Dig. Ally v. Culp McAuley, Inc.

• Decision Date: 01 July 2022
• Docket Number: 2:22-cv-02203-HLT-ADM
• Parties: DIGITAL ALLY, INC., Plaintiff, v. CULP MCAULEY, INC., et al., Defendants.
• Court: U.S. District Court — District of Kansas

DIGITAL ALLY, INC., Plaintiff,
v.
CULP MCAULEY, INC., et al., Defendants.

No. 2:22-cv-02203-HLT-ADM

United States District Court, D. Kansas

July 1, 2022

MEMORANDUM AND ORDER

HOLLY L. TEETER UNITED STATES DISTRICT JUDGE

This is a contentious breach-of-contract case. Plaintiff Digital Ally, Inc. has sued a corporation and four individuals for breaching agreements about health protection equipment. Plaintiff seeks both monetary and equitable relief for its claims and seeks a preliminary injunction preventing Defendants from disposing of the property acquired as part of the agreement or spending the remaining funds Plaintiff provided to Defendants. Doc. 4. Because Plaintiff has not shown that it will suffer irreparable harm or that it is substantially likely to prevail on its claims, the Court declines to issue an injunction and denies the motion for preliminary injunction.

I. BACKGROUND^[1]

A. Parties

Plaintiff is a company that specializes in video equipment and software for law enforcement agencies, commercial fleet companies, and event security teams. Doc. 1 at ¶ 4; Doc. 5 at 3. During the pandemic, Plaintiff altered its business to sell health protection equipment. Doc. 5-2 at ¶ 3.

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Defendant Culp McAuley, Inc. (“Culp McAuley”) is a “management consulting services business within the engineering, accounting, research, and management services sector.” Doc. 1 at ¶ 5. It supplies personal protective equipment (“PPE”) and COVID-19 test kits. Doc. 15 at 6. Culp McAuley is approved by the federal government to supply medical gloves to government entities. Doc. 18-1 at ¶ 4. Defendants Brandon Culp and Campbell McAuley are co-founders of Culp McAuley. Defendant Mark Depew is the registered agent and treasurer of Culp McAuley. Defendant Larry Roberts is the incorporator of Culp McAuley and operator of a trust account where the relevant funds were deposited. Doc. 1 at ¶¶ 5-9.^[2]

B. Venture Agreement

In the fall of 2021, Stanton Ross, who is Plaintiff's CEO, began discussing a business opportunity with Depew in which Culp McAuley would “facilitate the purchase, inspection, shipment, and/or sale of nitrile gloves” with funding from Plaintiff. Doc. 5-2 at ¶ 4. Ross testified at the hearing that Culp McAuley indicated it had a government contract to sell gloves. Plaintiff also sought to have Shield-branded gloves manufactured. Doc. 18-1 at ¶ 7. The Shield brand is a proprietary mark that belongs to Plaintiff. Doc. 1 at ¶ 20.

On September 22, 2021, Plaintiff and Culp McAuley entered into a venture agreement. Doc. 1-1 at 2. The venture agreement essentially has two parts. First, Plaintiff agreed to submit purchase orders to Culp McAuley to purchase non-Shield branded nitrile gloves in an amount not to exceed $2.5 million. Second, Plaintiff would submit purchase orders for Shield-branded nitrile gloves in an amount not to exceed $1.5 million. Id. at 2-3. The gloves were to be sold by Plaintiff or by Culp McAuley as Plaintiff's sales representative. Id.^[3] Prepayment for any purchase order

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was to be made to a trust account managed by Roberts. Id. There was a designated profit split for both types of gloves, but Culp McAuley was also to receive a 25% markup on the Shield-branded gloves. Id. at 2-4. The venture agreement stated that it “constitutes the intent of the parties,” and that “neither of the parties are subject to any binding agreements, obligations or responsibilities, except as set forth in definitive agreements to be executed by the parties.” Id. at 4. The terms and conditions also included the following obligations for Culp McAuley (“Seller”) and Plaintiff (“Buyer”):

Seller will use all reasonable efforts to comply with Buyer's shipping instructions as they are communicated from time to time[.] The parties agree that legal title shall pass to the Buyer upon payment to/from the Legal Trust account described in item 1 above. Seller is required to provide adequate insurance on the Products at all times and have risk of loss until such time as the Buyer shall notify Seller that it has sold the underlying Product. The Products will be held in Seller's warehouse at the direction of the Buyer until such time as the Buyer communicates shipping instructions. All costs of warehousing and insurance will be at the cost of the Seller[.] Buyer is not responsible for any duty or customs fees

Id. at 6. Under the terms and conditions, Kansas law governs. Id. The parties to the venture agreement (Plaintiff and Culp McAuley), Id. at 2, agreed to resolve disputes in either Kansas state or federal court and to submit to jurisdiction and venue in those courts, Id. at 6.

C. Purchase Order 1

The same day the parties executed the venture agreement, Plaintiff submitted a purchase order for 104,166 boxes of Cardinal Health Flexal Touch gloves for a price of $2,499,984 (“Purchase Order 1”). Doc. 1-2 at 2. Purchase Order 1 listed the delivery date as “Urgent Delivery.” Id. Under the terms and conditions of Purchase Order 1, it is “irrevocable upon the occurrence of

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the prepayment of funds into the Legal Trust account and Buyer's receipt of a corresponding sales/purchase order from Culp & McAuley, Inc., the receipt of which is hereby acknowledged, and the terms of which are acceptable to the Buyer.” Id. at 3. Plaintiff wired the money to the trust account managed by Roberts. Doc. 1-3; see also Doc. 1 at ¶¶ 17-19. Plaintiff did not intend for the gloves to be shipped to its business but rather intended Culp McAuley to sell them and share the revenue as outlined in the venture agreement. Doc. 5-2 at ¶ 6. Plaintiff believed that Culp McAuley had an existing government contract for certain products, including nitrile gloves, and that the gloves could quickly be sold. Id. Plaintiff expected profit in a matter of days or weeks. Id.

According to Defendants, however, shortly after the parties executed Purchase Order 1, the market for PPE began to cool and price-per-box of Cardinal Health Flexal Touch gloves dropped. Doc. 18-1 at ¶¶ 13-14. Using its best efforts, Culp McAuley was only able to procure $247,500 worth of the Cardinal Health Flexal Touch gloves, or approximately 11,000 boxes. Id. ¶ 12. To salvage the profit margin, Defendants argue that the parties agreed that Culp McAuley would use the remaining funds to purchase different PPE products with stronger profit margins. Id. ¶ 14.

Culp McAuley used some of the funds to purchase 89,400 respirator masks and 16,290 boxes of Cranberry Evolve gloves that were not requested by Plaintiff in Purchase Order 1. Doc. 1 at ¶ 48; see also Doc. 5-3 at ¶ 22. According to Defendants, these other items were the products the parties agreed to purchase when the price-per-box on the Cardinal Health Flexal Touch gloves dropped. Doc. 18-1 at ¶ 14. But some of these items were purchased before or shortly after the parties executed Purchase Order 1. Doc. 20-1 at 3-6. Of the $2,499,984 transferred in connection with Purchase Order 1, $862,722.50 has been spent, leaving approximately $1.6 million unspent. Doc. 5-3 at ¶ 23; see also Doc. 18-1 at ¶ 14. McCauley testified at the hearing that he did not know the current balance of the trust account.

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In December 2021, Culp McAuley approached the federal government about the government purchasing various types of PPE, including the masks and Cranberry Evolve gloves. Doc. 18-1 at ¶ 15. The government agreed. Id.^[4] Culp McAuley conveyed this to Plaintiff on December 30, 2021, but Plaintiff told Culp McAuley not to sell any of the products until the government contract was finalized. Id. ¶ 16; see also Doc. 18-15.

D. Purchase Order 2

On November 10, 2021, Plaintiff sent a second purchase order (“Purchase Order 2”). Doc. 1-4 at 2. Purchase Order 2 requested 240,000 boxes of Shield-branded gloves for a total of $1,416,000.^[5] Id. According to Defendants, Plaintiff had previously tried to have nitrile gloves manufactured under the Shield brand, but Plaintiff had been disappointed with the quality. Doc. 18-1 at ¶ 22. However, Culp McAuley was able to facilitate the manufacture of gloves that would meet or exceed the FDA's requirements, which allowed them to be sold as medical grade gloves suitable for use as PPE. Id.

The due date for Purchase Order 2 was March 1, 2022. Doc. 1-4 at 2. Plaintiff wired $1,500,000 (the cost of the gloves plus an additional $84,000 as a gesture of goodwill and to assist with shipping costs, see Doc. 5-2 at ¶ 8) to Roberts. Doc. 1-5 at 2; see also Doc. 1 at ¶¶ 20-28. The Shield-branded gloves were to be shipped to Plaintiff,^[6] but either party could sell them and both parties would share the revenue. Doc. 5-2 at ¶ 10.

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Defendants contend the parties agreed that Culp McAuley would enter a six-month production contract to supply Shield-branded gloves to Plaintiff. Doc. 18-1 at ¶ 23. Defendants argue that Purchase Order 2 was intended to cover the initial order of gloves-one-month of the six-month deal-and that Plaintiff would fund the remainder of the order. Id. ¶¶ 23, 28. Culp McAuley subsequently contracted with Encompass Industries, a Malaysia-based manufacturer, to produce 1,536,000 boxes of Shield-branded gloves over a six-month period. Id. ¶ 25; see also Doc. 18-9. The value of this production was $9,062,400, and Culp McAuley convinced Encompass to manufacture the Shield-branded gloves on credit by leveraging its relationship with Encompass and its reputation in the PPE industry. Doc. 18-1 at ¶ 26. According to Defendants, Plaintiff agreed to this plan and verbally committed to pay for the six-month manufacturing contract. Id. ¶ 27. Encompass subsequently completed the six-month manufacturing contract, and the Shield-branded gloves are currently in a Culp McAuley warehouse.^[7] Id. ¶ 29. According to Defendants, Plaintiff has only paid for the first month of manufacture, or 1/6 of the Shield-branded gloves, and is refusing to pay the remaining...