Candrian et al v. RS Industries Incorporated

Filing 72

ORDER the March 8, 2013 29 Temporary Restraining Order is DISSOLVED 7 Plaintiffs' Application for Preliminary Injunction is DENIED filed by Scott Candrian, Beverly Candrian.. Signed by Judge Cindy K Jorgenson on 5/21/2013. (JKM)

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IN THE UNITED STATES DISTRICT COURT

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FOR THE DISTRICT OF ARIZONA

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Plaintiffs,
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vs.
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RS INDUSTRIES, INC., an Iowa
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Corporation, PERRY HINTZE,
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STANLEY HINTZE, TIM HINTZE,
JEFF HINTZE, TODD HINTZE, GREG )
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HESTER, and KEVIN CONKLIN,
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Defendants.
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SCOTT and BEVERLY CANDRIAN,
husband and wife, and SCOTT and
BEVERLY CANDRIAN on behalf of
RS INDUSTRIES, INC., an Iowa
Corporation,

No. CIV 13-088-TUC-CKJ
ORDER

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Pending before the Court is Plaintiffs’ Application for Preliminary Injunction.

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Following the Court’s issuance of a Temporary Restraining Order on March 8, 2013, see

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Doc. 29, the parties submitted additional briefs regarding the issuance of a Preliminary

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Injunction and evidence and argument were presented to the Court on April 30 – May 2,

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2013.

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Factual and Procedural Background

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RS Industries, Inc. ("RS") is the parent company and sole owner of The Ryan Group,

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Inc. ("Ryan"), in Davenport, Iowa, and Sun Mechanical Contracting, Inc. ("Sun"), in Tucson,

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Arizona.

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On February 12, 2013, Plaintiffs Scott and Beverly Candrian, as husband and wife,

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filed a Complaint (Doc. 1) seeking a Declaratory Judgment and an Accounting from RS. On

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March 1, 2013, Plaintiffs Scott and Bevery Candrian, as husband and wife and on behalf of

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RS Industries, Inc., filed an Amended Complaint (Doc. 5) against RS, Perry Hintze

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(“Hintze”), Stanley Hintze (“S. Hintze”), Tim Hintze, Jeff Hintze, Todd Hintze, Greg Hester,

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and Kevin Conklin (“Conklin”) seeking a declaratory judgment, an order for an accounting,

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the appointment of a receiver, and alleging claims of ultra vires acts, breach of fiduciary

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duty, breach of covenant of good faith and fair dealing, and defamation.

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Scott Candrian (“Candrian”) is the founder and current CEO of Sun. Hintze has been

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the managing director, with the day-to-day responsibilities of Ryan, since 1987 and is the

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president of RS.

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Following a hearing, this Court issued a Temporary Restraining Order on March 8,

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2013. This matter proceeded to hearing on a requested Preliminary Injunction on April 30

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– May 2, 2013.1

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Bruce Beach (“Beach”) testified that his accounting firm has issued, reviewed, and

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audited financial statements for RS and that he has served as a consultant to the advisory

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board since the merger. He testified that, although he has never seen any signed writing that

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modified the buy-sell agreement, an agreement was reached at an advisory board meeting

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that stock would be issued to new junior shareholders in exchange for modifying the buy-sell

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agreement; he has received information as to the valuation of stock and compensations

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indicating the modification has been implemented.2 Beach opined that events occurring at

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RS could pose a risk of harm to Sun. Beach also testified that alleged conduct by Tom Peters

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(“Peters”), as stated in the hearing, would be a legitimate area of inquiry.

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Candrian similarly testified as to a modification of the buy-sell agreement; Candrian

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The summary of testimony includes testimony from both the Temporary Restraining
Order hearing and the Preliminary Injunction hearing.
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Similarly, Certified Public Accounant Christopher Linscott testified that his review
of financial records indicate that the modification was adopted and implemented.
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has received distributions and stock was issued as set forth in the modification. However,

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Candrian testified that the board of directors did not meet to discuss/adopt the modification.3

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Candrian also testified as to his belief that the conduct of Conklin and Hintze was to

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discredit Candrian, disrupt Sun, take stock owned by Candrian and Peters, and not pay

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Candrian money owed to him.

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Candrian testified that, based on the unanimous consent he executed, see Ex. 127, how

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the merger between Ryan and Sun had been structured, and subsequent emails, RS had two

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directors at the time of the closing and that there has never been an agreement to increase the

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number of directors. Candrian also testified that he first saw the unanimous consent executed

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by Hintze and S. Hintze that established three directors on March 11, 2013. See Doc. 126.

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Candrian testified as to his concerns regarding the authenticity of the Hintze unanimous

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consent. Candrian stated that there would not have been any reason why he would have

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agreed to the merger unless he was an equal partner and noted that Sun has generated

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approximately 50% of the revenues for RS over the years. He further testified that, despite

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the Hintze group having approximately 75% of the stock ownership, Hintze agreed to the 50-

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50 control. However, Candrian also acknowledged that the buy-sell agreement, which he

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signed, provided that nothing therein shall limit the size of the board. Second Amended

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Complaint, Doc. 34, Ex. E.

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Candrian opined that he believes injunctive relief is necessary to prevent interference

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with Sun (including the firing of himself and Peters), prevent justification of actions taken

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by the Hintzes and Conklin (including depriving Candrian of stock and modification of the

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board of directors), and tarnishing Candrian’s reputation.

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Jennifer Kakert (“Kakert”), an accountant who has worked at RS since February 2012

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and is currently employed by RS as its Chief Financial Officer, testified that the financial

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Beach testified there was a risk that adoption of the modification could jeopardize the
Subchapter S status of RS and that it was up to the board of directors to determine whether
to take that risk.
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health of RS is very, very strong.4 She also testified as to what she perceived were

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financial/accounting errors by Candrian and Peters; however, she testified that all of the

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information had been included in the financial records and books. Kakert opined that Ryan

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shareholders have recharacterized personal compensation since the litigation began. In some

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cases, she testified, the culture of RS has been that shareholders would run personal expenses

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through the company. Kakert also stated that U.S. Bank interpreted the Temporary

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Restraining Order to mean that RS could not access the Sun cash accounts (i.e., RS could

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place money from the line of credit to the accounts, but could not pull it back to repay the

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line of credit). Kakert testified that, when considering both the money received and taken

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out, Ryan has contributed $4 million more to the net worth of RS than Sun and that only 20-

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25% of RS’ revenues are received from Sun.

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compensation was not considered, Sun’s earnings surpassed Ryan’s for the time period she

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reviewed. Lastly, she testified that she does not believe RS is in any jeopardy of not being

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bondable and that she was hopeful of maintaining a line of credit with U.S. Bank

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(alternatively, negotiations are occurring with Quad City Bank).5

However, she also testified that, if

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Hintze testified that the unanimous consent that he signed at the time of the

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organization of RS appointed him and S. Hintze as directors. Further, Hintze testified that

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the unanimous consent that authorized the acquisition of Sun was signed by both him and S.

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Hintze. Indeed, he testified that there have been three directors for RS since the acquisition

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of Sun. However, Hintze acknowledged that no document was provided to Candrian at the

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time of the acquisition stating that S. Hintze was a director.

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Hintze also testified that the modification of the buy-sell agreement was never taken

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up by the board of directors, that he did not believe the modification was ever put into final

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In performing financial services for Sun, Kakert traveled to Tucson 12 times in one
year, usually for three to four days.
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Indeed, the testimony of Joseph Dhuey, bonding agent of Lovitt & Touché, Inc.,
indicates that, although additional review may be necessary, the companies will continue to
be bondable.
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form, and that he would not have consented to a modification without the advice of counsel.

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Hintze opined that the modification was never implemented.

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Hintze further testified that RS never intended to dishonor the employment agreement

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with Candrian or terminate Candrian’s employment before its expired term. Indeed, Hintze

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testified that, regardless of how this Court may rule on the preliminary injunction, he has no

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intention or firing Candrian before his employment contract expires. Hintze stated that Mark

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Kinseth (“Kinseth”) has his full support as Candrian’s successor. However, Hintze testified

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that an employment/consultant agreement between RS and Candrian following the September

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30, 2013, expiration of the employment agreement has not been reached; further, no

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agreement as to Candrian’s role during the redemption of his stock or dollar amount for a

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buyout for Candrian’s equity in the business has been reached.

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Hintze testified that he trusted Peters, who took care of financial matters, while Hintze

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was responsible for the day-to-day operations on construction sites. Hintze also testified that,

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from approximately 2007 to 2011, he did not review financial statements, go through the

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bills, or look at tax returns. He also testified that, when Conklin sought to obtain records

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which would have revealed Candrian’s income, Conklin could not obtain the records from

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Peters without Hintze’s authorization; Hintze acknowledged that he trusted Peters with such

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documentation. Hintze testified that Peters was placed on administrative leave in February

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2012.

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Hintze also testified that RS does not have access to Sun’s financial information and
that such access is needed for the bank and the operation of the company.

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Evidence was also presented regarding contact between Jennifer Kakert and U.S.

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Bank, contact between Candrian and U.S. Bank, and the filing of this lawsuit and how that

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may have affected RS’ standing with U.S. Bank.

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Candrian and Kakert disputed whether Kakert had ever been denied information from

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Sun. Candrian testified that information was available to RS and Kakert. Additionally,

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Candrian testified that he did not object to a forensic audit of Sun.

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Preliminary Injunction Standard

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As the Court previously stated, "[t]he basis for injunctive relief in the federal courts

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has always been irreparable injury and the inadequacy of legal remedies." Weinberger v.

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Romero-Barcelo, 456 U.S. 305, 312, 102 S.Ct. 1798, 1803 (1982). The standard for issuing

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a TRO is the same as that for issuing a preliminary injunction. See Brown Jordan Int'l, Inc.

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v. The Mind's Eye Interiors, Inc., 236 F.Supp.2d 1152, 1154 (D.Haw. 2007). Because a

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preliminary injunction is an extraordinary remedy, the moving party must carry its burden

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of persuasion by a "clear showing." Mazurek v. Armstrong, 520 U.S. 968, 117 S.Ct. 1865

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(1997); City of Angoon v. Marsh, 749 F.2d 1413 (9th Cir. 1984). To obtain injunctive relief,

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a moving party must show either "(a) probable success on the merits combined with the

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possibility of irreparable injury or (b) that [it] has raised serious questions going to the

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merits, and that the balance of hardships tips sharply in [its] favor." Bernhardt v. Los Angeles

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County, 339 F.3d 920, 925 (9th Cir.2003). The Ninth Circuit has explained that "these two

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alternatives represent ‘extremes of a single continuum,' rather than two separate tests. Thus,

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the greater the relative hardship to the moving party, the less probability of success must be

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shown." Immigrant Assistant Project of Los Angeles County Fed'n of Labor (AFLCIO) v.

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INS, 306 F.3d 842, 873 (9th Cir.2002), citation omitted.

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Likelihood of Success

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Only a reasonable probability of success, not an overwhelming likelihood, is all that

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need be shown for preliminary injunctive relief. Gilder v. PGA Tour, Inc., 936 F.2d 417, 422

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(9th Cir. 1991). In this case, the parties dispute whether the buy-sell agreement was

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modified. They further dispute whether there were two or three members of the board of

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directors. “Whether a contract has been modified by the parties thereto is ordinarily a

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question of fact for the trier of fact, as where the evidence is conflicting or the terms of the

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agreement are equivocal or uncertain. However, it is for the court to say whether certain

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letters passing between the parties constitute a modification of an existing contract between

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them.” 17A Am. Jur. 2d Contracts § 510. Ultimately, this Court may determine whether the
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conduct constituted a modification of the agreement. While it appears that some conduct

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indicates that the modification may have been implemented (i.e., a possible likelihood of

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success), other factors (e.g., the intent of Hintze, failure to adopt in writing) weigh against

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a likelihood of success. Similarly, the lack of notice to Candrian of the Hintze unanimous

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consent regarding the directors indicates that Defendants may be estopped from asserting

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there were three directors (i.e., a possible likelihood of success) must be weighed against the

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written documents and intent of Defendants. Further, the parties have not yet had an

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opportunity to brief whether these issues are for the jury or the Court to determine; indeed,

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they have not yet conducted any discovery. The parties have each presented credible

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evidence and arguments to support their positions. In light of the presentation of the

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evidence, the Court can only state at this stage of the litigation that there is some probability

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that Plaintiffs will be successful in their claims.

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Irreparable Injury

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The issuance of a preliminary injunction is only appropriate "when the moving party

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has demonstrated a significant threat of irreparable injury, irrespective of the magnitude of

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the injury." Simula, Inc. V. Autoliv, Inc., 175 F.3d 716, 725 (9th Cir. 1999). Additionally,

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Plaintiff must "demonstrate immediate threatened harm." Caribbean Marine Serv. Co. v.

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Baldridge, 844 F.2d 668, 674 (9th Cir. 1988). Moreover, where requested injunctive relief

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is based on past wrongs, a plaintiff must show there is a real and immediate threat he or she

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will be wronged again. City of Los Angeles v. Lyons, 461 U.S. 95, 102, 103 S.Ct. 1660, 1665

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(1983).

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Although the Court has determined that Plaintiffs have shown some probability of

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success, the Court does not find that a significant showing has been made. Therefore, a

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sliding scale requires a higher degree of irreparable harm be shown. See e.g. United States

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v. Odessa Union Warehouse Co-op, 833 F.2d 172, 174, 175 (9th Cir. 1987). The concerns

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the Court expressed in issuing the Temporary Restraining Order have been alleviated by the

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testimony presented at the Preliminary Injunction hearing. The testimony establishes that the
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companies will be able to continue to be bondable and maintain a line of credit. Included

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within this consideration is that Candrian does not object to a forensic audit of Sun. Further,

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Hintze has agreed that Candrian’s employment will not be terminated prior to the expiration

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of the employment contract and his testimony indicates that discussions for future consulting

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are ongoing. Additionally, the parties agree that Kinseth will be Candrian’s successor. The

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testimony establishes the strong financial health of RS and Sun and that all parties are

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interested in the continuing success of the companies.

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The dispute between the parties is a contract dispute which may be remedied by

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money damages. Economic damages are not traditionally considered irreparable because the

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injury can later be remedied by a damage award. Cal. Pharmacists Ass'n v. Maxwell Jolly,

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563 F.3d 847, 852 (9th Cir.2009), modified on other grounds, quoting Sampson v. Murray,

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415 U.S. 61, 90, 94 S.Ct. 937, 39 L.Ed.2d 166 (1974). Although there may be some

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likelihood of success by Candrian in this lawsuit, the Court finds that no irreparable harm

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will result if a Preliminary Injunction is not issued. Rather, any injuries related to the

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allegations in the Amended Complaint can be remedied by a damages award.

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Balance of Hardships

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Candrian argues that injunctive relief is necessary to effectively operate Sun while

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Hintze argues that access to Sun (i.e., a lifting of the Temporary Restraining Order) is

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necessary to effectively operate RS. The Court does not find that the balance of hardships

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favors either side.

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Public Interest

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Although Plaintiffs have argued that there is public interest in issuing injunctions to

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maintain the status quo for claims of accounting and dissolution of partnerships, this factor

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is neutral because any injunction would be narrow and only affect the parties and their

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affiliates. Shepard v. Patel, 2012 WL 6019036 *5 (D.Ariz. 2012).

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Conclusion

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After considering that Plaintiffs have some likelihood of success on the merits, the

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lack of irreparable harm, and the neutral balancing of hardships and public interest, the Court

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finds it appropriate to deny the request for a Preliminary Injunction and to dissolve the

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Temporary Restraining Order.

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Accordingly, IT IS ORDERED:

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Plaintiffs’ Application for Preliminary Injunction (Doc. 7) is DENIED.

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2.

The March 8, 2013 Temporary Restraining Order (Doc. 29) is DISSOLVED.

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DATED this 21st day of May, 2013.

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