Masters Group Internat’l, Inc. v. Comerica Bank

Masters Group Internat’l, Inc. v. Comerica Bank, 2015 MT 192 (July 1, 2015) (Baker, J. wrote an opinion in which Shea, J., joined; Shea, J. concurred; Rice, J., concurred and dissented and was joined by McKinnon, J.; Cotter, J., concurred and dissented, and was joined by McGrath, C.J., and Wheat, J.) (aff’d & rev’d)

Issue: (1) Whether the district court abused its discretion in denying Comerica’s motion to sever; (2) whether the district court erred in applying Montana law despite the contractual choice-of-law provision; (3) whether the district court erred in not deciding contract formation issues as a matter of law; (4) whether the district court erred by allowing TARP evidence to be presented to the jury.

Short Answer: (1) No (Baker, Shea, Cotter, McGrath, Wheat); (2) yes (Baker, Shea, Cotter, McGrath, Wheat); (3) no (5-Baker, Shea, Cotter, McGrath, Wheat- to 2-Rice, McKinnon); (4) yes (7-0 agree admission was error, but 4 (Baker, Shea, Rice. McKinnon) to 3 (Cotter, McGrath, Wheat) to reverse and remand for new trial).

Affirmed and reversed and remanded for a new trial

Facts: In 2004-2005, Masters Group International, Inc. entered into discussions with the governor’s office about establishing an international office products assembly and distribution facility in Butte, with state financial and technical assistance. Masters was also negotiating with Comerica Bank, headquartered in Michigan, about a loan to purchase the business and establish headquarters in Butte. On July 11, 2006, Masters executed a loan agreement and promissory note (Agreement) with Comerica for $9 million, subject to repayment on or before July 11, 2008. The Agreement provided it would be governed, construed and enforced by the laws of Michigan.

Masters signed an MOU with Butte-Silver Bow in October 2006, which included a proposed $4.5 million financial package from a tax increment financing district in Butte. Masters entered into a separate loan agreement with the Butte Local Development Corporation (BLDC), under which BLDC loaned Master $200,000 for start-up expenses for the proposed distribution center in the tax increment financing district, and Masters granted BLDC a security interest in its business assets, subordinate to Comerica’s existing security interest.

By the fall of 2007, it became clear the Butte facility would not be completed in time to meet the demands of Masters’ customers, and there was no other location in Butte that could work. Masters leased a warehouse in Reno, Nevada, and BLDC deauthorized the tax increment financing package.

Comerica amended its Agreement with Masters in October 2007 to add $500,000 to the principal amount of the loan, and again in December 2007 to add another $500,000, raising the loan total to $10 million, and securing these increases with a letter of credit from the Nolans and a personal pledge from Vlahos. The amendments were evinced by a promissory note, an amended agreement, and an amended guaranty, each of which stipulated to the application of Michigan law, and none of which changed the original July 11, 2008 maturity date.

Comerica sent a notice of default and reservation of rights to Masters in April 2008, due to the decrease in value of certain collateral, and again in July 2008. The parties discussed renewal and further loan increases in July 2008, but did not commit their negotiations to writing. The loan matured on July 11, 2008, without repayment by Masters. Comerica indicated it could not address renewal and loan increases until August 2008 due to staff vacations.

On August 1, 2008, Comerica sent a letter to Masters declining to extend the loan and forbearing only from day to day. It said that it would exercise its rights under the Agreement unless Masters paid the full amount by August 8, 2008. Eventually, Comerica agreed to amend the Agreement on August 27, 2008, providing Masters with another $500,000 and extending the maturity date of the loan (now totaling $10.5 million) to November 1, 2008.

Comerica sent another notice of default on November 25, 2008, giving Masters until December 5 to pay the loan in full. Masters sought alternative financing options and obtained a term sheet from Wells Fargo, which was disclosed to Comerica, on December 17, 2008. Comerica sent Masters a forbearance agreement on the same day, offering to forbear until February 16, 2009. This agreement had a Michigan choice-of-law clause, and imposed numerous significant conditions on Masters. Masters signed the agreement December 19, 2008, and guarantor Pratt signed December 21, 2008. Guarantor Vlahos was out of the country and did not sign the agreement; nonetheless, Comerica sent an entitlement order to Wachovia Securities on December 29, 2008, instructing it to liquidate Valhos’s assets and wire the cash to Comerica.

On Wednesday, December 31, 2008, at approximately 4:50 p.m. and without notice, Comerica initiated an offset of Masters’ and guarantors’ cash accounts and other liquid assets totaling nearly $10.5 million. Neither Masters nor the guarantors were alerted that the offset would occur. This resulted in a recall of Masters’ payroll checks and payments to suppliers, and precipitated the collapse of the company.

On October 4, 2011, BLDC filed a complaint against Masters in state court, alleging Masters failed to pay its obligations under the BLDC Agreement. Masters answered and filed a third-party complaint against Comerica, alleging breach of the forbearance agreement and other claims, and requesting punitive damages.

BLDC and Masters entered into a standstill agreement, under which Master acknowledged its indebtedness to MLDC and BLDC acknowledged Masters’ inability to repay BLDC other than by successful recovery against Comerica. BLDC agreed to cooperate with Masters in its litigation against Comerica, and the parties agreed not to settle or assign any claims against each other or Comerica without the other’s written consent.

In March 2012, Comerica filed a motion to sever the third-party complaint from the Masters-BLDC litigation. The district court did not rule on it and it was deemed denied.

In September 2013, Comerica moved for partial summary judgment on the application of Michigan law. The district court denied the motion because Comerica had not raised the issue in a timely manner, and held Montana law should apply. The district court also determined that Masters could reference at trial Comerica’s receipt of federal Troubled Asset Relief Program (TARP) funds following the “government bailout” of Comerica. 

Procedural Posture & Holding: A unanimous jury found Masters liable to BLDC for $275,251.09, and found Comerica liable to Masters for $52,037,593, which was allocated to principal and interest o funds wrongfully offset ($5,433,910), lost profits ($19,603,683), other consequential damages ($16.5 million) and punitive damages ($10.5 million). Comerica appeals, and the Supreme Court affirms in part and reverses in part.

Reasoning: (1) The district court did not abuse its discretion in implicitly denying Comerica’s motion to sever.

(2) The district court denied Comerica’s motion tfor partial summary judgment on issue of Michigan law as untimely. The scheduling order allowed pretrial motions to be filed until Nov. 25, 2013; Comerica filed its motion for partial summary judgment on Sept. 17, 2013. The motion was timely filed.

Masters and Comerica negotiated a clear choice-of-law provision that is neither against Montana public policy nor against public morals, and the district court erred by refusing to apply Michigan law.

The choice-of-law provision covers Masters’ contract claims and to Masters’ tort claims as well, as they are not independent of its breach of contract claims. Michigan law should have governed all of Masters’ claims.

Michigan law and Montana law do not conflict on the breach of contract claim. However, Michigan does not recognize an independent claim for breach of the implied covenant of good faith and fair dealing. Because the jury here was instructed that breach of the covenant is a breach of the contract, the instruction complied with Michigan law.

 

Because Masters’ tort claims stem directly from the parties’ contractual relationship, neither Masters’ constructive fraud claim nor its intentional interference claim will lie under Michigan law. Additionally, a tort claim for deceit us not cognizable under Michigan law.

 

Guarantors herein were not plaintiffs, as they assigned their claims against Comerica to Masters. However, their claims were personal to them, and neither Montana nor Michigan law allows the assignment of a personal injury action to a third party. Masters could not pursue damages based on the guarantors’ assignment of their tort claims against Comerica.

The district court erred in allowing Masters’ claims for constructive fraud, intentional interference with prospective economic advantage, and deceit to go to the jury. Because the only claims Masters has against Comerica are contractual, and Michigan law does not allow punitive damages for breach of contract, the punitive damages award must be vacated.

(3) Comerica moved for summary judgment on Masters’ contract claim, arguing the forbearance agreement was not fully executed and therefore was not a binding contract. Despite the late signatures by Masters and Pratt, and the lack of a signature from Vlahos, Masters and its guarantors began performing the conditions of the forbearance agreement, and Comerica began accepting those performances. When viewed in a light most favorable to Masters, Comerica’s conduct provided a triable dispute about whether it waived the forbearance agreement’s clause stating the preconditions to contract formation. Applying Michigan law to the waiver question results in the same outcome as applying Montana law. The district court did not err in submitting the questions of contract formation and waiver to the jury.

 

(4) Comerica requested a protective order to preclude any TARP-related discovery, as there is no private right of action for declining to extend TARP funds to Masters as a troubled borrower. Comerica then filed a motion in limine to exclude any evidence relating to TARP. The district court concluded that evidence regarding TARP funds was relevant to whether Comerica lied about the availability of those funds. However, the TARP evidence in this case was irrelevant, and the district court abused its discretion in admitting it. Because the TARP evidence may have had a prejudicial effect on the verdict, the Court orders a new trial.

 

Justice Shea’s Concurrence: The Court unanimously agrees that allowing the TARP evidence was error, although the justices differ as to whether the error is reversible, or was cured by the district court’s jury instructions. Justice Shea concludes that the only appropriate course is reversal and remand.

 

Justice Rice’s Concurrence & Dissent (joined by Justice McKinnon): Justice Rice believes the district court erred by failing to grant summary judgment to Comerica on the issue of contract formation. He would reverse for entry of judgment in favor of Comerica under either Montana or Michigan law. Conditions of contract formation are distinct from conditions of contract performance. Waiver applies to performance, not formation.

 

These were sophisticated parties in a sophisticated transaction. Masters was already in default. Comerica was forbearing only day to day. Comerica could exercise its rights at any time and, as provided by carefully prepared documents, it would not waive that right except by express written agreement and upon completion of the conditions of forbearance. Most importantly, Masters knew all of this. This was not a jury question. Because there are not four votes for the position espoused by this dissent, Justice Rice also joins issue 4 of Justice Baker’s opinion and concurs that the admission of the TARP evidence was prejudicial trial error requiring reversal and remand for a new trial.

 

Justice Cotter’s Concurrence & Dissent (joined by Chief Justice McGrath and Justice Wheat): Justice Cotter concurs in the majority opinion on all issues other than the decision to remand for a new trial based on the prejudicial effect of the TARP evidence. The district court instructed the jury properly, and none of the instructions invited the jury to consider TARP or award damages as a result of the failure to extend TARP. Moreover, Comerica has not established how it was harmed by the evidence. The Court is vacating punitive damages as well as consequential damages, and the remaining awards were calculated to the dollar on the losses to which lay and expert witnesses testified. Justice Cotter would affirm the district court’s evidentiary rulings and its use of a general verdict form.