The instant action involves a breach of contract claim arising in connection with the sale and purchase of distressed trade debt owed by certain bankrupt entities. There is an active and growing market in the United States for the sale and purchase of distressed debt, including trade claims against or loans to companies that have filed for bankruptcy protection. Depending on the financial condition of the debtor company and its capital structure, unsecured trade debts are generally sold and purchased at substantial discounts from their actual values.

Plaintiffs in this case are ALJ Capital I, L.P., ALJ Capital II, L.P. (together, ALJ), and DK Acquisition Partners, L.P. (DK). As assignees of Merrill Lynch, Pierce, Fenner & Smith Inc. (Merrill), ALJ and DK are the ultimate purchasers of the bankruptcy debt claims held by defendant The David J. Joseph Company, a creditor of the bankrupt entities and the seller of the distressed trade debt at issue. In the complaint, plaintiffs allege that the defendant breached the terms of a certain claims assignment agreement, and seek a judgment against defendant in an amount equal to the repurchase price of the bankruptcy debt claims, plus interest. Defendant moves, pursuant to CPLR 3212, for summary judgment dismissing the complaint. In response, plaintiffs cross-move for summary judgment. For the reasons stated herein, defendant's motion for summary judgment is granted, and plaintiffs' cross motion is denied.

On February 17, 2005, defendant sold and assigned its debt claims against the Debtors to Merrill, pursuant to a Claims Assignment Agreement (MLA), for about 38 cents on the dollar. Thereafter, pursuant to various agreements, including the so-called "assignment of participation" as well as "consent and elevation" agreements, DK and ALJ became the assignees of Merrill in respect of defendant's claims against certain Debtors, and thus were entitled to receive any distributions on such claims from the Debtors' estates. Based on the record, defendant's claim against Columbus (purchased by DK) was about $4.3 million, and defendant's claim against Lynchburg (purchased by ALJ) was about $3 million. The record also shows that, although the MLA authorized Merrill to assign and transfer defendant's claims against the Debtors to third parties, the identities of DK and ALJ, as documented assignees and transferees of Merrill, were unknown to defendant until after March 30, 2006.

Specifically, on March 30, 2006, defendant received a letter from each of the plaintiffs (the Disallowance Notice Letters). The Disallowance Notice Letters asserted that "Disallowance," as such term is defined in the MLA and discussed below, in respect of defendant's claims against Columbus and Lynchburg (together, the Claims) that were ultimately sold and assigned to plaintiffs, had occurred on November 29, 2005, in that the Debtors generally made a distribution to unsecured trade creditors on that date, but made no distributions to plaintiffs in respect of the Claims. The Disallowance Notice Letters further asserted that defendant had failed to cause the alleged Disallowance to be cancelled or removed within 120 days after the Disallowance, and demanded defendant to immediately repay plaintiffs the purchase price of the Claims pursuant to the MLA, plus interest at 8% per annum. Plaintiffs' assertions are based on Section 9 of the MLA, which provides, in relevant part:

Disputed Claim Adjustment: (i) In the event all or any part of the Claims are reduced, disallowed, rejected or objected to, in whole or in part, in the insolvency proceedings of the Debtors for any reason whatsoever, including, without limitation, pursuant to an order of the court ... or by a determination of the administrator of the Debtors, that the Claims are not valid, allowable, enforceable, non-contingent, liquidated, non-disputed or unsubordinated; (ii) if distributions are paid to Buyer in a time or manner, or pro rata amount, different from generally unsecured trade creditors of the Debtors generally ... (any such event described ... a "Disallowance"), Buyer shall provide Seller [*3]prompt written notice ... of the occurrence of such Disallowance and Seller shall have the exclusive right at its sole cost and expense for a period of one-hundred twenty (120) days from the occurrence of such Disallowance to cause such Disallowance to be cancelled, removed, withdrawn or otherwise eliminated (the "Cure Period"). If Seller has not caused such Disallowance to be cancelled, removed, withdrawn or otherwise eliminated during the Cure Period, Seller agrees to immediately repay, on demand of Buyer, an amount equal to the amount of the claims subject to the Disallowance multiplied by the Purchase Rate, plus interest at 8% per annum from the date of this agreement to the date of repayment ... .

In its initial response to the Disallowance Notice Letters, defendant wrote to plaintiffs, on April 5, 2006, and requested them to provide documentation substantiating their assertion that Merrill had assigned the Claims to them. On April 10, 2006, defendant again responded to the Letters by contending that (1) a Disallowance had not occurred under the MLA; (2) the Letters did not constitute "prompt written notice," as required by the MLA; and (3) plaintiffs were not entitled to demand repayment. On April 13, 2006, while reserving its position that it had no obligation to repurchase the Claims, defendant offered to "cure" the alleged Disallowance by agreeing to pay plaintiffs the amount of any distributions that had been reserved by the Debtors on account of the Claims, plus interest at a reasonable rate.

Plaintiffs did not respond to defendant's offer to "cure" the alleged Disallowance. Instead, they commenced the instant action, on May 5, 2006, by serving defendant with a complaint that alleges, in addition to the Disallowance alleged in the Disallowance Notice Letters, two other Disallowances. The three Disallowances alleged in the complaint are: (1) the Debtors' Notice of Disputed Claims List for Purpose of Participating in Rights Offering dated August 12, 2005 (the Rights Offering Notice); (2) the distribution made by the Debtors to certain unsecured creditors on November 29, 2005, as alleged in the Disallowance Notice Letters (the 11/05 Distribution); and (3) the letter from the Debtors, received by defendant on January 13, 2006, concerning certain allegedly preferential payments received by defendant from the Debtors during the 90 day period prior to the bankruptcy filing date (the Preference Demand).

On August 1, 2006, defendant and the Debtors settled all of the issues raised by the Preference Demand. The settlement agreement, which has been approved by the bankruptcy court, provided, among other things, that (1) in settlement of the Preference Demand against defendant in excess of $15 million, defendant would pay to the Debtors' estates $800,000; (2) [*4]defendant's Claims against Columbus and Lynchburg would be allowed in full; and (3) the Debtors would pay to Merrill's assignees (i.e. DK and ALJ) the distributions on the Claims, which had been withheld pending resolution of the Preference Demand against defendant. On September 1, 2006, DK received a distribution of $815,819.14 in respect of the Claim against Columbus, and ALJ received a distribution of $390,906.05 in respect of the Claim against Lynchburg.

In setting forth the standards for granting or denying a motion for summary judgment, pursuant to CPLR 3212, the Court of Appeals noted, in Alvarez v Prospect Hospital (68 NY2d 320, 324 [1986]), the following:

As we have stated frequently, the proponent of a summary judgment motion must make a prima facie showing of entitlement to judgment as a matter of law, tendering sufficient evidence to demonstrate the absence of any material issues of fact. Failure to make such prima facie showing requires a denial of the motion, regardless of the sufficiency of the opposing papers. Once this showing has been made, however, the burden shifts to the party opposing the motion for summary judgment to produce evidentiary proof in admissible form sufficient to establish the existence of material issues of fact which require a trial of the action [internal citations omitted].

Adhering to the guidance of the Court of Appeals, the lower courts uniformly scrutinize motions for summary judgment, as well as the facts and circumstances of each case, to determine whether relief may be granted. See, e.g., Giandana v Providence Rest Nursing Home, 32 AD3d 126, 148 (1st Dept 2006) (because entry of summary judgment "deprives the litigant of his day in court, it is considered a drastic remedy which should only be employed when there is no doubt as to the absence of triable issues") (citations omitted); Martin v Briggs, 235 AD2d 192, 196 (1st Dept 1997) (in considering a summary judgment motion, "evidence should be analyzed in the light most favorable to the party opposing the motion") (citations omitted). However, general allegations of a conclusory nature that are unsupported by competent evidence are insufficient to defeat a motion for summary judgment. Alvarez, 68 NY2d at 324-325.

Summary Judgment Should Be Granted In Favor Of Defendant

It is axiomatic that in order to prevail on a breach of contract claim, a plaintiff must establish all of the following elements: (1) existence of a binding contract; (2) plaintiff's performance of the contract; (3) defendant's material breach of the contract; and (4) resulting damages. Furia v Furia, 116 AD2d 694 (2d Dept 1986); J&L American Enterprises, Ltd. v DSA Direct, LLC, 2006 WL 216680 (Sup Ct. NY County 2006). Thus, unless the plaintiff has performed the contract pursuant to its terms, the plaintiff has not established all of the required elements for sustaining a breach of contract claim, even though the other three elements are satisfied.

In the instant case, as will be explained more fully below, plaintiffs failed to perform an important contractual provision of the MLA. On this basis alone, plaintiffs' breach of contract claim against defendant cannot be sustained.

In the instant case, Section 9 of the MLA requires the satisfaction of the following [*5]conditions before plaintiffs are entitled to seek recovery against defendant: (i) a Disallowance, as defined in the MLA, has in fact occurred; (ii) plaintiffs have duly provided defendant with "prompt written notice" of the Disallowance; and (iii) defendant has failed to cancel, remove or otherwise cure the Disallowance within 120 days of the date of the Disallowance. Plaintiffs must establish all of the foregoing conditions, before they are entitled to enforce against defendant the repayment obligations under the MLA.

Before discussing whether one or more Disallowances had in fact occurred under the MLA, it is important to note that the provisions of Section 9 regarding "prompt written notice" of any alleged Disallowance and the 120 days Cure Period for defendant to cure any alleged Disallowance were specifically and heavily negotiated, as evidenced by the various drafts of the MLA that were submitted by the parties in connection with this litigation. It is undisputed that plaintiffs are Merrill's assignees, and they step into Merrill's shoes and succeed to all of Merrill's rights and obligations under the MLA. See In Re Stralem, 303 AD2d 120, 123 (2d Dept 2003) ("[w]hen a valid assignment is made, the assignee steps into the assignor's shoes and acquires whatever rights [and obligations] the latter had"). In such regard, any argument by plaintiffs that, unlike the MLA, their claim participation agreement with Merrill does not contain a "prompt written notice" provision, is without merit. The reason is that, plaintiffs are bound, as a matter of law, by the terms and conditions of the MLA between Merrill, their assignor of the Claims at issue, and defendant, the seller of such Claims.

It is apparent that the Disallowance Notice Letters from plaintiffs to defendant, dated March 30, 2006, do not constitute "prompt written notice" with respect to the 11/05 Distribution, as the alleged Disallowance arising from such Distribution had occurred more than 120 days prior to the date of such Letters, and the Cure Period had already expired when defendant received the Letters. In respect of the two other alleged Disallowances arising from the Rights Offering Notice and the Preference Demand, plaintiffs did not provide notice of these alleged Disallowances until May 5, 2006, when they served defendant with the complaint commencing the instant action. If the complaint were deemed to constitute written notice to defendant, it was not "prompt" notice because the alleged Disallowances arising from (a) the Rights Offering Notice had occurred in or about mid-August 2005, and (b) the Preference Demand Letter had occurred in or about mid-January 2006. The tardiness of such deemed notice adversely affected defendant's ability to cure the alleged Disallowances, because the MLA requires defendant to complete the cure within 120 days from the date of an alleged Disallowance.

Plaintiffs contend, however, that even if the Disallowance Notice Letters do not constitute prompt written notice, defendant nonetheless received actual and timely notices from the Debtors with respect to the Disallowances, and thus defendant has not been prejudiced. Plaintiffs also contend that defendant should not be excused from its repayment obligations under the MLA, even if plaintiffs failed to comply with the prompt notice provision therein, unless prompt notice constituted a condition precedent.

Plaintiffs' contentions are unpersuasive for many reasons. Importantly, as noted above, the prompt written notice and Cure Period provisions were specifically negotiated by the parties. The MLA requires Merrill and its assignees (plaintiffs herein) to provide prompt written notice to defendant in the event of an Disallowance, so as to afford defendant with an opportunity to cure the Disallowance within the Cure Period, before plaintiffs can make a repayment demand, if and [*6]when defendant failed to complete a timely cure. Therefore, prompt written notice is a condition precedent to plaintiffs' right to seek repayment from defendant. Argo Corp. v Greater New York Mutual Insurance Co., 4 NY3d 332 (2005) (dismissed plaintiff's action for failure to provide defendant with prompt notice of an occurrence, as a condition precedent to defendant's obligation to perform). Without prompt written notice, (1) defendant did not know plaintiffs were Merrill's assignees; (2) plaintiffs were alleging a Disallowance; (3) plaintiffs were asserting repayment rights; and (4) defendant did not have an opportunity to cure any alleged Disallowance within the Cure Period. The fact that the Debtors, but not plaintiffs, provided notice to defendant as to the Rights Offering and the Preference Demand, did not mean that defendant knew that a Disallowance had occurred, and that plaintiffs were asserting repayment rights under the MLA. Therefore, plaintiffs' failure to provide defendant with prompt written notice, as required by the MLA, significantly prejudiced defendant.

As noted, the complaint, but not the Disallowance Notice Letters, alleges three Disallowances: the Rights Offering Notice, the 11/05 Distribution, and the Preference Demand.

The Rights Offering Notice

Plaintiffs argue that the Rights Offering Notice constituted a Disallowance under the MLA, and put defendant on notice that the Debtors intended to dispute or object to the Claims.

Such argument is without merit. Pursuant to the Debtors' joint plans of reorganization (the Plan), holders of general unsecured claims were entitled to make various elections, including, among others, the Inducement Cash Election^[FN1] and the New Common Stock and Rights Offering Election, as such terms were defined in the Plan. If a claim holder made the New Common Stock and Rights Offering Election, it was required to complete a subscription form that was incorporated into its voting ballot, so that the Debtors could calculate the maximum number of New Common Stock for which the holder could subscribe. The Debtors' calculation would be based, in part, on the amount of the holder's allowed claim. Affidavit of Jere McIntyre, Exhibit B.

Based on the record of this case, with respect to the Claims at issue, plaintiffs made the Inducement Cash Election, instead of the New Common Stock and Rights Offering Election. Thus, it is irrelevant that the subject Claims were listed on the Debtors' Disputed Claims List (which was annexed to the Rights Offering Notice), inasmuch as the claim amount "disputed" by the Debtors was for the sole purpose of calculating the subscription rights amount for participation in the Rights Offering. In other words, because plaintiffs made the Inducement Cash Election, the Rights Offering Notice had no impact whatsoever on the Claims, because plaintiffs were not interested in participating in the Rights Offering. Accordingly, the Rights Offering Notice did not constitute a Disallowance of the Claims, whether viewed from the [*7]perspective of the MLA, the Plan or the Bankruptcy Code.^[FN2] In any event, the notice given by plaintiffs to defendant with respect to the alleged Disallowance arising from the Rights Offering Notice was neither prompt nor timely, as required by the MLA.

The 11/05 Distribution

Section 9 of the MLA defines a Disallowance to include "distributions paid to Buyer in a time or manner, or pro rata amount, different from general unsecured trade creditors of the Debtors generally." Plaintiffs argue that the 11/05 Distribution was a Disallowance because other unsecured trade creditors were paid a distribution in November 2005, but plaintiffs were not.

Defendant contends that, because plaintiffs elected to be treated as Inducement Cash creditors, they were not treated differently from other Inducement Cash creditors of Columbus and Lynchburg, as most Inducement Cash creditors also did not receive any distribution in November 2005. Thus, defendant contends that the 11/05 Distribution was not a Disallowance.

In rebuttal, plaintiffs argue that the MLA speaks of general unsecured trade creditors, not just Inducement Cash creditors (a subset of general unsecured trade creditors), and the MLA also speaks of Debtors generally, not just the Lynchburg and Columbus debtors (a subset of all Debtors). Thus, plaintiffs characterize defendant's contention as "trying to fit a factual square peg into a contractual round hole," as well as "misleading and irrelevant." Plaintiffs' Brief, p. 9-10.

Plaintiffs' arguments are not persuasive. Since plaintiffs themselves elected to be treated as Inducement Cash creditors, and thus agreed to vote in favor of the Plan and the treatment provided thereunder, any distribution on the Claims they receive pursuant to the Plan should be compared with similarly situated creditors (i.e. other Inducement Cash creditors in the same subclass). This is appropriate because, pursuant to section 1122 of the Bankruptcy Code, a plan may place a claim in a particular class only if the claim is substantially similar to other claims in such class. Further, pursuant to section 1123 (a) (4) of the Bankruptcy Code, a plan must provide the same treatment for each claim in a particular class, unless a holder of a particular claim agrees to a less favorable treatment. By choosing to be Inducement Cash creditors, a subset of general unsecured creditors, the treatment of plaintiffs' Claims under the Plan should be compared with that of other Inducement Cash creditors, and not all general unsecured creditors.

Because of the foregoing, the MLA should be construed and analyzed to ascertain whether distributions paid to plaintiffs pursuant to the Plan were "in a time or manner, or pro rata amount, different from [other Inducement Cash creditors] of the [Columbus and Lynchburg] Debtors generally," so as to determine whether a Disallowance of the Claims had occurred under the MLA. This construction is reasonable because at the time the MLA was negotiated and executed (which predated the Plan), the parties could not predict with specificity as to how general unsecured claims would be classified under the Plan, or whether the Plan would provide [*8]for substantive consolidation^[FN3] of the estates for voting and distribution purposes. Thus, the language used in the MLA with respect to the treatment or Disallowance of the Claims should be viewed and analyzed in the context of the Plan, and plaintiffs' elected treatment of the Claims under the Plan.

Based on the affidavits of Jeffrey Pirrung, a consultant to the claims noticing and distribution agent in the Debtors' cases, defendant takes the position that the distributions on the Claims paid to plaintiffs under the Plan were not different from other Inducement Cash creditors of the Columbus and Lynchburg debtors, generally. Indeed, defendant contends that, based on Pirrung's affidavits, plaintiffs received their distributions earlier than most other Inducement Cash creditors, from whom the Debtors also held back and reserved distributions due to possible preference exposure. Defendant's Brief, p. 17-19. Defendant's reliance upon such affidavits appears reasonable, as Pirrung is a third party with knowledge of the claims resolution and distribution processes in the Debtors' cases.

Plaintiffs have not objected to or otherwise challenged the Pirrung affidavits. Their allegation that the 11/05 Distribution constituted a Disallowance cannot overcome or defeat the meaning and general import of the MLA, the Pirrung affidavits, the Plan and plaintiffs' elected treatment of the Claims thereunder. Thus, the 11/05 Distribution did not constitute a Disallowance under the MLA, and defendant was not obligated to cure same. In any event, similar to the Rights Offering Notice, the notice given by plaintiffs with respect to the 11/05 Distribution was neither prompt nor timely, as required by the MLA.

The Preference Demand

Plaintiffs argue that the Preference Demand also constituted a Disallowance because "there could be no more obvious example of a Disallowance than a letter that contained in it a threat to file a preference lawsuit." Plaintiffs' Reply Brief, p. 5. The Preference Demand neither "reduced, disallowed, rejected or objected to" the Claims, nor did it represent a "determination of the administrator of the Debtors, that the Claims are not valid, allowable, enforceable," as required by the MLA. Hence, the Preference Demand is not a Disallowance, as defined by the MLA.

Despite the lack of reference to any disallowance of claims in the Preference Demand, section 502 (d) of the Bankruptcy Code provides that "the court shall disallow any claim of ... a transferee of a transfer avoidable under section [547] of this title, unless such ... transferee has paid the amount ... for which such transferee is liable ... ." See also In re Maxwell Comm. Corp. PLC, 93 F3d 1036, 1054 (2d Cir 1996) (for a claim to be disallowed under § 502 (d), the claimant must have received a transfer that is avoidable under § 547); In re Enron Corp., 340 BR 180, 190 (Bankr SD NY 2006) (debtor did not have to first obtain a court determination that defendant bank had received a voidable preference to state a claim for disallowance of the proofs of claim filed by the bank), lv to appeal granted, 2006 WL 2548592 (SD NY Sep. 5, 2006). Cf. In re Odom Antennas, Inc., 340 F3d 705 (8th Cir. 2003) (§ 502 (d) could be used to disallow a [*9]claim only after the claimant is first adjudged to be liable for having received a preference).

Applying the foregoing to the instant case, and construing the complaint liberally in favor of plaintiffs in the context of defendant's motion for summary judgment, the Preference Demand may be deemed as the Debtors' intent to seek a disallowance of the Claims, even though no formal claim objection seeking such disallowance was ever filed. Thus, the Preference Demand may arguably be deemed a Disallowance within the meaning of the MLA.

However, plaintiffs did not provide notice of the Preference Demand until they served defendant with the complaint on May 5, 2006, a date that was almost four months after the Preference Demand of January 13, 2006. Because no "prompt written notice" was provided, defendant was not timely apprised of plaintiffs' assertion of a repayment demand with respect to the Preference Demand, and did not have an adequate opportunity to cure the deemed Disallowance within the 120 days Cure Period. Yet, defendant settled the Preference Demand on August 1, 2006, and thus removed and cured the deemed Disallowance in less than three months from the date of the complaint. Further, pursuant to the settlement, the Claims have been allowed in their full amounts, and plaintiffs have received distributions pursuant to the terms of the Plan. In such regard, defendant's repayment obligation under the MLA was never triggered, as the deemed Disallowance was cured by defendant within a reasonable time after plaintiffs provided defendant with written notice of same.

In such regard, it is unnecessary for the court to decide the merit, or more aptly the lack thereof, as to plaintiffs' argument that defendant's offer to cure was a "free option" that was not bargained or paid for under the MLA. Clearly, the heavily negotiated MLA provided defendant with a bargained-for opportunity to cure any alleged Disallowance within the Cure Period, and that plaintiffs could seek the contractual remedy of repayment only if defendant failed to procure a timely cure.

In the Disallowance Notice Letters and the complaint, plaintiffs do not allege that defendant breached certain representations and warranties of the MLA. The complaint only alleges a single claim that defendant breached section 9 of the MLA, by refusing to repay the purchase price. In the memorandum of law filed in support of the cross motion, plaintiffs allege that defendant also breached the representations and warranties of section 5 of the MLA, and that defendant should indemnify them pursuant to section 13 of the MLA.

Based on the statements made by plaintiff DK's counsel, it appears that defendant's indemnity obligation arises only if "there was a Disallowance and the value of the claim had gone up since the purchase and sale, then the buyer was entitled to be indemnified for its lost opportunity costs pursuant to Section 13 of the [MLA]." Affidavit of Joseph Satto in support of plaintiffs' cross motion, ¶ 14. On the other hand, "if there was a Disallowance and the value of the claim had gone down after the purchase and sale, then under Section 9 the client was entitled to receive a return of the purchase price plus interest at 8%." Id. at ¶ 13. Plaintiffs do not allege that the value of the Claims had gone up after the purchase and sale. In fact, it appears from plaintiffs' allegations that the value of the Claims had gone down. Thus, defendant's indemnity obligation under section 13 of the MLA was never triggered.

Moreover, pursuant to section 9 of the MLA, plaintiffs are not entitled to recover any amounts "in respect of a Disallowance in addition to any recovery for a breach by [defendant] of [*10]a representation, warranty or covenant of the [MLA] arising from the same event, facts or circumstances." Based on allegations, plaintiffs now seek to recover from defendant amounts in respect of one or more alleged Disallowances as well as breach of representations and warranties arising from the same event, facts or circumstances. This is impermissible under the MLA.

Accordingly, it is

ORDERED that defendant's motion for summary judgment is hereby granted; and it is further

ORDERED that plaintiffs' cross motion for summary judgment is hereby denied.

Dated: _________________

ENTER:

_____________________

WALTER B. TOLUB J.S.C.