Opinion
Civil No. 02-521 (RHK/AJB)
May 9, 2002
Marianne D. Short, Perry M. Wilson, III, and Paul J. Robbennolt, Dorsey Whitney, LLP, Minneapolis, Minnesota, for Plaintiff.
David L. Sasseville and Matthew P. Lewis, Lindquist Vennum, P.L.L.P., Minneapolis, Minnesota, for Defendants.
MEMORANDUM OPINION AND ORDER
Introduction
The parties are involved in a commercial dispute relating to a Purchase Agreement, Note, and Warrant, all of which were issued when Defendant Bayview Capital Partners, LP ("Bayview") agreed to provide subordinated debt financing to Velocity Express Corporation ("Velocity"). Before the Court is Defendants' Motion to Dismiss, brought pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure. For the reasons set forth below, Defendants' Motion will be granted with respect to Count I, and the remainder of the case remanded to Hennepin County District Court.
Also before the Court is Velocity's Motion for Partial Summary Judgment as to Count V, brought pursuant to Rule 56 of the Federal Rules of Civil Procedure. That motion has been briefed and is ready for disposition.
Background
Velocity is a Delaware corporation that provides "same-day-delivery and logistics solutions." (Compl. ¶ 1.) It is a "small business" within the meaning of the federal Small Business Investment Act of 1958 (the "SBIA"), 15 U.S.C. § 683, et. seq, and has its principal place of business in Minneapolis, Minnesota. (Id. ¶¶ 1, 44.) Bayview is a Minnesota limited partnership with its principal place of business in Wayzata, Minnesota. (Id. ¶ 2.) Bayview is licensed as a Small Business Investment Company (an "SBIC") by the Small Business Administration (the "SBA") and is regulated by the SBIA. (Id.) Bayview provides subordinated debt and equity capital to middle market companies. (Id.) Defendants Peter Kooman and Cary Musech are members of Bayview's Private Equity Team and are currently shareholders of Velocity. (Id. ¶¶ 3-4.)
In September 1999, Velocity agreed to acquire Corporate Express Delivery Systems, Inc. for approximately $60 million plus the assumption of debt. (Id. ¶ 5.) In connection with the transaction, GE Capital Corporation provided most of the acquisition funding, and Bayview provided subordinated debt financing pursuant to a Note and Warrant Purchase Agreement (the "Purchase Agreement"). (Id. ¶¶ 6-7, Ex. A.) Pursuant to the Purchase Agreement, Bayview loaned $5 million to Velocity, for which it was compensated in two ways: (1) under a Senior Subordinated Note (the "Note"), Velocity agreed to repay all the outstanding interest by September 30, 2004 at a 12% interest rate and (2) under a warrant (the "Warrant"), Velocity granted to Bayview the option to acquire Velocity common stock in the future at a set price. (Id. ¶¶ 7-8, Exs. B C.) Bayview was granted additional rights under the Purchase Agreement, Note, and Warrant, including the right to designate a nominee for election as a director of Velocity. (Id. ¶ 12.)
GE Capital Corporation is no longer involved with the parties to this litigation, and the Court has been advised by counsel that GE Capital Corporation has no financial interest in the outcome of this litigation.
The parties' relationship deteriorated after the agreements were signed, resulting in Velocity filing a nine-count Complaint in Hennepin County District Court, alleging breach of contract, breach of fiduciary duty, breach of the duty of loyalty, economic duress, and unjust enrichment, and seeking declaratory judgment, specific performance, and a temporary and permanent injunction.
On March 7, 2002, Defendants removed the action from Hennepin County District Court to this Court, pursuant to 28 U.S.C. § 1446. In the Notice of Removal, Defendants asserted that the action arises, in part, under federal law (the SBIA, 15 U.S.C. § 683, et. seq. and its regulations, 13 C.F.R. § 101, et. seq.) and that pursuant to 28 U.S.C. § 1441 and 1446, Bayview was entitled to remove the action to federal court. (See Notice of Removal.) Velocity did not oppose the removal. On March 25, 2002, Velocity moved for partial summary judgment with respect to Count V, and on March 29, 2002, Defendants jointly moved to dismiss the nine-count Complaint.
Analysis
Defendants have moved to dismiss all nine counts of the Complaint for failure to state claims upon which relief may be granted. For the reasons stated below, the Court addresses only Count I.
I. Count I
In Count I, entitled "Breach of Contract-Cost of Money," Velocity asserts that (1) it is a "small business" within the meaning of the SBIA, (2) Bayview is an SBIC regulated by the SBA pursuant to the SBIA, and (3) the Purchase Agreement and Warrant "are subject to the SBIA provisions and its regulations, 13 C.F.R. § 101, et. seq., and incorporate those provisions and regulations into the terms of the [Purchase] Agreement and Warrant." (Compl. ¶¶ 44-46.) Velocity alleges that Bayview breached the Purchase Agreement and Warrant by charging Velocity certain interest rates and fees above 14%, in violation of the cost of money ceiling provided for under 13 C.F.R. § 107.885. (Id. ¶¶ 47-48.)
A. Jurisdiction Over Count I
This Court has subject matter jurisdiction over "all civil actions arising under the Constitution, laws, or treaties of the United States." 28 U.S.C. § 1331. In Count I, Velocity asserts that the Purchase Agreement and Warrant are subject to the SBIA (a federal statute) and its regulations (federal regulations) and that Bayview is in violation of 13 C.F.R. § 107.855. (Compl. ¶¶ 44, 48.) Count I is the only count that references federal law and is the sole basis for Defendants' removal of this action to this Court. Although Velocity did not oppose the removal, at oral argument its counsel asserted that this Court does not have jurisdiction over any of the nine counts because Count I does not arise under federal law and that therefore, the Complaint in its entirety should be remanded to state court. Specifically, Velocity contends that because the Purchase Agreement and Warrant incorporate by reference the SBIA and its regulations, Count I is simply alleging a breach of the Purchase Agreement and Warrant, which sets forth a cost of money ceiling.
Federal regulations are treated as "laws of the United States." See Chasse v. Chasen, 595 F.2d 59, 61 (1st Cir. 1979) (stating "[i]t is beyond dispute that validly issued administrative regulations or executive orders may be treated as "laws of the United States" under § 1331(a)").
Velocity's incorporation-by-reference argument fails. The Court looks to the substance of the allegations in Count I, rather than their form, to determine the nature of the claim. The Purchase Agreement and Warrant make no reference to incorporating by reference the SBIA and its regulations, nor do they make reference to a maximum interest rate and fees that can be charged. The substance of Count I is the allegation that Bayview violated 13 C.F.R. § 107.885. Therefore, the substance of Count I is a claim that arises under federal law, over which this Court has jurisdiction.
B. Motion to Dismiss Count I
Bayview seeks the dismissial of Count I for failure to state a claim upon which relief can be granted. In considering a motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6), the Court must take as true the allegations contained in the complaint. Cooper v. Pate, 378 U.S. 546, 84 S.Ct. 1733 (1964) (per curiam). A complaint
must be viewed in the light most favorable to the plaintiff and should not be dismissed merely because the court doubts that a plaintiff will be able to prove all of the necessary factual allegations. "Thus, as a practical matter, a dismissal under Rule 12(b)(6) is likely to be granted only in the unusual case in which a plaintiff includes allegations that show on the face of the complaint that there is some insuperable bar to relief."
Fusco v. Xerox Corp., 676 F.2d 332, 334 (8th Cir. 1982) (quoting Jackson Sawmill Co. v. United States, 580 F.2d 302, 306 (8th Cir. 1978)). Viewing the complaint in this manner, a court may dismiss a case under Rule 12(b)(6) only if it is clear that no relief could be granted under any set of facts that could be proved consistent with the allegations. Hishon v. King Spalding, 467 U.S. 67, 73, 104 S. Ct. 2229, 2232 (1984) (citing Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 101-02 (1957)).
In Count I, Velocity asserts that Bayview, an SBIC, is charging certain interest rates in violation of 13 C.F.R. § 107.855. (Compl. ¶ 48.) SBICs are companies that provide equity capital for incorporated and unincorporated small businesses. See 15 U.S.C. § 684(a). Under the SBIA, SBICs are governed and regulated by 15 U.S.C. § 681, et. seq., and the regulations thereunder. Section 687(i) authorizes the issuance of regulations fixing the maximum rate of the total amount of money (or the "cost of money") that any SBIC may charge a small business borrower. 15 U.S.C. § 687(i). The SBA regulations define cost of money as "the interest and other consideration that you receive from a Small Business," and set out different cost of money ceilings for loans and debt securities. 13 C.F.R. § 107.885. In this case, the parties structured their transaction as one involving debt securities. Currently, the minimum cost of money ceiling for financing a debt security is 14%. Id.
A loan is defined as "a transaction evidenced by a debt instrument with no provision for you to acquire Equity Securities." 13 C.F.R. § 107.810.
Debt securities are defined as "instruments evidencing a loan with an option or any other right to acquire Equity Securities in a Small Business or its Affiliates, or [as a] loan which by its terms is convertible into an equity position, or a loan with a right to receive royalities that are excluded from the Cost of Money pursuant to § 107.855(g)(12)." 13 C.F.R. § 107.815(a).
Section 107.885 lists methods, which are not at issue in this matter, for determining if a ceiling rate higher than 14% applies. See generally, 13 C.F.R. § 107.885.
Generally, causes of actions arising under the SBIA must be brought by the SBA. Under § 687, however, a private party can bring a cause of action under the SBIA. See 15 U.S.C. § 687(i)(4). Section 687(i)(4) provides:
(4)(A) If the maximum rate of interest authorized under [the regulation, 13 C.F.R. § 107.885] on any loan made by a small business investment company exceeds the rate which would be authorized by applicable State law if such State were not preempted for purposes of this subsection, the charging of interest at any rate in excess of the rate authorized by paragraph (2) shall be deemed a forfeiture of the greater of (i) all interest which the loan carries with it, or (ii) all interest which has been agreed to be paid thereon.
(B) If in the case of any loan with respect to which there is a forfeiture of interest under subparagraph (A), the person who paid the interest may recover from a small business investment company making such a loan an amount equal to twice the amount of the interest paid on such a loan. Such interest may be recovered in a civil action commenced in a court of appropriate jurisdiction not later than two years after the most recent payment of interest.15 U.S.C. § 687(i)(4) (emphasis added).
In order to state a claim that a loan exceeds the cost of money ceiling set forth in 13 C.F.R. § 107.855, Bayview contends that under 15 U.S.C. § 687(i)(4) a borrower must show that the cost of money exceeded the maximum permissible rate under both applicable state law and the SBA regulation. (Bayview's Mem. in Supp. of Mot. to Dismiss at 6 (citing JZ Smoke Shop, Inc. v. American Commercial Capital Corp., 709 F. Supp. 422, 426 (S.D.N.Y. 1989).) Bayview argues that because Velocity has not alleged a violation of Minnesota usury law, Count I should be dismissed for failing to state a claim upon which relief can be granted. (Id. at 8.)
Velocity offers two responses: (1) Count I does not arise under § 687(i)(4) but rather the parties' Purchase Agreement, which merely incorporates by reference the cost of money ceiling embodied in the SBA regulations and (2) it disputes Bayview's assertion that breach of the cost of money ceiling is only actionable if the interest rate charged also violates state usury law. Citing In re Transworld Telecommunications, Inc., 260 B.R. 204 (D.Utah 2001), Velocity asserts that a violation of the cost of money ceiling, without regard to state usury law, is an actionable breach of contract. (Velocity's Mem. in Opp. of Mot. to Dismiss at 12.)
The Court rejects Velocity's arguments, concluding that the plain language of § 687(i)(4) requires a violation of state law: "[i]f the maximum rate of interest . . . exceeds the rate which would be authorized by applicable State law." 15 U.S.C. § 687(i)(4). Few cases have discussed this provision; however, two cases confirm the Court's reading of the statute. In Lloyd Capital Corp. v. Pat Henchar, Inc., 603 N.E.2d 246 (N.Y. 1992), the court discusses the SBIA and notes that "private parties may recover penalties where the violation also exceeds the permissible bounds of applicable State law." Lloyd Capital, 603 N.E.2d at 248 (citing 15 U.S.C. § 687(i)(4)(B)). In JZ Smoke, relied on by Bayview, the plaintiff, a corporate borrower, alleged that the defendant, an SBIC, violated § 687(i)(4) by charging excessive fees in violation of the SBA regulations and New York state usury law. JZ Smoke, 709 F. Supp. at 423. The court noted that in order for the plaintiff to recover on its claim under the SBIA, it must show that "the cost of money imposed by [the defendant] exceeded the maximum possible rate under applicable state law as well as the maximum permissible rate under the SBA regulations." Id. at 426. In that case, the plaintiff was unable to recover under § 687(i)(4) because it could not show that the defendant had violated New York state usury law. Id. at 427.
Velocity relies on In re Transworld to support its position that § 687(i)(4) does not require proof of a violation of state law. In that case, a Pennsylvania corporation and an SBIC entered into a loan agreement; subsequently, the corporation filed for bankruptcy. The district court, adopting the Bankruptcy Court's report and recommendation, found that the loan extended by the SBIC exceeded the cost of money ceiling set forth in 13 C.F.R. § 107.885. In re Transworld, 260 B.R. at 205. As part of its report and recommendation, the Bankruptcy Court also found that the loan agreement was governed by California law, the cost of money ceiling under applicable federal law was 14%, the loan agreement provided that the rate of interest shall not exceed the maximum rate permissible under applicable law, and determined that the SBIC had charged fees that exceeded 14%. Id. at 206-207. The bankruptcy court makes no mention of California state usury law, and from that omission, Velocity argues that § 687(i)(4) does not require a state law violation. The court in In re Transworld does not, however, hold that only a violation of the SBA regulation is required; it simply does not address whether a state law violation is required.
In light of the plain language of the statute and the persuasive discussions in JZ Smoke and Lloyd Capital, this Court concludes that in order to state a claim under § 687(i)(4), a plaintiff must allege a violation of both state usury law and the cost of money ceiling set forth in 13 C.F.R. § 107.885. In the Complaint, Velocity alleges a violation of 13 C.F.R. § 107.885 but not a violation of Minnesota usury law. Minnesota law does not set a ceiling for interest rates that can be charged to a corporation and provides that a corporation may not use usury as a defense to any action. See Minn. Stat. § 334.21 ("[n]o corporation shall hereafter interpose the defense of usury in any action"); see also Jones v. Nelson, 432 N.W.2d 792, 796 (Minn.Ct.App. 1988); Midwest Fed. Sav. Loan Ass'n v. West Bend Mut. Ins. Co., 407 N.W.2d 690, 695 (Minn.Ct.App. 1987). Because Minnesota does not set an interest rate ceiling for corporations, Velocity, as a corporation, cannot allege a claim for a violation of Minnesota state usury law. Therefore, under § 687(i)(4), Velocity cannot state a claim upon which relief can be granted, and Count I must be dismissed.
Finally, the Court notes that Velocity's incorporation-by-reference argument suffers a logical defect. Velocity states that the Purchase Agreement and Warrant are subject to the SBIA and its regulations and that the parties incorporate by reference those provisions into the terms of the Purchase Agreement and Warrant. (See Velocity's Mem. in Opp. of Mot. to Dismiss at 3; see also Compl. ¶ 46.) Yet, Velocity seeks only the cost of money ceiling (not the other statutory sections) to apply to the parties' agreements. The Complaint, the agreements themselves, and Velocity's memorandum do not support this argument. If the parties intended to incorporate by reference the provisions of the SBIA and its regulations, the parties incorporated by reference all, not part, of the SBIA and its regulations, including § 687(i)(4) which requires a violation of state law.
II. Supplemental Jurisdiction
Title 28 U.S.C. § 1367(a) provides that district courts "shall have supplemental jurisdiction over all other claims that are so related to claims in the action within such original jurisdiction that they form part of the same case or controversy under Article III of the United States Constitution." 28 U.S.C. § 1367(a). With the dismissal of Count I, only state law claims remain. As a result, supplemental jurisdiction over the remaining counts becomes discretionary under 28 U.S.C. § 1367(c)(3). Mindful of the need to "exercise judicial restraint and avoid state law issues whenever possible," the Court determines that it should not exercise supplemental jurisdiction over the remaining counts in the Complaint; accordingly, the Complaint will be remanded to state court. See Condor Corp. v. City of St. Paul, 912 F.2d 215, 220 (8th Cir. 1990); Banovetz v. King, 66 F. Supp.2d 1076, 1087-88 (D.Minn. 1999) (Tunheim, J.); 16 Moore's Federal Practice § 106.66 (Matthew Bender 3d ed.) (stating that "[i]f the jurisdiction-conferring claims are dismissed at an early stage of the proceedings, so that there has been no commitment of federal judicial resources, dismissal is almost always indicated").
At oral argument, counsel for both parties acknowledged that Counts II-IX do not arise under federal law.
Conclusion
Upon all the files, records, and proceedings herein, and for the reasons stated above, IT IS ORDERED that
1. Defendants' Motion to Dismiss (Doc. No. 14) is GRANTED IN PART and Count I of the Complaint is DISMISSED WITH PREJUDICE; and
2. The Clerk of Court is directed to remand this case to the Hennepin County District Court.
LET JUDGMENT BE ENTERED ACCORDINGLY.