Bezanson v. Fleet Bank, NH CV-90-118-B 08/27/93

UNITED STATES DISTRICT COURT FOR THE

DISTRICT OF NEW HAMPSHIRE

Dennis Bezanson

v. Civil No. 90-118-B

Fleet Bank, NH

O R D E R

Plaintiff, Dennis Bezanson, Trustee in Bankruptcy for

Unitex, Inc. ("Unitex"), obtained a jury verdict of $379,779.21

against Fleet Bank, N.H. ("Fleet") as a result of Fleet's alleged

failure to dispose of security it seized from Unitex in a

commercially reasonable manner. Fleet challenges the verdict in

a motion for judgment as a matter of law and a new trial arguing

that its actions were commercially reasonable, that plaintiff

failed to prove damages, and that the jury was given erroneous

instructions concerning Fleet's duty to dispose of the security

in a commercially reasonable manner. As I explain in greater

detail below, I grant Fleet's motion for judgment as a matter of

law because no reasonable finder of fact could conclude that

plaintiff proved his damages with reasonable certainty. I. FACTS

Unitex manufactured and sold graphics equipment to newspaper

and magazine publishers. By the time it began to experience

financial difficulties in early 1985, Unitex owed approximately

$3 million to Fleet's predecessor, Indian Head National Bank (the

"Bank") .1 In March 1985, Unitex reached an agreement with the

Bank to surrender its accounts receivable, inventory, and other

assets (collectively "Unitex Assets") that were subject to the

Bank's security interest. Four months later, Unitex filed for

bankruptcy protection and listed debts of approximately $3.7

million to other unsecured creditors. Bezanson was appointed

trustee of the Bankruptcy estate and is representing the

interests of Unitex's unsecured creditors in this action.

After taking possession of the Unitex Assets, the Bank

determined that the assets would command a substantially higher

price if Unitex was sold as an ongoing business. Accordingly,

the Bank hired consultants to run Unitex until a buyer could be

found for the business. The Bank also worked closely with a

group of Unitex's customers ("Users Group") whose support was

1 Between the time it took possession of the Unitex Assets and the time it agreed to sell the assets, the Bank collected certain accounts receivable and incurred certain expenses that resulted in a net figure of $3,020,220.29, which was owed to the Bank as of June 20, 1985.

2 crucial to the viability of the business. The Users Group

informed the Bank that it would have to find a new owner for

Unitex before the Annual Newspaper Products Convention ("ANPA

Convention") in early June in order to keep members of the group

from finding new suppliers at the Convention. In an effort to

sell the business prior to the ANPA Convention, the Bank held

discussions with more than 20 potential buyers. However, it met

with little success prior to late May when Graphics Technology,

International, Inc. ("GTI") emerged as a potential purchaser.

A. GTI's Offer

GTI was a shell corporation formed by Robert Dambach, James

McCauley, and John Vergoz for the purpose of purchasing Unitex.

All three men had worked in the graphics technology field and

were generally familiar with Unitex. Their proposal reguired GTI

to identify private lenders who would loan GTI the money to

purchase Unitex and fund operating expenses until the business

could be reestablished. GTI characterized its proposal as a

leveraged buyout in which the Unitex Assets would serve as the

sole security for GTI's loan. To assist in identifying potential

lenders, GTI retained a financial advisor, A R Technology, Inc.

("A R Technology"), and a small investment banking firm, Parker

Benjamin, Inc. ("Parker Benjamin").

3 On May 22, 1985, GTI made its initial offer to purchase

Unitex for $3.25 million. In its letter transmitting the offer,

GTI stated that it intended to use investment banking to finance

the purchase and added that the offer was "subject to [its]

receipt of a complete list of International Distributors and

users from the Indian Head National Bank." In the days that

followed. Bank officials attempted to evaluate GTI's offer by (i)

holding discussions with the principals in GTI and their

financial advisor and investment banker, and (ii) checking into

the credit history of Dambach, McCauley, and Vergoz, as well as a

business with which they were affiliated. In this regard, a Bank

official spoke with Dr. Mierza of A R Technologies, who reported

that GTI had selected an investment bank, and it was enthusiastic

that financing for the transaction could be obtained.2 Another

Bank official spoke with Mr. D'Avanzo of Parker Benjamin, who

told the official that Parker Benjamin had a "high level of

confidence [the] deal can be done and rather guickly."

2 At trial, a bank official testified about a conversation that occurred one week later in which Dr. Mierza acknowledged, in the words of the official, that "the likelihood of GTI raising the type of dollars that we were talking about to complete this transaction was speculative at best." Trial Transcript ("Tr.") at 2 0 0.

4 The principals in GTI met with Bank officials to discuss the

GTI offer on May 2 9 , 1985. Two significant points of

disagreement were discussed at this meeting. First, GTI objected

to the Bank's demand that GTI post a $200,000 non-refundable

deposit. Second, the parties disagreed concerning the management

of Unitex during the interim period between acceptance of the

offer and closing. GTI suggested in its initial proposal that it

would run the business, that funds generated by the business

would be paid into an escrow fund to be managed by Parker

Benjamin, and that business expenses would be paid from the

escrow fund. The Bank, however, objected because it was

concerned that the value of Unitex might decline before the sale

could be completed if GTI were allowed to use the proceeds of the

escrow account to pay operating expenses.

On June 1, 1985, GTI revised its offer and increased the

purchase price to $3.4 million. GTI made no mention of the

Bank's earlier demand for a $200,000 non-refundable deposit in

its revised offer. However, GTI did propose that two escrow

accounts be opened and managed by the Bank and that all monies

received by Unitex during the transition be paid into these two

accounts. One account would contain "monies received for the

shipment of everything going out of the factory at Inventory

5 Value." Monies placed in this account would be deducted from the

purchase price. The other escrow account would contain "deposits

reflecting an increase in any value over and above the current

value . . . ." Proceeds from the second account would be used to

fund business operations during the transition. GTI also

proposed that it would form a separate entity to manage Unitex

until the sale could be completed.

The parties met again on June 4, 1985. At the meeting, GTI

refused the Bank's demand for the $200,000 non-refundable

deposit, claiming it had not been provided information on Unitex

that GTI needed to complete its due diligence review. During

discussions concerning the upcoming ANPA Convention, GTI also

reguested an advance of $120,000 from the Bank to fund the cost

of representing Unitex at the ANPA Convention. These differences

were not resolved and the meeting adjourned. Two days later, GTI

was informed that the Bank had elected to sell Unitex to another

party.

A Bank official testified that the Bank rejected GTI's offer

because it had significant concerns as to whether GTI would be

able to obtain the financing needed to complete the transaction.3

3 The Bank official also testified that he was concerned with the GTI offer in part because another company with which two of GTI's principals were involved had a loan with the Bank which

6 Further, given the Bank's perceived need to find a buyer prior to

the ANPA Convention and GTI's inability to complete the purchase

prior to the convention, the official testified that the Bank

decided to accept an alternative proposal made by another entity

in whom Bank officers had more confidence. Notwithstanding these

concerns, the official testified that the Bank would probably

have accepted GTI's offer if it had produced the non-refundable

deposit.

B. Chorus' Offer

On June 3, 1985, while negotiations between the Bank and GTI

were ongoing. Chorus Data Systems, Inc. ("Chorus") submitted a

proposal to form a joint venture with the Bank to purchase

Unitex. Pursuant to this proposal. Chorus and the Bank would

form a new corporation to acguire the Unitex Assets, and the Bank

would receive 49% of the stock in the new corporation in exchange

for the assets. Chorus would receive warrants on the Bank's

stock exercisable for $3 million plus compounded interest of 2.5%

per month. However, if the new corporation was later sold or

was in a non-accrual status. Moreover, Bank records were produced at trial in which Bank officials expressed uncertainty concerning GTI's ability to obtain financing. However, one of the principals in GTI testified that the Bank had never expressed any concern during the negotiations that GTI might not be able to obtain financing.

7 merged with another corporation, the proposed agreement specified

that the Bank would reap a substantial additional profit -- the

size of which would depend on the value of the business when it

was sold or merged. Anticipating the possibility that other

creditors of Unitex might object to the transaction, the proposal

also stated that "[i]f, under an extremely conservative reading

of the Bank's duty, the transaction is not sufficiently 'arms

length,' warrants on a tiny fraction of the JV's [joint venture]

shares can be issued to a junior creditors' trust after

negotiation with creditors."

Bank officials met with representatives of Chorus on June 5,

1985 and informed Chorus that it was not interested in a joint

venture because of unspecified regulatory problems. The parties

then discussed an alternative proposal under which Chorus would

form a new entity that would give the Bank a $3 million note in

exchange for the Unitex Assets. The note would be converted to

convertible preferred stock in the new entity after a specified

period. According to Bank records and the testimony of a Bank

official, the Bank and Chorus reached an agreement in principle

along these lines either at the June 5, 1985 meeting or the next

day. As a result. Chorus went to the ANPA Convention to assure

members of the Users Group that Unitex would soon be operating under new ownership.

The agreement between Chorus and the Bank was reduced to

writing and signed after the ANPA Convention on June 20, 1985.

The agreement provided that a new entity, Cuniform Systems, Inc.

("Cuniform"), would purchase the Unitex Assets for $3 million.

The purchase price would be funded with a note that would be

exchanged by the Bank within 120 days for convertible preferred

stock in Cuniform. If Cuniform was liguidated or dissolved, the

agreement specified that the Bank's stock would be valued at $3

million plus compounded interest of 1.5% per month. If the stock

was redeemed at Cuniform's option, the Bank would be paid $3

million plus compounded interest of 2.5% per month. Finally, if,

as the parties anticipated, Cuniform went public, was sold, or

was merged with another entity, Cuniform's conversion rights

would terminate, and the Bank's stock would be converted to

common stock at an agreed-upon ratio. Thus, if Cuniform proved

to be successful, the Bank would recover the approximately $3

million it loaned to Unitex plus an additional amount that would

depend upon the value of Cuniform. Chorus was not reguired to

put down a deposit under the agreement. Nor was it reguired to

guarantee the $3 million loan. Although the Bank never recovered anything under its

agreement with Cuniform, Unitex's debt to the Bank was reduced by

the $3 million purchase price Cuniform agreed to pay for the

Unitex Assets.

II. DISCUSSION

Fleet challenges the jury's verdict by arguing that

plaintiff failed to produce sufficient evidence to sustain the

jury's finding that the Bank disposed of the Unitex Assets in a

commercially unreasonable manner. Fleet also argues that

plaintiff failed to prove his damages even if the Bank

unreasonably disposed of the assets. In reviewing these

arguments, I first consider the standards of review against which

I consider Fleet's motion for judgment as a matter of law and a

new trial. I then address the merits of Fleet's arguments.

A. Standards of Review

In considering Fleet's motion for judgment as a matter of

law, I will apply the same standard of review that formerly

governed a motion for judgment notwithstanding the verdict.

Putnam Resources v. Bateman,

, 459 n.7 (1st Cir.

1992). Accordingly, in ruling on the motion, I will not

consider the credibility of witnesses, resolve conflicts in the testimony, or

10 evaluate the weight of the evidence. Rather, [I] must examine the evidence and the inferences reasonably to be drawn therefrom in the light most favorable to the nonmovant . . . . A judgment notwithstanding the verdict should be granted only when the evidence, viewed from this perspective, is such that reasonable persons could reach but one conclusion.

I d . at 459 (guoting Wagenmann v. Adams,

(1st

Cir. 1987) (citations omitted)).

The standard I will apply in considering Fleet's motion for

a new trial is somewhat different:

A trial judge may not grant a motion for a new trial merely because he or she might have reached a conclusion contrary to that of the jurors, rather the trial judge may set aside a jury's verdict only if he or she believes that the outcome is against the clear weight of the evidence such that upholding the verdict will result in a miscarriage of justice.

I d . (guoting Conway v. Electro Switch Corp.,

(1st Cir. 1987) (citations omitted)).

With these standards in mind, I turn to the specific

arguments Fleet makes in support of its motion.

B. Commercial Reasonableness

1. A Definition

N.H. Rev. Stat. Ann. ("RSA") § 382-A:9-504(3) provides in

pertinent part that the "[s]ale or other disposition [of

11 collateral] may be as a unit or in parcels and at any time and

place and on any terms but every aspect of the disposition

including the method, manner, time, place and terms must be

commercially reasonable." (emphasis added).

Although the Uniform Commercial Code does not define the

term "commercially reasonable," it is apparent from the context

in which it is used that commercial reasonableness encompasses

the totality of circumstances surrounding the disposition of

collateral. Moreover, except for certain specified exceptions

not applicable here, no single factor, even price, will

conclusively determine the commercial reasonableness of a secured

party's actions. See RSA 382-A:9-507(2) ("[t]he fact that a

better price could have been obtained by a sale at a different

time or in a different method from that selected by the secured

party is not of itself sufficient . . . ."). Although the New

Hampshire Supreme Court has not addressed this issue, the view

that commercial reasonableness can only be determined upon a

consideration of all of the surrounding circumstances is

consistent with the meaning that other jurisdictions have given

the term. In re Zsa Zsa Ltd.,

(S.D.N.Y.

1972), a f f 'd mem.,

(2d Cir. 1973). See generally

Richard C. Tinney, What is "Commercially Reasonable" Disposition

12 of Collateral Required by UCC § 9-504(3),

, 316

(1981) :

Generally, the courts which have considered the question have held, either expressly or by necessary implication that the determination of whether a secured party has disposed of repossessed collateral in a commercially reasonable manner . . . should be based on a consideration of all relevant factors in each individual case, with emphasis being given to the aggregate of circumstances rather than to specific details taken in isolation . . . .

This understanding is also consistent with the standard the New

Hampshire Supreme Court used in describing a mortgagee's duty to

obtain a fair price at a foreclosure sale. Murphy v. Financial

D e v . Corp.,

(1985) ("[w]hat constitutes a fair

price . . . depends on the circumstances of each case.

Inadequacy of price alone is not sufficient to demonstrate bad

faith unless the price is so low as to shock the judicial

conscience"). Accordingly, in ruling on Fleet's post-trial

motions, I will use a definition of commercial reasonableness

that does not assign dispositive significance to any single

factor, but instead considers all relevant circumstances,

including matters such as price, contingencies, time of

performance, and the Bank's good faith. The commercial

reasonableness of the Bank's actions thus will depend upon

13 whether, under the totality of circumstances, a secured party

that is mindful of its duty to exercise reasonable efforts to

obtain the highest price for the seized collateral could have

accepted Chorus' offer in light of GTI's higher but contingent

offer.4

2. Application

In its post-trial motion. Fleet argues for the first time

that its commercial reasonableness must be evaluated from

Unitex's perspective. What I understand Fleet to mean by this is

that it was irrelevant from Unitex's perspective that the Bank

financed Cuniform's purchase of the Unitex Assets since its sale

of the assets reduced Unitex's debt by $3 million, even though

the Bank failed to recover on the loan to Cuniform. According to

Fleet, the jury should have viewed Chorus' offer as a firm offer

without contingencies because the Bank had made a commitment to

finance the sale when it accepted Chorus' offer. Thus, Fleet

argues that no reasonable jury could find for plaintiff since the

4 Fleet argues that it is entitled to judgment as a matter of law because a secured party can never act in a commercially unreasonable manner by rejecting an offer that is contingent on some future event or which involves delays or deferred payment. I reject this argument because I believe that it is inconsistent with the correct definition of commercial reasonableness. Accordingly, I also reject Fleet's argument that a new trial is reguired because I failed to properly instruct the jury on Fleet's theory of commercial reasonableness.

14 Bank's rejection of GTI's contingent offer in favor of Chorus'

lower but non-contingent offer could not as a matter of law have

been commercially unreasonable.

While I generally agree that the reasonableness of a secured

party's disposition of collateral ordinarily will be determined

by looking to the effect of the disposition on the debtor, I am

not persuaded that this new argument warrants either the entry of

judgment as a matter of law or a new trial. One aspect of

commercial reasonableness not addressed by Fleet's theory of the

case is its good faith. See, e.g.. In re Excello Press, Inc.,

(7th Cir. 1989); Swanson v. M a y ,

(Wash. A p p . 1985)(and cases cited therein); Peoples

Acceptance Corp. v. Van Epps,

,

(1978) . Because good faith may be considered

in assessing a secured party's commercial reasonableness, a juror

might reject the secured party's claimed reasons for turning down

a larger offer and instead find that the secured party's actions

were prompted by a bad faith desire to recover more than the

party was entitled to recover from the disposition of the

collateral. Thus, so long as sufficient evidence was produced at

trial to justify a juror's conclusion that the secured party

rejected the higher offer in bad faith, a verdict finding that

15 the secured party disposed of security in a commercially

unreasonable manner should not be overturned.

In the present case, plaintiff produced ample evidence of

the Bank's bad faith to sustain the jury's decision that the Bank

acted unreasonably. First, viewing the evidence in the light

most favorable to plaintiff, the jury was presented with evidence

that the Bank had rejected a $3.4 million offer in favor of a

substantially lower offer. While it is true that the GTI offer

contained contingencies that could not be resolved until after

the ANPA Convention, the jury was also presented with evidence

from which it could reasonably conclude that the offer the Bank

accepted remained only an oral agreement in principle which was

not reduced to writing and signed until well after the ANPA

Convention. Thus, the jury might well have attached little

importance to the Bank's claim that it had to have a new owner

for Unitex in place prior to the Convention.

Second, while the Bank claimed to have serious concerns

about GTI's ability to finance its offer, the jury may well have

viewed this assertion with skepticism since the Bank did little

to investigate this issue beyond placing calls to GTI's

investment advisors and eliciting statements indicating that the

advisers were optimistic that financing could be found.

16 Moreover, the jury might well have questioned the sincerity of

the Bank's concern about GTI's ability to obtain financing if it

accepted the testimony of one of plaintiff's witnesses that the

Bank never expressed any such concern during its negotiations

with GTI. Similarly, the Bank's demand for a non-refundable

deposit might well have been viewed by the jury as a pretext for

refusing GTI's offer since the Bank agreed to provide 100%

financing to Cuniform even though (i) Cuniform too was a shell

corporation, and (ii) Chorus refused to guaranty Cuniform's debt.

Finally, and most importantly, the jury might reasonably

have concluded that the Bank's rejection of GTI's offer was

prompted by a bad faith effort to reap a benefit from the

transaction which it would not have to share with Unitex's

creditors. There is no dispute that the proposal the Bank

accepted would have allowed the Bank to recover substantially

more than it was owed if Cuniform was successful. Moreover,

evidence was produced at trial that the Bank was aware that other

creditors of Unitex might make a claim to any excess money the

Bank recovered from the disposition of the Unitex Assets unless

provisions were made to shield such money from the creditors'

claims. Accordingly, there was substantial evidence to support a

finding that the Bank's actions were driven by a bad faith desire

17 to reap an unjustified profit from the disposition of the assets.

This evidence, when considered with the evidence of the higher

price of the GTI offer, was sufficient to permit a reasonable

juror to find for plaintiff on this issue. For the same reason,

the jury's decision is not against the clear weight of the

evidence. Therefore, neither judgment as a matter of law nor a

new trial is warranted on this issue.

C. Damages

If a secured party unreasonably disposes of a debtor's

assets, the debtor may recover as damages "any loss caused by"

the secured party's unreasonable conduct. RSA 382-A:9-507.

Although the New Hampshire Supreme Court has not established a

standard against which to test the sufficiency of the evidence

needed to support a damage award for the commercially

unreasonable disposition of collateral, it has many times

considered the sufficiency of a claim for damages in other

commercial contexts. For example, in Grant v. Town of Newton,

(1977), the Court stated that "[i]t is general

law that one who claims damages has the burden of proof. He must

by a preponderance of the evidence show that the damages which he

seeks were caused by the alleged wrongful act and he must show

the extent and amount of such damages." In other decisions, the

18 Court has consistently admonished the trial courts that a damage

award for lost profits in a breach of contract case will not be

allowed unless it was reasonably certain that profits would have

been earned in the absence of the breach. Great Lakes Aircraft

Co. v. City of Claremont,

(1992) (setting

aside jury award for lost profits where such profits were

dependent in part upon a financing scheme that "was still in

flux"); Hydraform Prods. Corp. v. American Steel & Alum Corp.,

(1985).

In the present case, plaintiff's sole argument on damages is

that GTI's $3.4 million offer would have generated approximately

$400,000 for Unitex's creditors that they did not receive because

the Bank wrongly accepted Chorus' $3 million proposal. To

sustain the verdict against Fleet's argument that plaintiff

failed to prove damages, plaintiff must establish that it

produced sufficient evidence to permit a reasonable juror to

conclude by a preponderance of evidence that GTI would have been

able to perform under the contract if the Bank had given GTI the

opportunity. Without such evidence, plaintiff's reguest for

damages is nothing more than an invitation to speculate about the

harmful conseguences of the Bank's wrongful conduct.

19 The principal obstacle plaintiff faces in his effort to

sustain the jury's verdict is that GTI's offer was contingent on

financing. Plaintiff argues, however, that the optimism

concerning GTI's ability to obtain financing expressed by GTI's

investment advisors was sufficient to sustain the jury's

verdict.5 In their entirety, these statements are as follows:

1. "They [GTI] have selected a regional investment bank, and based on their enthusiasm about a successful placement, are ready to move the proposed closing date to six weeks from the time we accept their o ffe r ; "

2. "[Parker Benjamin has] a high level of confidence [the] deal can be done and rather guickly;"

3. [Parker Benjamin is] "very confident [the] deal can be done;" and

4. "Based on the information he [Mr. D'Avanzo] had there was a high probability of raising the monies."

Even construing this evidence in the light most favorable to

plaintiff, these statements amount to nothing more than

5 The statements on which plaintiff relies were out-of-court statements made to Bank officials during the course of negotiations. Accordingly, the statements would have been inadmissible heresay if they had been offered to prove that GTI would have been able to obtain financing if the Bank had accepted GTI's offer. However, since Fleet failed to object to the admissibility of the statements or reguest a limiting instruction, I will consider them in ruling on Fleet's motion.

20 speculation about the GTI's ability to obtain financing.

Plaintiff argues that the Bank withheld information about Unitex

which GTI needed before it could decide whether to proceed with

its proposal. Since GTI's investment advisors also lacked this

information, plaintiff, in effect, must argue that even though

GTI did not know enough about Unitex to decide whether to

purchase the assets, its investment advisors had enough

information to make credible assessments as to the likelihood

that GTI would be successful in obtaining financing. Standing in

isolation, such statements are simply insufficient to establish

plaintiff's damages with reasonable certainty.

Plaintiff argues that its evidence of damages should be

liberally construed since it was the Bank's unreasonable refusal

of GTI's offer that prevented GTI from demonstrating that it had

the ability to obtain financing. I disagree. This is not a case

where a defendant's wrongful conduct made it impossible for the

plaintiff to prove his damages. Plaintiff could have subpoenaed

GTI's investment advisors or produced other experts at trial to

testify about the general availability of financing for similar

proposals at the time this transaction would have occurred.

Moreover, plaintiff could have obtained all available information

about the value of the Unitex Assets during discovery. Thus, its

21 experts could have provided informed testimony on the real

availability of financing for GTI's proposal. In short, nothing

prevented plaintiff from producing something more than mere

unsworn expressions of optimism from GTI's investment bankers to

prove that GTI would have been able to obtain financing if the

Bank had accepted its offer. Plaintiff's failure to do so here

deals a fatal blow to his case.

Because plaintiff failed to offer competent evidence of

damages which were sufficient to permit a reasonable juror to

conclude that plaintiff proved his damages with "reasonable

certainty," Fleet is entitled to judgment as a matter of law.

See University of R.I. v. A.W. Chesterton Co . , No. 92-1034,

(1st Cir. Aug. 16, 1993)(directed

verdict upheld where insufficient evidence of damages was

presented); TK-7 Corporation v. Estate of Ihsan Barbouti,

, 726-36 (10th Cir. 1993)(directed verdict); Belanger v.

Boise Cascade Corporation,

(2d Cir.

1992)(directed verdict).

III. CONCLUSION

Fleet's Motion for Judgment as a Matter of Law (document no.

22 32) is granted. In light of this ruling. Fleet's Motion for a

New Trial is moot.

SO ORDERED.

Paul Barbadoro United States District Judge

August 27, 1993

cc: Dennis G. Bezanson, Esg. N. Charles Remmel, II, Esg. Francis L. Cramer, III, Esg.

23