Pacific Cycle, Inc. v. PowerGroup International, LLC et al
Filing
131
ORDER that plaintiff Pacific Cycle, Inc.'s claim of alter ego liability against Michael Tomberlin is dismissed with prejudice, and this case is closed pending further action of the Georgia bankruptcy court. Signed by District Judge William M. Conley on 11/6/13. (rep)
IN THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF WISCONSIN
PACIFIC CYCLE, INC.,
Plaintiff,
OPINION & ORDER
v.
12-cv-529-wmc
POWERGROUP INTERNATIONAL, LLC,
(a/k/a POWERGROUP INTERNATIONAL, INC.),
TOMBERLING AUTOMATIVE GROUP, INC.
and MICHAEL TOMBERLIN,
Defendants.
On October 28, 2013, a trial was held to address a remaining issue still before this
court: whether, under the equitable doctrine of alter ego, defendant Michael Tomberlin
should be held jointly and severally liable for contractual damages arising from defendant
PowerGroup International, LLC‟s breach of its licensing agreement with plaintiff Pacific
Cycle, Inc.1 Tomberlin and Pacific Cycle both appeared by counsel. After hearing opening
statements and Pacific Cycle‟s case-in-chief, including its adverse examination of Mr.
Tomberlin, the court granted Tomberlin‟s motion for a directed verdict. As contemplated at
the time, this opinion and order memorializes and supplements the findings and reasons for
the court‟s ruling previously stated on the record.
One more claim in plaintiff‟s complaint remains unaddressed: whether, under the same
and related equitable doctrines, co-defendant Tomberlin Automotive Group, Inc. (“TAG”)
should be held jointly and severally liable for PowerGroup‟s breach. Proceedings on that
claim have been stayed as a result of TAG‟s recent bankruptcy filing.
1
FINDINGS OF FACT
A. The Parties and Related Entities
1. Plaintiff Pacific Cycle, Inc. is a Delaware corporation with its principal place of
business in Madison, Wisconsin.
2. Between 2005 and 2009, Pacific Cycle operated a Schwinn Motor Sports Division to
sell Schwinn-brand motor scooters.
3. Defendant PowerGroup International, LLC is a Georgia limited liability company
formed in May 2002. Its business was manufacturing and selling gas-powered ATVs
and scooters through a dealer direct network.
4. Ameritech Industries, LLC, is a Georgia limited liability company that is the sole
member and owner of PowerGroup.
5. Defendant Michael Tomberlin is an adult citizen and resident of the State of
Georgia. He is the president and CEO of PowerGroup and the sole member and
owner of Ameritech Industries, LLC.
6. Defendant Tomberlin Automotive Group, Inc. (“TAG”) is a corporation that was
organized in Georgia in 2006.
Its primary business is to manufacture and sell
through a dealer network specialty off-road vehicles that run on electricity. Michael
Tomberlin is the majority owner of TAG, holding approximately 80% of the interest,
and is its chief executive officer. Two independent individuals apparently own and
control the other 20%.
7. Asian Ventures, LLC was a Georgia limited liability company of which Michael
Tomberlin was the sole member.
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8. Unless formally merged, Michael Tomberlin and his companies generally maintained
the technical, legal and accounting formalities one would expect for distinct legal
entities.
9. Pursuant to 28 U.S.C. § 1332, this court has diversity jurisdiction over this matter
based on complete diversity between the plaintiff and defendants, as well as an
amount in controversy exceeding $1.5 million.
B. The License Agreement
10. In late April 2009, Pacific Cycle entered into a License Agreement with defendant
PowerGroup. The agreement incorrectly identified the licensee, PowerGroup, as an
incorporated entity rather than as a limited liability company.
The correct
designation of the licensee is PowerGroup International, LLC.
PowerGroup
International, Inc., did not and does not exist, but this was by mutual mistake and is
ultimately immaterial to the issues in controversy.
11. In Exhibit G to the License Agreement, Michael Tomberlin also indicated that he
was the 100% owner of the licensee. Technically, this, too, was incorrect: Ameritech
Industries is the 100% owner of PowerGroup. Because Tomberlin was and is the
100% owner of Ameritech Industries, he was for all practical purposes also the 100%
owner of PowerGroup.
12. The License Agreement granted PowerGroup the right to sell Schwinn-branded
motorized scooters in exchange for a 10% royalty, certain minimum payments, and
undertaking continuous manufacturing sourcing, marketing, distribution and warranty
service.
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13. While there were no minimum sales or royalty obligations for 2009 or 2010,
PowerGroup had minimum sales requirements and owed a minimum royalty of
$300,000 beginning in 2011 (Contract Year 3). These minimums were established based
on expected sales performance by PowerGroup, projected sales and robust assumptions
about the quality of both parties‟ distribution networks, all of which proved unrealistic in
light of a drastic collapse of the market for Schwinn (and indeed all) motorized scooters,
as well as the growth in warranty service obligations undertaken by PowerGroup and its
dealers on Schwinn scooters already in circulation.
Under the Agreement, these
minimums were to increase modestly each year of the license through its initial term,
which ended in 2014.
14. The License Agreement also provided that PowerGroup would provide warranty service
to the Schwinn scooters that Pacific Cycle had sold prior to the agreement, for which
PowerGroup would be reimbursed by Pacific Cycle.
15. In entering into the License Agreement with PowerGroup, Pacific Cycle relied
almost exclusively on the fact that Tomberlin and TAG had expertise and success in
the manufacturing, marketing and sales of motorized ATV and scooter markets. As a
result, Pacific Cycle made no effort to determine whether PowerGroup was
adequately capitalized, sufficiently staffed or otherwise capable of performing under
the License Agreement.
16. Similarly, Pacific Cycle neither sought nor obtained a personal guarantee from
Michael Tomberlin for any unfulfilled obligations undertaken by PowerGroup in the
License Agreement.
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17. Pacific Cycle also declined to perform even basic credit checks or seek credit
information from PowerGroup, TAG or Michael Tomberlin before executing the
Agreement.
18. Although Section 8.2 of the License Agreement gave Pacific Cycle the unlimited
right, on 10 days‟ notice, to inspect PowerGroup‟s books and records, it also did not
avail itself of this right at any time.
19. The License Agreement contains a broad non-assignment clause that prevents
PowerGroup from assigning or delegating any of its rights or responsibilities under
the agreement. Paragraph 9.1(a) provides:
LICENSEE acknowledges that this agreement and the rights
granted herein are personal to the LICENSEE and, without the
prior written consent of LICENSOR, may not be assigned,
sublicensed, pledged, encumbered or otherwise affected, nor may
any of LICENSEE‟s duties be delegated. Any attempted
assignment, sublicense, transfer or encumbrance shall be void
and shall constitute an incurable breach of this Agreement,
entitling, but not obligating LICENSOR to terminate this
Agreement in accordance with the provisions of Paragraph 10.2.
C. PowerGroup’s Difficulties In Performing Under the Agreement
20. Given the massive, global economic downturn in 2009 and 2010, the sales that
Pacific Cycle, Michael Tomberlin and PowerGroup had projected would cover
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PowerGroup‟s payment obligations under the License Agreement never materialized.
The lack of revenue from sales caused PowerGroup to suffer substantial financial
losses.
21. Between February and July of 2010, Tomberlin repeatedly raised concerns to Pacific
Cycle that, despite claiming to have invested approximately $1 million in the
venture, he no longer expected to be able to meet the annual, mandatory minimum
payments coming due beginning in 2011 under the License Agreement.
22. On March 22, 2010, Tomberlin advised Pacific Cycle‟s president, Alice Tillett, by email that “we will pay the [10%] royalties [due on actual sales] but not the
minimums under our agreement.” Pacific Cycle agreed to consider a modification of
the minimum royalty, but refused to eliminate the guaranteed minimum royalty
requirement altogether for fear of eliminating any incentive for PowerGroup to
continue efforts to sell Schwinn-branded scooters over which it still enjoyed an
exclusive license.
23. On August 11, 2010, Tillett sent Tomberlin a formal memorandum offering to
amend the Agreement to reduce PowerGroup‟s annual guaranteed minimum royalties
drastically (essentially seeking only a guarantee of the 10% royalty due under the
License Agreement), based on a roughly 90% reduction in the originally-projected
sales for each remaining year as the bench mark.
24. Although Pacific Cycle never withdrew this offer for the remainder of 2010 or at
any time during the year 2011, neither did PowerGroup ever accept or otherwise
respond to the proposal. This was because Tomberlin wanted PowerGroup to be
freed from any minimum payment obligation given the severity of the market
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downturn and PowerGroup‟s growing warranty obligations.
Thus, the License
Agreement was never formally amended to reflect any reduced minimums.
25. During 2009 and 2010, Asian Ventures, Inc. had an agreement to provide
PowerGroup, TAG and Tomberlin‟s corporate entities with management, legal,
accounting and other services for an established fee for shared services.
D. Merger and Management Agreement
26. On January 1, 2011, Asian Ventures merged with PowerGroup, LLC, with
PowerGroup becoming the surviving entity. This formal merger was accomplished
with the assistance of outside legal counsel, but without notice to Pacific Cycle.
27. The next day, on January 2, 2011, Michael Tomberlin personally prepared a
Management Agreement, pursuant to which TAG would take over PowerGroup‟s
day-to-day operations, including the sale and distribution of Schwinn motor scooters.
This Agreement was neither reviewed by counsel nor disclosed to Pacific Cycle.
28. Michael Tomberlin executed the Management Agreement on behalf of both
PowerGroup and TAG.
29. As part of the Management Agreement, all of PowerGroup‟s assets and most of its
liabilities were also transferred to TAG.
(Plaintiff's Ex. 57) All that remained in
PowerGroup was an inter-company debt to TAG in the amount of approximately
$1.3 million and, of course, its obligations to Pacific Cycle under the License
Agreement, which TAG had now agreed to fulfill.
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30. At the time of transfer, PowerGroup was more than a million dollars in debt and
facing hemorrhagic losses. Plus, virtually all of the tangible assets of PowerGroup
secured debt to its primary lender, including its cash and cash equivalents and
accounts receivable.
31. Like the merger of Asian Ventures with PowerGroup and the Management
Agreement between PowerGroup and TAG, the transfer of assets and liabilities from
PowerGroup to TAG were not disclosed to Pacific Cycle.
32. Under the Management Agreement, TAG also agreed to pay PowerGroup “a
royalty/fee of 7% for all dealer parts and Schwinn scooter sales,” with such payments
to be “paid monthly or quarterly at the discretion of TAG for the prior month or
quarter sales.”
33. Although there was a dispute as to whether TAG‟s payment of 7% of the sale price
of product due to PowerGroup under the Management Agreement would cover
PowerGroup‟s obligation to pay 10% of the wholesale cost of the same product to
Pacific Cycle due under the License Agreement, it appears from general testimony at
trial regarding dealer markups that this was likely the case (or at least that plaintiff
had no proof to the contrary). At the same time, TAG‟s obligation to pay extended
only to its actual sales and in no way obligated TAG to cover any minimum payment
obligation PowerGroup had to Pacific Cycle.
34. The Asian Ventures merger and the Management Agreement constituted “incurable
breaches” of the non-assignment provision in paragraph 9.1(b) of the License Agreement
between Pacific Cycle and PowerGroup.
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35. After Tomberlin‟s execution of the Management Agreement, PowerGroup‟s business
was operated entirely out of TAG. Schwinn motor scooters were sold by TAG and
appeared on TAG‟s books.
36. Pacific Cycle was unaware of the merger, Management Agreement and the transfer
of assets until they were discovered in the course of this litigation.
E. Termination of License Agreement
37. TAG sold approximately $720,000 in Schwinn scooters in 2011.
38. TAG‟s financial records reflect royalty payments to PowerGroup only in January,
February and March of 2011, totaling $34,658.
39. Between April and December of 2011, TAG sold more than $380,000 in Schwinn
motor scooters. TAG paid no royalty to PowerGroup for these sales.
40. In late 2011 and early 2012, Pacific Cycle‟s licensing manager, Danna Dueck,
began to press PowerGroup for overdue payments and royalty reports.
41. On January 24, 2012, Tomberlin sent an email to Dueck, stating that he regarded
PowerGroup‟s “Schwinn decision” to be an “error” and asked her to “suggest the best
path to execute this separation.”
42. On February 1, 2012, Pacific Cycle sent PowerGroup a “Notice of Breach”; on April
9, 2012, counsel for Pacific Cycle sent PowerGroup a “Notice of Termination” of the
License Agreement. Pacific Cycle received no response to either notice.
43. On December 20, 2012, Michael Tomberlin, again signing for both companies,
entered into a one-page document titled “Settlement of Tomberlin Automotive
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Group, Inc. vs. PowerGroup International LLC,” which purported “to exercise their
right to immediately terminate their Management Agreement without recourse” by
either party for damages.
44. PowerGroup breached the license agreement by: failing to submit royalty reports
for the third or fourth quarters of 2011; failing to pay any earned royalty for that
time period; and failing to pay the mandatory minimum royalty for 2011.
45. PowerGroup is now liable to Pacific Cycle for $1.56 million, which is the sum of the
minimum royalties owed by PowerGroup under the terms of the License Agreement,
plus interest at a rate of 12 percent per annum, and Pacific Cycle‟s attorneys‟ fees.
46. Ultimately, Michael Tomberlin received no tangible financial benefit from
PowerGroup‟s entering into or his efforts to operate PowerGroup and later TAG
under the License or Management Agreements. Moreover, whatever indirect benefit
Tomberlin might have had in owning assets that once existed in PowerGroup, Asian
Ventures or TAG, as well as from consolidating his holdings in all three in 2011
remain in TAG, which is now in bankruptcy in Georgia.
OPINION
Whether under Wisconsin or Georgia law, the parties agree that plaintiff Pacific
Cycle must prove three elements to prevail on an alter-ego claim against defendant Michael
Tomberlin. First, there must be “[c]ontrol, not mere majority or complete stock control,
but complete domination, not only of finances but of policy and business practice in respect
to the transaction attacked so that the corporate entity as to this transaction had at the time
no separate mind, will or existence of its own.” Consumer’s Co-op. of Walworth Cnty. v. Olsen,
10
142 Wis. 2d 465, 484, 419 N.W.2d 211 (1988). Second, “[s]uch control must have been
used by the defendant to commit fraud or wrong, to perpetrate the violation of a statutory
or other positive legal duty, or dishonest and unjust act in contravention of plaintiff‟s legal
rights.” Id. Third, “[t]he aforesaid control and breach of duty must proximately cause the
injury or unjust loss complained of.” Id. Ultimately, “the fiction of corporate entity is not
to be lightly regarded” under Wisconsin law, id. at 475 (quoting Milwaukee Toy Co. v. Indus.
Comm’n of Wis., 203 Wis. 493, 496, 234 N.W. 748 (1931)), and “the absence of any one of
[the three] elements prevents „piercing the corporate veil.‟” Id. at 485 (citation omitted).
While plaintiff has met its burden as to the first of these elements, the court finds it has not
as to the other two.
I. Complete Control and Lack of Separate Corporate Personality
There is no dispute that Tomberlin had complete control of PowerGroup through his
100% ownership of Ameritech LLC, which in turn owns 100% of PowerGroup, both before
and after its merger with Asian Ventures.
Even so, simple ownership is not enough to
justify piercing the corporate veil; plaintiffs must show “domination,” not just of finances
but also of policy and business practice, to the point that PowerGroup lacked a separate
personality and existence.
Given Tomberlin‟s apparent formal observance of these distinct entities both legally
and financially up to and including the formal merger of Asian Ventures with PowerGroup,
plaintiff fails to establish this kind of dominance until Tomberlin effectively dissolved
PowerGroup into TAG through the so-called “Management Agreement,” which Tomberlin
unilaterally executed without the benefit of counsel on behalf of both PowerGroup and
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TAG on January 2, 2011. The court finds that with respect to that transaction, Tomberlin
blatantly disregarded PowerGroup‟s corporate form and exercised complete domination over
it, such that PowerGroup became a mere shell corporation without a separate financial or
business existence and an instrumentality for TAG‟s and Tomberlin‟s own ends. Indeed,
through the Management Agreement, Tomberlin effectively stripped PowerGroup of its
assets and separate personality alike, while maintaining a separate corporate identity in
name only. Tomberlin‟s control also reached the level required for a finding of alter ego: he
entirely dominated not only PowerGroup‟s finances in shifting all of its assets and virtually
all liabilities, but also its business practices and policies by signing over PowerGroup‟s
responsibilities, obligations and operations to TAG, and ultimately even purporting to sign
away any claim PowerGroup may have against TAG.
The court accordingly finds that
plaintiff successfully established the first requirement for demonstrating alter ego liability.
II. Use of Control to Commit Fraud, Wrongdoing or Injustice
Having met their burden of proof as to the first element of alter ego, plaintiff‟s proof
nevertheless falls short with regard to Tomberlin using his dominance over PowerGroup to
commit some fraud, wrongdoing or injustice.
Consumer’s Co-op, 142 Wis. 2d at 484-85
(“[C]ontrol, absent a showing of injustice, would not justify exception to the general rule of
corporate nonliability.”). While the execution of the Management Agreement on January 2,
2011, constituted a breach of the terms of the License Agreement between PowerGroup and
Pacific Cycle, as did the formal merger of PowerGroup and Asian Ventures the day before,
this breach does not rise to the level of fraud or injustice.
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Indeed, it is unclear that
Tomberlin had a duty to disclose the breach to Pacific Cycle at all, much less that his failure
to do so rises to the level of fraud, inequitable conduct or some other injustice.
During argument on the motion for a directed verdict, counsel for Pacific Cycle
indicated that such a duty to disclose was recognized by the Wisconsin Supreme Court in
Kaloti Enterprises, Inc. v. Kellogg Sales Co., 2005 WI 111, 283 Wis. 2d 555, 699 N.W.2d 205.
There are a number of problems with this argument, even beyond the fact that the
circumstances in Kaloti were exceptionally egregious.
First, Kaloti concerned a claim of
intentional misrepresentation to induce entry into a contract, requiring an act or omission
intended to induce another to act upon it. There is no such claim here. Not only did Kaloti
involve solicitation of a new deal, the court found the fraud claim was not barred by the
economic loss doctrine because it was “extraneous to, rather than interwoven with, the
contract.” Id. at ¶¶ 42-51. Here, any arguable duty to disclose arose not only out of an
ongoing contractual relationship, but specifically out of an argued failure to disclose a breach of
the contract‟s specific terms, meaning any breach sounds in contract, not tort, much less in
intentional fraud. Second, there was in fact no contractual relationship between Tomberlin
himself and Pacific Cycle at all, meaning Tomberlin lacked even an arguable duty to
disclose, even if the court were to presume that PowerGroup had such a duty.2 Third,
though Pacific Cycle‟s counsel argued to the contrary, it is not clear, for the reasons
explained in the next section of this opinion, that Tomberlin‟s corporate machinations
attempting to revitalize the Schwinn scooter business by consolidating it in TAG, while a
2
To find that Tomberlin had such a duty because he was in effect a party to the contract
due to his claimed alter ego status would be an impossibly circular argument, since it would
depend on the court finding his breach of that duty was what made him liable as an alter
ego.
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technical breach, were ultimately “material” to the business‟s failure, or would, at the time,
have been material to Pacific Cycle‟s decision to continue the business relationship given its
lack of any good alternative. Finally, Kaloti explains that one factor required to find a duty
to disclose a fact is that the fact is “peculiarly and exclusively within the knowledge of one
party, and the mistaken party could not reasonably be expected to discover it.” Id. at ¶ 20.
Here, Pacific Cycle had the unlimited right to examine PowerGroup‟s books and records,
which disclosed exactly what had taken place between PowerGroup and TAG.
Moreover, on the evidence presented at trial, it is no more likely that Tomberlin was
attempting to conceal his shifting of assets from Pacific Cycle, as plaintiff contends, than
engaging in an ultimately unsuccessful attempt to keep his sundry business ventures afloat,
including his doomed License Agreement with Pacific Cycle, in response to pressure from
his companies‟ secured lenders. Compare Consumer’s Co-op, 142 Wis. 2d at 486-89 (declining
to pierce the corporate veil where transactions were undertaken “for the purpose of infusing,
rather than withdrawing, capital”), with CNC Serv. Ctr., Inc. v. CNC Serv. Ctr. Inc., 753 F.
Supp. 1427, 1449 (N.D. Ill. 1991) (applying Wisconsin law and piercing the corporate veil
where “the shareholders had continued to enrich themselves even while the corporate
capital was being eroded and while payment to the corporate creditors … was being evaded
by fancy footwork on the part of the shareholders”); see also Taurus IP, LLC v. Ford Motor
Co., 539 F. Supp. 2d 1122, 1126 (W.D. Wis. 2008) (no alter ego liability where all plaintiff
established was that individual “was a sole managing member of both [corporate entities]
and was involved in the transfer of the patent from one entity to another in a suspicious
time period,” which the court deemed a “far cry” from establishing that entity had no will of
its own and was used to commit fraud). Thus, the court finds it no more likely than not
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that Tomberlin intended to commit any fraud or injustice on Pacific Cycle, meaning that
plaintiff has not met its burden to demonstrate the second element required to find alter
ego liability.
If anything, the evidence tips against plaintiff given the deposition testimony of Earl
Hensley, Jr., PowerGroup‟s former controller and the one most familiar with the business‟s
finances, which plaintiff proffered in its case-in-chief. Hensley adamantly testified that the
Management Agreement was executed for “one reason and one only”: to take advantage of
the Net Suite systems TAG had in place, thereby increasing the ease of oversight and
administration while simultaneously decreasing costs. (Hensley Dep. (dkt. #123-1) 192:119.)
While certainly not conclusive, Hensley‟s testimony not only failed to bolster
plaintiff‟s proof of the “fraud or wrongdoing” in the transactions that Tomberlin
orchestrated between PowerGroup and TAG, it actually confirmed the disastrous financial
straits PowerGroup was confronting, necessitating its being folded into TAG as a business
matter and to appease creditors.
III. Proximate Cause
Hensley‟s testimony is even more devastating to plaintiff‟s attempt to prove the third
element of its alter ego claim -- that Tomberlin‟s control over PowerGroup proximately
caused the injuries for which it now seeks relief. Consumer’s Co-op., 142 Wis. 2d at 484. As
articulated at trial, plaintiff claims that Tomberlin‟s failure to disclose the execution of the
Management Agreement, and thereby his breach of the License Agreement, was not only
fraudulent or inequitable conduct, but also frustrated Pacific Cycle‟s ability to declare a
15
breach and swoop in to recover its losses. The evidence at trial was very much to the
contrary.
Even if the court were to take as true plaintiff‟s theory of the case and presume that
Tomberlin was engaging in a “shell game” with his companies in order to defraud Pacific
Cycle of assets, the causal link between that “shell game” and any injury to Pacific Cycle is
insufficient, because plaintiff failed to demonstrate that Pacific Cycle was actually injured
by the Management Agreement.
If anything, the Management Agreement allowed
Tomberlin and TAG to limp along a little further trying to revive sales of Schwinn-branded
scooters and the moribund dealer network. Moreover, as Hensley testified, by the time
Tomberlin executed the Management Agreement, PowerGroup‟s liabilities exceeded its
assets -- that is, the company was already underwater.
188:21-189:3.)
(Hensley Dep. (dkt. #123-1)
Even more devastating, those assets PowerGroup still had -- comprised
almost exclusively of its accounts receivable, certificates of deposit and bank accounts -were collateralizing its bank loans, strongly suggesting that those, too, would have been
unavailable to satisfy Pacific Cycle‟s unsecured claims in any event.
(Id. at 163:5-14;
167:13-168:3.)
Finally, even if Pacific Cycle had been able to wrench back its right to market
Schwinn-branded scooters sooner, there is no evidence it would have done any better than
Tomberlin. Indeed, the business appears to have been in a death spiral as soon as the
market turned. The best evidence of that is Pacific Cycle‟s refusal to take Tomberlin up on
his offers to sell back the business or to come forward with another suitor interested in
taking on the line.
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IV. Equities
Finally, the court would be remiss in failing to address the equities here, since alter
ego liability is ultimately an equitable remedy. Pacific Cycle wholly failed to demonstrate
that imposing liability on Tomberlin personally would be equitable. If anything, it strikes
this court that very much the opposite is true. From the outset, Pacific Cycle placed no
reliance on PowerGroup‟s financial wherewithal to undertake the varied tasks of supervising
production, sale, distribution and aftermarket service obligations of the Schwinn-branded
scooter product line as contemplated in the License Agreement, much less to honor its
minimum payment obligations in the event of a market downturn.
Instead, Pacific Cycle‟s new president had determined the entire scooter business fell
outside its core competence and was either going to discontinue the line altogether or
offload it on another company. The latter was preferable, since market abandonment might
have damaged Pacific Cycle‟s greatest asset (the Schwinn brand) by engendering ill-will
among its dealers and retail customers, as well as left Pacific Cycle with tail liability from
corporate structure, holdings, and warranty obligations on past sales. Hensley‟s testimony
underscored this latter concern.3
These concerns are no doubt why Pacific Cycle was
satisfied with Tomberlin‟s and TAG‟s reputation and apparent expertise in the ATV and
motorized scooter market, rather than inquiring into PowerGroup‟s balance sheet. In fact,
Pacific Cycle demonstrated no interest in the finances or viability of PowerGroup, TAG or
Tomberlin‟s other entities, much less Tomberlin himself, despite having every opportunity
to investigate both before and after it contracted to do business with PowerGroup.
Cf.
Accordingly to Hensley at least, Schwinn‟s scooter product line was in trouble and
(unbeknownst to Tomberlin) Pacific Cycle was looking at an enormous number of
outstanding warranty issues on the horizon. (Hensley Dep. (dkt. #123-1) 151:7-12.)
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3
Consumer’s Co-op., 142 Wis. 2d at 481-82 (“[W]hether a contractual relationship is truly one
in which a creditor had the opportunity to investigate the capital structure of a debtor and
knowingly failed to exercise the right to investigate before extending credit, such that the
creditor should be precluded from piercing the corporate veil, should be decided with
respect to the particular facts of each case.”).
Pacific Cycle also presented no evidence demonstrating that PowerGroup, TAG or
Tomberlin lacked the intent to make a good faith effort to turn the Licensing Arrangement
into a profitable business venture for all, and the evidence presented at trial suggested that
they did make such an effort.4 And when the market crashed, Pacific Cycle seemed more
than happy to renegotiate the minimum payment requirement to a fraction of the payment
originally due under the Agreement, which Pacific Cycle knew full well had been established
under its own, far rosier market scenario.
While these facts are not dispositive, they
certainly have some bearing on the equities here and, in particular, on the overarching
unfairness of holding Tomberlin personally liable for more than $1.5 million in minimum
payments under the License Agreement.
Pacific Cycle may have had a stronger argument were TAG before this court. Indeed,
this would have been an entirely different claim if brought against TAG, since
PowerGroup‟s assets and liabilities (whatever they amounted to) unquestionably ended up
in TAG. As it stands, however, this court may consider only the potential for alter ego
liability against Tomberlin himself, and Pacific Cycle has produced no evidence that
4
Pacific Cycle‟s own conduct during the tenure of the licensing arrangement also tends to
support this conclusion. Its willingness to reduce the amount of the mandatory minimums
from $300,000 to $23,000 suggests that it viewed the poor sales as understandable, given
the realities of the market, and not that it viewed PowerGroup‟s failure to pay to be part of
a fraudulent or ill-motivated scheme meant to work an injustice.
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Tomberlin personally ended up with any of PowerGroup‟s assets, nor that he otherwise
benefitted personally from the execution of the Management Agreement or subsequent
events.
To the extent that PowerGroup‟s assets remain with TAG, Pacific Cycle may pursue
them in bankruptcy, but there is no proof that PowerGroup‟s assets ended up in Tomberlin’s
hands. Additionally, and more importantly, Pacific Cycle was able to offer no proof that it
would have been any better off in the end had Tomberlin simply left PowerGroup as it was.
While Pacific Cycle speculates that it may have been able to pursue PowerGroup directly and
recover some assets were it not for the Management Agreement, the evidence at trial was to
the contrary.
Given the high burden of demonstrating alter ego liability and the
requirement that plaintiff prove a causal link between the alleged inequitable conduct and
the damages claimed, the court finds that Pacific Cycle has fallen well short of
demonstrating that Tomberlin himself can, much less should, be held liable as the alter ego
of PowerGroup.
ORDER
IT IS ORDERED that plaintiff Pacific Cycle, Inc.‟s claim of alter ego liability against
Michael Tomberlin is DISMISSED with prejudice, judgment be entered in his favor, and
that this case be closed pending further action of the Georgia bankruptcy court.
Entered this 6th day of November, 2013.
BY THE COURT:
/s/
________________________________________
WILLIAM M. CONLEY
District Judge
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