Flinn v. R.M.D. Corp. et al
Filing
143
MEMORANDUM OPINION AND ORDER by Senior Judge John G. Heyburn, II on 6/6/2014; 101 Motion for Summary Judgment is SUSTAINED; plaintiff's second amended complaint is DISMISSED WITH PREJUDICE; 124 Motion to Strike supplemental memorandum in support of summary judgment is DENIED AS MOOT. This is a final order. cc:counsel (TLB)
UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF KENTUCKY
AT LOUISVILLE
CIVIL ACTION NO. 3:11-CV-386-H
MICHAEL E. FLINN
PLAINTIFF
v.
R.M.D. CORP. and NEAL HARDING
DEFENDANTS
MEMORANDUM OPINION AND ORDER
This suit arises from Michael Flinn’s failed acquisition of Defendant Neal Harding’s
interest in RMD Corporation (“RMD”), which owned and operated multiple Hooters restaurants
across four states. This Court previously ruled that Flinn could not enforce an alleged agreement
due to of Kentucky’s Statute of Frauds. Nevertheless, the Court allowed Flinn to amend his
complaint to allege quantum meruit, unjust enrichment, equitable estoppel, and fraud. The Court
now finds that Flinn subsequently waived all his claims other than those for fraud. He did so by
writing in his response to Defendants’ summary judgment motion that he “elects to respond
[only] to Defendants’ arguments about his fraud claim, because this case is at its core a serious
fraud claim for which quantum meruit, equitable estoppel and unjust enrichment provide
insufficient redress.” The Court finds it hard to imagine a more clear way to waive claims short
of using the term “waive.”
Defendants have now moved for summary judgment on the remaining claim of fraud.
The record contains some three years of interactions and business dealings among the parties.
To be sure, the parties had obvious disagreements and misunderstandings.
But those
disagreements fall far short of suggesting fraud. For the reasons that follow, the Court concludes
that Flinn’s fraud claim cannot succeed.
I.
The most important facts are these.
Flinn was the General Partner and 70% owner of South Pacific Partners, a company that
owned franchise rights for Hooters in Australia and New Zealand and hoped to acquire RMD’s
assets. In mid-2008, during ongoing negotiations for this purchase, Flinn began serving as
RMD’s unofficial president and, by all accounts, was doing a commendable job. In December
2008, during the worst financial climate since the Great Depression, negotiations for the
purchase ended when financing could not be arranged.1 At that point, Flinn individually began
negotiations to purchase Neal Harding’s interest in RMD.2
Over the weekend of December 13-14, 2008, Harding and Flinn met to discuss the
potential deal. Flinn claims that the parties reached a full verbal agreement on a three-year
option purchase agreement (hereinafter termed the “Option Agreement”) containing the
following terms:
a. Flinn would have a three-year option to purchase RMD for a price of
$45,000,000.00, with the option period running from January 1, 2009
through December 31, 2011;
b. Flinn would serve as the president of RMD and would earn a $300,000
annual salary, which sum would be retroactive to Flinn’s initial informal
service as president;
c. Flinn would receive 20% of RMD’s pre-tax earnings while acting as
president during the three-year option period; the remaining 80% of
1
This failed transaction is called the “GE/Sun Trust” transaction in summary judgment briefing. The GE/Sun Trust
transaction contemplated a performance-based purchase price and was to be accomplished through third-party
financing. Had the deal gone through, SPP would have owned 40 Hooters franchises in four states. Between the
first and last letters of intent between the parties, the price dropped from ~$105,000,000 to ~$90,000,000.
2
On December 12, 2008, Mike Gregory, General Counsel for RMD, informed RMD’s higher level employees that
“[A]lthough we would like to have been able to complete the sale with [Flinn’s company], we are pleased that Neal
Harding and Mike Flinn are working on an agreement that will enable Mike Flinn to own RMD, and to assume the
day-to-day management authority and responsibility for the business.”
2
RMD’s pre-tax earnings were to be paid to Harding and applied toward
the $45,000,000 purchase price of RMD; and
d. The attorney’s fees and expenses Flinn incurred in the failed GE/Sun Trust
Transaction would be reimbursed.
In exchange for these terms,3 Flinn would help guarantee some of RMD’s debt and serve as its
President. Flinn alleges Harding wanted him to have “skin in the game” by “step[ping] up” and
guaranteeing “probably up to 20 percent” of RMD’s refinancing with First Federal Savings Bank
(“FFSB”). Flinn says that the purchase price covered not just Harding’s equity stake in RMD
but also the underlying real estate free and clear of debt. He says that interest was “never”
discussed at the weekend meeting. The parties never reduced the Option Agreement to writing
and never signed a similar document.
Harding’s recollection of the discussions is quite different. He says that Flinn agreed to
continue serving as President and begin receiving a $300,000 yearly salary, but his service term
was not necessarily delineated by any option period. Harding represented that he would accept
$45-50 million for his interest in RMD if Flinn could make a $10 million down payment. In
return, Harding would finance the remainder of the purchase price over five years, “with 80% of
the total cash available for distribution being applied to Flinn’s loan with Harding, and, after the
full payment of [a specified rate of] interest [to Harding/RMD], Flinn [would] keep[] the
remaining 20% of the total cash available for distribution to pay for Flinn’s tax liability he would
. . . incur[] by virtue of his ownership of Harding’s interest in RMD.” Harding is adamant he and
Flinn never reached a final agreement in December 2008.
3
Moreover, the deal was never
Flinn did not include the personal guarantees he eventually entered as an item in the list of terms the parties
allegedly agreed upon in either of his two amended complaints. DN 32-1 ¶ 10, ¶ 29; DN 53 ¶ 10. He added it to the
list for the first time in summary judgment briefing: “e. In exchange, and purportedly so that Flinn would “have skin
in the game,” Flinn guarantees 20% of RMD’s debt that was on an accelerated payout schedule and in need of
immediate refinancing due to the economic downturn.” DN 125, p.4 (emphasis in original).
3
completed because “Flinn was never able to raise the $10 million down payment.” The evidence
supports this conclusion and, in any event, falls well short of suggesting fraud.
After the weekend meeting, Harding asked Mike Gregory, RMD’s General Counsel, to
document the major points of the parties’ discussion. Flinn later contacted Gregory to discuss it.
Defendants produced Gregory’s planner pages for December 15, 2008 which described the
terms. The notes are inconclusive.4 Regardless, Gregory did not prepare a draft agreement until
sometime in January, 2009.
Flinn began acting as RMD’s official President on January 1, 2009, and was paid
retroactively to his start date in mid-2008. According to Flinn, between the weekend meeting
and the closing of the first tranche of FFSB loans, he “pressed” Gregory and Harding to get a
memorandum of understanding (“MOU”) finalized. Flinn alleges
Harding told me that he would get the Option Agreement finalized and signed.
Harding also told me not to distract Gregory from finishing his work on the FFSB
refinancing by asking him to work on the MOU . . . He told me not to worry about
getting [it] in writing because Gregory had all of the information he needed to
write it up. He told me that if the refinancing did not get finished, Chase could
call in its notes, leaving nothing for me to buy. Harding told me the Option
Agreement would be put in writing and signed promptly after RMD’s debt was
refinanced.
Despite the lack of a signed Option Agreement, on January 9, 2009, Flinn and his wife
personally guaranteed the first tranche of loans in RMD’s debt refinancing. Flinn learned for the
first time at closing that he was expected to guarantee not 20% but roughly 70% of RMD’s debt.5
Flinn originally explained that, notwithstanding this new information, he guaranteed the first
tranche anyway because he “knew RMD had enough real estate assets to justify taking on more
4
Flinn denies that the terms on the pages Gregory produced are the terms he transcribed. Flinn says Gregory was
writing in his planner as the two spoke but “[t]he notes of that conversation, if they still exist, have not been
produced.” DN 125, p. 43. Presumably, then, Gregory wrote these planner notes during a discussion with Harding.
5
This amounted to roughly $10 million for the first six loans refinanced on January 9, 2009, and $14 million in total
after the last tranche closed in June 2009.
4
risk early in his purchase of RMD. Appraisals showed that the company real property assets
exceeded the debt.”6
A week later, Gregory sent Flinn a draft MOU. Gregory circulated four MOUs in total,
the last one on February 15, 20097 but the parties signed none of them. Each version contains a
section labeled “Memo Purpose”:
This Memo outlines the essential provisions of the OPA;8 Neal and Mike will
follow this Memo with a full agreement containing the OPA essentials defined
below, with details further defined and with the terms and conditions ordinary to
such agreements. Neal and Mike acknowledge that, having agreed upon the
essential terms of employment and installment purchase, it is in RMD’s and the
Entities’ best interests that Neal and Mike move forward with Mike’s
employment and assumption of authority and responsibility for RMD’s and the
Entities’ operation. Neal and Mike agree to negotiate the remaining OPA details
in good faith, taking into account the tax and cash flow ramifications to each
other, and their joint purpose of engaging in a practical and workable agreement.9
The terms in each draft MOU differ markedly from Flinn’s account of the Option Agreement.
For instance, even the first draft contemplates a seller-financed installment purchase and adds to
6
In his Response to Defendants’ motion for summary judgment, Flinn’s explanation changed:
Flinn justifiably relied . . . the day he guaranteed the first tranche loans, despite Defendants’ delay
in formalizing the Option Agreement in writing because:
...
4. Flinn worried [about] raising [the issue of] the 70% guarantee (when he first saw it) in the first
tranche closing, because in the existing unprecedented economic environment, he feared stopping
the closing might lead the bank to decide not to loan RMD the money; he feared that might subject
[him] to a breach of contract claim by Harding based on the Option Agreement; and
[5.] Flinn believed that Harding could not on one hand demand Flinn’s performance of his Option
Agreement obligations (guaranteeing the loans and performing dutifully as RMD’s president), and
then refuse to perform Defendants’ obligations under the same agreement.
7
Gregory sent Flinn a draft MOU on January 16, January 27, and February 12, 2009. Further notations were made
on the draft sent to Flinn on February 12; Gregory labeled this newly notated MOU “V.3” and sent it to Flinn’s
transactional attorney, Art Berner, on February 15, 2009. Flinn’s brief claims there were five MOUs in total, but he
includes in that number two documents this Opinion refers to as “LOIs” (circulated on September 22 and October
12, 2009, respectively) and does not consider the February 12 and February 15 documents to be separate versions of
the MOU.
8
“OPA” is defined in the MOU’s “Background” section: “Being unable to consummate the asset purchase as
originally planned, and having developed a comfortable working relationship[,] Neal and Mike have reached an
agreement under which Mike will purchase all of Neal’s ownership in RMD and the Entities (the ‘OPA’).” DEx
102 (found at DN 101-6).
9
DEx. 102 (found at DN 101-6).
5
the $45 million price tag an as-yet undetermined amount “representing [Flinn’s] share of
expenses of the failed asset purchase paid by RMD or Neal on [Flinn’s] behalf.” 10 Flinn
downplays these differences.
He says that he “would have preferred to draft the Option
Agreement with the terms agreed in the December 2008 Weekend Meeting, but the MOU drafts
correctly stated that he and Harding had agreed to the ‘essential terms’ of their deal and were
required to ‘negotiate the remaining [option] details in good faith’ . . . .”
By month’s end, after circulating two “stabs at” the MOU, Gregory put Flinn on further
notice that Harding might adjust the terms. He said that he and Harding and Harper (RMD’s
Controller) had reviewed RMD’s financial situation: “We’ll see how that compares to the
purchase price as it stands; it may need adjusting, and Neal will determine, with [Harper’s] help,
what he thinks is fair.”
On March 25, 2009, after the last draft MOU was circulated, Flinn’s
transactional attorney Art Berner emailed Harding’s transactional attorney Tom Ice to inquire
whether he was working on a definitive agreement. Ice answered, “Not until the loan with First
Federal is completed.” At this point, it seems pretty clear that the parties knowingly had not
reached any sort of purchase agreement.
Meanwhile, counsel for Hooters of America (“HOA”) began reaching out to Gregory to
describe its “two primary concerns” with the proposed transaction:
First, we asked Mike Flinn’s attorneys, repeatedly and for several months, to
provide us with the terms of your proposed transaction with Mike. They did not
provide us with the terms . . . [Gregory] apparently drafted the bulled-point
description; however, he reported to our attorney that you would not let him send
it. As a result, at this point, we simply do not know the actual terms of your
proposed transaction with Mike Flinn.
10
This term was calculated to be $744,821 by the second MOU circulated on January 27, 2009, an amount
“representing Mike’s share of expenses of the failed [GE/Sun Trust transaction] paid by RMD or Neal on Mike’s
behalf.” Gregory wrote in a track changes comment connected to this figure, “We still need the amounts advanced
by RMD for various permitting, etc. during the sale process.” DEx. 105 (found at DN 135-1).
6
Second, we have concerns about Mike Flinn. We are not going to disclose the
business issues that have suddenly arisen between HOA and Mike, unless Mike
authorizes us to do so. However, these issues, at this point, lead us to believe that
we may be unable to approve Mike as a transferee of your equity in RMD.
Counsel then reminds Harding “any transfer of [Harding’s] rights and obligations under [the
franchise agreements at issue], including transfers of equity, requires HOA’s consent.” Harding
admits he received this letter on April 22, 2009.
Nevertheless, on April 24, 2009, Flinn
personally guaranteed four loans in the second tranche of loan refinancing with FFSB.11
On May 4, 2009, Harding responded to HOA:
I am aware of the communication between [HOA’s lawyer] and Mike Gregory
over the past several weeks concerning my proposed agreement with Mike Flinn. .
. . For the reasons I described to you when we talked, that agreement has neither
been completed nor reduced to writing. Since you expressed in your April 16th
letter that HOA has concerns about Mike Flinn, I have decided not to move
forward with any agreement with him until you advise me that those concerns are
resolved.
Consequently, Harding inserted a right of first refusal for HOA in the next draft agreement,12 a
term which would have assuaged HOA’s concerns about the Flinn deal. Flinn did not object to
this term.
The third and final tranche of loans closed on June 30, 2009. No MOUs were circulated
between the second and third tranche closings. Flinn explains that he personally guaranteed this
last tranche because “he had seen some significant revisions to the [last] draft MOU that
contained points from the Option Agreement, such as the 20/80 sharing of distributions, as well
11
Six loans were slated to close on this date, but FFSB noticed declines in the value of real estate serving as
collateral on two of the loans and deferred closing on those until later.
12
The September 2009 Letters of Intent are discussed in more detail later in this section.
7
as other terms that would protect Flinn if Harding found a buyer willing to pay a higher price for
his interest in RMD.”13 However, the parties never executed any of these draft MOUs.
In August 2009, Flinn entered into a Forbearance Agreement with two SPP investors to
delay suit on defaulted notes. In pertinent part, Flinn promised the investors a portion of his
distribution proceeds:
(1) Flinn is currently negotiating with Neal Harding . . . the terms of an [Option
Agreement] pursuant to which Harding would grant Flinn an option . . . to
purchase Harding’s equity interests in the entities that own the Restaurants . . .
and the right to receive 20% of the yearly profits distributed to Harding from the
Harding entities after Harding has received $2,250,00014 per year of such profits;
(2) [N]either Flinn nor Harding has any obligation to enter into the Option
Agreement; and
(3) [I]t shall be Flinn’s sole determination in his discretion of whether and when
the Option shall be exercised and how he shall finance any such exercise.
In September 2009, Gregory began circulating drafts of a Letter of Intent (“LOI”). He
sent two emails to Flinn with drafts attached labeled “Purchase Option Letter 9-8-09,” one on
September 22 and again with new track changes comments and revisions on October 12. The
terms in these drafts are markedly different from those in the Option Agreement. For instance,
the LOIs contained a performance-based purchase price rather than a fixed price of $45 million.
Further, another provision required that Harding receive at least $2,250,00015 in distributions at
the end of each year as a condition of the option period continuing for another year. Defendants
also included another provision that required HOA’s approval for the proposed sale. The parties
did not sign either draft LOI.
13
The 20/80 allocation of distribution proceeds, also a feature of the alleged Option Agreement, was included in the
in the last, unsigned MOU that Gregory circulated on February 15, 2009, with the caveat that accrued interest (5%
on $45 million) be paid before any distributions. See DEx. 218 (found at DN 129-3).
14
This figure represents 5% annual interest on the $45 million portion of the purchase price. This amount of interest
was envisioned in all drafts MOUs. The later Letters of Intent list this amount not as interest on a seller-financed
loan, but a minimum amount of distributions Harding was to receive each year as a condition of the option
remaining open another year.
15
See note 17 supra.
8
In spring of 2010, Flinn drafted a “Term Sheet” incorporating the terms that “Harding
had tried to impose” in the fall 2009 LOIs. He intended this for potential investors who would
finance the down-payment on the purchase. Flinn’s term sheet called for: (1) his purchase of
Harding’s ownership interest in RMD; (2) a term ending December 31, 2011; (3) a price of 5.5
times EBITDA; (4) $8 million cash at closing in addition to [Harding’s] cash on hand and
inventory value of net payables; and (5) a seller note for the difference, financed over 7 years at
an 8% interest rate with no prepayment penalty. Although Flinn included the disclaimer “This
Term Sheet represents only the current thinking of the parties with respect to certain of the major
issues . . . and does not constitute a legally binding agreement,” his proposal provides helpful
insight into his understanding of the existing situation.
Eventually, on April 13, 2010, the parties did sign a Letter of Acknowledgment that
allowed Harding sixty (60) days to obtain financing to purchase RMD (the “LOA”). The LOA
contains the following pertinent provisions:
I understand and agree that your acknowledgment confers no rights to me other
than the right to present this letter to potential sources for the funding I would
need to obtain in order to make a viable offer to you. I understand that you need
to see evidence from me which satisfies you that I have obtained that funding,
before we move forward. Although you and I have discussed in theory various
conditions, business structures, allocation of RMD resources, and other items that
may pertain in a sale/purchase of your ownership by me, there is no agreement
between us regarding the sale/purchase of your Ownership at this time. All
details of the sale/purchase would necessarily be addressed in a purchase
agreement.
…
I also understand that before we can enter into a Purchase and Sales Agreement,
Hooters of America, Inc. must approve me as a purchaser of your Ownership, and
also has a right of first refusal that it may exercise, or must waive before I could
move forward with purchasing your ownership.16
…
16
DN 101-14 (emphasis added).
9
With your acknowledgement of these basic terms, I will work for the next 60 days
to present you satisfactory evidence that I have obtained the necessary funding. I
understand that your acknowledgement does not extend beyond that time, and that
you may receive and accept an offer from another party prior to the expiration of
the 60 days . . . If I have not been able to present to you satisfactory evidence of
funding within [60 days], we can discuss whether you are willing to extend, and
what the next steps will be.
Sixty days passed and Flinn could not acquire the necessary financing.
Flinn claims that Harding then proposed a “modification” to the Option Agreement. If
Flinn agreed to resign as president, Harding would:
honor the Option Agreement terms requiring Harding/RMD to: (1) pay Flinn the
20% of cash available for distribution to Harding over the option period; (2) pay
Flinn’s legal fees and expenses incurred in attempting to close the GE/Sun Trust
Transaction; and (3) honor Flinn’s option to purchase Harding’s interest [in]
RMD for $45 million.
According to Flinn, Harding also represented
Flinn would . . . have a first right of refusal to purchase RMD in the event
Harding received an offer from a third party . . . Flinn [would have] the right to
close on his $45 million option price within 45 days. And, if Flinn could not or
chose not to close at that price, he would receive the positive difference, if any,
between the purchase price paid by the third party and Flinn’s option price . . .
Finally, Harding represented that he would extinguish Flinn’s personal guarantees
of RMD’s debt, saying he knew people who would be willing to take Flinn’s
place.
Flinn refers to this alleged verbal agreement as the “Modified Option Agreement.” According to
Flinn, Harding wanted him out of the way so he could sell his interest in RMD to a third party.
Flinn did step down in June of 2010. RMD paid his salary through July 2010. At this
juncture, Flinn had known and worked with Harding for over two and a half years. He claims he
“believed…in his heart, Harding—as an honest man—knew he was obligated to honor his
agreement with Flinn after having induced Flinn to perform on the Option Agreement by both
guaranteeing the FFSB loans and serving as RMD’s President.”
10
In the summer of 2011, Flinn says he found out through phone calls with his attorney Art
Berner and Robert Hersch, one of South Pacific Partners’ advisors in the failed GE/Sun Trust
transaction, that a sale of RMD to Hooters was “imminent.” On July 4, 2011, Flinn filed suit
alleging breach of contract. After dismissal of that complaint; an amended complaint and
extensive discovery followed; and, finally, this motion.
II.
Federal Rule of Civil Procedure 56 governs motions for summary judgment. Summary
judgment is appropriate if no genuine issue of material fact exists and the moving party is
entitled to judgment as a matter of law. See Fed.R.Civ.P. 56(c). On a motion for summary
judgment, the movant has the burden of showing that there exists no genuine issue of material
fact, and the evidence, together with all inferences that can permissibly be drawn therefrom,
must be read in the light most favorable to the party opposing the motion. See Matsushita Elec.
Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986).
The moving party may support the motion for summary judgment with affidavits or other
proof or by exposing the lack of evidence on an issue for which the party will bear the burden of
proof at trial. See Celotex Corp. v. Catrett, 477 U.S. 317, 324 (1986). On those issues for which
it shoulders the burden of proof, the moving party must make a showing that is “sufficient for the
court to hold that no reasonable trier of fact could find other than for the moving party.”
Calderone v. United States, 799 F.2d 254 (6th Cir. 1986) (emphasis and citation omitted). For
those issues on which the moving party will not have the burden of proof at trial, the movant
must “point[ ] out to the district court ... that there is an absence of evidence to support the
nonmoving party's case.” Celotex, 477 U.S. at 325.
11
In responding to a summary judgment motion, the nonmoving party may not rest upon
the pleadings, but must go beyond the pleadings and “present affirmative evidence in order to
defeat a properly supported motion for summary judgment.” Anderson v. Liberty Lobby Inc.,
477 U.S. 242, 257 (1986). The nonmoving party “must set forth specific facts showing there is a
genuine issue for trial.” Fed.R.Civ.P. 56(e).
A “clear and convincing evidence” standard applies to Flinn’s fraud claim. This is a jurycentric standard and courts are to determine whether a reasonable fact finder could find that this
standard has been met. Liberty Lobby, 477 U.S. at 251-252, 254-255.
That is, “[W]e must
determine whether the evidence is fit to induce conviction in the minds of reasonable persons
under this elevated, relatively stringent evidentiary standard.” Miller’s Bottled Gas v. BorgWarner Corp., 955 F.2d 1043, 1050 (6th Cir. 1992) (collecting cases). Courts should be mindful
that “credibility determinations, the weighing of evidence, and the drawing of legitimate
inferences from the facts are jury functions, not those of a judge.” Liberty Lobby, 477 U.S. at
255.
III.
Flinn’s remaining claim lies in fraud. Under Kentucky law, “the party claiming harm
must establish six elements . . . by clear and convincing evidence as follows: a) material
representation b) which is false c) known to be false or recklessly made d) made with
inducement to be acted upon e) acted in reliance thereon and f) causing injury.” Dodd v. Dyke
Industries, 2008 WL 1884081, *8 (W.D. Ky. 2008) (Heyburn, J.) (quoting United Parcel Serv.
Co. v. Rickert, 996 S.W.2d 464, 468 (Ky. 1999)); see also Harlow v. Beverly Health & Rehab.
Servs. Inc., 2010 WL 4669189 (Ky. App. 2010); Miller’s Bottled Gas, 995 F.2d at 1041. Where
12
the proven facts or circumstances merely show inferences, conjecture, or suspicion, the evidence
fails to establish fraud. Goerter v. Shapiro, 72 S.W.2d 444, 445-46 (Ky. 1934).
Flinn’s allegations center around two sets of circumstances: (1) Harding’s representations
starting in December 2008 that he would sign the Option Agreement and (2) Harding’s
representations in the summer of 2010 to induce Harding to resign as RMD’s president. The
Court will discuss how the elements of fraud apply to each set of representations, then discuss a
failure of proof that applies to both sets of representations.
A.
With regard to the initial Option Agreement discussions, Flinn is unable to prove with
clear and convincing evidence that (1) any of Defendants’ representations were false, (2) that
Defendants knew them to be false and/or made them recklessly (3) to induce Flinn to keep
pursuing the deal (elements two, three, and four of fraud). Despite exhaustive discovery, nothing
in the record suggests that Harding did not fully intend to enter some sort of agreement to sell his
interest in RMD to Harding.
For example, very shortly after meeting with Flinn on December 13-14, Harding asked
Gregory to record the terms of their discussion. On January 1, 2009, Harding instated Flinn as
RMD’s president, as promised. Shortly thereafter, he asked Gregory to prepare a first draft
MOU. None of the MOUs contained the precise terms that Flinn says were discussed in
December 2008. Moreover, Harding did not hide his belief that the parties had yet to reach any
specific enforceable agreement in December: from the first draft MOU forward, the “Memo
Purpose” section stated that the MOU would be “followed by a full written agreement containing
the [Option Purchase Agreement] essentials.” Also, each draft MOU contained a provision
13
reserving Harding’s right (albeit in an unenforceable, non-binding MOU) to consult his
accountant and attorney regarding the structure of any final agreement.
The MOUs recite the understanding that the parties would “negotiate the remaining OPA
details in good faith, taking into account the tax and cash flow ramifications to each other, and
their joint purpose of engaging in a practicable and workable agreement.” Over the greater part
of 2009, the parties did, in fact, continue their efforts to draft an MOU or LOI to capture the
parties’ evolving discussions. Harding and his agents expended significant time and expense in
the process.
This sustained effort suggests that Harding was committed to reaching an
agreement with Flinn.
Moreover, Flinn cannot prove element five, action in reliance, with clear and convincing
evidence. “A plaintiff’s reliance, of course, must be reasonable . . . or, as the Restatement
[Second of Torts § 537 (1977)] says, ‘justifiable.’” Flegles, Inc. v. TruServe Corp., 289 S.W.3d
544, 549 (Ky. 2009); 27 Williston on Contracts, § 69:33 (4th ed.). Flinn asserts that the terms of
the MOUs started changing significantly only after Flinn guaranteed all three tranches of RMD’s
debt. However, Harding’s actions should have put Flinn on notice that the Option Agreement
was never set-in-stone, even prior to Flinn’s signing the first personal guarantee. For instance,
Flinn acknowledges that Harding approached him “shortly after” the weekend meeting to float a
seller-financed installment purchase structure. Also, Harding asked Flinn to guarantee not 20%
but 70% of RMD’s debt. All of these events suggests that the parties had not committed to a
specific agreement, but were continuing to negotiate.
The Option Agreement and the MOU drafts contained different material terms. Rather
than protest the missing terms, (such as the specific 80/20 split of RMD’s pre-tax earnings or the
provision whereby RMD would repay Flinn for expenses and fees Flinn incurred over the course
14
of the GE/Sun Trust transaction), Flinn suggested new terms of his own. 17 For example, in the
draft MOU circulated on January 27, 2009, a comment entered by Gregory notes “[Flinn] would
like an automatic extension right in the event Neal is unable to have [him] removed as a
guarantor on any of the debt, regardless of whether [he] has met the other performance criteria
that would allow him to extend [the option period].” Another comment reads
[Flinn] would like a risk mitigation provision that covers the situation where Neal
receives a bona fide offer to purchase his position (including management
control) and [Flinn] can’t match it, then [Flinn] gets an amount equal to 1 times
actual equity [he] has paid to Neal, with a floor of $3 million. In addition, if the
price Neal chooses to accept is more than the Purchase Price, Neal and [Flinn]
split the amount beyond the Purchase Price 80% to Neal, 20% to [Flinn].
Flinn also apparently asked for clarification on how and when he would pay interest, a term he
claims was never discussed at the weekend meeting.
Taken together, Flinn’s conduct shows that he understood that the Option Agreement was
open for negotiation. In any event, Flinn continued serving as RMD’s president and the parties
continued to work toward an agreement into the fall and winter of 2009, a service for which he
was paid an adequate salary. Subsequent events demonstrate that Flinn could not have continued
in that capacity based on any assumptions about the enforceability of the Option Agreement.
B.
Flinn also cannot prove justifiable reliance upon what he calls the Modified Option
Agreement, much less with clear and convincing evidence.
17
By the time Gregory circulated the document “Neal_Mike Flinn Memorandum of Understanding V3” on February
15, 2009, the “Payment Terms” section provided that “Neal and Mike agree to a benchmark of 80% of . . . available
cash to be paid to Neal and applied toward the remaining Purchase Price, and 20% to be paid to Mike.” However,
the very next sentence stated “Neal and Mike understand and agree that the benchmark percentages may need to be
adjusted in conjunction with advice from their respective accountants to maintain compliance with tax laws and
regulations applicable to the installment sale.” DEx 218.
15
Flinn and Harding entered into the LOA in April 2010. Though the LOA expired without
Flinn’s raising the capital necessary to close the deal on its stated terms, it remains useful to the
Court’s analysis because it (and the circumstances leading to it) illustrates the state of the parties’
ongoing relationship and the state of the deal when Flinn resigned in June 2010.
By the spring of 2010, Flinn knew Harding was “shopping” his interest in the RMD
entities to other potential buyers.18 When Flinn found out that Harding had given Wings Over
North America a term sheet for financing purposes, Flinn proposed his own which called for
very different terms than the Option Agreement. For instance, his term sheet called for a
performance-based purchase price, $8 million cash at closing, the remaining price to be financed
by a seller’s note amortized over 7 years with 8% interest and no prepayment penalty. Flinn’s
term sheet also listed an option period running through December 31, 2011, reflecting his
understanding that the parties were still working out the details for a three-year option purchase
agreement. Flinn now says that he was merely seeking the same terms Anderson received. This
argument makes no sense if Flinn sincerely believed he and Harding had already reached a full
agreement.
Harding never signed Flinn’s term sheet. Instead, the parties signed the LOA which gave
Flinn 60 days to “present [Harding] satisfactory evidence that [Flinn] ha[d] obtained the
necessary funding.”
Flinn understood that Harding’s acknowledgement would not extend
beyond that time and that Harding could accept an offer from a third-party prior to that date. If
the 60 days passed and Flinn had not obtained satisfactory evidence of funding, the LOA
provided “we can discuss whether you [Harding] are willing to extend, and what the next steps
18
This was not in contradiction to any term in Flinn and Harding’s draft agreements; the drafts never contained a
“no shop” clause. In fact, both of the (unsigned) draft LOIs detailed specific provisions whereby Flinn would be
protected with a right of first refusal in a third-party purchase situation, showing that the parties had anticipated and
planned for the third-party sale contingency.
16
will be.”
The financing never materialized and Flinn left RMD in June. As an experienced
businessman with counsel, Flinn’s decision to step down without a signed document
memorializing the consideration for doing so is somewhat inexplicable.
Flinn continued to pursue financing after he resigned and moved back to Texas. After
Flinn’s resignation, Harding was still planning on sitting in on meetings Flinn had with potential
investors.19 This suggests that even post-resignation, Flinn hoped to close on the purchase of
Harding’s interest in the RMD entities, and Harding was not closed to the idea if Flinn could
raise necessary financing. It does not, however, help Flinn prove that he was induced to step
down as RMD’s president by the terms of a specific “Modified Option Agreement.”20 Even if
Harding made representations about a Modified Option Agreement, which Flinn has not proved,
Flinn was not justified in relying on those statements.
C.
An overarching reason why Flinn’s fraud claim must fail is his inability to connect the
alleged fraudulent misrepresentations to any injury.21 First, even accepting that Flinn’s personal
guarantees were extended in consideration for holding an offer open for a three-year option
period and that Flinn would not have acted as President of RMD for the salary alone, Flinn failed
19
See DN 125-19, Ex. 12. Mike Gregory emailed Flinn on Friday, June 18, 2010, informing Flinn that he’d told
Harding Flinn was going to be “back on Tuesday, with hopefully a conference call or meeting set for Wednesday
with the McMahan Group, and that you have a meeting with a GE Capital on Thursday that was initiated by GE
Capital. [Harding] is interested in sitting in on both the Wednesday and Thursday functions.”
20
The Modified Option Agreement was that Harding would still “honor” the Option Agreement by (1) paying Flinn
20% of available cash distributions over the option period; (2) paying Flinn’s legal fees and expenses incurred in
attempting to close the GE/Sun Trust Transaction; and (3) holding open Flinn’s option to purchase Harding’s
interest RMD for $45,000,000 through December 2011. See DN 53, ¶18. The “modifications” were terms whereby
Harding/RMD would extinguish the Flinn’s’ guarantees and provide Flinn the right to close on his $45 million
option price within 45 days of an offer from a third party, but if Flinn could not or chose not to close at that price,
Flinn would receive the positive difference, if any, of the purchase price paid by the third party and Flinn’s option
price. DN 125, p. 80.
21
Of course, Flinn claims he is owed attorney’s fees and 20% of RMD’s pre-tax earnings, but Flinn is not entitled to
these amounts for the reason discussed in Section III.B: Flinn cannot prove he justifiably relied (element 5) on
Defendants’ representations when he stepped down from the Presidency on the promised terms of a Modified
Option Agreement, assuming, as we must on summary judgment, that Defendants even made representations about
any such agreement.
17
to extend an offer within the time allowed under either the Option Agreement or the so-called
Modified Option Agreement. Flinn filed suit for breach of contract in July 2011, seven months
before the option period he now alleges he was relying on was slated to close. Flinn explains
that he did so because he had heard a sale of Harding’s interest to Hooters was “imminent”—but
this is a contingency he claims was covered by a Modified Option Agreement.22
Second, Flinn devotes extensive discussion to the benefits Defendants reaped from
Flinn’s willingness to personally guarantee RMD’s refinanced loans. To be sure, Defendants
seem to have benefitted from Flinn’s providing the personal guarantees. However, these benefits
are immaterial for purposes of fraud. Even if Flinn could prove all of the other elements of
fraud, and prove that he entered the guarantees believing he was “upholding his end” of the deal,
Flinn cannot show Defendants’ failure to obtain the full release of the Finns’ guarantees until
March 7, 2013 caused them any injury. Flinn has testified that neither he nor his wife was
damaged in any way by the guarantees. The loans never went into default; the Flinns never paid
amounts under them; and Flinn does not claim his ability to raise capital was inhibited by their
existence.
Finally, Flinn claims that he is owed attorney’s fees and 20% of RMD’s pre-tax earnings
for the option period. Although these injuries are connected to the fraudulent misrepresentations
Flinn alleges, Flinn is not entitled to these amounts for the reasons discussed at length in Section
III.B.
True, these terms were either contained in or reiterated in the Modified Option
Agreement. Yet Flinn was not justified in relying on Defendants’ representations as to the
22
This just goes to show that Flinn was not actually relying on the existence of an oral Modified Option Agreement
(element five), which is a necessary predicate of showing a nexus between reliance and resultant injury. If Flinn
were actually relying on the existence of a Modified Option Agreement, one would not expect to see him file suit in
July 2011, before even trying to exercise (or benefit from) the right of first refusal he claims he held under the
contract.
18
existence of any agreement when he stepped down from the RMD Presidency in 2010, even
assuming (as the Court must on summary judgment) that Defendant made such representations.
IV.
In sum, the parties have extensively developed the record, yet Flinn cannot show with
any convincing clarity that the source of his grievance is fraud rather than his own inability to
raise the capital necessary to close the deal. Essentially, what Flinn complains of is his own
failure to obtain a written, enforceable contract upon his resignation, and “against this the law
cannot protect . . . .” Kreate v. Miller, 11 S.W.2d 99, 101 (Ky. 1928) (internal citation omitted).
Being otherwise sufficiently advised,
IT IS HEREBY ORDERED that Defendants’ motion for summary judgment (DN 101) is
SUSTAINED and Plaintiff’s second amended complaint (DN 53) is DISMISSED WITH
PREJUDICE.
IT IS FURTHER ORDERED that Plaintiff’s motion to strike Defendants’ supplemental
memorandum in support of summary judgment (DN 124) is DENIED as moot.
This is a final order.
June 6, 2014
cc:
Counsel of Record
19
Disclaimer: Justia Dockets & Filings provides public litigation records from the federal appellate and district courts. These filings and docket sheets should not be considered findings of fact or liability, nor do they necessarily reflect the view of Justia.
Why Is My Information Online?