Opinion
CIVIL ACTION NO. 01-2437
March 4, 2004
FINDINGS OF FACT AND CONCLUSIONS OF LAW
This case arises out of a purchase and sale transaction pursuant to which ProLease Atlantic agreed to purchase, and Human Resource Options, Inc. ("HRO"), now known as MASH Enterprises Inc. ("MASH") agreed to sell, substantially all of HRO's assets. The terms of this transaction were set forth in an Asset Purchase Agreement dated May 12, 2000 (the "Purchase Agreement") which was executed by ProLease Atlantic and HRO, as well as by Mark Fried ("Fried") and Howard Vogel ("Vogel"), the shareholders of HRO, in their individual capacities. [HRO, Fried and Vogel shall hereinafter be referred to collectively as the "Counter Defendants"]. A bench trial was held on November 3, 2003. From the testimony produced at that trial I make the following Findings of Fact: The parts of the Purchase Agreement that are closely involved in this litigation are the following:
Both ProLease Atlantic and HRO are Professional Employer Organizations ("PEOs") which provide certain payroll, tax and employee benefit services for their clients.
See , Purchase Agreement, Defendant's Exhibit 52, at pages 43-44.
(i) The "Purchased Assets" included, among other things, HRO's client list and client contracts, as well as "all other property of Seller . . . even if not enumerated herein."
Id. , at pages 2-3. (Paragraph 1b).
(ii) The parties agreed that ProLease Atlantic was not assuming any of the debts or liabilities of HRO, except as explicitly set forth in Paragraph 4 of the Purchase Agreement (discussed infra).
Id. , at page 3 (Paragraph 1b).
(iii) ProLease Atlantic had the option to acquire the stock of any of HRO's "Affiliates" (defined in Paragraph 1(b) of the Purchase Agreement as including Professional Leasing Concepts, Inc. ("PLC"), ECW Professional, Inc. ("ECW") and HRO Team, Inc.)).
Id. , at pages 2-3 (Paragraph 1c). PLC and ECW were likewise PEOs owned by Fried and Vogel.
(iv) The Purchase Price for the Purchased Assets (the "Purchase Price") was (stated in simplified form) the product of $1,250 and the number of "Eligible Employees" (discussed more fully infra) on HRO's payroll on the date of Closing. The Purchase Price was also subject to certain adjustments, also discussed infra,
Id. , at page 4. (Paragraph 2a).
(v) ProLease Atlantic agreed to pay one-half of the Purchase Price in good funds at Closing, and the balance of the Purchase Price was to be represented by a Promissory Note to be made payable to HRO.
Id. , at page 6. (Paragraph 2b).
(vi) If, within one hundred eighty (180) days following the Closing of the transaction (the "Recalculation Date"), ProLease Atlantic determined that less than 97% of the Eligible Employees remained on ProLease Atlantic's payroll, the principal balance of the Promissory Note would be reduced by the product of $1,250 and the difference between: (1) 97% of the Eligible Employees and (2) the number of Eligible Employees on ProLease Atlantic's payroll as of the Recalculation Date (the "Reduction Formula"). In the event of a diminution of the principal balance of the Promissory Note under the Reduction Formula, ProLease Atlantic was to deliver to HRO an Allonge to the Promissory Note setting forth the new principal balance of the Promissory Note based upon the application of the Reduction Formula (the "Post-Reduction Amount"). HRO also had the right to review ProLease Atlantic's records to verify the accuracy of ProLease Atlantic's calculation of the Post-Reduction Amount. (The 180 day period following the Closing was also referred to at trial as the "look-back period").
Id. , at pages 10-11. (Paragraph 2d).
Id. , at page 11.
(vii) ProLease Atlantic was not to be liable for any obligations or liabilities of HRO with respect to the Purchased Assets, except for: (1) the client contracts purchased by ProLease Atlantic; (2) any equipment leases, if applicable, and (3) HRO's Lease for its Glenside, Pennsylvania office.
Id. , at page 15. (Paragraph 4).
(viii) The Counter Defendants jointly and severally represented that: (a) there were no pending claims against HRO for the collection or assessment of taxes by any governmental body; (b) all federal, state and local taxes owing by HRO (or its Affiliates) to any such body that might accrue up until the Closing would be paid by the Counter Defendants; (c) to the best of their knowledge, there were no undisclosed facts or conditions that if continued, or on notice, would result in a default under any permits, licenses, contracts or arrangements to which HRO was a party; (d) the Client List attached as "Exhibit C" to the Purchase Agreement (the "Client List") was a correct and current list of all of HRO's clients; (e) no representation or warranty made therein, or in any exhibit or document required to be furnished thereunder, contained any untrue statement of material fact, or omitted to state a material fact necessary to make any statement of fact contained therein not misleading; (f) they had disclosed to ProLease Atlantic all facts material to HRO's operations and the transactions contemplated under the Purchase Agreement, and acknowledged that the representations made by the Counter Defendants in the Purchase Agreement had been made with the knowledge and expectation that ProLease Atlantic was placing substantial reliance thereon.
Id. , at pages 21, 24, 25, 26-27 (Paragraphs 6(j), 6(n), 6(r)and 6(u)). At trial, Bala Ramamoorthy ("Ramamoorthy"), the President of ProLease Atlantic, likewise testified that ProLease Atlantic relied upon the aforementioned representations and warranties in deciding to purchase HRO. See , November 5, 2003 trial testimony of Ramamoorthy, at page 81 L. 5 to page 82 L. 2
(ix) Each of the representations, warranties and covenants made by the Counter Defendants survived the Closing.
Id. , at page 32.
(x) The Counter Defendants jointly and severally agreed that for a period of four (4) years following the Closing, they would jointly and severally indemnify ProLease Atlantic and hold it harmless from and against all costs, losses and damages (including reasonable expenses and reasonable legal fees) resulting from, inter alia: (1) any breach of a representation, warranty and/or covenant contained in the Purchase Agreement, or the untruth or material inaccuracy thereof; (2) any liability of HRO (or its Affiliates) which arose out of a state of affairs existing on or before the date of Closing, including any liability for taxes determined to be due as a result of an examination of HRO (or its Affiliates) by any taxing authority; and (3) any pre-Closing contracts, obligations, agreements or liabilities of HRO (or its Affiliates) not expressly assumed by ProLease Atlantic.
Id. , at pages 33-34 (Paragraph 11(a)).
(xi) ProLease Atlantic had the right to set off any amounts for which it had the right to seek indemnification from the Counter Defendants against any amounts otherwise owed by ProLease Atlantic to HRO under the Promissory Note.
Id. , at page 35. (Paragraph 11(d)).
(xii) The prevailing party in any legal proceeding would be entitled to its attorney's fees and costs.
Id. , at page 43. (Paragraph 28).
The Purchase Agreement was modified by a Letter Agreement dated May 30, 2000 (the "Letter Agreement"). The Letter Agreement modified the Purchase Agreement in part as follows: (i) the Closing of the ProLease Atlantic/HRO transaction would take place on June 30, 2000, but the commencement of the look-back period would remain as of June 1, 2000; (ii) ProLease Atlantic would not acquire the client contracts or stock of PLC and, therefore, PLC's client contracts and employees would not be calculated as part of the Purchase Price; (iii) ProLease Atlantic would administer PLC's payroll and benefits from the Closing until December 31, 2000 at a rate of $12.50 per employee per month; and (iv) that ProLease Atlantic would provide PLC's employees with health insurance coverage and would assist PLC in obtaining worker's compensation coverage for these employees until December 31, 2000, the cost of which was to be reimbursed by PLC to ProLease Atlantic.
A copy of the Letter Agreement was introduced at trial as Defendant's Exhibit 53.
See Exhibit 51. at Paragraph 5.
Id. , at Paragraph.
Id.
Id.
The Closing of the transaction in question occurred on June 30, 2000 at which time HRO represented to ProLease Atlantic that the total number of Eligible Employees was 3,307. Based on this figure, the parties determined that the Purchase Price was $4,133,750 (i.e., 3,307 x $1,250). Based upon those figures, at Closing, ProLease Atlantic remitted to HRO the sum of $2,066,875 (i.e., one half of the total Purchase Price)
See , Client List (Exhibit C to the Purchase Agreement), introduced at trial as Defendant's Exhibit 54.
At Closing ProLease Atlantic also executed a Promissory Note (the "Promissory Note") made payable to HRO in the amount of $2,066,875.
Additionally, at Closing, Counter-Defendants executed a Reaffirmation of Seller's Representations and Warranties, wherein Counter Defendants re-affirmed the representations and warranties contained in the Purchase Agreement "as if such representations and warranties were made as of the date of this Reaffirmation." Following the Closing, Fried became an Executive Vice-President of Professional Staff Leasing Corporation ("ProLease") and an agent of ProLease Atlantic. ProLease Atlantic's Set-Off Claim Under Paragraph 2(d)'s Recalculation Formula
The Reaffirmation of Seller's Representations and Warranties was introduced at trial as Defendant's Exhibit 60.
See , November 3, 2003 trial testimony of Mark Fried, at page 94 LL. 18-24.
ProLease Atlantic contends that Counter Defendants overstated the number of HRO's eligible employees thereby causing ProLease Atlantic to pay a significantly higher purchase price. Paragraph 2(d) of the Purchase Agreement provides that if, as of the Recalculation Date, ProLease Atlantic determined that less than 97% of the Eligible Employees purportedly purchased by ProLease Atlantic from HRO remained on ProLease Atlantic's payroll, the principal balance of the Promissory Note would be reduced by the product of $1,250 and the difference between: (1) 97% of the Eligible Employees and (2) the number of Eligible Employees on ProLease Atlantic's payroll as of the Recalculation Date. The term "Eligible Employee" was defined in Paragraph 2(a) of the Purchase Agreement:
The Eligible Employees shall be those employees who shall work at least thirty (30) hours per week and shall have been on the Seller's payroll for at least twelve (12) weeks prior to the Closing. . . . worksite employee equivalents who work less than thirty (30) hours per week ("Part Time Employees") shall be deemed an Eligible Employee provided that they shall have been on Seller's payroll for at least twelve weeks prior to the Closing; provided, however, that any Part Time Employees in excess of five percent (5%) of the total Eligible Employees shall not be counted as an Eligible Employee for purposes of determining the Purchase Price, except as hereinafter provided (the "Five Percent Limitation"). [By way of example . . . if, at the Closing, the Seller has 2,000 Eligible Employees of whom 150 are Part Time Employees . . . he number of Eligible Employees . . . shall be 1,950 (i.e., 1,850 are full time Eligible Employees and 150 are Part Time Employees. Because of the Five Percent Limitation, the number of Part Time Employees who may be counted as Eligible Employees . . . cannot exceed 100 Part Time Employees. Therefore, 1850 plus 100 equals 1,950 Eligible Employees.)] Notwithstanding the foregoing, Part Time Employees in excess of the Five Percent Limitation can be deemed to be "Eligible Employees" if there are Part Time Employees who each work less than thirty (30) hours per week but in the aggregate work thirty (30) hours per week; the aggregate of the Part Time Employees who together work thirty (30) hours per week shall be counted as one (1) "Eligible Employee". Assuming the facts of the previous example, if ten of the fifty Part Time Employees who were not counted as Eligible Employees work sixty (60) hours in the aggregate, the number of Eligible Employees shall be increased by two (2) to 1,852 Eligible Employees.
Following the Closing, ProLease Atlantic "transferred" data relating to the employees which it had purchased from HRO, from HRO's "Pay-Plus"payroll database to ProLease Atlantic's "Darwin" payroll system. This process was overseen by Fried, who was hired by ProLease as a Senior Vice-President of Operations following the Closing. At trial, ProLease Atlantic offered the fact testimony of Ramamoorthy, the President and sole shareholder of ProLease Atlantic and the expert testimony of Charles S. Lunden, CPA ("Lunden"), in support of its set-off claim. Lunden rendered an opinion as to the amount of a set-off to which ProLease Atlantic was entitled under Paragraph 2(d) of the Purchase Agreement. Mr. Lunden testified that, in order to make this calculation, he first obtained a data extract file from ProLease Atlantic which recorded every employee who had been paid by ProLease Atlantic between November 1, 2000 and November 28, 2000 (i.e., the Recalculation Date). In order to ensure that the information contained in this data extract was both accurate and complete, Mr. Lunden compared the data extract supplied to him by ProLease Atlantic with payroll registers maintained by ProLease Atlantic in the ordinary course of its business on its Darwin system (i.e. Plaintiff's Exhibits 5 and 6). Mr. Lunden then used a computer program to randomly select 76 "items" (i.e., payroll entries) from the payroll registers, and compared the information contained on these "items" to the information contained in the data extract, to determine whether the information contained in the data extract was both complete and accurate within a reasonable degree of statistical certainty. Comparing the information contained in the data extract with the information contained in the payroll registers, Mr. Lunden discerned that: (i) each of the 76 payroll entries randomly-selected from the payroll registers were likewise found on the data extract (i.e., that the names and payment dates matched); and (ii) that the number of hours worked by the randomly-selected employees likewise matched each of these 76 payroll entries. Based upon these findings, Mr. Lunden, opined, with a reasonable degree of statistical certainty, that the information contained in the data extract was both accurate and complete.
See , November 3, 2003 trial testimony of Mark Fried, at page 94 L.21 to page 97 L.14. As described more fully below, Defendant's expert Lunden demonstrated at trial that the number of these employees actually transferred from HRO to ProLease Atlantic was far less than the 3,307 listed on the Client List.
Mr. Lunden testified at trial that he is the Director of Economic Consulting for ARCCA, Inc. a litigation support firm See , November 5, 2003 testimony of Charles Lunden, at page 143 LL. 10-25. Mr. Lunden is a certified public accountant with a Bachelors of Science degree in Economics from the University of Pennsylvania. ID. , at page 144 LL. 6-16. Mr. Lunden was qualified at trial as an expert in generally accepted damage measurement principles. ID. , at page 148 LL. 3-7.
See , November 5, 2003 trial testimony of Charles Lunden, at page 154 LL 1-8.
Id. , at Page 155 L. 21 to page 156 L. 6.
See , November 5, 2003 trial testimony of Charles Lunden, at page 156 L. 10 to page 157 L. 25.
Id. , at page 157 L. 22 to page 158 L.23.
Id. , at page 156 LL. 10-18, page 157 LL. 6-11. Mr. Lunden testified that these findings allowed him to conclude, with a confidence level of 90 percent, that the information contained on the data extract was accurate and complete with a three percent margin of error. Id. Mr. Lunden likewise testified that his randomly-selected sample size of 76 "items" was considerably higher than the sample required in the accounting field to establish the accuracy of the data extract within a reasonable degree of certainty. ID. , at page 159 LL. 8-15.
Mr. Lunden then analyzed the data contained in this extract to provide an opinion as to the amount to which ProLease Atlantic was entitled to a set-off under Paragraph 2(d) of the Purchase Agreement. In making this analysis under the Purchase Agreement, Mr. Lunden determined the number of "Eligible Employees" on ProLease Atlantic's payroll as of the November 28, 2000 "Recalculation Date". Mr. Lunden testified that, in making this assessment, he excluded three categories of employees found on the data extract: (i) employees associated with new clients solicited by ProLease Atlantic subsequent to the Closing of the ProLease Atlantic/HRO transaction; (ii) employees associated with clients who, while running payroll with ProLease Atlantic during the month of November, 2000, had indicated their intention to terminate their affiliation with ProLease Atlantic prior to the November 28, 2000 look-back date (Robinson-Pallet, South Jersey Paper Products ("South Jersey Paper"), Trenton Corrugated Products ("Trenton Corrugated") and Ventresca, Ltd. ("Ventresca")); and (iii) employees associated with two clients (Aquahab, L.P.
ID. , at page 159 L. 23 to page 160 L. 12. Fried and HRO agreed at trial that, under the Purchase Agreement, employees associated with clients solicited by ProLease Atlantic subsequent to the Closing were not to be counted as "Eligible Employees" for purposes of computing ProLease Atlantic's entitlement to a set-off under the Recalculation Formula. See , November 3, 2003 trial testimony of Fried, at page 82 LL. 8-13 and November 4, 2003 trial testimony of Fried, at page 32 L. 20 to page 33 L. 6.
ID. , at page 1 61 LL. 3-1 2. These employees are found at Exhibit F of Mr. Lunden's Expert Report, which was introduced at trial as Defendant's Exhibit 96.
("Aquahab") and The Littman Group ("Littman")) who, while running payroll with ProLease Atlantic during the month of November, 2000, had their client services contract terminated by ProLease Atlantic before the Recalculation Date, in early November, 2000.
Id. , at page 160 L. 20 to page 161 L. 2. These employees are found at Exhibit E of Mr. Lunden's Expert Report, which was introduced at trial as Defendant's Exhibit 96. The course of events leading up to the termination of Aquahab and Littman's client contracts is described in greater detail below.
Based upon the data he reviewed, and the exclusions identified above, Lunden opined that, under Paragraph 2(d) of the Purchase Agreement, ProLease Atlantic was entitled to a set-off against the Promissory Note in the total amount of $1,692,500, leaving a remaining balance of $374,375. At trial, Mr. Lunden described in detail his calculations leading to this figure.
See , trial testimony of Charles Lunden, at page 162 LL. 5-10. See also Defendant's Exhibit 96 , at sub-Exhibit B.
Mr. Lunden computed the number of "Eligible Employees" on ProLease Atlantic's payroll as of the Recalculation Date, in accordance with the definitions set forth in Paragraph 2(a) of the Purchase Agreement. First, Mr. Lunden determined that there were 2,144 employees who ran payroll with ProLease Atlantic during November, 2000. Next, Mr. Lunden subtracted from this figure the number of part-time employees (i.e., employees working less than thirty hours per week) on ProLease Atlantic's payroll during November, 2000 (amounting to 563), yielding a balance of 1,581. Mr. Lunden added 108 to this balance, a number equivalent to 5% of the 2,144 total employees on ProLease Atlantic's payroll during November, 2000 (resulting in a total of 1,689 employees), in accordance with the Five Percent Limitation set forth in Paragraph 2(a) of the Purchase Agreement. Finally, Mr. Lunden (in accordance with Paragraph 2(a)'s instruction to account for "the aggregate of the Part Time Employees who together work thirty (30) hours per week") added to the 1,689 figure the number of remaining "full time equivalent" employees represented by the remaining 455 part-time employees who had not previously been counted in accordance with the Five Percent Limitation (yielding 164 full time equivalents), thereby determining that the number of "Eligible Employees" on ProLease Atlantic's payroll as of the Recalculation Date was 1,853.
Id. , at page 162 LL. 18-23. See also , Defendant's Exhibit 96. at sub-Exhibits B, C and D. This 2,144 figure excluded those clients reflected in Exhibits E and F of Lunden's Expert Report. ID. , at pages 4-5.
ID. , at page 163 LL. 2-7. See also , Defendant's Exhibit 96. at sub-Exhibit B, and Defendant's Exhibit 52, at Paragraphs 2(a) and 2(d). As noted above, the term "Eligible Employee" is defined in the Paragraph 2(a) as "those employees who shall work at least thirty (30) hours per week and shall have been on the Seller's payroll for at least twelve (12) weeks prior to the Closing."
ID. , at page 163 L. 8 to page 164 L. 1. See also, Defendant's Exhibit 96. at sub-Exhibit B, and Defendant's Exhibit 52 , at Paragraphs 2(a) and 2(d).
See , November 5, 2003 trial testimony of Charles Lunden, at page 164 LL. 1-14. See also, Defendant's Exhibit 96. at sub-Exhibit B, and Defendant's Exhibit 52 , at Paragraphs 2(a) and 2(d).
Having determined that the number of Eligible Employees on ProLease Atlantic's payroll as of the Recalculation Date was 1,853, Mr. Lunden applied the Recalculation Formula set forth in Paragraph 2(d) of the Purchase Agreement. Mr. Lunden multiplied 3!(307 (the number of "Eligible Employees" represented to be on HRO's payroll as of the Closing) by 97, yielding a product of 3,207. Mr. Lunden next subtracted the number of Eligible Employees on ProLease Atlantic's payroll as of the Recalculation Date (1,853, as noted above) from 3,207, resulting in a difference of 1,354. Finally, Mr. Lunden multiplied 1,354 by $1,250, and thereby opined to a reasonable degree of mathematical certainty, that under the Recalculation Formula, ProLease Atlantic was entitled to a total set-off against the principal balance of the Promissory Note of $1,692,500, resulting in a remaining principal balance of $374,375.
See , November 5, 2003 trial testimony of Charles Lunden, at page 164 L. 15 to page 165 L. 1. See also, Defendant's Exhibit 96. at sub-Exhibit B.
See , November 5, 2003 trial testimony of Charles Lunden, at page 165 LL. 207. See also, Defendant's Exhibit 96. at sub-Exhibit B.
See , November 5, 2003 trial testimony of Charles Lunden, at page 165 LL. 8-24. See also, Defendant's Exhibit 96. at sub-Exhibit B.
To oppose this testimony from ProLease Atlantic's expert Counter Defendants did not call an expert witness, but had Mr. Fried testify in support of their claim for breach of contract. Fried indicated on direct examination that as of the Recalculation Date there were 3,500 employees on ProLease Atlantic's payroll. On cross-examination he was unable to support this figure as evidenced by the following excerpt from his testimony:
Q: You said that as of November 28th you calculated that there were about 3500 eligible employees, correct ?
A: There were 3500 employees on — yes.
Q: Okay. And so where . . . do you come up with the November 28th date ? Did you go through each employee and determine . . . that they were on payroll as of November 28th ?
A: No.
Q: What report did you use then ?
A: I mdash; I used a combination of [reports], because no one report simply gave the information in a simple or complete fashion so that we could do a count or verify the allonge.
Q: So then your number that you gave of 3500 as of November 28th may not have been true as of November 28th, is — is that what you're saying ?
A: My number is of — the number that I gave was the number that indicates how many people were active at the time. I don't have — I think I testified to this before. I still don't have a single number that says these are the people who were on there. What I have is . . . a bunch of numbers all much higher than the allonge.
Q: So as you sit here today you cannot swear to this Court that the number of eligible employees on the payroll as of November 28th was your 3494 number, isn't that correct ?
A: Correct.
Q: It could be a sub — it could be more ?
A: Possibly, but not probably.
Q: Could be less, isn't that correct ?
A: A little bit, but not a lot.
Q: Well how do you know that it's a little bit and not a lot ?
A: That's why I looked at all the other reports . . . because no one gave us a report that was just simply a report that we could have looked at to come to the number. I have reports that are incomplete and inaccurate
Q: Now you're testifying that the number was based on incomplete and inaccurate information ?
A: That's what I said before. Yes.
Q: So, therefore, your number could-as we've just discussed — could be right, could be wrong ?
A: As a specific number ? Yes. But I think it shows that it isn't 2,083.
See , November 3, 2003 trial transcript, at page 190 L. 21 to page 192 L. 19.
When this testimony is compared to Lunden's qualifications and methods of proceeding it is clear to the Court that Mr. Lunden's conclusions are much more reliable. He is a graduate of the University of Pennsylvania with a major in Accounting and is a Certified Public Accountant. He is accredited in Business Evaluations by the American Institute of CPA's, he is a Certified Fraud Examiner, a Certified Life Underwriter and a Certified Management Accountant. He has testified as an expert in various State and Federal Courts as to Business Evaluations and measures of damages. Mr. Lunden explained that in reaching his decision that there were 1,853 employees on ProLease Atlantic's payroll as of the Recalculation Date, using generally accepted statistical methods he first verified that the payroll dates supplied to him by ProLease Atlantic were accurate. He then applied the recalculation formula to that data and thereby determined the number of Eligible Employees. Fried on the other hand insisted that the payroll reports supplied to him by ProLease Atlantic were incomplete but failed to explain why their reports were incomplete and also failed to provide an alternative method by which the number of Eligible Employees could be computed.
See November 3, 2003 trial transcript pages 144-146.
Despite the fact that the recalculation formula was to take into account only "eligible employees" (i.e., employees who worked at least 30 hours per week for at least 12 weeks prior to the closing, subject to the limitations and exceptions set forth in Paragraph 2(a) of the Purchase Agreement), during his November 3, 2003 testimony, Fried admitted that his calculation of 3,500 employees as of the Recalculation Date did not distinguish between full-time and part-time employees:
Q: Now in going through your number, your 3494 number, you will recall you don't get credit for all employees because there could be part-timers, and then there's an allocation.
A: Yes.
Q: Did you do that allocation ?
A: No.
Q: So your 3494 includes full-time — all employees, whether they worked one hour, whether they worked 40 hours a week ?
ID. , at page 192 L. 20 to page 193 L. 5. See also. ID. , at page 197 L. 19, to page 198 L. 6.
Fried also admitted that his look back calculation of 3,494 employees (which as noted above, did not differentiate between Eligible Employees and ineligible employees) was based principally on year to date payroll reports (Plaintiff's Exhibits 7 and 13), as opposed to the month to date reports for November, 2000 relied upon by Lunden. Fried's reliance upon year to date reports would produce a flawed result because it would include employees who were associated with clients whose affiliation with ProLease Atlantic was terminated prior to the Recalculation Date as well as employees associated with clients who were procured by ProLease Atlantic subsequent to the Closing Date (and who were not to be taken into account in determining the number of Eligible Employees as of the Recalculation Date); and employees who were hired subsequent to the Closing or were fired or resigned prior to the Recalculation Date.
See, in this regard, November 3, 2003 trial transcript, at page 109 L. 22 to page 110 L. 14, wherein Fried states, among other things, that "I actually was focused on the year-to-date reports, not the month to date reports." See also, ID. , at page 115 LL. 14-16, page 116 LL. 8-14.
ID. , at page 195 LL. 17-24. See also, November 4, 2003 trial testimony of Fried, at page 9 L. 19 to page 10 L. 5.
Fried attempted to justify his reliance upon these reports by arguing that he could account for all terminated employees by simply subtracting the number of employees designated as "terminated" on the face of the year to date reports from his year to date total of 3,494. This method of calculating the number of employees was undermined by Mr. Ramamoorthy, who noted on cross-examination that the employees designated as "terminated" on the face of the year to date reports represented only a fraction of the employees who were terminated during the look-back period:
See , for example, Fried's testimony of November 3, 2003, at page 110 L. 21 to page 111 L.6.
Q: Okay. Are — if an employee has not been terminated, is that an active employee ?
A: No, sir, not necessarily.
Q: Okay. What are the circumstances in which that would not be true ?
A: That's because primarily the business that we acquired from Human Resource Options and . . . even our own business is just small to medium size enterprises. Most of these business owners have 5, 10, 15 maybe 50 employees. That's the usual range. And most of them do not do a meticulous job of reporting back to us as to when an employee has joined or when the employee has left. Usually they report meticulously when the employee has joined, because the employee needs a check. But, when the employee leaves the services, they never report to us. The only way we know that is, if the client doesn't report, is when we get an unemployment claim for that employee . . . Then we call the client and say, wait a minute, here is Joe Smith whose [sic.] claiming for unemployment. You have not paid him a check in all these pay cycles, what is the reason ? Then they give us the reason. Does it happen often ? No.
Q: When you say a reason for — a reason for the termination — or A: Exactly, sir.
Q: Okay . . . the people at ProLease or ProLease Atlantic . . . say they see an employee who hasn't been paid in, I don't know, a month or so. Will they ever . . . take a look at them and then take it upon themselves to call the client and inquire as to what the status of that employee is ?
A: I really like to do that, only because it helps the database run faster . . . So, it is our policy of procedure to do that. Does it happen ? Maybe ten percent of the time. . . . There are some employees in my system since 1997 who have not been paid, but are still active.
See , November 4, 2003 trial testimony of Ramamoorthy at page 93 L. 9 to page 95 L. 9. See also. Id., at page 95 L. 12 to page 97 L. 21.
Based upon this I find that Mr. Fried's method of calculating "Eligible Employees" was unreliable.
Exclusion of Employees Associated With Aquahab, Littman, Robinson-Pallet Trenton Corrugated, South Jersey Paper and Ventresca In the Look-Back CalculationEmployees associated with Aquahab, Littman, Robinson-Pallet, Trenton Corrugated, South Jersey Paper and Ventresca were not included in the calculations made by Mr. Lunden and ProLease Atlantic. Counter Defendants contend that they were on the payroll as of the look-back date and should be included. Most of the testimony at trial dealing with the "disputed" clients was devoted to Aquahab and Littman (who collectively accounted for 282 of the 423 "disputed" employees). The court finds that the following facts have been established with respect to the events surrounding the termination of Aquahab's affiliation with ProLease Atlantic:
Aquahab and Littman are affiliated companies. Thus, for ease of reference, they will be collectively referred to below as "Aquahab".
(i) In early-November, 2000, ProLease Atlantic, having determined that Aquahab was unprofitable and presented certain unacceptable risk management issues, orally terminated its client services contract with Aquahab.
(ii) On November 6, 2000, Aquahab, through its President Les Littman ("Mr. Littman"), sent a certified letter to ProLease Atlantic (care of Mark Fried) memorializing ProLease Atlantic's prior oral termination of Aquahab's contract, and requesting that ProLease Atlantic process its payroll until and including the pay period ending December 16, 2000. Although this letter was apparently received by Fried on or about November 9, 2000, Ramamoorthy was unaware of this letter until several weeks thereafter.
(iii) On November 29, 2000, ProLease Atlantic (through Bakhtawar "Becky" Ramamoorthy), unaware of Mr. Littman's letter of November 6, 2000 requesting that ProLease Atlantic process its payroll until December 16, 2000, sent a letter to Aquahab terminating ProLease Atlantic's affiliation with Aquahab effective November 15, 2000 (thereby memorializing ProLease Atlantic's prior oral termination in early-November, 2000); and
(iv) On or about December 4, 2000, ProLease Atlantic first became aware of Aquahab's request in its letter of November 6, 2000 that ProLease Atlantic continue to process its payroll. By Letter Agreement dated December 5, 2000, ProLease Atlantic agreed, as an accommodation to Aquahab, to process its payroll until December 31, 2000.
Under Paragraph 2(f) of the Purchase Agreement, the following is stated:
On or before the Recalculation Date . . . the Buyer [ProLease Atlantic] shall deal with the Client Contracts . . . using the same commercially reasonable business practices as it has used in the past with respect to its own client contracts (i.e., the Buyer shall not wilfully and purposefully terminate any Client Contracts without cause solely to obtain a reduction in the amount of the Promissory Note, but shall have the right to terminate Client Contracts . . . for the same reason that it terminates its own client contracts (e.g., default by a client under a contract, and any risk management issues (credit risk, workmen's comp risk, unemployment risk, etc.)). (emphasis added).
See , November 4, 2003 trial testimony of Ramamoorthy, at page 127 L. 7 to page 129 L. 17, page 131 LL. 5-6, page 132 LL. 3-11; Novembers, 2003 trial testimony of Ramamoorthy, at page 124 LL. 1-25. See also, December 5, 2000 Letter Agreement between Les Littman and Ramamoorthy, introduced at trial as Defendant's Exhibit 31, wherein Mr. Littman memorializes this oral termination, stating "To review what occurred, you advised us in early November that you were terminating our Contract." Ramamoorthy also explained at trial that one of the principal reasons why Aquahab was unprofitable, was because it had a high ratio of part-time employees relative to full-time employees. See, November 4, 2003 trial testimony of Ramamoorthy, at page 129 LL. 3-6, November 5, 2003 trial testimony of Ramamoorthy, page 124 LL. 3 12. Moreover, as discussed more fully below, at the time of the Closing, ProLease Atlantic was unaware of Aquahab's high ratio of part-time employees relative to full-time employees. See , November 5, 2003 trial testimony of Lunden, at page 166 LL. 22-25, page 170 L. 25 to page 173 L. 14.
A copy of this letter was introduced at trial as Defendant's Exhibit 29.
See , November 5, 2003 trial testimony of Ramamoorthy, at page 126 L. 17 to page 127 L. 10. See also , Defendant's Exhibit 31 , wherein Mr. Littman states "I was actually unaware that you had not seen our letter of November 6 until yesterday."
A copy of this letter was introduced at trial as Defendant's Exhibit 30. Although, throughout this case, Counter-Defendants have maintained that Mrs. Ramamoorthy's letter of November 29, 2000 terminating Aquahab's client services contract effective November 15, 2000, constituted "backdating" (thereby implying that ProLease Atlantic engaged in some sort of fraud by terminating Aquahab's contract), Mrs. Ramamoorthy unequivocally testified at trial that ProLease Atlantic's formal termination letter to each of its terminated clients always post-dates the effective termination date of the client. See , November 5, 2003 trial testimony of Becky Ramamoorthy, at page 49 L. 4 to page 51 L. 17. See also , termination letters collectively introduced at trial as Defendant's Exhibit 92.
See , November 5, 2003 trial testimony of Ramamoorthy, at page 124 L. 25 to page 125 L. 4. See also , Letter Agreement introduced as Defendant's Exhibit 31.
See , Defendant's Exhibit 52.
Despite Counter Defendants' assertions to the contrary, there is no evidence in the record to suggest that Ramamoorthy terminated Aquahab's contract "without cause solely to obtain a reduction in the amount of the Promissory Note." As Mr. Ramamoorthy stated at trial he terminated Aquahab's client contract in early November 2000 because Aquahab presented unacceptable risk management issues, a matter specifically identified in Paragraph 2(f) as providing a "commercially reasonable" reason for terminating a client contract (these risk management issues are due to the fact that Aquahab was in the business of providing aquatic physical therapy services, which presented an increased risk of "slip and fall" type injuries) and because Aquahab was an unprofitable client. Based upon the foregoing I find that the exclusion of the employees associated with Aquahab-Littman from the look-back calculation was justified.
See , November 4, 2003 trial testimony of Ramamoorthy, at page 127 L. 7 to page 129 L. 17, page 131 LL. 5-6, page 132 LL. 3-11; November 5, 2003 trial testimony of Ramamoorthy, at page 124 LL. 1-25.
I find also that the exclusion of Robinson Pallet, Trenton Corrugated, South Jersey Paper and Ventrisca in the look-back calculation was a proper application of the Contract terms. All of these companies had notified ProLease that they were terminating their services.
Bala Ramamoorthy was called to testify by Counter Defendants and was shown P-39, P-40, P-41 and P-42 and was asked if they were on the payroll as of the look-back date. Mr. Ramamoorthy testified that those four clients were terminated before the November 28, 2000 look-back date. Becky Ramamoorthy testified that her main function was to work with clients to make sure that they were satisfied. She stated that every termination letter was actually sent out after the effective termination date. This is necessary because they must wait for the last run to find out the end date and then generate the letter.
Notes of testimony 11-4-03 p. 143-145.
Notes of testimony 11-4-03 p. 169-170.
Notes of testimony 11-5-03 p. 28, 37, and 51.
The court notes that each of these letters (i.e., P-39, 40, 41 and 42) starts out with the same sentence "This letter will confirm the termination of ProLease Services, effective [date], per your request". In the court's view to refer to these as termination letters is misleading because they are acknowledging an earlier termination by the clients; therefore, the date of termination should not be determined by the date of the letters in question but rather by the earlier termination notification by the client.
It is obvious from the complex nature of the services ProLease performed for these clients that the services could not be stopped immediately upon the first notification by the client.
CONCLUSIONS OF LAW
1. Paragraph 16 of the Purchase Agreement indicates that Maryland law should apply to any claim arising out of the purchased transaction. Neither side appears to dispute this and therefore the Court will apply Maryland law to all of the claims arising out of the contract as well as tort claims directly related to the execution or performance of the contract.
2. In civil matters, Maryland Courts typically require the party asserting a claim to prove the claim by a preponderance of the evidence.Gue vs. Mitchell, 214 A.2d 319, 322 (Md. 1965). Fraud claims, however, are adjudicated by a clear and convincing evidence standard. Md. Environmental Trust vs. Gaynor, 803 A.2d 512, 516 (Md. 2002). Therefore, ProLease Atlantic's set-off, breach of contract and negligent misrepresentation claims, as well as Plaintiffs' breach of contract claim against ProLease Atlantic are subject to the preponderance of the evidence standard and ProLease Atlantic's fraud claim is subject to the clear and convincing evidence standard.
3. ProLease Atlantic has proven by a preponderance of the evidence that under Paragraph 2(d) of the Purchase Agreement, it is entitled to a set-off against the Promissory Note in the sum of $1,692, 500.
4. Under Section 6(j)(2) of the Purchase Agreement, Counterclaim Defendants represented that all federal, state and local taxes due and owing by HRO and/or its affiliates (including ECW) to any governmental body would be paid at or before closing. Despite this, there was due and owing by ECW to the City of Philadelphia a business tax in the amount of $6,132.92. Despite demands Counterclaim Defendants never paid these taxes and ProLease Atlantic as ECW's successor in interest was required to do so. This issue has been conceded by Counterclaim Defendants. Counterclaim Defendants contend, however, that under Paragraph 11(a)(2) p. 33 of the Purchase Agreement, the $6,132.92 is subject to a $5,000 deductible provided for in that paragraph. I do not agree with Counter Defendants interpretation of that paragraph for the following reasons: the pertinent part of 11(a)(2) reads as follows:
". . . any liability for taxes hereinafter finally determined to be due as a result of any examination of seller . . . by any taxing authority."
This must be read in conjunction with Paragraph 6(j)(2) which reads as follows:
"All federal, state and local taxes owing by seller and the affiliates that may accrue up to the Closing Date shall be paid by seller and/or the affiliates."
Reading these two paragraphs together they say, in effect, seller is to pay all the taxes due and owing up to the Closing Date. If a later examination of your tax return results in further taxes due you are to pay them, but you are to get a deduction for the first $5,000 due. Paragraph 11(a)(2) clearly contemplates an audit type or "examination" type of determination. Counter Defendants interpretation would encourage seller not to pay taxes due at Closing because if they waited until after Closing they would automatically be entitled to a $5,000 deduction from the amount of taxes due. This is not a reasonable reading of this Contract and I so find.
Therefore, I find under Paragraph 11(a) of the Purchase Agreement ProLease Atlantic is entitled to be indemnified for the full $6,132.92 from the Counterclaim Defendants. Under Paragraph 11(d) of the Purchase Agreement ProLease Atlantic is entitled to a set-off in that amount against the principal balance of the Promissory Note.
5. ProLease Atlantic has proven by a preponderance of the evidence, and Counterclaim Defendants do not dispute, that ProLease Atlantic is entitled to a set-off against the Promissory Note in the additional amount of $106,806.71. This is to reimburse ProLease Atlantic for the large number of PLC employees who were covered by the HRO policy with Blue Cross unbeknownst to ProLease Atlantic.
6. Counterclaim Defendants failed to disclose to ProLease Atlantic that HRO had permitted its client to falsely designate their uninsured relatives and acquaintances as "employees" of HRO. This constituted a breach of Paragraph 6(u) of the Purchase Agreement (which, among other things, obligated Counterclaim Defendants to disclose to ProLease Atlantic "all facts material to HRO's operations and the transactions contemplated under the Purchase Agreement"). Under Paragraph 11(a) of the Purchase Agreement, ProLease Atlantic is entitled to seek indemnification from Counter Defendants for any breach by Counter Defendants of representations made in Paragraph 6(u) of the Purchase Agreement. Therefore, under Paragraph 11(d) of the Purchase Agreement, ProLease Atlantic is entitled to a set-off in the amount of $39,845.54 against the principal balance of the Promissory Note.
7. Under Paragraph 7 of the Letter Agreement, PLC agreed to reimburse ProLease Atlantic for "all costs" expended by ProLease Atlantic to assist PLC in obtaining worker's compensation insurance coverage for its employees. PLC failed to reimburse ProLease Atlantic for the sums expended by ProLease Atlantic in providing worker's compensation insurance to PLC's employees and this constituted a breach of the covenant under Paragraph 11(a) of the Purchase Agreement for which ProLease Atlantic is entitled to seek indemnification from Counter Defendants. Therefore, under Paragraph 11(d) of the Purchase Agreement, ProLease Atlantic is entitled to set-off the amount of $45,935.62 against the remaining principal balance of the Promissory Note.
8. Pursuant to Paragraph 7 of the Letter Agreement ProLease Atlantic agreed to administer PLC's payroll and benefits at the rate of $12.50 per employee per month. ProLease Atlantic performed that service for which PLC is indebted to ProLease Atlantic in the sum of $33,212. PLC and Counter Defendants' failure to reimburse ProLease Atlantic for administering PLC's payroll and benefits constitutes a violation of Paragraph 7 of the Letter Agreement. Under Paragraph 11(a) of the Purchase Agreement, ProLease Atlantic is entitled to indemnification for this "breach of covenant" from Counter Defendants and Paragraph 11(d) of the Purchase Agreement permits ProLease Atlantic a set-off in the amount of $33,212 against the principal balance of the Promissory Note.
9. The principal amount of the Promissory Note was to bear interest at the rate of 8% per annum and was to be paid in quarterly installments of principal and interest over a four year period following the closing. ProLease Atlantic made a quarterly payment of principal and interest of $151,558.69 to HRO on or about October 2, 2000. This payment was based on the assumption that the principal balance of the Promissory Note was $2,066,875. ProLease Atlantic was unaware at the time that they were entitled to the set-offs when it made that payment. Once ProLease Atlantic is credited with each of the set-offs to which it is entitled under the Purchase Agreement the principal balance of the Promissory Note is reduced to $143,287.06.
10. Mr. Lunden testified at trial, and I so find, that accounting for this revised balance with an interest rate of 8% and a four year amortization as well as ProLease Atlantic's $151,558.69 payment on October 2, 2000 that ProLease Atlantic overpaid on the Promissory Note in the amount of $2,540.
FRAUD CLAIM
Based upon the evidence presented at trial, and the law of Maryland, the Court finds that Counterclaim Defendants defrauded ProLease Atlantic. The Counterclaim Defendants jointly and severally represented in Paragraphs 6(n), 6(r) and 6(u) of the Purchase Agreement that: (a) the Client List was a correct and current list of all HRO's clients; (b) no representation or warranty made in the Purchase Agreement, or in any exhibit or document required to be furnished thereunder, contained any untrue statement of material fact, or omitted to state a material fact necessary to make any statement of fact contained therein not misleading; and (c) they had disclosed to ProLease Atlantic all facts material to HRO's operations and the transactions contemplated under the Purchase Agreement, and acknowledged that the representations made by the Counter Defendants in the Purchase Agreement had been made with the knowledge and expectation that ProLease Atlantic was placing substantial reliance thereon.
Despite the above, it is not disputed that Counterclaim Defendants failed to disclose to ProLease Atlantic: (1) that the HRO Group Health Insurance Policy with Capital Blue Cross actually included a large number of PLC's employees (which resulted in ProLease Atlantic inadvertently paying $106,807 in health insurance premiums on behalf of PLC's employees between approximately July 2000 and January 2001); and (2) that prior to the closing, Counter Defendants had instituted a policy whereby the employees of HRO's clients were permitted to falsely designate their relatives and acquaintances as "employees" of HRO, which resulted in ProLease Atlantic paying $39,845.54 in health insurance premiums to Amerihealth on behalf of the relatives and acquaintances from whom ProLease Atlantic was not taking withholding.
Counterclaim Defendants misrepresented that the Client List was "a correct and current list of all of HRO's clients", thereby inflating the number of "Eligible Employees" purportedly "sold" to ProLease Atlantic at the Closing and, by extension, the purchase price. In this regard ProLease Atlantic's expert Charles Lunden testified as follows:
Q: Did you do anything to analyze whether the number of 3307 was an accurate number:
A: I looked at the information in [Plaintiff's] exhibit 5, and what I found was that there were substantially more employees on exhibit 5 which covers the entire period from the beginning of 2000 until the end of 2000, when compared with the payroll histories, starting July 1, which is after the transaction date.
Q: Why don't you give one example.
A: Sure. Client number 747 gives an example of why the beginning balance is overstated. If we look at exhibit c to the purchase agreement . . . If we look at Global Networking . . . we see that on the HRO system, it was counted as 15 full-time employees at the date of the acquisition, the starting date . . . When we find the same client in exhibit six [which] reports all of the payments made on behalf of that client during the period July 1 through December of 2000.
Q: And what did you find?
A: That there were only nine employees that were paid during that time, and —
Q: When you say nine, do you mean full-time, part-time, or aggregate?
A: Aggregate. There were nine aggregate employees paid during that six month period. If we look just during the month of November, there were only four during the month of November and none of those were working on a full-time equivalent basis. So, what this tells is that the starting point included people that were not on payroll, but had not been terminated in the system . . .
Q: Now, you've heard some testimony here regarding the number of clients, including Aquahab. Did you do any analysis as to whether the figure, the number of full-time employees represented in exhibit c of the purchase agreement . . . was an accurate figure?
A: I did.
Q: And what did you determine?
A: I determined that it was not an accurate representation . . . we look at exhibit e [to Lunden's Expert Report], we find that based upon the payment patterns in November, there were 282 total employees of which 173 were part-timers . . . The full-time equivalent was 133 . . . That's on the payroll reports . . . and if we look at the HRO equivalent time period, we find that Aquahab had a total of 325 full-time and only 33 part-time.
Q: When you say the HRO equivalent time period, do you mean exhibit c? A: I do.
Q: So, you're saying there are 300 odd . . . employees represented as full-time on exhibit c for Aquahab . . . but only 133 full-time equivalent appear on the payroll reports?
A: That's correct.
Based on this and the other facts found by the Court, I find that Counterclaim Defendants made a number of material misrepresentations and/or intentional nondisclosures to ProLease Atlantic regarding HRO's business. Each of Counterclaim Defendants' misrepresentations was either known by Counterclaim Defendants to be false, or was made by Counterclaim Defendants with a reckless disregard for its truth. To the extent that some of these misrepresentations would be considered as "nondisclosures" the Court finds that these non-disclosures were made with knowledge that ProLease Atlantic would be misled by them to its detriment.
For example, notwithstanding the representations and warranties contained in Paragraph 6(n), 6(r) and 6(u) of the Purchase Agreement, Counterclaim Defendants had to know, prior to the Closing that the HRO Group Health Insurance Policy with Capital Blue Cross actually included PLC's employees; and they had instituted a policy whereby the employees of HRO's clients were permitted to falsely designate their relatives and acquaintances as "employees" of HRO in order to cause Amerihealth to include these individuals on the HRO/Amerihealth Group Health Insurance Policy. To the extent that these matters do not technically constitute "misrepresentations" they are certainly actionable non-disclosures, since (1) these non-disclosures materially relate to the assets purchased by ProLease Atlantic (i.e., the group health insurance policies, and the client contracts); (2) Counter Defendants failure to disclose these matters directly caused harm to ProLease Atlantic by causing ProLease Atlantic to pay health insurance premiums for persons from whom ProLease Atlantic was not taking withholdings.
See , the November 3, 2003 trial testimony of Mark Fried, at page 42, LL. 5-25.
It is clear to the Court, after reviewing Mr. Lunden's testimony, that the Client List at the time of the closing was not current and not correct. It is also clear to the Court that Counter Defendants had to know this. Following a detailed review of the transcript of Mr. Fried's testimony I find that he made no serious attempt to arrive at an accurate Client List. I conclude from this failure, that he knew that such an analysis by him would simply verify Mr. Lunden's report, and prove Protease Atlantic's claim that the Client List was inaccurate at the time the Purchase Agreement was executed.
A person reading Mr. Fried's testimony might be tempted to think that perhaps he did not have all the documents needed to make an accurate determination of the Client List. I refer such reader to this Court's Memorandum Opinion of January 31, 2003 which deals in detail with the efforts of this Court to complete the discovery process in this case.
It should also be born in mind that Mr. Fried was one of the founders of this business; that he continued with the business after it was sold and had to know better than anyone how to compute an accurate Client List and exactly what documents were needed in order to make such a calculation based on the formula set forth in detail in the Purchase Agreement.
Throughout this case, Counter Defendants have maintained that ProLease Atlantic should be "estopped" from claiming that the Client List was inaccurate since (according to Counter Defendants) "the express language of the applicable contract documents verify that the Eligible Employee Count . . . was jointly determined and mutually agreed upon by HRO and ProLease Atlantic." (Counter Defendants' Motion for Summary Judgment, at page 6). In fact, the plain language of the Purchase Agreement and the testimony adduced at trial unambiguously evidences that HRO alone calculated the number of Eligible Employees on HRO's payroll at Closing and supplied this number to ProLease Atlantic, that Counter Defendants warranted and represented to ProLease Atlantic that this figure was correct and that ProLease Atlantic relied upon HRO's representation that the Eligible Employee figure was accurate. As previously noted, in Paragraph 6(r) of the Purchase Agreement, Counter Defendants (not "the parties") represented that the Client List attached to the Purchase Agreement was correct and current. Furthermore, in Paragraph 6(u) of the Purchase Agreement, Counter Defendants acknowledged that their representations therein (including the representations in Paragraph 6(r)) had been made with the knowledge and expectation that ProLease Atlantic was placing substantial reliance thereon. At trial, Ramamoorthy confirmed that given the complexity of the PEO industry, it is impossible to verify the number of employees sold in a PEO acquisition through the ordinary course of due diligence, and that, as such, in making a PEO acquisition, Ramamoorthy necessarily relies upon the purchaser's representations and warranties. See, November 5, 2003 trial testimony of Ramamoorthy, at page 81 L. 3 to page 82 L.2. Thus, the explicit language of the Purchase Agreement, as well as the relevant testimony, belies any claim that the number of Eligible Employees was "jointly determined and mutually agreed upon by the parties".
When one considers the extent of the inaccuracy in the eligible employee Client List the conclusion is inescapable that Counter Defendants had to have done that knowingly. It is also clear that these misrepresentations/non-disclosures were reasonably relied upon by ProLease Atlantic in making its decision to purchase HRO's assets because they were the basis upon which the purchase price was computed. ProLease Atlantic was substantially damaged by its reliance upon Counter Defendants misrepresentations/non-disclosures because as a result of these ProLease Atlantic drastically overpaid under the Purchase Agreement.
Based upon the foregoing, I find that ProLease Atlantic has proven by clear and convincing evidence that it was a victim of fraud and that it is entitled to judgment against Counter Defendants, jointly and severally.
CLAIM FOR NEGLIGENT MISREPRESENTATION
Maryland recognizes negligent misrepresentation as a valid cause of action when a plaintiff shows: (1) that the defendant owed a duty of care to the plaintiff, and negligently asserted a false statement; (2) that the defendant intended that his statment would be acted upon by the plaintiff; (3) that the defendant had knowledge that the plaintiff would probably rely on the statement, which, if erroneous, would cause loss or injury; (4) that the plaintiff, justifiably, took action in reliance on the statement; and (5) that the plaintiff suffered damage proximately caused by the defendant's negligence. Gross v. Sussex Incorp., 332 Md. 247, 259, 630 A.2d 1156 (1993); Va. Dare Stores v. Shuman, 175 Md. 287, 291-92, 1 A.2d 897 (1938). Thus, in an action based upon negligent misrepresentation, the plaintiff need not prove that the defendant knew that the actionable statement was false: the plaintiff need only show that the actionable statement was made by the defendant in a negligent fashion, without regard by the defendant to whether the statement was true or false.
It is recognized in Maryland that a "duty of care" sufficient to give rise to a negligent misrepresentation claim arises out of a contractual relationship between the plaintiff and defendant. The analysis that applied to the fraud claim would apply with equal force to the claim of negligent misrepresentation. I find that ProLease Atlantic has proven by a preponderance of the evidence its claim of negligent misrepresentation against the Counter Defendants.
DAMAGES
Under the facts of this case the damages suffered by ProLease Atlantic would be the same under all three theories of liability. They are summarized as follows:
Original Principal Balance of the Promissory Note: $2,066,875
Set-Off Under The Recalculation Formula: $1,692,500
ProLease Atalntic's Payment of ECW Taxes: $6,132,92
ProLease Atlantic's Payment of Health Insurance for PLC's Employees $106,807
ProLease Atlantic's Payment of Health Insurance for Relatives and Acquaintances $39,846
ProLease Atlantic Payment of Worker's Compensation Insurance for PLC Employees $45,935.62
Counter Defendants; Failure to Reimburse ProLease Atlantic for Administering PLC's Payroll and Benefits $33,212
ProLease Atlantic's Promissory Note Payment $151,558.69
Based upon the foregoing ProLease Atlantic does not owe anything on the Promissory Note, and Counterclaim Defendants owe ProLease Atlantic the sum of $2,540.
RECISION
ProLease Atlantic has requested as a remedy, recision of the Contract. Because I have found fraud and material breaches of the Purchase Agreement recision is an available remedy. See, Washington Holmes, Inc. vs. Interstate Land Div. Co., 281 Md. 712, 382 A.2d 555, 562-63 (Md. 1978). Recision is purely an equitable remedy. Mattinqly vs. Mattingly, 92 Md. App. 248, 607 A.2d 575 (1992).
Although returning the parties to their pre-contractual positions is not an absolute prerequisite to the equitable remedy of recision I find that attempting to do so in this case would not be appropriate. Since the closing date of the Contract in question, certain clients have left, others have been added and the nature of this business is such that transferring it back to the original owners is simply not a practical solution at this late date. From all indications the original owners are no longer in this business and it is doubtful that they could service the clientele. Furthermore, although there was a substantial breach by the plaintiffs it did not destroy the main object of this transaction. The breach had the effect of reducing the size of the business transferred. For these reasons I deny the request to order recision of the Contract.
ATTORNEYS FEES
Paragraph 28 of the Purchase Agreement provides that the prevailing party in any legal proceeding between the parties would be entitled to attorneys fees and costs. ProLease Atlantic is the prevailing party under the Contract. Under Maryland law, a party may recover attorneys fees where authorized by contract. Sullivan vs. Easco, Corp., 662 F. Supp. 1396 (D. Md. 1987). Where the fee provision is not explicit, reasonable attorneys fees must be determined by the Court. The party requesting the fee must offer documentation of the hours worked and offer an explanation of how the time was spent, Id. at 1404. The party requesting the attorney's fee must also establish the reasonableness of the hourly rate of the attorney performing the service. This additional information will have to be supplied to the Court either by testimony at a subsequent hearing or by affidavit.
Based upon all of the foregoing the Court enters the following Order.
ORDER
AND NOW, this 4th day of March, 2004, it is hereby ORDERED that:
1. judgment is GRANTED in favor of Defendant ProLease Atlantic on Plaintiff HRO/Mash's Breach of Contract claim;
2. Counterclaim Plaintiff ProLease Atlantic is entitled to a set-off under the recalculation formula in the Promissory Note in the amount of $2,066,875;
3. judgment is GRANTED in favor of Counterclaim Plaintiff ProLease Atlantic against Counterclaim Defendants HRO/Mash, Mark Fried and Howard Vogel on its Counterclaims for Breach of Contract, Fraud and Negligent Misrepresentation in the amount of $2,540; and
4. Defendant ProLease Atlantic is entitled to attorneys fees and costs to be determined at a later date.