Operational default may have occurred in MOU, COA rules in reversing summary judgment

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A company and its owner are not entitled to summary judgment because there is an issue of material fact as to whether an operational default occurred in its memorandum of understanding with an automotive group, the Court of Appeals of Indiana has ruled.

Haytham ElZayn is an Ohio resident with experience administering vehicle service contracts through entities he has formed, acquired or controlled.

ElZayn and Joseph Campbell, the CEO of Tricor Automotive Group, discussed a business venture involving the formation of Allegiance Administrators LLC.

The plan was for Allegiance to take over a line of business that ElZayn currently ran through Dimension Service Corporation (Assurant Line of Business), with ElZayn overseeing the day-to-day business affairs by serving as CEO.

In preparation, ElZayn formed Dealer VSC to hold equity in Allegiance.

ElZayn then transferred to Dealer all of Dimension’s contractual interest in the Assurant Business while reserving the personal goodwill associated with the Assurant Business.

Dealer and Tricor executed a series of agreements regarding the establishment and operation of Allegiance, as well as earning contingencies and provisions for the operation of the entity.

Dealer then sought a line of credit from Tricor. Dealer, Tricor and ElZayn later executed a memorandum of understanding, under which Tricor agreed to provide a line of credit in exchange for 6% of Dealer’s interest in Allegiance.

As a party to the MOU, ElZayn had certain rights and obligations. Although Allegiance was not a party, the MOU refers at times to Allegiance and the terms of its agreements.

By Sept. 30, 2019, Dealer had drawn $5.6 million on the line of credit, while remaining current with interest payments.

Around this time, disputes arose as to the financial performance aspects of the interrelated agreements, including the proper way to calculate Allegiance’s independently calculated net earnings, or EBITDA, to determine whether the Assurant Business fell short of the earnings target.

In October 2019, an accounting firm issued a compilation report, setting forth three different ways to calculate EBITDA, which each resulted in ElZayn paying an adjustment to Allegiance for a shortfall as stipulated in the agreements.

ElZayn disputed that he owed any adjustment.

In May 2020, Tricor filed a complaint against Dealer, ElZayn and Allegiance.

In Count I, Tricor sought a declaratory judgment that, among other things, Dealer and ElZayn had committed “acts or omissions required by the loan documents … constitut[ing] a default under the loan documents.”

In Count II, Tricor asserted that ElZayn and Dealer breached the MOU and that there had been an event of default.

Dealer and ElZayn filed several counterclaims and cross-claims revolving around Tricor’s declaration of default and other claims.

In May 2021, Dealer and ElZayn moved for summary judgment on Tricor’s two claims as well as certain counts in their pleading. Tricor also sought summary judgment.

The Hamilton Circuit Court granted Dealer and ElZayn’s motion for summary judgment and denied Tricor’s motion. In part, the trial court found neither Dealer nor ElZayn committed a default as defined in the MOU.

On appeal, Tricor argued the trial court erred by granting summary judgment but did not challenge the denial of its motion for summary judgment.

The parties focused on whether Tricor could add the alleged EBITDA shortfall to the debt and, if so, whether there was a financial default due to nonpayment of the increased loan balance.

The Court of Appeals ruled the evidence shows a potential operational default premised on ElZayn’s material breach of an agreement for failing to reimburse Allegiance.

“Because of the contractual consequences for an operational default,” the opinion says, “this genuine issue of material fact is dispositive, showing that Dealer and ElZayn are not entitled to summary judgment on the claims and counterclaims.”

Addressing the default, the Court of Appeals focused on the agreement under which ElZayn could be obligated to reimburse Allegiance up to $2 million if there was an EBITDA shortfall.

“Because the parties disagree as to the proper EBITDA calculation, there is a genuine issue of material fact as to whether an EBITDA shortfall exists,” the opinion says.

The Court of Appeals also ruled there are additional issues of material fact as to whether Tricor gave effective notice of the shortfall, triggering the cure period in the MOU, and if ElZayn failed to reimburse Allegiance for the EBITDA shortfall, resulting in a material breach of the agreement and an operational default under the MOU.

Turning to whether Dealer and ElZayn are entitled to summary judgment, the Court of Appeals ruled the parties didn’t meet their burden of demonstrating they are entitled to summary judgment on Tricor’s first or second claims.

The Court of Appeals reached the same conclusion for the counterclaims.

The case was remanded for further proceedings on the merits.

Senior Judge Randall Shepard wrote the opinion. Judges Patricia Riley and Dana Kenworthy concurred.

The case is Tricor Automotive Group, and Allegiance Administrators LLC v. Dealer VSC Ltd., and Haytham Elzayn, 22A-PL-1137.