H Enterprises Intern. v. GENERAL ELEC. CAPITAL

• Court: U.S. District Court — District of Minnesota
• Citation: H Enterprises Intern. v. GENERAL ELEC. CAPITAL, 833 F.Supp. 1405 (D. Minn. 1993)
• Decision Date: 06 October 1993
• Docket Number: Civ. No. 4-91-679.
• Parties: H ENTERPRISES INTERNATIONAL, INC., Waldorf Corporation, Richard E. O'Leary, John E. Byrne, Anita M. Bertelson, Plaintiffs, v. GENERAL ELECTRIC CAPITAL CORPORATION, Defendant and Counterclaim Plaintiff, v. H ENTERPRISES INTERNATIONAL, INC., Waldorf Corporation, Richard E. O'Leary, John E. Byrne, Anita M. Bertelson, Counterdefendants, and Eugene U. Frey, George J. Frey and Edward K. Bixby as Trustees of the Mary F. Frey Family Trust U/A dated July 2, 1985; James R. Frey, Eugene U. Frey and Mary F. Frey as Trustees of the James R. Frey 1987 Trust U/A dated December 30, 1987; John J. Frey, Eugene U. Frey and Mary F. Frey as Trustees of the John J. Frey 1987 Trust dated December 30, 1987; and Carole F. Wolfe, Eugene U. Frey and Mary F. Frey as Trustees of the Carole F. Wolfe Trust U/A dated December 30, 1987, Additional Defendants on the Counterclaim.

833 F. Supp. 1405

H ENTERPRISES INTERNATIONAL, INC., Waldorf Corporation, Richard E. O'Leary, John E. Byrne, Anita M. Bertelson, Plaintiffs, v. GENERAL ELECTRIC CAPITAL CORPORATION, Defendant and Counterclaim Plaintiff, v. H ENTERPRISES INTERNATIONAL, INC., Waldorf Corporation, Richard E. O'Leary, John E. Byrne, Anita M. Bertelson, Counterdefendants, and Eugene U. Frey, George J. Frey and Edward K. Bixby as Trustees of the Mary F. Frey Family Trust U/A dated July 2, 1985; James R. Frey, Eugene U. Frey and Mary F. Frey as Trustees of the James R. Frey 1987 Trust U/A dated December 30, 1987; John J. Frey, Eugene U. Frey and Mary F. Frey as Trustees of the John J. Frey 1987 Trust dated December 30, 1987; and Carole F. Wolfe, Eugene U. Frey and Mary F. Frey as Trustees of the Carole F. Wolfe Trust U/A dated December 30, 1987, Additional Defendants on the Counterclaim.

Civ. No. 4-91-679.

United States District Court, D. Minnesota, Fourth Division.

October 6, 1993.

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James Robert Safley, Sara Anspach Poulos, Elliot S. Kaplan, Rita Coyle DeMeules, Robins, Kaplan, Miller & Ciresi, Minneapolis, MN, for plaintiffs.

Peter McCreery Lancaster, Dorsey & Whitney, Madge S. Thorsen, Jeffrey J. Weill, Robert Bruce MacDonald, Meredith Marie McQuaid, Daniel D. Hill, Zoltan Pinter, Popham Haik Schnobrich & Kaufman, Minneapolis, MN, John S. McGeeney, Paul, Hastings, Janofsky & Walker, Stamford, CT, for General Elec. Capital Corp.

Harold D. Field, Jr., Leonard, Street & Deinard, James Robert Safley, Elliot S. Kaplan, Rita Coyle DeMeules, Robins, Kaplan, Miller & Ciresi, Minneapolis, MN, for H Enterprises Intern., Inc., Richard E. O'Leary, John E. Byrne, Anita M. Bertelsen.

James Robert Safley, Elliot S. Kaplan, Rita Coyle DeMeules, Robins, Kaplan, Miller & Ciresi, Minneapolis, MN, for Waldorf Corp.

Harold D. Field, Jr., Jane F. Godfrey, Leonard Street & Deinard, Minneapolis, MN, for Eugene U. Frey, George J. Frey, Edward K. Bixby, James R. Frey, Mary F. Frey, John J. Frey and Carole F. Wolfe.

ORDER

DOTY, District Judge.

This matter is before the court on the motion of defendant General Electric Capital Corporation ("GECC") for summary judgment on plaintiffs' claims for tortious interference with contractual relations, tortious interference with prospective business relations, fraud, breach of fiduciary duty and the duty of good faith and fair dealing and Waldorf's damages claims. GECC also seeks summary judgment on claims asserted by the counterdefendants for tortious interference with contractual relations, breach of the duty of good faith and fair dealing and fraud. Based on a review of the file, record and proceedings herein, the motions are granted in part and denied in part.

BACKGROUND¹

1. Overview

Waldorf Corporation ("Waldorf") is engaged in the business of recycled paperboard and folding carton manufacturing, and is a wholly owned subsidiary of H Enterprises International, Inc. ("HEII"). On November 24, 1987, Waldorf entered into a loan and security agreement with GECC which replaced an earlier loan agreement between the parties ("1987 loan agreement").² Waldorf granted GECC a first priority security interest in all of Waldorf's assets to secure its obligations under the 1987 loan agreement. By its terms, the agreement expires on December 31, 1997. During the refinancing, the parties also executed a separate contingent interest agreement that provides for a future contingent interest payment to GECC upon a triggering disposition of the company.³

By its terms, the contingent interest agreement is secured by guarantees of HEII and its shareholders.⁴ Whether the contingent interest agreement is also secured by GECC's security interest in Waldorf's assets is hotly disputed. Plaintiffs contend that GECC's security interest was not intended to secure any obligations or performance under the contingent interest agreement. Plaintiffs claim that the contingent interest agreement was entered merely to provide GECC with an additional interest payment in the event of a triggering disposition. GECC claims, however, that the contingent interest agreement was designed to maintain a balance between Waldorf, the shareholders and affiliates until a triggering disposition occurs. GECC contends that the security interest secures not only the 1987 loan agreement and the obligations contained therein, but also all obligations arising from other agreements related to the refinancing, including Waldorf's performance under the contingent interest agreement.

On February 27, 1992, Waldorf paid GECC $91,218,822.57, which plaintiffs contend represents all amounts due under the 1987 loan agreement, including liquidated damages. Despite that payment, GECC insists that it retains a first priority security interest in Waldorf's assets. GECC contends its security interest survives Waldorf's prepayment and continues to protect GECC's rights under the contingent interest agreement until such interest is paid or the agreement expires by its terms.⁵ Waldorf contends that it has fully discharged its obligations under the 1987 loan agreement by paying GECC in full. Waldorf insists that the contingent interest agreement was never secured by its assets or the loan agreement.⁶

2. Plaintiffs' Version of the Facts

Plaintiffs claim that GECC misrepresented its position during the 1987 contractual negotiations. In 1987, Waldorf paid off a 1985 loan with GECC and sought financing for a recapitalization. GECC was eager to provide financing as the earlier loan to Waldorf turned out to be a "shrewd investment." In August 1987, GECC made a written proposal to provide new financing to Waldorf. Waldorf and Joseph Fleming ("Fleming") of GECC reached a tentative agreement that GECC would accept $20 million to retire the 1985 warrant. Michael Carpenter ("Carpenter"), a senior GECC executive, believed the warrant was more valuable and demanded a higher amount which Waldorf refused. GECC and Waldorf reached a compromise which called for Waldorf to pay GECC $20 million to retire the warrant. Waldorf also agreed to enter into a contingent interest agreement that provided for GECC to receive additional value from Waldorf upon a triggering disposition. GECC proposed that an additional payment be triggered by a sale of 50% of the controlling interest of Waldorf or HEII. Waldorf insisted, however, that a contingent interest payment would not be due unless more than 50% of Waldorf or HEII was sold so that a shareholder buyout would not require an additional payment to GECC.

During the 1987 negotiations, plaintiffs expressed concern about Waldorf's right to refinance the 1987 loan with GECC prior to its expiration date. Fleming indicated that Waldorf had the right to terminate the loan before its expiration. Waldorf also discussed its right to refinance with Carpenter. Carpenter believed that Waldorf would refinance before the loan expired. According to plaintiffs, Carpenter was concerned that if Waldorf repaid the 1987 loan before it expired, the contingent interest agreement would be unsecured and unprotected because GECC would no longer hold a security interest in Waldorf's assets. To provide some protection, Carpenter asked HEII and its shareholders to personally guarantee Waldorf's performance of the contingent interest agreement. HEII and its shareholders conceded that GECC needed some security to look to in the event of refinancing and a subsequent triggering disposition. Based on the representation that the contingent interest agreement was not secured by Waldorf's assets, HEII and its shareholders agreed to the guarantees.⁷

In 1990, Waldorf sought to acquire a large Canadian paperboard manufacturer, Paperboard Industries Corporation ("PIC"). The Trident group favored the transaction, while the Frey group opposed it. Waldorf informed GECC of the shareholder deadlock and advised GECC that Waldorf could no longer pursue PIC. The dispute over PIC prompted the two groups to discuss a shareholder buyout. In late October 1990, the Trident group offered to buy the interests of the Frey group. The Trident group informed GECC of the offer; Fleming stated that a shareholder buyout would be good for Waldorf and that GECC would be interested in financing a buyout.

According to plaintiffs, GECC encouraged a shareholder buyout because it erroneously believed it would receive a contingent interest payment. Fleming soon discovered, however, that the proposed buyout of the Frey group's interest would not trigger a contingent interest payment. Plaintiffs contend that GECC then began devising a scheme to compel a contingent interest payment. An internal GECC memorandum addressed to Fleming stated that a shareholder buyout would not result in a contingent interest payment. Nevertheless, the memorandum suggested that some provisions of the contingent interest agreement could be used as a "lever to force contingent interest payment to GECC."

Fleming continued to participate in discussions and meetings aimed at accomplishing a shareholder buyout. After Fleming confirmed that GECC would finance a buyout, the Frey group signed a letter of intent on April 10, 1991, to buy the interests of the Trident group. Fleming stated that GECC could provide a commitment to finance by May 21, 1991, the financing deadline set by the Frey group. On April 25, 1991, GECC and Frey signed a letter setting forth the terms on which GECC would provide financing of up to $240 million for the recapitalization of Waldorf and the redemption of the Trident stock. Fleming indicated that the financing would be accepted by GECC subject only to due diligence.

Fleming also proposed that the contingent interest agreement be liquidated in conjunction with the buyout. Frey agreed and offered to pay GECC $10 million to retire the agreement. GECC concluded, however, that $10 million was not adequate to retire the contingent interest...