Highland Crusader Offshore Par, et al v. LifeCare Holdings Inc, et al

Filing 511105506

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IN THE UNITED STATES COURT OF APPEALS United States Court of Appeals FOR THE FIFTH CIRCUIT Fifth Circuit FILED
May 10, 2010 N o . 09-10554 Lyle W. Cayce Clerk

H I G H L A N D CRUSADER OFFSHORE PARTNERS LP; HIGHLAND C R E D IT STRATEGIES FUND; HIGHLAND DISTRESSED O P P O R T U N I T I E S INC; HIGHLAND FLOATING RATE ADVANTAGE F U N D ; HIGHLAND FLOATING RATE LLC; RESTORATION O P P O R T U N I T I E S FUND; HIGHLAND CREDIT OPPORTUNITIES FUND C D O LP; HIGHLAND FUNDS I, on behalf of its Highland High Income S e r ie s ,

Plaintiffs - Appellants v. L I F E C A R E HOLDINGS INC; LCI HOLDCO LLC; JP MORGAN CHASE B A N K , NA,

Defendants - Appellees

A p p e a l from the United States District Court for the Northern District of Texas USDC No. 3:08-cv-00102

B e fo r e DEMOSS, ELROD, and HAYNES, Circuit Judges. P E R CURIAM:*

Pursuant to 5TH CIR. R. 47.5, the court has determined that this opinion should not be published and is not precedent except under the limited circumstances set forth in 5TH CIR. R. 47.5.4.

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No. 09-10554 Highland 1 appeals the district court's dismissal of its contract claims and g r a n t of summary judgment on its tort claims in favor of LifeCare Holdings, Inc., L C I Holdco, LLC (collectively, "LifeCare"), and JP Morgan Chase Bank, N.A. ("J P Morgan"). We AFFIRM. I. FACTS AND PROCEDURAL HISTORY W e recite the facts taking Highland's well-pleaded factual allegations as tr u e and viewing the facts in the light most favorable to Highland. LifeCare is o w n e d by The Carlyle Group, a private equity firm. Carlyle's original purchase o f LifeCare was funded in part by a senior credit facility from a number of le n d e r s , including Highland and JP Morgan, under a credit agreement dated A u g u s t 11, 2005 (the "Credit Agreement"). Under the Credit Agreement,

L i fe C a r e was the borrower, Highland was a "Term B Lender," and JP Morgan w a s both a lender and LifeCare's administrative agent.2 The Credit Agreement p r o v id e d the terms by which LifeCare was to repay its debt, and § 9.02 of the C r e d it Agreement allowed for those terms to be amended. Under § 9.02, certain a m e n d m e n t s could be made to the Credit Agreement if lenders holding more t h a n 50% of the total loan commitment approved of the amendment. LifeCare u tiliz e d this provision to pass two amendments to the Credit Agreement, and the

Appellants include: Highland Crusader Offshore Partners LP; Highland Credit Strategies Fund; Highland Distressed Opportunities Inc; Highland Floating Rate Advantage Fund; Highland Floating Rate LLC; Restoration Opportunities Funds; Highland Credit Opportunities Fund CDO LP; Highland Funds I, on behalf of its Highland High Income Series, Highland Crusader Offshore. The Appellants will be collectively referred to as "Highland." There are two types of lenders under the Credit Agreement: (1) lenders with revolving commitments under the Revolving Credit Facility; and (2) lenders with term loan commitments under the Term Loan B Facility ("Term B Lenders").
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No. 09-10554 p a s s a g e of the second amendment (the "Second Amendment") is the subject of th is litigation. As an inducement to consent to the Second Amendment, LifeCare offered a n incentive payment to all consenting Term B Lenders consisting of an a m e n d m e n t fee of 75 basis points (the "75 bps offer").3 LifeCare's 75 bps offer w a s subject to two conditions: (1) LifeCare would only accept consents to the o ffe r until the requisite vote was achieved; and (2) lenders consenting after that p o in t would not be paid any amendment fees. LifeCare, through JP Morgan, p o s t e d the 75 bps offer in a secure digital workspace known as Intralinks, which o n ly the lenders could access.4 A number of lenders, but not Highland, accepted LifeCare's 75 bps offer, b rin g in g the total consenting to 47% (just shy of the 50% needed). Highland c h o s e to monitor the offer's progress by collecting information on other lenders a n d tracking their positions on the proposal. On December 6, Highland, through its employee Mark Martinson, heard that LifeCare had increased its amendment fe e offer to 125 bps to certain Term B Lenders. Martinson called Jackson M e r c h a n t at JP Morgan and questioned him about these higher offers. When M a r t in s o n asked Merchant directly whether other lenders were being offered 1 2 5 bps, Merchant stated that he could neither "confirm nor deny" that fact. H ig h la n d never consented. Thereafter, LifeCare announced that it had obtained the requisite number o f consents and that the window to consent to the 75 bps offer had closed.

"75 basis points" refers to LifeCare's offer of an amendment fee equal to 0.75% of the aggregate loan commitments of each lender.
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LifeCare also used Intralinks to disseminate information about the first amendment.

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No. 09-10554 L ife C a r e was able to obtain the requisite consents by offering an amendment fee o f 125 bps to two Term B Lenders, Symphony Asset Management ("Symphony") a n d Quadrangle Group LLC ("Quadrangle").5 LifeCare and JP Morgan did not d is c lo s e on Intralinks the 125 bps offers it made to Symphony and Quadrangle o r their acceptance. After the requisite vote was achieved, LifeCare decided to p a y all timely consenting lenders 125 bps, even though most of the lenders had c o n s e n t e d at the 75 bps price. Because Highland never consented, it never r e c e iv e d the inducement payment consisting of the amendment fees. litig a tio n ensued. Highland initiated this lawsuit in Texas state court against LifeCare and J P Morgan, alleging that it was entitled to receive amendment fees because it w o u ld have consented to the Second Amendment if it had been offered 125 bps o r became aware that other lenders were being offered 125 bps. Highland fu r t h e r alleged that LifeCare and JP Morgan's failure to disclose the 125 bps o ffe r s : (1) breached § 3.12 of the Credit Agreement; (2) breached the implied c o v e n a n t of good faith and fair dealing under New York law; (3) constituted fr a u d ; (4) constituted conspiracy to commit fraud; (5) constituted aiding and a b e t t in g fraud; and (6) constituted negligent misrepresentation. JP Morgan and LifeCare removed Highland's suit to federal court and then m o v e d to dismiss Highland's claims under Federal Rule of Civil Procedure (" R u le " ) 12(b)(6). The district court granted LifeCare's and JP Morgan's motion t o dismiss in part and dismissed Highland's breach of contract, breach of the This

Symphony owned 2.3% of the loan commitments, and Quadrangle owned 4.4%. Their ownership percentages combined with the 47% that LifeCare had already obtained allowed LifeCare to obtain the votes it needed to pass the Second Amendment without Highland's consent.

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No. 09-10554 im p lie d covenant of good faith and fair dealing, and aiding and abetting fraud c la i m s . JP Morgan and LifeCare then moved for summary judgment on

H ig h la n d 's remaining claims, which the district court granted. This appeal fo llo w e d . II. DISCUSSION H ig h la n d appeals 6 the district court's Rule 12(b)(6) dismissal of its breach o f contract and breach of good faith and fair dealing claims.7 Highland also a p p e a ls the district court's grant of summary judgment on its fraud, conspiracy to commit fraud, and negligent misrepresentation claims. A. Claims Dismissed Under Rule 12(b)(6) H ig h la n d argues that the district court erred in dismissing its contract c l a i m s . Although this case invokes our federal question jurisdiction under 12 U .S .C . § 632, the parties do not challenge the district court's application of T e x a s 's choice of law rules. The Credit Agreement contains an enforceable c h o ic e of law provision choosing New York law, and, because Texas would honor t h e agreement's choice of law provision, we find that New York law governs H ig h la n d 's contract claims. See Resolution Trust Corp. v. Northpark Joint V e n t u r e , 958 F.2d 1313, 1318 (5th Cir. 1992) ("Under the Texas rules, in those c o n tr a c t cases in which the parties have agreed to an enforceable choice of law

This court reviews de novo a district court's dismissal under Rule 12(b)(6) as well as a grant of summary judgment. Beavers v. Metro. Life Ins. Co., 566 F.3d 436, 438-39 (5th Cir. 2009) (citing Jones v. Alcoa, Inc., 339 F.3d 359, 362 (5th Cir. 2003)); N. Am. Specialty Ins. Co. v. Royal Surplus Lines Ins. Co., 541 F.3d 552, 555 (5th Cir. 2008). Highland did not appeal the district court's dismissal of its aiding and abetting fraud claim. Accordingly, we do not consider it.
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No. 09-10554 c la u s e , the law of the chosen state must be applied."). Applying New York law, w e affirm the district court's dismissal of Highland's contract claims. 1. Section 3.12 of the Credit Agreement Section 3.12 contains the standard warranty that information furnished b y each side in connection with the Credit Agreement was correct. Highland a l l e g e s that LifeCare and JP Morgan's failure to disclose the 125 bps offers b r e a c h e d § 3.12 because the failure to disclose rendered false or misleading their I n tr a lin k s offer of 75 bps. The district court rejected Highland's contention, fin d i n g that the representation found in § 3.12 only warranted the accuracy of w r it t e n information furnished in connection with the negotiation of the original C r e d it Agreement and its attendant loan documents. We review the district c o u r t 's interpretation of § 3.12 de novo. Duane Reade, Inc. v. Cardtronics, LP, 8 6 3 N.Y.S.2d 14, 16 (N.Y. App. Div. 2008). In doing so, we must review the d is tr ic t court's interpretation of § 3.12 in light of the contract as a whole, Bailey v . Fish & Neave, 868 N.E.2d 956, 959 (N.Y. 2007), and, if the parties' intent with r e s p e c t to § 3.12 can be discerned from evidence found within the four corners o f the document, the court must enforce the parties' intent as written, see W .W .W . Assocs., Inc. v. Giancontieri, 566 N.E.2d 639, 642 (N.Y. 1990) ("[W]hen p a r tie s set down their agreement in a clear, complete document, their writing s h o u ld as a rule be enforced according to its terms."). Applying these standards, w e find no error in the district court's interpretation. T h e text of § 3.12 and the relevant definitions of its terms all support the d is tr ic t court's interpretation. The representation found in § 3.12 is written in t h e past tense and warrants the accuracy of certain identified documents and o th e r written information furnished in connection with the negotiation of "this

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No. 09-10554 A g r e e m e n t or any other Loan Document." The terms "this Agreement" and " L o a n Document" are defined terms, and, when the original definitions of these te r m s are inserted into § 3.12, the section states, in relevant part, that it only a p p lie s to "written information . . . furnished . . . in connection with the n e g o t ia tio n of the Credit Agreement dated as of August 11, 2005 . . . the G u a r a n t ie s , the Assumption Agreement and the Security Documents." 8 Neither § 3.12 nor the original definitions of "this Agreement" or "Loan Documents" m e n tio n s amendments to the Credit Agreement, even though the parties clearly c o n te m p la te d such amendments, as evidenced by § 9.02. Moreover, according t o their definitions,"the Guaranties," "the Assumption Agreement," and "the S e c u rit y Documents" were all documents that were attached as exhibits to the C r e d it Agreement on August 11, 2005, a fact that further supports the district c o u r t 's interpretation. We find no basis to reverse on this claim. 2 . Covenant of good faith and fair dealing H ig h la n d also alleges that the manner in which LifeCare and JP Morgan n e g o t ia t e d the Second Amendment breached the Credit Agreement's implied c o v e n a n t of good faith and fair dealing. Under New York law, every contract c o n ta in s an "[i]mplied . . . covenant of good faith and fair dealing, which is b r e a c h e d when a party to a contract acts in a manner that, although not e x p r e s s ly forbidden by any contractual provision, would deprive the other party o f the right to receive the benefits [it contracted for] under their agreement."

Highland argues that the first and second amendments' redefinition of the term "this Agreement" to mean "the Credit Agreement, as amended by this Amendment," shows that the parties intended § 3.12 to apply to amendments to the Credit Agreement. While amendments to the Credit Agreement do become part of the agreement itself, this redefinition of the term "this Agreement," in light of the evidence above, does not show that the parties intended § 3.12 to apply to amendments.

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No. 09-10554 J a f fe v. Paramount Commc'ns, Inc., 644 N.Y.S.2d 43, 47 (N.Y. App. Div. 1996) (c ita tio n omitted); see Maddaloni Jewelers, Inc. v. Rolex Watch U.S.A., Inc., 838 N .Y .S .2 d 536, 538 (N.Y. App. Div. 2007); see also Dalton ex rel. Dalton v. Educ. T e s tin g Serv., 663 N.E.2d 289, 291 (N.Y. 1995). Highland alleges that LifeCare a n d JP Morgan's actions deprived it of the opportunity to be compensated for a m e n d m e n t s to the Credit Agreement. The Credit Agreement, however,

e x p r e s s l y allows amendments such as this one to be made without all parties c o n s e n tin g and further does not provide that each consenting party must be the s u b je c t of equal inducements to consent. Highland's argument would result not in a "fair play" standard being applied but rather a wholesale rewriting of the c o n tr a c t to grant it a benefit for which it did not bargain.9 Because Highland has fa ile d to plead that LifeCare's and JP Morgan's actions deprived it of any benefit t h a t it bargained for in the Credit Agreement, we find that the district court p r o p e r ly dismissed Highland's good faith claim. See Jaffe, 644 N.Y.S.2d at 47-48 (fin d i n g that a plaintiff's good faith claim was properly dismissed because " p l a in t iff failed to allege any facts to demonstrate that [the defendant] deprived h im of any rights he had under the Agreement"). B. Claims Disposed of on Summary Judgment Highland also appeals the district court's grant of summary judgment on it s fraud, negligent misrepresentation, and conspiracy to commit fraud claims.

For this same reason, Highland's arguments regarding course of dealing and industry custom fail. Highland argues that the Credit Agreement is "silent" as to whether LifeCare and JP Morgan had to give notice of the 125 bps offer on Intralinks and, therefore, the district court had to consider extrinsic evidence allegedly showing that such notice was required. Under New York law, a court may "not imply a term where the circumstances surrounding the formation of the contract indicate that the parties, when the contract was made, must have foreseen the contingency at issue and the agreement can be enforced according to its terms." Reiss v. Fin. Performance Corp., 764 N.E.2d 958, 961 (N.Y. 2001).

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No. 09-10554 A s stated earlier, Texas's choice of law rules apply to this case, and, after a p p ly in g those rules, we find that Texas law governs the extracontractual c la im s. Under Texas law, we find that the district court properly granted

s u m m a ry judgment on Highland's fraud, negligent misrepresentation, and c o n s p ir a c y to commit fraud claims. 1. Fraud and Negligent Misrepresentation Highland claims that LifeCare and JP Morgan are liable for fraud and n e g lig e n t misrepresentation for representing that all Term B lenders were being o ffe r e d 75 bps when in reality some lenders were being offered 125 bps. H ig h la n d further alleges that it justifiably relied on LifeCare and JP Morgan's fa ls e or misleading representation in deciding not to consent to the 75 bps offer. J u st ifia b le or reasonable reliance is an element of both fraud and negligent m is r e p r e s e n ta tio n . See Richter v. Wagner Oil Co., 90 S.W.3d 890, 896-97 (Tex. A p p .- S a n Antonio 2002, no pet.) (stating that if a party knows that a r e p r e s e n ta tio n is false before acting upon it, he cannot reasonably rely on the m isre p re s e n ta tio n and has no claim for fraud or negligent misrepresentation); s e e also Clardy Mfg. Co. v. Marine Midland Bus. Loans Inc., 88 F.3d 347, 358 (5 th Cir. 1996) ("[U]nder a claim for negligent misrepresentation, the plaintiff m u s t prove `justifiable reliance' on the misrepresentation."); Ernst & Young, L .L .P . v. Pac. Mut. Life Ins. Co., 51 S.W.3d 573, 577 (Tex. 2001) ("To prevail on its fraud claim, [a plaintiff] must prove that: . . . (4) [it] actually and justifiably r e lie d upon the representation . . . ."). The undisputed summary judgement evidence shows that Highland c o lle ct e d information on other lenders and learned that LifeCare and JP Morgan h a d made offers of 125 bps to other lenders before the window for accepting the

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No. 09-10554 7 5 bps offer closed. In the trial court, Highland stipulated that one of its e m p lo y e e s , Martinson, actively "collected and updated . . . information he o b ta in e d on other Lenders' positions regarding the proposed second amendment in an electronic tracking sheet." Martinson testified during his deposition that h e learned of the 125 bps offers and questioned JP Morgan about the offers when H ig h la n d still had an opportunity to accept the 75 bps offer. Martinson further t e s t i fi e d that, when he asked JP Morgan directly about the 125 bps offers, JP M o r g a n stated that they could neither confirm nor deny whether such offers w e r e made. Based on Highland's own stipulation and the undisputed testimony of M a r t in s o n , no reasonable jury could find that Highland justifiably relied on L ife C a r e and JP Morgan's alleged misrepresentation because its own in v e s t ig a t io n of the facts negated any reasonable reliance upon the supposed m is r e p r e s e n ta tio n s . See Camden Mach. & Tool, Inc. v. Cascade Co., 870 S.W.2d 3 0 4 , 311 (Tex. App.­Fort Worth 1993, no writ) ("[W]hen a person makes his own in v e s t ig a tio n of the facts, and knows the representations are false, he cannot, as a matter of law, be said to have relied upon the misrepresentations of another."). A c co r d in g ly , we find that the district court properly granted summary judgment o n Highland's fraud and negligent misrepresentation claims. 2. Conspiracy to Commit Fraud H ig h la n d 's conspiracy claim is derivative of its fraud claim. Tilton v. M a rs h a ll, 925 S.W.2d 672, 681 (Tex. 1996). Because we find that summary ju d g m e n t was properly granted as to Highland's fraud claim, we find that s u m m a r y judgment was also properly granted as to Highland's conspiracy claim. S e e Cmty. Initiatives, Inc. v. Chase Bank of Tex., 153 S.W.3d 270, 285 (Tex.

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No. 09-10554 A p p .­ E l Paso 2004, no pet.) ("[I]f [a] plaintiff fails to raise a fact question as to t h e liability of at least one of the defendants for an underlying tort, it is proper t o render a summary judgment against the plaintiff on a civil conspiracy c la im ."). III. CONCLUSION For the foregoing reasons, we AFFIRM.

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