Court Opinion

ID: 8981311
Source: CourtListenerOpinion
Date Created: 2022-11-27 11:23:53.50672+00
Date Added: 2024-06-11T17:10:40.446211
License: Public Domain

LEVAL, District Judge,
dissenting.
I respectfully dissent. Judge Walker’s grant of a preliminary injunction staying the cure period was fully justified under Jackson Dairy, Inc. v. H.P. Hood & Sons, Inc., 596 F.2d 70 (2d Cir.1979), although I believe the stay should have been of more limited duration.
The first question on RJR’s application for a preliminary injunction is whether the cure period provided by the indenture was susceptible to a court ordered stay. That question has three parts: (i) Whether the intention of the parties as expressed in the indentures supplies the answer; (ii) whether the laws of New York give guidance; and (iii) whether the familiar rule for the grant of preliminary injunctions in the federal courts is applicable. On each of these issues, I disagree with the majority’s approach.
1. The ambiguity of the indentures. The majority opinion rules that the indentures unambiguously exclude a provisional stay. The theory is that because the indentures provide for cure periods of 60 and 90 days, they implicitly forbid any stay. When a contract provides for a cure period of a specified duration, any provisional stay, no matter how brief, alters the agreement and is therefore impermissible.
The argument has an appealing logic and in prior times would no doubt have evoked little disagreement. It fails, however, to take account of modern equity practice. In litigation today, provisional orders of restraint to preserve the status quo are commonplace. Temporary restraining orders, preliminary injunctions, and stays may delay the enforcement of contract rights. See cases cited on pp. 895-96 and 896 infra.1 Sophisticated parties who enter into financing contracts know full well that if the relationship sours, and default, acceleration or foreclosure is threatened, application may be made to the court for a stay to preserve the status quo during litigation. Metropolitan Life Insurance Company, one of the nation’s leading institutional lenders, and its attorneys were surely aware of this risk when it invested more than $300 million under the terms of the indentures.
In fact, the prospect of applications for stays is so familiar that the American Bar Foundation’s Model Debenture Indenture Provisions and Commentaries includes a standard clause, captioned Waiver of Stay, which is expressly designed for lenders to obtain a covenant from the borrower that “it will not at any time ... plead, ... claim or take the benefit ... of, any stay_”2 *893These lending institutions did not obtain such a Waiver of Stay in their indentures. Yet the majority opinion reads the indentures exactly as if they included this provision.3
One thing is clear: Wide ranging options were open to the contracting parties as to the availability of a stay. The indentures might have provided for an automatic stay of the cure period in the event of any litigation over a claim of default; the majority makes much of the fact that they did not so provide. Although the majority does not mention it, at the other extreme the indentures might also have included a borrower’s waiver of the right to seek a stay. Or, in between, the parties might also have specified when, under what circumstances, and for what maximum duration the cure periods might have been tolled. As to all these different possibilities, the indentures are silent. Beyond specifying a 60 or 90 day cure period, they say absolutely nothing about whether or under what circumstances a court might grant an interlocutory stay tolling its expiration. The meaning of this silence is resoundingly unclear.
The ambiguity that arises from the silence of the contract is compounded by the fact that when the issue came to be decided at the start of the litigation, there had been neither discovery nor inquiry into the contractual negotiations capable of casting light on the meaning of the silence. Were there evidence from the negotiations of shared understandings as to the availability of a stay (such as an understanding that in the absence of language dictating otherwise, courts would be expected to follow the usual rules for the grant or denial of a preliminary injunction), surely such evidence would be admissible to aid the court in interpreting the meaning of an ambiguous term. But the absence of discovery, hearing or trial on those issues deprives the court of any opportunity to know whether helpful interpretive evidence exists.
Where I see silence and ambiguity as to whether a stay is permitted under these indentures, the majority sees a contract term that is “unambiguous on its face ...; ‘a definite and precise meaning ... concerning which there is no reasonable basis for a difference of opinion.’ ” The recital of a 60-day cure period unambiguously *894demonstrates an intention to rule out any equitable stay. In fact, the majority finds the contract so unambiguous that extrinsic evidence would not even be admissible to affect its interpretation. No mention one way or the other of the tolling of cure periods plainly means no tolling of cure periods.
The majority’s interpretation postulates a rule of interpretation that when a contract includes reference to a specified period of time for the taking of some action, the parties are deemed to have waived any right to seek a provisional equitable stay. No authority is cited for this rule of interpretation. To my mind, furthermore, it has no reasonable basis. Contracting parties who wish to exclude access to a provisional stay can easily put that in their contract. The conclusion that these indentures unambiguously exclude any provisional stay is unjustified.
2. New York law allows for such a stay. I disagree also with the majority’s finding that a stay was “impermissible” under the law of New York.
The majority characterizes the district court’s ruling as “[rjelying on landlord-tenant cases [First National Stores, Inc. v. Yellowstone, 21 N.Y.2d 630, 290 N.Y.S.2d 721, 237 N.E.2d 868 (1968) ], in which New York State courts had granted stays to tenants threatened with eviction by landlords claiming defaults_” The majority found that this reliance was error because the Yellowstone injunctions apply only to real estate leases, and there is no authority for extending Yellowstone to this circumstance.
As a preliminary matter, the majority mischaracterizes the district court opinion. Judge Walker did not rely on Yellowstone as a basis for his ruling. He relied on equitable circumstances which he evaluated under the Second Circuit’s test governing the issuance of a preliminary injunction. See Jackson Dairy, Inc. v. H.P. Hood & Sons, Inc., 596 F.2d at 72; Video Trip Corp. v. Lightning Video, 866 F.2d 50, 52 (2d Cir.1989). It is true Judge Walker observed that his grant of a stay was “consistent with [the Yellowstone ] line of New York cases that tolls cure periods like those at issue under standards for equitable relief more relaxed than those just applied by the Court.” He explicitly recognized, however, that the Yellowstone cases were limited to the landlord-tenant context, and that they involve a more lenient standard than the one he followed. In no sense did he regard the Yellowstone decisions as controlling.
I agree with the majority (and Judge Walker) that the Yellowstone principle does not govern here. Yellowstone is an exception to New York’s normal preliminary injunction rule. Whereas the normal rule requires a showing of likelihood of success, irreparable harm and a balance of the equities before a court will award a preliminary injunction, Preferred Equities Corporation v. Ziegelman, 155 A.D.2d 424, 547 N.Y.S.2d 355 (2d Dept.1989); Grant Co. v. Srogi, 52 N.Y.2d 496, 438 N.Y.S.2d 761, 420 N.E.2d 953 (1981), the Yellowstone principle authorizes a stay of a tenant’s cure period merely upon a showing that the tenant may suffer termination of the lease if the stay is not granted. Post v. 120 East End Ave., 62 N.Y.2d 19, 475 N.Y.S.2d 821, 823, 464 N.E.2d 125, 127 (1st Dept.1983).4
Although I agree that the Yellowstone cases are not controlling, the majority’s insistence on their irrelevance is overstated. To be sure, there is no authority suggesting the New York courts would extend the diminished showing necessary under Yellowstone from leases to indentures governing debt. Judge Walker was surely justified, however, in noting the Yellowstone eases as a relevant indication of an openness in New York jurisprudence to stay cure periods to protect against irreparable harm. New York courts, furthermore, have in fact extended the Yellowstone doctrine beyond lease defaults to mortgage foreclosures — a context which is quite similar to ours. See 150 East 58th St. Assoc. v. Fletcher, 35 A.D.2d 947, 316 N.Y.S.2d 644 (1st Dept.1970).
*895But even if the majority opinion is correct that Yellowstone has no bearing whatever on these cure periods, nonetheless, it does not follow, as the majority opinion supposes, that a stay is “impermissible” under New York law. The majority cites no authority for this proposition. And New York law is to the contrary. The inapplicability of the special Yellowstone rule means only that the normal New York rule applies for the grant of an interlocutory stay or preliminary injunction. An applicant who shows irreparable harm, likelihood of success and a balance of equities is entitled to a preliminary injunction. Preferred Equities, 547 N.Y.S.2d, supra, at 356. “Preliminary injunctions and temporary restraining orders have been granted [by New York courts] in cases involving contract rights of all descriptions.” 7A Weinstein, Korn & Miller, New York Civil Practice ¶ 6301.29. It is not uncommon for such preliminary injunctions to bar temporarily the enforcement of explicit written contract rights pending litigation, including the stay of a cure period. See, e.g., 150 East 58th St. Assoc. v. Fletcher, 35 A.D.2d 947, 316 N.Y.S.2d 644 (1st Dept.1970) (tolling cure period for mortgage default); United States Ice Cream Corp. v. Carvel Corp., 136 A.D.2d 626, 523 N.Y.S.2d 869 (2d Dept.1988) (preliminarily enjoining exercise of explicit contractual right to terminate a franchise); Courageous Syndicate, Inc. v. People-to-People Sports Committee, Inc., 112 A.D.2d 916, 492 N.Y.S.2d 433 (2d Dept.1985) (defendant preliminarily enjoined from implementing contract provision for letting of yachts, pending litigation); Cut Corners v. Barterama, 83 A.D.2d 948, 442 N.Y.S.2d 790 (2d Dept. 1981) (defendant preliminarily enjoined from exercising right to oust plaintiff from selling in defendant’s flea market, pending trial of plaintiff’s contention that oral modification permitted plaintiff to remain).
I find no basis in New York cases for the majority’s conclusion that New York law opposes the provisional stay of a cure period under an indenture.
3. The federal preliminary injunction rule favors a stay. I turn finally to the availability of a stay under the familiar standards for a preliminary injunction in the Second Circuit, which I would consider the controlling inquiry in the absence of a clear answer provided by either the contract or New York law. In this circuit, a litigant is entitled to a preliminary injunction or stay on a showing of irreparable harm coupled with either likelihood of success on the merits or a combination of serious questions on the merits making a fair ground for litigation and a balance of hardships tipping decidedly in favor of the applicant. See Jackson Dairy, supra.
The majority makes assertions about the nature of preliminary injunctive relief which I believe are exaggerated. The opinion states that, “[i]n its efforts to preserve the parties’ rights and the status quo, the court must be careful not to alter the terms of the agreement. ‘The parties having agreed upon their own terms and conditions, “the courts cannot change them and' must not permit them to be violated or disregarded.” ’ Diversified Mtge. Inv. v. U.S. Life Title Ins. of N.Y., 544 F.2d 571, 575 (2d Cir.1976), quoting Whiteside v. North American Accid. Ins. Co., 200 N.Y. 320, 326, 93 N.E. 948 (1911).” (Emphasis added.) The majority finds that the district court failed to “follow these prescriptions.”
The prescriptions are overstated. It is in the nature of stays, TROs and preliminary injunctions that they can temporarily alter the terms of an agreement or suspend its operation, pending final adjudication.5 *896Commonly in contract litigation, by reason of a finding of irreparable harm that would otherwise be suffered, the court bars a contracting party from taking an action which, but for the order, would be expressly permitted by a provision of the contract. Such orders are issued notwithstanding recognition that the party against whom the order is directed may ultimately prevail on the merits and may therefore be fully entitled, under the terms of the contract, to do what it is preliminarily stayed from doing. For example, while this appeal was sub judice, this court directed the entry of a preliminary injunction barring a party from exercising a contractually specified termination right in order to maintain the status quo pending full trial. Reuters Ltd. v. United Press International, Inc., 903 F.2d 904 (2d Cir.1990). And, in Roso-Lino Beverage Distributors, Inc. v. Coca-Cola Bottling Distributors, 749 F.2d 124 (2d Cir.1984) (per curiam), this court provisionally barred the implementation of the contractually specified right to terminate a distributorship in order to preserve the status quo during arbitration. See also Unicon Management Corp. v. Koppers Co., 366 F.2d 199, 204 (2d Cir.1966) (plaintiff preliminarily enjoined from exercising its contractual right to manage defendant’s office by reason of equitable factors, pending trial of defendant’s claims of breach); Mississippi Power & Light v. United Gas Pipeline, 760 F.2d 618 (8th Cir.1985).
To be sure, in granting provisional relief courts should not lightly or excessively alter contractual commitments. The exacting rules governing preliminary injunctions are designed to insure that courts will do so sparingly and only when (and to the extent) well justified by irreparable harm and the balance of hardships. Had the majority asserted that in granting preliminary stays courts should not excessively or unreasonably interfere with negotiated contract rights, I would fully agree. But the opinion goes much further.
* * * # * *
Judge Walker followed this court’s well established Jackson Dairy standard in deciding whether to issue a preliminary injunction. The circumstance that most powerfully motivated his decision was that the bondholders, after triggering the start of the cure period by serving notices of default, objected to a speedy adjudication schedule. They demanded four months to conduct discovery, but objected to a stay of the cure period during their discovery. Judge Walker concluded, with excellent justification, that the bondholders could not in fairness have it both ways. If the bondholders’ position prevailed, their four months’ discovery would extend beyond the cure period, with the result that the borrower would be required either to yield to a probably invalid notice and cure without opportunity for judicial vindication, or run the risk of adjudication of the validity of the default notice without opportunity to cure in the event the court’s ruling were unfavorable. Judge Walker found this unreasonable. So do I. This supported his finding of irreparable harm;6 also, in view of the bondholders’ failure to make any showing of harm resulting from a stay of the cure period, it supported his finding of a balance of hardships in RJR’s favor.
The district judge also correctly found that RJR’s rejection of the bondholders’ claim of default raised a fair ground for litigation. Although he stopped just short of ruling that RJR was likely to succeed on the merits in defeating the plaintiffs’ imaginative theory of default, he did note that *897no other bondholders had seen fit to declare default under the same provisions.7
On the basis of the findings summarized above, Judge Walker was entirely justified in granting a preliminary injunction tolling the cure period. The majority opinion, in fact, appears to agree. It expressly states that when a lender demands discovery after serving a default notice, “the court may, in order to protect both the right of the lender to obtain admissible evidence of default and the right of the borrower to use the full cure period to secure an adjudication, stay the running of the cure period for such time as the lender needs for discovery.”
On the appropriate duration of the stay, however, I respectfully disagree with some of the district judge’s analysis. Judge Walker believed that unless a stay continued through adjudication of the merits of the claimed default, RJR would be deprived of its contractually guaranteed opportunity to cure. Accordingly, his order tolled the cure period through decision of RJR’s suit for declaratory judgment of the invalidity of the default notices.
In my view, this ruling granted too long a stay and bypassed the opportunity for a final ruling on the disputed question whether the agreement of the parties permitted tolling of the cure periods. As I noted above, the indentures are silent and ambiguous on this question. I agree with the majority opinion that, because the preliminary injunction provided for no further ruling on whether a stay was contemplated by the terms of the indentures, it “determined with finality the matter of whether the cure periods ... may be expanded by order of the court.” If the bondholders wished an opportunity to prove, after expedited discovery and trial of this issue, that no stay was permissible, they should have been entitled to it. They might conceivably have been able to present extrinsic evidence from the contract negotiations that would have shown that no tolling was intended. If this had been proved after expedited trial of that issue, the district court would then have terminated the stay and required the borrower to choose among its unpleasant options. If, on the other hand, the court had found after such trial that stay was contemplated under whatever conditions, it could then have continued the stay under terms consistent with the contractual understanding, including (if appropriate) a stay through eventual adjudication of the merits of the default notices.
Such a proceeding may be cumbersome.8 It is, nonetheless, necessary to preserve the opportunity for both sides to demonstrate (with the benefit of discovery) that a stay was or was not contemplated in the agreement represented by the indentures. The district judge’s resolution foreclosed the opportunity of the lenders. The majority’s resolution forecloses that of the borrower.
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In conclusion, I would affirm the district court’s grant of a preliminary injunction, but with a more limited duration. Initially the provisional stay should not, in my view, have extended through final trial on the merits, but only through prompt final trial of the ambiguous question whether the indentures allow for any stay of the cure periods. On the basis of that decision, the court would determine whether there is a contractual right to any further stay.9
*898Although arrived ■ at by very different chains of reasoning, the majority’s disposition and mine are not so far apart. Despite the implication in the majority opinion that the indentures bar RJR from seeking a stay of the cure period (“There is no mention in either indenture ... of a right on the part of RJR to seek an extension from the court”), the majority clearly rules it appropriate to stay the cure period during the lenders’ discovery. The lenders had demanded four months’ discovery. The record before us does not reflect whether any or all of this discovery has been accomplished, or whether the proceedings in the district court stopped during this appeal. Although the majority ruling vacates the stay instituted by the district judge, its remand for further proceedings “not inconsistent with this opinion,” presumably allows for the entry of a more limited stay to last through the bondholders’ discovery, if any remains to be done.

. In fact, the recent trend of the law has been to make such stays more easily available. Whereas the prior rule in this circuit barred the issuance of a preliminary injunction without a showing of likelihood of success on the merits, the newer rule in effect in the last 15 years or so, requires that a litigant show only a fair question for litigation, so long as it is coupled with irreparable harm and a balance of hardships in favor of the applicant. Jackson Dairy, supra. Sonesta International Hotels v. Wellington Assoc., 483 F.2d 247 (2d Cir.1973); Triebwasser and Katz v. American Telephone & Telegraph Co., 535 F.2d 1356 (2d Cir.1976).

. American Bar Foundation, Commentaries on Model Debenture Indenture Provisions 1965, § 5-15 [Section 515] Waiver of Stay or Extension Laws. The commentary explains that "these provisions historically have developed from the similar provisions contained in mortgage indentures ... [and that] a great many *893contemporary debenture indentures contain such provisions_”

. The majority opinion suggests that this clause concerns only stays arising under "statutory law” and is therefore irrelevant. I find this argument quite unconvincing. Grammarians could argue whether a covenant not to "plead ... any stay or extension law wherever enacted” addresses only enacted stays or includes non-statutory stays as well. As a matter of grammar, I cannot tell.
As a matter of contract interpretation, however, it would be bizarre for a lender to insist that the borrower waive the benefit only of those stays that are authorized by statute. A lender seeking a waiver of stay would have little interest in whether the stay had its origins in statutory or decisional law; it would wish a waiver of all stays. That is what the standard clause seems to me to involve.
Whether a stay was statutory (and thus forbidden) or judicial (and therefore not covered by the waiver) might turn on whether the procedural law of the state where suit was brought had been codified. Because bond indentures characteristically relate to long-term debt that will be outstanding for decades, the parties to the indenture would not know at the time of the agreement whether in the future when suit is brought the stay procedure will derive from statutory or judge-made law.
Furthermore, the majority’s reading might make the availability of a stay turn on whether the lawsuit involved citizens of the same or different states, and was brought in state or federal court. In New York, the procedural law is codified; preliminary injunctions and temporary restraining orders are authorized by New York Civ.Prac.L. & R. § 6301. Thus, for a suit brought in the New York state courts, a stay is a matter of statutory law. If the suit is brought in federal court, a stay is sought under Rule 65, F.R.Civ.P. Under the majority reading, the federal rule might not qualify as "enacted,” making the provision inapplicable.
The majority’s interpretation of the Model Indenture provision as relating only to statutory stays thus seems to me to be quirky and incompatible with the interests of the parties to the indenture, who might rationally agree either to allow or to disallow stays, but not depending on whether they come from statutes.

. The New York courts justify this attenuated requirement by the harshness of the default provisions in standard leases. Post, 475 N.Y. S.2d at 823, 464 N.E.2d at 127.

. The cases which the majority cites, in support of the proposition that preliminary injunctions may not alter contract terms, do not support it. The 1911 New York Court of Appeals decision which is quoted, Whiteside, was not a preliminary injunction case. An insured, suing to collect on a policy, asked the court to excuse his failure to have given the notice required by the policy. The court refused to cancel a contractual requirement and dismissed the action.
Although Diversified Mtge. Inv., supra, was a preliminary injunction case and quoted this proposition from Whiteside in vacating a preliminary injunction, it is clear on a close reading that Diversified does not adopt so drastic a rule. The preliminary injunction granted by District Judge Weinfeld was reversed not simply because it altered a contract provision. The Court of Appeals rather found that the plaintiff *896had shown "insufficient causally related irreparable injury,” 544 F.2d at 577, and that the preliminary injunction harmed the defendant by permanently depriving it of significant contractual rights. 544 F.2d at 575. In that respect, Diversified differs from this case; here, according to Judge Walker’s findings, denial of a stay would subject RJR to irreparable harm while grant of a stay would cause no harm to the lenders.

. The potential harm to RJR is enormous, especially if its other borrowing instruments include common cross-default provisions which make a default on any borrowing constitute a default under other instruments. If such is the case, a ruling adverse to RJR after expiration of the cure period could place its entire debt structure in default.

.Although this conclusion is not necessary to the affirmance of the stay, in my opinion Judge Walker might well have found that RJR demonstrated a likelihood of success on the merits. The negative covenants are quite specific in their proscription. They bar RJR from granting a "mortgage or pledge [of any assets] as security for any indebtedness” without securing the bonds “equally and ratably.” The arrangement which the bondholders contend violated this covenant was RJR’s promise to pay certain debt, selling unspecified assets to the extent necessary to do so. This involved neither a mortgage, nor pledge, nor encumbrance, nor security interest of any kind. Unquestionably, this involved paying another debt before the bondholders’, but that is not what the covenant appears to bar.

. It is, of course, likely that after discovery neither side would have any extrinsic evidence to present in aid of the interpretation of the ambiguous contract. In such case, no evidentia-ry hearing would be required.

. The majority's rebuttal characterizes this opinion as asserting that modern equity practice "routinely enjoins the effective dates of cure *898provisions” and "that a contractual provision specifying a cure period of 60 days sets only a minimum period subject to routine judicial extensions that could last for years.”
I hope my opinion makes clear that I do not hold any of the views attributed to me. I do observe that in litigation today, “provisional orders of restraint to preserve the status quo are commonplace.” I do not think that observation is controversial.
Far from suggesting that stays are, or should be, "routinely" granted, my opinion stresses the need for a strong showing of irreparable harm and balance of hardships to justify such an order, lest it interfere unduly with contractual commitments. The view that I advocate “routine judicial extensions lasting for years” (“calculated by the length of the chancellor’s foot”) is particularly puzzling in view of my conclusion that the stay granted below was too open-ended and should have lasted no longer than to allow for prompt trial of the amenability of the contract to any further stay.
Finally the majority makes much of the argument that, because Judge Walker’s tolling order provided no further opportunity to litigate the appropriateness of a stay prior to final resolution of the merits of the default notices, it was a permanent rather than a preliminary injunction. I do not disagree. But the remedy to correct the excessive duration of a stay is to shorten its duration — not to vacate it.