Opinion
Filing ID 2669230.
Submitted: August 15, 2003.
Decided: November 7, 2003.
Arthur G. Connolly, III Connolly, Bove, Lodge Hutz LLP.
Todd C. Schiltz Wolf, Block, Schorr and Solis-Cohen LLP.
Dear Counsel:
This post-trial opinion addresses prejudgment interest on judgments entered by former-Vice Chancellor Jacobs in a memorandum opinion dated January 22, 2003 (the "January 22 Opinion"), as well as awards based on opinions and stipulations discussed in Part III, below. Although the January 22 Opinion addressed all outstanding substantive claims raised in this controversy, an award of prejudgment interest was postponed until this Court could receive detailed statements of each party's legal and factual positions.
Fleet Boston Fin. Corp. v. Advanta Nat'l Bank, 2003 Del. Ch. LEXIS 8 (Del.Ch. Jan. 22, 2003).
Id. at *136
This controversy stems from a February 1998 acquisition by Fleet National Group, Inc., and its affiliates ("Fleet") of a $12.1 billion consumer credit card business then owned by Advanta Corp. and its affiliates ("Advanta"). The lawsuit commenced over four years ago. After three separate opinions by this Court, and resolution of certain claims by stipulation of the parties, each party was left with monetary obligations to the other. Nevertheless, net of such awards, exclusive of interest, leaves Advanta liable to Fleet for $43,566,437.27.
At issue currently is how interest should be awarded based on the resolution of the underlying claims. The parties disagree as to two separate issues: (1) whether interest should be applied before or after setoff of legal obligations; and (2) whether interest should be awarded as simple or compound interest. For reasons discussed below, I do not need to reach the simple versus compound interest dispute here. I must, however, address the more difficult issue — that of setoff.
Advanta argues that a three-step process should be followed: (1) this Court should determine the interest rate applicable to each claim and counterclaim; (2) the proper interest rate should be calculated on each claim or counterclaim separately; and (3) once interest has been applied to each award, this Court should offset the final awards. Computing interest this way is often called the "Interest on the Entire Claim Rule." Fleet, on the other hand, argues that this Court should net the competing awards before applying a single interest rate. Computing interest in this manner is known as the "Interest on Balance Rule." Both parties agree that, in certain circumstances, following the Interest on Balance Rule is appropriate; they disagree, however, as to whether this case is an appropriate circumstance for its application. For reasons more fully discussed below, I find that the underlying circumstances in this case require me to follow the Interest on Balance Rule.
Advanta's Memorandum of Law Regarding Prejudgment Interest (March 7, 2003) ("Advanta's Opening Memo"), at 8.
Fleet's Post-Trial Prejudgment Interest Memorandum (March 7, 2003) ("Fleet's Opening Memo"), at 8.
I. STATEMENT OF FACTS
Although a detailed statement of facts can be found in the January 22 Opinion, a summary of pertinent facts follows. Under the terms of an agreement (the "Agreement") entered into by Fleet and Advanta, Fleet acquired a majority of Advanta's consumer credit card business. The Agreement provided that a partnership was to be created into which the assets and liabilities of Advanta's credit card business were to be contributed. Fleet, in turn, agreed to assume Advanta's liabilities in an amount exceeding the value of assets it acquired. This excess amount equaled an "Agreed Deficit," which was defined as follows:
The Agreement was executed on October 28, 1997, and amended on February 20, 1998. Fleet boston, 2003 Del. Ch. LEXIS 8, at *4 n. 5.
Id.
Compl. ¶ 2.
AGREED DEFICIT FORMULA
$510 million + a "Special Adjustment" of approximately $43 million, minus (or plus) (iii) an "Agreed Adjustment."
Fleetboston, 2003 Del. Ch. LEXIS 8, at *4 (emphasis added).
It was this Agreed Adjustment, and its effect on the Agreed Deficit, that formed the basis of this case. This Adjustment would alter the Agreed Deficit by an amount that depended upon the volume of "Managed Receivables," and the portion of those Receivables subject to promotional "Introductory Rates." If, at closing, the Managed Receivables were more than $12.1 billion, or if the level of Introductory Rate Balances was less than $2,192,520, Fleet would assume more liabilities, thus increasing the consideration it paid for Advanta's consumer credit card business. If, however, these factors were less than the above key numbers, Fleet would assume fewer liabilities, thus decreasing the consideration paid. Lying at the heart of the complaint was Fleet's claim that Advanta misrepresented to Fleet information on its credit card business assets and liabilities.
Id. Such terms are defined in the Agreement.
Id.
II. PROCEDURAL HISTORY
Fleet's complaint, filed with this Court in January of 1999, contained thirteen separate counts. Advanta filed eight separate counterclaims. Through Memorandum Opinions of this Court dated January 5, 2001, October 15, 2001, and January 22, 2003; the parties' Stipulation and Proposed Order, signed by this Court on November 5, 2001; the parties' Stipulation filed in this Court on November 26, 2001; the Stipulation and Order signed by this Court on December 11, 2001; and the Stipulation of Dismissal dated December 19, 2001, all substantive claims have been resolved. The only issues left open by the January 22 Opinion were prejudgment interest and the awarding of costs. Fleet and Advanta, however, have been able to reach agreement on costs, which is reflected in a Stipulation and Proposed Order Concerning Costs, filed by the parties on September 10, 2003. Thus, the only issue remaining is that of prejudgment interest.
III. THE PARTIES' CONTENTIONS
The parties agree as to most factual, as well as legal, issues concerning setoff. At present, both parties have outstanding monetary obligations to each other. Both parties have submitted alternative forms of an Order and Final Judgment to this Court. Although differing due to the issue discussed in this opinion, both forms agree on the resolution of the underlying claims. The following reflects this consensus:
Fleet's Claims
$7,369,000.00 Count I $108,904,799.43 Count IX $1,400,000.00 Count X $1,700,000.00 Count XI $119,373,799.43 Total Fleet Recovery Exclusive of Interest
Advanta's Claims
$2,835,193.00 Counts III/IV $2,230,932.00 Additional Tax Distribution Withheld by Fleet Since
11/20/01 $20,163,676.00 Count V $854,967.16 Count VI $49,722,594.00 Count VIII $75,807,362.16 Total Due Advanta Exclusive of Interest
Net Due To Fleet
$119,373,799.43 Total Fleet Claims $75,807,362.16 Total Advanta Claims $43,566,437.27 Net Due Fleet
Fleet argues that since there is a net positive flow of monetary obligations running to it, interest should be awarded "only on the net balance due after accounting for counterclaims and setoffs." Advanta, on the other hand, argues that this Court must award interest on each claim, and then set off the total amounts. Because of the amount of money at stake, and the fact that there are differing interest rates depending on the claim being discussed, how this issue is determined can alter the monetary obligations of the parties by approximately $8,000,000.
Fleet's Opening Memo, at 8.
Advanta's Opening Memo, at 1.
Claims that arise under Sections 1.06(1) or 1.06(m) of the Agreement accrue interest "at a rate per annum equal to LIBOR as of the Closing Date." Agreement § 1.06(n). LIBOR at the time of closing of the Agreement was 5.625%. Stipulation and Order, Dec. 11, 2001. All other claims accrue interest at the statutory rate, which is 5% above the Federal Discount Rate. 6 Del. C. § 2301 (2003). The statutory rate, from February 1998 through March 2003, ranged from a high of 11.00% to a low of 5.75%. Affidavit of David Weinstock (March 7, 2003) ("Weinstock Affidavit).
Weinstock Affidavit § 15 ("This `interest on the balance' approach would deprive Advanta of $7,872,778 . . . in interest.").
Both parties agree that the Interest on Balance Rule is appropriate in certain situations. The pivotal issue driving whether to apply the Interest on Balance Rule, both parties agree, is the relationship between the claims of each party. Advanta contends that the Interest on Balance Rule should be applied only when each party's claims and counterclaims arise from the same contractual rights and are directly related to each other. Fleet, on the other hand, proposes a more relaxed standard. It contends this Court should look at the "economic reality" of the entire transaction; so long as the competing claims "are all directly related and arise under the unifying contract governing [a] single transaction," the Interest on Balance Rule should apply. It is the degree of correlation between the party's claims necessary to apply the Interest on Balance Rule that I address below.
Advanta's Opening Memo, at 9. Specifically, Advanta states: [T]he critical determinant of when interest should be calculated and awarded is whether the opposing claims are directly related to each other or are for breach of different contracts or obligations. If the claims are under the same contract and involve the same obligation and one is in the nature of a defense to the other, setoff before calculation of interest is appropriate. If the claims and counterclaims are under different contracts or involve different obligations altogether (i.e., for breach of different contracts or interference with business relations), interest should be calculated on the claims and counterclaims, separately, before any setoff. Id. at 10-11.
Plaintiffs' Post-Trial Prejudgment Interest Reply Memorandum (March 17, 2003) ("Fleet's Reply Memo"), at 6; see also Fleet's Opening Memo, at 8.
IV. ANALYSIS
A. Timing of Setoff
At issue in deciding whether to apply the Interest on Balance Rule is how directly correlated the setoff claims and counterclaims must be before the rule is applied. Fleet relies heavily on the case of Indu Craft, Inc. v. Bank of Baroda. In that case, Indu Craft and Baroda entered into an agreement whereby Baroda extended Indu Craft a $2,700,000 line of credit in exchange for a $2,700,000 promissory note. Baroda later reduced the maximum amount of credit it would extend by $300,000. Indu Craft sued based on a theory of breach of the implied covenant of good faith and fair dealing; Baroda counterclaimed for the amount due on the promissory note. The Second Circuit, in affirming the District Court's use of the Interest on Balance Rule, stated that this rule was used in an equitable fashion and did not disturb the use of it.
87 F.3d 614 (2d Cir. 1996).
Id. at 617.
Id. at 618.
Advanta argues that the promissory-note-in-exchange-for-line-of-credit involved in Indu Craft is much different from the transactions present in the current controversy. It argues that setoff was appropriate in Indu Craft because setoff was directly related to the plaintiffs claim, not collateral to it. Furthermore, Advanta cites to Socony Mobil Oil Co. v. Klapal for the proposition that "[t]he interest on balance' rule applies only when the amount to which a defendant is entitled as a counterclaim or setoff is for "defective performance by the plaintiff's of the contract on which his liquidated or determinable claim is based. The passage quoted, however, is part of a larger section of the District Court's opinion, which describes the Interest on the Entire Claim Rule as an exception to the Interest on Balance Rule. Indeed, in summarizing its description of the Interest on the Entire Claim Rule, the District Court states that the only time the rule should be applied is, "where the unliquidated setoff or counterclaim . . . arises out of a collateral matter."
Advanta's Reply Memo, at 4.
Advanta's Opening Memo, at 10 (quoting Socony Mobil Oil Co. v. Klapal, 205 F. Supp. 388, 391 (D. Neb. 1962) (quoting Mall Tool Co. v. Far W. Equip. Co., 273 P.2d 652, 663 (Wash. 1954)) (emphasis in original)).
Socony Mobil Oil Co., 205 F. Supp., at 391-92.
Id. at 392 (emphasis added).
What Advanta's argument implies is that any claims or counterclaims not based expressly on the Agreement are collateral to it and, thus, require application of the Interest on the Entire Claim Rule. I agree with Advanta that the test for whether the Interest on Balance Rule should be applied is whether the claims and counterclaims are directly related or collateral. I disagree, however, with Advanta's narrow use of the term "collateral." This term, by itself generally refers to similar but subordinate items. This, I believe, is how Advanta would prefer to use the term. Thus, if there were breaches to a side agreement as well as a main agreement to an overarching transaction, such breaches would be "collateral" to each other and, thus, would require application of the Interest on the Entire Claim Rule. Courts using the term "collateral" in their opinions, however, are using it in the sense of a collateral issue. According to Webster's Dictionary, a collateral issue is "an issue taken upon a matter aside from the general issue or the merits of a law case." Black's Law Dictionary defines collateral issue as a "Question or issue which [is] not directly involved in the matter, It is the use of these definitions that I find this Court should employ in determining whether or not to apply the Interest on Balance or Interest on the Entire Claim Rule. If the claims are collateral in the sense of being issues not directly involved in the matter, then the Interest on the Entire Claim Rule is appropriate.
See WEBSTER'S THIRD NEW INTERNATIONAL DICTIONARY OF THE ENGLISH LANGUAGE UNABRIDGED 444 (1993).
Id.
BLACK'S LAW DICTIONARY 262 (6th ed. 1990).
In awarding prejudgment interest, this Court has "broad discretion, subject to principles of fairness." In exercising its discretion, this Court has looked at the order to economic reality of entire transactions before awarding interest. In perform its function as a court of equity, that is, in order to take a detailed account of the economic realities of a transaction, this Court must be able to consider all claims and counterclaims arising from noncollateral issues surrounding a controversy before it, and must not limit itself to claims and counterclaims arising out of only identical agreements.
Summa Corp. v. Trans World Airlines, Inc., 540 A.2d 403, 409 (Del. 1988).
See, e.g., Smith v. Nu-West Indus., 2001 Del. Ch. LEXIS 8, at *4-*5 (Del.Ch. Jan. 12, 2001) (awarding compound interest in order to address the economic reality of the situation).
A glance at the current case serves to illustrate this point. Advanta, in attempting to distinguish the various claims as collateral to one another, argues that "[t]he claims and counterclaims here are for breach of completely different and separate obligations and, indeed, for breach of different contracts and tort duties, [and that] Fleet's damages are for adjustments to the Closing Balance Sheet and Agreed Deficit and for unpaid interim services, Former-Vice Chancellor Jacobs' words in the January 22 Opinion, however, characterize the claims quite differently. Former-Vice Chancellor Jacobs wrote, "This action . . . arises out of the February 1998 acquisition by Fleet of Advanta's $12.1 billion consumer credit card business." Major Subsection I of the opinion is entitled "Facts Common to All Claims." Further, that subsection ends with the note that "[e]ssentially, the claims in this lawsuit concern one or more elements of the formula by which the transaction consideration Fleet paid (i.e., the Agreed Deficit) was to be calculated."
Advanta's Opening Memo, at 12.
Fleetboston, 2003 Del. Ch. LEXILS 8, at *1.
Id. at *6.
The transaction at issue in this case, the purchase by Fleet of Advanta's consumer credit card business, is typical of many transactions in today's business world. One need only look at the closing set of a mid-level economic transaction to know that multiple side agreements and issues are involved in corporate dealings. The reality of this situation is that all claims and counterclaims in this lawsuit are related to the one transaction — they are not collateral issues.
Simply because issues are not collateral does not mean that the Interest on Balance Rule should apply, however. It merely states that the Interest on the Entire Claim Rule will likely not apply and implies that this Court should look at the economic realities of the case in order to determine whether the Interest on Balance Rule is appropriate. An inquiry into the facts of this case leads me to conclude that this is indeed a case where the Interest on Balance Rule should apply.
Although both Fleet and Advanta have outstanding monetary obligations toward one another, Fleet has always netted a positive monetary flow (of close to $45,000,000) when setting off such obligations. Contrary to its argument, Advanta has not been deprived of any funds. Courts award prejudgment interest in order to compensate parties for their lost opportunity cost. Here, there is no lost opportunity cost for Advanta. The only loss Advanta will encounter is the spread between the amount of interest it must pay under the Interest on the Entire Claim Rule versus the Interest on Balance Rule. This is not the type of loss that an award of prejudgment interest is designed to remedy. Accordingly, application of the Interest on Balance Rule is appropriate.
See, e.g., Ryan v. Tad's Enters., Inc., 709 A.2d 682, 705 (Del.Ch. 1996), aff'd, 693 A.2d 1082 (Del. 1997) ("Interest is typically awarded on the basis of a combination of the plaintiffs' lost opportunity cost, measured by a prudent investor rate; and the benefit realized by the defendant, measured in terms of the reduction in defendants' borrowing costs."); First Sec. Mortgage Co. v. Goldmark Plastics Compounds, 862 F. Supp. 918, 937 (E.D.N.Y. 1994) ("Prejudgment interest is awarded to filly compensate a party for the actual damages incurred, namely for the period of time the injured party has been deprived of the use of the monies due and owing.").
While there is no evidence Advanta has attempted to take advantage of differing interest rates in this case (stipulations governing scheduling were mutually agreed upon by the parties), I pause to point out the opportunity for abuse in applying the Interest on the Entire Claim Rule. If the difference between interest rates on monetary obligations between parties is large enough, the breaching party entitled to a higher interest rate may delay proceedings in order to take advantage of this spread. As such, the other party has its total recovery reduced with each passing delay. I suspect courts would be watchful for such potential abuse if considering the application of the Interest on the Entire Claim Rule. Accord Ryan, 709 A.2d at 705 (reducing interest rate by 2/3 to account for delay in bringing suit).
B. Applying Interest
Both sides filed briefs with this Court that addressed, in part, whether simple or compound interest is appropriate. In its reply memorandum to this Court, Fleet writes:
For the sake of simplicity and finality (and to avoid miring the Court in detail), Fleet will accept Advanta's calculation of the net prejudgment interest figure owed under the interest-on-the-balance rule. That is, netting the offsetting awards is clearly warranted in this case, but Fleet is willing to accept Advanta's lesser calculation for the net amount of interest due Fleet, which (calculated through March 31, 2003) is $17,997,989.
Fleet's Reply Memo, at 11.
In accepting this calculation, Fleet cites to the affidavit of David Weinstock, the Chief Accounting Officer and Vice President of Investor Relations of Advanta. Since Fleet signaled its willingness to accept Mr. Weinstock's calculations of the net prejudgment interest figure owed (exhibit 3 in the Weinstock Affidavit), I will not address Fleet's claim for the awarding of compound interest, or whether it would have been appropriate in this situation.
Id.
V. CONCLUSION
The parties sent to this Court alternative forms of an Order and Final Judgment. The parties will submit a revised Proposed Order. The text of the Order shall be identical to the Proposed Order submitted by Fleet, thus reflecting application of the Interest on Balance Rule. They will submit to this Court, by way of attachment, a calculation of prejudgment interest based on the method used in Mr. Weinstock's proposed affidavit.
IT IS SO ORDERED.