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Bank of America, N.A. v. New England Quality Service, Inc.

United States District Court, D. Vermont

January 4, 2017

BANK OF AMERICA, N.A., Plaintiff,

          OPINION AND ORDER (DOC. 7)

          Geoffrey W. Crawford, Judge

         Plaintiff Bank of America, N.A. ("BOA" or "the Bank") sues the above-captioned corporate defendants and Defendant Kevin C. Elnicki-the owner, member, officer, or principal of the corporate defendants-seeking to enforce BOA's rights in connection with certain commercial loans, credit agreements, and security agreements between the parties. (See Doc. 1.) Defendants filed a four-count Counterclaim, [1] asserting that BOA breached the loan agreement, breached its duty of good faith and fair dealing, intentionally interfered with contractual relations, and is liable for punitive damages. (See Doc. 6.) BOA moved to dismiss the Counterclaim (Doc. 7), and Defendants moved to amend their Counterclaim (Doc. 45). At a September 27, 2016 motion hearing, the court granted Defendants' motion to amend their Counterclaim, and decided to consider the merits of BOA's Motion to Dismiss the Counterclaim (Doc. 7) in light of Defendants' Amended Counterclaim (Doc. 48). BOA also seeks to strike Defendants' demand for a jury trial. (Doc. 7 at 17.)


         The factual allegations in the Amended Counterclaim include the following.[2] The court begins by briefly summarizing the credit facilities that BOA extended to Defendants between 2012 and 2015. The court then discusses Defendants' allegations of a course of dealing between the parties and a planned "tripartite debt consolidation program." Finally, the court recites the events giving rise to each party's claim that the other party defaulted or breached. Additional facts are set forth as necessary in the analysis below.

         I. Credit Facilities Extended by BOA to Defendants

         It is unnecessary here to recite all of the details of each of the agreements between BOA and Defendants. The court starts with summaries of the loans to NEQS in 2012 and 2013 and the loans to Earth Waste in 2014 and 2015. The court then briefly highlights some of the key provisions of those loans.

         A. Loans to NEQS in 2012 and 2013

         The parties began a lending relationship on or about August 15, 2012, when Defendant New England Quality Service, Inc. ("NEQS") and BOA entered into an agreement (the "2012 Loan Agreement") in which BOA agreed to lend to NEQS: two separate $500, 000 lines of credit (LOCs), and one $3, 600, 000 variable-rate term loan. (See Doc. 48 ¶ 5; see also Doc. 1 ¶ 52; Doc. 1-13 (copy of the 2012 Loan Agreement).) On or about April 16, 2013, BOA and NEQS executed Amendment No. 1 to the 2012 Loan Agreement, which included the addition of a $650, 000 LOC as a fourth credit "facility." (See Doc. 48 ¶ 27; Doc. 1-18 (copy of Amendment No. 1).) On or about November 15, 2013, BOA and NEQS executed another loan agreement (the "2013 Loan Agreement") in which BOA agreed to extend to NEQS another $500, 000 LOC. (See Doc. 1 ¶ 76; Doc. 1-24 (copy of 2013 Loan Agreement).)[3]

         B. Loans to Earth Waste in 2014 and 2015, Including the Shredder Loan

         On or about October 28, 2014, and in furtherance of a 2013 decision to acquire a new metals shredder, Earth Waste & Metal, Inc. ("Earth Waste") and BOA entered into a lending agreement (the "4.5MM Loan Agreement" or "shredder loan agreement"), under which BOA agreed to make available to Earth Waste a non-revolving convertible line of credit in the amount of $4, 582, 272. (See Doc. 48 ¶¶ 13-15; see also Doc. 1 ¶ 18; Doc. 1-1 (copy of the 4.5MM Loan Agreement).) The shredder loan agreement included a number of covenants, one of which was an obligation for Earth Waste to provide BOA with "financial information and statements" at regular intervals and "such additional information as requested by the Bank from time to time." (Doc. 1-1 at 7.) In particular, Earth Waste was required to supply BOA with its annual financial statements, reviewed by a certified public accountant, within 120 days of Earth Waste's fiscal year end. (Id.)[4]Another covenant required Earth Waste "to maintain on a consolidated basis a Basic Fixed Charge Coverage Ratio" of at least 1.15 to 1.0 through December 30, 2015. (See Doc. 48 ¶ 34; see also Doc. 1-1 at 8-9.)[5]

         The shredder loan agreement defined default to include failure to comply with any covenant or obligation contained within the agreement. (See Doc. 1-1 at 12.) The agreement further defined default to include the circumstance where "any default occurs under any other agreement the Borrower (or any Obligor) has with the Bank or any affiliate of the Bank." (Id.)[6]Upon an event of default, BOA's remedies included the right to "stop making any additional credit available to the Borrower, and require the Borrower to repay its entire debt immediately." (Id. at 11.)

         Drawing on the line of credit extended under the shredder loan, Earth Waste borrowed more than $1 million from BOA, and entered into contractual obligations with third party to purchase a metals shredder. (Doc. 48 ¶ 35.) On or about February 4, 2015, BOA extended an additional $500, 000 LOC to Earth Waste. (See Doc. 1-7.) On or about February 13, 2015, BOA extended a $2, 540, 000 term loan to Earth Waste. (See Doc. 1-11 .)[7]

         C. Summary of Initial Repayment Terms; Pay-on-Maturity Provisions

         Under the 2012 Loan Agreement, absent a renewal, the "expiration date" for the first LOC was August 15, 2013, at which time the agreement called for NEQS to "repay in full any principal, interest or other charges outstanding." (Doc. 1-13 at 2.) The "expiration date" for the second LOC was also August 15, 2013, at which time the agreement called for NEQS to repay the principal amount outstanding monthly "in equal installments beginning on October 1, 2013 ... and ending on September 1, 2018." (Id. at 3.) The 2012 Loan Agreement also called for NEQS to pay interest on the $3.6 million term loan in monthly installments, and to repay the principal of the loan in monthly installments between August 2012 and August 2019. (See Id. at 5, 23.) The additional $650, 000 LOC added by Amendment No. 1 was available until January 31, 2014, at which time the agreement called for NEQS to "repay in full any principal, interest or other charges outstanding." (Doc. 1-18 at 1.) The "expiration date" for the 2013 Loan Agreement was November 15, 2014, at which time the agreement called for NEQS to repay the amount outstanding "in equal combined installments of principal and interest" monthly until November 15, 2019. (Doc. 1-24 at 1.)

         The shredder loan required Earth Waste to repay the principal in monthly installments from December 1, 2015 through November 3, 2025. (Doc. 1-1 at 2; 18-20.) The repayment terms of the February 4, 2015 LOC set June 30, 2015 as the "expiration date, " and required Earth Waste to repay all principal, interest, and charges by that date. (Doc. 1-7 at 2.) The repayment terms of the February 13, 2015 term loan called for the principal to be repaid in installments from May 1, 2015 until October 1, 2021. (Doc. 1-11 at 2, 18-19.) All of the relevant agreements state that failure to make a payment when due is an event of default. (See Doc. 1-1 at 12; Doc. 1-7 at 11; Doc. 1-11 at 12; Doc. 1-13 at 16; Doc. 1-24 at 13.)

         II. Course of Performance and Planned "Tripartite Debt Consolidation Program"

         According to Defendants, beginning in mid-2013, BOA and Defendants began working together on a "loan consolidation program." (Doc. 48 ¶¶ 8, 11.) As Defendants describe it, at some point in 2015, the parties had identified a "final lending design" consisting of the following three components:

a) new money of at least four million dollars secured by certain business chattels for a modernization and expansion of NEQS's existing metal-shredding activity; b) new money for the purchase of five transfer stations in Washington County, New York for approximately $1.7 million, to be secured by a real estate mortgage on said property, which was appraised at over three million dollars; and c) refinancing of all existing NEQS debt with BOA, to be consolidated with the shredder loan and the real estate loan.

(Id. ¶¶ 12, 20.)[8] Defendants describe this alleged plan as the "tripartite debt consolidation program." (Id. ¶ 21.) Defendants assert that the parties intended for all three components of the plan to be accomplished "in sync" during 2015. (Id. ¶¶ 16-17.)

         Defendants allege that BOA line lender Scott Card referred to BOA as NEQS's "partner" in the planned loan-consolidation program. (Id. ¶ 11.) Mr. Card was "not concerned" about payment of the existing LOCs prior to final debt refinancing and consolidation. (Id. ¶ 24.) In fact, according to Defendants, at no time from 2012 to August 2015 did BOA invoke the pay-on- maturity provision of any of the several LOCs. (Id. ¶¶ 7, 9.) Instead, BOA "rolled over the LOCs post-maturity when needed, pending pay-off from the anticipated refinancing" component of the three-part loan-consolidation program. (Id. ¶¶ 10, 25-33.)

         III. Alleged Defaults and Breach

         After a "Letter Extension, " (see Doc. 1-8), August 24, 2015 was the new maturity date for Earth Waste's $500, 000 LOC. After a series of amendments (see Docs. 1-19, 1-20, 1-21, 1-22, 1-23), August 24, 2015 also became the new maturity date for NEQS's $650, 000 LOC. As to both of those LOCs, the August 24, 2015 maturity date was reached without payment in full. (Doc. 24 ¶¶ 102, 105.) BOA did not notify Defendants on August 24, or earlier, that it expected payment in full on that date. (Doc. 48 ¶ 45.) According to Defendants, they had "no idea that, contrary to years of prior dealings, on August 24, 2015 BOA wanted full payment of any LOC." (Id. ¶ 42; see also id, ¶ 44.)

         On or about August 25, 2015, BOA sent to Earth Waste and several of the other Defendants a letter entitled "Notice of Default and Reservation of Rights." (See Doc. 1 ¶ 108; Doc. 24 ¶ 108, Doc. 48 ¶ 38; Doc. 1-29 (copy of the August 25, 2015 letter).) The letter did not identify maturity of any LOC as an event of default. (Doc. 48 ¶ 46; see also Doc. 1-29.) Instead, referring to the shredder loan agreement, the letter stated: "It has come to the Bank's attention that there was a covenant failure in respect of the fixed charge coverage ratio [] as calculated in connection with the financial statements ending June 30, 2015." (Doc. 1-29 at 1.) The letter advised that BOA would "stop making any additional credit available to [Earth Waste] at this time as authorized under Section 8" of the shredder loan agreement. (Id.)

         After Defendants received the August 25, 2015 letter, BOA representatives traveled to Vermont to meet with Defendants, and "demanded to review confidential financial information of NEQS and its affiliate companies." (Doc. 48 ¶ 47.) According to Defendants, Earth Waste explained that "according to its accountant, if the Ratio is calculated pursuant to Generally Accepted Accounting Principles ('GAAP'), [Earth Waste] was in compliance with the Ratio covenant." (Id.) Defendants requested that BOA complete its financing obligations under the LOC. (Id.) At the meeting, a BOA representative stated that BOA "wanted out of the commodities-financing business, and did not agree to provide the financing needed to complete the shredder project." (Id. ¶ 48.) According to Defendants, BOA's desire to exit the commodities-financing business was its real, "ulterior" motive for declaring defaults and cutting off funding. (See Id. ¶ 39.)

         On September 28, 2015, Defendants stated as follows in a letter to BOA:

As you know, NEQS's accountant has determined, pursuant to GAAP, that the covenant has not been violated. I repeat NEQS's prior request that BOA immediately provide the underlying data and calculations it utilized to conclude that the Basic Fixed Charge Coverage ratio has been violated. As to the Business Review you requested, please understand that we are willing to comply with the loan documents in that regard, as we have in all others. However, my staff and I also have a business to run. The Review must be reasonable, both in scope and timing .... Given NEQS's compliance with the covenant, it is not in default. Rather, BOA has breached the loan documents at least by refusing to disburse loan proceeds as promised. As you know, the shredder project is already well under way, with NEQS having incurred substantial liability for previous loan disbursements, and having invested substantial amounts of its own resources. For BOA to cut off promised funding mid-stream is highly damaging, and deprives us of the income stream and other benefits we would realize with completion of the project. I understand that BOA wishes to terminate its lending activities in the commodities recycling industry, as you indicated at our recent meeting. Nonetheless, it must comply with commitments already made to us. I look forward to receiving the requested documentation, and respectfully demand that BOA immediately restore funding as promised so we cart complete the shredder project forthwith.

(Id. ¶ 49.)

         By letter dated December 16, 2015, BOA asserted that Defendants were in default for multiple reasons. (See Doc. 1-30 at 2-3.) The letter noted that Earth Waste's $500, 000 LOC and NEQS's $650, 000 LOC both matured on August 24, 2015, but had not been paid in full. (Id. at 2.) The letter also asserted that Earth Waste's Basic Fixed Charge Coverage Ratio for the fiscal quarter ending June 30, 2015 was 1.015 to 1.0. (Id.)[9] Finally, the letter asserted that Earth Waste had failed to furnish its 2014 final financial statements signed by a certified public accountant; and that Defendants had failed to provide financial information, documentation, and access for inspection as required by various loan documents. (Id. at 2-3.) The December 16, 2015 letter stated that BOA "has chosen not to exercise any of its rights and remedies under the Loan Documents at this time . . ., but may choose to do so at any time in the future without any further written notice .. . ." (Id. at 3.)

         It appears that the parties continued their discussions. According to Defendants, they provided "some but not all of the information requested by BOA" because they were concerned about "the burdensomeness of the requests" and also because they were "gradually becoming suspicious of BOA's bona fides." (Doc. 48 ¶ 54.) Defendants allege that they made a "good-faith" effort to comply with their obligations, and provided BOA with information that was "sufficient for BOA to substantially complete a 'due diligence' review of the lending relationship for purposes of assessing its options." (Id., ¶ 55.) But Defendants became concerned that "BOA was improperly disclosing certain of NEQS's confidential financial information to third parties, " and requested that BOA enter into a confidentiality agreement. (Id. ¶¶ 56-67.) BOA refused, characterizing the request as "inappropriate." (Id. ¶ 58.) Defendants refused to provide further information to BOA without a written confidentiality agreement. (Id. ¶ 59.)

         Finally, in a letter dated March 10, 2016, BOA asserted numerous events of default, and informed Defendants that it demanded payment in full of Earth Waste's $500, 000 LOC and NEQS's $650, 000 LOC; and that all of the other loans were accelerated and declared due. (See Doc. 48 ¶ 60; see also Doc. 1-32 (copy of March 10, 2016 letter).) BOA demanded payment by March 17, 2016. (Doc. 1-32 at 6.) None of the Defendants made payment to BOA as demanded. (See Doc. 1 ¶ 116; Doc. 24 ¶ 116.) For its part, to date, BOA has not restored funding for the shredder loan. (Doc. 48 ¶ 50.) According to Defendants, this has rendered them "unable to fulfill certain . . . obligations to third parties, " subjected them to claims by others, and prevented them from "realizing the business benefits [they] otherwise would have from completion of the shredder project, including reduced costs and increased profits." (Id. ¶ 41.) BOA filed this lawsuit on April 1, 2016. (Doc. 1.)


         I. Rule 12(b)(6) Standard

         To survive a Rule 12(b)(6) motion, a pleading "must contain sufficient factual matter, accepted as true, to 'state a claim to relief that is plausible on its face.'" Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)); see also Fed. R. Civ. P. 8(a)(2). The court must also draw all reasonable inferences in the non-moving party's favor. Lanier v. Bats Exch., Inc., 838 F.3d 139, 150 (2d Cir. 2016). Dismissal is appropriate when "it is clear from the face of the complaint, and matters of which the court may take judicial notice, that the plaintiffs claims are barred as a matter of law." Conopco, Inc. v. Roll Int'l, 231 F.3d 82, 86 (2d Cir. 2000).

         II. Applicable Law for Deciding BOA's ...

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