Capital Res., LLC v. Chelda, Inc.

• Decision Date: 06 November 2012
• Docket Number: No. COA12–288.,COA12–288.
• Parties: CAPITAL RESOURCES, LLC, and Institution Food House, Inc., Plaintiffs, v. CHELDA, INC., Charlotte Metro Restaurants, LLC, Barn Dinner Theatre, Inc., Make Sense of Dining of Florida, LLC, Make Sense Dining, Inc., Buster's Grill, LLC, Dabney C. Erwin and Charles B. Erwin, Defendants.
• Court: North Carolina Court of Appeals

735 S.E.2d 203

CAPITAL RESOURCES, LLC, and Institution Food House, Inc., Plaintiffs,

v.CHELDA, INC., Charlotte Metro Restaurants, LLC, Barn Dinner Theatre, Inc., Make Sense of ¹ Dining of Florida, LLC, Make Sense Dining, Inc., Buster's Grill, LLC, Dabney C. Erwin and Charles B. Erwin, Defendants.

No. COA12–288.

Court of Appeals of North Carolina.

Nov. 6, 2012.

Appeal by Defendants Chelda, Inc., Barn Dinner Theatre, Inc., Make Sense Dining of Florida, LLC, Make Sense Dining, Inc., and Charles B. Erwin from order entered 28 February 2011 and judgment entered 26 April 2011 by Judge Eric L. Levinson in Catawba County Superior Court. Heard in the Court of Appeals 29 August 2012.

Katten Muchin Rosenman, LLP, Charlotte, by Christopher A. Hicks and David B. Morgen, for Plaintiff.

Roberts & Stevens, P.A., Asheville, by Mark C. Kurdys, for Defendants Chelda, Inc., Barn Dinner Theatre, Inc., Make Sense Dining of Florida, LLC, Make Sense Dining, Inc., and Charles B. Erwin.

STEPHENS, Judge.

Defendants Chelda, Inc., Barn Dinner Theatre, Inc., Make Sense Dining of Florida, LLC, Make Sense Dining, Inc., and Chelda, Inc. CEO Charles B. Erwin (“Erwin”) (collectively, “Chelda”) ² appeal from (1) an order granting motions by Plaintiff Capital Resources, LLC, and Plaintiff–Intervenor Institution Food House, Inc., (collectively, “IFH”) for a protective order and to quash subpoenas duces tecum, and (2) from judgment entered upon a jury verdict following the granting of IFH's motion for directed verdict as to Chelda's counterclaims in an action filed by IFH for recovery of the unpaid balance and interest on a contract and promissory note. We vacate in part the order appealed from, but affirm the judgment entered.

Chelda owns various restaurants and restaurant chains, including the corporate defendants named in the caption of this opinion. IFH is a distributor of food to restaurants and chains. IFH does not manufacture food, but instead orders, warehouses, and delivers food products from manufacturers to restaurants, essentially serving as a “middleman” between the manufacturers and restaurants. Capital Resources is a financial services affiliate of IFH. Chelda manages several restaurants and chains and, between 1997 and 2009, IFH sold and delivered food products to Chelda. The evidence at trial relevant to this appeal primarily concerns two sources of income to IFH and a bonus scheme Erwin arranged with a longtime employee: (1) markup percentages on food products which IFH charged Chelda for providing food products, (2) marketing allowances IFH charged some food product manufacturers for advertising and other marketing services, and (3) bonus payments consisting of percentages of savings resulting from the employee's negotiation of lower prices for certain food products.

Compensation for IFH's services to Chelda was outlined in a series of Product Purchase Agreements (“PPA”) negotiated over the years between the parties. According to the PPA, the price Chelda paid IFH for food products was IFH's cost plus a certain markup percentage listed in an attachment to the PPA. Because food product prices change frequently, the specific prices IFH charges for food products are not listed in the PPA. Instead, food prices are listed in separate “pricing schedules,” unique to each customer and updated weekly by IFH, and the PPA lists only the markup percentage IFH will apply to the prices listed in the weekly pricing schedules. All PPAs between the parties were essentially identical, except for changes in the markup percentages.

For many food products, IFH handled all aspects of supplying Chelda, including negotiating the best prices with manufacturers. In addition, IFH allowed restaurant customers like Chelda a “direct negotiation option,” under which restaurants negotiate prices directly with manufacturers. Under the direct negotiation option, if Chelda negotiated a lower price from a manufacturer than what IFH had secured, IFH would put the directly negotiated price into IFH's pricing schedule. IFH would then determine its charge to Chelda by applying the appropriate markup percentage listed in the PPA to the directly negotiated price. In such circumstances, Chelda would receive the benefit of its successful negotiation skills, while IFH would still be compensated for its services in ordering,warehousing, and delivering the food products.

From 2001 to 2008, Steven Stern was a purchasing manager for Chelda, in charge of direct negotiations with food product manufacturers. To “incentivize” Stern, Erwin set up a bonus program whereby if Stern secured savings to Chelda for one year on a food product, Stern would receive half the savings during the first ninety days as a bonus and Chelda would retain all savings after ninety days. IFH agreed to assist Chelda with implementing this bonus program. At trial, the assistance from IFH and the route of bonus payments to Stern was disputed: IFH claimed Chelda requested that IFH send bonus payments consisting of half of the amount saved directly to Stern, which is what in fact occurred, while Chelda claimed it had requested only the information on savings from IFH and had intended that bonus payments to Stern be paid through Chelda. Erwin testified that he only learned of the direct payments from IFH to Stern in late June 2008.

IFH also presented evidence of a common restaurant industry practice known as “marketing allowances.” Marketing allowances are funds that food manufacturers pay the distributors of their products, usually as a lump sum or a percentage of the volume of a product ordered by a distributor. Distributors like IFH use marketing allowances to promote the manufacturer's food products in a variety of ways, including: hosting food shows, training chefs and menu developers, sponsoring events for customers, and advertising in the distributor's catalog. IFH collects marketing allowances from some manufacturers after an order is placed, essentially “back-billing” the manufacturer for advertising that IFH performed prior to the order. IFH has marketing allowance programs with many manufacturers, billing them, on average, seven percent of invoiced costs of food products ordered. Marketing allowances are negotiated solely between IFH and food product manufacturers. Thus, IFH does not give credit for marketing allowances to customers, such as Chelda, nor are marketing allowances mentioned in contracts with customers, like the PPA.

In April 2008, prior to Erwin's alleged discovery of the direct payments to Stern, Chelda was $2 million behind on payments due IFH under the PPA. Chelda and IFH agreed to reduce this debt to a promissory note, with monthly payments of approximately $10,000 and a balloon payment due 1 May 2009. When Chelda failed to make the balloon payment, Capital Resources initiated this action by filing a complaint on 20 May 2009. Plaintiffs' amended complaint was filed 9 June 2009. By order entered 10 January 2010, IFH was joined as an intervenor-plaintiff.

On 7 January 2010, Chelda filed an answer and counterclaim, alleging seven claims for relief: two claims each of civil conspiracy (claims 1 and 5) and breach of the duty of good faith and fair dealing (claims 2 and 4), and one claim each of breach of contract (claim 3), constructive fraud (claim 6), and unfair and deceptive trade practices (claim 7). These counterclaims were based on two primary allegations: (1) that, as a result of IFH paying bonuses to Stern directly, Chelda never realized any of the “post-ninety-day” savings as intended under Erwin's bonus scheme, and (2) that the cost to which the PPA markups applied should have included adjustments based on IFH's receipt of marketing allowances from manufacturers through back-billing.

Chelda substituted counsel twice, in January and October 2010. On no fewer than five occasions between September 2009 and October 2010, Chelda requested a continuance to conduct more discovery. In January 2011, Chelda filed nine motions for orders of commission for out-of-state subpoenas duces tecum to non-party manufacturers that conducted business with IFH (“the 2011 Subpoenas”). The 2011 Subpoenas were issued on a rolling basis and sought information on marketing allowances paid to IFH by various manufacturers during the ten-year relationship between IFH and Chelda. The Honorable Timothy Kincaid, Catawba County Superior Court, granted each motion and issued orders of commission. On 26 January 2011, IFH filed a motion for a protective order and a motion to quash the 2011 Subpoenas.³

On 21 February 2011, the Honorable Eric L. Levinson, Catawba County Superior Court, presided over a hearing on IFH's motions. By order entered 28 February 2011, Judge Levinson entered a protective order quashing the 2011 Subpoenas and ordering Chelda to consult with IFH before obtaining any additional subpoenas duces tecum. On 23 February 2011, Chelda sought a continuance of the pending trial claiming a denial of opportunity to obtain evidence, which was denied. On 4 March 2011, Chelda moved this Court for a temporary stay of proceedings, which was also denied.

On 7 March 2011, the case went to trial. At the close of evidence, IFH and Chelda each moved for a directed verdict with respect to the other's claims. Chelda withdrew its counterclaims 1, 5, and 6. The court denied Chelda's motion and granted IFH's motion as to Chelda's counterclaims 2, 3, 4, and, in part, 7. The jury found that Chelda had breached the PPA and promissory note and that IFH was entitled to damages totaling $2,489,422.82. The jury found that neither party committed unfair and deceptive trade practices. Chelda appeals from the trial court's order entered 28 February 2011 issuing a protective order and quashing the 2011 Subpoenas and from judgment entered upon the jury's verdict 26 April 2011 following the trial court's granting a directed verdict to IFH on Chelda's counterclaims.

Discussion

On appeal, Chelda brings forward...