Buckeye Ret. Co. v. Busch

• Decision Date: 26 May 2017
• Docket Number: No. 2016-CA-32.,2016-CA-32.
• Parties: BUCKEYE RETIREMENT CO., LLC, LTD., Plaintiff–Appellant/Cross–Appellee v. John R. BUSCH, et al., Defendants–Appellees/Cross–Appellants
• Court: Ohio Court of Appeals

82 N.E.3d 66

2017 Ohio 4009

BUCKEYE RETIREMENT CO., LLC, LTD., Plaintiff–Appellant/Cross–Appellee

v.John R. BUSCH, et al., Defendants–Appellees/Cross–Appellants

No. 2016-CA-32.

Court of Appeals of Ohio, Second District, Greene County.

Rendered on May 26, 2017

JAMES C. CARPENTER, Atty. Reg. No. 0012228, VINCENT I. HOLZHALL, Atty. Reg. No. 0074901, 41 South High Street, Suite 2200, Columbus, Ohio 43215, Attorneys for Plaintiff–Appellant/Cross–Appellee

GEORGE D. JONSON, Atty. Reg. No. 0027124, G. TODD HOFFPAUIR, Atty. Reg. No. 0064449, 36 East Seventh Street, Suite 2100, Cincinnati, Ohio 45202, JOHN D. SMITH, Atty. Reg. No. 0018138, ANDREW P. MEIER, Atty. Reg. No. 0083343, IRA H. THOMSEN, Atty. Reg. No. 0023965, 140 North Main Street, Suite B, P.O. Box 639, Springboro, Ohio 45066, Attorneys for Defendants–Appellees/Cross–Appellants

OPINION

WELBAUM, J.

{¶ 1} In this case, Plaintiff–Appellant, Buckeye Retirement Co., LLC, Ltd. ("Buckeye") appeals from a judgment rendered in favor of Defendants–Appellees/Cross–Appellants, John Busch, Thomas Noland, and Statman, Harris & Eyrich, LLC ("Statman"), following a bench trial. Busch, Noland, and Statman have all filed cross-appeals asserting assignments of error.

{¶ 2} Buckeye contends that the trial court erred in finding that Busch was not liable for fraudulent concealment and/or fraudulent representation, and in finding that Noland was not liable for tortious interference with contractual relations. Finally, Buckeye contends that the trial court erred by failing to find Statman vicariously liable for the conduct of Noland, who was a member in Statman.

{¶ 3} Noland's assignments of error raise the trial court's alleged error in concluding that Buckeye purchased the tort rights asserted in this matter, and the court's alleged error in concluding that Noland could be sued, as USAT's agent, for interference with a contract. Likewise, Busch contends that Buckeye did not have the ability to pursue its claims against any of the Appellees/Cross–Appellants.

{¶ 4} We conclude that the trial court did not err in awarding judgment in favor of Noland, Statman, and Busch. Accordingly, the judgment of the trial court will be affirmed. Furthermore, affirmance of the judgment in favor of Appellees/Cross–Appellants, Noland, Statman, and Busch renders their assignments of error moot.

I. Facts and Course of Proceedings

{¶ 5} This action arose from events occurring prior to a bankruptcy proceeding filed by U.S. Aeroteam, Inc. ("USAT") on December 24, 2003. When the bankruptcy was filed, Suhas Kakde was the chief executive officer, president, and majority stockholder in USAT, John Busch was the chief financial officer and vice-president of finance for USAT, and Thomas Noland was legal counsel for USAT. Noland was a member in Statman, and had practiced bankruptcy law, including Chapter 11 bankruptcies, for many years.

{¶ 6} In 1998, USAT was a preferred supplier, on a minority disadvantaged basis, with General Motors Corporation ("GM"). USAT had primarily been involved in the aerospace industry, but at GM's behest, began submitting bids for automotive work with GM and Delphi, which became a separate entity from GM in 1999. Based on discussions with GM, USAT geared up to meet the GM/Delphi business, which required an infusion of additional capital. At the time, USAT had an existing loan with First International Bank, which subsequently became United Parcel Service Credit ("UPS"). UPS had a considerable inventory credit line available for USAT, but could not expand the line to match USAT's business plan. As a result, USAT looked for other lenders and entered into an asset based loan with Provident Bank ("Provident") in November 2000.

{¶ 7} Asset based loans, also known as revolvers, are ones in which creditors allow advances against collateral, inventory, and equipment. Remittances back to the creditor (from accounts receivable of debtors) are typically made to a lock-box. The amounts advanced vary up to the maximum amount of the note, and fluctuate based on expansion or contraction of a debtor's receivables and inventory. Advance rates reflect the quality of a debtor's receivables, and typically vary between 70 and 85% of the total amount of the receivables. Generally, the advance rate applied to inventory is 50% of the value of raw inventory or finished goods. These loan formulas, which discount the real value of assets, mean that creditors may be made whole upon liquidation without recovering 100% of a debtor's assets.

{¶ 8} The maximum amount of the Provident loan was the lesser of $2,500,000 or the sum of: (1) 50% of the cost or market value, whichever was lower, of eligible inventory; (2) 80% of the amount of eligible receivables; and (3) 100% of the balance of the cash collateral account (collectively referred to as the "borrowing base"). In other words, the maximum amount USAT could borrow was $2,500,000, and the amount available on a given date varied, depending on the extent of USAT's eligible inventory and receivables, as well as how much money had already been borrowed. Ultimately, the amount of eligible receivables increased to 85%, due to the quality of USAT's receivables.

{¶ 9} The amount available under the loan was calculated through borrowing base reports or certificates (BBCs), which USAT submitted to Provident. BBCs contained reports of accounts receivable, inventory, and some other items that Provident used to calculate the formula and the amount available to USAT on the loan.

{¶ 10} The loan agreement did not provide specific times for submission, nor did it contain detailed requirements for content of the BBCs; instead, the agreement simply stated that the bank could require USAT to deliver schedules of all outstanding accounts. These schedules were to "be in form satisfactory to the Bank and shall show the age of such Accounts in intervals of not more than 30 days, and contain such other information and be accompanied by such supporting documentation as the Bank may from time to time prescribe." Joint Ex. 2, section 5.3, pp. 10–11. In addition, the agreement required USAT to deliver copies of its "invoices, evidences of shipment or delivery and such other schedules and information as the bank may reasonably request." Id . at p. 11. The only time specification listed for any of these records was that they be provided "from time to time solely for [the Bank's] convenience in maintaining records of the Collateral." Id .

{¶ 11} However, the agreement did require all collections on cash collateral to be deposited in a cash collateral account maintained by Provident, and also stated that Provident would apply all or part of the collected cash collateral on a daily basis against the loan obligation. Joint Ex. 2, section 7.1, p. 16. Any part of the collected balance in the cash collateral account that Provident elected not to apply to USAT's obligations could then be paid over to USAT's commercial account, which USAT could write checks against. Id . Although a lock box was used, at times creditors paid receivables directly to USAT, and USAT would deposit these payments in the cash collateral account.

{¶ 12} Certain items were ineligible to be included in calculating how much money USAT could obtain. For example, any receivables overdue more than 90 days were excluded, and if more than 25% of a customer's receivables were overdue by more than 90 days, all receivables from that customer were excluded. Money that USAT owed a customer was also excluded, as were invoices representing tooling or invoices listing receivables from non-U.S. based companies.

{¶ 13} The loan agreement also contained several financial and other covenants, and allowed Provident to take various actions, including acceleration, upon default, or at any time in its sole discretion, if the loan were due on demand.

{¶ 14} When the Provident loan was signed in November 2000, UPS had already filed multiple UCC filings covering USAT's business assets, but UPS agreed to subordinate its interest in receivables and inventory only, pursuant to an inter-creditor agreement. UPS, therefore, had a first lien on everything other than the inventory and receivables. Kakde personally guaranteed the loans to both UPS and Provident.

{¶ 15} USAT was in violation of major loan covenants on the first day the Provident agreement was signed. For example, the loan agreement required a ratio of liabilities to tangible net worth of 7.5 to 1. However, the ratio, based on an audit one month later, was 17.8 to 1. Provident ignored this violation, and in June 2001 drastically increased the ratio to 25 to 1. However, a financial assessment six months later showed that USAT had failed that ratio, too.

{¶ 16} The original loan document also required USAT to have a tangible net worth of $750,000. However, an audit one month after the loan began showed that USAT had only a tangible net worth of $369,000. Provident waived that requirement as well, and reduced the net worth requirement to $215,000. USAT barely reached that amount the first year and missed it by December 2002. Other violations related to the amount of current debt requirements, timely delivery of audited financials, the fact that USAT owed back taxes (more than $300,000 in early 2003); the fact that USAT was out of formula, i.e., obtained loan amounts greater than the collateral base; the fact that the bank allowed credit for receivables from one customer that were greater than 15% of the total receivables; and the fact that USAT overstated collateral by about $500,000 in 2002.

{¶ 17} In January 2002, Provident notified Kakde that the loan was in default and reminded him that he was personally liable. The loan was on the "watch list" in May 2002, and was still in default in August 2002. In the fall of 2002, the loan was transferred to Provident's Special Assets Division ("SAD"), and was assigned to Robert Burk, who was the vice president of the division. The loan came to Burk because of continued losses...