
USCA1 Opinion

	




                            UNITED STATES COURT OF APPEALS                                FOR THE FIRST CIRCUIT                                                                                      ____________________        No. 95-1359                                  LAURA THORN, LTD.,                                Plaintiff, Appellant,                                          v.                               ALBERT J. ALLETZHAUSER,                                 Defendant, Appellee.                                                                                      ____________________                     APPEAL FROM THE UNITED STATES DISTRICT COURT                          FOR THE DISTRICT OF MASSACHUSETTS                   [Hon. Edward F. Harrington, U.S. District Judge]                                               ___________________                                                                                      ____________________                                 Cyr, Circuit Judge,                                      _____________                            Bownes, Senior Circuit Judge,                                    ____________________                              and Boudin, Circuit Judge.                                          _____________                                                                                      ____________________             Charles L. Glerum, with whom Roberto C. Quinones and Choate, Hall             _________________            ___________________     ____________        & Stewart were on brief for appellant.        _________             Harry C. Beach, with whom Leonard F. Clarkin, Paul B. Bottino and             ______________            __________________  _______________        Clarkin, Sawyer & Phillips, P.C. were on brief for appellee.        ________________________________                                                                                      ____________________                                  December 21, 1995                                                                                      ____________________                             CYR,  Circuit  Judge.    Plaintiff  Laura  Thorn,  Ltd.                    CYR,  Circuit  Judge.                          ______________          ("Thorn, Ltd.") appeals a  summary judgment order disallowing its          claim  for breach  of  a loan  guaranty  by defendant  Albert  J.          Alletzhauser ("Alletzhauser").  As we conclude  that Alletzhauser          is not  entitled to judgment  pursuant to  Fed. R. Civ.  P. 56(c)          under Massachusetts  law, we vacate  the judgment and  remand for                                              further proceedings.                                           I                                          I                                     BACKGROUND1                                     BACKGROUND1                                     __________                    On  April 14,  1989,  an individual  named Laura  Thorn          loaned $250,000 to  Hamilton/Thorn Research Associates  ("HTRA").          At that time, Laura Thorn was the principal shareholder in Thorn,          Ltd., and  Thorn, Ltd.  in turn  was a  general partner  in HTRA.          Under the  terms of  a Subordinated Loan  Agreement ("Agreement")          and a Subordinated Promissory  Note ("Note"), HTRA's loan obliga-          tion to Laura Thorn  was subordinated to all existing  and future          HTRA  obligations to  Beverly National  Bank or  its successors.2          On December 31, 1990,  Laura Thorn assigned all her  rights under          the Agreement and Note to Thorn, Ltd.                    In July 1991, Thorn, Ltd. negotiated  a transfer of its          general  partnership interest in  HTRA to  Hamilton Laboratories,                                        ____________________               1Jurisdiction is based on 28 U.S.C.   1332(a)(2) (diversity)          and 28 U.S.C.   1291.  We recount the material facts in the light          most favorable  to Thorn, Ltd.,  the party against  which summary          judgment was granted.  Velez-Gomez v. SMA Life Assur. Co., 8 F.3d                                 ___________    ___________________          873, 874 (1st Cir. 1993).                2The Note is set out in the appendix.  See infra pp. i-ii.                                                       ___ _____                                          2          Inc.  ("HLI"), a  corporation partly owned  by Alletzhauser.   To          induce  the  transfer,  Alletzhauser  (as  guarantor),  HTRA  (as          maker), and Thorn, Ltd. (as subordinated lender), entered  into a          loan  guaranty  agreement  ("the  Guaranty") on  July  11,  1991,          whereby Alletzhauser guaranteed prompt  payment of HTRA's debt to          Thorn, Ltd.  "when and as the Subordinated Obligations become due          and payable in accordance with their terms. . . ."3   Pursuant to          section 1  of the Note and the Guaranty, on April 8, 1994, Thorn,          Ltd. demanded full  payment from Alletzhauser.   HTRA and Alletz-          hauser declined on the ground that payment was not due.                      In  September 1994, Thorn,  Ltd. commenced  this action          against  Alletzhauser in  federal district  court to  enforce its          Guaranty.   Alletzhauser  denied  liability, and  asserted as  an          affirmative defense that legal action on the Guaranty was "prema-          ture."   Ultimately, the district court  entered summary judgment          against Thorn, Ltd. on the ground that it had no present right to          enforce the Guaranty against Alletzhauser since HTRA, the primary          obligor, was not in default on its loan obligation to Thorn, Ltd.                                        ____________________               3The relevant Guaranty provisions are set out below:          Section 2 - Guaranty of Payment and Performance          _______________________________________________          The Guarantor unconditionally guarantees . . . the prompt payment          by the  Borrower to  the Lender of  the Subordinated  Obligations          when  and as the Subordinated  Obligations become due and payable          in accordance with their terms . . . .          Section 3 - Obligations Unconditional          _____________________________________          . . . This  Agreement shall not, however, be construed to require                ____  _________ _____ ___           __ _________ __ _______          the Guarantor  to make any  payment .  . . (b)  which the  Lender          ___ _________  __ ____ ___  _______             _____ ___  ______          either would not be entitled to receive or  would be obligated to          ______ _____ ___ __ ________ __ _______ __  _____ __ _________ __          hold in trust for the benefit  of, or otherwise turn over to, any          ____ __ _____ ___                                             ___          senior lender pursuant to the terms of an Intercreditor Agreement          ______ ______ ________ __ ___ _____ __ __ _____________ _________          or the Subordinated Note.  (Emphasis added.)          __ ___ ____________ ____                                          3          Thorn, Ltd. contends on  appeal that the district court  erred in          granting summary  judgment and abused its  discretion in refusing          to  strike certain  affidavits  submitted in  support of  Alletz-          hauser's motion for summary judgment.                                          II                                          II                                     DISCUSSION4                                     DISCUSSION4                                     __________                    Alletzhauser acknowledges the validity of the Guaranty,          but  contends that the present attempt to enforce it is premature          since the  loan obligation itself  is not yet  due.  Thorn,  Ltd.          responds  that the loan obligation  became due on  April 1, 1994,          and  since HTRA has not paid, Alletzhauser must honor the Guaran-          ty.   The  parties agree  that  Massachusetts law  governs  their          dispute.                    Under  Massachusetts  law, a  guarantor's  liability is          determined by the terms  of the guaranty agreement; as  a general          rule, the terms  of the  guaranty are not  construed against  the          guarantor.   See Merrimack Valley Nat'l Bank v. Baird, 363 N.E.2d                       ___ ___________________________    _____          688, 690-91 (Mass. 1977).  The operative provision in the Guaran-          ty states that Alletzhauser "unconditionally guarantees . . . the          prompt  payment by the Borrower to the Lender of the Subordinated          Obligations when  and as the Subordinated  Obligations become due                      ____  ___ __ ___ ____________  ___________ ______ ___          and payable in accordance with their terms  . . . . "  See  supra          ___ _______ __ __________ ____ _____ _____             ___  _____          note 3,   2 (emphasis added).  No other provision in the Guaranty                                        ____________________               4The summary judgment ruling  is reviewed de novo  under the                                                         __ ____          identical criteria incumbent upon the district court.   Alexis v.                                                                  ______          McDonald's Restaurants of Mass., Inc., 67 F.3d 341, 346 (1st Cir.          _____________________________________          1995).                                           4          expressly states when  Thorn, Ltd. may  look to Alletzhauser  for          payment  under the Guaranty, and the parties agree that the court          must examine the Note to determine when Alletzhauser is obligated          to make good on the Guaranty.                             The district court ruled that HTRA was not obligated to          repay  the Note  as  long as  senior  debt remained  outstanding.          Thorn, Ltd.  insists that  the district court  misinterpreted the          plain  language of the Note, which includes a payment schedule in          section  1.   This  provides for  periodic  payments by  HTRA and          further provides  that all outstanding principal  and accrued but          unpaid interest "shall be due and payable on April 1, 1994."  See                                                                        ___          infra Appendix p. i,   1.            _____                    Alletzhauser responds that the court must interpret the          Note as a whole, and that the  unconditional subordination provi-          sions  in section  4 plainly  supersede the payment  schedule set          forth in section 1.5   Section 4 contains the  following subordi-                             5          nation  provision:  "Notwithstanding any  other provision  of the                                        ____________________               5See Culp v. Tri-County Tractor, Inc., 736 P.2d 1348,  1350-                ___ ____    ________________________          53 (Idaho Ct. App. 1987) (ruling that subordination provisions in          notes superseded schedule for annual interest payments).  Alletz-          hauser suggests that the  Note provides for "complete" subordina-          tion, which  is not uncommon  in circumstances  where the  junior          lender is a parent company or an officer, director, or stockhold-          er  of  the borrower.    Carl D.  Lobell &  Sharon  B. Applegate,          Lending To Troubled Companies- Special Considerations: Fraudulent          _________________________________________________________________          Transfers,  Substantive  Consolidation, Subordinated  Debt Treat-          _________________________________________________________________          ment; Developing  Theories  of  Lender  Liability  And  Equitable          _________________________________________________________________          Subordination, PLI  Corp. Law & Practice  Course Handbook Series,          _____________          Apr. 1991,    III.D.(1),  available in  Westlaw at  733 PLI/Corp.                                    _________ __          175; see also Culp,  736 P.2d at 1350-52  (complete subordination               ___ ____ ____          of  officers' loans to company).  The transaction at bar involved          just such a junior loan from a corporate insider of the borrowing          company.                                          5          Subordinated Loan  Documents,6 the Maker [HTRA],  and each holder          of this note [Thorn, Ltd.] . . . agree that the Subordinated Debt          shall be  subordinated  as set  forth in  this Section  4 to  all          present  and  future extensions  of credit  to  the Maker  by The          Beverly National  Bank [or  its successors].  . .  ."   See infra                                                                  ___ _____          Appendix p.  i,   4.   More to the present  point, subsection 4.4          expressly  restricts the right of Thorn, Ltd. to enforce the Note          against HTRA.  "Notwithstanding any contrary term or provision of                          _______________ ___ ________ ____ __ _________ __          the Subordinated  Debt Documents, (i) no  Subordinated Debt shall          ___ ____________  ____ _________          become or be  declared to be due and payable prior to the date on          which  the  Senior Debt  becomes  or is  declared to  be  due and                                   _______  __ __  ________ __  __  ___ ___          payable .  . . ."   See  infra Appendix  p. ii,    4.4  (emphasis          _______             ___  _____          added).   Since there is no  dispute that senior debt  to Bank of          Boston remains outstanding, Alletzhauser argues that the district          court  correctly ruled  that  HTRA's primary  loan obligation  to          Thorn, Ltd.  is not yet due,  and therefore, he presently  has no          obligation on the Guaranty.7                      Thorn,  Ltd.  contends  that  subsection  4.4 does  not                                        ____________________               6According to  section 2 of the Note, the term "Subordinated          Loan  Documents"  includes the  Note,  the  Agreement, and  other          security agreements related to the loan.               7At  common law, the obligation of a guarantor is collateral          to the primary  debt.  "'[The  guarantor's] obligation was  based          not  on the note but upon  the contract expressed in the guaranty          that          [he] would  pay the principal sum  of the note  with interest, if          the maker of the note failed  to pay at maturity.'"  D'Annolfo v.                                                               _________          D'Annolfo  Constr. Co., 654 N.E.2d  82, 83 (Mass.  App. Ct. 1995)          ______________________          (quoting Charlestown Five Cents Sav. Bank v. Wolf, 36 N.E.2d 390,                   ________________________________    ____          392 (Mass. 1941)).  The Uniform Commercial Code does not abrogate          the common law rule here because the Guaranty is not inscribed on          the Note.  D'Annolfo, 654 N.E.2d at 84.                     _________                                          6          affect its right to enforce its Guaranty against Alletzhauser, as          distinguished  from  its  rights  against HTRA  under  the  Note.          Thorn,  Ltd. finds  support  for this  contention in   subsection                                                                           4.5(a):               The  provisions of this Section 4 are solely for the purpose                                                     ______          of   defining the  relative rights of the holders  of Senior Debt          on   the  one hand, and the  holders of Subordinated  Debt on the               other  hand, and  none of  such provisions  shall impair  as                                 ____ __  ____ __________  _____ ______               between the Maker  and any holder  of Subordinated Debt  the               obligation of  the Maker [HTRA], which  is unconditional and                                                _____  __ _____________ ___               absolute, to  pay to  such holder of  Subordinated Debt  the               ________               principal and premium, if any, thereof and interest thereon,               and all other amounts in  respect thereof, all in accordance                                                          ___ __ __________               with  the  terms  thereof,  nor shall  any  such  provisions               ____  ___  _____  _______          prevent   any  holder  of Subordinated  Debt from  exercising all          remedies  otherwise  permitted  by  applicable law  or  under the          terms of  such  Subordinated  Debt  upon  a  default  thereunder,          subject to     the rights,  if any, under the  provisions of this          _______ __     ___ ______   __ ___  _____ ___  __________ __ ____          Section 4 of   holders of Senior Debt.            _______ _ __   _______ __ ______ ____          See infra Appendix p. ii,   4.5(a) (emphasis added).  Thorn, Ltd.          ___ _____          insists that the subordination  provisions, interpreted in  light          of subsection  4.5(a), reflected  the overarching concern  of the          original senior lender (Beverly  National Bank) that its priority          right  to  payments from  HTRA not  be  jeopardized by  any right          Thorn,  Ltd. had  to payment  from HTRA;  and, further,  that any          attempt  by Thorn,  Ltd. to proceed  against Alletzhauser  on the          Guaranty  not be permitted to affect the senior lender's right to          priority payment,  nor undermine  HTRA's ability to  repay senior          debt according to its  terms.  As this lawsuit  only contemplates          recovery  from Alletzhauser and not HTRA, Thorn, Ltd. urges us to          disregard  section 4, and instead  give full effect  to the April          1994 due date specified in section 1.                     In addition  to subsection 4.5(a),  Thorn, Ltd.  points                                          7          out that the unquestioned  purpose of the Guaranty was  to induce          Thorn, Ltd. to transfer its  general partnership interest in HTRA          to HLI, a company partly owned by Alletzhauser.   With the resul-          tant transfer of control, Thorn, Ltd. lost all ability to require          HTRA to satisfy its senior debt to Bank of Boston, as well as any          power  to control  the  timing of  its  own recovery  from  HTRA.          Thorn,  Ltd. maintains, therefore, that section 1 of the Note was          meant  to offset  its loss  of control  by prescribing  a payment          schedule  which would  continue to  govern the  ongoing repayment          relationship between Thorn,  Ltd. and  Alletzhauser.   Otherwise,          Thorn, Ltd.  might never be able to collect on either the Note or          the Guaranty.                     Confronted with these mutually incompatible interpreta-          tions,  we conclude  that neither  satisfactorily  reconciles the          conflicting contract language so as to enable summary judgment on          the  present record.   The  Alletzhauser interpretation  comports          with  the classic construct of a  loan guaranty,8 as well as with          the  parties' "course of performance."9   On the  other hand, the                                                                                                                ____________________               8Indeed,  permitting  recovery   from  Alletzhauser  on  the          Guaranty  would result  in  a corresponding  depletion of  HTRA's          assets  prior to repayment of  the senior debt  in the event that          Alletzhauser is entitled to indemnification from HTRA, see 38 Am.                                                                 ___          Jur. 2d Guaranty   127 (1968); Restatement (Second) of Security                    ________               ________________________________          104(1) (1941),  notwithstanding the  fact that  the subordination          provisions are designed to protect  senior lenders from just such          an occurrence.                9Thorn,  Ltd. does  not explain  why it  made no  attempt to          enforce its rights sooner despite the fact that HTRA had not made          a  single payment of interest or principal in accordance with the          payment schedule in section 1 of the Note, either before or after          Thorn, Ltd. transferred control  to HLI in July 1991.   See Rosen                                                                  ___ _____          v.  A-H Inc., 456 N.E.2d 477, 479  n.5, 480 (Mass. App. Ct. 1983)              ________                                          8          context in which the  execution of the Guaranty took  place gives          no  indication as  to why  Thorn, Ltd.  would permit  a virtually          perpetual loan repayment extension to an enterprise it  no longer          owned.10   Both parties  represent that  substantial negotiations          attended  the drafting  of  the Note  and  Guaranty.   Yet  their          affidavits provide little information concerning the actual terms          of their negotiations and each party draws a different conclusion          as to their import.  Were  we to approve summary judgment without          more information, the  result reached might well  fail to reflect          the  aims and intentions of  the parties.   See Merrimack Valley,                                                      ___ ________________          363  N.E.2d at  690 ("[W]hen  a contract  term is  ambiguous, its          import  is ascertained from the parties'  intent as manifested by          the  guaranty's  terms  and  the  circumstances  surrounding  its          creation, such as [the] relationship  of the parties, actions  of          the parties and established business usages.").                    Normally, we would not  press for further record devel-          opment  absent a clearer indication that further evidence will be          forthcoming.   We  are convinced  nonetheless that  a remand  for          further proceedings  is appropriate here:   the contract language                                        ____________________          (noting that junior lender's  performance conformed with  court's          broad construction of subordination  provision in favor of senior          lenders), rev. denied, 459 N.E.2d 824 (Mass. 1984).                    ____ ______               10Neither the parol evidence rule nor the integration clause          in the  Guaranty prevents the court from  considering the circum-          stances  surrounding  the  execution  of the  Guaranty.    First,          extrinsic evidence  may inform  an ambiguity determination.   See                                                                        ___          Robert  Indus., Inc. v. Spence, 291 N.E.2d 407, 409 (Mass. 1973).          _______________ ____    ______          Second, the court  need not look  beyond the four corners  of the          Guaranty in this appeal,  since section 1 of the  Guaranty itself          supplies the context to which Thorn, Ltd. adverts.                                           9          is  in conflict; there is  no public policy  consideration to tip          the balance; and  there is  a much better  prospect of  resolving          this  private conflict as the  parties intended, if  an effort is          made  to discern their intentions  based on their actual negotia-          tions and the events that led up to and followed the Guaranty.                                          10                                         III                                         III                                      CONCLUSION                                      CONCLUSION                                      __________                    Given the  unresolved conflict  in the language  of the          guaranty and loan documents and  the dearth of evidence  relating          to the parties' intent,  we conclude that Alletzhauser failed  to          establish  an entitlement to summary judgment as a matter of law.                    We therefore  vacate the  judgment and remand  for pro-                    _______________________________________________________          ceedings consistent with  this opinion.   The parties shall  bear          ______________________________________    _______________________          their own costs.  SO ORDERED.                            SO ORDERED          _______________   __________                                          11                                      APPENDIX11                                      APPENDIX                                      ________          1.   Payment.  On each October 1  and April 1 occurring while any               _______          principal amount of this note is outstanding, [HTRA] shall pay to          [Laura]  all  accrued  but  unpaid interest  on  the  outstanding          principal balance of this note.  Commencing April 1, 1991, [HTRA]          shall pay to [Laura] a principal payment as follows:                    Date of Payment               Principal Payment                    _______________               _________________                    April 1, 1991                      $25,000                    October 1, 1991                    $25,000                    April 1, 1992                      $25,000                    October 1, 1992                    $25,000                    April 1, 1993                      $37,500                    October 1, 1993                    $37,500          The entire  remaining outstanding  principal balance of,  and all          ___ ______                                   _______      ___ ___          accrued  but unpaid  interest  on, this  note  shall be  due  and                       ______  ________                  _____ __  ___  ___          payable on April 1, 1994.            _______ __ _____ __ ____          . . . .          4.   Subordination.  Notwithstanding  any other provision  of the               _____________   _______________  ___ _____ _________  __ ___          Subordinated Loan Documents, [HTRA], and each holder of this note          ____________ ____ _________   ____   ___          [Thorn, Ltd.] .  . . agree  that the Subordinated  Debt shall  be           ___________         _____  ____ ___ ____________  ____ _____  __          subordinated  as set forth in  this Section 4  to all present and          ____________  __ ___ _____ __  ____ _______ _  __ ___ _______ ___          future extensions  of credit  to [HTRA]  by The  Beverly National          ______ __________  __ ______  __  ____   __ ___  _______ ________          Bank [or its successors] . . . .          ____               4.2   Limitation  on Payments.    Payments of  interest  and                     __________  __ ________          principal shall be made as they become due in accordance with the          terms of  the Subordinated Loan Documents.  . . . So  long as any                                                            __  ____ __ ___          Senior Debt is outstanding, no  payment of principal or  interest          ______ ____ __ ___________  __  _______ __ _________ __  ________          on this note shall be  made prior to the date when due  in accor-          __ ____ ____ _____ __  ____ _____ __ ___ ____ ____ ___  __ ______          dance with the terms of the Subordinated Loan Documents.            _____ ____ ___ _____ __ ___ ____________ ____ _________               4.3    Payments  Held in  Trust.    If, notwithstanding  the                      ________  ____ __  _____          foregoing, any payment or distribution of the assets of the Maker          of any kind or character shall  be received, by set-off or other-          wise, by any holder  of Subordinated Debt before all  Senior Debt          is  paid in full, such payment  or distribution and the amount of                            ____ _______  __ ____________ ___ ___ ______ __          any such  set-off shall be held in trust by such holder of Subor-          ___ ____  _______ _____ __ ____ __ _____          dinated Debt for the benefit of the holders  of Senior Debt . . .                       ___ ___ _______ __ ___ _______  __ ______ ____          which shall  have the right  . . .  to the payment  of all Senior          Debt  remaining unpaid until all such Senior Debt shall have been                                        ____________________               11All brackets and  emphasis in  the text of  the Note  have          been added.                                           i          paid in full.                 4.4  Limitation  on Enforcement.  No  holder of Subordinated                    __________  __ ___________          Debt shall, without the  prior written consent of the  holders of          the Senior  Debt, accelerate the  maturity of, or  institute pro-          ceedings to enforce, any  Subordinated Debt, notwithstanding  any          term  or provision to the  contrary contained in the Subordinated          Debt  Documents.  . .  .  Notwithstanding  any contrary  term  or          provision of the Subordinated Debt Documents, (i) no Subordinated          Debt  shall become or be declared to  be due and payable prior to          the date  on which the Senior  Debt becomes or is  declared to be          due and payable . . . .                4.5    Effect of  Provisions.   (a)  The provisions  of this                      ______ __  __________          Section 4 are  solely for  the purpose of  defining the  relative          rights of the  holders of Senior  Debt on the  one hand, and  the          holders of Subordinated Debt on the other hand, and none  of such                                                              ____  __ ____          provisions shall  impair  as between  the  Maker [HTRA]  and  any          __________ _____  ______  __ _______  ___  _____         ___  ___          holder of  Subordinated Debt [Thorn, Ltd.] the  obligation of the          ______ __  ____________ ____               ___  __________ __ ___          Maker [HTRA], which is unconditional and absolute, to pay to such          _____  ____   _____ __ _____________ ___ _________ __ ___ __ ____          holder of  Subordinated Debt the  principal and premium,  if any,          ______ __  ____________ ____ ___  _________ ___ _______          thereof and interest  thereon, and all  other amounts in  respect                  ___ ________  _______          thereof,  all in accordance with the terms thereof, nor shall any                    ___ __ __________ ____ ___ _____ _______          such  provisions prevent  any  holder of  Subordinated Debt  from          exercising all remedies otherwise  permitted by applicable law or          under the terms of such Subordinated Debt upon a default thereun-          der, subject to the rights, if any, under  the provisions of this          Section 4 of  holders of Senior  Debt.  The  Maker hereby  agrees          that,  during any period in  which the Maker  is not permitted to          make any payment by virtue of  the provisions of this Section  4,          any applicable statute of limitations shall be tolled.                                            ii
