Matrixx Initiatives, Inc. et al v. Siracusano, et al, 09-1156

SUPREME COURT UNANIMOUSLY REJECTS NARROW INTERPRETATION OF §10B(5)

On March 22, 2011 the United States Supreme Court decided Matrixx Initiatives, Inc. et al v. Siracusano, et al, 09-1156, which reaffirmed its holding in Basic Inc. v. Levinson, 485 U.S. 224 (1988).

In Basic the defendant made misleading statements denying that it was engaged in merger negotiations when, in fact, it was conducting preliminary negotiations. Basic urged a bright-line rule that preliminary negotiations are material only when the parties to merger negotiations reach an agreement in principal. The Supreme Court in Basic rejected that bright-line rule. Accordingly, a claim was stated under Section 10b(5).

The Plaintiffs alleged in Matrixx that Matrixx and three executives failed to disclose a possible link between its leading product, Zicam, a cold medicine, and the loss of smell. Matrixx became aware of several complaints by users of Zicam but contended that the complaints were not statistically significant and accordingly that disclosure was not necessary. Matrixx also sought to defend its turf in other ways. It learned that a research doctor was going to deliver a lecture in which he would reference the fact that various complaints were made by other users of Zicam. Matrixx learned of the proposed presentation and informed the doctor that it did not have permission to use its name. The doctor proceeded with the presentation without mentioning Matrixx.

Plaintiffs complained that Matrixx violated Section 10b(5) by making untrue statements of fact and failing to disclose material facts necessary to make the statements not misleading in an effort to maintain artificially high prices for its leading product Zicam. The Supreme Court rejected that narrow approach and held that other facts could be considered, including other studies providing a link between Zicam and loss of smell.

The unanimous Supreme Court opinion written by Justice Sotomayor represents an affirmation and expansion of Basic. A very important case.

Edward X. Clinton, Sr.

Read More

Contract Law - Repudiation

ARLINGTON LF LLC v. ARLINGTON HOSPITALITY INC., Court of Appeals, 7th Circuit 2011 - Google Scholar

This case holds that a finance company breached an agreement with a bankruptcy debtor when it refused to lend further funds to the debtor. The Seventh Circuit held that because the finance company repudiated the contract, it could not obtain any further relief under that contract.

Arlington Hospitality was the manager of the Ameriquest hotel chain. The Finance company agreed to lend Hospitality the sum of $11 million under a revolving line of credit.

The Bankruptcy court approved the term sheet and Hospitality drew 3.53 million on the credit line.

After the loan was made the finance company decided to terminate its relationship with Hospitality. It notified Hospitality that it would no longer advance any more funds to Hospitality. Slip Opinion at 7.

Several months later Hospitality repaid the $3.5 million loan, but did not pay the fees associated with the loan. The finance company sought an award of those fees from the Bankruptcy Court.

The Seventh Circuit held that when the finance company stated that it would not advance further funds under the "DIP loan" (debtor in possession loan) it "committed an anticipatory breach of the parties' lending agreement.

Under Illinois law, "when one party has committed a repudiation, the other party can treat the contract as ended." Slip Opinion at 15 (citing Timmerman v. Grain Exch. LLc, 915 N.E.2d 113, 124 (Ill. App. 2009); Truman L. Flatt & Sons, Co., Inc., v. Schumpf, 649 N.E.2d 990, 994 (Ill. App. 1995).

A party commits an anticipatory repudiation when it manifests a clear, unequivocal intent not to perform under the contract when performance is due. Id. citing In re Marriage of Olsen, 428 N.E.2d 684, 686 (Ill. 1988); Draper v. Frontier Ins., Co., 638 N.E.2d 1176, 1181 (Ill. App. 1994).

There was no retraction of the repudiation.

Thus, when it repudiated the contract, the Finance Company lost the right to any future performance by Hospitality.

Comment: this case is an excellent summary of the law of contract and repudiation.

Read More

Contract Law - Seventh Circuit Upholds Verdict Based On Oral Contract

MMG FINANCIAL CORPORATION v. MIDWEST AMUSEMENTS PARK, LLC, Court of Appeals, 7th Circuit 2011 - Google Scholar

This case was decided by the Seventh Circuit on January 5, 2011.

The Plaintiff, MMG Financial, brought suit against Midwest Amusements Park, LLC on the ground that Midwest has failed to pay for 24 go-karts that Midwest financed. The go-karts were originally sold by another company, Team Hurricane, but they were financed by MMG Financial. Thus, this is a routine equipment financing transaction. What makes the case unusual is that the parties drafted, but did not sign, a comprehensive written agreement which laid out the terms of the deal.

The sales agreement identified Midwest as the purchaser of the go-karts; MMG Financial as the finance company and Team Hurricane as the dealer. The price was to be $89,502.12 and the balance was to be paid over 24 months at an interest rate of 24%.

Midwest (which did business under the name Gronvall) did not sign the agreement, but it took delivery of the go-karts.

Midwest never made any payments for the go-karts.

MMG filed suit and Midwest filed a counterclaim alleging that MMG had never paid the original vendor of the go-karts.

At trial Midwest disputed that there was a contract. It also argued that MMG breached the contract by failing to pay for the go-karts. The evidence of the breach was an email from a CRG (the manufacturer of the go karts) that MMG had failed to pay for the go-karts. The district court excluded the email on the ground that it was hearsay.

The district court granted summary judgment to MMG on Midwest's counterclaim because Midwest was unable to point to any admissible evidence that MMG had breached the financing agreement. As the Seventh Circuit noted, "the evidence Midwest offered to establish that MMG had failed to pay Cameron Motorsports for the go-karts is classic hearsay...the testimony of its own employees repeating what Cameron Motorsports had told them." The statements were offered "to prove the truth fo the matter asserted, namely that MMG had not paid Cameron Motorsports for the go-karts shipped to Midwest." Slip Opinion at 8. Thus, Midwest was unable to point to any evidence showing that MMG breached the contract.

Comment: the plaintiff was able to prove to the jury that the parties accepted the draft sales agreement, even though it was never signed. This demonstrates that, in a rare case, the failure to obtain the signature on an agreement can be overcome with testimony and proof.

Edward X. Clinton, Jr.

Read More

First Bank v. UNIQUE MARBLE AND GRANITE CORPORATION, Ill: Appellate Court, 2nd Dist. 2010 - Google Scholar

First Bank v. UNIQUE MARBLE AND GRANITE CORPORATION, Ill: Appellate Court, 2nd Dist. 2010 - Google Scholar

This case is significant because it holds that an assignee for the benefit of creditors can recover fees even where another creditor has a valid security interest in all of the assets.

Unique Marble was a fabricator of marble and granite countertops. It fell upon hard times and, on November 18, 2008, it entered into an assignment for the benefit of creditors. James Gallo was the assignee and he took title to all of the assets of Unique Marble.

Three days later Gallo personally delivered a copy of the assignment to First Bank.

On December 23, 2008, First Bank obtained a judgment against Unique Marble in the amount of $451,568.08.

First Bank then brought collection proceedings against Unique Marble and its corporate officer.

On May 22, 2009, Gallo petitioned to intervene in the First Bank v. Unique Marble lawsuit. He sought $35,000 in fees and expenses.

First Bank argued that Gallo could not collect fees and expenses because of its prior security interest (which it had perfected on October 22, 2004).

The trial court granted First Bank summary judgment against Gallo. Gallo appealed and the Illinois Appellate Court for the Second District reversed.

The court reasoned that an assignment for the benefit of creditors is a "unique trust arrangement in which the assignee (or trustee) holds hte property for the benefit of a special group of beneficiaries, the creditors." Illinois Bell Telephone Co. v. Wolf Furniture House, Inc. 157 Ill. App. 3d 190, 194-95 (1987). The assignee owes a fiduciary duty to the creditors. Some debtors prefer to use an assignment for benefit of creditors (as opposed to bankruptcy) because the assignment process is much cheaper.

First Bank argued that it had priority over Gallo because First Bank had perfected its security interest before Gallo perfected his security interest.

The Court held that Gallo had a common law right to fees and expenses. As the Court noted "if assignees were required to forgo payment in favor of perfected security interests, no assignee would take on the risk of liquidating assets, and assignments for the benefit of creditors would cease to be available as an efficient method of maximizing the liquidation value of troubled companies."

Finally, the court held that Gallo could be compensated on the basis of quantum meruit principles. In so holding the Court ruled that Gallo had conferred a benefit on the Bank as well as all creditors.

Read More

Delaware Court Approves a Poison Pill

Read More

Two Important Securities Cases Accepted by Supreme Court

The U.S. Supreme Court has agreed to hear two significant cases. The first, Matrix Initiatives Siracusano, No. 09-1158 presents a question regarding materiality. The complaint alleges that Matrixx made false statements about its product Zicam, a nasal spray. Product liability suits had been filed against the company.

Matrixx denied press reports discussing complaints about a loss of smell. A report of an FDA investigation was followed by a drop in the share price despite statements by the company that it was not aware of any such inquiry.

A shareholder complaint suit was filed alleging securities fraud based on claims that the denials of the company were false and misleading. The district court dismissed the complaint and held that adverse product reports regarding a loss of smell did not have to be disclosed because they were not material. The court based its decision on In re Carter-Wallace, Inc., 220 F.3d 36 (2nd Cir. 2000). That rule has also been adopted by the First and Third Circuits.
The Ninth Circuit reversed. Siracusano v. Matrixx Initiatives, Inc., 585 F/3d 1167 (9th Cir. 2009) Citing Basic v. Levinson, 485 U.S. 224 (1988) the Court rejected the statistically significant test used by the district court. Materiality, the court stated, is a question generally reserved for the fact finder. The question is whether the allegations are properly pleaded under the Private Securities Litigation Reform Act (“PSLRA”) and state a cause of action under Bell Atlantic Corp. v. Twombly, 550 U.S. 5543 (2007). The question before the Supreme Court is the test for materiality.

The second securities case focuses on the question of primary liability. Janus Capital Group v. First Derivative Traders, No. 09-525. Defendant Janus Capital Group, Inc. (“JCG”) is a publicly traded asset management firm. It sponsors the Janus Funds. Janus Capital Management LLC (“JCM”) is a wholly owned subsidiary of Janus Capital.

Plaintiffs claim that JCG and JCM violated Section 10(b) of the Securities Exchange Act on the ground that the prospectuses for the funds created the misleading impression that steps would be taken to curb market timing. In fact, the complaint claims there were secret agreements which permitted market timing. As a result, plaintiffs claim they purchased their shares at an inflated price. Following the revelation of the truth, the share price dropped.

The district court dismissed the complaint on the ground that the complaint did not contain any allegations that JCG actually made or prepared the prospectuses or that any of the statements were attributable to it. As to JCM, the court held that the investment adviser did not owe any duty to the shareholders of its parent company when they have not purchased shares of the mutual fund.

The 4th Circuit reversed. In re Mutual Funds Investment Litig., 556 F.3d 111 (4th Cir. 2009). The Court held that the defendants adequately alleged that defendants “made” the misleading statements and that they were properly attributed to JCM the court held.

The allegations as to JCG, however, are insufficient to state a claim for primary liability the court concluded. Its limited role here was not sufficient to cause interested investors to believe that JCG had prepared or approved the Janus fund prospectuses. The court did find that plaintiffs had adequately pleaded a claim for control person liability.

The question of primary liability in Janus traces back to the Supreme Court’s decision in Central Bank Of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164 (1994). There, the Court held that there is no liability for aiding and abetting under Section 10(b) Since that time the courts have struggled with the question of what constitutes primary liability. Congress restored aiding and abetting for the SEC in the Private Securities Litigation Reform Act but not for private actions. A decision in both cases will come by the end of June 2011.

Read More

Contract Law - Cryptic Promissory Note Is A Written Contract

The case was captioned Kranzler v. Saltzman, 07 L 6809.

Kranzler loaned Saltman $100,000 on March 10, 1997. Saltzman signed a written "memo" that stated, "Loaned, to Lewis Saltzman $100,000 to be paid back with interest." Saltzman made partial payments, but did not pay the entire balance of the loan. Saltzman's last payment was dated July 5, 2005.

In November 2007, Kranzler sued Saltzman for breach of contract. The trial court found in favor of Kranzler and entered a judgment in his favor in the amount of $81,344.12.

Saltzman appealed on several grounds. Saltzman argued that the lawsuit was governed by the five year statute that applies to unwritten contracts (735 ILCS 5/13-205). Kranzler argued that the applicable statute of limitation was the ten year statute which applies to written contracts (735 ILCS 5/13-206).

The Court concluded that the promissory note was a written contract. Under Illinois law, "where the writings attached to the complaint do not contain the essential terms of the contract, even if the essential terms may be easily ascertained elsewhere, the contract is not written but oral." Clark v. Western Union Telegraph Co., 141 Ill. App. 3d 174, 176 (1986). A writing is considered "complete" "when the language of the instrument may fairly be construed to contain a promise to pay money or contains facts from which the law implies a promise to pay, so long as parol evidence is not necessary to establish any essential elements." Toth v. Mansell, 207 Ill. App. 3d 665, 670 (1990).

The required elements to prove a promise to pay are "(1) the parties to the agreement, (2) the nature of the transaction, (3) the amount in question, and (4) at least a reasonable implication of an intention to repay the debt." In re Estate of Garrett, 24 Ill. App. 895 (1975).

The Court found the instrument contained all of the required elements to establish a promise to pay under Illinois law.

The Court also held that the statute of limitations began to run on the date of the last payment made on the debt. The statute began to run when a payment is due but remains unpaid. Thus, the lawsuit was timely.

Comment: the defendant's position was unsympathetic. The defendant wanted to be excused from the obligation based on the statute of limitations. Furthermore, the case shows that even crude and simple documentation can be sufficient to provide a creditor with legally enforceable rights. Plaintiff would have been better to hire a lawyer, but his own simple note was enforceable.

Edward X. Clinton, Jr.

Read More