IRON MTN. SEC. STORAGE v. Am. Specialty Foods

• Decision Date: 06 September 1978
• Docket Number: Civ. A. No. 77-3276.
• Citation: 457 F. Supp. 1158
• Parties: IRON MOUNTAIN SECURITY STORAGE CORPORATION v. AMERICAN SPECIALTY FOODS, INC., and Iron Mountain, Incorporated.
• Court: U.S. District Court — Eastern District of Pennsylvania

457 F. Supp. 1158

IRON MOUNTAIN SECURITY STORAGE CORPORATION v. AMERICAN SPECIALTY FOODS, INC., and Iron Mountain, Incorporated.

Civ. A. No. 77-3276.

United States District Court, E. D. Pennsylvania.

September 6, 1978.

Spencer Ervin, Jr., Philadelphia, Pa., Charles W. Morse, Jr., Boston, Mass., for plaintiff.

Richard M. Shusterman, Philadelphia, Pa., for defendants.

OPINION

LUONGO, District Judge.

This is a diversity action¹ for a judgment declaring the rights and obligations of the parties under a contract between plaintiff, Iron Mountain Security Storage Corporation (IMSSC), and its debtor, American Specialty Foods, Inc. (ASF). The case is before me on a motion to dismiss defendants' counterclaim.

This controversy began with the divestment of IMSSC, a company providing record storage services in a New York cave, by its parent holding company, Iron Mountain, Inc. (Iron Mountain) in April 1975. Although not explained in the pleadings,² the parties agree that this event occurred as a result of Iron Mountain's poor financial condition. In addition to other debts, Iron Mountain owed a large sum of money to Schooner Capital Corporation (Schooner) and FNCB Capital Corporation (FNCB), and it was in default. In return for cancellation of the debt, Iron Mountain agreed to sell Schooner and FNCB all of its IMSSC stock (100% of the preferred, 98.82% of the common).

At this time, Iron Mountain also was in debt to IMSSC for $2,248,332 for cash borrowed from IMSSC prior to 1975. Some of that cash had been invested by Iron Mountain in open account advances to another of its subsidiaries, ASF, a company engaged in mushroom production which also serves as a holding company for subsidiaries producing macaroni and tomato products. Iron Mountain owned and continues to own all of ASF's common stock, and, in 1975, ASF was indebted to Iron Mountain for an amount in excess of $5,000,000. As part of the IMSSC sale transaction, the parties agreed that Iron Mountain's debt to IMSSC would be assumed by ASF; assumption of that debt apparently would setoff some of ASF's debt to Iron Mountain.

The transaction was consummated on April 30, 1975, when IMSSC delivered to ASF Iron Mountain's promissory note for $2,248,332 in exchange for a new promissory note from ASF for the same amount, payable in five years. In addition to the note transfer, the executive officers of IMSSC and ASF executed a "Note Exchange and Option Agreement," which provides:

"ASF shall have the right and option, exercisable at any time after April 1, 1976 and prior to the date the ASF Promissory Note matures and is payable in accordance with its terms, to repurchase from IMSSC the ASF Note at its then Formula Value (as defined in Section 4 hereof) payable in cash within 15 days of ASF delivering to IMSSC its notice of intent to exercise its option rights . . .."

Section 4.C. of the Agreement defines "Formula Value" as follows:

"Formula Value shall equal the greater of:

(1) The Available Net Worth of ASF (but not in any event more than $2,248,332); or

(2) The sum of $22,483, representing 1% of the principal amount of the ASF Note."

The remainder of § 4 states how to compute the "Available Net Worth of ASF" referred to in § 4.C.(1); generally, that figure consists of certain ASF asset values minus certain liability values "as of the last day of the month next preceding the month in which ASF exercises its repurchase option."

On June 15, 1977, ASF notified IMSSC of its intention to repurchase the promissory note for $22,483, which, in its view, was the correct "Formula Value" under § 4.C. of the Option Agreement. On June 23, 1977, ASF mailed IMSSC a certified check for $22,483, which contained a statement that endorsement by the payee "acknowledges that the proceeds constitute the full and complete repurchase price of the Maker's Note." On that same date, IMSSC notified ASF that it believed the "Formula Value" was a sum in excess of $22,483. On June 27, 1977, it returned the ASF check without endorsement or negotiation, explaining that the restrictive legend on the check made it unacceptable. On June 30, 1977, ASF had the Bank of Delaware wire-transfer funds in the amount of $22,483 to parties acting on IMSSC's behalf, and IMSSC had the funds placed in an escrow account for its own benefit.

On September 22, 1977, IMSSC instituted this suit against ASF and Iron Mountain, contending that ASF is obligated to pay an additional $891,977 for repurchase of the promissory note. Generally, it asserts that, in view of certain debt reductions by ASF, the "Available Net Worth of ASF" for purposes of § 4.C. of the Option Agreement is $914,460, and that that amount therefore was the correct "Formula Value" for repurchase of the note. IMSSC seeks a judgment declaring that it is entitled to the additional money and that it may hold the ASF promissory note until the additional funds are received. In addition, it asks for a declaration that the $2,248,332 promissory note from Iron Mountain (which IMSSC transferred to ASF on April 30, 1975 in return for ASF's note) be deemed to be held by ASF in constructive trust as security for the additional funds owed IMSSC and that IMSSC and Iron Mountain be enjoined from extinguishing indebtedness on that note until that additional money is paid.

Defendants filed an answer and counterclaim on November 29, 1977. In the answer, they contend that the "Available Net Worth of ASF" when computed according to the Option Agreement is "0" and that the correct "Formula Value" therefore is $22,483, the amount tendered. The counterclaim is in two counts. The first asserts a claim for damages for breach of the Option Agreement. The second count asserts a tort claim for compensatory and punitive damages for what defendants characterize as "bad faith or malicious breach of contract" (Defendants' Memorandum at 16). IMSSC has moved to dismiss the counterclaim.

DISCUSSION

Count I

The first count of the counterclaim alleges that ASF exercised its right under the Option Agreement to repurchase the ASF promissory note, paying the purchase price provided in the Agreement, but that IMSSC then breached its obligation under the Agreement to return the note to ASF. It avers that "as a direct and proximate result of the aforesaid breach of contract," ASF has suffered certain specified damages, and, in addition to the damages, it seeks to enjoin IMSSC from enforcing the note and to have IMSSC return the note to ASF.

IMSSC contends that Count I fails to state a claim upon which relief can be granted. Its main argument appears to be that this portion of the counterclaim is superfluous since it is just a "mirror image" of plaintiff's claim and defendants can achieve all they seek to recover by successfully defending against IMSSC. Not surprisingly, little authority is cited in support of this argument.³ I know of no rule preventing the assertion of a counterclaim merely because the theory relied upon is the converse of that in the complaint.

Defendants would have every right to seek a judgment declaring that their interpretation of the contract was the correct one. A ruling adverse to plaintiff on plaintiff's claim would merely result in a judgment that plaintiff was not entitled to the relief requested; although it might logically follow from that judgment that defendants' interpretation of the contract was the correct one, defendants would not be entitled to a judgment to that effect unless they specifically requested one. The claim made in Count I seeks more than a declaration in favor of defendants' interpretation of the contract, however; it seeks damages for breach of the contract by the plaintiff, IMSSC. As explained in their brief, defendants' theory of recovery is that, by refusing to surrender the promissory note and wrongfully asserting that ASF was still indebted to it, plaintiff caused defendants to suffer substantial consequential damages for which it is liable. Even under plaintiff's superfluity theory, therefore, the counterclaim would not be subject to dismissal, since it raises damages issues beyond the scope of the complaint. Since this aspect of the counterclaim arises out of the same set of facts as those set forth in the complaint, it is "compulsory" under Federal Rule of Civil Procedure 13(a) and would be nonlitigable under res judicata principles if not asserted as part of this case. See generally 3 Moore's Federal Practice ¶ 13.121 (2d ed. 1974). Count I will not be dismissed as superfluous.

In support of its motion, IMSSC relies on § 8-315(3) of the Uniform Commercial Code, which authorizes specific enforcement of the right to obtain possession of a security.⁴ Assuming that this section is applicable to the facts of this case, it does not aid plaintiff's argument. The section merely authorizes a specific form of relief; it does not purport to provide an exclusive remedy and does not state that other forms of relief, such as damages, are proscribed. See UCC § 8-315, Comment 2. The section therefore has no bearing on defendants' damage claim.

Plaintiff's argument appears to be that the availability of a statutory right to regain possession of the promissory note under § 8-315(3) provides defendants with "a full, complete and adequate remedy" (Plaintiff's Reply Memorandum at 19) for any breach of contract that has occurred. Plaintiff adds that, since it has offered to place the note in the Court's possession pending the outcome of this case (see generally Fed.R.Civ.P. 67), that remedy will flow automatically to defendants if they prevail on plaintiff's claim. Even if that is true, however, it is no reason why defendants, to protect their rights, cannot formally request such a remedy by filing a counterclaim. Moreover, defendants' request for damages clearly demonstrates that, on the face of the counterclaim, return of the note is not "a full, complete and adequate remedy" since they allege that ASF has sustained monetary injury as a...