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CAP Services, Inc. v. Schwartz

United States District Court, W.D. Wisconsin

December 7, 2017

DALE R. SCHWARTZ, Defendant.


          WILLIAM M. CONLEY District Judge

         In this lawsuit, plaintiffs CAP Services, Inc., and Community Assets for People, LLC, allege that Defendant Dale R. Schwartz (“Schwartz”) has breached his personal guaranty of two loans, totaling more than $1.4 million dollars, plus interest and late fees. Before the court are the parties' cross-motions for summary judgment. (Dkt. #13, 17.) Because the disputed guarantees were valid on their face and defendant's affirmative defenses, including those that form the basis for his own summary judgment motion, fail as a matter of law or were waived, the court will grant plaintiffs' motion for summary judgment.


         A. The Parties

         Plaintiff CAP is a not-for-profit Wisconsin corporation under section 501(c)(3) of the Internal Revenue Code and plaintiff Community Assets is its wholly owned, limited liability corporation. Each maintains their principal place of business in Stevens Point, Wisconsin, and lends money to organizations, companies, and ventures to advance community-based interests.

         Defendant Schwartz is domiciled in Faribault, Minnesota, the sole owner of Faribo Plumbing & Heating, Inc., a plumbing and heating services contractor with its principal place of business in Faribault. In addition to its plumbing services, Faribo performs excavation work and installs heat and sewer pipes. Since approximately 1984, Schwartz has been the sole owner of Faribo.[2]

         B. GreenWhey

         GreenWhey Energy, Inc., currently operates an anaerobic digester facility in Turtle Lake, Wisconsin, which processes and converts liquid waste into sustainable energy for its customers, primarily food and dairy producers. At all relevant times, GreenWhey was owned and managed by Larry Peaster, Timothy Peaster, and its president Tom Ludy. Ultimate control of GreenWhey is exercised by its parent company, GreenWhey Holdings, Inc.

         Back in 2010, GreenWhey retained a well-known accounting and advisory firm, Baker Tilly, to evaluate the feasibility of constructing and operating the Turtle Lake Facility, determine its eligibility for a federal New Markets Tax Credit (NMTC) and help procure loans and investments from third parties to fund the construction. A firm director, Michael Land, led the Baker Tilly team and was GreenWhey's primary contact. While GreenWhey procured loans and investments, Land communicated frequently with Ludy.

         In June 2012, Ludy and Land discussed the possibility of GreenWhey obtaining a secondary loan from CAP Services' NMTC program. GreenWhey and CAP, including its subsidiary Community Assets, then began negotiating the possibility that plaintiffs would provide financing for the development of the Turtle Lake Facility. At no point did plaintiffs or defendant participate in GreenWhey's operations or management, own any portion of GreenWhey or possess the authority to make decisions on GreenWhey's behalf.

         Defendant's company, Faribo Plumbing & Heating, was originally hired as a subcontractor to install piping for water, drainage and processing at GreenWhey's Turtle Lake Facility. Faribo also installed radiators and drains on that facility's roof, along with bypass valves, a heat exchanger and other piping. While performing this work, defendant Dale Schwartz personally visited the Turtle Lake site approximately 20 times. After completing its work, Faribo was paid all but approximately $30, 000 of its contract. Faribo also loaned GreenWhey $100, 000 in return for a promissory note for the same amount, dated October 5, 2011, which included a promise to pay 10% annual interest on the principal.

         GreenWhey also utilized this relationship with Faribo to approach Schwartz about the possibility of his serving as a guarantor on a loan. Consequently, when Baker Tilly director Land explained to GreenWhey president Ludy that CAP would require a personal guaranty from a third party before it would make a loan, Ludy informed Land that he had already spoken with defendant Schwartz about that possibility.

         During this period, Schwartz knew that Land was working to help GreenWhey raise funds. Additionally, on June 7, 2012, Land emailed Schwartz a document stating that his employer Baker Tilly had been retained by GreenWhey. (Pls.' Proposed Findings of Fact (dkt. #22) ¶ 106.) In a June 18, 2012, email to Schwartz, Land further stated that “Tom Ludy asked me to email you regarding a funding opportunity we are pursuing for [GreenWhey].” (Pls.' Proposed Findings of Fact (dkt. #22) ¶ 112.)[3] Land also told Schwartz in the same email that: (1) GreenWhey intended to ask CAP for a loan to pay for “heat sale related infrastructure costs”; and (2) CAP “will require a guarantee from a company or individual with sufficient net worth to back up repayment of the loan.” (Id. at ¶¶ 113-114.) After Land sent his June 18 email, Ludy also explained that if Schwartz was interested in serving as a guarantor, he would need to prepare a personal financial statement so CAP could confirm that he possessed sufficient assets to cover the loans.

         Baker Tilly and Land did not represent plaintiffs in their transactions with GreenWhey nor in the negotiation and execution of plaintiffs' eventual agreements with defendant Schwartz (the “Guaranty Agreements”). Plaintiffs were not even the only potential funding source that Land approached on GreenWhey's behalf. In his June 18 email to Schwartz, however, Land did state that plaintiff CAP is a “client” of Baker Tilly. This was based on Land's understanding that Baker Tilly had previously interacted with CAP regarding federal NMTC matters. (Pls.' Proposed Findings of Fact (dkt. #22) ¶ 118.)[4]

         Schwartz never spoke, emailed or otherwise communicated with anyone working for CAP or its subsidiary Community Assets. Nor did CAP or Community Assets ever attempt to communicate directly with Schwartz. All communications between the two parties to this lawsuit were directed through Ludy and Land. Nonetheless, Schwartz contends that he came to believe that Ludy, Land, Baker Tilly and GreenWhey were all acting as “agents” of the plaintiffs during this timeframe.

         C. Defendant Guarantees Repayment of Plaintiffs' Loans to GreenWhey

          On June 20, 2012, Land emailed Mary Patoka, the president and CEO of both plaintiffs, to advise that additional financing was needed to pay for piping infrastructure at GreenWhey's facility. Land also informed her that defendant Schwartz “has indicated a willingness to provide credit support for this funding, ” and he would be providing a personal financial statement for plaintiffs' evaluation. (Pls.' Proposed Findings of Fact (dkt. #22) ¶ 137.)

         That same day, Patoka participated in a call with Land and Ludy, who confirmed that Schwartz would likely serve as GreenWhey's guarantor if plaintiffs considered him acceptable. Defendant Schwartz sent his personal financial statement to Land the next day, although Schwartz has since stated it was inaccurate. Land forwarded that statement to Patoka the following day, confirming that Schwartz was “the contemplated guarantor” in his cover email. Schwartz was copied on that email.

         After reviewing Schwartz's financial statement and conducting a diligence review of GreenWhey, plaintiffs decided to lend the money to GreenWhey. Plaintiffs' attorneys then drafted and sent documents, including the two Guaranty Agreements, to GreenWhey's lawyers. In doing so, plaintiffs also informed Ludy and Land that they were not willing to fund the loans until they had received Schwartz's signatures on the Guaranty Agreements.

         On or about September 7, 2012, GreenWhey executed and delivered to plaintiff CAP a Fixed Rate Note in the original principal amount of $1, 000, 000.00 (the “CAP Note”) and a New Markets Tax Credit Agreement (the “CAP NMTC Agreement”). (Pls.' Proposed Findings of Fact (dkt. #22) ¶ 27.) On or about that same date, GreenWhey executed and delivered to plaintiff Community Assets a Fixed Rate Note in the original principal amount of $420, 881.36 (“the Community Assets Note”) and a New Markets Tax Credit Agreement (the “Community Assets NMTC Agreement”). (Id. at ¶ 29.) Consistent with the terms of these two NMTC Agreements, GreenWhey was obligated to repay all amounts due under the CAP Note and the Community Assets Note.

         Land also forwarded Schwartz the final versions of the Guaranty Agreements, dated September 7, 2012, which would render Schwartz personally liable for payment of the full amount then due and owing by GreenWhey should it default under the CAP Note, the Community Assets Note and the related NMTC Agreements. (Pls.' Proposed Findings of Fact (dkt. #22) ¶ 47.)[5] Although Schwartz did not sign the Guaranty Agreements at first -- because they did not include incentives he had demanded in return for guaranteeing the loans (such as a seat on the board of directors of Holdings) -- Schwartz does not dispute eventually signing both guarantees once certain demands were met. In fact, on September 13, 2012, Ludy emailed Schwartz an additional agreement (the “Letter Agreement”) signed by Ludy as president of Holdings, GreenWhey's parent company. (Pls.' Proposed Findings of Fact (dkt. #22) ¶ 154.) The Letter Agreement provided that, “[t]o induce [Schwartz] to provide the [loan guarantees], ” Holdings agreed to pay Schwartz 10% of all income it received from GreenWhey, excluding certain amounts to be paid to third parties. (Id. at ¶ 155.) Holdings also committed to give Schwartz access to the books and records of the GreenWhey entities, including board meeting minutes. (Id. at ¶ 156.) Schwartz then signed the Letter Agreement and returned it to Ludy on September 15, 2012. Less than a minute later, Schwartz also sent Ludy the executed signature pages for both Guaranty Agreements. (Pls.' Proposed Findings of Fact (dkt. #22) ¶ 160.)

         Moreover, just as contemplated by the parties at closing on the loans on September 7, plaintiffs did not release the proceeds to GreenWhey until September 18, 2012, after their lawyers had received Schwartz's executed signature pages for the Guaranty Agreements. Once received, plaintiff CAP ...

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