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Beck v. Sullivan

United States District Court, Fourth Circuit

October 4, 2013

JAMES M. BECK, Plaintiff,
v.
PATRICK SULLIVAN and SANDRA PEIFFER, Defendants.

MEMORANDUM ORDER

Richard D. Bennett United States District Judge

The Plaintiff James M. Beck (“Plaintiff” or “Beck”) filed this action against the Defendants Patrick Sullivan (“Sullivan”) and Sandra Peiffer (“Peiffer”), and Arbotek Associates, Inc. (“Arbotek”), [1] 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. An Order and Final Judgment has been entered against the Defendants, pursuant to Rule 58 of the Federal Rules of Civil Procedure, specifically providing that they shall be liable to the Plaintiff for reasonable attorneys’ fees and court costs. (ECF No. 56.) Pending before this Court is Plaintiff’s Motion for Reasonable Attorneys’ Fees and Expenses (ECF No. 57) (“Motion”). This Court has reviewed the parties’ submissions[2] and finds that no hearing is necessary. See Local Rule 105.6 (D. Md. 2011). For the reasons stated below, Plaintiff’s Motion (ECF No. 57) is GRANTED in the amounts of $64, 269.25 for attorneys’ fees, $5, 000.00 for expert fees, and $2015.17 for expenses, for a total of $71, 284.42.

BACKGROUND

The facts of this case were set forth in detail in this Court’s Memorandum Opinion of July 1, 2013. (ECF No. 55.) For present purposes, a brief summary will suffice.

The Plaintiff formed Avtek in 1988. The company represented manufacturers serving the technology market (referred to as “principals”) by designing, marketing, and selling their products in specific territories. Avtek, which maintained an office in Columbia, Maryland, grew to be a profitable firm. In 1998, the Plaintiff hired Peiffer as a sales engineer. The Plaintiff was considering retirement and saw Peiffer as a candidate to buy Avtek and replace him. Because Peiffer’s interest and talent lay in sales, the Plaintiff emphasized that any sale of the company would need to involve not only Peiffer, but someone with organizational skills and an administrative background.

The Plaintiff promoted Peiffer to Vice President of Sales in 2000, and in 2004 or 2005 Peiffer was named President of Avtek. In 2000, the Plaintiff moved to Wyoming and in 2004 moved to Montana. He maintained his position as owner and chief executive officer of Avtek by communicating remotely with staff and principals.

While serving as Avtek President, Peiffer began dating Sullivan sometime in late 2006 or early 2007. While the two were dating, Peiffer recommended that Plaintiff hire Sullivan based on his management background and his work with companies such as McDonnell Douglas, Airbus, and Boeing. The Plaintiff hired Sullivan in March 2007. At that time, the Plaintiff was unaware that Sullivan was in Chapter 13 bankruptcy. The record also reflects that at some point Peiffer and Sullivan were married.

The Plaintiff continued to consider selling Avtek, now discussing the sale with both Peiffer and Sullivan (the “Defendants”). The parties initially valued the firm at $1, 000, 000, but shortly before the sale, one of Avtek’s major principals terminated the firm. The parties then agreed that based on recent revenues and the remaining principals, Avtek was worth $900, 000.

On October 29, 2007, the Plaintiff sold Avtek to the Defendants through a Stock Purchase Agreement and a Management Agreement. Specifically, the Defendants purchased 100% of the stock of Avtek through Avtek Acquisition, Inc., a company wholly owned by the Defendants, in exchange for a Promissory Note for $900, 000. The Defendants, through Avtek Acquisition and in their individual capacities, agreed to manage Avtek, fulfill specific payment obligations, provide financial statements to the Plaintiff, and not to compete with Avtek until the Promissory Note had been satisfied. In particular, the Management Agreement created a “lockbox” whereby all Avtek revenue was to be placed in a separate holding account in order to prioritize payment of monthly installments on the Promissory Note. By agreeing to the terms of the sale, Sullivan represented that no bankruptcy proceeding was pending against him. Avtek Acquisition served as the guarantor, and the Defendants pledged 100% of their stock to the Plaintiff in the event of a default to secure the transaction. In addition, the Promissory Note dictated that upon default, the Plaintiff could accelerate the debt and recover the costs and expenses of enforcing the Note, including court costs, costs of appeal, and reasonable attorneys’ fees. See also Stock Purchase Agreement § 13.11.

From November 2007 through August 2008, the first ten monthly payments were made on time and in full. Thereafter, the payments became sporadic and fluctuated greatly in their amounts. The Plaintiff confronted the Defendants regarding Note payments after the first two instances of irregularity in September and October of 2008. Around the same time, Peiffer informed the Plaintiff that Sullivan was considering taking another job with SuperJet, an Italian company. The Plaintiff flew monthly to Maryland in late 2008 to meet with the Defendants and explained that if Sullivan wished to leave Avtek, the Plaintiff would return so that someone with managerial and administrative skills would be able to lead the company. The Defendants assured the Plaintiff that Sullivan was not leaving and that they were working to make Avtek a success.

In early 2009, without waiving his rights under the various contracts, the Plaintiff allowed the Defendants to sign an agreement to make modified payments on the Note. The payments continued to be inconsistent. Later in 2009, the Defendants failed to inform the Plaintiff of the losses of major principals, and failed to otherwise provide financial information in accordance with the Management Agreement.

In a March 2010 meeting with Peiffer, the Plaintiff discovered that, as early as 2008, Sullivan had left Avtek for SuperJet. Sullivan did not receive a salary from Avtek at any point after 2008 and had transferred his ownership interest in the firm to Peiffer. Avtek was left solely in the hands of Peiffer, who had no managerial skills. Also in that March 2010 meeting, the Plaintiff learned from Peiffer that Sullivan had been in bankruptcy when he entered the contract. At this time, the Plaintiff expressed a desire to re-involve himself with Avtek, but ultimately remained in Montana and did not return to an active role with the firm. Then, in February 2011, Peiffer told the Plaintiff that Avtek was considering a merger with Arbotek, another manufacturers’ representative firm. Agents of Arbotek represented to the Plaintiff that no such merger was planned.

As to the installments on the Note, the Defendants made some payments in 2010 and early 2011, but made no further payments after June 2011. On August 1, 2011, the Plaintiff notified the Defendants that they were in default. The Plaintiff declared all outstanding principal and interest due immediately, demanded repayment, and notified the Defendants that he was exercising his right to retake 100% of Avtek Acquisition’s stock. By October 2011, the Plaintiff discovered that Avtek had in fact entered a joint venture with Arbotek, creating a new company named ReSpin Sales and diverting business away from Avtek itself. Finally, it came to light that the Defendants improperly diverted funds that should have been deposited in the holding account for payment on the Note in the amount of $129, 557.92, and that Peiffer cashed checks for her own use, totaling $13, 950.00. When the Plaintiff reacquired the Defendants’ stock pursuant to the Stock Purchase Agreement, the value of Avtek was virtually zero.

The Plaintiff filed a Complaint against the Defendants and Arbotek on October 27, 2011. See Compl., ECF No. 1. This Court’s jurisdiction was 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, and the amount in controversy exceeds $75, 000. See First Am. Compl. ¶¶ 1-3. 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. Peiffer ignored discovery requests and refused to communicate with counsel. 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. Defendant Sullivan was directed to pay $1, 020.00 as sanction for his discovery violation. See Order, ECF No. 45. While Sullivan eventually submitted some documents, he never produced e-mail messages pertaining to his work at Avtek.

On April 5, 2013, the claims against Arbotek were dismissed with prejudice, after the parties reached a settlement. See Order Granting Stip. of Voluntary Partial Dismissal, ECF No. 43. As to the remaining Defendants Sullivan and Peiffer, the Plaintiff alleged breach of contract, several counts of 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 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, this Court made findings of fact and conclusions of law pursuant to Rule 52(a) of the Federal Rules of Civil Procedure.

First as to the claim for breach of contract in Count One, this Court concluded that both Defendants breached provisions of the Stock Purchase Agreement and Management Agreement. Specifically, both Defendants breached the clause requiring disclosure if one of them was in bankruptcy at the time of signing, violated the non-compete clause by forming a joint venture, failed to provide financial information as required by various provisions of the Management Agreement, improperly deposited Avtek revenue in accounts other than the “lockbox” account, and breached their obligations to pay on the Promissory Note. This Court rejected Defendant Sullivan’s argument that the Management Agreement was void as against public policy. As to Count Three, Intentional Misrepresentation Regarding Joint Venture with Arbotek against Peiffer, this Court found in favor of Peiffer. The Plaintiff failed to prove at trial that Peiffer made any false statement in connection with the joint venture; any false statements were made by agents of Arbotek, who settled. This Court found in the Plaintiff’s favor as to Count Four, Intentional Misrepresentation Regarding Sullivan’s Bankruptcy, concluding that both Sullivan and Peiffer committed fraud by signing the Stock Purchase Agreement and Management Agreement with the knowledge of Sullivan’s bankruptcy. This Court also found in favor of the Plaintiff as to the claim for Intentional Misrepresentation Regarding Sullivan’s Employment at SuperJet in Count Five. The Plaintiff proved by clear and convincing evidence that both Peiffer and Sullivan falsely stated that Sullivan would not be seeking another job when they knew that he was accepting an offer with the Italian company and relinquishing his ownership interest in Avtek. Finally, this Court found that the Plaintiff proved his claim for Conversion against Peiffer in Count Six, on the basis that when Peiffer cashed checks for herself out of Avtek funds, she exerted ownership over those amounts in denial of the Plaintiff’s right to them.[3]

The Plaintiff claimed that, as a result of this Court’s findings that the Defendants Peiffer and Sullivan were liable for breach of contract and intentional misrepresentations, he was entitled to damages in the amount of the benefit of the bargain, totaling $900, 000. This Court concluded that the Plaintiff was entitled to a lesser amount because he failed to mitigate damages. Specifically, the Plaintiff had the right to take back all shares of stock pledged by Avtek and by the Defendants at the first moment of default in September 2008. Based on the Defendants’ conduct and the Plaintiff’s knowledge, the Plaintiff should have mitigated his losses by exercising his contractual rights, at the latest, in March 2010. Accordingly, based on the amount that the Plaintiff should have received if the Defendants met their obligations through March 2010, this Court concluded that Defendants Sullivan and Peiffer are jointly and severally liable for $125, 564.33. This Court also awarded $13, 950.00 to the Plaintiff against Peiffer for the amount she converted. Finally, the Plaintiff sought punitive damages from both Defendants. This Court determined that Defendant Sullivan’s conduct did not warrant the imposition of punitive damages. As to Defendant Peiffer, however, this Court concluded that an award of punitive damages was warranted in the amount of $129, 557.92, which is equal to the total amount of unauthorized deposits of Avtek funds into accounts other than the “lockbox” account. In sum, this Court awarded $269, 072.95 to the Plaintiff. In so concluding, this Court also noted that the Plaintiff is the prevailing party in this action and is therefore entitled to reasonable attorneys’ fees pursuant to the Stock Purchase Agreement.

The Plaintiff filed a Motion for Reasonable Attorneys’ Fees and Expenses (ECF No. 57).

STANDARD OF REVIEW

In this diversity case, Maryland law governs a party’s right to recover attorneys’ fees. Roger E. Herst Revocable Trust v. Blinds to Go (U.S.) Inc., No. ELH-10-3226, 2011 WL 6444980, at *1 (D. Md. Dec. 20, 2011). ...


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