ATSCO Holdings Corp. et al v. Air Tool Service Company et al

Filing 139

Opinion and Order: Defendants' Rule 52(c) Motion is denied as the Court finds it needs additional evidence to determine the remaining claims. The parties shall confer and submit to the Court no later than April 22, 2022 agreed upon dates for Defendants presentation of evidence. Judge Christopher A. Boyko on 4/15/202. (L,Ja)

UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF OHIO
EASTERN DIVISION
ATSCO HOLDINGS CORP. ET AL.,
Plaintiffs,

vs.
AIR TOOL SERVICE CO. ET AL.,
Defendants.

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CASE NO.1:15CV1586
SENIOR JUDGE
CHRISTOPHER A. BOYKO

OPINION AND ORDER

CHRISTOPHER A. BOYKO, SR. J:
The parties to the above action have requested, and the Court has agreed to determine
the claims in this case in a most unusual manner. The parties have requested that the Court
determine the claims in this case entirely on a paper record and video depositions and without
any evidence or testimony in open court unless the Court determines such testimony is
necessary. The parties have submitted deposition transcripts, video tapes of the depositions and
have submitted exhibits for the Court’s consideration. Once those documents and depositions
were entered into the record, Plaintiffs are deemed to have rested their case. Then Defendants
were permitted to file any motion they deemed fit for the Court’s consideration. Should the
Court deny the Motion, then Defendants will present their evidence and the Court will make the
final determination. At this stage of the proceedings, Plaintiffs have rested and Defendants
have moved under Fed. R. Civ. P. 52(c) for judgment. For the following reasons, the Court
denies Defendants’ Motion.
By way of background, according to Plaintiffs’ Amended Complaint, Plaintiffs ATSCO

Holdings Corp. and Hy-Tech Machine, Inc. are Delaware corporations with principal places of
business in Pennsylvania. Defendant Air Tool Service Co. is an Ohio corporation and
Defendant Rick Sabath, Air Tool Service Co.’s sole shareholder, is a North Carolina resident.
The case is here on the Court’s diversity jurisdiction.
The claims in this case arise out of an Asset Purchase Agreement executed on August
13, 2014, wherein Plaintiffs purchased nearly all the assets of Defendant Air Tool for
$7,658,540. The purchase price was to be adjusted pursuant to a closing statement and working
capital adjustment. Pursuant to the Agreement, $387,500 has been placed in escrow in
connection with the capital adjustments and to deal with any disputes.
According to Plaintiffs’ Trial Brief, Defendants made several representations and
warranties including: 1) the financial statements were true and accurate; 2) there were no debts
or liabilities outside those reflected in the balance sheet or financial statements; 3) Defendants
were the owners of all the Intellectual Property used in its business operations; 4) Defendants
inventories were finished and saleable; and 5) Defendants owned the assets listed in the
agreement and these assets were well maintained and in good working condition. After closing,
Plaintiffs learned that these representations and warranties were untrue.
Plaintiffs allege that certain grinders and grinder part inventories intended for a
customer, ATA, were non-saleable. These were valued at $93,313. Two tools manufactured for
Michigan Pneumatic were non-saleable. These were valued in the agreement at $13,000. Parts
manufactured for a company, TorcUp, were defective. These were valued at $8,000. Other
parts and assemblies valued in the agreement at $90,000, were unusable or unrepairable.
Equipment sold to Plaintiffs also were in poor condition, causing loss to Plaintiffs.
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These include a computerized numerical controlled manufacturing machine, the Okuma
MacTurn, that stopped functioning shortly after closing, costing Plaintiffs $32,714.36 to repair
and will require an additional $45,000 in parts and $30,000 in labor charges to make the
machine operational. Due to the MacTurn’s unreliability, Plaintiffs have lost $100,000 in
productivity. Without a sufficient replacement, Plaintiffs cannot continue the manufacturing
business, costing them an additional $130,000.

Defendants further kept payments rightfully

belonging to Plaintiffs in the amount of $2,715.42.
Despite Defendants’ representations, third parties have disputed the ownership of certain
intellectual property sold by Defendants to Plaintiffs. There were also $20,000 in liabilities
owed to third parties that Defendants did not disclose in the balance sheet.
Plaintiffs further alleges $1,109.50 was paid to Defendant from a third party vendor
when that payment should have gone to Plaintiffs. The APA gives Plaintiffs a working capital
adjustment pursuant to a contractual formula. Under that formula, Plaintiffs allege they are
entitled to $100,928.
In addition, certain plans and drawings were found to be inaccurate or incomplete
resulting in damages of $127,250.
As a result, Plaintiffs asserted Breach of Contract and Unjust Enrichment claims against
Defendants.
Defendants Counterclaimed for the escrowed amount of $387,500, contending they
made no false representations. According to Defendants, Plaintiffs had ample opportunity prior
to closing to inspect all inventory, equipment, balance sheets and accounts but failed to do so.
Defendants further allege Plaintiffs failed to take adequate steps to protect the assets and
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inventory post-closing.

Defendants allege they complied with all contractual requirements, yet

Plaintiffs have breached the agreement by failing to release the escrowed funds.
Specifically, Defendants dispute Plaintiffs’ failure under the terms of the contract to
timely complete an inventory and submit to Defendants an Inventory Acknowledgment,
precluding recovery on any working capital adjustment.
Defendants further contend Plaintiffs stipulated to judgment on Defendants’
Counterclaim on the MacTurn Inefficiency and Work Performed elsewhere claims and MacTurn
Maintenance. Also, Plaintiffs’ need, but do not have, expert witness testimony on their
MacTurn claims.
Defendants allege their contract with Plaintiffs contains a $75,000 indemnification limit
such that Defendants are not liable for losses below the $75,000 threshold.
Lastly, Defendants allege they will prove at trial that Plaintiffs waived any contract
claims.
Procedural History
On July 20, 2017, the Court held a Final Pre-Trial in the above-captioned case. At the
Final Pre-Trial, Defendants argued Plaintiffs failed to provide timely notice of claims under the
express terms of the APA. Plaintiffs acknowledged that the notice was not submitted within the
time frame agreed to by the parties in the APA. According to Defendants, this failure to timely
submit a notice of a claim was a condition precedent to filing an action in court and precludes
Plaintiffs from asserting such claims in the above-captioned case. Plaintiffs requested an
opportunity to brief the issue. On July 21, 2017, the Court issued an order continuing the bench
trial set for July 31, 2017, and instead, ordered the parties to brief the notice issue. After the
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briefing, on December 17, 2017 the Court issued its Opinion and Order granting Defendants’
Motion to Preclude any of Plaintiffs’ claims that were not listed in writing prior to a cut off date
set in the contract for notifying Defendants of any claimed insufficiencies in the equipment.
Plaintiffs, on the original day of trial, dismissed their remaining contract claims, consented to
judgment on Defendants’ Counterclaim and reserved for appeal those claims dismissed by the
Court in its December 2017 Opinion and Order. On appeal the Sixth Circuit reversed in part
this Court, holding that because the Defendants failed to raise their claim notice defense in their
Answer or in a motion for summary judgment, Plaintiffs were prejudiced in their ability to
respond as discovery had already been closed and the Court did not give notice it was
conducting a summary judgment review on the Motion. Because Defendants failed to show
material prejudice and failed to specifically assert lack of claim notice as an affirmative defense,
that defense has been waived.
The case was returned to the Court and a new trial date was set. Plaintiffs proposed and
Defendants agreed, with approval of the Court, the following mechanism to present their cases
to the Court without live testimony due in part to the Covid pandemic and concerns over older
principals having to provide live testimony:
On or before October 23, 2020, the parties shall take trial testimony of Plaintiffs’ trial
witnesses by video and stenographic means. Plaintiffs shall bear the cost of these
proceedings for video and stenographic recording.
Plaintiffs shall all arrange the location, presence of witnesses and all video and
stenographic services and give notice of the schedule of witnesses to testify at least
seven (7) calendar days before the date of the testimony so as to allow Defendants and
counsel to make arrangements to attend, in person or via commercially available
electronic means such as Zoom, Skype or a similar system , supply exhibits and other
necessary preparations.

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Each party shall be responsible to provide those exhibits that party wishes to utilize to
the court reporter, marked as appropriate, in advance of the scheduled testimony.
Objections during trial testimony will be brief, not speaking objections. In the event a
questioning party is unclear as to the basis of any objection, inquiry may be made as to
the basis for the objection, and a short response provided, so as to allow a questioning
party to seek to cure any defect in the question, as the questioning party deems
appropriate.
At the conclusion of the recording of Plaintiffs’ scheduled witnesses, Plaintiffs shall
cause the video recordings and the transcripts to be filed with this Court for review, and
to be made the record of the testimony in this case.
Thereafter, the parties will confer as to the exhibits identified in the Plaintiffs’ Trial
Brief to ascertain which will be admitted without objection, and which will require a
hearing with Court as to admissibility.
Following admission of Plaintiffs’ exhibits, whether by stipulation, or ruling, Plaintiff
will be deemed to have rested its case in chief.
The parties hereby stipulate to the authenticity of the exhibits listed by both parties in
their respective Trial Briefs, obviating the need of testimony from the custodian of
records, but preserving all other objections.
At the conclusion of Plaintiffs’ case in chief, and upon receipt of the transcripts from
Plaintiffs’ witnesses by the Court and the parties, Defendants shall have three (3) weeks
to file any motion they wish to file, including but not limited to pursuant to Rule 52(c) of
the Federal Rules of Civil Procedure.
Plaintiffs shall have thirty (30) days to file any brief in opposition to motion(s) filed by
Defendants. Any reply by Defendants shall be filed fourteen (14) days after the filing of
Plaintiffs’ Brief in Opposition.
Should the Court wish to have arguments from counsel on any subjects raised in the
filings of the Parties, same will be set at the convenience of the Court and counsel.
In the event the Court concludes that evidence from the Defendant is required to decide
some or all of the issues in this matter, the Court will advise the parties as to those issues
for which it requests additional evidence, and a hearing will be set for Defendant s to
present its evidence.
The Court and the parties will, after Defendants have rested, establish a method and
timing for providing final arguments in a briefing schedule on any remaining issues.
For purposes of all trial testimony, the parties shall exchange all trial exhibits seven (7)
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calendar days before the commencement of Plaintiffs’ witnesses’ testimony.
Defendants’ Motion
Defendants contend they are entitled to judgment on Plaintiffs’ remaining claims.
Regarding Plaintiffs’ contract claims Defendants argue:
1) Plaintiffs’ breach of contract on the working capital adjustment agreement found in
Section 2.3 of the Asset Purchase Agreement is meritless because Plaintiffs have failed to
demonstrate by competent evidence that they complied with the prerequisites required under the
APA to arrive at a working capital adjustment. Plaintiffs have failed to demonstrate that
Defendants misrepresented the nature or quality of the Inventory in question. Plaintiffs have
failed to demonstrate they supplied an Inventory Roll-Back account within twenty days of
closing per the express terms of the contract. Plaintiffs were required under the APA to provide
an Inventory Acknowledgment within twenty days of closing. They did not. Plaintiffs were
further required under the APA to utilize the method used to prepare the Audited Financial
Statements. They did not. Also, Plaintiffs were required per the APA to comply “with the
Seller’s past practices, including giving effect to reasonable allowances for bad debt,
Inventory shrinkage and obsolescence, and reasonable reserves for customer returns,
allowances and Rebates.” (APA 2.3.2.2). Finally, Plaintiffs representatives did not know what
Defendants’ practices were so they clearly did not utilize them. Instead, they imposed their own
practices which were not authorized under the terms of the APA. Therefore, Plaintiffs failed to
comply with the required terms of the APA and Plaintiffs’ claim for a working capital
adjustment must fail.
Defendants further argue Plaintiffs cannot demonstrate they are entitled to damages
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arising from the alleged problems with the MacTurn machine. Upon purchase, Plaintiffs had no
in-house staff member who could diagnose or service it. Instead, Plaintiffs relied on an outside
service professional. Plaintiffs failed to obtain expert testimony to prove the MacTurn was not
in compliance with the representations and warranties made in the APA at Section 3.17.
Plaintiffs possessed the MacTurn for five months before it began to operate erratically. The
APA required that the MacTurn operate as warrantied at the time of possession. There is no
evidence that it did not operate as warrantied at that time.
The APA further warrantied that Defendants maintain the MacTurn according to
industry standards, yet Plaintiffs offer no evidence that Defendants’ maintenance fell below the
standard. Plaintiffs have offered no evidence of the industry standards nor have they offered
evidence that the MacTurn was maintained below that standard. Finally, the APA warrantied
that the MacTurn will be suitable for use in business as currently conducted, yet Plaintiffs offer
no testimony on what the MacTurn’s use was and have admitted they possess no knowledge of
how Defendants conducted business at the time of the sale. Thus, their claim on the MacTurn
fails.
Waiver
According to Defendants, under the express terms of the APA Section 11.5(c), the
parties agreed that their sole remedies were as follows:
The parties acknowledge and agree that their sole and exclusive remedy with
respect to any and all Claims (other than Claims arising from fraud,
criminal activity or willful misconduct on the part of a party hereto in
connection with the transactions contemplated by this Agreement) for any breach
of any representation, warranty, covenant, agreement or obligation set forth
herein or otherwise relating to the subject matter of this Agreement, shall
be pursuant to the indemnification provisions set forth in this Article XI.
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In furtherance of the foregoing, each party hereby waives, to the fullest extent
permitted under Law, any and all rights, Claims and causes of Action for any
breach of any representation, warranty, covenant, agreement or obligation set
forth herein or otherwise relating to the subject matter of this Agreement it
may have against the other parties hereto and their Affiliates and each of
their respective Representatives arising under or based upon any Law,
except pursuant to the indemnification provisions set forth in this Article XI.

Because Plaintiffs never sought indemnification, they have waived any breach of
contract claims.
Plaintiffs’ Opposition
Plaintiffs allege they paid $7.600,000.00 to purchase substantially all the assets of
Defendants’ business via the APA. At Section 3.17 of the APA, Defendants represented and
warrantied that those assets were in good working order and were sufficient to operate the
business as Defendants had in the past. Based on the testimony of three witnesses, Plaintiffs can
show Defendants’ representations and warranties were not accurate.
The first witness, Joe Molino, Chief Operating Officer and Chief Financial Officer of
Plaintiffs’ parent company, P & F Industries, Inc., testified that Plaintiffs relied heavily on the
representations and warranties in the APA when purchasing the business in order to operate the
business as it was operated before the purchase.
The second witness, Jim Aloi, Vice-President of Finance for Plaintiff Hy-Tech, testified
that the purchase of ATSCO was to get access to their customers. However, once operations
started with ATSCO-purchased equipment, it was difficult to get quality product from the
equipment, in particular the MacTurn. That machine was regularly unable to produce product
and was out of service for nearly four months. Aloi described the expenses incurred to fix the

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MacTurn and further testified that Plaintiffs ultimately had to purchase a new MacTurn for
$330,000 as the purchased machine was unreliable.
Plaintiffs’ third witness is Patrick Curry, Hy-Techs Operations Manager. In that
position, Curry was responsible for the day-to-day operation of Hy-Techs business including:
quality control, daily manufacturing, shipping and receiving and product development. Curry
testified that the MacTurn was purchased because it reduced certain steps in the manufacturing
process because it was both a lathe and milling machine. Yet, due to its problems, it failed to
consistently produce product for six to eight months.
Plaintiffs oppose Defendants’ argument that Plaintiffs failed to comply with the
prerequisite obligations under the APA arguing this exact issue was rejected by the Sixth Circuit
on appeal, which held that Defendants’ failure to raise these defenses in their Answer, Motion to
Dismiss or Summary Judgment resulted in waiver of these procedural challenges.
Even if they could still raise this issue, the evidence presented shows Defendants failed
to engage in any pre-suit resolution as required by the APA, thus further militating against
Defendants’ argument.
Defendants’ argument that Plaintiffs cannot show the equipment was defective or did not
conform to the representations and warranties made in the APA because they had it for five
months is a non-starter because the APA says the warranties remain for twelve months after the
closing date.
Per the APA, Plaintiffs assert they do not need to prove why the MacTurn did not work;
they merely need to prove that it did not work as represented in the APA. This they have done
with the depositions of Curry and Aloi.
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LAW AND ANALYSIS
Defendants move for judgment on partial findings pursuant to Fed. R. Civ. P. 52(c)
which reads:
(c) Judgment on Partial Findings. If a party has been fully heard on an issue
during a nonjury trial and the court finds against the party on that issue, the court
may enter judgment against the party on a claim or defense that, under the
controlling law, can be maintained or defeated only with a favorable finding on
that issue. The court may, however, decline to render any judgment until the
close of the evidence. A judgment on partial findings must be supported by
findings of fact and conclusions of law as required by Rule 52(a).
“In entering judgment under Rule 52(c), the court must set forth specific findings of fact that are
reviewed for clear error.” In re Mod. Plastics Corp., 732 F. App'x 379, 385 (6th Cir. 2018)
Sharp v. United States, 401 F.3d 440, 442 (6th Cir. 2005).
The parties agree that the only remaining claims are Plaintiffs’ claims for Breach of
Contract at Counts 6, 7, 8 and 9 of their Amended Complaint. These claims include the
Working Capital Adjustment, MacTurn Work issues and work performed elsewhere, MacTurn
Maintenance Costs and MacTurn replacement costs.
MacTurn Performance Issues
According to Plaintiffs, Defendants breached the Asset Purchase Agreement regarding
the warranties and representations of the MacTurn CNC machine. In deciding this issue the
Court begins with the warranties and representations made in the Asset Purchase Agreement.
Article III, Section 3.17 reads in pertinent part:
The Fixed Assets(I) are in good operating condition and repair, subject to normal
wear and tear, (ii) have been reasonably maintained consistent with standards
generally followed in the industry, (iii) are suitable for their present uses, and (iv)
are sufficient in nature, quality and quantity to permit Purchaser to conduct the
Business from and after the Closing as currently conducted.
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Plaintiffs assert that the MacTurn machine performed erratically when initially put into
service at Plaintiffs’ Cranberry, Pennsylvania location. Ultimately, Plaintiffs had to buy a new
machine due to the lack of dependable performance by the MacTurn purchased from
Defendants. Plaintiffs do not have an expert to opine on the source or cause of the mechanical
issues with the MacTurn.

Instead, Plaintiffs rely on the testimony of Jim Aloi, former vice-

president of finance for Plaintiffs who testified “I recall that [it was] very difficult to get quality
product off of one specific machine, an Okuma Macturn...that was a very difficult situation for
us, to get quality parts off of that particular machine” (Aloi depo. 15:15-23.). Aloi testified that
the MacTurn did not work for a four month period, was regularly offline and when it did work it
did not produce parts that complied with planned drawings. Aloi produced repair bills and
expenses associated with the failure of the MacTurn to perform as warrantied and ultimately
resulted in Plaintiffs having to purchase a replacement for the MacTurn costing $330,000.00.
Plaintiffs further offer the testimony of Patrick Curry, an engineer and operations
manager for Plaintiffs, responsible for the day-to-day manufacturing operation, quality control,
shipping and receiving. According to Curry, because the MacTurn was a multi-function CNC
machine capable of doing lather and milling work it was prized for its efficiency in that it
eliminated several steps in the manufacturing process. However, the MacTurn purchased from
Defendants had issues including a six to eight month period where it failed to provide consistent
production.
Defendants argue that the MacTurn problems did not surface until nearly five months
after the close of sale. Defendants further assert that Plaintiffs have failed to produce any expert
testimony as to the cause of the MacTurn problems and cannot say if the MacTurn problems
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were the result of damage in the transport of the machine from Mentor Ohio to Plaintffs’ facility
in Cranberry, Pennsylvania.
Plaintiffs counter that they do not need to show why the MacTurn failed to perform, only
that it failed to perform up to the warranties and representations in the Asset Purchase
Agreement. Moreover, it is inconsequential that the MacTurn problems first surfaced five
months after the close of sale because the Asset Purchase Agreement expressly states “The
representations and warranties contained in this Agreement shall survive the Closing for a
period of twelve (12) months...”
According to Curry, the MacTurn began experiencing performance issues “within a few
days to a week” of relocating the machine to Pennsylvania. (Curry depo. Pg. 22). He further
testified “from the time we had the machine, over the next six to eight months, we never really
had true production where the machine ran three or four or five months without any problems.”
Id at 22-23. Curry lists a number of problems with the MacTurn including the controller not
working, having to rebuild the main spindle and internal components failing. (Id at 22). Curry
then discussed a list of parts purchased to fix the problems with the MacTurn.
The Court agrees with Plaintiffs that they do not need an expert to testify on the cause of
the problems of the MacTurn. Fed. Rule of Evid. 701 reads, “If a witness is not testifying as an
expert, testimony in the form of an opinion is limited to one that is: (a) rationally based on the
witness's perception; (b) helpful to clearly understanding the witness's testimony or to
determining a fact in issue; and (c) not based on scientific, technical, or other specialized
knowledge within the scope of Rule 702.” “The function of lay opinion testimony is to
‘describ[e] something that the jurors could not otherwise experience for themselves by drawing
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upon the witness's sensory and experiential observations that were made as a first-hand witness
to a particular event.’” United States v. Kilpatrick, 798 F.3d 365, 379 (6th Cir. 2015)(quoting
United States v. Jayyousi, 657 F.3d 1085, 1120 (11th Cir.2011) (Barkett, J., concurring in part
and dissenting in part)); see also United States v. Garcia, 413 F.3d 201, 211 (2d Cir.2005)
(describing lay opinion testimony as an acceptable shorthand for the rendition of facts the
witness personally perceived).
Here, both Curry and Aloi testified to what they personally observed and experienced
with the MacTurn’s performance. Both testified it did not produce product with the quality or
quantity sufficient to perform the work required. This evidence is sufficient to show the
MacTurn did not perform as represented and warrantied in the APA that it was in “good
operating condition,” was “suitable for their present uses” and was “sufficient in nature, quality
and quantity to permit Purchaser to conduct the Business from and after the Closing as currently
conducted.” Because the APA further states these representations and warranties remain in
force until one year after the closing, Defendants’ argument that the MacTurn issues began after
five months is not dispositive of the issue.
Therefore, the Court finds Plaintiffs’ have offered competent evidence that the MacTurn
did not perform as represented, however, Defendants have not yet presented their case to the
Court. Consequently, the Court declines to issue a judgment in Defendants’ favor on the
MacTurn claims until it hears all the evidence in the case.
Working Capital Adjustment
Plaintiffs bought Defendants business for the purchase price of $7,658,540 dollars along
with the assumption of Assumed Payables.

Pursuant to Section 2.3 of the Asset Purchase
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Agreement the purchase price may be adjusted based on differences between the Closing Net
Working Capital Amount and the Base Net Working Capital Amount. According to
Defendants, Plaintiffs have failed to demonstrate they are entitled to any working capital
adjustment because Defendants did not inaccurately portray the inventory sold to Plaintiffs.
Furthermore, Plaintiffs failed to comply with the strict terms of the Asset Purchase Agreement
by providing an Inventory Roll-Bank count and Inventory Acknowledgment within twenty days
of the close of the APA. Plaintiffs also agreed to produce the Inventory Roll-Back utilizing a
method consistent with that used in performing the Audited Financial Statements. Defendants
allege the Audited Financial Statements at issue were those of Defendants, not Plaintiffs.
However, Plaintiffs not only failed to utilize such a method but in fact failed to even inquire
what method was used. Therefore, they cannot now prevail on such a flawed and contracontractual argument for a working capital adjustment.
Under Section 2.3, within twenty days of closing, Plaintiffs were to conduct a physical
inventory in accordance with Defendants’ past practices and the reasonable procedures of
Plaintiffs. These are not defined in the Agreement. Plaintiffs were then required to give
Defendants notice of the inventory and allow a representative of Defendants to attend. Again,
within twenty days of closing a roll-back of the inventory count was to be performed by
Plaintiffs in the same manner as used by Defendants to perform an audit of its financial
statements. Inventory Roll-back is not defined in the Agreement.
Upon completion, Plaintiffs were to deliver the Inventory Roll-Back statement to
Defendants and such statement was to be final unless formally disputed and arbitrated. No
arbitration was held.
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Defendants would then prepare a Closing Statement based on the Inventory Roll-Back
along with the books and records of Defendants at the time of the closing. Defendants would
provide Plaintiffs with a calculation of the difference between the sum of the net book value of
accounts plus the net book value of the inventory based on the roll-back. It would then subtract
the assumed payables plus customer deposits. This would then equal the Closing Net Working
Capital Amount. The parties were then to compare the Closing Net Working Capital Amount to
the Base Net Working Capital Amount which the Asset Purchase Agreement listed as $858,689.
If the Closing Net amount were greater than the Net Amount, Plaintiffs would pay the
difference. If less, Defendants would pay the difference.
According to Plaintiffs, they are entitled to $100,928 for the Working Capital
Adjustment. Plaintiffs Trial Brief asserts that witnesses Joe Molino, Patrick Crotty,1 Jim Aloi,
and Robert Ober will testify on this issue and that Exhibits PX-1-5, PX-13, and PX22-25
support their claim. However, Plaintiffs never filed any testimony with the Court as required by
their own stipulation. Instead, they simply provided the Court two thumb drives of testimony.
But their failure to comply with their own stipulation means anything not filed with the Court is
not part of the record. The only filings with the Court include the deposition testimony of Joe
Molino and Jim Aloi on this issue and that is all that will be considered by the Court.
According to Defendants, Plaintiffs have failed to demonstrate they are entitled to any
working capital adjustment because Defendants did not inaccurately portray the inventory sold
to Plaintiffs. Furthermore, Plaintiffs failed to comply with the strict terms of the Asset Purchase
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The Court believes this to have been a typographical error by Plaintiffs and that the
witness identified as Patrick Crotty is actually Patrick Curry whose trial deposition has been
docketed and will be considered by the Court.
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Agreement by providing an Inventory Roll-Bank count and Inventory Acknowledgment within
twenty days of the close of the agreement. Plaintiffs also agreed to produce the Inventory RollBack utilizing a method consistent with that used in performing the Audited Financial
Statements. Defendants allege the Audited Financial Statements at issue were those of
Defendants, not Plaintiffs. However, Plaintiffs not only failed to utilize such a method but in
fact, failed to even inquire what method was used. Therefore, they cannot now prevail on such a
flawed and contra-contractual argument for a working capital adjustment.
The Inventory Acknowledgment provided by Plaintiffs was submitted on October 14,
2014, more than thirty days after the time established by the APA. Defendants raised the issue
of failure to timely provide an Inventory Acknowledgment notice previously in this suit but the
Sixth Circuit found they had waived the defense by failing to assert it as an affirmative defense.
However, Defendants assert now that Plaintiffs failure to follow any of the procedures in
establishing a working capital adjustment entitles Defendants to judgment on the claim.
Plaintiffs contend that Defendants failed to participate in the pre-suit resolution
procedure set forth in the Asset Purchase Agreement at Section 2.3.3 specifically intended to
resolve any disputes arising from the Inventory Roll-Back and the Closing Statement. The Sixth
Circuit agreed that Defendants failure to abide by the dispute resolution procedure in the APA
demonstrated Defendants were not materially prejudiced by Plaintiffs failure to timely submit an
Inventory Acknowledgment. Section 2.3 set forth a specific agreed upon method for resolving
disputes and the Sixth Circuit noted that Defendants refused to arbitrate these disputes as they
were contractually obligated to do. Now, Defendants claim that Plaintiffs failure to comply with
the time requirements and failure to apply Defendants’ accounting methodologies warrants
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judgment in their favor. The Court disagrees. The APA does not foreclose a working capital
adjustment based on a failure to timely submit an Inventory Roll-Back and Closing Statement,
nor is it foreclosed for failure to apply Defendants’ methodologies. Instead, the parties had
agreed to, but failed to abide by their own dispute resolution procedure to address issues such as
these. Because the Court finds Defendants failed to abide by its own agreed upon dispute
resolution they cannot show material prejudice for Plaintiffs failure to timely file the Inventory
Roll-Back and Closing Statement. Moreover, Defendants argument that Plaintiffs failed to
apply the correct methodology for determining a working capital adjustment is an evidentiary
issue on the correct amount of the working capital adjustment and not a defense to the
entitlement of the same. Therefore, the Court must consider the evidence regarding entitlement
to and calculation of the working capital adjustment. Since Defendants have yet to put on their
case or present their evidence and in light of the testimony of Plaintiffs’ principals and exhibits
offered therein, the Court finds it needs to consider all the evidence in order to render judgment
on the working capital adjustment claim. Therefore, the Court holds that Defendants are not
entitled to judgment on Plaintiffs’ claims for a working capital adjustment.
Finally, insofar as Defendants allege Plaintiffs waived their rights under the APA at
Section 11.5 to bring suit on any claims brought for breach of the APA, the Sixth Circuit held
Defendants waived any such challenge by failing to assert it as an affirmative defense.
Moreover, Defendants failure to arbitrate the disputes results in the parties leaving the
determination to the Court.
Because the Court requires additional evidence on the remaining claims, the Court
denies Defendants’ Motion under Rule 52(c).
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IT IS SO ORDERED.
/s/Christopher A. Boyko
CHRISTOPHER A. BOYKO
Senior United States District Judge

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