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Pure Earth, Inc. v. Gregory W. Call

March 21, 2012

PURE EARTH, INC.
v.
GREGORY W. CALL



The opinion of the court was delivered by: Davis, J.

FINDINGS OF FACT AND CONCLUSIONS OF LAW

I. Introduction

This action arises out of the events surrounding the acquisition of Casie Ecology Oil Salvage ("Casie"), MidAtlantic Recycling Technologies, Inc. ("MART"), and Rezultz, Inc. ("Rezultz") (collectively referred to as the "Companies") by Pure Earth, Inc. ("PEI"). In February of 2007, Pure Earth entered into an agreement, dubbed the Stock Purchase Agreement ("SPA"), with Gregory Call, the majority owner of the Companies, to detail the terms of the acquisition. Subsequent to the negotiation of the agreement, each party found fault with the other's performance of its obligations under the SPA, resulting in the instant suit.

Under the terms of the SPA, Call and the other owners (collectively, the "Sellers") agreed to sell PEI all of the stock of Casie, MART, and Rezultz. In exchange, the Sellers were to receive nine hundred thousand (900,000) shares of unregistered common stock of PEI on the closing date, three hundred thousand (300,000) shares of unregistered common stock of PEI two hundred ten (210) days after the closing date, and four hundred thousand (400,000) shares of common stock upon the occurrence of certain contingencies. (PEI Ex. 1 at 2.) The SPA further provided that, on the closing date, the Companies would make partial payment to Call on a loan that Call had previously extended to the Companies and deliver a subordinated promissory note for the amount that remained due and owing after they made the partial payment to Call. (Call Ex. 69 at 01473.) In addition, PEI and Call negotiated a separate agreement to employ Call as the CEO of one of the Companies and as a member of PEI's board of directors. Subsequent to the execution of the original agreement, the parties negotiated several amendments to the SPA. After the closing date, March 30, 2007, the parties entered into a final amendment, the Fifth Amendment, which resolved an alleged shortfall of $6.7 million that existed in the net asset value of the Companies at the time of closing. (See generally Call Ex. 69.) Pursuant to the Fifth Amendment, the Sellers returned eight hundred and ten thousand shares (810,000)*fn1 of the (900,000) shares of stock they received. (Id. at 01473.) In addition, the Sellers agreed that they were not entitled to receive the additional three hundred thousand (300,000) shares of stock negotiated under the original agreement. (Id.) PEI also converted a portion of the amount owed to Call under the loan to shares of PEI stock and entered into a new promissory note with Call, under which it owed Call $1,000,000. (Id.) Finally, PEI issued a specified amount*fn2 of unregistered shares of common stock to the Sellers. (Id.)

Despite the resolution of the valuation disagreement, the relationship between the parties continued to deteriorate. These disagreements ultimately culminated in the termination of Call from his position as CEO, and the filing of the instant lawsuit by PEI. In particular, PEI alleges that Call is obligated to indemnify it for losses incurred as a result of alleged breaches of the warranties detailed within the text of the SPA. In turn, Call has filed a counterclaim and third- party claims against Mark Alsentzer and Brent Kopenhaver, CEO and CFO of PEI respectively, asserting breach of contract and warranty*fn3 and securities fraud. Call alleges that he was tricked into signing the SPA, on the basis of three material misrepresentations: (1) the alleged failure to disclose an investigation by the New York City Business Integrity Commission ("BIC") into the connections between Juda Construction, Ltd. ("Juda"), a wholly owned subsidiary of PEI, and organized crime (2) the alleged misrepresentation that PEI had won a multi-million dollar contract to provide waste treatment services for the World Trade Center site, and (3) alleged false statements regarding the amount of business that PEI would bring to the Call Companies. To resolve this dispute, we conducted a bench trial that concluded on November 15, 2011. Having thoroughly considered the documentary evidence and testimony, we make findings of fact and conclusions of law pursuant to Federal Rule of Civil Procedure 52(a). To begin, the credible evidence does not entirely support the contentions of either party. Neither side presented sufficient corroborative documentary evidence to adequately support their positions, instead choosing to advance subjective factual conclusions, thereby leaving the resolution of this case to turn, in large part, on our assessment of the credibility of the witnesses.

What testimony do we believe, and what inferences do we draw from that testimony?

Unfortunately, none of the parties were fully open and honest with this Court, instead choosing to practice their accomplished skills in shaping the perception of events rather than providing a dispassionate and trustworthy rendition of the facts.*fn4

The credibility of each of the principal witnesses falls well below our comfort zone and we find as a fact that all were deliberately untruthful on important matters. We have rarely had greater distrust of a collection of witnesses presented at trial.*fn5 With this cautious and restrained eye, we review the proceedings in this matter.

Given the volume of claims asserted by the Plaintiff and the number of contract provisions concerned with respect to each claim, we have created a separate set of factual findings and legal conclusions for each claim, contained within one section. A more comprehensive section involving legal conclusions general to all of the Plaintiff's claims for indemnification follows these more specific conclusions.

II. General Factual History and Procedural Background

1. On February 13, 2007, PEI entered into a Stock Purchase Agreement ("SPA") with Call, with a closing date of March 30, 2007. Pursuant to the SPA, PEI acquired all of the outstanding shares of Casie Ecology Oil Salvage, Inc. ("Casie"), MidAtlantic Recycling Technologies, Inc. ("MART"), and Rezultz, Inc. ("Rezultz"), (collectively, the "Companies"). Call was the majority owner, but not the sole owner, of the stock of the Companies. (See generally PEI Ex. 1.) Mark Alsentzer and Brent Kopenhaver were the CEO and CFO, respectively, of PEI.

2. Under the SPA, the Sellers were to receive PEI stock valued at $4.5 million (900,000 shares at a negotiated and agreed upon value of $5 per share) in exchange for their shares in the Companies. At the time of the negotiation of the contract, Call owned eighty-nine percent (89%) of the outstanding stock of MART, eighty-one percent (81%) of the outstanding stock of Casie, and ninety percent (90%) of the outstanding stock of Rezultz. (See generally PEI Ex. 1.)

3. The purchase price was to be based upon the Net Asset Value of Call's Companies, as referenced in the Companies' December 31, 2005 financial statements, which were prepared by Ed Avena.

4. The parties agreed in the SPA that following closing they would restate the Net Asset Value of the Companies in accordance with generally accepted accounting principles (GAAP) and adjust the purchase price accordingly to account for any deficiency. (PEI Ex. 1 at 2-3.)

5. A reconciliation was to occur in 2007, for which a separate evaluation for the period ending on March 30, 2007, the date of the closing, would occur. This net asset valuation was to be conducted in accordance with GAAP. Call was aware that such a reconciliation was to occur.

6. Both PEI and Call were represented by sophisticated legal counsel in the negotiations. PEI was represented by Stradley Ronon Stevens & Young, LLP, and Call was represented by Flaster Greenberg, P.C.

7. In addition, Call also received professional advice from Edward Avena, an accountant, and Everingham & Kerr.

8. Skoda Minotti, an accounting firm employed by PEI, initially calculated a net asset shortfall.

9. Call hired Glenn Josephs to review all of the calculations of Skoda Minotti. Josephs found that Skoda Minotti's calculation of the net asset shortfall was excessive.

10. The ultimate net asset shortfall was recalculated in part to account for the findings of Josephs. The ultimate net asset shortfall agreed to by the parties, as memorialized in the Fifth Amendment to the SPA, was $6,763,037.10. (See Call Ex. 69.)

11. Call executed the SPA on behalf of himself and the Companies.

12. Call read and understood the SPA before he executed it.

13. The SPA was a carefully negotiated and comprehensive agreement between the parties and their counsel. The SPA contained all of the promises that the parties made to each other, including forty-six detailed and specific representations and warranties.

14. The SPA contains an integration clause, which provides as follows:

14.6 Entire Understanding: Amendment. This Agreement, together with the Exhibits and Schedules hereto, states the entire understanding between the Parties with respect to the subject matter hereof and supersedes all prior oral and written communications and agreement with respect to the subject matter hereof. This Agreement shall not be amended or modified except in a written document signed by all Parties. (PEI Ex. 1 at § 14.6.)

15. Call understood the integration clause to mean that all promises made between PEI and himself were included in the SPA, and understood the SPA to supercede all prior oral communications and agreements that Call had with anyone acting on behalf of PEI.

16. The SPA contains representations and warranties that Call, as the seller of the Companies, extended to PEI. PEI also made representations and warranties to Call within the text of the SPA.

17. Section 7.10 of the Stock Purchase Agreement, contains a representation and warranty from PEI that provides as follows:

Disclosure. No representation or warranty or other statement made by Buyer in this Agreement, the Buyer Closing Documents or the Schedules or otherwise in connection with the transactions contemplated hereby contains any untrue statement or omits to state a material fact necessary to make any of them, in light of the circumstances in which it was made, not misleading. (PEI Ex. 1 at § 7.10.)

18. Section 7.8 of the SPA contains the following representation and warranty from PEI:

"Except as set forth in Schedule 7.8 (a), no Proceeding*fn6 involving, or related to Buyer or Buyer's business is currently pending." (PEI Ex. 1 at § 7.8)

19. Schedule 7.8 to the SPA lists three matters identified as "proceedings" and five "judgments" which involved Juda Construction, Ltd. ("Juda"), a PEI subsidiary. (PEI Ex. 1-1(a).) The presence of the BIC Monitor at Juda was not identified as a "proceeding".

20. On September 14, 2009, PEI commenced this action by filing a Complaint against Call seeking indemnification for Call's asserted breach of numerous representations and warranties contained in the SPA that constitute "Adverse Consequences" under the SPA. (Doc. No. 1.)

21. On November 6, 2009, Call responded to PEI's Complaint by filing an Answer, Amended Counterclaim, Third-Party Complaint and Jury Demand against PEI, Alsentzer, and Kopenhaver. (Doc. No. 12.)

22. In the Amended Counterclaim, Call asserts that Alsentzer and Kopenhaver made material misrepresentations during the course of the negotiations for the SPA. (Doc. No. 12.)

23. Specifically, Call alleges that Alsentzer and Kopenhaver told him in pre-contract negotiations that: (1) a combination of PEI and the Companies would form a synergistic relationship that would provide the Companies with access to the New York City market;

(2) PEI had won a significant contract to haul waste from the World Trade Center site ("WTC Project") and that waste from the WTC Project would be brought to the Companies; and (3) the Companies would receive 100,000 tons of waste from another PEI project, referred to as the "Rego Park Project." Call also alleges that in pre-contract negotiations Alsentzer and Kopenhaver provided Call with false pro forma financial projections and concealed a three-year long "investigation" conducted by BIC into Juda. (Doc. No. 12 at 13-25.)

24. On November 30, 2009, PEI moved to dismiss all of Call's claims, except for his claim that PEI breached the representation and warranty contained in Paragraph 7.8 of the SPA by allegedly failing to disclose the existence of the BIC "investigation."

25. On May 27, 2010, the Court issued an Order which it granted PEI's motion in part and denied it in part. (See generally Doc. No. 18.)

26. As a result of the Court's decision and Call's voluntary dismissal of certain claims, Call's only remaining claims were his breach of contract/warranty claim against PEI (Count Four) and his claim for alleged violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, promulgated thereunder, against the PEI Parties (Count Five).

27. After the close of discovery, PEI moved for summary judgment on Call's securities fraud claim. PEI also moved for summary judgment on certain aspects of Call's breach of contract claim. (See Doc. Nos. 35-41, 46, 48.)

28. On January 13, 2011, the Court issued an Order granting in part and denying in part the PEI Parties' Motion. We denied Call's Motion. (Doc. No. 54.)

29. Call's remaining claims are for securities fraud against the PEI Parties and for alleged breach of the SPA against PEI. Call's only remaining claims of misrepresentation are (1) the alleged failure to mention an investigation by the New York City Business Integrity Commission ("BIC") into the connections between Juda Construction, Ltd. ("Juda"), a wholly owned subsidiary of PEI, and organized crime, (2) the alleged misrepresentation that PEI had won a multi-million dollar contract to provide waste treatment services for the World Trade Center site, and (3) alleged false statements regarding the amount of business that PEI would bring to the Call Companies.

30. PEI's breach of contract claim against Call seeking indemnification for the Adverse Consequences remains pending. PEI seeks a declaratory judgment that it has the right to set-off the amounts of the Adverse Consequences against the PEI stock owned by Call and promissory note owed to Call. PEI also seeks monetary damages to the extent that the stock and promissory note are insufficient to cover all of PEI's damages, along with attorney's fees, pursuant to the provisions of the SPA.

III. Adverse Consequences Claimed by PEI

1. Section 11.1 of the SPA provides:

Seller's Obligation to Indemnify. Seller shall defend, indemnify and hold harmless Buyer, PEI, their respective Affiliates, and their respective Representatives, successors, and assigns (collectively "Buyer Indemnified Parties"), from and against any and all first and third party actions, suits, claims, demands, debts, liabilities, obligations, losses, damages, costs, and expenses (including without limitation reasonable attorneys', experts' and consultants' fees) (collectively "Adverse Consequences"), arising out of, or in connection with, or caused by, directly or indirectly, any or all of the following: (a) any misrepresentation, Breach or failure of any warranty, representation, agreement, covenant or certification made by the Companies or Seller, in this Agreement or pursuant hereto; . . . . (c) any successful action by Buyer against Seller or the Companies to enforce this Agreement or any of the agreements, documents or instruments contemplated hereby or executed in connection herewith; . . . . (PEI Ex. 1 at § 11.1.)

2. Section 11.5 of the SPA provides as follows:

Setoff. In addition to any other rights the Buyer Indemnified Parties may have under this Agreement for indemnification, Buyer, on behalf of the Buyer Indemnified Parties, shall, following ten (10) days' notice to Seller, have the right to setoff against any amounts or other consideration that may be due to Seller (including without limitation, the Shareholder Loan), the amount of any Adverse Consequences incurred or reasonably expected to be incurred by the Buyer Indemnified Parties in connection therewith, accruing from or arising as a result of any breach of the representations, warranties, covenants and obligations made or to be complied with and performed by Seller or any Company pursuant to this Agreement or in any agreement, certificate or instrument delivered by or on behalf of Seller or any Company pursuant hereto. The setoff rights referenced in the preceding sentence shall not constitute a limitation on the Buyer Indemnified Parties' rights hereunder or as a measure of liquidated damages and the Buyer Indemnified Parties may seek full indemnification for all Adverse Consequences suffered and may pursue all rights and remedies available to them, at law or in equity, against Seller or any Company, without seeking recourse against any other Party. (PEI Ex. 1 at § 11.5.)

3. Subsequent to the closing of the SPA, PEI alleged numerous breaches by Call of the representations and warranties contained in the SPA that it claimed constituted "Adverse Consequences" under paragraph 11.1 of the SPA. PEI provided Call with repeated notice of the alleged breaches.

4. In this litigation, PEI pursues the following putative breaches:*fn7

a. $41,239.00 in professional expenses incurred for the preparation of amended tax returns for the Companies for tax years 2004, 2005, 2006, and the first quarter of 2007, as a result of the Seller's alleged breach of one or more of the covenants, representations and warranties contained in sections 6.4, 6.5, 6.13(a);

b. $66,561 incurred as fees to the New Jersey Department of Environmental Protection ("NJDEP") associated with (i) certain submissions to the NJDEP relating to the sale of the Companies' capital stock to PEI and (ii) past due fees incurred prior to the Closing Date by Casie and MART, alleged to be the responsibility of Seller that were incurred as an alleged violation of the covenants, representations, and warranties contained in sections 6.2 (b)(iv), 6.4, 6.5, 6.12, 6.13(a), 6.13(f), 6.17(a), 6.17(b), 6.22;

c. $80,000 incurred as a result of certain legal fees paid to Drinker Biddle in alleged breach of sections 6.4, 6.5, 6.8(a), 6.12 of the SPA;

d. $30,928 incurred as professional expenses for legal work performed in connection the procurement of approval from the NJDEP for the sale of the Companies to PEI, alleged to be breaches of sections 6.4, 6.5, 6.8(a),

6.12, 6.17(b), and 8.4 of the SPA;

e. $300,013 incurred because of the purported existence of certain liabilities that existed at the date of the closing balance sheet, which were allegedly not recorded thereon, alleged to be in violation of sections 6.4, 6.5, 6.8(a), and 6.12 of the SPA;

f. $104,901 incurred as a result of the existence of payments to employees for waiver of medical insurance coverage that were allegedly not disclosed on the Closing Date, alleged to be violations of sections 6.4, 6.5, 6.12, and

6.15 of the SPA;

g. $87,585 incurred due to the Companies' payment of personal life insurance coverage for Call and another individual in alleged breach of one or more of the covenants, representations, and warranties contained in sections 6.4, 6.5, 6.12, and 6.15 of the SPA;

h. $2,014,354 incurred as a result of local authorities in Cumberland County,

New Jersey, denying PEI the right to use a landfill located in Cumberland County in alleged violation of sections 6.17(a)-(b), 6.22(a)-(g) of the SPA;

i. Declaratory relief entitling PEI to an award in the amount of a fine from the EPA in an amount to be determined at trial as a result of the Companies' alleged failure to properly process hazardous waste, properly test oil recovered from hazardous waste, commingling of hazardous waste recovered oil with non-hazardous waste recovered oil, shipping of hazardous waste into the stream of commerce without proper manifests and shipping papers, and other related violations, alleged to be violations of sections 6.17(a)-(b), 6.22(a)-(g), and 6.18 of the SPA;

j. $110,565 that PEI is required to pay to secure the return of a Humboldt SC-3 centrifuge and spare rotating unit from Wisconsin due to repairs authorized by the Companies and alleged to have been made prior to the Closing Date in alleged violation of sections 6.4, 6.5, 6.6, 6.8(a)-(b), 6.9, and 6.12 of the SPA;

k. $149,906 in damages PEI sustained because certain yellow iron equipment of the companies was allegedly not in satisfactory condition on the Closing Date in alleged violation of one or more of the covenants, representations, and warranties contained in sections 6.6, 6.9, and 6.28 of the SPA;

l. $85,678 in professional fees incurred by PEI for accounting work PEI was required to perform due to the inadequacy of the books and records of the Companies, which is alleged to constitute a violation of sections 6.4, 6.5, 6.12, and 6.13 of the SPA.

We address these twelve alleged adverse consequences in turn.

4a. Amended tax returns

Plaintiff's Claim

a. Plaintiff claims that Defendant is liable for $41,239.00 in costs incurred in filing amended tax returns for the Companies for tax years 2004, 2005, 2006, and the first quarter of 2007, as a result of the Seller's alleged breach of one or more of the covenants, representations and warranties contained in sections 6.4, 6.5, and 6.13(a).

Contractual Provisions

b. Under Section 6.4 of the SPA, the Sellers were required to provide financial statements that "fairly and accurately present the financial condition and the results of operations, changes in shareholders' equity and cash flows of the Companies as and at the respective dates of and for the period referred to in such Financial Statements, all in accordance with GAAP." *fn8 (PEI Ex. 1 at § 6.4)

c. Section 6.5 of SPA requires that the books of account and other financial records of the Companies are "complete and correct and represent actual, bona fide transactions and have been maintained in accordance with sound business practices, including the maintenance of an adequate system of internal controls." (PEI Ex. 1 at § 6.5.)

d. SPA 6.13(a) warrants that "The Companies and the Seller (with respect to the Business) have timely filed all Tax Returns that were required to be filed. All such Tax Returns were true, correct, and complete and have been prepared in compliance with all Legal Requirements. All Taxes owed by the Companies and the Seller (with respect to the Business) (whether or not shown on any Tax Return) have been paid. No penalty, interest, or other charge is or will become due with respect to the late filing of any such Tax Return or late payment of any such Tax." (PEI Ex. 1 at § 6.13(a).)

e. The SPA required that by 12/31/05 Ed Avena would create financial statements in accordance with GAAP for the Call Companies and turn them over to PEI.

Factual Findings

f. The financial statements completed by Ed Avena for the Call Companies were not prepared in accordance with GAAP.

g. PEI seeks $41,239.00 in professional expenses incurred by Skoda Minotti in the creation of amended tax returns for the Companies for tax years 2004, 2005, 2006, and the first quarter of 2007.

h. This claim arises from PEI's desire to become a public company. To gain this status, PEI was required to present at least two years of certified financial statements which have been verified by CPA as GAAP compliant.

i. Because the financial statements prepared by Ed Avena did not comply with GAAP, PEI prepared conforming amended financial statements and filed amended tax returns. These steps were necessary and appropriate.

j. Had the original financial statements submitted to PEI been in conformity with GAAP, PEI would have incurred certain costs in obtaining certification of the statements by an independent firm. However, under these circumstances, the need to file amended tax returns would not have arisen.

Conclusions

k. Independent of the other provisions, Seller did not breach sections 6.5 or 6.13(a). No evidence was submitted tending to establish that Seller did not file tax returns for the years prior to the Closing Date. The accounting method used by the Call Companies, although not in accord with GAAP, was "in accordance with sound business practices." *fn9

l. Defendant breached provision 6.4, as it requires financial statements to be prepared in accordance with GAAP. Call did not prepare financial statements and tax returns in accordance with GAAP.

m. The cost of filing the amended tax returns was a consequential damage incurred by Pure Earth attributable to the breach of Section 6.4. Consequential damages for a breach of contract under Pennsylvania law are recoverable if they "are a natural result of breach, were reasonably foreseeable and contemplated by the party, and provable with reasonable certainty." Smith v. State Farm Mut. Auto. Ins. Co., No. 11-7589, 2012 WL 508445, at *5 (E.D. Pa. Feb. 16, 2012)(citing Ferrer v. Trustees of the Univ. of Pa., 825 A.2d 591, 610 (Pa. 2002))(applying Pennsylvania contract law). Plaintiff has proven its damages with reasonable certainty, given that it has produced billing records to validate its damages request. Moreover, a clear causal chain links the failure to render financial statements in accordance with GAAP and the need to file amended tax returns. Finally, given Call's knowledge that the financial statements provided should have been in accordance with GAAP (see Trial Tr. vol. II, 55, November 15, 2011), and Call's knowledge that PEI sought to take the company public subsequent to the acquisition (see Trial Tr. vol. II, 56, November 15, 2011), the cost of filing amended tax returns as a consequence of failing to produce financial statement that comported with GAAP should have been foreseeable to Call. As a result, the costs of filing the amended tax returns meet the strictures required for the collection of consequential damages.

4b. NJDEP fees Plaintiff's Claim

a. Plaintiff claims that Call is liable for $66,561 incurred as fees paid to the New Jersey Department of Environmental Protection ("NJDEP") associated with (i) certain submissions to the NJDEP relating to the sale of the Companies' capital stock to PEI and (ii) past due fees incurred prior to the Closing Date by Casie and MART, alleged to be the responsibility of Seller that were incurred as an alleged violation of the covenants, representations, and warranties contained in sections 6.2 (b)(iv), 6.4, 6.5, 6.12, 6.13(a), 6.13(f), 6.17(a), 6.17(b), 6.22 of the SPA.

Contractual Provisions

b. Under 6.2 (b)(iv), "neither the execution and delivery of [SPA] nor the consummation or performance of any of the transactions contemplated" were meant to "directly or indirectly . . . cause Buyer to become subject to, or to become liable for the payment of any Tax." (PEI Ex. 1 at § 6.2.)

c. Under Section 6.4 of the SPA, the Sellers were required to provide financial statements that "fairly and accurately present the financial condition and the results of operations, changes in shareholders' equity and cash flows of the Companies as and at the respective dates of and for the period referred to in such Financial Statements, all in accordance with GAAP." (PEI Ex. 1 at § 6.4.)

d. Section 6.5 of the SPA requires that the books of account and other financial records of the Companies are "complete and correct and represent actual, bona fide transactions and have been maintained in accordance with sound business practices, including the maintenance of an adequate system of internal controls." (PEI Ex. 1 at § 6.5.)

e. Section 6.12 of the SPA provides that, "The Companies have no Liability except for Liabilities reflected or reserved against in the Financial Statements at December 31, 2005, all of which are accurately reflected on the Companies' books and records." (PEI Ex. 1 at § 6.12.)

f. SPA 6.13(a) warrants that "The Companies and the Seller (with respect to the Business) have timely filed all Tax Returns that were required to be filed. All such Tax Returns were true, correct, and complete and have been prepared in compliance with all Legal Requirements. All Taxes owed by the Companies and the Seller (with respect to the Business) (whether or not shown on any Tax Return) have been paid. No penalty, interest, or other charge is or will become due with respect to the late filing of any such Tax Return or late payment of any such Tax." (PEI Ex. 1 at § 6.13(a).)

g. 6.13 (f) provides that, "No assessment for the deficiency for any Tax has been proposed, asserted or assessed against any Companies or Seller with respect to taxable periods ended on or before the Closing Date which has not been resolved, paid in full or fully reserved in accordance with GAAP in the Financial Statements . . . . Each of the Companies has fully accrued or reserved in the Financial Statements all Taxes of such Company for any periods prior to the Closing Date that are not yet due and payable as of the Closing Date and has made adequate provision in the financial statements for all current taxes and assessments for which such Company is or may be held liable, and the unpaid taxes of the Company and/or Seller (with respect to the Business) (i) did not on December 31, 2006 and do not exceed the reserve for tax liability (rather than any reserve for deferred Taxes established to reflect timing differences between book and Tax income) set forth on the December 31, 2006 balance sheet of the Companies included in the Financial Statements, and (ii) do not exceed the reserve as adjusted for the passage of time through the Closing Date in accordance with past customs and practice of the Companies and/or Seller (with respect to the Business) in filing its Tax Returns." (PEI Ex. 1 at § 6.13(f).)

h. SPA 6.17(a) provides that, "the operation of the Business, the conduct of the Business as where such business has been conducted, the hiring, terminating, and compensating and otherwise managing or dealing with employees, and the ownership, possession and use of the Assets used in or for the Business, comply and have complied with all Legal Requirements applicable to the Companies, their operations, the Business, the Assets and the Liabilities. The Companies have obtained and hold all Governmental Authorizations required for the lawful operation of the Business as and where such business is presently conducted." (PEI Ex. 1 at § 6.17.)

i. 6.17(b) provides,"Except as set forth in Schedule 6.17, all such Governmental Authorizations are in full force and effect, no violations are or have been recorded in respect of any Governmental Authorization and no proceeding is pending or threatened to enforce, revoke, terminate or limit any Governmental Authorization. Except as set forth in Schedule 6.17, no Company is in default, and has not received any notice of any claim of default, with respect to any such Governmental Authorization or of any notice of any other claim or Proceeding (or threatened Proceeding) relating to any such Governmental Authorization. Except as set forth in Schedule 6.17, all such Governmental Authorizations shall survive a change in ownership of the Companies without the Consent of any Person and shall remain in full force and effect immediately following the Closing." (PEI Ex. 1 at § 6.17.)

j. Section 6.22 provides that except as disclosed in Schedule 6.22, i. (a) "Each Company, the Business and the Assets used in or for the Business are, and at all times have been, in full compliance with, and have not been and are not in violation of or liable under, any Environmental Law.*fn10 No Company has any basis to expect, nor has it or any other Person for whose conduct it is or may be held to be responsible received, any actual or threatened order, notice or other communication from (i) any Governmental body or private citizen acting in the public interest, (ii) the current or prior owner or operator of any Facilities, or (iii) any other Person, of any actual or potential violation or failure to comply with any Environmental Law, or of any actual or threatened obligation to undertake, bear the cost of or otherwise be responsible for any Environmental, Health, and Safety Liabilities including with respect to any Facility or other property or asset (whether real, personal, or mixed) in which any Company has or had an interest, or with respect to any property or Facility at or to which Hazardous Materials were generated, manufactured, refined..."

ii. (b) "There are no pending or threatened claims, Encumbrances,*fn11 or other restrictions of any nature resulting from any Environmental, Health and Safety Liabilities or arising under or pursuant to any Environmental Law including with respect to or affecting any Company, the Business, the Assets used in or for the Business, or any Facility or other property or asset (whether real, personal or mixed) in which the Company has or had an interest."

iii. (c) "The Seller and each Company have no Knowledge of or any basis to expect, nor have they, or any other Person for whose conduct they are or may be held responsible, received, any citation, directive, inquiry, notice, Order, summons, warning or other communication that relates to Hazardous Activity, Hazardous Materials, or any alleged, actual, or potential violation or failure to comply with or Liability under any Environmental Law, or of any alleged, actual, or potential violation or failure to undertake or bear the cost of any Environmental, Health and Safety Liabilities including with respect to any Facility or property or asset (whether real, personal or mixed) in which any Company has or had an interest, or with respect to any property or facility to which Hazardous materials generated, manufactured, refined, transferred, imported, used, handled, or processed by any Company, the Business or any other Person for whose conduct they are or may be held responsible, have been transported, treated, stored, handled, transferred, disposed, recycled or received."

iv. (d) "None of the Companies nor any other Person for whose conduct it is or may be held responsible has any Environmental, Health and Safety Liabilities including with respect to the Business, the Assets used in or for the Business, any Facility or any other property or asset (whether real, personal, or mixed) in which any Company has or had an interest or any property geologically or hydrologically adjoining any Facility or any other property or asset." (PEI Ex. 1 at § 6.22.)

Factual Findings

k. PEI issued the following checks to NJDEP:

i. On April 30, 2007, PEI issued a check for $6,692.25 to the Treasurer of the State of New Jersey. (PEI Ex. 9.) Although Kopenhaver testified that this check was for the payment of compliance monitoring fees, no bill or underlying documentation was introduced to explain when the fee was incurred, and no testimony was presented as to the exact nature of the fee.

ii. On April 30, 2007, a check for $4,326.00 was issued to the Treasurer of the State of New Jersey. (PEI Ex. 9.)

Kopenhaver testified that the check was written for compliance monitoring fees, but no bill or other form of corroboration was produced to the Court, nor was any testimony provided regarding the exact nature of the charge.

iii. On April 30, 2007, a check for $21,318.00 was written to the Treasurer of the State of New Jersey. (PEI Ex. 9.) Kopenhaver testified that the check was for "annual renewal fees" for the Call companies for the time period prior to acquisition. No documentation was produced to support this conclusory testimony.

iv. On April 30, 2007, a check was written for $4,724.00 to the Treasurer of the State of New Jersey. (PEI Ex. 9.) According to Kopenhaver, the check was allegedly for annual renewal fees for MART. No bills were produced to support the testimony of Kopenhaver. In addition, an accounts payable listing for MART produced by Call to PEI under section 11.1(a) of the SPA lists, a listing for the exact same amount, $4,724.00, is indicated as owing to the Treasurer of the State of New Jersey, and consequently disclosed to PEI. (See Call Ex. 67 at 2615.)

l. Kopenhaver testified that the fees were accrued prior to acquisition by the Call Companies, but were paid by PEI subsequent to the Closing Date. We cannot accept the free-standing testimony of Kopenhaver as to the purpose of these checks. As we said earlier, we find him to be manipulative, self-interested, and undeserving of our trust. His truths are false truths. Indeed, given the ease with which Plaintiff could have produced the underlying documentation, we find its absence to be significant.

m. PEI, through Kopenhaver, consulted with Stradley Ronon regarding the payment of the above fees to NJDEP, in an effort to determine which of the fees should be the responsibility of the Sellers. Stradley Ronon's response characterized the fees as compliance monitoring fees and annual renewal fees and reached the conclusion that the fees were the responsibility of the Defendant. (See PEI Ex. 6.) Stradley Ronon's basis for concluding that these fees should properly be characterized as compliance monitoring and annual renewal fees is unknown. Nor does any other basis for characterizing the fees in this manner appear in the record. Thus, the Stradley Ronon letter characterizing the costs as compliance monitoring and annual fees is a hearsay assertion in conflict with Fed. R. Evid. 801(c), which is also untrustworthy because it was prepared in anticipation of litigation.

n. We do not find Kopenhaver's testimony, standing alone, to provide a sufficient basis for us to conclude that the charges concern compliance monitoring and annual fees. Nor do we find his testimony that the amounts listed in Schedule 11.1(a), which were disclosed to PEI prior to acquisition, corresponded to different types of fees. Kopenhaver's bald assertion that the disclosed fees owing to the Treasurer of the State of New Jersey reflected fees for categories "related to other charges that the state of New Jersey would charge" (Trial Tr. vol. I, 95, November 14, 2011) is an unsupported assertion which we cannot accept as fact. No evidence was produced to explain how Kopenhaver was able to reach this conclusion by looking at the accounts receivable produced by Call; we simply cannot credit Kopenhaver's testimony on this point.

o. Nor do we find sufficient evidence to support Kopenhaver's characterization as to when the fees were incurred and debts satisfied by the fees. To reiterate, we do not find Kopenhaver to be a trustworthy witness. As a result, we cannot conclude that the fees were incurred by Call and undisclosed to the Buyers.

Conclusions

p. We were not presented with any trustworthy evidence that the checks produced by Plaintiff represent payment of liabilities that were incurred by Defendant. Accordingly, we cannot find that Section 6.2(b)(iv) has been breached. There is no evidence that it was Call or the Call Companies that caused the buyer to become subject to a tax or a liability of any kind, as those terms are defined in the SPA.

q. There has been no credible evidence that the checks produced represented payments of liabilities that Call or the Call Companies incurred and failed to record. It has not been proven to our satisfaction that any error in the financial statements, if error existed, was the consequence of a failure to record this particular liability, in violation of section 6.4.

r. Since it has not been established that the checks at issue represent payment of liabilities incurred by Call or the Call Companies, we cannot find a breach of Section 6.5. We have not been presented with evidence, nor do we conclude, that the books are records are not "complete and correct" and do not "represent actual, bona fide transactions and have been maintained in accordance with sound business practices, including the maintenance of an adequate system of internal controls." (PEI Ex. 1 at § 6.5.)

s. Plaintiff has failed to establish violations of §§6.13 (a), 6.13(f), 6.17(a) and 6.17(b). We do not credit the unsupported assertions of Kopenhaver; Plaintiff's claim fails with the failure to present independent documentary evidence in support of this contention.

t. Plaintiff has failed to establish a violation of §6.22. As discussed earlier, we do not accept Kopenhaver's unsupported assertions as true. Since PEI has failed to produce credible evidence establishing the actual nature of the debt satisfied by these checks, we do not find violations of Governmental Authorizations or pending or threatened proceedings to limit or revoke Government Authorizations within the meaning of the contract. Accordingly, we do not find that the Companies had received any notice of any claim of default, with respect to any such Governmental Authorization or of any notice of any other claim or Proceeding (or threatened Proceeding) relating to any such Governmental Authorization. Consequently, we cannot conclude that the costs paid to the NJDEP were necessary in order for the Companies to continue to be authorized to operate despite the change in ownership. (PEI Ex. 1 at § 6.22.)

u. We do not have credible evidence before us establishing any portion of the $66,561 in fees paid to the NJDEP as attributable to an actual or threatened failure to comply with any environmental law provision. (See PEI Ex. 1 at § 6.22.)

v. No credible evidence was produced of any "pending or threatened claims, Encumbrances, or other restrictions of any nature resulting from any Environmental, Health and Safety Liabilities or arising under or pursuant to any Environmental Law including with respect to or affecting any Company, the Business, the Assets used in or for the Business, or any Facility or other property or asset (whether real, personal or mixed) in which the Company has or had an interest" in violation of Section 6.22(b).(PEI Ex. 1 at § 6.22.)

w. PEI produced no evidence that Seller suspected, had reason to suspect, or had received, "any citation, directive, inquiry, notice, Order, summons, warning or other communication that relates to Hazardous Activity, Hazardous Materials, or any alleged, actual, or potential violation or failure to comply with or Liability under any Environmental Law, or of any alleged, actual, or potential violation or failure to undertake or bear the cost of any Environmental, Health and Safety Liabilities including with respect to any Facility or property or asset (whether real, personal or mixed) in which any Company has or had an interest, or with respect to any property or facility to which Hazardous materials generated, manufactured, refined, transferred, imported, used, handled, or processed by any Company, the Business or any other Person for whose conduct they are or may be held responsible, have been transported, treated, stored, handled, transferred, disposed, recycled or received." (PEI Ex. 1 at § 6.22.)

x. No credible evidence was produced that either Call or the companies "ha[d] any Environmental, Health and Safety Liabilities including with respect to the Business, the Assets used in or for the Business, any Facility or any other property or asset (whether real, personal, or mixed) in which any Company has or had an interest or any property geologically or hydrologically adjoining any Facility or any other property or asset." (PEI Ex. 1 at § 6.22.)

4c. Drinker Biddle Legal Fees

Plaintiff's Claim

a. PEI alleges that Call incurred $80,000 in legal fees paid to Drinker Biddle in alleged breach of sections 6.4, 6.5, 6.8(a), and 6.12 of the SPA.

Contractual Provisions

b. Under Section 6.4 of the SPA, the Sellers were required to provide financial statements that "fairly and accurately present the financial condition and the results of operations, changes in shareholders' equity and cash flows of the Companies as and at the respective dates of and for the period referred to in such Financial Statements, all in accordance with GAAP." (See PEI Ex. 1 at § 6.4.)

c. Section 6.5 of SPA requires that the books of account and other financial records of the Companies are "complete and correct and represent actual, bona fide transactions and have been maintained in accordance with sound business practices, including the maintenance of an adequate system of internal controls." (See PEI Ex. 1 at § 6.5.)

d. Under Subsection 6.8 of the SPA, the Sellers warranted that, "(a) The Companies own good and marketable title to all of the Assets free and clear of Encumbrances other than Permitted Encumbrances and those described in Schedule 6.8(a). The consummation of the transactions contemplated hereby shall not render Buyer liable in any manner for any debt, liability, tax or obligation of the Companies, known or unknown, fixed or contingent, except for the Liabilities identified on Schedule 6.8(a) to this Agreement (all of which are reflected in the most recent Financial Statements of the Companies)." (See PEI Ex. 1 at § 6.8.)

e. Section 6.12 of the SPA provides that, "The Companies have no Liability except for Liabilities reflected or reserved against in the Financial Statements at December 31, 2005, all of which are accurately reflected on the Companies' books and records." (See PEI Ex. 1 at § 6.12.)

Factual Findings

f. PEI paid $80,000 in legal fees to Drinker, Biddle & Reath, LLP on January 31, 2008. (See PEI Ex. 13.)

g. The subject litigation took place before the Closing Date, but no evidence was produced as to the exact date of the litigation.

h. Drinker Biddle represented both Gregory Call and the Call Companies in litigation against Brian Horne, a minority stockholder in the Companies.

i. The Companies were "shut down" as a result of the actions of Brian Horne.

j. Conflicting testimony was presented regarding the nature of the lawsuit. Alsentzer and Kopenhaver testified that the case involved a shareholder litigation suit against Brian Horne, a minority shareholder in the Call Companies, and concerned Horne's rights with respect to the purchase of the Companies.

k. Call testified that the shareholder dispute was only a portion of the litigation. The remainder of the action pertained to a pricing dispute and a dispute regarding the shut down of the facilities, which concerned the rights of the Companies rather than Gregory Call personally.

l. Neither party produced documents or any other independent form of clarification as the precise nature of the lawsuit. Neither side persuaded this Court of the truth of their assertions on this point.

Conclusions

m. Because Avena shredded certain books and records of the Companies for the period prior to the acquisition, PEI was not able to produce a full set of financial statements for the period immediately prior to the closing. We do not fault PEI for this inability, however the absence of these records leaves resolution of this claim dependent upon our determination of the credibility of the PEI principals. Unfortunately, they were deceptive on important matters and we cannot accept their testimony as an act of faith. Corroboration is required. Absent these books and records, we do not have intellectual comfort that Avena excluded the $80,000 legal fee claim. Accordingly, we cannot find a breach of section 6.4.

n. Since the books and records for the years prior to the acquisition were not available, and these books and records alone would allow us to determine whether the $80,000 of legal fees were identified as liabilities, we cannot conclude that a violation of 6.5 took place.

o. Although PEI produced Schedule 6.8 to the Court, the schedule refers to a chart that appears to be a part of the schedule, but is not in evidence. Thus, it does not appear that Schedule 6.8 in its entirety was produced to the Court. As a result, the Court cannot determine a violation of section 6.8 of the SPA occurred.

p. The December 31, 2005 Financial Statements referenced in Section 6.12 of the SPA have not been introduced into evidence. Consequently, the Court cannot conclude that the values reflected in those statements does not include the $80,000.

q. In sum, Plaintiff's claims on this issue rest principally upon the unsupported contentions of its witnesses. Given our clear and firm adverse credibility findings with the PEI principals, we find that plaintiffs failed to satisfy their burden of persuasion.

4d. Legal Fees for Seller's NJDEP Consents

Plaintiff's Claim

a. Buyer claims that Seller is liable for incurring $30,928 in professional expenses for legal work performed in connection with the seller's alleged obligations to obtain approval from NJDEP for the sale of the companies to Pure Earth, which it claims violates Sections 6.4, 6.5, 6.8 (a), 6.12, 6.17(b), and 8.4 of the SPA.

Contractual Provisions

b. Under Section 6.4 of the SPA, the Sellers were required to provide financial statements that "fairly and accurately present the financial condition and the results of operations, changes in shareholders' equity and cash flows of the Companies as and at the respective dates of and for the period referred to in such Financial Statements, all in accordance with GAAP." (See PEI Ex. 1 at § 6.4.)

c. Section 6.5 of SPA requires that the books of account and other financial records of the Companies are "complete and correct and represent actual, bona fide transactions and have been maintained in accordance with sound business practices, including the maintenance of an adequate system of internal controls." (See PEI Ex. 1 at § 6.5.)

d. Under Subsection 6.8 of the SPA, the Sellers warranted that, "(a) The Companies own good and marketable title to all of the Assets free and clear of Encumbrances other than Permitted Encumbrances and those described in Schedule 6.8(a). The consummation of the transactions contemplated hereby shall not render Buyer liable in any manner for any debt, liability, tax or obligation of the Companies, known or unknown, fixed or contingent, except for the Liabilities identified on Schedule 6.8(a) to this Agreement (all of which are reflected in the most recent Financial Statements of the Companies)." (See PEI Ex. 1 at § 6.8.)

e. Section 6.12 of the SPA provides that, "The Companies have no Liability except for Liabilities reflected or reserved against in the Financial Statements at December 31, 2005, all of which are accurately reflected on the ...


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