TriCor Automotive Group v. Haytham Elzayn

Citation: Not availableDocket: 22A-PL-01137

Court: Indiana Court of Appeals; September 28, 2023; Indiana; State Appellate Court

Original Court Document: View Document

SummaryOriginalCytator Case TreatmentBackward CitatorAnalysis

EnglishEspañolSimplified EnglishEspañol Fácil

In a case involving Tricor Automotive Group and Allegiance Administrators LLC against Dealer VSC Ltd. and Haytham ElZayn, the Indiana Court of Appeals reviewed a series of contracts and a Memorandum of Understanding (MOU) executed in 2018. Tricor alleged a default event had occurred under the MOU, while Dealer and ElZayn denied any default. The litigation led to summary judgment in favor of Dealer and ElZayn on various claims. Tricor appealed, arguing that evidence indicated a default had occurred. The court ultimately found that a genuine issue of material fact existed regarding whether an operational default occurred, which precluded summary judgment. Consequently, the court reversed the summary judgment and remanded the case for further proceedings. ElZayn, a resident of Ohio, has experience managing vehicle service contracts, while Tricor is based in Indiana, with Joseph Campbell as CEO and Brian Leslie as CFO.

ElZayn and Campbell initiated a business venture leading to the establishment of Allegiance, an Ohio entity intended to take over ElZayn's existing Assurant line of business managed through Dimension. ElZayn would act as CEO, overseeing daily operations. To facilitate this, ElZayn created Dealer, an Ohio entity he owned entirely, to hold equity in Allegiance, transferring Dimension’s contractual interest in the Assurant Business to Dealer while retaining personal goodwill. Dealer was to contribute this contractual interest to Allegiance, which would also purchase ElZayn's personal goodwill, funded by a significant capital contribution from Tricor. 

Tricor’s investment included a provision that if the Assurant Business did not meet earnings targets, ElZayn would reimburse Allegiance up to $2 million, which would then be distributed to Tricor as an excess capital contribution. On April 1, 2018, Dealer and Tricor executed a Formation and Contribution Agreement, which outlined that Dealer would hold 51% and Tricor 49% of Allegiance, with both parties making initial pro rata capital contributions. ElZayn was to be employed as CEO under the Operating Agreement. 

The Formation and Contribution Agreement included details for Allegiance to acquire ElZayn’s personal goodwill associated with the Assurant Business, with Tricor contributing $7 million in cash specifically for this purpose. This amount was earmarked to purchase goodwill through a separate Goodwill Purchase Agreement, executed on the Closing Date, where Allegiance paid ElZayn the $7 million from Tricor's contribution.

The First Amendment to the Goodwill Agreement includes an earnings contingency aimed at protecting Tricor if the Assurant Business fails to meet a net earnings milestone. Specifically, if Allegiance’s EBITDA from the Assurant Business is below $3 million for the 12 months ending June 30, 2019, ElZayn must reimburse Allegiance for the shortfall, capped at $2 million. This provision is detailed in Section 4(b) of the Goodwill Agreement, which states that the Purchase Price is contingent on Allegiance achieving at least $3 million in EBITDA. Should this earnings threshold not be met, the Purchase Price will be reduced by the shortfall amount, up to the $2 million limit. ElZayn is required to reimburse Allegiance for this difference within 90 days of the shortfall, and Allegiance must then distribute that amount to Tricor as a return of capital. The Goodwill Agreement does not define EBITDA or outline its calculation method.

Subsequently, an Operating Agreement was executed by Dealer and Tricor, aligning with prior agreements for entity operation. Approximately one year later, Dealer sought a line of credit from Tricor, leading to a Memorandum of Understanding (MOU) wherein Tricor agreed to provide the credit in exchange for 6% of Dealer’s interest in Allegiance, represented by 6 Allegiance Units. The MOU required Dealer to issue a convertible promissory note to Tricor and pledge its 45 Allegiance Units as collateral for draws on the Loan Facility. The MOU also outlines that if an uncured event of default occurs, the pledged Allegiance Units will convert to equity for Tricor, effectively offsetting Dealer’s debt. Tricor’s ownership in Allegiance would increase from 49% to 55%, with Dealer retaining 45%. The Loan Facility's initial limit was set at $2 million, pending confirmation of any Goodwill Adjustment due to the earnings shortfall from the Assurant Business.

Section 5 of the MOU outlines potential default events, defining a default under the Note as follows: (a) failure to pay interest within 5 calendar days of notice from Tricor; (b) failure to pay amounts due from principal reduction due to the Reset Limit; (c) material non-compliance by Mr. ElZayn, Dealer VSC, or related entities with the Organizational Agreements; (d) actions by Dimension or related entities detrimental to Allegiance; and (e) non-payment of Allegiance receivables owed by Dealer VSC or affiliates within 30 days of the Effective Date, with a notice and 30-day opportunity to cure for these receivables. For other payment defaults, no notice or opportunity to cure is provided, except Tricor must give written notice and a 30-day opportunity to cure for material non-compliance or detrimental actions. Upon any default, Mr. ElZayn would resign as President and CEO of Allegiance.

Section 7 states that ElZayn’s role is subject to the MOU, which mandates amendments to the Operating Agreement to implement its terms. Section 8 addresses consent to changes, indicating that the execution of the MOU by the Members satisfies any required consent for transactions covered by it.

Dealer executed the Note obligating it to make monthly interest payments, with principal repayment limited to scenarios involving uncured defaults, where Tricor can demand repayment without notice. Additionally, Dealer pledged Allegiance Units as collateral under a Unit Pledge Agreement, allowing Tricor to transfer title to these units upon default.

As of September 30, 2019, Dealer had drawn $5.6 million from the Loan Facility while remaining current on interest payments. Disputes arose regarding financial performance, specifically the calculation of EBITDA for the Assurant Business, which was critical to determining if ElZayn needed to reimburse Allegiance up to $2 million, to be distributed to Tricor. An independent accounting firm was engaged to calculate EBITDA, with Tricor anticipating a maximum goodwill adjustment of $2 million.

On September 30, 2019, Tricor notified ElZayn, the designated notice recipient under the Unit Pledge Agreement, that he owed a maximum Goodwill Adjustment of $2 million. ElZayn contested this demand, citing the incomplete report from the Accounting Firm and disputing the existence of an EBITDA shortfall justifying the adjustment. On October 22, 2019, the Accounting Firm issued a compilation report presenting three methods for calculating EBITDA, each indicating a Goodwill Adjustment but not specifying the contractually agreed calculation method. The report included an affidavit detailing that the compilation was based on information provided by Allegiance, which included different expense allocation scenarios for the Assurant Business. 

On October 24, 2019, Tricor demanded the $2 million Goodwill Adjustment by November 4, 2019, threatening to designate it as a draw against the Loan Facility if not received. ElZayn responded on October 28, disputing the adjustment and Tricor's draw proposal. Tricor subsequently added the disputed adjustment to Dealer's Loan Facility, raising the total loan balance from $5.6 million to $7.6 million. By March 31, 2020, Tricor informed Dealer that the Reset Limit of the Loan Facility had decreased to $3,362,093 and demanded that Dealer reduce the balance by $4,237,907 by April 30, 2020. On that date, Dealer paid Tricor $2,240,000, which, if the disputed Goodwill Adjustment was not considered a draw, would have brought Dealer’s balance below the Reset Limit, assuming a balance of $5.6 million.

On May 5, 2020, Tricor notified Dealer of a payment deficiency of $1,997,907 and declared Dealer in default under Section 5(b) of the Memorandum of Understanding (MOU). Tricor indicated that the default triggered an automatic conversion of pledged Allegiance Units into ownership by Tricor, specifically converting 14 units, which reduced the outstanding loan by $2,091,969, bringing it within the Reset Limit. Additionally, Tricor claimed an automatic conversion of 22 more units, resulting in a further loan reduction of $3,287,380 and leaving a balance of $19,348 due from Dealer. Tricor offered Dealer 30 days to repay the balance to reclaim ownership of the 22 units, asserting that Tricor now owned 91 Allegiance Units while Dealer retained 9.

Simultaneously, Tricor initiated the termination of ElZayn’s salary and benefits as CEO of Allegiance, falsely presenting his departure as a resignation effective May 1, 2020. Shortly thereafter, Campbell sought to introduce a proposed First Amended and Restated Operating Agreement at an upcoming board meeting, prepared by Tricor’s legal counsel. 

The original Operating Agreement designated ElZayn as CEO and limited removal grounds to written resignation, permanent disability, or death. However, the MOU specified that upon default, ElZayn was deemed to have resigned. It also stated that the Operating Agreement could be amended with unanimous consent from both Tricor and Dealer. The proposed amendments included changes to the requirement for unanimous consent for certain actions and suggested shifting control of daily operations from the CEO to the Board, thereby diminishing ElZayn's authority.

ElZayn, a Board of Managers member, opposed the Board's consideration of the proposed First Amended and Restated Operating Agreement, asserting that the Board lacked authority to consider it and that any amendments required unanimous member approval. Despite his objections, the Board voted to adopt the Amended Operating Agreement. The discussion during the meeting highlighted a conflict regarding whether the initial Operating Agreement mandated unanimous consent for amendments, which was not adhered to.

On May 8, 2020, Tricor initiated a lawsuit against Dealer, ElZayn, and Allegiance in Hamilton County, seeking a declaratory judgment concerning alleged defaults under loan documents (Count I) and claiming breaches of the MOU, Note, and Unit Pledge Agreement (Count II). On February 3, 2021, Dealer and ElZayn filed counterclaims related to Tricor's declaration of default and other claims regarding the Goodwill Adjustment, control over pledged units, and the legality of the Operating Agreement amendment.

Dealer and ElZayn sought summary judgment on Tricor's claims and their counterclaims, while Tricor filed a competing motion for summary judgment. The trial court ultimately granted Dealer and ElZayn's summary judgment motion, declaring that neither had committed a default, that Tricor lacked authority to convert Dealer's membership units, that Dealer owned the pledged units, and that the amendments to the Operating Agreement were invalid. Tricor appealed, contesting the trial court's decision to grant summary judgment to Dealer and ElZayn, focusing on whether a genuine issue of material fact existed regarding operational defaults.

The Court of Appeals of Indiana reviews summary judgment de novo, applying the same standard as the trial court. Summary judgment is appropriate if the evidence shows no genuine issue of material fact, allowing the moving party to be entitled to judgment as a matter of law. A fact is deemed material if its resolution could affect the case outcome, and an issue is genuine if it necessitates a trier of fact to resolve conflicting accounts or if undisputed material facts support differing reasonable inferences.

The initial burden lies with the moving party to demonstrate no genuine issue of fact exists, after which the burden shifts to the non-moving party to present contrary evidence. The court acknowledges that both parties agree Indiana is the proper forum, with Indiana law governing the appeal, and notes no conflict of laws exists between Indiana and Ohio.

The court reviews the contract as a whole to ascertain the parties' intent and interprets its language to avoid rendering any terms ineffective. Specific terms in the contract control over general statements. Tricor challenges the trial court's summary judgment for Dealer and ElZayn regarding Tricor's first and second claims, as well as several counterclaims. The main issue revolves around whether evidence shows an uncured default event under the Memorandum of Understanding (MOU), particularly concerning the addition of the alleged EBITDA shortfall to the debt and whether this constituted financial default.

The MOU does not limit default definitions to financial defaults related to underpayment but includes operational defaults arising from any material breach. The court concludes that evidence suggests a potential operational default due to ElZayn's material breach of the Goodwill Agreement for not reimbursing Allegiance for the EBITDA shortfall. This genuine issue of material fact precludes summary judgment for Dealer and ElZayn on the claims and counterclaims.

An operational default under the Memorandum of Understanding (MOU) occurs if either Dealer or ElZayn materially breaches any of the following: the Operating Agreement, the Contribution Agreement, or any associated agreements, including the Goodwill Agreement. A material breach of the Goodwill Agreement arises if there is an EBITDA shortfall, obligating ElZayn to reimburse Allegiance up to $2 million. Disputes regarding the EBITDA calculation create a genuine issue of material fact concerning whether a shortfall exists and whether ElZayn failed to make the required reimbursement. 

Despite Dealer and ElZayn's claim that Tricor did not provide notice of the EBITDA shortfall, evidence indicates Tricor notified ElZayn in October 2019, suggesting a factual dispute regarding whether effective notice was given of the operational default. 

Upon an uncured operational default, the MOU stipulates that ElZayn would automatically resign as President and CEO of Allegiance, with his continued service contingent on compliance with the MOU's terms. An operational default also triggers a corresponding default under the Note, allowing Tricor to accelerate all unpaid amounts without further notice. Furthermore, the Unit Pledge Agreement allows Tricor to transfer title to pledged units to satisfy Dealer's debt upon default.

The Unit Pledge Agreement establishes certain contingencies for "non-payment defaults," but these do not impact Tricor’s right to acquire title to Allegiance Units. As long as there is debt on the loan, Tricor is entitled to at least one Allegiance Unit, since fractional units cannot be transferred. If the debt amount exceeds the value of the unit, Tricor must reimburse the Dealer for the difference. There are significant factual disputes regarding whether there was an EBITDA shortfall, if Tricor provided adequate notice of this shortfall, and whether ElZayn failed to reimburse Allegiance, which could lead to a material breach of the Goodwill Agreement and operational default under the MOU. Such an uncured default allows Tricor to trigger the acceleration clause, obtaining the pledged Allegiance Units and modifying the Operating Agreement to limit ElZayn's authority.

Tricor's Amended Complaint includes two claims: a declaratory judgment regarding the EBITDA calculation and a breach of contract concerning the Convertible Promissory Note. For the first claim, Tricor seeks a declaration that actions beyond non-payment can constitute a default under the loan documents, and the evidence suggests a potential operational default exists, indicating that Dealer and ElZayn are not entitled to summary judgment. The second claim alleges a breach of contract related to the Note, which encompasses liabilities from operational defaults, supported by provisions that integrate rights and powers from associated agreements.

Dealer and ElZayn failed to prove their entitlement to summary judgment on Tricor’s Second Claim due to the designated evidence not ruling out operational default. In their counterclaims, Count 1 alleges that Dealer and ElZayn fully complied with their obligations under the MOU and related agreements; however, evidence shows ElZayn did not fulfill his payment obligations under the Goodwill Agreement. Additionally, Count 1 claims Tricor falsely declared a default, but evidence presents a genuine issue of material fact regarding Tricor's basis for this declaration, thus denying summary judgment for Count 1.

In Count 2, Dealer and ElZayn assert that Tricor breached the Note by incorrectly declaring a default. The Note incorporates Tricor's rights from the MOU, which specifies that an operational default, linked to ElZayn's non-payment of the Goodwill Adjustment, results in a default under the Note. Therefore, summary judgment on Count 2 is also denied.

Counts 3 and 4 involve allegations that Tricor breached the Unit Pledge Agreement and committed conversion by exercising control over the Allegiance Units. However, operational default grants Tricor rights under the related contracts, including the right to accelerate debt and transfer title to Allegiance Units, leading to a denial of summary judgment for these counts as well.

Count 5 seeks a declaratory judgment that the MOU does not allow Tricor to unilaterally amend the Operating Agreement without Dealer VSC's consent. A specific amendment to Section 7.1 transferred management authority from ElZayn to the Board of Managers, highlighting the contested nature of the amendment. Overall, Dealer and ElZayn did not demonstrate sufficient grounds for summary judgment across all counts of their counterclaims.

Tricor claimed to hold 91 Allegiance Units, while Dealer held 9, maintaining Dealer's membership in Allegiance after the Operating Agreement was amended. Section 7.7(a) of the Operating Agreement requires unanimous consent for amendments, indicating that Tricor could not unilaterally make changes. However, the evidence suggests that Section 7.7(a) may not apply due to an operational default. The MOU outlines conditions for leadership changes upon default, stating that ElZayn would be deemed to have immediately resigned as President and CEO, while also allowing for modifications to the Operating Agreement to reflect MOU terms. The original Operating Agreement only allowed for ElZayn's removal under specific circumstances. The existence of a potential operational default creates a genuine issue of material fact regarding modifications to the Operating Agreement, preventing summary judgment on the matter. Consequently, the court's decision to grant summary judgment in favor of Dealer and ElZayn was deemed premature, leading to a reversal and remand for further proceedings on the merits.