855 F.2d 406 (7th Cir. 1988), 87-2561, Secon Service System, Inc. v. St. Joseph Bank and Trust Co.
|Citation:||855 F.2d 406|
|Party Name:||SECON SERVICE SYSTEM, INC., a/k/a Yale Transport Corporation, Plaintiff-Appellant, v. ST. JOSEPH BANK AND TRUST COMPANY and Jay Chodock, Defendants-Appellees.|
|Case Date:||August 18, 1988|
|Court:||United States Courts of Appeals, Court of Appeals for the Seventh Circuit|
Argued May 16, 1988.
Arthur M. Wisehart, Wisehart & Koch, New York City, for plaintiff-appellant.
Calvin H. Cobb, Jr., Steptoe & Johnson, Washington, D.C., for defendants-appellees.
Before CUMMINGS, COFFEY and EASTERBROOK, Circuit Judges.
EASTERBROOK, Circuit Judge.
St. Joseph Bank & Trust Co. (the Bank) advanced $2.15 million in 1976 to enable St. Abbs, Inc., a holding company, to buy out Indiana Refrigerator Lines, Inc., a trucking company incorporated in Indiana. By 1978 Indiana Refrigerator Lines was in difficulty, with substantial debt outstanding to the Bank, and late in 1979 St. Abbs and the Bank began searching for a buyer. They found F. Ralph Nogg, an expert in trucking industry bailouts, who submitted a letter of intent to purchase St. Abbs and Indiana Refrigerator Lines (collectively IRL) on October 23, 1979.
Before closing, Nogg hired Dermott Noonan, a former Yale University accounting professor, to examine IRL. Noonan's eventual conclusion, reached in May 1980, was that IRL's finances were "in a chaotic condition" and that it had incurred "substantial overdrafts" on its accounts at the Bank. The extent to which Noonan apprised Nogg of these facts before Nogg completed his purchase of IRL on December 17, 1979, is not clear, but Nogg himself testified that he knew IRL was in serious trouble when he decided to purchase it.
The purchase took the form of an agreement between Nogg and the Bank that enabled Nogg to vote 77% of St. Abbs's stock: 52% owned by Nogg, and 25% owned by the Bank but subject to Nogg's control as trustee under an irrevocable 5-year voting trust. In return for the St. Abbs stock, the Bank agreed to invest $300,000 in IRL, and Nogg agreed to cause IRL to use the cash to repay its overdrafts at the Bank. The Bank also promised to indemnify Nogg to the extent any material discrepancies in IRL's financial statements turned out to exceed $169,000.
The minutes of the initial December 17, 1979, shareholders' meeting show that Nogg, inexplicably described as the sole shareholder, voted to elect a seven-member Board of Directors for both St. Abbs and Indiana Refrigerator Lines. Two of its members (Richard A. Rosenthal and Samuel Raitzin) also served on the Bank's Board of Directors. Nogg installed himself as Chairman and Chief Executive Officer of both St. Abbs and Indiana Refrigerator Lines.
Early in 1980 Nogg began negotiating on IRL's behalf with Yale Express, Inc., and its wholly-owned subsidiary Secon Service System, Inc., New York corporations operating as debtors-in-possession under Chapter XI, 1 to purchase certain ICC operating
authorities from Secon. These negotiations had an incestuous air: In addition to his previous contacts with Yale, of which he was once trustee in bankruptcy, Nogg was Secon's fourth-largest creditor; Secon's counsel during the negotiations was Arthur M. Wisehart, a member of the Boards of Directors of St. Abbs and Indiana Refrigerator Lines until he resigned in January 1980. On May 30, 1980, the Bankruptcy Court for the Southern District of New York approved the purchase, and Indiana Refrigerator Lines and Secon signed a purchase agreement on June 27, 1980.
The purchase agreement entitled Secon to 2% of the gross revenues of Indiana Refrigerator Lines for six years, with a minimum yearly payment of $80,000 guaranteed after the first year. In the event of insolvency of Indiana Refrigerator Lines, the operating authorities were to revert automatically to Secon, which protected its position by taking out a security interest in the authorities themselves. Indiana Refrigerator Lines assumed the "primary responsibility" for obtaining the ICC's approval of the transfer (a condition of the agreement), and promised to bear most of the costs of dealing with the ICC. A standard integration clause supported the Agreement's provision that: "No promises, representations, warranties, guarantees or agreements not herein contained shall have any force or effect".
By September 1980 Nogg had lost interest in the operating authorities and stopped trying to obtain the ICC's approval for the transfer. Still short of cash, and responding to the Bank's increasing reluctance to honor IRL's rubber checks (the Bank had been tolerating overdrafts even after the repayments made when Nogg purchased IRL), Nogg worked out a deal with the Bank that would have provided IRL with a $1.5 million capital contribution in return for transfer to the Bank of 60% of the common stock of St. Abbs. The September 22, 1980, Memorandum of Understanding memorializing this arrangement explained that an audit completed in June 1980 by Price Waterhouse at Nogg's behest revealed that IRL's financial situation was much worse than Nogg had thought, necessitating an infusion of money.
Immediately after signing the September 22 Memorandum, which would have given the Bank control of more than half of St. Abbs's common stock, Nogg decided that the recapitalization contemplated by the Memorandum wasn't worth the loss of his authority. He invoked the voting trust and forced St. Abbs's Board to repudiate the Memorandum. The Bank then agreed to an additional $500,000 loan and redemption of all of its St. Abbs shares in return for additional promissory notes and assurances of certain changes in IRL's financial practices. Raitzin and Rosenthal then resigned from the Boards of St. Abbs and Indiana Refrigerator Lines.
Despite the changes in IRL's financial practices, the Bank understandably continued to feel insecure, and on January 16, 1981, it filed a state court action in Nebraska (where Nogg had moved IRL's headquarters) to enforce its security interests in Indiana Refrigerator Lines' accounts receivable and other assets. St. Abbs and Indiana Refrigerator Lines responded by filing Chapter XI reorganization petitions.
Over the objections of Secon's counsel, the ubiquitous Mr. Wisehart, the bankruptcy court approved a plan that terminated all claims of IRL's creditors "whether ... based on allegations of equitable subordination, fraudulent conveyance, preferential treatment or nonvalidity of claims". Secon did not appeal the order approving the plan. Instead it filed a complaint in the Northern District of Indiana containing six claims against the Bank and four individual defendants. Subject matter jurisdiction was predicated on diversity of citizenship and on alleged violations of federal securities laws and the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.
Secs. 1961-68. Three of the individual defendants were dismissed without prejudice almost immediately. After three years of discovery, the Bank and the remaining individual defendant, Jay Chodock, filed a motion to dismiss under Fed.R.Civ.P. 12(b)(6), which the district court treated as a motion for summary judgment because it referred to matters outside the pleadings. The district court granted the motion.
Secon asserted six claims against the Bank. In Secon's view, the Bank (1) acted as a joint venturer with IRL and therefore is liable for the latter's failure to complete the purchase of the operating authorities; (2) conspired together with IRL and others to defraud Secon (by knowingly misrepresenting or concealing IRL's financial condition in order to induce Secon to accept delayed payments for its operating authorities); (3) did defraud Secon (by not making the delayed payments); (4) promoted fraudulent conveyances of funds from IRL to itself, and breached fiduciary duties to both IRL and Secon; (5) engaged in securities fraud; and (6) committed RICO violations.
Before we get under way, a little housekeeping. Mr. Chodock seems to have lingered in this case almost accidentally. Originally accused of being Raitzin's son-in-law and "interfer[ing] with the day-to-day operations of St. Abbs and IRL despite the fact that he was wholly inexperienced and incompetent in transportation matters", Mr. Chodock escaped Secon's attention in this appeal. 2 We presume Secon has abandoned any claim against him and we affirm the judgment in his favor without further ado.
Secon's first attempt to recover damages for breach of the purchase agreement came in the bankruptcy proceeding. There, the creditors' committee (chaired by Wisehart, as Secon's representative) proposed to resolve all disputes between IRL and the Bank in return for subordination of $850,000 of the Bank's secured claims against Indiana Refrigerator Lines. The proposal--dubbed a "Compromise Agreement" although not everyone agreed--provided:
[N]either the Debtors ... nor any creditor of the Debtors shall have the right to assert any claim, demand, cause of action or claim of subordination against the Bank in connection with ... any transactions between or involving the Bank and the Debtors ...
The bankruptcy court's order approving the Compromise Agreement after a hearing under its cram-down power, 11 U.S.C. Secs. 1124-29, echoed this provision:
[N]either the Debtors ... nor any creditor of the Debtors shall have the right to assert any claim, demand, cause of action or claim of subordination against the Bank ...
Secon did not appeal. Nonetheless it now contends that the Bank used its influence (or "control") over IRL and Nogg to induce IRL to transfer cash to the Bank when IRL was insolvent, with intent to defraud IRL's other creditors, such as Secon.
The district court in this action concluded that Secon's fraudulent conveyance claim is an...
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