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Blackrock Capital Investment Corporation v. Fish

Supreme Court of West Virginia

April 24, 2017

BLACKROCK CAPITAL INVESTMENT CORPORATION and 52nd STREET ADVISORS LLC, Defendants Below, Petitioners,
v.
JERRY FISH; WILLIAM FISH; and FLORA FISH, as Administratrix of the Estates of James Eugene Fish and Jeffrey Scott Fish; RICHARD T. SWAIN, CATHY MAJORIS, and MEGAN SCHLOTTER SWAIN, as Co-Administrators of the Estate of Steven M. Swain; and DAVID SCOTT WILLIAMS and RUTH WILLIAMS, Plaintiffs Below; AL SOLUTIONS, INC.; and TREMONT ASSOCIATES, LLC, Defendants Below; and TRAVELERS PROPERTY CASUALTY COMPANY OF AMERICA, Intervenor Below, Respondents.

          Submitted: January 25, 2017

         Appeal from the Circuit Court of Hancock County The Honorable Ronald E. Wilson, Judge Civil Action Nos. 11-C-88 and 11-C-90

          Jeffrey A. Holmstrand, Esq. Grove, Holmstrand & Delk, PLLC Counsel for the Petitioners

          Tiffany R. Durst, Esq. Nathaniel D. Griffith, Esq. Brown & Poe, PLLC Counsel for Respondent AL Solutions, Inc.

          Robert P. Fitzsimmons, Esq. Clayton J. Fitzsimmons, Esq. Fitzsimmons Law Firm PLLC Wheeling, West Virginia Mark Colantonio, Esq. M. Eric Frankovitch, Esq. Carl A. Frankovitch, Esq. Frankovitch, Anetakis, Colantonio and Simon Counsel for the Plaintiffs Below

          LOUGHRY CHIEF JUSTICE dissents and reserves the right to file a separate opinion, WALKER JUSTICE dissents and reserves the right to file a separate opinion.

         SYLLABUS BY THE COURT

         1. "A motion for summary judgment should be granted only when it is clear that there is no genuine issue of fact to be tried and inquiry concerning the facts is not desirable to clarify the application of the law." Syllabus Point 3, Aetna Casualty & Surety Co. v. Federal Insurance Co. of New York, 148 W.Va. 160, 133 S.E.2d 770 (1963).

         2. "A circuit court's entry of summary judgment is reviewed de novo." Syllabus Point 1, Painter v. Peavy, 192 W.Va. 189, 451 S.E.2d 755 (1994).

         3. "A circuit court's entry of a declaratory judgment is reviewed de novo." Syllabus Point 3, Cox v. Amick, 195 W.Va. 608, 466 S.E.2d 459 (1995).

         4. This Court reviews a circuit court's interpretation of a contract de novo.

          KETCHUM JUSTICE

         In this appeal from the Circuit Court of Hancock County, we examine the equitable doctrine of unconscionability. Before the circuit court, a subsidiary company sought a declaratory judgment against its parent companies. The subsidiary challenged three management agreements by which the parent companies managed, controlled and participated in the affairs of the subsidiary.

         The subsidiary company claimed that two clauses in the agreements were unconscionable. One clause said the parent companies could never be liable to the subsidiary; the other clause required the subsidiary to indemnify the parent companies for all legal and liability costs. The subsidiary company asserted the parent companies unilaterally imposed the clauses without giving the subsidiary any meaningful choice, and asserted that the clauses were oppressive and unjust. The circuit agreed and, in an order dated October 16, 2015, declared that the two challenged clauses were unconscionable and unenforceable.

         One of the parent companies now appeals. As we discuss below, we find no error in the circuit court's declaratory judgment order ruling the clauses unconscionable.

         I. FACTUAL BACKGROUND

         In December 2010, an explosion and fire killed three workers at a processing plant in New Cumberland, West Virginia. The plant processed powdered titanium and zirconium, metals that are pyrophoric and "liable to ignite spontaneously on exposure to air."[1] Moreover, industry safety guides say that water should never be sprayed on these metals if they catch fire; the titanium and zirconium will dissociate water into oxygen and hydrogen gas, and the hydrogen will then explode.[2] Prior to the fire, a water-based fire suppression system was installed in the processing plant.

         This appeal centers on three agreements to manage the processing plant that were executed four years before the fire, in December 2006. These management agreements involved three corporate parties: Tremont, Blackrock, and the subsidiary they created, AL Solutions.

         The first corporate party, respondent Tremont Associates, LLC ("Tremont"), was a broker that connected buyers and sellers of businesses. Tremont often took an ownership stake in the businesses for its efforts. Tremont had no employees and just two owners: Troy Kenyon and Henry Goddard.

         In mid-2006, Tremont learned that a company (called Jamegy, Inc.) was seeking to sell its titanium and zirconium processing business, including the West Virginia processing plant. Tremont then searched for investors to buy the processing business.

         The investors Tremont settled upon are the second party. Petitioner Blackrock Kelso Capital Corporation is an investment fund; petitioner Blackrock Kelso Capital Advisors, LLC, managed that investment fund.[3] These two companies operated jointly and seamlessly in the purchase of the West Virginia processing plant, and we - like the parties - refer to them singularly as "Blackrock." It is important to know the names of two employees of Blackrock: Marshall Merriman and Stephen Sachman.

         On December 6, 2006, Tremont and Blackrock (the parent companies) came together and incorporated the third party, AL Solutions, Inc. (the subsidiary).[4] The stated function of AL Solutions was to buy and operate the West Virginia processing plant. The documents of incorporation fixed the number of directors at three. Three directors were then appointed: Mr. Kenyon (from Tremont), and Mr. Merriman and Mr. Sachman (from Blackrock). Those three directors then anointed Mr. Goddard (from Tremont) as president of AL Solutions. Mr. Goddard later testified that the decision to appoint him as president was "dictated . . . by the guys at Blackrock."

         On December 29, 2006, three management agreements were executed between AL Solutions on the one side (identified in the agreements as "the company"), and Tremont and Blackrock on the other (identified as "the management parties").[5] Each management agreement required Tremont and Blackrock to provide "certain services" to AL Solutions. The three agreements were:

● The "Management Services Agreement, " under which Tremont and Blackrock agreed to provide "certain agreed upon management and financial services" to AL Solutions;
● The "Advisory Services Agreement, " which required the provision of "certain advisory services" to AL Solutions; and
● The "Transaction Fee Agreement, " requiring the provision of "certain consulting and advisory services" to AL Solutions.

         In exchange for providing "certain services" to AL Solutions, Tremont and Blackrock were entitled to collect fees. In an e-mail, Mr. Goddard said these fees were important to Tremont because "management fees keep the lights on over here."

         The "certain services" Tremont and Blackrock were required to provide are nowhere defined, in the agreements or elsewhere. In discovery, individuals from Tremont and Blackrock all claimed in some fashion that the agreements made them responsible for providing AL Solutions with "management services" or "guidance and assistance." However, they were also of the opinion that safety issues at the processing plant were not within the scope of the agreements. For instance, Mr. Sachman testified that safety was "completely outside the purview" of the Management Services Agreement, but conceded, "I can't point you to a specific clause within the agreement that explicitly says that."

         Within each of these management agreements are two clauses that are the focus of this appeal. The first is an indemnification clause that requires AL Solutions to indemnify Tremont and Blackrock "from any and all losses, claims, damages and liabilities" arising out of the agreements or "the rendering of any other advice or performance of any other services[.]"[6] The second clause is titled "no liability, " and says that Tremont and Blackrock cannot be liable to AL Solutions "in contract or tort or otherwise" for anything arising out of the agreements.[7]

         At a meeting on December 29, 2006, lawyers employed by Tremont and Blackrock presented the three management agreements to Mr. Goddard. No lawyer was hired to represent the interests of AL Solutions, either in the negotiation or the execution of the agreements. Mr. Goddard signed the three agreements as "president" of AL Solutions; he then signed the same documents as the "managing director" of Tremont. The chief operating officer of Blackrock (Michael Lazar) signed, and then the board of directors for AL Solutions approved the agreements.

         After signing the three management agreements, and on the same day, Mr. Goddard stepped down as president of AL Solutions. Mr. Goddard admitted in a deposition that his sole purpose in being appointed as president of AL Solutions for less than one month was to "just sign[] some papers to set the shell up."

         During the period that Tremont and Blackrock were negotiating and consummating the December 2006 purchase of the titanium and zirconium business, several fires or explosions occurred at the processing plant. In July 2006, a worker died in a fire. Fires also occurred on December 21, 2006, and February 7, 2007. Testimony suggested no one from Tremont or Blackrock investigated the cause of these fires. Instead, even though safety documents said water should never be used on titanium and zirconium fires, a water deluge system was installed. Despite the fire suppression system, at least three more fires occurred at the processing plant.[8]

         On December 9, 2010, another explosion and fire occurred at the processing plant. Three AL Solutions employees were killed in the fire: brothers James Eugene Fish and Jeffrey Scott Fish died inside the plant; Steven M. Swain's skin was burnt off inside the plant but he escaped and collapsed outside, only to die of his burn injuries four days later. A contractor, David Scott Williams, escaped but received burns. Employees Jerry Fish and William Fish - brothers of decedents James and Jeffrey Fish - suffered emotional distress when they witnessed the fire that killed their brothers.

         The circuit court noted that, over a 15-year period culminating in December 2010, fires and explosions had killed nearly 20% of the workforce at this plant.

         II. PROCEDURAL BACKGROUND

         The plaintiffs (the injured workers and the family members of the deceased workers) sued defendants AL Solutions, Tremont, and Blackrock. The plaintiffs asserted that, through powers conferred by the three management agreements, Tremont and Blackrock actively managed, controlled, and participated in the daily affairs of AL Solutions.[9] The plaintiffs alleged that, acting together, the three defendants recklessly operated and managed the West Virginia processing plant and that they knowingly failed to comply with federal, state, and industry safety standards.[10]

         When AL Solutions answered the plaintiffs' complaints, it also asserted a cross-claim for contribution and/or indemnification against its parent corporations, Tremont and Blackrock. Tremont and Blackrock countered by asserting claims against AL Solutions pursuant to the indemnification and no-liability clauses in the three management agreements. Tremont and Blackrock alleged that AL Solutions was contractually obligated to pay for their attorney fees and costs defending against the plaintiffs' case and to indemnify them from liability.

         AL Solutions subsequently amended its cross-claim against Tremont and Blackrock and added a request for a declaratory judgment. AL Solutions asked the circuit court to declare that the indemnification and no-liability clauses in the management agreements were unconscionable and unenforceable. On November 18, 2014, AL Solutions filed a motion for partial summary judgment regarding the unconscionability of those two clauses.

         In an order dated October 16, 2015, the circuit court granted partial summary judgment in favor of AL Solutions. Applying West Virginia law to the contracts, the circuit court found the indemnification and no-liability clauses procedurally and substantively unconscionable.

         Blackrock now appeals the circuit court's partial summary judgment order.[11]

         III. STANDARD OF REVIEW

         "A motion for summary judgment should be granted only when it is clear that there is no genuine issue of fact to be tried and inquiry concerning the facts is not desirable to clarify the application of the law."[12]

         We review a circuit court's entry of an order granting summary judgment, as well as an order granting a declaratory judgment, de novo.[13] Additionally, this Court reviews a circuit court's interpretation of a contract de novo.[14] The term "de novo" means "Anew; afresh; a second time."[15] "We have often used the term 'de novo' in connection with the term 'plenary.' . . . Perhaps more instructive for our present purposes is the definition of the term 'plenary, ' which means '[f]ull, entire, complete, absolute, perfect, unqualified.'"[16]

         We therefore give a new, complete and unqualified review to the parties' arguments and the record before the circuit court. Our goal is to determine if there is any genuine issue of fact about the unconscionability of the two clauses, or if any inquiry concerning the facts is desirable to clarify the application of the law.

         IV. ANALYSIS

         Blackrock's appeal of the circuit court's order boils down to two assertions of error. Blackrock's central argument is that the circuit court ignored a choice of law provision within each management agreement that required the application of New York, not West Virginia, law. When construed under New York principles of contract law, Blackrock argues that the indemnification and no-liability clauses are conscionable and fair. Blackrock's second argument challenges the manner in which the circuit court entered its ruling, asserting the circuit court ruled on an incomplete record and thereby deprived it of due process.

         We address and, as explained below, reject Blackrock's two contentions.

         A. Unconscionability in General

         The first argument we address is Blackrock's assertion that the indemnification and no-liability clauses are conscionable and fair. Blackrock contends the circuit court erred in finding the clauses to be unconscionable, in part because it failed to interpret the clauses under New York law.

         The circuit court found the indemnification clause and the no-liability clause unconscionable after applying West Virginia law. However, the management agreements contain a choice of law provision providing that they would "be governed and construed in accordance with the internal laws of the State of New York[.]" This Court has recognized "the presumptive validity of a choice of law provision"[17] and found that such a provision is "not automatically void[.]"[18]

          Blackrock argues the circuit court erred in applying West Virginia law. We agree with Blackrock on this point, and hold that the circuit court should have assessed the unconscionability of the two clauses under New York law, not West Virginia law. Nevertheless, New York's unconscionability jurisprudence is structured almost identically to West Virginia's. Under a plenary review, when we apply New York's contract law to the record, the outcome of this case remains unchanged: the indemnification clause and no-liability clause in the management agreements are unconscionable.

         Under New York law, like under West Virginia law, an unconscionable agreement is one that "is so grossly unreasonable or unconscionable in the light of the mores and business practices of the time and place as to be unenforcible [sic] according to its literal terms."[19] "[A]n unconscionable contract is one such as no man in his senses and not under a delusion would make on the one hand, and as no honest or fair man would accept, on the other."[20] The doctrine of unconscionability is rooted in equitable principles, is flexible, and is "intended to be sensitive to the realities and nuances of the bargaining process[.]"[21]

         Like West Virginia, New York law holds that a party alleging unconscionability must generally show that "the contract was both procedurally and substantively unconscionable when made - i.e., some showing of an absence of meaningful choice on the part of one of the parties together with contract terms which are unreasonably favorable to the other party."[22] "The procedural element of unconscionability concerns the contract formation process and the alleged lack of meaningful choice; the substantive element looks to the content of the contract, per se."[23] A court assesses the existence of overall unconscionability under a sliding scale between procedural and substantive unconscionability: "the more questionable the meaningfulness of choice, the less imbalance in a contract's terms should be tolerated and vice versa."[24]

         One court summarized New York's doctrine of unconscionability this way:

In determining the conscionability of a contract, no set weight is to be given any one factor; each case must be decided on its own facts. However, in general, it can be said that procedural and substantive unconscionability operate on a "sliding scale"; the more questionable the meaningfulness of choice, the less imbalance in a contract's terms should be tolerated and vice versa. While there may be extreme cases where a contractual term is so outrageous and oppressive as to warrant a finding of unconscionability irrespective of the contract formation process such cases are the exception. Generally, there must be a showing of both a lack of a meaningful choice and the presence of contractual terms which unreasonably favor one party. . . . Absent some violation of law or transgression of a strong public policy, the parties to a contract are basically free to make whatever agreement they wish, no matter how unwise it might appear to a third party. The doctrine of unconscionability, with its emphasis on the contract-making ...

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