Opinion ID: 2709212
Heading Depth: 3
Heading Rank: 1

Heading: Creation of Subordinated Indebtedness

Text: In order for Hindman to have breached the subordina‐ tion agreements, it must be established that his wire transfer created a “debt, liability, or obligation.” The parties seem to agree that for this to happen there must have been a valid loan—i.e., they do not argue that the term “Subordinated Indebtedness” is ambiguous.2 A loan is a contract by which one delivers a sum of mon‐ ey to another and the latter agrees to return at a future time a sum equivalent to that which he borrows. In order to constitute a loan there must be a con‐ tract whereby, in substance one party transfers to the other a sum of money which that other agrees to repay absolutely, together with such additional sums as may be agreed upon for its use. If such be the intent of the parties, the 2 As a fallback, Hindman does raise the possibility that the term is am‐ biguous, suggesting that an overly broad reading of “each and every … debt, liability and obligation of every type and description” might in‐ clude pensions, travel‐expense reimbursements, director’s fees, or health‐insurance premiums but that, when the commercial context is restored, the subordinated agreements clearly would not apply to such “payments” from Clark to Hindman. See ConFold Pac., Inc. v. Polaris In‐ dus., Inc., 433 F.3d 952, 955 (7th Cir. 2006) (discussing latent ambiguity). Given our resolution of Hindman’s primary argument, we need not ad‐ dress his alternative contention, which in any event is waived because it was raised for the first time on appeal. See, e.g., Williams v. Dieball, 724 F.3d 957, 961 (7th Cir. 2013). No. 12‐1208 15 transaction will be considered a loan without regard to its form. Calcasieu‐Marine Nat’l Bank v. Am. Emp’rs Ins. Co., 533 F.2d 290, 296–97 (5th Cir. 1976) (emphases added) (internal quotation marks omitted) (citing In re Grand Union Co., 219 F. 353, 356 (2d Cir. 1914); accord United States v. Kristofic, 847 F.2d 1295, 1296 (7th Cir. 1988). Accordingly, whether the transaction at issue created Subordinated Indebtedness de‐ pends on whether a valid loan contract was created between Hindman and Clark. The basic elements of a contract are offer, acceptance, and consideration. In re F.T.R., 833 N.W.2d 634, 649 (Wis. 2013).3 Hindman’s arguments focus on the element of acceptance. But Wells Fargo suggests that, even though a loan is a con‐ tract, acceptance is not a prerequisite to its formation. This is a curious argument, particularly because it comes from a bank. Suppose A walks into a branch of Wells Fargo, plops $10,000 down on the counter, and says, “I am loaning this to you and you will pay me double next week.” Under Wells Fargo’s view, it would be stuck with the money and owe $20,000 to A the following week, even if the banker to whom A had tendered the money immediately had said “no, thank you,” and refused to take the cash. But there clearly would not be an enforceable contract in that scenario. See Nat’l Bank of Paulding v. Fid. & Cas. Co., 131 F. Supp. 121, 123–24 (S.D. 3 Wisconsin law applies to the parties’ dispute (with one caveat, noted later) by virtue of a choice‐of‐law provision in the subordination agree‐ ments. But most, if not all, of the legal principles involved in this appeal are well‐established rules that are largely uniform throughout the coun‐ try, which the parties implicitly acknowledge by their heavy reliance on Illinois law. 16 No. 12‐1208 Ohio 1954) (“In order to have a loan, there must be an agreement, either expressed or implied, whereby one person advances money to the other and the other agrees to repay it upon such terms as to time and rate of interest, or without interest, as the parties may agree. In order to have a contract, there must be a meeting of minds.”); Restatement (Second) of Contracts § 55 illus. 2 (1981) (“A offers to lend B $100 on specified terms and tenders the money to B. B’s acceptance of the tender forms a contract on the terms specified.”); cf. Goossen v. Estate of Standaert, 525 N.W.2d 314, 318 (Wis. Ct. App. 1994) (valid loan contract existed between borrower and lender, where borrower offered to borrow money, lend‐ er accepted offer by processing the loan, and borrower pro‐ vided consideration by paying lender’s loan fee). We thus consider Hindman’s arguments that there was never a valid loan due to lack of acceptance.4 Under Wisconsin law, “whether an offer was accepted is a question of fact.” Hoeft v. U.S. Fire Ins. Co., 450 N.W.2d 459, 463 (Wis. Ct. App. 1989). For “acceptance of a contract to oc‐ cur, there must be a meeting of the minds, a factual condi‐ tion that can be demonstrated by word or deed.” Zeige Dis‐ trib. Co. v. All Kitchens, Inc., 63 F.3d 609, 612 (7th Cir. 1995) (Wisconsin law). Objective manifestations of assent, rather 4 It is important to distinguish between the fundamental contractual el‐ ement of acceptance and accepting loan proceeds. They are not necessari‐ ly the same; it depends on how the parties structure their transaction. Cf. Restatement (Second) of Contracts, supra, § 62. Consider the following: A says to B, “if you loan me $10, I promise to pay you $15 a week later.” If B subsequently tenders $10 to A, a valid contract is formed upon B’s per‐ formance and A’s refusal of the loan proceeds would constitute a breach. This is a classic example of a unilateral contract. See, e.g., Patel v. Am. Bd. of Psychiatry & Neurology, Inc., 975 F.2d 1312, 1314 (7th Cir. 1992). No. 12‐1208 17 than subjective intentions, are controlling. See Associated Milk Producers, Inc. v. Meadow Gold Dairies, Inc., 27 F.3d 268, 272 (7th Cir. 1994) (Wisconsin law). Hindman does not dispute that he transferred money to Clark with the intent to make a loan, but he argues that the anticipated loan never came into existence because there was no acceptance by Clark, given that D.D.H. had already been stripped of his authority to make business decisions for Clark when he signed the subordinated debenture. Wells Fargo ignores Hindman’s argument and contends that the subordinated debenture unambiguously reflects that Hind‐ man made a loan of $750,000 to Clark and that Clark had agreed to repay the loan. It relies on the fact that D.D.H. no‐ tified it in late‐2009 (before he was stripped of his authority) that Hindman would be making a loan to Clark. A corporation is a legal entity separate from its directors, officers, and shareholders, In re Rehab. of Centaur Ins. Co., 632 N.E.2d 1015, 1017 (Ill. 1994), but it can act only through “its officers and directors and is bound by their actions when performed within the scope of their authority,” Ahlgren v. Blue Goose Supermarket, Inc., 639 N.E.2d 922, 928 (Ill. App. Ct. 1994). Under Illinois law, which governs the internal affairs of an Illinois corporation such as Clark, see, e.g., Wachovia Sec., LLC v. Banco Panamericano, Inc., 674 F.3d 743, 754 (7th Cir. 2012), “the business and affairs of the corporation shall be managed by or under the direction of the board of direc‐ tors,” 805 ILCS 5/8.05(a); see also Hall v. Woods, 156 N.E. 258, 267 (Ill. 1927). The board, therefore, “is the true agent of a corporation, and the actions of the directors of the board, if within the scope of the corporate charter, are binding upon 18 No. 12‐1208 it.” Baltimore & Ohio R.R. Co. v. Foar, 84 F.2d 67, 70 (7th Cir. 1936). Wells Fargo offers no evidence to contradict Hindman’s evidence that Clark’s board of directors stripped D.D.H. of his authority to make business decisions on January 8, 2010, which was four days before the subordinated debenture was executed and five days before the wire transfer. There is no evidence that a loan agreement was completed before Janu‐ ary 8. It does not matter that negotiations may have been ongoing since late‐2009, when D.D.H. still had authority. See Perritt Ltd. P’ship v. Kenosha Unified Sch. Dist. No. 1, 153 F.3d 489 (7th Cir. 1998) (no contract formed for purchase of real estate where, midway through extended negotiations, the school district’s status under Wisconsin law changed in a manner divesting the school board of authority to purchase real estate and no agreement had been finalized before the status change). The only evidence in the record shows that D.D.H. lacked actual authority to bind Clark when the pur‐ ported loan was executed. We acknowledge that this is a strange case because D.D.H. was not some low‐level employee but rather Clark’s president and CEO. Generally, a corporation’s highest‐ ranking officers’ duties are outlined in the corporation’s by‐ laws, and while the board may alter an officer’s authority by resolution, it may do so only if the resolution is consistent with the bylaws. 805 ILCS 5/8.50. However, Clark’s bylaws are not part of the record, and Wells Fargo has made no at‐ tempt to argue that the board was prohibited from stripping its president and CEO of business‐decision‐making authori‐ ty without removing him from his office. Therefore, Wells No. 12‐1208 19 Fargo cannot prevail on the theory that D.D.H. retained ac‐ tual authority to bind Clark in contract. Nor can Wells Fargo prevail on the ground that D.D.H. had apparent authority, which “‘exists where a principal through his words or conduct, creates a reasonable impres‐ sion that the agent has been granted the authority to perform certain acts,’” Orix Credit Alliance, Inc. v. Taylor Mach. Works, Inc., 125 F.3d 468, 474 n.1 (7th Cir. 1997) (quoting Wasleff v. Dever, 550 N.E.2d 1132, 1138 (Ill. App. Ct. 1990)). It is true that “[t]he existence and scope of an agency relationship are questions of fact.” Id. at 474. But Hindman was present at the meeting where the board stripped D.D.H. of his authority. Thus, he had actual knowledge that D.D.H. could not make business decisions, and he could not have reasonably be‐ lieved that D.D.H. had authority to enter into a loan agree‐ ment on behalf of Clark. On the other hand, Wells Fargo probably held a reasona‐ ble belief that D.D.H. had authority. Indeed, there is no evi‐ dence that Clark ever notified Wells Fargo that D.D.H. had been stripped of his authority, and he signed the debenture as president and CEO. But this does not help Wells Fargo for two reasons. First, it was not a party to the purported loan agreement between Clark and Hindman, and we have found no cases in which a plaintiff was able to invoke the doctrine of apparent authority to enforce a contract to which it was not a party. Second, even if Wells Fargo could invoke that doctrine, it would be required to show that it took some ac‐ tion in reliance upon D.D.H.’s apparent authority. See Harris v. Knutson, 151 N.W.2d 654, 658 (Wis. 1967) (apparent agen‐ cy requires “[r]eliance … by the plaintiff, consistent with or‐ dinary care and prudence”). And as discussed below, there 20 No. 12‐1208 is a genuine dispute of fact as to whether Wells Fargo al‐ lowed Clark to take additional cash advances or otherwise acted in reliance on the $750,000 transfer from Hindman. Because D.D.H. lacked authority to bind Clark under or‐ dinary principles of agency, the fact that he executed the subordinated debenture does not establish that Hindman and Clark had a valid loan agreement. Looking for another reason to bind Clark, one might posit that Clark’s board of directors ratified the loan, given that D.D.H. and Hindman constituted a majority of the directors who had previously voted to strip D.D.H. of authority. However, under Illinois law, a board of directors cannot act informally (without a meeting) unless it has the written consent of all directors. 805 ILCS 5/8.45. It is unclear how many directors Clark had, but we do know that at least one director (Robert Early) did not consent to the loan. Thus, the actions of D.D.H. and Hind‐ man did not constitute actions by the board and could not serve to bind Clark to a loan agreement. Alternatively, Clark may be deemed to have accepted the loan agreement through its actions, for example, if it put the loan proceeds to use. See Hoffman v. Ralston Purina Co., 273 N.W.2d 214 (Wis. 1979) (finding acceptance where offeree accepted benefits of offer but never expressly accepted and, in fact, said he would not accept); Phillips Petroleum Co. v. Taggart, 73 N.W.2d 482, 488 (Wis. 1955) (“One cannot accept the benefits of a contract over a long period of time and then successfully contend that the contract is not binding.”). Hindman argues that Clark never took any advances based on the $750,000 and that the people with authority to bind Clark took immediate action to reject the purported loan by instructing D.D.H. to stop the wire transfer. For its No. 12‐1208 21 part, Wells Fargo maintains that Clark accepted the loan through its conduct and points to three facts: (1) $750,000 appeared on Clark’s daily collateral report for January 15, which had been signed by Clark’s treasurer, Robert Sears; (2) once Wells Fargo received that report, Williams spoke with another Clark representative, Maria Preston, who informed her that the influx of cash was another capital loan from Hindman (Appellee’s Supp. App. 52); and (3) Clark used the $750,000 to pay down its line of credit and took $3,036,089.96 in advances between January 15 and January 21. We conclude that there are genuine issues of material fact that need to be resolved before determining whether Clark accepted through its actions. Hindman has designated evi‐ dence showing that the people with authority to make busi‐ ness decisions acted swiftly in attempting to reject his loan once they found out about it. There is no dispute that, de‐ spite those efforts, the wire transfer went through and the funds hit Clark’s account. Though not entirely clear, it ap‐ pears that the daily collateral reports were accounting ledg‐ ers showing what money was coming in and that all incom‐ ing funds had to be reported. In other words, it is not clear from the record that Clark had the option of not reporting the funds on the daily collateral report once they hit its ac‐ count. That Preston informed Williams that the cash influx was another capital loan from Hindman is not dispositive. There is nothing to support the notion that Preston had au‐ thority to bind Clark to a loan obligation or that she was even purporting to do so; rather, all that can be said is that she believed a valid loan had been made and relayed that information to Williams, but Preston was not in the loop of decision makers. 22 No. 12‐1208 Finally, there is a disputed question of fact as to whether Clark actually used the $750,000 to take cash advances. Alt‐ hough the record shows that $3,036,089.96 was advanced be‐ tween January 15 and January 21, when the $750,000 (which is included in that figure) was wired to Gibraltar Bank by Bassett, Wells Fargo has failed to demonstrate that those ad‐ vances could not have been taken but for the influx of $750,000 on January 15. The daily collateral report for Janu‐ ary 15 shows that Clark had $2,727,430.26 available for bor‐ rowing. (Appellee’s Supp. App. 64.) Set aside Hindman’s $750,000 for the moment and the total available for borrow‐ ing becomes $1,977,430.26, which was more than enough to cover the $471,668.95 in advances taken on January 15, and even the additional advances of $910,793.56 and $592,208.82 taken on January 19 and 20, respectively (as the advances for those three days total $1,974,671.33). Of course, the total ad‐ vances between January 15 and 21 exceed the borrowing availability reflected on the January 15 daily collateral report (which includes the $750,000) by $308,659.70. The problem with concluding that this shows Clark to have drawn on the $750,000 is that, although all advances between January 15 and 21 are accounted for, there is no evidence as to how much incoming cash Clark received on January 19, 20, and 21 with which it paid down its line of credit.5 The only daily collateral report included in the record is for January 15. We agree with Wells Fargo that if Clark in fact took ad‐ vances that it could not have taken but for the influx of 5 That the total advances taken over those four days exceeds the borrow‐ ing availability reflected on the January 15 daily collateral report sug‐ gests that there was incoming cash, because otherwise Wells Fargo would have been allowing an overdraft of $308,659.70. No. 12‐1208 23 $750,000 from Hindman, then Clark accepted the loan as a matter of law, notwithstanding the fact that the authorities at Clark were attempting to have the loan funds rejected. If, on the other hand, Clark took only advances that it could have taken without Hindman’s funds, then it is difficult to see how Clark accepted the loan given the wealth of evidence that those with decision‐making authority promptly took steps to reject the funds, though a trier of fact might find otherwise after gauging witness credibility and examining the documentary evidence. The record developed thus far does not provide an answer either way. This is a very peculiar case. The district court erred in casting aside Hindman’s arguments as irrelevant. There may be grounds for rejecting Hindman’s theory, but relevance is not one of them. We need not explore what those other grounds may be because Wells Fargo has not bothered to raise them and instead has largely ignored Hindman’s spe‐ cific contentions concerning D.D.H.’s authority. Although Clark may have accepted through its conduct, there are too many factual uncertainties in this record to warrant sum‐ mary judgment in either party’s favor. Because the record is unclear as to whether Clark accept‐ ed Hindman’s purported loan, thereby creating Subordinat‐ ed Indebtedness, we cannot say that Hindman breached the subordination agreements as a matter of law. This problem alone requires that the district court’s judgment be vacated and the cause remanded for further proceedings. The par‐ ties, however, quarrel over several other issues that are like‐ ly to reappear on remand if Clark is found to have accepted Hindman’s loan. We will address those issues in the interest 24 No. 12‐1208 of judicial economy. See, e.g., Stollings v. Ryobi Techs., Inc., 725 F.3d 753, 763 (7th Cir. 2013).