Brechner v. Phoenix Network Solutions LLC
N16C-12-058 CEB
Del. Super. Ct.Dec 1, 2017Background
- Plaintiff Craig Brechner sold Phoenix Telecom NC, LLC (Telecom) and received a $1.8 million Subordinated Note and Subordination Agreement as part of the purchase consideration.
- Phoenix Network Solutions, LLC (Network) purchased Telecom; Scout Partners II acted as agent and lender for a $6 million senior Credit Agreement.
- The Subordinated Note is expressly subordinated to the senior Credit Agreement; the Subordination Agreement forbids payments to Brechner during an ongoing Event of Default under the senior loan.
- The Subordinated Note defines an Event of Default to include four consecutive quarters of missed interest payments; Brechner alleges such missed payments occurred and defendants do not dispute nonpayment.
- Section 3.4 of the Subordinated Note allows acceleration/collection by Brechner upon default only if the senior indebtedness is paid in full, but adds that if the senior debt is in default the Agent must take "commercially reasonable steps" to protect lenders before Brechner is barred from accelerating or suing.
- Defendants moved for summary judgment arguing the Subordination Agreement’s no-payment-during-default clause bars any recovery; plaintiff argues the Note’s Section 3.4 creates triable issues about the Agent’s duties and whether the subordination clause can be applied to extinguish Brechner’s remedies.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether summary judgment should be granted dismissing Brechner’s suit based on the Subordination Agreement’s prohibition on payments during senior default | Brechner says Note §3.4 imposes an independent Agent duty to take commercially reasonable steps when senior debt is in default, creating a triable issue and a path to recovery | Defendants say the Subordination Agreement conditions all payment on absence of senior default, so no payment or acceleration is permitted while senior debt is in default, entitling them to summary judgment | Denied: genuine issues remain about interplay between Subordination Agreement and Note §3.4 and the Agent’s required conduct; summary judgment inappropriate given limited record |
| Whether the Subordination Agreement’s condition precedent nullifies any default under the Subordinated Note | Brechner contends the Note contemplates default and includes protections to prevent being frozen out; those provisions should be given effect | Defendants contend the Subordination Agreement controls and prevents any payment or remedy while senior debt is in default, so no subordinated default can be acted upon | Court declines to resolve; finds conflicting provisions create factual and interpretive issues not suited for summary judgment |
| Whether relatedness of senior lenders/Agent to Network affects meaning of "commercially reasonable" steps | Brechner argues relatedness makes Agent’s obligation material and was addressed by Note drafting, raising factual questions | Defendants imply relatedness does not change legal effect of subordination clause | Court notes relatedness is plausibly relevant and reinforces need for discovery; cannot decide on present record |
| Whether record suffices for summary disposition given scarce discovery and affidavits | Brechner: the sparse record and outstanding factual questions warrant denial and further discovery | Defendants: submitted documents and affidavits sufficient for judgment as a matter of law | Court: views record as insufficient and denies summary judgment; emphasizes summary judgment requires no triable issue and that here reasonable hypotheses for plaintiff’s recovery exist |
Key Cases Cited
- Moore v. Sizemore, 405 A.2d 679 (Del. 1979) (summary judgment burden-shifting principles)
- Matas v. Green, 171 A.2d 916 (Del. Super. 1961) (courts view facts in light most favorable to non-moving party)
- Ebersole v. Lowengrub, 180 A.2d 467 (Del. 1962) (summary judgment inappropriate when material factual disputes exist)
- Motorola, Inc. v. Amkor Tech., Inc., 849 A.2d 931 (Del. 2004) (insufficient facts preclude summary disposition)
- Mann v. Oppenheimer & Co., 517 A.2d 1056 (Del. 1986) (standard for granting summary judgment)
- Cross v. Hair, 258 A.2d 277 (Del. 1969) (no right to summary judgment; must be convinced no triable issue exists)
- Vanaman v. Milford Mem'l Hosp., Inc., 272 A.2d 718 (Del. 1970) (if any reasonable hypothesis for recovery exists, summary judgment must be denied)