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Banco Panamericano, Inc. v. Consortium Service Management Group

August 26, 2008

BANCO PANAMERICANO, INC., A SOUTH DAKOTA CORPORATION, PLAINTIFF,
v.
CONSORTIUM SERVICE MANAGEMENT GROUP, INC., ALSO KNOWN AS CONSORTIUM MANAGEMENT GROUP, INC., A TEXAS CORP., AND CSMG GASTECH, LLC, A TEXAS LLC, DEFENDANTS.
CONSORTIUM SERVICE MANAGEMENT GROUP, INC., ALSO KNOWN AS CONSORTIUM MANAGEMENT GROUP, INC., A TEXAS CORP., AND CSMG GASTECH, LLC, A TEXAS LLC, COUNTER-PLAINTIFFS,
v.
BANCO PANAMERICANO, INC., A SOUTH DAKOTA CORPORATION, COUNTER-DEFENDANTS.



The opinion of the court was delivered by: Rebecca R. Pallmeyer United States District Judge

Judge Rebecca R. Pallmeyer

MEMORANDUM OPINION AND ORDER

Plaintiff Banco Panamericano, Inc. ("Banco") filed this breach of contract action against Defendants Consortium Service Management Group, Inc. ("CSMG") and CSMG Gastech, LLC ("Gastech") (together, the "Defendants"). In total, Banco calculates that it is entitled to recover $1,043,123.85. Because more than $75,000 is at stake and, as explained below, the parties are diverse in citizenship, the court's jurisdiction is secure.

This case arises from a February 15, 2002 Consolidated, Amended and Restated Loan, Guaranty and Security Agreement (the "Loan Agreement") and Promissory Note (the "Note"). Pursuant to these instruments, Banco loaned CSMG and Gastech $203,800 for work they would perform pursuant to a contract with a company called Resource Technology Corporation ("RTC"). Banco contends that Banco advanced principal under the instruments, but Defendants failed to repay those advances. According to CSMG and Gastech, Banco's owner, Leon Greenblatt, used RTC, which he partially owns, to defraud Defendants and induce them to enter into the agreements with Banco and a separate contract with RTC. Based on this purported conduct, Defendants have filed several affirmative defenses as well as counterclaims for fraud, conspiracy, and breach of contract. Banco now moves for summary judgment on its breach of contract claims against CSMG and Gastech, on CSMG's and Gastech's affirmative defenses, and on CSMG's and Gastech's counterclaims. For the reasons explained below, the court grants Banco's motion for summary judgment on the Defendants' liability only. As genuine issues of material fact remain, the amount of damages to be awarded is reserved pending further proceedings.

FACTUAL BACKGROUND

The facts presented here are drawn from the parties' Local Rule 56.1 Statements: Banco's amended Rule 56.1(a) statement ("Pl.'s 56.1"); CSMG's and Gastech's Rule 56.1(a) response to Plaintiff's Rule 56.1(a) statement ("Defs.' 56.1 Resp."); CSMG's and Gastech's Rule 56.1(b) statement of additional facts ("Defs.' 56.1"); and Banco's response to Defendants' statement of additional facts ("Pl.'s 56.1 Resp."). Unless noted otherwise, the facts are undisputed.

I. Parties

Banco is incorporated in South Dakota corporation and has its principal place of business in Chicago, Illinois. (Pl.'s 56.1 ¶ 2; Notice of Removal ¶ 3, 05 C 1429 Docket Entry No. 1.) CSMG is a Texas corporation with its principal place of business in Corpus Christi, Texas. (Pl.'s 56.1 ¶ 3; Notice of Removal ¶ 4.) Gastech was a Texas limited liability company, until the State of Texas dissolved it on February 14, 2003. (Pl.'s 56.1 ¶ 4.) Gastech is a subsidiary of CSMG. (Notice of Removal ¶ 5.) None of Gastech's members is an Illinois citizen. (Id.)

Aside from the three parties, one other entity plays a significant role in this litigation: RTC.

RTC is an Illinois corporation that was engaged in the business of constructing and operating landfill gas collection and conversion systems between January 1999 and July 2003. (Pl.'s 56.1 ¶ 1.) Involuntary bankruptcy proceedings were initiated against RTC on November 15, 1999 and converted to Chapter 11 bankruptcy proceedings on January 18, 2000. (Id. ¶ 10.) In many ways, Banco and RTC are intertwined. As just one example, both entities are connected to Greenblatt: one of Greenblatt's family trusts owns Banco, and RTC is the wholly-owned subsidiary of a company of which Greenblatt is the 50% owner. (Defs.' 56.1 ¶¶ 1-2.) The relationship between these entities is significant and will be set forth in greater detail below, because Defendants contend that Greenblatt (and thus Banco) manipulated RTC and its employees to defraud them in connection with the Note.

II. Landfill Gas Projects

A. Corpus Christi

Since 1999, CSMG has been engaged in a business relationship with RTC in which CSMG has worked to develop a method of purifying gases emanating from RTC's landfills, by separating carbon dioxide from methane to produce a commercially saleable methane gas. In 1999, CSMG's President and Chairman, Donald S. Robbins, and RTC employee Kevin Werner discussed the possibility that CSMG might sell the proposed technology to operators of natural gas pipelines. (Pl.'s 56.1 ¶ 11.) In 2000, Robbins, Werner, and another RTC employee-George Calvert-had further conversations, specifically discussing the equipment needed to remove carbon dioxide from the landfill gases. (Defs.' 56.2 ¶ 9.) During one such conversation, Calvert and Robbins discussed RTC's interest in using the CSMG technology to purify gas at the J.C. Eliot Landfill in Corpus Christi, Texas (the "Corpus Christi Landfill"). (Id.) Calvert did not believe that CSMG's machine could in fact separate the carbon dioxide in landfill gas from the methane or that RTC could produce commercially saleable methane gas from landfill gas. (Id. ¶ 10; Calvert Dep. 114:7-16, Ex. 2 to Defs.' 56.1.) Calvert testified that he told CSMG (and, thus, its subsidiary, Gastech) "from the beginning" that a machine could not separate carbon dioxide from methane. (Id. at 109:5-14.) Calvert also told Greenblatt he was skeptical about the project. (Id. at 122:21-123:17.) Greenblatt replied that he had been told (the record does not make clear who told him this) that the machine had worked in Ukraine and replied to Calvert: "Give it a try." (Id. at 123:21-124:10.) Calvert claims, however, that Greenblatt never directed RTC to do, or not to do, any particular business activity. (Id. at 95:13-21.)

Whatever Calvert's reservations may have been, it is undisputed that on approximately June 14, 2001, CSMG and RTC entered into an Operating Agreement related to the Corpus Christi Landfill. (Pl.'s 56.1 ¶ 8.) Pursuant to that Agreement, RTC granted CSMG the right to use a portion of the Corpus Christi Landfill to evaluate, collect, explore, test, treat, process, develop, and utilize gases produced there. (Id.; Operating Agreement dated 6/14/01 §§ 1.5, 1.8, 2, Ex. H to Pl.'s 56.1.) CSMG agreed to provide a methane separator plant (or scrubber) at the Landfill. (Id. § 4b.) In exchange, RTC agreed to provide, among other things, landfill gases and the equipment necessary to transport those gases to the plant; RTC also agreed to compensate CSMG monthly for providing the scrubber. (Id. §§ 4a, 5.) Specifically, RTC agreed to provide "at least 1750 CFM [cubic feet per minute] of Landfill Gas." (Id. § 4a.) RTC agreed, further, that it would make its "[b]est efforts to provide Landfill Gas with less than One Percent (1%) of air by volume." (Id.) There is no indication in the record that Banco or Greenblatt had any additional involvement in the Corpus Christi project at that point.

Ultimately, the Corpus Christi landfill project was not a success. Calvert testified that RTC abandoned the operation once it became clear that the City of Corpus Christi was creating "roadblocks" for RTC in an effort to steer the gas processing project to a local operator. (Calvert Dep. 137:24-138:5.) The parties agree that RTC was unable to fulfill its contract at the Corpus Christi Landfill, and that RTC and CSMG did not complete the gas scrubbing operation. (Pl.'s 56.1 ¶ 12; Defs.' Resp. to Pl.'s 56.1 ¶ 12.) Calvert testified that at some unspecified point, he and Greenblatt discussed the decision to abandon the Corpus Christi Landfill. (Calvert Dep. 154:17-155:2.) After Calvert told Greenblatt that the issues at the site would never be straightened out, Greenblatt replied that they should "scrap" the project. (Id.)

B. Chastang

RTC employee Kevin Werner was responsible for RTC's operations at the Chastang Landfill in Mobile, Alabama (the "Chastang Landfill") from January 1999 to July 2002. According to Robbins, Werner told Robbins in late 2001 that RTC had decided to move the carbon dioxide separator (or scrubber) from Corpus Christi to the Chastang Landfill, where RTC had negotiated a contract for the sale of processed gas. (Defs.' Resp. to Pl.'s 56.1 ¶ 13; Aff. of Kevin Werner dated 12/7/04 ¶ 2, Ex. O to Pl.'s 56.1 ("Werner Aff.").)*fn1 Robbins responded by telling Werner that CSMG would need to finance the cost of moving its scrubber to the Chastang Landfill and asked RTC to suggest a funding source. (Pl.'s 56.1 ¶ 14.) It is unclear why CSMG was required to bear the cost of moving its scrubber on RTC's behalf, but an unspecified individual from RTC suggested Banco as a funding source. (Id.) As described in greater detail below, Banco agreed to loan CSMG and Gastech $203,800. (Id. ¶ 16.) In total, CSMG's budget for installing the scrubber at the Chastang Landfill totaled $1,440,000; the loan at issue in this litigation was intended to partially fund this venture. (Id.)

On approximately February 14, 2002, CSMG and RTC executed another Operating Agreement, this one related to the Chastang Landfill project. (Pl.'s 56.1 ¶ 9.) In the 2002 Operating Agreement, CSMG agreed to provide an operational methane separation plant. (Operating Agreement dated 2/14/01*fn2 § 4, Ex. I to Pl.'s 56.1.) To facilitate this, RTC granted CSMG the right to use a portion of the Chastang Landfill, without cost, for a period of five years "for the evaluation, testing and exploration program, and the construction, operation and maintenance" of gas processing facilities and related equipment, pipes, and utility lines. (Pl.'s 56.1 ¶ 9; 2/14/01 Operating Agreement §§ 1.4, 1.5, 2, 3.) According to the 2002 Operating Agreement, these facilities were to be used for evaluating, exploring, testing, treating, processing, and utilizing landfill gas and constituent products. (Id. § 1.4.) RTC agreed to provide at least 1750 CFM of landfill gas, and assured CSMG that the gas would be less than 1% oxygen by volume. (Id. § 4.) In exchange, CSMG agreed to provide a methane separator plant and the equipment necessary for the landfill gas purification effort. (Id.) CSMG also agreed to provide methane gas to "the end user," at a specified quality level. (Id.) Pursuant to the 2002 Operating Agreement, RTC agreed to compensate CSMG, based on a delineated formula. (Id. § 5.)

Just prior to execution of the 2002 Operating Agreement, in January 2002, RTC and the owners of the Chastang Landfill--TransAmerican Waste Industries, Inc.-amended their agreement to provide that RTC would complete installation of the CSMG scrubber by September 1, 2002 and undertake to commence delivery and sale of landfill gas to a named customer-Mobile Solid Waste Authority ("Mobile")--by that date. (Defs.' 56.1 ¶ 33; Amendment to December 23, 1996 Agreement, Ex. 10 to Defs.' 56.1 (at Dep. Ex. 6).)*fn3 Between February 2002 and May 2003, RTC and CSMG installed the scrubber at the Chastang Landfill. (Pl.'s 56.1 ¶ 15.) RTC spent more than $800,000 on the project; its work on the Chastang Landfill project included constructing foundations and infrastructure as well as purchasing components for the scrubber. (Id. ¶ 47.) Nevertheless, by March 2003, RTC was still unable to deliver processed gas meeting Mobile's requirements, as the gas's oxygen level exceeded that required by the customers. (Defs.' 56.1 ¶ 36.) In July 2003, the landfill owner evicted RTC from the site, claiming that RTC had failed to timely complete the project at the Landfill. (Pl.'s 56.1 ¶ 48.) CSMG challenges the notion that its equipment was to blame for the failure. Robbins testified that the volume of gas generated at the Chastang Landfill never reached the 1750 CFM and that the oxygen content of the gas provided to the carbon dioxide separator was never below 1%, as specified in the 2002 Operating Agreement. (Defs.' 56.1 ¶ 38.) According to Robbins, this prevented the parties' successful delivery of processed gas to Mobile. (Id.)

Subsequently, on December 17, 2004, RTC's Chapter 11 trustee, CSMG, and various other entities reached a settlement agreement relating to the Chastang Landfill. (Pl.'s 56.1 ¶ 49.) When the Bankruptcy Court approved that agreement, RTC's gas rights at the Chastang Landfill were terminated, and "RTC's equipment at the Chastang landfill" was sold free and clear of Banco's lien. (Id.) The gas rights, the Chastang project, and the other equipment RTC had at the Chastang Landfill had all been collateral for Banco's DIP loan to RTC. (Id. ¶ 51.)

III. The Loan

The parties agree that Plaintiff, as lender, and Defendants, as borrowers, entered into the Note and Loan Agreement contemporaneous with the 2002 Operating Agreement. Robbins executed the Note and the Loan Agreement on behalf of both CSMG and Gastech. (Pl.'s 56.1 ¶ 5; Note, Ex. D to Pl.'s 56.1; Loan Agreement, Ex. E to Pl.'s 56.1.) The Note is for the principal amount of $203,800 at an interest rate of 12%. (Pl.'s 56.1 ¶ 18.) By its terms, the "Note evidences a straight line of credit," and permits advances on either oral or written request. (Note.) The Note also provides that, "[o]nce the total amount of principal has been advanced, Borrowers is to [sic] entitled to further loan advances." (Id.)*fn4 That same clause specifies that Banco is under no obligation to advance funds under enumerated conditions, including if the borrowers are on default under the terms of the Note. (Id.)

In the Note, CSMG and Gastech agreed to repay the loan in twenty payments of $5,000 each, beginning on June 1, 2002, and to make monthly payments of accrued, unpaid interest on each payment date. (Pl.'s 56.1 ¶ 18; Note.) The Note contains a maturity date of June 1, 2004, at which time all remaining principal and accrued interest was due. (Defs.' 56.1 ¶ 24; Note.) Defendants contend, however, that it had no obligation to make monthly payments "unless funds had been advanced by Banco under the line of credit provided in the Note." (Defs.' Resp. to Pl.'s 56.1 ¶ 18.) In his deposition, Greenblatt acknowledged that CSMG was required to make repayments under the Note only if Banco had advanced funds "under the straight line of credit," but he testified that funds were in fact advanced pursuant to the Note prior to June 1, 2002. (Deposition of Leon Greenblatt of 8/27/07 37:4-16, Ex. 1 to Defs.' 56.1.)

Simultaneously with the Note, CSMG and Gastech as borrowers and Banco as lender entered into the Loan Agreement. (Loan Agreement.) The Loan Agreement states that the Promissory Note evidences a demand loan. (Id. at Preliminary Statements.) In the Loan Agreement, CSMG acknowledges that it is indebted to Banco in the principal amount of $203,800. (Id.) Banco acknowledges agreeing to provide unspecified amounts of "requested additional credit" to CSMG pursuant to the terms and conditions in the Note and Loan Agreement. (Id.)

A. Advances Made Under the Note

There is no genuine issue of material fact as to whether the principal amount of $203,800 was advanced under the Note; CSMG and Gastech admit this. They do not admit that it was Banco who advanced the funds, but as they have not identified any other lender for the funds they admittedly received, the court deems admitted Banco's assertion that it advanced the money. (Pl.'s 56.1 ¶ 20.) Confirming this, in a November 2007 SEC filing, CSMG stated: "The Company is in default on a note with an initial balance of $203,800 to Banco Pamamericano [sic] that became due April 1, 2002. On February 10, 2005, Banco Panamericano filed suit in the Circuit Court of Cook County, Illinois for $514,920 (balance accrued as of September 30, 2007 including interest at 12% is $368,685)." (CSMG Form 10-QSB dated 11/13/07 at 29, Ex. N to Pl.'s 56.1.) As explained below, the parties dispute whether additional sums were advanced as well, but Plaintiff has effectively withdrawn its claim for any such additional sums. (Reply at 3 ("Banco is willing to accept summary judgment for $203,800 plus interest and late charges.").)

Banco asserts that it advanced funds in excess of $203,800: in the Complaint, filed initially in February 2005, Banco asserted that it advanced $211,205.61 on behalf of Defendants, under the terms of the Note and the Loan Agreement. (Compl. ¶ 17, Ex. B to Pl.'s 56.1.) Defendants denied this assertion. (Ans. ¶ 17, Ex. C to Pl.'s 56.1.) Now, Banco asserts--again over Defendants' objection--that it advanced $223,197.26 under the Note between March and December 2002. (Pl.'s 56.1 ¶ 19.) To support this, Banco points to a series of checks in its Local Rule 56.1 Statement. (Banco Panamericano Inc. Checks, Ex. J to Pl.'s 56.1) These checks reflect payments of:

* $5,000 to Hydraulic Crane Specialists, Inc. (6/12/02; with "Partial payment Crane Rental - Mobile Project" on the memo line)

* $500 to Thrifty Car Rental (6/28/02, with "CSMG" on the memo line)

* $17,835 to Silvertrans Inc. (5/10/02; with "CSMG" on the memo line)

* $8,600 to Alamo Transformer Co. (5/10/02; with "CSMG" on the memo line)

* $2,380 to Cat Rental Store (6/28/02; with "1881645 CSMG L9203001" on the memo line)

* $6,557.50 to Hydraulic Crane Specialists (7/8/02)

* $2,000 to Towne Place Suites (7/8/02)

* $2,296.26 to Diversified Employment (7/8/02)

* $2,500 to J&C Diversified (7/8/02)

* $750 to Thrifty Car Rental (7/8/02)

* $2,500 to Clark Geer Latham (7/8/02)

* $1,124.02 to Thrifty Car Rental (7/24/02; with "CSMG A/C" on the memo line)

* $1,391.04 to Porter Capital (7/29/02; with what appears to be "#CG ...


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