Northstar Industries v. Merrill Lynch & Co.

• Decision Date: 17 August 2009
• Docket Number: No. 08-2480.,08-2480.
• Citation: 576 F.3d 827
• Parties: NORTHSTAR INDUSTRIES, INC., a Minnesota corporation, Plaintiff-Appellant, v. MERRILL LYNCH & CO., INC. and Merrill Lynch Global Private Equity, Inc., f/k/a Merrill Lynch Global Partners, Inc., foreign corporations, and Robert F. End, individual, Defendants-Appellees.
• Court: U.S. Court of Appeals — Eighth Circuit

576 F.3d 827

NORTHSTAR INDUSTRIES, INC., a Minnesota corporation, Plaintiff-Appellant, v. MERRILL LYNCH & CO., INC. and Merrill Lynch Global Private Equity, Inc., f/k/a Merrill Lynch Global Partners, Inc., foreign corporations, and Robert F. End, individual, Defendants-Appellees.

No. 08-2480.

United States Court of Appeals, Eighth Circuit.

Submitted: March 11, 2009.

Filed: August 17, 2009.

Paul Egtvedt, Minneapolis, MN. argued, for appellant.

Robert L. Schnell, Jr., argued, Aaron D. Van Oort, Jana M.Viramontes, Minneapolis, MN, on the brief, for appellee.

Before WOLLMAN, BRIGHT and COLLOTON, Circuit Judges.

BRIGHT, Circuit Judge.

Northstar Industries, Inc. ("Northstar") brought this action in the district court against Merrill Lynch & Co., Inc., Merrill Lynch Global Private Equity, Inc. ("MLGPE"),¹ and Robert F. End for the balance of a brokerage fee it claimed due in the sum of $5.6 million. Northstar contended that fraudulent representations by Merrill Lynch caused Northstar to accept a lower fee than the amount to which it was entitled. On appeal, Northstar challenges the district court's order granting Merrill Lynch's 12(b)(6) motion to dismiss, arguing that the district court erroneously 1) dismissed the action based on factual findings directly contrary to the complaint 2) failed to address Northstar's prayer for rescission, and 3) concluded that Minnesota fraud law could not compensate Northstar's damages. Having jurisdiction pursuant to 28 U.S.C. § 1291, we reverse and remand to the district court for further proceedings.

I. Background²

For almost forty years, Northstar has provided services related to mergers and acquisitions. Its president, Thomas O'Connell, has closed well over 350 transactions during his career. For over twenty-five of these years, Northstar has maintained an ongoing business and personal relationship with Mr. Orville "Gene" Bicknell, former owner of NPC International, Inc., the world's largest franchisee of Pizza Hut restaurants.

In January 2004, Northstar entered into a fee agreement with Stonington Partners, Inc., a company engaged in acquiring and investing in businesses ("Stonington Fee Agreement"). Stonington agreed that, if Northstar introduced Stonington to a business that it ultimately bought, Northstar would receive a finder's fee in the amount of 2% of the first $100 million in transaction value and 1% of the value thereafter.

In late 2004 or early 2005, arising from this long-standing relationship between Northstar and Bicknell, Northstar learned that Bicknell was considering selling one of his companies, NPC. Northstar brought this information to Stonington. Stonington then referred Northstar to MLGPE as a potential NPC purchaser.

On March 4, 2005, Northstar and Merrill Lynch adopted the terms of the Stonington Fee Agreement ("March Fee Agreement"). Robert F. End, Managing Director of Merrill Lynch, then began negotiating with Bicknell and NPC for the possible purchase of NPC as directed by Merrill Lynch. Northstar did not participate in these negotiations. Around May 12, 2005, End and his Merrill Lynch colleague, Christopher J. Birosak, contacted Northstar by telephone and ordered Northstar to cease any further contact with Bicknell or NPC. Northstar did so and Merrill Lynch became Northstar's only source of information about the deal.

In October 2005, after seven months of negotiations, End contacted Northstar and spoke to its Senior Vice President B. Wayne Quist. End stated that Bicknell's purchase price was $615 million, and that this purchase price would result in a fee of $7.15 million due and payable to Northstar under the March Fee Agreement. However, in order to close the deal at $615 million, End stated that the fees associated with the transaction needed to be significantly reduced. End proposed to Quist that Northstar accept a "proportionate" fee reduction in relation to the other parties entitled to a fee in the transaction, all sacrificing "equally." End stated that a "proportionate" or "pro rata" reduction would result in a fee of $1.5 million for Northstar (a 78% reduction that amounted to approximately $5.6 million). End told Quist that he needed an answer from Northstar no later than the start of the business day on Monday, October 17, 2005. Quist stated that he did not have the authority to approve such a fee reduction and would need to speak to O'Connell about End's proposal.

After discussing the matter with O'Connell, Quist sent an e-mail message to End proposing that Northstar reduce its fee by approximately 50% to $3.6 million cash at closing, plus other considerations, based on "what you said [yesterday] ... that you are willing to take pro rata cuts from the total fees and expenses." Complaint ¶ 37. Minutes after receiving Quist's e-mail, End replied electronically to Quist, stating that Northstar's proposal would not work, and that, "The deal is dead and I will communicate this to [Bicknell] on Monday morning." Complaint ¶ 38.

That Sunday, O'Connell called End. End reiterated that the $15 million shortfall in the transaction had to be compensated from the fees in the transaction, which could only work if everyone entitled a fee took a "proportionate" or "pro rata" fee reduction. Furthermore, End stated that Northstar would receive a cash fee of $1.5 million following such a "pro rata" reduction. End also assured O'Connell that "everyone due a fee would take a `pro rata' reduction, that `all parties would be treated on the same basis,' that there would be an accounting of all fee reductions, [and] that the total fees in the transaction would be reduced by at least $15 million in order to meet Bicknell's price of $615 million." Complaint ¶ 39.

Based on End's representations, Northstar agreed to enter into a new fee agreement ("November Fee Agreement") so as to reduce its fee to $1.5 million. "Had Northstar known the truth, Northstar would not have agreed to reduce its fee to $1.5 million and the transaction could have been closed without such a fee reduction to Northstar." Complaint ¶ 42.

On or about October 20, 2005, four days after End's representations concerning pro rata fee reductions for all parties, Merrill Lynch and Bicknell/NPC entered into a mutual exclusivity agreement for the sale of NPC to Merrill Lynch for $615 million. The purchase closed on May 3, 2006 and Northstar received its full $1.5 million fee.

In March 2007, Northstar saw NPC's press release, as well as its 10K and S-8 forms, which companies publicly file with the Securities and Exchange Commission. Northstar realized that the total fees paid at the closing of the transaction had not decreased from the May 9, 2005 proposed amount of $23.5 million, but in fact had increased to $24,270,000 at the time of closing. Thus, Northstar repeatedly requested that Merrill Lynch explain the increase in total fees paid in the transaction and provide an accounting of fees as promised by End.

In response, on May 9, 2007, End called O'Connell and told him for the first time that the reduction in fees was in fact not "proportionate" or "pro rata." End admitted that he told Quist and O'Connell that the fee reductions would be "proportionate" and "pro rata," but stated to O'Connell that he regretted using the term "pro rata" because the fee reductions were not in fact so. End further stated that he should have used a term other than "pro rata." End also stated, for the first time, that End's group, MLGPE, received a fee of $3,000,000, a 50% reduction from its usual fee, and that Stonington requested $1.5 million, but received $500,000 in payment.

O'Connell told End that this was not what End had represented in their telephone discussion on October 16, 2005, and reiterated his request for an accounting of all fees paid in the transaction. End again stated that, although he told O'Connell in about October 2005 that the fee reductions were "pro rata," this was not what he meant. End agreed to provide Northstar an accounting of fees, stating that Cassey P. Davis of his office would provide such information via e-mail. Quist e-mailed Davis requesting such information.

Not having received a response from Davis, Quist e-mailed End on/or around May 29, 2007, requesting that Northstar "be treated like the others [in the deal] and that Northstar's fee be increased based on End's representations and promises to Northstar that all the fees in the transaction were to have been reduced on a `proportionate,' `pro rata' basis, that everyone due a fee would sacrifice `equally,' and that there would be an accounting of fees." Complaint ¶ 51. End responded by e-mail the next day, and, for the first time, claimed that when discussing fee reductions, he was only referring to three fees— Northstar's, Stonington's, and MLGPE's, but not the Merrill Lynch $14,047,000 debt placement fees/costs, attorneys' fees, accountants' fees, or any other fees. End further informed Northstar for the first time that the MLGPE fee had not been finalized until the closing and a fee agreement with Stonington did not exist until the "eleventh hour." End then refused to provide Northstar with the promised full accounting of fees.

O'Connell and Quist spoke with End by telephone on or about June 1, 2007, when End revealed that Northstar's fee reduction constituted the only agreed reduction in October 2005. End indicated that he regretted the Northstar fee reduction and stated that he would consider creative solutions to the fee dispute in an effort to supplement the Northstar fee, requesting that Northstar forward such a proposal to Merrill Lynch.

On or about June 15, 2007, Northstar sent a letter to Merrill Lynch outlining the terms of a proposed settlement that would increase the Northstar fee, plus other considerations, in part by making the Northstar fee reduction identical to the 50% reduction received by End's organization, MLGPE. End then sent a letter to Northstar refusing to settle the matter, or...