Hampton Tree Farms, Inc. v. Jewett

• Decision Date: 30 March 1995
• Citation: 320 Or. 599,892 P.2d 683
• Parties: HAMPTON TREE FARMS, INC., Petitioner on Review, v. Kate W. JEWETT, Personal Representative of the Estate of William W. Jewett, Deceased, and Erickson Hardwood Company, Respondents on Review. Daniel A. ERICKSON, Appellant, v. John C. HAMPTON and Diamond Wood Products, Inc., an Oregon corporation, Respondents. CC 9004-02368; CA A70222; SC S41148.
• Court: Oregon Supreme Court

Page 683

892 P.2d 683

320 Or. 599

HAMPTON TREE FARMS, INC., Petitioner on Review, v. Kate W. JEWETT, Personal Representative of the Estate of

William W. Jewett, Deceased, and Erickson Hardwood

Company, Respondents on Review.

Daniel A. ERICKSON, Appellant, v. John C. HAMPTON and Diamond Wood Products, Inc., an Oregon

corporation, Respondents.

CC 9004-02368; CA A70222; SC S41148.

Supreme Court of Oregon.

Argued and Submitted Nov. 3, 1994.

Decided March 30, 1995.

[320 Or. 601-A] Jeffrey M. Batchelor, of Lane Powell Spears Lubersky, Portland, argued the cause for petitioner on review. With him on the petition was David G. Hosenpud, Portland.

John L. Langslet, of Martin, Bischoff, Templeton, Langslet & Hoffman, Portland, argued the cause for respondents on [320 Or. 601-B] review Erickson Hardwood Co., and Kate W. Jewett and Daniel A. Erickson. With him on the responses was Julie K. Bolt, Portland.

VAN HOOMISSEN, Justice.

Plaintiff, Hampton Tree Farms, Inc. (Hampton), seeks review of a Court of Appeals decision reversing the trial court's grant of Hampton's motion for summary judgment as to the counterclaims of defendant Erickson Hardwood Company (EHC). ¹ Hampton Tree Farms, Inc. v. Jewett, 125 Or.App. 178, 865 P.2d 420 (1993). The issue is whether the trial court correctly determined that there is no genuine issue as to any material fact on EHC's claims and that Hampton is entitled to a judgment as a matter of law. ORCP 47 C. For the reasons that follow, we affirm the decision of the Court of Appeals.

FACTS AND PROCEDURAL BACKGROUND

EHC owned a lumber and pallet manufacturing plant in Garibaldi and another plant and dry kilns in Grande Ronde. Hampton was EHC's major supplier of logs, which were essential to EHC's pallet industry. In February 1986, William Jewett obtained for Hampton's benefit an irrevocable letter of credit as security for logs sold by Hampton to EHC. The letter required the issuing bank to make immediate payment to Hampton of up to $100,000 if EHC's debt to Hampton became more than 11 days overdue. EHC's account was more than 11 days overdue most of the time, but Hampton did not draw on the letter of credit. Jewett extended and increased the letter of credit several times. By the fall of 1987, EHC owed Hampton over $300,000. Hampton was unwilling to continue supplying logs to EHC without further assurance that EHC would pay its debt.

In October 1987, in order to induce Hampton to continue selling logs to EHC, Erickson and Jewett signed a guaranty agreement in favor of Hampton. That agreement provided that Erickson and Jewett jointly and severally guaranteed prompt payment to Hampton "at maturity of every note, check, loan, advance, contract for payment of logs and all other claims or indebtedness for which [EHC] is now liable or shall become liable to Hampton in the future." The guaranty was "continuing." It was to "remain in full force until revoked." Erickson and Jewett also agreed that, in the event of EHC's default, they personally would "pay on demand all sums due and to become due."

In December 1987, EHC filed for protection under Chapter 11 of the Bankruptcy Code. Hampton continued to supply EHC with logs, and EHC's debt grew to $810,000. In February 1988, Hampton prepared an order for approval by the bankruptcy court, containing the following terms: Hampton would continue to supply logs to EHC and, in return, Hampton would be given a post-petition first-priority security interest and lien on the logs, products, accounts, and proceeds from the sale of the products. The proposed order also provided that EHC would give Hampton projected operating cash flow budgets, weekly invoices, and monthly financial reports; that a separate account would be established for deposit of cash proceeds of Hampton's collateral; that Hampton would receive at least 40 percent of the funds deposited in the account; that, if that amount was insufficient to pay outstanding balances, then EHC would pay more, so that no invoices would be over 30 days old; and that Hampton's approval was required for any purchase by EHC over $2,000. Hampton and EHC signed the proposed order. Also in February 1988, Jewett replaced the letter of credit with a $250,000 certificate of deposit, issued in Jewett's and Hampton's names jointly, subject to the terms of a pledge agreement that gave Hampton the sole right to redeem the certificate in the event of EHC's default.

In July 1988, Smith, Hampton's vice-president, wrote a letter "To Whom it May Concern," stating in part:

"[Hampton Tree Farms, Inc., is] the principal supplier [ ] of alder logs to Erickson Hardwood at Garibaldi, Oregon. Erickson Hardwood processes the alder logs into pallets. Presently, Erickson Hardwood has 1,500 MBF of alder logs on hand for processing into pallets. As to future log supply, we do not believe that we will experience any major curtailment in log deliveries to Erickson Hardwood for the pallet operations at Garibaldi, Oregon. Placing your pending order for pallets with Erickson Hardwood will be helpful."

EHC's Chapter 11 reorganization was confirmed by the bankruptcy court in November 1988. The plan indicated that EHC had secured a steady supply of logs from Hampton and that Hampton had "agreed to supply the logs and to receive payments only after the Debtor [EHC] is paid for the finished product." John Hampton understood the plan to require Hampton to purchase logs from outsiders for EHC's use should Hampton be unable to meet EHC's requirements. All parties understood that the success of the plan was contingent on Hampton's continuing to supply logs to EHC, because EHC had no other source of logs. John Hampton told Jewett that he believed that EHC was a viable business and, in reliance on that statement, Jewett increased the amount of his guaranty. EHC and Hampton worked together closely, and financial statements show that, by the spring of 1989, EHC's income exceeded its expenses and its debts were diminishing.

By May 1989, EHC had significantly reduced its debt to Hampton. However, EHC still owed Hampton more than $600,000. Hampton became concerned about the ratio of EHC's inventory to its receivables. During a meeting with Erickson and Jewett, John Hampton stated that Hampton would require additional security. When asked if Hampton would renege on its agreement to supply logs to EHC, John Hampton said that it would not. The parties then agreed to additional security, and EHC agreed to increase the percentage of its receivables to be paid to Hampton. At that same meeting, John Hampton suggested that EHC should sell its Garibaldi mill. Erickson and Jewett agreed that John Hampton would "explore the market" and report back to them. John Hampton stated that he would assure potential buyers of the mill that Hampton would continue to supply logs to EHC and that no shutdown of the mill was anticipated.

In June 1989, John Hampton told Jewett that a deal had been made to sell the mill to Diamond Wood Products (Diamond). Later, John Hampton told Erickson that he had sold the mill to Diamond for $2.5 million. Erickson pleaded with John Hampton not to sell, arguing that the mill was becoming profitable and would succeed. John Hampton responded that EHC should seek outside financing, because Hampton was unwilling to continue supplying logs to EHC on the previously agreed terms. That same month, Hampton began reducing the supply of logs to EHC.

Erickson thereafter met with potential investors who expressed an interest in purchasing lumber from EHC and in providing financing. Erickson told them that he needed to consult with John Hampton, because Hampton was EHC's sole supplier of logs. Erickson met with John Hampton, who refused to agree to the arrangement with the potential investors. John Hampton again told Erickson that the mill had been sold to Diamond, that Diamond would get all of Hampton's logs, and that Erickson should discontinue seeking outside financing.

In July 1989, John Hampton met with Diamond to negotiate the details of the sale of EHC's mill. EHC was not informed of that meeting. John Hampton proposed that Diamond buy the mill for $1.5 million in cash and the release of Erickson and Jewett from their guarantees, and that a payment of $1 million be made later. John Hampton prepared a memorandum of understanding that included those terms, which Diamond's president signed. Diamond thereafter made a counterproposal, which it presented to John Hampton at another meeting. EHC was not informed of that meeting. Diamond's counterproposal reflected Diamond's concern that EHC's creditors would continue to have liens on EHC's equipment after the sale. Diamond proposed, therefore, that EHC should petition the bankruptcy court for modification of its reorganization plan, to require liquidation following acceptance of Diamond's offer to buy the Garibaldi mill for $800,000, or its offer to buy both the Garibaldi and the Grande Ronde mills for $1,200,000. Under Diamond's counterproposal, all but one of EHC's secured creditors would have been paid. Diamond also indicated to John Hampton that Diamond might just wait for EHC to collapse, hoping to acquire EHC's assets at a lower price. Hampton continued to assure EHC that a sale to Diamond would go through. ² Because of his experience, John Hampton knew, or should have known, that the mill had more value if it was operating than if it was closed.

Because Hampton controlled EHC's log supply, EHC, Jewett and Erickson were forced to agree to sell the mill and other assets and to drop their negotiations with the potential investors. In July 1989, an earnest money agreement was executed by Diamond, EHC, Erickson, and Jewett, which provided that Diamond would pay $1,400,000 for the mills at Garibaldi and Grande Ronde, with a further payment of $900,000 to be made at a future date. The agreement contained in the earnest money agreement differed from the prior proposal of John Hampton and from...