Find Laws Find Lawyers Free Legal Forms USA State Laws
Laws-info.com » Cases » Pennsylvania » Superior Court » 2013 » Kudrich, E., et al. v. Skydyne Co. (Memorandum)
Kudrich, E., et al. v. Skydyne Co. (Memorandum)
State: Pennsylvania
Court: Supreme Court
Docket No: 1141 EDA 2012
Case Date: 06/27/2013
Plaintiff: Kudrich, E., et al.
Defendant: Skydyne Co. (Memorandum)
Preview:J-A31018-12

NON-PRECEDENTIAL DECISION - SEE SUPERIOR COURT I.O.P. 65.37 ERIC KUDRICH, JOSEPH CURTIS, RICHARD MCKEEBY, AND NEC, LLC A/K/A NEC HOLDINGS, LLC, Appellant v. SKYDYNE COMPANY, Appellant No. 1141 EDA 2012 IN THE SUPERIOR COURT OF PENNSYLVANIA

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

ERIC KUDRICH, JOSEPH CURTIS, RICHARD MCKEEBY, NEC, LLC A/K/A NEC HOLDINGS, LLC, Appellants v. THE SKYDYNE COMPANY, Appellee

IN THE SUPERIOR COURT OF PENNSYLVANIA

No. 1245 EDA 2012

Appeal from the Order Entered April 5, 2012 In the Court of Common Pleas of Chester County Civil Division at No(s): 2010-05363 BEFORE: STEVENS, P.J., BOWES, and PLATT,* JJ.
____________________________________________ *

Retired Senior Judge assigned to the Superior Court.

J-A31018-12

MEMORANDUM BY BOWES, J.:

FILED JUNE 27, 2013 Eric Kudrich,

This matter involves an appeal and cross-appeal.

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. -2-

J-A31018-12

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. 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.

B.

-3-

J-A31018-12

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 -4-

J-A31018-12

$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:

-5-

J-A31018-12

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 In this

position of corporate vice-president of worldwide manufacturing. 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

-6-

J-A31018-12

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

-7-

J-A31018-12

inventory verification was performed, and he stated that an outside auditor reviewed the conducted inventory and verified it: Q. A. . . . What was the process by which the year end inventory was done for the year end 2008? 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, and then they gave us what we should put into the computer. Now, there was a change in accountants, accounting firms for that 2008 year end, correct? Yes, that's correct. And why was that change - - do you know why the change was made? Well, I can't say exactly why the change was made. We brought in a firm to do a forensic audit when the president Mr. Paris left. They then discussed the cost of having UHY, the people who had done it in 2007, what their cost would be versus doing a reviewed audit by Vanacore DeBenedictus, and I believe after discussions with the potential buyers, they opted to do the reviewed because of the cost difference. Tell the Court how the 2007 inventory was done with the accounting firm versus how it was done in 2008. Well, with the 2007 inventory we used tags, but the accountants came in and verified the tags before the tags were removed or any changes were made to the counts on the computer. We used tags in 2008, but the company basically asked us how we did it. . . . . [T]hey then signed off on the way we did the audit for 2008, the inventory. .... Q. What was your role in the 2008 year end inventory? -8-

Q. A. Q. A.

Q. A.

J-A31018-12

A. Q. A.

I coordinated it. . . . Was there anyone else, for instance anyone who inputted information regarding the inventory? I believe that most of the inputting was done by Mr. Fahnestock and Mr. Dansen. I'm sure there might have been other people in the office that helped, but I can't say that with any certainty who else would have helped. Now, as part of taking the inventory, the year end 2008, you used what you described as inventory tags? Yes. What are those? That's correct. It's a three-piece tag that has a white sheet, a yellow, a pink sheet, and then a hard cardboard sheet, you go out and attach it to the piece of equipment you counted, you write on the white sheet, the white sheets come back, and that's what you do your tag control with. And so what happens to the tags that are not left with the particular inventory? Tags that aren't used or accounted for are stored. And that happened in 2008? Yes, it did, to the best of my knowledge and recollection. What types of schedules did you prepare with regard to the year end 2008 inventory? Well, you sit down and you make up a map of the plan and each one gets assigned an area and you start on a certain day and they go out and do that. Did you, yourself, meaning you, keep track of the - - how did you keep track of the inventory tags?

Q. A. Q. A.

Q. A. Q. A. Q. A.

Q.

-9-

J-A31018-12

A.

I created an Excel spread sheet, and when I handed the tags out to someone I put down what tags they took and who took them.

Id. at 206-209. Skydyne countered this evidence with the testimony of Peter Keay, who acknowledged using the same E2 System to track inventory after Skydyne purchased Hornet. Mr. Keay stated that after he entered the

facilities following closing, he felt that there might be a discrepancy in the value of the inventory set forth in the asset purchase agreement. After

using the E2 system for five months, Skydyne performed a physical tagged inventory, just as had been done at the end of December 2008, and Mr. Keay stated that, based on Skydyne's inventory count, the value of Hornet's inventory as of March 27, 2009, was only $401,932.58. Hornet's March 27, 2009 inventory purportedly was overstated in the following respects: a) $135,405.80 of materials/items recorded as Inventory were either obsolete food service related materials/items, or were otherwise not of merchantable or useable quality; $99,029.39 of materials/items recorded as Inventory as of March, 2009 simply did not exist; in January, 2009 Inventory was falsely inflated as the result of a transaction whereby Hornet Group, Inc. ("HGI") purchased 130 packing cartons for which it was invoiced and paid $388.70, but recorded the 130 packing cartons as Inventory with a value of $87,761.70; Inventory was falsely inflated in an amount not less than $79,586.98 as the result of depletable goods (such as chemicals, gloves, drill bits, garnet abrasive, cartons) - 10 -

b) c)

d)

J-A31018-12

being purchased and recorded with incorrect costs and units of measure, or improper general ledger code assignment, and thereafter not reduced or removed from recorded Inventory as and when the goods were used and depleted, but not replaced; e) HGI scrap and process losses totaling $73,247.36 were not accounted for on bills of materials, or otherwise recorded on HGI's books; food service cabinets recorded as Inventory having a value of $46,858.35 had been placed by HGI with several food service dealers on a consignment basis. The cabinets continued to be recorded as Inventory at a value of $46,858.35 even though the cabinets had not been retrieved by or returned to HGI, and even after HGI ceased its food service business; $32,005.65 of HGI finished goods were recorded as Inventory, which finished goods were either obsolete or did not exist; $26,490.00 of Jones Zylon cabinets were carried on HGI's books as accounts receivable, but were also recorded as Inventory after the sales/receivables were realized; HGI scrap items/materials were recorded as Inventory having a value of $25,153.14; certain items/materials recorded as Inventory as of March, 2009, and which subsequently were subjected to no activity by way of usage or otherwise, were overstated in quantity by at least $13,440.65; $8,022.83 of bulk molding compound was recorded as finished goods Inventory, despite HGI having rejected the material as defective and having received a credit for the defective material; and $3,940.27 of HGI items were recorded as having been shipped to purchaser(s), but thereafter were recorded as Inventory.

f)

g)

h)

i) j)

k)

l)

Appellant's brief at 9-10 (emphases omitted). - 11 -

J-A31018-12

The

plaintiffs

conducted

a

hand-counted

tagged

inventory

on

December 31, 2008, downloaded the results into the E2 system, which it used until March 27, 2009, and used the figure in that system to arrive at inventory value as of March 27, 2009, of about $1,000,000. Conversely,

Skydyne used the E2 system from March 27, 2009, until its August 2009 physical, tagged inventory. According to Skydyne, the inventory as of

March 27, 2009, was only worth about $400,000. We now address the arguments raised by Skydyne in this appeal. As noted, it first charges the trial court with failing to enforce the clear and unambiguous language of the asset purchase agreement. Its argument in this respect is two-fold. Skydyne first suggests that the trial court did not apply clear and unambiguous contract terms when it viewed Skydyne's evidence skeptically because Skydyne did not conduct its hand-counted inventory until five months after the sale, despite being immediately aware of a possible discrepancy. According to Skydyne, the difference in value was quite

significant, more than one-half less than that represented by the plaintiffs. The trial court stated that it could not "help but be swayed by the time which passed from the date of closing until [Skydyne] was moved to act to `discover' what it now claims was a [sixty percent] discrepancy in the value of the inventory as warranted and the actual value as of March 27, 2009." Trial Court Opinion, 6/25/12, at 7. The trial court refused to credit

- 12 -

J-A31018-12

Skydyne's evidence, in part, due to the fact that there was "simply no reasonable and credible explanation [for] this delay [in conducting the physical inventory]." Id. Skydyne maintains that the quoted language indicates that the trial court ignored the following language in the parties' contract, which accorded Skydyne twenty-four months to enforce the representations and warranties made in the agreement, including the warranty as to the value of Hornet's inventory: 12.2. Survival of Representations. All covenants, agreements, representations and warranties made herein shall survive the Closing Date; provided, however, that representations and warranties made herein shall only continue for a period of twentyfour (24) months after the Closing Date and no indemnification claim may be brought under Section 9 with respect to such representations and warranties after the expiration of such period (unless notice of such claim is provided prior to the expiration of such period)[.]. Asset Purchase Agreement, 3/27/09, at
Download 1141-eda-2012.pdf

Pennsylvania Law

Pennsylvania State Laws
Pennsylvania Tax
Pennsylvania Labor Laws
Pennsylvania State
Pennsylvania Agencies
    > Pennsylvania Secretary of State

Comments

Tips