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USCA1 Opinion

UNITED STATES COURT OF APPEALS


FOR THE FIRST CIRCUIT

____________________

No. 95-1359

LAURA THORN, LTD.,

Plaintiff, Appellant,

v.

ALBERT J. ALLETZHAUSER,

Defendant, Appellee.

____________________

APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF MASSACHUSETTS

[Hon. Edward F. Harrington, U.S. District Judge]


___________________

____________________

Cyr, Circuit Judge,


_____________

Bownes, Senior Circuit Judge,


____________________

and Boudin, Circuit Judge.


_____________

____________________

Charles L. Glerum, with whom Roberto C. Quinones and Choate, H


_________________
___________________
_________
& Stewart were on brief for appellant.

_________
Harry C. Beach, with whom Leonard F. Clarkin, Paul B. Bottino
______________
__________________ _______________
Clarkin, Sawyer & Phillips, P.C. were on brief for appellee.
________________________________

____________________

December 21, 1995


____________________

CYR,
CYR,

Circuit Judge.
Circuit Judge.
______________

("Thorn, Ltd.") appeals a

claim

for breach

of

a loan

entitled to judgment

under Massachusetts

Laura

Thorn,

Ltd.

summary judgment order disallowing its

Alletzhauser ("Alletzhauser").

is not

Plaintiff

guaranty

by defendant

As we conclude

pursuant to

law, we vacate

Albert

J.

that Alletzhauser

Fed. R. Civ.

the judgment and

P. 56(c)

remand for

further proceedings.

I
I

BACKGROUND1
BACKGROUND1
__________

On

April 14,

loaned $250,000 to

1989,

an individual

named Laura

Hamilton/Thorn Research Associates

Thorn

("HTRA").

At that time, Laura Thorn was the principal shareholder in Thorn,

Ltd., and

Thorn, Ltd.

Under the

terms of

in turn

HTRA

obligations to

On December 31, 1990,

general partner

a Subordinated Loan

and a Subordinated Promissory

tion to Laura Thorn

was a

in HTRA.

Agreement ("Agreement")

Note ("Note"), HTRA's loan obliga-

was subordinated to all existing

Beverly National

Bank or

and future

its successors.2

Laura Thorn assigned all her

rights under

the Agreement and Note to Thorn, Ltd.

In July 1991, Thorn, Ltd. negotiated

general

partnership interest in

HTRA to

a transfer of its

Hamilton Laboratories,

____________________

1Jurisdiction is based on 28 U.S.C.


and 28 U.S.C.

1291.

most favorable

to Thorn, Ltd.,

judgment was granted.

1332(a)(2) (diversity)

We recount the material facts in the light


the party against

which summary

Velez-Gomez v. SMA Life Assur. Co., 8 F.3d


___________
___________________

873, 874 (1st Cir. 1993).

2The Note is set out in the appendix.

See infra pp. i-ii.


___ _____

Inc.

induce

("HLI"), a

the

corporation partly owned

transfer,

Alletzhauser

(as

by Alletzhauser.

guarantor),

HTRA

maker), and Thorn, Ltd. (as subordinated lender), entered

loan

guaranty

agreement

("the

Guaranty") on

whereby Alletzhauser guaranteed prompt

July

11,

To

(as

into a

1991,

payment of HTRA's debt to

Thorn, Ltd.

"when and as the Subordinated Obligations become due

and payable in accordance with their terms. . . ."3

section 1

Pursuant to

of the Note and the Guaranty, on April 8, 1994, Thorn,

Ltd. demanded full

payment from Alletzhauser.

HTRA and Alletz-

hauser declined on the ground that payment was not due.

In

against

Guaranty.

September 1994, Thorn,

Alletzhauser in

Alletzhauser

Ltd. commenced

federal district

denied

court to

liability, and

this action

enforce its

asserted as

an

affirmative defense that legal action on the Guaranty was "prema-

ture."

Ultimately, the district court

entered summary judgment

against Thorn, Ltd. on the ground that it had no present right to

enforce the Guaranty against Alletzhauser since HTRA, the primary

obligor, was not in default on its loan obligation to Thorn, Ltd.

____________________

3The relevant Guaranty provisions are set out below:

Section 2 - Guaranty of Payment and Performance


_______________________________________________

The Guarantor unconditionally guarantees . . . the prompt payment


by the
when

Borrower to

the Lender of

and as the Subordinated

the Subordinated

Obligations

Obligations become due and payable

in accordance with their terms . . . .

Section 3 - Obligations Unconditional


_____________________________________
. . . This
____

Agreement shall not, however, be construed to require


_________ _____ ___
__ _________ __ _______

the Guarantor
___ _________

to make any
__ ____ ___

payment .
_______

. . (b)

either would not be entitled to receive or


______ _____ ___ __ ________ __ _______ __
hold in trust for the benefit
____ __ _____ ___

which the
_____ ___

Lender
______

would be obligated to
_____ __ _________ __

of, or otherwise turn over to, any


___

senior lender pursuant to the terms of an Intercreditor Agreement


______ ______ ________ __ ___ _____ __ __ _____________ _________
or the Subordinated Note.
__ ___ ____________ ____

(Emphasis added.)

Thorn, Ltd. contends on

granting summary

to

strike certain

appeal that the district court

judgment and abused its

affidavits

erred in

discretion in refusing

submitted in

support of

Alletz-

hauser's motion for summary judgment.

II
II

DISCUSSION4
DISCUSSION4
__________

Alletzhauser acknowledges the validity of the Guaranty,

but

contends that the present attempt to enforce it is premature

since the

loan obligation itself

responds

that the loan obligation

and

is not yet

due.

became due on

Thorn,

Ltd.

April 1, 1994,

since HTRA has not paid, Alletzhauser must honor the Guaran-

ty.

The

parties agree

that

Massachusetts law

governs

their

dispute.

Under

Massachusetts

law, a

guarantor's

liability is

determined by the terms

of the guaranty agreement; as

rule, the terms

guaranty are not

guarantor.

of the

a general

construed against

the

See Merrimack Valley Nat'l Bank v. Baird, 363 N.E.2d


___ ___________________________
_____

688, 690-91 (Mass. 1977).

The operative provision in the Guaran-

ty states that Alletzhauser "unconditionally guarantees . . . the

prompt

payment by the Borrower to the Lender of the Subordinated

Obligations when
____

and as the Subordinated


___ __ ___ ____________

Obligations become due


___________ ______ ___

and payable in accordance with their terms


___ _______ __ __________ ____ _____ _____

note 3,

2 (emphasis added).

. . . . "

See
___

supra
_____

No other provision in the Guaranty

____________________

4The summary judgment ruling

is reviewed de novo
__ ____

identical criteria incumbent upon the district court.

under the

Alexis v.
______

McDonald's Restaurants of Mass., Inc., 67 F.3d 341, 346 (1st Cir.


_____________________________________
1995).

expressly states when

payment

Thorn, Ltd. may

look to Alletzhauser

for

under the Guaranty, and the parties agree that the court

must examine the Note to determine when Alletzhauser is obligated

to make good on the Guaranty.

The district court ruled that HTRA was not obligated to

repay

the Note

Thorn, Ltd.

plain

section

as

long as

insists that

senior

debt remained

the district court

outstanding.

misinterpreted the

language of the Note, which includes a payment schedule in

1.

This

further provides

provides for

periodic

payments by

that all outstanding principal

HTRA and

and accrued but

unpaid interest "shall be due and payable on April 1, 1994."

infra Appendix p. i,
_____

See
___

1.

Alletzhauser responds that the court must interpret the

Note as a whole, and that the

sions

in section

4 plainly

forth in section 1.5


5

nation

provision:

unconditional subordination provi-

supersede the payment

Section 4 contains the

"Notwithstanding any

schedule set

following subordi-

other provision

of the

____________________

5See Culp v. Tri-County Tractor, Inc., 736 P.2d 1348,


___ ____
________________________

1350-

53 (Idaho Ct. App. 1987) (ruling that subordination provisions in


notes superseded schedule for annual interest payments).
hauser suggests that the
tion, which

Alletz-

Note provides for "complete" subordina-

is not uncommon

in circumstances

where the

junior

lender is a parent company or an officer, director, or stockholder

of

the borrower.

Carl D.

Lobell &

Sharon

B. Applegate,

Lending To Troubled Companies- Special Considerations: Fraudulent


_________________________________________________________________

Transfers, Substantive Consolidation, Subordinated Debt Treat_________________________________________________________________

ment; Developing Theories of Lender Liability And Equitable


_________________________________________________________________
Subordination, PLI
_____________
Apr. 1991,

Corp. Law & Practice

III.D.(1),

175; see also Culp,


___ ____ ____

available in
_________ __

736 P.2d at 1350-52

Course Handbook Series,


Westlaw at

733 PLI/Corp.

(complete subordination

of

officers' loans to company).

The transaction at bar involved

just such a junior loan from a corporate insider of the borrowing


company.

Subordinated Loan

Documents,6 the Maker [HTRA],

and each holder

of this note [Thorn, Ltd.] . . . agree that the Subordinated Debt

shall be

present

subordinated

and

as set

future extensions

Beverly National

Bank [or

forth in

this Section

of credit

its successors].

to

4 to

the Maker

. .

."

all

by The

See infra

___ _____

Appendix p.

expressly

i,

4.

"Notwithstanding any contrary term or provision of


_______________ ___ ________ ____ __ _________ __

the Subordinated
___ ____________

become or be

the

Debt Documents, (i) no


____ _________

Subordinated Debt shall

declared to be due and payable prior to the date on

Senior Debt

payable .
_______

added).

point, subsection 4.4

restricts the right of Thorn, Ltd. to enforce the Note

against HTRA.

which

More to the present

. . ."

See
___

becomes
_______

or is
__ __

infra Appendix
_____

Since there is no

declared to
________ __

p. ii,

4.4

dispute that senior debt

be
__

due and
___ ___

(emphasis

to Bank of

Boston remains outstanding, Alletzhauser argues that the district

court

correctly ruled

Thorn, Ltd.

that

is not yet due,

obligation on the Guaranty.7

HTRA's primary

loan obligation

and therefore, he presently

to

has no

Thorn,

Ltd.

contends

that

subsection

4.4 does

not

____________________

6According to
Loan

Documents"

section 2 of the Note, the term "Subordinated


includes the

Note,

the

Agreement, and

other

security agreements related to the loan.

7At

common law, the obligation of a guarantor is collateral

to the primary
not

debt.

"'[The

on the note but upon

guarantor's] obligation was

based

the contract expressed in the guaranty

that
[he] would

pay the principal sum

the maker of the note failed

of the note

with interest, if

to pay at maturity.'"

D'Annolfo Constr. Co., 654 N.E.2d


______________________

82, 83 (Mass.

D'Annolfo v.
_________

App. Ct. 1995)

(quoting Charlestown Five Cents Sav. Bank v. Wolf, 36 N.E.2d 390,


________________________________
____
392 (Mass. 1941)).

The Uniform Commercial Code does not abrogate

the common law rule here because the Guaranty is not inscribed on
the Note.

D'Annolfo, 654 N.E.2d at 84.


_________

affect its right to enforce its Guaranty against Alletzhauser, as

distinguished

Thorn,

from

Ltd. finds

its

rights

support

against HTRA

for this

under

contention in

the

Note.

subsection

4.5(a):

The

provisions of this Section 4 are solely for the purpose


______

of

defining the

on

the
other

relative rights of the holders

one hand, and the


hand, and

between the Maker


obligation of
absolute, to
________

holders of Subordinated

none of
____ __

such provisions
____ __________

and any holder

Debt on the

shall impair
_____ ______

of Subordinated Debt

the Maker [HTRA], which


_____
pay to

of Senior Debt

such holder of

as

the

is unconditional and
__ _____________ ___
Subordinated Debt

the

principal and premium, if any, thereof and interest thereon,


and all other amounts in
with
____

the
___

terms
_____

prevent

any

holder

remedies

otherwise

terms of

such

respect thereof, all in accordance


___ __ __________

thereof,
_______

nor shall

of Subordinated
permitted

Subordinated

by
Debt

upon

the rights,
___ ______

Section 4 of
_______ _ __

holders of Senior Debt.


_______ __ ______ ____

Thorn,

attempt

Guaranty

payments from

Ltd. had

by Thorn,

or

default

thereunder,

provisions of this
__________ __ ____

Thorn, Ltd.

light

the overarching concern

of the

National Bank) that its priority

HTRA not

to payment

under the

provisions, interpreted in

4.5(a), reflected

original senior lender (Beverly

to

provisions

exercising all

4.5(a) (emphasis added).

insists that the subordination

right

Debt from

if any, under the


__ ___ _____ ___

See infra Appendix p. ii,


___ _____

such

applicable law

subject to
_______ __

of subsection

any

be

from HTRA;

Ltd. to proceed

jeopardized by

any right

and, further,

against Alletzhauser

that any

on the

not be permitted to affect the senior lender's right to

priority payment,

nor undermine

debt according to its

recovery

disregard

terms.

HTRA's ability to

As this lawsuit

repay senior

only contemplates

from Alletzhauser and not HTRA, Thorn, Ltd. urges us to

section 4, and instead

give full effect

to the April

1994 due date specified in section 1.

In addition

to subsection 4.5(a),

Thorn, Ltd.

points

out that the unquestioned

Thorn, Ltd. to transfer its

purpose of the Guaranty was

to induce

general partnership interest in HTRA

to HLI, a company partly owned by Alletzhauser.

With the resul-

tant transfer of control, Thorn, Ltd. lost all ability to require

HTRA to satisfy its senior debt to Bank of Boston, as well as any

power

to control

Thorn,

meant

the

timing of

its

own recovery

from

HTRA.

Ltd. maintains, therefore, that section 1 of the Note was

to offset

schedule

its loss

which would

continue to

relationship between Thorn,

Thorn, Ltd.

of control

by prescribing

govern the

Ltd. and

a payment

ongoing repayment

Alletzhauser.

Otherwise,

might never be able to collect on either the Note or

the Guaranty.

Confronted with these mutually incompatible interpreta-

tions,

we conclude

that neither

satisfactorily

reconciles the

conflicting contract language so as to enable summary judgment on

the

present record.

with

the

The

Alletzhauser interpretation

the classic construct of a

comports

loan guaranty,8 as well as with

parties' "course of performance."9

On the

other hand, the

____________________

8Indeed,
Guaranty
assets

permitting

would result

recovery

in

from

a corresponding

prior to repayment of

Alletzhauser

on

depletion of

the senior debt

the

HTRA's

in the event that

Alletzhauser is entitled to indemnification from HTRA, see 38 Am.


___
Jur. 2d Guaranty
________
104(1) (1941),

127 (1968); Restatement (Second) of Security


________________________________
notwithstanding the

provisions are designed to protect

fact that

the subordination

senior lenders from just such

an occurrence.

9Thorn,

Ltd. does

not explain

why it

made no

attempt to

enforce its rights sooner despite the fact that HTRA had not made
a

single payment of interest or principal in accordance with the

payment schedule in section 1 of the Note, either before or after


Thorn, Ltd. transferred control

to HLI in July 1991.

See Rosen
___ _____

v.

A-H Inc., 456 N.E.2d 477, 479


________

n.5, 480 (Mass. App. Ct. 1983)

context in which the

no

indication as

execution of the Guaranty took

to why

Thorn, Ltd.

would permit

perpetual loan repayment extension to an enterprise it

owned.10

attended

Both parties

the drafting

represent that

of

the Note

and

place gives

a virtually

no longer

substantial negotiations

Guaranty.

Yet

their

affidavits provide little information concerning the actual terms

of their negotiations and each party draws a different conclusion

as to their import.

Were

more information, the

result reached might well

the

aims and intentions of

363

N.E.2d at

import

the

we to approve summary judgment without

690 ("[W]hen

the parties.

a contract

is ascertained from the parties'

guaranty's

terms

and

the

See Merrimack Valley,


___ ________________

term is

ambiguous, its

intent as manifested by

circumstances

creation, such as [the] relationship

fail to reflect

surrounding

of the parties, actions

its

of

the parties and established business usages.").

Normally, we would not

opment

press for further record devel-

absent a clearer indication that further evidence will be

forthcoming.

We

further proceedings

are convinced

nonetheless that

is appropriate here:

a remand

for

the contract language

____________________

(noting that junior lender's

performance conformed with

broad construction of subordination

court's

provision in favor of senior

lenders), rev. denied, 459 N.E.2d 824 (Mass. 1984).


____ ______

10Neither the parol evidence rule nor the integration clause


in the
stances

Guaranty prevents the court from


surrounding

extrinsic evidence

the

execution

may inform

considering the circum-

of the

Guaranty.

an ambiguity determination.

First,

See
___

Robert Indus., Inc. v. Spence, 291 N.E.2d 407, 409 (Mass. 1973).
_______________ ____
______
Second, the court

need not look

Guaranty in this appeal,

beyond the four corners

since section 1 of the

supplies the context to which Thorn, Ltd. adverts.

of the

Guaranty itself

is

in conflict; there is

the balance; and

there is

no public policy

a much better

this

private conflict as the

made

to discern their intentions

consideration to tip

prospect of

parties intended, if

resolving

an effort is

based on their actual negotia-

tions and the events that led up to and followed the Guaranty.

10

III
III

CONCLUSION
CONCLUSION
__________

Given the

unresolved conflict

in the language

of the

guaranty and loan documents and

to the parties' intent,

establish

the dearth of evidence

relating

we conclude that Alletzhauser failed

to

an entitlement to summary judgment as a matter of law.

We therefore vacate the judgment and remand for pro_______________________________________________________

ceedings consistent with this opinion.


______________________________________

their own costs.


_______________

SO ORDERED.
SO ORDERED
__________

The parties shall bear


_______________________

11

APPENDIX11
APPENDIX
________

1.

Payment.
_______

On each October 1

and April 1 occurring while any

principal amount of this note is outstanding, [HTRA] shall pay to


[Laura]

all

accrued

but

unpaid interest

principal balance of this note.

on

the

outstanding

Commencing April 1, 1991, [HTRA]

shall pay to [Laura] a principal payment as follows:

Date of Payment
_______________

Principal Payment
_________________

April 1, 1991

$25,000

October 1, 1991

$25,000

April 1, 1992

$25,000

October 1, 1992

$25,000

April 1, 1993

$37,500

October 1, 1993

$37,500

The entire
___ ______
accrued

remaining outstanding

but unpaid
______

interest
________

principal balance of,


_______

on, this

note

and all
___ ___

shall be
_____ __

due
___

and
___

payable on April 1, 1994.


_______ __ _____ __ ____

. . . .

4.

Subordination.
_____________

Notwithstanding
_______________

any other provision


___ _____ _________

of the
__ ___

Subordinated Loan Documents, [HTRA], and each holder of this note


____________ ____ _________
____
___
[Thorn, Ltd.] .
___________
subordinated
____________

. . agree
_____

that the Subordinated


____ ___ ____________

as set forth in
__ ___ _____ __

future extensions
______ __________

of credit
__ ______

this Section 4
____ _______ _
to [HTRA]
__ ____

by The
__ ___

Debt shall
____ _____

be
__

to all present and


__ ___ _______ ___

Beverly National
_______ ________

Bank [or its successors] . . . .


____

4.2

Limitation
__________

on Payments.
__ ________

Payments of

interest

and

principal shall be made as they become due in accordance with the


terms of

the Subordinated Loan Documents.

Senior Debt is outstanding, no


______ ____ __ ___________ __
on this note shall be
__ ____ ____ _____ __

. . . So
__

long as any
____ __ ___

payment of principal or
_______ __ _________ __

made prior to the date when due


____ _____ __ ___ ____ ____ ___

dance with the terms of the Subordinated Loan Documents.


_____ ____ ___ _____ __ ___ ____________ ____ _________

interest
________

in accor__ ______

4.3

Payments
________

Held in
____ __

Trust.
_____

If, notwithstanding

the

foregoing, any payment or distribution of the assets of the Maker


of any kind or character shall
wise, by any holder
is

of Subordinated Debt before all

paid in full, such payment


____ _______

any such
___ ____

be received, by set-off or other-

or distribution and the amount of


__ ____________ ___ ___ ______ __

set-off shall be held in trust by such holder of Subor_______ _____ __ ____ __ _____

dinated Debt for the benefit of the holders


___ ___ _______ __ ___ _______
which shall
Debt

Senior Debt

have the right

. . .

of Senior Debt . . .
__ ______ ____

to the payment

of all Senior

remaining unpaid until all such Senior Debt shall have been

____________________

11All brackets and

emphasis in

been added.

the text of

the Note

have

paid in full.

4.4

Limitation
__________

on Enforcement.
__ ___________

Debt shall, without the


the Senior

holder of Subordinated

prior written consent of the

Debt, accelerate the

ceedings to enforce, any


term

or provision to the

Debt

Documents.

. .

No

maturity of, or

holders of

institute pro-

Subordinated Debt, notwithstanding

any

contrary contained in the Subordinated


Notwithstanding

any contrary

term

or

provision of the Subordinated Debt Documents, (i) no Subordinated


Debt

shall become or be declared to

the date

on which the Senior

be due and payable prior to

Debt becomes or is

declared to be

due and payable . . . .

4.5

Effect of
______ __

Provisions.
__________

Section 4 are

solely for

rights of the

holders of Senior

(a)

the purpose of

The provisions

of this

defining the

relative

Debt on the

one hand, and

holders of Subordinated Debt on the other hand, and none


____
provisions shall
__________ _____
holder of
______ __

impair
______

as between
__ _______

the
___

Maker [HTRA]
_____

Subordinated Debt [Thorn, Ltd.] the


____________ ____
___

the

of such
__ ____
and
___

any
___

obligation of the
__________ __ ___

Maker [HTRA], which is unconditional and absolute, to pay to such

_____

____

holder of
______ __

_____ __ _____________ ___ _________ __ ___ __ ____


Subordinated Debt the
____________ ____ ___

thereof and interest


___ ________
thereof,
such

principal and premium,


_________ ___ _______

thereon, and all


_______

other amounts in

if any,

respect

all in accordance with the terms thereof, nor shall any


___ __ __________ ____ ___ _____ _______

provisions prevent

any

holder of

exercising all remedies otherwise

Subordinated Debt

from

permitted by applicable law or

under the terms of such Subordinated Debt upon a default thereunder, subject to the rights, if any, under
Section 4 of
that,

holders of Senior

during any period in

make any payment by virtue of

Debt.

the provisions of this

The

which the Maker

Maker hereby

agrees

is not permitted to

the provisions of this Section

any applicable statute of limitations shall be tolled.

4,

ii

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