Opinion ID: 3011213
Heading Depth: 1
Heading Rank: 4

Heading: erroneous application of contract

Text: PRINCIPLES Having affirmed the District Court's determination that the Bankruptcy Court had core proceeding jurisdiction to enter a final judgment on Barry's claim that HBI's signing bonus obligation was unenforceable as part of an illegal stock redemption or a fraudulent conveyance, we now consider the District Court's decision on the merits of that claim. The Bankruptcy Court and District Courts employed substantially similar modes of analysis. The initial task was to determine the parties' intent utilizing traditional principles of contract law. After finding the text of the September Transaction documents ambiguous, the Bankruptcy Court considered the extrinsic evidence tendered at trial and made a factual finding that the parties' minds met on a redemption of Irwin's stock by HBI, and that the Purchase Letter effectuated this intended redemption.10 Next, it considered whether the redemption _________________________________________________________________ 10. We read the Bankruptcy Court's conclusion that a stock redemption was intended on September 5, 1991, and effectuated on April 15, 1992, to rest exclusively on its factual finding that this was what the parties intended. This is thus not a case where a court acknowledges that the parties intended one form of transaction, but treats the transaction in a different manner for reasons unrelated to the parties' intent. Compare Sedbrook v. Zimmerman Group, Ltd., 526 N.W.2d 758 (Wis. Ct. App. 1994)(de facto merger); Fenderson v. Athey Prod's Corp. Kolman Div., 581 N.E.2d 288 (Ill. App. Ct. 1991)(same). 16 thus accomplished was consistent with New Jersey law. Based on its finding that HBI was insolvent at the time of the redemption, it held that the transaction violated N.J.S.A. 14A:7-14.1. The Bankruptcy Court then turned to consider whether the September Transaction constituted a fraudulent conveyance under 11 U.S.C. S 548 and N.J.S.A. 25.2-20, et seq. It was undisputed that the Agreement for redemption of Irwin's stock was entered within a year of the Bankruptcy Court's order of relief and at a time when the HBI was insolvent. The Bankruptcy Court focused upon the only remaining fraudulent transfer element: whether HBI received less than reasonably equivalent value when it entered into the redemption agreement. Slip. 36. Because it was undisputed that the stock had a value of $1.00 or less, the Court concluded that HBI's obligation to pay Irwin $300,000 was a fraudulent conveyance. Finally, the Bankruptcy Court held that Barry's personal guaranty was unenforceable because it was a part of an integrated transaction involving an illegal stock redemption. Tracing the steps of the Bankruptcy Court's analysis demonstrates that the foundation of its ultimate legal conclusions was its finding that the parties contracted for a stock redemption. We must respectfully disagree with this foundational premise. We find no ambiguity in the text of the documents and all of the extrinsic evidence relevant under New Jersey law is entirely consistent with the express and unambiguous intent reflected in those terms. While the parties intended that Irwin would grant an option to HBI that could result in a redemption, they did not intend for that option to be exercised at a time when HBI was insolvent. Moreover, all of the relevant evidence indicates that no redemption occurred. We begin with basic principles of New Jersey contract law: Evidence of the circumstances is always admissible in aid of the interpretation of an integrated agreement. This is so even when the contract on its face is free from ambiguity. The polestar of construction is the intention of the parties to the contract as revealed by the language used, taken as an entirety; and, in the quest for the intention, the situation of the parties, the 17 attendant circumstances, and the objects they were thereby striving to attain are necessarily to be regarded. The admission of evidence of extrinsic facts is not for the purpose of changing the writing, but to secure light by which to measure its actual significance. Such evidence is adducible only for the purpose of interpreting the writing -- not for the purpose of modifying or enlarging or curtailing its terms, but to aid in determining the meaning of what has been said. So far as the evidence tends to show, not the meaning of the writing, but an intention wholly unexpressed in the writing, it is irrelevant. The judicial interpretive function is to consider what was written in the context of the circumstances under which it was written, and accord to the language a rational meaning in keeping with the expressed general purpose. Atlantic Northern Airlines, Inc. v. Schwimmer, 12 N.J. 293, 301 (N.J. 1953). We next turn to the documents. The four simultaneously executed documents spell out carefully, and in great detail, the terms of an integrated transaction, the primary objectives of which were (1) to vest Barry with immediate control of HBI, (2) to provide Barry with the opportunity of becoming the sole stockholder of HBI and (3) to terminate any relationship between HBI and Irwin other than his employment relationship. To accomplish these objectives, the documents unambiguously provide, inter alia, for (a) the immediate transfer of Irwin's stock to Barry as voting trustee, (b) the granting of an irrevocable three year option to purchase Irwin's HBI stock exercisable by Barry, HBI, or an entity to be organized by Barry, (c) the employment of Irwin by HBI in a sales capacity, (d) the payment by HBI of a $300,000 signing bonus to Irwin, (e) Irwin's agreement to a restrictive covenant of non-disclosure and noncompetition, (f) Irwin's resignation as an officer and director of HBI, and his release of all his rights under HBI's stockholder agreement and executive compensation plan, (g) the exchange of releases between Irwin on the one hand and Barry and HBI on the other, and (h) Barry's guaranty of HBI's signing bonus obligation. The Letter Agreement provided that Irwin's rights under the Employment 18 Agreement (including the signing bonus) were being given to him in consideration for his agreement to enter the overall transaction (e.g., his commitments to transfer his stock to the voting trust, to grant the irrevocable option, to provide services, to release his rights, etc.). Barry signed the Letter Agreement, both individually and as HBI's president. (Pa. 533) On January 15, 1992, Barry exercised the stock buyout option by sending a letter signed in his individual capacity, to himself, as voting trustee, and to Irwin stating: [Y]ou are hereby notified that I elect to exercise my option to acquire all of the shares of stock in Halper Bros., Inc., which are held by the Voting Trustee pursuant to the Voting Trust Agreement. (Pa. 526)(emphasis added). Discussing the preamble of the Letter Agreement, the Bankruptcy Court noted: The plain language of [statement (i)] fails to delineate whether the transaction is a sale of stock by an individual shareholder or a redemption of the Debtor's stock by the Company. The text also fails to stipulate who is the purchaser of the stock, the Debtor, or Barry or an entity controlled by Barry. The signature portion of the Letter Agreement also offers no assistance to the Court as it was executed by Barry, individually, and Barry in his capacity as president of the Debtor. (Pa. 51) While the above statements are true, these facts do not make the Letter Agreement ambiguous or inconsistent. Rather, the precise language of the Letter Agreement creates the unambiguous possibility of either a sale or a redemption of the stock to any one of the three potential purchasers. Because Barry assumed sole control of HBI immediately upon the agreements' execution, this meant that Barry had a choice: he could purchase the stock individually, acquire the stock through an entity controlled by him, or cause HBI to redeem the shares. Any of the three methods would accomplish the undisputed primary objective of making Barry HBI's sole shareholder. The fact that a choice of method existed does not create an ambiguity by itself. If Barry or an entity controlled by Barry 19 exercised the option to purchase Irwin's shares, the transaction would constitute a personal purchase and sale of stock between shareholders. However, if, and only if, HBI exercised this option, the transaction would constitute a redemption. Because Barry signed the Purchase Letter in his individual capacity and stated that he elected to exercise his option, this transaction constituted a personal purchase of the stock, not a redemption by HBI. Moreover, an examination of all of the extrinsic evidence confirms, rather than conflicts with, the intent evidenced in the documents. The cousins had previously declined to enter a transaction in which the benefit to them came solely through a redemption of their stock because they were aware that such an agreement would be unenforceable during any period of insolvency. This rejection as well as Barry's desire to secure a tax deduction for HBI resulted in a compromise. To appease the selling cousins, their stock could be purchased by Barry or a new Barry-created entity. These potential purchasers--unlike HBI--could exercise their options while HBI was insolvent. To accommodate Barry's tax concern, payment for this option would come through HBI as a deductible signing bonus. Finally, the selling cousins' concerns regarding HBI's ability to pay the signing bonus were allayed by Barry's personal guaranty thereof. In short, based on the September Transaction documents, the extrinsic evidence, and the unambiguous terms of the Purchase Letter, we conclude that (1) Irwin granted an option to HBI that could be exercised if Barry infused capital and turned the business around, but which all recognized could not be exercised during insolvency, (2) Irwin granted Barry an option to purchase his shares which Barry exercised, and (3) there was no stock redemption. In reaching this conclusion we are not unmindful of the fact that the Bankruptcy Court credited the testimony of Barry and his lawyer that they intended the Purchase Letter to be an exercise of HBI's option to buy Irwin's stock. We accept that factual finding for present purposes. Under New Jersey law, however, Barry's subjective intent is not legally relevant. The undisclosed subjective intent of a participant in a transaction cannot be used to alter the 20 intent clearly manifested in the documents to which he subscribed. See Atlantic Northern, 12 N.J. at 301. The Bankruptcy Court's reliance on that evidence was therefore error. As we have earlier noted, the Bankruptcy Court's erroneous determination that the transaction constituted a stock redemption was the basis for its judgment that the stock transfer was illegal and that the Guaranty was unenforceable. It follows that we must reverse the District Court's judgment and remand with instructions that there be further proceedings.