Porter Capital Corporation v Zulfikar Masters

Hearing dates: 9 th and 10 th December 2015

Introduction

These appeals raise a series of essentially 7 issues arising from the judgment of Mr Nicholas Strauss QC, sitting as a deputy judge of the High Court, delivered on 10 ^th December 2013 after a 6-day trial. All the issues concern the construction of two contractual documents that governed the relationships between the parties. The parties were Porter Capital Corporation ("Porter"), a factoring company incorporated in Alabama, and a shareholder guarantor of the borrower, Mr Zulfikar Masters O.B.E., who is based in England and Switzerland ("Mr Masters"). Porter factored the commercial debts of Cura Pharmaceuticals Inc, a company incorporated in New Jersey ("Cura") for a period of some 5 ¹/₂ years between 2004 and 2010.

The two documents that governed these relationships were a Commercial Financing Agreement dated 18 ^th November 2004 between Porter and Cura (the "CFA"), and a document entitled "Performance Covenant and Waiver" (the "PCW") also dated 18 ^th November 2004 by which Mr Masters (who owned 22.5% of the shares of Cura) and the other Cura shareholders guaranteed Cura's obligations to Porter. The two agreements are annexed to this judgment. I will set out only the most crucial terms in this judgment, but the CFA and the PCW need to be read in their entirety to understand the arrangements that the parties made. Clause numbers referred to in this judgment without qualification relate to the CFA.

The other parties to the PCW were Mr Fabio Lanzieri, the President, CEO and a 5% shareholder in Cura, who was based in New Jersey ("Mr Lanzieri"), Mr Alastair Young, a director and a 72.5% shareholder in Cura, who was based in Melbourne, Australia ("Mr Young"), and Mr Lanzieri's wife, Mrs Maria Lanzieri. Mr and Mrs Lanzieri's guarantee under the PCW was limited to the value of their interest in their home at 7, Riverside Lane, Holmdal, New Jersey (the "Lanzieris' property"), which was subject to a prior mortgage.

The chronology of the relationship was not complex. From 2004, Porter advanced monies to Cura under the terms of the CFA against Cura's receivables. Cura was able to monitor amounts owed, amounts held in reserve and amounts advanced on Porter's web portal. By 2 ^nd March 2010, Porter declared Cura in default under the CFA, claiming a balance of some $1.67 million as at 19 ^th March 2010. On 19 ^th March 2010, notice of Cura's Chapter 7 bankruptcy was issued in the US Bankruptcy Court, District of New Jersey. Porter brought three sets of proceedings under the CFA: these proceedings in England claiming some $2.67 million against Mr Masters commenced on 9 ^th February 2012, proceedings against Mr Young in the County Court of Victoria, Australia commenced on 5 ^th October 2011, and proceedings in New Jersey against Mr and Mrs Lanzieri which resulted in summary judgment on 16 ^th March 2012. After a mediation in Melbourne attended by Porter and Messrs Young and Masters, Porter and Mr Young entered into a settlement agreement dated 3 ^rd September 2012 (the "settlement agreement"), under which Mr Young paid Porter $1.2 million on 3 ^rd October 2012, and Porter covenanted not to pursue the proceedings against Mr and Mrs Lanzieri and to give credit for the sum it received from Mr Young in these proceedings. On 5 ^th October 2012, Porter's proceedings in New Jersey against Mr and Mrs Lanzieri were dismissed "with prejudice and without costs". That left only these proceedings outstanding against Mr Masters alone.

The judge was asked by the parties to these proceedings to decide 15 issues that he described at paragraph 46 of his judgment, and which resulted in his making 13 declarations in his order of 5 ^th February 2014. In addition, the judge ordered the taking of an account and later ordered Mr Masters to make an interim payment to Porter of $650,000 (both of which have been stayed pending these appeals).

The judge explained the way in which the CFA operated at paragraphs 9–29 by reference to its detailed provisions. I do not intend to repeat that account in this judgment. I shall, however, attempt at this stage to summarise some of the basics. Under the CFA, Porter agreed to advance money to Cura against those of its customers' receivables that it chose to purchase. Porter agreed to collect the receivables from the customer for a fee of between 2% and 6% depending on how quickly the customers paid (the "collection fee"). Porter charged Cura a range of other fees and interest. The purchase price for each receivable was its full value less the maximum collection fee (i.e. 94%), but there was a rebate of between 1% and 4% paid to Cura if the receivable was paid by the customer in less than 75 days. In respect of each invoice, Porter advanced a maximum of 75% of its value to Cura, deducting a basic "reserve" of 19% in addition to the maximum possible collection fee of 6%. Porter was to maintain a Reserve Account for Cura into which it would place the 19% reserve amount (or a greater percentage if Porter decided to do so) to be applied against charge backs or any "Obligations" of Cura to Porter defined in clause 15 as including any sums due by Cura to Porter under the CFA and any other indebtedness or liability of Cura to Porter. In practice, Porter exercised its discretion under the CFA to advance far less than the 75% of the value of the receivables to Cura. The actual average figure was approximately 20%. Exhibit B to the CFA specified that Cura should pay Porter interest on the average monthly outstanding balances on all advances at the rate of the greater of 8.5% and the Prime Rate plus 4% on an annualised basis, charged daily, collected at the end of each month until all advances are paid in full and all Obligations satisfied. Clause 8 allowed Porter to make "over-advances" to Cura to ease its short-term cash-flow problems, by way of a negative balance on the Reserve Account in return for a "one-time processing and administrative fee" of up to 3% of the over-advance, and interest on the outstanding over-advance balance at the rate of 1 ¹/₂% per month.

The issues on this appeal

The 7 issues that arise on appeal can be summarised very briefly as follows:-

i) Issue 1: the reserve account issue: whether the judge was right to decide that an over-advance with higher fees and interest only arose when there was a negative balance in the Reserve Account?

ii) Issue 2: the compound interest issue: whether the judge was right to decide that Porter was not entitled to charge compound interest on over-advances, and was entitled to charge compound interest on all advances under clause 5 and Exhibit B (to the CFA)?

iii) Issue 3: the legal fees issue: whether the judge was right to decide that Porter was not entitled to recover from Cura its legal fees and collection expenses under either clause 10 or clause 22?

iv) Issue 4: the release issue: whether the judge was right to decide that Mr Masters was not released from any part of his liability to Porter as a result of the settlement agreement?

v) Issue 5: the terminal days issue: whether the judge was right to decide that for the purpose of determining the rebate both terminal days are to be taken into account in calculating the number of days in which an invoice was paid?

vi) Issue 6: the interest on fees issue: whether the judge was right to decide that Porter was entitled to interest on its underwriting and other fees?

vii) Issue 7: the prima facie case issue: whether the judge was right to decide that Porter had shown a prima facie case that Cura owed the sums claimed and default interest from 1 ^st October 2008?

Connecticut law

It was common ground that all the issues identified in the parties' Connecticut law experts' joint report were to be decided under Connecticut law, even where there was no specifically pleaded issue of Connecticut law, provided the issue itself was pleaded; both the CFA and the PCW were expressly subject to that law. The judge refused, however, to go further so as to apply Connecticut law to issues which do not arise in the pleadings at all.

The judge recited certain, mostly agreed, principles of Connecticut contract law at paragraphs 55–62 of his judgment. The most relevant ones that might potentially be relevant to aspects of these appeals are as follows:-

i) When a guarantee contains clear and unambiguous language it is to be given effect according to its terms.

ii) Ambiguity exists where the parties' intent is not clear and certain from the language of the contract itself.

iii) If, but only if, a contractual provision is ambiguous (or there is a missing term, or a collateral agreement), the court can have regard to the "course of performance", that is evidence of the conduct of the parties after the contract in the course of performing it, as an aid to interpretation of the provision, although such evidence will not be conclusive on the issue.

iv) The provisions in a contract must be read together and the more specific language in a contract prevails over the more general.

Issue 1: the reserve...