McDonald Data Services, Inc. et al v. Secure One Data Solutions, LLC
MEMORANDUM OPINION AND ORDER re 71 MOTION for Summary Judgment filed by St. Cloud Capital Partners II, L.P., 54 MOTION for Summary Judgment filed by McDonald Data Services, Inc., Chris Henretta. Signed by Judge Amos L. Mazzant, III on 3/7/16. (cm, )
United States District Court
EASTERN DISTRICT OF TEXAS
MCDONALD DATA SERVICES, INC. and
and CHRIS HENRETTA
SECURE ONE DATA SOLUTIONS, LLC
ST. CLOUD CAPITAL PARTNERS II, L.P.
CASE NO. 4:13-CV-384
MEMORANDUM OPINION AND ORDER
Pending before the Court is Plaintiffs’ Motion for Summary Judgment (Dkt. #54) and
Intervenor’s Motion for Summary Judgment and Brief in Support (Dkt. #71). After reviewing
the relevant pleadings, the Court finds that the motions should be denied.
On September 6, 2007, Intervenor St. Cloud, individually and as successor-in-interest to
St. Cloud Capital Partners II, L.P., and Cal Coast Data Entry, Inc. (“CCDE”) entered into a credit
facility evidenced, in part, by a Securities Purchase Agreement (“SPA”) and Secured Promissory
Notes (“Note One”) (Dkt. #60 ¶ 9). Subsequently, CCDE formed Secure One as a wholly
owned subsidiary (Dkt. #60 at ¶ 10).
In April 2008, Secure One executed a Loan Assumption Agreement becoming an obligor
under Note One and the SPA (Dkt. #60 at ¶ 11). Secure One executed a Joinder Agreement and
pledged its assets under the SPA (Dkt. #60 at ¶ 11).
On October 1, 2008, Secure One signed a Secured Promissory Note under which Secure
One agreed to pay St. Cloud the sum of $1,500,000 (“Note Two”) (Dkt. #60 at ¶ 12). On the
same date, Secure One signed a Pledge and Security Agreement (the “PSA”) under which Secure
One granted St. Cloud a security interest in the Collateral (as defined in the PSA) (Dkt. #60 at ¶
Also on October 1, 2008, Secure One, on the one hand, and McDonald and Data
Preparation Int’1, Ltd. (“Data Preparation”), on the other hand, executed an Asset Purchase
Agreement and Promissory Note (collectively referred to as the “APA”) (Dkt. #60 at ¶ 13).
McDonald and Data Preparation may be collectively referred to as “Junior Lender” (Dkt. #60 at
Additionally, on October 1, 2008, in conjunction with the execution of the APA, Secure
One, McDonald, Data Preparation, and St. Cloud signed a Subordination Agreement (the
“Agreement”) (Dkt. #60 at ¶ 14).
The Agreement, in relevant part, states as follows:
The Junior Lender (Plaintiffs) hereby subordinates any and all indebtedness now
or at any time hereafter owing by Borrower (Secure One), or any successor or
assign of the Borrower, including without limitation, a receiver, trustee, or debtorin-possession...to the Junior Lender, whether such indebtedness is absolute,
contingent, direct or indirect and howsoever evidenced, including without
limitation, all interest thereon, including pre-petition and post-petition interest,
fees, and expenses and any other charges, and any refinancings thereof
(collectively the “Junior Debt”) to any and all indebtedness now or at any time
hereafter owing by the Borrower to the Senior Lender (St. Cloud).
The Junior Lender (Plaintiffs) hereby subordinates all security interests, liens,
encumbrances and claims, whether now existing or hereafter arising, which in any
way secure the payment of the Junior Debt...to all security interests, liens,
encumbrances and claims, whether now existing or hereafter arising, which in any
way secure the payment of the Senior Debt.
The Junior Lender shall not (i) exercise any of the remedies with respect to the
Junior Debt, or (ii) take any action to enforce any of its liens on the Junior
The Junior Lender agrees that it shall have no right to possession of any assets
included in the Junior Lender’s Collateral or in the Senior Lender’s Collateral,
whether by Judicial Action or otherwise.
(Dkt. #60 at ¶¶ 15-16).
Under the Subordination Agreement, Plaintiffs agreed to subordinate all indebtedness
owed by Secure One to St. Cloud (Dkt. #60 at ¶ 17).
On December 16, 2009, Secure One signed a Secured Promissory Note under which
Secure One agreed to pay St. Cloud the sum of $1,500,000 (“Note Three”) (Dkt. #60 at ¶ 18).
Note Three was originally due on August 31, 2012 (Dkt. #60 at ¶ 18). On June 20, 2011, St.
Cloud and Secure One signed a Change In Terms Agreement (“CITA One”) thereby aggregating
the principal and interest under Note One, Note Two, and Note Three, and amending the terms of
payment under those notes (Dkt. #60 at ¶ 18).
On December 1, 2012, St. Cloud and Secure One signed a Change In Terms Agreement
(“CITA Two”) amending the terms of payment in which Secure One agreed to pay all amounts
due to St. Cloud by no later than December 31, 2014 (Dkt. #60 at ¶ 19).
Plaintiffs initiated this lawsuit against Defendant on July 9, 2013, asserting a cause of
action for breach of promissory note (Dkt. #60 at ¶ 20).
On October l, 2013, Plaintiffs and Defendant entered into a forebearance agreement (the
“Forbearance Agreement”) whereby the parties agreed to stay any prosecution of this action in
exchange for regular monthly payments from Defendant (Dkt. #60 at ¶ 21). The Forbearance
Agreement extended the payment deadline until June 1, 2014 (Dkt. #60 at ¶ 21).
On June 1, 2014, the parties entered into the First Amendment to the Forbearance
Agreement extending the terms of the Forbearance Agreement to July 1, 2014 (Dkt. #60 at ¶ 22).
On July 10, 2014, the Parties entered into a Second Amendment to the Forbearance
Agreement extending the terms to January 1, 2015 (Dkt. #60 at ¶ 23).
After the alleged default by Defendant under the Second Amendment to the Forbearance
Agreement, Plaintiffs failed to send a written Blockage Notice and wait the requisite 180 days
activated by the sending of the Blockage Notice (Dkt. #60 at ¶ 29).
On June 1, 2015, St. Cloud sent a Blockage Notice to Secure One. As of the filing of this
Response, 180 days have not elapsed since Secure One delivered this Blockage Notice (Dkt. #60
at ¶ 30).
On June 10, 2015, St. Cloud sent a demand that Plaintiffs perform their obligations under
the Agreement (Dkt. #71 at ¶ 16).
St. Cloud is the owner and holder of Note One, Note Two and Note Three. Note One,
Note Two and Note Three were never assigned or transferred to any other person or entity (Dkt.
#71 at ¶ 17).
As of April 30, 2015, Secure One was indebted to St. Cloud in the sum of $3,189,599.76,
including principal and accrued interest (Dkt. #60 at ¶ 31).
Interest is accruing under Note One, Note Two and Note Three at the rate of twelve
percent per annum, or $974.86 per diem (Dkt. #71 at ¶ 18).
St. Cloud has incurred attorney’s fees in the sum of approximately $21,000.35 of this
sum, St. Cloud incurred attorney’s fees related to collection on Note One, Note Two and Note
Three against Secure One in the sum of $7,000. St. Cloud incurred attorney’s fees related to the
determination and enforcement of its rights under the Subordination Agreement, the declaratory
judgment action, and the determination of lien priority, against Plaintiffs in the sum of $14,000
(Dkt. #71 at ¶ 19).
On September 10, 2015, Plaintiffs filed their Motion for Summary Judgment and Brief in
Support (Dkt. #54). On October 2, 2015, Defendant filed Secure One Data Solutions, LLC’s
Response and Brief in Support of Response to Plaintiffs’ Motion for Summary Judgment (Dkt.
#60). On October 9, 2015, Plaintiffs filed their Reply to Defendant’s Response to Plaintiffs’
Motion for Summary Judgment (Dkt. #63). Plaintiffs seek summary judgment that Secure One
breached the Promissory Note and that Plaintiffs are entitled to attorneys’ fees based on Secure
One’s breach (Dkt. #54 at p. 2)
On January 15, 2016, St. Cloud filed Intervenor’s Motion for Summary Judgment and
Brief in Support (Dkt. #71). On January 29, 2016, Plaintiffs filed Plaintiffs’ Response to
Intervenor St. Cloud’s Motion for Summary Judgment (Dkt. #72). On February 5, 2016, St.
Cloud filed Intervenor’s Reply to Plaintiffs’ Response to Intervenor’s Motion for Summary
Judgement (Dkt. #73). On February 15, 2016, Plaintiffs filed their Sur-Reply to Intervenor St.
Cloud’s Motion for Summary Judgment (Dkt. #74). St. Cloud seeks summary judgment against
Secure One on its claim for breach of contract and attorneys’ fees against Secure One for breach
of the notes (Dkt. #71 at ¶ 2). St. Cloud also seeks summary judgment against Plaintiffs for
breach of the Agreement and attorneys’ fees against Plaintiffs for the breach of the Agreement in
addition to a declaratory judgment that St. Cloud has superior right to payment and superior lien
position to Plaintiffs against the assets of Secure One (Dkt. #71 at ¶ 3).
The purpose of summary judgment is to isolate and dispose of factually unsupported
claims or defenses. See Celotex Corp. v. Catrett, 477 U.S. 317, 327 (1986). Summary judgment
is proper if the pleadings, the discovery and disclosure materials on file, and any affidavits
“[show] that there is no genuine dispute as to any material fact and that the movant is entitled to
judgment as a matter of law.” FED. R. CIV. P. 56(a). A dispute about a material fact is genuine
“if the evidence is such that a reasonable jury could return a verdict for the nonmoving party.”
Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). The trial court must resolve all
reasonable doubts in favor of the party opposing the motion for summary judgment. Casey
Enters., Inc. v. Am. Hardware Mut. Ins. Co., 655 F.2d 598, 602 (5th Cir. 1981) (citations
omitted). The substantive law identifies which facts are material. Anderson, 477 U.S. at 248.
The party moving for summary judgment has the burden to show that there is no genuine
issue of material fact and that it is entitled to judgment as a matter of law. Id. at 247. If the
movant bears the burden of proof on a claim or defense on which it is moving for summary
judgment, it must come forward with evidence that establishes “beyond peradventure all of the
essential elements of the claim or defense.” Fontenot v. Upjohn Co., 780 F.2d 1190, 1194 (5th
Cir. 1986). Where the nonmovant bears the burden of proof, the movant may discharge its
burden by showing that there is an absence of evidence to support the nonmovant’s case.
Celotex, 477 U.S. at 325; Byers v. Dallas Morning News, Inc., 209 F.3d 419, 424 (5th Cir. 2000).
Once the movant has carried its burden, the nonmovant must “respond to the motion for
summary judgment by setting forth particular facts indicating there is a genuine issue for trial.”
Byers, 209 F.3d at 424 (citing Anderson, 477 U.S. at 248-49). The nonmovant must adduce
affirmative evidence. Anderson, 477 U.S. at 257. No “mere denial of material facts nor . . .
unsworn allegations [nor] arguments and assertions in briefs or legal memoranda” will suffice to
carry this burden. Moayedi v. Compaq Computer Corp., 98 F. App’x 335, 338 (5th Cir. 2004).
Rather, the Court requires “significant probative evidence” from the nonmovant in order to
dismiss a request for summary judgment supported appropriately by the movant. United States
v. Lawrence, 276 F.3d 193, 197 (5th Cir. 2001). The Court must consider all of the evidence, but
must refrain from making any credibility determinations or weighing the evidence. See Turner v.
Baylor Richardson Med. Ctr., 476 F.3d 337, 343 (5th Cir. 2007).
The parties agree that the Subordination Agreement is governed and controlled by the
laws of the State of California (Dkt. #71 at ¶ 28; Dkt. #71 at Exhibit 7 at ¶ 7; Dkt. #72 at ¶ 72).
However, Plaintiffs argue that St. Cloud is not entitled to a declaratory judgment due to an
apparent ambiguity in the Agreement (Dkt. #72 at ¶ 1). Section 1.3 of the Agreement states that
“[t]he Junior Lender shall not (i) exercise any of the remedies with respect to the Junior Debt, or
(ii) take any action to enforce any of its liens on the Junior Lender’s Collateral” (Dkt. #72 at ¶
13). Section 1.6(d) states that “[o]nce the Blockage Period has expired, Junior Lender may, at
its option, during any time period that Junior Debt is in default, take any enforcement action it
dee[m]s appropriate with respect to all or any part of the Junior Debt, without any requirement
that it obtain the prior consent of the Senior Lender” (Dkt. #72 at ¶ 14).
Plaintiffs contend that “[t]his provision was intentionally included by Henretta to give
McDonald and Data Preparation . . . the right to enforce its Promissory Note against Secure One
after the blockage period expire[d]” (Dkt. #72 at ¶ 16). Plaintiffs assert that when the contract is
read as a whole, “the Court should interpret the Agreement to mean that after the blockage
period expired, Plaintiffs were able to take any enforcement action needed in order to collect on
the Note. The Court should also rule that after the blockage period expired, St. Cloud’s rights
under the Agreement were waived” (Dkt. #72 at ¶ 16). Defendant contends that “when the
agreement is read as a whole, the Subordination Agreement is not contradictory. Further,
Plaintiffs are bound by their agreement that their lien rights are subordinated to the lien rights of
St. Cloud” (Dkt. #73 at ¶ 12).1
St. Cloud argues that Plaintiffs’ ambiguity argument is not relevant to a determination of the issues in St. Cloud’s
summary judgment motion (Dkt. #73). However, the Court believes that it is relevant to the summary judgment
motion because if a fact finder was persuaded by Plaintiffs’ argument that the Agreement should be interpreted to
mean that “after the blockage period expired, St. Cloud’s rights under the Agreement were waived” then St. Cloud
Under California law, when a contract provision is ambiguous, summary judgment is
generally improper “because differing views of parties’ intent will raise a genuine issue of
material fact.” Meridian Project Systems, Inc. v. Hardin Const. Co., LLC, 426 F.Supp. 2d 1101
(E.D. Cal. 2006) (citing Maffei v. N. Ins. Co. of New York, 12 F.3d 892, 898 (9th Cir.1993)).
“Under California law, interpretation of a contract is an issue of law if ‘(a) the contract is
not ambiguous; or (b) the contract is ambiguous but no parole evidence is admitted or the parole
evidence is not in conflict.’” Meridian Project Sys., Inc. v. Hardin Const. Co., LLC, 426 F. Supp.
2d 1101, 1109 (E.D. Cal. 2006) (citing Centigram Argentina, S.A. v. Centigram Inc., 60 F. Supp.
2d 1003, 1007 (N.D. Cal.1999)); see WYDA Assocs. v. Merner, 42 Cal. App. 4th 1702, 1710
(1996). Whether or not a contract is ambiguous is a question of law to be determined by the
Court. Producers Dairy Delivery Co. v. Sentry Ins. Co., 41 Cal. 3d 903, 912 (1986). Under
California law, a contractual provision is ambiguous when it is capable of two or more
constructions, both of which are reasonable. Daniel v. Ford Motor Co., 806 F.3d 1217, 1224
(9th Cir. 2015). When interpreting contracts, the agreement must be “read as a whole in a
manner which reconciles apparent repugnancies and, to the extent possible, gives some meaning
to each clause.” S. Pac. Land Co. v. Westlake Farms, Inc., 233 Cal. Rptr. 794, 804 (Cal. Ct.
App. 1987). If a contract provision is ambiguous, summary judgment is generally improper
“because differing views of the intent of parties will raise genuine issues of material fact.”
Meridian Project Sys., Inc. v. Hardin Const. Co., LLC, 426 F. Supp. 2d 1101, 1109 (E.D. Cal.
2006) (citing Maffei v. N. Ins. Co., 12 F.3d 892, 898 (9th Cir.1993)).
The Court finds that the Agreement is ambiguous. Furthermore, the parole evidence that
the parties submitted is not conclusive (Dkt. #72-1). After a careful review of the record and the
would not have a superior right to payment (Dkt. #72 at ¶ 16). Therefore, the Court finds that it is proper to analyze
the ambiguity of the Agreement.
arguments presented, the Court is not convinced that Plaintiffs or Intervenor have met their
burden of demonstrating that there is no material issue of fact entitling them to judgment as a
matter of law.2 The case should proceed to trial.
It is therefore ORDERED that Plaintiffs’ Motion for Summary Judgment (Dkt. #54) is
hereby DENIED, and Intervenor St. Cloud’s Motion for Summary Judgment and Brief in
Support (Dkt. #71) is hereby DENIED.
SIGNED this 7th day of March, 2016.
AMOS L. MAZZANT
UNITED STATES DISTRICT JUDGE
Since the Court’s determination was not based on the affidavit of Mr. Lautz, there is no need to determine if
Plaintiffs’ objection to St. Cloud’s summary judgment evidence should be sustained or overruled (Dkt. #73 at ¶¶ 1720). Additionally, the Court need not address whether St. Cloud is entitled to attorney’s fees at this time (Dkt. #73
at ¶ 21).
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