-: Okay, so Attorney Salinger, whenever you're ready.
-: Thank you.
Good morning. May it please the court.
My name is Seth Salinger.
I represent the Appellants Lantern 18
and Sam and Marsha Bergman.
And with me today is my associate
who's also on the brief today is my associate (indistinct).
When I was retained to appeal the decision
on summary judgment in this case,
I thought this was a garden variety promissory note case.
I still think it's a garden variety promissory note case,
but obviously there are unique circumstances here that got
the SJC's attention since this court took it up directly
from the appeals court.
And I think one of the difficult issues here is that the
defendants are obligores on a promissory note,
which the Superior Court said was an instrument that
provided for one obligation and one obligation only,
and that is to pay money. And that is true,
but what the appellants have tried to argue is that because
of the unique circumstances of the governor's Covid 19
emergency orders that essentially, not essentially,
did in fact prevent my clients from performing the cleaning
services that generated the revenue
that enabled them to pay,
-: Is that not the nature of a personal obligation,
so if I have a landscaping business and I want to buy a
backhoe and the bank won't give me money
as Gaziano landscape, but they'll give me,
make me a personal obligation, if my landscape company goes
under, I'm still on the hook, correct?
To pay for the backhoe?
That's why they want my personal obligation,
not Gaziano Landscape, Inc.
-: Well, that's true.
So it's interesting because the appellee
points out that the Bergmans are co-obligores on the note.
I would submit what they really are as guarantors.
-: Right, I think that you hit the nail right on the head.
They're guarantors and guarantors need to pay up
when the obligore does not, regardless of circumstances.
Isn't that the whole point of a guarantor?
-: The point is that if an underlying note obligation
is deemed either unlawful or unenforceable
or the obligations of that note are suspended,
then concomitantly the obligations of the guarantor
should also be suspended.
-: What is your legal authority for that proposition?
Salinger: What is the legal authority
for that proposition?
-: Yeah, that a guarantor is off the hook
when the obligore is off the hook.
It doesn't seem to make sense.
-: I think it's standard law that if a note
is discharged then the guarantor's obligation is discharged.
So it's discharged if it's suspended.
That's what we're saying,
that under the very narrow circumstances of this case and
for a very limited period of time and only applying in very
extreme circumstances where there is an emergency with an
attendant government edict that affects the entire economy
for that period of time, the note should be suspended
and the obligations of anybody
who's obligated are the note should similarly be.
-: So any borrower is off the hook and any guarantor
is off the hook during Covid 19?
-: Well we have examples, for example of the CDC issuing
eviction moratoriums.
We have examples of banks reformatting
mortgages during Covid.
We have examples of landlords acquiescing to tenants saying
I can't pay and either suspending lease obligations
or rewriting leases or letting commercial tenants out of
leases, probably millions of dollars in this country
over the last two years were not paid
to commercial landlords because of that very reason.
So yes, there are emergency situations
where commercial paper gets reformed
either by operation of equities and the private
parties agreeing to do it,
or sometimes by the executive branch reaching
down into a private contract.
-: But here we don't have any of that.
We have neither the private parties agreeing as equitable
matter to discharge the obligation,
nor do we have any sort of legislative or agency action
suspending the obligation.
You're just saying that as a matter of law,
the court should come in and suspend the obligation.
So my question was, what is your legal authority for that
proposition that we as the court can come in to do what the
agency, the legislature, and the private parties
decided not to do?
-: Well, courts do this.
Courts do rewrite, for example, covenants not to compete
or they did prior to the enactment of the statute,
which severely limited the applicability of that doctrine.
Courts have rewritten contracts
throughout our jurisprudence.
That's why we no longer have caveat emptor.
That's why we now have an implied covenant
to good faith and fair dealing.
All of these things arose because courts said,
the letter of the contract says what it says.
Nobody disagrees with that.
In this case, nobody disagrees with the fact
that the promissory note has an absolute obligation
and that there's an acceleration clause.
The appellee seems to be arguing,
-: And it doesn't have a force majeure clause.
-: There's no force majeure.
-: It's a really draconian, but very clear contract
saying you gotta pay up.
There are no excuses, there's no force majeure,
there's nothing out there like to provide leeway, is there?
-: That's correct.
-: So isn't that the intention of the parties?
-: Well, you know, typically I think one would expect
to see a force majeure clause in a services contract.
-: Right, isn't that important, because you would
expect a force mature clause, particularly we've got,
this is a real contract and it's not drafted,
it's not an internet type of contract.
Lawyers here clearly have drafted this thing.
There's a lot of thought in it, right?
-: I assume that my brother drafted the contract.
I don't know.
I didn't participate.
But, but my point is that I've never seen,
frankly, a standalone promissory note.
By the way, I don't believe this is
a standalone promissory note because this note,
even though it doesn't reference the security agreement or
the asset purchase agreement, is clearly given only because
it was incidental to the purchase of a business.
But even if we look at it in isolation,
-: But it doesn't have one of these clauses that say,
okay, if the profits aren't what you said it was,
we renegotiate, it doesn't have a force majeure clause.
It's just, we're doing this but we need
to be paid promptly or we're gonna impose interest
and penalties and acceleration.
It's just hard to discern, that was the intention.
And you're trying to shift the risk now
back to the seller it looks like, of Covid.
-: Well, I'm not trying to shift the risk.
I'm trying to, what I'm saying is,
there's an unforeseeable circumstance
that neither party could have contemplated,
and particularly in a promissory note situation where one
does not expect to see a force majeure clause
because typically those clauses arise in contracts
that have to do with the delivery of goods
or services that could be interrupted
because of a supply chain problem or a war
or something like that.
Nothing like that was contemplated here.
Neither party contemplated it.
-: Has any appellate court in the country
rewritten these types of contracts because of Covid?
-: I'm sorry, I didn't quite hear.
-: Has any appellate court in the country
rewritten these types of promissory notes
or contracts because of Covid?
I saw there are a couple of citations to district court
decisions and your namesake's opinion,
the Salinger superior court decision,
But has any appellate court ruled the way
you want us to rule in the country?
-: I don't think so.
Not that I can discern.
-: How do you fit into the doctrine of frustration
of purpose or impossibility given the chase standard
in the facts of that case?
Salinger: Again, I understand that the problem for,
-: Are you relying on those two doctrines?
-: The frustration of purpose?
-: And/or impossibility?
-: I would say more impossibility than
frustration of purpose.
It is that the borrowers here,
they're not really the borrowers, again,
I think they're the guarantors are a husband and wife and
they are the business and
and both counsel at the preliminary injunction made this
point, that these are two husband and wife businesses.
And so to try to pretend that somehow the LLC is separate
and distinct from the husband and wife for purposes of being
able to perform doesn't really confront reality if the LLC,
-: Isn't that the purpose of the LLC,
to kind of avoid that reality?
Salinger: I'm sorry?
-: Isn't that really the purpose of the LLC,
to sort of avoid that reality?
-: The purpose of the LLC to be a separate juristic person?
Absolutely.
But it's also a fact, it's a truism,
that they are the LLC for all intents and purposes.
So if the LLC can't perform the services and can't earn
money, they can't earn money.
-: You're trying to pierce your own corporate veil.
-: I'm sorry?
-: You're trying to pierce your own corporate veil.
-: When it assists my argument, yes.
-: So the creditors of the LLC can all go
after your clients personally.
-: Well, I mean,
-: I just want to make sure you're clear
as to what you're articulating.
-: What I'm saying here is that we are confronted
with what I would consider to be a Dickensian result.
Neither party here did anything wrong.
Not suggesting that LeFort doesn't have the rights
that are articulated in the promissory note,
but we have a situation that unloaded on the parties, as a
result of which one party is now facing the prospect of
being sent to the poor house and the other party is set
with the prospect of getting a windfall through no, yes,
because they can foreclose now.
-: Counsel, could I just push back on that a little bit?
Just as (indistinct) made the point about there's no force
provision in the promissory note, okay,
so prior to entering this promissory not, this contract,
they had the ability to negotiate back and forth and they
did not negotiate for that benefit.
Your clients did not do that.
Let's say after not some global pandemic, not some war,
let's just say all of your clients' contracts, after signing
this, dissipated and they weren't making any money simply
because nobody wanted to hire them.
Are you saying that they would just be excused from making
the payments under the promissory note?
Salinger: Not, not under that, no.
Not under the hypothetical that you raised, your Honor.
-: But you started off by saying they couldn't earn money and
that's because for whatever reason and
I know you're saying it's the pandemic and the executive
orders, but the crux of your argument
is they couldn't earn money to pay the note.
-: But there's a difference between a general economic
downturn or poor business decisions
that result in a debtor's inability
to earn money to pay back the lender.
That's distinct from what the courts referred to
in the frustration of purposes cases
and the impossibility of defense cases,
a supervening event.
Justice Georges: Sure.
-: That is the distinction.
Had it not been for that, there would be no argument.
Had Lantern 18 simply been unable
to earn revenue through some other circumstance,
not having to do with a circumstance over which nobody had
any control, we wouldn't be here, there would be no lawsuit.
Lafort would have the absolute opportunity to foreclose,
to accelerate and I don't know that Lantern 18
would have any defense.
Even one such as in this appeal that is essentially
based on no precedent.
-: Council, before we run out of time,
is there any distinction in the analysis as it relates to
the acceleration clause?
-: Is there any?
-: Difference in the analysis in your view
as it relates to the acceleration clause?
-: I'm not quite sure I understand.
-: So in other words, the guarantor,
that's why you have a guarantee, in case something goes
wrong, but the guarantee wasn't just for the money,
the contract also provided for acceleration.
Is there anything in your view of the caseload or the
analysis that we should look differently in whether or not
the acceleration clause can be enforced?
-: I'm still not quite following.
-: Can I follow up and maybe flesh that
out a little bit?
I think Justice Lowy is saying,
does acceleration change things?
What seems inequitable here,
if there is something inequitable,
it's the acceleration, that all
this money is gonna come due.
It would be one thing to have them catch up
and they got the emergency loan and they could catch up.
But the acceleration changes everything.
Isn't that the real harm to your client?
-: Yes, I think and the record, I'm sorry Judge.
-: Is the analysis different when the company
tries to use the acceleration clause?
Is there something we should look at differently there?
And is there any law to support that?
-: Again, the strict interpretation of the contract gives
the lender here the right to accelerate.
We're not suggesting otherwise, every promissory note
has an acceleration clause.
What's different here is that these events occurred after
five years of uninterrupted note performance and they
occurred after there were attempts to offer cure payments,
which were rejected.
-: No.
-: I'm sorry?
-: The answer is no, there's no different analysis.
That's what you're saying.
It's a windfall.
We're trying to find out if there's some case law argument
that you have, helpful to you, that says it's a promissory
note, they got a guarantee.
That's why you got a guarantee, you gotta pay, but whoa,
all of a sudden we gotta pay everything?
We're trying to find out from you if there's any different
in the analysis relative to the acceleration clause.
It's a simple question.
The answer evidently is no, that's fine.
-: I don't think that I have,
I think I may have a case but I can't highlight it for you
in the time that I have remaining.
-: Can I push you a little bit?
Because this may be the most important question
we're asking you.
So if we seem in Massachusetts to treat acceleration causes
just like liquidated damages,
we don't look at subsequent events,
but Covid makes the acceleration clause tough,
as a matter of equity, at least.
I mean they may be churlish that they're not,
that they're pushing the enforcement of this
and they're getting a windfall from it.
But is there a legal basis for us to say, because of Covid,
it's not proper to enforce the acceleration clause here?
-: Well, if you balance the equities,
the avoidance of the acceleration clause simply means that
the lender gets put back in the position that it was prior
to the cessation of payments.
The flip side of that is that the borrower loses everything.
So if we're balancing the relative prejudice,
the relative harm, what we're saying is,
the temporary suspension of payment
does not work an undue prejudice on the lender.
-: Is that, again, we're looking for a legal basis.
Is it a violation of the covenant
of good faith and fair dealing?
-: I think it is.
-: Well, but you don't argue that. So how do we?
-: The problem is that it rises in the context
of settlement discussions, most of which were,
some of which were broadcast to the superior court,
but most of which could not be for obvious reasons.
Again, I think you have to look at this in toto,
that this happens after five years of note performance and
suddenly a couple of months of non-payment means that the
debtors are out of luck and they lose everything,
when they did attempt to cure there, by the way,
there's no opportunity to cure in the note, either.
The lender doesn't have to accept cure payments.
The lender can just say,
I took $360,000 of your money and now I can take
the business back because you missed a couple of months
because I'm gonna accelerate,
I don't have to accept your cure payments.
-: What is the business, by the way?
I don't understand what the collateral is.
I mean, is it the brooms and the cleaning fluid?
-: I mean, probably it's $10,000 worth of mops and cleaning
fluid and the rest is probably goodwill and a customer list.
It's not a, I don't think that
there are significant tangible assets,
but based on that, it was a significant purchase price
and this a significant indebtedness.
I don't think that my client should have to file
for bankruptcy or mortgage their house
under the circumstances of this case.
So, and the lender here, not really a lender,
the seller would not have suffered any undue prejudice
to wait, I believe it was five days,
five days for an SBA loan to come in that would have brought
all the payments current.
Rather than waiting the five days,
they filed suit and ran into court
and sought a preliminary injunction.
Yes, I think that's unfair.
-: Yeah, but unfair is not law.
You're not turning any, what do we look to?
Do we look to anything to support that or we just say,
as the trial judge, motion judge said,
they should have renegotiated the contract,
but they didn't have to.
-: When were they going to renegotiate the contract?
The problem had already manifested. Okay.
There was no time to renegotiate.
Justice Kafker: Not helping us.
-: Okay, I think we'll stop there.
-: Thank you, your Honor.
-: Okay, Attorney Engle.
-: Good morning, your Honors.
May it please the court.
My name is Stuart Engel and I represent the plaintiff
and appellee in this case.
The one thing I would agree upon with my brother counsel is
this is a garden variety promissory note transaction.
-: Except it happens during Covid 19 where there
are these emergency orders.
Why is it equitable to allow your client to suddenly
accelerate the payments when, as your opposing counsel says,
it was a matter of waiting five days?
-: Well, respectfully, your Honor, two points on that.
One, it wasn't a matter of waiting five days.
The record will show that my clients did not file suit until
the lease, the note was four months in arrears
and after a good amount of discussion between the parties.
Second of all, this was this acceleration provision,
which is, your Honor knows,
is standard in every promissory note that I've ever seen
of this nature, was not, respectfully, unjust enrichment
or windfall, and in fact,
the case law is clear that if the parties negotiate this
as part of an underlying contract,
that the debtor, the three co-obligores in this case,
cannot claim that an acceleration provision that they
negotiated in good faith, and I might add
negotiated twice.
The original transaction was in 2015
when my client sold the business.
And then in 2018, the co-obligores at that time
wanted to extend out the payments further,
so that they could lower the monthly payments,
and a new set of documents was again negotiated
through council and that provision was included.
The other point I would make,
and I think it's important in the context of this,
is that we're talking about something
that happened two and a half years ago.
The governor's restrictions were lifted thereafter.
And in point of fact, had the co-obligores simply
paid off the note, they would've been done five months ago.
So to the extent in anticipation,
-: I'm confused, the argument is they don't
have the money to pay it off.
They have the money to catch up.
But they don't have the money to,
the acceleration clause is the killer, right?
-: Well I would respectfully disagree with that.
You are making an assumption that they didn't
have the money to pay or catch up,
as the superior court judge noted in her
decision, allowing the summary.
-: How much was the acceleration clause?
It's being pushed forward two years, right?
-: It was 26 months of payments and then
a final balloon payment.
-: Give me the, you know the number.
-: It was approximately $265,000.
-: 260. This is a small business.
This is a maid service.
You're asking them to come up with $265,000
two years ahead of time?
I mean, it's reasonable to infer they
probably don't have the cash for that.
That's why they negotiated this kind of deal.
So tell us why, during, Covid changes things,
elderly people don't want people in their homes.
Other people who have health issues don't want people
in their homes, all of us didn't want people in our homes.
Is there any, so I'll ask you the same question.
Any appellate courts decided this the other way,
that you're aware of?
Engle: No.
-: Any appellate courts decided it your way,
that you're aware of?
Engle: Yes, your Honor.
Not, I shouldn't say appellate court.
Moriano.
-: A very different case.
Engle: The appeals court here decided,
I would also reference, in my supplemental brief,
-: It seems odd to me, this is a societal issue and we don't
have one appellate case yet?
We're the first court to deal with this issue?
-: With respect to the narrow issue as you posed
on the acceleration provision,
I would,
-: How about just any appellate court dealing
with these types of promises to pay?
Do we have any decisions yet?
-: I do not, Your Honor.
Justice Kafker: Have you researched it?
-: I have, and the closest thing I have,
I attached to the supplemental brief, a decision,
a very well thought out decision on a case that is very
close analogous to this case
that the US District Court in Chicago,
Justice Kafker: Yes, I read that case.
-: Issued two weeks ago, and it's an interesting parallel
to this case, whereas, the performance
by my client, as in that case, occurred five
years earlier when they sold the business.
What distinguishes the case that everybody relies on
with the Cafe Neuro case here
and other cases, is that performance was ongoing,
that's the essence of a lease, or for example,
if the cleaning business had contracts
with a commercial building or a residential building
or customers and the performance by both parties was ongoing
and could not have been performed.
That's not the case here.
And it's in fact not the case in the decision
that I attached to,
-: That's a little tricky though because, I mean,
I don't know if the Neuro case is decided correctly
or not, but the difference,
clearly the ongoing nature of this business was important to
the payment of your client.
So it's not as if this is an abstraction.
There was sort of a built-in assumption they're going to
continue to run this business, wasn't it?
-: Well, it actually isn't an important assumption.
My client performed, they sold the business
as the superior court judge correctly
pointed out in her decision, allowing the summary judgment.
A lender doesn't care.
And I use that term in quotes,
where the money is coming from for the payments,
whether it's from revenues, from savings, from inheritance,
from anywhere else.
Respectfully, the court makes an incorrect assumption
when they assume that the two individual co-obligores
did not have the funds or the means
or the assets to make the payments.
That's nowhere in the record.
And I would respectfully suggest
it's not the case in actual fact.
-: Step back from month to month.
Obviously we're interested in the acceleration clause
and the questions that were posed at the end
of the argument to Mr. Salinger.
In your research, even putting Covid 19 aside,
is there, you mentioned that promissory notes
have acceleration classes.
Is that any case or any doctrine anywhere in any
circumstances that you're aware of that's differentiated the
analysis for the money in default
as opposed to the acceleration clause?
-: There is not, your Honor,
and in fact I didn't mention in my brief, but
as the court is well aware in Metropolitan Life Company
versus (indistinct), and more recently, the appeals court
in Selby Holdings stated that, on the concept
of unjust enrichment or a windfall,
as my brother council referred to it, is not applicable
where there is a valid underlying contract
that defines the obligations of the parties.
This isn't simply my clients draconianly saying
we want all our money up front because
you missed four payments.
This was negotiated twice.
This was drafted by lawyers twice.
The two individuals who are co-obligores,
meaning they're jointly and separately liable,
were obligores for a reason.
This isn't simply, to answer your question,
the reason that there is no appellate decision that
distinguishes between simply the obligations under the note
and the acceleration clause is because,
in this case in particular,
they were all negotiated in good faith.
-: But that was all before Covid.
You seem to be ignoring the fact that we had
this worldwide pandemic and the fact that it was negotiated
before Covid doesn't change the fact that your clients
did say, Yes, we want to accelerate this and we want
all that money, right now.
-: It's not that we want all the money,
it was the money that they were entitled to.
-: Entitled to because,
Engle: Under the terms of the note.
-: That was negotiated before Covid.
-: Well, if Your Honor were to apply that logic
to all acceleration provisions, any time
that there was any intervening event,
you would open up the type of Pandora's box that would
not only undo well-established commercial banking law,
but you would create a situation, for example,
if you had two spouses who were co-obligores on a note
and there was, for example,
consistent with the Moriano case,
if one of them got Covid or got cancer or was in a car
accident or some intervening act
occurs that that individual,
that entity, then says we can't perform
under the circumstances.
-: I'm not saying that we should apply it to everything.
I'm just referencing the motion judge's comment that
it's a shame that your clients couldn't
figure out a way to resolve this.
-: Without discussing things that are not part of the
record and would be privileged in nature,
The record does reflect that there were offers plural
and attempts to resolve that simply did not work out.
And there are other reasons based upon the history of the
relationship between the parties that
that did not occur for reasons.
-: Council, can I ask you on the doctrine of impossibility,
has there ever been a case that you're aware of that applies
that doctrine where performance is complete by one side?
-: Not that I am aware of.
The doctrine of impossibility in a case like this,
there would have to be something that would show
that the entire substance, nature, and purpose
of the transaction between these two parties
was destroyed to use that word,
I'm not sure it's the correct word,
as a result of this event.
And the fact of the matter is that is not
what occurred here.
-: Have you researched whether the doctrine has ever been
applied in a situation where one party's
performance is complete?
-: I researched the issue and not that I am aware of.
Judge Wendlandt: What about the doctrine
of frustration of purpose?
-: Again, the answer would be no.
And in fact, looking at Chase, which is the primary case
that Your Honors at this court issued back in 1991,
talks about, they talk about in sum,
the four elements for frustration and purpose.
What was the main purpose of the contract?
Has some event caused a significant change in circumstances
that continued performance can no longer be achieved?
Three, was the non occurrence of that event
a basic assumption of the contract? And four,
did the contract allocate the risk to my clients?
And on three of those prongs of that test,
the answer's clearly no.
The main purpose of the contract was not
for cleaning services.
The main purpose of the contract was not frustrated
by the Covid pandemic.
The main purpose of the contract was back in 2015,
my client sold its business and all that was left to be
performed was the payments.
The purpose of the contract was to transfer an asset.
And that occurred in full and the only thing left to do
was to obtain payment.
The third prong, the non-currence of the event
was not a basic assumption of the contract.
As I believe Justice Kafker pointed out,
when questioning my brother,
This wasn't a situation where the performance of the
business, there were no contingencies based
upon the performance of the business or revenues
or even the business being in existence.
My clients had performed.
All that was left was the payment.
There was no force majeure clause there, unlike Cafe Neuro.
There was no contingency in the language
of the contract that said we are offering this space and the
only thing you can do in this space ongoing is provide a
restaurant with indoor seating that serves indoors.
The purpose of the transaction was not frustrated nor made
impossible by the Covid pandemic.
And I think it's important to emphasize that while
my brother characterizes the two individuals as guarantors
and then attempts to pierce his own corporate veil,
they were co-obligores.
They were jointly and severally liable.
And to the extent that the court might be persuaded,
that would respect, and I don't believe should be,
but to the extent that the court might be persuaded that
certain defenses may arise to the business,
I would respectfully suggest that those defenses do not
arise to the two individuals.
There is absolutely nothing in the record.
Nor was it proffered by the two individual defendants that
the Covid pandemic rendered them
unable to make the payments.
That there were any defenses applicable to them that
the governor's mandates and orders
applied to them individually.
I mean, there is a reason that lenders and sellers
require co-obligores in that sense, so that if something
happens to one obligore, the other obligore
is still on the hook and they are not
guarantors of obligore number one's obligations.
They are jointly, severally, and independently obligated
under the note.
And if your Honors have any further questions,
I'm happy to answer them, otherwise,
thank you for your time.
-: SJC 13269 LeFort Enterprises, Inc.
V Lantern 18 LLC and others.