Hampton Tree Farms, Inc. v. Jewett

• Decision Date: 08 December 1993
• Parties: HAMPTON TREE FARMS, INC., Respondent-Cross-Appellant, v. Natalie D. JEWETT, Personal Representative of the Estate of William W. Jewett, Deceased, Third-Party Plaintiff, Appellant-Cross-Respondent, and Daniel A. ERICKSON and Erickson Hardwood Company, Third-Party Plaintiffs, Appellants, v. John C. HAMPTON and Diamond Wood Products, Inc., an Oregon corporation, Third-Party Defendants, Respondents. 9004-02368; CA A70222.
• Court: Oregon Court of Appeals

Page 420

865 P.2d 420

125 Or.App. 178

HAMPTON TREE FARMS, INC., Respondent-Cross-Appellant, v. Natalie D. JEWETT, Personal Representative of the Estate of

William W. Jewett, Deceased, Third-Party

Plaintiff, Appellant-Cross-Respondent,

and

Daniel A. ERICKSON and Erickson Hardwood Company, Third-Party Plaintiffs, Appellants, v. John C. HAMPTON and Diamond Wood Products, Inc., an Oregon

corporation, Third-Party Defendants, Respondents.

9004-02368; CA A70222.

Court of Appeals of Oregon.

Argued and Submitted Sept. 18, 1992.

Decided Dec. 8, 1993.

John L. Langslet, Portland, argued the cause for appellants and appellant-cross-respondent. With him on the briefs were [125 Or.App. 180-A] Julie K. Bolt and Martin, Bischoff, Templeton, Langslet & Hoffman.

Jeffrey M. Batchelor, Portland, argued the cause for respondent-cross-appellant Hampton Tree Farms and respondent John Hampton. With him on the brief were David G. Hosenpud and Lane Powell Spears Lubersky.

Mary K. Vander Weele, Portland, argued the cause for respondent Diamond Wood Products. With her on the brief were Stephen S. Walters and Stoel Rives Boley Jones & Grey.

Before RICHARDSON, ^* C.J., and De MUNIZ and LEESON, ^** JJ.

De MUNIZ, Judge.

Defendants appeal from a judgment for Hampton Tree Farms, Inc. (plaintiff), to enforce a guaranty and a pledge agreement made by defendant William Jewett. ¹ They contend, inter alia, that the trial court erred in failing to grant their motion for directed verdict on plaintiff's claim on the guaranty and in granting summary judgment to plaintiff dismissing their counterclaims. Plaintiff cross-appeals, contending that the trial court erred in failing to award it attorney fees for successfully defending against the counterclaims.

Defendant Erickson Hardwood Company (EHC) owned two Oregon plants, an alder lumber and pallet manufacturing plant in Garibaldi, and a "cut-up plant" and dry kilns in Grand Ronde. Daniel Erickson was EHC's president and sole shareholder. Jewett was an officer of the corporation, had loaned it substantial sums of money and held options to purchase its stock. Between 1984 and 1987, EHC installed an automatic pallet assembly machine and a new mill at the Garibaldi plant.

Plaintiff was EHC's major supplier of alder logs, which were essential to EHC's pallet industry. Beginning in February, 1986, Jewett obtained, for plaintiff's benefit, an irrevocable letter of credit as security for logs sold by plaintiff to EHC. The letter required the issuing bank to make immediate payment to plaintiff of up to $100,000 if EHC's log account was more than 11 days overdue. EHC's account was more than 11 days overdue most of the time, but plaintiff did not draw on the letter of credit. Jewett extended and increased the letter of credit several times.

In the fall of 1987, EHC owed plaintiff approximately $300,000. Plaintiff was unwilling to continue supplying logs without further assurances that the debt would be paid. In October, 1987, "to induce [plaintiff] to continue to sell logs," Erickson and Jewett jointly and severally gave plaintiff a guaranty for

"the prompt payment to [plaintiff] 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 [plaintiff] in the future * * *."

The guaranty was "continuing." It was to "remain in full force until revoked." Jewett and Erickson agreed that, in the event of EHC's default, they would "pay on demand all sums due and to become due." As a part of the guaranty, Erickson and Jewett executed a security agreement and UCC financing statement.

Shortly after EHC began to operate its new mill at Garibaldi, a drought interrupted its supply of alder logs, and the mill closed. In December, 1987, EHC filed a petition for reorganization under Chapter 11 of the Bankruptcy Code. Plaintiff continued to supply EHC with logs, and EHC's debt grew to $810,000. In February, 1988, Jewett replaced the letter of credit with a $250,000 certificate of deposit, issued in Jewett's and plaintiff's names jointly, subject to the terms of a pledge agreement that gave plaintiff the sole right to redeem the certificate in the event of EHC's default. Jewett's pledge and certificate of deposit secured only pre-bankruptcy debt. In October, 1989, John Hampton, plaintiff's president, wrote a letter to Jewett expressing the intention to redeem the certificate of deposit, and in April, 1990, plaintiff filed this lawsuit.

Jewett responded to plaintiff's complaint by requesting that Erickson and EHC be joined as defendants. The trial court granted the request, and all three defendants filed counterclaims for breach of fiduciary duty, negligence, breach of contract and breach of the duty of good faith and fair dealing. They also filed third-party claims against Hampton, individually, and Diamond Wood Products, a customer of plaintiff's, in which they alleged that Hampton and Diamond had acted to destroy EHC's business and had thereby triggered Jewett's liability to plaintiff. The trial court granted summary judgment to plaintiff on defendants' counterclaims and dismissed the third-party claims.

Summary judgment is appropriate under ORCP 47 if the record on summary judgment shows that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law. In considering defendants' contention that the court erred in granting plaintiff's motion for summary judgment on their counterclaims, we view the record in the light most favorable to defendants. Stanfield v. Laccoarce, 288 Or. 659, 665, 607 P.2d 177 (1980). The record on summary judgment consists of all exhibits and depositions submitted by the parties in support of, or in opposition to, the motion for summary judgment. That is the record we review here.

In response to plaintiff's motion for summary judgment, defendants submitted evidence that EHC filed its bankruptcy petition under Chapter 11 after Hampton promised that plaintiff would supply EHC with logs to keep EHC's mill running. From the time EHC filed for bankruptcy in December, 1987, defendants operated the Garibaldi and Grand Ronde mills under the supervision of the bankruptcy court, with protection from EHC's creditors. Plaintiff continued to sell logs to EHC on credit, and understood that a consistent log supply was essential to EHC's Chapter 11 plan. Plaintiff became EHC's only supplier, and, if it did not produce enough logs for EHC, it would purchase them and deliver them to EHC's mill. A February, 1988, order of the bankruptcy court recites that EHC, in the ordinary course of its business and at its discretion, could obtain logs from plaintiff on credit and that plaintiff would have a first priority lien on all logs, products, accounts and proceeds of the mill and retain title to all logs until they were manufactured and the lumber or pallets were sold.

The bankruptcy court confirmed EHC's reorganization plan in November, 1988. All parties contemplated that the success of the plan was contingent on plaintiff continuing to supply EHC with logs. Hampton told Jewett that he believed that EHC was a viable business; in reliance on that, Jewett increased the amount of his guaranty. After the filing of the reorganization plan, EHC and plaintiff worked together closely. Financial statements show that, in the spring of 1989, EHC's income exceeded its expenses and its debts were diminishing.

In May, 1989, Hampton called a meeting with EHC, because he was concerned about an imbalance between EHC's receivables and its inventory. Plaintiff sought additional collateral as a condition of continuing to supply logs to EHC, and Jewett, Erickson and EHC agreed to provide plaintiff additional collateral for any debt over $600,000. Jewett assigned to plaintiff a mortgage that he had received from Erickson and his wife on two Dairy Queen restaurants. EHC increased to 60% the percentage of receivables that it would pay to plaintiff. Hampton assured defendants that plaintiff would continue to supply logs to EHC. A few days later, EHC's log debt was reduced to below $600,000.

Also at the May meeting, Hampton suggested that it was a good time to try to sell the Garibaldi mill, because he believed that it was profitable and marketable. He promised that he would tell any potential buyer that plaintiff would continue to supply the mill with logs and that he did not anticipate any shut-downs. Erickson and Jewett authorized Hampton to find a potential purchaser and to report back within 30 days.

A few weeks later, Hampton reported to Erickson that Diamond would buy the mill for $2.5 million. Because he believed that the mill would continue to be profitable and that the proposed sale price was too low, Erickson asked Hampton not to insist on the sale. Hampton made it clear to Erickson that if he did not agree to the sale, plaintiff would stop supplying logs to EHC, which would force the closure of the mill.

In mid-June, 1989, Erickson met with a Japanese businessman who was interested both in purchasing 40 to 50 car loads of alder lumber per month from EHC and in providing financing. Erickson could do nothing without plaintiff's consent, because plaintiff was EHC's sole log supplier. Hampton refused to consider the arrangement. Hampton told Erickson: "You don't understand, Diamond is going to get all the logs. Don't even try to find financing. The mill is sold and that's it."

Without advising Erickson, Hampton and Tom Schmit, plaintiff's financial officer, met with Diamond on July 10, 1989, to negotiate the sale of EHC's assets. Hampton proposed a sale price of $1.5 million in cash and the release of Erickson and Jewett from their guaranties. Hampton proposed an additional $1 million payment "down stream" to plaintiff, Erickson and Jewett from a limited partnership to be created with Diamond. Hampton wrote a memorandum of understanding that...