The opinion of the court was delivered by: Judge Smith
Plaintiff The Chillicothe Telephone Company ("Plaintiff" or "CTC") brings this action seeking recovery of $5,482,867 paid to Defendants The Variable Annuity Life Insurance Company and Modern Woodmen of America (collectively "Defendants") in the course of a financing transaction between the parties. Defendants move to dismiss for failure to state a claim upon which relief can be granted (Doc. 15). Defendants have also filed a motion to add additional authority (Doc. 23). For the reasons that follow the Court GRANTS Defendants' Motion to Add Additional Authority (Doc. 23) and GRANTS Defendants' Motion to Dismiss (Doc. 15).
Plaintiff CTC and Defendants are parties to two sets of note purchase agreements ("Note Agreements") and promissory notes ("Notes") by which Defendants loaned $42,000,000 to Plaintiff CTC. (See Compl. ¶ ¶ 8,12 and Exhibits A-D). The Note Agreements and Notes were entered into on August 1, 2002 and November 1, 2002. See id.
The Note Agreements contained covenants relating to Plaintiff CTC's net worth ("Net Worth Covenant") and total debt ("Total Debt Covenant"). With respect to the Net Worth Covenant, the Note Agreements provided that Plaintiff CTC would:
. . . maintain Consolidated Adjusted Net Worth in an amount at least equal to $30,000,000, plus 25% of Consolidated Net Income, if any, determined on a cumulative basis for each fiscal year of the Company ending on or after December 31, 2002 and prior to the twelve-month period for which such determination is being made (without reduction for any Consolidated Net Loss incurred in any such fiscal year). (Compl. at ¶ 17).
With respect to the Total Debt Covenant, the Note Agreements provided "at the end of any fiscal quarter of the Company, Consolidated Total Debt [would not] exceed 60% of Consolidated Total Capitalization as of such fiscal quarter end." (Compl. at ¶ 18). Plaintiff CTC alleges that the intent of these net worth and total debt covenants was to ensure Defendants of the continuing ability of Plaintiff CTC to pay the principal and interest due on the Notes. (Compl. at ¶ 19).
If Plaintiff defaulted on the Net Worth or Total Debt Covenants, Defendants could, at "their option, by notice in writing to the [Plaintiff], declare the [Note Agreements] to be forthwith due and payable . . . together with interest accrued thereon and the premium specified in Section 2(a) . . . ." (Compl. Ex. A, Section 7). Section 2(a) sets forth the formula for determining the prepayment premium. (Compl. Ex. A, Section 2). Section 2(a) further allows for voluntary prepayment of the amounts due and owing under the Note Purchase Agreements at any point prior to maturity, but provides that in the event of voluntary prepayment, a prepayment premium would be required. Id.
Plaintiff CTC made timely payments of principal and interest due on the notes through August, 2005. (See Compl. ¶ ¶ 11,15). In the summer of 2004, Plaintiff CTC provided notice to Defendants that Plaintiff's parent was contemplating a "going-private" transaction under the Securities Exchange Act of 1934. (Compl. at ¶ 20). In the fall of 2004, Plaintiff notified Defendants that it would have to pay its parent approximately $2.2 million to fund the going-private transaction. (Compl. at ¶29). Without amendment to the Note Agreements, the going-private transaction would have violated the Net Worth and Total Debt Covenants constituting an event of default under Section 7(f). (See Compl., Exs. A and C).
On December 15, 2004, Plaintiff and Defendants amended the Note Agreements ("First Amendments") in order to permit Plaintiff to fund the going-private transaction and still be in compliance with the Net Worth and the Total Debt Covenants. (Compl. at ¶ 32; Defs' Mot. to Dis. at 3). As amended, the Net Worth Covenant benchmark was lowered to $27,500,000 and the Total Debt Covenant percentage was raised such that the Consolidated Total Debt would not exceed 61% of Consolidated Total Capitalization.
In April, 2005, Plaintiff's parent completed the going-private transaction. (Compl. at ¶ 24). The cost to Plaintiff of the going-private transaction was over $5 million, more than twice Plaintiff's initial estimate. (Compl. at ¶ 34). Following the going-private transaction, Plaintiff notified Defendants of the increased costs and of the violation of the Net Worth and Total Debt Covenants notwithstanding the modifications in the First Amendments. (Compl. at ¶¶ 37-38). Plaintiff alleges it then requested further modifications to the Note Agreements, but that Defendants denied this request. (Compl. at ¶ 39-40). Plaintiff further alleges Defendants demanded that Plaintiff obtain new financing to pay off the principal balance on the notes as well as the amount designated in the Note Agreements as a "prepayment premium." (Compl. at ¶ 40). Plaintiff alleges that in response to Defendants' demand, it offered to pay down some of the principal amounts due on the Notes to cure the violation of the Net Worth and Total Debt Covenants, but that Defendants refused this request. (See Compl. at ¶ 42).
In July, 2005, Plaintiff obtained replacement financing and on August 29, 2005, it tendered to Defendants the principal and interest due and owing under the promissory notes, but did not include any prepayment premium. (Compl. at ¶ 45). Defendants rejected the August 29, 2005 payment because of Plaintiff's failure to include payment for the prepayment premium. (Compl. at ¶ 45).
On September 1, 2005, Plaintiff tendered to Defendants the principal, interest due and the prepayment premium. (Compl. at ¶ 46). Plaintiff alleges that its payment of the prepayment premium was under protest and subject to a reservation of rights including the rights asserted in this lawsuit. (Compl. at ¶ 46; Pl's Reply at 5).
On September 30, 2005, Plaintiff filed a Complaint in the Court of Common Pleas, Ross County, Ohio. Defendants removed this action to the Court on October 25, 2005. Plaintiff seeks recovery of the prepayment premium and asserts four causes of action against Defendants including: (1) improper penalty; (2) breach of contract; (3) breach of the duty of good faith and fair dealing; and ...