pre-conference-letter-marchetti.docx

1045-00004 · Client 1045 · Pleadings & Court Filings

pre-conference-letter-marchetti.docx DOCUMENT Litigation

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CALDERWOOD & HARKNESS LLP Attorneys at Law 600 Lexington Avenue, 30th Floor New York, New York 10022 Telephone: (212) 554-7800 Facsimile: (212) 554-7801

December 2, 2024

Via NYSCEF and First-Class Mail

Hon. Althea Marchetti Justice, Supreme Court of the State of New York County of New York, Commercial Division 60 Centre Street, Room 238 New York, New York 10007

Re: Belmont Ridge Bank NA v. Triton Harbor Industries, LLC, Marcus J. Kappel, and Elaine D. Kappel Index No. 654871/2024 Pre-Conference Letter in Advance of Preliminary Conference Scheduled for December 6, 2024

Dear Justice Marchetti:

I am Linda Osei, a partner at Calderwood & Harkness LLP, counsel for plaintiff and counterclaim-defendant Belmont Ridge Bank NA ("BRB"). I respectfully submit this letter in advance of the preliminary conference currently scheduled for December 6, 2024 at 10:00 a.m. before Your Honor, pursuant to the Court's individual rules for the Commercial Division.

Defendants and counterclaim-plaintiffs Triton Harbor Industries, LLC ("Triton Harbor"), Marcus J. Kappel, and Elaine D. Kappel (collectively, "Defendants") are represented by Theodore "Ted" Huang, Esq. and Natasha Orlov, Esq. of Kestrel Voss & Huang LLP, 780 Third Avenue, 24th Floor, New York, New York 10017.

By way of preliminary note, Calderwood & Harkness LLP was retained by BRB on November 4, 2024 to serve as litigation counsel in this action. On November 12, 2024, the firm filed a Notice of Substitution of Counsel on NYSCEF, replacing BRB's prior counsel, Blakemore & Stern LLP. Since its engagement, Calderwood & Harkness has undertaken a thorough review of the case file, the pleadings, and the underlying transaction documents, and has conferred with opposing counsel regarding discovery planning and case management. BRB's Answer to Counterclaims was filed on November 22, 2024, placing all issues in the action at issue.

This letter is intended to provide the Court with a summary of the factual and legal background of the action, BRB's proposed discovery schedule and case management positions, the anticipated discovery disputes of which BRB is presently aware, and BRB's proposal for a preliminary conference order.

I. Background of the Action

BRB filed the original Verified Complaint in this action on August 12, 2024, seeking, among other relief: (i) enforcement of a Forbearance and Modification Agreement dated October 6, 2023 (the "Forbearance Agreement") between BRB and Triton Harbor; (ii) judgment on the personal guaranties executed by Marcus J. Kappel and Elaine D. Kappel (the "Guaranties"); and (iii) recovery of the deficiency balance remaining after application of all collateral proceeds and payments. The total accelerated indebtedness claimed in the Complaint is $17,456,212, comprising Term Loan A principal of $10,625,000; Revolving Credit Facility principal of $6,200,000; accrued and unpaid interest of $487,322; and late fees and default interest of $143,890.

The Underlying Credit Relationship. The credit relationship between BRB and Triton Harbor originated with a Credit Agreement dated June 15, 2021 (the "Credit Agreement"), pursuant to which BRB provided Triton Harbor with total committed credit facilities of $22,000,000, consisting of: (a) a $14,000,000 Term Loan A, structured with an eighty-four (84) month term and bearing interest at the Secured Overnight Financing Rate ("SOFR") plus 275 basis points; and (b) an $8,000,000 Revolving Credit Facility bearing interest at SOFR plus 250 basis points. The facilities were secured by substantially all of Triton Harbor's assets, including accounts receivable, equipment, contract rights, and a first-priority lien on Triton Harbor's Long Island City terminal facility located at 47-15 Austell Street, Long Island City, New York 11101.

The borrower, Triton Harbor Industries, LLC, is a Delaware limited liability company with its principal offices at 47-15 Austell Street, Suite 200, Long Island City, New York 11101. Triton Harbor is a mid-market marine industrial services company engaged in harbor maintenance, marine terminal operations, commercial diving services, and specialized marine construction and demolition work in the greater New York metropolitan area and the northeastern seaboard. Marcus J. Kappel is the founder and Chief Executive Officer of Triton Harbor and holds a 72% membership interest. Elaine D. Kappel serves as Chief Financial Officer and holds the remaining 28% membership interest.

Financial Deterioration and Covenant Breaches. In the first half of 2023, Triton Harbor experienced significant financial deterioration driven primarily by the loss of two major contracts that had historically constituted a substantial portion of the company's revenue base. Specifically, Triton Harbor lost the Port of Bridgehaven municipal port services contract, which had generated approximately $12 million per year in revenue, and the Newark Bay maintenance contract, which had generated approximately $7.5 million per year. The combined loss of these two contracts — representing, on BRB's information and belief, approximately 55% of Triton Harbor's consolidated annual revenue — led to rapid degradation of the company's financial performance and a breach of two key financial covenants under the Credit Agreement. As of the quarter ending March 31, 2023, Triton Harbor's Fixed Charge Coverage Ratio ("FCCR") had fallen to 0.87x, well below the required minimum of 1.20x, and its Total Leverage Ratio had risen to 4.92x, significantly in excess of the covenant maximum of 3.50x.

Transfer to Special Assets and Risk Downgrade. On March 8, 2023, BRB's internal credit review process resulted in the downgrading of the Triton Harbor credit to Substandard (Risk Rating 7), and the account was formally transferred from BRB's relationship management division to its Special Assets Group ("SAG") for workout management. At the time of the transfer, the total outstanding balance under the Credit Agreement was approximately $17,575,000, consisting of $11,375,000 under Term Loan A and $6,200,000 under the Revolving Credit Facility.

The Forbearance Agreement. Following several months of negotiations between BRB's Special Assets Group and Triton Harbor and its restructuring advisors, the parties executed the Forbearance and Modification Agreement on October 6, 2023. The Forbearance Agreement set forth the following material terms, among others: (i) BRB agreed to forbear from exercising its remedies under the Credit Agreement for a period of one hundred eighty (180) days, running through April 3, 2024 (the "Forbearance Period"); (ii) Triton Harbor was required to make monthly cash payments of $125,000 during the Forbearance Period; (iii) Triton Harbor was required to pledge additional collateral, consisting of certain equipment leases appraised at $2,300,000 and the personal residence of Marcus J. Kappel and Elaine D. Kappel located at 14 Birchmont Lane, Westport, Connecticut 06880, which was appraised at $3,100,000; (iv) the existing personal guaranty of Marcus J. Kappel was amended from a limited guaranty (capped at $4,500,000) to an unlimited personal guaranty; and (v) Elaine D. Kappel executed a new unlimited personal guaranty of Triton Harbor's obligations under the Credit Agreement as modified by the Forbearance Agreement.

Expiration of the Forbearance Period and Acceleration. The Forbearance Period expired on April 3, 2024. Although Triton Harbor had made certain of the required monthly payments during the Forbearance Period, the central financial milestone — the cure of the FCCR covenant — was not achieved. As of March 31, 2024, Triton Harbor's FCCR stood at 0.94x, which, while improved from the 0.87x level recorded one year earlier, remained materially below the 1.20x minimum required under the Credit Agreement and the Forbearance Agreement. On April 15, 2024, BRB issued a formal Notice of Default and Acceleration to Triton Harbor and the individual guarantors, declaring all outstanding indebtedness under the Credit Agreement immediately due and payable. BRB subsequently commenced foreclosure proceedings with respect to the Long Island City terminal facility on May 20, 2024, and filed the present action on August 12, 2024 seeking a money judgment for the full accelerated balance plus enforcement of the Forbearance Agreement and Guaranties.

II. The Counterclaims

On October 18, 2024, Defendants filed an Answer with Counterclaims, asserting the following four counterclaims against BRB: (1) fraudulent inducement; (2) negligent misrepresentation; (3) breach of the implied covenant of good faith and fair dealing; and (4) rescission of the Forbearance Agreement and the amended Guaranties. Counterclaim-plaintiffs seek compensatory damages in an amount not less than $12,500,000, plus unspecified punitive damages.

The central factual allegations underlying each of the four counterclaims are substantially similar. In essence, counterclaim-plaintiffs contend that during the negotiations leading to the Forbearance Agreement, two officers within BRB's Special Assets Group — Senior Vice President Derek Whitmore, then the Head of SAG, and Vice President Joanna Reeves — allegedly made oral and written representations during September 2023 to Marcus J. Kappel and Elaine D. Kappel that, upon Triton Harbor's successful completion of the forbearance milestones set forth in the Forbearance Agreement, BRB intended to extend a new $6.5 million revolving credit facility to Triton Harbor in order to provide the company with sufficient working capital to support its operational recovery. The counterclaims further allege that BRB concealed from Triton Harbor and the Kappels the existence of an internal memorandum directing BRB to pursue a "structured exit" from the lending relationship, and that BRB never had any genuine intention of extending new credit, but rather used the forbearance process to extract additional collateral and unlimited personal guaranties from the Kappels while positioning itself to maximize recovery upon a default.

BRB filed its Answer to Counterclaims on November 22, 2024, in which it denied all material allegations and asserted the following affirmative defenses, among others: (i) that the Forbearance Agreement contains an integration clause (Section 12(a)) barring reliance on prior or contemporaneous oral or written representations not set forth in the Forbearance Agreement, and that the parol evidence rule precludes introduction of any alleged prior or contemporaneous promises of future credit; (ii) that Section 9(c) of the Forbearance Agreement contains an explicit disclaimer of any commitment by BRB to extend, renew, or modify the credit facilities or to make any new loans or advances; (iii) that Triton Harbor and the Kappels are sophisticated commercial parties, represented by independent counsel and a restructuring advisor, who executed the Forbearance Agreement with full knowledge of its terms; (iv) the statute of frauds; (v) ratification and waiver; and (vi) that the demand for punitive damages fails to state a claim as a matter of law because the alleged conduct, even if credited, does not rise to the level required for an award of punitive damages in a private bilateral lending dispute.

III. BRB's Proposed discovery Schedule

BRB respectfully proposes the following discovery schedule and case management framework for the Court's consideration. BRB believes this schedule provides a fair and efficient path to resolving the disputes in this action while affording both parties sufficient time to conduct meaningful discovery.

A. Document Production

BRB proposes that the parties exchange their initial document productions on or before January 15, 2025. BRB believes this date is realistic and achievable given the current state of document review and the complexity of the document universe in this case.

BRB's document universe consists of approximately 34,000 documents, including internal and external email correspondence, internal memoranda, credit files, credit approval and review documentation, credit committee meeting minutes and presentations, Special Assets Group records and strategy memoranda, and communications with third-party advisors. Calderwood & Harkness has commenced the review of these documents for responsiveness and privilege, and that review is currently progressing in a manner that BRB expects will permit a substantial initial production by the proposed January 15, 2025 deadline.

As to the parties' discovery demands, Triton Harbor has served a total of 87 document requests and 14 interrogatories upon BRB. BRB has served 52 document requests and 12 interrogatories upon Triton Harbor. BRB has reviewed the Defendants' discovery demands and is in the process of preparing responses and gathering responsive documents. BRB intends to produce all non-privileged responsive documents in accordance with the proposed schedule and will provide a privilege log in compliance with CPLR 3122.

With respect to the format of document production, BRB proposes that all documents be produced in TIFF image format with extracted text and standard metadata fields (including custodian, date created, date modified, author, and file type), Bates-stamped sequentially. BRB's counsel has communicated this proposed format to Defendants' counsel for their review and comment.

Additionally, BRB proposes that the parties submit a stipulated confidentiality and protective order to the Court for so-ordering, providing for two tiers of confidentiality designation: "Confidential" and "Highly Confidential — Attorneys' Eyes Only." The parties have been in active negotiations regarding the terms of such a protective order and expect to be in a position to submit a proposed order to the Court for its approval shortly after the preliminary conference.

B. Fact Depositions

BRB proposes the following schedule of fact depositions, all of which BRB anticipates can be completed within the fact discovery period described below:

1. Derek Whitmore (Senior Vice President and Head of Special Assets Group, BRB) — February 18, 2025

2. Joanna Reeves (Vice President, Special Assets Group, BRB) — February 25, 2025

3. Philip Aaronson (Executive Vice President and Chief Credit Officer, BRB) — March 4, 2025

4. Marcus J. Kappel (Founder, Chief Executive Officer, and 72% Member, Triton Harbor Industries, LLC) — March 11, 2025

5. Elaine D. Kappel (Chief Financial Officer and 28% Member, Triton Harbor Industries, LLC) — March 18, 2025

The proposed dates set forth above are subject to refinement based on counsel availability and witness schedules, and BRB is prepared to discuss alternative dates with opposing counsel to accommodate scheduling concerns.

In addition to the depositions identified above, BRB anticipates that depositions of certain non-party witnesses may be warranted as discovery progresses. These may include, among others: (i) Raymond Mercer, Managing Director of Mercer Tidwell & Associates LLC, the independent restructuring advisory firm retained by Triton Harbor during the forbearance negotiation period, whose testimony may bear on the representations allegedly made by BRB officers and the scope of information available to Triton Harbor and the Kappels during the negotiations leading to the Forbearance Agreement; and (ii) a representative of Ridgeline Appraisal Group, Inc., the independent appraisal firm that appraised the collateral pledged in connection with the Forbearance Agreement.

BRB respectfully reserves the right to identify additional deposition witnesses as document discovery progresses and as the contours of the parties' factual disputes come into sharper focus.

C. Close of Fact discovery

BRB proposes that fact discovery close on April 30, 2025. This proposed deadline allows sufficient time to complete the five depositions currently identified, to accommodate any additional depositions of non-party witnesses, and to address any follow-up document requests arising from the deposition testimony. BRB submits that this timeline is reasonable in light of the complexity of the underlying credit transaction and the scope of the counterclaims.

D. Expert discovery

BRB has retained Wentworth Risk Advisors LLC as its consulting and testifying expert in this action. BRB's designated expert will be Dr. Gerald Stokes, a former senior bank examiner with the Office of the Comptroller of the Currency and currently a professor of finance at Hartwell University. Dr. Stokes is expected to offer expert testimony regarding banking industry practices, the standard of care applicable to commercial lenders in workout and forbearance negotiations, and the reasonableness of BRB's conduct in managing the Triton Harbor credit relationship.

BRB proposes the following expert discovery schedule:

• Exchange of initial expert reports: May 15, 2025

• Exchange of rebuttal expert reports: June 5, 2025

• Expert depositions to be completed by: June 30, 2025 (proposed close of expert discovery)

E. Dispositive Motions

BRB proposes that the deadline for the filing of summary judgment motions be set for September 15, 2025. BRB anticipates moving for summary judgment on all four of Triton Harbor's counterclaims on the grounds that each is precluded as a matter of law by the express provisions of the Forbearance Agreement, including the integration clause, the explicit disclaimer of any commitment to extend credit, and the acknowledged sophistication of the borrower and guarantors. In addition, depending on the nature and scope of the affirmative defenses raised by Triton Harbor and the Kappels in response to BRB's claims, BRB may also move for summary judgment on its affirmative claims for enforcement of the Forbearance Agreement and the Guaranties.

IV. Anticipated discovery Disputes

BRB respectfully brings to the Court's attention several discovery issues that BRB anticipates may require the Court's intervention. BRB raises these issues at this early stage in the interests of efficiency and to permit the Court to establish a framework for resolving any disputes promptly as they arise.

A. Privilege Issues — The Aaronson Memorandum (August 22, 2023)

A significant discovery dispute is anticipated regarding an internal memorandum dated August 22, 2023, authored by Philip Aaronson, Executive Vice President and Chief Credit Officer of BRB, addressed to Derek Whitmore, Senior Vice President and Head of the Special Assets Group, with a copy to Margaret Linden, Senior Vice President and General Counsel of BRB (the "Aaronson Memorandum"). The Aaronson Memorandum, titled "Triton Harbor — Recommended Disposition Strategy," addresses BRB's internal strategic considerations relating to the Triton Harbor credit relationship in the period prior to the execution of the Forbearance Agreement.

Defendants' counsel, Mr. Huang, has already indicated in pre-conference communications — including a letter dated November 25, 2024 to the undersigned — that Defendants intend to seek production of the Aaronson Memorandum. Defendants contend that the memorandum is a business document reflecting a credit management decision, not a communication for the purpose of obtaining legal advice, and therefore does not fall within the protection of the attorney-client privilege.

BRB intends to assert the attorney-client privilege over the Aaronson Memorandum. The memorandum was distributed to Margaret Linden in her capacity as General Counsel of BRB for the specific purpose of obtaining legal advice regarding BRB's legal rights, obligations, and potential exposure in connection with the deteriorating credit relationship with Triton Harbor, including the legal implications of various potential courses of action. The communication was made in confidence and was not shared beyond the three individuals identified on the memorandum. BRB submits that the inclusion of General Counsel on a business memorandum does not, standing alone, divest the communication of its privileged character where, as here, the dominant purpose of the communication to General Counsel was to obtain legal advice.

BRB respectfully requests that, in the event Triton Harbor moves to compel production of the Aaronson Memorandum, the Court schedule briefing on the privilege issue and, if necessary, conduct an in camera review of the document to assess the validity of BRB's privilege claim.

BRB also notes that additional privilege issues will arise in the course of document production. Specifically, BRB will assert the attorney-client privilege and the work product doctrine over communications between BRB personnel and BRB's prior counsel, Blakemore & Stern LLP, during the pre-litigation period from approximately April 2024 through August 2024. BRB will further assert privilege over certain internal SAG strategy memoranda prepared in anticipation of litigation during the same period. BRB will provide a detailed privilege log identifying all withheld documents in accordance with CPLR 3122.

B. Scope of discovery Concerning BRB's Internal Credit Processes

BRB anticipates that Defendants may seek to discover, on a broad and institution-wide basis, BRB's internal credit approval processes, credit committee meeting minutes and policies, risk-rating methodologies, and workout and restructuring procedures beyond those specifically relating to the Triton Harbor credit relationship. BRB has reason to believe, based on the breadth of certain of the 87 document requests served by Defendants, that Defendants will take the position that BRB's general lending practices and internal policies are relevant to the counterclaims alleging fraudulent inducement and breach of the implied covenant of good faith and fair dealing.

BRB's position is that discovery should be limited to documents and information directly concerning the Triton Harbor credit relationship, including the underwriting, management, and workout of that specific credit, and the forbearance negotiations that culminated in the execution of the Forbearance Agreement. Institution-wide credit policies, internal audit reports, and general risk-rating methodologies that do not pertain to the Triton Harbor relationship are not relevant to any claim or defense in this action and are unduly burdensome to produce, particularly in light of the approximately 34,000-document universe that BRB is already reviewing for responsiveness and privilege. BRB submits that requiring production of institution-wide materials would impose substantial costs disproportionate to any marginal relevance they might have, and that such materials are properly excludable under CPLR 3103(a).

Additionally, to the extent Defendants seek to compel production of any communications between BRB and the Office of the Comptroller of the Currency or internal audit materials prepared for regulatory compliance purposes, BRB may assert the bank examination privilege with respect to such materials, and respectfully reserves its right to do so at the appropriate time.

C. Confidentiality Protections

Both parties' document productions will necessarily include commercially sensitive financial information. BRB's productions will include internal credit analyses, risk ratings, credit committee deliberations, and proprietary lending methodologies. Triton Harbor's productions will include the company's financial statements, projections, customer contracts, and other competitively sensitive business information. In the absence of appropriate confidentiality protections, the production of such materials in the course of discovery could cause competitive harm to both parties.

BRB urges the Court to enter a stipulated protective order at or promptly after the preliminary conference. As noted above, the parties have been negotiating the terms of such an order, and BRB believes that the parties are close to agreement on most material terms. BRB proposes that materials designated "Highly Confidential — Attorneys' Eyes Only" be limited in their disclosure to outside counsel of record, experts retained in the litigation, and the Court and its personnel. Materials designated as "Confidential" would be disclosed to the foregoing persons and, in addition, to a limited number of designated in-house representatives of the producing party's adversary for purposes of assisting their counsel in the prosecution or defense of the action.

D. ESI Protocol and De-Duplication

BRB respectfully requests that the Court endorse the adoption of an agreed-upon ESI protocol to govern the format, de-duplication methodology, and Bates numbering conventions applicable to the parties' electronic document productions. An agreed-upon protocol will minimize the risk of discovery disputes regarding production format and will promote efficiency in the review and use of produced documents. BRB's counsel transmitted a proposed ESI protocol to Kestrel Voss & Huang LLP for review as of December 2, 2024, and BRB expects to be in a position to report on the status of the parties' discussions regarding the protocol at the December 6, 2024 conference.

V. BRB's Position on Anticipated Motion Practice

In addition to the discovery matters described above, BRB wishes to advise the Court of anticipated pre-trial motion practice.

First, BRB intends to file a motion pursuant to CPLR 3211(a)(7) to dismiss Triton Harbor's demand for punitive damages. BRB contends that the demand for punitive damages is unsupported as a matter of law because the alleged conduct at issue — representations made during arm's-length forbearance negotiations between a lender and its sophisticated commercial borrower — does not constitute the type of egregious, morally reprehensible conduct directed at the public generally that is required to sustain a claim for punitive damages. The alleged conduct, even if true, sounds in private contract and does not implicate any duty owed to the public at large. BRB anticipates filing this motion after the completion of initial document production, in or about late January 2025.

Second, as noted above in Section III.E, BRB may move for partial summary judgment on one or more of the counterclaims at the earliest appropriate juncture following the close of fact discovery, depending on the state of the evidentiary record at that time.

VI. Status of Settlement Discussions

BRB respectfully advises the Court that no settlement discussions have taken place between the parties to date. BRB does not object to a referral to mediation or a judicial settlement conference at an appropriate time in the litigation; however, BRB respectfully submits that meaningful settlement discussions are premature at this juncture. The parties' factual disputes, particularly regarding the alleged oral representations and the Aaronson Memorandum, will not be capable of informed evaluation until document production is substantially complete and key depositions, particularly those of Derek Whitmore, Joanna Reeves, and Marcus J. Kappel, have been taken. BRB therefore suggests that, to the extent the Court is inclined to schedule a settlement conference or mediation referral, such proceedings be deferred until on or about April 2025, following the close of fact discovery.

VII. Proposed Preliminary Conference Order

For the Court's convenience, BRB respectfully requests that the Court enter a preliminary conference order incorporating the following schedule:

BRB has conferred with opposing counsel, Mr. Huang and Ms. Orlov, regarding this proposed schedule. As of the date of this letter, the parties are in general agreement regarding the proposed timeline for document production and fact depositions, but have not yet reached agreement on all aspects of the proposed schedule. BRB will be prepared to advise the Court at the December 6, 2024 conference as to any areas of disagreement, and respectfully submits that any such disputes can be resolved efficiently at the conference.

In conclusion, BRB respectfully requests that the Court consider BRB's proposed discovery schedule and case management positions as set forth herein. BRB is prepared to provide any additional information the Court may require in advance of or at the December 6, 2024 preliminary conference, and to address any questions or concerns the Court may have regarding the proposed schedule or the matters discussed in this letter.

A copy of this letter is being served simultaneously upon Theodore "Ted" Huang, Esq. and Natasha Orlov, Esq. of Kestrel Voss & Huang LLP, counsel for Defendants and counterclaim-plaintiffs.

Respectfully submitted,

CALDERWOOD & HARKNESS LLP

By: ________

Linda Osei, Partner 600 Lexington Avenue, 30th Floor New York, New York 10022 Tel: (212) 554-7800 losei@calderwoodharkness.com

Attorneys for Plaintiff / Counterclaim-Defendant Belmont Ridge Bank NA

cc: (via NYSCEF and email)

Theodore "Ted" Huang, Esq. Natasha Orlov, Esq. Kestrel Voss & Huang LLP 780 Third Avenue, 24th Floor New York, New York 10017

Margaret Linden, SVP & General Counsel Belmont Ridge Bank NA (via email)

Priya Anand, Esq. Calderwood & Harkness LLP

Carlos Espinoza, Esq. Calderwood & Harkness LLP

Milestone	Proposed Date
Initial document production (both parties)	January 15, 2025
Fact depositions	February – March 2025 (specific dates as set forth in Section III.B above)
Close of fact discovery	April 30, 2025
Exchange of initial expert reports	May 15, 2025
Exchange of rebuttal expert reports	June 5, 2025
Close of expert discovery	June 30, 2025
Deadline for summary judgment motions	September 15, 2025

CALDERWOOD & HARKNESS LLP Attorneys at Law 600 Lexington Avenue, 30th Floor New York, New York 10022 Telephone: (212) 554-7800 Facsimile: (212) 554-7801
December 2, 2024
Via NYSCEF and First-Class Mail
Hon. Althea Marchetti Justice, Supreme Court of the State of New York County of New York, Commercial Division 60 Centre Street, Room 238 New York, New York 10007
Re: Belmont Ridge Bank NA v. Triton Harbor Industries, LLC, Marcus J. Kappel, and Elaine D. Kappel Index No. 654871/2024 Pre-Conference Letter in Advance of Preliminary Conference Scheduled for December 6, 2024
Dear Justice Marchetti:
I am Linda Osei, a partner at Calderwood & Harkness LLP, counsel for plaintiff and counterclaim-defendant Belmont Ridge Bank NA ("BRB"). I respectfully submit this letter in advance of the preliminary conference currently scheduled for December 6, 2024 at 10:00 a.m. before Your Honor, pursuant to the Court's individual rules for the Commercial Division.
Defendants and counterclaim-plaintiffs Triton Harbor Industries, LLC ("Triton Harbor"), Marcus J. Kappel, and Elaine D. Kappel (collectively, "Defendants") are represented by Theodore "Ted" Huang, Esq. and Natasha Orlov, Esq. of Kestrel Voss & Huang LLP, 780 Third Avenue, 24th Floor, New York, New York 10017.
By way of preliminary note, Calderwood & Harkness LLP was retained by BRB on November 4, 2024 to serve as litigation counsel in this action. On November 12, 2024, the firm filed a Notice of Substitution of Counsel on NYSCEF, replacing BRB's prior counsel, Blakemore & Stern LLP. Since its engagement, Calderwood & Harkness has undertaken a thorough review of the case file, the pleadings, and the underlying transaction documents, and has conferred with opposing counsel regarding discovery planning and case management. BRB's Answer to Counterclaims was filed on November 22, 2024, placing all issues in the action at issue.
This letter is intended to provide the Court with a summary of the factual and legal background of the action, BRB's proposed discovery schedule and case management positions, the anticipated discovery disputes of which BRB is presently aware, and BRB's proposal for a preliminary conference order.
I. Background of the Action
BRB filed the original Verified Complaint in this action on August 12, 2024, seeking, among other relief: (i) enforcement of a Forbearance and Modification Agreement dated October 6, 2023 (the "Forbearance Agreement") between BRB and Triton Harbor; (ii) judgment on the personal guaranties executed by Marcus J. Kappel and Elaine D. Kappel (the "Guaranties"); and (iii) recovery of the deficiency balance remaining after application of all collateral proceeds and payments. The total accelerated indebtedness claimed in the Complaint is $17,456,212, comprising Term Loan A principal of $10,625,000; Revolving Credit Facility principal of $6,200,000; accrued and unpaid interest of $487,322; and late fees and default interest of $143,890.
The Underlying Credit Relationship. The credit relationship between BRB and Triton Harbor originated with a Credit Agreement dated June 15, 2021 (the "Credit Agreement"), pursuant to which BRB provided Triton Harbor with total committed credit facilities of $22,000,000, consisting of: (a) a $14,000,000 Term Loan A, structured with an eighty-four (84) month term and bearing interest at the Secured Overnight Financing Rate ("SOFR") plus 275 basis points; and (b) an $8,000,000 Revolving Credit Facility bearing interest at SOFR plus 250 basis points. The facilities were secured by substantially all of Triton Harbor's assets, including accounts receivable, equipment, contract rights, and a first-priority lien on Triton Harbor's Long Island City terminal facility located at 47-15 Austell Street, Long Island City, New York 11101.
The borrower, Triton Harbor Industries, LLC, is a Delaware limited liability company with its principal offices at 47-15 Austell Street, Suite 200, Long Island City, New York 11101. Triton Harbor is a mid-market marine industrial services company engaged in harbor maintenance, marine terminal operations, commercial diving services, and specialized marine construction and demolition work in the greater New York metropolitan area and the northeastern seaboard. Marcus J. Kappel is the founder and Chief Executive Officer of Triton Harbor and holds a 72% membership interest. Elaine D. Kappel serves as Chief Financial Officer and holds the remaining 28% membership interest.
Financial Deterioration and Covenant Breaches. In the first half of 2023, Triton Harbor experienced significant financial deterioration driven primarily by the loss of two major contracts that had historically constituted a substantial portion of the company's revenue base. Specifically, Triton Harbor lost the Port of Bridgehaven municipal port services contract, which had generated approximately $12 million per year in revenue, and the Newark Bay maintenance contract, which had generated approximately $7.5 million per year. The combined loss of these two contracts — representing, on BRB's information and belief, approximately 55% of Triton Harbor's consolidated annual revenue — led to rapid degradation of the company's financial performance and a breach of two key financial covenants under the Credit Agreement. As of the quarter ending March 31, 2023, Triton Harbor's Fixed Charge Coverage Ratio ("FCCR") had fallen to 0.87x, well below the required minimum of 1.20x, and its Total Leverage Ratio had risen to 4.92x, significantly in excess of the covenant maximum of 3.50x.
Transfer to Special Assets and Risk Downgrade. On March 8, 2023, BRB's internal credit review process resulted in the downgrading of the Triton Harbor credit to Substandard (Risk Rating 7), and the account was formally transferred from BRB's relationship management division to its Special Assets Group ("SAG") for workout management. At the time of the transfer, the total outstanding balance under the Credit Agreement was approximately $17,575,000, consisting of $11,375,000 under Term Loan A and $6,200,000 under the Revolving Credit Facility.
The Forbearance Agreement. Following several months of negotiations between BRB's Special Assets Group and Triton Harbor and its restructuring advisors, the parties executed the Forbearance and Modification Agreement on October 6, 2023. The Forbearance Agreement set forth the following material terms, among others: (i) BRB agreed to forbear from exercising its remedies under the Credit Agreement for a period of one hundred eighty (180) days, running through April 3, 2024 (the "Forbearance Period"); (ii) Triton Harbor was required to make monthly cash payments of $125,000 during the Forbearance Period; (iii) Triton Harbor was required to pledge additional collateral, consisting of certain equipment leases appraised at $2,300,000 and the personal residence of Marcus J. Kappel and Elaine D. Kappel located at 14 Birchmont Lane, Westport, Connecticut 06880, which was appraised at $3,100,000; (iv) the existing personal guaranty of Marcus J. Kappel was amended from a limited guaranty (capped at $4,500,000) to an unlimited personal guaranty; and (v) Elaine D. Kappel executed a new unlimited personal guaranty of Triton Harbor's obligations under the Credit Agreement as modified by the Forbearance Agreement.
Expiration of the Forbearance Period and Acceleration. The Forbearance Period expired on April 3, 2024. Although Triton Harbor had made certain of the required monthly payments during the Forbearance Period, the central financial milestone — the cure of the FCCR covenant — was not achieved. As of March 31, 2024, Triton Harbor's FCCR stood at 0.94x, which, while improved from the 0.87x level recorded one year earlier, remained materially below the 1.20x minimum required under the Credit Agreement and the Forbearance Agreement. On April 15, 2024, BRB issued a formal Notice of Default and Acceleration to Triton Harbor and the individual guarantors, declaring all outstanding indebtedness under the Credit Agreement immediately due and payable. BRB subsequently commenced foreclosure proceedings with respect to the Long Island City terminal facility on May 20, 2024, and filed the present action on August 12, 2024 seeking a money judgment for the full accelerated balance plus enforcement of the Forbearance Agreement and Guaranties.
II. The Counterclaims
On October 18, 2024, Defendants filed an Answer with Counterclaims, asserting the following four counterclaims against BRB: (1) fraudulent inducement; (2) negligent misrepresentation; (3) breach of the implied covenant of good faith and fair dealing; and (4) rescission of the Forbearance Agreement and the amended Guaranties. Counterclaim-plaintiffs seek compensatory damages in an amount not less than $12,500,000, plus unspecified punitive damages.
The central factual allegations underlying each of the four counterclaims are substantially similar. In essence, counterclaim-plaintiffs contend that during the negotiations leading to the Forbearance Agreement, two officers within BRB's Special Assets Group — Senior Vice President Derek Whitmore, then the Head of SAG, and Vice President Joanna Reeves — allegedly made oral and written representations during September 2023 to Marcus J. Kappel and Elaine D. Kappel that, upon Triton Harbor's successful completion of the forbearance milestones set forth in the Forbearance Agreement, BRB intended to extend a new $6.5 million revolving credit facility to Triton Harbor in order to provide the company with sufficient working capital to support its operational recovery. The counterclaims further allege that BRB concealed from Triton Harbor and the Kappels the existence of an internal memorandum directing BRB to pursue a "structured exit" from the lending relationship, and that BRB never had any genuine intention of extending new credit, but rather used the forbearance process to extract additional collateral and unlimited personal guaranties from the Kappels while positioning itself to maximize recovery upon a default.
BRB filed its Answer to Counterclaims on November 22, 2024, in which it denied all material allegations and asserted the following affirmative defenses, among others: (i) that the Forbearance Agreement contains an integration clause (Section 12(a)) barring reliance on prior or contemporaneous oral or written representations not set forth in the Forbearance Agreement, and that the parol evidence rule precludes introduction of any alleged prior or contemporaneous promises of future credit; (ii) that Section 9(c) of the Forbearance Agreement contains an explicit disclaimer of any commitment by BRB to extend, renew, or modify the credit facilities or to make any new loans or advances; (iii) that Triton Harbor and the Kappels are sophisticated commercial parties, represented by independent counsel and a restructuring advisor, who executed the Forbearance Agreement with full knowledge of its terms; (iv) the statute of frauds; (v) ratification and waiver; and (vi) that the demand for punitive damages fails to state a claim as a matter of law because the alleged conduct, even if credited, does not rise to the level required for an award of punitive damages in a private bilateral lending dispute.
III. BRB's Proposed discovery Schedule
BRB respectfully proposes the following discovery schedule and case management framework for the Court's consideration. BRB believes this schedule provides a fair and efficient path to resolving the disputes in this action while affording both parties sufficient time to conduct meaningful discovery.
A. Document Production
BRB proposes that the parties exchange their initial document productions on or before January 15, 2025. BRB believes this date is realistic and achievable given the current state of document review and the complexity of the document universe in this case.
BRB's document universe consists of approximately 34,000 documents, including internal and external email correspondence, internal memoranda, credit files, credit approval and review documentation, credit committee meeting minutes and presentations, Special Assets Group records and strategy memoranda, and communications with third-party advisors. Calderwood & Harkness has commenced the review of these documents for responsiveness and privilege, and that review is currently progressing in a manner that BRB expects will permit a substantial initial production by the proposed January 15, 2025 deadline.
As to the parties' discovery demands, Triton Harbor has served a total of 87 document requests and 14 interrogatories upon BRB. BRB has served 52 document requests and 12 interrogatories upon Triton Harbor. BRB has reviewed the Defendants' discovery demands and is in the process of preparing responses and gathering responsive documents. BRB intends to produce all non-privileged responsive documents in accordance with the proposed schedule and will provide a privilege log in compliance with CPLR 3122.
With respect to the format of document production, BRB proposes that all documents be produced in TIFF image format with extracted text and standard metadata fields (including custodian, date created, date modified, author, and file type), Bates-stamped sequentially. BRB's counsel has communicated this proposed format to Defendants' counsel for their review and comment.
Additionally, BRB proposes that the parties submit a stipulated confidentiality and protective order to the Court for so-ordering, providing for two tiers of confidentiality designation: "Confidential" and "Highly Confidential — Attorneys' Eyes Only." The parties have been in active negotiations regarding the terms of such a protective order and expect to be in a position to submit a proposed order to the Court for its approval shortly after the preliminary conference.
B. Fact Depositions
BRB proposes the following schedule of fact depositions, all of which BRB anticipates can be completed within the fact discovery period described below:
1. Derek Whitmore (Senior Vice President and Head of Special Assets Group, BRB) — February 18, 2025
2. Joanna Reeves (Vice President, Special Assets Group, BRB) — February 25, 2025
3. Philip Aaronson (Executive Vice President and Chief Credit Officer, BRB) — March 4, 2025
4. Marcus J. Kappel (Founder, Chief Executive Officer, and 72% Member, Triton Harbor Industries, LLC) — March 11, 2025
5. Elaine D. Kappel (Chief Financial Officer and 28% Member, Triton Harbor Industries, LLC) — March 18, 2025
The proposed dates set forth above are subject to refinement based on counsel availability and witness schedules, and BRB is prepared to discuss alternative dates with opposing counsel to accommodate scheduling concerns.
In addition to the depositions identified above, BRB anticipates that depositions of certain non-party witnesses may be warranted as discovery progresses. These may include, among others: (i) Raymond Mercer, Managing Director of Mercer Tidwell & Associates LLC, the independent restructuring advisory firm retained by Triton Harbor during the forbearance negotiation period, whose testimony may bear on the representations allegedly made by BRB officers and the scope of information available to Triton Harbor and the Kappels during the negotiations leading to the Forbearance Agreement; and (ii) a representative of Ridgeline Appraisal Group, Inc., the independent appraisal firm that appraised the collateral pledged in connection with the Forbearance Agreement.
BRB respectfully reserves the right to identify additional deposition witnesses as document discovery progresses and as the contours of the parties' factual disputes come into sharper focus.
C. Close of Fact discovery
BRB proposes that fact discovery close on April 30, 2025. This proposed deadline allows sufficient time to complete the five depositions currently identified, to accommodate any additional depositions of non-party witnesses, and to address any follow-up document requests arising from the deposition testimony. BRB submits that this timeline is reasonable in light of the complexity of the underlying credit transaction and the scope of the counterclaims.
D. Expert discovery
BRB has retained Wentworth Risk Advisors LLC as its consulting and testifying expert in this action. BRB's designated expert will be Dr. Gerald Stokes, a former senior bank examiner with the Office of the Comptroller of the Currency and currently a professor of finance at Hartwell University. Dr. Stokes is expected to offer expert testimony regarding banking industry practices, the standard of care applicable to commercial lenders in workout and forbearance negotiations, and the reasonableness of BRB's conduct in managing the Triton Harbor credit relationship.
BRB proposes the following expert discovery schedule:
• Exchange of initial expert reports: May 15, 2025
• Exchange of rebuttal expert reports: June 5, 2025
• Expert depositions to be completed by: June 30, 2025 (proposed close of expert discovery)
E. Dispositive Motions
BRB proposes that the deadline for the filing of summary judgment motions be set for September 15, 2025. BRB anticipates moving for summary judgment on all four of Triton Harbor's counterclaims on the grounds that each is precluded as a matter of law by the express provisions of the Forbearance Agreement, including the integration clause, the explicit disclaimer of any commitment to extend credit, and the acknowledged sophistication of the borrower and guarantors. In addition, depending on the nature and scope of the affirmative defenses raised by Triton Harbor and the Kappels in response to BRB's claims, BRB may also move for summary judgment on its affirmative claims for enforcement of the Forbearance Agreement and the Guaranties.
IV. Anticipated discovery Disputes
BRB respectfully brings to the Court's attention several discovery issues that BRB anticipates may require the Court's intervention. BRB raises these issues at this early stage in the interests of efficiency and to permit the Court to establish a framework for resolving any disputes promptly as they arise.
A. Privilege Issues — The Aaronson Memorandum (August 22, 2023)
A significant discovery dispute is anticipated regarding an internal memorandum dated August 22, 2023, authored by Philip Aaronson, Executive Vice President and Chief Credit Officer of BRB, addressed to Derek Whitmore, Senior Vice President and Head of the Special Assets Group, with a copy to Margaret Linden, Senior Vice President and General Counsel of BRB (the "Aaronson Memorandum"). The Aaronson Memorandum, titled "Triton Harbor — Recommended Disposition Strategy," addresses BRB's internal strategic considerations relating to the Triton Harbor credit relationship in the period prior to the execution of the Forbearance Agreement.
Defendants' counsel, Mr. Huang, has already indicated in pre-conference communications — including a letter dated November 25, 2024 to the undersigned — that Defendants intend to seek production of the Aaronson Memorandum. Defendants contend that the memorandum is a business document reflecting a credit management decision, not a communication for the purpose of obtaining legal advice, and therefore does not fall within the protection of the attorney-client privilege.
BRB intends to assert the attorney-client privilege over the Aaronson Memorandum. The memorandum was distributed to Margaret Linden in her capacity as General Counsel of BRB for the specific purpose of obtaining legal advice regarding BRB's legal rights, obligations, and potential exposure in connection with the deteriorating credit relationship with Triton Harbor, including the legal implications of various potential courses of action. The communication was made in confidence and was not shared beyond the three individuals identified on the memorandum. BRB submits that the inclusion of General Counsel on a business memorandum does not, standing alone, divest the communication of its privileged character where, as here, the dominant purpose of the communication to General Counsel was to obtain legal advice.
BRB respectfully requests that, in the event Triton Harbor moves to compel production of the Aaronson Memorandum, the Court schedule briefing on the privilege issue and, if necessary, conduct an in camera review of the document to assess the validity of BRB's privilege claim.
BRB also notes that additional privilege issues will arise in the course of document production. Specifically, BRB will assert the attorney-client privilege and the work product doctrine over communications between BRB personnel and BRB's prior counsel, Blakemore & Stern LLP, during the pre-litigation period from approximately April 2024 through August 2024. BRB will further assert privilege over certain internal SAG strategy memoranda prepared in anticipation of litigation during the same period. BRB will provide a detailed privilege log identifying all withheld documents in accordance with CPLR 3122.
B. Scope of discovery Concerning BRB's Internal Credit Processes
BRB anticipates that Defendants may seek to discover, on a broad and institution-wide basis, BRB's internal credit approval processes, credit committee meeting minutes and policies, risk-rating methodologies, and workout and restructuring procedures beyond those specifically relating to the Triton Harbor credit relationship. BRB has reason to believe, based on the breadth of certain of the 87 document requests served by Defendants, that Defendants will take the position that BRB's general lending practices and internal policies are relevant to the counterclaims alleging fraudulent inducement and breach of the implied covenant of good faith and fair dealing.
BRB's position is that discovery should be limited to documents and information directly concerning the Triton Harbor credit relationship, including the underwriting, management, and workout of that specific credit, and the forbearance negotiations that culminated in the execution of the Forbearance Agreement. Institution-wide credit policies, internal audit reports, and general risk-rating methodologies that do not pertain to the Triton Harbor relationship are not relevant to any claim or defense in this action and are unduly burdensome to produce, particularly in light of the approximately 34,000-document universe that BRB is already reviewing for responsiveness and privilege. BRB submits that requiring production of institution-wide materials would impose substantial costs disproportionate to any marginal relevance they might have, and that such materials are properly excludable under CPLR 3103(a).
Additionally, to the extent Defendants seek to compel production of any communications between BRB and the Office of the Comptroller of the Currency or internal audit materials prepared for regulatory compliance purposes, BRB may assert the bank examination privilege with respect to such materials, and respectfully reserves its right to do so at the appropriate time.
C. Confidentiality Protections
Both parties' document productions will necessarily include commercially sensitive financial information. BRB's productions will include internal credit analyses, risk ratings, credit committee deliberations, and proprietary lending methodologies. Triton Harbor's productions will include the company's financial statements, projections, customer contracts, and other competitively sensitive business information. In the absence of appropriate confidentiality protections, the production of such materials in the course of discovery could cause competitive harm to both parties.
BRB urges the Court to enter a stipulated protective order at or promptly after the preliminary conference. As noted above, the parties have been negotiating the terms of such an order, and BRB believes that the parties are close to agreement on most material terms. BRB proposes that materials designated "Highly Confidential — Attorneys' Eyes Only" be limited in their disclosure to outside counsel of record, experts retained in the litigation, and the Court and its personnel. Materials designated as "Confidential" would be disclosed to the foregoing persons and, in addition, to a limited number of designated in-house representatives of the producing party's adversary for purposes of assisting their counsel in the prosecution or defense of the action.
D. ESI Protocol and De-Duplication
BRB respectfully requests that the Court endorse the adoption of an agreed-upon ESI protocol to govern the format, de-duplication methodology, and Bates numbering conventions applicable to the parties' electronic document productions. An agreed-upon protocol will minimize the risk of discovery disputes regarding production format and will promote efficiency in the review and use of produced documents. BRB's counsel transmitted a proposed ESI protocol to Kestrel Voss & Huang LLP for review as of December 2, 2024, and BRB expects to be in a position to report on the status of the parties' discussions regarding the protocol at the December 6, 2024 conference.
V. BRB's Position on Anticipated Motion Practice
In addition to the discovery matters described above, BRB wishes to advise the Court of anticipated pre-trial motion practice.
First, BRB intends to file a motion pursuant to CPLR 3211(a)(7) to dismiss Triton Harbor's demand for punitive damages. BRB contends that the demand for punitive damages is unsupported as a matter of law because the alleged conduct at issue — representations made during arm's-length forbearance negotiations between a lender and its sophisticated commercial borrower — does not constitute the type of egregious, morally reprehensible conduct directed at the public generally that is required to sustain a claim for punitive damages. The alleged conduct, even if true, sounds in private contract and does not implicate any duty owed to the public at large. BRB anticipates filing this motion after the completion of initial document production, in or about late January 2025.
Second, as noted above in Section III.E, BRB may move for partial summary judgment on one or more of the counterclaims at the earliest appropriate juncture following the close of fact discovery, depending on the state of the evidentiary record at that time.
VI. Status of Settlement Discussions
BRB respectfully advises the Court that no settlement discussions have taken place between the parties to date. BRB does not object to a referral to mediation or a judicial settlement conference at an appropriate time in the litigation; however, BRB respectfully submits that meaningful settlement discussions are premature at this juncture. The parties' factual disputes, particularly regarding the alleged oral representations and the Aaronson Memorandum, will not be capable of informed evaluation until document production is substantially complete and key depositions, particularly those of Derek Whitmore, Joanna Reeves, and Marcus J. Kappel, have been taken. BRB therefore suggests that, to the extent the Court is inclined to schedule a settlement conference or mediation referral, such proceedings be deferred until on or about April 2025, following the close of fact discovery.
VII. Proposed Preliminary Conference Order
For the Court's convenience, BRB respectfully requests that the Court enter a preliminary conference order incorporating the following schedule:
BRB has conferred with opposing counsel, Mr. Huang and Ms. Orlov, regarding this proposed schedule. As of the date of this letter, the parties are in general agreement regarding the proposed timeline for document production and fact depositions, but have not yet reached agreement on all aspects of the proposed schedule. BRB will be prepared to advise the Court at the December 6, 2024 conference as to any areas of disagreement, and respectfully submits that any such disputes can be resolved efficiently at the conference.
In conclusion, BRB respectfully requests that the Court consider BRB's proposed discovery schedule and case management positions as set forth herein. BRB is prepared to provide any additional information the Court may require in advance of or at the December 6, 2024 preliminary conference, and to address any questions or concerns the Court may have regarding the proposed schedule or the matters discussed in this letter.
A copy of this letter is being served simultaneously upon Theodore "Ted" Huang, Esq. and Natasha Orlov, Esq. of Kestrel Voss & Huang LLP, counsel for Defendants and counterclaim-plaintiffs.
Respectfully submitted,
CALDERWOOD & HARKNESS LLP
By: ________
Linda Osei, Partner 600 Lexington Avenue, 30th Floor New York, New York 10022 Tel: (212) 554-7800 losei@calderwoodharkness.com
Attorneys for Plaintiff / Counterclaim-Defendant Belmont Ridge Bank NA
cc: (via NYSCEF and email)
Theodore "Ted" Huang, Esq. Natasha Orlov, Esq. Kestrel Voss & Huang LLP 780 Third Avenue, 24th Floor New York, New York 10017
Margaret Linden, SVP & General Counsel Belmont Ridge Bank NA (via email)
Priya Anand, Esq. Calderwood & Harkness LLP
Carlos Espinoza, Esq. Calderwood & Harkness LLP
Milestone | Proposed Date
Initial document production (both parties) | January 15, 2025
Fact depositions | February – March 2025 (specific dates as set forth in Section III.B above)
Close of fact discovery | April 30, 2025
Exchange of initial expert reports | May 15, 2025
Exchange of rebuttal expert reports | June 5, 2025
Close of expert discovery | June 30, 2025
Deadline for summary judgment motions | September 15, 2025

CALDERWOOD & HARKNESS LLP

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