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[U] Kudrich v. Skydyne Co.

Superior Court of Pennsylvania

June 27, 2013



Appeal from the Order Entered April 5, 2012 In the Court of Common Pleas of Chester County Civil Division at No(s): 2010-05363




This matter involves an appeal and cross-appeal. Eric Kudrich, Joseph Curtis, Richard McKeeby, NEC, LLC a/k/a NEC Holdings, LLC, (the "plaintiffs") instituted this action after The Skydyne Company ("Skydyne") ceased making payments to them under four promissory notes that Skydyne issued to them in connection with the March 27, 2009 sale of Hornet Group, Inc. ("Hornet") pursuant to an asset purchase agreement. The plaintiffs, Hornet's former shareholders, sought the entire amount due under the promissory notes, approximately $350, 000, plus interest. Skydyne countered that plaintiffs had misrepresented the value of Hornet's inventory in the asset purchase agreement by $630, 553.50 so that it no longer owed the plaintiffs any money under the promissory notes.

After a nonjury trial, the court concluded that Hornet's inventory value as of the date of the sale was not misstated to any extent in the asset purchase agreement, and found in favor of the plaintiffs. It ruled that the plaintiffs were entitled to past-due and future interest payments under the four promissory notes, but it refused to allow the plaintiffs to accelerate the principal. This latter ruling was premised upon the fact that, under the promissory notes in question, the plaintiffs' debt was subordinated to debt that Skydyne owed to PNC Bank, except with respect to certain, scheduled payments. Skydyne filed an appeal from the trial court's determination, and the plaintiffs filed a cross-appeal.

Based on the plaintiffs' answer to one of Skydyne's requests for admissions, we conclude that plaintiffs conceded that they misrepresented the amount of the inventory by $87, 373 and that the verdict must be reduced to reflect that concession. With that exception, we reject Skydyne's challenges to the award in favor of plaintiffs. We therefore reverse and remand for re-calculation of the amount owed by Skydyne to the plaintiffs. In the cross-appeal, we affirm.

On November 12, 2009, the plaintiffs instituted this breach of contract action in Lackawanna County. After Skydyne filed preliminary objections, the lawsuit was transferred to Chester County, and Skydyne then filed a counterclaim. The matter proceeded to a nonjury trial and, on December 1, 2011, the trial court entered a verdict in favor of plaintiffs in the aggregate amount of $40, 833.32, the amount of interest past due under the notes. This appeal and cross-appeal followed the filing and denial of countervailing post-verdict motions. Skydyne raises these questions for our review:

A. Whether the trial court erred in failing to construe and enforce the terms, conditions and provisions of the Asset Purchase Agreement, as written, in accordance with their plain meaning, particularly sections 5.2, 5.20, 5.26, 9.1, 9.3, 9.4, 9.5, 12.1, 12.2 and 12.8 of the Agreement.
B. Whether the trial court erred in the application of law to fact by failing to find and conclude that plaintiffs breached their representations and warranties as to the quantity, quality and value of the Inventory as of March 27, 2009.
C. Whether the trial court erred in failing to find and conclude that the fair preponderance of the credible, competent evidence introduced at trial established that plaintiffs breached their representations and warranties as to the quantity, quality and value of the Inventory as of March 27, 2009.

Appellant's brief at 4.

We observe that issue B is not advanced to any extent in the argument portion of Skydyne's brief. See Appellant's brief at 13-17 (setting forth the merits of issue A); Id. at 18-26 (arguing its position on issue C). Therefore, we confine our review to the first and third issues set forth in Skydyne's statement of questions involved.

On March 27, 2009, Skydyne purchased the assets of Hornet from plaintiffs pursuant to an asset purchase agreement for total consideration of $4, 830, 465.29. The assets conveyed by the plaintiffs included a manufacturing facility located in Port Jervis, New York. The agreement contained various representations and warranties, and, of significance herein, the plaintiffs' representation and warranty about the value of Hornet's inventory, which the plaintiffs stated had a fair market value of $1, 032, 486.01 as of March 27, 2009. As part of the purchase, the plaintiffs received four subordinated promissory notes dated March 27, 2009, and issued in the principal amount of $350, 000.

From April 2009 until August 2009, Skydyne made four interest payments to the plaintiffs totaling $5, 833.36. It then ceased payment based on its position that the inventory as of March 27, 2009 was not worth $1, 032, 486.01. In August, Skydyne shut down operations and conducted a physical inventory. At trial, Skydyne maintained that the inventory was significantly overstated in the asset purchase agreement and that Hornet's inventory on March 27, 2009, was worth only $401, 932.58, or sixty percent less than that outlined in the contract. Skydyne therefore claimed that it did not owe plaintiffs the outstanding $350, 000 under the promissory notes.

The parties introduced divergent evidence as to the value of the inventory when Skydyne purchased Hornet. The trial court found the plaintiffs' evidence credible, concluded that the inventory value was not overstated, ruled that Skydyne still owed the plaintiffs the amounts outlined in the promissory notes, and entered a verdict against Skydyne and in favor of plaintiffs for the amount of overdue interest.

The controlling issue in this matter is whether the value of the inventory as of March 27, 2009, as set forth in the asset purchase agreement, was misstated. The plaintiffs maintained that Hornet's inventory was worth $1, 032, 486.01 on March 27, 2009, while Skydyne claimed that it was only worth $401, 932.58, and that the plaintiffs therefore breached their warranties and representations in the asset purchase agreement. The trial court refused to credit Skydyne's evidence regarding the value of Hornet's inventory on March 27, 2009.

Since this appeal involves the review of a verdict entered by the trial court following a nonjury trial, the following standard of review applies:

Our review in a nonjury case is limited to whether the findings of the trial court are supported by competent evidence and whether the trial court committed error in the application of law. We must grant the court's findings of fact the same weight and effect as the verdict of a jury and, accordingly, may disturb the nonjury verdict only if the court's findings are unsupported by competent evidence or the court committed legal error that affected the outcome of the trial. It is not the role of an appellate court to pass on the credibility of witnesses; hence we will not substitute our judgment for that of the factfinder. Thus, the test we apply is not whether we would have reached the same result on the evidence presented, but rather, after due consideration of the evidence which the trial court found credible, whether the trial court could have reasonably reached its conclusion.

Greene v. United Services Automobile Ass'n., 936 A.2d 1178, 1181 (Pa.Super. 2007) (citation omitted).

We first review the evidence presented by the plaintiffs, the verdict winners. Jay Benson, a former CEO of Hornet, testified as follows. He earned a Ph.D. in business administration and began his career in 1976 at Kolmar Laboratories ("Kolmar"), which was the largest manufacturer of cosmetics and pharmaceuticals in the world. He eventually assumed the position of corporate vice-president of worldwide manufacturing. In this latter position, he was involved with inventory and inventory control.

When Mr. Benson left Kolmar in 1992, he began to work for AAR Skydyne, which produced cases and containers in Port Jervis, New York for governmental entities. In 1995, Mr. Benson left AAR Skydyne and formed Hornet, a small operation that competed with AAR Skydyne. Hornet eventually branched out to selling its customers human-remains containers and other products. Mr. Benson became President, Chairman, and Chief Executive Officer of Hornet. Sometime in 2001, Mr. Benson was approached to return to AAR Skydyne, and, when he refused, the two entities merged.

As part of the merger, Mr. Benson initiated a new software system for tracking inventory that was certified under the International Organization for Standardization's quality standards, which meant that Hornet was audited annually by an outside specialist. Ken Doe, who was a certified quality engineer at Kolmar, was hired to implement the new inventory tracking system. He purchased a then-state-of-the-art program known as the E2 System at a cost of $250, 000. The E2 System was used continually until the 2009 sale.

In 2005, Mr. Benson suffered health problems, and Don Paris became CEO. At that time, Hornet began to use audited financial statements, which entailed the use of an outside auditor. Eric Kudrich, one of the plaintiffs herein, testified that a physical inventory was taken in December 2008. He stated that Hornet's inventory was tagged and counted by hand. The conduct of the inventory was reviewed and approved by a certified public accounting firm. N.T. Non-Jury Trial, 6/20/11, at 131. The results of the physical inventory were then downloaded into the E2 software program, which was used until the sale to track inventory value. Id.

Robert Finch worked for Hornet and conducted the physical inventory at the end of 2008. He extensively outlined how the hand-counted, tagged inventory verification was performed, and he stated that an outside auditor reviewed the conducted inventory and verified it:

Q. . . . What was the process by which the year end inventory was done for the year end 2008?
A. To the best of my recollection we did it the way we did it every other year, we did the tag inventory, where the pieces were counted, tags were put on them, and those tags were reconciled, any changes were given to the accountants, ...

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