Charlesbank Equity Fund II v. Blinds to Go

• Decision Date: 02 June 2004
• Docket Number: No. 03-2408.,03-2408.
• Citation: 370 F.3d 151
• Parties: CHARLESBANK EQUITY FUND II, Limited Partnership and Harvard Private Capital Holdings, Inc., Plaintiffs, Appellants, v. BLINDS TO GO, INC., Defendant, Appellee.
• Court: U.S. Court of Appeals — First Circuit

370 F.3d 151

CHARLESBANK EQUITY FUND II, Limited Partnership and Harvard Private Capital Holdings, Inc., Plaintiffs, Appellants, v. BLINDS TO GO, INC., Defendant, Appellee.

No. 03-2408.

United States Court of Appeals, First Circuit.

Heard April 5, 2004.

Decided June 2, 2004.

COPYRIGHT MATERIAL OMITTED

John T. Montgomery, with whom Martin J. Newhouse, Lesley F. Wolf, and Ropes & Gray LLP were on brief, for appellants.

David H. Erichsen, with whom Peter A. Spaeth, Debra Squires-Lee, Michael R. Dube, and Hale and Dorr LLP were on brief, for appellee.

Before SELYA and HOWARD, Circuit Judges, and SINGAL,^* District Judge.

SELYA, Circuit Judge.

This appeal challenges the district court's denial of a preliminary injunction seeking what amounts to a freeze order (although its proponents describe the requested relief as being in the nature of an equitable attachment). Concluding, as we do, that the lower court correctly chose to employ the traditional four-part standard for gauging the propriety of preliminary injunctive relief in this situation and proceeded to apply that standard faultlessly, we affirm the decision below.

I. BACKGROUND

Our starting point is the cast of characters. Defendant-appellee Blinds To Go, Inc. (BTG) operates a slew of retail stores in North America (a few of which are located in Massachusetts). Plaintiffs-appellants Charlesbank Equity Fund II, Limited Partnership (Charlesbank) and Harvard Private Capital Holdings, Inc. (HPCH) are affiliated entities that make and hold investments on behalf of the President and Fellows of Harvard College.

The litigation between these protagonists has its roots in a venture capital transaction. On December 18, 1995, HPCH and BTG entered into a preferred share purchase agreement (the Agreement). Pursuant to the Agreement, HPCH made a $15,000,000 capital investment and, in exchange, BTG issued to HPCH the entirety of a new class of stock, totaling 20,618,556 preferred shares with conversion privileges. As a prophylactic device, BTG insisted that HPCH grant to the holders of BTG's common stock a right of first refusal. The provision embodying this safeguard, as amended and restated in a 1997 shareholders' agreement, required that the holders of BTG's common stock be afforded the opportunity of first refusal in the event of any transfer of the preferred shares arising out of a third party's "bona-fide offer to purchase" the shares (so long as the offeror was "acting at arm's length").

The Agreement contained several other provisions. Of particular pertinence here, HPCH or its permitted assignee had the right to "put" all the preferred shares in specific time frames or upon the occurrence of certain triggering events. Receipt of notice of the exercise of this option obligated BTG to redeem the shares within sixty days at a per share price calculated in accordance with a formula delineated in BTG's corporate charter. A significant element of this formula was the EBITDA (i.e., earnings before interest, income tax, depreciation and amortization as determined in accordance with generally accepted accounting principles, consistently applied) for the immediately preceding twelve months. In order to secure the due performance of this buy-back obligation, BTG granted to HPCH a security interest in its existing and after-acquired assets.

The relationship between HPCH and BTG proved uneventful through the end of the millennium. A precursor to discord surfaced in November of 2001, when HPCH transferred its preferred shares and appurtenant rights and interests under the Agreement (including its security interest in BTG's assets) to Charlesbank. Although the 1997 shareholders' agreement was still in effect, HPCH consummated the transfer without first offering the preferred shares to the holders of BTG's common stock. Charlesbank proceeded to exercise the "put" option in the first available window of opportunity, notifying BTG on January 14, 2002, of its desire that the company redeem the preferred shares. Under the terms of the Agreement, the EBITDA for the fiscal year ending on February 2, 2002 would apply to that redemption.

The calculation of the EBITDA did not go smoothly. Over the next few months, the figure diminished to a point well below what Charlesbank had anticipated. This shrinkage in turn lowered the projected purchase price of the preferred shares. As these estimates slumped, Charlesbank grew increasingly suspicious that BTG was cooking the books. The buy-back transaction stalled.

On June 21, 2002, Charlesbank took matters into its own hands. Invoking federal diversity jurisdiction, see 28 U.S.C. § 1332(a), it sued BTG in the United States District Court for the District of Massachusetts (BTG is a Canadian corporation that maintains its principal place of business there and Charlesbank is a Massachusetts limited partnership). The complaint asserted claims for breach of contract and breach of the implied covenant of good faith and fair dealing. HPCH (a Massachusetts charitable corporation headquartered in that state) soon joined the fray as an additional plaintiff. The interests of the two plaintiffs are congruent and, from this point forward, we refer to them, collectively, as "C-H."

In October of 2002, BTG and the holders of its common stock countersued in a Canadian court. They sought a declaration that BTG did not owe any money to C-H because the transfer of the preferred shares was unauthorized. BTG posited that the transaction between Charlesbank and HPCH triggered the right of first refusal; that HPCH nonetheless disregarded that obligation; and that, therefore, the shunned right of the holders of BTG's common stock to purchase the preferred shares vitiated the purported transfer and trumped Charlesbank's right to exercise the "put" option. In the alternative, BTG asked for a judicial determination that it owed only $15,453,548 for the preferred shares.

The Canadian court of first instance dismissed the suit on the ground of forum non conveniens. That holding was affirmed on appeal (i.e., the Canadian appellate tribunal agreed that Massachusetts was a more convenient forum) but the dismissal was vacated and the case stayed pending resolution of the first-filed action. Thus, the battle between the parties shifted back to the federal district court.

C-H's primary allegation was — and is — that BTG manipulated its finances and shrank the EBITDA by posting a series of spurious year-end reserves after the "put" option had been exercised. In C-H's view, these machinations artificially deflated the EBITDA by nearly $5,000,000 (i.e., from $12,900,000 to just over $8,000,000) and the projected purchase price for the preferred shares by roughly $8,300,000 (every reduction of $1,000,000 in the EBITDA translates, under the formula, into a reduction of approximately $1,700,000 in the aggregate purchase price). BTG denied C-H's allegations; reiterated its claim that the right of first refusal should have been honored; and urged that, in all events, its books fairly and accurately reflected the company's finances.

Fed.R.Civ.P. 65(a) deals with the issuance of preliminary injunctions. On July 15, 2003, C-H invoked that rule and moved for a preliminary injunction "in the nature of an equitable attachment of the assets of the defendant." In practical effect, it sought to freeze a substantial amount of BTG's funds in order to secure eventual payment of the purchase price for the preferred shares. BTG opposed the motion, and the district court summarily denied it. The court's decision rested on two independently sufficient grounds. First, the court concluded that it lacked the authority to issue such an injunction under the Supreme Court's landmark opinion in Grupo Mexicano de Desarrollo, S.A. v. Alliance Bond Fund, Inc., 527 U.S. 308, 119 S.Ct. 1961, 144 L.Ed.2d 319 (1999). Second, the court found that C-H had failed to show irreparable harm (and, thus, had not satisfied a necessary threshold requirement for the issuance of a preliminary injunction). After moving unsuccessfully for reconsideration, C-H appealed. We now affirm.

II. APPELLATE JURISDICTION

Although the parties seem to be content that we have jurisdiction over this appeal, we are duty-bound to test that hypothesis. When a colorable question exists an appellate court has an unflagging obligation to inquire sua sponte into its own jurisdiction. See Espinal-Dominguez v. Commonwealth of P.R., 352 F.3d 490, 495 (1st Cir.2003). That is the situation here.

As a general rule, only final orders are immediately appealable. See id. (citing 28 U.S.C. § 1291). Virtually every general rule admits of exceptions, however, and a statutory exception to this finality principle authorizes interlocutory review of orders "granting, continuing, modifying, refusing or dissolving injunctions, or refusing to dissolve or modify injunctions." 28 U.S.C. § 1292(a)(1). Consequently, if the remedy that C-H seeks is in the nature of an injunction, we have jurisdiction here and now to review an order denying that relief.

This question comes to the forefront because C-H appears at times to argue that it is not seeking an injunction at all, but, rather, an equitable attachment. See, e.g., Appellants' Br. at 1, 4. For jurisdictional purposes, it matters whether the relief requested is more appropriately classified as an injunction or an attachment. While orders granting or denying injunctions are immediately appealable, the status of attachment orders is more problematic.

It is common ground that — at least in the absence of special circumstances — federal appellate courts lack jurisdiction to undertake interlocutory review of orders granting prejudgment attachments. See Teradyne, Inc. v. Mostek Corp., 797 F.2d 43, 45-47 (1st Cir.1986); see also 16 Charles Alan Wright & Arthur R. Miller, Federal Practice and Procedure § 3922 (2d ed.1995). By like token, orders denying prejudgment attachments are not per se appealable when...