On appeal from Superior Court of New Jersey, Chancery Division, Mercer County.
Before Judges Skillman, Kestin and Wefing.
The opinion of the court was delivered by
In early 1988, defendants Aris and Marilena Christodoulou, through their wholly-owned holding company, defendant Mayfair Pharmaceutical, Inc., purchased defendant Penick Corporation (Penick), which was a pharmaceutical company primarily engaged in the manufacture of bulk pharmaceuticals, particularly opium derivatives, for other companies, as well as the fermentation of pharmaceuticals and the manufacture of bismuth salts. To finance this acquisition, Penick borrowed $5 million from plaintiff Glenfed Financial Corporation (Glenfed) under a five-year term note. Penick also obtained a revolving line of credit from Glenfed, which was governed by a formula under which Penick could borrow up to 85% of its eligible accounts receivable, 50% of its inventory and 25% of its work in progress, subject to a maximum of $4 million. As security for these loans, Glenfed took a first lien on all of Penick's assets and also required Penick to place all payments from its customers in a "blocked account" to be held in trust for Glenfed.
Shortly after it was acquired by the Christodoulous, Penick began experiencing substantial financial losses, due primarily to sharp increases in the prices of its raw materials and intense price competition in the markets for its primary products. Consequently, Penick attempted through a series of proposed transactions to obtain additional financing from sources other than Glenfed. First, Penick attempted to borrow $2.5 million from another financial institution, Atlantic Bank (Atlantic), but this proposed
loan was made contingent on Glenfed's agreeing to share its security interest in Penick's assets with Atlantic. When Glenfed refused to consent to any dilution of its security interest, Atlantic declined to proceed with the loan. Second, Penick proposed to sell its primary business, the manufacture of opium derivatives, to one of its principal competitors, Mallinckrodt Special Chemical Company (Mallinckrodt). This proposal would have involved the transfer to Mallinckrodt of equipment and inventory in which Glenfed held a security interest, with Penick continuing to be indebted to Glenfed for approximately $1 million. Mallinckrodt set a short deadline for Penick to decide whether to enter into this transaction. Glenfed failed to decide whether to consent to the release of its collateral by that deadline, and consequently the transaction was not consummated. Third, Penick attempted to obtain additional financing through an Initial Public Offering (IPO) of its stock. In connection with this proposal, Penick requested Glenfed to waive Penick's violations of certain financial covenants and not to accelerate the maturity date of its loans, because the Securities and Exchange Commission would approve the IPO only if Penick's obligation to Glenfed matured at least twelve months after the IPO offering date. However, Glenfed insisted that the due date on its note be accelerated to a date no later than April 2, 1992, thus allegedly preventing the IPO from being approved.
After Penick was unsuccessful in its various efforts to obtain additional financing, it began diverting payments received from its customers, which under the loan agreement were supposed to be placed in the blocked account for the benefit of Glenfed, into its regular operating accounts. These diversions eventually totaled $866,173.53.
When Glenfed became aware of Penick's diversions of customer payments, it declared the loan in default, accelerated Penick's obligations thereunder, and initiated this litigation to collect the outstanding balance. Glenfed joined Aris and Marilena Christodoulou as defendants, alleging that their involvement in the diversion
of payments from Glenfed's customers constituted a conversion and an interference with its contractual rights.
Penick filed a counterclaim, alleging that Glenfed's failure to cooperate in Penick's various attempts to secure additional financing constituted a breach of Glenfed's implied duty of good faith and fair dealing. Penick also alleged that Glenfed had applied economic duress in securing Penick's agreement to the acceleration of the due date of the note from May 2, 1993 to April 2, 1992. In addition, Penick alleged that Glenfed had breached the revolving credit agreement by failing to advance additional funds in accordance with its terms.
The case was tried in the Chancery Division over a period of thirteen days. The trial court concluded that Penick had breached its obligations under the revolving credit agreement by diverting payments from its customers from the blocked account into its operating accounts, and that Penick owed Glenfed $4,440,172.83 under the credit agreement. The court also concluded that Glenfed had not breached its duty of good faith and fair dealing with respect to its involvement in Penick's efforts to secure additional financing either through the proposed loan of an additional $2.5 million from Atlantic or the sale of its bulk narcotics business to Mallinckrodt. However, the court concluded that Glenfed had exerted economic duress to secure Penick's consent to the acceleration of the maturity date of the note, and as a result Penick had suffered $3 million in damages. The court set-off these damages against the $4,440,172.83 which Penick owed Glenfed and entered judgment in favor of Glenfed for $1,440,172.83. The trial court also dismissed Glenfed's claims against the Christodoulous and declined to award Glenfed any counsel fees.
Glenfed appeals from those parts of the judgment which awarded Penick $3 million on its counterclaim and which dismissed Glenfed's claims against the Christodoulous, and also from the court's failure to award counsel fees. Penick cross-appeals from the part of the judgment which reflects the trial court's rejection of its counterclaim based on Glenfed's alleged breach of its duty of
good faith and fair dealing in connection with the proposed sale to Mallinckrodt. Penick also cross-appeals from the trial court's failure to award the full amount of damages which it sought on its counterclaim and from the court's failure to award prejudgment interest. Penick does not appeal from the trial court's rejection of its claims that Glenfed breached the revolving credit agreement by improperly limiting advances for working capital and that Glenfed breached its duty of good faith and fair dealing by refusing to share its security interest in Penick's assets with Atlantic.
We conclude that the trial court erred in determining that Glenfed exerted improper economic duress upon Penick in connection with the acceleration of the maturity date of its debt, and that there is no alternative basis for the imposition of liability upon Glenfed in connection with either Penick's proposed sale to Mallinckrodt or its proposed IPO. Therefore, we reverse the $3 million judgment entered in favor of Penick on its counterclaim. We also conclude that the Christodoulous are personally liable to Glenfed for the conversion of $866,173.53 in payments received from Penick's customers and that Glenfed is entitled to counsel fees in accordance with the terms of the loan agreement. Since the trial court should have dismissed Penick's counterclaims, we have no need to consider Penick's other arguments and we affirm the parts of the judgment challenged by Penick on its cross-appeal.
Our courts recognize that an otherwise enforceable contract may be invalidated on the ground that it was entered into under "economic duress." Continental Bank of Pa. v. Barclay Riding Academy, Inc., 93 N.J. 153, 175, 459 A.2d 1163, cert. denied, 464 U.S. 994, 104 S. Ct. 488, 78 L. Ed. 2d 684 (1983). Although "there is still not firm agreement as to the scope of the concept of 'economic duress,'" ibid., "the 'decisive factor' ...