GBJ Corp. v. Eastern Ohio Paving Co., 96-4244

Citation139 F.3d 1080
Decision Date19 March 1998
Docket NumberNo. 96-4244,96-4244
Parties35 UCC Rep.Serv.2d 995 GBJ CORPORATION; Topaz Capital Corporation; Jeffrey J. Gelmin; and Patrick J. Callanan, Plaintiffs-Appellants, v. EASTERN OHIO PAVING COMPANY; Jeffrey Zink; Glenn Straub; and Fred A. Leistiko, Defendants-Appellees.
CourtUnited States Courts of Appeals. United States Court of Appeals (6th Circuit)

James C. Jones (briefed), Charles B. Manuel, Jr. (argued and briefed), Law Office of Charles B. Manuel, Jr., New York City, for Plaintiffs-Appellants.

Larry A. Zink (argued and briefed), Zink, Zink & Zink Co., Canton, OH, for Defendants-Appellees.

Before: MERRITT, KENNEDY, and BOGGS, Circuit Judges.

OPINION

BOGGS, Circuit Judge.

Plaintiffs' claims, stemming from the defendants' alleged improper seizure of a corporation, were dismissed by the district court on summary judgment. G.B.J. Corp. v. Eastern Ohio Paving Co., 950 F.Supp. 816 (N.D.Ohio 1996) [GBJ I ]. The plaintiffs appeal. We affirm in part and reverse in part, and remand this case for further proceedings.

I
A

The plaintiffs are all associated with Lightweight Environmental Products Corp. (LEPCO). Patrick Callanan is (or was) the president and sole stockholder of LEPCO. GBJ and Topaz Capital Corporations hold promissory notes from LEPCO, and GBJ has an option to purchase 25% of LEPCO's stock. Jeffrey Gelmin is the president and sole shareholder of Topaz and GBJ.

The defendants are connected to Eastern Ohio Paving Company (EOP). Glenn Straub is the president of EOP, Jeffrey Zink is its counsel, and Fred Leistiko was a consultant and an alleged agent of EOP in the events underlying this case. When distinguishing the individual roles of the defendants is unimportant, the defendants will be referred to as "EOP" or "the defendants."

B

In October 1989, a company called Sequa loaned $700,000 to LEPCO, which secured the loan with the whole of its stock. Eventually, Sequa filed suit against LEPCO for non-payment of this debt and obtained a default judgment for $849,769.

In their verified complaint, the plaintiffs offer a detailed version of events--the bulk of which the defendants either contradict or deny--that runs as follows. In 1992, EOP expressed interest in infusing LEPCO with capital and taking control of it, and the two sides began negotiating. At the defendants' request, Callanan negotiated discounted settlements of LEPCO's outstanding debts, which EOP agreed to pay. The keystone of these dealings was EOP's proposed purchase from Sequa of the judgment against LEPCO.

On June 8, the plaintiffs allege, the two sides reached a detailed oral agreement, whose terms were as follows:

1. Straub and EOP would buy Sequa's judgment against LEPCO for $325,000.

2. Straub and EOP would buy promissory notes that LEPCO owed to GBJ, Topaz, and another company, for 50cents on the dollar.

3. Once Straub and EOP paid off GBJ's notes, GBJ would give up its LEPCO stock options to Straub and EOP. The options allowed GBJ to buy up to 25% of LEPCO's capital stock.

4. Straub and EOP would buy promissory notes that LEPCO owed to Callanan, for their full value.

5. Straub and EOP would pay in full LEPCO's Barclays' Bank loan of $44,000.

6. Straub and EOP would pay the withholding and property taxes LEPCO owed, as of the date of Straub and EOP's purchase of the Sequa judgment.

7. Beyond its payments to buy out LEPCO's notes and pay LEPCO's taxes, Straub and EOP would not have to pay any more than $150,000 total to LEPCO's other creditors.

8. Upon payment of the notes, Callanan would surrender 85% of his LEPCO stock to Straub and EOP.

9. Leistiko would be LEPCO's national sales manager and would accept $20,000 as a finder's fee for setting up the deal.

The plaintiffs allege that the oral agreement was reaffirmed on June 10 and 11, but that it became apparent on June 12 that the defendants had no intention of reducing the agreement to writing. EOP did purchase Sequa's judgment against LEPCO, but did not fulfill the other terms of the alleged agreement. On June 15, the defendants notified Callanan that they were relieving him of his duties and had taken possession of his 100% controlling interest. The plaintiffs claim that once it was in control, EOP sold off many of LEPCO's assets and failed to pay off the promissory notes, at least one of which was personally guaranteed by Callanan, ruining his credit rating. The remaining assets of LEPCO were transferred to a successor corporation, Hazorb, Inc.

The defendants' version of events is simpler. They claim that there was no agreement with the plaintiffs. EOP began discussing possible financing for LEPCO in May 1992. Independently, EOP negotiated with Sequa to purchase its judgment against LEPCO for $325,000, and did so on June 9. In return for the $325,000, Sequa gave EOP not just its judgment against LEPCO, but also a full assignment of Sequa's "right, title and interest to any agreements, contracts, stock options, judgments or otherwise" to EOP. The latter assignment thus included Sequa's secured interest in the whole of LEPCO's stock, and since LEPCO was in default on its obligations, the defendants argue, EOP acquired all of LEPCO's stock.

C

The plaintiffs filed their initial complaint in April 1993, in the United States District Court for the Southern District of New York. The case was assigned to Judge Cedarbaum. In March 1994, the plaintiffs applied for a preliminary injunction to prevent the defendants from further dismantling LEPCO, but Judge Cedarbaum denied the motion. In May, Judge Cedarbaum transferred the case to the United States District Court for the Northern District of Ohio, because there was only a weak basis for personal jurisdiction in New York, and a much stronger one in Ohio.

In November, the plaintiffs filed an amended verified complaint with lengthy exhibits. The dismissal of this complaint is the subject of this appeal. The complaint set forth five causes of action:

1. "Defendant's [sic] Failed to Repay a loan made to LEPCO in the amount of $85,000 with interest thereon due and payable at the rate of 12% per annum under the terms of GBJ's notes."

2. The defendants' "Removal of Plaintiff Callanan ...; their fraudulent seizure and control of the company[ ] ...; their operation of LEPCO in a manner which has resulted in the dissipation of its assets and the serious impairment of its good will, name, and reputation in the industry ... [and with] its creditors, note holders, suppliers, and customers all violate the [stockholder agreement] and seriously impair the value of GBJ's option to purchase 25% of the capital stock of LEPCO...."

3. "Defendants ... Failed to Repay loans made to LEPCO in the amount of $100,000 under the terms of Callanan's notes."

4. "Fraud." The complaint says that the defendants represented that they would enter into the multi-part deal detailed above. These representations, the complaint continues, were a material factor in inducing Callanan to give Sequa a full release. This cleared the way for Sequa to transfer its interest in LEPCO to the defendants, setting in motion the events underlying this lawsuit.

5. "Defendants' breach of their implied covenants of good faith and fair dealings proximately caused harm and damages to Plaintiffs."

In April 1995, the defendants moved for summary judgment on all claims and attached their own lengthy series of exhibits. They argued that:

(1) the first and third causes of actions are barred by the Statute of Frauds;

(2) the fourth cause of action fails to state a claim for fraud because, under New York law, allegations that one did not intend to honor a contract, or that one made misrepresentations as to future events, do not state a claim for fraud; and

(3) the fifth cause of action fails to state a claim, because the implied covenant of fair dealing is limited to performance under an enforceable contract, and the Statute of Frauds dictates that there is no enforceable contract.

The defendants made no argument regarding the second cause of action. In the facts section of their brief in support of summary judgment, though, they stated that the second claim had been decided by Judge Cedarbaum when she denied plaintiffs' motion for a preliminary injunction.

The next month, the plaintiffs filed a brief response and one exhibit, a copy of a placemat. The placemat was supposed to represent evidence of the oral agreement--it appears as a series of numbers with no explanation, and with defendant Zink's initials doodled on them. The plaintiffs do not claim that the placemat is itself a written contract.

The district court granted the defendants' motion in October 1996. The plaintiffs then filed this timely appeal.

II

The plaintiffs challenge the dismissal of each of the five claims. For the reasons set forth below, we affirm the district court with regard to four of the claims, but reverse and remand with regard to the remaining one, the second cause of action for wrongful seizure of LEPCO and the damages that resulted.

A

Before beginning our analysis, we pause to correct an error made by the district court in its choice-of-law analysis. The district court noted that the case had been transferred from New York; said that the choice-of-law rules of the transferor court apply when a case is transferred for the convenience of the parties; and held that New York law therefore applied. GBJ I, 950 F.Supp. at 818.

In so holding, the district court made two errors. First, it conflated choice-of-law rules with substantive law, assuming without discussion that since New York choice-of-law rules apply, New York law applies.

Second, the district court was wrong to use New York choice-of-law rules. The case was not transferred for the convenience of the parties. Rather, it was transferred under 28 U.S.C. § 1406(a), because of improper venue and a lack of jurisdiction. When a case is transferred on that basis, the choice-of-law rules of the transferee court apply. That...

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