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Rmb Fasteners, Ltd., A Hong Kong Limited Liability Company v. Heads & Threads International

February 7, 2012

RMB FASTENERS, LTD., A HONG KONG LIMITED LIABILITY COMPANY, PLAINTIFF,
v.
HEADS & THREADS INTERNATIONAL, LLC, A DELAWARE LIMITED LIABILITY COMPANY, CAPITAL PARTNERS, INC., A CONNECTICUT CORPORATION, JPMORGAN CHASE BANK, N.A., A NATIONAL BANKING ASSOCIATION, PATRICK D. CAVANAUGH, AS ASSIGNEE FOR THE BENEFIT OF THE CREDITORS OF HEADS & THREADS INTERNATIONAL, LLC, AND MICHAEL WRENN, AN INDIVIDUAL. DEFENDANTS.



The opinion of the court was delivered by: Honorable JudgeRebecca Pallmeyer

MEMORANDUM OPINION AND ORDER

Plaintiff RMB Fasteners, LTD ("RMB" or "Plaintiff") manufactures screws, bolts, washers, nuts, and other fastening devices. RMB exported its products to companies throughout the world, including to Defendant Heads & Threads International, LLC ("HTI"), a global importer and distributor of industrial and construction fasteners. In March 2011, the economic downturn took its toll on HTI. Facing insolvency, HTI completed a trust agreement on March 25, 2011, assigning all of its assets to Defendant Patrick D. Cavanaugh as assignee for the benefit of HTI's creditors.

Pursuant to the Uniform Commercial Code ("UCC"), RMB seeks to reclaim not only goods that it shipped within ten days of its reclamation demand, but all goods for which HTI has not paid--recovery RMB claims it is entitled to under UCC § 2-207 because of alleged false assurances of HTI's solvency. RMB also alleges that HTI ordered and accepted those goods without the intention to pay, but instead with the intention to liquidate the goods in a fire sale for the benefit of its primary creditor, Defendant JP Morgan Chase Bank ("Chase"), whose loan is secured by a floating lien on HTI's inventory.

Plaintiff brings claims of reclamation, fraud, conspiracy, conversion, and unjust enrichment against Defendants HTI; Chase; Capital Partners, alleged to be HTI's primary investor;Michael Wrenn, HTI's President and CEO; and Cavanaugh, not in his individual capacity, but solely as assignee for the benefit of HTI's creditors.Additionally, RMB alleges that Defendants HTI and Wrenn breached the special-circumstance fiduciary duty owed by insolvent companies to their creditors. Finally,RMB brings claims for breach of contract and account stated against Defendants HTI and Cavanaugh. Defendants have moved to dismiss all claims other than breach of contract and account stated. For the reasons articulated below, Defendants' motions to dismiss are granted in part and denied in part.

FACTUAL BACKGROUND

Plaintiff RMB is a Hong Kong limited liability company that, since 2006, has been in the business of manufacturing and exporting fasteners and fastener-related items, such as screws, bolts, washers, and nuts, to companies throughout the world. (First Am. Verified Compl. for Injunctive and Other Relief (hereinafter "First Am. Compl."), ¶¶ 2, 11.) None of RMB's members are United States residents or corporations. (Hr'g Tr., Mar. 29, 2011, at 6.) Defendant HTI is a Delaware limited liability company with its principal place of business in Carol Stream, Illinois. (Id. ¶ 3.) HTI is in the business of importing and distributing industrial and construction fasteners and related products, including RMB products. (Id. ¶ 12.) There is no indication that HTI has any foreign members. (Hr'g Tr., Mar. 29, 2011, at 3.) Defendant Michael Wrenn, a resident of Downers Grove, Illinois, is HTI's President and CEO. (Id. ¶ 7.) Defendant Capital Partners is a Connecticut corporation and private equity investment firm that Plaintiff alleges is one of HTI's primary investors. (Id. ¶¶ 4, 16-17.) Defendant Chase is a national banking association, chartered under the laws of the United States. (Id. ¶ 5.) Chase provided financing to HTI secured, at least in part, by a floating blanket lien on HTI's inventory. (Id. ¶ 20; Pledge and Security Agreement, December 20, 2007, Ex. B to Kuhn Decl., Ex. 1 to Chase's Mem. of Law in Opp. to Pl.'s Emergency Mot. for TRO(hereinafter " Chase's Opp. to TRO"), at art. II.) Plaintiff alleges that Chase and Capital Partners have had "full or partial" control over HTI's operations since at least December 2010, including the decision to order RMB products and attempts to sell HTI in late 2010 and early 2011. (First Am. Compl.¶¶ 18, 21-23.)

Since approximately September 2006, RMB and HTI have engaged in a trade relationship under which the two companies have entered into hundreds of sales contracts for HTI's purchase of RMB products, amounting to over $72 million worth of goods. (Id. ¶¶ 13, 15.) Despite the relatively long and, it appears, symbiotic history between the two companies, RMB was allegedly unaware of HTI's financial troubles. RMB's First Amended Complaint does not make clear when or how HTI's financial problems began, but Plaintiff does allege that from approximately June 2009 to February 2011, HTI entered into approximately eight forbearance agreements with Chase and HTI's other lenders. (Id. ¶ 22.)*fn1 Chase agreed not to call HTI's loans provided that HTI deliver frequent financial reports; that HTI attempt to either (a) find a buyer for substantially all of its assets or (b) secure refinancing with another lender; and that HTI retain a Chief Restructuring Officer, approved by Chase, to be "given final decision-making authority regarding the day-to-day operational, financial, and strategic management" of HTI. (Forbearance Agreement and Amendment No. 4 to Credit Agreement § 5.2-.4, Ex. M to First Am. Compl.) Also pursuant to the forbearance agreement, HTI retained Conway MacKenzie, a "turnaround" firm, to advise HTI regarding HTI's deteriorating financial situation in November 2010. (Id. § 5.1; First Am. Compl. ¶¶ 24-25.). Upon reviewing HTI's sales forecasts in December 2010, Conway MacKenzie warned both HTI and Chase that HTI would not meet its sales projections for the first quarter of 2011. (First Am. Compl. ¶¶ 33-34.)

On December 9, 2010, HTI, through Wrenn, instructed RMB to hold new shipments. (E-mail Message from Wrenn and Ruth Dowling, Vice President Materials, HTI, to Barbara Chen (a/k/a Pak Hung Yeung), Vice President Sales, RMB, of 12/9/10, Ex. A. to First Am. Compl.) Wrenn explained that HTI had an "extraordinary container volume," and requested that RMB hold any new shipments so that HTI could "handle the heavy influx and work [its] way through the backlog." (Id.) Wrenn stated that HTI "expect[ed] demand in the U.S. to resume starting January 2 . . . and to have this situation completely resolved prior to the Chinese New Year." (Id.) Plaintiff has not alleged facts to suggest HTI lied about having a backlog of inventory caused by an influx of shipments during a period of low demand; Plaintiff nevertheless alleges, however, that the real reason for the shipment hold was that, unbeknownst to RMB at the time, HTI's financing agreement with Chase had expired, leaving HTI unable to pay for additional RMB shipments. (First Am. Compl. ¶¶ 38-39.) According to RMB, HTI, Wrenn, Capital Partners, and Chase were aware of HTI's insolvency in or before December 2010, and knew that HTI was unable to pay for new purchases of RMB products. (Id. ¶¶ 43-46.)

On December 21, 2010, Wrenn notified RMB that HTI would begin to approve new shipments delayed the week before and that beginning on December 27, HTI would "begin to approve new bookings, including primary Mill shipments and expedited items." (E-mail Message from Wrenn & Dowling to Chen of 12/21/10, Ex. B. to First Am. Compl.). Wrenn again attributed the previous delay to a "container backlog" and projected that demand would pick up in the new year. The next day, Ruth Dowling, HTI's Vice President of Materials, followed up with an e-mail message informing RMB that:

1. This week we should be able to approve everything remaining that you attempted to book last week.

2. We appreciate your offer to help us with payment. At the moment, I don't have any new instructions for you regarding payment. We may contact you at some time in the future.

3. I believe we are waiting for some past due flange nuts and carriage bolts. Please make every effort to book past due flange nuts. We have urgent need for those items and will approve them immediately.

4. Has RMB stopped production of HTI goods? We are working to provide a revised delivery due date for our open PO's. It will likely be after the first of the year before we have answers for you. That said, we do anticipate business picking up in Jan. I would hate to get caught in a position where we run out of product because RMB has not produced it. Any comment?

(E-mail Message from Dowling to Chen of 12/22/10, Ex. C. to First Am. Compl.)

Shortly after the beginning of the new year (2011), Wrenn followed up on RMB's apparent offer to help HTI with payment. In a letter dated January 3, 2011, Wrenn stated:

We are asking for your support and cooperation once again during the first quarter of 2011. We are moving to a new bank between now and the end of March 2011 and during that time we need to extend our payment terms by 30 days. We want to stress that this is a temporary situation and we will resume payments according to our normal terms in April. .

We expect 2011 to be a better year and we thank you, our partner, for your extraordinary assistance. (Letter from Wrenn & Dowling to Chen of 1/3/11, Ex. D to First Am. Compl.)

On January 14, 2011, Wrenn sent a letter to all of HTI's vendors, including RMB, explaining HTI's financial situation. (Letter from Wrenn to Vendors of 1/14/11, Ex. F. to First Am. Compl.) Specifically, Wrenn's letter noted that HTI's inventory increased significantly during November and December because sales were weaker than in previous years, while at the same time HTI "released and subsequently received a tremendous amount of product from" its suppliers. (Id.) Wrenn also explained that due to the financial crisis, low sales levels, and "high cash outflows required to pay for product and shipping costs," HTI was "facing greater short-term borrowing restrictions at a time when it need[ed] just the opposite." (Id.) In particular, Wrenn observed that banks were reluctant to "lend against higher inventory levels because they fear inventory could lose value quickly should another economic crisis develop." (Id.) Wrenn thanked HTI's suppliers for their support and cooperation in extending payment terms and offered an optimistic appraisal of HTI's financial situation going forward:

Some positive news is that our January sales revenues thus far are more than 50% higher than the same period one year ago and we expect continued revenue growth in the weeks and months ahead. We have been working very closely with our banks and investors to provide the necessary capital to fund operating needs in 2011 and beyond. At this time, we are on track to finalize an arrangement to provide the required long term funding by the end of first quarter 2011 or sooner. (Id.)

On January 25, 2011, RMB's Vice President of Sales, Barbara Chen (a/k/a Pak Hung Yeung) met face-to-face with Wrenn, Dowling, and Fred Weber (HTI's CFO) at HTI's offices in Carol Stream, Illinois. (First Am. Compl. ¶ 85.) Plaintiff alleges that, at this meeting, Wrenn informed Chen that, in the summer of 2010, Chase had requested that Capital Partners obtain additional investment or new ownership to fund HTI's operations. (Id. ¶ 88.) Wrenn allegedly disclosed that Capital Partners had informed HTI that a potential buyer had made an offer to purchase HTI. (Id. ¶ 86.) At this meeting, Chen requested that HTI amend the Bills of Lading on RMB's in-transit shipments to allow RMB to retrieve the shipments. (Id. ¶ 89.) According to RMB, Wrenn stated that HTI would have to seek Chase's approval for such a request. (Id. ¶ 90.)

The next day, January 26, 2011, Chen again met face-to-face with Wrenn and Dowling. At this meeting, Wrenn allegedly informed Chen that Chase had refused to allow HTI to change the Bills of Lading. (Id. ¶ 92.) RMB alleges that Wrenn also informed Chen that if the prospective buyer were to make a deposit by mid-February-an event Wrenn allegedly said was "highly possible"-HTI's cash flow problems would be solved. (Id. ¶ 93.) Additionally, RMB claims that Wrenn expressed confidence that the deal with the prospective buyer would close before February 12, 2011, and that in the event that the deal fell through, Capital Partners and HTI would secure refinancing with a new bank. (Id. ¶ 95.) Wrenn reportedly acknowledged that he was unsure "why Capital Partners was slow in addressing Chase's request that Capital Partners and HTI obtain additional investment or new ownership to fund HTI's operations," but assured Chen that "Capital Partners was complying with Chase's request and that soon HTI and Capital Partners would 'settle everything.'" (Id. ¶¶ 99-100.) Wrenn further assured Chen that "the amount due on RMB's past due invoices to HTI was correct, that HTI would pay RMB for all past-due invoices, and that HTI would honor open orders as well." (Id. ¶ 97.)

Notably, it appears that RMB ceased new shipments to HTI before the time of these two meetings. January 18, 2011, was the last Bill of Lading date listed on RMB's inventory of unpaid goods. (Invoice Numbers, Ex. A to Reclamation Demand, Ex. I to First Am. Compl.) On January 27, 2011, the day after the last face-to-face meeting, RMB filed a UCC Financing Statement pertaining to the unpaid goods shipped to HTI, and notice of the Financing Statement and lien was delivered to Chase on January 28, 2011. (Id. ¶¶ 105-06.)

On February 10, 2011, Plaintiff alleges, RMB ceased production of new products for HTI. (Id. ¶ 108.) Plaintiff claims that up until that date, it had manufactured and held approximately $1,160,000 worth of goods to fill 617 outstanding HTI purchase orders, and that these finished goods either were not readily sellable to other purchasers because they were custom orders, or were regarded as overstock and would have to be sold at a deep discount. (Id. ¶¶ 109-12.) Plaintiff alleges that approximately $350,000 of the finished goods are completely unsellable to other customers and are likely to be sold as scrap metal.(Id. ¶ 113.)

On February 12, 2011, Chen placed multiple, unanswered telephone calls to Wrenn, seeking information regarding the purported deal for the sale of HTI and the satisfaction of all outstanding invoices. (Id. ¶¶ 115-16.) That same day, RMB sent a Reclamation Demand via mail to HTI pursuant to UCC § 2-207, 810 ILCS 5/2-207, demanding the return of all unpaid goods. (Reclamation Demand.) RMB calculated the value of the goods at $2,562,056.03. (Id.) Wrenn addressed the Reclamation Demand by e-mail on February 19, 2011, noting that HTI was working hard to provide "some satisfaction in the near future," and that HTI had taken steps to protect RMB's reclamation rights by setting aside the remaining goods while HTI's attorneys and Chief Restructuring Officer evaluated the claim. (E-mail Message from Wrenn to Chen of 2/19/11, Ex. J. to First Am. Compl.) On March 4, 2011, HTI informed RMB that HTI had set aside approximately $380,000 worth of RMB products shipped within ten days of RMB's Reclamation Demand, ...


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