In a decision perhaps more noteworthy for demonstrating the pitfalls of inartful drafting of subordination agreements than for the outcome of the case, the First Circuit Court of Appeals in DCC Operating, Inc. v. Luis Rivera Siaca, Enery Ortiz-Rivera and Conjugal P’ship v. Wayne S. Foren (In re Olympic Mills Corp.),1 upheld a $3,000,000 award against a subordinated creditor who received payments from a defunct borrower before the senior lender was paid in full. The subordinated creditor, Luis Rivera Siaca (“Rivera”), the “affluent chairman” of the borrower, Coachman, Inc. (“Coachman”), sought to justify his receipt and retention of the payments because the subordination agreement at issue did not specifically describe the loans that were being subordinated to the “Senior Debt,” and by his reading of the “plain language” of the subordination agreement at issue, the subordination did not apply to loans made by Rivera to the borrower after he executed the subordination agreement. In contrast, the senior lender, Development Capital Ventures, LP (“DCV”), argued that the “plain language” of the subordination agreement clearly subordinated all loans made by Rivera, whenever made. In the end, what is “clear” is that the dispute could likely have been avoided if greater care had been taken in drafting the subordination agreement.


The case had its genesis in a $2 million bridge loan from DCV to Coachman. The loan was evidenced by a “Convertible Subordinated Demand Note” dated as of February 24, 2000 in the original principal amount of $2,000,000 (the “Note”). According to the opinion, the Note had a maturity date of June 30, 2000, although it was later amended to extend the maturity date to January 31, 2001 and to increase the principal amount to $2,500,000.2 Attached to the Note were four “Annexes”: a term sheet relating to the conversion feature of the Note, a guaranty, an asset purchase agreement referred to as the “Hampshire Agreement” which contemplated the formation of a new subsidiary by Coachman to acquire inventory and equipment from Hampshire Corporation, and a “Subordination and Standby Agreement” which Rivera was required to sign (the “Subordination Agreement”).3 Rivera signed the Subordination Agreement on February 24, 2000, and also executed the Note as the authorized signatory for Coachman on that date. At the time the Note and the Subordination Agreement were executed, Coachman owed Rivera some $5.75 million on existing loans made by Rivera to Coachman. Neither the Note nor the Subordination Agreement identified the particular loans to be subordinated to the new bridge loan.4

About a year later, Coachman defaulted under the bridge loan. DCV, through its general partner “DCC,” demanded that Coachman pay off the bridge loan. When Coachman failed to do so, “DCC demanded that Rivera pay all amounts due from payments he had received from Coachman or its affiliates over the previous year.”5 Apparently during that year, Rivera had received payments aggregating “at least” $5,600,000. Also during that period, Rivera had made new loans to Coachman and two of its affiliates (one of which was not formed at the time of the bridge loan) totaling $16.6 million (the “New Loans”). According to Rivera, the payments he had received had been on account of the New Loans and by the “plain language” of the Subordination Agreement, the New Loans were not subordinated to the bridge loan.6 Consequently, Rivera refused to accede to DCC’s demands for payment.

Summary of the Course of the Litigation

On November 7, 2001, DCC brought suit against Rivera based on diversity jurisdiction in the United States District Court for the District of Puerto Rico alleging various state-law claims under the Subordination Agreement. Shortly thereafter, on November 26, 2001, Coachman and Olympic Mills filed Chapter 11 petitions. Coachman and Olympic Mills filed a motion to intervene as of right in DCC’s suit in the district court, arguing that the payments to Rivera might be subject to their avoidance powers as debtors in possession. They also asked that the action be referred to the bankruptcy court for further adjudication.7 A series of procedural machinations took place, the action was referred to the bankruptcy court on May 1, 2003, cross motions for summary judgment were filed, and judgment was entered in favor of DCC in August, 2004—nearly three years after the action was initially filed. Rivera appealed, the Bankruptcy Appellate Panel affirmed and the matter came before the First Circuit, which issued its decision on January 17, 2007.

The Decision on the Merits

After dealing with the “procedural tangle”8 of the case and determining that the original diversity jurisdiction was not destroyed by the intervention of Coachman and Olympic Mills, the First Circuit turned to the merits of the case.9

The Contentions of the Parties

DCC contended that the “plain language” of the Subordination Agreement subordinated all of the loans made by Rivera to Coachman and its affiliates, regardless of when the loans were made. Rivera argued that, on the contrary, the “plain language” of the Subordination Agreement subordinated only the loans made before execution of the Subordination Agreement, or alternatively, that the language of the agreement was ambiguous and should be construed against DCC as the drafter of the agreement.10 The parties relied on two provisions from the Subordination Agreement in support of their positions. The first was the provision defining the term “Subordinated Debt,” which read as follows:

“Subordinated Debt” shall mean all principal, interest, fees, costs, enforcement expenses (including legal fees and disbursements), collateral protection expenses and other reimbursement and indemnity obligations that the Subordinating Creditor [Rivera] has loaned to the Borrower [Coachman] or any of its affiliates.11

The second provision described the subordination of the debt as follows:

7. Subordination. The Senior Debt [DCV’s $2 million bridge loan] and the Note and any and all other documents and instruments evidencing or creating the Senior Debt and all guaranties, mortgages, security agreements, pledges and other collateral guarantying or securing the Senior Debt or any part thereof shall be senior to the Subordinated Debt irrespective of the time of the execution, delivery or issuance of any thereof.12

DCC looked to the first provision defining “Subordinated Debt” and argued that the words “shall mean” indicated:

the future progressive tense and, as the main verb phrase in this definitional section, use of those words require that the entire definition is to be read at the time the [Subordination Agreement] is being enforced, not the time at which it was executed.13

The First Circuit’s view of the parties’ reliance on grammar is evident from its ensuing description of Rivera’s response:

Not to be syntactically outplayed, Rivera responds that “has loaned” can only refer to loans outstanding as of the date of the Subordination Agreement, and cannot possibly encompass loans made after that date. The grammatical acrobatics continue with competing interpretations of the “Subordination” clause, specifically with respect to the following language: “irrespective of the time of the execution, delivery or issuance of any thereof.” DCC posits that this language modifies “Subordinated Debt,” which is the closest noun; Rivera argues that it modifies “Senior Debt,” which is the direct object of “shall be senior.”14 DCC also argued that the Subordination Agreement had to be read together with the Note because, according to DCC, the Subordination Agreement “expressly incorporates the Note by reference.”15 DCC based this contention on a recital in the Subordination Agreement that stated that the execution of the Subordination Agreement was a condition precedent to DCV’s willingness to make the loan evidenced by the Note.16

DCC pointed to two provisions in the Note in support of its interpretation of the Subordination Agreement. The first was the Note’s definition of the Subordination Agreement (which agreement was attached to the Note as Annex D) set forth in ¶1.(xiv) of the Note which read:

“Subordination and Standby Agreement” shall mean the agreement (Annex D) by Mr. Luis Rivera to subordinate and defer repayment of the principal of any loan by him to the Company [Coachman], Olympic Mills Corp., Olympic Group, Inc. or the new entity pursuant to the Hampshire Agreement until this Note is converted and repaid.17

The second provision in the Note relied upon by DCC was ¶5.1 of the Note, which read as follows:

Subordination and Standby Agreement. Mr. Luis Rivera Siaca shall execute an irrevokable. [sic] Subordination and Standby Agreement, in the form attached here to [sic] as Annex D, whereby his loans to the Company [Coachman] or its affiliates are subordinated to this Note and he agrees to defer payment of principal on such loans until this Note is either converted into Series E Preferred Stock or is repaid.18

Based on the foregoing language from the Note and the recital from the Subordination Agreement allegedly making the execution of the Subordination Agreement a condition precedent to DCV’s making the loan, DCC argued that “the ‘Subordinated Debt’ unambiguously applies to all of Rivera’s loans to Coachman and its affiliates.”19 Rivera countered by arguing that (a) the Subordination Agreement did not incorporate the Note by reference—though it did refer to and describe the Note, and (b) the Note “[was] ‘outside the four corners’ of the Subordination Agreement, and, for the purpose of deciding their contract dispute, constitute[d] extrinsic evidence.”20

Analysis by the First Circuit

Applying Delaware law as was directed by the Subordination Agreement (and the Note), the First Circuit began with the rules of contractual construction and the principle under Delaware law that, in construing a contract, the intention of the parties is given priority.21 Furthermore, the Court, citing authorities, provided a number of other principles of contractual construction, including that an agreement must be read “as a whole, giving effect to all provisions therein,”22 and that a court will “consider extrinsic evidence to interpret the agreement only if there is an ambiguity in the contract.”23 The Court also observed that in Delaware:

A contract is not rendered ambiguous simply because the parties do not agree upon its proper construction. Rather a contract is ambiguous only when the provisions in controversy are reasonably or fairly susceptible of different interpretations.24

To the First Circuit’s knowledge, there was no case decided by the Delaware Supreme Court standing for the principle recognized in Williston on Contracts and other jurisdictions to the effect that instruments executed at the same time, by the same parties, for the same purpose in the course of the same transaction “will be considered and construed together as one contract or instrument, even though they do not in terms refer to each other.”25 However, the Court thought it was “fair to predict” that the Delaware Supreme Court would “read the disputed language of the Subordination Agreement in light of the pertinent provisions of the Note.”26 It reached this conclusion because (1) both the Note and Subordination Agreement were signed the same day by “substantially the same parties,”27 as part of the same transaction for a “unitary purpose,”28 (2) “the execution of the Subordination Agreement was listed as a condition precedent to the Note,”29 (3) the Subordination Agreement was attached as an annex to the Note,30 and (4) neither document contained “a merger clause or any indication of the parties’ intent to reach each contract in isolation.”31

Having concluded that the Note and the Subordination Agreement should be read together, the First Circuit quickly disposed of Rivera’s contentions regarding the interpretation of the Subordination Agreement.

The Court found:

The language of the Subordination Agreement quickly comes into focus when viewed through the lens of the Note. The most obvious blow to Rivera’s interpretation of the Subordination Agreement is the Note’s use of “any loan” in ¶1.(xiv), without any accompanying prospective limitation. In fact, subsequent language in ¶1.(xiv) shows that such a limitation could not have been intended. In pertinent part, ¶1.(xiv) explains that the Subordination Agreement would require Rivera “to subordinate and defer repayment of the principal of any loan by him to the Company [Coachman], Olympic Mills Corp., Olympic Group, Inc. or the new entity pursuant to the Hampshire Agreement until this Note is converted and repaid.” (Emphasis supplied.) However, prior to February 24, 2000, Rivera had extended loans to Coachman and Olympic Mills only; he did not extend any loans to the “new entity” (a/k/a/ Glamourette) until afterwards. (It is unclear even whether Glamourette existed on the date of the signing.) Further, ¶5.1 provides that DCV’s loan would issue only if Rivera would agree that “his loans to the Company [Coachman] or its affiliates [not simply “and its affiliate Olympic Mills”] are subordinated to this Note.” (Emphasis supplied.) The Subordination Agreement uses similarly broad language in ¶1.(xiv): “the Subordinating Creditor [Rivera] has loaned to the Borrower [Coachman] or any of its affiliates.” (Emphasis supplied.)

We are unwilling to endorse, as Rivera would have us do, an interpretation of “has loaned” that would render the above language meaningless or superfluous see Crowe, 365 F.3d at 97, and that would run counter to the overall scheme that these documents were designed to effect. See E.I. du Pont de Nemours, 498 A.2d at 1113. Because the disputed language is not reasonably susceptible of different interpretations, see Rhone-Poulenc, 616 A.2d at 1195, we hold that the Subordination Agreement, when properly read in conjunction with the Note, unambiguously covers the post- Subordination Agreement loans at issue in this case. We are therefore not required (or permitted), under Delaware law, to consider evidence extrinsic to these documents. See Eagle Indus., Inc. v. DeVilbiss Health Care, Inc., 702 A.2d 1228, 1232 (Del. 1997).32

Thus, after nearly six years of wrangling about the interpretation of the “plain language” of the Subordination Agreement, the senior lender ultimately prevailed.33


Regardless of whether one considers Rivera’s arguments to have been colorable or mere “grammatical acrobatics” as the First Circuit seemed to conclude, it is evident that the Subordination Agreement could have been—and should have been—far more explicit. Parties to subordination agreements should take heed and make certain that the agreements unambiguously reflect the intent of the parties.