Opinion
Case No. 09-21782-svk, Adv. Proc. No. 10-2194.
March 18, 2011
DECISION ON DEBTORS' MOTION TO ENFORCE THE SETTLEMENT AGREEMENT
Bulk Petroleum Corporation ("Bulk" or the "Debtor"), the Committee of Unsecured Creditors (the "Committee") and United Central Bank ("UCB"), the successor to Mutual Bank, have been embroiled in various disputes in this Chapter 11 case. After a day of mediation with this Court's colleague, Judge Margaret Dee McGarity, a global settlement was reached. UCB's ability to settle is constrained because the original lender, Mutual Bank, was closed and liquidated by the Federal Deposit Insurance Corporation ("FDIC"), and UCB had acquired Mutual Bank's loans under a Purchase Assumption Agreement with the FDIC. The Debtor and the Committee understood that UCB would seek approval from the FDIC for the global settlement, and UCB's representatives did nothing to dispossess them (or the Court) of that notion. However, about four months after the conclusion of the mediation, UCB announced that it had not forwarded the terms of the global settlement to the FDIC, because its own loan committee had not approved the settlement. This Motion to Enforce the Settlement followed.
Bulk Petroleum Corporation is one of 29 affiliated debtors (collectively, the "Debtors") in this jointly administered Chapter 11 case, which was filed on February 18, 2009.
The Committee, appointed on March 9, 2009, consisted of CITGO Petroleum Corporation, BP Products North America Inc., Marathon Petroleum Company LLC and M M Service Station Equipment Specialists. After consummation of a settlement of various disputes between the Debtors and BP, BP withdrew as a member of the Committee. (Dec. 29, 2010 Disclosure Statement at 19.)
I. Facts A. The adversary proceeding
One of the disputes with UCB took the form of an adversary proceeding filed by Bulk and 7 affiliates and later joined by the Committee. The Complaint asserts that in September 2008, Darshan Dhaliwal, the Debtors' principal, approached Mutual Bank for financing to reduce the Debtors' obligations to Amcore Bank. Allegedly, Mutual Bank agreed to assist Bulk if Bulk reciprocated by helping Mutual Bank to increase its capital reserves. (Compl. ¶¶ 19, 20.) Under the arrangement, Mutual Bank would lend and immediately borrow back $6 million paying .75% higher interest on the amount reborrowed, ensuring a .75% positive cash flow for the Debtors on the loan. ( Id. at ¶ 21.) Mutual Bank also agreed to lend $4 million to Bulk secured by various gas stations. ( Id.) In the first part of the transaction, JT Petroleum, LLC (an affiliate owned by Darshan's son, Jaspal Dhaliwal) executed a promissory note for $6 million to Mutual Bank, guaranteed by Interstate Petroleum, LLC (one of the Debtors), Jaspal Dhaliwal, Darshan and his wife. ( Id. at ¶ 24.) After deductions for closing costs and legal fees, $5,978,276 was deposited into JT's account at Mutual Bank. Then, a check for $5,975,000 payable to Darshan was drawn on that account, and paid to Mutual Bank. ( Id.)
Even though JT never received the benefit of the $6 million loan, the Complaint claims that certain of the Debtors transferred mortgages to Mutual Bank to secure the JT loan and transferred real estate to JT (who then pledged it to Mutual Bank) in order to secure the transaction. ( Id. at ¶¶ 26-38.) According to the Complaint, the portion of the arrangement designed to benefit Bulk was never consummated. ( Id. at ¶ 25.) Rather than receiving millions of dollars to pay down Bulk's debt to Amcore Bank, JT was obligated on a $6 million promissory note, the Debtors had issued a guaranty, transferred property and granted various mortgages, while Mutual Bank received the proceeds of the $6 million Note back. ( Id. at ¶ 24.) According to the Debtors, the transaction with JT was a sham, the underlying promissory note is unenforceable ( Id. at ¶ 40), and since Mutual Bank did not provide adequate consideration for the promissory note, "all obligations of the Debtors to grant liens or encumbrances on their assets and to guaranty performance of the $6 Million Note are void." ( Id. at ¶ 43.)
UCB filed a Motion to dismiss Count I of the Complaint, arguing that since JT is not a debtor in bankruptcy, the Debtors lacked standing to assert that JT received insufficient consideration in the transaction. At a hearing on June 28, 2010, at which the Court took a limited portion of the Motion to Dismiss under advisement, a discovery conference was scheduled for August 18, 2011. On July 6, 2011, the Court issued an Order denying UCB's Motion to Dismiss Count I of the Complaint, concluding that the Debtors have standing to attack and this Court has jurisdiction to consider the transaction involving the Debtors, JT, Mutual Bank and Darshan Dhaliwal. The August 18, 2010 discovery conference was adjourned at the request of the parties to September 14, 2010.
B. Other Disputes and UCB's Settlement Posture
Meanwhile, the Court held a hearing on August 24, 2010, to consider the other disputes involving UCB, including UCB's Motion for Relief from Stay (to which the Debtors, Committee and other parties objected); UCB's objection to the Debtors' employment of a real estate professional; and UCB's limited objection to the Debtors' Motion to sell certain property in Evansville, Indiana. After several hours of testimony, the Court granted a short recess. When the hearing resumed, the parties jointly requested an adjournment to pursue settlement discussions. (Aug. 24, 2010 Tr. 102.) When the Court stated its reluctance to adjourn the hearing and its willingness to continue with the hearing that day, Committee counsel Francis Lawall stated that he agreed to the adjournment only in light of "UCB's commitment to engage in material, substantive, serious negotiations for a global resolution over the next seven days which would either be by conference call and then a subsequent approach to the FDIC for approval of a deal." ( Id. at 102-103.)
Before granting the continuance, the Court directly asked UCB's attorney, Michael Lee, "can you get authority to do a global settlement at this point or do you have to hold out for your whole loan amount as you did in the auction? . . . I know there are probably parameters that you're under with your status." ( Id. at 102-103.) The Court's comments referred to UCB's settlement posture earlier in the case. UCB previously had agreed to include its collateral (along with that of other major lenders) in an auction of over 100 of the Debtors' gas stations. (May 3, 2010 Objection to UCB's Motion for Relief from Stay at 2.) Considerable expense was incurred in advertising and organizing the auction, and it was well-attended. ( Id.) At 7:00 or 8:00 p.m. in the evening, after the auction had been in process for several hours, UCB abruptly withdrew its collateral. ( Id. at 3). In a Declaration defending UCB's decision to pull its collateral in the middle of the auction, UCB Vice President Tom Le stated: "Pursuant to the shared loss provisions of the Purchase and Assumption Agreement, in the event UCB receives a settlement proposal for (or will otherwise collect) less than 100% of the amount owed, UCB is required to obtain FDIC's approval before agreeing or otherwise accepting any compromise." (June 4, 2010 Reply in Support of Motion for Relief from Automatic Stay, Ex. B.)
In response to the Court's concern, Attorney Lee replied, "Judge, of course, there are some parameters with the FDIC but as we committed to Mr. Kerkman and Mr. Lawall, you know, we believe that a global settlement and . . . there's something on the table that we're — you know, we've got some points to discuss, there are some points that we can probably fine tune to be right there and so there is something on the table. We will work diligently as Mr. Lawall is requesting to see if we can, you know, bring it home." (Aug. 24, 2010 Tr. 103.) Attorney Lawall replied, "Your Honor, again, as long as UCB is saying that, we are prepared to bring the necessary internal decision makers to the table to engage in those negotiations during that period of time, and as was indicated on the record there was a settlement agreement, the terms of which we won't talk about here, but we were told that based upon that document that they presented, they saw as a basis for a good faith reason to complete negotiations based on that." ( Id. at 103-104.)
The Court then asked Attorney Lee whether an adjourned hearing in the next few weeks would give him "enough time to get your people with authority to the table?" ( Id. at 104.) Attorney Lee replied, "I mean we haven't talked to the FDIC this afternoon. You know, we will make every effort as we can to move Heaven and earth to get the FDIC person there. You know, I — can we guaranty that he will be there? I can't guaranty it right here but Mr. Kinsella, Mr. Lee [sic] and I will make those efforts as well as engage with Mr. Kerkman and Mr. Lawall. You know, we are stepping towards that path." ( Id. at 104.)
Attorney Lee is undoubtedly referring to UCB Vice President Tom Le.
C. The September 2, 2010 Status Conference and the Mediation
Based upon the representations that there would be good faith negotiations toward settlement, the Court adjourned the hearing to September 3, 2010. The parties contacted the Court on September 2, 2010 and requested a status conference, which was held by telephone that afternoon. Instead of continuing with the evidentiary hearing, the parties requested mediation with Bankruptcy Judge McGarity in order to reach a global resolution. The Court again inquired whether UCB could enter into such a settlement without FDIC involvement. Attorney Lawall indicated "that is a — has been a key point that we have been discussing. And I understand that Mr. Lee, while he may not carry the FDIC's card, that the possibility, and even the agreement to go to mediation, has come from — with the FDIC's blessing; not that it necessarily binds the FDIC, but the FDIC is aware of the process and has not objected to it." (Sept. 2, 2010 Tr. 7-8.) Attorney Lawall directly asked UCB's attorney to confirm his understanding: "Mike, am I — am I right on that?" And Attorney Lee replied, "Right. I mean . . . when this was first raised, you know, my client did run it up to the FDIC and while it hasn't objected to it . . ." ( Id. at 8.) Attorney Lee went on to describe a working relationship with the loan officer on the "front lines" making a "report and recommendation to the FDIC." The Court expressed concern that time should not be wasted if the FDIC would simply reject the settlement. ( Id. at 9.) Attorney Lee admitted there was risk: even "if Tom makes a — my client makes a recommendation, you're right there could be an FDIC lawyer who will say, thank you for the report and the recommendation, or FDIC, you know, authority person, may still say no to it. I mean, that is — that is a risk." ( Id. at 9.) Despite the risk that the FDIC would not agree with any report and recommendation offered by UCB, the parties confirmed their preference for mediation. The Court contacted Judge McGarity to schedule a mediation session, and adjourned the September 3, 2010 hearing to September 29, 2010, to be held in the event mediation was not successful.
Attorney Lawall may be referring to Tom Le.
The mediation was held on September 17, 2010 and lasted the entire day. At the conclusion, success was reported. The parties subsequently contacted the Court to adjourn the September 29, 2010 hearing four times under the auspices that the settlement was being presented to the FDIC. (The hearing was adjourned to October 27, 2010, then to November 9, 2010, then to December 14, 2010, and then to February 15, 2011.)
D. The Failure to Consummate the Settlement
On January 20, 2011, the Debtors filed Modifications to their Disclosure Statement. In that document, the Debtors stated:
As the modifications were being made, late on January 19, 2011, United Central first informed the Debtors that its own loan committee had rejected the settlement agreement. This is contrary to the representations that United Central's attorneys had made to the Debtors, the Committee and the Court. United Central had represented that it was recommending approval and the settlement agreement was being reviewed by the FDIC for approval. In reliance of United Central's representations, the Debtors, Committee and Court had adjourned and delayed resolution of various matters.
(Jan. 20, 2011 Modifications to Disclosure Statement at 2.) UCB responded by stating that "contrary to the multiple references in the Disclosure Statement and Plan . . . there is no settlement agreement between the Debtors and UCB." (Jan. 20, 2011 Objection to the Disclosure Statement at 3.)
E. The Motion to Enforce the Settlement
On January 21, 2011, UCB filed a Motion to Bar Discovery, Testimony or Admission of Other Evidence on Settlement or Compromise, which was scheduled to be heard on February 1, 2011. The Debtors and the Committee objected to that Motion and filed a Motion to Enforce the Settlement Agreement. Thirty minutes before the hearing to consider the Motion to bar discovery, UCB filed a Motion for Substitution of Judge or Recusal, arguing that the Court could not be free of bias if it learned the terms of the settlement. At the hearing the Court authorized discovery to proceed and denied UCB's Motion for Substitution of Judge or Recusal.
On February 9, 2011, the Debtors filed an Expedited Motion to Compel Discovery, asserting that, with no prior notice, UCB failed to appear at a scheduled deposition scheduled on February 8, 2011. After the Motion to Compel was filed and scheduled for an emergency hearing, UCB filed an Objection to the Notice of Deposition. Among the grounds for the Objection were that UCB could not produce individuals with direct, personal information about the "Facts" because such knowledgeable individuals, Luke Lively, Tom Le, and James Wilbur [sic] were no longer employed by UCB. The Court held a hearing on February 10, 2011 on the Motion to compel discovery and learned that UCB's attorneys had arranged to produce the witnesses for deposition in a very short timeframe. The Court accepted this resolution of the Motion to Compel, but nevertheless held that sanctions should be imposed for UCB's failure to provide the Debtors with advance notice that UCB did not intend to appear at the deposition. In order to accommodate the discovery, the Court rescheduled the hearing on the Motion to Enforce the Settlement Agreement for February 18, 2011.
F. The Hearing on the Motion to Enforce the Settlement
On February 18, 2011, the Court held an evidentiary hearing on the Debtors' Motion to Enforce the Settlement Agreement. The Court first considered UCB's Motion to Dismiss the Debtors' Motion on the basis that the settlement agreement was not "subscribed" as required by Wisconsin law. The Debtors argued that federal law, not Wisconsin law, controlled. The Committee contended that even if Wisconsin law applied, the settlement met the requirements, based on equitable estoppel or reliance grounds. After considering the arguments, the Court found that the Motion set forth a plausible claim for relief, and denied the Motion to Dismiss. See Ashcroft v. Iqbal, 129 S.Ct. 1937 (2009); Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007); Swanson v. Citibank, N.A., 614 F.3d 400 (7th Cir. 2010).
UCB cited Affordable Erecting, Inc. v. Neosho Trompler, Inc., 291 Wis. 2d 259 (2006) and Wis. Stat. § 807.05 to invalidate an unsigned settlement agreement. This Court assumes without deciding that Wisconsin contract law applies to determine whether there was a settlement agreement. See Elustra v. Mineo, 595 F.3d 699 (7th Cir. 2010) (applying Illinois law to a settlement which occurred in federal court in the Northern District of Illinois). UCB also cited Laska v. Laska, 255 Wis. 2d 823, 829 (Ct. App. 2002), which held the "plain meaning of the term `subscribe' requires that a party's assent or approval be formalized in some way on the document itself." "Although the signature need not be handwritten, the term `subscribed' cannot be read to dispense altogether with a written indication of assent." Id. (emphasis supplied). Likewise, in DIRECTV, Inc. v. Borst, 2006 WL 1308118, *2 (W.D. Wis. May 9, 2006), Judge Crabb held that an exchange of letters after an oral agreement could satisfy the "primary purpose of Wis. Stat. § 807.05, which is to insure that parties have a written record of exactly what they have agreed to" and lead a court to find there was assent. Here, the Court recognized that while the settlement agreement was not subscribed contemporaneous with the mediation, a written agreement was requested by Attorney Lee, provided by Attorney Kerkman, and then subsequent emails requesting documents to consummate the agreement plausibly showed a written indication of assent among the parties to that agreement.
The Court then considered UCB's Motion to Quash a deposition notice for Tom Le. Mr. Le, whose presence at the mediation session made him a critical witness, had been subpoenaed, but did not appear for the hearing. UCB argued that he lived more than 100 miles from the courthouse, but the Debtors disagreed, based on an Internet mileage calculation. Moreover, UCB argued that Mr. Le did not have enough time to clear his schedule, which the Debtors also questioned, given that the date was discussed at Mr. Le's deposition, which was held February 15, 2011. In the end, given the strong preference of the Debtors and the Committee to proceed with the hearing, the Court accepted the reading of certain portions of Mr. Le's deposition into evidence, in lieu of his testimony. Fed.R.Bankr.P. 7032.
Notwithstanding Attorney Lee's assurances at the August 24, 2010 and September 2, 2010 hearings that the FDIC had been notified of the mediation and the general parameters of the settlement, UCB's evidence at the February 18, 2011 hearing was that upon advice of counsel, the settlement was not approved by UCB's Special Assets Committee and therefore could not be submitted to the FDIC. (Feb. 18, 2011 Tr. 99.) Rather than being the person on the "front lines" going to the mediation with authority to finalize a "report and recommendation to the FDIC" as Attorney Lee represented, UCB witness James Wilber testified that Tom Le was only at the mediation to "take a copious amount of notes." ( Id. at 101.) However, after the mediation, Mr. Wilber had discussions with Tom Le about "issues that may impact how we would present information to the FDIC." ( Id. at 103.) He stated that he and Tom Le "did talk about one of the other issues in the settlement agreement. Typically, my recollection of the conversation was — is to make sure we framed what, if anything, we would have to do to prepare for an appropriate presentation to the FDIC, if that were to happen." ( Id. at 104.) Mr. Wilber's testimony implied that by recommending this settlement to the FDIC, UCB could effectively lose the FDIC loss share on Mutual Bank's entire portfolio, but this interpretation of the FDIC agreement was directly contrary to the prior representations of Attorney Lee, and effectively negated on cross-examination. ( Id. at 116; 150.)
The Debtors' witnesses were Darshan Dhaliwal and Attorney Jerome Kerkman. Attorney Kerkman testified that at the end of the lengthy mediation session, the parties came to the specific terms of a settlement. "We started going through each of the terms of the settlement and we — in a bullet-point fashion went through them all . . . Tom Le — the bank officer — was kind of hedging on whether he wanted to commit to it. Fran Lawall got into — got up and pushed the issue, and at the end of pushing the issue, Tom Le said, `The bank will recommend this to the FDIC.' . . . And, there was also the discussion that there would be information required to put together the package for the FDIC." ( Id. at 157-59.)
After the mediation, in a series of emails, UCB's attorneys led the Debtors to believe that the agreement was being packaged to obtain FDIC approval. Attorney Michael Lee's September 23, 2010 e-mail stated: ". . . per your email of yesterday, please send me the proposed settlement document you put together as soon as possible — the sooner we get it, the sooner it can be dealt with and ultimately incorporated in the package that needs to be reviewed by the FDIC." (Jan. 26, 2010 Motion to Enforce the Settlement Agreement, Ex. B.) That same day Attorney Lee sent Attorney Kerkman another email requesting financial documents needed by Tom Le "to add to his package for the FDIC." ( Id., Ex. C.) In response to Attorney Lee's September 23, 2010 email, on September 27, 2010, Attorney Kerkman sent Attorney Lee the proposed Settlement Agreement. The only blank in the proposed agreement was a value for some personal property, that the Debtors considered a very minor issue. ( Id. at 159-60.)
Another email on October 26, 2010 from Attorney Lee to Attorney Kerkman states:
As I told you yesterday, we met with UCB and learned that FDIC's requirements are changing on UCB. Also, KPMG has added a layer by reviewing loan policies. As a result, the FDIC is now requiring even more documentation for proposed settlements than we initially thought. UCB now needs to provide to the FDIC the following for each of Bulk Petroleum, JT Petroleum, Darshan Dhaliwal, Debra Dhaliwal and Jaspal Dhaliwal . . .
( Id., Ex. D.) The checklist of documents required in the October 26 email included FDIC form financial statements and FDIC form affidavits of financial condition. Attorney Lee attached these FDIC forms to the email. After Attorney Kerkman submitted two packages of documents in response to the October 26, 2010 email, Attorney Lee confirmed receipt in a November 23, 2010 email and stated: "I assume that your production of documents . . . regarding the settlement proposal is now complete and so UCB is sending the entire package into the approval process. If this differs from your understanding contact me immediately." ( Id., Ex. E.) On December 6, 2010 Attorney Lawall sent Attorney Lee an email asking where things stood. ( Id., Ex. F.) Attorney Lee replied, "No word yet on proposal." ( Id.)
UCB did not make any further information requests, and the Debtors assumed the settlement agreement had been submitted to the FDIC for approval. Then on January 19, 2011, Attorney Kerkman received a telephone call from Attorney Lee stating that UCB's loan committee had not approved the deal. (Feb. 18, 2011 Tr. 160-61.) In the four months between the mediation and the telephone call, UCB never advised the Debtors or the Committee that Tom Le did not have the authority to agree to terms to recommend to the FDIC. In fact, Attorney Lee's emails implied that once all the documents were provided, FDIC approval was being sought. Attorney Kerkman was therefore "in shock" when he learned that UCB had never submitted the settlement to the FDIC, and instead had internally rejected it. ( Id. at 161.)
Attorney Kerkman also testified to the actions the Debtors took in reliance on the settlement with UCB, including extensive travel and legal fees incurred in negotiating with other creditors. ( Id. at 162-63.) Mr. Dhaliwal testified as to the money he had expended in reliance on the settlement with UCB. ( Id. at 209-10.)
At the conclusion of the testimony and receipt of the Exhibits into evidence, the Court held that there was a meeting of the minds between the Debtors, the Committee and UCB on a global settlement to be presented for approval to the FDIC. The Court stated:
I will find there's a breach. I will find that the bank did not act in good faith. I will find that the debtor and the Committee relied on there being an enforceable meeting of the minds as to the major terms of the treatment of this creditor and that that — that meeting of the minds was with someone who acted with apparent authority to recommend that to the bank. (sic) He had enough experience, he was in this Court, he knew what the stakes were. If he was uncomfortable with his ability to negotiate a deal for the treatment of this claim, he shouldn't have agreed to the mediation. It should have been called off, and we should have had the litigation. But he came, with counsel, and mediated for several hours, resulting in [adjournment of] several hearings. It wasn't just in [the Debtors' and Committee's] mind there was a settlement. It was represented to this Court, we're just working on the FDIC, adjourn this hearing. . . . If the facts are as the bank is now stating, that in addition to the FDIC approval, you needed some loan committee or some higher up committee approval, and that Mr. Le was either no longer there or not in a position to recommend the deal that he had sat there and negotiated, with authority, then I find the bank acted in bad faith, and among the remedies could be deemed waiver of the FDIC approval. That is what Attorney Lawall is suggesting.
UCB makes much of this in its brief, arguing that the Court recognized that Tom Le did not have authority to enter into a settlement on UCB's behalf and to recommend that to the FDIC. The Court merely misspoke and, based on Attorney Lee's representations at the August 24 and September 2 hearings, considered Tom Le as the person on the "front lines" with authority to make a "report and recommendation" to the FDIC.
( Id. at 263-264.) The Court took under advisement the issue of the appropriate remedy, and after receiving briefs from the parties, concludes that the Committee's position on waiver of the condition of FDIC approval is correct.
II. Analysis
In Tabatabai v. West Coast Life Ins. Co., Judge Stadtmueller explained that a party who has control over a contractual condition, and hinders or prevents its occurrence, can be deemed to have waived it:
The doctrine of prevention is the general principle in contract law that if one party to a contract hinders, prevents, or makes impossible performance by the other party, the latter's failure to perform will be excused. In terms of conditions precedent, the doctrine prohibits a party from escaping liability on the ground that a condition precedent has not been met where that party has caused the failure of the condition. Furthermore, in Wisconsin, a party whose obligation is dependent upon the occurrence of a condition must put forth a good faith effort to obtain the condition and must not hinder or prevent its occurrence.
2010 U.S. Dist. LEXIS 135507, *30-31 (E.D. Wis. Dec. 21, 2010) (internal quotations and citations omitted). In Tabatabai, the condition precedent was a medical test required by an insurance company before granting coverage. The plaintiff claimed that the insurance company controlled administration of the test, and should be deemed to have waived the requirement when the proposed insured died before the test was administered. Judge Stadtmueller rejected the claim, finding that the insurance company had indeed requested the test, and there was no evidence that the insurance company delayed in obtaining the test so as to prevent the proposed insured from obtaining coverage.
In contrast, the evidence in this case shows that despite Tom Le's authority to report and recommend a settlement to the FDIC, UCB failed to make any such report or recommendation. This evidence of UCB's dilatory behavior starts with UCB's counsel's statements on the record in open court confirming that "the possibility, and even the agreement to go to mediation, has come from — with the FDIC's blessing; not that it necessarily binds the FDIC, but the FDIC is aware of the process and has not objected to it." (Sept. 2, 2010 Tr. 7-8.) Moreover, Tom Le was represented to be the one on the "front lines" making a "report and recommendation to the FDIC." ( Id. at 9.) At the conclusion of the mediation, when Tom Le was "hedging," in response to Attorney Lawall's direct question, Tom Le stated: "The bank will recommend this to the FDIC." (Feb. 18, 2011 Tr. 157-58.)
UCB's conduct after the conclusion of the mediation session confirms the Debtors' and Committee's version of the transaction as a "done deal" subject only to FDIC approval (which approval would be recommended by UCB), rather than UCB's version, under which Tom Le was a mere note-taker and messenger to take the Debtors' proposal to a bank committee for either full acceptance or complete rejection. The strongest evidence of this conduct is the series of emails between the attorneys. Less than a week after the mediation, UCB's attorney solicited the proposed settlement document with the inducement: "the sooner we get it, the sooner it can be dealt with and ultimately incorporated in the package that needs to be reviewed by the FDIC." (Jan. 26, 2010 Motion to Enforce the Settlement Agreement, Ex. B.) Attorney Kerkman promptly drafted and submitted the Settlement Agreement, and Attorney Lee then followed up with at least 3 requests for documents "for the FDIC." ( Id., Ex. C.) After the Debtors complied with Attorney Lee's October 26, 2010 email announcing that FDIC had increased its documentation requests, on November 23, 2010, Attorney Lee confirmed the receipt of two "FedEx" packages constituting all the requested documents, and said, "UCB is sending the entire package into the approval process." ( Id., Ex. E.) On December 6, 2010, in response to Attorney Lawall's email, Attorney Lee advised that there was no word yet on the proposal. ( Id., Ex. F.) Finally, on January 20, 2011, Attorney Kerkman confirmed a telephone conversation with Attorney Lee on January 19, in which UCB's attorneys claimed "regulations supposedly issued by the FDIC" and "other documents" resulted in the decision by UCB not to send the settlement agreement to the FDIC or to recommend its approval to the FDIC. ( Id., Ex. H.) There was no shortage of opportunities to clarify that the settlement that had been hammered out after long hours of mediation with Judge McGarity was never ready for submission to the FDIC because it did not comply with UCB's credit policy. Especially on October 26, 2011, after the FDIC allegedly changed its requirements and required more detailed financial information, UCB could easily have notified the Debtors and the Committee that the Bank's internal policies were also in play. No such warning was given however, and the Debtors and the Committee proceeded in reliance on UCB's statements at the mediation that Tom Le would recommend the settlement to the FDIC. Assuming that the UCB settlement was in place, the Debtors' representatives made several trips to negotiate a Chapter 11 plan with other creditors, and Darshan Dhaliwal lined up financing to consummate the proposed plan. In short, UCB alone controlled the contingency that the settlement agreement was subject to FDIC approval. UCB's failure to seek that approval, after representing to the Debtors and the Committee that it would do so, results in a waiver of that contingency under the doctrine of prevention.
According to UCB, given the strictures of its purchase agreement with the FDIC, it was not even at liberty to tell the Debtors and the Committee which terms of the settlement did not comply with UCB's credit policy. (Feb. 18, 2011 Tr. 253.)
Although not applicable in Tabatabai, 2010 U.S. Dist. LEXIS 135507, the Seventh Circuit Court of Appeals upheld application of the doctrine of prevention in NLRB v. Local 554, Graphic Communications International Union, AFL-CIO, 991 F.2d 1302 (7th Cir. 1993). In that case, the NLRB sought to enforce an order requiring a local union to sign a labor contract. Although the employees and the company repeatedly asked the union representatives to put the agreement in writing, they refused, claiming unspecified errors in the proposed agreement. When the company finally filed an unfair labor practices charge, the local union representatives asserted that they had no obligation to sign the agreement, because the International Union had not yet approved it as required by the contract. Id. at 1304. The NLRB rejected this argument on the basis that the local union's "failure to even submit the contract to the International Union for signature prevents it from relying upon the lack of a signature in refusing to sign the contract. . . . Essentially, the [NLRB] concludes that the union's dilatory behavior excuses the condition that the International Union sign the contract." Id. at 1307-08. The Seventh Circuit agreed, finding that "A party's failure to honor its duties to effect a contractual condition excuses the performance of that condition." Id. at 1308.
This Court agrees with the Committee's argument that NLRB v. Local 554 is directly on point and compelling authority for the proposition that UCB's failure to present the proposed settlement terms to the FDIC, a contingency solely in UCB's control, excuses or waives that contingency. As the local union was required to sign the labor agreement in NLRB v. Local 554, UCB should be required to sign the settlement agreement here, and the treatment of UCB's claims against the settling parties should be binding on UCB, notwithstanding the absence of FDIC approval.
UCB responds that the doctrine of prevention is not a tool by which Bulk may create a contract, citing Continental Bank, N.A. v. Everett, 964 F.2d 701 (7th Cir. 1992) and Hauer v. Union State Bank of Wautoma, 192 Wis. 2d 576 (Ct. App. 1995). The cases are completely distinguishable and do not support UCB's arguments. In Everett, a lender did not perfect a security interest in a broadcast license, because the lender concluded the security interest would not be valid. 964 F.2d 701. When the lender sued its guarantors, they defended by arguing that the lender had impaired the collateral by failing to perfect the security interest. The case turned on the express language of the guaranty, which provided that the lender had no duty whatsoever as to the collection or protection of the collateral, except for collateral in the lender's possession. Judge Easterbrook soundly rejected the guarantors' claim that the lender lacked good faith in failing to perfect the security interest, because the express terms of the guaranty did not require the lender to do so: "Gap-filling methods such as good faith do not block use of terms that actually appear in the contract. The guarantors released Continental from any obligation to use the collateral for their benefit. The guarantors may rue their decision but cannot escape it." Id. at 705 (citations and internal quotations omitted.) Unlike in Everett, the Debtors here are not seeking to change express terms of the Settlement Agreement; rather they want to enforce the agreement according to its terms, less the contingency of FDIC approval that UCB waived by failing to seek it.
UCB's reliance on Hauer is similarly misplaced. 192 Wis. 2d 576. The case also involved a guarantor defending against a suit on her guaranty. This guarantor, who was allegedly incompetent when she signed the guaranty, argued that the lender lacked good faith in negotiating with her, and that her guaranty should be set aside. The Wisconsin Court of Appeals noted that the general provision of Wisconsin's Uniform Commercial Code imposing an obligation of good faith applies only to the performance or enforcement of a contract, and does not impose a duty of good faith in the negotiation and formation of a contract. Id. at 463-64. However, this case is about good faith in the failure of performance: UCB's failure to seek FDIC approval of the Settlement Agreement, as it represented it would.
Instead of a guarantor seeking relief from the express terms of a guaranty, the Court can hypothesize facts that would make Hauer or Everett comparable to the case at bar: Assume that a senior loan officer of a lender and prospective borrower held hours of negotiations about the terms of a loan. In the end, the loan officer says that the lender will make the loan, but only if the Small Business Administration ("SBA") provides a guaranty. The loan officer agrees to approach the SBA and to recommend that the SBA issue the guaranty. A term sheet is agreed upon, and the loan officer sends the borrower a series of emails requesting information needed by the SBA, including SBA forms for the provision of financial information. Having submitted all the necessary information and SBA forms, and hearing no objection from the loan officer, the borrower acts in reliance on the prospect of receiving the loan. Four months after the terms of the loan were agreed upon, the lender calls and tells the borrower that the SBA was never contacted, and the loan will not be made due to unspecified concerns of the lender's internal loan committee. Under these facts, the Court concludes that the Seventh Circuit and the Wisconsin Court of Appeals would find that the lender breached its duty of good faith to effect the contractual condition (the SBA guaranty) within the lender's control. See Everett, 964 F.2d 701; Hauer, 192 Wis. 2d 576.
Closer to our facts is Unit Trainship, Inc. v. Soo Line Railroad Co., 905 F.2d 160 (7th Cir. 1990), where the Seventh Circuit reviewed an oral contract between two railroads for the running of a "unit-train" between Chicago and Seattle. The only condition precedent of the contract was approval of the unit-train concept by the ICC. One of the railroads, the Milwaukee Road, withdrew from the ICC proceedings. The Seventh Circuit held that the Milwaukee Road did not exercise good faith under the contract by attempting to hinder the occurrence of the condition precedent. Id. at 162-63. Applying Illinois law, the court noted that where a party's obligation is subject to a condition precedent, a duty of good faith and fair dealing is imposed upon that party to cooperate and to not hinder the occurrence of the condition. Id. at 163. Similarly, the Court finds here that UCB did not act in good faith by failing to present the settlement to the FDIC for approval.
In Cauff, Lippman Co. v. Apogee Finance Group, Inc., 807 F. Supp. 1007 (S.D.N.Y. 1992), the court considered a complex financing transaction involving six aircraft. After the buyer tried to convince a broker to accept a smaller commission than specified in the contract, and the broker refused, the buyer completed the deal with another financier. The broker sued, but the buyer claimed that certain contingencies were not satisfied, including the execution of loan documents, and procurement of a loan commitment on terms satisfactory to the buyer. The buyer had canceled a meeting at which the loan documents would be finalized. The court held that all of the conditions precedent to the contract were waived because the buyer acted in bad faith and prevented the broker from satisfying them. Id. at 1022. Noting that the doctrine of prevention is related to the duty of good faith and fair dealing implicit in every agreement, the court said: "The implied covenant of good faith and fair dealing requires a promisor to reasonably facilitate the occurrence of a condition precedent by either refraining from conduct which would prevent or hinder the occurrence of the condition, or by taking positive action to cause its occurrence. A party's failure to act in good faith so as to facilitate the occurrence of a condition precedent requires the condition to be deemed satisfied or excused, rendering the contract enforceable." Id. (citing In re Roman Crest Fruit, Inc., 35 B.R. 939 (Bankr. S.D.N.Y. 1983) (holding that contract was valid even though debtor's acceptance of contract was conditioned on approval of its attorney, where debtor's breach of duty of good faith caused attorney to withhold his approval)).
UCB's final argument in response to the doctrine of prevention is that Bulk failed to prove that the FDIC would have approved the settlement even if UCB had recommended it. UCB misstates the law and misunderstands the burden of proof. The court faced a similar claim in Cummings v. Beaton Assocs., 618 N.E.2d 292 (Ill. App. Ct. 1992). In Cummings, a Chapter 11 debtor and its principals settled state court litigation with McDonald's, and the settlement was subject to approval of the bankruptcy court. During the hearing on approval of the settlement, McDonald's lawyer presented a letter changing the terms of the settlement to remove any payment to the debtor's principals. The bankruptcy court did not approve the original settlement, because the letter offered more to the bankruptcy estate. In the principals' state court suit for breach of the settlement agreement, McDonald's argued that the doctrine of prevention did not apply, because the principals did not prove that the bankruptcy court would have approved the agreement in the first place, even without the interference by McDonald's. The Illinois Court of Appeals rejected this argument, pointing out that Section 245 of the Restatement of Contracts states that it is not necessary for the non-breaching party to show that the condition would have occurred but for the lack of cooperation. Cummings, 618 N.E.2d at 305.
UCB cites Windsor Investing Corp. v. T.J. McLaughlin's Sons, 225 N.Y.S. 7 (N.Y.Sup.Ct. 1927), aff'd, 229 N.Y.S. 926 (N.Y.App.Div. 1928), but the law has evolved since that decision. Faced with a defendant's reliance on Windsor for the proposition that the plaintiff must show that but for the defendant's conduct the condition would have been satisfied, the court in Ixe Banco, S.A. v. MBNA Am. Bank, N.A. explained:
However, both subsequent New York authority and Williston (upon which the Windsor court relied) indicate that a plaintiff need not prove the defendant actually prevented the condition precedent from occurring so long as the plaintiff shows the defendant's behavior substantially hindered performance.
2009 U.S. Dist. LEXIS 89979, *19 (S.D.N.Y. Sept. 29, 2009). The Ixe Banco court went on to hold that the doctrine of prevention only required the plaintiff to show that the defendant materially hindered the performance of the contingency. Once the plaintiff met that burden, it was incumbent on the defendant to prove that the contingency would not have occurred notwithstanding the defendant's misbehavior. Here, Bulk showed that by failing to present the Settlement Agreement to the FDIC, UCB materially interfered with the contingency in the Settlement Agreement. UCB should then have proven that notwithstanding its failure to present the settlement to the FDIC, the FDIC would not have granted approval. UCB posits that Mr. Wilber's testimony satisfies this burden, but the Court disagrees. As noted in NLRB v. Local 554,
The existence of a requirement for international approval suggests a correlative duty of due diligence on the part of a local to seek such approval or at least to bring the contract to the attention of the International for its consideration. Whether, for good reason, bad reason, or no reason at all an International may thereafter refuse to approve is not a question in this case because the International herein was never asked.
991 F.2d at 1307. Mr. Wilber and UCB never asked the FDIC to approve the settlement, and therefore Mr. Wilber's testimony concerning what the FDIC would or would not have approved is pure speculation and insufficient to meet UCB's burden.
A final issue is whether the Court has the subject matter or personal jurisdiction over JT, Debra and Jaspal Dhaliwal. In deciding UCB's Motion to Dismiss Count I of the Complaint, the Court already has ruled that claims against JT are sufficiently intertwined with this Chapter 11 case (because, among other reasons, some of the Debtors transferred property to JT that was pledged to Mutual Bank and other Debtors gave guaranties of the JT indebtedness), to provide the Court with jurisdiction. For the same reasons, the Court can enforce a settlement that involves JT, its principal, Darshan and his wife. Moreover, Darshan and Attorney Kerkman testified that Darshan represented his family's interest at the mediation, and therefore, sufficient evidence exists that a meeting of the minds occurred between UCB and those parties, as well as Bulk and the Committee.
The Court has already addressed the balance of UCB's arguments, including that UCB lacked good faith in connection with the fulfillment of the contingency, in the oral decision at the conclusion of the February 18, 2010 hearing.
III. Conclusion
For the foregoing reasons, the Motion to Enforce the Settlement Agreement is granted. This Memorandum Decision constitutes the Court's findings of fact and conclusions of law. A separate Order will be entered.