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NORTEL NETWORKS, INC. v. GOLD & APPEL TRANSFER

January 5, 2004.

NORTEL NETWORKS, INC., Plaintiff,
v.
GOLD & APPEL TRANSFER, S.A., Defendant



The opinion of the court was delivered by: JOHN BATES, District Judge

MEMORANDUM OPINION

In this diversity of citizenship action brought pursuant to 28 U.S.C. § 1332, plaintiff Nortel Networks ("Nortel") claims that defendant Gold & Appel Transfer ("G&A") failed to abide by two letter agreements that obliged it to provide $35 million in loans to NETtel Communications ("NETtel"). Nortel was the administrative agent for a syndicate of lenders (the "Syndicate") that purchased NETtel securities and made short-term loans to NETtel on the condition that a portion of the G&A financing would be used by NETtel to repay the Syndicate's loans. Presently before the Court are the parties' cross-motions for partial summary judgment. Nortel moves for summary judgment solely on Count II of its complaint, which alleges breach of the second letter agreement, dated July 17, 2000. G&A moves for summary judgment on Count I of Nortel's complaint, which alleges breach of the earlier letter agreement, dated April 13, 2000, as well as on Count II.

The pending motions present three issues. The first is whether a written notice requirement that appears in both letter agreements was a material condition precedent to G&A's performance under the agreements. The second is whether G&A's course of conduct between July Page 2 and November of 2000 operated as a waiver of that provision, excusing NETtel's failure to make a written request for funds. And the third, relevant only to G&A's motion, is whether Nortel was an intended third-party beneficiary of the April agreement.*fn1 The parties' briefs and arguments at a hearing on these cross-motions focused on these issues, and the Court agrees that the motions may be decided upon their resolution.*fn2 The Court concludes that Nortel's provision of notice was not a material condition precedent to G&A's performance under the July agreement. G&A has failed to rebut Nortel's contention that G&A waived the written notice requirement. Nortel is thus entitled to summary judgment on Count II of its complaint. As for G&A's motion, the Court finds that a genuine issue of material fact exists as to whether the members of the Syndicate were intended third-party beneficiaries of the April agreement. Summary judgment on Count I of Nortel's complaint will therefore be denied at this time.

  I. BACKGROUND

  Nortel is a large, publicly-traded Canadian corporation that provides network services and infrastructure in over 150 countries. G&A is a British Virgin Islands fund that invests in and makes loans to companies in the telecommunications field. Deposition of Walt Anderson ("Anderson Dep.") at 23. It is wholly owned by Iceberg Transport, S.A., a Panamanian company, id. at 7, and managed by Walt Anderson, id. at 10. NETtel was a Washington D.C.-based local Page 3 telecommunications carrier. It built a network spanning 9,000 miles and thirteen U.S. cities before filing for bankruptcy in September 2000. It ultimately liquidated its assets later that year. Prior to the agreements that are the subject of this dispute, and pursuant to a credit agreement dated July 28, 1999, the Syndicate made a secured loan to NETtel of approximately $130 million for the purchase of network equipment. Affidavit of Scott Binder ("Binder Aff") ¶ 4. G&A had by then become NETtel's largest single shareholder, having made an equity investment of more than $30 million. Anderson was made a director of NETtel following G&A's investment, and moved G&A into office space at NETtel headquarters.

  By April 2000, NETtel's outside accountants had begun to question its viability as a going concern. Anderson Dep. at 109-10. Afraid that the accountants would render a qualified opinion as to the company's finances and thus jeopardize its ability to make an initial public offering, NETtel CEO James Kenefick approached Anderson for additional funding. According to Anderson, the accountants had agreed that if G&A made a standby commitment of $35 million to NETtel, they would not issue a letter questioning NETtel's ability to meet its obligations as they became due.*fn3 Id. at 112. Accordingly, on April 13, 2000, G&A agreed to provide subordinated financing to NETtel in the principal amount of up to $35 million. Def.'s Cr. Mot. Ex. A. G&A agreed to provide the financing either on July 5, 2000, or between that date and the date of any initial public offering of NETtel shares. The agreement also stipulated that G&A would "advance Page 4 funds hereunder upon at least fifteen (15) business' [sic] days prior written request from [NETtel]." Id. It contains no mention of Nortel or any other members of the Syndicate.

  In the following months, NETtel decided to forego its plans for an initial public offering and to explore other means of raising long-term capital. Kenefick Dep. at 98-99. More immediately, by July 2000, NETtel needed funds to meet its operating expenses. Id. at 129-30. Kenefick approached Anderson to arrange a loan from G&A. According to Kenefick, Anderson said that G&A would be unable to make any more capital available to NETtel before September 15, 2000, but that it would have at least some money available for NETtel thereafter. Id. at 102-05. Unable to wait that long, NETtel requested short-term loans and equity investments totalling about $20 million from members of the Syndicate to bridge NETtel's working capital needs until September. The lenders agreed on the express condition that their bridge loans would be repaid from the proceeds of the financing that G&A would be able to provide after September 15, 2000.*fn4 Binder Aff. ¶ 7, Exs. A and B. By a letter agreement dated July 17, 2000, G&A agreed to provide subordinated financing to NETtel in the principal amount of up to $35 million upon the terms and conditions set forth in a promissory note issued on that date. Def.'s Cr. Mot. Ex. E. The G&A financing was to be provided on or before September 15, 2000, and was to have a maturity date of the earlier of July 5, 2001, or the date of any initial public offering of NETtel shares. Like the April agreement, the July agreement provided that G&A would "advance funds hereunder upon at Page 5 least fifteen (15) business' [sic] days prior written request from [NETtel]." Id. But unlike the April agreement, the July agreement provided that, to the extent of $20 million, it and the accompanying promissory note were for the benefit of and were enforceable by Nortel and any other members of the Syndicate. Id.

  Notwithstanding G&A's alleged inability to provide financing until September 2000, G&A loaned NETtel $13.8 million that summer: a traunche of $1.8 million in July and another $12 million sometime in August. Anderson Dep. at 162. G&A denies that this new funding was made pursuant to any outstanding agreement with or legal obligation to NETtel.*fn5 Def.'s Rep. at 8. Rather, G&A claims to have acted pursuant to Kenefick's "personal appeal to try to save" NETtel, Anderson Dep. at 156, and in the hope that "with that money and a little bit of time and negotiations with creditors the company could be saved from bankruptcy."*fn6 Id. at 166. NETtel did not make and G&A did not demand any written request for these funds. Instead, "the relationship had always been [that] whenever [NETtel] needed money," the funds were advanced Page 6 pursuant to a conversation between Kenefick and Anderson. Deposition of Craig Bandes ("Bandes Dep.") at 45, 55-56, 67-68 ("[I]t was just the practice, the way it had been established from the beginning, that Jim [Kenefick] would just ask Walt [Anderson] for the money and it would come in. We had just never done a written request before."); see also Kenefick Dep. 169-70.

  The bridge loans failed to satisfy NETtel's capital needs, and G&A provided no further funding on or before September 15, 2000. On September 28, 2000, in the presence and with the approval of the Syndicate's representatives, Bandes Dep. 103-04, NETtel filed a voluntary petition for relief under the Bankruptcy Code. NETtel's hard assets were subsequently liquidated. Proceeds of the liquidation satisfied a portion of the Syndicate's loans made to NETtel in the summer of 2000, but only because those loans had been written to subordinate prior secured loans from the Syndicate. Thus, Nortel asserts that G&A's failure to provide $20 million pursuant to the July agreement resulted in a $20 million loss. This action was filed on April 12, 2002.

  II. ANALYSIS

 A. Summary Judgment

  Summary judgment is appropriate when the pleadings and the evidence demonstrate that "there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c). The party seeking summary judgment bears the initial responsibility of demonstrating the absence of a genuine dispute of material fact. See Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). The moving party may successfully support its motion by "informing the district court of the basis for its motion, and identifying those portions of `the pleadings, depositions, answers to interrogatories, and admissions on file, together with the Page 7 affidavits, if any,' which it believes demonstrate the absence of a genuine issue of material fact." Id. (quoting Fed.R.Civ.P. 56(c)).

  In determining whether there exists a genuine issue of material fact sufficient to preclude summary judgment, the court must regard the non-movant's statements as true and accept all evidence and make all inferences in the non-movant's favor. See Anderson v. Liberty Lobby. Inc., 477 U.S. 242, 255 (1986). A non-moving party, however, must establish more than the "mere existence of a scintilla of evidence" in support of its position. Id. at 252. By pointing to the absence of evidence proffered by the non-moving party, a moving party may succeed on summary judgment. Celotex, 477 U.S. at 322. "If the evidence is merely colorable, or is not significantly probative, summary judgment may be granted." Anderson, 477 U.S. at 249-50 (internal citations omitted). Summary judgment is appropriate if the non-movant fails to offer "evidence on which ...


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