Eldridge v. Gordon Bros. Grp., L.L.C.

• Decision Date: 13 July 2017
• Docket Number: Nos. 12-2311,16-1929,s. 12-2311
• Citation: 863 F.3d 66
• Parties: David Kay ELDRIDGE; Ray Eldridge, Jr.; D. Chris Eldridge, as trustee, not individually, of the C. Eldridge 1994 GST Trust; Patricia K. Sammons, as trustee, not individually, of the P.K. Sammons 1994 Trust; K's Merchandise Mart, Inc., Plaintiffs, Appellants, v. GORDON BROTHERS GROUP, L.L.C.; William Weinstein; Frank Morton, Defendants, Appellees.
• Court: U.S. Court of Appeals — First Circuit

863 F.3d 66

David Kay ELDRIDGE; Ray Eldridge, Jr.; D. Chris Eldridge, as trustee, not individually, of the C. Eldridge 1994 GST Trust; Patricia K. Sammons, as trustee, not individually, of the P.K. Sammons 1994 Trust; K's Merchandise Mart, Inc., Plaintiffs, Appellants,

v.GORDON BROTHERS GROUP, L.L.C.; William Weinstein; Frank Morton, Defendants, Appellees.

Nos. 12-2311

16-1929

United States Court of Appeals, First Circuit.

July 13, 2017

Thomas E. Patterson, with whom Kristi L. Browne and The Patterson Law Firm, LLC, Chicago, IL, were on brief, for appellants.

Theresa A. Foudy, with whom Turner P. Smith, Curtis, Mallet–Prevost, Colt & Mosle LLP, New York, NY, Richard M. Zielinski, Peter D. Bilowz, and Goulston & Storrs PC, Boston, MA, were on brief, for appellees.

Before Torruella, Thompson, and Kayatta, Circuit Judges.

THOMPSON, Circuit Judge.

PREFACE

Today's case involves a moderately complex business dispute, rich with issues. On one side is plaintiff K's Merchandise Mart, Inc., which we call "Old K's" (for reasons that will soon become clear).¹ On the other side is defendant Gordon Brothers Group, L.L.C., which we call "Gordon," along with two of its executives, defendants William Weinstein and Frank Morton. Old K's challenges orders by the district judge granting defendants summary judgment and requiring it to pay them $35,000 in sanctions. After studying the briefs, the record, and the applicable law, we affirm the summary-judgment rulings but vacate the sanctions order and remand for reconsideration of the sanctions matter, assuming defendants still wish to pursue it.

BACKGROUND

Consistent with the summary-judgment standard, we set out the essential facts in the light most complimentary to Old K's position, see Collazo–Rosado v. Univ. of P.R. , 765 F.3d 86, 89, 92 (1st Cir. 2014) —even though the "facts," as accepted for summary-judgment purposes, may not be the actual facts if the case went to trial.

Old K's Precarious Financial Position

Founded by David Kay Eldridge in 1957, Old K's sold clothing, appliances, sporting goods, jewelry, furniture, and other merchandise from retail stores in Illinois, Indiana, Iowa, Florida, Kansas, Kentucky, and Missouri. And Old K's saw many years of success. But by the early to mid-2000s, competition with ginormous retailers like Target, Wal–Mart, Best Buy, and Toys "R" Us caused Old K's financial distress—the company, for example, suffered a net loss of $1.8 million in 2004.

Faced with mounting losses, Old K's hired the investment firm William Blair & Co ("Blair") sometime in 2005 to help sell the company before the end of the year. Blair explained that because Old K's was "unlikely" to find a buyer, "liquidation" was the "most logical" way to go.² Blair later hooked Old K's up with Gordon, a company known nationwide for its expertise in retail liquidations. Old K's hired Gordon in July 2005 to "provide preliminary advice and consultation to [Old K's] in connection with a possible orderly liquidation of [Old K's] ‘big box’ format stores" and to "develop a plan for the disposition of all inventory in the [s]tores with reference to the optimal timing of a ‘store closing’ or similar themed sale." Eldridge, Old K's president, would later testify that the reason Old K's retained Gordon was to get "different viewpoints and evaluate" Old K's "options" in case Old K's "decide[d] ... to liquidate."

Asked to analyze the liquidation value of Old K's merchandise and real estate, Gordon offered to buy Old K's in August 2005 for about $25 million. Convinced that Old K's was worth much more, Old K's rejected the offer and asked Gordon to finish its "[r]eal [e]state appraisal and inventory liquidation" analysis—adding that if liquidation ended up being the way to go, Old K's would do the liquidation itself before accepting an offer like the one Gordon had floated. But unfortunately for Old K's, its business continued hemorrhaging money in the months following Gordon's offer, posting losses of between $3.2 and $6.7 million for the fiscal year ending January 2006.

And things turned from bad to worse for Old K's when its principal lender, LaSalle National Bank ("LaSalle"), sent it a notice of default for violating financial-performance covenants, slashed its credit line, and dishonored checks to its vendors. LaSalle's Robert Barnhard, a former Gordon employee, then met with folks from Old K's in February 2006. During this confab, Barnhard flatly disagreed with Old K's proposed plan to improve profitability by reducing inventory and asked Old K's to prepare a 13–week cash-flow projection and business plan. Barnhard also hired consulting firm Alliance Management, Inc. ("Alliance") to gauge Old K's performance. Issuing a report in late February 2006, Alliance noted that Old K's (a) had "[a]ccumulated losses ... exceed[ing] $8 million dollars [over] a 3 year period," (b) "fac[ed] significant liquidity challenges that are material to the continuing business operations," and (c) had a "business model" that was outdated and "not sustainable." After getting Alliance's report, LaSalle demanded that Old K's liquidate by about mid-April 2006.

Hoping to get LaSalle "off [its] back," Old K's hired consulting firm Buccino & Associates ("Buccino") in March 2006, with the aim of convincing LaSalle to extend the liquidation deadline—Buccino's founder and LaSalle's president were "personal friend[s]," apparently. But Buccino struck out, meaning—according to Buccino—that Old K's "would be out of cash by October [2006], possibly as early as July [2006]," given its then-current financial and operational situation. A Buccino official later recounted how LaSalle was pretty ticked off with the state of affairs, and "they [meaning LaSalle] required quick action to either replace their loan to take them out or they would foreclose." That same official added that, given how over-collateralized the loan was, he "believe[d]" that Buccino "would have found a bank" to provide take-out financing—though he also said that despite having "talked to several lenders," Buccino found "no interested parties" because of "the conditions that existed" and so Buccino's feeling was that Old K's "would probably have to file for bankruptcy." And in fact, Buccino prepared several liquidation analyses for Old K's.

With no financial savior in sight, Old K's entered into a forbearance agreement with LaSalle in which Old K's (among other things) admitted to certain defaults, expressed an intent to hold a liquidation sale, and agreed to file a voluntary bankruptcy petition "on or about April 17, 2006." To help it navigate the complexities of the bankruptcy process, Old K's hired a powerhouse law firm, Mayer Brown LLP, and a communications consultant, Sitrick and Company. Old K's also solicited bids to liquidate its assets from several liquidation companies—Gordon (which had never given up the idea of acquiring Old K's, it seems), Hilco, American Group, and Tiger Capital.

Gordon's Representations

With the bankruptcy deadline fast approaching, Old K's reconnected with Gordon. And Gordon still had interest in acquiring Old K's. In an email to Gordon employees, Weinstein outlined his strategy:

Guys, we felt like there was $20 ml of equity in the deal 6 months ago. It did not erode that quickly. ... This could be a classic out of court deal. We guarantee the bank to shut them up. We go to a creditor rights lawyer and hire them to represent the trade in an out of court. We either propose a pot plan or percentage plan distribution at less than 100% and more than a bankruptcy would pay them. We pick up the "equity" in the discount. We run through x-mas out of court.

And during meetings in early April, Gordon made several representations to Old K's that are at the heart of this case:

• After achieving a "composition" with Old K's creditors—a "composition" is "[a]n agreement to settle a dispute or debt whereby one party abates part of what is due or claimed," seeComposition , Black's Law Dictionary at 346—Gordon planned to run the company as a going concern at least through the Christmas selling season before deciding on whether to continue operations, sell the company, or liquidate the company.

• Gordon had the expertise and experience to turn the company around and to keep it running.

• Gordon would get inventory flowing again by guaranteeing payment for future shipments from suppliers within a week.

• And Gordon would consult with the company's management before making any major decision affecting business operations.

By the way, everyone knew at the time that if no creditor composition happened, Gordon would liquidate the company straight away.

Rise and Fall of New K's

After these comments, Old K's—represented by in-house and outside counsel—developed and executed a multi-step plan with Gordon:

Step 1 . Old K's signed a letter of intent—a document "detailing the preliminary understanding of parties who plan to enter into a contract or some other agreement." Letter of Intent , Black's Law Dictionary at 1044. As pertinent here, the letter of intent provided that Gordon would become the "exclusive agent" for Old K's "in connection with the continued operation and/or liquidation of the Company's business operations and disposition of assets of the Company, ... all in [Gordon's] sole discretion"—though Gordon promised to "use best efforts to keep the Company's officers reasonably informed of [its] decision-making process."³ Old K's attorneys at Mayer Brown added the words "and/or liquidation of" during the drafting process.⁴ Two weeks after signing the letter of intent, Gordon's Morton emailed a colleague that he thought Gordon could "do 2 or 3 store wide events during the next 6 months without taking the juice out of the liquidation."

Step 2 . Gordon paid about $40 million to pay off Old K's debt to LaSalle, relieving Old K's from the imminent loss of its financing and from the LaSalle-demanded bankruptcy filing. Around this same time, Gordon decided to settle with Old K's ...