Herbert v. Pico Ski Area, No. S1268-00 CnC (Katz, J., June 8, 2004)

[The text of this Vermont trial court opinion is unofficial. It has been
reformatted from the original. The accuracy of the text and the
accompanying data included in the Vermont trial court opinion database is
not guaranteed.]




STATE OF VERMONT
Chittenden County, ss.:



HERBERT

v.

PICO SKI AREA




                                  ENTRY




       This is a third-party beneficiary case, with an overlay of bankruptcy
injunctions and successor-liability. Plaintiffs Herberts ran Pico Mountain
Ski Area under a series of successive corporate entities. Electricity was
supplied to them throughout by Central Vermont Public Service, CVPS.
Eventually, the Herberts sold Pico to Defendant American Skiing, under
elaborate contracts which provided among other things for a $214,802.79
escrow to cover possible “liens, encumbrances or other claims.” CVPS,
which had billed Pico in the amount of $214,802.79, now seeks these funds
to cover bills incurred during the Herberts’ operation of Pico. The Herberts
oppose CVPS’s entry into this case and assert their ownership over the
escrow monies. We reject the Herberts’ claims based on three areas: res
judicata, CVPS’ third-party beneficiary status, and the Herberts’ lack of
ownership in the escrow fund. We note that while each of these lines of
reasoning overlap, they also provide independent bases for our conclusion.

           V.R.C.P. 19. Joinder & V.R.C.P. 24. Intervention

        Plaintiffs Herberts initiated this suit to compel defendant American
Skiing to release an escrow fund totaling $214,802.79 to them. CVPS has
made a Rule 24(a) motion to intervene. V.R.C.P. 24. American Skiing in
turn has moved to join CVPS as a party because of CVPS’s potential right
to the money. V.R.C.P. 19(a). American Skiing argues that while it is
merely a stakeholder of the money, without a decision that is binding on
both the Herberts and CVPS, it might be open to future litigation and
inconsistent judgments concerning their duty to execute the escrow fund.
We find that this concern satisfies American Skiing’s burden of persuasion,
advancing a cogent argument as to why CVPS should be joined to the
present litigation. Grassy Brook Village, Inc. v. Richard D. Blazej, Inc.,
140 Vt. 477, 481–82 (1981). The Herberts’ main concern—that joinder
would violate the Bankruptcy Court’s injunction—has been answered by
that court’s entry granting CVPS leave to intervene in this case. (CVPS’s
Am. Mot. for Summ. J., at exs. A, B, Jan. 23, 2003.) That decision clarified
that the injunction, which the Herberts claim and CVPS acknowledges, did
not end the debt owed to CVPS, or their right to collect it from others, but
rather CVPS’s right to collect from the Herberts themselves. Id. at ex. A.
Despite the Herberts’ arguments to the contrary, the Bankruptcy Court held
that the previous injunction did not prevent CVPS from pursuing this
escrow fund so long as 1) it has a right to the escrow fund and 2) the funds
are not owned by the Herberts. Id.

        To the extent that the Herberts have re-argued the injunction to us,
we reject their claims as res judicata. Lamb v. Geovjian, 165 Vt. 375, 379–
80 (1996). When CVPS sought a declaratory judgment from the
Bankruptcy Court concerning the scope of its injunction, the Herberts
opposed and asserted their claim to immunity from any suit. (Herberts’
Opp’n to CVPS Mot. to Determine Scope of Inj. & Cross Mot. for
Determination that Bankr. Inj. Prohibits CVPS from Gaining Access to the
Herberts’ Funds Held in Escrow, Jul. 16, 2002.) Thus, the Bankruptcy
Court considered whether or not this present case was a violation of the
injunction, and by extension the immunity it granted to the Herberts.
Notwithstanding its somewhat equivocal language about who owns the
escrow fund, the Bankruptcy Court’s decision implicitly rejects the
Herberts’ claim of ownership. (CVPS’s Am. Mot. for Summ. J., at exs. A,
Jan. 23, 2003.) Immunity, after all, means freedom not only from adverse
judgments but from further litigation entirely. Right or wrong, by refusing
to grant such immunity the Bankruptcy Court has ruled the escrow funds
outside the realm of the Herberts’ immunity. The sole decision remaining
for us, then, is whether CVPS or another party has a right to this money.
To argue that the fund is the Herberts’ property would challenge the
Bankruptcy Court’s interpretation as to the scope of its prior injunction and
would amount to a collateral attack on this issue. See Trahan v. Trahan,
2003 VT 100, at ¶ 11 (re-litigation of issues covered by family court order
was an impermissible collateral attack). In other words, by allowing the
intervention of CVPS and refusing to grant immunity, the Bankruptcy
Court found that the escrow fund did not belong to the Herberts.
       While this is not the only basis for our decision, as we will discuss
below, we conclude the Bankruptcy Court’s decision is preclusive on this
matter. Therefore, in the interest of avoiding inconsistent judgments, we
will adhere to that decision that the escrow fund does not fall under the
Herbert’s sphere of immunity and by implication lies outside their control
and ownership. We also order CVPS joined as a party to the present case.




                     Contract for Sale of Pico Mountain

       CVPS makes a detailed argument suggesting that the Herberts
“stripped” their successor corporate entities of assets, while continuing to
run up electric bills which were never paid. So when they sold their rights
to Pico, there were no means of paying off the unsecured trade creditors.
Nevertheless, both American Skiing and the Herberts seem to have been
aware that those creditors might not view things with quite the same
sangfroid. So the contract they reached contains two key provisions:

       ¶ 4.02 Purchase Price Adjustment
       (a) The Purchase Price payable to [Herberts] shall be reduced on a
       dollar-for-dollar basis by the amount necessary to deliver free, clear and
       unencumbered title to all Purchased Assets. Initially, the adjustment will
       be made by deducting such amounts from cash payable at Closing to
       reflect amounts paid, incurred or required to discharge all liens and
       encumbrances, and satisfy all liabilities that have been identified as of
       the Closing Date which could mature or otherwise be perfected into or
       result in the establishment of a lien or encumbrance upon, or a claim to
       or against any of the Purchased Assets, or a claim against Buyer as the
       owner of the Purchased Assets.
                               *     *     *

(c) Buyer agrees to establish at Closing, and maintain in a segregated
account, an escrow to fund the liens, encumbrances and other liabilities
identified in Schedule 4.02. Sellers shall be afforded an opportunity to
resolve any and all disputes with respect to the liens, encumbrances and
other liabilities identified in Schedule 4.02; provided, however, that
Buyer reserves the right to apply the escrowed proceeds to pay such
claims and receive a discharge of any such liens, encumbrances or other
liabilities at any time, and in any manner, buyer deems appropriate, in
buyer’s sole discretion, in order to preserve and protect its property
interest in the Purchased Assets. Sellers may not act for or on behalf of
Buyer in attempting to resolve such disputes or claims, but rather shall
contest, dispute or resolve such claims at Sellers’ sole cost and expense
and in Sellers’ name. Nothing set forth herein shall in any way prevent,
prohibit or restrict Buyer from taking any action, or refraining from any
action Buyer deems necessary or appropriate to defend, protect or
advance its interests with respect to such claims, whether or not
consistent with Sellers’ position as to such matters.

                               *     *     *


¶4.05 Adjustment for Utilities
   Sellers shall cause all meters for electricity, gas, water, sewer and
other utility usage related to the Purchased Assets to be read on the
Closing Date, and Sellers shall pay all charges for such utilities which
have accrued on or prior to the Closing Date. If the utility companies are
unable or refuse to read the meters on the Closing Date, all charges for
such utilities to the extent unpaid shall be prorated and adjusted as of the
Closing Date based on the most recent bills therefor. The Sellers shall
provide notice to Buyer within three days before the Closing Date setting
forth (i) whether utility meters will be read as of the Closing Date and (ii)
a copy of the most recent bill for any utility charges which are to be
prorated and adjusted as of the closing Date. If the meters cannot be read
       as of the closing Date and, therefore, the most recent bill is used to
       prorate and adjust as of the closing Date, then to the extent that the
       amount of such prior bill proves to be more or less than the actual
       charges for the period in question, a further adjustment shall be made
       after the Closing Date as soon as the actual charges for such utilities are
       available, which Buyer shall have read as soon as possible after the
       closing Date. Sellers’ and Buyer’s obligation to make such post-Closing
       Date adjustments for utilities shall survive the Closing. Sellers’
       obligations hereunder not funded separately by Sellers at Closing shall be
       deducted from cash payable to Sellers at Closing.
(Pl. Opp’n to CVPS’s Am. Mot. for Summ. J., at ex. B, Dec. 8, 2003.)

       After reaching these contract terms, the parties determined to escrow
the amount of $214,802.79, as shown on the “Closing Statement” executed
by the parties December 9, 1996, the date on which American Skiing
purchased the Pico assets. (CVPS’s Am. Mot. for Summ. J., at ex. H, Jan.
23, 2003.) This sum is listed under “Section 4.02(c) Reservations,” an
obvious reference to the previously cited contract provisions. $214,802.79
happens to be the amount of the bill presented by CVPS. (See Pl. Opp’n to
CVPS’s Am. Mot. for Summ. J., at ex. D, Dec. 8, 2003.)

       Here, the Herberts argue that there was a “proration duty” under
4.05, which was their only duty. Proration, however, exists only in the
event that the utilities could not read their respective meters and was a
short-term means of setting aside money for the payment of utility bills.
The record before us does not even permit the suggestion that the
precondition for proration ever occurred—an inability or refusal to read the
meters.

       On the other hand, certain legal conclusions seem inescapable from
the quoted provisions 4.02 and 4.05. First, this was an integrated contract,
drafted with great care, between sophisticated parties each represented by
counsel. See Restatement (Second) of Contracts § 209 (1981); 17A Am.
Jur. 2d Contracts § 396 (discussing integrated contracts and its effect on
interpretation). Second, American Skiing transparently determined that it
expected the electricity bill of its predecessor to be paid as of the Closing
Date. It may be argued about whether American Skiing actually would
have suffered successor liability, or whether CVPS had any right to impose
a lien. Either proposition may be argued. But neither proposition need be
decided.

        This is a contract case, and the contract of these parties must be
interpreted and applied, so that the objectively expressed contractual intent
will govern. Restatement (Second) of Contracts § 212 cmt. a (1981).
American Skiing was buying Pico; it did not intend to buy lawsuits. Even
ill-founded lawsuits, which it might eventually win. Cf. 3 S. Williston & R.
Lord, A Treatise on the Law of Contracts § 7:45, at 701 (4th ed., 1992)
(“Forbearance to prosecute or defend a suit or other action which has been
or may be instituted is generally held sufficient consideration without
inquiring whether the suit or the defense would have been successful or
not.”). Moreover, in entering on the Pico premises, American Skiing
obviously understood that it would be opening an account with the only
supplier of electricity, CVPS, and reasonably wanted to do so under
favorable terms. American Skiing did not want to deal with a utility which
had just been burned for almost a quarter million dollars, and therefore
announced to the successor ski operator that it wanted some huge deposit,
in order to open the new account. How much better to be dealing with
some CVPS manager on the basis of a paid bill, or at least one secured by
escrowed funds, required by American Skiing’s contract. Although
American Skiing’s particular intent, at the time, may not be part of the
record, its purposes are easily divined from the contractual language and
are clear and not at all surprising in the context of everyday business.
Isbrandtsen v. North Branch Corp., 150 Vt. 575, 578 (1988). Courts
interpreting contracts need not naively blind themselves to the reality of
commerce. Id. (citing Restatement (Second) of Contracts § 212 cmt. b
(1981)).

                      Third-Party Beneficiary Status

       From the contract and the closing statement, it is plain that a certain
amount of the money was escrowed at the closing to cover outstanding
debts whose creditors might have a perfected interest, lien, or claim against
American Skiing. CVPS’s bill for electricity was one of those debts listed.
As we have discussed, it was in American Skiing’s interest to include
CVPS because any claims by CVPS, regardless of their validity, would
have been an unwanted hassle to American Skiing and had the potential to
harm its on-going business relationship with CVPS. It was the intent of
American Skiing and the Herberts, then, to provide a pay off, or benefit, to
parties such as CVPS, who were creditors of the Herberts. In other words,
CVPS and other creditors listed under the ¶ 4.02 closing sheet were third-
party beneficiaries to the contract because they were the intended recipients
of escrow funds necessary to satisfy the Herbert’s debt. Morrisville
Lumber Co. v. Okcuoglu, 148 Vt. 180, 184 (1987) (parties’ contemplated
satisfaction of a debt to another is the essence of a third-party beneficiary
contract). This is acknowledged implicitly by American Skiing when it
notes that “[i]n the absence of the bankruptcy proceeding there would be no
question that the money could be turned over to CVPS.” (Def. Resp. to
CVPS’s Am. Mot. for Summ. J., at 2, Jul. 1, 2003.) (notwithstanding prior
blanket assertions by American Skiing to the contrary).

       The question raised by the Herberts is whether CVPS still has a
claim to this escrow money since the Bankruptcy Court’s 1997 Injunction
has ended any liability of the Herberts. According to them, CVPS has
neither claim nor right to this money because the injunction extinguished
the debt and blocks CVPS from going after any of the Herbert’s assets.
The problem with this argument, however, is that it is premised on two
conceptual fallacies. First, the debt that the Herberts and their companies
once carried prior to bankruptcy has not been dissolved by the bankruptcy
injunction. As the Bankruptcy Court made clear in its order allowing
CVPS to intervene in this case, the injunction has only barred CVPS from
ever seeking payment from the Herberts, personally. (CVPS’s Am. Mot.
for Summ. J., at ex. A, Jan. 23, 2003.) The debt owed to CVPS’s still
remains. Thus, CVPS is still free to pursue this claim against other parties
or other sources. See 11 U.S.C. § 524(e) (outlining the effects of a
discharge from a bankruptcy); Terwilliger v. Terwilliger, 206 F.3d 240, 247
(2d Cir. 2000) (noting that a barnkruptcy injunction works as an affirmative
defense only for the party it covers); see also Adamson v. Dodge, 174 Vt.
311, 315–16 (2002) (noting that former spouse that had her name on the
other’s credit card account was liable for the debt following his bankruptcy
and subsequent injunctive protection). Conceptually, CVPS’s debt from
the electricity supplied to Pico remains, and it has a right to pursue any
asset outside of the Herberts’ protected sphere.

         The second concept that the Herberts rely upon concerns the
ownership of the escrow account. According to them, they own the escrow
account so that even if CVPS could still pursue its debt, it could not touch
the escrow because it is their asset. This mischaracterizes the nature of the
escrow account and the type of action CVPS is pursuing. Ownership over
an escrow fund is contingent on fulfilling the conditions of escrow. In re
Mushroom Transportation, Co., 282 B.R. 805, 817 (E.D. Pa. 2002). Legal
title to the res of the escrow, whether property or money, does not pass
from the grantor to the grantee until the condition of the escrow has been
satisfied. 28 Am. Jur. 2d Escrow § 17. The grantees in this case are the
Herberts who have a contingent right to any remaining escrow funds after
the CVPS debt has been satisfied. The question of whether this contingent
right is enough to establish ownership has been addressed by jurisdictions
in other contexts. See H. Warren., Who Must Bear Loss Resulting from
Defaults or Peculations of Escrow Holder, 15 A.L.R. 2d 870 (1951, Supp.
2004) (citing to cases that ownership and risk of loss do not shift to grantee
until after the conditions for the escrow are met). Most have held that
ownership does not pass until the condition of the escrow is met or fails.
Id. In particular, bankruptcy courts have considered escrow funds to be
outside the bankruptcy estate. While the focus in such situations has been
primarily on debtor–grantors who contribute to an escrow prior to
bankruptcy, the courts have, short of fraud, refused to include the escrow
contributions in the estate because even though the debtor holds legal title,
it is contingent on whether the conditions of the escrow are met. P. Mears,
Can a Bankruptcy Trump an Escrow?: A Primer on Enforceability, 6–Oct.
Bus. L. Today 40, 42 (1996); see also T. Byrne, Escrows and Bankruptcy,
48 Bus. L. 761 (1993). Hence, the Herberts’ sole claim of ownership here
is an equitable title, contingent on the satisfaction of CVPS’s electrical bill.
We are persuaded that this contingent right does not create a right of
ownership in the Herberts and leaves the escrow fund outside of their
control and ownership and, therefore, outside the protection of the
bankruptcy court’s injunction. (Cf. CVPS’s Am. Mot. for Summ. J., at exs.
A, B, Jan. 23, 2003.)

       As the third-party beneficiary of the escrow fund provisions in the
sale contract, CVPS has the best claim on the escrow funds and is eligible
to claim them. In essence, the nature of CVPS’s claim is for the money in
escrow alone. It is not a claim against the Herberts or their estate. It is
rather essentially an in rem claim against a discrete fund, presumably
including the interest it has earned. CVPS will not receive, nor does it
seek, a personal judgment against the Herberts, but a declaration that the
stakeholder must pay over the res. In this respect, our conclusion that
CVPS has a right to the escrow funds has nothing to do with the law of
bankruptcy or the judgments of the Bankruptcy Court. It is instead a simple
contract interpretation, which establishes third-party beneficiary CVPS’s
right to funds that were segregated through contract.
        Based on the foregoing, CVPS’s motion to intervene and motion for
summary judgment are granted.

      Dated at Burlington, Vermont________________, 2004.



                                        ________________________
                                        Judge
