Morey v. Chiapas Organic Services, Inc. et al

Filing 58

MEMORANDUM OPINION. Signed by Honorable Jimm Larry Hendren on April 11, 2012. (adw)

IN THE UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF ARKANSAS
FAYETTEVILLE DIVISION
JIM MOREY

PLAINTIFF
v.

Civil No. 10-5213

CHIAPAS ORGANIC SERVICES, INC.
and CHIAPAS ORGANIC HOLDINGS, INC.

DEFENDANTS

CHIAPAS ORGANIC SERVICES, INC.

COUNTER-CLAIMANT

v.
JIM MOREY

COUNTER-DEFENDANT
MEMORANDUM OPINION

On the 29th day of March, 2012, the captioned matter came on
for trial to the Court.
represented

by

counsel.

representative,
counsel.
Jim

Defendants
Montemayor1,

appeared

and

were

through

their

represented

by

The Court heard the testimony of witnesses Dean Harris,

Morey,

evidence,

Sergio

Plaintiff appeared in person, and was

and

and

Sergio

now

Montemayor,

makes the

and

following

received
findings

documentary
of

fact and

conclusions of law:
Procedural Background
1.

Plaintiff Jim Morey ("Morey") sued defendants Chiapas

Organic Services, Inc. ("COS") and Chiapas Organic Holdings, Inc.

1

At the time of trial, Montemayor was a part-time consultant for COH, and he did
not know whether appropriate corporate action had been taken to authorize his appearance
on a consulting basis as corporate representative for COH and COS. Although Montemayor
testified during depositions as the corporate representative of both COH and COS, he was
formally employed only by COH. His paychecks, however, were written on a CGO account.

("COH")

for

breach

of

a

written

employment

contract

(the

"Employment Agreement").2 COS counterclaimed, alleging that Morey
had

breached

his

fiduciary

duty,

breached

the

Employment

Agreement, and converted COS property.
2.

Morey moved for summary judgment on his breach of

contract claim, and the Court found that defendants had breached
the Employment Agreement when they ceased paying Morey his salary,
and later re-commenced paying it at half the agreed amount.
The evidence was not sufficient, on summary judgment, to
determine the amount of damages for breach, and that issue was
left for determination at trial.
Facts
3.

The evidence at trial showed that

COH is a holding

company incorporated for the purpose of holding the stock and
coordinating the operations of two subordinate entities, COS and
Chiapas Granjas Organicas, S.A.P.I. de C.V. ("CGO").
farming operation located in Chiapas, Mexico.

CGO is a

COS is the entity

created to distribute CGO produce in the United States. All three
companies -- COH, COS, and CGO -- did business under the brand
"Chiapas Farms."
4.

Chiapas Farms was the creation of venture capitalist Sam

Fairchild ("Fairchild") and Javier Velez Bautista ("Velez").

2
Other asserted claims -- for breach of the covenant of good faith and fair
dealing, promissory estoppel, and unjust enrichment -- were dismissed by Order dated
January 25, 2011.

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Velez was CEO (sometimes he referred to himself as President) of
both COH and COS.

Sergio Montemayor ("Montemayor") was CFO of

COH, but managed financial affairs for all three companies.
5.

Morey, whose background was in operations management --

both for Walmart and as an independent consultant -- was tapped by
Fairchild to assist in developing the Chiapas Farms companies from
the ground up.

Morey saw huge opportunities in the fledgling

companies,

invested

and

not

only

time

but

money

in

their

development.
6.

In August, 2008, Morey was offered the position of Vice

President and General Manager of U.S. Operations for COS. Morey,
COS, and COH entered into the Employment Agreement, which became
effective October 1, 2008, memorializing their relationship.
7.

The

Employment

Agreement

between Morey, COS, and COH.

is

a

tripartite

contract

Its terms were negotiated by Morey

and Fairchild, and the document was drafted by a lawyer in the pay
of defendants.
all

U.S.

In it, Morey agreed to assume responsibility for

operations

of

COS,

and

to

protect

the

business

information of COS, COH, and "any of their respective subsidiaries
or affiliates" (referred to in the Employment Agreement as "the
Employer Group") in the event of his termination.
Morey was to be compensated with a base salary of $220,000
per year, performance bonuses and expense reimbursements, and
1.25 days paid vacation per month, but the Employment Agreement is

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silent as to which entity will fund these types of compensation.
Morey was also to receive specified remuneration from both COS and
COH, as outlined below.
8.

COS, which is defined as "the Employer" in the contract,

agreed to provide Morey with a cell phone and group heath and
dental insurance benefits for him and his family.
9.

COH, which is defined as "the Holding Company" in the

contract, agreed to issue stock to Morey.

It agreed to issue,

within ninety days of the execution of the Employment Agreement,
500,000 shares of Class B Common Stock "as compensation for
services previously rendered."

It further agreed that no later

than December 31, 2008, it would issue an additional 264,000 such
shares as "incentive" to Morey "to continue his employment" with
COS.

These shares would vest in three equal installments, on

October 1 of 2009, 2010, and 2011, unless Morey was terminated by
COS without cause, in which case the shares would automatically
vest upon Morey's receipt of notice of termination.
10.

The Employment Agreement was terminable for any reason

by Morey or COS upon thirty days' notice.

In addition, COS could

terminate Morey "for just cause, including, but not limited to,
any willful breach of duty."
11.

The Employment Agreement was governed by Arkansas law,

and could not be modified except by written agreement of the
parties.

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12.

Also effective October 1, 2008, COS and COH entered into

a contract with Dean Harris ("Harris") to serve as "Director of
U.S. Operations," although the contract did not specify whose
operations these were. The terms of Harris' contract are very
similar to those of Morey's.
13.

On or about October 1, 2008, Morey opened the United

States office for COS, and began to carry out his duties.

For

reasons

the

business

unrelated
did

not

to

his

skill

prosper.

or

Money

dedication,
was

tight,

however,
and

was

often

transferred from COH to COS, or from COS to COH or CGO, to pay
bills or cover shortfalls.

For example, on December 1, 2008,

Morey transferred $12,000.00 from COH to COS to pay payroll, rent,
and insurance. In April, 2009, Montemayor directed Morey to write
a check out of the COH "payables account" to a CGO account
"because

it

was

overdrawn."

On

June

29,

2009,

Montemayor

instructed Morey to send all but $2,000.00 from the COS account to
the COH account, even though that would not leave enough money in
the COS account to make payroll.

On September 9, 2009, Morey

asked Montemayor if he could "pay down my COH Visa credit card" so
he could pay travel expenses to go to a trade show.
29,

2009,

Morey

e-mailed

Montemayor

asking

that

On October
money

be

transferred to the COS account to make an insurance payment.
While Montemayor testified that monies flowing from COS to
COH and CGO were to pay for product, and that monies flowing from

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COH to COS were loans, there is no paper evidence of this
whatsoever, and it is clear that COH kept COS entirely in the dark
about

all

bookkeeping

and

accounting

issues.

This

secrecy

completely undermines Montemayor's credibility on the topic.
14.

In mid-2009, Morey received a telephone call telling him

that payment of his salary was going to be deferred. It is not
entirely clear who conveyed this information to him, but Javier
Velez ("Velez"), President of both COH and COS, stated in a letter
to Morey dated July 15, 2010, that "[m]anagement of Chiapas
Organic Holdings directed you in June last year that all Chiapas
Farms executives would be paid 50% of their salaries, and that you
and Dean Harris should do so from that point forward, as the rest
would be paid in stock."
15.

From May 29, 2009, until September 15, 2009, neither

Morey nor Harris received any salary or insurance reimbursement.
At that

point,

they

began

receiving

payments

of

half

their

salaries. Neither man was happy about this situation, and many emails were exchanged between them and Montemayor and Velez, asking
when full salary and insurance reimbursement would resume.
16.

On August 11, 2009, Harris contacted Montemayor for

information about when he might get paid.

Montemayor responded

"[w]e may be able to start paying you the equivalent of one half
payroll period starting this pay period, and to continue that way
for several pay periods, till funding from investors reach certain

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levels.

Afterwards, we would go back to full pay period payments

and program payment of prior payroll period differences."
17.

On August 14, 2009, Morey sent Montemayor an e-mail

asking if he could start paying Harris his full salary on August
31, 2009.

Montemayor responded that he did not think it "likely

that the larger investors will have come in by then."
18.

On September 14, 2009, Montemayor advised Morey by e-

mail that "we can start half payroll for you.

Pls. confirm

amounts before writing checks so that I can make sure enought $ is
available in the account."
19.

On October 6, 2009, Morey e-mailed Velez, asking "[p]er

our last conversation in July are we still on track to resume full
pay and collect our back pay this month. . . . Any updates would
be appreciated."

Velez responded "[w]hen we resume paying full

salaries, we should pay to everyone, but first to the ones we have
paid the least."
20.

On October 7, 2009, Velez e-mailed Morey, stating "[w]e

will not be able to catch up with deferred payroll and other
payments until we reach revenues of over $2 mill. Per month which
I anticipate will be sometime in November."
21.

On October 29, 2009, Morey sent Montemayor an e-mail

stating that he had had to sell part of his IRA to pay bills, and
explaining the consequences if he did not replace that money by
November 1.

Montemayor responded the next day, saying "[s]orry,

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but it seems that we are still a couple months away from being
able to 'catch-up' with accrued salaries payable to employees...."
22.

On November 12, 2009, Morey sent Montemayor an e-mail

asking "[d]o you want me to write 1/2 payroll, or full this
week??"

Montemayor responded "[l]et's continue with one half."

Montemayor also advised Morey on that date to "Pls. coordinate
with Shelly regarding this next payroll payment, as it may be that
Paycom is ready to make the payment instead of your cutting the
check.

Pls. confirm outcome."

23.

On November 30, 2009, Shelly e-mailed Morey to "continue

to issue payroll checks through the end of the year," and that "we
are going to start with the first payroll of the year to process
payroll" with "another payroll processor, Pay Choice."
24.

On December 1, 2009, Morey e-mailed Montemayor asking

"[d]o I continue 1/2 pay or full pay this week."
responded "[l]et's do 1/2 pay.

Montemayor

I'll keep you posted about the

date when we can go back to full pay."
25.

On December 14, 2009, Montemayor sent Morey an e-mail

stating "[w]e need to continue with the 50% paycheck methodology
for now.

It seems that the 'catch-up' of past salaries will be

next year when we receive some of the major funding, which I hope
will take place during the first quarter."
26.

On May 18, 2010, IGNIA Fund I, LP, a venture capital

fund, announced an investment of $5,000,000 in COH, as "part of a

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US$6.5 million equity financing round that includes a US$1.5
million investment from existing shareholders."
27.

In early June, 2010, Velez had a conversation with Morey

in which he alluded to possible bankruptcy, which worried Morey
because he had so much deferred salary and insurance reimbursement
on the books.

Morey testified that he felt like, after he had

"set it all up," that defendants "were done with us" and we were
being

"pushed

out

the

door."

Without

checking

first

with

Montemayor or Velez, on June 30, 2010, Morey wrote checks to
himself totaling about $29,487.20, and to Harris checks totaling
$23,047.10. He advised Montemayor that day that he had written
these checks to cover "payroll owed" for February through June,
2010.
28.

On July 15, 2010, Velez sent Morey a letter terminating

his employment for writing the checks to himself and Harris.

He

stated that the termination was based on paragraph 7.A.2. of the
Employment Agreement, "as your actions constitute a willful breach
of duty."

Paragraph 7.A.2. allows COS to terminate Morey "for

just cause, including, but not limited to, any willful breach of
duty" in the course of his employment.
29.
15,

2010,

Harris was also terminated by letter from Velez on July
the

reason

given

being

that

"Chiapas

Farms

is

reorganizing its efforts in the United States and your services
are no longer required."

COS and COH eventually entered into a

-9-

settlement

with

Harris

regarding

his

claims

for

deferred

compensation.
30.

During his employment, Morey's payroll checks were drawn

on a COS account, but he used a COH credit card to charge business
expenses.
and

COH,

He was a signatory on bank accounts held by both COS
and

frequently

authorized

wire

transfers

of

funds

was

owed

belonging to both entities.
31.

At

the

time

of

his

termination

Morey

$118,599.00 in deferred salary and unpaid vacation, and $3,775.81
in deferred insurance reimbursements.

He also claims 30 days'

salary ($18,333.33) for the notice period for termination without
cause, and the value of 176,000 shares of COH stock that did not
vest. In addition to these amounts, specified in the Employment
Agreement,

he

seeks

consequential

damages

in

the

amount

of

$7,962.49 for interest on credit cards used to charge living
expenses while his salary was deferred, and $4,544.00 in penalties
resulting from the liquidation of his IRA during that same period.
32.

The damages claimed by COS on its counterclaim are the

amounts of the checks written by Morey to himself and Harris;
taxes related to those checks, and the costs of settlement with
Harris, which Montemayor testified was "triggered" by Morey's
payments to Harris when defendants were hoping to pay Harris in
stock.

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ANALYSIS
33.

Having already determined that defendants breached the

Employment Agreement by deferring Morey's salary and insurance
reimbursements, and that Morey is entitled to damages, the Court
turns first to the issue of how much is due.
At the time of his termination, and taking into account the
checks Morey wrote to himself, Morey was owed $118,599.00 in
deferred

salary

and

unused

paid

deferred insurance reimbursements.

vacation,

and

$3,775.81

in

He is entitled to recover

these amounts.
34.

Morey also claims 30 days' salary, $18,333.33, for the

notice period for termination without cause, and the value of
176,000 shares of stock that did not vest.

The Court is not

persuaded that he is entitled to these items of damages.
Entitlement to these items depends on Morey being terminated
without cause.

It is clear that the policy of COS and COH, from

mid-2009 until the date of Morey's termination, was to defer a
portion of his and Harris' salaries, as well as the salaries of
other executives.

It is also clear that the issuance of payroll

checks had been delegated to a payroll service in January, 2010.
Morey was aware of these policies, and during the time he wrote
payroll checks he consulted regularly with Montemayor before
writing any checks for salary or insurance reimbursement to
himself or Harris.

-11-

Morey did not, however, consult with Montemayor or anyone
else in COS or COH before writing the payroll checks to himself
and Harris in June, 2010. Given the precarious financial position
of the companies, Morey's awareness that salary deferments were
considered necessary, and the fact that payroll checks were at
that time being issued by a payroll service, his unauthorized
writing

of

these

salary

checks

justified

COS

and

COH

in

terminating him for cause.
35.

Morey also seeks consequential damages in the amount of

$7,962.49 for interest on credit cards used to charge living
expenses,

and

$4,544.00

liquidation of his IRA.

in

penalties

resulting

from

the

The Court does not find any basis to

allow recovery of these items of damage.
As explained by the Arkansas Supreme Court,
[c]onsequential damages are those damages that do not
flow directly and immediately from the breach, but only
from some of the consequences or results of the breach.
. . . In order to recover consequential damages in a
breach-of-contract case, a plaintiff must prove more
than the defendant's mere knowledge that a breach of
contract will entail special damages to the plaintiff.
It must also appear that the defendant at least tacitly
agreed to assume responsibility.
K.C. Properties of N.W. Arkansas, Inc. v. Lowell Investment
Partners, LLC , 373 Ark. 14, 24, 280 S.W.3d 1, 11 (Ark. 2008)
(internal citations omitted).
There is no evidence that COH or COS tacitly agreed to assume
responsibility for the interest on Morey's credit cards or his IRA

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penalties, making these items unrecoverable.
36.

The Court must next determine who is liable for Morey's

damages.

The tripartite Employment Agreement is curiously silent

as to who is responsible for funding Morey's salary, but it makes
COS responsible for providing him and his family with insurance.
It requires no analysis or interpretation, therefore, to conclude
that only COS is liable for the $3,775.81 in deferred insurance
reimbursements.
37.

The salary issue is more complex.

While ordinarily

one's employer pays one's salary, the circumstances here call that
usual practice into question.

The Employment Agreement placed

responsibilities on Morey toward both companies, and provided for
various types of remuneration for his services.

It spelled out

which company was liable for many of these types of remuneration,
but was silent as to which company was responsible for payment of
salary.

Under these circumstances, the document is ambiguous --

either, or both, of the entities could have been responsible for
payment of salary.

"A contract's language is ambiguous if there

is doubt or uncertainty as to its meaning and it is fairly
susceptible to more than one equally reasonable interpretation."
Lynn v. Wal-Mart Stores, Inc., 102 Ark. App. 65, 71, 280 S.W.3d
574, 579 (Ark. 2008)
38.

When a contract is ambiguous, "extrinsic evidence is

permitted to establish intent of the parties, and the meaning of

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the contract then becomes a question of fact."

Vogelgesang v.

U.S. Bank, N.A., 92 Ark. App. 116, 120, 211 S.W.3d 575, 578
(Ark.App. 2005).
In determining the intent of the parties,
the courts may consider and accord considerable weight
to the construction of an ambiguous contract . . . by
the parties themselves, evidenced by subsequent
statements, acts, and conduct. Courts may also acquaint
themselves with and consider circumstances existing at
the time of the execution of a contract and the
situation of the parties who made it.
Deltic Timber Corp. v. Newland, 2010 Ark. App. 276, 10, --- S.W.3d
---, 2010 WL 1233471 (Ark.App. 2010) (internal citation omitted).
In addition, the doctrine of contra proferentum, recognized
by Arkansas courts, "require[s] that if uncertainty or ambiguity
exists within the terms of a contract, or if it [is] susceptible
to more than one reasonable construction, then the courts must
construe the contract most strongly against the party who drafted
it."

Price v. Willbanks, 2009 Ark. App. 849, 6, --- S.W.3d ---,

2009 WL 4840028 (Ark. App. 2009).
39.

Applying the foregoing precepts to the evidence, the

Court finds that both COH and COS are liable under the Employment
Agreement for the payment of Morey's salary.
in the

development

of

both

companies

performing services for both of them.

Morey was involved

"from

the

ground up,"

He was a signatory on the

bank accounts of both companies, and frequently transferred money
between their bank accounts. Some of these transfers were for the
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purpose of putting money from the COH account into the COS account
to make payroll at COS.
While COS issued Morey's paycheck, COH furnished his credit
card.

Morey frequently received directions as to how to conduct

business from Montemayor, who was an executive only of COH, as
well as Velez, who was President of both companies.

Morey's

efforts were designed and intended to benefit both companies, anad
he was required under the Employment Agreement to protect the
business interests of both companies.
When these facts are construed in favor of Morey and against
COH and COS, the Court concludes that both COS and COH were
responsible for funding Morey's salary, and are liable for damages
measured by unpaid salary on Morey's breach of contract claim.
40.

COS asserted three counterclaims.

It contended that by

writing the June 30, 2010, payroll checks to himself and Harris,
Morey

breached

his

fiduciary

duty

to

COS;

converted

funds

belonging to COS; and breached the Employment Agreement.
The breach of contract claim is without merit, resting as it
does on defendants' theory that they modified the Employment
Agreement with regard to deferred salary, an argument that was
rejected by the Court in its Order of March 1, 3012, granting
Morey partial summary judgment.
The conversion claim is likewise without merit.
is a

common-law

tort

action

for

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the

wrongful

"Conversion

possession of

another's property.

The tort of conversion is committed when a

party wrongfully commits a distinct act of dominion over the
property of another that is inconsistent with the owner's rights."
Schmidt v. Stearman, 98 Ark. App. 167, 173-74, 253 S.W.3d 35, 41
(Ark. App. 2007) (internal citation omitted).

Morey's action in

writing the payroll checks to himself and Harris resulted in the
transfer of monies owed by defendants to himself and Harris, and
is not consistent with the definition of conversion.
41.

Morey was Vice President, U.S. Operations, of COS, and

as such, owed the company a fiduciary duty to act in good faith,
with ordinary care, and "in a manner he reasonably believes to be
in the best interests of the corporation."

Wal-Mart Stores, Inc.

v. Coughlin, 369 Ark. 365, 370, 255 S.W.3d 424, 428 (Ark. 2007).
Given the evidence outlined in ¶¶ 15-27, the Court finds that
Morey did not reasonably believe he was acting in the best
interests of COS when he wrote the payroll checks to himself and
Harris on June 30, 2010.

Notwithstanding this finding, there is

no evidence that the writing of these checks actually damaged COS.
Montemayor's testimony that it "triggered" the costs of settlement
with Harris, when defendants were hoping to pay Harris in stock,
is nothing more than speculation.
In the absence of damages, there is no basis for awarding
judgment to COS on this claim.

As outlined in AMI 1512, damages

is an essential element of the cause of action.
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The Court finds,

therefore, that COS is not entitled to any recovery on its
counterclaims.
42.

For reasons set forth in this Memorandum Opinion, the

Court finds that Morey is entitled to judgment against COS in the
sum of $3,775.81, and to judgment jointly and severally against
COS and COH in the sum of $118,599.00.
The Court further finds that the counterclaim of COS against
Morey should be denied and dismissed.
Judgment in accordance with these findings will be entered
concurrently herewith.
IT IS SO ORDERED, this 11th day of April, 2012.
/s/ Jimm Larry Hendren
JIMM LARRY HENDREN
UNITED STATES DISTRICT JUDGE

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