Eldridge et al v. Gordon Brother Group, L.L.C. et al
Filing
60
Judge Douglas P. Woodlock: MEMORANDUM AND ORDER entered granting 43 Motion for Partial Summary Judgment and directing the parties to submit a joint status report on or before September 9, 2011 addressing what further action is necessary to bring this case to final judgment. (Woodlock, Douglas)
UNITED STATES DISTRICT COURT
DISTRICT OF MASSACHUSETTS
DAVID KAY ELDRIDGE, RAY ELDRIDGE, JR.,
D. CHRIS ELDRIGE, as trustee, not
individually, of the C. ELDRIDGE
1994 GST TRUST, PATRICIA K. SAMMONS,
as trustee, not individually, of
the P.K. SAMMONS 1994 GST TRUST,
C. ELDRIDGE 1994 GST TRUST,
P.K. SAMMONS 1994 GST TRUST, and
K’S MERCHANDISE MART, INC.
Plaintiffs.
v.
GORDON BROTHERS GROUP, LLC,
WILLIAM WEINSTEIN, FRANK MORTON,
Defendants.
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CIVIL ACTION NO.
08-11254-DPW
MEMORANDUM AND ORDER
August 4, 2011
Plaintiffs, K’s Merchandise Mart, Inc. (“Old K’s”) and its
shareholders, brought this action against Gordon Brothers Group,
LLC (“Gordon”) and two of its executives, William Weinstein and
Frank Morton, (collectively, “Defendants”) following the
liquidation of Old K’s assets.
Plaintiffs contend Defendants
made several misrepresentations, including that they planned to
save the company from liquidation, when in fact they had no
intention to do so.
judgment.
motion.
Defendants have moved for partial summary
For the reasons stated below, I will grant Defendants’
I.
A.
BACKGROUND
Old K’s Structure and Challenges
Old K’s, was a Delaware-based retail business
founded by the Eldridge family in the 1950’s.
The company
offered general merchandise products, including furniture and
jewelry across the country.
David Kay Eldridge (“Kay”) and his
brother, Ray, were respectively the President and the VicePresident of Old K’s and each held almost 50% of Old K’s shares.
Kay Eldridge’s children, Patricia Sammons and Chris Eldridge,
were also involved in the family business, as co-trustees of a
trust that owned a small amount of the company’s shares.
For many years, Old K’s was a successful family business.
Starting in 2000 however, the company began to face intense
pressure from large discount retailers such as Wal-Mart and
Target, or “category killer” specialty stores, such as Best Buys
and Toys “R” Us.
This competition had a negative impact on the
company’s sales, resulting in a net loss of $1.8 million in 2004.
Old K’s sales did not constitute its only source of financing.
The company also benefitted from a revolving loan obtained in
2001 from LaSalle Bank National Association (“LaSalle”).1
B.
Reports Recommending the Liquidation of Old K’s
Due to the company’s poor performance, Old K’s consulted in
1
As is common practice, the balance on the revolving loan
fluctuated with the amount of inventory maintained by Old K’s.
2
May 2005 with William Blair & Co. (“Blair”), an investment firm,
about the prospect of selling the family business within a year.
Blair stressed that the prospect of a strategic buyer was
unlikely and that “liquidation was the most logical approach for
the owners.”
Shortly thereafter, Blair introduced Old K’s Chief
Financial Officer, Richard Powers, and Old K’s attorney, John
Cobb, to Gordon.
By agreement dated July 20, 2005, Old K’s
retained Gordon to “provide preliminary advice and consultation
to [Old K’s] in connection with a possible orderly liquidation of
[Old K’s] ‘big box’ format stores . . . [and] develop a plan for
the disposition of all inventory in the [s]tores with reference
to the optimal timing of a ‘store closing’ or similar themed
sale.”
The purpose of retaining Gordon was, in Kay Eldrige’s
view, to obtain “different viewpoints and evaluate [Old K’s]
options” in the event they “decide[d] to liquidate.”
At the end of August 2005, Gordon extended an offer to buy
Old K’s business for $25 million.
Kay Eldridge refused Gordon’s
offer, on the assumption that the company was worth much more.
Nevertheless, Old K’s performance continued to decline in the
months following Gordon’s offer.
Despite the holiday season, Old
K’s suffered a much higher loss in the fiscal year ending in
January 2006 than in the previous year.2
2
Shortly thereafter,
The parties disagree regarding the amount of loss Old K’s
sustained during the fiscal year ending in January 2006.
Defendants argue the loss for this period amounted to $6.7
3
LaSalle sent Old K’s a notice of default for violation of the
financial performance covenants, reduced its line of credit by $4
million, and stopped honoring checks to Old K’s vendors, thereby
putting the company in a dire financial situation.
Robert
Barnhard of LaSalle met with representatives of Old K’s in
February 2006.
During this meeting, Barnhard openly disagreed
with the company’s intention to reduce its inventory to improve
profitability, and requested the production of a 13-week cash
flow projection and business plan.
Because Old K’s was unable to
comply with this request, LaSalle retained
Alliance Management,
Inc. (“Alliance”), a consulting firm, to evaluate Old K’s
performance.
Alliance issued a report on February 28, 2006.
Noting that
the accumulated loss had “exceeded $8 million dollars for the 3
year period,” Alliance found that Old K’s was “facing significant
liquidity challenges that [we]re material to the continuing
business operations.”
Alliance also noted that Old K’s “business
model does not appear to be feasible given the current
configuration of the company and its capital structure.”
Following the issuance of this report, LaSalle demanded that Old
K’s be liquidated by the end of April 2006.
million. By contrast, Plaintiffs suggest that this amount did
not take into account assets and revenue of over $3.5 million in
diamond inventory. Regardless of which number is correct, the
loss for the fiscal year ending in January 2006 was higher than
the loss sustained by the company the previous year, i.e., $1.8.
4
In an effort to ease the pressure from LaSalle, Old K’s
hired a consulting firm, Buccino & Associates (“Buccino”).
Like
Alliance, Buccino concluded that Old K’s was facing a liquidity
crisis and “would be out of cash by October [2006], possibly as
early as July [2006].”
The role of Buccino soon shifted to
assisting Old K’s in preparing a plan to sell substantially all
of the assets of the company.
In Buccino’s view, “[i]t was very
quickly understood that there wasn’t time or money to effect a
turnaround.”
LaSalle and Old K’s entered into a forbearance agreement on
April 5, 2006, in which Old K’s admitted defaults with regard to
its coverage ratio and confirmed its intention to file a
voluntary bankruptcy notice on April 17, 2006.
To this end, Old
K’s retained bankruptcy counsel, Mayer Brown, LLP, and a
bankruptcy communications consultant, Sitrick & Company.
In
addition, Old K’s sought proposals to conduct a nationwide
liquidation sale from the major liquidation firms, including
Gordon, Hilco, American Group, and Tiger Capital.
C.
The Representations Made by Gordon and the Letter of Intent
Meanwhile, Gordon remained interested in acquiring Old K’s.
In an email sent to several Gordon’s employees on March 30, 2006,
Weinstein described his strategy as follows:
Guys, we felt like there was $20ml of equity in the deal
6 months ago. It did not erode that quickly. We need to
see in our numbers how much of the real estate is company
owned versus outside the company. We think most is in the
5
company which is good. This case could be a classic out
of court deal. We guarantee the bank to shut them up. We
go to a creditor rights lawyer and hire them to represent
the trade in an out of court. We either propose a plan or
percentage plan distribution at less than 100% and more
than a bankruptcy would pay them. We pick up the ‘equity’
in the discount. We run through x-mas out of court.
So we had $6.0ml over the debt before any costs, losses,
fees etc. Not so great. Here is the upside though. If we
can cash the trade for let’s say 70% (should be a no
brainer in today’s market) we pick up $6.0ml. If we can
get to a x-mas sale with augment, I think the net is
close to 100 cents on cost if not more.
In early April, Weinstein and Morton met with
representatives of Old K’s to discuss the prospect of
guaranteeing the loan with LaSalle and acquiring the company.
During this meeting, Defendants made several representations,
which are at the core of the present matter.
Defendants
represented that, upon completion of the creditor composition,
they planned to operate Old K’s as a going concern at least
through the Christmas selling season before making a decision on
whether to continue the operations, sell or liquidate the
company.
They assured Old K’s management that they had the
expertise and experience to do so.
Further, Defendants stated
that Gordon would guarantee payment for future shipments from
suppliers within a week, that they would consult with Old K’s
management prior to making any major decisions with regard to the
company’s operations, and that Weinstein would rent an apartment
in Decatur, where Old K’s headquarters were located, in an
attempt to keep the company running.
6
Based on these representations, Old K’s and [Gordon] entered
into a letter of intent on April 5, 2006.
Pursuant to this
letter, [Gordon] became Old K’s “exclusive agent in connection
with the continued operation and/or liquidation of the Company’s
business operations and disposition of assets of the Company . .
. all in Gordon’s sole discretion (but [Gordon] will use best
efforts to keep the Company’s officers reasonably informed of
[Gordon]’s decision-making process).”
The letter also provided
that “it may be necessary to restructure the Company entity in
order to accomplish the foregoing as well as the economic
equivalent of the [t]ransaction.”
Shortly thereafter, Defendants attempted to convince LaSalle
to continue financing Old K’s outside of a bankruptcy proceeding,
but LaSalle insisted on being paid in full.
As a result, on
April 12, 2006, Gordon Retails Partners, LLC advanced
approximately $40 million necessary to pay LaSalle off in full
and became Old K’s lender.
During the same time period,
Defendants and Old K’s attorneys prepared a draft moratorium
letter to be sent to all Old K’s creditors.
As part of that
process, Weinstein sent an email on April 28, 2006 to Old K’s
attorneys, copying Richard Powers, Old K’s CFO, suggesting that
the draft should make clear the following:
Where it says [Gordon] desires to run this as a going
concern, I would rather soften this to say that we will
do so as we evaluate whether a restructuring of the
company is feasible. Something like this. I do not want
7
to sound like we are committing to this.
Along the same lines, Weinstein again reminded Old K’s attorneys
and its CFO on May 1, 2006 that the draft should not overstate
Gordon’s intention:
It is clearly our intention to run the company for a
period of time while we determine what the right
configuration/make-up of the business is. We just want
to be clear that this is a broken business that we see
some underlying value in. However, there are no sure
things and we don’t want to over promise.
D.
The Creation and Liquidation of New K’s
In an attempt to save the company from liquidation, Gordon
and Old K’s entered into a Limited Liability Company Agreement
(the “LLC Agreement”) on May 6, 2006.
During the negotiations
and conclusion of the agreement, Old K’s was represented by John
Cobb, its attorney, as well as by Mayer Brown.
The purpose of
the LLC Agreement was to create New K’s Merchandise LLC (“New
K’s”), a Delaware company that would inherit the business
operations of Old K’s, including certain of its assets and
liabilities.
Gordon and Old K’s, which held respectively 77.5%
and 22.5% of New K’s capital, were the signatories of the LLC
Agreement and the only members of New K’s.
Powers, Old K’s
attorney, concedes that, had Old K’s not entered in the LLC
Agreement on May 1, the most likely outcome would have been the
bankruptcy and liquidation of the company.
The LLC Agreement designated Gordon as the “sole manager” of
New K’s.
LLC Agreement, § 3(b).
In this capacity, Gordon had
8
the authority to “exercise all the powers and privileges granted
to a limited liability company,” including the right to liquidate
the entity.
Id., § 3(a).
Gordon undertook to “use its best
efforts to consult with [Old K’s] regarding the Managers’ conduct
of the affairs of the Company” and “to keep each Member fully
informed of any material decisions and activities of the Manager
with respect to the Company.”
Id.
In addition, the LLC Agreement provided for a “Liquidating
Distribution” scheme, allowing Old K’s to recover a minimum
distribution of $3 million, subject to certain deductions, in the
event the creditors were composed without a bankruptcy filing, or
$1.5 million if New K’s filed for bankruptcy despite the creditor
composition.
Id., § 6(b)(iii).
The LLC Agreement also contained
an integration clause stating that agreement “embodies the entire
agreement and understanding among the parties hereto with respect
to the subject matter hereof and supersedes all prior agreements
and understandings relating to such subject matter.”
Id., §
16(g).
Following the conclusion of the LLC Agreement, Gordon
managed in July 2006 to obtain the agreement from the majority of
Old K’s unsecured creditors to accept 50% of the amount owed and
to release Old K’s shareholders from potential claims.
The
composition of Old K’s creditors allowed the company to save
millions of dollars in debt and be kept out of bankruptcy.
9
In a
matter of weeks, Gordon deployed substantial resources to
replenish the company’s inventory, in an attempt to reverse the
decline in sales.
It also worked on improving New K’s
merchandising, advertising, and operations.
The effectiveness of
Gordon’s work during that period is, however, disputed by
Plaintiffs.
Although Gordon offered to guarantee the payment of New K’s
vendors for a certain amount of time, New K’s vendors were often
reluctant to deal with New K’s due to the liquidity crisis faced
by Old K’s.
Richard Powers, Old K’s CFO, admitted in a letter
dated July, 20 2006 that Gordon had little control over the stock
because “many of our vendors were not shipping new merchandise
until the [c]omposition [of creditors] was approved and
implemented.”3
At the end of August 2006, it became clear to Gordon that
New K’s stores were “[j]ust not doing the business,” according to
Weinstein.
On this basis, Gordon determined that its efforts to
turn around the company’s business had failed and decided to
liquidate New K’s. Powers agreed that, should the company be
liquidated, “the best time in which to accomplish that
[liquidation] is the last quarter of the year in order to take
3
Plaintiffs contend that Richard Powers later testified
that he did not “recall” whether any vendor refused to ship until
the creditor composition was approved and implemented. Yet,
during deposition, Powers admitted that the statement he had made
in the letter dated July 20, 2006 was truthful.
10
advantage of the holiday selling season.”
Gordon announced on
October 3, 2006 that New K’s would be closing its stores at the
end of the year.
New K’s business operations ceased in January
2007, and its wind-down proceeded after that date.
After the beginning of the liquidation, Old K’s made
multiple attempts to obtain financial and performance information
from Gordon.
In March 2008, Old K’s received the sum of
$1,748,217 from New K’s, which represented the minimum $3 million
minus certain adjustments, and Old K’s was authorized to conduct
an on-site inspection of documents.
Because some documents
appeared to be missing, Old K’s requested additional information
from Gordon.
In May 2008, the company received two CD’s of
information in response to this request.
II.
STANDARD OF REVIEW
Summary judgement is appropriate when “the movant shows
that there is no genuine dispute as to any material fact and the
movant is entitled to judgment as a matter of law.”
P. 56(a).
FED. R. CIV.
Traditionally, “[a] dispute is genuine if the evidence
about the fact is such that a reasonable jury could resolve the
point in the favor of the non-moving party,” and “[a] fact is
material if it has the potential of determining the outcome of
the litigation.”
Farmers Ins. Exchange v. RNK, Inc., 632 F.3d
777, 782 (1st Cir. 2011) (quoting Rodríguez- Rivera v. Federico
Trilla Reg’l Hosp., 532 F.3d 28, 30 (1st Cir. 2008)).
11
When ruling on summary judgment, a district court must view
“the facts in the light most favorable to the party opposing
summary judgment.”
Cir. 2011).
Rivera-Colón v. Mills, 635 F.3d 9, 10 (1st
“Where, as here, the nonmovants have the burden of
proof on the dispositive issue, they must point to ‘specific
facts sufficient to deflect the swing of the summary judgment
scythe.’”
Ahern v. Shinseki, 629 F.3d 49, 54 (1st Cir. 2010)
(quoting Mulvihill v. Top–Flite Golf Co., 335 F.3d 15, 19 (1st
Cir. 2003)).
A court may not rely on “conclusory allegations,
improbable inferences, and unsupported speculation.”
Del Toro
Pacheco v. Pereira, 633 F.3d 57, 62 (1st Cir. 2011) (quoting
Sutliffe v. Epping Sch. Dist., 584 F.3d 314, 325 (1st Cir.
2009)).
III.
DISCUSSION4
4
At the outset, Defendants argue that the claims of Old K’s
shareholders, should be dismissed for lack of standing. I agree
and note that Plaintiffs failed to address this issue in their
opposition. Defendants’ argument is premised on the tenet that
“a corporation and its shareholders are distinct juridical
persons and are treated as such in contemplation of law.” Pagan
v. Calderon, 448 F.3d 16, 28 (1st Cir. 2006). That means that
“[a]ctions to enforce corporate rights or redress injuries to [a]
corporation cannot be maintained by a stockholder in his own name
. . . even though the injury to the corporation may incidentally
result in the depreciation or destruction of the value of the
stock.” Id. (quoting In re Dein Host, Inc., 835 F.2d 402, 405
(1st Cir. 1987)) (alterations in original). Here, the only
signatories of the LLC Agreement are Old K’s and Gordon. To be
sure, Old K’s shareholders agreed to be bound by a Joinder
Agreement; but this agreement was limited to the provisions and
obligations set forth Section 13 (i.e., representations and
warranties by Old K’s) and Section 14 (i.e., indemnification by
Old K’s shareholders in favor of Gordon) of the LLC Agreement.
12
Plaintiffs filed a three-count complaint on July 22, 2008,
alleging that Defendants made several false misrepresentations
designed to induce them to form New K’s and transfer Old K’s
assets (Count I), that they failed to provide an accounting of
the financial condition and operations of New K’s (Count II), and
more generally, that they breached several provisions of the LLC
Agreement (Count III).
Following a lengthy discovery process,
Defendants moved for partial summary judgment on the claims for
(A) fraudulent inducement and (B) breach of contract, as it
pertains to the implied covenant of good faith and fair dealing.
Defendants also allege that (C) Plaintiffs’ damages theory based
on “benefit of the bargain” is too speculative to warrant
recovery.
A.
Fraudulent Inducement5
It does not confer any rights to Old K’s shareholders under the
LLC Agreement. Accordingly, I conclude that Old K’s is the only
party with standing in the present matter and that the claims
brought by Old K’s shareholders in their own name should be
dismissed for lack of standing.
5
As the parties agree, Illinois law governs the fraudulent
inducement claim. “Where there is at least a reasonable relation
between the dispute and the forum whose law has been selected by
the parties, we will forego an independent analysis of the
choice-of-law issue and apply the state substantive law selected
by the parties.” Platten v. HG Bermuda Exempted Ltd., 437 F.3d
118, 127 n.5 (1st Cir. 2006) (quoting Fed. Ins. Co. v. Raytheon
Co., 426 F.3d 491, 496 n.2 (1st Cir. 2005)) (internal quotation
marks omitted). A “reasonable relation” exists between the
present dispute and Illinois law given that Plaintiffs are
located in Illinois and the alleged misrepresentations occurred
in that state.
13
In Count I, Plaintiffs contend that Defendants made several
misrepresentations in an attempt fraudulently to induce Old K’s
to enter into the LLC Agreement.
In order to state a claim for fraudulent inducement under
Illinois law, a plaintiff must demonstrate that the
representation is “(1) one of material fact; (2) made for the
purpose of inducing the other party to act; (3) known to be false
by the maker, or not actually believed by him on reasonable
grounds to be true, but reasonably believed to be true by the
other party; and (4) was relied upon by the other party to his
detriment.”
Jordan v. Knafel, 880 N.E.2d 1061, 1069 (Ill. App.
Ct. 2007).
Defendants argue that the fraudulent inducement claim
fails as a matter of law on the ground that (1) the alleged
statements do not constitute actionable misrepresentations,(2)
they are barred by the integration clause contained in the LLC
Agreement, and (3) Plaintiffs waived any fraudulent inducement
claim when they accepted payment of the liquidating distribution,
instead of challenging Gordon’s decision to liquidate New K’s in
a timely fashion.
1.
Actionable Misrepresentations
Defendants’ first defense against the fraudulent inducement
claim is that the alleged misrepresentations offer nothing more
than predictions of future conduct, puffery, or statements of
opinion, and are therefore non actionable.
14
The alleged
misrepresentations concern either (a) specific statements of
intent concerning future conduct, or (b) expertise asserted by
Defendants during the course of the negotiations preceding the
conclusion of the LLC Agreement.
These two types of
misrepresentations will be discussed separately.
a.
Statements of Future Intent
The core of the fraudulent inducement claim rests on
several statements reflecting Defendants’ alleged intention to
perform future conduct.
Specifically, Plaintiffs contend that
Defendants made the following representations:
i.
Gordon planned, upon
composition, to operate New
least through the Christmas
making a decision on whether
or liquidate;6
completion of the creditor
K’s as a going concern at
2006 selling season before
to continue operations, sell
ii. Gordon would guarantee future shipments from
suppliers within a week of the conclusion of the LLC
Agreement; and
iii. Gordon would consult with New K’s Management on any
important decisions.
These representations7 were false, according to Plaintiffs,
6
In their opposition, Plaintiffs contend that Gordon
misrepresented that they would “turn around [Old] K’s and save it
from liquidation.” By contrast, Plaintiffs had claimed both in
the complaint and their statement of material facts that the
representation was instead to operate the company “as a going
concern at least through the Christmas 2006 selling.” I will
deem these two themes to be interchangeable for purposes of this
Memorandum and Order.
7
In addition to the statements identified in the text,
Plaintiffs alleged initially that Defendants misrepresented that
Weinstein would rent an apartment in Decatur. Although
15
because Defendants never “intended to do anything other than to
liquidate New K’s.”
Plaintiffs’ reliance on misrepresentations of intention to
perform future conduct, also known as “promissory fraud,” is
disfavored in Illinois because it “is easy to allege but
difficult to prove or disprove.”
Bower v. Jones, 978 F.2d 1004,
1012 (7th Cir. 1992) (applying Illinois law).
It follows that
“[a] statement of future intention cannot generally be the basis
of a claim of fraud because alleged misrepresentations must be
statements of present or preexisting facts, and not statements of
future intent or conduct.”
Bradley Real Estate Trust v. Dolan
Assocs. Ltd., 640 N.E.2d 9, 12-13 (Ill. App. Ct. 1994).
But this
rule admits of an exception where the false promise or
representation of future conduct is “part of a scheme to
defraud.”
Omnicare, Inc. v. UnitedHealth Grp., Inc., 629 F.3d
697, 722-23 (7th Cir. 2011) (quoting Ass’n Benefit Servs., Inc.
v. Caremark Rx, Inc., 493 F.3d 841, 853 (7th Cir. 2007))
(applying Illinois law); HPI Health Care Servs., Inc. v. Mt.
Vernon Hosp., Inc., 545 N.E.2d 672, 682 (Ill. 1989) (holding that
Defendants addressed this statement in their memorandum,
Plaintiffs failed to do so in their opposition. By contrast,
Plaintiffs claim for the first time in their opposition that
Defendants falsely misrepresented that Gordon “would only make
money by running New K’s as opposed to liquidating it.” They
fail, however, to adduce any evidence showing that such a
representation was ever made. For these reasons, both statements
will be disregarded for purposes of this Memorandum and Order.
16
promises may be actionable where “the false promise or
representation of future conduct is alleged to be the scheme
employed to accomplish the fraud.”) (internal citation omitted)).
The scheme exception applies when “a party makes a promise
of performance, not intending to keep the promise of performance
but intending another party to rely on it, and where the other
party relies on it to his detriment.”
Concord Indus., Inc. v.
Harvel Indus. Corp., 462 N.E.2d 1252, 1255 (Ill. App. Ct. 1984);
see also Price v. Highland Cmty. Bank, 722 F. Supp. 424, 460
(N.D. Ill. 1989) (“if the intention behind the intentionally
false promise is to induce the promisee to act for the promisor’s
benefit, the promise is actionable”).
Plaintiffs fail to meet
the requisites for this exception.
i.
Gordon’s Plan to Operate Old K’s as a Going Concern
The first alleged promise - the plan to operate New K’s
as a going concern through the Christmas selling season - does
not suggest that Defendants engaged in a fraudulent scheme.
For one thing, Plaintiffs cannot show that Defendants did
not intend, at the time the statement was made, to do as they
said they would.
Plaintiffs’ reliance on spreadsheet documents
created prior to the LCC Agreement showing a liquidation phase
starting in November 2006 is unpersuasive.
Contrary to
Plaintiffs’ contention, these documents do not demonstrate that
Gordon’s intention was to commence liquidation at that time;
17
instead, they merely suggest that Gordon made financial
projections to consider beginning the liquidation of New K’s
assets in November 2006.8
Further, these projections are
consistent with Gordon’s role to act as the company’s agent in
connection with the continued operation and/or liquidation of its
assets.
Equally unpersuasive is Plaintiffs’ reliance on a series of
emails between Gordon’s employees, most of which date after the
conclusion of the LLC Agreement.
Only two of these emails were
sent before the conclusion of the LLC Agreement and neither one
demonstrates that Defendants did not have the intention to run
the company as claimed.9
For another thing, even assuming arguendo that the evidence
cited above creates a genuine issue of material fact regarding
misrepresentation concerning the potential for continuing as an
8
Plaintiffs places great weight on the fact that, Morton
recognized during deposition, that Gordon did not create any
financial analysis premised on the idea of Old K’s turnaround.
But as Morton explained, though Gordon approached Old K’s as a
liquidation strategy, they “always kept open the options for
other things to happen,” while making clear that “it was highly
likely that this was a liquidation.”
9
Weinstein stated in the first email dated March 30, 2006
that his plan was to acquire Old K’s and run it “through x-mas
out of court.” The second email sent by Morton on April 21, 2006
suggests the possibility of conducting “2 or 3 store wide events
during the next 6 months without taking the juice out of the
liquidation.” This email corroborates Gordon’s intention to run
the company for at least the next 6 months, i.e., until November
2006. The potential that liquidation was likely at the end of
this period was, however, a prospect Plaintiffs could not ignore
because it was plainly under consideration.
18
ongoing firm, Plaintiffs cannot show that one could have relied
reasonably on the alleged promise.
At the time of the conclusion
of the LLC Agreement, Plaintiffs could not ignore that Old K’s
was in a dire financial situation and that its liquidation was a
likely prospect.
No less than five consulting or investment
firms - Blair, Alliance, Buccino, LaSalle, and XRoads - had
recommended the liquidation of Old K’s assets at that time.
For
instance, Buccino stated that “[i]t was very quickly understood
that there wasn’t time or money to effect a turnaround.”
Given
the circumstances, Plaintiffs cannot reasonably allege that
Gordon made a reliable commitment to operate Old K’s during that
time period.
Rather, as Richard Powers admitted, their
commitment was limited to making a “genuine effort” to continue
to operate the company.
The parties’ letter of intent, which
empowered Gordon to act as the company’s exclusive agent in
connection with not only Old K’s continued operations, but also
with the liquidation of its assets, corroborates this view.
More
importantly, Weinstein made clear to Old K’s in April 2006 prior to the conclusion of the LLC Agreement - that while Gordon
desired to run the company “as a going concern,” they would do so
as they “evaluate whether a restructuring of the company is
feasible.”
The reason was that Gordon did not “want to sound
like [it was] committing to this.”
Along the same lines,
Weinstein reaffirmed to Old K’s on May 1, 2006 - also prior to
the conclusion of the LLC Agreement - his “intention to run the
19
company for a period of time while we determine what the right
configuration/make-up of the business is.”
In making this
reaffirmation, his stated objective was to make “clear that this
is a broken business that we see some underlying value in,” but
that “there are no sure things and we don't want to over
promise.”
Thus, Old K’s could not ignore the prospect of a
liquidation prior to the end of 2006.10
The alleged promise pertaining to Gordon’s plan to operate
New K’s as a going concern fails for another reason.
Whether a
company, especially a financially-distressed company, can be
saved from liquidation is rarely reliably ascertainable.
For
this reason, “[t]he general rule in Illinois is that any
statements regarding future events, circumstances, profitability,
and financial success cannot be a basis for a fraud claim.”
Bixby’s Food Sys. v. McKay, 193 F. Supp. 2d 1053, 1065 (N.D. Ill.
2002); Niemoth v. Kohls, 524 N.E.2d 1085, 1094 (Ill. App. Ct.
1988) (“although representations as to the past income of a
business are actionable, representations as to the future income
are not.”); Ziskin v. Thrall Car Mfg. Co., 435 N.E.2d 1227, 1231
(Ill. App. Ct. 1982) (categorizing a representation of future
10
To the extent Plaintiffs contend that Defendants should
have waited until the end of the December 2006 to liquidate, the
theory is undermined by the recognition expressed by Richard
Powers, Old K’s CFO, that, should the company be liquidated, “the
best time in which to accomplish that [liquidation] is the last
quarter of the year in order to take advantage of the holiday
selling season.”
20
profitability “as an opinion of future occurrence, which without
more, is not actionable”).
Several courts applying Illinois law
have recognized that representations concerning the financial
health of a company constitute generally inactionable statements
of opinion.
See Fogel v. Gordon & Glickson, P.C., 393 F.3d 727,
730 (7th Cir. 2004) (“the firm’s representation to [plaintiff]
concerning the future value of the PC’s remaining assets was a
prediction, rather than a promise on which a reasonable person
could rely.”); Cont’l Bank, N.A. v. Meyer, 10 F.3d 1293, 1299
(7th Cir. 1993) (“the statement was only an opinion that the
partnership, not yet in existence, would produce a profit, and
was not a representation of a pre-existent or present fact.”);
Hengel, Inc. v. Hot ‘N Now, Inc., 825 F. Supp. 1311, 1321 (N.D.
Ill. 1993) (rejecting “plaintiff’s assertion that the projected
financial statements can support a claim for fraud.”).
ii.
Gordon’s Promise to Guarantee Future Shipments
As to the second alleged promise - to guarantee future
shipments - the record falls short of establishing a scheme to
defraud.
Again, Plaintiffs cannot demonstrate that Defendants
did not have the intention to do as they said at the time the
statement was made.
As Gordon explained, even though it offered
to guarantee the payment of New K’s vendors during a certain
amount of time, New K’s vendors were often reluctant to deal with
the company due to the liquidity crisis faced by Old K’s.
21
Plaintiffs contend that, instead, the delay was caused by
Gordon’s failure to provide financial information and by its
refusal to guarantee vendors beyond September 2006.
This
statement is decisively contradicted by Richard Powers, Old K’s
CFO, who admitted in July 2006 that Gordon had little control
over the stock because “many of our vendors were not shipping new
merchandise until the [c]omposition [of creditors] was approved
and implemented.”
No actionable misrepresentation was made in
this connection.
iii. Lack of Consultation
A similar analysis applies to the third alleged promise to
consult with Old K’s management prior to making any important
decisions regarding the company’s operations.
Again, it appears
from the record that Defendants did not consult with Old K’s
management to the extent Plaintiffs perhaps wished to be
consulted, but that alone is not sufficient to make out a claim
for promissory fraud, since there is no proof that Defendants
made the alleged promise never intending to keep it.
Morever,
Plaintiffs do not establish how more consultation would have lead
to a different result.
As Alliance reported in February 2006,
Old K’s “business model does not appear to be feasible given the
current configuration of the company and its capital structure.”
In short, I conclude that the record does not support an
inference that Defendants engaged in a scheme to defraud.
22
Plaintiffs have done nothing more than to adduce evidence that
Defendants eventually did not act as they said they would.
See
Trade Fin. Partners, LLC v. AAR Corp., 573 F.3d 401, 413 (7th
Cir. 2009) (rejecting fraud claim “when the evidence of intent to
defraud consists of nothing more than unfulfilled promises and
allegations made in hindsight.”) (quoting Caremark Rx, 493 F.3d
at 853).
This is not enough to support a claim for fraudulent
inducement.
See Omnicare, 629 F.3d at 723 (rejecting fraud claim
on the ground that plaintiff “has not put forth sufficient
evidence to prove that [defendants] were engaged in a scheme to
defraud it.”).
As Judge Posner has observed, “a promissory fraud
is actionable only if it either is particularly egregious or,
what may amount to the same thing, it is embedded in a larger
pattern of deceptions or enticements that reasonably induces
reliance and against which the law ought to provide a remedy.”
Desnick v. Am. Broadcasting Co., Inc., 44 F.3d 1345, 1354 (7th
Cir. 1985) (applying Illinois law).
Plaintiffs did not meet this
standard.
b.
Gordon’s Expertise to Operate Old K’s
Plaintiffs contend that Defendants falsely represented that
Gordon possessed the experience and expertise to turn the
business around, to make it profitable, and to save it from
bankruptcy.
Defendants respond that these statements constitute
puffing.
23
Commercial puffery refers to “meaningless superlatives that
no reasonable person would take seriously, and so it is not
actionable as fraud.”
Hanson-Suminski v. Rohrman Midwest Motors,
Inc., 898 N.E.2d 194, 204 (Ill. App. Ct. 2008) (citation
omitted).
For this reason, general representations concerning
one’s expertise or experience constitute ordinarily no more than
statements of opinion.
See, e.g., Meyer, 10 F.3d at 1299
(considering bank’s statements that the partnership would be
managed by “competent general partners” to be no more than
opinion); High Road Holdings, LLC v. Ritchie Bros. Auctioneers,
Inc., No. 07-4590, 2008 WL 450470, at *7 (N.D. Ill. Feb. 15,
2008) (applying Illinois law) (“to the extent that [plaintiff’s]
claim focuses on [defendant]’s website’s claims of expertise,
they rely on puffery that is not actionable as fraud.”);
Nanlawala v. Jack Carl Assocs., Inc., 669 F. Supp. 204, 207 (N.D.
Ill. 1987) (holding statements that defendant futures trader had
“expertise” was merely “puffing”).
The rationale is that a
business “might have been expected to put its best good forward
at a sales meeting.”
Baeco Plastics, Inc. v. Inacomp Fin.
Servs., Inc., No. 92-0798, 1993 WL 410066, *12 (N.D. Ill. Oct.
13, 1993).
To overcome a “puffery defense,” Plaintiffs might undertake
to show that Defendants represented that Gordon had experience in
a field, where they knew it had none.
24
That is not what
Plaintiffs have alleged.
They never argued that Gordon had not
run several companies in the past or that they did not have the
expertise necessary to run New K’s.
Instead, they claim that all
the individuals at Gordon who worked on New K’s “had primarily
liquidation experience.”
To support their claim, Plaintiffs rely
on the depositions of five employees and independent consultants
who worked on New K’s.
The mere fact that these five individuals
admitted that their recent experience at Gordon focused on
liquidation does not mean that they, or more generally, the
company did not have sufficient experience to turn around New
K’s.
Importantly, Joseph McLeish, one of the consultants cited
by Plaintiffs, testified to nearly 20 years of experience in
operating jewelry and catalog showroom prior to joining Gordon.
In any event, Plaintiffs fail to show how expertise to liquidate
or turn around a company differ.
As McLeish stated, there is not
necessarily a difference between these two concepts in the sense
that “if you’re going to do a liquidation, obviously it’s not
going to be successful, if you can’t turn around that consumer
trend, if you can’t get customers in the door.”
Plaintiffs have
failed to show that the alleged representations pertaining to
Gordon’s experience were more than puffery.
c.
Conclusion
Having found that the alleged misrepresentations are not
actionable statements of fact, I conclude that summary judgment
25
as to Count I is appropriate.
Nevertheless for purposes of
completeness of this Memorandum and Order, I will address the
remaining arguments advanced by Defendants regarding the impact
of the integration clause of the LLC Agreement, as well as the
effect of the waiver.
2.
Integration Clause
Defendants’ second defense to the fraudulent inducement
claim is that the existence of an integration clause in the LLC
Agreement weighs toward finding that reliance on any unwritten
pre-contractual promises could not have been reasonable.
I
disagree in part.
Unlike a non-reliance provision, “an integration clause will
not preclude a plaintiff from relying upon extrinsic evidence in
order to establish a cause of action for fraud.”
W.W. Vincent
and Co. v. First Colony Life Ins. Co., 814 N.E.2d 960, 968 (Ill.
App. Ct. 2004).
The reason behind this rule is as follows:
[F]raud is a tort, and the parol evidence rule is not a
doctrine of tort law and so an integration clause does
not bar a claim of fraud based on statements not
contained in the contract. Doctrine aside, all an
integration clause does is limit the evidence available
to the parties should a dispute arise over the meaning of
the contract. It has nothing to do with whether the
contract was induced by fraud.
Id. (quoting Vigortone AG Prod., Inc. v. PM AG Prod., Inc., 316
F.3d 641, 644 (7th Cir. 2002)) (alteration in original).
Defendants rely on Barille v. Sears Roebuck, for the
proposition that an unambiguous integration clause may preclude a
26
fraud claim based on pre-contractual misrepresentations.
N.E.2d 118, 123 (Ill. App. Ct. 1997).
682
But the same Illinois
appellate court has more recently rejected Barille’s approach, on
the ground that “the presence of an integration clause in the
agreement does not bar the plaintiffs’ actions for fraud.”
First
Colony Life, 814 N.E.2d at 968; Salkeld v. V.R. Bus. Brokers, 548
N.E.2d 1151, 1157 (Ill. 1989) (noting that parol evidence rule
shall “not be permitted to be used for the accomplishment of
fraud”) (internal citation omitted).
Yet, this approach applies
only to misrepresentations that do not fall within “the meaning
of the contract.”
First Colony Life, 814 N.E.2d at 968.
This is
the case for those pertaining to Gordon’s expertise, which I have
found to constitute mere puffery.
See Section III.A.1.b. supra.
The same is not true, however, of the misrepresentations
pertaining to Gordon’s authority to conduct New K’s operations.
On this point, the LLC Agreement is clear in the sense that it
grants Gordon the sole authority to conduct New K’s business
activities or to liquidate its assets.
3(b).
LLC Agreement, § 3(a) & §
Similarly, the LLC Agreement states that Gordon “shall use
its best efforts to consult with [Old] K’s” regarding the conduct
of the company.
Id., § 3(a).
Accordingly, I conclude that any representations regarding
Gordon’s authority to conduct New K’s activities or its duty to
consult with Old K’s management are barred by the integration
27
clause contained in the LLC Agreement.
By contrast, I do not
find the integration clause would bar statements of competence to
performing which I have, however, found as alleged otherwise nonactionable puffery.
3.
Waiver
Defendants’ last argument on summary judgment is that
Plaintiffs waived their fraudulent inducement claim by accepting
payment of the liquidating distribution, instead of challenging
Gordon’s decision to liquidate New K’s in a timely fashion.
I
find this argument unconvincing.
Nearly fifty years ago, the Illinois Supreme Court held
that:
A
person
who
has
been
misled
by
fraud
or
misrepresentation is required, as soon as he learns the
truth, to disaffirm or abandon the transaction with all
reasonable diligence, so as to afford both parties an
opportunity to be restored to their original position.
If, after discovering the untruth of the representations,
he conducts himself with reference to the transaction as
though it were still subsisting and binding, he thereby
waives all benefit or relief from the misrepresentations.
Eisenberg v. Goldstein, 195 N.E.2d 184, 186-87 (Ill. 1963).
“Specifically, waiver will apply if a party, after discovering
the alleged fraud and with full knowledge of its materials
aspects, engages in conduct which is inconsistent with an
intention to sue.”
App. Ct. 1981).
Kaiser v. Olson, 435 N.E.2d 113, 118 (Ill.
The rationale is that “[o]ne is not permitted to
28
lie back and speculate as to whether avoidance or affirmance of a
contract will ultimately prove more profitable.”
Id.
That said, “[a]n additional and essential element [of the
waiver] is that the injured party intend to affirm the contract
and intend to abandon his right to recover damages for the loss
resulting from the fraud.”
Lee v. Heights Bank, 446 N.E.2d 248,
254 (Ill. App. Ct. 1983).
“If the intention to waive is implied
from conduct, the conduct should speak the intention clearly.”
Havoco of Am., Inc. v. Hilco, Inc., 799 F.2d. 349, 354 (7th Cir.
1986) (citation omitted) (applying Illinois law).
Generally,
“[t]he question of intent is one of fact for the jury to decide.”
Lee, 446 N.E.2d at 254.
There is a dispute of material fact as to whether Plaintiffs
intended to waive their right to sue for the alleged fraud.
To
be sure, one could argue that Plaintiffs were aware of the
alleged fraud long before they decided to sue.
As of October
2006, when the liquidation was announced, Plaintiffs could not
reasonably ignore that Gordon failed to consult with Old K’s
management as expected or to guarantee the vendors in due course.
Nor could they ignore that Gordon did not wait until the end of
2006 to make a decision to liquidate.
Still, Plaintiffs did not
stay “idle” following the commencement of the liquidation.
began searching for a legal counsel in a timely fashion.
They
After
the lawyers were retained, they sent successive letters to Gordon
29
seeking financial and performance information starting in 2007
through March 2008, when the payment of the distribution
liquidation was paid.
That same month, they were allowed to
conduct an onsite inspection of documents and found out that some
of them were missing.
It was only in May 2008 that Defendants
produced certain documents, which Plaintiffs now claim
demonstrate Gordon’s pre-existing plan to liquidate New K’s.
The
present matter was filed promptly thereafter in July 2008.
Accordingly, I conclude that “[w]hile the principle of
waiver may apply, whether it does apply is a question of fact
that is not appropriately a subject for summary judgment here.”
Stamatakis Indus., Inc. v. King, 520 N.E.2d 770, 774 (Ill. App.
Ct. 1987); Lee, 446 N.E.2d at 254 (same).
B.
Breach of Implied Covenant of Good Faith and Fair Dealing11
Plaintiffs contend that Gordon breached the contractual
covenant of good faith and fair dealing implied in the LLC
Agreement.
11
The alleged breach of the implied covenant of good faith
and fair dealing is a contract-based claim governed by Delaware
law. The LLC Agreement provides that “[t]his Agreement and the
rights and obligation of the parties hereunder shall be governed
by and interpreted and enforced in accordance with the laws of
the State of Delaware.” LLC Agreement, § 16(c). Massachusetts,
“absent any contravening public policy, honors choice-of-law
provisions in contracts.” Hartford Fire Ins. Co. v. CNA Ins. Co.
(Europe) Ltd., 633 F.3d 50, 54 n.7 (1st Cir. 2011). I see no
reason to reject the parties’ choice of Delaware law.
30
Under Delaware law, every contract contains an implied
covenant of good faith and fair dealing that “requires ‘a party
in a contractual relationship to restrain from arbitrary or
unreasonable conduct which has the effect of preventing the other
party to the contract from receiving the fruits’ of the bargain.”
Dunlap v. State Farm Fire and Cas. Co., 878 F.2d 434, 442 (Del.
2005) (quoting Wilgus v. Salt Pond Inv. Co., 498 A.2d 151, 159
(Del. Ch. 1985)).
When evaluating the merits of a covenant
claim, a court “must assess the parties’ reasonable expectations
at the time of contracting and not rewrite the contract to
appease a party who later wishes to rewrite a contract he now
believes to have been a bad deal.”
Nemec v. Shrader, 991 A.2d
1120, 1126 (Del. 2010) (en banc).
“Thus, parties are liable for
breaching the covenant when their conduct frustrates the
‘overarching purpose’ of the contract by taking advantage of
their position to control implementation of the agreement’s
terms.”
Dunlap, 878 F.2d 442 (citation omitted).
Nevertheless,
“courts will not readily imply a contractual obligation where the
contract expressly addresses the subject of the alleged wrong,
yet does not provide for the obligation that is claimed to arise
by implication.”
Moore Bus. Forms, Inc. v. Cordant Holdings
Corp., No. 13911, 1995 WL 662685, at *8 (Del. Ch. Nov. 2, 1995))
(internal quotation marks and citation omitted).
31
Defendants’ first contention - that the complaint fails to
plead an implied covenant claim as a matter of law - is easily
disposed of.
It is well-established that a breach of an implied
covenant of good faith and fair dealing requires allegations of
“a specific implied contractual obligation, a breach of that
obligation by the defendant, and resulting damage to the
plaintiff.”
S. Track & Pump, Inc. v. Terex Corp., 623 F. Supp.
2d 558, 562 (D. Del. 2009) (applying Delaware law).
complaint does just that.
The
It states that Gordon “breached the
contractual covenant of good faith and fair dealing implied [in]
the LLC Agreement when it engaged in the [alleged] fraud and
mismanagement.”
(Compl. ¶ 76.)
Plaintiffs later filed a
supplemental letter from their expert, James K. Steward, on
September 15, 2010, explaining that Gordon had “breached the
covenant of good faith and fair dealing by not undertaking an
operational turnaround of [New] K’s.”
As to damages, the
complaint requests “an accounting, and award [of] compensatory
damages, exemplary damages, and attorney’s fees and for such
other relied as this Court deems just and proper.”
The
allegations contained in the complaint are sufficient to raise
the claim.
Nevertheless, the implied covenant claim fails as a matter
of law.
Plaintiffs confuses breach of contract and breach of
implied covenant, which is “a limited and extraordinary legal
32
remedy” that addresses only events that could not reasonably have
been anticipated at the time the parties contracted.
A.2d at 1128.
Nemec, 991
The implied covenant has no application here not
only because Plaintiffs cannot show that the liquidation of the
company could not be anticipated, but also because express
provisions of the LLC Agreement address the conduct of the
alleged wrong.
The agreement uses unambiguous language granting
Gordon - as the “sole manager” of New K’s - the authority “to
exercise all the powers and privileges granted to a limited
liability company.”
LLC Agreement § 3(a).
The agreement also
provides that Gordon has the unilateral right to liquidate New
K’s assets.
See id. § 11(b) (“Events of Dissolution or
Liquidation. The LLC shall be dissolved upon . . . the consent of
the Manager”).
Because the express terms govern, that “leave[s]
no interstitial space in which the doctrine of the implied
covenant might operate.”
ASQR India Private, Ltd. v. Bureau
Veritas Holding, Inc., No. 4021, 2009 WL 1707910, at *12 (Del.
Ch. June 16, 2009).
Moreover, Plaintiffs cannot find refuge by
alleging that their expectation at the time of the LLC Agreement
was that Defendants would necessarily save the company from
liquidation.
As discussed in great length in Section
III.A.1.a.i. supra, Plaintiffs could not ignore that liquidation
was one of the possible outcomes of the conclusion of the LLC
Agreement.
The parties’ expectation is also reflected in the
33
letter of intent, which granted Gordon the authority to “act as
the Company’s exclusive agent in connection with the continued
operation and/or liquidation of the company’s business operations
. . . all in [Gordon]’s sole discretion.”
Accordingly, I will grant summary judgment in favor of
Defendants as to Count II.
C.
Benefit of the Bargain Damages
Assuming arguendo that the claims for fraudulent inducement
or breach of implied covenant were to survive summary judgment,
Defendants contend that Plaintiffs’ request for benefit of the
bargain damages i.e., expectation damages, is too speculative to
warrant recovery.
For claims of fraudulent inducement, a plaintiff may request
benefit of the bargain damages.
Kleinwort Benson N. Am., Inc. v.
Quantum Fin. Servs., Inc., 673 N.E.2d 369, 377 (Ill. App. Ct.
1996).
The rationale is “that a defrauded party is entitled to
the benefit of his bargain in a transaction and should be placed
in the same position that he would have occupied had the false
representations on which he acted been true.”
Mulligan v. QVC,
Inc., 888 N.E.2d 1190, 1196-97 (Ill. App. Ct. 2008).
The
plaintiff has the burden of establishing “a reasonable basis for
computing those damages” because “[a] court may not award damages
based on speculation or conjecture.”
Maloney v. Pihera, 573
N.E.2d 1379, 1391 (Ill. App. Ct. 1991).
34
By parity of reasoning,
the standard measure for damages recoverable for breach of
contract in Delaware is the “expectation interest” of the nonbreaching party.
E.I. Dupont de Nemours and Co. v. Pressman, 679
A.2d 436, 445 (Del. 1996).
To be entitled to benefit of the
bargain damages, the plaintiffs must show “a reasonable basis for
the [fact finder] to estimate with a fair degree of certainty his
probable loss.”
Moody v. Nationwide Mut. Ins. Co., 549 A.2d 291,
293 (Del. 1988).
The theory advanced by Plaintiffs to justify the allocation
of benefit of the bargain damages is contained in a June 15, 2010
report drafted by James K. Steward, their expert.
In that
report, Steward concludes that there was “a viable turnaround
strategy that would have produced a higher return and recovery
value for the stakeholders of [New K’s] than liquidation.”
This
conclusion is based on the assumption that two areas of
operations and strategy at New K’s - i.e., the excess in Selling,
General & Administration Expenses (SG&A) and the inventory
turnover - poorly compared with that of comparable businesses
listed in the 2005 Almanac of Business and Industrial Financial
Ratios and therefore could be the subject of a turnaround.
Steward submitted a two-page supplemental letter on September 15,
2010, declaring that “[h]ad Gordon Brothers implemented the
operational changes to lower SG&A expenses and increase inventory
management, . . . , the value of the new entity would have
35
increased to a conservative range between $171,565,000.00 and
$263,398,000.00.”
In his view, “[t]his range represents the
value lost under the benefit of the bargain rule for fraud [and
breach of implied covenant] damages,” recognizing that Plaintiffs
would only be entitled to 22.5% of such damages.
The expert report submitted by Plaintiffs fails to provide a
reasonable basis for computing the benefit of the bargain
damages.
The damages are based on mere speculation that some
unidentified turnaround firm would have been able to reduce the
SG&A amount of New K’s and accelerate its inventory turnover.
The report does not provide any time frame for achieving these
results, nor does it provide an assessment of the costs involved.
It does not take into consideration New K’s dire financial
situation at the time of the liquidation either.
Critically,
several firms had recommended the liquidation of Old K’s assets
before the conclusion of the LLC Agreement.
Even Powers agreed
that, had Old K’s not entered in the LLC Agreement on May 1, the
most likely outcome would have been the bankruptcy and
liquidation of the company.
The report demonstrates that were
this case to go to trial, jurors would be left to their own
devices to determine the appropriate amount of expectation
damages.
For this reason, I conclude that Plaintiffs would not
be entitled to recover benefit of the bargain damages, even
assuming that the claims for fraudulent inducement and breach of
36
implied covenant survived summary judgment, which, of course, I
have concluded they do not.
IV.
CONCLUSION
For the reasons set forth more fully above, I GRANT
Defendants’ motion for partial summary judgment as Counts I and
II.
(Dkt. No. 43.)
The parties shall submit a joint status
report on or before September 9, 2011 addressing what further
action is necessary to bring this case to final judgment.
/s/ Douglas P. Woodlock
DOUGLAS P. WOODLOCK
UNITED STATES DISTRICT JUDGE
37
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