement is intended by
the parties hereto to effect an arms' length purchase by [ZFI] of the Participation and it is not to
be construed as a loan or a commitment to make a loan by [ZFI] to Oak Rock." Jd.
Because the ZFI Alleged Participation Agreement contains two "5.3" sections, the first "5.3"
section wi II be referred to as "5 .3( I)" and the second "5 .3" section wi II be referred to as "5. 3(2)."
Bankruptcy Court Proceedings
On April29, 2013, !DB, along with Bank Leumi USA and Bank Hapoalim B.M., filed a
petition for involuntary relief under chapter 7 of the United States Bankruptcy Code against Oak
Rock in the Bankruptcy Court. [Bankruptcy Docket, Docket Entry No. 1]. By Order dated May
6, 20 13, the Bankruptcy Court converted the Bankruptcy Case from one under Chapter 7 to one
under Chapter II of the Bankruptcy Code. [Bankruptcy Docket, Docket Entry No. 37].
Oak Rock commenced adversary proceedings against !DB, as agent, and certain of the
Alleged Participants. 2 Supplemental Findings, at I. All parties filed answers, cross-claims and
counterclaims, and motions for summary judgment, oppositions thereto, replies and
supplemental statements were filed in each of the Adversary Proceedings.
On March 27, 2014, the Bankruptcy Court read its decision on the summary judgment
motions into the record [Bankruptcy Docket, Docket Entry No. 54 7], and issued written
Supplemental Findings of Fact and Conclusions of Law on April I 0, 2014 and Orders granting
summary judgment in favor of !DB in the Adversary Proceedings related to this appeal on April
24.2014 3 The Bankruptcy Court ruled that certain agreements, which are not at issue on this
appeal, were "true participation" agreements (see Supplemental Findings at 14, 18), but that the
The docket numbers and dates of initiation of the adversary proceedings are as follows: (I) May
30,2013 (Adv. Pro. Index Nos. 8-13-08077, 8-13-08078, 8-13-08079), (ii) June 27, 2013 (Adv. Pro.
Index Nos. and 8-13-08102, 8-13-08103), (iii) July 29,2013 (Adv. Pro. Index No. 8-13-08119), and (iv)
September 20, 2013 (Adv. Pro. Index Nos. 8-13-08154 and 8-13-08157) (collectively, the "Adversary
The Summary Judgment Orders (the "Summary Judgment Orders") and Supplemental Findings
of Fact and Conclusions of Law (the "Supplemental Findings") are as follows: (i) Rothenberg Appellants,
Adv. Pro. 13-08079- Docket Entry Nos. 57-58; (ii) Appellant POS Funding, Adv. Pro. 13-08102Docket Entry Nos. 47-48; (iii) Guber Appellants, Adv. Pro. 13-08154- Docket Entry Nos. 37; 39; (iv)
Birnberg Appellants and Appellant Redstone, Adv. Pro. 13-08078- Dkt. Nos. 63-64; (v) Yagerman
Appellants, Adv. Pro. 13-08157- Docket Entry Nos. 32-33; (vi) Cox Appellants, Adv. Pro. 13-08119Docket Entry Nos. 41-42, (vii) Brown Appellants, Adv. Pro. 13-08103- Docket Entry Nos. 68-69, and
(viii) Appellant ZFI, Adv. Pro. 13-08077- Docket Entry Nos. 102; 106.
agreements entered into by the Appellants were not "true participation" agreements. !d. at 1922.
The issue on each of these appeals is whether the Bankruptcy Court erred in granting
!DB's motion for summary judgment and determining that the Appellants do not hold "true
participations." Additionally, certain Appellants argue that the Bankruptcy Court should have
denied summary judgment to !DB because the agreements are ambiguous.
Standard of Review
This Court has jurisdiction to hear appeals from judgments, orders, and decrees of a
bankruptcy court. 28 U.S.C. § 158(a). On appeal from a bankruptcy court decision, a district
court reviews a bankruptcy court's findings of fact for clear error. Fed. R. Bankr. P. 8013.
Issues of Jaw, as well as "mixed questions of Jaw and fact," are reviewed de novo. In re
Vebuliunas, 332 F.3d 85, 90 (2d Cir. 2003). "On appeal the district court ... may affirm, modify,
or reverse a bankruptcy judge's judgment, order or decree or remand with instructions for further
proceedings." Fed. R. Bankr. P. 8013; see also In re Morea, 437 B.R. 40,50 (E.D.N.Y. 2010).
"On appeal to the district court from an order of the Bankruptcy Court granting summary
judgment, the standard of review is de novo." In reM Silverman Laces, Inc., No. 01-civ-6209,
2002 WL 31412465, *3 (S.D.N.Y. Oct. 24, 2002).
"Participation agreements are a form of multiple lender transaction[s]." In re Okura &
Co. (Am.). Inc., 249 B.R. 596, 607 (Bankr. S.D.N.Y. 2000). "A participation agreement is a
commonly used financing device for splitting a Joan between two or more lenders-the lead
lender and the participants. Some of the primary reasons for participation agreements are the
allocation of risk for the lead bank, the participant's passive role in negotiations with the
borrower, and diversification of a bank's portfolio." In re Sackman Mortgage Corp., 158 B.R.
926, 931 (Bankr. S.D.N. Y. 1993). "Participations are not loans; they are contractual
arrangements between a lender and a third party, in which the third party, or participant, provides
funds to the lender. The lender, in turn, uses the funds from the participant to make loans to the
borrower." In re ACRO Bus. Fin. Corp., 357 B.R. 785, 787-88 (Bankr. D. Minn. 2006) (citing
Bayer Corp. v. MascoTech, Inc. (In re AutoStyle Plastics), 269 F.3d 726, 736 (6th Cir. 2001)).
"Under a participation agreement, the participant agrees to pay the lead lender for the lead
lender's promise to transfer to the participant a like percentage of the underlying loan. In the
typical participation, the lead lender transfers to the participant not only the benefits to be
received from a share in the underlying loan (i.e. a pro rata share in the principal and interest
payments) but also the risk of the borrower's default. The lead lender makes no warranties or
guarantees about the borrower's ability to repay the loan or about the worth of the collateral in
the event of default. If the borrower does default, the participant is entitled to a pro rata share of
any monies received upon liquidation of the collateral, but it has no right of recourse against the
lead lender." In re Sackman Mortgage Corp., 158 B.R. at 932. If the agreements are "true
participations," and thus sales rather than loans, "then the funds are effectively removed from the
res of the estate." In re Lendvest Mortgage, Inc., 119 B.R. 199,200 (B.A.P. 9th Cir. 1990)
(citing Fireman's Fund Insurance Companies v. Grover (In re Woodson Co.), 813 F.2d 266,271
(9th Cir. 1987)).
Interpreting Participation Agreements
To determine whether an agreement is a true participation agreement or a disguised loan,
courts "first look to the written agreement to discern the parties' intent, limiting [their] inquiry
to the words ofthe agreement itself so long as the agreement sets forth the parties' intent clearly
and unambiguously." In re Sackman Mortgage Corp., 158 B.R. at 932. Under New York law,
the initial interpretation of a contract "is a matter of law for the court to decide." Int 'I Multifoods
Corp. v. Commercial Union Ins. Co, 309 F.3d 76, 83 (2d Cir. 2002) (citations omitted). "The
primary objective in contract interpretation is to give effect to the intent of the contracting parties
'as revealed by the language they chose to use."' Natwest USA Credit Corp. v. A/co Standard
Corp., 858 F. Supp. 401,412-13 (S.D.N.Y. 1994) (citing Sayers v. Rochester Telephone
Corporation Supplemental Management Pension Plan, 7 F.3d I 091, I 094 (2d Cir. 1993)). An
interpretation that gives a reasonable and effective meaning to all of a contract's terms is
preferred to one that leaves a part unreasonable or of no effect. !d. at 413.
In interpreting a contract, the Court must first determine "whether the contract is
unambiguous with respect to the question disputed by the parties." Int 'I Mu/tifoods Corp., 309
F.3d at 83. Contract language is unambiguous when it has "a definite and precise meaning,
unattended by danger of misconception in the purport of the [contract] itself, and concerning
which there is no reasonable basis for a difference of opinion." Sayers, 7 F.3d at I 095 (quoting
Breed v. Insurance Co. of North America, 46 N.Y.2d 351, 355,413 N.Y.S.2d 352, 385 N.E.2d
1280 ( 1978)). Contract language is ambiguous where it could suggest "more than one meaning
when viewed objectively by a reasonably intelligent person who has examined the context of the
entire integrated agreement and who is cognizant of the customs, practices, usages and
terminology as generally understood in the particular trade or business." Lightfoot v. Union
Carbide, 110 F.3d 898, 906 (2d Cir. 2007) (citations and quotations omitted). "The language of
a contract is not made ambiguous simply because the parties urge different interpretations."
Seiden Associates, Inc. v. ANC Holdings, Inc., 959 F.2d 425, 428 (2d Cir. 1992). "Unless an
ambiguity is found and proof of the parties' subjective intent is proffered, the court will not look
beyond the four corners of the contract when construing its meaning." In re Sackman Mortgage
Corp., 158 B.R. at 932. When the terms of a contract are ambiguous, extrinsic evidence,
including evidence of industry custom or practice, may be considered to determine the parties'
intent. See Christiania General Insurance Corp. v. Great American Insurance Company, 979
F.2d 268, 274 (2d Cir. !992).
Test to Determine a "True Participation" from a "Disguised Loan"
Courts have developed two tests to determine whether a transaction is a true participation
or whether it is in fact a disguised loan. The following factors indicate that a transaction is a true
money is advanced by participant to a lead lender;
a participant's right to repayment only arises when a lead lender is paid;
only the lead lender can seek legal recourse against the borrower; and
the document is evidence of the pmies true intentions.
In re Coronet Capital Co., 142 B.R. 78, 82 (Bankr. S.D.N.Y. !992).
However. "the relationship between a lead lender and a participant is characterized as
debtor and creditor if the participation is in fact a loan (In re Coronet Capital Co., 142 B.R. at
80) and the following factors indicate that a transaction is not in fact a participation, but rather a
I) guarantee of repayment by the lead lender to a participant;
2) participation that lasts for a shorter or longer term than the underlying obligation;
3) different payment arrangements between borrower and lead lender and lead lender
and participant; and,
4) discrepancy between the interest rate due on the underlying note and interest rate
specified in the participation.
Id; see also In re Sprint Mortgage Bankers Corp., 164 B.R. 224 (Bankr. E.D.N. Y. 1994).
"The most determinative factor of all of these is the risk allocation involved in the
transaction. If the participant does not bear the same risk of loss as the seller, or if the seller has
made a guarantee of payment to the participant, the transaction is generally considered a loan and
not a sale." In re Corporate Financing, Inc., 221 B.R. 671 (Bankr. E.D.N.Y. 1998). "In a
typical participation agreement, the lead lender makes no warranties or guarantees about the
borrower's ability to repay the underlying loan. Thus, an indicium of a loan is the guarantee of
repayment by the lead lender to a participant." In re Sackman Mortgage Corp., !58 B.R. at 933.
"[l]n cases considering whether financial transactions are true participations or disguised loans,
the most important question is whether the alleged participant is subject to the risk of loss
resulting from default by the underlying borrower. If the participant is not subject to that risk,
the transaction is a loan to the participation seller, not a participation in the seller's loan to its
borrower." In re Brooke Capital Corp., No. 08-22789-7,2012 WL 4793010, at *15 (Bankr. D.
Kan. Oct. 5, 20 12), rev 'd sub nom. S. Fid. Managing Agency, LLC v. Citizens Bank & Trust Co.,
No. 12-2702-JTM, 2014 WL 129336 (D. Kan. Jan. 14, 2014), rev'd sub nom. In re Brooke
Capital Corp., 588 F. App'x 834 (lOth Cir. 2014). "Factors which may cause a transaction to be
other than a true loan participation include anything that indicates the participants are not subject
to the normal risks of ownership, such as guaranteed returns by the lead institution, or required
repurchase agreements." McVay v. W. Plains Serv. Corp., 823 F.2d 1395, 1398 (I Oth Cir. 1987).
"Since a participation is, by its nature, contractual, the parties to a participation
agreement may choose whatever terms they wish and the agreement will generally be enforced
as to its terms." In re AutoStyle, 269 F.3d at 736. "Whether the parties intended outright sales or
loans for security is determined from all the facts and circumstances surrounding the transactions
at issues." In re Golden Plan o(Cali(ornia, Inc., 829 F.2d 705, 709 (9th Cir. 1986). "[M]erely
looking to what the agreement names the transaction is an insufficient basis to support the
finding of a participation agreement because, "[ s]imply calling transactions 'sales' does not
make them so. Labels cannot change the true nature of the underlying transactions." In re
Woodson Co., 813 F.2d at 272. It is the economic substance of a transaction that should
determine the rights and obligations of interested parties. See Liana Corp., N. V. v. PCH
Associates (in re PCH Associates), 804 F.2d 193, 199 (2d Cir. 1986).
Alleged Participation Agreements
Test for "True Participation" Agreements
Money Advanced by Participant to Lead Lender
The parties do not dispute that the first factor- that money was advanced by the Alleged
Participants to Oak Rock - is satisfied here.
Participant's Right to Repayment
The second factor of the true participation test- whether a participant's right to
repayment only arises when a lead lender is paid- hinges on the interpretation of Paragraphs I
and 6 of the Alleged Participation Agreements. Paragraph 6 provides that "all compensation for
the above transactions as and when actually received shall be divided between the parties hereto
in proportion to their respective participating interest." Alleged Participation Agreements ~ 6
(emphasis added). The Alleged Participants argue that "as and when actually received" refers to
Oak Rock's receipt of payment on the underlying Dealer Loans, and that the Alleged
Participant's right to "all compensation" was therefore conditioned on Oak Rock receiving
payments on the underlying Dealer Loan. See, e.g., [Docket 14-civ-3700, Docket Entry No.6
("Rothenberg Appellants Brief'), at 19-21]. On the other hand, !DB points to Paragraph I which
provides for a set rate of return to be paid according to a set schedule and makes no mention of
Oak Rock's receipt of funds from the underlying Dealer Loan. See [Docket 14-civ-3700, Docket
Entry No.9 ("!DB Brief'), at 17-20]. In response, the Alleged Participants argue that Paragraph
I of the Alleged Participation Agreements, which provides for the interest rate payment
schedule, must be read in conjunction with Paragraph 6, which states that "all compensation for
the above transactions as and when actually received shall be divided between the parties hereto
in proportion to their respective participating interest." Alleged Participation Agreements~ 6.
The Alleged Participants argue Oak Rock's receipt of payment on the underlying Dealer Loans
was a condition precedent to the Alleged Participants receiving Payment and thus the second
prong of the true participation test - whether the Alleged Participants right to repayment only
arose when Oak Rock was paid- is satisfied here and the Alleged Participants shared the same
underlying risk as Oak Rock in the Dealer Loans. See, e.g., [Docket 14-civ-3 700, Docket Entry
No. I 0 ("Rothenberg Appellants Reply Brief'), at 3].
The Alleged Participation Agreements are ambiguous as to whether the Alleged
Participant's right to repayment arose only when Oak Rock was paid. On the one hand,
Paragraph I suggests that the Alleged Participants would be paid a set interest rate on a particular
schedule, however Paragraph 6' s language that all compensation would only be paid "as and
when actually received" could be rendered superfluous if the Paragraph I 's interest payment
schedule was not conditioned on Oak Rock's receipt of payments from the Dealers "as and when
actually received." This ambiguity precludes a finding that the Alleged Participants were paid
regardless of whether Oak Rock was paid on the Dealer Loans and precludes the granting of
summary judgment. See Long Island Airports Limousine Serv. Corp. v. Playboy-Elsinore
Associates, 739 F .2d I 0 I, I 03 (2d Cir. 1984) ("We do not suggest now how the clauses or
language should be reconciled, only that they are not so clearly unambiguous as to be capable of
disposition on summary judgment").
Legal Recourse Against the Borrower
As for the third factor- whether only the lead lender can seek legal recourse against the
borrower- the Alleged Participation Agreements do not specifically state whether or not the
Alleged Participants have recourse against the Borrower on the underlying Dealer Loan,
however at least some of the agreements provide that "Oak Rock shall have and is hereby given,
the sole authority for and on behalf of the parties hereto, to administer the [Loan Agreement I
Agreement] in Oak Rock's name alone and the same shall be binding upon the parties hereto,
provided however, that with respect to effecting collections, Oak Rock shall be deemed to be
acting both for Oak Rock and with respect to Participant's interest in such transactions, for
Participant as Participant's agent." Alleged Participation Agreements~ 2 (emphasis added).
While not explicit, this language suggests that only Oak Rock has legal recourse against the
borrower and therefore weighs in favor of finding a true participation agreement. Similar
language has been found to give only the lender right to seek legal recourse against the borrower.
See In re Autostyle, 269 F.3d at 738, n.3 (participation agreements stated that "[t]he account shall
be conducted solely in [Lender's] name. [Lender] is entitled to make Advances as it deems fit
under the Agreements. [Lender] shall have the right to take all actions and proceedings, judicial
or otherwise that [Lender] may reasonably deem necessary or proper to protect the joint interests
provided herein ... ").
Document is Evidence of Parties' True Intentions
The fourth factor- whether the Alleged Participation Agreements evidence the intent of
Oak Rock and the Alleged Participants to create a true participation- weighs in favor of a
finding of a true participation as the agreements are all entitled "Participation Agreements," refer
to the Alleged Participants as "participants" and use terms that evidence a "participation" or
•·sale" including Paragraph One (I) which states that "Oak Rock hereby grants, bargains, sells
and assigns to Participant .... a participating interest." Alleged Participation Agreement~ I.
However, "[s]imply calling transactions 'sales' does not make them so. Labels cannot change
the true nature of the underlying transactions." In re Woodson Co., 813 F.2d at 272. The fact
that the Alleged Participation Agreements contain numerous references to terms such as
·'participation'' or "sale" does not compel the conclusion that the documents are in fact
participation agreements (see In re Coronet Capital Co., 142 B.R. at 82 ("although the parties
can call a document a "loan participation agreement", we are not obliged to make a holding that
exalts substance over form")) though it does provide some evidence that the parties intended to
enter into participation agreements. It does not appear that the Bankruptcy Court considered any
extrinsic evidence of the parties' intentions in entering these agreements, but such evidence may
help clarify whether the parties intended to enter into participation agreements or whether they
intended to enter into loan transactions.
Therefore, three of the four Coronet factors weigh in favor of finding that the Alleged
Pa1iicipation Agreements are true participation agreements and the Alleged Participation
Agreements are ambiguous as to the last factor.
"Disguised Loan" Test
Guarantee of Repayment by the Lead Lender to Participant
The first factor of the disguised loan test is whether the lead lender has guaranteed the
participant's repayment or otherwise shifted the risk away from the creditworthiness of the lead
lender's borrower to that of the lead lender itself. The "the risk allocation involved in the
transaction" is the "most determinative factor" because if the Alleged Participants "[do] not bear
the same risk of loss as [Oak Rock], or if [Oak Rock] has made a guarantee of payment to the
[Alleged Participants]" then the transactions will generally be considered to be loans rather than
sales. In re Corporate Fin., Inc., 221 B.R. at 679 (Bankr. E.D.N.Y. 1998). This issue is again
tied up in the internal inconsistency between Paragraphs I and 6 of the Alleged Participation
!DB argues that the Alleged Participants do not hold "true participations" because they
did not share the same risk in the Dealer Loans as Oak Rock. See !DB Brief, at 17-20. !DB
alleges that Paragraph I provides a guaranteed rate of return insofar as it gives the Alleged
Participants a fixed rate of return with specified interest rate on a specified schedule, and that the
exception in Paragraph 6 confirms that the Alleged Participants would receive this set amount as
it states that: "on the principal amount of Participant's participating interest, compensation is to
be paid at a rate per annum of [
]%." Alleged Participation Agreements~ 6; !DB Brief, at 19.
!DB argues that Paragraph 5, which provides that "each party hereto has no recourse whatsoever
to the other party excepting on/yfiJr breach of this agreement, breach of trust of malfeasance"
(id. ~ 5) (emphasis added) confirms that if Oak Rock failed to provide the promised rate of return
according to the schedule set forth in Paragraph l, it would be liable to the Alleged Participants
for breach of contract. !DB Brief, at 18. !DB argues that this guarantee indicates that the
Alleged Participants did not share the same risk as Oak Rock of default on the underlying Dealer
Loans because the Alleged Participants could look to Oak Rock as another source of potential
revenue as Oak Rock was contractually obligated to provide the guaranteed interest payments to
the Alleged Participants on the schedule provided for in Paragraph 1, even in the event of default
on the underlying Dealer Loan. !DB Brief, at 19-20. The Alleged Participations argue that there
is no guarantee of payment anywhere in the Alleged Participation Agreements. See, e.g.,
Rothenberg Appellants Brief, at 26.
While courts have found guaranteed interest payments by the lead lender to the
participant to be indicative of a disguised loan rather than a true participation, in those cases, the
guarantee was explicit and there were additional factors supporting a finding of a "disguised
loan." See, e.g., In re Woodson Co., 813 F.2d at 271 (court found agreements were not
purchases and sales because the investment was "risk-free" as the agreement provided that
investors were to be paid a guaranteed rate of interest monthly regardless of whether borrowers
made their monthly payments to lender; in event of default, the lender paid the investor the
interest and balance principal owed on the investor's "participation"; and lender purchased
insurance policy to insure its contractual obligations to investors); In re Coronet, 142 B.R. at 8081 ("agreement specifically provide[d] ... that 'Coronet agrees to pay interest on the Senior
Interest, at the Return Rate, during such period(s) of time as the Borrower shall not be current
with respect to the payment of interest on the loan'" and "require[ d] Coronet to repay the
balances of the Senior Interest at the Return Rate to the Participant prior to Coronet's retention of
any sums received at maturity.").
In In re Corporate Financing, the court found that despite the fact that there was a
'"functional' guarantee of repayment because [lender] continued to pay investors their interest
despite the fact that (unbeknownst to the individual investor) the underlying mortgagor had
defaulted on its payments to the [lender]," there was no guarantee of repayment because "the
explicit language of the [Agreement] makes no reference to a guaranteed repayment of the
defendant's investments." In re Corporate Financing, 221 B.R. at 679-80. In that case, the
Court contrasted "those instances where the courts have found that transactions constituted loans
because the investment was guaranteed." !d. at 680 (citing In re Woodson Co., 813 F.2d 266
(finding that transaction was loan based upon debtor's guarantee of monthly interest payments
regardless of underlying borrower's performance); In re Sprint Mortgage Bankers Corp., 164
B.R. at 229 (holding that investors had made loans to debtor because debtor's principal had
executed personal guarantees for the investments); In re Coronet Capital Co., 142 B.R. at 78
(relying upon guarantee of repayment to investor, court held investment was loan).
Where an investor receives "no contractual guarantee of repayment or compensation" in
the case of the borrower's default, "[s]uch assumption of risk strongly suggests that the 
investors [are] not in a creditor-debtor relationship with [Lender]." In re Golden Plan of
CaiijiJI·nia, Inc., 829 F.2d at 709-10. While "[a]n indicator of a disguised loan is a provision for
the participant to be guaranteed repayment of its principal and interest before the lead lender is to
receive its portion" (In re Sackman Mortage Corp., !58 B.R. at 935), the Alleged Participation
Agreements do not unambiguously contain such a provision guaranteeing repayment of the
Alleged Participant's principal and interest prior to Oak Rock receiving its portion. Whether
Paragraph I provides for an implicit guarantee of payment by Oak Rock to the Alleged
Participants is related to the ambiguity between Paragraphs I and 6 of the Alleged Participation
Agreements- while Paragraph I sets out a specific payment schedule of interest payments, there
is no explicit guarantee that Oak Rock win pay this amount to the Alleged Participants if it does
not receive payments from the Borrowers on the underlying Dealer Loans. If Oak Rock's
obligation under Paragraph I is conditioned on its receipt of payment from the Dealers provided
in Paragraph 6, then it cannot be said that Oak Rock has guaranteed repayment in the event of
default by the Dealers. The language of the Alleged Participation Agreements is ambiguous as
to whether there was a contractual guarantee of a certain return to the Alleged Participants.
Duration of Participation Agreement
As to the second factor- whether the participation lasts for a shorter or longer term than
the underlying obligation- the Alleged Participation Agreements "are for specified periods of
time that do not correlate to the underlying [Dealer Loans]." Supplemental Findings, at 21. The
fact that the Alleged Participation Agreements last for different periods of time than the
underlying loans is suggestive of a disguised loan. See In re Sprint Mortgage Bankers Corp.,
164 B.R. at 229 ("further indication that the transactions were loans is suggested by ... the term of
the investments ... Each assignment of mortgage to Plaintiffs stated that their "interest shall
definitely mature" one year from the date of the guarantee. However, each mortgage involved in
this case matured on a date other than the date on which Plaintiffs were entitled to repayment.");
In re Corporate Financing, Inc., 221 B.R. at *680 ("When the transaction with the investor has a
stated term longer or shorter than the term of the underlying mortgage, this is an indication of a
loan and not of a participation").
Many of the Alleged Participants argue that the difference in duration between the
Alleged Participation Agreements and the underlying Dealer Loans is "immaterial" because the
Dealer Loans continued to be renewed and that whatever payment schedule was set forth in the
Alleged Participation Agreements, the obligation of Oak Rock to pay the Alleged Participations
was conditioned on the provisions of Paragraph 6 of the [Alleged Participation Agreements].
See, e.g.. Rothenberg Appellants Brief, at 27. The Alleged Participants argue that the
Bankruptcy Court erred in concluding that "the commencement dates of the participation
agreements do not correspond with the dates of the underlying loans, so once each participation
agreement expires, the Debtor is obligated to return the initial investment regardless of the status
of the underlying loans" (Supplemental Findings, at 21) because "the Bankruptcy Court
overlooked the qualification in Paragraph 6 of the participation agreements that Oak Rock's
obligation to pay is conditioned on its receipt of the applicable funds from the Dealers. Thus,
contrary to the Bankruptcy Court's finding, Oak Rock would not be obligated to repay any of the
participations without first receiving payment from the underlying Dealer." Rothenberg
Appellants Reply Brief, at 9.
While at this stage, the different durations of the Alleged Participation Agreements and
the underlying Dealer Loans weighs in favor of finding that the agreements were loans rather
than "true participations," the Alleged Participants' arguments need to be reevaluated after
further consideration of the meaning of Paragraph 6.
Different Payment Arrangements
The Bankruptcy Court found the third factor, differing payment arrangements between
borrower and lead lender and lead lender and participant, to be very significant; the underlying
Dealer Loans were all revolving loans and the Bankruptcy Court held that "[w]hen participating
in a revolving loan agreement, that amount should fluctuate based on the amount of credit the
Debtor provides, and the amount the Debtor collects from the underlying borrower on any given
day. Such a relationship stands in stark contrast to what the [Alleged Participants) have in these
cases, which is a fixed payment schedule with a specified interest rate, or a fixed· interest rate
with the repayment of principal at the end." Supplemental Findings, at 22. On appeal, the
Alleged Participants argue that there is no caselaw supporting the proposition "that a participant
contractually limiting the amount of capital it puts at risk in a participation agreement relieves
the participant of or otherwise shifts its credit risk for the capital that has been invested"
(Rothenberg Appellants Reply Brief, at II) and that "[c]redit risk is not dependent upon the
amount of principal invested. The risk of default by the Dealer remains constant whether or not
the [Alleged Participants) invested additional capital each time Oak Rock made an advance to a
Dealer." !d. (emphasis in original).
While the Alleged Participation Agreements did not contain the "true-up" provisions
found in some of Oak Rock's other participation agreements, which required advancement of
additional funds if and when Oak Rock made subsequent advances in the revolving Dealer
Loans, the Court is not aware of any authority suggesting this precludes a finding that the
Alleged Participation Agreements are "true participations." In fact, the Sixth Circuit rejected a
similar argument made by appellants in In re Autostyle Plastics, Inc. (see Final Reply Brief of
Appellant, In re Autostyle Plastics, Inc., 2000 WL 34432863 (arguing bankruptcy court erred in
ruling that certain agreements were true participations in a revolving line of credit because, inter
alia, the "a one-time, lump-sum payment. .. cannot represent an undivided, participating interest
in a revolving line of credit" because under the revolver, the lender made continuous loans to the
borrower and "[a) true participant in a revolving credit facility would continually fund its
percentage portion of each loan and likewise receive its percentage portion of each repayment of
principal and interest" but the "one-time advances were materially different loans than the [)
revolving line of credit")) when it found that the agreements were valid participation agreements.
See In re AutoStyle Plastics, Inc., 269 F.3d 726 (finding agreements to be true participation
The fact that the underlying Dealer Loans were a revolving credit facility but the Alleged
Participations did not contain "true-up" provisions may be suggestive of a loan but it is not
determinative, as differing payment arrangements is just one factor to be considered. Moreover,
there is evidence that other aspects of the payment arrangements between Oak Rock and the
Dealers and between Oak Rock and the Alleged Participants were similar. See, e.g., Rothenberg
Appellants Reply Brief, at I 0 ("Each of the Dealer Loans required the Dealers to make monthly
payments of interest .... Similarly, the Participation Agreements required payments of interest
each calendar month").
Interest Rate Discrepancy
The fourth factor, discrepancy between the interest rate due on the underlying note and
interest rate specified in the participation, is, after risk allocation, "[t]he second most important
factor in determining whether a transaction is a Joan or a sale of a ... participation." In re
Corporale Financing, 221 B.R. at 680. The Alleged Participants argue that there was a lower
interest rate paid under the Alleged Participation Agreements than the Dealer Loans and this was
to compensate Oak Rock for originating and servicing the Dealer Loans. See Rothenberg
Participants Reply Brief, at 7-8. !DB does not respond to Appellants' arguments regarding the
interest rate differential between the Alleged Participation Agreements and the Dealer Loans.
See !DB Brief.
Some courts have suggested that a lower interest rate paid to a participant than that paid
on the underlying loan is consistent with a true participation agreement because it represents the
lead lender's fee for servicing or administrating the loans. See In re Woodson Co., 813 F.2d at
272 (in a true participation, the ditTerence between the interest rate paid by borrower and that
provided to investor-participants would be based on a spread reflecting seller's reasonable charge
for servicing the loans for investor-participants); In re Sackman Mortgage Corp., !58 B.R. at 935
("in a typical participation agreement, the participant pays the lead lender for administering the
loan by a direct fee, an adjustment of the interest or both."); In re Corporate Fin., Inc., 221 B.R.
at 680 ("Agreements provided that the plaintiff would retain the difference between the (higher)
rate paid by the mortgagor and the (lower) rate paid to the investor as compensation for servicing
the Joan. This is another strong indication that the investments .... were participations and not
intended as loans directly to the plaintiff."). While the Alleged Participation Agreements do not
explicitly state whether the difference in interest rates was intended as compensation to Oak
Rock for servicing the loan, the "the difference between the interest rate that [Oak Rock) was
charging [the Dealers] and the rate the [Alleged Participants] [were] to be paid under the
[Alleged Participation Agreements] could have been intended to compensate (Oak Rock) for
administering the loan." In re Brooke Capital Corp., 2011 WL 204278, at *8.
The Bankruptcy Court did not specifically address the interest rate discrepancy between
the Alleged Participation Agreements and the Dealer Loans other than to state that the Alleged
Participants argue that additional distinctions are immaterial "so long as (i) the interest rate on
the participation agreement does not exceed the interest rate on the underlying loan ... "
Supplemental Findings, at 22. If there is a lower interest rate on an Alleged Participation
Agreement than the corresponding Dealer Loan, this would weigh in favor of finding a true
participation agreement, however if the interest rate is higher, this would weigh in favor of
finding a ''disguised Joan." See In re Brooke Capital Corp., 2011 WL 204278, at *8
("requirement that the lead lender pay interest to the participant at a higher rate than it was
charging the underlying borrower would seem more suggestive of a loan from the 'participant' to
the lead lender than a lower rate is.").
Summary Judgment was Improperly Granted
In light of the Alleged Participation Agreements' ambiguity with respect to key issues
regarding whether the agreements are "true participations," particularly whether the Alleged
Participation Agreements provided for a guaranteed payment to the Alleged Participants and/or
whether the Alleged Participants' right to repayment only arose when Oak Rock was paid on the
underlying Dealer Loans, the Bankruptcy Court erred in granting summary judgment. See
Sayers v. Rochester Telephone Corp., 7 F.3d 1091, 1094 (2d Cir. 1993) ("In a contract dispute a
motion for summary judgment may be granted only where the agreement's language is
unambiguous and conveys definite meaning."); Topps Co. v. Cadbury Stani SA.!. C., 526 F.3d
63, 68 (2d Cir. 2008) ("a motion for summary judgment may be granted in a contract dispute
only when the contractual language on which the moving party's case rests is found to be wholly
unambiguous and to convey a definite meaning."); Schering Corp. v. Home Insurance Co., 712
F.2d 4, I 0 (2d Cir. I 983) ("where a contract is not wholly unambiguous, summary judgment
must be denied even where both parties move for pre-trial resolution").
It is not clear whether the Bankruptcy Court considered any extrinsic evidence 4 to
determine if such evidence could resolve the ambiguities or elucidate the intent of the parties
(see [Docket 14-civ-3876, Docket Entry No. 14 ("Redstone Reply Brief''), at 5-6 ("all relevant
extrinsic evidence should have been presented to the Bankruptcy Court in order for it to properly
determine what Oak Rock and [the Alleged Participants] intended")]; US ex rei. Keller Painting
Corp. v. Torcon, Inc., No. 12-civ-1061, 2014 WL 6769234, at *8 (E.D.N.Y. Nov. 29, 2014)
("Although a determination that a contract is ambiguous usually requires the court to deny
summary judgment. the court may nonetheless grant summary judgment where the extrinsic
evidence illuminating the parties' intended meaning of the contract is so one-sided that no
reasonable person could decide to the contrary" (internal citations omitted))), or whether
additional discovery was necessary to assist in the interpretation of these agreements. See, e.g.,
Rothenberg Appellants Brief at 6 ("No discovery took place prior to the filing of the summary
judgment motions"). The Bankruptcy Court's decision is reversed as to the Alleged Participation
Some potential extrinsic evidence has been pointed out in the Appellants' briefs, such Oak
Rock's audited financial statements which excluded the "participations sold" from Oak Rock's Loan
Receivables, and the testimony of Clifford Zucker, Chief Restructuring Officer of Oak Rock, that the
participations agreements were not the property of the Debtor's estate. See Zucker Dec!.~ 13
Agreements as the ambiguity in those Agreements precluded granting summary judgment to JOB
on the issue of whether the Alleged Participation Agreements were "true participations."
ZFI Alleged Participation Agreement
Jurisdiction over the ZFI Appeal
JOB argues that this Court does not have jurisdiction over ZFI's appeal because the
ZFI Adversary Proceeding is still pending and thus ZFI's appeal is an interlocutory appeal. JOB
Brief, at 3. ZFI argues that the appeal does arise from a "final" judgment, order or decree and
thus is appealable, or in the alternative, the Court should grant leave to appeal. [Docket 14-civ3874. Docket Entry No. II ("ZFI Reply Brief'), at 2-5].
"Bankruptcy court rulings are appealable to the district courts pursuant to 28 U.S.C. §
158(a), which gives the district court jurisdiction to review both final determinations, and, with
leave, interlocutory orders of the bankruptcy court." First Fidelity Bank. N.A., New Jersey v.
Hooker Investments. Inc. (In re Hooker Investments, Inc.), 937 F.2d 833, 836 (2d Cir. 1991).
"For appeals 'of right' a district court only has jurisdiction to hear appeals from 'final judgments,
orders, and decrees."' A des-Berg Investors v. Breeden (In re Bennett Funding Group. Inc.), 439
F.3d 155, 159-60 (2d Cir. 2006) (quoting 28 U.S.C. § 158(a)(l)).
The Second Circuit has held that:
The standards for determining finality in bankruptcy ditTer from
those applicable to ordinary civil litigation. The need for different
standards arises ti·om the fact that a bankruptcy proceeding is
umbrella litigation often covering numerous actions that are related
only by the debtor's status as a litigant and that often involve
decisions that will be unreviewable if appellate jurisdiction exists
only at the conclusion of the bankruptcy proceeding. We have thus
recognized that Congress intended to allow for immediate appeal in
bankruptcy cases of orders that finally dispose of discrete disputes
within the larger case.
In re Bennelt Funding Group. Inc., 439 F.3d at 160 (quoting Sonnax Industries, Inc. v. Tri
Component Products Corp. (In re Sonnax Industries, Inc.), 907 F.2d 1280, 1283 (2d Cir.
1990) (emphasis in original; internal quotation marks and citations omitted)); see also Cor Route
5 Co., LLC v. Penn Traffic Co. (In re Penn Traffic Co.), 466 F.3d 75, 77-78 (2d Cir. 2006) ("A
more flexible concept of 'finality' is applied in the bankruptcy context than in appeals of
ordinary civil litigation, such that orders in bankruptcy cases may be appealed if they finally
dispose of discrete disputes within the larger bankruptcy case." (quotations, brackets and citation
omitted)). "[A] 'dispute,' for appealability purposes in the bankruptcy context, means at least an
entire claim on which relief may be granted." In re Bennett Funding Group. Inc, 439 F.3d at
160 (quoting Shimer v. Fugazy (In re Fugazy Exp., Inc.), 982 F.2d 769, 775-76 (2d Cir. 1992)).
·'[F]or a bankruptcy court order to be final. .. the order need not resolve all of the issues raised by
the bankruptcy but it must completely resolve all of the issues pertaining to a discrete claim ... "
In re Fugazy Exp., Inc., 982 F.2d at 776; see also Quigley Co., Inc. v. Law Offices of Peter G.
Angelos (In re Quigley Co., Inc.), 676 F.3d 45, 51 (2d Cir. 2012) (holding that final orders in
bankruptcy cases are "orders that finally dispose of discrete disputes within the larger case"
(quotations and citation omitted)).
Although the Bankruptcy Court's April24, 2014 Orders resolved a discrete dispute
within the larger bankruptcy case- whether certain agreements constitute "true participations" or
"disguised loans," the April24, 2014 Orders did not terminate the Adversary Proceeding in the
ZFI case as there are apparently claims still pending in that Adversary Proceeding. 5 "Because
In the Adversary Proceeding ( 13-8077), ZFI also asserted cross-claims against IDB for unjust
enrichment (seventh claim) and tortious interference (eighth claim) and equitable subordination (ninth
claim) [Adv. Pro. 13-8077, Docket Entry No. 14] but in its notice of motion for summary judgment
requested an order entering summary judgment in favor of ZFI only with respect to the first through sixth
claims for relief in ZFI's Counterclaim, Cross-Claim and Third-Party Complaint [Adv. Pro. 13-8077,
Docket Entry No. 61, at 4] and thus it appears that ZFI's seventh through ninth claims in the Adversary
there are claims still pending ... in the adversary proceeding, [the) order was not a final judgment,
and therefore, the appeal is interlocutory." Fischer v. 47th St. Photo, Inc., No. 92-civ-6529, 1993
WL 126525, at *2 (S.D.N.Y. Apr. 22, 1993); see also In re Chateaugay Corp., 922 F.2d 86, 90
(2d Cir. 1990) (''[a)n order granting partial summary judgment is interlocutory" (citing Liberty
Mutual Ins. Co. v. Wetzel, 424 U.S. 737,742-43,96 S.Ct. 1202, 1205-06,47 L.Ed.2d 435
(1976))); Matter of Wood & Locker, Inc., 868 F.2d 139, 144 (5th Cir. 1989) ("no appeal may be
taken from a bankruptcy court order that adjudicates fewer than all of the claims or the rights and
liabilities of fewer than all of the parties in an adversary proceeding absent Rule 54(b)
certification-even if the order would be considered final if it arose in another context"); In re
Hawker Beechcraft, Inc., No. 12-misc-11873, 2013 WL 6673607, at *4 (S.D.N.Y. Dec. 18,
2013) (Bankruptcy Court's decision was not a final order where "the adversary proceeding
remain[ed) open"); Brooks Fashion Stores, Inc. v. Wainscott Sportswear, Inc., No. 96-civ-0362,
1996 WL 221591, at *I (S.D.N.Y. May I, 1996) ("Order did not resolve the entire adversary
proceeding" and therefore, "the partial summary judgment [was) an interlocutory order").
ZFI urges the Court to exercise its discretion to grant leave to appeal pursuant to 28
U.S. C. § 158(a)(3) which provides that "interlocutory orders and decrees" may be appealed
"with leave of the court." 28 U.S.C. § 158(a)(3). "In exercising their discretion as to whether to
grant leave to appeal an interlocutory order in a bankruptcy case, district courts have generally
applied the standards set forth in 28 U.S.C. § 1292(b)." In re Hawker Beechcraft, Inc., 2013 WL
6673607, at *4. Thus, to determine whether leave to appeal an interlocutory order should be
granted, a district court considers whether: (I) "such order involves a controlling question of
law," (2) "as to which there is substantial ground for difference of opinion" and (3) "an
Proceeding remain pending and ZFI allegedly "continues to prosecute [them] ... by, among other things,
serving interrogatories on I DB." IDB Brief, at 3.
immediate appeal from the order may materially advance the ultimate termination of the
litigation." 28 U.S.C. § 1292(b); see In re Cutter, No. 05-civ-5527, 2006 WL 2482674, at *3
(E.D.N.Y. Aug. 29, 2006) (stating that, while neither§ 158 nor the Bankruptcy Rules "provides
guidelines for determining whether a district court should grant leave to appeal...most district
courts in the Second Circuit have applied the analogous standard for certifying an interlocutory
appeal ti·om a district court order, set forth in 28 U.S.C. § 1292(b)" (citations omitted)). It is in
the district court's "discretion" to "permit an appeal to be taken from such order." 28 U.S.C. §
1292(b). "[L ]eave to appeal from interlocutory orders should be granted only in exceptional
circumstances [that]. .. overcome the general aversion to piecemeal litigation and justify departing
from the basic policy of postponing appellate review until after the entry of a final judgment."
Picardv. Estate o[Madofj; 464 B.R. 578,582-83 (S.D.N.Y. 2011) (citation and quotation
omitted); see also Klinghoffer v. S.N. C. Achille Lauro Ed Altri-Gestione Motonave Achille
Lauro in Amministrazione Straordinaria, 921 F.2d 21, 25 (2d Cir. 1990) (stating that "only
exceptional circumstances [will] justify a departure from the basic policy of postponing appellate
review until afier the entry of a final judgment" (internal citations omitted)).
Under the first prong, a "controlling question oflaw exists if: (I) reversal ofthe ... court's
opinion could result in dismissal of the action, (2) reversal of the ... court's opinion, even though
not resulting in dismissal, could significantly affect the conduct of the action, or (3) the certified
issue has precedential value for a large number of cases." In re Lloyd's Am. Trust Fund
Litig, 96-civ- I 262, I 997 WL 458739. at *4 (S.D.N.Y. Aug. 12, 1997) (citing Klinghoffer, 921
F.2d at 24. Here, the question is a question of law- review of the Bankruptcy Court's granting
of summary judgment on the meaning of agreements- and the question is controlling because
"[a]lthough a reversal here would not result in dismissal of the adversary proceeding, it would
undoubtedly significantly affect the conduct of the adversary proceeding" (In re Hawker
Beechcrafl, Inc., 2013 WL 6673607, at *4) because whether the ZFI Alleged Participation
Agreement is a true participation agreement or a disguised loan will impact the ZFI Adversary
Under the second prong, there may be "substantial ground for difference of opinion" with
respect to the legal issue presented for interlocutory appeal when "(I) there is conflicting
authority on the issue, or (2) the issue is particularly difficult and of first impression for the
Second Circuit." In re Lloyd's Am. Trust Fund Litig., 1997 WL 458739, at *5 (citing
Klinghoffer, 921 F.2d at 25). Here, the issue presented on appeal regarding the distinction
between true participation agreements and disguised loans is complex and as multiple parties
have noted, there is scant caselaw on the issue (see Rothenberg Appellants Brief at 18 ("There
are also only a handful of cases around the country dealing with the issue, and none by the
Second Circuit"); see [Docket 14-civ-3876, Docket Entry No. 5 ("Redstone Brief'), at 8 ("The
Second Circuit has not yet provided controlling authority as to what is necessary to prove a true
loan participation.")], thus, the second section 1292(b) factor is satisfied.
Finally, with respect to the third factor, whether an immediate appeal from the order may
materially advance the ultimate termination of the litigation, withholding leave to appeal would
not only prejudice ZFI but it would delay the ultimate resolution of an important issue in the
bankruptcy- whether the Appellants hold true participations or disguised loans. Thus, ZFI has
shown that "exceptional circumstances" warrant a departure from the policy against interlocutory
appeals because granting ZFI leave to appeal would prevent unduly delay and piecemeal
litigation on the important issue of whether Appellants hold true participations or disguised
ZFI Alleged Participation Agreement
The Bankruptcy Court found that while the ZFI Alleged Participation Agreement
"contains the four requirements of a participation agreement enunciated in Coronet Capital Co.,
it also contains characteristics of an unsecured loan or investment under applicable caselaw" and
therefore granted summary judgment in favor of !DB and against ZFI. Supplemental Findings,
at 19. However, consideration of the factors distinguishing a disguised Joan from a participation
agreement indicates that the ZFI Alleged Participation Agreement is a true participation
agreement and not a disguised Joan.
The Bankruptcy Court found that the ZFI Alleged Participation Agreement's "one year
term limit put the risk ofloss of the transaction on the Debtor, which must provide ZFI with a
full return of its $1 million investment at the end of the one year term, no matter how the
Merchants Advance Loan performed." Supplemental Findings, at 19. The Bankruptcy Court
focused solely on Paragraph 5.3(1), which allows ZFI to terminate the Agreement at the end of
its one-year term and obligates Oak Rock to repurchase ZFI's interest (see ZFI Alleged
Participation Agreement 'II 5.3( I)), but ignored Paragraph 5 .3(2), which provides that
"notwithstanding the provisions of Paragraphs 5.1, 5.2 and 5.3 ... if[Merchants Advance] [was]
in default on the date of termination, Oak Rock, in its sole discretion, [could] chose to "liquidate
the Participation through the orderly liquidation of the outstanding Advances, in which case
[ZFI] [would] receive from Oak Rock its proportionate share of the liquidation proceeds until
such time as [ZFI] [was] paid in full." !d. '\15.3(2). This provision makes clear that Oak Rock
was not obligated "to provide ZFI with a full return of its $1 million investment at the end of the
one year term, no matter how the Merchants Advance Loan performed" (Supplemental Findings,
at 19), but could, if the Merchants Advance Loan was in default, choose to liquidate the loan and
ZFI would only receive its proportionate share of the liquidation proceeds. Therefore, ZFI and
Oak Rock proportionally shared the risk of default by Merchants Advance, the underlying
borrower. See In re Sackman Mortgage Corp., 158 B.R. at 932 ("[i]n the typical participation,
the lead lender transfers to the participant not only the benefits to be received from a share in the
underlying loan (i.e. a pro rata share in the principal and interest payments) but also the risk of
the borrower's default ... If the borrower does default, the participant is entitled to a pro
rata share of any monies received upon liquidation of the collateral, but it has no right of
recourse against the lead lender."); In re Brooke Capital Corp., 2012 WL 4793010, at *15 ("in
cases considering whether financial transactions are true participations or disguised loans the
most important question is whether the alleged participant is subject to the risk of loss resulting
from default by the underlying borrower"). Section 5 of the ZFI Alleged Participation
Agreement provided no guarantee of repayment by Oak Rock to ZFI if Merchants Advance
defaulted on the underlying loan, which is consistent with other provisions in the Agreement.
See ZFl Alleged Participation Agreement~ 4.4 (Oak Rock "does not guarantee the repayment of
any Participated Advance ... ").
As to "[t)he second most important factor in determining whether a transaction is a loan
or a sale of a ... participation" (In re Corporate Financing, 221 B.R. at 680), there was no
discrepancy in interest rates as "the lowest rate of return to which Oak Rock was entitled on the
Merchants Advance Loan was 13.0%" and "ZFI was also entitled to receive a fixed rate of
13.0% on its participation in the Merchants Advance Loan- equal to or lower than the rate
received by Oak Rock" and thus ZFI "never stood to receive a higher rate of return than did Oak
Rock." [Docket 14-3874, Docket Entry No.6 ("ZFI Brief"), at 19). The Bankruptcy Court did
not discuss this factor.
The Bankruptcy Court also relied upon the fact that the terms of the ZFI Alleged
Participation Agreement do not match the terms of the Merchants Advance Loan because the
agreements had different commencement dates and there was no requirement in the ZFI Alleged
Participation Agreement for purchases of like participations in subsequent advances or periodic
reconciliations between the Debtor and ZFI to reflect the payments and drawdowns on the
underlying loan. Supplemental Findings, at 19. However, as noted supra in Section II.C.2.c.,
the Court is not aware of any authority suggesting that the lack of a "true-up" provision in a
participation agreement in a revolving loan precludes finding the agreement is a true
participation. Moreover, the absence in the ZFI Alleged Participation Agreement of the "trueup" provision found in some of Oak Rock's other participation agreements is not fatal to finding
that the ZFI Alleged Participation Agreement is a true participation because "a participation is,
by its nature, contractual, [and] the parties to a participation agreement may choose whatever
terms they wish and the agreement will generally be enforced as to its terms." In re AutoStyle,
269 F.3d at 736.
Based upon the foregoing, the ZFI Alleged Participation Agreement should be enforced
according to its terms. The parties chose to create a participation agreement as the language of
the agreement demonstrates that ZFI would be paid only when Oak Rock was paid by Merchants
Advance (see ZFI Alleged Participation Agreement~ 3.4), the parties shared the risk of a
Merchants Advance default as ZFI was not guaranteed full repayment but only its proportionate
share of the liquidation proceeds in the event of a default (see id.
3.5, 4.4, 5.3(2)), and the
agreement unambiguously evidences the parties' intent to create a true participation agreement.
6.5 ("This Agreement is intended by the parties hereto to effect an arms' length
purchase by Participant of the Participation and it is not to be construed as a loan or a
commitment to make a loan by Participation to Oak Rock."). Because the ZFI Alleged
Participation bears all the hallmarks of a true participation agreement and none of the disguised
loan factors provide a basis to recharacterize the agreement as a disguised loan, the ZFI Alleged
Participation Agreement is a true participation agreement and the Bankruptcy Court erred in
granting summary judgment to !DB rather than to ZFI on this issue.
The Court has considered the patiies' submissions in their entirety. For the foregoing
reasons, the Order of the Bankruptcy Court is reversed as to the ZFI Alleged Participation
Agreement as summary judgment should have been entered in favor of ZFI and against !DB on
the issue of whether ZFI has a true participation agreement, and reversed as to the Alleged
Participation Agreements as the ambiguity in those Agreements precluded granting summary
judgment to !DB on the issue of whether the Alleged Participation Agreements were true
participations. The matter is remanded to the Bankruptcy Court for further proceedings
consistent with this Order.
s/ Sandra J. Feuerstein
Sandra J. Feuerstein
United States District Judge
Dated: March 31, 2015
Central Islip, New York
Disclaimer: Justia Dockets & Filings provides public litigation records from the federal appellate and district courts. These filings and docket sheets should not be considered findings of fact or liability, nor do they necessarily reflect the view of Justia.
Why Is My Information Online?