SCR v. Warshawsky

07-4029-cv SCR v. Warshawsky

1 UNITED STATES COURT OF APPEALS 2 FOR THE SECOND CIRCUIT 3 August Term, 2008 4 (Argued: November 21, 2008 Decided: March 12, 2009) 5 Docket No. 07-4029-cv 6 -------------------------------------7 SCR JOINT VENTURE L.P., 8 Plaintiff-Appellee, 9 - v -10 ARI WARSHAWSKY and JEROME WARSHAWSKY 11 Defendants-Appellants. 12 -------------------------------------

13 Before: SACK and WESLEY, Circuit Judges, and KAHN, District 14 Judge.*

15 Appeal from a judgment of the United States District 16 Court for the Eastern District of New York (Arthur D. Spatt, 17 Judge). The district court granted summary judgment for 18 plaintiff-appellee SCR Joint Venture L.P. in its action to 19 collect an allegedly unpaid debt from defendants-appellants 20 Jerome and Ari Warshawsky, and denied the Warshawskys' motion to 21 reconsider that decision. 22 We conclude, contrary to the decision of the district 23 court, that, in the circumstances presented, a statement in an

* The Honorable Lawrence E. Kahn, of the United States District Court for the Northern District of New York, sitting by designation.

1 affidavit opposing the motion for summary judgment made "to my 2 knowledge" was made with sufficient personal knowledge to create 3 a genuine issue of material fact as to whether the senior debt 4 had not been repaid, a fact that, if established, would preclude 5 suit based on certain guarantees made by the defendants. To that 6 extent we vacate the judgment of the district court. We agree 7 with the district court and affirm, however, insofar as it 8 dismissed on summary judgment the Warshawskys' claim that SCR 9 acquired its interest with a champertous purpose in violation of 10 section 489 of New York's Judiciary Law, and insofar as it 11 granted summary judgment on SCR's claim for payment of debt on 12 the so-called "Carve-Out Note." 13 Affirmed in part, vacated in part, and remanded.

14 RICHARD GABRIELE, Westerman, Ball, 15 Ederer, Miller & Sharfsten, LLP, 16 Mineola, NY, for Appellants.

17 STEVEN GIORDANO, Vlock & Associates, 18 P.C., New York, NY, for Appellees.

19 SACK, Circuit Judge: 20 Defendants-Appellants Jerome and Ari Warshawsky (the 21 "Warshawskys"), father and son, appeal from an order of the 22 United States District Court for the Eastern District of New York 23 (Arthur D. Spatt, Judge) filed August 17, 2007, denying a motion 24 to reconsider an order of the court filed June 6, 2007. In the 25 June 6 order, the district court granted summary judgment in 26 favor of Plaintiff-Appellee, SCR Joint Venture L.P. ("SCR"), 27 based on the Warshawskys' guarantees to SCR of notes that had *3 1 been issued by their business, I.W. Industries Inc. ("IW"), in 2 connection with an ultimately unsuccessful reorganization in 3 bankruptcy of the business. 4 The district court concluded that the relevant 5 agreement between the parties required the senior IW debt to be 6 repaid before SCR could seek to collect on the guarantees. It 7 further held that the Warshawskys had the burden of establishing 8 that the senior debt has not been repaid, and that they had not 9 raised a triable issue of fact on that issue because their 10 evidence as to it consisted only of hearsay deposition testimony 11 and an affidavit of Jerome Warshawsky stating that "[t]o my 12 knowledge, [the Senior Creditor] has not been paid in full." 13 We conclude that in this context, a statement made "to 14 my knowledge," unlike a statement made "upon information and 15 belief," is sufficient to assert personal knowledge and thus 16 created a genuine issue of material fact as to the repayment. We 17 therefore vacate the district court's judgment in that respect 18 and remand as to that claim. We affirm the district court's 19 grant of summary judgment against the Warshawskys, however, on 20 their claim that SCR acquired its interest in the debt with a 21 champertous purpose in violation of section 489 of New York's 22 Judiciary Law, and on SCR's claim for repayment of one of the 23 notes, which the parties refer to as the "Carve-Out Note." *4 1 BACKGROUND 2 On March 3, 2004, in connection with IW's ultimately 3 unsuccessful Chapter 11 bankruptcy reorganization proceedings,1 IW 4 and SCR's predecessor in interest, Summitbridge National 5 Investments, LLC ("Summitbridge"), executed three notes: (1) a 6 "Carve-Out Note" in the sum of $79,971.77; (2) a "New 7 Subordinated A Note" in the sum of $429,300; and (3) a "New 8 Subordinated B Note" in the sum of $2,075,505.74 (collectively 9 the "Notes"). On the same day, the Warshawskys each individually 10 executed personal guarantees for payment of the Notes in the 11 aggregate sum of $2,584,777.51 (the "Guarantees"). 12 The next day, the Warshawskys, Summitbridge, Citibank 13 N.A., and FCC, LLC, doing business as First Capital ("First 14 Capital"), executed another agreement with IW called the Debt 15 Subordination and Intercreditor Agreement (the "Subordination 16 Agreement"), which, among other things, subordinated the debt of 17 Summitbridge and Citibank, the "Junior Creditors," to that of 18 First Capital, the "Senior Creditor." About four months later, 19 on July 12, 2005, Summitbridge assigned and transferred its 20 interest in the Notes and Guarantees to SCR. 21 According to SCR, the Warshawskys defaulted with 22 respect to their obligation under the Notes and Guarantees by 23 failing to pay any of the principal of or interest on them. This 24 appeal arises out of an action by SCR brought in the district

1 The company later underwent a consensual liquidation by its secured creditors.

1 court to collect this allegedly unpaid debt. The court granted 2 summary judgment for SCR on three grounds relevant to this 3 appeal. Memorandum and Order Granting Summary Judgment 21, SCR 4 Joint Ventures, L.P. v. Warshawsky, No. 06 Civ. 3532 (E.D.N.Y 5 Sept. 18, 2007) (Docket No. 47). First, the court rejected the 6 Warshawskys' argument that SCR could not collect its debt because 7 the senior debt had not been repaid, concluding that the 8 Warshawskys had submitted no admissible evidence to show that the 9 senior creditor had not been paid in full. Id. at 10-13. 10 Second, the court rejected the Warshawskys' argument that SCR 11 acquired the debt with a champertous purpose in violation of 12 section 489 of New York's Judiciary Law, concluding that this 13 argument was waived, and, even were it not, that there was no 14 evidence establishing a triable issue of fact to support it. Id. 15 at 13-18. Third, the court rejected the Warshawskys' argument 16 that more discovery was needed prior to summary judgment in light 17 of SCR's refusal to cooperate, concluding that the Warshawskys 18 could have obtained the requested information previously. Id. at 19 18-21. The Warshawskys filed a motion to reconsider the grant of 20 summary judgment, which the district court denied. The 21 Warshawskys appeal. 22 DISCUSSION 23 I. Reviewability of the Summary Judgment Order 24 The Warshawskys' notice of appeal, while referring to 25 the grant of summary judgment, explicitly appeals only from the *6 1 denial of their motion to reconsider.2 SCR argues that we 2 therefore have jurisdiction to review only that order, not the 3 underlying grant of summary judgment. 4 Our recent decision in "R" Best Produce, Inc. v. 5 DiSapio, 540 F.3d 115 (2d Cir. 2008) counsels otherwise. In "R" 6 Best Produce, we decided that we had jurisdiction to review an 7 underlying district court order -- in that case denying a motion 8 to vacate a default judgment -- where the notice of appeal 9 referred to an order denying reconsideration, but not the 10 underlying order itself. We endorsed a "straightforward 11 approach" to resolving the issue of which orders, not referred to 12 in a notice of appeal, are reviewable, concluding that "a notice 13 of appeal from denial of a motion to reconsider, filed within ten 14 days of the order or judgment sought to be considered, suffices 15 to bring up for review the underlying order or judgment, at least 16 where the motion renews arguments previously made." Id. at 121. 17 The motion to reconsider in the instant case similarly "renews

2 The Notice of Appeal states that the appeal is

from the Memorandum Decision and Order of the Honorable Arthur D. Spatt, United States District Judge, denying Defendant's Motion for Reconsideration, entered on the 20th day of August, 2007, which Order denied reconsideration of the Memorandum Decision and Order granting Plaintiff's Motion for Summary Judgment, denying Defendants' Cross- Motion for Summary Judgment and granting related relief, entered on the 21st day of June, 2007.

Notice of Appeal, SCR Joint Ventures, L.P. v. Warshawsky, No. 06 Civ. 3532 (E.D.N.Y Sept. 18, 2007) (Docket No. 59).

1 arguments previously made," and, therefore, we may review the 2 underlying order granting summary judgment. 3 II. Standard of Review 4 "We review a district court's grant of summary judgment 5 de novo, construing the evidence in the light most favorable to 6 the non-moving party and drawing all reasonable inferences in its 7 favor." Allianz Ins. Co. v. Lerner, 416 F.3d 109, 113 (2d Cir. 8 2005). Summary judgment must be granted to the movant "if the 9 pleadings, the discovery and disclosure materials on file, and 10 any affidavits show that there is no genuine issue as to any 11 material fact and that the movant is entitled to judgment as a 12 matter of law." Fed. R. Civ. P. 56(c); see also Roe v. City of 13 Waterbury, 542 F.3d 31, 35 (2d Cir. 2008). "An issue of fact is 14 genuine if the evidence is such that a reasonable jury could 15 return a verdict for the nonmoving party. A fact is material if 16 it might affect the outcome of the suit under the governing law." 17 Id. (citation and internal quotation marks omitted). 18 III. Payment of the Senior Debt 19 Section 2.4(a) of the Subordination Agreement provides:

20 Until the Senior Creditor Repayment, no 21 Junior Creditor shall be entitled to exercise 22 any rights or remedies with respect to . . . 23 any Guarantor or any Junior Creditor 24 Guaranty, including without limitation to the 25 right to . . . make demand under, sue under 26 or otherwise seek payment under any Junior 27 Creditor Guaranty. . . . 28 Subordination Agreement, § 2.4(a). Under the terms of the

29 Subordination Agreement, then, until full repayment has been made 30 to the Senior Creditor, Junior Creditors, such as Summitbridge *8 1 and its successor in interest SCR, cannot bring suit against the 2 Guarantors, the Warshawskys, for the Junior Creditor Guaranty, 3 i.e., the debt owed to the Junior Creditor by the Warshawskys. 4 This lawsuit was brought for precisely that purpose: to 5 collect on the debt allegedly owed to SCR by the Warshawskys. 6 The Warshawskys assert that the Senior Creditor had not been paid 7 in full at the time this action was begun, and that, therefore, 8 this lawsuit is barred. 9 A. SCR's Arguments Based on Contractual Language 10 SCR argues that the remainder of section 2.4(a)3 11 nonetheless permits it to bring this suit. But the proviso 12 contained in that section applies only to "the Citibank Carve-Out 13 Note, the Summitbridge Carve-Out Note or the Citibank Short Fall 14 Note," not the New Subordinated A Note or the New Subordinated B 15 Note at issue.

3 The remainder of Section 2.4(a) reads: Notwithstanding the foregoing, if a Junior Creditor Note Default occurs with respect to the Citibank Carve- Out Note, the Summitbridge Carve-Out Note or the Citibank Short Fall Note, other than a default based solely upon the fact that a Junior Creditor Note Default under the Citibank Sub A Note, the Summitbridge Sub A Note, the Citibank Sub B Note or the Summitbridge Sub A Note has occurred, the applicable Junior Creditor may demand, sue for, take or receive from any Guarantor (but not from Borrower), by set off or in any other manner, the whole or any part of the amount due to such Junior Creditor in respect of the Citibank Carve-Out Note, the Summitbridge Carve-Out Note and/or the Citibank Short-Fall Note.

Subordination Agreement, § 2.4(a). *9 1 Section 2.6(b) of the Subordination Agreement provides 2 that the "rights and interests . . . hereunder . . . shall remain 3 in full force and effect irrespective of . . . any . . . defense 4 available to . . . Borrower." Subordination Agreement, § 2.6(b) 5 (emphasis added). SCR argues that this section permits it to 6 assert its claim under the subordinated notes because it 7 establishes that the Subordination Agreement does not "provide a 8 defense" for the Warshawskys or "limit the rights" of SCR. 9 Appellee Br. 20. But the provision refers only to the rights and 10 interests under the Subordination Agreement. The Warshawskys are 11 not asserting that the rights thereunder are not "in full force 12 and effect." They insist only that these rights not be expanded 13 to permit collection of the junior debt before the senior debt 14 has fully been paid.4

15 B. The Warshawkys' Arguments Based on Nonpayment of the Senior 16 Debt 17 The district court found that while the Senior Creditor

18 had to be repaid before SCR could bring suit for its debt, the 19 Warshawskys had not submitted admissible evidence to establish 20 that the Senior Creditor had not been paid in full. In their 21 motion to reconsider, the Warshawskys pointed out that prior to 22 the court's ruling on the summary judgment motion, they had

4 SCR also insists that it is entitled to relief on the basis of principles established in Minority Equity Capital Co. v. Jackson, 798 F. Supp. 200 (S.D.N.Y. 1992). But even were Jackson binding on the district court or on us, SCR's reliance is misplaced. The subordination agreement there contained an exception whereby the clause barring the right to bring suit before the senior debt was paid was not applicable if the debtor missed three consecutive payments. Id. at 202. There is no similar exception here.

1 submitted an affidavit by Jerome Warshawsky. It stated in 2 pertinent part: "To my knowledge, First Capital has not been 3 paid in full." Affidavit of Jerome Warshawsky, dated February 9, 4 2007 ("Warshawsky Aff.") ¶ 7. The district court nonetheless 5 denied the motion to reconsider because it concluded that 6 "statements made 'to my knowledge,' or similar statements made 7 upon information and belief or upon speculation are generally 8 insufficient to raise a triable issue of fact sufficient to 9 defeat summary judgment." Order Denying Motion To Reconsider 6, 10 SCR Joint Venture, L.P. v. Warshawsky, No. 06 Civ. 3532 (E.D.N.Y. 11 Aug. 17, 2007) (Docket No. 52). 12 We disagree. To be sure, for summary judgment 13 purposes, "[a] supporting or opposing affidavit must be made on 14 personal knowledge." Fed. R. Civ. P. 56(e)(1). "The Rule's 15 requirement that affidavits be made on personal knowledge is not 16 satisfied by assertions made 'on information and belief.'" 17 Patterson v. County of Oneida, N.Y., 375 F.3d 206, 219 (2d Cir. 18 2004). An affidavit making allegations on the basis of a party's 19 personal knowledge, and not merely on information and belief, 20 however, may be relied upon to oppose summary judgment. See id. 21 Jerome Warshawsky's affidavit satisfies the 22 requirements of Rule 56(e). He stated that he was a former Vice 23 President of IW and "fully familiar with the facts and 24 circumstances set forth" in the affidavit. Warshawsky Aff. ¶ 1. 25 He testified, "To my knowledge, First Capital has not been paid 26 in full." Id. ¶ 7. *11 1 It is perhaps unfortunate that the drafter of the 2 affidavit, likely not Mr. Warshawsky himself, used the phrase 3 "[t]o my knowledge" before asserting that First Capital had not 4 been paid in full. He could have simply said, "First Capital has 5 not been paid in full," and thereby avoided the issue of the 6 significance of the phrase "[t]o my knowledge." In this context, 7 though, we think that the phrase "to my knowledge" was redundant 8 -- it clearly meant "I know that . . . ." It does not mean that 9 the asserted fact was made only "upon information and belief," 10 the ordinary suggestion of which is: "I have reason to believe 11 this fact but do not have personal knowledge of it."5 12 Insofar as there is confusion, it likely arises because 13 the phrase "to my knowledge" is similar to the common expression 14 "to the best of my knowledge," which seems to inject a level of 15 uncertainty into just how sure the declarer is of the truth of 16 the asserted fact. We need not decide today, and therefore do 17 not address, the extent to which a statement "to the best" of an 18 affiant's knowledge is, in a particular context, made with 19 personal knowledge sufficient to raise a genuine issue of 20 material fact when opposing a motion for summary judgment. 21 We conclude that Jerome Warshawsky's statement, based 22 on his personal knowledge, that the Senior Creditor had not been

5 Several of the cases on which the district court relied to conclude that Jerome Warshawsky's statement did not raise a triable issue of fact dealt with statements made "on information and belief," or grounded on suspicion or hearsay. The cases that specifically involved the phrase "to my knowledge," in addition to not being binding on this court, were cases, unlike this one, where the affidavit made no claim of personal knowledge.

1 paid raised a "genuine issue" as to whether the Senior Creditor 2 has been paid in full, a fact, which, if established, would 3 certainly be "material." The district court therefore erred in 4 granting summary judgment for SCR on this ground. 5 IV. The Defense of Champerty 6 The Warshawskys also argue that SCR may not maintain a 7 lawsuit against them based on its interest in the Notes and 8 Guarantees because that interest was obtained with a champertous 9 purpose in violation of Section 489 of New York's Judiciary Law. 10 Section 489 renders it unlawful for a "corporation or 11 association . . . [to] solicit, buy or take an assignment 12 of . . . a bond, promissory note . . . or any claim or demand, 13 with the intent and for the purpose of bringing an action or 14 proceeding thereon." N.Y. Jud. L. § 489. "[A]n assignment made 15 in violation of [this] statute is void and may not be sued upon." 16 Semi-Tech Litig., LLC v. Bankers Trust Co., 272 F. Supp. 2d 319, 17 331 (S.D.N.Y. 2003), aff'd and adopted in relevant part, 450 F.3d 18 121, 123 (2d Cir. 2006) (per curiam). The statute is violated if 19 the "'primary purpose . . . , if not the sole motivation behind[] 20 entering into the transaction'" was bringing suit. Id. (quoting 21 Bluebird Partners, L.P. v. First Fid. Bank, N.A., 94 N.Y.2d 726, 22 736, 709 N.Y.S.2d 865, 871, 731 N.E.2d 581, 587 (2000)) (ellipsis 23 in original). But if "the accused party's primary goal is found 24 to be satisfaction of a valid debt," and the party only intends 25 to bring suit absent full performance of the valid debt, the 26 statute is not violated. Elliot Assoc., L.P. v. Banco De La *13 1 Nacion, 194 F.3d 363, 381 (2d Cir. 1999) (internal quotation 2 marks omitted). The district court concluded that the 3 Warshawskys had waived the champerty defense by failing to raise 4 it in their answer and found that, in any event, the claim failed 5 on the merits. 6 SCR offered proof, by affidavit, that it attempted to 7 collect the debt without litigation, and that only after the 8 Warshawskys failed to satisfy the debt did SCR decide to bring 9 suit. Unrebutted as it is, we think this is sufficient evidence 10 to support the district court's conclusion as a matter of law 11 that SCR's primary goal was satisfaction of the debt, and, 12 therefore, it did not violate section 489 in obtaining its 13 interest in the Notes and Guarantees and bringing suit thereon. 14 While the Warshawskys point to evidence of the denial of a 15 license in Massachusetts to a company related to SCR because of 16 the company's predatory collection practices, this raises no 17 issue of triable fact as to SCR's intent in acquiring its 18 interest in the Notes and Guarantees. The district court 19 therefore correctly granted summary judgment to SCR with respect 20 to the Warshawskys' claim that SCR's interest in the Notes and 21 Guarantees is not valid because it was acquired in violation of 22 section 489. Because the district court correctly granted 23 summary judgment on the merits, we need not decide whether the 24 court correctly found the argument to have been waived. 25 The Warshawskys had sought to determine the amount of 26 consideration SCR had paid Summitbridge for its interest in the *14 1 Notes in hopes of demonstrating that it was nominal -- an 2 indication of a champertous purpose in obtaining them. See, 3 e.g., Aubrey Equities, Inc. v. SMZH 73rd Assocs., 212 A.D.2d 397, 4 398, 622 N.Y.S.2d 276, 278 (1st Dep't 1995) (finding issue of 5 triable fact where "the transfer was for what appears to be a 6 token consideration"). But the district court concluded, rightly 7 in our view, that further discovery regarding the amount of 8 consideration SCR paid for the Notes and Guarantees was not 9 warranted. The Warshawskys had adequate opportunity to obtain 10 that information, through discovery and otherwise, and failed to 11 do so. 12 V. The "Carve-Out" Agreement 13 Finally, the Warshawskys conceded at oral argument that 14 Section 2.4 of the Subordination Agreement does not bar suit on 15 their debt under the "Carve-Out Note." It is thus not contested 16 that summary judgment was properly granted for SCR with respect 17 to SCR's suit for repayment on the Carve-Out Note. 18 CONCLUSION 19 For the foregoing reasons, we affirm the district 20 court's grant of summary judgment dismissing the Warshawskys' 21 claim that SCR violated section 489 of New York's Judiciary Law. 22 We also affirm the district court's grant of summary judgment for 23 SCR with respect to the Carve-Out Note. But we vacate the 24 judgment insofar as it was based on the absence of a genuine 25 issue of material fact as to whether First Capital, the Senior 26 Creditor, had been paid in full. The judgment of the District *15 1 Court is affirmed in part, vacated in part, and the case is 2 remanded for further proceedings.