ForteCEO Services, Inc. v. Terra Contracting, LLC et al
Filing
112
MEMORANDUM Opinion and Order Signed by the Honorable Joan B. Gottschall on 9/4/2014. Mailed notice(ef, )
UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
FORTECEO SERVICES, INC., d/b/a
FORTEONE,
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)
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Plaintiff,
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v.
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TERRA CONTRACTING, LLC; TERRA )
ABATEMENT SERVICES, LLC; TERRA )
I/S, LLC; PJT EQUIPMENT LEASING,
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LLC; and DOWN UNDER MUNICIPAL )
SERVICES, LLC,
)
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Defendants.
)
Case No. 11 CV 5179
Judge Joan B. Gottschall
MEMORANDUM OPINION & ORDER
Plaintiff ForteCEO Services, Inc. sued defendants Terra Contracting, LLC; Terra
Abatement Services, LLC; Terra I/S, LLC; PJT Equipment Leasing, LLC; and Down Under
Municipal Services, LLC; alleging breach of contract and seeking a declaratory judgment. Now
before the court is Forte’s motion for partial summary judgment on its claim for declaratory
judgment. For the reasons stated below, the motion is granted.
I. BACKGROUND
The following facts are not disputed unless indicated otherwise.
Forte is an Illinois corporation that provides business-consulting services.
As of
September 26, 2012 (the date on which the defendants answered the complaint), the defendants
(collectively, Terra) were citizens of Michigan and were engaged in the business of providing, or
supporting, environmental-remediation services and industrial, sewer and hazardous-material
cleaning and abatement services. From at least 2010 through 2012, Steve Taplin was the 100%
owner of Terra Contracting, LLC; Terra Abatement Services, LLC; Terra I/S, LLC, and PJT
Equipment Leasing, LLC. Taplin also owned 68% of Down Under Municipal Services, LLC
before January 1, 2011, at which time he became its 100% owner.
In February 2010, Terra engaged Forte to provide a detailed assessment of Terra’s
business. On May 12, 2010, Forte and Terra entered into and executed a written agreement
detailing the “scope, process, and deliverables” of the project. One of the goals of the project is
to “[i]mplement recommendations from the Business Assessment report that will grow sales,
profits, and Enterprise Value.” (Agreement 1, ECF No. 88-4.)
In his deposition, Taplin indicated that he considers the agreement binding on all parties.
Forte began providing anticipatory services to Terra in April 2010, and continued providing
services pursuant to the terms of the agreement after May 12, 2010. Forte’s engagement with
Terra ended in March 2011.
By the terms of the agreement, 25% of Forte’s base fee for its services was deferred into
an incentive bucket. Forte was entitled to incentive payments based on annual-performance and
sale-incentive formulas detailed in the agreement. The parties dispute how the formulas work,
but agree that they are tied in part to Terra’s EBITDA (Earnings Before Interest, Taxes,
Depreciation and Amortization).
In July 2010, Enbridge Energy Partners, LLP engaged Terra to provide contracting
services relating to a leak in an underground pipeline that caused an estimated 800,000 gallons of
crude oil to spill into a waterway of the Kalamazoo River in Michigan. Terra earned substantial
revenue from the Enbridge project in 2010 and 2011.
Bruce Reder was Terra’s chief financial officer from July 27, 2010 through December 31,
2012. Around April 2011, Reder prepared an EBITDA-improvement calculation for 2009 and
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2010 based on Terra’s audited financial statements and a calculation of the Annual Performance
Incentive Fee for 2010. Reder sent the calculation to Forte on April 26, 2011. The EBITDAimprovement calculation included EBITDA relating to the Enbridge project.
Sometime
thereafter, Forte received Terra’s audited financial statements for 2009 and 2010. The 2010
statements included earnings and expenses from the Enbridge project.
Forte sent an invoice dated July 15, 2011 to Terra for incentive-fee amounts due pursuant
to the parties’ agreement. Terra advised Forte that it would not pay the amount set forth in the
invoice. Terra told Forte that EBITDA relating to Enbridge should not be included in Terra’s
EBITDA for purposes of the incentive-compensation calculations.
In connection with this litigation, Terra provided Forte with its calculations of the
incentive-compensation formulas in the agreement, totaling $175,000. In those calculations,
Terra did not include EBITDA it asserted was related to the Enbridge project. Forte argues that
revenue and expenses from the Enbridge revenue should have been included in Terra’s EBITDA
calculation.
The agreement’s incentive-formula provision states:
Incentive Formula:
1. Annual Performance (For years 2010 and beyond)
•
% of EBITDA (excluding ForteONE cost) above 2009 level in
each calendar year
• 5% from 0 to $500,000
• 7.5% from $500,001 to $1,000,000
• 10.0% above $1,000,000
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•
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Paid within 30 days of final audited financial statements
Computation consistent with 2009 (re owner add backs, etc)
EBITDA (Earnings Before Interest, Taxes, Depreciation and
Amortization) is computed using the audited consolidated financial
statements. Any owner salary, benefits, etc above the 2009 level
will be added back.
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•
Annual Performance Incentive terminates at the end for [sic] the
full fiscal year after the Sale Incentive (below) is paid in full.
2. Sale Incentive
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•
•
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ForteONE receives a Sale Incentive payment of:
1x the incentive bucket if Total Consideration is less than
$15.0mm
2x the incentive bucket if Total Consideration is $15.0[mm] or
above
5% of Total Consideration above $20,000,000 of Total
Consideration
Example: If company is sold for a Total Consideration of $25.0mm
o Sale Incentive:
o 2x incentive bucket, plus
o 5% of $5.0mm
ForteONE earns Sale Incentive at earlier of[:] (i) time of sale (ii) end of
engagement or (iii) end of 2012.
• End of engagement buyout required as we need to be at the
company to insure it stays on the right path. Involvement
could be minimal.
• Can be extended by mutual agreement
• Buy-out at end of 2012 or end of involvement (engagement) based on
valuation formula of 5.5 times trailing 12 months adjusted EBITDA.
Example: If engagement ends, and Buy-out occurs in July 2011,
o EBITDA July 2010 to June 2011 = $4.0mm
o Valuation: $4.0mm x 5.5 = $22.0mm
o Buy-out:
o 2x incentive bucket, plus
o 5% of $2.0mm
•
•
•
•
Minimum payment at end of engagement or 2012 is 2x the Incentive
Bucket.
Company Sale means at least 51% of the ownership equity is
transferred to a third party) [sic] or recapitalized (meaning at least 51%
of the Enterprise Value of the company is paid to existing
shareholders)
If a division, subsidiary or portion of the company is sold, the full Sale
Incentive is earned at that time based upon the valuation formula.
Tail: If the company is sold within 12 months of an engagement
termination, the full Sales [sic] Incentive (detailed above) is due.
(Agreement 7-8, ECF No. 88-4.)
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Forte seeks an accounting to determine the appropriate amount of Annual Performance
Incentives to which it is entitled for 2011 and beyond, and for a declaration of its entitlement to
these payments.
II. LEGAL STANDARD
Summary judgment is appropriate when the movant shows there is no genuine dispute as
to any material fact and the movant is entitled to judgment as a matter of law. Fed. R. Civ. P. 56;
Smith v. Hope Sch., 560 F.3d 694, 699 (7th Cir. 2009). The court ruling on the motion construes
all facts and makes all reasonable inferences in the light most favorable to the nonmoving party.
Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255 (1986). Summary judgment is appropriate
when the nonmoving party cannot establish an essential element of its case on which it will bear
the burden of proof at trial. Kidwell v. Eisenhauer, 679 F.3d 957, 964 (7th Cir. 2012).
Forte invokes this court’s jurisdiction pursuant to 28 U.S.C. § 1332 (diversity of
citizenship) because the defendants are citizens of Michigan and Forte is a citizen of Illinois.
When a federal court sits in diversity, it applies state substantive law and federal procedural law.
Hanna v. Plumer, 380 U.S. 460, 465 (1965) (construing Erie R. Co. v. Tompkins, 304 U.S. 64
(1938)). To determine which state’s substantive law governs, the court applies the forum state’s
choice-of-law rules. Auto-Owners Ins. Co. v. Websolve Computing, Inc., 580 F.3d 543, 547 (7th
Cir. 2009).
III. ANALYSIS
A.
Choice of Law
As a preliminary matter, the court must determine what state’s substantive law applies
under Illinois’s choice-of-law rules. “Where neither party argues that the forum state’s choice of
law rules require the court to apply the substantive law of another state, the court should apply
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the forum state’s substantive law.” ECHO, Inc. v. Whitson Co., Inc., 52 F.3d 702, 707 (7th Cir.
1995). Here, the defendants tell the court that Illinois law governs this case. Forte tells the court
that “an argument could be made” that either Illinois or Michigan law applies, but that “the
state’s laws regarding contract interpretation are essentially the same.” Accordingly, the court
applies Illinois substantive law.
B.
Agreement Terms
The parties agree that Terra’s EBITDA is an input into the incentive-payment calculation.
But the parties dispute the appropriate amount of incentive-compensation payments that Terra
must pay to Forte under the agreement. Forte argues that it should include Terra’s EBITDA
attributable to the Enbridge project, but Terra disagrees.
Under Illinois law, “[t]he primary goal of contract interpretation is to give effect to the
intent of the parties, as shown by language in the contract. In determining the intent of the
parties, a court must consider the document as a whole and not focus on isolated portions of the
document. If the language of a contract is clear and unambiguous, the intent of the parties must
be determined solely from the language of the contract itself. That language should be given its
plain and ordinary meaning and the contract enforced as written. The interpretation of a contract
is a question of law and may, therefore, be decided on a motion for summary judgment.” Palm
v. 2800 Lake Shore Drive Condo. Ass’n, 10 N.E.3d 307, 327-28 (Ill. App. Ct. 2014) (internal
citations omitted). Thus, the court must enforce the terms of the contract if the terms are clear
and unambiguous.
Terra argues that the contract does not define “EBITDA,” that “EBITDA” is ambiguous,
and that the court should consider extrinsic evidence to determine what the parties meant. The
court finds this argument unavailing. EBITDA is not an obscure term whose meaning must be
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ascertained with the aid of extrinsic evidence; it is a financial metric “that investors commonly
rel[y] upon.” In re Vivendi Universal, S.A. Sec. Litig., 381 F. Supp.2d 158, 179 (S.D.N.Y. 2003);
see also Royal Ten Cate USA, Inc. v. TT Investors, Ltd., 562 F. App’x 187, 188 n.1 (5th Cir.
2014); Steiner Corp. v. Benninghoff, 5 F. Supp. 2d 1117, 1130 (D. Nev. 1998); Dictionary of
Accounting Terms 171 (6th ed. 2014). The incentive-formula provision gives the long-form of
the acronym and states that EBITDA is to be “computed using the audited consolidated financial
statements.” (Agreement 7, ECF No. 88-4.) The court concludes that the term “EBITDA” “is
clear and unambiguous, [thus] the intent of the parties must be determined solely from the
language of the contract itself.” Palm, 10 N.E.3d at 328.
There is no real dispute that the revenue and expenses from the Enbridge project would
ordinarily be included in an ordinary total-EBITDA calculation. But Terra argues that the goal
of the agreement was to grow Terra’s enterprise value. It notes that the Enbridge project was a
one-time event that did not increase Terra’s enterprise value. Accordingly, Terra believes that
the term “EBITDA” in the incentive-formula provision “clearly indicates only sustainable
EBITDA and would not include extraordinary one-time events like Enbridge.” (Am. Resp. 16,
ECF No. 104.)
Essentially, Terra invites the court to transform the word “EBITDA” in the incentiveformula provision into “sustainable EBITDA.” The court declines the invitation to alter the
fundamental terms of the provision. The language of the provision is clear and unambiguous that
all EBITDA above Terra’s 2009-EBITDA level should be included as an input in calculating
Forte’s annual-performance incentive.
Terra is correct, of course, that one of the purposes of the provision is to provide Forte
with an incentive to grow Terra’s enterprise value. But determining the enterprise value of a
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privately held company is often a difficult task requiring some conjecture in the form of “a riskadjusted discounted cash flow analysis of its future profit streams.” Okerlund v. United States,
365 F.3d 1044, 1048 (Fed. Cir. 2004). The court finds it eminently reasonable that the parties
would not want to go through a lengthy valuation process every time Forte’s bill came due.
Instead, the parties contracted to use EBITDA based on Terra’s audited financial
statements as a proxy; as Terra states: “To incent ForteONE to grow Terra’s Enterprise Value,
Terra agreed to pay ForteONE a percentage of those increases, measured as a multiple of cash
flow, or EBITDA.” (Am. Resp. 3, ECF No. 104.) Terra itself acknowledges that EBITDA has
a “clear[] link” to enterprise value. (Id.)
To be sure, EBITDA is not a perfect proxy for the value that Forte added to Terra. (For
that matter, neither is enterprise value; Terra’s future streams of cash flow could increase or
decrease independently of Forte’s actions). One-time events such as the Enbridge project may
have an “unsustainable” effect on EBITDA. To solve this problem, Forte and Terra could have
contracted to tie incentive compensation to “sustainable EBITDA” or some other metric—but
they didn’t. Despite its deficiencies, the parties chose plain-vanilla EBITDA as the metric upon
which Forte would receive its incentive compensation. That choice is a rational one, and the
court finds as a matter of law that enforcing the incentive-formula provision as written does not
frustrate the underlying goal of the contract.
Rewriting the contract or making EBITDA
adjustments after-the-fact to suit Terra’s needs would violate the court’s task of upholding the
“plain and ordinary meaning” of the contract’s terms. See Palm, 10 N.E.3d at 328.
The agreement terms unambiguously require Terra to include EBITDA, sustainable or
otherwise, in its calculation of Forte’s incentive payments. The court grants Forte’s motion for
partial summary judgment as to Count II of its complaint. Terra is ordered to provide an
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accounting to determine the amount of annual-performance incentive payments to which Forte is
entitled.
The memorandum of law accompanying Forte’s motion for partial summary judgment
appears to seek summary judgment on its claim for contractual late charges and for “the Annual
Performance incentive fee until the Sale Incentive fee is paid in full.” But in its reply brief, Forte
clarifies that it seeks partial summary judgment solely “on the issue of whether EBITDA relating
to Terra’s earnings from Enbridge . . . is included in a determination of Forte’s incentive
compensation under the parties’ written agreement . . . .” (Pl.’s Reply Mem. 1, ECF No. 105.)
To the extent that Forte seeks a ruling on additional issues now, the court denies the
motion. It would be premature to decide these issues before Terra clarifies the fixed amount due
for the annual-performance incentive. Once Terra has provided an accounting and Forte has
determined the amounts it seeks, Forte may seek leave to file another motion for summary
judgment on the remaining issues. 1
IV. CONCLUSION
For the reasons stated above, Forte’s motion for partial summary judgment as to Count II
of its complaint is granted. Terra shall provide Forte with an accounting to determine the
appropriate amount of performance-incentive payments inclusive of EBITDA from the Enbridge
project by October 17, 2014.
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The court has a great deal of difficulty understanding the convoluted argument that Forte
makes in Section III.F of its memorandum in support of its motion for partial summary
judgment. If Forte files a new motion for summary judgment, Forte is advised to explain why it
is entitled to incentive compensation for years in which it provided no consulting services to
Terra.
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ENTER:
/s/
JOAN B. GOTTSCHALL
United States District Judge
DATED: September 4, 2014
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