Davis v. PMA Companies Inc et al

Filing 124

ORDER moot 56 Plaintiff's Motion for Partial Summary Judgment; granting 57 Defendant's Motion for Summary Judgment; all remaining pending mtns are stricken as moot.. Signed by Honorable Robin J. Cauthron on 3/7/13. (lg)

IN THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF OKLAHOMA
J. MARK DAVIS,
Plaintiff,
vs.
PMA COMPANIES, INC.,

Defendant.

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Case No. CIV-11-359-C

MEMORANDUM OPINION AND ORDER
Now before the Court is Defendant’s Motion for Summary Judgment (Dkt. No. 57).
For reasons for fully set forth herein, the Court now GRANTS Defendants’ Motion IN
FULL.
I. BACKGROUND
In 2007, Defendant PMA Companies, Inc. (“PMA”) entered into a Stock Purchase
Agreement (“SPA”) with Charles C. Caldwell, Thomas G. Hamill, Colin D. O’Connor, and
J. Mark Davis (collectively, “the Sellers”). Through the SPA, PMA purchased from the
Sellers all of the shares of Midlands Holding Company, the sole owner of Midlands
Management Corporation (“MMC”). Although the Sellers received an initial cash payment
for their shares, the SPA provided an opportunity to earn additional payments, conditioned
on MMC’s performance over the next several years. If MMC met the Adjusted Earnings
Before Interest earned, Taxes, Depreciation, and Amortization (“EBITDA”)1 targets set forth

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Under the SPA, “Adjusted EBITDA” “means MMC’s audited consolidated earnings
before taking into account any interest expense, income taxes, depreciation, and amortization for

in § 2.4(c)-(e) of the SPA, the Sellers had the opportunity to receive Earn-Out Payments, an
Aggregate Look-Back Payment, and a Cumulative Incentive Payment. Under the SPA, PMA
covenanted to “cause MMC to continue to operate in a manner consistent with its past
practice, policies and operations prior to the Closing Date” and “exercise its business
judgment in a manner that is consistent with MMC and Sellers’ efforts to achieve the
Adjusted EBITDA that is required for Sellers to receive the Earn-Out Payments, the
Aggregate Look-Back Payment and the Cumulative Incentive Payment.” (Def.’s Br., Dkt.
No. 57, Ex. 1 at 34, 35.)
Prior to the SPA, Plaintiff Davis served as Executive Vice President of MMC. In
connection with PMA’s stock purchase, MMC entered into a new, amended Employment
Agreement with Davis whereby MMC agreed to employ Davis as Executive Vice President
from October 1, 2007, until September 30, 2011. However, on December 12, 2010, Davis
resigned for “Good Reason,” citing conduct constituting a material change in his duty,
authorities, or responsibilities and a material breach by MMC of its obligations under the
Employment Agreement. In the event of a resignation for good reason, the Employment
Agreement required MMC to pay Davis a severance package if Davis signed and did not
revoke a valid general mutual release agreement. Davis did not execute the required release
and MMC has not made any severance payments to Davis.

the applicable period.” (Def.’s Br., Dkt. No. 57, Ex. 1 at 4.)
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Davis filed the present suit on April 1, 2011, alleging that (1) PMA breached the SPA
by (a) failing to exercise its business judgment in a manner consistent with Davis’s efforts
to achieve the conditional bonus payments and (b) operating MMC in a manner inconsistent
with its past practices, policies, and operations; (2) PMA intentionally interfered with the
Employment Agreement between Davis and MMC; (3) PMA breached the duty of good faith
by acting to prevent Davis from achieving the additional payments; and (4) constructively
discharged Davis by controlling MMC and creating intolerable employment conditions.2
Defendant has moved for summary judgment on all four of Plaintiff’s causes of action.
II. LEGAL STANDARD
Summary judgment is proper if the moving party “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). A fact is material if it affects the disposition of the substantive claim.
Anderson v. Liberty Lobby, Inc., 477 U.S. 242 (1986). The party seeking summary
judgment bears the initial burden of demonstrating the basis for its motion, and identifying
those portions of “‘the pleadings, depositions, answers to interrogatories, and admissions on
file, together with the affidavits, if any,’” that demonstrate the absence of a genuine issue of
material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986) (citation omitted). If the
movant satisfactorily demonstrates an absence of genuine issue of material fact with respect

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Davis’s Complaint also contained two other counts, brought against MMC only.
However, the Court dismissed MMC as a non-diverse, dispensable party upon Plaintiff’s request.
(Order of July 22, 2011, Dkt. No. 25.)
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to a dispositive issue for which the non-moving party will bear the burden of proof at trial,
the non-movant must then “go beyond the pleadings and by her own affidavits, or by the
‘depositions, answers to interrogatories, and admissions on file,’ designate ‘specific facts
showing that there is a genuine issue for trial.’” Id. at 324. A court considering a summary
judgment motion must view the evidence and draw all reasonable inferences therefrom in the
light most favorable to the nonmoving party. Kendrick v. Penske Transp. Servs., Inc., 220
F.3d 1220, 1225 (10th Cir. 2000).
III. DISCUSSION
A. Count I: PMA’s Breach of the Stock Purchase Agreement
Davis’s breach of contract claim alleges that PMA breached §§ 7.5(a)(i) and (iii) of
the SPA. PMA argues that regardless of whether its actions constituted a breach, summary
judgment is appropriate because Davis did not follow the proper notice procedure before
bringing suit, meaning he has not established an express condition precedent. Additionally,
PMA asserts that Oklahoma does not recognize “tortious breach” under the circumstances
of this case.
1. Section 7.5 Notice
Section 2.5 of the SPA provides a remedy in the event that PMA commits a material
breach of § 7.5(a)(i) or (iii) and that breach “is not cured or resolved by the procedures set
forth in such Section.” (Def.’s Br., Ex. 1 at 14.) The procedure necessary to trigger § 2.5’s
remedy is found in § 7.5(b). (Id. at 35.) Under § 7.5(b), the “Sellers shall give [PMA]
written notice of any respect in which the Sellers believe that any change made by [PMA]
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constitutes a material breach of its obligations set forth in this Section 7.5.” (Id.) Among
other requirements, the Section 7.5 Notice must “be given promptly and in any event within
ten (10) days following the date that the Sellers shall have Knowledge that such change has
been made or the date upon which the Sellers have been advised by [PMA’s] chief executive
officer that such change will be made.” (Id.) Although PMA acknowledges that Davis sent
it a purported Section 7.5 Notice on November 12, 2010, PMA contends that notice was
deficient in two respects: (1) it was not from “Sellers,” collectively, and (2) it was not
timely.
Section 7.5(b) directs the “Sellers” to give PMA proper notice, not an individual
Seller. The SPA defines and distinguishes between “Sellers” and a “Seller” in its very first
paragraph:
THIS STOCK PURCHASE AGREEMENT is made as of the 1st day of
October, 2007, by and among PMA CAPITAL CORPORATION, a
Pennsylvania corporation (the “Buyer”), CHARLES C. CALDWELL
(“Caldwell”), THOMAS G. HAMILL (“Hamill”), COLIN D O’CONNOR
(“O’Connor”) and J. MARK DAVIS (“Davis”) (collectively the “Sellers,” and,
individually, a “Seller”) and Midlands Holding Corporation, an Oklahoma
corporation, solely for the purpose of Section 2.7.
(Def.’s Br., Ex. 1 at 1 (emphasis added).) Thus, under the SPA, Davis alone is a “Seller,”
whereas Davis, Hamill, Caldwell, and O’Connor together comprise the “Sellers.” Because
only Davis sent the Section 7.5 Notice, Defendants contend it did not come from Sellers, as
required by § 7.5(b).
In response, Davis argues that § 7.5(b) does not require collective notice, relying on
a constructive provision in § 1.1. Section § 1.1(c) provides that “[d]efinitions shall be
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equally applicable to both the singular and plural forms of the terms defined, and references
to the masculine, feminine or neutral gender shall include each other gender.” However, “it
is well established under the generally applicable rules governing contract interpretation that
specific provisions . . . take precedence over more general provisions.” Cogswell v. Merrill
Lynch, Pierce, Fenner & Smith Inc., 78 F.3d 474, 480 (10th Cir. 1996) (citing Mutual Life
Ins. Co. v. Hill, 193 U.S. 551, 558 (1904)). The express language distinguishing between
Seller and Sellers takes precedence over a general canon of construction.
Moreover, the collective nature of § 2.5’s remedy clarifies why § 7.5(b) requires
notice from all the Sellers, collectively. Section 2.5, once triggered, requires PMA to “pay
[all] Sellers in cash the sum of the maximum amount of the Earn-Out Payments and the
Cumulative Incentive Payment that could have been earned.” (Def.’s Br., Ex. 1 at 15.) In
contrast, the individual remedy provided by § 8.3 requires only individual action. Under
§ 8.3, PMA will “indemnify each Seller” for “any and all Losses arising from or related
to . . . any material breach, non-fulfillment or violation of any covenant or agreement made
by [PMA] in [the SPA].” (Id., Ex. 1 at 37.) To seek individual indemnification, § 8.7
requires only individual notice from the party claiming a loss.
Davis makes one final argument against PMA’s assertion that he did not comply with
§ 7.5(b), claiming that even if § 7.5(b) required collective notice, a subsequent email from
another Seller remedied the problem, bringing the Sellers into substantial compliance. On
December 17, 2010, Thomas Hamill sent an email stating, “‘I want to preserve whatever
rights we Sellers may have.’” (Pl.’s Resp., Dkt. No. 63, at 12 & Ex. 8.) However, Hamill’s
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December email is not sufficient to satisfy § 7.5(b)’s condition precedent of adequate notice:
it was not from all the Sellers, it did not describe with particularity a material breach, nor did
it ask PMA to take any particular action. Thus, there was no substantial compliance.
Because the Sellers collectively did not give adequate notice under § 7.5(b), § 2.5’s remedy
is not applicable.3
2. Exclusivity
Davis argues that regardless of whether he complied with § 7.5(b), summary judgment
on his breach of contract claim is inappropriate because § 2.5’s remedy is not exclusive. It
is true that § 2.5 is not the only remedy available to Davis. Section 8.3 also provides a
remedy—indemnification. However, Davis has not sought indemnification under § 8.3 or
followed § 8.7’s corresponding claim procedure. Moreover, § 8.11, entitled “Exclusive
Remedy,” states that “[e]xcept for Sellers’ rights under Section 2.5, the rights to
indemnification provided for in this Section 8 shall constitute the exclusive remedy
of . . . Sellers . . . with respect to matters in any way relating to this Agreement or arising in
connection herewith, whether under any laws, at common law or otherwise.” (Def.’s Br., Ex.
1 at 39 (emphasis added).) Section 8.11 clearly establishes that disgruntled Sellers like Davis
have two remedies in the event of a material breach: § 2.5’s collective remedy or § 8.3’s
individual indemnification.

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PMA also argues that Davis’s Section 7.5 Notice was untimely. However, because the
Court agrees that § 7.5 required collective notice, it need not address whether the faulty notice
was timely.
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3. Tortious Breach of Contract
In his Complaint, Davis alleged not only that PMA breached the SPA, but that it
“tortiously breached the Stock Agreement.” However, “tort claims for a contemporaneous
breach of contract are generally not permitted under Oklahoma law.” KT Specialty
Distribution, LLC v. Xlibris Corp., Case No. 08-CV-0249-CVE-SAJ, 2008 WL 4279620, at
*3 (N.D. Okla. Sept. 11, 2008). Oklahoma courts recognize tortious breach of contract only
in limited circumstances, such as in the context of certain special relationships. See Rodgers
v. Tecumseh Bank, 1988 OK 36, 756 P.2d 1223, 1225-27 (declining to extend tortious breach
of contract cause of action recognized in Christian v. Am. Home Assurance Co., 1977 OK
141, 577 P.2d 899; distinguishing insurance contracts as adhesion contracts, made for the
purpose of eliminating risk, and involving a special relationship). Because the SPA, like the
contract in Rodgers, is the product of an arms-length transaction and there is no special
relationship between PMA and Davis, PMA cannot be liable for tortious breach of contract.

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B. Count II: PMA’s Interference with the Employment Agreement
Count II of Davis’s Complaint asserts that “PMA intentionally interfered with the
Employment Agreement by improperly and unfairly circumventing Davis’ authority,
purposely ensuring Davis could not fully perform his duties under the Employment
Agreement.” (Compl., Dkt. No. 1, at 7, ¶ 31.) Under Oklahoma law, to establish a claim of
tortious interference with a contractual or business relationship, a plaintiff must prove:
“(1) the interference was with an existing contractual or business right; (2) such interference
was malicious and wrongful; (3) the interference was neither justified, privileged nor
excusable; and (4) the interference proximately caused damage.” Wilspec Techs., Inc. V.
DunAn Holding Grp., Co., Ltd., 2009 OK 12, ¶ 15, 204 P.3d 69, 74. Especially pertinent to
this case, “the claim is viable only if the interferor is not a party to the contract or business
relationship.” Id.
The Oklahoma Supreme Court has not answered whether a parent corporation is party
to the contracts or business relationships of its subsidiaries. However, the Oklahoma Court
of Civil Appeals recently addressed that question in Hawk Enterprises, Inc. v. Cash America
International, Inc., 2012 OK CIV APP 66, 282 P.3d 786. In Hawk, the court held that there
was no per se rule preventing parent corporations from being held liable for tortious
interference with the contracts of their subsidiaries. Id. ¶ 19, 292 P.3d at 794. Rather, courts
must determine whether a particular parent can be liable “on a case by case basis, analyzing
the factors provided in the Restatement [(Second) of Torts § 767].” Id.

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Focusing on the last of § 767’s seven factors, the relationship between the parties, the
Hawk court reversed summary judgment and remanded the case for additional proceedings.
In analyzing whether the parent-defendant was a stranger to the contract between its
subsidiary and the plaintiff, the court looked both at the nature of the underlying
agreement—a franchise contract between the plaintiff and the subsidiary, for which the
parent had signed a guaranty—and the relationship of the parent and subsidiary.
Emphasizing that “the exact relationship between [the subsidiary] and the [parent-defendant]
[was] not fully developed in this record,” meaning it was unclear whether the parent wholly
or only partially owned the subsidiary and the extent of the decision-making authority and
control of the parent over the subsidiary, the court directed the parties to address those
“material” issues on remand. Id. ¶¶ 20-22, 292 P.3d at 795.
Unlike in Hawk, the relationship between the parties in this case is clear. Not only
does PMA wholly own MMC, the SPA expressly gave PMA control over MMC by granting
PMA three of the five positions on MMC’s Board of Directors. Moreover, the contracts
involved in this matter are different than those at issue in Hawk. PMA is not just a guarantor
of one party’s obligations to another agreement. In contrast, the Employment Agreement
between MMC and Davis came about as a result of the SPA between PMA and Davis. Given
the nature of the contracts and PMA’s control over MMC, PMA is a party to the Employment

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Agreement. Thus, since the alleged interferor—PMA—is not a stranger or third-party, Davis
cannot maintain a cause of action for tortious interference.4
C. Count III: PMA’s Breach of the Duty of Good Faith
Davis’s third cause of action alleges he “has been damaged by PMA’s breach of its
duty of good faith under the [SPA].” (Compl. at 7, ¶ 37.) Oklahoma recognizes the
“obligation to exercise good faith and fair dealing.” First Nat’l Bank & Trust Co. of Vinita
v. Kissee, 1993 OK 96, ¶ 24, 859 P.2d 502, 509. However, generally, “a breach of the
implied covenant of good faith and fair dealing merely results in a breach of contract,” not
an independent tort. Id. Only in special circumstances has the Oklahoma Supreme Court
recognized a claim for tortious breach of contract based on the implied duty of good faith.
See, e.g., Rodgers, 1988 OK 36, 756 P.2d at 1225-27 (refusing to extend duty to commercial
loan contracts); RJB Gas Pipeline Co. v. Colo. Interstate Gas Co., 1989 OK CIV APP 100,
¶ 58, 813 P.2d 1, 11 (declining to extend duty to private take-or-pay gas purchase contracts).
For example, in Rodgers, the Oklahoma Supreme Court refused to extend the implied
duty of good faith and fair dealing—recognized in the context of insurance agreements—to
commercial loan contracts “because of the inherent differences between insurance policies
and commercial loan agreements.” Rodgers, 1988 OK 36, ¶ 13, 756 P.2d at 1227. Unlike
other contracts, insurance policies are adhesion contracts that involve a special relationship
and are entered into for the purpose of eliminating risk. Id. at 1226-27. Thus, the court held,

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The Court does not find it necessary to address PMA’s alternative argument that Davis
cannot establish an interference with a contractual right.
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“[w]here, as here, there is no special relationship, parties should be free to contract for any
lawful purpose and upon such terms as they believe to be in their mutual interest. To impose
tort liability . . . for every breach of contract would only serve to chill commercial
transactions.” Accordingly, only when the facts indicate “[g]ross recklessness or wanton
negligence” might a remedy in tort be available. Id., 1988 OK 36, 756 P.2d at 1226, ¶ 16.
Davis relies on Beshara v. Southern National Bank, 1996 OK 90, 928 P.2d 280, for
an example of a case in which the Oklahoma Supreme Court recognized a bad faith tort in
the context of a commercial contract. In Beshara, the plaintiff alleged that his bank withheld
the funds in his account in an intentional and malicious manner, and in reckless and wanton
disregard for his rights as a customer. 1996 OK 90, 928 P.2d at 288. Viewing all inferences
in the plaintiff’s favor, the court reversed summary judgment in favor of the defendant and
held that the plaintiff “should have been allowed the opportunity to proceed on his
allegations for tortious breach of the duty of good faith and fair dealing.” Id. at 1996 OK
90, ¶ 28, 928 P.2d at 288. However, this case is more reminiscent of RJB Gas Pipeline,
where “[t]he parties’ relationship was founded on contracts agreed to at arms length between
the parties, both of which are experienced in their fields.” 1989 OK CIV APP 100, ¶ 59, 813
P.2d at 12. PMA’s actions did not amount to gross negligence or reckless disregard of
Davis’s rights under the SPA.

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D. Count VI: PMA’s Wrongful Termination/Constructive Discharge
Finally, Davis contends that PMA, acting through MMC, forced him to resign by
making his working conditions intolerable. When an employer “intentionally ma[kes] or
allow[s] the employee’s working conditions to become so intolerable that a reasonable
person in the employee’s situation would feel that [he] had no choice but to quit,” the
employer can be held liable for “constructive discharge.” OUJI CIV 21.8. Here, Davis
claims that he had to give MMC notice of material breach of the Employment Agreement
because of PMA’s actions. Section 6(f)(iv) of the Employment Agreement permitted Davis
to resign for “Good Reason” if MMC committed a material breach of any of its obligations
to Davis under the Employment Agreement. (Def.’s Br., Ex. 4 at 4.) Resigning for good
reason under § 6(f) entitled Davis to the generous severance package described in § 7(b).
However, in order to trigger MMC’s obligation to pay severance compensation, David had
to first sign a valid general mutual release, as required by § 7(b)(iv) of the Employment
Agreement.

Davis argues that he should receive compensation for his resignation

notwithstanding § 7(b)(iv)’s release requirement because MMC’s breach of the Employment
Agreement relieved Davis from complying with any of its provisions. This logic ignores the
fact that Davis agreed to all of the provisions in the Employment Agreement, including the
requirement that he sign a release to obtain severance compensation in the event of a
voluntary resignation for “Good Reason,” or a resignation resulting from MMC’s material
breach.

Therefore, summary judgment on Davis’s constructive discharge claim is

appropriate.
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IV. CONCLUSION
Accordingly, the Court hereby GRANTS IN FULL Defendant’s Motion for Summary
Judgment (Dkt. No. 57). Judgment will be entered in favor of Defendant PMA Companies,
Inc. Plaintiff’s Motion for Partial Summary Judgment (Dkt. No. 56) is thus MOOT. All
remaining pending motions are stricken as moot.
IT IS SO ORDERED this 7th day of March, 2013.

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