RFC Capital Corp. v. EarthLink, Inc., 2004 Ohio 7046 (OH 12/23/2004), Case No. 03AP-735.
| Citation | 2004 Ohio 7046 |
| Decision Date | 23 December 2004 |
| Docket Number | Case No. 03AP-735. |
| Parties | RFC Capital Corporation, Plaintiff-Appellee, v. EarthLink, Inc., Defendant-Appellant. |
| Court | United States State Supreme Court of Ohio |
APPEAL from the Franklin County Court of Common Pleas, C.P.C. No. 02CVH05-5786.
Carpenter & Lipps, LLP, Jeffrey A. Lipps and Michael H. Carpenter, for appellee.
Balch & Bingham, LLP, Cary Ichter and S. Paul Smith; Thompson Hine, LLP, John T. Sunderland and Scott A. Campbell, for appellant.
{¶1} Defendant-appellant, EarthLink, Inc. ("EarthLink"), appeals from the Franklin County Court of Common Pleas' denial of its motion for directed verdict and grant of judgment in favor of plaintiff-appellee, RFC Capital Corporation ("RFC"). For the following reasons, we reverse the judgment in favor of RFC and remand.
{¶2} The genesis of this case lies in the Loan and Security Agreement RFC and non-party Internet Commerce & Communications, Inc. ("ICC") executed on May 22 2000.1 At the time ICC executed the Loan and Security Agreement, it was a publiclytraded corporation that provided internet access, among other internet services, to its customers. RFC was, and is, a finance company focused on lending money in the telecommunications, energy and technology industries.
{¶3} Pursuant to the Loan and Security Agreement, RFC agreed to loan ICC up to $12 million of working capital. RFC structured the loan as a revolving line of credit, allowing ICC to borrow at a rate of three times the amount of monthly revenues received into a lockbox account under RFC's control.
{¶4} To secure the loan, ICC granted RFC a security interest in, among other assets:
[A]ll of [ICC's] customer base, which shall include but not be limited to all of [ICC's] past, present and future customer contracts, agreements, lists, documents, computer tapes, letters of agency or other arrangements, any customer list relating thereto and any information regarding prospective customers and contracts, agreements, goodwill and other intangible assets associated with any of the foregoing (herein the "Customer Base") * * *.
Loan and Security Agreement, Section 12(a)(vi). RFC protected this security interest by mandating that ICC could not "further sell, assign, transfer, pledge, hypothecate, mortgage or otherwise encumber any right or rights with respect to the Collateral or any rights or interests thereunder absent the express written consent of [RFC]." Loan and Security Agreement, Section 14(d).
{¶5} One day after RFC and ICC executed the Loan and Security Agreement, RFC filed a UCC-1 financing statement with the Colorado Secretary of State and the Denver County Recorder's Office. The UCC-1 financing statement identified those assets in which RFC had a security interest, including the customer base.2
{¶6} By late 2000, ICC was experiencing financial trouble and began working with a broker to sell its dial-up internet access customer base ("customer base"). ICC's broker contacted Cliff Bryant, EarthLink's Director of Acquisitions, and inquired whether EarthLink3 would be interested in buying ICC's customer base. Mr. Bryant expressed interest, and visited ICC's headquarters in January and March 2001 to pursue a possible purchase. During the March 2001 meeting, ICC executives and Mr. Bryant discussed the size of the customer base. Charles Eazor, ICC's Senior Vice President of Operations, drafted and gave Mr. Bryant a document in which ICC represented that 124,926 dial-up users logged onto the internet via ICC's system and 97,338 active dial-up customers were in the ICC billing systems. ICC also provided Mr. Bryant with a breakdown of ICC dial-up customers by region showing that ICC had a total of 100,728 customers.
{¶7} On March 15, 2001, ICC and EarthLink executed a contract entitled "Agreement by EarthLink Enterprises, Inc. to Acquire the Dial-Up Subscriber Business of Internet Commerce & Communications, Inc." ("EarthLink Agreement"). Pursuant to the EarthLink Agreement, ICC agreed to deliver its customer base to EarthLink and EarthLink agreed to pay a "bounty" of $190 for each ICC dial-up customer who transferred his or her business to EarthLink and paid for either dial-up or web hosting service for two consecutive months. In Exhibit A to the EarthLink Agreement, ICC represented that it had 97,000 customers who could transfer to EarthLink. Thus, if all 97,000 customers transferred to EarthLink and paid for two months of service, EarthLink would pay ICC a total of $18,430,000.
{¶8} Because the parties would not be able to determine the total purchase price until months after signing the EarthLink Agreement, they agreed that EarthLink would make multiple partial payments to ICC. The first two payments were each to be $4,607,500, or 25 percent of the estimated total purchase price. The parties calculated this amount by multiplying the $190 bounty by the number of ICC customers set forth in Exhibit A — 97,000 — and dividing by four [($190 x 97,000 customers) / 4 = $4,607,500]. The EarthLink Agreement called for the first payment to be made within 24 hours of the execution of the EarthLink Agreement4 and the second to be made within 48 hours of the transfer of the customer base. Thereafter, EarthLink would make any additional payments, if necessary, on a monthly basis.
{¶9} The EarthLink Agreement further stated that:
RFC Corporation, pursuant to a Loan and Security Agreement with RMI.NET (now, Internet Commerce & Communications, Inc.) dated May 22, 2000, has a senior secured lien on all customers, revenue, assets, and real or personal property associated with the Transferred Customer Base. RFC has agreed to waive any security interest, lien, or encumbrance in the Transferred Customer Base, and execute any necessary documents, in order to allow this Agreement to be executed, and performed under in full by IC&C. EarthLink Agreement, Exhibit A, Section D. This provision was added to the EarthLink Agreement when Douglas Hanson, ICC's Chairman and CEO, telephoned Mr. Bryant immediately before the parties executed the EarthLink Agreement and informed him that RFC had a security interest in the customer base. Mr. Bryant asked if RFC knew of the proposed sale of the customer base, and Mr. Hanson assured him that RFC knew of the sale and had agreed to release the collateral.
{¶10} Mr. Bryant believed that Section D protected EarthLink from any claims RFC could have on the customer base. Thus, neither Mr. Bryant nor any other EarthLink employee contacted RFC or conducted a search of UCC filings to determine whether RFC filed a UCC-3 filing statement releasing its security interest.
{¶11} Meanwhile, RFC was unaware of the pending deal until March 13, 2001, when Jon Steging, ICC's Chief Financial Officer, telephoned Clint Mitchell, who was then RFC's Senior Credit Manager. Mr. Steging forwarded Mr. Mitchell a draft of the EarthLink Agreement and requested that RFC provide ICC a letter releasing its security interest in the customer base. In response, Mr. Mitchell told Mr. Steging that RFC would only release its security interest if ICC paid off its loan or paid down the loan by an amount equal to the value of the customer base. Mr. Mitchell also informed Mr. Steging that the EarthLink Agreement should not include the false representation that RFC already agreed to release its security interest.
{¶12} Dissatisfied with RFC's refusal to provide an outright release of its security interest, Mr. Hanson, ICC's Chairman and CEO, emailed Richard Rudek, RFC's President, and informed him that the sale of the customer base was necessary for ICC's survival. In response, Mr. Rudek did not agree to an outright release of RFC's security interest, but he did agree to conduct a financial review of ICC to determine the exact parameters under which RFC might release its security interest.
{¶13} Thus, at the time ICC and EarthLink executed the EarthLink Agreement, RFC was considering the release of its security interest, but it had not agreed to do so. Nevertheless, ICC stated in the 10K Form filed with the Securities and Exchange Commission on March 30, 2001 that, "[w]e have received approval from RFC Capital Corporation, our lender under a revolving line of credit, regarding their release of any lien they may have on [the] portion of our business [sold to EarthLink]."
{¶14} After RFC's financial review of ICC, RFC drafted the "Second Amendment to the Loan and Security Agreement" ("Second Amendment") to address the sale of the customer base. RFC and ICC executed the Second Amendment on April 2, 2001. Section 11 of the Second Amendment provided that:
The Lender hereby consents to the sale of the Purchased Accounts by [ICC]. Upon the performance by [ICC] and [its wholly-owned subsidiary] of all their obligations under the Loan Agreement and this Amendment, the Lender agrees to release its security interest in the Purchased Accounts.
{¶15} Among ICC's obligations under the Second Amendment was making principal payments so that the loan amount outstanding equaled only 1.75 times the monthly revenues received into the RFC-controlled lockbox account.5 See Second Amendment, Section 12. At the time RFC and ICC entered into the Second Amendment, RFC expected that ICC would meet this obligation by transferring to RFC money from the sale of the customer base. Indeed, in April 2001, ICC paid down the loan by $2.3 million with funds obtained from EarthLink's first payment. RFC estimated that ICC would have to pay at least another $2.4 million to comply with its obligation under Section 12 to pay down the loan amount.
{¶16} Neither ICC nor RFC informed EarthLink of the Second Amendment. In fact, Mr. Hanson forbade RFC from contacting EarthLink. Despite RFC's knowledge that EarthLink expected the customer base to be delivered free and clear of any security interest, RFC followed Mr. Hanson's instructions.
{¶17} On May 3, 2001, EarthLink received the...
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