Radakovich v. Energy Recovery, Inc.

Filing 84

OPINION and ORDER Regarding Motions for Partial Summary Judgment and Scheduling Order, ( Final Pretrial Conference set for 5/19/2014 02:00 PM before District Judge Denise Page Hood, Jury Trial set for 6/10/2014 09:00 AM before District Judge Denise Page Hood) Signed by District Judge Denise Page Hood. (LSau)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MICHIGAN
SOUTHERN DIVISION
ROY RADAKOVICH, as representative on behalf
of former shareholders of Pump Engineering, LLC,
Plaintiff,
Case No. 11-13443
v.
HON. DENISE PAGE HOOD
ENERGY RECOVERY, INC.,
Defendant.
____________________________________________/
OPINION AND ORDER REGARDING
MOTIONS FOR PARTIAL SUMMARY JUDGMENT
and
SCHEDULING ORDER
I.

BACKGROUND/FACTS
This matter is before the Court on cross-motions for Partial Summary

Judgment1 filed by both parties. Briefs, including supplemental papers, have been
filed and a hearing held on the matter.
On August 8, 2011, Plaintiff Roy Radakovich (“Radakovich”) filed a Complaint
against Defendant Energy Recovery, Inc. (“ERI”) alleging:

Breach of Escrow

Agreement (Count I); Breach of Duty of Good Faith and Fair Dealing (Count II); and
Unjust Enrichment (Count III), pled in the alternative. The Court dismissed the
1

E.D. Mich. LR 7.1(b) provides a party must obtain leave of court to file more than one
motion for summary judgment in a case.

Unjust Enrichment claim (Count III) in an order dated September 30, 2012. (Doc. No.
15)
ERI entered into an Agreement and Plan of Merger (“Merger Agreement”) with
Pump Engineering, LLC (“Pump Engineering”) on December 21, 2009. (Comp., ¶¶
4, 22) ERI is engaged in the business of making energy recovery devices used with
desalination equipment. (Comp., ¶ 19) Pump Engineering was engaged in the
business of developing turbo chargers and pumps commonly used with desalination
equipment. (Comp., ¶ 15) Turbo chargers produced by Pump Engineering allow
reverse osmosis desalination plants and other liquid based industrial processing plans
to be more efficient and require less energy for operation. (Comp., ¶ 16) Radakovich
was named the “Company Representative” on behalf of the former owners of Pump
Engineering. (Comp., ¶ 23) As a result of the Merger Agreement, Pump Engineering
was merged into a wholly owned subsidiary of ERI and its existence ceased, with
certain exceptions, “all the property, rights, privileges, powers and franchises.”
(Comp., ¶¶ 24-25) After the merger, ERI referred to its subsidiary as Pump
Engineering, Inc. (“PEI”).
In May 2009, prior to the merger, Pump Engineering entered into a contract
with Hyflux Hydrochem PTE, Ltd. (“Hyflux”) for Pump Engineering to provide
Hyflux certain turbo charges and equipment that met certain efficiency to be delivered
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in certain dates. (Comp., ¶¶ 17-18) By virtue of the Merger Agreement, ERI acquired
the rights in and control over the performance and completion of the Hyflux contract.
(Comp., ¶ 26)
As part of the consideration for the Merger Agreement, ERI agreed to place in
an Escrow Account a sum of money (the “Earn-Out”) to be distributed to Radakovich
based upon a separate Contingent Payment Escrow Agreement (the “Escrow
Agreement”). (Comp., ¶ 27) The Earn-Out was to be distributed to Radakovich upon
satisfaction of certain Milestone performance achievements related to the Hyflux
contract. (Comp., ¶ 28) Pursuant to the Escrow Agreement, ERI agreed to deliver the
sum of Three Million Five Hundred Thousand Dollars ($3,500,000) to an agreed upon
Escrow Agent who in turn would pay the Earn-Out upon achievement of certain
Milestones under the Hyflux contract. (Comp., ¶¶ 32-33)
The Escrow Agreement provided for three Milestones, two of which are at issue
in this lawsuit.

(Comp., ¶ 34)

Milestone 1 was to meet certain efficiency

requirements set forth in section 7.1 of the Hyflux contract, without Hyflux imposing
liquidated damages. (Comp., ¶ 35) Upon meeting the Milestone 1 requirement,
Radakovich was to be paid $1,300,000. (Comp., ¶ 37) Milestone 2 was to meet
certain delivery terms set forth in section 7.2 of the Hyflux contract, without the
imposition of liquidated damages by Hyflux. (Comp., ¶ 38) Upon satisfaction of
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Milestone 2, Radakovich was to be paid $1,200,000. (Comp., ¶ 40)
Radakovich asserts that ERI breached the Escrow Agreement because ERI did
not reasonably meet the requirements of Milestones 1 and 2. (Comp., ¶¶ 45-63)
Radakovich claims that he has no way of knowing whether the efficiencies were ever
met since ERI did not allow Radakovich to participate in the efficiencies testing and
did not provide Radakovich with raw test data. (Comp., ¶ 55-56) Radakovich asserts
that ERI repeatedly agreed to extend the time for delivery and that no penalty should
have been assessed for the delayed delivery dates because Hyflux agreed to the delays.
(Comp., ¶¶ 57-64) Radakovich alleges that despite the lack of basis for the penalties
issued by Hyflux, ERI did not contest these penalties because Radakovich, under the
Escrow Agreement, paid for the penalties instead from the amount Radakovich could
have received from the Earn-Out if Milestones 1 and 2 were met. (Comp., ¶¶ 64-67)
Radakovich claims that ERI chose to provide an unlawful gain to Hyflux since ERI
could do so at no expense. (Comp., ¶ 67) Radakovich alleges that ERI breached the
Escrow Agreement by utilizing its position of control to preclude Radakovich from
obtaining the necessary resources to meet efficiencies and by verbally extending
delivery dates without properly amending the Hyflux contract in writing which
resulted in unnecessary penalties issued by Hyflux. (Comp., ¶¶ 70-72)
In his motion for partial summary judgment, Radakovich seeks judgment in his
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favor on the breach of contract issue as to Milestone 2 only in Count I, the breach of
duty of good faith and fair dealing as to Milestone 2 in Count II, and dismissal of
ERI’s affirmative defenses. ERI seeks partial summary judgment in its favor on the
breach of contract claim in Count I as to Milestones 1 and 2 and the breach of duty of
good faith and fair dealing in Count II as to Milestone 1.
II.

ANALYSIS
A.

Summary Judgment Standard of Review

Rule 56(a) of the Rules of Civil Procedures provides that the court “shall grant
summary judgment if 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.” Fed. R. Civ.
P. 56(a). The presence of factual disputes will preclude granting of summary judgment
only if the disputes are genuine and concern material facts. Anderson v. Liberty Lobby,
Inc., 477 U.S. 242, 248 (1986). A dispute about a material fact is “genuine” only if
“the evidence is such that a reasonable jury could return a verdict for the nonmoving
party.” Id. Although the Court must view the motion in the light most favorable to the
nonmoving party, where “the moving party has carried its burden under Rule 56(c), its
opponent must do more than simply show that there is some metaphysical doubt as to
the material facts.” Matsushita Electric Industrial Co. v. Zenith Radio Corp., 475 U.S.
574, 586 (1986); Celotex Corp. v. Catrett, 477 U.S. 317, 323-24 (1986). Summary
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judgment must be entered against a party who fails to make a showing sufficient to
establish the existence of an element essential to that party's case, and on which that
party will bear the burden of proof at trial. In such a situation, there can be “no
genuine issue as to any material fact,” since a complete failure of proof concerning an
essential element of the nonmoving party's case necessarily renders all other facts
immaterial. Celotex Corp., 477 U.S. at 322-23. A court must look to the substantive
law to identify which facts are material. Anderson, 477 U.S. at 248.
B.

Breach of Contract, Count I
1.

Interpretation of Contract

A breach of contract claim under Delaware law must meet the following
elements: 1) the existence of a contract, whether expressed or implied; 2) a breach on
an obligation imposed by the contract; and, 3) the resulting damage to plaintiff.
Pritchett v. I/O Repair, Inc., 2013 WL 1750888 *4 (Del. Comp. Pl Apr. 22, 2013). The
parties acknowledge the existence of the written Escrow Agreement, meeting the first
element.
The ultimate goal in interpreting a contract is to determine the shared intent of
the parties. In re Mobilactive Media, LLC, 2013 WL 297950 * (Del Ch. Jan. 25, 2013)
Delaware adheres to the objective theory of contracts. Id. The court must look to the
most objective indicia of that intent–the words found in the written instrument. Id.
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The court ascribes to the words their common or ordinary meaning and interprets the
words as would an objectively reasonable third-party observer. Id. A disagreement
between the parties as to the contract’s construction does not suffice to render it
ambiguous. Id. A contract will be deemed ambiguous only if its language is
susceptible to two or more reasonable interpretations. Id.
2.

Milestone 1

ERI seeks summary judgment on the Milestone 1 claim in Count 1. Radakovich
claims there are genuine issues of material fact as to Milestone 1 and ERI is not entitled
to judgment on this claim.
The Merger Agreement provides that portions of the Contingent Cash
Consideration set forth on Exhibit B shall be released from the Contingent Payment
Escrow upon the achievement of applicable Milestones set forth in Exhibit B. (Merger
Agr., ¶ 2.11) “The determination of whether any Milestone has been achieved shall be
determined by [ERI] in its reasonable discretion.” (Merger Agr., ¶ 2.11) The Escrow
Agreement in ¶ 3(h) provides that Radakovich “shall have the right to dispute whether
[ERI] used its reasonable discretion to determine whether such Milestone was achieved
...” (Escrow Agr., ¶ 3(h)) Contingent Cash Payment 1 means $1,300,000 if Milestone
1, as defined in Exhibit B, is achieved. (Appx. I, p. 2) Exhibit B provides:
Exhibit B - Milestones and Contingent Cash Consideration
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Capitalized, undefined terms in this Exhibit shall have the
meaning ascribed to such term in the Hyflux Purchase Order
Terms and Conditions dated as of May 26, 2009 (the “PO”).
Milestone 1 to be Achieved to Release Contingent Cash
Payment 1
Successful attainment of the average efficiency performance
guarantees set forth in Section 7.1 of the PO without the
imposition of any Performance Liquidated Damages as
defined in that Section and receipt of all Factory Acceptance
Test Certificates.
Within thirty (30) days after the achievement of the above
Milestone 1, if so achieved, Contingent Cash Payment 1
shall be released from the Contingent Payment Escrow to
the Company Representative for the benefit of the Company
Unit Holders. ...
(Appx. I, pp. 4-5) Section 7.1 of the Hyflux PO provides:
7.1

The average efficiency of the twenty-five (25) tested
turbo-charger units during Factory Acceptance (FAT)
shall be as offered by the Supplier for the three (3)
duty points nominated in the particular specifications
at two tenth percent (0.2%) negative tolerance.
Individual turbo charger performance can have a
maximum negative tolerance of three-tenth percent
(0.3%)
Despite having a negative efficiency which exceeds
three-tenths percent (0.3%), the turbo charge is still to
be shipped. Supplier commits to work another rotor
assembly within thirty (30) days until it meets
Supplier’s guaranteed points.
For any shortfall in the efficiency after the thirty (30)
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days period, Performance Liquidated Damages shall
be imposed and calculated on a per unit basis as
further described in the following paragraph. ...
Hyflux PO, § 7.1
ERI asserts that it is undisputed that the delivered turbo charges did not meet the
Performance Guarantees of the Hyflux Contract. ERI refers to the Statement of
Undisputed Material Facts (“UMF”) document it submitted which sets forth the
evidence from discovery. (Doc. No. 49, UMF Nos. 3, 5, 9, 11, 17, 18, 21, 22)
Radakovich did not submit any dispute to these statements. PEI’s engineers Kevin
Terrasi and Dr. Ying Ma conducted the FAT test, with Hyflux witnesses present. Id.
The test results objectively indicated that PEI failed to meet the efficiencies. Id. ERI
asserts that it was within the bounds of “reasonable discretion” provided in the Escrow
Agreement in determining that PEI did not successfully meet Milestone 1.
In response, Radakovich claims there are questions of fact on the Milestone
1 efficiency issue. However, Radakovich does not specifically dispute that the FAT
tests were performed nor that the efficiencies required were not met. Rather,
Radakovich argues that Radakovich, or his representatives, were not allowed to
participate in the tests and were purposely not told when the actual test dates were so
that they would not be able to attend. Radakovich further argues that ERI was
obligated under the Escrow Agreement to cooperate with Radakovich and his
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representatives to effectuate the intent of the Merger Agreement.
Radakovich argues that ¶ 12.11 of the Merger Agreement provides “Further
Assurances” that the parties would use reasonable efforts to effectuate the Merger
Agreement and other ancillary agreements. (Merger Agreement, ¶ 12.11) However,
Radakovich has not pointed to any terms of any agreement (other than the general
“Further Assurances” provision), including the Merger Agreement, the Escrow
Agreement or any appendices, which provides that Radakovich or his representatives
must be present at the FAT tests. The provision involving Contingent Cash Payment
1 of $1,300,000, only provides “Milestone 1, as defined in Exhibit B, is achieved.”
(Appx. I, p. 2) Exhibit B expressly provides that Milestone 1 is achieved upon
successful attainment of the average efficiency performance guarantees set forth in
Section 7.1 of the Hyflux PO, which provides 0.2% or 0.3% negative tolerance.
Radakovich does not submit any evidence to show that these test results were
inaccurate and he does not allege that these test results were fraudulent. As noted, no
provision or terms of any agreement, including the “Further Assurances” provision,
provides that Radakovich or his representatives, must be present at the FAT tests. Any
reasonableness requirement on ERI as to determining whether Milestone 1 is achieved
is tempered by Section 7.1 of the Hyflux PO. Radakovich agreed to this provision in
Exhibit B of Appendix I to the Escrow Agreement.
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ERI has submitted sufficient evidence to support its claim that Milestone 1 was
not achieved. Radakovich has not provided evidence to create any genuine issues of
material fact to rebut ERI’s evidence that Milestone 1 was not achieved as required by
Section 7.1 of the Hyflux PO. Radakovich’s argument that he or his representatives
did not participate in the FAT tests is without merit since there are no provisions under
any agreement that Radakovich must be present at the FAT tests. Radakovich has not
shown that the FAT tests were not performed as required under the Hyflux PO (to
which he was not a party). Summary judgment will be entered in favor of ERI on the
breach of contract Milestone 1 claim in Count I.
3.

Milestone 2

Radakovich argues that he is entitled to partial summary judgment on his breach
of contract claim as to Milestone 2 in Count I. ERI responds that there is no dispute
that under the Hyflux PO, the turbo charges were delivered four to seven months after
the specified dates in the Hyflux contract. Although the delivery dates were not met,
Hyflux did not waive the late delivery penalties under the Hyflux contract.
Milestone 2 to be Achieved to Release Contingent Cash Payment 2:
On-time delivery and performances of the Supply in
accordance with the Delivery Schedule, as those terms are
defined in SECTION 7.2 of the PO, without the imposition
of any liquidated damages as set forth in that Section. This
Milestone payment will be disbursed after all successful
deliveries.
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(Appx. I, p. -5) Section 7.2 of the Hyflux PO provides:
7.2

The Supplier shall ensure that the Supply is delivered
and preformed on or before the date(s) as stipulated
in the Delivery Schedule or such dates as may be
adjusted by the Client. Save for the reasons beyond
the control of the Supplier, the Supplier shall be liable
to pay the Client liquidated damages as follows. ...

(Hyflux PO, § 7.2)
There is no dispute that the delivery of the turbo charges was late. However, the
PO provides that the dates may be adjusted. (Hyflux PO, § 7.2) Radakovich submitted
evidence that Hyflux and PEI, ERI’s subsidiary, agreed to the later dates. ERI does
not dispute that later dates were agreed to. ERI argues that since there was no
subsequent written agreement to the later dates, Section 7.2 was not met and that
Milestone 2 was not achieved.
Delaware law provides that subsequent changes to a written agreement may be
waived or modified by course of conduct. Pepsi-Cola Bottling Co. of Ashbury Park
v. Pepsico, Inc., 297 A.2d 28, 33 (Del. 1972). Radakovich submitted evidence that
ERI management believed there should be no penalties because the delivery was timely
and agreed to by Hyflux. (Pelegrin Dep., pp. 44-45, 95) Radakovich also submitted
evidence that ERI only paid what it considered a “minor” $130,000 delivery penalty.
(Doc. No. 41, Ex. 20, Blanco email) Although Radakovich submitted evidence that
PEI, ERI’s subsidiary, and Hyflux agreed to the later delivery dates, a penalty was
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charged. As to whether the “minor penalty”, as argued by Radakovich, is sufficient for
ERI to reasonably determine that Milestone 2 was not achieved, this issue is an issue
for the jury. Reasonableness is a question of fact to be determined by the finder of fact.
Desert Equities, Inc. v. Morgan Stanley Leveraged Equity, 624 A.2d 1199, 1206 (Del.
1993).
ERI also argues that because Milestone 2 was contingent on the achievement of
Milestone 1 Radakovich’s claim as to Milestone 2 must also be dismissed. However,
there is no provision in any of the agreements that Milestone 2 is contingent on
Milestone 1. The issue of whether ERI breached its obligation to determine whether
Milestone 2 was achieved, in light of the “minor” penalty amount, is not subject to
summary judgment at this time.
C.

Breach of Good Faith and Fair Dealing, Count II

ERI seeks summary judgment on the breach of duty of good faith and fair
dealing claim in Count II as to Milestone 1. Radakovich seeks judgment in his favor
on the breach of duty of good faith and fair dealing in Count II as to Milestone 2.
An implied covenant claim is not a tort, but a contractual claim. Wood v. Baum,
953 A.2d 136, 143 (Del. 2008). An implied covenant of good faith and fair dealing
claim is a limited gap-filling tool to infer contractual terms to which the parties could
have agreed had they anticipated a situation they failed to address. Nemec v. Shrader,
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91 A.2d 1120, 1126-28 (Del. 2010). It is not a “free-floating duty” or “a substitute for
fiduciary duty analysis.” Longergan v. EPE Holdings, LLC, 5 A.3d 1008, 107 (Del.
Ch. 2010). “Fair dealing” is a commitment to deal “fairly” in the sense of consistently
with the terms of the parties’ Agreement and its purpose. Gerber v. Enterprise
Products Holdings, LLC, 67 A.3d 400, 418-19 (Del. Supr. 2013)(quotation omitted).
“Good faith” does not envision loyalty to the contractual couterparty, but rather
faithfulness to the scope, purpose, and terms of the parties’ contract. Id. at 419. The
analysis turns on the contract itself and what the parties would have agreed upon had
the issue arisen when they were bargaining originally. Id. The implied covenant
should not be used to give plaintiffs contractual protections that the plaintiffs failed to
secure for themselves at the bargaining table. Aspen Advisors LLC v. United Artists
Theatre Co., 843 A.2d 697, 707 (Del. Ch. 2004).
Because the Court finds in favor of ERI as to the Milestone 1 issue in Count I,
ERI is also entitled to judgment in its favor as to the breach of good faith and fair
dealing as to the Milestone 1 issue in Count II. As noted, there is no provision in any
contract between Radakovich and ERI that Radakovich or his representatives must be
present at the FAT tests. An implied covenant cannot be used to give Radakovich
contractual protection that was not bargained for in the contract. Aspen Advisors, 843
A.2d at 707.
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Radakovich argues he is entitled to judgment as to Count II on the Milestone 2
issue. ERI responds that there is no requirement that any penalty assessment can be
contested.
There is no term in any of the agreements as to what amount of penalty would
govern under Milestone 2. Radakovich has submitted sufficient evidence to show that
the amount of late shipment penalty assessed was “minor,” in the amount of $130,000,
in light of the amount at issue of $1.2 million under Milestone 2. There remain
genuine issues of material fact under Count II that ERI exercised good faith and fair
dealing when it determined that Milestone 2 was not met.
D.

Affirmative Defenses

Radakovich argues that he is entitled to summary judgment on ERI’s affirmative
defenses because ERI failed to provide a Rule 30(b)(6) witness for ERI”s support of
its affirmative defenses. In response, ERI argues that Radakovich solely relies on one
poorly worded question and answer exchange at ERI’s several hours long 30(b)(6)
deposition to demonstrate that ERA has no evidence to support its affirmative defenses.
ERI asserts no interrogatories were served regarding ERI’s affirmative defenses. ERI
claims that there were no specific questions of ERI’s 30(b)(6) witness regarding ERI’s
affirmative defenses during the eight hour deposition. ERI has offered to allow
Radakovich an extra opportunity to depose its witnesses regarding ERI’s affirmative
15

defenses. Radakovich asserts the offer is too late.
At the Rule 30(b)(6) deposition of Borja Blanco, Radakovich’s counsel
questioned Mr. Blanco as to affirmative defenses nos. 2-9:
Q.

That’s my point. I don’t want you to guess. For
purposes of the record, can you go through two
through nine and tell me if you know of any facts
underlying any one of these points. Again, don’t
guess I just need to know?

A.

Just reading this and telling you exactly I know
what’s referring to. No.

(Blanco Dep., p. 126).
Radakovich’s brief fails to set forth the elements and the law required to show
whether the affirmative defenses have been met or not. Judgment is denied without
prejudice as to the affirmative defenses.
III.

CONCLUSION
For the reasons set forth above,
IT IS ORDERED that Plaintiff’s Motion for Partial Summary Judgment (Doc.

No. 41) is DENIED.
IT IS FURTHER ORDERED that Defendant’s Motion for Partial Summary
Judgment (Doc. No. 48) is GRANTED IN PART and DENIED IN PART as more fully
set forth above. The Milestone 1 breach of contract claim in Count I and the Milestone
1 good faith and fair dealing claim in Count II are DISMISSED. The Milestone 2
16

breach of contract claim in Count I and the Milestone 2 good faith and fair dealing
claim in Count II REMAIN.
IT IS FURTHER ORDERED that Plaintiff’s Motion to Strike (Doc. No. 74) is
DENIED.
IT IS FURTHER ORDERED that Plaintiff’s Motion to File Supplemental Brief
(Doc. No. 79) is GRANTED.
IT IS FURTHER ORDERED that the following schedule governs this matter:
Final Pretrial Conference Date: May 19, 2014, 2:00 p.m.
All clients and representatives with authority to settle must appear.
The proposed Joint Final Pretrial Order pursuant to LR 16.2
must be submitted by: May 12, 2014
Trial Date: June 10, 2014, 9:00 a.m.
S/Denise Page Hood
Denise Page Hood
United States District Judge
Dated: March 28, 2014
I hereby certify that a copy of the foregoing document was served upon counsel of
record on March 28, 2014, by electronic and/or ordinary mail.
S/LaShawn R. Saulsberry
Case Manager

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