Article courtesy of Kevin P. Braun of Morgan, Lewis & Bockius LLP
CT Court Holds that Noteholder Could Not Recover Damages for Borrower’s Failure to Pay Note at Original Maturity Where the Maturity Date was Extended and Events of Default were Waived by “Requisite Holders” in Accordance With Note Terms, Despite Noteholder Having Issued Demand and Default Notice Prior to Extension and Waiver.
Eichler v. Healthy Mom, LLC, 204 Conn. App. 504 (2021)
In November 2014, the plaintiff, David Eichler (the “Noteholder”), made a loan to the defendant, Healthy Mom, LLC (the “Borrower”), in the principal amount of $50,000, which was secured by a promissory note (the “Note”). The Note was one of a series of convertible promissory notes called the “Series B Notes.” Under the terms of the Note, any provision of the Note could be amended, waived or modified upon the written consent of either the Borrower and the Noteholder of the Note or the Borrower and the “Requisite Holders” (majority by principal amount) of the Series B Notes. The Note defined Requisite Holders as “the holders of Series B Notes evidencing at least a majority of the aggregate principal amount of all Series B Notes then outstanding.”
When the Note reached its maturity in December 2015, the Borrower failed to pay the amount due under the Note. The Noteholder of the Note demanded payment but the Borrower did not respond. After the Noteholder sent three additional written demand letters for payment with no response from the Borrower, the “Requisite Holders” (but not including the Noteholder) and the Borrower executed a series of extension agreements that further extended the maturity date of the Note. The third extension agreement, executed in August 2018 (the “Extension Agreement”), extended the maturity date to September 2019 and provided that the amendment thereunder constituted a waiver of any event of default under the Series B Notes occurring prior to September 2018 and a waiver of any rights of any holder relating thereto.
In April 2018, the Noteholder filed a complaint against the Borrower, alleging a breach of contract for failure to pay the Note on maturity and asserting that the Borrower was in default for the principal amount of $50,000, plus interest, costs and fees. The Noteholder argued that under the terms of the Note, the Noteholder was allowed to demand payment on the earlier of the maturity date or when payment had been declared due and payable by the Noteholder upon an event of default. However, the Borrower contended that the Noteholder’s claim was barred by waiver, given that under the Extension Agreement, the maturity date was extended to September 2019 and the Noteholder waived any event of default under the Note. In November 2019, the trial court found in the favor of the Borrower. The trial court held that the parties agreed to allow amendments, modifications and waivers to the provisions of the Note by the consent of only the Borrower and the Requisite Holders and per the terms of the Extension Agreement, the maturity date was validly extended and demand and default were properly waived. The Noteholder appealed.
On appeal, the court applied a contract interpretation analysis and affirmed the judgment of the trial court. Citing to specific precedent, the court reasoned that a promissory note is “nothing more than a written contract for the payment of money” and when interpreting a contract, the court “must look at the contract as a whole” and “consider all relevant portions together.” Further, the court noted that the mere fact that a contract may be a “bad bargain for one of the parties” does not justify altering the clear meaning of the words. For these reasons, the court found that because the Note expressly allowed for amendments, modifications and waivers of the provisions thereof by the consent of only the Borrower and the Requisite Holders and although the Noteholder may not have fully appreciated the impact of that provision when the Note was executed, the maturity date of the Note was properly extended and demand and default were validly waived per the terms of the Extension Agreement. Therefore, the court concluded that the Borrower successfully established its defense of waiver and upheld the judgment of the trial court in favor of the Borrower.