Case Title: Al Baraka Bancorp v. Hilweh

Citation: 163 Vt 148, 656 A.2d 197

Docket Number: 

State: vermont

Court: Vermont Supreme Court

Date: 1994-12-16T00:00:00Z

Document:
AL_BARAKA_BANCORP_V_HILWEH.93-593; 163 Vt 148; 656 A.2d 197

[Filed 16-Dec-1994]

[Motion for Reargument Denied 5-Jan-1995]

NOTICE:  This opinion is subject to motions for reargument under V.R.A.P. 40
as well as formal revision before publication in the Vermont Reports. 
Readers are requested to notify the Reporter of Decisions, Vermont Supreme
Court, 109 State Street, Montpelier, Vermont 05609-0801 of any errors in
order that corrections may be made before this opinion goes to press. 


                           No. 93-593


Al Baraka Bancorp (Chicago), Inc.         Supreme Court

                                          On Appeal from
     v.                                   Chittenden Superior Court

Munhib Hilweh, the Hilweh Enterprises     October Term, 1994
Corp., and Norstar Bank of Upstate
New York, Inc.


Matthew I. Katz, J.

Donald J. Rendall, Jr. of Sheehey Brue Gray & Furlong P.C., Burlington, and
 Jeffrey B. Lieberman and John J. Sikora, Jr. of Barak, Ferrazzano, Kirschbaum
 & Perlman, Chicago, Illinois, for plaintiff-appellant 

George A. Michak of Eckert Seamans Cherin & Mellott, Harrisburg,
 Pennsylvania, Gregory S. Mertz of McCormick, Fitzpatrick & Mertz, P.C.,
 Burlington, and David J. Wukitsch of McNamee, Lochner, Titus & Williams,
 P.C., Albany, New York, for defendant-appellee 


PRESENT:  Allen, C.J., Gibson, Dooley, Morse and Johnson, JJ.


     DOOLEY, J.   This is a mortgage foreclosure action in which two
competing mortgagees -- Al Baraka Bancorp (Chicago), Inc., plaintiff, and
Norstar Bank of Upstate New York, Inc., defendant -- are seeking to reach
mortgaged property in Colchester, Vermont.  The mortgagor, The Hilweh
Enterprises Corp. (HEC) of Plattsburg, New York, did not contest foreclosure
and has not appeared here.  Plaintiff initiated this action, relying on HEC's
default in making payments pursuant to an agreement, bond, and mortgage and
named defendant as an inferior mortgagee.  Defendant filed an answer,
counterclaim, and cross-claim for foreclosure, arguing in part that
plaintiff's mortgage is unenforceable because it does not secure lawful
indebtedness.  The trial court granted defendant's motion for summary
judgment on the counter- claim, awarding it a foreclosure judgment, and
dismissed plaintiff's foreclosure complaint. Plaintiff has appealed.  We
affirm. 

 

     Plaintiff and HEC entered into two financial agreements, each evidenced
by three documents: the Agreement, the Bond, and the Mortgage.  In the first
in October 1989, plaintiff provided HEC $1,400,000.  In the second in October
1990, plaintiff increased the amount paid to HEC by $217,000 to a total of
$1,617,000.  The documents in the second transaction are modifications of
those in the first agreement to reflect the additional amount of money.  It
is appropriate to treat the agreements together as one transaction. 

     In the Agreement, plaintiff agreed to tender a total of $1,617,000 in
exchange for 231 shares of nonparticipatory preferred shares in HEC, and a
non-interest-bearing bond in the amount of $1,617,000, secured by a mortgage
on Vermont property.  The shares entitled plaintiff to receive cumulative
dividends at a rate of 14% out of any surplus or net profits of the
corporation before common shareholders could receive dividends.  Although the
preferred stock did not generally confer voting rights, approval of a
majority of preferred shareholders (consisting only of plaintiff) is required
for selling assets outside the normal course of business, issuing additional
stock, borrowing funds, and making loans and like transactions.  HEC had the
right to redeem the preferred shares at $7,000 per share at any time if funds
were available. It was obligated to redeem all the preferred shares by
October 4, 1991 (at a total redemption value of $1,617,000) and to pay all
dividends that had accumulated until that time.  By mutual written agreement,
the redemption period could be extended another two years.  The Agreement
also included an "equity kicker" allowing plaintiff to convert its preferred
shares to common shares on a one-for-one basis.  If shares were converted or
redeemed, the principal amount would decrease $7000 per share; thus, if all
231 preferred shares were either converted or redeemed, the principal would
be reduced to zero (FN1). 

 

     The Bond, which is expressly subject to the terms of the Agreement,
obligated HEC to pay to plaintiff the full sum of $1,617,000 on or anytime
before October 6, 1991, two days after the deadline for redemption of the
preferred stock.  The Bond is subject to the terms of the agreement.  It
authorizes HEC to prepay "the indebtedness" in whole or in part provided that
dividends under the Agreement had been paid in full through the date of
prepayment.  An acceleration clause in the Bond states that the full sum plus
dividends would become due, at plaintiff's option, if HEC defaulted in the
payment of any installment of principal or dividend due under the Agreement. 

     The Mortgage states that HEC is "justly indebted" to plaintiff under the
Agreement for "indebtedness" in the amount of $1,617,000, as evidenced by the
Bond.  The Mortgage secures the payment of the principal sum and dividends
pursuant to the Agreement and the Bond, the performance of covenants and
agreements, and any "other indebtedness" of HEC to plaintiff. 

     There is no dispute about the documents comprising the arrangement
between plaintiff and HEC; only their proper interpretation is at issue. 
Although there was some initial skirmishing about the fact, we also take it
as undisputed that HEC is insolvent.(FN2)

     Defendant argues from the documents and the fact of HEC's insolvency
that there is no longer an obligation for HEC to pay plaintiff and,
therefore, the Mortgage cannot be enforced. Defendant's argument is based
primarily on  513(a) of the New York Business Corporation Law, which allows
a corporation to "redeem its redeemable shares . . . except when currently

 

the corporation is insolvent or would thereby be made insolvent."  N.Y. Bus.
Corp. Law  513(a) (McKinney 1986). It views the statute as simply an
application of the basic principle that a stockholder, as opposed to a
creditor, is owed nothing when the corporation becomes insolvent.  It argues
that plaintiff is a stockholder, not a creditor, whose only enforceable right
under the Agreement was to have the preferred stock redeemed, and this right
was extinguished on insolvency. 

     Plaintiff disputes defendant's claims for the arrangement between it and
HEC, characterizing it as a loan rather than an equity investment.  Thus, it
views HEC's insolvency as irrelevant to the existence of an underlying "debt"
which can be enforced by mortgage foreclosure. 

     On defendant's motion for summary judgment, based on the undisputed
transaction documents and certain affidavits described below, the trial court
granted judgment to defendant, concluding that plaintiff was a stockholder in
HEC, not a creditor, and no debt existed to be enforced by the Mortgage. 

     Before we reach the heart of the matter, we dispose of three collateral
issues if only to note their existence or indicate why they are not
determinative.  The first is the question of which state's law applies to
this dispute.  The Mortgage Security Agreement between plaintiff and HEC
attempted to answer that in part by providing that the Mortgage and Agreement
"shall be construed, interpreted and governed by the laws of the State of
Illinois," except where the mortgaged premises are located in another state
"the enforcement hereof against the premises . . . and remedies therefor,
shall be governed by the laws of the jurisdiction in which the premises . . .
are located."  We interpret this to mean that questions of the interpretation
of the documents between plaintiff and HEC are to be determined under
Illinois law and issues related to mortgage foreclosure are to be determined
by Vermont law.  We see no reason why this provision is invalid.  See
Restatement (Second) of Conflict of Laws  187 (1969).  The parties have not
indicated how Illinois law bearing on contract interpretation is different
from that of 

 

Vermont.  Thus, we have relied on Vermont contract law where indicated. 

     The determinative questions in this case, however, actually relate to a
different area of the law, not addressed in the Agreement, that is, the
powers and duties of a business corporation.  The parties agree that New York
law controls these questions because HEC is a New York corporation.  This
conclusion is consistent with choice of law principles.  See id.  302(b),
303. 

     Second, the trial court accepted defendant's argument that it could
stand in HEC's position for purposes of contesting the obligation to pay
plaintiff and the validity of the mortgage, and plaintiff has not challenged
this conclusion.  Thus, once the trial court concluded there was no longer a
debt upon which plaintiff could predicate an action for foreclosure, it
assumed that the proper remedy was to dismiss plaintiff's foreclosure action.
 Retrovest Assocs. v. Bryant, 153 Vt. 493, 500, 573 A.2d 281, 285 (1990).  We
have not reexamined this assumption. 

     Third, in opposition to the motion for summary judgment, plaintiff
submitted affidavits of its employees stating that plaintiff intended the
transaction with HEC to be a loan.  For example, the affidavit of Chari
Aweidah, Vice-President of plaintiff, states that the transaction with HEC
was a loan of money but was structured differently because plaintiff, a
subsidiary of a Saudi Arabian partnership, must comply with Islamic law,
which forbids the charging of interest.  Plaintiff argues that at a minimum
these affidavits should defeat summary judgment because they show the real
intent of the contracting parties. 

     The requirements for summary judgment are familiar.  It is appropriate
where there is no genuine issue of material fact and the moving party is
entitled to judgment as a matter of law, after giving the benefit of all
reasonable doubts and inferences to the nonmoving party. See State v.
Delaney, 157 Vt. 247, 252, 598 A.2d 138, 141 (1991); V.R.C.P. 56(c).  There
is no genuine issue for trial, however, "`[w]here the record taken as a whole
could not lead a rational trier of fact to find for the nonmoving party.'" 
Kelly v. Town of Barnard, 155 Vt. 296, 305 n.5, 583 A.2d 614, 619 n.5 (1990) (quoting Matsushita Elec. Indus. Co. v. Zenith Radio
Corp.,