Mhc Investment Co. v. Racom Corp.

• Decision Date: 19 June 2002
• Docket Number: No. 4-01-CV-90708.,4-01-CV-90708.
• Parties: MHC INVESTMENT COMPANY, Plaintiff, v. RACOM CORPORATION Defendant, v. Ronald W. Stepien, Dennis H. Melstad, and David Sokol Third-party Defendants.
• Court: U.S. District Court — Southern District of Iowa

254 F.Supp.2d 1090

MHC INVESTMENT COMPANY, Plaintiff, v. RACOM CORPORATION Defendant, v. Ronald W. Stepien, Dennis H. Melstad, and David Sokol Third-party Defendants.

No. 4-01-CV-90708.

United States District Court, S.D. Iowa, Central Division.

June 19, 2002.

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Mark McCormick, Des Moines, IA, for plaintiff and third-party defendant.

Kevin H. Collins, Nancy J. Pinner, Cedar Rapids, IA, for defendant.

MEMORANDUM OPINION AND ORDER

PRATT, District Judge.

Plaintiff, MHC Investment Company ("MHC"), filed this action for judgment on a series of agreements between itself and Defendant Racom Corporation ("Racom"). Racom has pled affirmative defenses of fraudulent inducement, lack of authority on the part of Racom's board of directors to enter the agreement, and lack of consideration. Racom has also brought counterclaims against MHC and the individual third-party defendants for fraud, civil RICO, slander per se, and breach of fiduciary duty. Plaintiff MHC now moves for summary judgment on its original claim and, along with the third-party defendants, moves for summary judgment on Racom's counterclaims. Racom has resisted and also moved to extend summary judgment proceedings pursuant to Rule 56(f) of the Federal Rules of Civil Procedure. On April 2, 2002, the Court denied Racom's motion to extend. For the following reasons, MHC's motions for summary judgment are now granted.

I. Facts

Racom is in the business of providing two-way radio service to utilities, emergency services and law enforcement. MHC is a holding company with interests primarily in energy utilities. On July 16, 1996, MHC's predecessor-in-interest, MidAmerican Capital Company, purchased the sole share of Series A Preferred Stock of Racom pursuant to a Stock Purchase Agreement. The Series A Preferred Stock (the "Preferred Share") had a cumulative dividend rate of 8% per annum with dividends payable semi-annually on June 30 and December 31 of each year. Dividends were deferred for the first two years after the Stock Purchase Agreement and issuance of the Preferred Share.

The parties also agreed that pursuant to the Stock Purchase Agreement, at least six directors of Racom must authorize any "Important Matter," as defined in the Agreement. Racom President Gregg Miller acknowledges in his testimony that this provision was requested by MHC in negotiations. Racom's board minutes indicate at least six board members attended every board meeting in 1999. The parties also agreed that MHC would have the right to elect two representatives to Racom's board of directors.

Finally, the Stock Purchase Agreement grants MHC a "Put" on its Preferred Share, by which MHC may tender the Preferred Share back to Racom for its original price of $10 million (the "Redemption Price") in addition to any accrued or unpaid dividends, in the event that Racom did not meet certain specified financial conditions by July 16, 2001. Under this provision, MHC would have until September 16, 2001 to tender the put and then Racom would be required to meet the obligation with cash within 90 days of receiving notice that MHC was exercising the right.

On June 29, 1998, the parties also agreed that MHC would loan Racom $9.75 million dollars with an interest rate of 14% to resolve a dispute with another shareholder, Ericcson, and buy out Ericcson's stake in Racom. All of Ericcson's shares were purchased in an effort to resolve a conflict over Ericcson's alleged nonperformance of equipment delivery and faulty equipment performance. In January 1999, MHC accepted 45 shares of common stock in Racom in exchange for its forbearance of certain rights under the Stock Purchase Agreement relating to the payment of dividends that were due but not paid in December 1998. Due to another anticipated nonpayment on June 30, 1999, the parties signed a Common Stock Agreement on June 15, 1999, resulting in an increase in the dividend rate and interest rate on unpaid dividends from 8% to 8.5% retroactively effective on January 1, 1999. In addition, the Common Stock Agreement requires Racom to issue an additional 280 common shares to MHC should MHC exercise its Put.

On September 1, 1999, the parties entered into a Restructuring Agreement, resulting in Racom's issuance of an additional 85 shares to MHC and an increase in the dividend rate and interest rate on unpaid dividends from 8.5% to 9% effective July 1, 1999. In addition, the interest rate on the $9.75 million loan was increased to 18%. In exchange, MHC extended the due date for the $9.75 million loan to June 30, 2000.¹ Racom contends none of the agreements reached subsequent to the Stock Purchase Agreement were approved by the necessary quorum of six Racom directors; however, Racom's board minutes indicate otherwise.

As of July 16, 2001, Racom had not met the financial conditions specified in the Stock Purchase Agreement, thus MHC was eligible under that Agreement to exercise its Put. MHC began formulating an exit strategy for its investment in Racom and Mr. Melstad led a team to study possible options. At the time, Mr. Melstad was President of MHC and one of MHC's two representatives on the Racom board of directors.

MHC tendered the Put on September 12, 2001. MHC estimated that Racom was obligated to pay $15,155,366.60 based on accrued and unpaid dividends added to the Redemption Price. Racom has never challenged this accounting. Racom stated in a press release that it had "made a tender offer of $15 million," and that it was "ready, willing, and able to honor its agreement;" however, Racom also claimed that "MHC has made demands which are not provided for in the agreement and has refused the offer."

In addition to the action before this Court, several other actions ensued. MHC's representatives on Racom's board, Mr. Melstad and Mr. Stepien, sued Racom in the Delaware Court of Chancery to challenge their removal from Racom's board subsequent to the exercise of the Put. MHC also filed an action in that same court seeking to inspect Racom's books and records. In addition, Racom brought an action in Iowa District Court for Marshall County seeking a determination of the validity of certain actions of Racom's board as well as a determination of the validity and enforceability of the Stock Purchase Agreement. MHC removed that action and a motion to remand is pending in that case. Extensive discovery has already taken place in the Delaware actions.

II. Summary Judgment Standard

The purpose of summary judgment is to "pierce the boilerplate of the pleadings and assay the parties' proof in order to determine whether trial is actually required." Wynne v. Tufts Univ. Sch. of Med., 976 F.2d 791, 794 (1st Cir.1992), cert, denied 507 U.S. 1030, 113 S.Ct. 1845, 123 L.Ed.2d 470 (1993). Summary judgment "allows courts and litigants to avoid full-blown trials in unwinnable cases, thus conserving the parties' time and money and permitting courts to [conserve] scarce judicial resources." Id.

The precise standard for granting summary judgment is well-established and oftrepeated: summary judgment is properly granted when the record, viewed in the light most favorable to the nonmoving party and giving that party the benefit of all reasonable inferences, shows that there is no genuine issue of material fact, and the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c); Harlston v. McDonnell Douglas Corp., 37 F.3d 379, 382 (8th Cir.1994). The Court does not weigh the evidence nor make credibility determinations, rather the court only determines whether there are any disputed issues and, if so, whether those issues are both genuine and material. Anderson v. Liberty Lobby, Inc., 411 U.S. 242, 252, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986).

The moving party bears the initial burden of demonstrating the absence of a genuine issue of material fact based on the pleadings, depositions, answers to interrogatories, admissions on file, and affidavits, if any. Celotex Corp. v. Catrett, All U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986), cited in Handeen v. Lemaire, 112 F.3d 1339, 1345 (8th Cir.1997); Anderson, 411 U.S. at 248, 106 S.Ct. 2505. Once the moving party has carried its burden, the nonmoving party must go beyond the pleadings and, by affidavits or by the depositions, answers to interrogatories, and admissions on file, designate specific facts showing that there is genuine issue for trial. Fed.R.Civ.P. 56(c), (e); Celotex, 411 U.S. at 322-23, 106 S.Ct. 2548; Anderson, 411 U.S. at 257, 106 S.Ct. 2505. "[T]he mere existence of some alleged factual dispute between the parties will not defeat a motion for summary judgment; the requirement is that there be no genuine issue of material fact." Anderson, 477 U.S. at 247-48, 106 S.Ct. 2505 (emphasis added). An issue is "genuine" if the evidence is sufficient to persuade a reasonable jury to return a verdict for the nonmoving party. Id. at 248, 106 S.Ct. 2505. "As to materiality, the substantive law will identify which facts are material .... Factual disputes that are irrelevant or unnecessary will not be counted." Id.

III. MHC's Breach of Contract Claim

Racom contests MHC's breach of contract claim with the affirmative defenses of fraudulent inducement, lack of authority on the part of Racom's board of directors to enter into the contract, and lack of consideration. The Court will address these defenses in turn.

A. Fraudulent Inducement

Under Iowa law, a contract procured by another's fraud is voidable. C.E Hosier v. Hosier ex rel. Estate of C.W. Hosier, 2001 WL 1451137 (Iowa App.) at *6 (citing Restatement (Second) of Contracts §§ 7, 380) see also Tralon Corp. v. Cedarapids, Inc., 966 F.Supp. 812, 829 (N.D.Iowa 1997); Phipps v. Winneshiek County, 593 N.W.2d 143, 145 (Iowa 1999). Accordingly, fraudulent inducement is a defense to a breach of contract claim. Gunderson v. ADM Investor Services, Inc., 85 F.Supp.2d 892, 919 (N.D.Iowa 2000); Higgins v....