United States District Court, C.D. California
BEINER ENTERPRISES, INC. Plaintiff,
ADAM CALDWELL, INC. et al. Defendants.
FINDINGS OF FACT AND CONCLUSIONS OF LAW RE LIABILITY
ANDRÉ BIROTTE, Jr., District Judge.
This matter was tried before this Court, sitting without a jury, on February 17-19, 2015.
Brook Carroll and Danielle Everson of Clark Everson LLP appeared on behalf of Plaintiff and Counter-defendant Beiner Enterprises. Mary Reiten of Terrell Marshall Daudt & Willie PLLC appeared for Defendants and Counter-claimants Adam Caldwell, Inc. and Jennifer Caldwell.
Having heard the admissible evidence presented by the parties, the arguments of counsel, and the supplemental briefing, and having considered the demeanor and credibility of the witnesses and all papers and exhibits presented by the parties for purposes of this trial, including admissions in the Final Pretrial Conference Order, the Court makes the following findings of fact and conclusions of law pursuant to Rule 52 of the Federal Rules of Civil Procedure.
FINDINGS OF FACT
A. The Parties
1. Plaintiff and Counter-Defendant Beiner Enterprises, Inc. ("BEI") is a citizen of the state of Washington. BEI's president and sole shareholder is Robert Lance Beiner ("Lance"). (Dkt. No. 95, Admitted Fact ("AF") 1, 3.) Lance, the individual, is not a party to the instant litigation.
2. Defendants and Counter-Claimants Adam Caldwell, Inc. ("ACI") and Jennifer Caldwell ("Jennifer") are citizens of the State of California. Jennifer is the president and sole shareholder of ACI, a position she has held since November 2011. (AF 6, 10-11.)
3. Adam Caldwell ("Adam") incorporated ACI, a California corporation, in August 2004 and served as ACI's president and sole shareholder through November 2011. (AF 7; Ex. 34.)
4. Lance incorporated BEI, a Washington corporation, in December 12, 2005. (Ex. 127.)
5. Prior to incorporating BEI, Lance was the president of Beiner, Inc., a California corporation. Beiner, Inc. dissolved and ceased to exist in December 2005. (AF 5; Ex. 128.) Beiner, Inc. is not a party to the instant litigation.
B. Background Regarding Gray Market
6. A "gray market" is defined as "a market employing irregular but not illegal methods; a market that legally circumvents authorized channels of distribution to sell goods at prices lower than those intended by the manufacturer." (Merriam Webster's Online Dictionary, available at http://www.merriam- webster.com/dictionary/gray%20market; see also Trial Tr. at 32:24-33:7 (L. Beiner).)
7. ACI currently operates in - and Beiner, Inc. and BEI used to operate in - the gray market for electric motor parts. (Trial Tr. at 32:24-33:7 (L. Beiner); 279:2-8 (J. Caldwell).)
8. The major vendors that supply electric motor parts to ACI (and previously supplied them to BEI) on the gray market are also original equipment manufacturers ("OEMs") that would sell parts to unauthorized distributors. While this practice is not illegal, it may violate agreements between manufacturers and these vendors. (Trial Tr. at 35:20-36:15; 38:6-39:8 (L. Beiner).)
9. Vendor relationships such as these are valuable, and as a result ACI has always kept and continues to keep its purchases from these vendors confidential. (Trial Tr. at 361:12-17 (J. Caldwell).)
10. ACI keeps its customer lists secret for similar reasons. (Trial Tr. at 288:19-25 (J. Caldwell).)
C. Creation Of ACI And BEI
a. Beiner, Inc.
11. From 1991 through 2004, Lance owned and operated Beiner, Inc., which engaged in the purchase and sale of electric motor parts under the trade name B&B Electric Sales. (Trial Tr. at 32:13-20 (L. Beiner).)
12. Adam Caldwell ("Adam") and Jennifer Caldwell (nee Shows) ("Jennifer") became employees of Beiner, Inc. in the early 1990s. (Trial Tr. at 280:18-281:12 (J. Caldwell).)
13. Lance taught Adam about the gray market business, and the two developed a close working relationship. (Trial. Tr. at 49:17-22, 52:8-21 (L. Beiner).)
14. When Jennifer began working for Beiner, Inc. (in approximately 1992 or 1993), she and Adam were dating; they subsequently married. (AF 14, 16-17; Trial Tr. at 281:8-12, 323:11-14 (J. Caldwell).)
15. Beiner, Inc. dissolved in December 2005. (AF 5; Ex. 128.)
16. Neither party adduced any evidence at trial that Lance, as an individual sole proprietor, ever engaged in any business using the trade name B&B Electric Sales following the dissolution of Beiner, Inc. in 2005.
b. Lance's Contested Divorce
17. In 2004, Lance was going through a contested divorce in Washington State and sought to, and did in fact, minimize his assets to avoid having to share those assets with his soon-to-be ex-wife. (Trial Tr. at 233:19-21; 243:9-244:16 (L. Beiner).)
18. As part of his effort to minimize his assets, Lance sought permission from the Washington state court to liquidate Beiner, Inc. and retire. (Exs. 32-33.) Lance represented to the Washington state court that liquidation (as opposed to selling the company) was necessary because Beiner, Inc. had lost a key vendor and could no longer maintain the volume of sales it once enjoyed. (Ex. 33.)
19. Despite his representations to the Washington state court, Lance neither retired nor liquidated Beiner, Inc. (Trial Tr. at 281:24-282:10 (J. Caldwell); 417:1-3, 417:21-23 (B. Gonzalez).)
20. Indeed, Beiner, Inc. was not in danger of going out of business, even after it lost its vendor, because it still had 9-12 months of inventory on its shelves. Beiner, Inc. kept that amount of inventory as a contingency against losing a vendor. (Trial Tr. at 417:4-20 (B. Gonzalez).)
c. Incorporation of ACI
21. In 2004, Lance approached Adam Caldwell and told him that he had feared for his health following a heart attack he suffered in 2000. Lance told Adam that he loved him like a son, and in the case of his (Lance's) untimely death, Lance wanted to see that Adam was taken care of, and that Adam could continue in the business of gray market sales for electric motor parts. (Trial Tr. at 43:23-44:23 (L. Beiner).)
22. In or around August 2004, Lance asked Adam to set up a new corporation to facilitate this purpose and to, in practical effect, operate the sales arm of the gray market sales for electric motor parts business. (Trial Tr. at 46:4-18 (L. Beiner); Ex. 34.)
23. Adam incorporated ACI in August 2004 (Ex. 34), at or around the same time that Lance asked the Washington court to permit him to liquidate Beiner, Inc. and facilitate his retirement.
24. Lance does not have, and has never had, any ownership interest in ACI. (AF 8, 10-12.)
25. At the time he incorporated ACI, Adam contributed approximately $22, 000 in capital. (Trial Tr. at 420:24-421:25 (B. Gonzalez).)
26. Neither Lance nor BEI (a company which was not yet in existence in 2004) invested any cash in ACI. (Trial Tr. at 439:17-19 (B. Gonzalez).)
27. At the time ACI was incorporated, Lance was under orders from the Washington court not to dispose of community assets. (Trial Tr. at 238:25-239:3 (L. Beiner).
28. Lance admits that the name B&B Electric Sales was a community asset and had value in 2004. (Trial Tr. at 239:4-10 (L. Beiner).)
29. Lance gifted the name B&B Electric Sales to ACI prior to finalizing his divorce in 2004. In fact, according to ACI's recorded Fictitious Business Name Statement, ACI began doing business as B&B Electric Sales in 2004 (Ex. 35),  and Lance himself indicated that ACI owns the B&B Electric Sales trade name. (Ex. 81.)
30. Lance never notified the Washington state court overseeing his divorce proceedings that ACI was created, and Lance did not mention this fact during his divorce settlement mediation. (Trial Tr. at 242:6-16 (L. Beiner); Exs. 32-33, 36.)
d. Incorporation of BEI
31. Lance incorporated BEI in December 2005. (Ex. 127.)
32. BEI has never operated under the trade name B&B Electric Sales. (Trial. Tr. at 245:2-17 (L. Beiner).)
D. ACI and BEI Were Engaged in a Partnership
a. Partnership agreement and structure
33. Though no written agreement exists between them (AF 20), ACI and BEI, through their shareholders, orally agreed to form a partnership whereby ACI acted as BEI's exclusive sales agent, and BEI acted as ACI's exclusive vendor in the gray market for electric motor parts. (Ex. 39; Trial Tr. 215:2-5 (L. Beiner); 280:3-4, 282:22-283:10 (J. Caldwell).)
34. As part of this partnership arrangement, BEI acquired inventory from vendors and then transferred inventory to ACI based upon customer orders. ACI in turn shipped the inventory that was sold, collected customer payments, and paid BEI the cost of its inventory plus a "special markup, " usually consisting of ACI's revenues minus operating expenses, including employee payroll. (Trial Tr. at 59:3-14, 93:16-25 (L. Beiner); 280:3-7 (J. Caldwell).)
35. The special markup was calculated based on ACI's monthly gross sales ( i.e., profit/loss statement), and it was not dependent on ACI's accounts receivables, retained earnings, or any other balance sheet entries. (Trial Tr. at 434:18-435:20; 439:24-440:2 (B. Gonzalez).)
36. Also as part of this partnership arrangement, ACI and BEI agreed that once Lance decided to retire - which he represented he would do upon turning seventy years old - ACI would have the right of first refusal to acquire BEI and/or its assets. (Trial Tr. at 280:13-15; 286:16-287:3; 291:7-15 (J. Caldwell); see also 467:22-468:4 (M. Ladiana).)
37. ACI paid BEI for their inventory pursuant to the partnership arrangement until July 12, 2013, when BEI (pursuant to a directive by Lance) instructed ACI to cease selling BEI inventory, and ACI complied with that instruction. (Trial Tr. 61:21-24 (L. Beiner), 275:17-276:13 (B. Gonzalez); 299:5-300:10 (J. Caldwell).)
38. ACI and BEI never agreed not to compete with one another upon termination of the partnership. (Trial Tr. 282:22-283:10 (J. Caldwell).)
> b. Purported agreement between Lance and Adam regarding control over ACI
39. According to Lance, around the time that Adam incorporated ACI (and before the incorporation of BEI), Adam and Lance agreed that Lance would exercise complete control over ACI unless and until Lance unexpectedly died and/or became incapacitated, at which time Adam would take over the company. (Trial Tr. at 45:4-18 (L. Beiner).)
40. Adam never discussed any such agreement with Jennifer, who had been married to Adam for approximately 5 years at the time Lance and Adam purportedly entered into this agreement. (Trial Tr. at 279:9-14, 285:9-14 (J. Caldwell).)
41. Adam is now deceased and cannot testify regarding the scope of any agreement with Lance. (Trial. Tr. at 279:21-22 (J. Caldwell).)
42. To the extent any such agreement existed between Lance and Adam, the agreement was between Lance (as an individual) and Adam and/or ACI, and the agreement's terms did not include any term that allowed Lance to exercise complete control over ACI and its business operations.
c. In furtherance of the partnership agreement, ACI and BEI exercised joint control over the partnership business enterprise
43. ACI and BEI exercised joint control over the business enterprise, jointly participating in the profits, losses, and management of the partnership. For example, ACI personnel, including Adam, Jennifer and Michael Ladiana, engaged in the purchase of electric motor parts on BEI's behalf (and as a result, ACI has always had business relationships with vendors). ACI and BEI collaborated in decisions affecting both companies, such as hiring and firing decisions, scheduling, the purchase of inventory, and related matters, and ACI and BEI were privy to each other's customer and vendor lists. (Trial Tr. at 283:23-284:9; 284:22-285:5; 362:11-363:1 (J. Caldwell); 426:9-427:5 (B. Gonzalez); 465:18-466:21 (M. Ladiana); Ex. 112.)
44. Despite exercising joint control over the business enterprise, ACI and BEI were separately owned. In this regard, Adam held himself out as the exclusive owner of ACI during his tenure. ACI bore the brunt of the day-to-day efforts in operating the enterprise and the brunt of the business risk. (Trial Tr. at 284:7-21 (J. Caldwell); see also 465:18-466:21 (M. Ladiana).)
45. For example, ACI paid for all the office equipment and furniture used in the partnership, including the shelving at ACI and BEI's leased warehouse and office space. (Trial Tr. at ...