ORDER
DUDLEY BOWEN JR., District Judge
Presently before the Court is a motion for partial summary judgment by Plaintiff Whitesell Corporation ("Whitesell") on its claim for price increases. Defendants Electrolux Home Products, Inc. ("EHP") and Husqvarna Outdoor Products, Inc. and Husqvarna, A.B. (the latter two collectively referred to as "Husqvarna") have filed a cross-motion for partial summary judgment respecting the same claim. The Clerk has given the non-moving parties notice of the summary judgment motions and the summary judgment rules, of the right to file affidavits or other materials in opposition, and of the consequences of default. (Doc. Nos. 268 292.) Therefore, the notice requirements of Griffith v. Wainwright, 772 F.2d 822, 825 (11th Cir. 1985) (per curiam), have been satisfied. The motions have been fully briefed and are ripe for consideration.
This claim is set forth in Count II of Whitesell's First Amended Complaint entitled "Breach of Supply Agreement." (Doc. No. 68, ¶ 78(iii) ("EHP breached the terms of the Supply Agreement . . . by, among other things . . . failing to pay Whitesell for cost justified price increases permitted under the Supply Agreement.").)
I. BACKGROUND
A. Claim Overview
On December 14, 2000, almost ten years ago, EHP entered into a Supply Agreement with Whitesell. The Supply Agreement is entitled "Strategic Partnership Agreement" by the parties, and it will be referred to as either the Supply Agreement or the SPA herein. At the time the SPA was executed, EHP manufactured appliances for kitchen, cleaning, and outdoor use such as refrigerators, cookers, washing machines, vacuum cleaners, chain saws, and lawn mowers. (EHP Compl. ¶ 2.) Pursuant to the SPA, EHP agreed to buy all of its current and future requirements for certain goods from Whitesell during the pendency of the Agreement, and Whitesell agreed to supply all of EHP's requirements for such goods. (See generally Ex. 1 to EHP Compl., Doc. No. 1.)
EHP manufactured its indoor and outdoor products through two separate divisions. On June 12, 2006, EHP's Outdoor Products Division was spun off into a Swedish Corporation — Defendant Husqvarna, A.B. (Doc. No. 126 at n. 6.) Husqvarna, A.B. allegedly transferred the Outdoor Division to Defendant Husqvarna Outdoor Products, Inc., a Delaware Corporation, with Husqvarna, A.B. being the sole or primary stockholder of Husqvarna Outdoor Products, Inc. (Am. Compl. ¶¶ 4-5.)
The Supply Agreement began a multi-million dollar relationship between the parties that involves thousands of different parts. Litigation between the parties started in the third year of their relationship when EHP filed suit against Whitesell on March 24, 2003. The parties entered into a settlement agreement within a few months, only to return to this Court nearly two years later in March 2005. The parties again entered into an agreement to maintain the status quo in the form of a Consent Order, dated May 17, 2005. Despite the best efforts of the Court and two mediators, the life of this litigation is approaching a decade. The Court need not delve into the tortuous history of the case here, though it would provide a helpful insight into the relationship of the parties. Instead, the factual and procedural backgrounds detailed in prior Orders are incorporated herein.
Of paramount importance to the pending motions for summary judgment, the SPA contains a "Cost Justification" provision, which reads as follows:
It is Whitesell's intent
to maintain and hold firm all pricing for the duration of the Agreement. Only if in an adverse market situation that drastically affects Whitesell's costs would Whitesell request a price increase from Electrolux.
In the event Whitesell requests a price increase for any Good(s) Whitesell provides,
then
upon the request of Electrolux,
Whitesell shall provide such cost increase evidence to Electrolux for any requested changes in any specific unit prices.
After supplying reasonable documentation of such cost increase, Electrolux shall make the determination on the price change request.
After such validation of increased costs, both parties shall have a face to face meeting and within 30 days mutually agree on any price changes to be implemented. Electrolux shall have the sole option to either accept the substantiated price change request on any specific Good(s) that a price change was requested or quote those specific Good(s) with Qualified Suppliers. Whitesell shall be given thirty days to evaluate any bonafide written offer after receiving copies of such third party offer. However, Whitesell shall have the right of refusal to match all bonafide written offers received by Electrolux on all such Good(s).
(Id. § 5.5 (emphasis added).) The instant motions for summary judgment call upon the Court to interpret and apply this contract provision to the evidence related to Whitesell's price increase claim and determine whether there is a triable issue of fact.
At this juncture, I am constrained to note that I have already concluded sua sponte that the subject matter of the SPA — that is, the "Goods" — was too indefinite to be enforced. (See generally Order of Oct. 14, 2008.) Ultimately, the scope of the parties' contractual obligations was redefined to include only four categories of parts, three of which were specified in the parties' Settlement Memorandum of May 28, 2003. The fourth category has been referred to as the "course of performance" category. The significant Cost Justification provision is included in the SPA — the original contract between the parties — and has never been amended through the Settlement Memorandum, the Consent Order of May 17, 2005, or otherwise. While the Court may question the validity of the entirety of the SPA as an enforceable contract, the parties do not. Accordingly, the Court will press on accepting at face value that certain of the SPA's provisions, to include the Cost Justification provision, are enforceable and govern the relationship between the parties.
According to the cumbersome but plain terms of the Cost Justification provision, Whitesell committed to maintain the pricing of supplied goods for the duration of the Supply Agreement unless "an adverse market situation drastically affects Whitesell's costs. . . ." (SPA § 5.5) In that event, the SPA employs a certain procedure by which Whitesell may seek price increases. An outline of the procedure follows:
• Whitesell first requests the price increase.
• Defendants may request cost justification evidence for the price increase.
• If Defendants make such request, Whitesell is obligated to provide "reasonable documentation" justifying the requested increase in "specific unit prices."
• Once the increased price has been validated by evidence, the parties must have "a face to face
meeting and within 30 days
mutually agree
on any price changes to be implemented."
• Absent an agreement, Defendants have the sole discretion to decide whether to accept the substantiated price change on a specific part or to quote a different price for that part from a "Qualified Supplier."
• Whitesell then has 30 days to evaluate any bonafide third party offer and has the right of first refusal to match said offer.
(Id.)
The procedure requires Whitesell to provide cost justification evidence upon request; additionally, in granting Defendants the sole discretion to reject a price increase in favor of an unmatched bona fide offer from a third party supplier, there is no doubt that the Cost Justification provision favors Defendants. Yet, when a contract is designed to maintain and hold firm the pricing of parts, the onus is appropriately upon the party seeking to change the price to justify any change.
According to Whitesell, during the relationship the price for steel dramatically increased worldwide, driving up its costs to produce and supply many of the parts it provided to Defendants. Consequently, Whitesell notified Defendants that it would increase the costs of certain parts in 2004, 2005, 2006 and 2007. Whether Defendants are liable to Whitesell for the price increases subject to these notices is the issue brought to bear through the motions for partial summary judgment. In particular, on January 22, 2010, Whitesell sought summary judgment based upon its 2005 price increases. In Whitesell's estimation, these claims amount to more than $30 million. (See Pl.'s Memo. in Supp. of Mot. for Partial Summ. J., at 2.) In response, Defendants filed a cross motion for summary judgment on the 2005 price increases; Defendants additionally sought summary judgment on Whitesell's 2007 price increases.
The price increases of 2004 and 2006 are not at issue in the current motions for summary judgment.
The parties' briefs related to the instant motions for summary judgment on Whitesell's price increase claim reveal an initial dispute as to whether Whitesell was obligated to provide cost increase evidence to Defendants; more specifically, Whitesell contends that Defendants did not request cost increase evidence with respect to the 2005 increases. Assuming Whitesell was required to provide cost increase evidence, the parties dispute whether the evidence provided was sufficient. Upon consideration of the evidence of record, as more fully discussed below, this Court first concludes that there is no genuine issue of material fact regarding Defendants' request for cost justification evidence relating to the 2005 price increases. The Court next concludes that there is no genuine issue of material fact that the cost increase evidence provided by Whitesell was insufficient under the SPA. Therefore, because Whitesell did not implement its price increases using the procedure set forth in the Cost Justification provision of the SPA, Defendants did not breach the contract for failing to pay the price increases as a matter of law. Thus, Defendants are entitled to summary judgment on Whitesell's price increase claim for 2005 and 2007.
The Court need not address whether the price quotes supplied by Defendants were "bonafide" as contemplated by the Cost Justification provision of the SPA.
B. Factual Background
On April 13, 2004, Whitesell notified EHP that it would be increasing prices as a result of mounting steel costs. (Whitesell Decl. ¶ 4 Ex. A.) On May 7, 2004, Whitesell sent EHP an email attaching industry news articles concerning the "record high" steel prices. (Whitesell SOMF, Ex. W.) In response to this email, EHP responded by email as follows: "[EHP] appreciate[s] all of the newspaper reading materials [Whitesell] sent over the last few weeks. While interesting, this is not the process set forth to present a proposed material based price increase to EHP." (Leon Decl., Ex. A (emphasis added).) Subsequently, on November 16, 2004, Whitesell emailed a one-page document containing a chart titled "Taiwan Wire Analysis," which is dated May 20, 2004. The chart lists only two "materials" and purports to show cost increases in this material for the period of November 2003 to May 2004. (Whitesell SOMF, Ex. A.) Attached to the chart are six invoices containing information apparently written in Chinese with no translation provided. (Id.)
"SOMF" stands for "Statement of Material Facts." Whitesell's SOMF with exhibits appears in the record at document number 266.
Nevertheless, it is undisputed that EHP and Whitesell reached an agreement to pay increased pricing in 2004; further, the agreed-upon increases were less than the full amount of Whitesell's 2004 price increase requests. (Leon Decl. ¶ 6; Whitesell Decl. ¶ 6.) Thereafter, in February and March of 2005, Whitesell sent additional notices of price increases to EHP. (See generally Whitesell Decl., Ex. B.) In each of the notices, Whitesell cites to the increased cost of steel. For example, in an email dated February 24, 2005, Whitesell indicates that it had no alternative but to "pass along" the "excessive cost increases" that Whitesell had suffered in the marketplace. Whitesell continues: "To compound matters, exchange rates have moved in a significant negative direction as well as we have just received additional steel price increases in January as well driving our overall cost increases up to a[n] unbearable and unsustainable level. We have attempted to only increase items with low or negative margins in an effort to support EHP the best we can during these difficult and trying times. . . ." (Id.) In a letter dated February 18, 2005, Mr. Neil Whitesell, the Chief Executive Officer, indicates that Whitesell had experienced "well over a 30% total cost increase on the vast majority of the products" supplied to EHP. (Id.)
One of EHP's executive officers, Mr. Roger J. Leon, testified that during 2004 and 2005, he spoke to Mr. Whitesell on numerous occasions to notify him that EHP did not consider the materials provided (i.e., the news articles and the "Taiwan Wire Analysis" chart) to be sufficient cost justification evidence under the Cost Justification provision of the SPA. (Leon Decl. ¶¶ 5-7.) In response to requests for cost justification, Mr. Leon claims Whitesell consistently referred EHP employees to the materials provided in 2004. (Id. ¶ 7.)
On March 10, 2005, another of EHP's executive officers, Mr. Donald J. Market, sent an email to Mr. Whitesell objecting to the price increases: "Our agreement specifically states that [EHP] may not `cherry pick' parts for selective cost reductions in the initial term, yet [Whitesell is] doing just that in [the] price increases. I take great exception to your selectively asking for price increases that obviously benefit your company while imposing higher costs on mine." (Market Decl., Ex. A.) Mr. Whitesell responded: "We have had well over a 100% cost increase in steel pricing of which we provided proof of last year." (Id. (emphasis added).)
In making the 2005 price increase requests, Whitesell sent at least twenty separate price increase notices to the various Indoor and Outdoor Products Divisions of EHP dated February 2, 14, 18, 23, and 28 and March 25 and 28. (See Market Decl. ¶ 10; Leon Decl. ¶ 15; Whitesell Decl., Ex. B.) On March 9, 2005, in the midst of its price increases, Whitesell filed a "Motion for Preliminary Relief and to Enforce Settlement Agreement," within which Whitesell sought, inter alia, to have this Court compel EHP to pay the 2005 price increases which Whitesell was in the process of communicating to EHP. (Doc. No. 11, at 4.) In its opposition brief filed on March 24, 2005, EHP stated, in pertinent part, the following:
These price increase notices were sent prior to the time that EHP's Outdoor Products Division was spun off into Husqvarna, which occurred on June 12, 2006.
After receiving Whitesell's proposed price increases,
EHP has repeatedly requested that Whitesell provide the cost increase evidence required by Paragraph 2 of § 5.5. To date, Whitesell's only response has been to send EHP newspaper articles which discuss increases in the price of steel but has to date consistently refused to provide any specific cost justification documentation concerning how much Whitesell's price
for this steel it has purchased to produce the fastener and wireform parts supplied to EHP has actually increased.
(Doc. No. 13, at 8 (emphasis added).) Whitesell then filed a reply brief, wherein it acknowledged EHP's position that Whitesell had refused to provide sufficient cost justification evidence. Rather than argue that EHP had not requested such evidence, Whitesell referred the Court to the cost justification evidence it had sent in 2004. (Doc. No. 17, at 5.) Moreover, when Defendants answered Whitesell's First Amended Complaint containing the subject price increase claim on November 16, 2005, they denied that they were liable for any price increases because the requests did not "follow[] the cost justification procedures required by Section 5.5 of the Supply Agreement in that Whitesell refused to supply cost increase evidence justifying the requested changes to the effected [sic] part's specific unit prices." (Doc. No. 70, at 10, ¶ 29.)
EHP would again challenge the sufficiency of Whitesell's cost justification evidence in its brief opposing Whitesell's motion to enforce the Consent Order of May 17, 2005. (Doc. No. 45, at 6 ("Whitesell has produced absolutely no evidence of how these purported cost increases have impacted its unit costs for manufacturing the specific parts for which it has sought price increases as required by . . . § 5.5.").)
With respect to the 2005 price increases, Defendants have pointed out the following noteworthy aspects of Whitesell's price increase requests. As mentioned previously, Whitesell offered the rising cost of steel as justification for the price increases. Yet, 20 of the 116 Indoor Products Division parts that were subject to a price increase contain no steel. (Market Decl. ¶ 8 Ex. Q.) In Mr. Neil Whitesell's letter of February 18, 2005, he indicates that Whitesell had experienced "well over a 30% total cost increase on the vast majority of the products." (Whitesell Decl., Ex. B.) Yet, the increases Whitesell sought in specific unit parts ranged from 3.01% to 95.64% without any explanation as to how the increases were calculated. (Leon Decl. ¶ 10.) Finally, while Whitesell complained of negative exchange rates and additional steel price increases in January 2005, it provided no evidence to support these purported factors in increasing EHP's costs in 2005.
As previously noted, the "Taiwan Wire Analysis" chart purported to show cost increases in two materials only for a period of November 2003 to May 2004.
On May 17, 2005, the parties entered into a Consent Order whereby EHP would not be obligated to pay the 2005 price increase requests until the price increase dispute could be judicially resolved. (Doc. No. 30, at 3.)
In March 2007, Whitesell sent additional price increase notices to Defendants. In response to EHP's request for cost increase justification, Whitesell sent an email dated March 12, 2007 to EHP, which stated in pertinent part:
The price adjustment [of 2007] was due to oversight in that the prices should have been adjusted in
2004 when steel prices and other cost factors went up drastically and was not caught due to a[n] error in our system. The price increase justification (Whitesell steel cost increases/invoices, etc) where [sic] given to [EHP] during that period. . . ."
(Market Decl., Ex. B.) On that same day, Mr. Donald J. Market of EHP sent a letter to Whitesell in which he states that the explanation in the above email does not satisfy the Cost Justification provision of the SPA, and he expressly demanded cost increase evidence of the 2007 cost increase requests. (Id., Ex. C.) Whitesell stood firm on its position that the 2004 information was sufficient. In an email to Husqvarna on April 19, 2007, Whitesell stated: "As stated in my previous e-mail, `cost justification has been previously been [sic] presented and accepted by [Defendants] in the form of actual Whitesell steel invoices.'" (Sadler Decl., Ex. D.)
Mr. Market lodged the same objection to Whitesell by email dated April 27, 2007. (Market Decl., Ex. D.)
In the initial brief supporting its motion for partial summary judgment, Whitesell indicates that it provided invoices for its steel costs to support its price increases. (Doc. No. 265, at 4.) Whitesell then goes on to attack the sufficiency of the third party quotes that EHP provided in response to the price increase notices. (Id. at 5-18.) There is absolutely no mention of Whitesell's contention that Defendants did not request cost justification materials. Whitesell first mentions this contention in its reply brief filed on March 26, 2010. In the reply brief, Whitesell concedes that EHP asked for cost justification evidence in response to the 2004 and 2007 notices (doc. no. 308, at 4); however, it states that with respect to the 2005 price increase notices, "Defendants offer no evidence of any request they made for cost justification . . . apart from their own unsubstantiated declarations" (id. at 2). Thus, whether EHP requested cost justification evidence in 2005 has been placed at issue. Thereafter, the Court must determine whether the evidence Whitesell produced in 2004 (i.e., news articles and the "Taiwan Wire Analysis" chart) is sufficient to satisfy the requirements of the Cost Justification provision.
II. SUMMARY JUDGMENT STANDARD
The Court should grant summary judgment only if "there is no genuine issue as to any material fact and . . . the movant is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c). The purpose of the summary judgment rule is to dispose of unsupported claims or defenses which, as a matter of law, raise no genuine issues of material fact suitable for trial. Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986).
In considering a motion for summary judgment, all facts and reasonable inferences are to be construed in favor of the nonmoving party. Hogan v. Allstate Ins. Co., 361 F.3d 621, 625 (11th Cir. 2004). Moreover,
[t]he mere existence of some factual dispute will not defeat summary judgment unless the factual dispute is
material to an issue affecting the outcome of the case. The relevant rules of substantive law dictate the materiality of a disputed fact. A genuine issue of material fact does not exist unless there is sufficient evidence favoring the nonmoving party for a reasonable jury to return a verdict in its favor.
Chapman v. AI Transp.,
229 F.3d 1012, 1023 (11
th Cir. 2000) (
en banc) (quoted source omitted) (emphasis supplied). The party opposing the summary judgment motion, however, "may not rest upon the mere allegations or denials in its pleadings. Rather, its responses . . . must set forth specific facts showing that there is a genuine issue to be tried."
Walker v. Darby,
911 F.2d 1573, 1576-77 (11
th Cir. 1990).
Where contract language is unambiguous, construction is unnecessary and the court simply enforces the contract according to its clear terms. Caswell v. Anderson, 241 Ga. App. 703 (2000). In this case, the parties do not dispute and the Court concludes that the Cost Justification provision is unambiguous. Thus, this Court must only determine whether any material issues of fact remain for jury determination with respect to the parties' respective duties and performance under this provision.
III. LEGAL ANALYSIS
A. Request for Cost Justification Evidence
In its reply brief of March 26, 2010, Whitesell contends that EHP did not request cost justification evidence with respect to its 2005 price increase requests pursuant to Section 5.5 of the SPA. Upon review of the record, however, the Court concludes that no reasonable jury would determine that EHP did not request cost justification evidence of the 2005 price increases.
Both Mr. Roger J. Leon and Mr. Donald J. Market of EHP testified by declaration that they consistently objected to Whitesell's continued reliance on the materials provided in 2004 (i.e., the news articles and the "Taiwan Wire Analysis" chart) as sufficient cost justification evidence for the 2005 increases. (See Leon Decl. ¶¶ 2, 5-7; Market Decl. ¶ 2-3.) Whitesell presents no evidence to contradict this testimony; instead, it takes issue with the credibility of the declarations, stating that they are "unsubstantiated." In the midst of the 2005 price increase exchange, Whitesell filed a motion asking this Court to compel EHP to pay the 2005 price increases. At that time, EHP represented in court filings and in its Answer to the claim that it had requested cost justification evidence from Whitesell but that the evidence provided was unspecific and thus insufficient under Section 5.5 of the SPA. Rather than then contest EHP's representation that it had requested additional cost justification for the 2005 price increase requests, Whitesell simply maintained in its contemporary court filings that the information it provided in 2004 was sufficient. Further, Mr. Neil Whitesell responded to EHP's objection to the 2005 price increase with a statement that Whitesell "had well over a 100% cost increase in steel pricing of which [Whitesell] provided proof of last year." (Market Decl., Ex. A.) Logic dictates there would be little need for Mr. Whitesell to make such representation if he had not been asked to provide cost justification. Finally, while Whitesell attacks the validity of the declarations, it is noteworthy that the declarations were filed prior to the filing of Whitesell's reply brief of March 26, 2010, in which Whitesell contends for the first time that EHP never requested cost justification evidence for the 2005 price increases. I cannot rationally accept that EHP contrived the relevant testimony of its officers before it knew that Whitesell claimed EHP had not requested cost justification evidence in 2005.
Upon the foregoing, particularly in consideration of the context of Defendants' in judicio statements to which there were no contemporaneous objections or disputes, the Court concludes that the declarations of Messrs. Leon and Market are sufficient, undisputed evidence that EHP requested evidence justifying the 2005 price increases.
B. The Sufficiency of the Cost Justification Evidence
According to the SPA, once Defendants request cost justification evidence, Whitesell is obligated to provide "reasonable documentation" "for any requested changes in any specific unit prices." In this case, Whitesell presented newspaper articles that generally discuss the rise in steel prices and a one-page chart entitled "Taiwan Wire Analysis" which shows that Whitesell's costs of obtaining two types of material from Taiwan had increased over 60% in an eighteen-month period. This chart is presumably supported by the attached invoices that are written in Chinese with no translation. Despite the fact that the aggregate value of these price increases is over $30 million (according to Whitesell), it relies solely on this meager documentation to justify the costs increases in 2005 and 2007. Indeed, Whitesell does not dispute Defendants' statement that this documentation "is the sum total of all cost justification evidence which Whitesell provided in support of all price increase requests at issue in this litigation." (See Defs.' Memo. in Opp'n to Pl.'s Mot. for Partial Summ. J., at 12 (doc. no. 293).)
Assuming arguendo that this documentation is accurate, the Court must now determine whether there is a genuine issue of material fact with respect to whether it satisfies the requirements of the Cost Justification provision. Upon consideration of the clear language of the Cost Justification provision and the stated intent of the parties therein, the Court concludes that no dispute of fact remains for jury determination on this issue. Whitesell's purported cost justification evidence provides no information about the specific unit prices for which it sought an increase. Rather, it only demonstrates an increase in the cost of steel and steel wire in a generalized way. It is of little moment that the rise in steel costs may be characterized as drastic and undeniable. Whitesell had an obligation to show how the increased steel prices correlate specifically to the unit price increases that it sought to impose.
Defendants have never disputed the fact that the price of steel drastically increased in 2004; rather, they dispute whether Whitesell has satisfactorily shown that the specific price increase requests correlate to the increased price of steel as mandated by the Cost Justification provision.
Particularly telling on this point is Whitesell's failure to counter or mitigate the pricing discrepancies Defendants noted in their court papers related to the instant motions for summary judgment. For instance, Defendants point out that various parts subject to Whitesell's price increase contained no steel. Also, the increases sought in specific unit parts ranged from 3.01% to 95.64% without any explanation as to how these varying percentage increases were calculated. There was also no evidentiary support offered for Whitesell's complaints about negative exchange rates and additional increases in steel costs occurring in January of 2005, let alone evidence that these factors relate to the specific price increase requests.
Rather than explain these discrepancies, Whitesell explains that the price increases were more arbitrary. For instance, in an email to EHP in February 2005, Whitesell states: "[Whitesell] ha[s] no alternative but to pass along a portion of these increased costs to you in the form of a selective price increase. Our aim is to only increase those items with very low or negative margins." (Whitesell Decl., Ex. B.) The import of this statement is that it appears that Whitesell's price increase requests were designed to correct its low or negative price margins as opposed to being a direct correlation to the adverse market situation of rising steel prices. Accordingly, Whitesell did not uniformly raise prices on all parts containing steel but rather sought random and varying percentage increases. Whitesell contends that it is not required to show a direct correlation between the adverse market situation and the specific price increases; however, this contention ignores the plain contractual language that requires evidence that justifies "specific unit prices." Simply put, selective price increases is inconsistent with the general intent of the SPA that Whitesell maintain and hold firm all pricing for the duration of the agreement unless "an adverse market situation . . . drastically affects Whitesell's costs. . . ."
Moreover, it is unreasonable for Whitesell to maintain, as it has throughout the parties' relationship, that evidence related to 2004 price increases justifies the price increases of 2007. Were the Court to accept this contention, the very heart of the procedure for price increases — i.e., Defendants' contractual right to demand evidence justifying specific unit price increases — would be rendered superfluous. In short, Whitesell failed to demonstrate, as requested by Defendants, how the overall increase in steel prices affected its cost of producing the parts in question and therefore correlated to its price increase requests.
Upon the foregoing, the Court concludes that Whitesell did not comply with the requisite procedure of the SPA to implement price increases as a matter of law. No reasonable jury would determine that the cost justification evidence Whitesell provided in 2004 is "reasonable documentation" of its "requested changes in any specific unit prices." Accordingly, Defendants are not liable for the subject price increases and are entitled to summary judgment on Whitesell's price increase claim.
IV. CONCLUSION
Upon the foregoing, Whitesell's motion for partial summary judgment on its price increase claim (doc. no. 264) is hereby DENIED. Defendants' cross motion for partial summary judgment on Whitesell's price increase claim (doc. no. 292) is GRANTED. More specifically, Defendants are entitled to summary judgment on Whitesell's claim that Defendants are liable to Whitesell for the price increases Whitesell sought to implement in 2005 and 2007. Moreover, Whitesell's motion under Rule 56(f), Federal Rules of Civil Procedure, is DENIED AS MOOT. (Doc. No. 311).
Whitesell's Rule 56(f) motion predominantly pertains to evidence relating to the issues involving the third party quotes, which the Court found unnecessary to address. To the extent that Whitesell argues it needs additional discovery to determine whether "cost justification was timely requested and adequately provided" in 2007, the motion does not explain or establish what additional discovery is needed that would impact the issues decided by this Order. In short, Whitesell has not provided sufficient reason to warrant a delay in the resolution of these motions.
ORDER ENTERED at Augusta, Georgia, this 4th day of November, 2010.
also alleges that Defendant Stern, one of the Underwriters, violated §§ 25400 and 25500 of the California Corporations Code. Section 25400 "makes it unlawful for any person `selling or offering for sale . . . [a] security, to make, for the purpose of inducing the purchase . . . of such security by others, any statement which was, at the time and in the light of the circumstances under which it was made, false or misleading . . . and which he [or she] knew . . . was so false or misleading.'"
Cal. Amplifier, Inc. v. RLI Ins. Co., 94 Cal.App.4th 102, 109 (Ct. App. 2001) (quoting
Cal. Corp. Code § 25400)). To bring a cause of action under this provision, a private claimant must further satisfy § 25500, which provides that a person who "willfully participates in any act or transaction in volition of § 25400 shall be liable to any person who purchases . . . a security at a price which was affected by such act or transaction."
Cal. Corp. Code § 25500.
To meet the "willful participation" requirement, a plaintiff must "satisfy a high level of scienter." See Cal. Amplifier, 94 Cal.App.4th at 112. This means that the plaintiff must demonstrate that the defendant acted with "an intent to defraud through a knowingly false statement." Id. Accordingly, "[o]nly persons who willfully, not merely recklessly, violate section 25400, . . . can be liable for damages." Id. But while the elements of a claim under §§ 25400 and 25500 are relatively straightforward, the pleading requirements for "willful participation" are not. See Reiger v. Altris Software, Inc., 1999 WL 540893, at *10 (S.D. Cal. April 30, 1999) (noting that an "interesting question arises as to whether Section 25500 claims are subject to a heightened pleading standard for fraudulent intent" but then leaving that question for another day). In the absence of any definitive guidance on this question, the Court will hold Allstate to the pleading requirements Federal Rule of Civil Procedure 9(b), which requires misstatements to be pled with particularity, but which permits knowledge or intent to be pled generally. Fed.R.Civ.P. 9(b); see Twombly, 550 U.S. at 570 (requiring claimants to plead facts that "state a claim for relief that is plausible on its face"); Iqbal, 129 S. Ct. at 1949 (requiring claimants to "plead[] factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged); Glenfed, 42 F.3d at 1546-47 (observing that where no heightened pleading standard is required, a plaintiff need not plead fraudulent intent with particularity).
Under these requirements, Allstate has adequately alleged a violation of §§ 25400 and 25500. According to Allstate, Stern willfully participated in the conveyance of misleading information to investors through its involvement in investigating, drafting, and reviewing the data set forth in the Official Statements. Given that role, Stern had a duty to disclose any known information necessary to prevent the Official Statements from being false or misleading. See Howard, 228 F.3d at 1061 (holding that a defendant can be held liable when it knowingly participates in the creation of a false or misleading statement). Allstate has further alleged that Stern knowingly or wilfully participated in the alleged fraud. According to Allstate, Stern knew of the existence of documents that undermined portions of the Official Statements and was aware of the need for the Bonds to obtain an investment-grade rating. As previously discussed in this Order, such allegations are insufficient to plead scienter with particularly; nonetheless, to the extent particularity is not required under California law, Allstate has stated a claim.
(3) The Trustee Has Not Adequately Plead Violations of Twenty-Eight Other States' Securities Laws.
In its Counterclaim, the Trustee also alleges that Defendants violated the securities laws of some twenty-eight states. (Doc. 130 at ¶ 211). This vague allegation, however, does not adequately identify or explain which specific laws Defendants are alleged to have violated. Such an approach does not satisfy the pleading requirements of Federal Rule of Civil Procedure 8(a), let alone Rule 9(b) or any other heightened pleading requirements that may apply to such claims. Accordingly, to the extent the Trustee attempts to raise securities claims based on these other states' laws, these claims are dismissed.
E. Allstate Has Stated a Claim for Common Law Fraud.
Allstate brings its claim for common law fraud against Global Entertainment, the Hocking Defendants, the Fain Group, the Town, and PVEC-LLC. Upon review of the allegations in its Amended Complaint, Allstate has sufficiently stated a claim against each of these Defendants. To prove common law fraud in Arizona, a plaintiff must satisfy nine elements:
(1) a representation, (2) its falsity, (3) its materiality, (4) the speaker's knowledge of its falsity or ignorance of its truth, (5) the speaker's intent that the information should be acted upon by the hearer and in a manner reasonably contemplated, (6) the hearer's ignorance of the information's falsity, (7) the hearer's reliance on its truth, (8) the hearer's right to rely thereon, and (9) the hearer's consequent and proximate injury.
Taeger v. Catholic Family and Cmty. Servs., 196 Ariz. 285, 294, 995 P.2d 721, 730 (Ct. App. 1999) (citation omitted). To adequately plead a claim for fraud, a party must "state with particularity the circumstances constituting fraud of mistake" in accordance with Rule 9(b).
See Kearns, 567 F.3d at 1125 ("`[W]hile a federal court will examine state law to determine whether the elements of fraud have been pled sufficiently to state a cause of action, the Rule 9(b) requirement that the circumstances of the fraud must be stated with particularity is a federally imposed
rule.'"). In addition, claims for fraud generally cannot lie where the allegedly false or misleading representation pertains to future prospects or performance.
See Dawson v. Withycombe, 216 Ariz. 84, 96, 163 P.3d 1034, 1046 (Ct. App. 2007). Nonetheless, forward-looking statements are actionable when the Defendants make the statements with actual knowledge that projections, promises, or expectations will not be met.
See id. (quoting
Law v. Sidney, 47 Ariz. 1, 4-5, 53 P.2d 64, 66-67 (1936)).
Allstate's allegations meet each of these elements as to Global Entertainment, the Hocking Defendants, the Fain Group, the Town, and PVEC-LLC. As discussed throughout this Order, the parties have adequately alleged that the event, attendance, and revenue projections in the Official Statements were unreasonable, and therefore misleading, when these Defendants made these statements.
F. Allstate Has Stated a Claim Against All Defendants for Aiding and Abetting the Commission of Fraud.
Allstate next alleges that each of the Defendants is liable pursuant to an aiding and abetting theory. To state a claim for aiding and abetting fraud under Arizona law, a plaintiff must plead three elements: (1) the commission of fraud by the primary tortfeasor causing injury to the plaintiff; (2) the defendant's knowledge of the fraud; and (3) the defendant's substantial assistance or encouragement of the primary tortfeasor in accomplishing the fraud. See Wells Fargo Bank, N.A. v. Ariz. Laborers, Teamsters and Cement Masons Local No. 395 Pension Trust Fund, 201 Ariz. 474, 485, 38 P.3d 12, 23 (2002). For liability to attach, however, a plaintiff need not show "the existence of . . . a pre-existing duty of care[;]" instead, "aiding and abetting liability is based on proof" of scienter — i.e. that the defendants knew that "the conduct they [were] aiding and abetting [was] a tort." Id. (citations omitted). At the pleading stage of a claim for aiding and abetting the commission of fraud, a misrepresentation of fact must be set forth with particularity, as required by Rule 9(b). See Kearns, 567 F.3d at 1125 (noting that 9(b)'s pleading requirements apply to state law claims brought in federal court). The other elements, including scienter, however, must simply satisfy the pleading requirements set forth in Twombly and Iqbal. See Twombly, 550 U.S. at 570 (requiring claimants to plead facts that "state a claim for relief that is plausible on its face"); Iqbal, 129 S. Ct. at 1949 (requiring claimants to "plead[] factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged"); see also Fed.R.Civ.P. 9(b) (explaining that "[m]alice, intent, knowledge, and other conditions of a person's mind may be alleged generally").
Allstate has adequately pled facts giving rise to a plausible claim of aiding and abetting liability as to each of the Defendants. As discussed throughout this Order, Allstate has set forth facts indicating that several of the Defendants committed securities fraud. Similarly, because Allstate need not plead scienter with particularity to state a claim for aiding and abetting liability, the allegations in Allstate's Amended Compliant are sufficient to satisfy the second and third elements of the claim. Accordingly, the Court finds that Allstate has stated a claim for aiding and abetting liability against all Defendants.
G. Allstate and the Trustee Have Stated Claims for Negligent Misrepresentation, But Only to the Extent that Those Claims Pertain to Past or Present Statements of Fact.
Under Arizona law, a defendant is liable for negligent misrepresentation when he or she negligently provides false information to another in the course of his business or employment and the other party, justifiably relying on this false information, incurs damages. PLM Tax Certificate Program 1991-92, L.P. v. Schweikert, 216 Ariz. 47, 50, 162 P.3d 1267, 1270 (Ct. App. 2007). Where a defendant discloses some facts, but negligently omits others, that defendant is liable if its disclosures create a misleading or false impression. Hill v. Jones, 151 Ariz. 81, 84-85, 725 P.2d 1115, 1118-19 (Ct. App. 1986). A claim for negligent misrepresentation, however, cannot "be premised upon a promise of future conduct." McAlister v. Citibank, 171 Ariz. 207, 215 829 P.2d 1253, 1261 (Ct. App. 1992). Instead, a claim for negligent misrepresentation must be based on statements about past or present facts. Shacknai v. Mathieson, 2009 WL 4673767, at *4 (D. Ariz. Dec. 3, 2009) (citing McAlister, 171 Ariz. at 215, 829 P.2d at 1261). To the extent that the relevant pleading raise allegations pertaining to negligent omission of facts necessary to make a past or present assertion not misleading, Allstate and the Trustee have stated a claim for negligent misrepresentation. Where the alleged omission pertains to future events, promises, or projections, the negligent misrepresentation claims fail.
(1) Allegations Pertaining to Past or Present Facts
To the extent that the pleadings allege that Kutak and Stinson, and perhaps the other Defendants, negligently failed to disclose certain defects in Bond-related documents, Allstate and the Trustee have stated a claim for negligent misrepresentation. According to Allstate and the Trustee, Kutak and Stinson drafted a provision in the Official Statements that creates the misleading impression that Bondholders would have a "first lien" upon certain TPT Revenues that were pledged for debt servicing. (Doc. 155, Ex. 1 at 8). This statement, however, is alleged to be misleading because certain drafting defects have essentially prevented the Bondholders from exercising any lien.
Significantly, the allegedly misleading assertion that the Bonds were secured by a lien on certain revenue is statement of present fact — which may be actionable under Arizona law. While the Bonds had not yet been issued when this statement was made, all of the relevant documents creating the alleged defects were in existence. Accordingly, at the time Defendants issued the statement, it had allegedly been established to a legal certainty that the defects at issue would render the lien basically worthless.
(2) Allegations Pertaining to Future Projections
To the extent the alleged omissions are alleged to have rendered a forward-looking statement false or misleading, Allstate and the Trustee do not state a claim for negligent misrepresentation. The issue here is whether a claim for negligent misrepresentation can lie where an omission of present or past facts is alleged to have made a statement pertaining to future events false or misleading. Although there does not appear to be any Arizona authority directly on point, other jurisdictions have split in deciding this issue. First, in a 1996 decision, the New York Court of Appeals found future financial projections to be actionable where a company executive explicitly told investors that his projections were reasonable, even though in calculating the projections, the executive failed to take into account a new state utility rate structure. Kimmell v. Schaefer, 675 N.E.2d 450, 455 (N.Y. 1996). Because the new utility rate completely undermined the feasibility of the projections, the court found the executive liable for negligent misrepresentation. Id.
A more recent decision from the Second Circuit Court of Appeals, however, reached the opposite conclusion. See Hydro Investors, Inc. v. Trafalgar Power, Inc., 227 F.3d 8 (2d Cir. 2000). In Hydro Investors, the appellate court rejected a claim for negligent misrepresentation against an energy company that made certain energy output projections but failed to disclose present facts indicating that the proposed site for a hydroelectric power plant was not viable. See id. at 20. In rejecting the claim for negligent misrepresentation, the court held, "[T]he alleged misrepresentation must be factual in nature and not promissory or relating to future events that might never come to fruition." Id. at 20-21 (emphasis added).
The Second Circuit then proceeded to severely criticize the decision in Kimmell, 675 N.E.2d at 455, noting key distentions and deficiencies. See Hydro Investors, 227 F.3d at 21 n. 1. According to the Hydro Investors court, the projections in Kimmell were actionable only because they "were calculated based on known and existing utility rates that [were] applied incorrectly" — i.e. the failure to use the existing rate structure was akin to a misstatement of a present fact. Id. Similarly, Kimmell was unique in that the projections at issue were based on an existing facility and on past results, which were misleading since the new rate structure did not relate to the past results. Id. Third, the Kimmell court did not actually address whether future projections were actionable, but merely assumed that they were based on the procedural posture of the case and the issues addressed on appeal. Id. Finally, the Second Circuit noted that, "although the Appellate Division in Kimmell [implicitly] found that future prediction/projections could qualify as the basis for a negligent misrepresentation claim . . ., that finding is contrary to the great weight of authority. Id.
The Court agrees with the Second Circuit's analysis. The inquiry does not depend on whether the omission itself relates to a past or present fact. Instead, the relevant inquiry is whether the failure to disclose renders an existing statement of fact false or misleading. Cf. Metropolitan, 532 F. Supp.2d at 1290 (holding that a cause of action based on an omission requires the plaintiff to show "how [an] alleged omitted fact negates the truth of or renders misleading the statements actually made"). If this were not the case, almost any unfulfilled promise of future conduct would give rise to a claim for misrepresentation. A plaintiff could state a claim by identifying some adverse condition existing when the projection or promise was made that, in hind-sight, ultimately proves to undermine that projection. This would obliterate Arizona's rule that future statements cannot serve as the basis of a negligent misrepresentation claim. See McAlister, 171 Ariz. at 215, 829 P.2d at 1261 (holding that promises of future conduct are not actionable as negligent misrepresentations). This is so, even where the projection or promise of future conduct turns out to have been unreasonable. See Dozier v. Maispace, 2007 WL 518622, at *7 (N.D. Cal Feb. 13, 2007) ("Making a promise with an honest but unreasonable intent to perform cannot be construed as a misrepresentation concerning past or existing material facts, and therefore does not constitute a basis for a negligent misrepresentation claim. There is no tort of negligent false promise.") (emphasis added).
Accordingly, though Allstate and the Trustee contend that Defendants omitted past and present facts from the 2001 and 2005 Reports, this does not give rise to a claim for negligent misrepresentation. Allstate and the Trustee cannot escape the fact that an omission is only actionable to the extent it negates the truth of or renders misleading the statements actually made. Here, the information omitted from the 2001 and 2005 Reports is alleged to have been misleading because it undercut or negated the truth of future event, attendance, and revenue projections in the Official Statements. And while Allstate and the Trustee further contend that the Official Statements were misleading because they failed to disclose the decision to forgo a final feasibility report and S Y's subsequent withdrawal, Allstate and the Trustee fail to explain how these omissions rendered some past or present statement of fact false or misleading.
As set forth in this Order, projections can serve as a basis for a claim of fraud when a defendant knowingly makes unreasonable statements of future performance. Hence, the parties have stated a claim for fraud on that basis. Nonetheless, because future promises and projections are not actionable under a negligent misrepresentation theory, the Court dismisses Allstate's and the Trustee's claims to the extent their claims that are based on that theory.
IV. Plaintiffs and the Trustee Are Afforded Leave to Amend.
As the Ninth Circuit has routinely held, "Dismissal without leave to amend is improper unless it is clear, upon de novo review, that the complaint could not be saved by any amendment." Thinket Ink Info. Res., Inc. v. Sun Microsystems, Inc., 368 F.3d 1053, 1061 (9th Cir. 2004). It is not clear at this juncture that amendment would be unable to save those portions of Plaintiffs' and the Trustee's claims that have been dismissed. Accordingly, unless otherwise noted, dismissal of the parties' claims is with leave to amend.
CONCLUSION
Upon consideration of the parties' filings, IT IS THEREFORE ORDERED that Defendants' Motions to Dismiss (Docs. 157-59, 164-65, 170, 173-74, 177) are GRANTED IN PART and DENIED IN PART as set forth in this Order:
(1) Plaintiffs have raised a Section 10(b) claim against Global Entertainment, Richard Kozuback, T.L. Hocking and Associates, Thomas L. Hocking, the Town of Prescott Valley, Fain Signature Group, Prescott Valley Signature Entertainment, LLC, and Prescott Valley Event Center, LLC. Accordingly, to the extent these Defendants move to dismiss Plaintiffs' Section 10(b) claims, those Motions are DENIED.
(2) Plaintiffs have not stated a Section 10(b) claim against Robert W. Baird Co, Inc., M.L. Stern Co., LLC, Edward D. Jones Co., L.P., Kutak Rock LLP, or Stinson Morrison Heckler LLP. Plaintiffs' Section 10(b) claims against those Defendants, therefore, are DISMISSED with LEAVE TO AMEND.
(3) Plaintiffs have adequately raised a Section 20(a) claim against Global Entertainment, Richard Kozuback, W. James Treliving, Fain Signature Group, and Prescott Valley Signature Entertainment, LLC. Defendants' Motions to dismiss these claims are DENIED.
(4) Wells Fargo Bank, N.A. Has Standing to Pursue Claims on Behalf of the Bondholders in this case. To the extent Defendants attempt to dismiss the Trustee's Counterclaim on the basis of standing, those Motions are DENIED.
(5) Issues of fact preclude a finding at this time with respect to the Town of Prescott Valley's notice of claim and statute of limitations defenses as they pertain to the fraud-based claims alleged against the Town. Prescott Valley's Motion to Dismiss the fraud-based claims, therefore, is DENIED.
(6) The Trustee's Claims for Breach of Contract, Reformation, and Declaratory Judgment against the Town are barred by Arizona's notice of claim provision and the applicable statute of limitations. To the extent that the Town's Motion seeks dismissal of these claims, that Motion is GRANTED. These claims, insofar as they pertain to the Town, are DISMISSED with PREJUDICE.
(7) Allstate has adequately stated a claim pursuant to Arizona Revised Statute § 44-1991(A)(1) against each Defendant with the exception of Robert W. Baird Co, Inc., M.L. Stern Co., LLC, Edward D. Jones Co., L.P., Kutak Rock LLP, and Stinson Morrison Heckler LLP. Allstate's § 1991(A)(1) claim against Baird, Stern, Jones, Kutak, and Stinson, therefore, is DISMISSED with LEAVE TO AMEND.
(8) Allstate and the Trustee have both stated a claim pursuant to Arizona Revised Statute Section 44-1991(A)(2) against each Defendant. Allstate has stated a claim pursuant to Arizona Revised Statute Section 44-1991(A)(3) against each Defendant. Defendants' Motions to Dismiss these claims, therefore, are DENIED.
(9) Allstate has not stated a claim pursuant to Arizona Revised Statute Section 44-1998 against any Defendant. That claim, therefore, is DISMISSED with LEAVE TO AMEND.
(10) Allstate has stated a claim pursuant to Arizona Revised Statute Section 44-1999(A)(1) against Global Entertainment, Richard Kozuback, W. James Treliving, Fain Signature Group and Prescott Valley Signature Entertainment, LLC. To the extent these Defendants move to dismiss this claim, their Motions are DENIED.
(11) Allstate has stated a claim pursuant to Sections 12 13 of the Illinois Securities Law against each of the Defendants with the exception of Kutak Rock LLP and Stinson Morrison Heckler LLP. Accordingly, Plaintiffs' Sections 12 and 13 claims against Kutak and Stinson are DISMISSED with LEAVE TO AMEND.
(12) Allstate has stated a claim against M.L. Stern Co., LLC for violations of Sections 25400 and 25500 of the California Corporations Code. To the extent Stern moves to dismiss this claim, that Motion is DENIED.
(13) To the extent the Trustee alleges violations of some twenty-eight states' securities laws, those claims are DISMISSED with LEAVE TO AMEND.
(14) Allstate has stated a claim for common-law fraud against Global Entertainment, T.L. Hocking and Associates, Thomas L. Hocking, the Town of Prescott Valley, Fain Signature Group, Prescott Valley Signature Entertainment, LLC, and Prescott Valley Event Center, LLC. These Defendants' Motions to Dismiss those claims, therefore, are DENIED.
(15) Allstate has stated a claim for aiding and abetting fraud against each Defendant. Accordingly, Defendants' Motions to Dismiss this claim are DENIED.
(16) Allstate and the Trustee have stated a negligent misrepresentation claim against each of the Defendants. That claim, however, lies only to the extent it is based on allegations that Defendants' alleged omissions rendered a present or past statement of fact false or misleading. Accordingly, Defendants' Motions to Dismiss these claims are GRANTED IN PART and DENIED IN PART. To the extent that the parties' negligent misrepresentation claims pertain to future statements, promises, events, or projections, those claims are DISMISSED WITH PREJUDICE. IT IS FURTHER ORDERED that to the extent Allstate, the Class Action Plaintiffs, and/or the Trustee seek to amend the defects in their pleadings, they shall have until December 3, 2010 to do so.
IT IS FURTHER ORDERED that due to the complexity of this case and the length of the parties' pleadings, if the parties seek to amend by submitting a Second Amended Complaint or an Amended Counterclaim, the parties shall: (1) provide the Court and all Defendants a redline indicating all changes from the prior pleading and amended pleading; and (2) provide the Court and all Defendants a conversion table indicating which paragraphs have been renumbered in the newly amended pleading.