Shields Enterprises, Inc. v. First Chicago Corp.
| Decision Date | 03 November 1992 |
| Docket Number | No. 91-2134,91-2134 |
| Parties | RICO Bus.Disp.Guide 8088 SHIELDS ENTERPRISES, INCORPORATED, a Kansas corporation, Plaintiff-Appellant, v. FIRST CHICAGO CORPORATION, a Delaware corporation, First National Bank of Chicago, a national bank, First Capital Corporation of Chicago, an Illinois corporation, et al., Defendants-Appellees. |
| Court | U.S. Court of Appeals — Seventh Circuit |
Stephen Novack (argued), Kenneth S. Schlesinger, Karen L. Levine, Novack & Macey, Chicago, Ill., for plaintiff-appellant.
Dan K. Webb, Scott J. Szala (argued), Kenneth T. Kristl, Kevin E. White, Timothy P. O'Connor, Winston & Strawn, Peter J. Kilchenmann, Lynn A. Goldstein, Cynthia H. Hyndman, Chicago, Ill., for defendants-appellees.
Before CUDAHY, COFFEY and MANION, Circuit Judges.
Shields Enterprises, Inc. (SEI) sued the First Chicago Corporation and Richard Gallagher, a First Chicago officer (all of whom we shall refer to collectively as "First Chicago" unless context otherwise requires), alleging violations of the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. §§ 1961-68 (RICO), sections 1964(b), (c), and (d), as well as various supplemental state law claims. This case presents a familiar scenario: a business arrangement gone sour results in a federal lawsuit by one of the disgruntled partners for triple damages under RICO. Early on, the district court dismissed with prejudice SEI's state law tort claim for damages for economic duress. Subsequently, the court granted First Chicago's motion for summary judgment on SEI's RICO claims, and dismissed SEI's other supplemental state law claims without prejudice 762 F.Supp. 1331 pursuant to United Mineworkers of America v. Gibbs, 383 U.S. 715, 86 S.Ct. 1130, 16 L.Ed.2d 218 (1966). SEI appeals, and we affirm in part, reverse in part, and remand.
Since we are reviewing a grant of summary judgment against SEI, we set out the facts in the light most favorable to SEI, and draw all reasonable inferences in SEI's favor. See Hammond v. Fidelity and Guaranty Life Ins. Co., 965 F.2d 428, 429 (7th Cir.1992). Viewed in that light, the record reveals the following. In the spring of 1983, SEI, Martin Cooper, and Arlene Harris formed Cellular Business Systems, Inc. (CBSI), a non-public corporation specializing in computer billing services for the cellular telephone industry. SEI, Cooper, and Harris each received one-third of CBSI's outstanding stock in exchange for cash and services.
Although the cellular telephone industry was in its infancy when CBSI was formed, it grew rapidly. This, in turn, led CBSI to grow. But this growth required increased capital, and CBSI's shareholders came to realize that to capture a larger share of the market for cellular billing services, they would have to find a new source of funds since they had planned to invest only a limited amount of money themselves. Enter First Chicago, which in 1984 became interested in investing in CBSI. While pondering how large an ultimate investment it should make, First Chicago provided interim financing to CBSI by making several loans totaling $1.2 million.
By March 1985, First Chicago had decided to make a substantial equity investment in CBSI. First Chicago agreed with CBSI's shareholders to invest a total of $8 million in CBSI in six separate installments over one year. In return for its investment, First Chicago was to own 52% of CBSI's stock. The average price per share was slightly under $20. The stock sale agreement specifically excluded any rights for SEI, Cooper, and Harris to participate in future CBSI stock sales. The agreement contemplated that First Chicago and the other shareholders would be involved together until at least 1992.
At the same time, SEI, Cooper, and Harris agreed to contribute their CBSI stock to a new corporation, CBSI Technology Group, Inc. (Technology Group), in exchange for receiving one-third apiece of Technology Group's stock. SEI, Cooper, and Harris also agreed that they would not sell Technology Group's CBSI stock without their unanimous consent. They also granted Technology Group, and then each other, rights of first refusal if any shareholder received an offer to buy his or her interest in Technology Group.
During the summer of 1985, CBSI experienced rapid success in capturing market share. By the fall, it had captured 80% of the relevant market. But as before, this rapid growth created a pressing need for new capital. CBSI's impressive performance in capturing market share caused it to overextend itself in servicing. CBSI's expenses consistently outstripped its revenues, and CBSI was projected to run out of cash by the end of June 1986 absent another capital infusion.
To meet this need for cash, First Chicago agreed to accelerate its last three stock purchases under the stock sale agreement. This supplied an immediate $3 million to CBSI in the fall of 1985. First Chicago also proposed an additional $2 million stock sale. The proposed price per share was $4, well below the average price per share of First Chicago's original investment. First Chicago at first insisted on purchasing all the additional stock itself. The owners of Technology Group, however, protested that the $4 per share price was ridiculously low, and feared that if First Chicago bought all the stock at that price, Technology Group's equity position in CBSI would be severely diluted. 1 Technology Group's owners therefore urged First Chicago to set a higher price for the stock. First Chicago refused to change the price.
Because it feared unreasonable dilution of its position, SEI insisted that First Chicago at least allow Technology Group to purchase a proportionate share of the new stock, even though Technology Group's owners did not desire to make any additional investment at that time. First Chicago finally relented and in mid-December 1985 First Chicago and Technology Group each purchased stock in amounts that approximately maintained the parties' proportionate interests in CBSI (about 55% for First Chicago and 45% for Technology Group). SEI funded Technology Group's purchase because neither Cooper nor Harris chose to invest any more cash in CBSI.
Late in 1985, Cooper decided he "wanted out" of CBSI. Cooper had been acting as CBSI's Chief Executive Officer and Chief Operating Officer and found his position very stressful. Cooper decided that one way to end his involvement with CBSI was to sell the company. 2 Thus, in late 1985, Cooper met with John LaMacchia, president of Cincinnati Bell Information Systems, Inc., to discuss a possible sale of CBSI to Cincinnati Bell. Cooper reinitiated these discussions with LaMacchia in March 1986.
Cooper had begun negotiating with LaMacchia unbeknownst to First Chicago. When First Chicago's representatives found out, they were somewhat surprised that Cooper would be negotiating to sell CBSI without the majority shareholder's knowledge. Upon finding out about the negotiations, First Chicago at first took a cautious approach to the sale, stating that it might be best to solicit bids from other possible buyers to obtain the maximum price for CBSI. However, by mid-April, First Chicago had decided that it wanted to sell CBSI to Cincinnati Bell at the price Cincinnati Bell was willing to pay, without shopping CBSI to any other potential buyers.
On April 17, 1986, LaMacchia met with Cooper, Richard Gallagher, a First Chicago officer and CBSI director, and T. Russel Shields, SEI's CEO and principal shareholder, to discuss the sale of CBSI to Cincinnati Bell. At this meeting, the parties reached an agreement in principle that called for Cincinnati Bell to pay CBSI's shareholders $13 million up front, and $7 million in the future contingent on CBSI's performance. On April 27, SEI, Cooper, Harris, and First Chicago entered an Allocation Agreement setting forth the distribution of Cincinnati Bell's payments to CBSI's shareholders.
Despite participating in the April 17 meeting, and signing the Allocation Agreement on SEI's behalf, Shields, unlike Cooper, did not want to sell CBSI. Shields thought that the price Cincinnati Bell was offering was far below CBSI's actual value. Shields also believed that by holding on to CBSI for a few more years, the shareholders could realize a much higher selling price. Shields' objection posed a formidable obstacle to CBSI's sale because of the agreement between Technology Group's shareholders requiring unanimous consent to any sale of Technology Group's CBSI stock. According to Shields, when he made his objections known to First Chicago's representatives, they told him, in effect, just to "shut up" so as not to blow the deal.
As a means to accommodate Cooper's desire to get out of CBSI while not selling his own firm's interest, Shields offered to have SEI buy Cooper's and Harris's Technology Group stock. Shields first made this offer in a phone conversation with Cooper on April 25. He reiterated his offer at a May 28 meeting, and made a formal written offer to Cooper and Harris on May 29.
According to SEI, First Chicago reacted to Shields' offer to Cooper and Harris by making a series of threats designed to dissuade Cooper and Harris from selling to SEI and to "force" CBSI's sale to Cincinnati Bell. Initially, SEI offered evidence that Don Kilpatrick, a First Chicago vice-president, threatened that if SEI refused to agree to CBSI's sale to Cincinnati Bell, First Chicago would issue and buy new low-priced stock to dilute Technology Group's interest; replace CBSI's management, installing Kilpatrick, whom SEI claims was not competent to run CBSI, as CEO; and terminate a consulting contract between SEI and CBSI. These threats were allegedly repeated several times.
On May 30, 1986, Shields met with Cooper, Robert Schwimmer (a CBSI board member involved in the negotiations to sell CBSI to Cincinnati Bell), and...
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