Opinion ID: 2616451
Heading Depth: 1
Heading Rank: 2

Heading: Changes in Terms of MPI's Debt Financing

Text: In order to make the cash payments to LP required at closing, MPI had to borrow money. GP personnel secured $4.5 million for this purpose for MPI from the Bank of America. The GP personnel informed the Montana group that they had borrowed this amount for six months and had signed a note. The Montana group never saw the note and apparently was not informed exactly when the note was due except some time in December 1974. GP guaranteed the loan. The intention of GP at the time of the loan, which was expressed to the Montana group, was that when this note became due it would be renewed for a longer term, 3 to 5 years. The renewal would be guaranteed by GP which would also guarantee loans to MPI of larger amounts. GP's action and intention were pursuant to paragraph 4(b) which provides, in part: MPI may borrow funds for the acquisition of assets and for working capital. OPM [GP's subsidiary] shall use its best efforts to assist MPI in borrowing such funds and each of the parties agrees to jointly and severally guarantee payment of any loan or loans to MPI. Harry Kane was GP's, and also MPI's executive vice president of finance and a member of MPI's board of directors. On December 19, 1974, about a week before the 6-months note was due, and in the absence of any demand by Bank of America, Mr. Kane caused GP to pay the Bank of America loan. He also had a demand note to GP executed on behalf of MPI in the amount of the payoff by GP. It is undisputed that Mr. Kane took these steps without consulting MPI's board of directors (which had met only two days earlier, on December 17) and without informing the Montana group of his intentions. [5] It is also undisputed that he did this without informing MPI's board of directors or the Montana group that in October 1974 GP had approved a guarantee to the Bank of America of any indebtedness of MPI up to $10 million. In the minutes of the GP board of directors' meeting at which this guarantee was approved, the chairman and Mr. Kane stated that it was necessary in conjunction with the purchase from LP to make this guarantee. We interpret this statement to mean that the guarantee was required under the obligation GP assumed under paragraph 4(b) of the shareholders' agreement previously quoted. When a guarantor is required to pay a debt it has guaranteed, the guarantor has a right to payment from the debtor. However, in this case there is no evidence the bank required payment from GP or MPI. The strong inference is to the contrary. At the time the note was paid, GP's guarantee was on file with the bank and it would have covered any renewal or extension of the loan. The trial court found the bank was prepared to lend funds to MPI on the basis of this. The expectation of the Montana group, as expressed in the shareholders' agreement, was that GP would arrange longer term financing. GP contends that it had a right to pay off the Bank of America loan under the terms of the shareholders' agreement executed upon the incorporation of MPI. The section of the agreement relied upon by GP provides:    If either party pays any debt of MPI, the other party shall reimburse such party for any payment in excess of one-half of such debt; provided, however, that no prepayment of term indebtedness shall be made without the mutual consent of the parties.   . We do not construe this provision to authorize GP to pay the Bank of America loan and substitute a demand note without the knowledge or approval of the MPI board of directors and without notifying MPI of possible alternative financing. The agreement provides that the business and affairs of MPI are to be managed by a six-member board of directors, and that GP and MLS are each to have the right to designate three of the directors. It is not, of course, a breach of fiduciary duty for a joint venturer, or a stockholder in a close corporation, to loan money to the enterprise. However, the refinancing of a debt in excess of $4.5 million is a major item of business; the terms of such a refinancing were a proper matter for determination by the board of directors. MPI's board, including the Montana group's nominees, should have been informed that the $10 million loan guarantee was in the hands of the Bank of America and should have been given an opportunity to explore the possibility of long-term bank financing. Instead GP appropriated to itself the power that inevitably accrues to a creditor who is in a position to call in a major debt at any time. We have been cited to no authorities which are in point. It has been held that corporate insiders may not profit financially from a private purchase of a corporation's liabilities when they had a duty to acquire them for the corporation. Young v. Columbia Land & Inv. Co., 53 Or. 438, 99 P. 936, 101 P. 212 (1909). See, generally, 3 Fletcher Cyclopedia Corporations §§ 868-869 (1975 Repl. Vol.). Although there is here no question of financial profit to GP (except in the matter of interest rates, discussed below) the fiduciary principle is, in our opinion, the same. GP obtained significant financial leverage in the management of MPI without the authority of MPI's board of directors and without informing the board that alternative possibilities existed. This transaction was a clear breach of duty on the part of GP.