Ssmc, Incorporated, N v. V. Terri Steffen, Singer Furniture Acquisition Corporation, & Third Party and Singer Furniture Company Dennis Ammons Charles Shaughnessy William Johnson Eugene Matthews William Foster John Does I-Xx v. James Ting Philip Watson Semi-Tech Global, Limited (Bermuda) International Semi-Tech Microelectronics, Incorporated Shinwa Company, Limited, Third-Party
Docket: 95-3054
Court: Court of Appeals for the Third Circuit; December 12, 1996; Federal Appellate Court
The case centers on a complex commercial transaction between Paul Bilzerian and James Ting involving SSMC, Inc., SFC(Del.), and SFAC. James Ting, as CEO of Semi-Tech Microelectronics, controlled SSMC and owned Singer Furniture Company. In May 1989, Ting's STM agreed to sell SFC(Del.) to SFAC, which was managed by Bilzerian and his wife, Terri Steffen. The sale was formalized through a Share Purchase Agreement, where SSMC sold the common stock of SFC(Del.) to SFAC for $44.6 million, secured by a Stock Pledge Agreement prohibiting SFAC from selling or disposing of the pledged shares.
The Promissory Note required SFAC to repay the full amount by March 31, 1990, but on May 14, 1990, the parties refinanced the Note. The refinancing included an immediate payment of $25 million, a reduced Promissory Note of $15 million, and a Contingent Promissory Note of $4.6 million. The Refinancing Agreement stipulated that the Old Note would become due if SFAC’s ownership of SFC equity fell below 51% or if SFC's assets were sold or if mergers occurred. A "Second Closing" was also mentioned, set to occur five business days after the "Effective Date of the Settlement Agreement."
The Settlement Agreement involved two entities controlled by Bilzerian (Bicoastal Corporation and Bicoastal Royalties Corporation) and two entities controlled by Ting (STM and SSMC), resolving disputes following Bicoastal's bankruptcy. This Agreement, later amended, addressed obligations from prior agreements, including a royalties agreement. Under the Refinancing Agreement, the Promissory Note would have been replaced by two Subordinated Notes totaling $15 million if a Second Closing occurred; otherwise, the Note was due August 14, 1993. The First Closing occurred as scheduled in May 1990, reducing the Note to $15 million, but the prerequisite Settlement Agreement for the Second Closing was never effective, allegedly due to SSMC's lack of good faith in obtaining necessary bank approval. Consequently, SFAC remained obligated under the original Promissory Note.
In late 1991, SFC(Del.)'s board formed a subsidiary, SFC(Va.), and after merging SFC(Del.) into SFC(Va.), dissolved SFC(Del.). Despite SSMC holding valid stock in SFC(Del.), SFAC exchanged the pledged shares for 4,000,000 shares of SFC(Va.) stock, which were later redeemed, effectively eliminating SSMC's security interest. As the Second Closing did not occur, SFAC still owed $15 million on the Promissory Note due August 14, 1993, along with interest. SFAC did not make the payment, leading SSMC to demand payment and financial information. SFAC's reports revealed the merger and the loss of SSMC's security interest. Subsequently, SSMC filed suit against SFAC, Steffen, and others for fraud, breach of contract, unjust enrichment, tortious interference, conversion, and conspiracy, seeking damages and attorney's fees.
In May 1995, SFAC filed for Chapter 11 bankruptcy. Following a pretrial conference, the district court declared the merger a legal nullity, reinstating SFC(Del.) and confirming that all shares belonged to SSMC. A temporary restraining order was issued to prevent Steffen from placing SFC(Va.) into bankruptcy.
SFAC communicated perceived errors in a May court order to the court, which prompted SSMC to respond with a proposal for resolving outstanding issues. SFAC did not reply to SSMC's letter. During a September 1, 1995 status conference, SSMC requested summary judgment against SFAC for breach of the Stock Pledge Agreement and Promissory Note, as well as against Steffen on a conversion claim, stating it would accept an injunction declaring it the owner of all SFC(Del.) stock as its sole remedy. SFAC reserved objections to the May rulings but did not object to SSMC's proposals.
On October 30, 1995, the district court issued a final order granting SSMC's summary judgment, confirming SSMC as the legal and beneficial owner of SFC(Del.), declaring the attempted merger with SFC(Va.) a nullity, and rendering shares issued to Steffen as null and void. SFAC's counterclaim was dismissed. On appeal, SFAC and Steffen argued the district court's ruling contravened the Uniform Commercial Code (U.C.C.) by granting SSMC ownership without meeting U.C.C. Article 9 requirements. SFAC claimed a lack of notice regarding the remedy violated the spirit of Article 9. The court rejected these arguments, clarifying that state law does not restrict federal court remedies and that equitable powers allow for setting aside rights from flawed transactions. SSMC's claims exceeded mere enforcement of a security interest, encompassing various causes of action, and although it sought multiple remedies initially, it ultimately accepted only equitable relief.
SSMC's security interest under Article 9 of the U.C.C. does not preclude it from pursuing additional remedies beyond those specified in the Code. U.C.C. § 9-501(1) allows a debtor to seek judgment or enforce a security interest through available judicial means, including non-Code remedies. Although Article 9 does not establish a substantive cause of action for secured parties, it allows a combination of remedies, indicating they are cumulative rather than exclusive. A secured party retains non-U.C.C. remedies if not expressly waived, as evidenced by the Stock Pledge Agreement, which grants SSMC rights under the U.C.C. without limiting its options. Federal courts possess the authority to enforce security interests through equitable remedies, as affirmed in relevant case law. The district court's adoption of such a remedy was deemed appropriate, despite SFAC's claim that it lacked notice of SSMC's intent to seize possession of SFC(Del.), an argument SFAC presented after conceding that the U.C.C. did not prevent such a remedy.
Substantial notice of the proposed remedy was provided to SFAC, beginning with the district court's order and memorandum opinion issued in May 1995 and lasting until the final order on October 30, 1995. During this time, SFAC had the opportunity to oppose the proposed relief outlined in an August 1995 letter from SSMC, but failed to do so. At a status conference on September 1, 1995, SFAC did not dispute SSMC's proposals and instead acknowledged their accuracy. While SFAC claimed it should not have been divested of its SFC(Del.) stock, it did not request the court to assess its value. As a result, SFAC's arguments were not preserved for appeal, and no exceptional circumstances were presented to warrant consideration.
Even if SFAC’s argument were preserved, it would fail based on the admissions of its own witnesses, particularly Bilzerian, who stated the stock was worthless as of 1991. SFAC's assertion that this value was irrelevant to the 1995 determination was countered by Steffen's testimony indicating SFC was losing millions of dollars in 1994. Given these admissions, SFAC could not claim the district court erred in failing to conduct a valuation.
SFAC also argued that if the case was not remanded for a valuation hearing, the district court's order should be treated as a rescission ab initio of the sale of SFC(Del.) to SFAC, asserting that SSMC wrongly received $25 million. This argument was dismissed as unfounded, as the district court did not rescind the sale and SSMC did not improperly receive the payment. The original agreement involved SFAC selling SFC(Del.) for $44.6 million, and after SFAC defaulted, the parties refinanced the note, which included a loan of $25 million to pay SSMC. SFAC's actions following the merger of SFC(Del.) into SFC(Va.) and the payment of large salaries despite financial losses further supported the district court's decision not to require SSMC to refund any money to SFAC.
The district court found that the Second Closing did not occur, which SFAC disputes, arguing that a reasonable jury could conclude otherwise. SFAC claims SSMC's alleged fraud prevented the Second Closing, as SSMC failed to obtain necessary bank approval for the Settlement Agreement’s Amendment. SFAC asserts that SSMC's nonperformance excuses the closing's non-occurrence, citing Restatement (Second) of Contracts, § 245. However, the court rejected this argument, noting that any breach of contract claim would pertain to other partners and not alter the fact that the Second Closing never took place. SFAC's own admissions during deposition and counsel's concession at oral argument further supported the court's position.
Additionally, SFAC contests the court's ruling regarding Steffen's alleged conversion of SFC(Va.) stock, arguing that since the attempted merger with SFC(Del.) was deemed a "legal nullity," Steffen could not be liable. The court clarified it found Steffen converted SSMC's interest in SFC(Del.) stock, not SFC(Va.) stock, and did not suggest SFC(Del.) was a legal nullity. Under Virginia law, conversion involves wrongful authority over another's property, and Steffen's actions to merge SFC(Del.) stock into SFC(Va.) without SSMC's consent constituted a conversion of SSMC's interest in SFC(Del.) stock, supporting the district court's ruling.
SFAC argues that the district court erred in ruling that its amended counterclaim was compulsory, leading to a dismissal with prejudice without prior notice. Although SFAC moved to dismiss its counterclaim, it contends the court's classification of the claim as compulsory effectively barred it from further pursuit without notice, violating Fed. R.Civ. P. 41(a)(1). The court countered that SFAC had notice of its intention to dismiss the counterclaim during a status conference, where it clarified that the dismissal would be without prejudice but required the compulsory counterclaim to be pursued in the case. SFAC's attorney did not challenge this characterization, likely due to SFAC's prior assertions that the counterclaim was indeed compulsory. The court concluded that a dismissal without prejudice would have the same effect as a dismissal with prejudice under the rules governing compulsory counterclaims. Consequently, the district court's order is affirmed in all respects. Additionally, SFAC cannot claim relief under the Settlement Agreement, as it is neither a third-party beneficiary nor a successor in interest to any signing party.
