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Norman v. Elkin

United States Court of Appeals, Third Circuit

June 13, 2017

JEFFREY M. NORMAN, Appellant
v.
DAVID W. ELKIN; RICHARD M. SHORIN; ELKIN GROUP INC.; U.S. MOBILCOMM INC. Appellants

          Argued January 13, 2017

          On Appeal from the United States District Court for the District of Delaware (D.C. No. 1-06-cv-00005) District Judge: Hon. Leonard P. Stark

          David A. Felice (Argued) Bailey & Glasser, Counsel for Appellant/Cross-Appellee

          Steven L. Caponi (Argued) David A. Dorey Adam V. Orlacchio Blank Rome Counsel for Appellees/Cross-Appellants

          Before: SMITH, Chief Judge, JORDAN, and SHWARTZ, Circuit Judges.

          OPINION

          JORDAN, Circuit Judge

         Jeffrey Norman and David Elkin were the only two shareholders of U.S. MobilComm Inc. ("USM"), a Delaware company that acquired and sold rights to radio frequencies. Norman held a minority interest and sought legal relief after he discovered that Elkin had transferred to another company the ownership of several frequencies purchased by USM, that Elkin had treated capital contributions as loans, and that Elkin had paid himself from USM funds without giving Norman any return on his minority investment. It was the beginning of a long and tortuous litigation trail. Despite two juries having sided with Norman, the verdicts in his favor were overturned. Most of his claims were ultimately held to be barred by the statute of limitations, after the District Court rejected his argument that a state court case he had brought to inspect USM's books and records pursuant to § 220 of Title 8 of the Delaware Code tolled the statute of limitations. Other claims were eliminated for insufficient evidence. Norman now appeals, seeking to restore portions of each of the two jury verdicts he won and also to allow him to pursue certain claims that had been foreclosed by the District Court. Elkin cross-appeals and asks us to affirm on alternative grounds the several rulings rejecting Norman's claims.

         We conclude that the District Court erred in concluding that tolling of the statute of limitations is categorically inappropriate when a plaintiff has inquiry notice before initiating a books and records action in the Delaware courts. Accordingly, we will send most of the claims back to the District Court to determine whether tolling should have applied and, if so, whether any of the claims are nevertheless time-barred. We also conclude that the District Court erred when it vacated the jury's award of nominal damages for one of Norman's breach of contract claims. Finally, we hold that Norman's fraud claim was not supported by sufficient proof of damages and we thus affirm judgment as a matter of law on that claim on the alternative grounds that Elkin has proposed.

          I. Factual Background[1]

         In the early 1990s, the FCC announced plans to grant licenses for the commercialization of 220 megahertz ("MHz") radio frequencies. Those frequencies had previously been available only for non-commercial purposes, so entrepreneurs anticipated that the newly available frequencies would create lucrative business opportunities. Such ambitions were frustrated, however, by technological failures and regulatory logjams, and investor hopes eventually turned to disappointment. This case is a consequence of the bursting of the 220 MHz bubble.

         A. The Auction and Sale of Frequencies

         Norman and Elkin founded USM in order to acquire, develop, and sell licenses to 220 MHz frequencies. In 1991-92, the FCC granted the first wave (Phase I) of 220 MHz licenses by lottery. Norman's primary responsibility at USM was to acquire, aggregate, and manage licenses held by individual Phase I license holders throughout the country. By 1996, USM had successfully acquired around 40-50 licenses and entered into agreements to manage over 150 more. At that point, Norman's involvement in the day-to-day business affairs of USM ceased. Elkin, by contrast, continued to manage the company.

          In 1998, the FCC began the second phase of licensing through a competitive auction. Elkin registered USM for the auction and USM won the rights to several frequencies. Those rights were subsequently registered in the name of another company that Elkin owned, The Elkin Group ("TEG"). According to Elkin, the involvement of TEG was necessary because USM did not have the funds to participate in the auction or bid on any of the licenses without TEG's assistance. Elkin also said he wanted to make sure that a friendly corporation acquired the licenses that overlapped with those already owned by USM. Norman v. Elkin (“Norman F), CIV. A. No. 06-005, 2007 WL 2822798, at *2 (D. Del. Sept. 26, 2007).

         Norman closely monitored the FCC's bidding process and, a few days after the auction, he e-mailed Elkin asking for more information about the auction results. He also called the FCC to inquire into the status of USM's licenses acquired through the second phase auction. Some FCC notices referred to USM as the winning bidder, while other public documents referred to TEG as the owner of the licenses.

         B. Capitalization and the Shareholder Loan Agreement

         Norman owns 25% of the stock of USM and Elkin owns 75%. When they founded USM, they entered into an oral agreement to invest a proportional share of capital in the company to meet a million dollar capital requirement -Norman promised to invest $250, 000 while Elkin promised to invest $750, 000. Despite those promises, disputes over contributions quickly arose. Norman allegedly only contributed $200, 000 of his $250, 000 obligation. Elkin also failed to make his full capital contribution; he initially furnished around $360, 000. Further complicating what was supposed to be a straightforward capitalization story, Elkin and Richard Shorin, the Assistant Secretary of USM, felt that Norman had spent USM's funds on personal matters and so, at Elkin's direction, USM treated those expenditures as capital outlays and reduced Norman's capital contribution to approximately $140, 000.

         Elkin claimed to believe that he was only required to maintain a capital contribution proportional to Norman's contribution. So he reduced his own contribution target to $420, 000. He did that by causing USM to enter into a "Shareholder Loan Agreement" sometime between 1995 and 2002. Consistent with that document, USM agreed to treat any amount that Elkin contributed to the company above $420, 000 as a loan.[2] Subsequently, Elkin gave additional sums to keep USM afloat, and a document listing all of Elkin's purported loans (the "Shareholder Loan Schedule") showed that Elkin had loaned USM more than $690, 000, including certain capital contributions that were converted into loans.

         In 2000 and 2001, USM sold off its Phase I licenses. It prioritized repayment of Elkin's loans and paid him $615, 026, without giving Norman any money. One of the key issues in this case is when Norman knew or should have known about those payments. He received federal income tax K-1 forms from USM each year, and in 2000 and 2001 the forms declared that USM had realized a capital gain. Those K-1 forms did not state what had been sold, and they did not list any shareholder loans or distributions. However, in a deposition, Norman admitted that "a capital gain, by definition … has to be sale of a license[.]" (App. at 512.)

         In the summer of 2002, Norman and Elkin had a telephone conversation, after not having spoken in a long time. Elkin said that some licenses had been sold. Norman described the call as follows:

I logged a call into him and said: Hey, what is going on with the company? And he was a little bit evasive as I recall. And then I pointedly asked him: Has anything been sold? And he said: Yes. And I said: Well, what? And he goes: Well, we sold some licenses. And I forget the cities he even said.
I said: Well, did you take a distribution? And he said: Yeah. I said: Well, you know, what about me basically? And he said: Oh, it wasn't your turn.

(App. at 860-61.) Norman asked for additional information, which Elkin never sent. Later, on October 2, 2002, Norman's attorney sent a letter (the "October 2002 Letter") requesting information pursuant to 8 Del. C. § 220.[3] Specifically, the letter requested information regarding "the sale or other disposition of any assets or stock of [USM] over the past three (3) years, and the distribution or use of any proceeds of any such sales or dispositions." (App. at 228.)

         Approximately two months passed and, on December 3, 2002, Norman received a letter (the "December 2002 Letter") from Elkin acknowledging that USM had sold the licenses "it owned." (App. at 231). The letter included purchase and sale agreements which revealed that TEG sold some of the Phase II licenses acquired during the auction. The letter also included a breakdown of the uses of the proceeds, including repayment of what were characterized as shareholder loans, but it significantly understated the amount paid to Elkin. The Shareholder Loan Agreement was subsequently included in a letter that USM sent to Norman's attorney in October 2003 (the "October 2003 Letter") in response to a request for further information. Norman v. Elkin (“Norman II "), 726 F.Supp.2d 464, 472 (D. Del. 2010); (App. at 128, 131).

         II. Procedural Background

         The in-court battles between the parties began on November 16, 2004, more than a year before the fight became a federal case. Norman filed suit under 8 Del. C. § 220 in the Delaware Court of Chancery to compel Elkin to allow inspection of USM's books and records. Elkin vigorously opposed that proceeding and it dragged on for almost a year, until October 2, 2005, when the Chancery Court compelled USM to disclose the requested documents.[4]

         Norman filed the complaint that is the foundation of this appeal on December 5, 2005. Though he filed it in the Court of Chancery, the case was, at Elkin's instigation, promptly removed to the District Court. Norman raised a wide variety of tort and contract claims against Elkin, [5] USM, and TEG (collectively, the "Defendants") including breach of contract, usurpation of corporate opportunities, conversion, fraud, breach of fiduciary duties, and unjust enrichment.[6]

          With regard to his breach of contract claim, Norman alleged that he and Elkin entered into an oral contract about the amount of capital they would contribute and the equity they would each receive. Norman advanced three theories of breach: 1) that Elkin had failed to pay him his (Norman's) pro rata share of all proceeds, 2) that Elkin had refused to maintain his (Elkin's) full capital contribution of $750, 000, and 3) that Elkin had improperly caused USM to enter into the Shareholder Loan Agreement.[7]

         A. Summary Judgment Opinion (Norman I)

         The Defendants eventually moved for summary judgment, arguing that all of Norman's claims were barred by the statute of limitations. Norman I, 2007 WL 2822798, at *3-4. In the course of denying that motion, the District Court made several rulings relevant to this appeal. It first determined the applicable statute of limitations. Id. at *3. Since the suit was brought in Delaware, it applied Delaware's procedural law, including the state's borrowing statute, 10 Del. C. § 8121.[8] Norman I, 2007 WL 2822798, at *4. On that basis, it decided that Delaware law required that Pennsylvania's two-year statute of limitations be applied to all but the breach of contract claim, since Pennsylvania's limitations period was shorter than Delaware's for those non-contract claims.[9] Id. For the breach of contract claim, the Court applied Delaware's three-year limitations period, rather than Pennsylvania's four-year period. Id.

         The District Court then accepted Norman's argument that the statute of limitations for all of the claims was tolled as a result of Elkin's alleged wrongdoing and concealment of facts. Id. at *5. Accordingly, "the statute of limitations began to run at the time [Norman] knew or had reason to know of the facts constituting the alleged wrong." Id. The Court emphasized that "the date on which [Norman] knew or should have known the facts constituting his claims is a material dispute of fact" and therefore concluded that the claims could not be ruled untimely at the summary judgment stage. Id.

         B. First Trial and Post-Trial Motions (Norman II)

         Three of Norman's nine claims went to trial: breach of contract, fraud, and conversion. Norman II, 726 F.Supp.2d at 468. The District Court did not allow the other claims to go to the jury and stated that it would reserve judgment as to whether any of them were viable.[10]Id. After a three-day trial, the jury returned a verdict for Norman and awarded him $105, 756 in compensatory damages and $48, 000 in punitive damages on the fraud claim, $38, 000 in compensatory damages on the conversion claim, and $1 in nominal damages on the breach of contract claim. Id. The combined verdict was "equal to $1 ...


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