Diversified Striping Sys. Inc. v. Kraus

• Decision Date: 21 July 2022
• Docket Number: 20200309-CA
• Citation: 516 P.3d 306
• Parties: DIVERSIFIED STRIPING SYSTEMS INC., KMB Equipment LLC, Kevin Beck, and Pamela K. Beck, Appellants and Cross-appellees, v. Joe KRAUS, FLJ LLC, and National Striping Inc., Appellees and Cross-appellants.
• Court: Utah Court of Appeals

516 P.3d 306

DIVERSIFIED STRIPING SYSTEMS INC., KMB Equipment LLC, Kevin Beck, and Pamela K. Beck, Appellants and Cross-appellees,
v.
Joe KRAUS, FLJ LLC, and National Striping Inc., Appellees and Cross-appellants.

No. 20200309-CA

Court of Appeals of Utah.

Filed July 21, 2022

Jonathan O. Hafen, Salt Lake City, Rita M. Cornish, Bountiful, Davis County, David P. Mooers-Putzer, and Timothy M. Willardson, Salt Lake City, Attorneys for Appellants and Cross-appellees

Jeremiah R. Taylor, D. Scott Crook, Salt Lake City, Taylor Cutler, and Christopher S. Feuz, Salt Lake City, Attorneys for Appellees and Cross-appellants

Judge Jill M. Pohlman authored this Opinion, in which Judge Ryan D. Tenney and Justice Diana Hagen concurred.¹

Opinion

POHLMAN, Judge:

¶1 This case arises from a complex business dispute that culminated in a bench trial, after which the district court found one side liable for breach of contract and breach of fiduciary duty. Both sides now appeal. The court's determinations on liability are not contested on appeal. Instead, the main issues before us focus on the court's decisions regarding lost profits and damages, joint and several liability, the availability of prejudgment interest, the applicable postjudgment interest rate, punitive damages, and postjudgment attorney fees. We affirm in part, reverse and vacate in part, and remand.

BACKGROUND²

¶2 This dispute involves two groups in the pavement striping business. We first introduce the two groups and their joint venture, the four relevant documents, and the breakdown of the business relationship, followed by a description of the litigation and the resulting judgment and damages award.

The Beck Parties

¶3 Kevin and Pamela Beck own or control several entities. One of those entities, Diversified Striping Systems Inc. (DSS), is the successor to National Striping Company, Incorporated (NSCI), which was a joint venture, the formation of which we describe below.³ The Becks also own or control KMB Equipment LLC (KMB), which was formed to own construction equipment, which it would then lease to the Becks’ other companies.

The Kraus Parties

¶4 Joe Kraus owned or controlled National Striping Inc. (NSI), which provided striping services in California. He also partially owned or controlled FLJ LLC (FLJ), a company that provided pavement striping services for highways and airports. Kraus was the only member of FLJ with operational experience; the other two members provided only capital. But in late 2009 or early 2010, FLJ's two capital investors left the company for reasons unrelated to this case, leaving Kraus with insufficient capital to achieve his business plans. Kraus needed to either scale back the operations of FLJ and NSI or secure an infusion of capital.

The Joint Venture

¶5 In mid-2010, Kraus and Kevin Beck began discussing the possibility of a joint venture. Kraus sought the Becks’ investment in his striping business, and while the Becks had no experience in that industry, they had substantial experience in construction and

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contracting generally. Eventually, the Becks and Kraus agreed that they would form a company together, with the Becks owning 80% and Kraus owning 20%. The general nature of the agreement was that Kraus would contribute equipment and other assets owned by FLJ or NSI, and the Becks would contribute capital.

¶6 In 2011, Kraus and the Becks formed DSS to provide highway and airport striping services. DSS would use the employees, location, customer lists, contact information, and web domain of Kraus's existing striping business. It would also employ the general manager (Manager) of Kraus's existing business and use the striping trucks and other equipment owned by FLJ. Kraus would bring his experience, knowledge, and relationships for the benefit of DSS. He would be involved in the marketing and business strategy as well as provide general oversight of the venture.

¶7 The parties agreed that Kraus would not be an employee of DSS, nor would he draw a salary. Instead, Kraus's return on his investment would be in the form of 20% ownership in DSS and its expected profits. In addition, Kraus would be an executive officer or director of the company. To provide Kraus some income while the venture got off the ground, the parties agreed that Kraus would be given an advance on his anticipated 20% of DSS's profits. The advance would be equal to $70,000 per year for two years.

¶8 The Becks agreed to provide the capital necessary to achieve Kraus's business plan, including financing the purchase of an epoxy truck. An epoxy truck is a striping truck needed for certain jobs, such as the lucrative projects associated with striping airport runways and taxiways. Given that the Becks were running other businesses, they did not envision being heavily involved in DSS's management.

¶9 Kraus's preexisting business, NSI, had outstanding debts to vendors and suppliers that arose in connection with its prior operations. Kraus was personally responsible for these debts, and he was concerned that vendors might be reluctant to do business with the new venture if they knew he was involved. For this reason, and to allow him more time to sort out his finances, Kraus agreed that he would receive his equity in DSS "a year or so" after the business was formed and was operational. But it was always understood that Kraus would be a 20% owner of DSS in return for his and his companies’ contributions.

The Documents Memorializing the Agreement

¶10 The parties’ agreement was memorialized in four documents: the asset purchase agreement, a promissory note, a stock sale agreement, and a profit advance agreement.

¶11 First, the asset purchase agreement (the Asset Purchase Agreement), dated January 19, 2011, was entered into by FLJ and KMB. FLJ was controlled by Kraus, and it owned striping equipment and related assets. KMB was owned and controlled by the Becks and was formed at the time of the transaction for the purpose of leasing equipment to DSS and other businesses.

¶12 Pursuant to the Asset Purchase Agreement, KMB agreed to pay FLJ $100,000 in exchange for the used equipment under the terms of the promissory note. The agreement states that the $100,000 is "payable without interest, when [KMB's] lease income from the subject equipment equals $100,000."⁴ The equipment was not appraised or valued for purposes of the transaction. And although Kraus later testified that he had paid over $500,000 for the equipment, the district court did not determine its fair market value. Rather, the court found only that the fair market value at the time of the transaction exceeded the $100,000 figure recited in the Asset Purchase Agreement.

¶13 Second, the promissory note (the Note), dated February 25, 2011, reiterated the above payment terms. It stated that KMB would pay FLJ $100,000 "without interest, when [KMB's] lease revenue from the equipment purchased for which this note is given equals $100,000." The district court

516 P.3d 313

later found that KMB never paid FLJ the full $100,000 but that it made partial payments on the Note totaling $85,996.78, leaving an unpaid amount of $14,003.22.

¶14 Third, the stock sale agreement (the Stock Sale Agreement), dated February 18, 2011, was between DSS and Kraus. Under that agreement, DSS agreed to transfer to Kraus 200 shares of DSS stock, equal to 20% of the issued and outstanding shares, in return for a payment of $100,000, due on or before December 1, 2012. The Stock Sale Agreement also recited that Kraus was to be made a director or executive officer of DSS prior to the sale. The district court later found that Kraus was never issued his 20% of the DSS shares. The parties disputed whether Kraus satisfied the conditions precedent to DSS's obligation to issue the shares to him. Yet the parties ultimately stipulated that at all relevant times Kraus had a 20% ownership interest in DSS and at all times was entitled to a 20% share of its profits.

¶15 Fourth, Kraus and DSS signed the agreement for advances against profits (the Profit Advance Agreement) in April 2011. Under this agreement, DSS agreed to pay Kraus $70,000 per year, or $5,833.33 per month, for the period from January 2011 through December 2012, totaling twenty-four months. Further, Kraus agreed that if his 20% share of DSS's profits fell below this amount, he would repay DSS for any overage. The district court later found that although DSS made some of these monthly payments until June 2011, DSS made no further payments after that month. The court found that the total unpaid amount under the Profit Advance Agreement was $108,833.31.

The Breakdown of the Joint Venture

¶16 After the formation of DSS, Kraus transferred all the employees of his prior business to DSS. The Becks, however, arranged for the employees to be employed not by DSS, but by a payroll and human resources company owned by them, Professional Consulting Services (PCS). The Becks did not disclose this to Kraus until after the fact. Although Kraus was "not too concerned" about this alternate arrangement, it mattered to him how much PCS was going to charge DSS for the employees, and the Becks alone determined the amount and did not disclose it to Kraus in advance.

¶17 Shortly after DSS's formation, Manager began working as its general manager. DSS also began operating out of the location used by Kraus's previous business. Kraus provided DSS with all his customer and contact lists. And in March and April 2011, Kraus caused all the striping equipment used by his prior business to be transferred to KMB.

¶18 For DSS to rent this equipment from KMB, Pamela Beck had told Kraus that KMB would charge 1–2% above the cost of maintaining the equipment. DSS exclusively used the equipment; it was not used by the Becks’ other businesses or regularly rented to others. After the above transactions closed, KMB charged DSS $10,000 per month for renting this equipment. The district court found this "amount bore no relationship to the cost of maintaining the equipment"...