Clean Harbors, Inc. v. John Hancock Life Ins.

• Decision Date: 29 August 2005
• Docket Number: No. 04-P-892.,04-P-892.
• Citation: 833 N.E.2d 611,64 Mass. App. Ct. 347
• Parties: CLEAN HARBORS, INC. v. JOHN HANCOCK LIFE INSURANCE COMPANY & others.<SMALL><SUP>1</SUP></SMALL>
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

Page 611

833 N.E.2d 611

64 Mass. App. Ct. 347

CLEAN HARBORS, INC. v. JOHN HANCOCK LIFE INSURANCE COMPANY & others.¹

No. 04-P-892.

Appeals Court of Massachusetts, Suffolk.

Argued March 10, 2005.

Decided August 29, 2005.

COPYRIGHT MATERIAL OMITTED

Thomas S. Fitzpatrick, Boston, for the plaintiff.

Brian Davis, Boston (Karen Collari Troake with him) for the defendants.

Present: LENK, CYPHER, & KAFKER, JJ.

LENK, J.

The plaintiff, Clean Harbors, Inc. (Clean Harbors), appeals from summary judgment entered in favor of the defendant lenders (collectively, "John Hancock") on Clean Harbors' claims that the "make whole amount" charged by the defendants upon Clean Harbors' early repayment of a loan was improper, and that certain of the defendants violated G.L. c. 271, § 49, the usury statute. The defendants cross-appeal from what they consider to be an insufficient attorneys' fee award.²

We affirm the judge's rulings regarding the enforceability of the make whole amount provisions of the parties' loan agreement and the amount awarded to John Hancock for attorney's fees. We reverse summary judgment on Clean Harbors' usury claim and remand for further proceedings.

We summarize the undisputed facts, taken principally from the judge's March 15, 2004, "Memorandum and Orders on Cross-Motions for Summary Judgment and Related Matters," and supplemented somewhat, here and in our discussion of the issues on appeal, from the summary judgment record.

The parties' dispute originated with an April, 2001, loan transaction. Clean Harbors is a publicly-traded Massachusetts company in the business of providing environmental services for hazardous and industrial waste management. At the time of the summary judgment proceedings, Clean Harbors anticipated gross revenues in excess of $650 million for the year 2003. But its financial picture in the late 1990's was quite different, reflecting an industry-wide downturn caused by increasing competition and decreasing waste. Having suffered net losses each year between 1995 and 1999, Clean Harbors was faced with repaying $50 million in notes that were coming due in May, 2001. Needing to refinance that debt, Clean Harbors retained Deutsche Bank Securities, Inc. (Deutsche Bank) in October, 2000, to act as its financial advisor in structuring a new credit arrangement and as its exclusive placement agent in contacting and conducting negotiations with potential investors.

Deutsche Bank warned Clean Harbors that financing would likely be difficult to obtain, due to the tight capital markets and the turmoil in the waste management industry at the time. Clean Harbors decided to pursue private "mezzanine financing," as other financing alternatives were either unavailable or too expensive.³ Deutsche Bank solicited mezzanine finance proposals on Clean Harbors' behalf. Only two potential investors emerged, John Hancock being one of them.

In January, 2001, Deutsche Bank forwarded both proposals to Clean Harbors. Clean Harbors preferred to go with John Hancock, but was concerned that the terms of John Hancock's proposal included a prohibition on redemption within the first three years of the loan. Clean Harbors wanted the flexibility to prepay the loan, and so instructed Deutsche Bank to seek a more favorable prepayment provision. John Hancock agreed to substitute a revised prepayment provision that permitted Clean Harbors to pay off the notes early, so long as Clean Harbors agreed to pay a "make whole amount" applicable to the first three years of the loan. The proposed make whole amount used a discount rate tied to the interest paid on United States Treasury securities at the time of prepayment plus 250 basis points.⁴ At some point in February, 2001, Deutsche Bank utilized that formula to calculate the make whole amounts that might become due upon Clean Harbors' prepayment at various times during the first three years of the loan. These estimates ranged from $10.5 million to $14.35 million.

On April 12, 2001, the parties executed the Securities Purchase Agreement (SPA). The first sections of the SPA called for Clean Harbors to issue senior subordinated notes in the aggregate principal amount of $35 million, at sixteen percent interest, with fifty percent of the principal due in 2007, and the remainder due in 2008, and to issue warrants to the defendants for the purchase of 1,519,020 shares of Clean Harbors common stock. Most significant for our purposes were the following additional provisions:

"4.1 Optional Prepayment of Notes at Any Time. The Company [Clean Harbors] may prepay the Notes, in full, or in part in integral multiples of $1,000,000 on any date. Prepayments of the principal of any Notes shall be made together with (a) interest accrued on the principal amount being prepaid to the Settlement Date and (b) the Make Whole Amount.

". . .

"4.9 Make Whole Amount. The Company acknowledges that the Make Whole Amount due at any optional or required prepayment of the Notes (including any prepayment required pursuant to any provision of Section 4 or Section 7.2) has been negotiated with the Purchasers to provide a bargained for rate of return on the Purchasers' investment in the Notes and is not a penalty.

". . .

"7.2 Acceleration in Event of Default .... (ii) By Action of Holders. If any Event of Default other than those specified in subsections (x), (xi), or (xii) of Section 7.1 shall exist, the Required Holders shall have the right to declare all the Notes then outstanding to be immediately due and payable in full at 100% of the outstanding principal amount thereof together with all interest accrued thereon and the Make Whole Amount, without any presentment, demand, protest or other notice of any kind, all of which are hereby expressly waived."

Also included in the SPA's definitions at § 10 was the formula for determining the discount rate, which specified the formula of 2.5 percent (or 250 basis points) plus yield based on the applicable U.S. Treasury rate.

The loan proceeds were advanced on April 30, 2001. To accommodate Clean Harbors, the lenders wired the funds to Clean Harbors' bank before 11:00 A.M.⁵ On the afternoon of April 30, 2001, Special Value Bond Fund, LLC, Arrow Investment Partners, and Bill and Melinda Gates Foundation filed their notification of the loans by hand with the Attorney General's office pursuant to G.L. c. 271, § 49(d). All the other lenders had filed their notices prior to April 30.

In the summer of 2001, Clean Harbors learned of an opportunity to purchase the Chemical Services Division (CSD) of Safety-Kleen Corporation, one of Clean Harbors' chief competitors, which had filed for bankruptcy protection a year earlier. Clean Harbors viewed the purchase as critical to its survival; the purchaser of CSD would likely dominate the national market, leaving the competition in its wake.

After months of negotiation, Clean Harbors announced its agreement to purchase CSD in February, 2002. The purchase price and the assumption of liabilities meant that Clean Harbors needed to finance $255 million in order to close. Clean Harbors obtained financing from a group of investors headed by Cerberus Capital Management L.P. John Hancock considered participating in the new financing, but ultimately declined.

The purchase of CSD posed a problem for Clean Harbors with respect to its existing loan with John Hancock. Under the terms of the SPA, Clean Harbors' purchase of CSD would place Clean Harbors in technical default.⁶ Such default would permit John Hancock's acceleration of the notes and would implicate the make whole amount provisions of the SPA, which were expressly applicable to voluntary as well as required prepayment, that is, payment in full in response to acceleration, as detailed in §§ 4.9 and 7.2(ii), supra. In July, 2002, Clean Harbors sought and obtained John Hancock's permission to waive the thirty-day notice required prior to prepayment of the notes. On August 5, 2002, Clean Harbors requested that John Hancock consider a reduction in the make whole amount, at that time estimated at roughly $17 million, which would be owed under the SPA upon prepayment of the notes. At some point in mid-August, John Hancock notified Clean Harbors that it would not reduce the make whole amount.

In an internal memorandum dated August 12, 2002, an attorney for the law firm representing Clean Harbors opined that default and acceleration were more advantageous than voluntary prepayment of the John Hancock notes, in terms of Clean Harbors' ability to challenge the make whole amount. The memorandum specifically advised: "In light of the Renda v. Gouchberg case [4 Mass.App.Ct. 786, 343 N.E.2d 159 (1976)], it is important to position the transaction as a `default' by the Company and an acceleration by the Investors, rather than a voluntary prepayment by the Company" (emphasis original). Subsequent electronic mail (e-mail) correspondence between Clean Harbors' attorneys and those representing the new lenders for the CSD acquisition, dated August 30, 2002, included the memorandum. In his deposition, a Clean Harbors attorney acknowledged that the legal memorandum was shared with the new lenders, but denied that Clean Harbors attempted to implement the strategy recommended therein.⁷

Instead, according to Clean Harbors, the new lenders "indicated that they would not fund the transaction unless the situation with John Hancock was resolved," and that they would not "fund into a default." As of September 3, 2002, Clean Harbors' president and chief executive officer (CEO), Alan McKim, knew that Clean Harbors was going to be in default under the SPA and believed that John Hancock would call the notes for that reason.

On September 6, 2002, Clean Harbors executed the closing documents for the purchase of CSD. By letter, also dated September 6, 2002, Clean Harbors notified John Hancock that it (Clean Harbors) was in default under the SPA. See note 6, supra. On September 9, 2002, John Hancock...