Air Sols. v. Spivey

• Decision Date: 09 February 2023
• Docket Number: 20CA1998
• Citation: 2023 COA 14
• Parties: Air Solutions, Inc., d/b/a Airpro Incorporated, a Colorado corporation, and Benjamin Vrbancic, an individual, Plaintiffs-Appellees v. Christopher R. Spivey, Defendant-Appellant.
• Court: Colorado Court of Appeals

2023 COA 14

Air Solutions, Inc., d/b/a Airpro Incorporated, a Colorado corporation, and Benjamin Vrbancic, an individual, Plaintiffs-Appellees v. Christopher R. Spivey, Defendant-Appellant.

No. 20CA1998

Court of Appeals of Colorado, Third Division

February 9, 2023

SUMMARY

A division of the court of appeals addresses a number of issues relating to specific performance as a remedy for a breach of contract. In particular, the division addresses adequacy of damages and perceived uncertainties in the parties' agreement as those issues bear on specific performance of a contract to convey an interest in a closely held business.

City and County of Denver District Court No. 19CV30557 Honorable Michael J. Vallejos, Judge

Malik Legal Solutions, LLC, Nadia G. Malik, Denver, Colorado for Plaintiff-Appellee Air Solutions, Inc.

Allen & Curry, P.C., Damon M. Semmens, Theodore A. Wells Denver, Colorado, for Plaintiff-Appellee Benjamin Vrbancic

Burg Simpson Eldredge Hersh & Jardine, P.C., David K. TeSelle Nelson Boyle, Englewood, Colorado, for Defendant-Appellant

OPINION

J JONES, JUDGE

¶ 1 This case arose from a dispute over ownership of a new closely held business, Air Solutions, Inc., that would buy an established closely held business, Air Cleaning Specialists, Inc. Plaintiffs, Air Solutions and Benjamin Vrbancic, brought this case seeking a declaration that defendant, Christopher R. Spivey, isn't an owner of Air Solutions because he never entered into a binding agreement to become an owner. Spivey counterclaimed, alleging primarily that he and Vrbancic had contractually agreed that he would be an owner (on terms discussed below) of the nascent corporation. He also asserted a variety of other legal and equitable counterclaims against Air Solutions and Vrbancic (individually or in tandem) relating to that alleged contract, the negotiations leading up to it, and disputes over terms of Spivey's relationship with Air Solutions (such as entitlement to expense reimbursements).

¶ 2 The district court empaneled a jury to decide Spivey's legal counterclaims and reserved ruling on any remaining declaratory judgment and equitable claims and counterclaims until after the jury decided Spivey's legal counterclaims. Before and during trial, Spivey dismissed some of his counterclaims. As a result, the only legal claims the jury decided were Spivey's counterclaims against Vrbancic for breach of contract and fraud. The jury found in Vrbancic's favor on the fraud counterclaims but found in Spivey's favor on his breach of contract counterclaim.

¶ 3 After trial, Spivey asked the court for a decree of specific performance on the breach of contract counterclaim and for declaratory relief, arguing, among other things, that the nature of the contract rendered an award of damages inadequate to compensate him for the benefit of his bargain. The court denied Spivey's request for specific performance and his remaining declaratory judgment and equitable counterclaims. (The court denied Air Solutions and Vrbancic's declaratory judgment claim based on the jury's verdict on Spivey's breach of contract counterclaim.)

¶ 4 Spivey appeals. He challenges the district court's denial of his request for a decree of specific performance as well as the court's denial of his declaratory judgment and equitable counterclaims. We conclude that in denying Spivey's request for a decree of specific performance, the court misapplied the law and relied in part on reasons unsupported by the record, thereby abusing its discretion. Spivey is entitled to a decree of specific performance against Vrbancic on the contract that the jury found. We also conclude that the district court erred by denying Spivey's counterclaims for declaratory judgment against both Air Solutions and Vrbancic, though on remand the district court will need to determine the precise terms of any such declaration, taking into account, among any other relevant considerations, the decree of specific performance, the effect of the jury's verdict on Spivey's requests for declaratory relief not directly related to specific performance of the contract, and the evidence admitted at trial. We affirm the district court's denial of Spivey's equitable counterclaims for promissory estoppel and unjust enrichment.

I. Background

¶ 5 The facts giving rise to this case are relatively complicated, as is the case's procedural history. But a somewhat detailed recitation of both is necessary to fully understand, address, and analyze the legal issues that the parties raise on appeal. We will do our best to clarify rather than obscure.

A. Pre-Litigation Facts

¶ 6 Vrbancic worked for Air Cleaning Specialists (which did business as "Airpro") - a company that manufactured, sold, and installed industrial-grade air filtration systems - for several years. In 2016, he negotiated with the company's two owners to buy the company. They agreed on a purchase price of $2.5 million.

¶ 7 Vrbancic didn't have the required funds so he explored obtaining a loan. A banker recommended a loan from the Small Business Administration (SBA). Vrbancic applied for such a loan. Because Vrbancic didn't qualify to borrow the full purchase price, the sellers agreed to carry $375,000 of the price as a loan. But to obtain the SBA loan for the remaining sum, Vrbancic needed to come up with $250,000 to put toward the purchase price. He didn't have that kind of money, so initially he looked for someone who could loan him that sum.

¶ 8 In the meantime, in August 2017, Vrbancic filed articles of incorporation for Air Solutions, which would be the entity that would buy Air Cleaning Specialists. The articles indicated that Air Solutions would issue 1,000 shares of stock, but the company didn't issue any shares at that time.

¶ 9 Vrbancic's efforts to find a lender for the $250,000 weren't successful. Eventually, however, a lawyer acquaintance of his steered him to Spivey, an experienced businessman looking for promising investment opportunities. The two first got together in October 2017. Things went well. Spivey agreed to contribute the $250,000.^[1] What he was to receive in return was disputed.^[2] Vrbancic testified that he thought Spivey would receive a 33% interest in the company; Spivey, on the other hand, testified that he thought he would receive a 50% interest. The parties also contemplated that Spivey would take on some kind of management role with the company, primarily to look for ways the company could operate more efficiently.

¶ 10 Spivey provided financial information to the banker handling the SBA loan. According to Spivey, that banker told him that so as not to slow the progress of obtaining the SBA loan - which was pretty far along - he would need to take less than 20% of the company. This was so because (1) an SBA regulation - 13 C.F.R. § 120.160(a) (2017) - requires any person owning 20% or more of a borrowing entity to personally guarantee the loan (the 20% Rule) and (2) having Spivey go through the process of providing the personal guaranty would push the closing beyond the end of the year. Spivey testified that, although he was willing to sign a personal guaranty, he accommodated the banker's request because he didn't want to delay the deal.^[3] (Vrbancic testified that Spivey told him much later that he didn't want to personally guarantee the loan because he didn't want to be burdened with the debt.) Spivey agreed with the banker's suggestion that he initially own only 17.5% of Air Solutions, but maintained at trial that he always intended, and the parties understood, that his interest would automatically increase once the company paid the SBA loan in full.

¶ 11 The banker drafted documents showing Vrbancic as an 82.5% owner and Spivey as a 17.5% owner and sent them to Vrbancic. Vrbancic testified that he was surprised to see the reduced share for Spivey, but he signed and submitted documents to the bank and the SBA showing Spivey as a 17.5% owner (and, in at least one document he submitted to the SBA, did so under penalty of perjury).

¶ 12 And this is where things got messy. The sale didn't close by year-end but was scheduled to close on January 31, 2018. Spivey and Vrbancic met with the lawyer representing Air Solutions (and perhaps also representing Spivey or Vrbancic or both) to discuss whether Air Solutions would be an "S" corporation, a limited liability company, or something else, as well as a written stockholder's agreement. On January 23, the lawyer sent a letter to Spivey and Vrbancic purporting to set forth what they had agreed to: Spivey would contribute $175 to the company for 17.5% of the company's shares, Vrbancic would contribute $825 to the company for 82.5% of the company's shares, and the $250,000 Spivey had put toward the purchase of Air Cleaning Specialists would be treated as a loan to Air Solutions. Depending on the strictures of the SBA loan documents, "the note may be convertible or the parties may negotiate other terms that may include director positions and fees, employment benefits, or other terms."

¶ 13 According to Spivey, this letter didn't reflect the terms to which he believed he and Vrbancic had agreed. He sent an email to Vrbancic on January 29 - two days before the closing. In that email, he said they had originally talked about him owning 33% of the company, and later talked about him owning 50%, but the bank had "talked [him] down" to 17.5% "to avoid having to re-write the loan application, so [he] would not have to sign the Personal Guarantee." He proposed a "50:50" arrangement with neither party having "control" "up until the time I get my $250,100 investment back, subject to the limitations of" the SBA loan. After Spivey got his $250,100 back, the split would remain "50:50"...