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IRON MT. SEC. STORAGE CORP. v. AMERICAN SPECIALTY

September 6, 1978

IRON MOUNTAIN SECURITY STORAGE CORPORATION
v.
AMERICAN SPECIALTY FOODS, INC., and Iron Mountain, Incorporated



The opinion of the court was delivered by: LUONGO

This is a diversity action *fn1" for a judgment declaring the rights and obligations of the parties under a contract between plaintiff, Iron Mountain Security Storage Corporation (IMSSC), and its debtor, American Specialty Foods, Inc. (ASF). The case is before me on a motion to dismiss defendants' counterclaim.

This controversy began with the divestment of IMSSC, a company providing record storage services in a New York cave, by its parent holding company, Iron Mountain, Inc. (Iron Mountain) in April 1975. Although not explained in the pleadings, *fn2" the parties agree that this event occurred as a result of Iron Mountain's poor financial condition. In addition to other debts, Iron Mountain owed a large sum of money to Schooner Capital Corporation (Schooner) and FNCB Capital Corporation FNCB, and it was in default. In return for cancellation of the debt, Iron Mountain agreed to sell Schooner and FNCB all of its IMSSC stock (100% Of the preferred, 98.82% Of the common).

 At this time, Iron Mountain also was in debt to IMSSC for $ 2,248,332 for cash borrowed from IMSSC prior to 1975. Some of that cash had been invested by Iron Mountain in open account advances to another of its subsidiaries, ASF, a company engaged in mushroom production which also serves as a holding company for subsidiaries producing macaroni and tomato products. Iron Mountain owned and continues to own all of ASF's common stock, and, in 1975, ASF was indebted to Iron Mountain for an amount in excess of $ 5,000,000. As part of the IMSSC sale transaction, the parties agreed that Iron Mountain's debt to IMSSC would be assumed by ASF; assumption of that debt apparently would setoff some of ASF's debt to Iron Mountain.

 The transaction was consummated on April 30, 1975, when IMSSC delivered to ASF Iron Mountain's promissory note for $ 2,248,332 in exchange for a new promissory note from ASF for the same amount, payable in five years. In addition to the note transfer, the executive officers of IMSSC and ASF executed a "Note Exchange and Option Agreement," which provides:

 
"ASF shall have the right and option, exercisable at any time after April 1, 1976 and prior to the date the ASF (Promissory) Note matures and is payable in accordance with its terms, to repurchase from IMSSC the ASF Note at its then Formula Value (as defined in Section 4 hereof) payable in cash within 15 days of ASF delivering to IMSSC its notice of intent to exercise its option rights . . .."

 Section 4.C. of the Agreement defines "Formula Value" as follows:

 
"Formula Value shall equal the greater of:
 
(1) The Available Net Worth of ASF (but not in any event more than $ 2,248,332); or
 
(2) The sum of $ 22,483, representing 1% Of the principal amount of the ASF Note."

 The remainder of § 4 states how to compute the "Available Net Worth of ASF" referred to in § 4.C.(1); generally, that figure consists of certain ASF asset values minus certain liability values "as of the last day of the month next preceding the month in which ASF exercises its repurchase option."

 On September 22, 1977, IMSSC instituted this suit against ASF and Iron Mountain, contending that ASF is obligated to pay an additional $ 891,977 for repurchase of the promissory note. Generally, it asserts that, in view of certain debt reductions by ASF, the "Available Net Worth of ASF" for purposes of § 4.C. of the Option Agreement is $ 914,460, and that that amount therefore was the correct "Formula Value" for repurchase of the note. IMSSC seeks a judgment declaring that it is entitled to the additional money and that it may hold the ASF promissory note until the additional funds are received. In addition, it asks for a declaration that the $ 2,248,332 promissory note from Iron Mountain (which IMSSC transferred to ASF on April 30, 1975 in return for ASF's note) be deemed to be held by ASF in constructive trust as security for the additional funds owed IMSSC and that IMSSC and Iron Mountain be enjoined from extinguishing indebtedness on that note until that additional money is paid. DP Defendants filed an answer and counterclaim on November 29, 1977. In the answer, they contend that the "Available Net Worth of ASF" when computed according to the Option Agreement is "0" and that the correct "Formula Value" therefore is $ 22,483, the amount tendered. The counterclaim is in two counts. The first asserts a claim for damages for breach of the Option Agreement. The second count asserts a tort claim for compensatory and punitive damages for what defendants characterize as "bad faith or malicious breach of contract" (Defendants' Memorandum at 16). IMSSC has moved to dismiss the counterclaim.

 DISCUSSION

 Count I

 The first count of the counterclaim alleges that ASF exercised its right under the Option Agreement to repurchase the ASF promissory note, paying the purchase price provided in the Agreement, but that IMSSC then breached its obligation under the Agreement to return the note to ASF. It avers that "as a direct and proximate result of the aforesaid breach of contract," ASF has suffered certain specified damages, and, in addition to the damages, it seeks to enjoin IMSSC from enforcing the note and to have IMSSC return the note to ASF.

 IMSSC contends that Count I fails to state a claim upon which relief can be granted. Its main argument appears to be that this portion of the counterclaim is superfluous since it is just a "mirror image" of plaintiff's claim and defendants can achieve all they seek to recover by successfully defending against IMSSC. Not surprisingly, little authority is cited in support of this argument. *fn3" I know of no rule ...


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