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Securities – Default on Payment Obligation

By: Derek Hawkins//January 22, 2018//

Securities – Default on Payment Obligation

By: Derek Hawkins//January 22, 2018//

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7th Circuit Court of Appeals

Case Name: The Oilgear Company v. Robert A. Hitt

Case No.: 17-2534

Officials: EASTERBROOK and SYKES, Circuit Judges, and BUCKLO, District Judge

Focus: Securities – Default on Payment Obligation

As Oilgear’s CEO, Robert Hitt held restricted stock. When Hitt left his position in 2014, Oilgear exercised its option to repurchase the shares. Oilgear and Hitt agreed that he would receive $753,000: $108,000 immediately and $215,000 (plus interest) each June for the next three years. The 2015 installment was paid but the 2016 and 2017 installments were not. In this suit under the diversity jurisdiction, Oilgear sought and received a declaratory judgment that it is entitled to defer payment of the 2016 and 2017 installments.

Hitt’s theme is that payment to him is deferred only when Oilgear is in default. Once the Bank waived its remedies, Hitt insists, the bar to payment evaporated. Section 2.3 of the tripartite agreement indeed allows either the default’s cure or the Bank’s waiver of remedies to permit a resumption of payments to Hitt. But Hitt does not contend that the default has been cured, and the Bank conditioned its waiver on a power to approve additional payments to Hitt. No approval, no waiver; and no waiver (or cure), no payment.

He maintains that this understanding would make the tripartite agreement illusory. Not at all. Hitt already has received $323,000 for his stock. The other $430,000 remains due, with interest accumulating. It will be paid as soon as (a) Oilgear cures its default, (b) the Bank consents, or (c) the debt to the Bank is paid off through Oilgear’s merger or liquidation. Of course, if Oilgear does not have (and never obtains) the money to pay the Bank and Hitt too, then Hitt will lose out, but that’s what it means to hold junior debt.

Affirmed

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Attorney Derek A. Hawkins is the managing partner at Hawkins Law Offices LLC, where he heads up the firm’s startup law practice. He specializes in business formation, corporate governance, intellectual property protection, private equity and venture capital funding and mergers & acquisitions. Check out the website at www.hawkins-lawoffices.com or contact them at 262-737-8825.

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