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New York Bronze Powder Company, Inc. v. Benjamin Acquisition Corporation, No. 6, September Term, 1997.

[Contracts - Discussing and applying preference under New York (and Maryland) law that "doubtful" language be construed as a covenant and not a condition.]

IN THE COURT OF APPEALS OF MARYLAND No. 6 September Term, 1997 _________________________________________

NEW YORK BRONZE POWDER COMPANY, INC.

v.

BENJAMIN ACQUISITION CORPORATION

_________________________________________ Bell, C.J. Eldridge Rodowsky Chasanow Raker Smith, Marvin H. (retired, specially assigned) Karwacki, Robert L. (retired, specially assigned), JJ. _________________________________________ Opinion by Smith, J. _________________________________________ Filed: August 25, 1998

This case presents the problem of whether a provision in a contract is a condition or a promise or both. The Court of Special Appeals in an unreported opinion reversed a trial court judgment and construed as a condition precedent a provision in a non-negotiable note/contract requiring surrender of the note in order to receive payment. The facts relevant to this decision may be briefly stated. New York Bronze Powder Company, Inc. (New York Bronze) entered into an agreement dated March 15, 1990, with Benjamin Acquisition Corporation (Benjamin) under which Benjamin agreed to purchase from New York Bronze the assets of a business then known as Benjamin F. Rich Company (Rich) for $4.5 million, together with the assumption of certain of Rich's liabilities. Closing was to take place on April 30, 1990. Shortly prior to the closing, Benjamin expressed its concerns to New York Bronze over the valuation of certain assets. The matter was resolved by an April 30, 1990 modification of the purchase agreement (Amendment No. 1). Under Amendment No. 1 $350,000 of the $4.5 million purchase price was deferred, and Benjamin executed a non-negotiable note to New York Bronze for $350,000. Under Section 3 of Amendment No. 1 Benjamin undertook, at its expense, to have prepared a balance sheet of Rich accompanied by the opinion of a specifically named accounting firm, and Benjamin promised to use its best efforts to cause that audited balance sheet to be delivered to New York Bronze no later than June 14, 1990.

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To the extent that the audited balance sheet reflected a net worth of Rich that was less than $4.5 million, Benjamin was entitled under Section 3 of the note to a dollar for dollar credit against the $350,000 deferred purchase price. The note was payable in two installments, the first due on the tenth business day after delivery of the audited balance sheet, and the second due on July 30, 1991. Thus, assuming that the audited balance sheet was prepared within the contemplated time and that it reflected Rich's net worth to be $4.5 million or more, $150,000 of the deferred purchase price would have been due and payable on or about June 28, 1990, and the balance of $200,000 would have been due and payable on July 30, 1991. As matters unfolded following the April 30, 1990 closing under the modified asset purchase agreement, the accounting firm specified in Amendment No. 1 never opined on the audited balance sheet, and apparently never completed its audit. Benjamin never made or tendered any cash payment on the note. In October 1993 New York Bronze sued Benjamin in the Circuit Court for Montgomery County alleging non-payment of the note and breach of the modified asset purchase agreement. After a bench trial the court entered judgment for $350,000 in favor of New York Bronze. Benjamin appealed to the Court of Special Appeals, raising three issues, but that court found it necessary to address only one. That issue is whether the portion of Section 4.2 of

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the note, italicized below, should be construed as a condition precedent to payment.1 That section provides: 4.2 Payments. Payments of any portion of the principal of this Note shall be made by check drawn on a United States commercial bank and shall be mailed by registered mail, return receipt requested, on or prior to the date on which such payment is due, to the Noteholder at the address set forth in the Purchase Agreement. If the date on which any payment hereunder is due is not a Business Day, then such payment shall be due on the next succeeding Business Day. The Noteholder shall be required to surrender this Note for cancellation upon the maturity or prepayment in full of this Note in order to receive payment. (Emphasis added). Section 4.4 of the note provides that it "SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK." The Court of Special Appeals held that, under New York law, the italicized language created a condition, the non-occurrence of which extinguished Benjamin's obligation to pay the $350,000 or any part thereof. New York Bronze then petitioned this Court for the writ of certiorari, which was granted.

1

The first question presented in Benjamin's brief to the Court of Special Appeals asked [w]hether the trial Court erred by awarding a judgment to the plaintiff upon a promissory note, which note had been transferred by plaintiff and could not be presented by plaintiff for payment, without requiring plaintiff to provide for the protection of defendant from a subsequent claim by the third-party holder of the note.

Court of Special Appeals, No. 52, September Term, 1996, Appellant's Brief at 3.

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The factual foundation for Benjamin's position that the "condition" was not fulfilled lies in the testimony of New York Bronze's chief financial officer. When New York Bronze attempted to introduce not the note but a copy of the note, the following colloquy took place: Q. [Counsel for New York Bronze]: Can you identify Exhibit No. 3? A. This would be the Benjamin Acquisition subordinated promissory note [due] July 30, 1991 for $350,000. (The document referred to was marked for identification as Plaintiff's Exhibit 3.) .... Q. Was anything paid on that note? A. No, nothing has been received. Q. Is that a true and accurate copy of the original? A. It appears to be, yes. [Counsel for New York Bronze]: Your Honor, I would move Exhibit No. 3 into evidence[.] The Court: Any objection? [Counsel for Benjamin]: Yes, Your Honor. I have a bit of a problem with this exhibit to the extent Plaintiff is suing on a note and exhibiting the copy as opposed to the original. It causes me a great deal of concern. The Court: Okay. Can you establish foundation as to the location of the original? .... Q. [Counsel for New York Bronze]: Do you have the original note? A. No, I don't.

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Q. Have you sold the original note? A. No, I have not. Q. Has it been encumbered by anyone? Have you encumbered the original note? A. I just want to say where the original note is. Q. Where is it? A. Because I am not sure about the word encumbered. Perpetual Savings Bank was the lender at the time. They had an interest in all the assets. They kept the original documents. Q. Is that a true and accurate copy of the original note? A. Yes. [Counsel for New York Bronze]: I would move No. 3 into evidence. The Court: Any further objection? [Counsel for Benjamin]: Yes, Your Honor. That still raises a question. Now they are suing us on a note they are not even holding. The Court: Well, I will receive this over objection. foundation has been laid. (Emphasis added). On the second day of trial, Benjamin again demanded production of the original note. Benjamin, however, did not argue that the original document had to be produced pursuant to Section 4.2 of the note. Instead, its attorney stated, "[W]e don't know whether it was assigned." The trial court indicated that Benjamin seemed to be arguing the issue of capacity to sue, or of real party in interest. Benjamin did not elaborate further, so that it never I think a

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specifically argued that the last sentence of Section 4.2 of the note created a condition precedent to any payment. The circuit court did not alter its ruling admitting the copy. In this Court New York Bronze argues that the question on which the Court of Special Appeals decided the case was not tried and decided by the circuit court and should have been excluded from consideration on appeal for lack of preservation. The short answer to this contention is that, assuming that Benjamin did not preserve the issue in the circuit court, the Court of Special Appeals nevertheless has discretion under Maryland Rule 8-131(a) to consider the question. The Court of Special Appeals held that New York Bronze was not entitled to the principal amount of the note, or any part thereof, because it had not surrendered the original note to Benjamin. In reaching that result, the Court of Special Appeals reasoned: New York and Maryland law are congruent on the point that words in a contract (or note) are to be given their ordinary meaning. Slatt v. Slatt, 477 N.E.2d 1099, 1100, motion for reargument denied, 482 N.E.2d 568 (N.Y. 1985); United States Building Maintenance Co., Inc. v. State, 410 N.Y.S.2d 466 (N.Y. 1980); General Motors Acceptance v. Daniels, 303 Md. 254 (1985). The New York courts have defined a condition precedent as "an act or event, other than a lapse of time, which, unless the condition is excused, must occur before a duty to perform a promise in the agreement arises." Oppenheimer & Co. v. Oppenheim, Appel, Dixon & Co., 660 N.E.2d 415, 418 (N.Y. 1995); Merritt Hill Vineyards v. Windy Hgts. Vineyard, Inc., 460 N.E.2d 1077, 1081-82 (N.Y. 1984).[2]

This squares with Maryland law. This Court has defined a condition precedent as "'a fact, other than mere lapse of time, which, unless excused, must exist or occur before a duty of immediate performance of a promise arises.'" Chirichella v. Erwin, 270 Md. 178, 182, 310 A.2d 555, 557 (1973) (quoting 17 Am. Jur. 2d, Contracts,

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