Pollock v. DR Horton, Inc.-Portland

• Decision Date: 15 October 2003
• Citation: 190 Or. App. 1,77 P.3d 1120
• Parties: Roger M. POLLOCK and RMP Properties, Inc., nka KMP Properties, Inc., an Oregon corporation, Appellants, v. D.R. HORTON, INC.-PORTLAND, a Delaware corporation, and D.R. Horton, Inc., a Delaware corporation, Respondents.
• Court: Oregon Court of Appeals

77 P.3d 1120

190 Or. App. 1

Roger M. POLLOCK and RMP Properties, Inc., nka KMP Properties, Inc., an Oregon corporation, Appellants, v. D.R. HORTON, INC.-PORTLAND, a Delaware corporation, and D.R. Horton, Inc., a Delaware corporation, Respondents.

9903-02825; A110606.

Court of Appeals of Oregon.

Argued and Submitted October 2, 2001.

Decided October 15, 2003.

Gary M. Berne, Portland, argued the cause for appellants. With him on the briefs were David F. Rees, and Stoll Stoll Berne Lokting & Shlachter, P.C.

Peter H. Glade, Portland, argued the cause for respondents. With him on the brief were Paul Bierly and Markowitz, Herbold, Glade & Mehlhaf, P.C.

Before WOLLHEIM, Presiding Judge, and DEITS, Chief Judge, and LINDER, Judge.¹

DEITS, C.J.

Plaintiffs appeal a judgment entered after the trial court's grant of summary judgment to defendants on plaintiffs' claims for breach of contract and on defendants' counterclaims for breach of fiduciary duty, restitution, and breach of contract. We reverse.

Because the trial court granted defendants' motions for summary judgment, we state the facts in the record most favorably to plaintiffs, including drawing all reasonable inferences in their favor. ORCP 47 C; Flug v. University of Oregon, 335 Or. 540, 542, 73 P.3d 917 (2003); Jones v. General Motors Corp., 325 Or. 404, 420, 939 P.2d 608 (1997). Plaintiff Roger M. Pollock (Pollock) is the sole shareholder in plaintiff KMP Properties, Inc., formerly known as RMP Properties, Inc. (RMP). In 1990 RMP began building homes in the Portland area, focusing on the market for first-time buyers. It built homes on speculation, without having buyers for them, and then sold them after construction began, usually after completion. Such homes are known in the trade as "spec" homes, in contrast to "custom" homes, which are sold before being built. The business grew rapidly; by 1997 RMP was the largest builder of spec homes in the Portland area. In that year, it started 303 homes, sold 187, and had profits of over $3 million.

Pollock's goal was for RMP to continue its rapid growth, but he was uncertain whether it could do so on its own. By 1997, he was also concerned that changes in the local banking climate, particularly the purchase by a Minnesota bank of the bank that financed RMP's business—which was the last large locally owned bank in Oregon—would affect his ability to obtain the necessary financing. In addition, he was uncertain whether his and RMP's credit would be sufficient to obtain that financing from any other source. He therefore sought to sell RMP or its assets to a large regional or national homebuilder that would have the necessary resources to continue the business's growth. His goal was to remain in charge of the business after the sale and to participate in the benefits of its expansion. In order to find a purchaser, Pollock hired a local investment banker, who prepared an offering memorandum and sent it to several interested companies. The memorandum described the nature of RMP's business, including its focus on spec homes.

Defendant D.R. Horton, Inc. (Horton), was one of the companies that received the offering memorandum. It expressed interest and eventually agreed with Pollock on the terms for it to purchase RMP's assets. Under the agreement, Horton would form D.R. Horton, Inc.-Portland (Horton-Portland) as a new subsidiary, and Horton-Portland would purchase the assets. It would pay Pollock $6.5 million in cash and $1.25 million in restricted Horton stock, and Pollock would become an officer of Horton-Portland, in charge of the division's operations. Horton told Pollock that it wanted to work with people who were entrepreneurs and who could operate by themselves with little interference from above. Pollock thus understood that the agreement contemplated that he would be free to run the business as he had always run it, with the only difference being that he would now receive a salary. Before closing the deal, Horton performed a thorough due diligence investigation that gave it the opportunity to become fully familiar with RMP's business, including its emphasis on spec homes, the turnover of its inventory, and the gross margins that it customarily obtained on its sales.

Pollock believed that the business was worth approximately $12 million rather than the $7.75 million in cash and stock that Horton-Portland paid at the closing. As a way to make up the difference, the "Asset Purchase Agreement" (APA), which was the primary document for implementing the purchase, provided a profit-sharing arrangement that it described as the "earn-out."² Under the earn-out, plaintiffs were entitled to receive 50 percent of the profit that Horton-Portland made above $3.75 million during the first three years after the closing and 50 percent of the profit above $4 million in the fourth year. Pollock intended to use the resources³ that Horton would provide to expand the business rapidly, thereby making possible a level of production and sales of houses that would make the earn-out extremely valuable. He thought that the earn-out could produce as much as twice as the amount that he would have received if he had sold the business outright at its current fair value. Pollock did not intend to change his previous business approach but, rather, to expand it by building and selling increased numbers of houses. Thus, he would continue his focus on a high volume of sales with relatively modest gross profit margins, and he would continue building spec rather than custom houses. The offering memorandum made clear that his fundamental purpose in selling the business was to obtain resources that he could use in that fashion.

The APA reflects the above considerations. Article 9 included a noncompetition provision that prevented Pollock and RMP from engaging in a competitive business for three years after the end of the earn-out period or three years after the termination of Pollock's employment, whichever came first. It also contained confidentiality and enforcement provisions. Among those provisions was Section 9.06:

"Purchaser [⁴] covenants to provide good faith financial support to the Company during the Earn-Out Period. For the purpose of this Section 9.06, Purchaser's good faith financial support shall not be deemed to require Purchaser to provide financing in excess of that justified by the Acquired Business's sales volume or pre-tax profit margin in any given period."

Article 10 of the APA provided for the earn-out payments that plaintiffs would receive. They were based on the performance of the business that plaintiffs sold, which was Horton-Portland's only business during this period. Section 10.01 defined the earn-out and established the accounting procedures for determining its amount. Section 10.02 limited Horton-Portland's management and evaluation of the business during the earn-out period:

"At all times during any Earn-Out Year, in managing the operations of the Acquired Business, the Purchaser shall apply operating, performance and financial criteria to the business of the Acquired Business substantially similar to the criteria applied to the Parent's other operating divisions, subject to such departures therefrom as in the Purchaser's reasonable judgment may be required by any market conditions affecting the business of the Parent or the Acquired Business subject to Purchaser[']s obligations pursuant to Section 9.06 above. Provided that no corporate overhead other than the amount in Section 10.01(b) above shall be allocated to the entity for which `Earn-Out' payments are being calculated."

(Underscoring in original.)

Finally, and as a part of the overall transaction, Pollock and Horton-Portland entered into an employment agreement under which Pollock was to be responsible for Horton-Portland's day-to-day operations. The employment agreement was expressly tied to the earn-out, expiring at the end of the earn-out period. It could also terminate earlier for a number of reasons, including cause, which the agreement defined in part as that Pollock had "committed any act of fraud, embezzlement or theft in connection with his duties hereunder."

Before Pollock sold RMP's assets to Horton-Portland, he had routinely used its money to pay for work on his own homes and for other personal matters. RMP showed those expenses on its books as shareholder loans. After the sale, Horton-Portland paid some equipment rental fees for work on Pollock's personal residence and his beach home. Pollock did not become aware of those payments until after plaintiffs filed the complaint in this case. In addition, Pollock moved Horton-Portland's offices from the location that RMP had used to a building that he owned.⁵ He rented the top floor of the building to Horton-Portland for its offices and the lower floor to his father-in-law's business. He intended for Horton-Portland to pay the cost of remodeling the space that it used and, in return, intended to charge it rent that was significantly below the market rate. He did not intend to have Horton-Portland pay for remodeling the lower floor, but, in fact, the Horton-Portland bookkeeper paid all of the remodeling bills for both floors from company funds.⁶ When Pollock learned of that action, he instructed the bookkeeper to determine the amount that the company had overpaid so that he could reimburse it. The bookkeeper had not completed that calculation at the time of his resignation, in part because the same suppliers and subcontractors generally worked on both parts of the building and it was not easy to divide their bills between the floors. Pollock was embarrassed about the situation and did not inform his superiors about it. During the course of this litigation, he used records that defendants provided during discovery, calculated the amount that he believed he owed, and paid it.

Pollock also had a Horton-Portland employee attend hearings concerning whether to include property that Pollock owned in...