Ncmic Finance Corporation v. Artino

• Decision Date: 28 July 2009
• Docket Number: No. 4:07-cv-00204-JEG.,4:07-cv-00204-JEG.
• Citation: 638 F.Supp.2d 1042
• Parties: NCMIC FINANCE CORPORATION, Plaintiff, v. William ARTINO; Daniel Kerr; Sally Schmaltz; Pro Funding Group, LLC; and Unnamed Co-Conspirators, Defendants.
• Court: U.S. District Court — Southern District of Iowa

638 F.Supp.2d 1042

NCMIC FINANCE CORPORATION, Plaintiff, v. William ARTINO; Daniel Kerr; Sally Schmaltz; Pro Funding Group, LLC; and Unnamed Co-Conspirators, Defendants.

No. 4:07-cv-00204-JEG.

United States District Court, S.D. Iowa, Central Division.

July 28, 2009.

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Frank B. Harty, Benjamin Patrick Roach, Nyemaster Goode West Hansell & O'Brien PC, Des Moines, IA, for Plaintiff.

Stanley J. Thompson, Davis Brown Koehn Shors & Roberts PC, Des Moines, IA, for Defendants.

ORDER

JAMES E. GRITZNER, District Judge.

The matter before the Court for decision is the action of Plaintiff NCMIC Finance Corporation (NCMIC) against Defendants William Artino (Artino) and Pro Funding Group, LLC (PFG) (collectively Defendants).¹

On June 13, 2007, the Court issued an injunction against Artino and PFG enforcing the restrictive covenants contained in Artino's employment agreement with NCMIC. Order of June 13, 2007, Clerk's No. 10.

On December 15, 2008, the Court commenced a bench trial on the Complaint. The bench trial concluded on December 16, 2008. Attorneys Frank Harty and Ben Roach represented NCMIC. Attorneys Stan Thompson and Sarah Franklin represented Defendants.

On January 20, 2009, both NCMIC and Defendants filed their written closing statements. The Court finds the matter fully submitted and ready for disposition. This order constitutes the Court's findings of fact and conclusions of law. Fed. R.Civ.P. 52(a) ("In an action tried on the facts without a jury or with an advisory jury, the court must find the facts specially and state its conclusions of law separately.").

I. JURISDICTION

The Court issued an order on November 24, 2008, denying Defendants' motion to dismiss for lack of subject-matter jurisdiction pursuant to Federal Rule of Civil Procedure 12(b)(1). Order of November 24, 2008, Clerk's No. 54. Defendants argued NCMIC failed to assert a colorable claim under the Computer Fraud and Abuse Act (CFAA), 18 U.S.C. § 1030; and therefore the Court lacked federal question subject-matter jurisdiction. The Court determined "NCMIC's complaint adequately alleges a substantial and colorable CFAA violation against [Defendants]," without deciding the merits of NCMIC's CFAA claim. Order of November 24, 2008, at 9, Clerk's No. 54. The Court exercised supplemental subject-matter jurisdiction over NCMIC's state law claims "because those claims `are so related to claims in the action within such original jurisdiction that they form part of the same case or controversy under Article III of the United States Constitution.'" Order of November 24, 2008, at 4 n. 3 (quoting 28 U.S.C. § 1367(a)).²

II. FINDINGS OF FACT

After assessing the credibility of the trial witnesses and analysis of the exhibits offered into evidence, the Court finds the following facts by a preponderance of the evidence.

A. The Parties

NCMIC is a subsidiary of NCMIC Group Inc., a financial services holding company. The original and core business of NCMIC has been to provide professional liability insurance to chiropractors. In the business division pertinent to this case, NCMIC provides lease equipment financing primarily for small-ticket healthcare items. NCMIC's leasing customer base is half chiropractic professionals and half other healthcare professionals. NCMIC's customer base comes from healthcare vendors who recruit customers to purchase or lease their healthcare equipment. The healthcare vendors forward these prospective purchasers to NCMIC to secure financing for purchasing the healthcare vendor's equipment.

Artino entered the lease finance business starting in 1984. From 2000 through June 2003, Artino founded Professional Capital Group (PCG) with Scott Stewart (Stewart). PCG was an equipment leasing business that offered direct base loans over the Internet to service healthcare vendors. Artino and Stewart both owned and operated PCG. PCG developed a business relationship with NCMIC, whereby NCMIC provided a line of credit to PCG that allowed PCG to write leases. Artino became a NCMIC employee in June 2003 when NCMIC purchased PCG and hired Artino as vice president and general manager of NCMIC's equipment-financing division.

In August 2006, Artino met with Daniel Kerr (Kerr) on at least twelve different occasions to discuss forming a new corporation called Pro Funding Group (PFG) that would compete against NCMIC and serve as a captive leasing company for ProSolutions, Inc. (PSI), a chiropractic equipment vendor. Artino considered Kerr his business partner at PFG. Artino hoped PFG could help PSI's customers secure financing with lenders in exchange for receiving commissions from PSI.

B. Artino's Employment with NCMIC

Around August 2002, NCMIC and PCG began negotiations for an asset-purchase agreement in which NCMIC would acquire PCG. After ten months of negotiations, NCMIC purchased PCG in June 2003. As part of the transaction, Artino was offered $60,000, an employment offer as NCMIC's vice president and general manager of the equipment-financing division that the parties memorialized in a written employment agreement (Employment Agreement), a severance pay package (Severance Agreement), and a personal goodwill purchase agreement (Goodwill Agreement). These agreements were all executed simultaneously as part of one transaction. Artino began employment at NCMIC on June 30, 2003. The Severance Agreement provided Artino eighteen months salary in the event of severance, while all other NCMIC executives only received twelve months severance pay. The Goodwill Agreement paid Artino one half of one percent of all leasing business booked by NCMIC during Artino's employment. Even though the Goodwill Agreement provided Artino incentives to generate a high volume of leases without regard to the riskiness of the lease, Greg Cole (Cole), NCMIC's president, testified that Artino always "made appropriate underwriting decisions." Tr. 114.

Artino explained the Goodwill Agreement's significance in the overall deal as follows: "[T]he actual form of goodwill came up as a suggestion from McGladrey [& Pullen, CPAs] for a way for us to treat the sale [of PCG] as a capital gain. . . . Since this was the acquisition of [PCG] and all of its — you know, our knowledge and us coming on, McGladrey came up with this personal goodwill purchase which got us capital gains treatment for tax, for income taxes on that payment." Tr. 345; 347. Artino explained that the parties agreed that the bulk of Artino's compensation would be paid through the Goodwill Agreement because of its tax implications. Artino explained, "It wasn't like . . . we were disposing of [PCG] and then coming in as employees at NCMIC. I mean, that's how it got structured, but we — clearly, the consideration was for the acquisition and our efforts toward developing [PCG]." Tr. 349.

Even though NCMIC purchased PCG's intellectual property, including a website used for determining the creditworthiness of prospective customers, NCMIC believed that Artino's expertise was a primary reason for purchasing PCG's assets. Cole testified that the "big" asset NCMIC was purchasing from PCG was "the intellectual knowledge that [Artino] brought to the table, along with [Stewart], because they had been in the lease finance industry for so long and in very high level positions." Tr. 83. Cole retained every PCG employee because of their expertise in the industry. Patrick McNerney (McNerney), NCMIC Group Inc.'s chief executive officer, testified that NCMIC purchased PCG because of Artino's wealth of experience in lease finance and his experience and contacts in the business.

The Employment Agreement was part of the consideration for the NCMIC-PCG transaction. Artino read and understood the terms of the Employment Agreement, Goodwill Agreement, and Severance Agreement. Artino obtained legal counsel to review these documents before executing the sale of PCG to NCMIC. Artino's Employment Agreement contained a restrictive covenant not to compete with NCMIC or solicit NCMIC's customers for a period of eighteen months following the termination of Artino's employment and prohibiting Artino from disclosing any confidential information to NCMIC's competitors. Both the Employment Agreement and Goodwill Agreement could only be modified in writing during Artino's employment with NCMIC.

As vice president and general manager, Artino had total day-to-day control of the equipment-financing division. Artino became a NCMIC officer at the first board of directors meeting after Artino began employment at NCMIC and was an officer until his resignation became effective on December 1, 2006. As vice president and general manager, Artino had access to and played a central role in developing NCMIC's business plan, vendor relationships, and customer relationships regarding equipment-lease financing. In NCMIC's corporate hierarchy, Artino reported directly to Cole.

In early 2006, NCMIC expressed concern that Artino's and Stewart's compensation levels were too high. Cole wrote in a performance evaluation that Artino's salary, coupled with his benefits, was too "rich" and the "single largest expense item" in the equipment-financing division. Tr. 115. In January 2006, Cole approached Artino and Stewart about changing the way their goodwill payments were calculated under the Goodwill Agreement. Cole testified that he "suggested after some time how about if we consider a quarter percent versus half percent for each of them commission and maybe up to forty percent of the net profit from the line of business share." Tr. 177. After these discussions, Artino worked with Gary Hoffman, NCMIC's chief financial officer, to figure out a way to make the equipment-financing division more profitable, but the parties never reached an agreement changing the terms of the Goodwill Agreement.

Following these discussions and attempts to...