Herbert v. Pico Ski Area, No. S1268-00 CnC (Katz, J ., June 8, 2004)

[The text of this Vermont trial court opinion is un official. It has been reformatted from the original. The accuracy of the text and the accompanying data included in the Vermont trial cou rt opinion database is not guaranteed.]

STATE OF VERMONT

Chittenden County, ss. :

HERBERT

v.

PICO SKI AREA

ENTRY

This is a third-party beneficiary case, with an ov erlay of bankruptcy injunctions and successor-liability. Plaintiffs He rberts ran Pico Mountain Ski Area under a series of successive corporate ent ities. Electricity was supplied to them throughout by Central Vermont Publ ic Service, CVPS. Eventually, the Herberts sold Pico to Defendant Ame rican Skiing, underelaborate contracts which provided among other thin gs for a $214,802.79

escrow to cover possible “liens, encumbrances or ot her claims.” CVPS, which had billed Pico in the amount of $214,802.79, now seeks these funds to cover bills incurred during the Herberts’ operat ion of Pico. The Herberts oppose CVPS’s entry into this case and assert their ownership over the escrow monies. We reject the Herberts’ claims base d on three areas: res judicata, CVPS’ third-party beneficiary status, and the Herberts’ lack of ownership in the escrow fund. We note that while e ach of these lines of reasoning overlap, they also provide independent ba ses for our conclusion.

V.R.C.P. 19. Joinder & V.R.C.P. 24. Intervention

Plaintiffs Herberts initiated this suit to compel defendant American Skiing to release an escrow fund totaling $214,802. 79 to them. CVPS has made a Rule 24(a) motion to intervene. V.R.C.P. 24 . American Skiing in turn has moved to join CVPS as a party because of C VPS’s potential right to the money. V.R.C.P. 19(a). American Skiing arg ues that while it is merely a stakeholder of the money, without a decisi on that is binding on both the Herberts and CVPS, it might be open to fut ure litigation and inconsistent judgments concerning their duty to exe cute the escrow fund. We find that this concern satisfies American Skiing ’s burden of persuasion, advancing a cogent argument as to why CVPS should b e joined to the present litigation. Grassy Brook Village, Inc. v. Richard D. Blazej, Inc.

, 140 Vt. 477, 481–82 (1981). The Herberts’ main con cern—that joinder would violate the Bankruptcy Court’s injunction—has been answered by that court’s entry granting CVPS leave to intervene in this case. (CVPS’s Am. Mot. for Summ. J., at exs. A, B, Jan. 23, 2003. ) That decision clarified that the injunction, which the Herberts claim and C VPS acknowledges, did not end the debt owed to CVPS, or their right to co llect it from others, but rather CVPS’s right to collect from the Herberts th emselves. Id . at ex. A.Despite the Herberts’ arguments to the contrary, th e Bankruptcy Court held

that the previous injunction did not prevent CVPS f rom pursuing this escrow fund so long as 1) it has a right to the esc row fund and 2) the funds are not owned by the Herberts. Id

.

To the extent that the Herberts have re-argued the injunction to us, we reject their claims as res judicata. Lamb v. Ge ovjian , 165 Vt. 375, 379– 80 (1996). When CVPS sought a declaratory judgment from the Bankruptcy Court concerning the scope of its injunc tion, the Herberts opposed and asserted their claim to immunity from a ny suit. (Herberts’ Opp’n to CVPS Mot. to Determine Scope of Inj. & Cro ss Mot. for Determination that Bankr. Inj. Prohibits CVPS from Gaining Access to the Herberts’ Funds Held in Escrow, Jul. 16, 2002.) Th us, the Bankruptcy Court considered whether or not this present case w as a violation of the injunction, and by extension the immunity it grante d to the Herberts. Notwithstanding its somewhat equivocal language abo ut who owns the escrow fund, the Bankruptcy Court’s decision implic itly rejects the Herberts’ claim of ownership. (CVPS’s Am. Mot. for Summ. J., at exs. A, Jan. 23, 2003.) Immunity, after all, means freedom not only from adverse judgments but from further litigation entirely. Ri ght or wrong, by refusing to grant such immunity the Bankruptcy Court has rul ed the escrow funds outside the realm of the Herberts’ immunity. The s ole decision remaining for us, then, is whether CVPS or another party has a right to this money. To argue that the fund is the Herberts’ property wo uld challenge the Bankruptcy Court’s interpretation as to the scope o f its prior injunction and

would amount to a collateral attack on this issue. See Trahan v. Trahan

, 2003 VT 100, at ¶ 11 (re-litigation of issues cover ed by family court order was an impermissible collateral attack). In other words, by allowing the intervention of CVPS and refusing to grant immunity , the Bankruptcy Court found that the escrow fund did not belong to the Herberts.While this is not the only basis for our decision, as we will discuss

below, we conclude the Bankruptcy Court’s decision is preclusive on this matter. Therefore, in the interest of avoiding inc onsistent judgments, we

will adhere to that decision that the escrow fund d oes not fall under the Herbert’s sphere of immunity and by implication lie s outside their control and ownership. We also order CVPS joined as a part y to the present case.

Contract for Sale of Pico Mountain

CVPS makes a detailed argument suggesting that the Herberts “stripped” their successor corporate entities of as sets, while continuing to run up electric bills which were never paid. So wh en they sold their rights to Pico, there were no means of paying off the unse cured trade creditors. Nevertheless, both American Skiing and the Herberts seem to have been aware that those creditors might not view things wi th quite the same sangfroid. So the contract they reached contains t wo key provisions:

¶ 4.02 Purchase Price Adjustment ( a) The Purchase Price payable to [Herberts] shal l be reduced on a dollar-for-dollar basis by the amount necessary to deliver free, clear and

unencumbered title to all Purchased Assets. Initia lly, the adjustment will be made by deducting such amounts from cash payable at Closing to reflect amounts paid, incurred or required to disch arge all liens and encumbrances, and satisfy all liabilities that have been identified as of the Closing Date which could mature or otherwise be perfected into or

result in the establishment of a lien or encumbranc e upon, or a claim to or against any of the Purchased Assets, or a claim against Buyer as the

owner of the Purchased Assets.* * *

(c) Buyer agrees to establish at Closing, and ma intain in a segregated account, an escrow to fund the liens, encumbrances and other liabilities

identified in Schedule 4.02. Sellers shall be affo rded an opportunity to resolve any and all disputes with respect to the li ens, encumbrances and other liabilities identified in Schedule 4.02; prov ided, however, that Buyer reserves the right to apply the escrowed proc eeds to pay such claims and receive a discharge of any such liens, e ncumbrances or other liabilities at any time, and in any manner, buyer d eems appropriate, in buyer’s sole discretion, in order to preserve and p rotect its property interest in the Purchased Assets. Sellers may not act for or on behalf of Buyer in attempting to resolve such disputes or cla ims, but rather shall contest, dispute or resolve such claims at Sellers’ sole cost and expense and in Sellers’ name. Nothing set forth herein shal l in any way prevent, prohibit or restrict Buyer from taking any action, or refraining from any action Buyer deems necessary or appropriate to defe nd, protect or advance its interests with respect to such claims, whether or not consistent with Sellers’ position as to such matter s.

* * *

¶4.05 Adjustment for Utilities Sellers shall cause all meters for electricity, gas, water, sewer and other utility usage related to the Purchased Assets to be read on the Closing Date, and Sellers shall pay all charges for such utilities which have accrued on or prior to the Closing Date. If t he utility companies are unable or refuse to read the meters on the Closing Date, all charges for such utilities to the extent unpaid shall be prorat ed and adjusted as of the Closing Date based on the most recent bills therefo r. The Sellers shall provide notice to Buyer within three days before th e Closing Date setting forth (i) whether utility meters will be read as of the Closing Date and (ii) a copy of the most recent bill for any utility char ges which are to be prorated and adjusted as of the closing Date. If t he meters cannot be readas of the closing Date and, therefore, the most rec ent bill is used to prorate and adjust as of the closing Date, then to the extent that the amount of such prior bill proves to be more or less than the actual charges for the period in question, a further adjus tment shall be made after the Closing Date as soon as the actual charge s for such utilities are available, which Buyer shall have read as soon as p ossible after the closing Date. Sellers’ and Buyer’s obligation to m ake such post-Closing Date adjustments for utilities shall survive the Cl osing. Sellers’ obligations hereunder not funded separately by Sell ers at Closing shall be deducted from cash payable to Sellers at Closing. (Pl. Opp’n to CVPS’s Am. Mot. for Summ. J., at ex. B, Dec. 8, 2003.)

After reaching these contract terms, the parties d etermined to escrow the amount of $214,802.79, as shown on the “Closing Statement” executed by the parties December 9, 1996, the date on which American Skiing purchased the Pico assets. (CVPS’s Am. Mot. for Su mm. J., at ex. H, Jan. 23, 2003.) This sum is listed under “Section 4.02( c) Reservations,” an obvious reference to the previously cited contract provisions. $214,802.79 happens to be the amount of the bill presented by C VPS. (See Pl. Opp’n to CVPS’s Am. Mot. for Summ. J., at ex. D, Dec. 8, 200 3.)

Here, the Herberts argue that there was a “prorati on duty” under 4.05, which was their only duty. Proration, howeve r, exists only in the event that the utilities could not read their respe ctive meters and was a short-term means of setting aside money for the pay ment of utility bills. The record before us does not even permit the sugge stion that the precondition for proration ever occurred—an inabili ty or refusal to read the

meters.

On the other hand, certain legal conclusions seem inescapable from the quoted provisions 4.02 and 4.05. First, this w as an integrated contract,drafted with great care, between sophisticated part ies each represented by

counsel. See Restatement (Second) of Contracts § 2 09 (1981); 17A Am.

Jur. 2d Contracts § 396 (discussing integrated contracts and its eff ect on interpretation). Second, American Skiing transpare ntly determined that it expected the electricity bill of its predecessor to be paid as of the Closing Date. It may be argued about whether American Skii ng actually would have suffered successor liability, or whether CVPS had any right to impose a lien. Either proposition may be argued. But nei ther proposition need be

decided.

This is a contract case, and the contract of these parties must be interpreted and applied, so that the objectively ex pressed contractual intent will govern. Restatement (Second) of Contracts § 2 12 cmt. a (1981). American Skiing was buying Pico; it did not intend to buy lawsuits. Even ill-founded lawsuits, which it might eventually win . Cf. 3 S. Williston & R. Lord, A Treatise on the Law of Contracts § 7:45, at 701 (4th ed., 1992) (“Forbearance to prosecute or defend a suit or othe r action which has been or may be instituted is generally held sufficient c onsideration without inquiring whether the suit or the defense would hav e been successful or not.”). Moreover, in entering on the Pico premises , American Skiing obviously understood that it would be opening an ac count with the only supplier of electricity, CVPS, and reasonably wante d to do so under favorable terms. American Skiing did not want to d eal with a utility which had just been burned for almost a quarter million d ollars, and therefore announced to the successor ski operator that it wan ted some huge deposit, in order to open the new account. How much better to be dealing with some CVPS manager on the basis of a paid bill, or a t least one secured by escrowed funds, required by American Skiing’s contr act. Although American Skiing’s particular intent, at the time, m ay not be part of the record, its purposes are easily divined from the co ntractual language andare clear and not at all surprising in the context of everyday business.

Isbrandtsen v. North Branch Corp. , 150 Vt. 575, 578 (1988). Courts interpreting contracts need not naively blind thems elves to the reality of

commerce. Id . (citing Restatement (Second) of Contracts § 212 c mt. b (1981)).

Third-Party Beneficiary Status

From the contract and the closing statement, it is plain that a certain amount of the money was escrowed at the closing to cover outstanding debts whose creditors might have a perfected intere st, lien, or claim against American Skiing. CVPS’s bill for electricity was o ne of those debts listed. As we have discussed, it was in American Skiing’s i nterest to include CVPS because any claims by CVPS, regardless of thei r validity, would have been an unwanted hassle to American Skiing and had the potential to harm its on-going business relationship with CVPS. It was the intent of American Skiing and the Herberts, then, to provide a pay off, or benefit, to parties such as CVPS, who were creditors of the Her berts. In other words, CVPS and other creditors listed under the ¶ 4.02 cl osing sheet were thirdparty beneficiaries to the contract because they we re the intended recipients of escrow funds necessary to satisfy the Herbert’s debt. Morrisville Lumber Co. v. Okcuoglu , 148 Vt. 180, 184 (1987) (parties’ contemplated

satisfaction of a debt to another is the essence of a third-party beneficiary contract). This is acknowledged implicitly by Amer ican Skiing when it notes that “[i]n the absence of the bankruptcy proc eeding there would be no question that the money could be turned over to CVP S.” (Def. Resp. to CVPS’s Am. Mot. for Summ. J., at 2, Jul. 1, 2003.) (notwithstanding prior blanket assertions by American Skiing to the contra ry).

The question raised by the Herberts is whether CVP S still has aclaim to this escrow money since the Bankruptcy Cou rt’s 1997 Injunction

has ended any liability of the Herberts. According to them, CVPS has neither claim nor right to this money because the i njunction extinguished the debt and blocks CVPS from going after any of th e Herbert’s assets. The problem with this argument, however, is that it is premised on two conceptual fallacies. First, the debt that the Her berts and their companies once carried prior to bankruptcy has not been disso lved by the bankruptcy injunction. As the Bankruptcy Court made clear in its order allowing CVPS to intervene in this case, the injunction has only barred CVPS from ever seeking payment from the Herberts, personally. (CVPS’s Am. Mot. for Summ. J., at ex. A, Jan. 23, 2003.) The debt o wed to CVPS’s still remains. Thus, CVPS is still free to pursue this c laim against other parties or other sources. See 11 U.S.C. § 524(e) (outlinin g the effects of a discharge from a bankruptcy); Terwilliger v. Terwil liger , 206 F.3d 240, 247 (2d Cir. 2000) (noting that a barnkruptcy injunctio n works as an affirmative defense only for the party it covers); see also Ada mson v. Dodge , 174 Vt. 311, 315–16 (2002) (noting that former spouse that had her name on the

other’s credit card account was liable for the debt following his bankruptcy and subsequent injunctive protection). Conceptual ly, CVPS’s debt from the electricity supplied to Pico remains, and it ha s a right to pursue any asset outside of the Herberts’ protected sphere.

The second concept that the Herberts rely upon con cerns the ownership of the escrow account. According to them , they own the escrow account so that even if CVPS could still pursue its debt, it could not touch

the escrow because it is their asset. This mischar acterizes the nature of the escrow account and the type of action CVPS is pursu ing. Ownership over an escrow fund is contingent on fulfilling the cond itions of escrow. In re Mushroom Transportation, Co. , 282 B.R. 805, 817 (E.D. Pa. 2002). Legal title to the res of the escrow, whether property or money, does not passfrom the grantor to the grantee until the condition of the escrow has been

satisfied. 28 Am. Jur. 2d Escrow § 17. The grantees in this case are the Herberts who have a contingent right to any remaini ng escrow funds after the CVPS debt has been satisfied. The question of whether this contingent right is enough to establish ownership has been add ressed by jurisdictions in other contexts. See H. Warren., Who Must Bear L oss Resulting from

Defaults or Peculations of Escrow Holder , 15 A.L.R. 2d 870 (1951, Supp. 2004) (citing to cases that ownership and risk of l oss do not shift to grantee until after the conditions for the escrow are met). Most have held that ownership does not pass until the condition of the escrow is met or fails.

Id . In particular, bankruptcy courts have considered escrow funds to be outside the bankruptcy estate. While the focus in such situations has been primarily on debtor–grantors who contribute to an e scrow prior to bankruptcy, the courts have, short of fraud, refuse d to include the escrow contributions in the estate because even though the debtor holds legal title, it is contingent on whether the conditions of the e scrow are met. P. Mears, Can a Bankruptcy Trump an Escrow?: A Primer on Enfo rceability , 6–Oct. Bus. L. Today 40, 42 (1996); see also T. Byrne, Esc rows and Bankruptcy

, 48 Bus. L. 761 (1993). Hence, the Herberts’ sole c laim of ownership here is an equitable title, contingent on the satisfacti on of CVPS’s electrical bill. We are persuaded that this contingent right does no t create a right of ownership in the Herberts and leaves the escrow fun d outside of their control and ownership and, therefore, outside the p rotection of the bankruptcy court’s injunction. (Cf. CVPS’s Am. Mot . for Summ. J., at exs. A, B, Jan. 23, 2003.)

As the third-party beneficiary of the escrow fund provisions in the sale contract, CVPS has the best claim on the escro w funds and is eligible to claim them. In essence, the nature of CVPS’s cl aim is for the money inescrow alone. It is not a claim against the Herber ts or their estate. It is

rather essentially an in rem claim against a discre te fund, presumably including the interest it has earned. CVPS will no t receive, nor does it seek, a personal judgment against the Herberts, but a declaration that the stakeholder must pay over the res. In this respect , our conclusion that CVPS has a right to the escrow funds has nothing to do with the law of bankruptcy or the judgments of the Bankruptcy Court . It is instead a simple contract interpretation, which establishes third-pa rty beneficiary CVPS’s right to funds that were segregated through contrac t. Based on the foregoing, CVPS’s motion to intervene and motion for summary judgment are granted.

Dated at Burlington, Vermont________________, 2004

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________________________ Judge