The opinion of the court was delivered by: REBECCA R. PALLMEYER
REPORT AND RECOMMENDATION: COUNT II
This case arises from Defendants' 1986 purchase from Plaintiffs, and prompt resale to a third party, of the assets of a steel fabrication plant in Melrose Park, Illinois. Plaintiffs claim that Defendants' conduct in connection with the purchase and resale constituted a breach of fiduciary duties and breach of contract. The parties' cross-motions for summary judgment on the fiduciary duty claim (Count I of Plaintiffs' Amended Complaint) is addressed in another Report and Recommendation ("R & R on Count I") issued today. This Report addresses the parties' cross-motions on Count II, the contract claim.
Plaintiffs, FM Properties of Wisconsin, Inc., and CSFM Corporation, became owners of the Melrose Park plant as the result of a foreclosure by FM's parent, First Wisconsin National Bank ("FWNB"). As explained in the R & R on Count I, Defendants Phillip O. Elbert, William W. McKee, their partnership of Elbert & McKee Company, their colleague Raymond Jasica, and Chicago Steel Corporation are all diverse in citizenship from Plaintiffs. Plaintiffs allege that, at the time Defendants purchased the plant's assets, Defendants contracted to share with Plaintiffs the proceeds of any resale that occurred within two years. Defendants did re-sell the assets five months after the purchase from Plaintiffs; Plaintiffs allege that Defendants have breached their contract by refusing to share the proceeds from the resale.
FACTUAL BACKGROUND: COUNT II
The following factual background is supported by the parties' Local Rule 12(m) and 12(n) statements.
Citations are also provided to other materials relied upon by the parties. Additional related facts can be found in the court's Report and Recommendation on Count I of Plaintiffs' Amended Complaint.
First Wisconsin National Bank (FWNB) and its wholly-owned subsidiary FM Properties, Inc. acquired the assets of a steel fabricating plant located in Melrose Park, Illinois through a deed in lieu of foreclosure when the plant's former owner defaulted on a loan from FWNB. (Plaintiffs' Rule 12(m) Statement on Count I, PP 7,10.) FM Properties created a wholly-owned subsidiary, Chicago Steel/CSFM, to hold the assets.
In October 1984, FWNB, which had no experience in the operation of a steel plant, signed an agreement with Defendants Elbert and McKee to obtain certain consulting and other services for Chicago Steel/CSFM.
Elbert and McKee subsequently recruited Defendant Jasica to serve as President and Chief Executive Officer of Chicago Steel/CSFM. (Letter from Elbert to Jasica of 11/4/84, Ex. DX-16 to Plaintiffs' Rule 12(m) Statement on Count II.)
A. Defendants' Purchase of Chicago Steel/CSFM
From the beginning of their relationship with Plaintiffs, Defendants understood that FWNB wanted to sell the company as soon as practicable. In March 1985, Defendants notified Plaintiffs that they were interested in purchasing the company's assets themselves. (Minutes of Chicago Steel/CSFM Board of Directors' Meeting of 3/14/85, Ex. PX-32 to Plaintiffs' Rule 12(m) Statement on Count II.) On or about March 12, 1986, Defendants signed and sent a letter of intent to FWNB offering to purchase the company, free of all other debt, with a promissory note in the amount of $ 2,742,000 plus all of the company's "excess cash flow" in calendar year 1986. (Letter from Elbert, McKee, and Jasica to First Wisconsin National Bank of 3/12/ 86 P 2, Ex. PX-46 to Plaintiffs' Rule 12(m) Statement on Count II.) The letter also provided that in the event Defendants resold the company within two years after closing, Defendants would pay Plaintiffs one-half (50%) of the amount by which the "net proceeds" of the resale exceeded $ 3,250,000. ( Id. P 3(d).)
Plaintiffs rejected Defendants' initial offer, and the parties continued to negotiate through the summer of 1986.
On or about August 19, 1986, Plaintiffs and Defendants signed an agreement in which Defendants, either individually or through a corporation they might form, agreed to purchase all of the assets of Chicago Steel/CSFM.
(Letter from Ehle, Fitzsimonds, and Giese
to McKee, Elbert, and Jasica of 8/19/86 (hereinafter "Purchase and Sale Agreement"), Ex. PX-5 of Plaintiffs' Rule 12(m) Statement on Count II.) The Purchase and Sale Agreement included the following provisions relevant to Count II:
1. Purchase price. The purchase price was defined as the sum of the following:
(a) The amount of $ 2,500,000 payable in cash at closing. (Id. P 1(a).)
(b) An additional amount of $ 1,776,000, payable in cash at closing. This amount, however, would be reduced (or increased) by any cash payments made by (or to) Defendants to (or from) Plaintiffs prior to closing. (Id. P 1(b).) Defendants contend, and Plaintiffs concede for purposes of this motion only, that Defendants paid Plaintiffs $ 776,000 in cash prior to closing, thus lowering the amount due under this subparagraph to $ 1,000,000. (Plaintiffs' Rule 12(m) Statement on Count II on Count II P 20(b).)
(c) 1,500,000 shares of preferred stock, par value of $ 1.00 per share, to be issued by Defendants' corporation to Plaintiffs. The preferred stock would earn cash dividends at the annual rate of 5% and, for up to five years after closing, would be redeemed annually in an amount equal to 25% of the company's annual after-tax net earnings. At the end of five years or at such earlier time as Defendants might resell the company, Defendants had the option to redeem any remaining outstanding shares of preferred stock for the total sum of $ 1.00. (Purchase and Sale Agreement P 1(c), Ex. PX-5 of Plaintiffs' Rule 12(m) Statement on Count 11.)
2. Split of Proceeds Upon Resale. The Agreement also provided that in the event Defendants resold the company or substantially all of its assets within two years, Defendants were required to share a portion of any profit from that sale with Plaintiffs. Because of its central importance to Count II, this provision is reprinted in its entirety below:
(d) In addition, if all or substantially all of the voting common stock or assets of New Corporation are sold within 2 years after the date of closing, Seller shall be entitled to 50% of the amount by which the net proceeds of the sale exceeds the sum of the following:
(i) All amounts actually paid to Seller in connection with the purchase and sale of assets contemplated hereby, including amounts (whether paid in respect of dividends of redemptions) actually paid with respect to the preferred stock; provided that for purposes of this subparagraph (d)(i), the amount paid to seller under subparagraph (b) above shall be deemed to be $ 1,776,000;
(ii) All of the retained earnings of the New Corporation determined on a cumulative basis from the inception of New Corporation through the closing of such sale, less the amount of all dividends on and required redemptions of Preferred Stock that accrues prior to such closing but are not due to be paid until after such closing; and
(iii) Any cash capital contributed to the New Corporation before or after the closing of the sale and purchase of the assets of Seller to Buyer.
(Id. P 1(d) (emphasis added).)
Significantly, the term "net proceeds" -- a term that is the principal focus of the parties' dispute in Count II -- is not defined anywhere in the Agreement, nor does the Agreement anywhere explicitly address the effect of debt or profits of Defendants' corporation on the "net proceeds" of the resale. Also, the parties refer to the sum of subparagraphs (i)-(iii) as the "trigger amount," a phrase that appears nowhere in the Agreement itself but will be adopted by the court for the sake of convenience and consistency with the parties' briefs.
B. Plaintiffs and Defendants Close the Deal
On December 12, 1986, Plaintiffs and Defendants closed their purchase and sale of Chicago Steel/CSFM. (Plaintiffs' Rule 12(m) Statement on Count II P 20.) For this purpose, Defendants formed a wholly-owned corporation to acquire the assets of Chicago Steel/CSFM.
(Defendants' Rule 12(m) Statement on Count II P 2; Ex. PX-10 to Plaintiffs' Rule 12(m) Statement on Count II.) The principal components of this and related transactions were as follows:
1. Chicago Steel/CSFM gave Chicago Steel/Illinois a bill of sale, assignment and general conveyance of all of its assets. (Ex. F200970-973 to Plaintiffs' Rule 12(m) Statement on Count II.)
2. Defendants contend, and Plaintiffs concede for purposes of this motion only, that Defendants paid Plaintiffs $ 776,000 in cash between the date of the Agreement and the closing. (Plaintiffs' Rule 12(m) Statement on Count II P 20(b).)
3. Chicago Steel/Illinois obtained a $ 3,500,000 term loan from American National Bank ("ANB") and paid the money to Chicago Steel/CSFM to purchase its assets. (Ex. PX-10 to Plaintiffs' Rule 12(m) Statement on Count II; Elbert Dep., at 52; McKee Dep., at 52; Jasica Dep., at 179.) This amount covers the $ 2,500,000 payable under paragraph 1(a) of the Agreement and the $ 1,000,000 payable under paragraph 1(b) of the Agreement, as modified by the payment of $ 776,000 (above).
5. Chicago Steel/Illinois obtained a $ 1,000,000 revolving line of credit from American National Bank, which Defendants' corporation used for working capital. (Secured Promissory Note, Ex. PX-9 to Plaintiffs' Rule 12(m) Statement on Count II; Elbert Dep., at 52.)
6. Chicago Steel/Illinois issued 1,500,000 shares of preferred stock, par value of $ 1.00 per share, to Chicago Steel/CSFM in accordance with the parties' Purchase and Sale Agreement. (Plaintiffs' Rule 12(m) Statement on Count II P 20.)
7. The individual Defendants guaranteed repayment of the loans from American National Bank and First Wisconsin National Bank but were not principally liable for them. (Guarantee Agreements, Exs. PX-10, PX-12 to Plaintiffs' Rule 12(m) Statement on Count II; Elbert Dep., at 51, 53-54; McKee Dep., at 52, 54; Jasica Dep., at 180, 192.)
8. In April 1987, Defendants paid Plaintiffs $ 25,891.48 to redeem some of Plaintiffs' preferred stock, pursuant to paragraph 1(c) of the Purchase and Sale Agreement. (Defendants' Rule 12(m) Statement on Count II P 4; Jasica Aff. P 9.)
In short, instead of personally borrowing or providing the money to purchase Plaintiffs' assets, Defendants borrowed all the necessary funds through their own corporation, Chicago Steel/Illinois. (Plaintiffs-Counterdefendants' Memorandum in Opposition to Defendants-Counterplaintiffs' Motion for Summary Judgment on Count II (hereinafter "Plaintiffs' Opposition II"), at 3-4.) At no time did Defendants put any of their own funds into Chicago Steel/Illinois. (Plaintiffs' Rule 12(m) Statement on Count II P 20(d); Elbert Dep., at 325-26; McKee Dep., at 48, 52, 54-56, 59-60; Jasica Dep., at 180, 266.)
C. Parties' December 11, 1986 Acknowledgement
As part of the process of closing their deal, Plaintiffs and Defendants executed an Acknowledgement on December 11, 1986. (Attachment to Plaintiffs' Rule 12(n) Statement on Count II.) The Acknowledgement included several references to the Purchase and Sale Agreement, of which the following is most material:
(2) Payment of Purchase Price. The parties acknowledge and agree that the purchase price set forth in paragraphs 1(a) and (b) of the Agreement shall be payable as follows:
(a) The amount of $ 3,500,000 payable in cash at closing, and
(b) A promissory note of [Chicago Steel/Illinois] in the principal amount of $ 2,800,000 to be delivered to the Seller and secured by security interests granted to Seller in certain work-in-process, inventory, accounts receivable and contract rights, all as set forth in the promissory note and security agreement executed by [Chicago Steel/Illinois] and delivered to Seller on December 11, 1986.
As discussed below, the parties disagree as to how to interpret this provision's effects on the ...