E-Alert Case Updates

Plain Language of Release Agreement Conditional upon Payment, Insufficient to Terminate Defendant’s Indemnification Obligations

Capefirst Funding, LLC v. Botanical Skin Works, LLC, et al.
No. 1:15-cv-979-GBL-JFA, (U.S. District Court for the Eastern Division of Virginia, March 3, 2016)
by Caroline E. Willsey, Law Clerk
Semmes, Bowen & Semmes (www.semmes.com)

Available at: https://ecf.vaed.uscourts.gov/doc1/18917081447

In Capefirst Funding, LLC v. Botanical Skin Works, LLC, the Court considered a Motion for Summary Judgment brought by Defendant Sharon Kinnier (“Kinnier”), the Managing Director of Botanical Skin Works, LLC (“BSW”). Kinnier argued that she was entitled to summary judgment on Capefirst Funding, LLC’s (“Capefirst”) indemnification and breach of contract claims against her. Similarly, Kinnier argued that she was entitled to summary judgment on her own Counterclaim for breach of contract, or alternatively, for declaratory judgment. The issue before the Court was whether the plain language of a Mutual Release Agreement executed between Capefirst and BSW terminated Kinnier’s obligation to indemnify BSW under a separate Validity Guaranty executed between Kinnier and Capefirst.

Capefirst is a Virginia limited liability company that loans money to businesses in return for security investments in accounts receivables. BSW is a Maryland limited liability company engaged in the manufacture and sale of organic and natural skincare products. Capefirst and BSW entered into two (2) loan agreements, referred to as “Factoring Agreements” on May 16, 2011, and on February 1, 2012. The 2012 Agreement superseded the 2011 Agreement. Kinnier and Capefirst separately entered into a Validity Guaranty on May 16, 2011, the same day that Capefirst and BSW entered into the first Factoring Agreement. Under the terms of the Validity Guaranty, Kinnier agreed to indemnify Capefirst from any damage or loss Capefirst sustained in the course of its dealings with BSW.

In 2012, BSW faced financial difficulties. As a result, Capefirst and BSW entered into negotiations to settle and resolve all outstanding obligations. In January 2013, Capefirst and BSW entered into a Mutual Release Agreement (the “Release”). Paragraph 1 of the Release stated that, before February 13, 2013, BSW would pay to Capefirst $195,000 (the “Settlement Amount”) in full satisfaction of all past, present, and future claims. Paragraph 2(a) stated that, conditioned upon Capefirst’s receipt of the Settlement Amount, Capefirst would release BSW from any claims arising under the Factoring Agreements. Paragraph 8 stated the following with regard to any guaranty agreements between the parties:

The Parties hereby agree that the Factoring Agreement is, and shall be immediately terminated and shall be null, void and of no future force and effect. Any past, present or future rights or obligations of the Parties under or related to the Factoring Agreement, including without limitation any guarantees provided by the BSW Parties in relation thereto, shall likewise be terminated and shall be null, void and of no future force and effect.

BSW failed to pay the Settlement Amount when due on February 13, 2013.

On July 7, 2015, Capefirst filed a Complaint in the Circuit Court of Fairfax County, Virginia against BSW, Kinnier, and BSW’s CEO (who was later dismissed from the action). The Complaint set forth a claim for indemnification and a claim for breach of contract against Kinnier under the Validity Guaranty. The case was subsequently removed to the U.S. District Court for the Eastern District of Virginia. Kinnier filed an Answer and a Counterclaim for breach of contract, or alternatively, for declaratory judgment. Kinnier alleged that Capefirst breached the terms of the Release by including her in this action. Alternatively, Kinnier sought a declaratory judgment that the Factoring Agreement, and any related guaranty agreements, including the Validity Guaranty, were terminated, null, and void under the Release. Kinnier subsequently filed a Motion for Summary Judgment as to Capefirst’s claims against her and as to the single count in her Counterclaim.

Ultimately, the Court denied Kinnier’s Motion for Summary Judgment. First, the Court held that the plain language of the Release did not terminate Kinnier’s obligation under the Validity Guaranty. The Court, applying Maryland law, noted that settlement agreements are contracts and are therefore subject to the rules of contract interpretation. Maryland applies the objective theory of contracts, giving unambiguous terms their plain meaning, regardless of the parties’ intentions at the time the contract was formed. Applying these principles to the case at hand, the Court held that when viewed as a whole, the termination provision in Paragraph 8 (terminating Kinnier’s obligation under the Validity Guaranty) was not effective upon signing the Release, but rather, was conditioned upon payment of the Settlement Amount. Despite the fact that Paragraph 8 itself did not contain any conditional language, the Court chose to focus on the language of Paragraphs 1 and 2(a), both of which plainly make release of the parties conditioned upon payment of the Settlement Amount. The Court further reasoned that if Paragraph 8 were to immediately release Kinnier from liability under the Validity Guaranty, that interpretation would also mean that Paragraph 8 released all of the BSW parties of all liability under the Factoring Agreements and other related agreements. The Court found such an interpretation to be untenable because it would render the settlement payment conditions in Paragraphs 1 and 2(a) meaningless.

The Court also denied Kinnier’s Counterclaim for declaratory judgment based upon its finding that the plain language of the Release did not terminate Kinnier’s obligations under the Validity Guaranty.