Colaco v. Cavotec SA

• Citation: 236 Cal.Rptr.3d 542,25 Cal.App.5th 1172
• Decision Date: 11 July 2018
• Docket Number: G052619
• Court: California Court of Appeals Court of Appeals
• Parties: Michael COLACO et al., Plaintiffs, Cross-defendants and Appellants, v. CAVOTEC SA et al., Defendants, Cross-complainants and Respondents.

25 Cal.App.5th 1172

236 Cal.Rptr.3d 542

Michael COLACO et al., Plaintiffs, Cross-defendants and Appellants,

v.CAVOTEC SA et al., Defendants, Cross-complainants and Respondents.

G052619

Court of Appeal, Fourth District, Division 3, California.

Filed July 11, 2018

Stradling Yocca Carlson & Rauth, Jason H. Anderson, Jason de Bretteville and Bradley E. Marrett, Newport Beach, for Plaintiffs and Appellants.

Greenberg Gross, Alan A. Greenberg, Wayne R. Gross, Costa Mesa, and Howard M. Privette for Defendants and Respondents.

OPINION

ARONSON, J.

Appellants Inet Airport Systems, Inc., Inet Airport Systems, LLC,¹ Michael Colaco, and April Barry appeal from the judgment entered against them in this action arising from Inet’s sale of its assets to respondents Cavotec SA and Cavotec Inet US, Inc. (collectively Cavotec). Colaco was Inet’s sole shareholder and its chief executive officer and Barry was Inet’s director of administration. After the transaction, Colaco became Cavotec Inet US, Inc.’s president and a member of its board of directors, and Barry became the company’s chief financial officer.

Following a lengthy trial, the jury awarded Cavotec $1.313 million against Inet, Colaco, and Barry, jointly and severally, based on the jury’s findings that (1) Inet breached its asset purchase agreement with Cavotec by failing to forward all postclosing customer payments Inet received on Cavotec’s behalf; (2) Colaco and Barry breached the fiduciary duties they owed as Cavotec officers by causing Inet to withhold customer payments and creating false and backdated invoices to conceal Inet’s failure to pay; (3) Colaco’s conduct breached the employment contract he entered into as Cavotec Inet US Inc.’s president; and (4) Colaco and Barry converted Cavotec’s funds for their personal use. The jury also awarded Cavotec $2 million in punitive damages against Colaco only.

On appeal, Inet argues the trial court erred in denying its motion for judgment notwithstanding the verdict (JNOV) because the undisputed evidence showed Cavotec breached the asset purchase agreement by failing to make its final $2 million payment. Inet contends the trial court should have offset that $2 million against the $1.313 million Inet failed to pay to Cavotec, and the net result is a judgment for $687,000 in Inet’s favor.

We agree the trial court erred in denying Inet’s motion. Cavotec’s obligation to make the final $2 million payment and Inet’s obligation to turn over all postclosing payments to Cavotec are independent covenants under the asset purchase agreement. Inet’s breach of its obligation therefore did not excuse Cavotec from its obligation. Rather, Cavotec was contractually required to perform and then seek damages or an offset from Inet. The jury’s verdict, however, excused Cavotec from its obligation based on Inet’s breach and awarded Cavotec damages for the same breach. That is an impermissible windfall that allows Cavotec to retain the assets it purchased from Inet without paying the full purchase price.

Colaco contends the trial court erred in refusing to apply Delaware law to the claims against him because Cavotec Inet US, Inc., was incorporated in Delaware, and therefore the internal affairs doctrine required the court to apply Delaware law in resolving the issues regarding Colaco’s performance as an officer of Cavotec Inet US, Inc. Colaco asserts he was entitled to judgment on Cavotec’s fiduciary duty and punitive damages claims because Delaware law bars fiduciary duty claims that arise from contractual obligations and prohibits punitive damages on fiduciary duty claims.

We disagree. In Colaco’s employment agreement, he and Cavotec Inet US, Inc. agreed California law would govern all their rights and liabilities. California law recognizes a strong public policy favoring enforcement of choice-of-law provisions and our courts may refuse to enforce a provision bearing a reasonable relationship to the parties or their transaction only when the opponent shows a state other than the one on which the parties agreed has a materially greater interest in the determination of the particular issues involved. Colaco fails to explain how Delaware has a materially greater interest in applying its law on the fiduciary duty claims raised in this case. Instead, he simply argues the internal affairs doctrine establishes a bright line rule that overrides the parties’ choice-of-law provision. It does not, and Colaco fails to explain how applying California law on these particular issues will impair internal corporate affairs.

Barry also argues the internal affairs doctrine required the trial court to apply Delaware law regarding the fiduciary duty and punitive damages claims against her. Barry’s position differs from Colaco’s because she did not enter into a contract with Cavotec Inet US, Inc. and she never agreed California law would govern her rights and liabilities. Nonetheless, we need not decide whether the internal affairs doctrine required the trial court to apply Delaware law because the result on the claims against Barry are the same under both Delaware and California law, and therefore Barry cannot establish any error was prejudicial.

We also reject Colaco’s contention the asset purchase agreement barred Cavotec’s claims for breach of his employment contract and punitive damages. As explained below, the exclusive remedy provision on which Colaco relies only applies to claims arising under the asset purchase agreement, but Cavotec sued Colaco for breaching his fiduciary duties and his employment agreement, not the asset purchase agreement. Contrary to Colaco’s contention, the jury’s decision to award Cavotec damages on its claim against Inet for breach of the asset purchase agreement and award the same amount of damages for Colaco’s breach of his employment contract does not mean the jury held Colaco liable for Inet’s breach of the asset purchase agreement. Rather, it simply means the breach of those separate agreements resulted in the same damages, nothing more. Similarly, the punitive damages waiver in the asset purchase agreement does not apply to Cavotec’s punitive damages claim against Colaco because that claim is not made under the asset purchase agreement.

We conclude Cavotec’s $1.313 award against Inet must be offset against its failure to make the second $2 million payment owed under the APA. Finally, for the reasons expressed at the end of this opinion, we leave undisturbed Cavotec’s $2 million punitive damage award against Colaco.

I FACTS AND PROCEDURAL HISTORY

Inet was headquartered in Fullerton, California. It designed, manufactured, and installed stationary and mobile airport and aircraft servicing equipment at airports around the world. Michael Colaco was Inet’s chief executive officer and its sole shareholder. April Barry was Inet’s director of administration. Cavotec SA is a global engineering company headquartered in Lugano, Switzerland. It has 42 subsidiaries that operate in 30 countries.

In August 2011, Colaco and Inet entered into the "Asset Purchase Agreement and Plan of Reorganization" (APA) with Cavotec SA and Cavotec Inet US Inc., a Delaware corporation Cavotec SA formed as a subsidiary for this transaction.² Under the APA, Inet agreed to sell substantially all of its assets to Cavotec, including Inet’s long-term, in-process customer contracts, Inet’s inventory and equipment, all leasehold improvements to Inet’s manufacturing facility, and Inet’s intellectual property. In exchange, Cavotec agreed to transfer to Inet 7.7 million shares of Cavotec SA stock and make two, $2 million "Performance Earn-out Payments" to Inet, one on the APA’s first anniversary in August 2012 and another on its second anniversary in August 2013. In the APA, the parties valued the Cavotec SA shares at nearly $21 million. Although Colaco was a signatory to the APA, he gave only a limited number of warranties and assumed minor obligations that are not at issue.

When the APA closed, Colaco became Cavotec Inet US, Inc.’s president and a member of its board of directors, and Barry became the company’s chief financial officer. To govern the terms of Colaco’s employment, he and Cavotec entered into a "Contract of Employment" (Employment Contract) that required Colaco to "devote his best efforts and all his business time to the business and operations of [Cavotec]." The Employment Contract also included a choice-of-law provision that stated, "All the rights and liabilities of the parties shall be governed by and construed in accordance with the law of California." Barry did not enter into an employment agreement with Cavotec.

The in-process customer contracts were the primary assets Cavotec acquired under the APA. Inet could not transfer those contracts to Cavotec without the customers’ consent, but the parties closed on the APA before any customers consented. Inet and Cavotec therefore executed an additional document entitled the "Guidelines for Contracts" (Guidelines). Under the Guidelines, Inet agreed to cooperate with Cavotec in obtaining each customer’s consent and to continue performing each contract until the customer consented to the transfer. The Guidelines also provided that Inet was responsible for all costs and entitled to all profits that were incurred or earned on a contract before the APA closed, and Cavotec promised to reimburse Inet for any costs it incurred after the APA closed, but Cavotec would be entitled to any postclosing profits. Inet agreed to forward to Cavotec any postclosing payments it received from customers to which Inet was not entitled under the Guidelines. After the deal closed, numerous disagreements arose between Colaco and Cavotec regarding Inet’s business, the efforts of Colaco and Inet to obtain the consents necessary to transfer the customer contracts, and whether Inet transferred all required customer payments to Cavotec. Based on these disagreements, Cavotec refused to make the first Performance Earn-out Payment when it came due in mid-...