Opinion
Civil No. 97-2303 (DWF/AJB).
May 31, 2001.
Robert J. McGillivray, Esq., and James M. Jorissen, Esq., Oppenheimer, Wolff Donnelly, Minneapolis, MN., counsel for Plaintiff.
Curtis D. Smith, Esq., Moss Barnett, Minneapolis, MN., counsel for Defendant.
FINDINGS OF FACT, CONCLUSIONS OF LAW, ORDER FOR JUDGMENT, AND MEMORANDUM
The above-entitled matter came on before the Honorable Donovan W. Frank, Judge of the above-named Court, as a Court trial on February 15, 20-23, 26-28, and March 1-2, 5-8, 14, and 16, 2001. Based upon the presentations of counsel, the testimony of all witnesses, the exhibits received, and the Court having reviewed the contents of its file and being otherwise duly advised in the premises, the Court hereby makes the following:
FINDINGS OF FACT
1. Plaintiff, Channelmark Corporation ("Channelmark"), is a Minnesota corporation with principal business offices located in Wayzata, Minnesota. Channelmark was formed by David Beck ("Beck") and Robert Daugherty ("Daugherty") to develop alternative markets for food products, surplus products, and downgraded products. Channelmark, in the mid-1990s, was engaged in the business of identifying, creating, and managing programs to recover the highest value of underutilized resources in the processing and distribution of various food items. Beck and Daugherty were Channelmark's only shareholders, each owning 50% of its stock. Channelmark was financed in large part by loans from Daugherty. In 1996, Channelmark showed a loss of $362,313 on its federal tax return. In 1997, Channelmark showed a loss of $259,974 on its federal tax return.
2. At all times material to this litigation, Defendant Destination Products International, Inc. ("DPI") was a Delaware corporation engaged in business as a developer and seller of quality, private label food products. DPI was founded in 1995 by Defendant Cott Corporation ("Cott") and David Nichol ("Nichol"). At the time DPI was formed, Cott (or one of its subsidiaries) owned 85% of DPI's stock, and the balance was owned by Nichol, who had a substantial background in private label food product development. Nichol served as DPI's President, and was primarily responsible for new product development. Michael Steele ("Steele") was DPI Vice President and General Manager, and was responsible for overseeing DPI's day-to-day operations. John Moorcroft ("Moorcroft") was DPI's Vice President of Finance, responsible for overseeing DPI's accounting, payable and receivable functions. DPI had a negative net worth in late 1996 and was heavily dependent upon loans from one of its shareholders, i.e., Cott. A review of DPI's financial statements for the period during which it entered into the contested agreement with Channelmark reflects that DPI was then indebted to Cott for $25 million in inter-company loans and had a negative net worth exceeding $5 million.
3. Cott is a Canadian corporation located in Toronto, Ontario, Canada. At all times material, Cott was a holding company that owned several operating companies in Canada, the United States, and abroad. Cott's primary business is the manufacture and sale of private label soft drinks. It is a public company and had substantial financial assets at all times relevant to this matter.
4. Channelmark developed a relationship with Kentucky Fried Chicken ("KFC"). Channelmark bought and sold chicken tenders, crispy strips, and other out-of-specification products that KFC could not sell in its stores.
5. During the course of its relationship with KFC, Channelmark identified an opportunity to create value out of KFC's miscut chicken-chicken that, due to its size, shape, or cut does not meet KFC's quality control specifications.
6. Chickens are converted into the KFC eight-piece specification through processing on a cutting line, where the breasts, wings, legs, and thighs are cut away from the bird. Because of processing inefficiencies, due primarily to the high rate of speed at which chickens travel down the cutting lines, a small percentage of the birds going down the KFC lines end up as miscuts. The parties did not agree during the course of the trial as to what percentage of birds ended up as miscuts. However, regardless of the range of that percentage, that issue was not outcome determinative in any way in the case before the Court. Moreover, that issue, regardless of whether the Court adopts the Plaintiff's view or the Defendants' view, did not materially affect the success or failure of the miscut chicken program.
7. KFC had ownership or control of the miscuts as a result of the cost plus contracts it had with its processors. Under those contracts, KFC had to pay the processors for all of the chickens that were sent down the KFC cutting lines, including the miscuts. With respect to the miscuts, the processors would give KFC a small credit and dispose of the miscuts themselves.
8. During 1994 and 1995, Channelmark identified an opportunity to acquire miscut chicken parts from certain chicken processors under contract with PepsiCo Food Systems ("PFS"), a subsidiary of PepsiCo, Inc. PFS contracted with various chicken processors (including Tyson Foods, Goldkist, Sanderson Farms, Columbia Farms, and Wampler) to supply ready-to-cook eight-piece chicken for PepsiCo's restaurant subsidiary KFC. As noted above, at paragraph 6, during processing, a small percentage of the processed meat falls outside KFC's specifications and those pieces are referred to as "miscuts."
9. In 1995 and again in 1996, Channelmark conducted trial runs in order to test the feasibility of purchasing large volumes of miscut chicken expected to be generated by KFC and its suppliers. During the test programs, Channelmark received the assistance of R. Matthew Beeson ("Beeson"), who had previously worked as the head of KFC's poultry procurement. The test programs were conducted in four plants owned and operated by Tyson Foods of Arkansas. At that time, there were 23 processing plants, involving 6 processors. Twelve of those plants were Tyson Foods plants.
10. During the test programs, Channelmark, based upon results from the program, concluded that each plant could produce approximately 40,000 pounds of miscuts per week. However, it should be noted, and the Court so finds, that the program did not involve a marinated boneless skinless chicken breast ("BSB") product like the product that was produced during a 1997 program that is the subject of this litigation. Notably, during the entire 1995/1996 test programs, Channelmark never produced any chicken breasts close to the specifications of the Safeway premium product.
11. During the 1996 test program, Channelmark discovered that it would need to obtain significant financing to pay PFS, its processors, and Channelmark's subcontractors. As the Court will describe further below, Channelmark entered into an agreement with Defendants for the financing of the miscut venture. In 1996, Channelmark had paid Tyson in advance for miscut chicken. Tyson did not like this arrangement, however, as it required the participation of Tyson employees to arrange advance payment so that release numbers for the chicken could be obtained. In the aftermath of the test program, Tyson insisted that Channelmark operate within standard credit terms, which, for Tyson, meant net 14 days. Tyson also required as a condition to moving forward with the miscut program that Channelmark either procure a creditworthy partner, or post a letter of credit sufficient to cover the volumes that would be coming out of the plants.
12. On August 30, 1996, Channelmark and KFC entered into an agreement ("the KFC-PFS Agreement"), giving Channelmark the right to purchase all of KFC's miscuts created by its contract processors, 23 in number. The KFC-PFS Agreement provided that: (1) PFS would direct its processors to sell Channelmark miscuts generated from the KFC cutting lines (KFC-PFS Agreement ¶ 2); (2) Channelmark would pay the processors $0.30 per pound (or such higher price as the processor was getting prior to the date of the KFC-PFS Agreement) for the miscuts (KFC-PFS Agreement, ¶¶ 4 and 6); (3) Channelmark would pay PFS $275,000 for the exclusive right to purchase the miscuts (KFC-PFS Agreement, ¶ 7), plus $0.025 per pound for all miscuts purchased from a PFS processor (KFC-PFS Agreement ¶ 8); and (4) the miscut program would have an initial term of one year, with the option to renew annually for four years, for an annual renewal payment by Channelmark of $275,000 (KFC-PFS Agreement ¶ 10).
13. While Channelmark anticipated that a steady and predictable flow of miscut chicken would result from the KFC-PFS Agreement, the KFC-PFS Agreement expressly stated that it could not guarantee that any volume of miscut chicken would be available under the KFC-PFS Agreement. Further, the KFC-PFS Agreement required Channelmark to negotiate payment terms with KFC's contract and non-contract processors. Channelmark negotiated payment terms with the processors in accordance with their standard terms which generally required payment within 14 days. However, in actual practice, the evidence establishes that the processors determined the terms under which they were paid, with little negotiation with Channelmark. As noted, most of the processors required payment within 14 days, in addition to the requirement to post a letter of credit sufficient to cover the volumes that would be coming out of individual plants.
14. Although the KFC-PFS Agreement stated that the initial $275,000 payment was not due until three-million pounds of miscuts had been provided, PFS eventually made it clear that it wanted to receive that payment before the end of 1996. Accordingly, in addition to the letter of credit demanded by Tyson Foods as a precondition to restarting the miscut program, Channelmark was obligated to come up with an additional $275,000 on or before December 31, 1996.
This, in part, and the Court so finds, explains why Channelmark, during this period of time, was almost desperately looking for a creditworthy partner so they could move forward with the miscut chicken program. However, as the end of 1996 neared, Channelmark faced additional pressure to commence the miscut chicken program because the clock was running on the initial term of the KFC-PFS Agreement and Channelmark had yet to implement the KFC-PFS Agreement.
15. More importantly, with respect to processors and their status under the KFC-PFS Agreement and during 1996, on August 19, 1996, 11 days before the KFC-PFS Agreement was signed, Channelmark received a letter from Tyson (Plaintiff's Ex. 160) in which Tyson indicated to Beck that they had found a new use and market for miscuts. At that time, Tyson made it clear that all parties would have to re-evaluate the use of miscuts in any proposed miscut program because they had also found an internal use for their miscuts. Three days before the KFC-PFS Agreement was signed, Beck received a memo (Defendants' Ex. 4) from Steve Whitfield ("Whitfield"), of Tyson Foods.
The August 27, 1996, memo from Whitfield to Beck stated, in pertinent part, as follows:
This recently increased demand [for miscut chicken parts] in addition to the plans for utilizing miscut parts for grinding internally for use in the Tyson Foods system will in essence completely dry up the supply of miscut parts.
With this knowledge in hand, there will be no need to proceed any further with the bid process initiated last week. There will be some limited availability of miscuts this week, but that availability will end as of Friday, August 30, 1996! I apologize for any inconvenience caused by this change in direction, but Tyson Foods is moving in the direction necessary to maximize profits in a period of time that makes this difficult at best!
Even though Tyson reluctantly changed its view, under pressure, as will be noted below, from KFC, there is significant circumstantial evidence throughout the record to establish that Tyson and virtually all processors were reluctant participants and resistant to the concept of Channelmark's market for the miscut chicken parts.
From the Court's point of view, and the Court so finds, it was apparent to all parties concerned that for any miscut chicken program to work, all processors would have to change their attitude, their habits, and the way they did business, even assuming that all other conditions were met.
Based upon the evidence, the fact is that the processors never did change their attitude or their reluctance to participate in an unconditional, cooperative manner, as the Court will explain below. That issue, from the Court's point of view, was not addressed by the Plaintiff or Plaintiff's expert. That issue, based upon the record before the Court, was downplayed by the Plaintiff. Moreover, neither party presented any probative evidence on the changing market conditions and their effect on the miscut chicken supply and demand. Relatedly, if it is the Plaintiff's position, based upon the record, that they did not downplay this issue at trial, then Channelmark clearly underestimated their own ability and the ability of KFC-PFS to secure the compliance of the processors, in the real sense of the word, with a miscut chicken program, consistent with the terms of the KFC-PFS Agreement.
Contrary to DPI-Cott's position that this fact was not only a cause of the failure of the miscut program-which is true-but also that it was Channelmark's responsibility, however, is that DPI-Cott was acutely aware of the sensitive nature of securing the compliance of the processors. For example, based upon the evidence, the processors were either looking for ways not to comply with the contract or, alternatively, were holding all parties to each and every provision of the contract, especially the provisions relating to credit. DPI-Cott knew precisely how important the credit arrangements were with the processors and how any untimely payments would adversely affect the contract. Nonetheless, DPI-Cott, for inexplicable reasons, was delinquent in its payments under the December 24, 1996, agreement between Channelmark and DPI ("CM-DPI Agreement"). Late payments did in fact not only reduce the actual volume of chicken that was produced for the miscut chicken program but, more importantly, insured that the processors would never trust Channelmark in such a fashion that they would ever obtain the full cooperation and compliance from all of the potential processors. For that, DPI is responsible. For that, as the Court will further explain below and so finds, DPI breached the contract between Channelmark and DPI-Cott.
16. As found in paragraph 11 above, prior to signing the KFC-PFS Agreement, Channelmark understood, based on its experiences during the test program, that it lacked the financial capacity to finance the significant volume of miscut chicken available under the KFC-PFS Agreement. Moreover, Channelmark knew that Tyson insisted that Channelmark demonstrate its financial ability to perform within ordinary credit parameters.
17. Because of Channelmark's need for financial assistance to go forward with the miscut program, it sought a business relationship with DPI. Channelmark's first contact in the summer of 1996 was with Chef Michael Brando ("Brando"), who was at that time Director of Manufacturing and Product Development for DPI. Brando represented to Beck, of Channelmark, that Cott was committed to the food business, was moving forward to develop new products, and was looking for cost-advantage products for use in his private label food business.
18. Beginning in July 1996, and continuing during a period of approximately five months, Channelmark and the Defendants, Cott and DPI, participated in negotiations aimed at consummating a joint program between the parties.
19. During negotiations and discussions between Channelmark and both DPI and Cott, Channelmark disclosed the details surrounding the miscut program, including the financing and other requirements that would be necessary for a joint program between the parties to be successful.
20. During one of the meetings which occurred on September 3, 1996, at Cott's corporate headquarters in Toronto, Canada, Beck presented Channelmark's business plan to Nichol, Brando, and other representatives of Cott and DPI. Cott and DPI were made aware that Channelmark would require significant financial resources to move the program forward.
21. Subsequent to the September 3, 1996, meeting, Beck approached Nichol and inquired as to where Nichol felt the parties were going, given the state of negotiations. At that time, Nichol stated that he felt the program had merit and promise, but that he would need to get Cott's approval to provide the required financing.
22. Several days after the September 3, 1996, meeting, Beck spoke with Brando, who informed Beck that Nichol wanted Channelmark to begin the development of a BSB product. By a letter dated September 12, 1996, Beck provided Brando with a proposed BSB product and again informed him that both the volume of miscut chicken and the mix of chicken coming off the lines were factors that could not be guaranteed.
23. In October 1996, Steele of DPI became active in the parties' negotiations. During an October 6, 1996, meeting, Beck and Steele began exploring an agreement and developing a pro forma. Shortly thereafter, the pro forma underwent a number of changes as a result of a collaborative process between Beck and Steele.
24. During this time frame, the parties discussed operating as a joint venture, initially through the vehicle of a limited liability company. On October 11, 1996, Beck and Daugherty met with Steele in Chicago to discuss formation of the entity, as well as the assembly of financial projections for presentation to Cott, who Steele represented would provide the financing.
25. At Steele's request, Beck met with representatives of KFC on October 27, 1996, and informed them that Channelmark had obtained financing and requested that KFC meet with DPI and Cott. However, shortly thereafter, Channelmark received from Cott and DPI a draft letter of intent which abandoned the idea of a limited liability company. On November 5, 1996, Beck wrote to Steele and informed him that although Channelmark was disappointed with the letter of intent, that Channelmark was still willing to try to work something out.
26. On November 12, 1996, Beck and Daugherty traveled to Toronto to meet with Steele, Nichol, and Brando. During the meeting, Channelmark was informed that Cott was no longer interested in forming a limited liability company. Rather, Cott wanted to do business on the basis of a purchase order for a single product. Upon receiving that news, Daugherty informed the Defendants that Channelmark did not wish to do business on that basis, and the meeting ended.
27. In the middle of November 1996, Beck received a call from Nichol. Nichol informed Beck that the program remained important to Cott, that Cott would provide the necessary financing, and that he requested that Channelmark provide samples of a BSB product to Safeway. Channelmark complied with the request and shortly thereafter forwarded the samples, in anticipation that the parties would be moving forward.
28. On November 21, 1995, Beck wrote to Steele. In his letter, Beck informed Steele that Channelmark would require a 45-day start-up period. During conversations with Steele, Beck explained that the start-up period would be required to afford time to get processors on board, and because the ability to produce a BSB product was not then in place. Beck also disclosed in his letter the payment terms for the various processors, and in discussions with Steele, reiterated that Tyson and other suppliers of raw chicken would require payment on net 14-day terms, and that Twin Rivers Foods had payment terms of net 7 days. At no time did Steele object or otherwise express reservations about those payment terms.
29. On November 21, 1996, Steele sent a facsimile to Beck, in which he indicated his understanding that, during the initial period, DPI would be obliged to purchase four-million pounds of BSB and for the guarantee of payment to Tyson for product sent to Twin Rivers. In a subsequent conversation, Beck explained to Steele that the financing required would encompass payment to all of the processors, and Steele informed Beck that he had participated in discussions with Cott's finance committee in relation to the approval of financing and that "things looked good."
30. As the parties continued negotiations, it became increasingly apparent that Tyson would remain insistent that Channelmark demonstrate its ability to establish credit sufficient to cover the flow of miscuts. On November 26, 1996, Beck wrote to Steele and informed him of the credit required to be in place by the time of an upcoming meeting with Tyson and KFC in order to get the program running. The letter stated, in part, as follows:
Please note that we require the establishment of a credit or banking relationship satisfactory to the PFS processors by Tuesday, December 3, 1996, although product will not start actually shipping for 7-10 days after that date. Specifically, we must demonstrate the ability to issue an irrevocable standby letter of credit sufficient to guarantee all the amounts due under the PFS agreement through the date on which 4,000,000 pounds of boneless skinless breast is delivered to DPI.
Our specific issue for next week is the meeting with Tyson Foods scheduled by PFS for 8:30 AM on Wednesday, December 3. As you know, Tyson has used Channelmark's balance sheet as a pretense to obstruct their obligations to deliver PFS product to us since early September. It was and is Tyson's position that Channelmark must be able to buy product on their standard credit terms (net 14 days), supposedly, because any deviation from terms becomes an accounting hardship for them. Tyson has told us that an irrevocable standby letter of credit is required until such time our balance sheet or payment record supports the required credit line.
Given the fact that Tyson is now willing to supply Channelmark from all 12 plants, we estimate the need for a credit line of $450,000 (12 plants x 40,000 pounds per plant per week x 3 week order cycle x $0.31 per pound). PFS is demonstrating willingness to push its processors on our behalf, so we view it as critical that Tyson has no question about being paid for products shipped to Channelmark for DPI's account.
31. Notwithstanding the request and efforts of Beck, on December 3, 1996 (the day before the meeting with Tyson and PFS), Steele informed Beck that he would only be able to procure from Cott a letter of credit in the amount of $120,000. Beck informed Tyson and KFC of Channelmark's inability to secure from DPI a letter of credit for $450,000. KFC nonetheless agreed to participate in the meeting, despite DPI's failure to secure a credit line of $450,000. Beck appeared at the meeting with Tyson and PFS without the promised line of credit.
32. When Beck showed up at the meeting without the credit guarantee, PFS's Mark McKay ("McKay") was upset. Beck informed McKay that Channelmark would post the $120,000 letter of credit. Channelmark posted the letter of credit for $120,000.
33. On December 7, 1996, Beck and Jay Holdrieth ("Holdrieth"), then counsel for Channelmark, traveled to Toronto to meet with Mark Halperin ("Halperin"), Steele, Moorcroft, Nichol, and Brando. The purpose of the meeting was to familiarize counsel with the miscut program and to discuss the structure of an agreement, including financing issues.
34. It was during the meeting on December 7, 1996, that Steele indicated that DPI and Cott had "booked" $8 million for the miscut program, understanding that $8 million was the total exposure of Cott and DPI for the first year. It was also made clear to the representatives of Channelmark at that meeting that financing for the program had been secured from Cott.
35. On December 9, 1996, Steele and Beck met with McKay and Tony Scherer ("Scherer") of PFS in Louisville, Kentucky. Steele wanted to gain a better understanding of PFS's level of support for the miscut program. During the meeting on December 9, 1996, McKay indicated that for the program to work, it had to be done in a "seamless" way and that proper financing was imperative. McKay also mentioned that PFS could not guarantee the amount of volume that would be available under the KFC-PFS Agreement. McKay further stated that PFS was anxious to receive the $275,000 payment called for in the KFC-PFS Agreement.
36. As a result of the December 9, 1996, meeting, Steele stated he had "the final piece of confidence" to move forward with the program, which is a sentiment consistently expressed in a December 10, 1996, letter to Scherer. See Plaintiff's Ex. 107.
37. On December 17, 1996, Beck traveled to Toronto to meet with Cott's Chief Financial Officer Paul Henderson ("Henderson"). Also in attendance at this meeting were Steele and Moorcroft. During the meeting, Beck provided an overview of the methodology of the pro forma.
38. At the meeting on December 17, 1996, it was made clear by the individuals from DPI that Cott had approved of the miscut program and the financial implications of approving the miscut program. Steele expressed his understanding that the first product to be developed would be the Safeway BSB. The individuals present from Cott and DPI did express some concern that PFS and PepsiCo might not approve of the transaction if they discovered that Cott was financing the deal.
39. Based upon the evidence before the Court, it is the Court's finding that DPI and Cott clearly knew the significance of guaranteed financing and its importance to the deal/agreement in the eyes of all parties that were privy to the agreement, especially the processors.
40. In the aftermath of the December 17, 1996, meeting, Beck prepared a draft press release announcing the emerging relationship of Channelmark and DPI. The press release discussed and introduced the concept of "Cotticization." See Plaintiff's Ex. 221.
41. As Channelmark approached the final agreement with the Defendants, Channelmark assumed that DPI was an operating division of Cott. Channelmark also reasonably believed, based upon the evidence before this Court, that Cott had provided the financing required to finance the miscut program.
42. The Court finds that, in December of 1996, Channelmark was justified in assuming and in believing that Cott and DPI held themselves out to be one and the same organization and operated in that manner. Cott made all of the major decisions for DPI. Cott and DPI had interlocking officers and directors and shared the same in-house counsel. Cott provided DPI with all of its operating capital through loans. Cott and DPI shared the same Toronto offices. Cott also supplied a full range of administrative services to DPI. Cott was routinely identified on DPI's letterhead, business cards, checks, and credit applications that were submitted. In fact, DPI and Cott represented to Channelmark that they wanted to "Cotticize" Channelmark. In the course of negotiations, Channelmark had numerous meetings with Cott's President and Director Nichol, who, based upon the evidence before the Court, was making nearly all decisions for DPI. Nichol was not an officer of DPI until after the CM-DPI Agreement was signed on December 24, 1996.
43. Given the nature of the relationship between Cott and DPI, the assurances provided to Channelmark that Cott had provided the funds to DPI necessary to execute the miscut program, and Defendants' concern that PFS and PepsiCo-both Cott competitors-would not approve of Cott's participation in the miscut program, it was not deemed unusual by Channelmark that Cott was not a signatory to the CM-DPI Agreement.
44. As noted in paragraph 2, supra, DPI's financial statements for the period that it entered into the CM-DPI Agreement reflect that DPI was then indebted to Cott for $25 million in intercompany loans and had a negative net worth of more than $5 million.
45. On December 24, 1996, Channelmark and DPI entered into the CM-DPI Agreement. See Plaintiff's Ex. 21.
46. It is the Court's view that, due to the time constraints involved and the potential size of the miscut program, Channelmark and DPI decided in late 1996 to enter into a short-term agreement for the purchase and sale of Safeway BSB, while a longer-term relationship was further explored.
47. The financing was to be "consistent with the pro forma" in an amount sufficient to enable Channelmark to "execute consistent with such pro forma and to demonstrate credit which is satisfactory to the processors . . . such that the processors are willing to deliver product to Channelmark under the PFS Agreement." See Plaintiff's Ex. 21. Pursuant to paragraph 2(a) of the CM-DPI Agreement (see Plaintiff's Ex. 21), the financing was to be "consistent with the pro forma." Paragraph 2(a) of the CM-DPI Agreement stated, in pertinent part, as follows:
DPI will provide financing consistent with the pro forma attached as Exhibit "G" hereto (the "Pro Forma") that will allow Channelmark to execute consistent with such Pro Forma and to demonstrate credit which is satisfactory to the processors (as defined in the PFS Agreement) such that the processors are willing to deliver product to Channelmark under the PFS Agreement. Such financing may take the form of bank financing, a joint banking relationship, a guaranty or such other structure as may be acceptable to DPI, Channelmark and the processors. In this regard, DPI has transferred $120,000 (U.S.) to an account over which DPI shall have sole signing authority to secure a letter of credit which Channelmark has arranged to issue to its processors. DPI shall control all payments to third parties (including processors and all other payments under the PFS Agreement). For greater certainty, any funds advanced by DPI under this paragraph 2(a) shall count toward payments required to be made by DPI under the PO (as hereinafter defined).
48. Pursuant to paragraph 2(c) of the CM-DPI Agreement (Plaintiff's Ex. 21), DPI was to immediately issue an irrevocable blanket purchase order for 4,000,000 pounds of BSB. Paragraph 2(c) of the Agreement read as follows:
(c) DPI will immediately issue an irrevocable blanket purchase order (the "PO") to Channelmark for 4,000,000 pounds of boneless skinless chicken breast ("BSB") at the price of $1.954 per pound. The PO is attached hereto as Exhibit "B." DPI shall draw against the PO from time to time over the twelve-month period following the date of this agreement. DPI shall advise Channelmark of and Channelmark will comply with shipping dates, shipping locations and quantities of BSB required from time to time. Channelmark's obligation to supply the quantities ordered by DPI and DPI's obligation to purchase 4,000,000 pounds of BSB, shall be limited only by availability of BSB under the PFS Agreement. The price of $1.954 per pound shall include the BSB, plus all processing and packaging charges and freight charges to DPI's customers' distribution centers or warehouses, all in accordance with and subject to the quality specifications attached as Exhibit "C."
49. The CM-DPI Agreement contemplated that the parties would jointly process and sell miscut chicken for 90 days, at which time DPI had the option of entering into a long-term relationship with Channelmark under a joint venture or similar structure. Paragraph 2(d) of the Agreement read as follows:
(d) Channelmark and DPI will jointly process and sell product under the PFS Agreement until the earlier of:
(i) the conversion of the temporary relationship into a longer-term relationship on the terms described below; or
(ii) the termination of the temporary relationship by DPI. For greater certainty, termination of the relationship by DPI shall not affect DPI's commitment under the PO.
50. The pro forma which was attached to the CM-DPI Agreement and referred to in paragraph 2(a), was clearly a projection. Relatedly, Channelmark informed the Defendants of that fact repeatedly throughout the negotiations, and Moorcroft conceded that fact during his testimony. The pro forma was the product of a collaborative effort, based on the facts that were available to Channelmark and DPI, as well as Cott, at the time it was being put together.
51. Contrary to the position of the Defendants during the trial of this matter, there is no evidence to suggest that Cott or DPI ever informed Channelmark that Cott and DPI's financial obligations were linked to financial performance or that the financing to be provided was somehow conditioned on meeting the cash flow or income projections of the pro forma. While it may be that the Defendants, with the wisdom provided by hindsight, wish now that there would have been a provision either in the CM-DPI Agreement itself or the pro forma, there clearly was not.
52. In fact, it is the Court's view that when the circumstances leading up to the signing of the CM-DPI Agreement on December 24, 1996, the CM-DPI Agreement itself, and the circumstances surrounding the implementation or attempted implementation of the CM-DPI Agreement are carefully scrutinized, it can be said with absolute certainty that the CM-DPI Agreement was a half-cooked, hastily drawn agreement by the parties for reasons made clear by the evidence. Those reasons include, but are not limited to: (a) the time was running on the KFC-PFS Agreement, that agreement having been signed on August 30, 1996; (b) PFS wanted early payment of the $275,000 by the end of 1996, and Channelmark had no way of paying it without a financial partner like Cott; (c) an unrealistic start-up period (45 days); and (d) for Cott and DPI's part, the deal looked too good to be true when they had a client-Safeway-to whom they needed to deliver product.
It is the Court's view, based upon all of the evidence in the case, that these factors explain why the parties entered into what they each thought was an opportunistic, but as it turns out, half-cooked, hastily drawn agreement, where many specific terms had not been carefully thought out and negotiated. Each party plunged quite willingly into this CM-DPI Agreement and, from the Court's point of view, that CM-DPI Agreement was doomed to fail from the very beginning, especially with the almost immediate breach by DPI-Cott of the contract which will be addressed below. A nonexclusive list of those reasons which confirm the precipitous manner in which the CM-DPI Agreement was drawn and why it was doomed to fail from its inception are as follows:
(a) All parties virtually ignored the noncooperation and resistance of the processors. As noted above at paragraph 15, the parties were forewarned before the KFC-PFS Agreement was even signed that there were problems with the vitality of the miscut chicken program because of internal uses for the miscut chicken and a change in strategy by major processors like Tyson. Yet, this KFC-PFS Agreement contemplated and assumed full-fledged cooperation and compliance from all processors. It never happened.
(b) The specific financial guarantees and agreements were not entirely agreed to and set forth in the Agreement with respect to the form of the guarantee and the amount of the financial guarantees. This was especially crucial because all parties, including Cott and DPI, knew full well how critical timely payments were to a group of mostly resistant and reluctant, if not recalcitrant processors. Yet, for inexplicable reasons, from the inception of this CM-DPI Agreement, the payments were not just untimely, but outright delinquent. And, while the Plaintiff has overstated the significance of those untimely payments, the credit problems associated with those payments clearly exacerbated the situation. The Defendants' conduct was a breach of the CM-DPI Agreement, especially when they knew how critical timely payments were to a group of processors who were reluctant to participate from the beginning;
(c) The rush to an agreement resulted in, almost incredibly so, no specific terms with respect to the specifications of what the Safeway-BSB product would be. With respect to the issue of specification, including trimming issues, sizing issues-just to name two-the CM-DPI Agreement did not delineate specifications to a reasonable degree of particularity, notwithstanding all of the discussions that the parties had prior to signing the CM-DPI Agreement;
(d) Overaggressive and premature sales to Safeway;
(e) No marketing plan for non-BSB product;
(f) Defendants' usurpation of control of the program due, in part, to lack of initiative in planning by Plaintiff;
(g) Delays in start-up;
(h) Unavailability of equipment;
(i) PFS not holding up their end of the CM-DPI Agreement with respect to the percentage of white meat being processed versus dark meat, separate from the issue of sorting the meat. Both parties relied on the test program for guidance, including projections, when, in fact, only four plants of 23 and one processor were involved in the test program;
(j) Processing costs were not settled before either the KFC-PFS Agreement was signed or the agreement between Plaintiff and the Defendants was signed;
(k) Trimming to meet the Safeway specs, irrespective of the cost to the program, did not exist, at least in the Agreement on December 24, 1996;
(l) Unrealistically low price for the product; and
(m) On December 19, 1996, Frank Ross paid for, and to expedite the process, hired a label expeditor, again confirming the great sense of urgency with which the parties had to quickly, if not hastily, make a deal.
53. The pro forma projected that five processors and a total of 23 processing plants would participate in the 1997 program. The total weekly volume was projected to be 884,000 pounds per week. Tyson Foods was projected to be and was the single biggest supplier of miscuts, with seven plants providing weekly miscuts by the end of the 1997 program. Another Tyson Foods plant (Forrest, Mississippi) provided chicken for two weeks of the program, but was eliminated from the program after "clearly taking advantage of the program" by providing a large shipment that consisted almost exclusively of thigh quarters, i.e., the lowest valued product. Another Tyson Foods plant in Jacksonville, Florida, did not materially participate in the program because it would not have been economical to ship product from that plant all the way to Arkansas for further processing. Two other Tyson Foods plants listed in the pro forma that did not participate (Wilkesboro, North Carolina, and Harrisonburg, Virginia) were likewise located far from the Arkansas processing facility chosen by Channelmark. Finally, the last plant listed as a Tyson Foods plant in the pro forma (Gadsden, Alaska) was not actually a KFC supplier.
54. Goldkist, which the pro forma projected would have the second highest number of plants providing miscut chicken, never materially participated in the 1997 program. Goldkist had another use for its miscuts and took the position that it was not obligated to participate in the miscut program because its contracts with PFS were different than those of other processors. No action was taken by PFS or Channelmark against Goldkist.
55. Sanderson Farms, which the pro forma projected would have four plants providing miscuts, began participating in the 1997 program in May of that year. Sanderson Farms had met with Mr. Beeson in late February about providing miscuts to the program, but did not reach an agreement with Beeson and Channelmark on a price until late April. The agreed upon price was $.72 per pound for white meat only and four Sanderson Farms plants provided miscuts at that price from early May through the end of the program.
56. Columbia Farms, which the pro forma projected would have two plants providing miscuts, had another customer for its miscuts and did not begin providing any miscuts until June 1997. After a number of discussions with Mr. Beeson and KFC, Columbia Farms was allowed to wait until June 2, 1997, to begin supplying miscuts to give Columbia Farms an opportunity to give notice to its existing customer. The two Columbia Farms plants that ultimately supplied miscuts to the program were located in South Carolina and shipped the miscuts to a processing plant in Philadelphia, Pennsylvania. The Philadelphia processing plant never produced DPI-BSB.
57. The final supplier in the pro forma, Wampler, participated in the 1997 program for a short period of time and was terminated from the program because of quality concerns. Because the Wampler plant was located in West Virginia, nearly all of its miscuts were sent to a processing plant in Philadelphia rather than to the Twin Rivers Foods facility in Arkansas. As previously noted, the Philadelphia plant never produced DPI-BSB.
58. All parties anticipated that miscut production and processing volumes would take some time to reach projected levels.
59. As noted above in paragraph 52, when Channelmark signed the agreement on December 24, 1996, no final product specification for the DPI-BSB had been issued. Moreover, because there was no final product specification for the DPI-BSB product, Channelmark had been unable to finalize price estimates for further processing of the BSB product with Twin Rivers.
60. As of December 24, 1996, the evidence does establish that Beck's understanding was that the BSB product would have a target weight of 71 grams, with an 8 percent pump, and would permit up to 4 percent fat.
61. Contrary to the testimony of Robert McColl, of DPI, the Court finds that the parties had not agreed to a final product specification in mid-November 1996. Moreover, no such product specification is set forth in the CM-DPI Agreement of December 24, 1996, identified as Plaintiff's Exhibit 21.
62. Neither Beck nor anyone else from Channelmark saw the final BSB specification until approximately January 12, 1997, while he was attending a meeting in Toronto. While in Toronto, the Court finds that Beck was informed for the first time that the BSB product would be a no-fat product. Upon receiving this information, Beck informed Steele that a zero fat requirement would increase the cost to manufacture the BSB and also create a reduction in yield.
The Court finds that this specification did constitute a change in the specification contemplated by the CM-DPI Agreement signed on December 24, 1996. The Court finds that the evidence establishes that "natural fall" was implicit in the pro forma agreement. The Court further finds that that unilateral modification which narrowed the specification substantially affected the yield.
63. Similarly, during a January 12, 1997, meeting with Steele and Dr. Ed Fryar ("Fryar"), Beck reviewed the final written product specification for the first time. Beck had not seen the specification before then. The Court finds there were two principal changes from what Channelmark had understood the specification to be when it signed the CM-DPI Agreement. First, the fat content had been reduced to zero fat. Second, the packaging requirement had changed from "around ten pieces" to five two-packs of breast meat. What did remain consistent with Channelmark's understanding of the specifications was that the product would have to meet an average target weight of 71 grams. What Beck and Fryar understood this to mean was that Channelmark could use smaller pieces and larger pieces from the natural distribution of breast meat so long as they averaged 71 grams.
64. The Court finds and concludes that DPI breached the CM-DPI Agreement of December 24, 1996, by unilaterally changing the specification. Similarly, during a trip to Twin Rivers Foods in connection with the first production run of the DPI-BSB, DPI's Bob McColl changed the specification by imposing a 15 gram tolerance-from 70 to 85 grams raw weight (pre fat trim)-around the 71 gram average set forth in the specification. McColl also insisted that the breasts be trimmed into a teardrop shape.
The Court finds that this narrowing of the specification and imposition of a trim requirement dramatically reduced the volume of BSB available to convert into DPI-BSB. Further, both Channelmark and Twin Rivers justifiably had anticipated creating the DPI-BSB from the natural fall of chicken coming off of the line.
Based upon the evidence before the Court, the same haste and desperation that caused the parties to enter into what the Court has already referred to as a "half-cooked" agreement also caused Channelmark, in another act of desperation, to "go along" with trying to produce a product pursuant to the narrow specification, presumably in the hopes that Cott-DPI would exercise its option for a joint venture. In that way, while Twin Rivers was absorbing significant additional costs and Channelmark was absorbing significant additional costs beyond those contemplated by the agreement of the parties, Channelmark assumed or otherwise hoped that these costs would somehow be recouped down the road if Cott-DPI exercised its option to enter into a joint venture.
However, the desperate conduct of the Plaintiff is not a defense to the breach of the CM-DPI Agreement with respect to the significantly narrowed specification that resulted in a significant increase in costs to the program in order to produce a DPI-BSB product, while at the same time having a significant, but adverse, impact on the volume of chicken meeting the specifications.
65. The evidence establishes that the parties discussed that this particular specification would obligate Channelmark to trim larger breast filets. In response to Channelmark's concerns, Steele suggested to Beck that DPI would adjust the price or make it up to Channelmark without specifying how that would be done.
66. From the beginning of the program, Channelmark and Twin Rivers suggested a number of solutions to the problem, including a widening of the range falling into the existing specification, a change in the price being charged to Safeway, or the creation of a new product for the larger filets. In fact, in an April 1, 1997, letter to Steele and Craig Miller ("Miller"), Fryar informed the Defendants of the substantial benefits of moving to an expanded size range:
An expanded size range would have several advantages. The primary advantage is that you can do this immediately without introducing another SKU and without having to make any changes to your existing box or program. Another advantage is that only about 35% of the filets fall into the existing range of 70 to 85 grams, while approximately 70% will fall into an expanded range of 60 to 95 grams. This expanded range will almost double your April production from 2,416 cases to 4,350 cases (it will also increase your typical monthly production from 3,372 cases to 6,100 cases-based on 375,000 lbs. of incoming product weekly). It will also decrease the amount of trim that you produce since you will not have to trim the larger filets as much-they will naturally be offset by the smaller filets in the range.
67. At the insistence of DPI, Channelmark continued to trim all incoming breast meat to DPI's specification without regard to the losses that were occurring. Moreover, because of the changed specification's impact on volume, DPI instructed Channelmark to purchase additional quantities of BSB from non-PFS processors, including Twin Rivers and ConAgra Poultry. The evidence shows that these breasts were larger, required substantial trimming, and cost significantly more than those obtained under the KFC-PFS Agreement. Channelmark continued to do so, but complained about that decision as well. In a March 18, 1997, memorandum to Steele, Beck noted that Channelmark was "concerned that the losses that decision causes be kept separate from the margin generated by the Channelmark program."
68. It is the Court's finding that DPI-Cott needed to cover its over-aggressive sales to Safeway and hold steady to the change specification that the Court finds was a different product than that contemplated by the CM-DPI Agreement of December 24, 1996. In fact, Cott and DPI, through Nichol, essentially promised Channelmark that they would pay for the extra costs of outside product for non-KFC-PFS Agreement chicken so long as the spec was met for Safeway. The Court finds that DPI-Cott, from the very beginning of the program, was looking for a value-added product, not a commodity or natural by-product that the CM-DPI Agreement contemplated and Channelmark understood it was providing to DPI. DPI was looking for an upscale version of BSB, not a commodity product.
Notably, it is the Court's view that both parties, to an extent, ignored this issue because of the desire of each to reach an agreement to meet their respective needs. However, the needs for one were adverse to the other to the extent that the DPI-BSB product was not the product at all that had been produced during the test program in 1995 and 1996.
It is the Court's view that both parties downplayed to the Court the detrimental effect that the lack of a specification and then a changed specification had on the case itself and on the contract in 1997. Essentially, neither party will admit that they simply did not cross their "T"s and dot their "I"s when they made a deal in December 1996. Each wanted a contract for different reasons, and each hastily signed the contract without agreeing in a meaningful way on the specifications for the product. However, the product, as contemplated by Channelmark, was substantially consistent with the CM-DPI Agreement and the test program versus the product as specified by DPI-Cott for Safeway.
The Court finds that the narrow range for the specification, plus all of the trimming, destroyed the financial viability of the program, assuming that it was viable to begin with.
69. The Court finds that Fryar was substantially correct when he told Miller and testified that Twin Rivers and Channelmark were turning a $2 piece of chicken into a $1 piece of chicken to meet the specs of DPI for Safeway.
70. Even though one of the express responsibilities of DPI, pursuant to the contract, was to demonstrate credit with Channelmark's processors and suppliers so that those processors and suppliers would be willing to ship product to Channelmark under the KFC-PFS Agreement, the CM-DPI Agreement did not specifically articulate the amount of financing that DPI was to provide other than requiring a $120,000 letter of credit. The pro forma attached to the CM-DPI Agreement was illustrative of the cash flow needs if the miscut program was to operate at the volume level stated in the pro forma. However, the program never operated at the volume stated in the pro forma.
Paragraph 2(a) of the CM-DPI Agreement simply stated that "DPI will provide financing consistent with the pro forma." See Plaintiff's Ex. 21. As noted above, the pro forma did not specify what amount of financing was required.
The Court has already noted that Tyson Foods was a reluctant participant in the arrangement set forth in the KFC-PFS Agreement. The Court does find that one of the reasons for the lower volume than expected during the first quarter of the program was because DPI was delinquent in making adequate credit arrangements with Tyson. In fact, despite being informed by Channelmark that a credit arrangement of at least $450,000 would be needed to support anticipated volumes with Tyson, DPI did not contact Tyson to discuss the issue of credit worthiness until February 21, 1997. It was not until March 19, 1997, that Cott posted a $500,000 guarantee on behalf of Channelmark and DPI.
71. DPI also failed to make timely credit arrangements with other processors. Wampler Foods was delayed in coming on line because DPI did not fill out Wampler's standard credit application. It is the Court's finding that while DPI's failure to timely demonstrate credit to Tyson did not have near the adverse impact as claimed by the Plaintiff, it did, nonetheless, have a negative impact on the miscut program.
72. When DPI contractually assumed Channelmark's duties and obligations under the KFC-PFS Agreement (see Plaintiff's Ex. 21 at ¶ 3), Defendants took over Channelmark's responsibility to pay processors and suppliers pursuant to the terms Channelmark had negotiated with them, which in most cases, frankly, from the Court's point of view, meant that processors could dictate the finance terms. However, whether the processors could so dictate such terms or not, DPI was untimely with payments from the inception of the program, causing a substantial impact on the success of the program to the extent that the processors were reluctant to participate and that the cumulative effect of lack of timely payments and lack of clear cut credit terms exacerbated the lack of cooperation by the processors with Channelmark and DPI.
73. Tyson's standard credit terms were net 14 days. From the very outset of the program in January 1997, and continuing until the program was shut down, DPI was late in making payments owing to Tyson.
74. DPI was also habitually late in making payments to Twin Rivers Foods, whose payment terms of net 7 days had been accepted by DPI in the CM-DPI Agreement as well.
75. Sanderson Foods, a contract processor, never got paid by DPI.
76. All payments to Columbia Farms were untimely.
77. Payments to KFC and Beeson were customarily late.
78. Channelmark's complaints to DPI and Channelmark about the late payments were entirely unavailing.
79. In June 1997, DPI unilaterally and abruptly stopped paying the processors, which resulted in the shutdown of the miscut program. The Court finds that the Cott Corporation made the decision not to provide DPI with further funding and to shut the program down as part of a reorganization. Cott had decided, based upon the evidence, that the miscut program no longer fit its "strategic focus."
80. DPI asserted significant control over the day-to-day operations of the program. Channelmark was not provided timely financial information or current accounts payable information during the program. This lack of information by itself made it virtually impossible for Channelmark to effectively manage the program.
81. While Channelmark did not have a leadership or management team in place, the Court finds that, with or without that team in place, it was the intent of DPI and Cott to usurp entire control over the program, and they did. There were no joint decisions made on any issue once the CM-DPI Agreement was signed on December 24, 1996.
Again, Channelmark did not force this issue contractually because it is the Court's view that Channelmark was so desperate to see the CM-DPI Agreement succeed that Channelmark was willing to comply with virtually any behavior on the part of DPI, even if it was a breach of the CM-DPI Agreement, in the apparent hope that once the program became successful, it would be a joint venture. Consequently, what happened, in effect, and the Court so finds, is that a big company like Cott, since Cott was controlling all of the decisions that DPI was making, leveraged a small overanxious company-Channelmark-who desperately wanted to sell miscuts and to see the miscut program succeed, because of their view of how profitable the KFC-PFS Agreement could be. Conversely, Cott and DPI wanted the miscut program to succeed for the benefit of their primary client, Safeway, which turned out to be to the detriment of Channelmark. Channelmark, for their part, for most of the time from December 1996 through June 1997, acceded to the unreasonable demands of Cott and DPI, demands that were not contemplated by the CM-DPI Agreement signed on December 24, 1996.
82. After Cott made its decision to restructure DPI, Steele asked DPI's paid consultant, Miller, to evaluate whether DPI should elect to pursue a joint venture with Channelmark. Miller performed the evaluation and recommended that Cott and DPI not pursue a joint venture with Channelmark. This analysis was presented to Defendants' management in June 1997.
83. All payments to processors were ceased before the end of June 1997. Cott and DPI terminated their relationship with Channelmark and effectively withdrew from contractual relations under the CM-DPI Agreement in June 1997.
84. Contrary to the Defendants' position, they did in fact, in violation of the CM-DPI Agreement, attempt to renegotiate behind the back of Channelmark the PFS Agreement with Twin Rivers and restart the miscut chicken program without Channelmark. Further, since Cott and DPI were unable to obtain miscuts under the KFC-PFS Agreement after June 1997, Defendants sought other resources for breast meat to provide BSB product for Safeway. Once it obtained a source of supply, DPI approached Safeway and obtained a price increase to $5.99 for the BSB product that Channelmark had been supplying. This price increase was consistent with the increase recommended by Beck in May 1997 and ignored by DPI and Cott. It was also confirmation that, from Cott's point of view with respect to the CM-DPI Agreement set forth in Plaintiff's Ex. 21, "the deal was too good to be true."
85. The failure to produce the volume of miscut chicken and revenue as projected in the pro forma was in substantial part caused by the changed and narrow specification for DPI-BSB, untimely payments, untimely efforts to establish credit with processors, reluctant and resistant processors, over aggressive and premature sales to Safeway, and overall delays in start-up, and not the failure of Channelmark to fulfill all of its material obligations under the CM-DPI Agreement.
86. Contrary to the assertions of the Defendants with respect to the mismanagement of the miscut program by Channelmark, the Defendants insisted on controlling payments to third parties and did not provide financial or payable information to Channelmark. Moreover, Defendants essentially prevented Channelmark from managing the day-to-day operations of the program by directing Channelmark to focus on DPI-BSB to the exclusion of all other activities contemplated under the CM-DPI Agreement, regardless of the costs incurred to process DPI-BSB. Thus, whether Channelmark had the ability to perform all of the other activities contemplated under the CM-DPI Agreement, such as, for example, the marketing of non-BSB products, the fact remains that the Defendants insisted that Channelmark focus on BSB.
87. Channelmark has asserted that Cott was the alter ego of DPI and that Cott should be held directly responsible for any liability of DPI on that basis. The Court agrees. Not once was DPI described as a separate legal entity to any of the representatives of Channelmark. It is clear that the Cott Corporation made all of the decisions at any meeting that was attended by Channelmark. Plaintiff justifiably and reasonably believed that DPI and Cott were one and the same company, notwithstanding the fact that Cott was not a party listed on the contract.
88. Cott and DPI shared the same offices. Cott and DPI shared essentially the same administration, receptionist, and telephone system. Cott and DPI shared the same e-mail system and computer network, human resources department, payroll department, benefits department. Cott prepared DPI's tax return for joint filing. DPI and Cott had the same in-house counsel, and there existed substantial overlap between the entities' officers and directors.
89. As noted in paragraph 42, DPI routinely stated it was a Cott company on its letterhead, business cards, checks, and credit applications. From the early contacts of DPI and Cott with Channelmark, they presented themselves together in video-tape presentations to Channelmark and others and described how they would "Cotticize" Channelmark. At different times, DPI was referred to as a subsidiary of Cott or a division of Cott.
90. It was Cott that ultimately decided to discontinue the miscut program, as well as DPI's operations, and to extensively restructure DPI, including terminating its CEO and COO. It is the Court's finding that Cott made all major decisions for DPI.
91. DPI did not observe corporate formalities. When DPI's assets were sold, the funds went directly to Cott, not to DPI.
92. DPI received all of its operating capital from Cott through loans that were neither repaid nor documented.
93. It is the Court's view that the evidence establishes that DPI's so-called corporate existence was essentially nonexistent.
94. Channelmark has alleged that Twin Rivers made an offer in 1996 to Channelmark under which Twin Rivers Foods would receive the KFC-PFS Agreement in exchange for agreeing to pay a royalty of $0.035 on every pound of chicken provided by the PFS processors. Defendants have moved the Court for an order excluding the Twin Rivers offer as untimely.
Plaintiff made no mention of its alternative damage theory in any of its official disclosures. Specifically, this alternative damage theory is not set forth in any of the three complaints, including the second amended complaint that was served in December 2000. The damages sought, pursuant to the alternative theory, are part of the fraud claim. More importantly, the Plaintiff did not disclose its alternative damage theory in its Rule 26 disclosures, dated January 30, 1998, or in its supplemental Rule 26 disclosure dated March 22, 1999. Finally, no disclosure was made during the mediation of this matter before the Magistrate Judge. The Defendants were prejudiced by the untimely disclosure of Plaintiff's alternative damage theory. Defendants' motion to exclude evidence of damages based on the Twin Rivers offer is granted.
95. Alternatively, the decision of the Court to grant the motion does not affect the case because the Court finds and concludes that there was no meaningful or actual offer made by Twin Rivers to Channelmark in July 1996 or at any other time. The Court finds and concludes that there is no credible evidence of a firm offer by Twin Rivers Foods to Channelmark. Any suggestion otherwise is speculative. Moreover, even if there was some type of intent in the minds of Twin Rivers Foods and Channelmark to enter into such an agreement, such an agreement was not financially feasible for either party. At the time the purported offer was suggested or made, a $50,000 to $100,000 late payment to Twin Rivers Foods imperiled their financial viability. Both companies were experiencing negative cash flow in July 1996. Consequently, the Court finds that first there was no offer made to Twin Rivers and secondly, if some type of offer was made, it was essentially meaningless, because neither company was in a financial position to either make the offer or accept the offer and then carry it out. Thus, even if the disclosures of this alternative damage theory were timely, the Court finds and considers it as not proven for the reasons stated.
96. Plaintiff and Defendants called experts to address the issue of damages. During direct and cross-examination, Plaintiff's expert, Dr. H. L. Goodwin ("Goodwin"), acknowledged that certain of the calculations he performed in relation to the cost of goods-sold model and included in his expert report were erroneous due to omissions. In the report that he submitted on March 13, 2001, after Goodwin's testimony was concluded, Defendants' expert Robert DeValk ("DeValk"), reported that when corrected to account for the omissions and Goodwin's cost of goods-sold calculations, Channelmark would have generated a net profit of $276,616 during the initial period of the parties' relationship.
Based upon the Court's evaluation of the methodology of Goodwin, the context of DeValk's analysis, and having considered deboning yields, raw product volume, costs of goods sold, production costs, and resale prices for tenders and BSB, and based upon the Court's analysis of the cause for fluctuation and yield and volume, the Court finds and concludes that the Plaintiff has established that Channelmark would have generated a net profit during the initial period of the parties' relationship of $276,616, if DPI and Cott would have complied in all respects with the requirements of the CM-DPI Agreement set forth in Plaintiff's Ex. 21. Relatedly, all of Goodwin's and DeValk's calculations assume compliance with the written specification in the CM-DPI Agreement set forth in Plaintiff's Ex. 21. The Court finds that when the CM-DPI Agreement was signed, Steele had agreed to compensate Channelmark for the change from 4% fat to no-fat. If the specification was 4% fat or if the Defendants made up the difference to Channelmark, the yields, volume, and profitability would have been significantly higher. For these reasons and consistent with the Findings of Fact above, the Court finds and concludes that the amount of lost profits Channelmark is entitled to is $276,616 during the initial period of the parties' relationship.
Quite unfortunately, it is worthwhile noting that both experts' reports were fraught with errors, omissions, last-minute modifications, flawed assumptions, and much speculation, quite separate from the methodology utilized by each. In fairness to both experts, despite the Court's observation of their flawed evaluation, much of the explanation can be found in the lack of documents and records that were probative or otherwise entitled to be relied upon by a lay witness or, in this case, the expert witnesses of each party. It is in this context that the Court has made its findings with respect to the total amount of lost profits of $276,616 during the initial period of the parties' relationship.
97. In July 1997, Steele promised to compensate Channelmark for work performed in connection with Channelmark's review of Twin Rivers invoices and the AF sale of certain inventory. Channelmark provided the requested services and was never compensated. Channelmark expended $5,000 in performance of those services. Channelmark is entitled to reimbursement for those expenses under the doctrine of promissory estoppel.
98. DPI also promised to pay past due invoices and reimbursement for services performed. In addition to the $5,000 noted in the paragraph above, the Court finds that invoices that remain unpaid, as set forth in Plaintiff's Ex. 77, total $90,206, plus $3,956 for expenses associated with Frank Ross that DPI-Cott promised to pay. That total, which the Court finds the Plaintiff has established, is $99,162.
99. Paragraph 6 of the CM-DPI Agreement, introduced as Plaintiff's Ex. 21, states, in pertinent part, as follows:
6. If DPI elects to cancel the joint relationship, then Channelmark shall be entitled to 100% of the profits described in paragraph 5 earned on the sale of the PFS Products (i.e., all profits) except those attributable to sales of BSB in excess of the Safeway purchase price to customers other than Safeway, and DPI shall have no liability to Channelmark except for performance of the PO. Upon cancellatien [sic] of the joint relationship and until DPI has completed all of its obligations to purchase BSB hereunder, DPI shall continue in effect the joint financial relationship or other existing financing mechanism referred to in paragraph 2(a) for the purchase of raw chicken under the PFS Agreement and processing and administrative expenses related to production of the BSB product specified in the PO. If, in the event of such cancellation by DPI, at the time of cancellation DPI has drawn against the PO in excess of 2,000,000 pounds of BSB from Channelmark, Channelmark shall have the option to require DPI to order additional quantities of BSB under the PFS Agreement such that DPI will have on order not less than 2,000,000 pounds of BSB following the date on which DPI makes such election. The purchase price for any BSB exceeding 4,000,000 pounds in the aggregate will be equal to $1.954 (U.S.) per pound minus one-half of the profit derived by Channelmark on such sales to DPI. Channelmark may exercise the option only if it has met the average monthly shipping requirement of BSB during the temporary relationship. Channelmark has represented to DPI that Channelmark has the capacity to ship at least 500,000 pounds of BSB to DPI per month.
100. The Court finds that paragraph 6, referred to by the parties as the exculpatory clause of the CM-DPI Agreement, prevents Channelmark from recovering its future loss profit damages. Pursuant to paragraph 6, DPI's only obligation was to perform under the PO. Upon a breach by DPI, which the Court has found occurred, Channelmark's damages are limited to the amount proven for the temporary period.
Alternatively, and quite separate from the exculpatory clause in paragraph 6 of Plaintiff's Ex. 21, the Court finds that there is no evidence in the record to establish that the Plaintiff was financially capable or otherwise viable, beyond the one-year period, without financing from either DPI-Cott or another financial partner to carry on with the CM-DPI Agreement. Therefore, separate from the speculative assumptions made by both experts with respect to what type of net profits would be available for a period of four years, and quite separate from the conduct and behavior of DPI and Cott, the record establishes the Plaintiff was not financially capable or otherwise viable to carry on this venture. Thus, with or without the exculpatory clause set forth in Plaintiff's Ex. 21, the evidence in this case unequivocally establishes that the case before the Court is a case about a one-year period of time.
101. DPI advanced an amount of money of more than $2 million, but less than $3 million, than it received either in DPI-BSB or proceeds from sales on other products. The DPI Agreement provided that all advances made by DPI would be treated as advance payments to Channelmark for the DPI-BSB that Channelmark was to provide under the purchase order.
However, in light of the fact that the Court has concluded any inability by Channelmark to comply with the terms of the CM-DPI Agreement during the temporary period was caused by the conduct of DPI and Cott, the Court finds that the Defendants have not established any breach by Channelmark and that any failure to fulfill specific obligations under the CM-DPI Agreement by Channelmark, if there were any, were caused by DPI, not Channelmark. The Court also finds that DPI has failed to establish that specific amounts were actually advanced under the CM-DPI Agreement and for what those amounts were advanced. For example, the evidence does not differentiate, in large part, between monies advanced under the CM-DPI Agreement and monies advanced outside the CM-DPI Agreement to non-PFS processors.
It is the Court's view that with respect to DPI's counter-claim, Defendants have not been able to account for the processing costs, administrative costs, equipment costs, and other costs attributable to purchases of chicken from non-PFS processors. However, even if those amounts were deemed ascertainable, the Court has concluded that it is the Defendants' conduct, not the Plaintiff's, that is the primary cause for their loss.
102. That any conclusion of law which may be deemed a finding of fact is incorporated herein as such.
Based upon the above findings of fact, the Court hereby makes the following:
CONCLUSIONS OF LAW
1. That consistent with the Findings of Fact, Defendants are liable to Channelmark for breaching the CM-DPI Agreement for the temporary period of the CM-DPI Agreement as set forth in Plaintiff's Ex. 21 on the following grounds:
a. Defendants' failure to establish credit;
b. Defendants' change in the specification for DPI-BSB;
c. Defendants' failure to pay processors on time;
d. Defendants' usurpation of management and control from Channelmark; and
e. Defendants' unilateral suspension of its performance, including payment to processors.
2. As a result of the breach of the CM-DPI Agreement as set forth in Plaintiff's Ex. 21 for the temporary period, the Court finds and concludes, consistent with the Findings of Fact, that the lost profits that Channelmark is entitled to are $276,616.
3. Defendants are liable under the doctrine of promissory estoppel for their clear and definite promise to pay for the investigation conducted by David Beck, unpaid invoices, and the services of Frank Ross, those totaling, consistent with the Findings of Fact in paragraph 98, in the amount of $99,162.
4. Consistent with the Findings of Fact, the Court concludes that DPI is Cott's alter ego. Cott is therefore liable for all of Channelmark's damages as found by the Court under Minnesota law as well as Delaware law.
5. Plaintiff has failed to prove that Defendants are liable for fraud in the inducement.
6. Plaintiff has failed to prove that Defendants tortiously interfered with Channelmark's contracts and prospective business advantage.
7. To the extent that Plaintiff has alleged that Cott is liable under the doctrine of promissory estoppel, as an alternative claim for relief for all damages in the case, except for the Findings and Conclusions of this Court with respect to reimbursements to Plaintiff under the theory of promissory estoppel by DPI and Cott, the Court finds that Plaintiff has failed to prove that a clear and definite promise was made for all of DPI's obligations except those found by the Court.
8. Defendants have failed to prove that Channelmark breached the CM-DPI Agreement. Therefore, Plaintiff is not liable to the Defendants under any theory of recovery advanced at trial by the Defendants.
9. Any Finding of Fact which may be deemed a Conclusion of Law is incorporated herein as such.
Based upon the above Findings of Fact and Conclusions of Law, this Court makes the following:
ORDER FOR JUDGMENT
1. Plaintiff Channelmark Corporation is entitled to judgment against the Defendants in the amount of $375,778, plus interest, together with reasonable costs and disbursements.
LET JUDGMENT BE ENTERED ACCORDINGLY.
MEMORANDUM
Based upon the Court's scrutiny of 19 days of testimony and all of the exhibits submitted to the Court, as well as the arguments of counsel, the Court has concluded that from the very outset of this case this business arrangement or agreement between the parties, for lack of a more apt characterization, was a one-year agreement. Simply put, this was a one-year case.
First, it was a one-year case because of the exculpatory clause found at paragraph 6 of Plaintiff's Exhibit 21. Alternatively, and quite significantly, as noted at paragraph 100 of the Court's Findings of Fact, there was no proof by the Plaintiff that Channelmark was financially viable beyond a one-year period of time without a stable financial partner. Moreover, any testimony with respect to loss of future profits on the assumption of unproven market conditions and the myriad of variables-never established by either party or their experts-fell woefully short of a preponderance of the evidence under the best of circumstances. Under the worst of circumstances, it was speculation and guesswork and perhaps the good faith hopes and dreams of the Plaintiff.
The Findings speak for themselves with respect to Plaintiff's alternative theory of recovery, namely, a purported offer made by Twin Rivers to Channelmark in 1996 or any other time. The Findings of the Court make it unequivocally the case that whether all of the evidence was in or the Court granted the Defendants' motion on the issue of timeliness and prejudice to exclude the evidence on the purported offer of Twin Rivers, there was simply no probative evidence of a firm offer by Twin Rivers to Channelmark. To the contrary, the evidence indicates preliminary negotiations, at best, and a suggestion by Channelmark and Twin Rivers that, ignoring their lack of financial viability, such an agreement might be profitable for both. For the reasons stated in the Court's Findings, such an offer and acceptance was not proven. This Finding of the Court was not a close call, based upon the evidence, the financial status of both entities, and the market conditions in 1996 and shortly thereafter.
The Court does not condone much of the behavior of DPI and Cott. However, the Court's failure to approbate their conduct is not tantamount to a finding of fraud. Relatedly, in many respects, this is a case about a big company seizing on the eagerness, if not desperation, of a small company, like Channelmark, to serve one of their big clients, Safeway. Regardless of the circumstances under which each party entered into the CM-DPI Agreement on December 24, 1996, the Court has concluded that for the reasons, perhaps repetitively stated and explained in the Findings of Fact of this Court, that the CM-DPI Agreement was doomed from the beginning. However, even if the Plaintiff takes exception to the Court's characterization and related findings, the fact is that Defendants and Plaintiff had the ability to walk away from the CM-DPI Agreement at the end of one year, with or without the exculpatory clause set forth in paragraph 6.
DPI-Cott made a premature-unilateral exit from the CM-DPI Agreement. That exit was a breach of the CM-DPI Agreement. The damages, be they out-of-pocket damages or lost profits, that flowed from that exit, at least those that were proven at trial, are another matter. Quite separate from the liability issues the Court has decided with respect to the claims and assertions of both parties, the Court has concluded that neither party established their damage claims except for the lost profits that Channelmark is entitled to in the amount of $276,616. Significantly, from the Court's point of view, such lost profits assumed full compliance by DPI-Cott with the contract as set forth in Plaintiff's Ex. 21 which did not include the narrow specification the parties attempted to function under during the temporary arrangement they had.
Pursuant to the doctrine of promissory estoppel, Defendants are liable for their promise to pay for the investigation conducted by David Beck, the unpaid invoices, and the services of Frank Ross, those damages totaling $99,162. Plaintiff Channelmark Corporation is therefore entitled to a judgment against the Defendants in the amount of $375,778, plus interest, together with reasonable costs and disbursements. The Plaintiff has requested attorney's fees in addition to reasonable costs and disbursements. Plaintiff has not cited any authority for an award of attorney's fees. The Court is unaware of any statutory or other legal basis for such an award. If there is such a basis for an award of attorney's fees, the Court invites Plaintiff to so indicate in a letter to the Court, with a copy to opposing counsel.
Conclusion
Based upon the evidence before the Court, this case has had a long, unfortunate, and expensive history for all parties concerned. The parties have a decision to make at this time. Each party can prolong the unfortunate and expensive history of this case with an appeal, or they can attempt to settle this case in the context of the Court's decision, as difficult as that may be. The Court would suggest that the latter would serve the best interests of all parties concerned. D.W.F.