Mgmt. Capital, L.L.C. v. F.A.F., Inc.
| Decision Date | 12 June 2019 |
| Docket Number | No. 2017-275-Appeal. (PB 08-2364),2017-275-Appeal. (PB 08-2364) |
| Citation | 209 A.3d 1162 |
| Parties | MANAGEMENT CAPITAL, L.L.C. v. F.A.F., INC. et al. |
| Court | Rhode Island Supreme Court |
Joseph V. Cavanagh, Jr., Esq., Robert James Cavanagh, Jr., Esq., for Plaintiff.
Robert D. Wieck, Esq., Rajaram Suryanarayan, Esq., for Defendants.
Present: Suttell, C.J., Goldberg, Flaherty, and Indeglia, JJ.
This case arises from the milieu of the financial world where arcane terms such as "stock warrant," "put," and "call" are commonplace but nevertheless remain alien to the uninitiated. The resolution of this appeal, however, requires us to resort to concepts distilled from principles taught in a first-year contracts class: reformation, ambiguity, and anticipatory repudiation. The plaintiff, Management Capital, L.L.C. (Management), initiated this litigation after the defendant, F.A.F., Inc. (FAF), maintained that a common stock warrant held by Management had no value. A Superior Court justice, sitting without a jury at a trial held over six days in June 2015, found in favor of Management. On appeal, FAF contends that the trial justice erred when he: (1) reformed certain dates in a stock warrant that he found were a result of mutual mistake; (2) determined that "funded debt" was an unambiguous term meaning "long-term debt"; (3) found that FAF repudiated its obligations under the stock warrant; (4) found that Management properly preserved its post-repudiation rights; (5) determined that Management proved its damages with reasonable certainty; (6) determined that prejudgment interest would accrue from October 13, 2008 onward; and (7) did not rule on FAF's counterclaims. For the reasons set forth in this opinion, we affirm the judgment of the Superior Court.
In early 2002, Ernest Humphreys (Humphreys), Robert Manchester (Manchester ), Steve Carlotti (Carlotti), and Jerry Cerce (Cerce) formed Management Capital, L.L.C. and Management Solutions, L.L.C. Drawing on the deep business and legal experience of their founding principals, Management Capital, L.L.C. invested in companies—often small, privately-owned business entities that had the potential to grow. Providing consulting and advisory services to these companies, Management Solutions, L.L.C. worked in concert with Management Capital, L.L.C.1
FAF, a Rhode Island jewelry company, was just the kind of company in which Management sought to invest; in other words, "an ideal client" for Management. Humphreys thought FAF was an "exciting company" with "tremendous opportunity," but, as of 2002, FAF faced an $ 11.5 million judgment (the BHG judgment) and a $ 1 million claim for damages (the Drianna claim) (collectively the claims). Manchester testified that, in light of the claims, FAF's value at that time was "not zero, but * * * nominal."
Cerce introduced Humphreys to his cousin, Arthur Fiorenzano (Fiorenzano), president of FAF, in early 2002. In the spring of 2002, Management and FAF agreed that Management would help FAF resolve the claims. The principals at Management were "excited" about "help[ing] [FAF] become more successful in the future." In addition to charging a $ 300 hourly fee, Management would receive a yet-to-be-determined "success fee" pending the results of Management's work.
In the summer of 2002, Management suggested to FAF that it grant a common stock warrant2 (the Warrant) to Management upon its successful settlement of the BHG judgment. The Warrant would essentially serve as Management's "success fee." Armand Almeida (Almeida), FAF's chief financial officer (CFO), initially advised Fiorenzano against issuing a warrant to Management. Despite Almeida's qualms, FAF ultimately agreed to issue Management a warrant.
On July 26, 2002, Humphreys sent an email to Fiorenzano with a one-page summary of the "Warrant Terms" (the Warrant Terms) attached for the parties to discuss at an upcoming meeting. The Warrant Terms outlined the basic provisions of what would eventually become the Warrant. After some negotiation, the Warrant Terms were agreed to by both parties in writing on October 9, 2002.
According to the Warrant Terms, Management had the right to acquire 10 percent of FAF's stock for the exercise price of $ 710,000, exercisable any time before December 31, 2007. The $ 710,000 exercise price was based on 10 percent of FAF's then-current agreed value of $ 7.1 million. The Warrant Terms stated that the $ 7.1 million figure "values FAF at a 4 multiple of the average of the EBITDA for 2001 and forecast 2002, less only funded debt of approximately $ 3.7 million."3
Under the Warrant Terms, Management also had the right to put4 the Warrant to redeem either the shares it had purchased from FAF or the Warrant itself; likewise, FAF had the right to call5 the Warrant to force Management to sell whatever shares Management had purchased from FAF or the Warrant itself. Both the put and call rights were exercisable any time after December 31, 2007.
In December 2002, Management successfully resolved the claims against FAF. The next month, Management turned its focus to drafting the Warrant. On January 14, 2003, Humphreys sent an email to Almeida (David Syner, FAF's accountant (Syner), Fiorenzano, and Cerce were also copied), with a draft of the Warrant attached. During the following months, FAF and Management exchanged several communications regarding various terms of the Warrant.
Humphreys and Manchester testified that, at that time, Management's main priority was to ensure that Management would be able to review FAF's 2007 audited financial statements before Management decided whether to exercise or put the Warrant; this review period was not a concept captured by the initial draft Warrant or Warrant Terms. FAF agreed to Management's request, and a forty-five-day review period was inserted into the draft.6 The following day, FAF's attorney, who was also involved in negotiating the Warrant, added language proposing September 30, 2007 as a definite date for the Warrant's expiration, among other edits. In a later draft, FAF's attorney, after a conversation with Humphreys, also inserted a provision that created a thirty-day window (the Window), allowing Management to put and exercise the Warrant simultaneously, or put the Warrant before Management was required to exercise the purchase of shares.
The creation of the Window resulted in two inconsistencies regarding the years in the provided deadlines to exercise and put/call the Warrant. Section 3 of the draft Warrant provided that the deadline to exercise the Warrant was seventy-five days after receipt of the 2007 audited financial statements or October 31, 2007, whichever was the earlier to occur . Similarly, Section 13 provided that the date the put/call rights began to run started forty-five days after receipt of the 2007 audited financial statements or September 30, 2007, whichever was the earlier to occur . A literal reading of Sections 3 and 13 would always result in the respective dates of October 31, 2007 and September 30, 2007 as the earlier date to occur, because the audited financial statements for the year ending December 31, 2007 would never be available until sometime in calendar year 2008. Despite a clear contradiction, these dates remained in the final Warrant.
Management and FAF executed the final Warrant on July 7, 2003. Under the terms of the final Warrant, Management had the right to acquire 10 percent of FAF's stock for the exercise price of $ 710,000, exercisable any time before either seventy-five days elapsed after Management received FAF's 2007 audited financial statements or October 31, 2007, whichever was the earlier to occur. The final version of Section 3.1 provided:
"This Warrant may be exercised in whole or in part at any time by the registered holder by the surrender of this Warrant at any time after the date hereof and before 5:00 p.m. on: (a) the date which is seventy-five (75) days after receipt by [Management], or any subsequent holder hereof, of the audited financial statements of [FAF] for the year ending December 31, 2007; or (b) October 31, 2007, whichever is the earlier to occur (‘Expiration Time’); together with payment to [FAF] of the Exercise Price (or portion thereof) for the shares to be purchased hereunder."
Section 13 provided a timeline for the put and call rights. Similar to Section 3, the right to put/call was exercisable any time before either forty-five days elapsed after Management received FAF's 2007 audited financial statements or September 30, 2007, whichever was the earlier to occur. The final version of Section 13 stated, in relevant part:
Section 14 set out a formula for calculating the purchase price. Section 14 provided, in relevant part:
Although the final Warrant encapsulated the basic ideas...
To continue reading
Request your trial
-
Sadler v. 30 Route 6, LLC
... ... Eastern Motor Inns, Inc. v. Ricci, 565 A.2d 1265, ... 1269 (R.I. 1989). Specific ... appropriate framework. See Management Capital, L.L.C. v ... F.A.F., Inc. , 209 A.3d 1162, 1175 (R.I. 2019) ... ...
-
Premier Land Dev. v. Kishfy
...damages sustained from a breach of contract must be proven with a reasonable degree of certainty * * *." Management Capital, L.L.C. v. F.A.F., Inc ., 209 A.3d 1162, 1179 (R.I. 2019) (quoting Marketing Design Source, Inc. v. Pranda North America, Inc. , 799 A.2d 267, 273 (R.I. 2002) ). A pla......