Northwest Bank v. Sovereign Holdings, Inc. et al
Filing
59
ORDER granting 31 Motion for Partial Summary Judgment; denying as moot 11 Motion for Preliminary Injunction. Signed by U.S. District Judge Karen E. Schreier on 2/23/16. (DJP)
UNITED STATES DISTRICT COURT
DISTRICT OF SOUTH DAKOTA
SOUTHERN DIVISION
NORTHWEST BANK, formerly known as
First National Bank,
Plaintiff,
4:15-CV-04066-KES
MEMORANDUM OPINION
AND ORDER GRANTING
PLAINTIFF’S MOTION FOR
PARTIAL SUMMARY JUDGMENT
vs.
SOVEREIGN HOLDINGS, INC.,
Defendant.
Plaintiff, Northwest Bank, filed suit against defendants, Sovereign
Holdings, Inc., Hepar, L.L.C., and Mary Ellen Nylen, asserting claims for breach
of contract, conversion and fraudulent transfer, breach of fiduciary duty, and
injunctive relief through the imposition of a constructive trust. Docket 1.
Northwest and defendants stipulated to the dismissal of all claims except the
breach of contract claim against Sovereign. Docket 38. Northwest now moves
for partial summary judgment on the breach of contract claim. Sovereign
opposes the motion. For the following reasons, Northwest’s motion is granted.
BACKGROUND
Construing the facts in a light most favorable to the non-moving party,
Sovereign, the facts are as follows:
Northwest Bank 1 is a state bank incorporated in Iowa with a principal
place of business in Spencer, Iowa. Sovereign is a business incorporated in
South Dakota with a principal place of business in Jefferson, South Dakota.
Northwest Bank is a successor by merger to First National Bank of Sioux
City, Iowa, which was effective October 12, 2013.
1
Hepar is a limited liability company organized in South Dakota with a principal
place of business in Jefferson, South Dakota. Hepar is a 100% owned
subsidiary of Sovereign. Mary Ellen Nylen is President and Treasurer of
Sovereign. Mark Nylen is Vice President and Secretary of Sovereign. Hepar
Bioscience, L.L.C. is a separate company owned and managed at least in part
by Mark Nylen or Mary Ellen Nylen.
To secure loans made by Northwest to Hepar Bioscience, Sovereign
executed multiple guarantees to Northwest. Sovereign executed guarantees on
December 13, 2011, January 4, 2012, and May 20, 2013. Docket 1-1;
Docket 1-2; Docket 1-3. On September 17, 2014, under a business loan
agreement and promissory note, Northwest loaned Hepar Bioscience
$19,678,345.72.
On February 20, 2015, Hepar Bioscience filed a petition under
Chapter 11 of the United States Bankruptcy Code in United States District
Court for the District of South Dakota. On March 13, 2015, Northwest
accelerated the amount due on the loan and demanded that Sovereign remit
full payment on the outstanding debt as provided in the loan guarantees. As of
May 2015, the outstanding principal on the loan is $18,561,612.25 2.
Northwest alleges that the outstanding debt is $18,561,612.25. Sovereign has
not offered a current loan figure. In its response to Northwest’s statements of
material fact in support of Northwest’s motion for summary judgment,
Sovereign stated that “Sovereign cannot admit or deny the amount owed by
Hepar Bio [sic] as it does not have a copy of the note or agreement referenced
there[.]” Docket 42 at 3, ¶9.
2
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STANDARD OF REVIEW
“One of the principal purposes of the summary judgment rule is to
isolate and dispose of factually unsupported claims or defenses[.]” Celotex Corp.
v. Catrett, 477 U.S. 317, 323-24 (1986). Summary judgment is proper “if the
movant shows that there is no genuine dispute as to any material fact and the
movant is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(a); Celotex
Corp., 477 U.S. at 323 (“[A] party seeking summary judgment always bears the
initial responsibility of . . . demonstrat[ing] the absence of a genuine issue of
material fact.” (internal quotations omitted)). The moving party must inform the
court of the basis for its motion and also identify the portion of the record that
shows there is no genuine issue in dispute. Hartnagel v. Norman, 953 F.2d
394, 395 (8th Cir. 1992) (citation omitted).
Once the moving party has met its initial burden, the nonmoving party
must establish “that a fact . . . is genuinely disputed” either by “citing to
particular parts of materials in the record,” or by “showing that the materials
cited do not establish the absence . . . of a genuine dispute.”
Fed. R. Civ. P. 56(c). “The nonmoving party may not ‘rest on mere allegations or
denials, but must demonstrate on the record the existence of specific facts
which create a genuine issue for trial.’ ” Mosley v. City of Northwoods, Mo., 415
F.3d 908, 910 (8th Cir. 2005) (quoting Krenik v. Cty. of Le Sueur, 47 F.3d 953,
957 (8th Cir. 1995)). For purposes of summary judgment, the facts and
inferences drawn from those facts are “viewed in the light most favorable to the
party opposing the motion.” Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio
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Corp., 475 U.S. 574, 587 (1986) (quoting United States v. Diebold, Inc., 369 U.S.
654, 655 (1962)).
DISCUSSION
Because neither party disputes the validity of the guarantees, the court
finds that the guarantees constitute valid contracts. See City of Davenport v.
Shewry Corp., 674 N.W.2d 79, 86 (Iowa 2004) (“[A] guaranty is a contract by
one person to another for the fulfillment of a promise of a third person.”)
(alterations in original). Due to a choice of law provision in the guarantees, the
parties also agree that Iowa law governs the breach of contract claim.
Docket 1-1 at ¶14; Docket 1-2 at ¶14 (stating the “Guaranty is governed by the
laws of Iowa[.]”). As such, the only issue is whether Sovereign’s conduct
constitutes a breach of the guarantees.
Under Iowa law, a plaintiff must establish the following elements to
succeed on a breach of contract claim:
(1) the existence of a contract, (2) the terms and conditions of the
contract, (3) that [plaintiff] has performed all the terms and
conditions required under the contract, (4) the defendant’s breach
of the contract in some particular way, and (5) that plaintiff has
suffered damages as a result of the defendant’s breach.
Royal Indem. Co. v. Factory Mut. Ins. Co., 786 N.W.2d 839, 846 (Iowa 2010)
(citing Molo Oil Co. v. River City Ford Truck Sales, Inc., 578 N.W.2d 222, 224
(Iowa 1998) (alterations in original)).
The parties agree that Northwest has satisfied the first three elements of
the claim. Northwest filed the three guarantees with the court, satisfying the
first two elements. Northwest has also performed its contractual obligations by
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loaning over 19 million dollars to Hepar Bioscience, which satisfies the third
element. As to the fourth and fifth elements, Northwest argues that Sovereign
breached the contract by failing to pay the outstanding loan balance that came
due after Hepar Bioscience defaulted on the loan. Generally, Sovereign agrees
that the bankruptcy petition filed by Hepar Bioscience permitted Northwest to
accelerate the amount due on the loan and to demand payment from
Sovereign. Despite this position, Sovereign disputes that summary judgment is
appropriate by arguing that (1) Hepar Bioscience’s reorganization plan in
bankruptcy court renders Northwest’s breach of contract claim moot, (2)
Northwest allegedly waived or limited the assets that it can obtain from
Sovereign due to promissory estoppel, and (3) the court should defer judgment
on Northwest’s motion until the divorce action between Mark and Mary Ellen
Nylen is resolved. The court will address each argument in turn.
a.
Hepar Bioscience’s reorganization plan in bankruptcy court
does not render Northwest’s claim moot.
In support of the argument that Hepar Bioscience’s reorganization
through bankruptcy renders the breach of contract claim moot, Sovereign
asserts that the reorganization plan specifically considers Sovereign’s
guarantees to Northwest. Under the reorganization plan, Sovereign alleges that
“paragraph 1, page 11, states that Northwest Bank is fully secured. The plan
goes on to state that ‘any “adverse change” and deemed “insecurity” clauses in
the loan documents which would allow the creditor to notice a default are
terminated upon confirmation of the plan.’ ” Docket 44 at 3. Sovereign argues
that because of the reorganization plan, “Hepar Bio [sic] is no longer in default
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and the Bank’s action against the guarantor will be moot.” Id. In light of the
alleged mootness of the claim, Sovereign urges the court to delay its judgment
on the motion for summary judgment until the bankruptcy proceedings are
complete. Sovereign offers no authority to support these arguments.
In response to Sovereign’s request that the court defer judgment on
Northwest’s motion for summary judgment, Northwest argues that Sovereign
should have sought protection from the bankruptcy court, not a district court,
in order to stay the motion. Docket 48 at 6 (citing C.H. Robinson Co. v. Paris &
Sons, Inc., 180 F. Supp. 2d 1002, 1018 (N.D. Iowa 2001)). But even if Sovereign
pursued a stay of proceeding from the bankruptcy court, Northwest argues
that a deferred judgment is generally not available to guarantors of debt. Id.
(citing In re F.T.L., Inc., 152 B.R. 61, 63 (Bankr. E.D. Va. 1993) (stating that
absent compelling and unusual circumstances, guarantor of debt must file its
own bankruptcy petition to obtain a stay in a district court proceeding)).
As to the impact of the Hepar Bioscience’s bankruptcy petition on the
substance of the breach of contract claim, Northwest argues that both the
written guarantees and Iowa case law mandate that Sovereign is liable for the
outstanding loan balance. Northwest first cites paragraph 5 of the December
2011 and January 2012 guarantees 3, which consider a scenario where Hepar
Bioscience files a petition for bankruptcy. See Docket 1-1 at ¶5; Docket 1-2 at
Northwest does not cite the May 2013 guarantee. The court notes that the
2013 guarantee does not contain a specific provision addressing a situation
where Hepar Bioscience files a petition for bankruptcy. But, the court finds
that the guarantee as a whole essentially mirrors the provisions contained in
the December 2011 and January 2012 guarantees.
3
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¶5. In part, both guarantees provide the following: “If a bankruptcy petition
should at any time be filed by or against [Hepar Bioscience], the maturity of the
Debt, so far as [Sovereign’s] liability is concerned, shall be accelerated and the
Debt shall be immediately payable by [Sovereign].” Id. Northwest also argues
that Iowa law holds guarantors liable when debtors default on a loan,
regardless of whether the creditor can seek recovery from the principal debtor.
Docket 48 at 6 (citing Kent Feeds, Inc. v. Manthei, 646 N.W.2d 87, 91 (Iowa
2002) (stating that an unconditional guarantee imposes liability on the
guarantor upon the default of debtor irrespective of whether the creditor seeks
recovery from debtor, “particularly where their liabilities arise from separate
instruments.”)).
The court agrees with Northwest’s position. Even if the court assumes
that the bankruptcy court will eventually approve Hepar Bioscience’s
reorganization plan, Sovereign offers no authority to support its argument that
a stay in this proceeding is appropriate or that Northwest’s breach of contract
claim against Sovereign is somehow moot. In contrast, Northwest offers ample
support for the court to find that Sovereign should have sought relief from the
bankruptcy court if it desired to stay this action. C.H. Robinson Co., 180
F. Supp. 2d at 1018. The court also finds that the plain language of the
written guarantees and Iowa case law establish that Sovereign is liable for the
outstanding debt because Hepar Bioscience defaulted on its loan. See Docket
1-1 at ¶5; Docket 1-2 at ¶5; see also Kent Foods, Inc., 646 N.W.2d at 91. Thus,
the court finds that Hepar Bioscience’s reorganization plan provides neither a
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basis for rendering the breach of contract claim moot nor an avenue to stay
this action. This argument also does not create any dispute of material fact
relating to the breach of contract claim.
b.
The defense of promissory estoppel is not relevant to the issue
of whether Sovereign’s conduct breached the guarantees.
Sovereign next argues that the court should limit Northwest’s right to
recover under the guarantees. Sovereign relies upon communications from Troy
Heitman, Executive Vice President and Senior Lender for Northwest. Sovereign
cites two emails that Heitman sent to Mark Nylen. The first email was sent on
July 30, 2014. It addressed the prospective sale of a Hepar asset, a Cessna
airplane:
Northwest Bank understands that Hepar LLC (which is owned by
Sovereign Holdings, Inc.) has as its primary asset an airplane.
Sovereign Holdings is a guarantor of certain loans made by
Northwest Bank to Hepar Bioscience LLC. Northwest Bank
consents to the sale of the airplane by Hepar LLC and waives any
interest it may have (whether through Sovereign Holdings, Inc. or
otherwise) in the airplane or the proceeds from the sale of the
airplane and shall make no claim to the airplane or the proceeds
from the sale of the airplane.
Docket 45 at 9. Sovereign also cites a second email from Heitman that
considers the sale of transportation equipment owned by Sovereign. The
second email states the following:
I write you in response to your letter of November 10, 2014
regarding an auction you referenced was held on November 6,
2014. The bank is not willing to waive the Sovereign Holding Inc’s
Guaranties of the obligations of Hepar BioScience, L.L.C. that it
currently holds. The Bank does not have a security interest in
Sovereign’s transportation equipment and accordingly, at this time
takes no position regarding the auction of such equipment.
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Id. at 10. Based on these emails, Sovereign urges the court to hold that
Northwest is estopped from acquiring any proceeds from the sale of the
airplane or transportation equipment as a means of collecting on the
guarantees.
Northwest responds by asserting that the potential avenues available for
collecting on a judgment are irrelevant to the question of whether the court
should grant summary judgment on the breach of contract claim. Northwest
cites Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986), emphasizing
that a court’s inquiry regarding a motion for summary judgment is limited to
the facts that are relevant to the claim at issue. As it pertains to the breach of
contract claim, Northwest submits that Sovereign’s argument could only be
relevant if Northwest had waived the guarantees. Docket 48 at 4. But the
second email cited by Sovereign confirms that Northwest was unwilling to do
so.
While Sovereign may eventually be able to raise a promissory estoppel
defense as a means of protecting proceeds from the sale of the aircraft and
transportation equipment, the court finds that the defense is not relevant to
the issue of whether Northwest is entitled to a judgment in the full amount
owed on the breach of contract claim. When reviewing this motion, the court’s
inquiry is limited to whether Sovereign’s conduct breached the contract and
whether it caused Northwest any damages. See Royal Indem. Co., 786 N.W.2d
at 846. Sovereign offers no authority to show how promissory estoppel is
relevant regarding the issue of whether it breached the written guarantees.
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Thus, the court finds that the promissory estoppel argument does not create a
genuine issue of material fact that precludes summary judgment.
c.
A state-court divorce proceeding does not provide a basis for
deferring judgment on the breach of contract claim.
Sovereign urges the court to defer judgment on the breach of contract
claim until a divorce action between Mark Nylen and Mary Ellen Nylen is
complete. Sovereign relies upon Federal Rule of Civil Procedure 56(d)(1), which
states: “If a nonmovant shows by affidavit or declaration that, for specified
reasons, it cannot present facts essential to justify its opposition, the court
may: (1) defer considering the motion or deny it[.]” Fed R. Civ. P. 56(a)(1).
Sovereign cites an order from the Honorable Judge Steve Jensen, First Judicial
Circuit in Union County, South Dakota. Sovereign asserts that the order states
that funds in a Sovereign bank account cannot be removed without Judge
Jensen’s approval and order. Docket 44 at 7. According to Sovereign, this
order, and the final resolution of the divorce action, may render Northwest’s
cause of action moot. Id. Sovereign offers no authority to support this
argument.
It is unclear to the court how a state-court divorce proceeding would
impact its analysis regarding the motion for summary judgment on the breach
of contract claim. Because Sovereign has failed to provide sufficient support for
this argument, the court finds that the state-court divorce proceeding does not
create any disputes of material fact that are relevant to the motion before the
court.
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CONCLUSION
The parties agree that the guarantees Sovereign provided to Northwest
are effective and constitute valid contracts. The parties also agree that
Northwest cites sufficient grounds upon which it accelerated the outstanding
loan payments due from Hepar Bioscience. The defenses asserted by Sovereign
are not based on disputes of fact. Instead, Sovereign offers only legal defenses
to the motion for summary judgment. The court finds that Hepar Bioscience’s
reorganization plan filed in bankruptcy court does not render the breach of
contract claim moot. The court also finds that Sovereign’s defenses relating to
promissory estoppel and the state-court divorce proceeding are not relevant to
the court’s analysis of the breach of contract claim. Thus, it is
ORDERED that Northwest’s motion for partial summary judgment
(Docket 31) is GRANTED. It is
FURTHER ORDERED that in the event the parties are unable to agree on
the amount owed under the guarantee, Northwest will file an affidavit detailing
current damages stemming from the breach of contract claim by March 10,
2016. If Sovereign has objections, its response is due by March 21, 2016. It is
FURTHER ORDERED that the motion for a preliminary injunction
(Docket 11) is denied as moot.
Dated February 23, 2016.
BY THE COURT:
/s/ Karen E. Schreier
KAREN E. SCHREIER
UNITED STATES DISTRICT JUDGE
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