Credit v. Hindman

Decision Date30 October 2013
Docket NumberNo. 12–1208.,12–1208.
Citation734 F.3d 657
PartiesWELLS FARGO BUSINESS CREDIT, Plaintiff–Appellee, v. Donald J. HINDMAN, Defendant–Appellant.
CourtU.S. Court of Appeals — Seventh Circuit

OPINION TEXT STARTS HERE

Sherry D. Coley, Godfrey & Kahn S.C., Green Bay, WI, for PlaintiffAppellee.

Donald V. Jernberg, Jernberg Law Group, Arlington Heights, IL, for DefendantAppellant.

Before BAUER, MANION, and TINDER, Circuit Judges.

TINDER, Circuit Judge.

Wells Fargo Business Credit sued Donald J. Hindman under diversity jurisdiction for breach of contract. Wells Fargo and Hindman were both creditors of Clark National, Inc., whose president and CEO was Hindman's son, and several related companies. Wells Fargo agreed to make loans and extend credit to the companies only if Hindman agreed to become a subordinated creditor. Hindman agreed and subsequently executed a series of sub ordination agreements with Wells Fargo, which subordinated all present and future debts, liabilities, and obligations that the companies owed to Hindman to any amounts they owed to Wells Fargo.

In January 2010, a series of events occurred resulting in Hindman authorizing a wire transfer of $750,000 from his personal investment account at Wells Fargo to Clark at the request of his son. By that time, however, his son purportedly had been stripped of the authority to make business decisions by Clark's board of directors. When the authorized decision makers learned about the purported loan, they ordered Hindman's son to reject the funds. Hindman's son promptly instructed the Wells Fargo Bank vice-president in charge of Hindman's personal investment account to stop the transaction. For reasons that are not clear, the transaction was not stopped before the $750,000 hit Clark's accounts and was automatically used to pay down its Wells Fargo line of credit. A few days later, however, the same Wells Fargo Bank vice-president who had attempted to stop the transaction transferred $750,000 from Clark's account to Hindman's account at a bank in Florida at Hindman's request.

Wells Fargo claims that Hindman's receipt of the $750,000 constitutes a clear violation of the subordination agreements because Clark repaid a debt to Hindman while it had outstanding obligations to Wells Fargo. Hindman, on the other hand, maintains that a valid loan was never consummated between him and Clark because his son had been stripped of authority to make business decisions and thus could not bind the company. Furthermore, the authorized decision makers rejected the proposed loan once they learned about it; that is, there was never an authorized acceptance, and so a valid loan contract never existed. Wells Fargo ignores most of Hindman's arguments and maintains that the transfer of funds completed the loan because Hindman's son had signed a subordinated debenture and Clark used the funds to pay down its line of credit and take subsequent cash advances. Hindman responds that even if a valid loan existed, he did not breach the subordination agreements, either because the loan was properly rescinded by the parties thereto, or because Wells Fargo consented to return of the funds. Wells Fargo says that rescission of the loan agreement would place Hindman in breach of the subordination agreements unless it had given proper consent, and it argues that the vice-president who returned the money to Hindman lacked authority to give consent under the subordination agreements.

The district court granted Wells Fargo's motion for summary judgment and denied Hindman's cross-motion. It rejected Hindman's arguments concerning rejection and rescission as irrelevant. The court reasoned that Hindman's transfer of $750,000 to Clark created a debt, liability, or obligation and that returning the funds to Hindman before Wells Fargo had been paid in full constituted a breach of the subordination agreements because Wells Fargo had not consented. This was the extent of the court's reasoning. It did not explain why Hindman's arguments were irrelevant, and it did not acknowledge the dispute over the issue of consent. The court subsequently awarded damages of $750,000 plus interest to Wells Fargo, which Hindman also challenges.

We vacate the judgment and remand for further proceedings. The arguments raised by Hindman in the district court and on appeal are not baseless and should have been addressed by both the district court and Wells Fargo. By failing to address Hindman's plausible arguments, Wells Fargo has failed to carry its burden in showing that there are no genuine issues of material fact and that it is entitled to judgment as a matter of law. SeeFed.R.Civ.P. 56. It may well turn out that Hindman's facially plausible arguments are not persuasive, but based on this record and Wells Fargo's seeming refusal to acknowledge those arguments, we cannot make that determination without performing Wells Fargo's tasks for it, which we will not do.

I. Background

Hindman owned and operated Clark and three related companies (collectively, “Borrowers”) for a number of years. When Hindman retired around 2005, his son Donald D. Hindman (D.D.H.) assumed control of the family businesses and became president and CEO of Clark. While Hindman ceased participating in day-to-day operations, he remained involved by routinely making loans to Borrowers to initiate capital-raising campaigns and by serving as chairman of Clark's board of directors. (Appellant's Separate App. 51; Appellee's Supp.App. 46.)

Wells Fargo Business Credit is a secured lender that loaned money and extended credit to Borrowers. The business line of credit provided funds as working capital to cover expenses while incoming accounts receivable were pending. The amount of advances Borrowers could take on their line of credit depended on the accounts receivable and inventory they reported on their daily collateral reports. Wells Fargo closely monitored those reports and adjusted Borrowers' line of credit accordingly. All incoming cash (including loans) was reported on the daily collateral report and deposited into a cash-collateral account held by Wells Fargo for Borrowers' benefit. Wells Fargo used the incoming funds to pay down Borrowers' line of credit, which created available credit on which Borrowers could take additional advances. All advances approved by Wells Fargo then would be deposited into Borrowers' master-funding account. (Appellee's Supp.App. 68–69.)

Before agreeing to provide this line of credit, Wells Fargo required that any debts Borrowers owed or would owe to Hindman be subordinated to ensure that Wells Fargo would get paid before he would. Accordingly, Wells Fargo and Hindman entered into a series of subordination agreements under which Hindman became a subordinated creditor. There were three largely identical subordination agreements in total. (Appellant's Separate App. 1–7; Appellee's Supp.App. 1–8, 27–33, 36–42.) As Wells Fargo alleges breach of all three, and none of the parties' arguments rely on any differences in the wording of the agreements, we simply refer to them as the subordination agreements.

The subordination agreements subordinated payment of “Subordinated Indebtedness” to payment in full of Borrowers' indebtedness to Wells Fargo, and that term is defined in relevant part as “each and every ... debt, liability and obligation of every type and description which any Borrower may now or at any time hereafter owe to [Hindman], whether such debt, liability or obligation now exists or is hereafter created or incurred.” (Appellant's Separate App. 2.) Hindman agreed that he would not, absent Wells Fargo's prior written consent, “demand, receive or accept any payment (whether of principal, interest or otherwise) from Borrowers until their indebtedness to Wells Fargo had been paid in full and Wells Fargo had released its lien on any collateral (subject to a few narrow exceptions not relevant here). ( Id. at 3.) In the event Hindman received an unauthorized payment, the subordination agreements provided that he would “hold the amount so received in trust for [Wells Fargo] and [would] forthwith turn over such payment to [Wells Fargo].” ( Id.)

Toward the end of 2009, D.D.H. informed Wells Fargo in face-to-face meetings that Clark needed additional capital and that a majority of this capital would likely come from Hindman. To protect Wells Fargo's status as senior creditor, its representatives discussed with D.D.H. a form of subordinated debenture that would be used for all future subordinated loans. (Appellee's Supp.App. 47, 51.)

On January 6, 2010, Hindman emailed Tom Bassett, a vice-president of Wells Fargo Bank (not Business Credit) who handled Hindman's personal investment account, instructing Bassett to go ahead and sell some of Hindman's stock to provide $1 million in working capital for Clark and requesting that it be done promptly. (Appellant's Separate App. 27.) On January 7, D.D.H. emailed Bassett instructing him to hold the funds from the sale of equities in Hindman's account until D.D.H. provided wiring instructions, which D.D.H. expected to do the following day. ( Id. at 49.)

On January 8, Clark's board of directors held a meeting. It is unclear from the record how many directors Clark had, but the minutes reflect that a quorum was present, consisting of the following three directors: Hindman, D.D.H., and Robert Early. Hindman served as chairman and D.D.H. served as secretary. Also in attendance were Clark CFO Mark Bruno; Kevin Cleary, a member of Clark's board of advisors and the president of Dearborn Partners, which had been retained by Clark to provide financial advisory services; and T.D. Decker, Clark's full-time turn-around consultant and financial advisor. ( Id. at 51.) At this meeting, the board agreed to Cleary's suggestion that D.D.H. “would step aside from corporate decision-making and focus on new sales, preserving existing customer relationships and assisting, as needed, in the sales of...

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