SRM Arms, Inc. v. Gsa Direct, LLC
| Decision Date | 04 August 2021 |
| Docket Number | Docket No. 47194 |
| Citation | 169 Idaho 196,494 P.3d 744 |
| Court | Idaho Supreme Court |
| Parties | SRM ARMS, INC., Plaintiff-Appellant-Cross Respondent, v. GSA DIRECT, LLC ; FFL Design, LLC; Defendants-Respondents-Cross Appellants, and Anthony Scott Turlington; David Lehman; Ryan Fitzgerald ; Miltac Industries, LLC, an Idaho limited liability company; Primus Technology Solutions, LLC, an Idaho limited liability company; GOL, LLC, a Nevada limited liability company, Defendants-Respondents. GSA Direct, LLC, Counterclaimant-Respondent-Cross Appellant, v. SRM Arms, Inc., Counterdefendant-Appellant-Cross Respondent, and Snake River Machine, Inc. ; SRM Performance Products; and Jeff Hajjar, Counterdefendants-Third Party Defendants-Appellants. |
David V. Nielsen, Attorney at Law, Boise, and The Pels Law Firm, Bethesda, Maryland, for Appellants-Cross Respondents. Jon D. Pels argued.
James R. Donoval, Eagle, for Respondents-Cross Appellants GSA Direct, LLC; FFL Design, LLC; Miltac Industries, LLC; Primus Technology, LLC; and GOL, LLC. James R. Donoval argued.
Angstman Johnson, Boise, for Respondents-Cross Appellants Anthony Scott Turlington; David Lehman ; and Ryan Fitzgerald. Matthew Christensen argued.
In this appeal we address the aftermath of an informal business arrangement gone sour, and the resulting trial in which the presiding judge modified the jury's verdicts. SRM Arms, Inc., ("SRM") filed suit against GSA Direct, LLC, ("GSA") and FFL Design, LLC, ("FFL") (collectively, the "Entity Defendants"), and Anthony Scott Turlington ("Turlington"), David Lehman ("Lehman"), and Ryan Fitzgerald ("Fitzgerald") (collectively the "Individual Defendants"), alleging breach of contract, breach of the covenant of good faith and fair dealing, fraud, aiding and abetting in the commission of fraud, and unjust enrichment.
After the jury awarded verdicts for SRM, which the district court calculated as totaling $1,110,695, the Entity Defendants and the Individual Defendants asked the court to modify the judgments or grant a new trial. The district court entered a remittitur1 for the claims against the Entity Defendants because it found the amount the jury awarded was excessive and not supported by sufficient evidence at trial. On appeal, SRM argues the district court erred in reducing the awarded damages. In their cross-appeal, the Entity Defendants argue the jury improperly found fraud and improperly found FFL liable for GSA's debts. The Entity Defendants also argue the damages should have been reduced further.
Additionally, the district court granted the Individual Defendants’ motion for a new trial on liability and damages because it found the jury instructions were inadequate to distinguish between direct liability and alter-ego liability. On appeal, SRM argues the jury correctly determined direct liability and associated damages. All parties seek attorney fees and costs.
SRM Arms is a manufacturer of firearms specializing in a unique semi-automatic shotgun designed by its CEO. On January 25, 2011, SRM signed a scant half-page business agreement with GSA Direct to be the "Authorized Distributor" for SRM's products. This entitled GSA to a 35% discount from the list price of the products it sold to firearms merchants. GSA also sold SRM's firearms and accessories to merchants through its affiliated distributors, including FFL Design, LLC, (Delaware) and FFL Design, LLC, (Idaho) (collectively "FFL"), which used an online platform called "vArmory" to market and sell SRM's products. The Individual Defendants in the case—Turlington, Lehman, and Fitzgerald—had ownership interests in each of the previously named companies.
No written document set forth the shipping, billing, or payment procedures between SRM and GSA. However, it was generally understood that a firearms merchant would place an order with GSA or one of its affiliates, and GSA would forward the order to SRM. GSA would then take physical possession of the firearm products from SRM at SRM's facilities and ship them to the customer at GSA's expense. After the products had shipped, GSA billed the customer, processed payments, and calculated how much it owed SRM. GSA then issued a purchase order to SRM, which, at the direction of SRM, did not include any serial numbers. GSA delivered purchase orders and payments to SRM in batches, which created delays in the payment schedule. SRM never issued any invoices of its own.
Although there was no formal agreement as to the timeframe in which SRM would be paid, all parties agree that by September 2013, a backlog of payments had developed. GSA conducted its own audit and determined that it owed SRM a balance of $284,145 and SRM agreed. GSA asserted that the backlog developed because SRM was unable to produce shotguns on schedule, which resulted in 747 cancelled orders for shotguns between 2011 and 2016, and that a significant number of the shotguns sold (approximately 19% during the course of SRM and GSA's business relationship) had to be returned for repair or replacement.
SRM and GSA did not make a formal arrangement as to how GSA would pay down its debt. SRM continued to supply GSA with shotguns to sell. By December 2014, GSA had paid the backlog debt down from $284,145 to $189,484. At this point, the debt accounted for about 5% of GSA's total sales ($4,092,773) under its distribution contract with SRM. In spring 2015, SRM indicated that an additional backlog had accrued since January 2014 of $174,750, though SRM did not provide specifics, such as serial numbers for the guns for which it alleged GSA had yet to pay. Lehman testified at trial that any additional payments owed were not delinquent but only delayed, consistent with the accepted routine for accounts payable. SRM later updated the deficit total for this second time period, from January 2014 through July 2015, to $212,815. GSA disputed this total, and again SRM provided no serial numbers for the guns associated with GSA's alleged debt.
In May 2015, SRM's CEO emailed Turlington and Lehman, asking to discuss the unpaid backlog. Turlington replied to SRM from his FFL email account and copied Lehman at his FFL email address. Turlington offered several solutions for paying off the debt, including finding investors for FFL, which Turlington stated would let them "shift a portion of operations costs from GSA Direct to FFL Designs," and allow them "to begin a steady payment against the backlog" within the next 30 to 60 days. Turlington concluded by reassuring SRM of their intentions:
Jeff, you have been more than patient with us as we have worked to get this situation fixed. We ask is [sic] that you give us a few more months to pull the plans above into action and this will allow us to take care of the backlog once and for all. If none of these options above work then I think the only logical conclusion would be for us to stop selling the shotgun and go get jobs that will allow us to get the backlog paid. Regardless, there isn't a scenario where we don't get the backlog paid because that is the commitment we've made and will keep.
At trial, Lehman and Turlington stated that FFL was a separate company from GSA; however, SRM maintained it was a subset of GSA and, therefore, liable for GSA's debts. According to SRM, the email from Turlington was written on behalf of GSA members and amounted to both a business guarantee by GSA and FFL as well as a personal guarantee by the Individual Defendants that the loan would be paid. At trial, SRM testified that Lehman, Turlington, and Fitzgerald had also separately made oral promises to personally guarantee the debt, or that FFL would pay the debt. The Individual Defendants all denied this. Instead, each of the Individual Defendants claimed he had told SRM's CEO that once FFL was funded by investors, GSA would have lower overhead costs and would better be able to pay the backlog debt. After SRM alerted GSA to its concerns about the backlog of payments, SRM continued to supply GSA with shotguns.
In 2016, FFL began selling SRM shotguns with an additional 13.5% service fee through its online platform, vArmory. FFL would then pay GSA, and GSA would pay SRM its 65% due under the distribution contract. Turlington, Lehman, and SRM came to an oral agreement in late 2015 or early 2016 that once FFL became fully operational, GSA would pay SRM 100% of its sales revenues until the original backlog amount of $189,484 was paid. In May 2016, FFL began dealing directly with SRM to arrange shipment of the shotguns, and FFL would charge the buyer and pay SRM, retaining its service fee and paying SRM the entire remaining balance.
On September 13, 2016, SRM terminated its distribution agreement with GSA, and demanded immediate payment of the backlog debt, which it then calculated to have grown to $422,029. GSA replied through counsel that without SRM's supply of shotguns, which was its sole source of income, it could not repay the debt. In the event this occurred, GSA indicated it would file articles of dissolution, making a lawsuit against GSA fruitless.
At trial, the claims against the Entity Defendants were presented along with the direct liability claims against the Individual Defendants, i.e. the claims against Turlington, Lehman, and Fitzgerald for actions taken in their individual capacities, and not for actions taken as proxies of the entities. The district court ordered bifurcation of the claims against the Individual Defendants for actions taken as proxies or alter-egos,2 to be considered later in a separate bench trial, if necessary.3 An 11-day jury trial took place in October 2018. The jury returned verdicts against both the Entity Defendants and the Individual Defendants. The jury's special verdict form did not ask the jury to set forth the factual basis for each of the verdicts. The jury submitted the following verdicts in favor of SRM and...
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