NEXBANK SSB v. ORIX FINANCE CORP (2011)

MEMORANDUM OPINION

Opinion By Justice Francis

NexBank, SSB, appeals the trial court's judgment in favor of Orix Finance Corporation.   In four issues, NexBank claims the trial court erred by concluding:  NexBank breached its agreement with Orix;  NexBank was not immune from liability under the agreement;  Orix did not waive its rights under the agreement;  and Orix was damaged in the amount of $7 million.   For the reasons that follow, we reverse the trial court's judgment and render judgment that Orix take nothing on its claims against NexBank.

Marcal Paper Mills, Inc. was a New Jersey corporation that manufactured and sold paper products.   In late December 2005, Marcal entered into a $50 million Second Lien Term Loan and Security Agreement with the Foothill Group, Inc. as the original lender and NexBank as agent.   The Second Lien Loan was secured by a blanket security interest and lien against all of Marcal's assets but was subordinate to an existing $77 million loan which was also secured by a blanket lien on all of Marcal's assets.   In February 2006, Orix bought a twenty percent interest of the $50 million principal amount of Marcal's obligations under the Second Lien Loan agreement with Foothill.   Following the sale of the twenty percent interest to Orix, the original lender on the Second Lien Term Note became the Highland Group.

On November 30, 2006, Marcal filed a voluntary petition for bankruptcy under Chapter 11 of the Bankruptcy Code. In early January 2007, the bankruptcy court approved a debtor in possession (DIP) term loan and line of credit, providing Marcal up to $84.5 million in financing.   The DIP loan and line of credit was superior to and had priority over the Second Lien Loan. Orix did not participate in the DIP loan and line of credit, but the Highland Group did.

An unrelated third party, Apollo, was initially interested in buying Marcal but backed out in the fall of 2007 when Marcal failed to meet certain goals and continued to underperform.   Because there was no buyer for the company, Marcal's assets were to be sold at auction under section 363 of the Bankruptcy Code.

In order to create interest in the auction, NexBank was directed by the Highland Group (the majority lender) to make a credit bid against the indebtedness owed under the Second Lien Loan;  this type of bid is known as a “stalking horse” bid.   Although NexBank and the Highland Group believed the Second Lien Loan agreement allowed for the majority owners to take this action, they nevertheless sought Orix's approval for the action.   Orix, who participated in discussions, reviewed draft documents and made comments, visited the Marcal company site, and appeared to be on board with the stalking horse bid, did not give written consent or approval to NexBank to make the bid.

In early November, Marcal filed a bidding procedures motion seeking approval of the proposed sale of its assets under the terms of an asset purchase agreement between Marcal and NexBank as agent.   The motion was set for hearing on November 16, 2007.   Four days later, the bankruptcy court approved the bidding procedures, ruling that if no higher bid were received, Marcal was to present the proposed purchaser and the asset purchase agreement to the court for approval.   In addition, the court set the sale hearing for January 15, 2008.   When no other bids were received, Marcal submitted the stalking horse bid to the bankruptcy court for approval of the sale.   On January 14, 2008, the day before the sale hearing, Orix filed a limited objection to the sale, alleging NexBank did not have authority to make the credit bid.   The bankruptcy court declined to rule on the limited objection and encouraged Orix to withdraw the motion subject to a mutual reservation of right.   Orix did so and the bankruptcy court approved the sale.

The assets of Marcal were transferred to a new company.   NexBank and the Highland Group tendered twenty percent equity ownership of the new company to Orix, but Orix refused to accept any equity ownership.

Orix sued NexBank for breach of contract.   The parties signed a joint stipulation of agreed facts and, following a nonjury trial, the trial court entered judgment in favor of Orix and ordered NexBank to pay $7 million in damages.   This appeal followed.

In its fourth issue, NexBank claims the evidence is legally and factually insufficient to support any damage award.

The parties agree the agreement is governed by New York law;  we apply Texas law, however, with respect to all procedural issues.  McAfee, Inc. v. Agilysis, Inc., 316 S.W.3d 820, 824 (Tex.App.—Dallas 2010, no pet.).   Findings of fact in a nonjury trial have the same force and effect as a jury's verdict.  Compass Bank v. MFP Fin. Servs., Inc., 152 S.W.3d 844, 851 (Tex.App.—Dallas 2005, pet. denied).   When, as in this case, a complete reporter's record is filed, the trial judge's fact findings may be reviewed for legal and factual sufficiency under the same standards as jury verdicts.   Id. In doing so, we do not substitute our judgment for that of the fact finder, even if we would have reached a different conclusion when reviewing the evidence.  FDIC v. F & A Equip.   Leasing, 854 S.W.2d 681, 684–85 (Tex.App.—Dallas 1993, no writ).   We evaluate a trial judge's conclusions of law independently, determining whether the trial judge drew the correct legal conclusions from the facts.  Dallas Morning News Co. v. Bd. of Trustees of Dallas Indep.   Sch. Dist., 861 S.W.2d 532, 536 (Tex. App—Dallas 1993, writ denied).

A party who challenges the legal sufficiency of the evidence to support an issue upon which he did not have the burden of proof at trial must demonstrate on appeal that there is no evidence to support the adverse finding.  Luce v. Interstate Adjusters, Inc., 26 S.W.3d 561, 566 (Tex.App.—Dallas 2000, no pet.).   When reviewing a “no evidence” point, we determine “whether the evidence at trial would enable reasonable and fair-minded people to reach the verdict under review.”  City of Keller v. Wilson, 168 S.W.3d 802, 827 (Tex.2005).   We sustain a no evidence point only if there is no more than a scintilla of evidence proving the elements of the claim.  St. Joseph Hosp. v. Wolff, 94 S.W.3d 513, 520 (Tex.2002).   In making this determination, we view the evidence in the light favorable to the verdict, crediting favorable evidence if reasonable jurors could, and disregarding contrary evidence unless reasonable jurors could not.  City of Keller, 168 S.W.3d at 807.   Evidence is legally insufficient where (1) there is a complete lack of evidence of a vital fact;  (2) the factfinder is barred by rules of law or of evidence from giving weight to the only evidence offered to prove a vital fact;  (3) the evidence offered to prove a vital fact is no more than a scintilla;  or (4) the evidence conclusively establishes the opposite of a vital fact.  Lochinvar Corp. v. Meyers, 930 S.W.2d 182, 188 (Tex. App—Dallas 1996, no writ).

Under New York law, the measure of damages in a breach of contract action is intended to place the injured party in “as good a position as it would have been in had the contract been performed.”  Goodstein Constr.   Corp. v. City of N.Y., 604 N.E.2d 1356, 1360 (N.Y.1992).   The “benefit of the bargain” rule provides the injured party recover the difference between the value of what was received under the contract and the value of what would have been received if the contract had been performed according to its terms.  Sager v. Friedman, 1 N.E.2d 971, 974 (N.Y.1936);  Clearview Concrete Prods.   Corp. v. S. Charles Gherardi, Inc., 453 N.Y.S.2d 750, 756 (N.Y.App.Div.1982) (measure of damages is difference between actual value of property and value it would have had absent breach).   The damages claimed must be measurable with a reasonable degree of certainty and must be adequately proven.  Clearview Concrete Prods.   Corp., 453 N.Y.S.2d at 756.   Damages may not be speculative and the court must determine whether, as a matter of law, the damages alleged satisfy the legal requirements of proof with reasonable certainty.  Bi–Econ.   Mkt., Inc. v. Harleysville Ins. Co. of N.Y., 886 N.E.2d 127, 130 (N.Y.2008);  Kenford Cnty, Inc. v. Cnty of Erie, 537 N.E.2d 176, 178 (N.Y.1989) (citing Kenford Cnty, Inc. v. Cnty of Erie, 493 N.E.2d 234 (1986)).

In its first amended petition, Orix asserted NexBank breached the Second Lien Loan Agreement by making the credit bid, specifically by “compromising the indebtedness of Marcal as part of the voluntary credit bid, without receiving ORIX Finance's written consent to discharge or release Marcal's obligation to repay all principal due.”   Assuming without deciding NexBank in fact breached the contract, under New York law, Orix would be entitled to recover the difference between the value of what it received after the breach by NexBank and the value of what it would have received if the contract had been performed according to its terms, in other words, what it would have received but for NexBank's breach.   Thus, Orix was required to establish what it would have received if NexBank had not made the credit bid as well as what it did receive after the breach.

At trial, Orix presented evidence that Marcal owed about $86 million to the first lienholders and about $64 million to the second lienholders.   Both debts were collateralized with the same assets.   Marcal filed for bankruptcy on November 30, 2006.   In early January, the bankruptcy court approved an $84.5 million financing plan to allow Marcal to continue operations while the company was in bankruptcy.   Apollo, the company who had expressed interest in Marcal, pulled out of negotiations in August 2007 because Marcal continued to underperform and failed to meet certain threshold goals.   NexBank submitted the credit bid in November, setting a entry level bid for the bankruptcy process.

When asked what would have happened if NexBank had not made the credit bid, Christopher Smith, senior managing director for Orix, responded he had “no idea what would have happened” and “it would be pure speculation on anybody's part as to what could have happened, positive or negative.”   Likewise, Orix conceded at oral argument that, without the credit bid, the outcome was unclear.   There might have been another bid or there might have been a foreclosure with Marcal's assets being sold off.   Orix might have gotten “maybe more, maybe less.”

Although the record shows Orix owned twenty percent of the Second Lien Loan, nothing in the record shows Orix would have received any return of its investment if NexBank had not made the credit bid.   There is no evidence Marcal's assets would have been sufficient to pay the first lien debt and accrued interest;  it follows that there is no evidence to show Marcal's assets, after paying off the superior lien, would have been sufficient to pay any portion of the Second Lien Loan balance or accrued interest.   After reviewing the record, we conclude Orix presented no evidence of what it would have received but for NexBank's purported breach.   Thus, Orix failed to establish an essential element of the “benefit of the bargain” rule.   See Sager, 1 N.E.2d at 974;  Clearview Concrete Prods.   Corp., 453 N.Y.S.2d at 756.   We sustain NexBank's fourth issue.   In light of our disposition, we need not address the remaining issues.  Tex.R.App. P. 47.1.

We reverse the trial court's judgment and render judgment that Orix take nothing on its claims against NexBank.

100998F.P05

MOLLY FRANCIS JUSTICE