The Akron Legal News

Ex-Cedar Fair CEO whose stock crashed loses appeal

ANNIE YAMSON
Special to the Legal News
Published: March 14, 2017

A contractual dispute between the former CEO of the Cedar Fair Entertainment Company and Merrill Lynch saw no change in a federal court of appeals recently when a three-judge appellate panel affirmed judgment in favor of Merrill Lynch.

"The ticker symbol for Cedar Fair Entertainment Company - operator of Cedar Point and other amusement parks - is, fittingly, 'FUN,' and it thus reveals little about the nature of the collateral-liquidation dispute presently before us," Judge Danny Boggs wrote in the opinion he authored on behalf of the 6th U.S. Circuit Court of Appeals.

At issue was a lawsuit filed by Richard Kinzel, the former CEO of Cedar Fair.

Court documents state that, in April 2008, Kinzel borrowed nearly $8 million from Merrill Lynch to finance his exercise of FUN stock options and to pay the estimate income and payroll taxes that would be due immediately upon exercise.

In order to secure the loan, Kinzel pledged as collateral various assets, including the shares of FUN that he would be acquiring.

Case summary states that Kinzel entered into a loan management account agreement, which allowed Merrill Lynch to liquidate the collateral at its sole discretion upon any 12 events, including if the value of the collateral became "insufficient."

Later that same year, the stock market crashed and the market value of FUN tumbled from the exercise price of $23.19 per share in April, to $6.99 per share in March 2009.

The Merrill Lynch account managers responsible for Kinzel's account had set a $7.00-per-share "trigger" for liquidation of FUN shares and, on March 3, 2009, they began selling off shares without advance notice to Kinzel.

Kinzel and his wife sued Merrill Lynch, upset that his longtime bank would sell his shares even though he was "doing everything right."

He alleged breach of contract and breach of the covenant of good faith and fair dealing.

The U.S. District Court for the Northern District of Ohio granted judgment in favor of Merrill Lynch on the breach-of-good-faith claim, dismissed the breach of contract claim and denied the Kinzels leave to file a third amended complaint alleging breach of contract.

The 6th Circuit agreed with that judgment, ruling that the Kinzels could not show a breach of contract and that Merrill Lynch, in fact, acted with "sincerity, honesty, fair dealing and good faith."

"The Kinzels do not dispute that a remedy event occurred, nor do they argue that any other provision in the loan management account agreement would have operated to prevent Merrill Lynch from liquidating when the price of FUN fell below $7 per share - or, indeed, at any time," Boggs wrote.

"Accordingly, even if all the facts in the Kinzels' pleadings are true, the Kinzels cannot show that Merrill Lynch actually breached any term of the loan management account agreement when it liquidated the Kinzels' shares: The Kinzels had given 'ultimate control' and 'sole discretion' to Merrill Lynch to liquidate the collateral in the securities account when the stock market crashed, and Merrill Lynch acted accordingly."

The circuit court held that simply because the Kinzels fulfilled their obligations under the contract did not, under any rule of contract law, somehow suspend Merrill Lynch's power to exercise its own contractual rights.

"Here, the evident sense and meaning of the parties' agreement is that Merrill Lynch was to enjoy unfettered discretion in its decision to liquidate the Kinzels' collateral; that the Kinzels would have preferred Merrill Lynch to wait a while longer before liquidating cannot overcome the clear language in the contract that the Kinzels and Merrill Lynch - all sophisticated parties - chose to execute," Boggs wrote.

"The district court was therefore correct to hold that allowing leave to amend would be futile because any breach-of-contract claim the Kinzels brought, to the extent that it differed from their breach-of-good-faith claim, would fail to survive a motion to dismiss."

The appellate panel also noted that Merrill Lynch did recognize Kinzel's attempts to forestall liquidation by moving money into the account from a home equity line of credit and other payments.

Merrill Lynch vice president Doug Rosen noted that Kinzel was bringing in "as much liquidity as possible" in an effort to reduce the loan balance and, the day following the beginning of liquidation, he sought and received a risk manager's assent to lower the trigger temporarily to $5.50 per share.

Kinzel ultimately paid the loan balance in full and avoided further liquidation of FUN stock, though he argued that he would still have an additional 167,900 shares if they had not been liquidated.

"Despite the falling stock prices, Merrill Lynch agreed to halt its liquidation after only one day, and to impose a new $5.50 trigger value before further liquidation would occur in the future," Boggs wrote. "Accordingly, the district court properly held that Merrill Lynch exercised its discretion within the 'contemplated range' of 'judgment based upon sincerity, honesty, fair dealing and good faith.'"

The 6th Circuit concluded that the district court properly granted judgment in favor of Merrill Lynch and it affirmed the lower courts judgment.

Judges Bernice Donald and Ronald Lee Gilman joined Boggs to form the majority.

The case is cited Kinzel, et al. v. Bank of America, et al., case No. 16-3355.

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