JEFFREY M. NORMAN, Appellant
DAVID W. ELKIN; RICHARD M. SHORIN; ELKIN GROUP INC.; U.S. MOBILCOMM INC. Appellants
January 13, 2017
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
A. Felice (Argued) Bailey & Glasser, Counsel for
L. Caponi (Argued) David A. Dorey Adam V. Orlacchio Blank
Rome Counsel for Appellees/Cross-Appellants
Before: SMITH, Chief Judge, JORDAN, and SHWARTZ, Circuit
JORDAN, Circuit Judge
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.
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.
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.
The Auction and Sale of Frequencies
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
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).
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.
Capitalization and the Shareholder Loan Agreement
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.
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. 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
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.)
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. 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.)
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).
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.
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,  USM, and TEG
(collectively, the "Defendants") including breach
of contract, usurpation of corporate opportunities,
conversion, fraud, breach of fiduciary duties, and unjust
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.
Summary Judgment Opinion (Norman I)
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. 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. Id. For the breach of contract
claim, the Court applied Delaware's three-year
limitations period, rather than Pennsylvania's four-year
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.
First Trial and Post-Trial Motions (Norman II)
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.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 ...