Summary
In Palmer, however, an unpublished district court opinion on which the Ivize court relied, the court noted that “[e]ven where nominal damages are possible, a trial is not always warranted,” and it refused to allow such a claim in that case because no loss was shown by the plaintiff and a trial on liability would have been a futile exercise.
Summary of this case from Layne Christensen Co. v. Bro–Tech Corp.Opinion
CA No. 01C-03-114-JEB.
Submitted: November 19, 2003.
Decided: February 27, 2004.
Defendants' Motion for Summary Judgment.
Granted.
Robert J. Katzenstein, Esquire, Smith Katzenstein Furlow LLP, Wilmington, Delaware. Attorney for Plaintiff Bradley Palmer.
Edward M. McNally, Esquire, Morris, James, Hitchens and Williams, LLP, Wilmington, Delaware. Attorney for Defendants Alan Herstrum, James Kee, Thomas Lutes and Mario Kranjac.
Richard A. Morse, Esquire, Young, Conaway, Stargatt Taylor LLP, Wilmington, Delaware. Attorney for Defendants Nathaniel Moffat, Jay Moffat and Pamela Moffat.
OPINION
This case is a dispute among the members and managers of a Delaware limited liability company. The Court has previously granted a motion to dismiss filed by certain defendants who were members but not managers of the Company. Defendants Nathaniel Moffat, Abby Moffat and Jay Moffat ("moving defendants") now seek summary judgment based on their assertion that Plaintiff Bradley Palmer suffered no damages. For the reasons explained below, the motion for summary judgment is Granted.
FACTS
In April 1997, Plaintiff Palmer and Defendant Nathaniel Moffat, as well as other investors, formed the Yazoo Power Equipment Group, LLC ("YPE" or "the Company"), pursuant to Delaware's Limited Liability Company Act. Palmer was president of the Company's management committee. Defendant Alan Herstrum served as YPE's president.
DEL. CODE ANN. tit. 6, ch. 18 (1999).
The business strategy was to buy up small companies engaged in the manufacture of lawn and garden power equipment. In April 1997, F.D. Kees Power Equipment, L.L.C. ("F.D. Kees"), was organized as a wholly owned subsidiary of YPE, engaged in the lawn mower manufacturing business. In May 1997, YPE acquired the assets of Yazoo Manufacturing Company ("Yazoo"), which designed and manufactured outdoor maintenance equipment. At closing, Yazoo Manufacturing Company changed its name to K.R. Holdings and guaranteed financing of the sale with Trademark National Bank. The Asset Purchase Agreement and the Loan and Security Agreement contained several covenants, one of which provided that YPE would maintain a minimum of $1 million net worth. Default of any of the covenants gave K.R. Holdings the right to foreclose on the security for the loan, which included all of YPE's assets and outstanding stock units.
Business did not proceed smoothly for YPE. In March 1998, YPE hired KPMG Peat Marwick, LLP ("KPMG") to review the Company's finances. KPMG concluded that YPE was in breach of several contractual covenants and that equity as of December 31, 1997, totaled a negative $1,693,546, well below the agreed-upon floor of $1 million. The alleged defaults triggered the contractual obligation of certain YPE members to make a capital contribution of $250,000 to the Company, although the parties dispute whether the investment was required from each member or in the aggregate. Notice of the defaults was given to the members of the management committee and also to the creditor, K.R. Holdings, which stated its intention to foreclose if the default were not cured.
Section 4.2.1 of YPE's Operating Agreement provided as follows:
The Class A Members shall contribute an additional $250,000 to the Company within ten (10) days of retained earnings falling below ($1,000,000) (negative one million dollars).
See Kranjac Reply Affidavit, Exhibits 6 and 7, Letters from Dan M. Swain, Jr., president of K.R. Holdings, Inc., dated October 9 and October 21, 1998, respectively.
The financial obligation created by the default triggered a series of hostile events among YPE's members and managers. Section 4.2.1 of the Operating Agreement required that the additional investment be made within 10 days of the default. Although KPMG completed its report in March 1998, the parties were not able to negotiate a recapitalization plan until November 1998. The new plan altered the management structure in favor of the Moffats and called for both the Moffats and Palmer to contribute $250,000 to the Company. The funds were put into escrow with the law firm where Defendant Kranjac worked, and the documents were prepared.
On November 9, 1998, the parties signed the documents, but Palmer, who was the last to sign, added a condition pertaining to removal of members from the management committee, thus negating the contract. Later that day, K.R. Holdings completed its foreclosure on YPE. When the Company was put up for private auction, both Palmer and the Moffat Group put in a bid. The Moffats' bid was accepted, and the sale was finalized in November 1998. Palmer was out.
Three months later, in February 1999, YPE acquired ownership of HCC, Inc., a company which designed and manufactured power machines. The cash portion of the sales price was $1.87 million, which was financed under the Company's revolving line of credit. In July 1999, YPE acquired the Chetech Company, Pug, Inc. and Applied Design Technology, LTD. The $1.7 million purchase price was also financed on credit.
Carpenter Affidavit, Exhibit D, "Notes to Consolidated Financial Statements."
In October 1999, YPE sold its major subsidiary, F.D. Kees, to Husqvarna Forest and Garden Company, Inc. ("Husqvarna"). In December 1999 YPE acquired the assets of the ICC Crawler product line and Tenax Corporation, which designed and manufactured power machines. The purchase price was primarily allocated to inventories and goodwill. The purchase price of $490,000 consisted of $120,000 in cash and $370,000 in seller financing.
See id. at Ex. D.
In March 2001, Plaintiff filed suit in Superior Court, alleging that YPE's members and managers conspired to defraud him of more than $15 million of his equity interest in the Company. Plaintiff seeks to recover a share of the profits allegedly generated from the Husqvarna sale, as well as a share in any of YPE's remaining assets.
Eight months after the Complaint was filed, in November 2001, YPE, which was by then known as Pug Power, LLC, was declared bankrupt in the United States Bankruptcy Court in Jackson, Mississippi. Sale of all of YPE's assets was authorized for the benefit of secured creditors.
In re Pug Power, LLC, Bankr. S.D. Miss., C.A. No. 01-03578, Ellington, J. (Nov. 30, 2001).
STANDARD OF REVIEW
When considering a motion for summary judgment, the Court must determine whether genuine issues of material fact exist in the record. If after reviewing the record in a light most favorable to the non-moving party, the Court finds that there are no genuine issues of material fact, summary judgment is appropriate. The Court's decision must be based on the record, including all pleadings, affidavits, depositions, admissions, and answers to interrogatories, not on potential evidence. Even where there are disputed facts, summary judgment is warranted if the undisputed facts and the non-movant's version of the disputed facts entitle the moving party to judgment as a matter of law.DISCUSSION
Plaintiff alleges breach of the Operating Agreement, conspiracy to convert Plaintiff's equity in YPE, conspiracy to commit fraudulent misrepresentation, tortious interference prospective economic advantage and breach of the implied covenant of good faith and fair dealing. Defendants deny any wrongdoing, but move for judgment as a matter of law because Plaintiff cannot show damages.In response to the motion for summary judgment on the issue of damages, Plaintiff argues that the Husqvarna sale resulted in a net profit of approximately $4.1 million which should have been distributed to shareholders such as himself. Plaintiff also contends that the proceeds were wrongfully used to acquire other assets rather than being paid out to shareholders. In support of these contentions, Plaintiff points to exhibits attached to the affidavit of Jeffrey Carpenter, a New York attorney who represented Plaintiff at one time. A Proforma Closing Balance Sheet suggests that the Company's post-distribution cash balance was $4.86 million as of June 30, 1999. Plaintiff argues that this figure accurately reflects the amount available to shareholders because it was calculated without subtracting the funds used for acquisitions completed after the sale date. Defendants assert that the pro forma sheet is an estimate calculated three months prior to the actual sale.
Carpenter Aff., Ex. C-5.
Defendants argue that there were no net proceeds after payment of YPE's debts, and that, even if there were, YPE would have been contractually prohibited from distributing them. Based on the affidavit of Defendant Herstrum, YPE's president from May 1997 through June 2000, Defendants assert that F.D. Kees was sold for $10.9 million and that the proceeds were used to satisfy debts. Herstrum also avers that the sale improved YPE's credit, allowing for the subsequent purchase of other businesses but that no member of YPE reaped any personal gain from the sale.
More specifically, Defendants point to YPE's 2000 tax return, which reflects a negative equity of $1,148,512, as of January 1, 2000. This document establishes the fact that, approximately three months after the Husqvarna sale in October 1999, YPE was in significant arrears and had no capital available for distribution.
Carpenter Aff., Ex. I.
Defendants further argue that even if the Company had had a positive equity, distribution would have been contractually prohibited. In the security agreement between YPE and Bay Street Corporation, dated May 8, 1997 (which financed the Yazoo purchase), YPE put up all its inventory and receivables as security for partial financing of the purchase of Yazoo Manufacturing Company. Section 9 incorporates by reference the negative covenants and financial covenants contained in Section 9.2 and Section 9.3, respectively, of the Loan Security Agreement entered into by YPE and F.D. Kees (as borrowers) and K.R. Holdings (as lender). Section 9.2 of the latter agreement prohibited YPE from making any type of distribution until full payment is made to either creditor (Bay Corporation or K.r. Holdings) unless the creditor provided written consent. Section 9.3 required YPE to maintain a minimum working capital of $1 million through March 31, 1998, and increasing incrementally after that date. Since Plaintiff's argument is based on what might have happened if the Moffat buyout of November 1998 had never occurred, the questions must be resolved pursuant to the original financing agreements. Defendant have also submitted a copy of the bankruptcy order, dated November 30, 2001.
Kranjac Reply Affidavit, Ex. 1.
Id. at Ex. 2.
Id.
The documents offered by Defendants establish three critical facts. First, as of January 2000, YPE had capital debt exceeding $1.5 million. Second, even if YPE had had positive working capital after the Husqvarna sale, the security agreements prohibited distribution prior to the creditor's debt being paid in full unless the creidtor signed a release. Finally, it is beyond dispute that YPE (dba Pug Power) was declared bankrupt in November 2001.
Based on these uncontested facts, the Court finds that Plaintiff's contention that he would have reaped profits from YPE if he had remained as president is unsupporte Defendants have shown that there are no genuine issues of material fact as to actual damages. Plaintiff's speculative assertion that YPE would not have failed if Plaintiff himself had remained in control of the Company is a negative proposition that is not susceptible of proof. The bottom line is that Plaintiff cannot show that he suffered damages.
Even where actual damages cannot be demonstrated, the breach of a contractual obligation often warrants an allowance of nominal damages. In USH Ventures v. Global Telesystems Group, this Court addressed an alleged breach of a contract to finance and develop a wireless communications network for the Hungarian government. This Court held that the question of whether plaintiffs could have obtained financing for the project was part of plaintiff's proof of damages. Because the question of proximate cause, which is usually left to the jury, required an understanding of financial issues beyond the ken of the average jury, the Court ruled that the absence of testimony from a financial expert precluded the issue from reaching the jury. The evidentiary ruling did not vitiate the plaintiff's loss from a technical standpoint, and the Court found that he was therefore entitled to nominal damages. While USH Ventures could not show damages because of an evidentiary ruling, Mr. Palmer cannot show damages because there is none to be had.
See MindGames, Inc. v. Western Pub. Co., Inc., 218 F.3d 652 (7th Cir. 2000).
USH Ventures v. Global Telesystems Group, 796 A.2d 7, 23 (Del.Super. 2000).
Id. at 21.
Id. at 23 (citing Charles T. McCormick, Handbook on the Law of Damages, 91 (1935); Arthur L. Corbin, Corbin on Contracts § 1001 (1964).
If the case proceeded to trial, Plaintiff could receive at most a nominal award because profits were decimated as of January 2000, and the Company was declared bankrupt in November 2001. This Court questions the wisdom of going through a lengthy and costly trial when it is known from the outset that the plaintiff will perhaps recover one dollar and part of his pride. Even where nominal damages are possible, a trial is not always warranted:
[T]he allowance of nominal damages is generally based on the ground either that every injury from its very nature legally imports damage, or that the injury complained of would in the future be evidence in favor of the wrongdoer, specially where, if continued for a sufficient length of time, the invasion of the plaintiff's rights would ripen into a prescriptive right in favor of the defendant. The maxim "de minimis non curat lex" [the law cares not about trifles] will not preclude the award of nominal damages in such cases. However, if there is no danger of prescription, no proof of substantial loss or injury, or willful wrongdoing by the defendant, it has been said that there is no purpose for allowing damages, and judgment should be rendered for the defendant.
22 AM. JUR. 2D, Damages § 9, p. 39 (emphasis added).
Under this reasoning, Defendants' motion should be granted because no loss has been or can be shown. The Court is persuaded that in this case an award of nominal damages and a concomitant trial on liability would be a futile exercise for all entities involved.
The Court does not suggest that there is no place for trials where nominal damages are the only possible result. Certain types of cases warranting only minimal awards should be addressed in open court, such as those involving defamation or certain tort claims which involve minor emotional controversies. This is not such a case.
Read v. Carpenter, 1995 WL 945544 at *4 n. 3 (Del.Super.).
CONCLUSION
For all these reasons, Defendants' motion for summary judgment is hereby Granted. It Is So ORDERED.