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Forsythe v. Black Hills Corp.

February 8, 2008

GERALD FORSYTHE, MICHELLE R. FAWCETT, MARSHA FOURNIER, MONICA BRESLOW, MELISSA S. FORSYTHE, AND JOHN W. SALYER, JR., PLAINTIFFS,
v.
BLACK HILLS CORPORATION, DEFENDANT.



The opinion of the court was delivered by: Matthew F. Kennelly, District Judge

MEMORANDUM OPINION AND ORDER

This case arises from the acquisition in 2000 of Indeck Capital, Inc., an independent power-generation business, by Black Hills Corporation, a public company also in the business of generating electric power. Plaintiffs are the former shareholders of Indeck Capital. They have sued Black Hills over what they allege are breaches of the Merger Agreement by which Black Hills took control of Indeck Capital, as well as breaches of an implied duty of good faith and fair dealing that plaintiffs claim arose in connection with that agreement and Black Hills' alleged negligent spoliation of evidence material to this dispute. Black Hills has moved the Court for summary judgment on all claims in plaintiffs' second amended complaint. Plaintiffs have filed a cross-motion in which they ask for summary judgment as to liability on all of their claims. For the reasons set forth below, the Court grants Black Hills' motion with respect to counts 2, 4, and 7 of plaintiffs' second amended complaint and otherwise denies the motion and denies plaintiffs' motion in its entirety.

Background

In 2000, plaintiffs Gerald Forsythe, Michelle Fawcett, Marsha Fournier, Monica Breslow, Melissa Forsythe, and John Salyer, Jr. sold Indeck Capital, Inc., a power-generation business whose stock they owned, to defendant Black Hills Corp. The Merger Agreement governing the sale provided for an immediate payment to plaintiffs plus contingent "earn-out" consideration to be issued over the ensuing four years. Specifically, the earn-out consideration for each of the four years was to be based on a percentage of the net income of Black Hills Generation Company ("Generation" or "earn-out entity"), the entity that took over Indeck Capital's operations under Black Hills' umbrella. Black Hills stock equivalent in value to thirty-five percent of Generation's net income was to be paid to plaintiffs after each of the four years, with an absolute upward limit of $35 million worth of that stock. Plaintiffs allege, among other things, that Black Hills artificially depressed Generation's income by saddling it with intercompany loans that plaintiffs say did not really exist or, at a minimum, carried artificially high interest rates. This and related actions by Black Hills, plaintiffs assert, violated the express terms of the Merger Agreement or, in the alternative, an implied duty of good faith and fair dealing that they contend Black Hills owed the former Indeck shareholders. Plaintiffs also allege that Black Hills engaged in negligent spoliation of evidence material to this dispute.

Plaintiffs' second amended complaint names only Black Hills as a defendant. Various Black Hills officers and former officers were named as defendants in an earlier version of the complaint; in March 2007, the Court dismissed for failure to state a claim a fraudulent misrepresentation claim against those individual defendants, leaving only claims against Black Hills. The second amended complaint, which plaintiffs filed in August 2007, does not assert any new claims against the individual Black Hills officers.

The second amended complaint includes seven claims. Counts 1 through 5 are claims of breach of contract that relate to specific provisions of the Merger Agreement. The first four counts allege breaches in the form of Black Hills' conduct of Generation and its calculation of the earn-out consideration. In count 1, plaintiffs allege that Black Hills breached its obligation to cause Generation to be run in a "reasonably prudent manner" by saddling it with insufficiently documented debt that, they contend, was not really debt at all. If this debt was real, plaintiffs contend in the alternative, then Black Hills put insufficient equity into Generation. In count 2, plaintiffs allege that Black Hills caused Generation to enter into material transactions with affiliates-i.e., other Black Hills entities-on terms less favorable to it than it could have obtained from unrelated entities. In count 3, plaintiffs allege that Black Hills took several actions intended to reduce the earn-out consideration paid to them. In count 4, plaintiffs allege that Black Hills violated the Merger Agreement's provisions that required Black Hills to "assume" and "satisfy" two of Indeck's pre-merger financial obligations.

In count 5, their final breach of contract claim, plaintiffs allege that Black Hills violated a Merger Agreement provision that required it to make available work papers underlying Generation's financial statements during the earn-out years. They also allege defendants violated a provision that guarantees plaintiffs' access to certain books and records of Generation in the event of a dispute over the earn-out calculation. Black Hills lost or was too quick to destroy e-mail back-up tapes and other materials, plaintiffs allege. Count 6 is a related spoliation claim premised on what plaintiffs assert was Black Hills' common law duty to preserve evidence once this dispute became reasonably foreseeable.

Count 7 claims a breach of Black Hills' implied duty of good faith and fair dealing. In this claim, argued in the alternative to other claims, plaintiffs contend that, to the extent the Court determines Black Hills did not breach specific provisions of the Merger Agreement, its alleged misconduct should be remedied under this theory.

Discussion

Summary judgment is appropriate if "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(c). When determining whether a genuine issue of material fact exists, the Court must view the facts in the light most favorable to the nonmoving party and draw all reasonable inferences in its favor. See Anderson v. Liberty Lobby, 477 U.S. 242, 248 (1986); Lesch v. Crown Cork & Seal Co., 282 F.3d 467, 471 (7th Cir. 2002). Because the Court is presented with cross-motions for summary judgment in this case, it must consider each party's motion separately and draw all reasonable inferences against the party whose motion is under consideration. See Crespo v. Unum Life Ins. Co. of Am., 294 F. Supp. 2d 980, 991 (N.D. Ill. 2003) (citing Brownlee v. City of Chicago, 983 F. Supp. 776, 779 (N.D. Ill. 1997)).

A. Alleged Breach of Section 7.7(i) of the Merger Agreement (Count 1)

In count 1 of the second amended complaint, plaintiffs allege that Black Hills violated a term of the Merger Agreement that required Black Hills to run Generation during the earn-out period in "a reasonably prudent manner" and to take actions Generation's board of directors deemed beneficial to Generation's business. (In full, section 7.7(i) provides that, during the earn-out period, "[Generation] shall and [Black Hills] shall cause [Generation] to operate and manage the business of [Generation] in a reasonably prudent manner and shall take such actions that the Board of Directors deems beneficial to the business and operations of [Generation] during such period.") Plaintiffs allege that Black Hills failed to observe corporate formalities in documenting and authorizing intercorporate borrowing by Generation and other transfers. Moreover, plaintiffs contend, Black Hills made these transfers without regard for whether they would benefit the business and operations of Generation, effectively treating Generation as a "piggy bank." This loose flow of funds in and out of Generation, plaintiffs allege, shows that Generation's intercompany debt was really equity and that no interest expense should have been subtracted from its earnings. In the alternative, plaintiffs allege, if Generation was legitimately indebted to affiliates, then Black Hills failed to provide it with enough equity capital for the earn-out entity to be run prudently or in a way that helped its business. Plaintiffs allege that they were injured to the extent Black Hills' actions undercut the earn-out consideration plaintiffs would otherwise have received.

Under Delaware law, which governs the Merger Agreement, the elements of a breach of contract are the existence of a valid contract, breach of an obligation under that contract, and damages to the plaintiff from the breach. See, e.g., VLIW Technology, LLC v. Hewlett-Packard Co., 840 A.2d 606, 612 (Del. 2003). The parties do not dispute that the Merger Agreement satisfies the first of these elements. For each side's motion, therefore, the Court will focus on the issues of breach and damages.

With regard to the issue of breach, neither side has attempted to delineate the meaning of "reasonably prudent" as it is used in section 7.7(i). The parties' respective arguments therefore reduce to assertions that Black Hills' conduct of Generation did or did not meet a standard whose contours they have made little effort to help the Court define. The Court declines to grant either side's motion for summary judgment under these circumstances.

The Court does, however, take the view that by its express terms, section 7.7(i) required Black Hills to pay particular attention to the business interests of Generation in their own right and not merely treat Generation as it would any other of its subsidiaries. This contractual duty is complementary to but distinct from the one contained in section 7.7(v), which bars Black Hills from taking any actions designed to avoid paying plaintiffs the earn-out consideration they are owed (and which the Court examines separately below). A reasonable jury could conclude that section 7.7(i) was breached by one or more aspects of Black Hills' conduct of Generation's affairs under some concept of reasonable prudence. Conversely, a reasonable jury might not draw this inference in plaintiffs' favor. On the evidence and legal arguments now before it, the Court cannot say. For this reason, the Court denies both parties' motions for summary judgment as to count 1 of the second amended complaint.

B. Transactions Between Generation and Affiliates on Terms Allegedly Less Favorable than Generation could have Obtained from Third Parties (Count 2)

In count 2 of the second amended complaint, plaintiffs allege that Black Hills violated the Merger Agreement's prohibition on material transactions between Generation and affiliates whose terms were less favorable than what Generation could have obtained from unrelated parties. (In full, section 7.7(iii) provides that, during the earn-out period, Black Hills was to cause the earn-out entity to "refrain from entering into material transactions with affiliates of the Company unless such transactions are on terms and conditions no less favorable (when all aspects of the transactions are considered) to the Company than could be obtained from non- related parties.") Specifically, plaintiffs claim that in 2001 Black Hills prevented Generation from drawing directly on a credit facility that Black Hills obtained in connection with the merger and instead forced Generation to borrow funds from an affiliate, WRDC, that WRDC had borrowed directly under this credit facility. In the second amended complaint, plaintiffs allege WRDC lent these funds to Generation at a premium over the rate the bank charged WRDC.

To prevail on a breach of contract claim, Delaware law requires a valid contract, breaching conduct, and damages to the plaintiff from the breach. See VLIW Technology, 840 A.2d at 612. As with count 1, the parties do not dispute that the Merger Agreement satisfies the first of these elements; accordingly, the Court will focus on the issues of breach and damages.

1. Defendant's Motion

Black Hills' principal argument for why it deserves summary judgment on this count is that plaintiffs' allegation that WRDC charged a premium rate is demonstrably false. Because WRDC did not charge Generation a premium, Black Hills argues, there is neither a breach of section 7.7(iii) nor any damage to plaintiffs. Black Hills also argues that there is no evidence that Generation could have obtained credit on any better terms than those it obtained from WRDC.

Plaintiffs now appear to concede that WRDC never charged Generation a premium rate, but they speculate that Black Hills itself may have done so when, after April 2001, it supplanted WRDC and Generation as the primary borrower on a new ABN-AMRO credit facility. They also argue Black Hills did not investigate whether Generation could have obtained a lower rate of interest from unrelated parties and did not try to reconcile its duty under section 7.7(iii) with its decisions to charge Generation an "all-in" corporate interest rate and allot to Generation a corresponding share of corporate overhead. Plaintiffs do not, however, point to evidence that would ground an inference in their favor. Their arguments are thus entirely speculative. If the moving party has shown the absence of any genuine issue of material fact, then the non-movant's "response must . . . set out specific facts showing a genuine issue for trial" to avoid summary judgment. Fed. R. Civ. P. 56(e)(2). Speculation alone will not defeat the motion.

See, e.g., Becker v. Tenenbaum-Hill Assocs., Inc., 914 F.2d 107, 112 (7th Cir. 1990). Black Hills is accordingly entitled to summary ...


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