Electrical Distributors, Inc. v. SFR, Inc.

• Decision Date: 27 January 1999
• Docket Number: Nos. 96-4198,97-4009,97-4070,s. 96-4198
• Citation: 166 F.3d 1074
• Parties: 37 UCC Rep.Serv.2d 485, 1999 CJ C.A.R. 1679 ELECTRICAL DISTRIBUTORS, INC., also known as EDI, Inc., Plaintiff-Counter-Defendant-Appellant/Cross-Appellee, v. SFR, INC., QED, Inc., Defendants-Counterclaimants-Third Party Plaintiffs-Appellees/Cross Appellants, Steven R. Heaps, Defendant-Cross-Claimant-Appellee, v. Ronald Mitchell and B. Jon Mitchell, Third Party Defendants-Appellants/Cross-Appellees.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 1074

166 F.3d 1074

37 UCC Rep.Serv.2d 485, 1999 CJ C.A.R. 1679

ELECTRICAL DISTRIBUTORS, INC., also known as EDI, Inc., Plaintiff-Counter-Defendant-Appellant/Cross-Appellee, v. SFR, INC., QED, Inc., Defendants-Counterclaimants-Third

Party Plaintiffs-Appellees/Cross Appellants, Steven R. Heaps, Defendant-Cross-Claimant-Appellee, v. Ronald Mitchell and B. Jon Mitchell, Third Party

Defendants-Appellants/Cross-Appellees.

Nos. 96-4198, 97-4009, 97-4070.

United States Court of Appeals, Tenth Circuit.

Jan. 27, 1999.

Submitted on the briefs: ^*

Jackson Howard and Leslie W. Slaugh of Howard, Lewis & Petersen, Provo, Utah, for Electrical Distributors, Inc., Ronald Mitchell, and B. Jon Mitchell.

Paul S. Felt and James L. Wilde of Ray, Quinney & Nebeker, Provo, Utah, for SFR, Inc. and QED, Inc.

P. Bruce Badger of Fabian & Clendenin, Salt Lake City, Utah, for Steven R. Heaps.

Before HENRY, HOLLOWAY, and LUCERO, Circuit Judges.

HOLLOWAY, Circuit Judge.

Appellants/Cross-Appellees Electrical Distributors, Inc. (EDI) brought suit in Utah state court against SFR, Inc. to enforce a promissory note and alleging breach of contract. SFR removed the case to the United States District Court for the District of Utah on diversity grounds, filing a counterclaim against EDI and a third-party complaint against Duff Mitchell and Jon Mitchell, alleging breach of a purchase agreement contract, unjust enrichment, a claim for accounting and a right to indemnity. Steven Heaps intervened, seeking declaratory relief against EDI that he was entitled to a one-third share of a promissory note issued by SFR and naming EDI as the payee. After inconclusive summary judgment proceedings, the case was tried to the court and judgment was entered on October 4, 1996, on a memorandum decision and order of September 24, 1996. I App. at 140.

EDI and Jon Mitchell filed a timely motion to amend conclusions of law which the district judge denied. The judge also entered an order awarding attorney fees to Duff Mitchell. Both the EDI appellants and the cross-appellants, SFR, et al., have timely appealed the judgment. We have jurisdiction pursuant to 28 U.S.C. § 1291.

I The Factual Background

The district judge made detailed findings and conclusions in her Memorandum Decision and Order following the bench trial. 1 App. at 124-136. She found that the suit originated in the District Court of Utah County, Utah, and was removed to the federal district court on September 25, 1995. Id. at 124. Defendant SFR shortly filed a counterclaim against EDI, alleging breach of contract, unjust enrichment, a claim for accounting and a right to indemnity. SFR also filed a third-party complaint against Duff Mitchell and R. Jon Mitchell, alleging the same causes of action. In July 1996, Steven R. Heaps intervened and filed a complaint against SFR for declaratory relief and a cross-claim against EDI for declaratory relief and alleging breach of the covenant of good faith, inter alia. Heaps also filed a third-party complaint against Duff and Jon Mitchell. In August 1996 the court realigned Heaps as a defendant. Id. at 132.

The judge found the background facts as follows. EDI is a Utah corporation with its principal place of business in Salt Lake County. Duff Mitchell, Jon Mitchell and Steven Heaps are residents of Utah. SFR is a Colorado corporation doing business under the name QED, Inc. SFR does business in Utah. EDI is a close corporation in the wholesale electrical supply business, whose ownership was divided among five shareholders, Joseph Timmons and Duff Mitchell each holding 40% of the issued stock. Duff Mitchell's initial investment was in the form of goodwill valued at $100,000. Steven Heaps and Jon Mitchell each held 8% of EDI's issued stock, both having made an initial $20,000 investment. Jerry Lees held 4% of the issued stock of EDI. Duff Mitchell was president of EDI, and the two Mitchells and Heaps worked for the company. Lees and Timmons were never employees of EDI.

SFR is a close corporation in the wholesale electrical supply business. It had two shareholders, Dean Stauffer, SFR's President, and Tom Foley. SFR wanted to become a full-line distributor of electrical products in the Salt Lake City area. SFR determined it could do this through a purchase of EDI. SFR initiated telephone conversations and meetings with representatives of EDI. Initial negotiations involved Stauffer for SFR and Duff Mitchell for EDI. Id. at 125. Later, Jon Mitchell and Steven Heaps were included in the discussions.

The negotiations culminated in execution of an "Asset Purchase Contract" (the Purchase Contract) dated May 17, 1993. 2 App. at 780, et seq. Dean Stauffer signed the Purchase Contract for SFR and Duff Mitchell signed for EDI. In addition, Duff Mitchell, Jon Mitchell and Steven Heaps signed as "individual sellers." The purchase price included four components: (1) an initial payment of $10,000 by SFR; (2) a subsequent payment of $240,000 by SFR on the closing date; (3) EDI's right to retain and collect aged accounts receivable up to $470,000; and (4) a percentage of future net profits generated by EDI as determined by a contractual schedule, varying from 80% down to 10% of the profits during stated periods. Id. at 126.

Included in the Purchase Contract was a covenant not to compete binding the individual sellers. Duff and Jon Mitchell and Steven Heaps agreed that for a period of seven years they would not, directly or indirectly, engage in the sale of electrical supplies in Utah, except as employees of SFR. The Purchase Contract provided that its terms and conditions were governed by Colorado law. Id. at 126.

Following execution of the Purchase Contract, SFR, the Mitchells and Heaps entered into a "Consulting Agreement." It was not signed by SFR; however, Stauffer testified he intended SFR to be bound by that agreement and a copy signed by the Mitchells and Heaps was retained by SFR. Id. at 127.

Paragraph 1 of the Consulting Agreement contained a profit-sharing provision identical to that of the Asset Purchase Contract except that payments were to be made to Duff Mitchell, Jon Mitchell and Heaps. Trial testimony indicated that this profit-sharing provision was not intended to replace or supplement the provision contained in the Purchase Contract. Paragraph 7 of the Consulting Agreement provided that payments under the profit-sharing provision were to continue, notwithstanding termination or resignation of Duff Mitchell, Jon Mitchell or Steven Heaps. Id. at 127.

Following the sale, the Mitchells and Heaps became salaried employees of SFR. Duff Mitchell received $52,000 of the $250,000 paid to EDI under the Purchase Contract. The remaining balance was used to retire EDI stock held by Jon Mitchell, Heaps, Timmons and Lees. After the Purchase Contract and Consulting Agreement were signed and the $250,000 initial payment had been dispersed by EDI, Duff Mitchell became the sole officer and shareholder in EDI. Id. at 127. The Mitchells and Heaps agreed that any net profits received would be shared equally among them.

Because of a discrepancy indicated by a December 1993 inventory between EDI's book inventory and its physical inventory, no profit-sharing payments under the Purchase Contract or the Consulting Agreement were paid to Duff Mitchell, Jon Mitchell or Heaps in 1993 or 1994.

Although he was not obligated by the Purchase Contract or Consulting Agreement to do so, Stauffer testified he renegotiated with the Mitchells and Heaps because he viewed their expertise as critical to the EDI/SFR venture and he feared that they would leave SFR if there continued to be no profit-sharing payments. Id. at 128. In January 1995, Duff Mitchell acted as a spokesman for Jon Mitchell and Heaps and accepted an alternative to the profit-sharing plan whereby SFR would pay $750,000, evidenced by a promissory note, with monthly payments of $10,000 for 75 months. EDI was the named payee under the note and was to receive monthly payments from January 31, 1995, to March 31, 2001. Id. at 128-29. Stauffer testified that the note was intended to replace the profit-sharing provisions of the Purchase Contract and the Consulting Agreement, and the Mitchells and Heaps, not EDI, were to receive the note proceeds. Duff Mitchell told Stauffer that the note proceeds would be shared equally by Duff Mitchell, Jon Mitchell and Heaps. Id. at 129.

There was conflicting evidence regarding the effect of the $750,000 note on the Purchase Contract. Heaps testified he believed the note replaced only the profit-sharing provision, leaving the rest of the Purchase Contract, including the covenant not to compete, intact. Id. at 129. Heaps said that had the note replaced the entire Purchase Contract, Timmons and Lees would have shared in the note proceeds. Dean Stauffer also testified that the note replaced only the profit-sharing provision of the Purchase Contract. Duff and Jon Mitchell testified the note replaced the entire Purchase Contract, abrogating the covenant not to compete. The court found Stauffer's and Heaps's testimony (that the note replaced only the profit-sharing provision) was more credible. Id. at 129.

The judge found that shortly after receiving the $750,000 note, Duff Mitchell prepared a "sham note." This second document changed the principal sum to $550,000, shortened the note term to July 31, 1999, and reduced the number of monthly payments to 55. The document was found to bear a forged signature of Dean Stauffer. The judge found that evidence presented at trial indicated that Duff Mitchell created the second note because he believed he was entitled to more than a one-third share of the $750,000 note. Duff Mitchell represented to Jon Mitchell and Heaps that the fake $550,000 note was, in fact, the note received from SFR. Duff Mitchell delivered a copy of the phony note to Heaps, and Duff Mitchell never disclosed to SFR his creation of the $550,000 note, his representations to Jon Mitchell...