JAMES M. BECK, Plaintiff,
PATRICK SULLIVAN and SANDRA PEIFFER, Defendants.
RICHARD D. BENNETT, District Judge.
The Plaintiff James M. Beck ("Plaintiff" or "Beck") filed this action against the Defendants Patrick Sullivan ("Sullivan"), Sandra Peiffer ("Peiffer"), and Arbotek Associates, Inc. ("Arbotek"), alleging breach of contract, tortious interference with contract, intentional misrepresentations, and conversion. These allegations relate to the sale of the Plaintiff's company, Avtek Associates, Inc. ("Avtek"), to the Defendants on October 29, 2007. Jurisdiction is based on diversity of citizenship pursuant to 28 U.S.C. § 1332, as the Plaintiff is a resident of Montana, and Defendants Sullivan and Peiffer are residents of Maryland. See First Am. Compl. ¶¶ 1-3. Further, the matter in controversy exceeds $75, 000. See id.
Prior to conducting a two-day bench trial, the procedural posture in this case is as follows. The Plaintiff filed a Complaint against the Defendants on October 27, 2011. See Compl., ECF No. 1. On November 17, 2011, the Plaintiff filed a Motion for Temporary Restraining Order and Preliminary Injunction. See TRO & PI Mot., ECF No. 5. The Court entered an Order granting the Plaintiff's Motion after Defendants Peiffer and Sullivan stipulated and agreed to the preliminary injunctive relief requested. See Joint Stip., ECF No. 11; TRO & PI Order, ECF No. 12. After Defendants Peiffer and Sullivan answered the Plaintiff's original Complaint, the Plaintiff filed an Amended Complaint on December 12, 2011. Am. Compl., ECF No. 14. Thereafter, Defendant Arbotek filed a Motion to Dismiss the Plaintiff's First Amended Complaint, ECF No. 16, for failure to state a claim. That motion was denied by this Court on July 6, 2012. See Order, ECF No. 21.
During discovery, the Plaintiff encountered very little cooperation from the Defendants Peiffer and Sullivan. As a result, the Plaintiff filed Motions for Sanctions and Motions to Compel against the two Defendants. See Mot. for Sanctions & to Compel, ECF No. 25; Show Cause Order, ECF No. 32. When Defendant Peiffer failed to show cause regarding her lack of response to discovery requests, this Court ordered that Default Judgment, only as to liability, be entered against her pursuant to Rule 37(b)(2) and (d) of the Federal Rules of Civil Procedure. See Entry of Default J., ECF No. 31. Eventually, Defendant Sullivan was directed to pay $1, 020.00 as sanction for his discovery violations. See Order, ECF No. 45.
On April 5, 2013, the claims against Defendant Arbotek were dismissed with prejudice, after the parties reached a settlement. See Stip. of Voluntary Dismissal, ECF No. 42. As to the remaining Defendants Sullivan and Peiffer, the Plaintiff alleges breach of contract, intentional misrepresentations, and conversion. See First Am. Compl. Accordingly, on June 17 and 18, 2013, this Court held a two-day bench trial, proceeding on the issues of liability and damages as to Defendant Sullivan and the issues of damages as to Defendant Peiffer, who was found liable by entry of Default Judgment. The Plaintiff and Defendant Sullivan called the same two witnesses in their cases-in-chief: the Plaintiff James M. Beck and the Defendant Patrick Sullivan. Based on the exhibits introduced into evidence, the testimony of those two witnesses, the written submissions of the parties, and the oral arguments of counsel, the following constitutes this Court's findings of fact and conclusions of law pursuant to Rule 52(a) of the Federal Rules of Civil Procedure. The accompanying Order enters Judgment in favor of Plaintiff James M. Beck and against Defendants Patrick Sullivan and Sandra Peiffer.
I. FINDINGS OF FACT
A. The Formation and Growth of Avtek
This matter involves the purchase of a small business called Avtek Associates, Inc. ("Avtek"). Plaintiff James Beck ("Beck") formed Avtek in 1988. Avtek is a manufacturers' representative firm for companies serving the technology market. As Beck testified, Avtek represents clients (referred to as "principals") in the manufacturing industry, designing products for them and marketing and selling those products in a specific territory. To be successful in the world of manufacturers' representative firms, Avtek needed to increase the number of principals it represents, maintain good customer relations, and understand technology to market products suitable for its principals. According to Beck, Avtek grew to be a profitable firm.
Defendant Sandra Peiffer ("Peiffer") started working at Avtek in 1998 as a sales engineer. Around the same time, Beck began considering the opportunity of selling Avtek and retiring from the manufacturers' representative business. Because Peiffer was a talented sales person, Beck testified that he began grooming her for the position of President of Avtek, with the hope that she would one day run the firm.
In 2000, Beck promoted Peiffer to Vice President of Sales so that she would have increased exposure to Avtek's principals. At that time, Beck also initiated conversations with Peiffer to discuss the possibility of selling the company to her. However, because Peiffer's interest and talent lay in sales, Beck emphasized that any sale of the company would need to involve not only Peiffer but also someone with organization skills and an administrative background.
Beck moved to Jackson Hole, Wyoming, in 2000, and lived there until 2004. He communicated with Avtek's staff and principals by e-mail and telephone. He also made frequent trips to Avtek's office in Columbia, Maryland. Sometime in 2004 or 2005, Beck promoted Peiffer to President of Avtek. Around that time, Beck moved to Bozeman, Montana, where he currently resides. Beck testified that he maintained his position as owner and chief executive officer of Avtek by communicating remotely with Avtek staff and principals.
While Peiffer was serving as President of Avtek, she met Defendant Patrick Sullivan ("Sullivan"), and the two began dating sometime in late 2006 or early 2007. While the two Defendants were dating, Peiffer contacted Beck and encouraged him to hire Sullivan for a sales position in Avtek's office. Peiffer also endorsed Sullivan as a potential future owner of Avtek, because of his management background working for companies such as McDonnell Douglas, Airbus, and The Boeing Company. Beck held a face-to-face meeting with Peiffer and Sullivan to discuss Sullivan's candidacy and reviewed his resume. Because of Sullivan's background in management and experience in growing sales for companies, Beck testified that he hired Sullivan as a sales engineer of Avtek in March 2007. At that time, Beck was unaware that Sullivan was in bankruptcy under Chapter 13 of the Bankruptcy Code, by which an individual repays his debts over a period of years.
B. The Sale of Avtek to the Defendants
After Sullivan became a full-time employee of Avtek, Beck testified that he continued discussions regarding the sale of Avtek, now with both Peiffer and Sullivan. Prior to the sale, Beck provided the Defendants all the information that he thought they needed to make an informed decision and explained Avtek's revenue stream and regular expenses. Beck began assessing the value of Avtek using manuals developed by a trade organization of electronics representative associations. Initially, Beck and the Defendants Peiffer and Sullivan agreed that Avtek was worth $1, 000, 000. A few months prior to the sale of Avtek, however, one of Avtek's major principals, Atmel Corporation ("Atmel"), terminated the firm. When Peiffer, Sullivan, and Beck become aware of the termination of Atmel, they agreed that the value of Avtek should be reduced to $900, 000. The Defendants and Beck arrived at that figure by reviewing Avtek's recent revenues and principals. Avtek had brought in $866, 178.00 in revenue in 2007, and its revenues in prior years hovered around $700, 000 to over $1, 000, 000. See Avtek Revenue History, Pl.'s Ex. 16.
On October 29, 2007, Beck sold Avtek to Peiffer and Sullivan at a closing in which both Beck and the Defendants Peiffer and Sullivan were represented by counsel. Specifically, Peiffer and Sullivan purchased 100% of the stock of Avtek through Avtek Acquisition, Inc. ("Avtek Acquisition"), a company wholly owned by Peiffer and Sullivan. See Stock Purchase Agreement, Pl.'s Ex. 1. Peiffer signed the Stock Purchase Agreement on behalf of Avtek Acquisitions, and both Peiffer and Sullivan signed in their individual capacities. See id. In exchange for his stock in Avtek, Beck received a promissory note in the amount of $900, 000.00. See Promissory Note, Pl.'s Ex. 10. Under the terms of the Promissory Note, Peiffer and Sullivan (through Avtek Acquisition) were to pay Beck $14, 166.68 per month for eighty-four months. Id.
The Stock Purchase Agreement contains section 5.6, by which Defendants Peiffer and Sullivan affirmed that "[n]o bankruptcy, receivership or debtor relief proceedings are pending" against them. See Stock Purchase Agreement § 5.6. Sullivan admits that he read and understood section 5.6. Sullivan also discussed section 5.6 with Peiffer before signing. Although Sullivan knew he was in bankruptcy, Sullivan did not disclose this fact when signing the Stock Purchase Agreement. Sullivan testified that he decided that the fact that he was in bankruptcy would not have any effect on Avtek, and thus he signed the Stock Purchase Agreement knowing it contained a false statement.
The Stock Purchase Agreement also contains a "Covenant Not to Compete" at section 9.2. See id. § 9.2. Peiffer and Sullivan agreed that until the Promissory Note had been satisfied, Peiffer and Sullivan would not: (i) "compete with Avtek in the business anywhere within the United States;" (ii) "encourage, induce or solicit any actual or prospective Avtek Principal" to discontinue business with Avtek; (iii) "divert from Avtek business or income from any actual or prospective Avtek Principal;" (iv) refer any prospective Avtek Principal or prospective Avtek customer to any Person other than Avtek;" or (v) offer services to any Avtek customer in any capacity other than on behalf of and in the name of Avtek. Id.
In addition to the Stock Purchase Agreement, Beck, Peiffer, and Sullivan signed other transaction documents containing various collateral and contractual provisions that were meant to dictate Peiffer and Sullivan's obligations with regard to the sale of Avtek. The Management Agreement is one such transaction document. See Mgmt. Agreement, Pl.'s Ex. 2. Peiffer signed the Management Agreement on behalf of Avtek Acquisition, and Peiffer and Sullivan signed in their individual capacities as well. In a section of the agreement titled "Management Responsibilities, " Peiffer and Sullivan agreed to "manage, operate, administer and maintain [Avtek] in a business-like manner" in compliance with federal, state, and local laws, and in accordance with the terms and conditions of the Stock Purchase Agreement, Management Agreement, and other transaction documents. Id. § 3.1.
The Management Agreement structured a series of bank accounts and limitations on the transfer of Avtek funds, which Beck and Sullivan both described as a "lockbox." The purpose of the lockbox was to ensure that installments on the Promissory Note as well as payments for the operating costs of Avtek were satisfied each month. Section 3.2 of the Management Agreement provided that all Avtek revenue would be deposited into a "Holding Account" on a daily basis. Id. § 3.2. All commissions and other payments from the principals of Avtek were to go directly into the Holding Account. Id. Per section 3.3, electronic transfers from the Holding Account would occur at the end of each month in the following order: first, the monthly Note installment, totaling $14, 166.68, would be paid to Beck; and second, the amount needed to cover all operating expenses would be transferred into an "Operating Account" from which Peiffer and Sullivan would pay for things such as staff salaries and rent. Id. § 3.3. Any balance remaining in the Holding Account at the end of the calendar year would be transferred into Avtek's Operating Account. Id.
Additionally, Peiffer and Sullivan agreed to the conditions contained in section 3.6, "Books and Records: Financial Reporting." Id. § 3.6. Specifically, Peiffer and Sullivan affirmed that they would at all times "maintain materially accurate and complete books and records" pertaining to Avtek's financial condition, and would furnish "quarterly and annual financial statements" of Avtek, including a "balance sheet, income statement, and statement or retained earnings" to Beck. Id. In addition, Peiffer and Sullivan agreed to provide any other information reasonably requested by Beck from time to time. Id.
Pursuant to a Guaranty Agreement, Avtek Acquisition agreed to irrevocably guarantee "the full and punctual payment, observance and performance of all Obligations." See Guaranty Agreement, Pl.'s Ex. 11. Avtek Acquisition, Peiffer, and Sullivan also pledged 100% of the Avtek stock to Beck in the event of default. See Avtek Stock Pledge Agreement, Pl.'s Ex. 12; Peiffer Stock Pledge Agreement, Pl.'s Ex. 13; Sullivan Stock Pledge Agreement, Pl.'s Ex. 14. If, for example, the Defendants failed to make a timely payment on the Promissory Note or defaulted on one of their management obligations in the Management Agreement, then Beck could retake Avtek by exercising his rights under the Stock Pledge Agreements. Id.
The Promissory Note also dictated that any default by the Defendants would result in an increased default rate of interest, which would be two percent above the then applicable interest rate. Promissory Note § 8. In the event of default, Beck could "declare all unpaid principal and accrued interest" immediately due. Id. § 10. If Beck attempted to enforce the Promissory Note, then the Defendants would be liable for "all costs and expenses incurred, " including court costs, costs of appeal, and reasonable attorneys' fees. Id.
C. Events Occurring After the Sale of Avtek
After the sale of Avtek on October 29, 2007, the Defendants' began making payments on the Promissory Note, but those payments became sporadic. See Note Payment Summary, Pl.'s Ex. 22. The Defendants made ten consecutive, full installments (i.e., monthly payments of $14, 166.68) from November 2007 through August 2008, but then failed to pay Beck the monthly installments due for September and October 2008. See id. Payments made from November 2008 through June 2011 fluctuated greatly, with some monthly installments going unpaid and some installment totaling as little as $650.00 (paid on June 3, 2011) or as great as $31, 000.00 (paid on March 6, 2010). Id. The Defendants' payments dropped precipitously in 2009. By the end of 2009, the Defendants had paid only $229, 569.39 on the Promissory Note; if they had been making timely installments on the Note, they would have paid Beck a total of $368, 333.68. See id. In the beginning of 2010, however, it appears that business for Avtek picked up, and the Defendants made several payments at or above the amount due each month. See id. (reflecting payments of $20, 000 in January 2010, $31, 000 in March 2010, and $14, 166.68 in both April and June 2010). After June 2010, however, payments dropped precipitously once again. See id. No further payment was made after June 2011. Id.
Beck first confronted the Defendants about these irregular Note Payments after the Defendants failed to pay him the monthly installments due in September and October 2008. As Beck testified, he met with the Defendants in Maryland, and they explained that Avtek did not have enough money in the Holding Account to cover the installments on the Note. Beck testified that around the same time, Peiffer told him that Sullivan had been offered a job with an Italian airline company, now known as SuperJet. Beck asked if Sullivan had accepted the job offer, and Peiffer said that he had not. Beck continued to fly to Maryland to have conversations with the Defendants in October, November, and December 2008. Beck stated that he explained to the Defendants that if Sullivan was interested in another job, Beck would be willing to return to Avtek and run the company with Peiffer, as it was important that Avtek's leadership involve someone with managerial and administrative skills. The Defendants responded that they remained hopeful that Avtek would be a success and assured Beck that Sullivan was not taking another job.
On January 27, 2009, and without waiving his rights under the various contracts, Beck wrote to the Defendants and directed them to make modified Note payments from January 2009 through June 2009, and then return to their usual monthly schedule for the remainder of 2009. See Jan. 27, 2009 Letter, Pl.'s Ex. 18. Under the modified plan, the Defendants would also pay back at least $25, 568.02 of its past due amounts for 2009. See id. Beck came to Maryland in early February to meet with Peiffer, Sullivan, and a prospective principal of Avtek. While Beck was in town, Peiffer and Sullivan signed Beck's letter, confirming their agreement with the modification to the Note payment schedule. See id.
Avtek's revenue dropped in 2009 after Avtek lost one of its major principals, White Electronic Design Corporation ("White Electronics"). According to Beck, the Defendants never told him about the termination of White Electronics. Beck began requesting revenue forecasts and other financial information from the Defendants, in accordance with section 3.6 of the Management Agreement. Beck testified that ...