The opinion of the court was delivered by: Amy Reynolds Hay Chief United States Magistrate Judge
Chief Magistrate Judge Amy Reynolds Hay
FINDINGS OF FACT AND CONCLUSIONS OF LAW HAY, Chief Magistrate Judge
On May 23, 2005, the plaintiff, CentiMark Corporation ("CentiMark"), brought suit against Pegnato & Pegnato Roof Management, Inc., d/b/a Pegnato & Pegnato Building System Services, Inc. ("Pegnato" or "the Company") and William and Maryella Pegnato ("the Pegnatos"). The complaint included breach of contract, conversion and unjust enrichment counts, and a request for accounting against Pegnato. Complaint ("Compl."), Counts I-IV. The complaint also included a conversion claim against William and Maryella Pegnato, individually. Compl., Count III.
In September, 2005, counsel advised that the matter had been settled and the Court decreed that the case be marked closed, noting that "the only matters remaining to be completed are the payment of the settlement proceeds, if any, and the submission of a stipulation for dismissal ...." See Dkt. . The Court also informed that the order was not a dismissal or disposition of the action and retained jurisdiction to consider any issue arising until the settlement was finalized. Before a stipulation of dismissal had been filed, however, Pegnato filed a Voluntary Petition seeking Chapter 11 relief in the United States Bankruptcy Court for the Central District of California. On January 3, 2006, the bankruptcy court entered an order approving the sale of substantially all of Pegnato's assets to First Service Networks, Inc. ("First Service"), and the bankruptcy case was thereafter dismissed and closed.
On April 16, 2007, the Court granted CentiMark's consent motion to reopen the case and place it on the active docket. The action was designated for placement in the Court's Alternate Dispute Resolution ("ADR") Program and the parties stipulated to mediation before a neutral arbitrator. That process failed to produce a settlement and discovery proceeded.
After the disposition of various pretrial motions, the sole remaining claim, i.e., the conversion claim against William and Maryella Pegnato, was tried to the Court on February 9-10, 2009.*fn1 Having heard the testimony and reviewed the exhibits, pursuant to Fed.R.Civ.P. 52(a)(1), the Court makes the following findings of fact and conclusions of law.
1. CentiMark is a Pennsylvania corporation that markets, sells, installs, and services roofs and roofing systems to commercial and industrial customers in the United States, Canada, Mexico and Puerto Rico. Compl., ¶ 1; Trial Transcript 2/9/09 ("Tr.1") at 14-15.
2. Pegnato was a California corporation co-founded by the Pegnatos in 1992. Answer, ¶ 2; Tr.1 at 93-94, 147. William Pegnato was the Chief Executive Officer ("CEO") of Pegnato when it was founded. Tr.1 at 147. William Pegnato continued to serve as the CEO through at least November, 2005. See Ex. 6 and Ex. 23 at 2. At various times, Maryella Pegnato served as the President, Secretary and Chief Operating Officer of the Company. Tr.1 at 93-96. The Pegnatos were the majority shareholders of the company when it was founded. Tr.1 at 96-97; Trial Transcript 2/10/09 ("Tr.2") at 39.
B. Ownership Changes at Pegnato
3. In 1999, in order to raise capital, the Company sold 25% of its stock to two investor groups, Everest Investors and Link Net, with each group taking 12.5% of Pegnato's outstanding shares in consideration of a cash infusion to the Company. Tr.1 at 97-98, 125-26; Tr.2 at 5-6, 39.
4. Robert Nettinga and his brother, Paul Nettinga, headed the Link Net investment group. Tr.2 at 5-6, 39.
5. As part of their agreement to provide capital to the company, the investors required the Company to meet certain financial targets at the end of one calendar year. Tr.1 at 97-98, 125-27; Tr.2 at 5-6, 39.
6. If the Company was unable to meet these targets, the investment groups would collectively take control of 51% of the company's stock. Tr.1 at 97-98, 125-27; Tr.2 at 5-6, 39.
7. In 2000, the Company failed to meet these financial targets and the investors obtained 51% of the Company's stock. Tr.1 at 97-98, 125-27; Tr.2 at 5-6, 39.
8. William Pegnato testified that in 2003, Robert Nettinga became CEO of the Company and Mr. Pegnato became its President. Tr.1 at 147-48.
9. The Company conducted business by, inter alia, e-mail and memoranda. Tr.1 at 32; Exs. 2, 15-20, 22.
10. The Company had a Board of Directors which held meetings that often concerned the financial affairs of the Company. Tr.2 at 16-17.
D. The Strategic Alliance
11. In 2001, CentiMark and Pegnato discussed forming a strategic alliance that would enable CentiMark to more effectively and efficiently service customers. Tr.1 at 19-20. William Pegnato was the Company's sole representative in these discussions. Tr.2 at 180. At the time, he was the CEO of Pegnato, running the entire operation of the Company. Tr.1 at 179.
12. On August 22, 2001, CentiMark entered into a Strategic Alliance Agreement ("Agreement") with Pegnato whereby Pegnato would provide roofing services to customers on CentiMark's behalf. Exhibit ("Ex.") 1 at ¶ 1.
13. The services provided included (1) emergency repairs, (2) comprehensive repairs, (3) site inspections and data gathering, (4) preventive maintenance, and (5) CentiMark warranty work. Ex. 1 at Exs. A.1 through A.5 thereto.
14. Customers were to be charged $125 per hour for emergency repair services, which charge was comprised of a $41.00 markup for CentiMark and $84.00 for Pegnato for performing the services. Pegnato was required to bill the customer for services rendered, collect the monies owed, and remit -- by wire transfer on a weekly basis -- CentiMark's portion of the money as follows:
Pegnato will bill the Customer directly at the rate of $125.00 per hour. Upon receipt of payment from Customer, Pegnato will pay CentiMark their markup for the invoice (that is, $125.00 - $84.00 = $41.00) for each hour of service performed. Said payment to CentiMark will be made each Tuesday via direct electronic deposit to CentiMark for all payments received from Customers from the previous Monday to the week earlier Monday before the Tuesday payment date.
Ex. 1 at Ex. A.1 thereto.
15. The signatories to the Agreement were William Pegnato, CEO, for Pegnato and Edward B. Dunlap, President, for CentiMark. Ex. 1, p.6.
16. For several years, CentiMark's Agreement with Pegnato was very successful. Pegnato performed the repair services, invoiced the customers, collected the money owed by the customers and wired CentiMark its portion of the money on a weekly basis. The Agreement generated close to $2 million in gross revenue during CentiMark's fiscal year ending April 2003, and CentiMark expected that number to increase to between $3 and $5 million. Tr.1 at 21-22, 28-31.
17. Under the terms of the Agreement, Pennsylvania law is to govern disputes related to the performance of the Agreement. Exh. 1, ¶ 16.
D. Pegnato's Financial Situation and Its Impact on the Alliance Agreement
18. Beginning in 2002 and continuing into 2005, Pegnato experienced rapid growth, during which time the Company needed additional capital to fund that growth. Tr.2 at 48-49.
19. With the rapid expansion, Pegnato experienced cash flow problems and by 2003 was struggling to maintain sufficient cash to pay its obligations. Tr.1 at 183; Tr.2 at 4-5.
20. In mid-2003, the Company obtained additional funds through a California Economic Development Loan ("CEDL"). Tr.2 at 7-9.
21. The CEDL loan proceeds were placed in a separate account ("the Reserve Account") at the Company's bank and could not be accessed without the authorization of Robert Nettinga. Tr.2 at 6-9, 19-21.
22. Disbursements from the Company's operating bank account, however, did not require any authorization from Robert Nettinga. Tr.2 at 20-21.
23. In March of 2004, at William Pegnato's direction, Donna Taylor, a customer service representative for Pegnato, advised CentiMark that due to unspecified "internal situations" Pegnato would not be able to send wire transfers on a regular basis for 60 days and asked whether CentiMark would prefer weekly checks instead. Tr.1 at 184-85; Ex. 2. Neither Ms. Taylor nor William Pegnato informed CentiMark of Pegnato's then current cash flow problem; Mr. Pegnato thought it would be unwise to do so. Tr.1 at 185-86; Ex. 2.
24. William Pegnato testified that he does not know who at the Company made the decision to mail CentiMark checks rather than to wire transfer the money as required by the Agreement. Tr. 2 at 42-43.
25. Pegnato sent weekly checks by mail to CentiMark for a period of time. Tr.1 at 34-35. Pegnato then stopped transmitting CentiMark's money on a regular basis and by May 25, 2004, had not forwarded ...