Opinion
C.A. No. 0311017379.
Submitted: June 11, 2007.
Decided: June 19, 2007.
Decision upon defendant's motion for summary judgment on damages — GRANTED.
Raymond M. Radulski, Esquire, Wilmington, Delaware, and David Staats, Esquire, Law Office of David Staats, P.A., Wilmington, Delaware, attorneys for the plaintiff.
M. Duncan Grant, Esquire, and Phillip Mellet, Esquire, Pepper Hamilton, LLP, Wilmington Delaware, attorneys for the defendant.
OPINION
Defendant The Bank of New York (Delaware) (Bank) has filed a motion for summary judgment on damages. Briefing and argument are complete.
The plaintiff, Empire Financial Services, Inc. (Empire or EFS) was in the collection business. Empire's principal was Joseph Maccari (Maccari). In January 1997, an employee of Empire, Elviro Ocasio (Ocasio), disrupted Empire's business by entering into an agreement with James Armistead (Armistead), an employee of the Bank, to transfer active accounts from Empire to the new business Ocasio was starting, called DBA. When Maccari arrived at work one day in January, he found that his records had been stolen, that equipment had been removed or destroyed, and that a number of his employees had quit. His business was effectively destroyed. There have been numerous legal proceedings between Empire and Ocasio, culminating in a settlement agreement and release dated August 23, 2000, which resolved, inter alia, allegations of the misappropriation of property and tortuous interference by Ocasio with Empire's contractual relations. This case involves Empire's claim against the Bank arising out of the same incidents. The issue pending is damages, the Bank's liability having previously been determined.
See Settlement Agreement and Release, Tab 3 to defendant's opening brief in support of its motion for summary judgment on damages, filed May 18, 2007.
Certain of the accounts transferred to DBA were accounts for which payment schedules had been entered into by the debtor with Empire prior to February 1, 1997. These are referred to as "paying accounts." Certain of the accounts transferred to DBA were accounts which Empire referred to outside attorneys for suit and collection prior to February 1, 1997. These are referred to as "legal accounts."
This case was bifurcated for trial in June, 2004, because of problems associated with Empire's damages expert. Liability proceeded first. The only cause of action presented to the jury was civil conspiracy arising from the theft of documents and data from Empire's business. The conspiracy charge contained the following language which was read to the jury, and which was provided in written form for the jury's review:
Conspiracy — Essential Factual Elements
Plaintiff, Empire, claims that it was harmed by Elviro Ocasio when he wrongfully removed property and data belonging to Empire in January 1997, and that the Bank is responsible for the harm because it was part of a conspiracy to commit the wrongful removal. A conspiracy is an agreement by two or more persons to commit a wrongful act. Such an agreement may be made orally or in writing or may be implied by the conduct of the parties.
In order to find a civil conspiracy, you must find the following:
1. An agreement between Armistead and Ocasio
2. That the agreement have an improper or unlawful purpose; and
3. Actual damage
On June 30, 2004, a jury returned the following verdict:
1. Do you find that the plaintiff, Empire, has proven by a preponderance of the evidence that before Elviro Ocasio left his employment with Empire, he and James Armistead reached an agreement about what would happen with the Bank's accounts?
Answer: Yes
2. Do you find that the plaintiff, Empire, has proven by a preponderance of the evidence that the agreement included the commission of an unlawful or improper act?
Answer: Yes
3. Do you find that plaintiff, Empire, was damaged?
Answer: Yes
Post-trial a case management schedule was established, with damages circumscribed by a decision limiting Empire's recovery to the amount established by the contract between the parties. Empire failed to meet the scheduled deadline for the production of expert testimony. The sanction imposed for failing to adhere to the Court's order was the imposition of zero damages.
The June 28, 2005 decision on the Empire's Motion for Reargument or Relief from Judgment recites the history to that time regarding the production of expert testimony. The zero damages award was entered because Empire had failed to comply with the Court's order. Empire Financial Services, Inc. v. Bank of New York (Delaware), Del. Super., C.A. No. 00C-09-235, Del Pesco, J.(June 28, 2005) (Letter Op.).
Empire appealed the dismissal. The Supreme Court decision states:
C. Zero dollar damage award.
Having prevailed on its civil conspiracy claim, Empire was entitled to be compensated for the harm caused by the tortuous act committed in furtherance of the conspiracy. Shortly before the damages trial, however, the trial court decided that Empire suffered no damages. The court started with the premise that Ocasio had committed the tort of conversion by stealing Empire's account records. Those records, however, had virtually no value unless Empire was servicing the Bank's accounts. The Bank, by contrast, was expressly authorized to withdraw its accounts from Empire at any time, for any reason. Thus, according to the trial court, the Bank's conduct was not wrongful, and could not be the source of harm for purposes of a conspiracy claim.
Empire Financial Services, Inc. v. Bank of New York (Delaware), 900 A.2d 92, 97 (Del. 2006).
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The underlying tort, therefore, is not simply an act of conversion. Ocasio used wrongful means — theft — to interfere with an existing contract between Empire and the Bank. Because that contract was terminable at will, however, Ocasio's conduct is more properly characterized as interference with Empire's expectation that its business relationship with the Bank would continue. The Restatement (Second) of Torts § 766, comment g, addresses this situation:
Until [it is] terminated . . ., the contract is valid and subsisting, and the defendant may not improperly interfere with it. The fact that the contract is terminable at will, however, is to be taken into account in determining the damages that the plaintiff has suffered by reason of its breach. . . .
One's interest in a contract terminable at will is primarily an interest in future relations between the parties, and he has no legal assurance of them. For this reason, an interference with this interest is closely analogous to interference with prospective contractual relations.
Accordingly, we construe Ocasio's conduct as wrongful interference with a prospective contractual relationship. Empire's damages, therefore, are not limited to the value of the stolen records and of the assets that were destroyed at its offices. Empire can recover for the lost profits that it would have earned, but for Ocasio's wrongful interference, from servicing the Bank's accounts. (footnotes omitted) (emphasis supplied)
Later in the opinion, when explaining why the Court was not required to consider Empire's other claims on appeal, the Court says: "Empire has obtained a favorable jury verdict on the civil conspiracy claim and will be entitled to seek recovery of all damages, including lost profits, arising from the wrongful conduct."
Id. at 98-99.
On remand, a case scheduling order was put in place. Again, problems developed. After a teleconference, Empire chose to submit its expert reports by April 10, 2007, rather than reschedule the trial set for June 11, 2007. It was well known that the Bank intended to pursue Daubert motions as well as a motion for summary judgment before trial. Thus, the schedule was aggressive.
This trial date was later bumped to June 12, 2007, for jury selection, and June 13, 2007, for commencement of the trial.
Daubert v. Merrell Dow Pharm., 509 U.S. 579 (1993).
Empire submitted its letter of April 10, 2007, setting forth the parameters of its experts' testimony. A hearing was held, and an opinion was issued, striking both of Empire's experts on Daubert grounds.
Empire Financial Services, Inc. v. Bank of New York (Delaware), 2007 WL 1677580 (Del.Super.).
Also pending was the Bank's motion for summary judgment. That was argued on Monday, June 11, 2007. This is my decision on that motion.
Lost Profits:
Defendant seeks dismissal of Empire's claim for lost profits, based on the evidence tendered to date. The issue presented is not whether lost profits is a proper component of Empire's damages case, it is, but whether Empire has presented evidence sufficient to prove its case. Empire's claim, while not clearly quantified, is about $900,000.
The lost profits case, which might seem like a relatively simple thing to prepare and present, has been complicated by two things.
First, the evidence shows that Empire was not making a substantial profit before the incident in question. The record indicates that Empire earned about $37,000 in profits in the aggregate in the five years preceding 1997. That is, on average, slightly more than $7,000 a year. While the Supreme Court decision reports that "Empire's paying and legal accounts were yielding about $22,000 per month in profits," that is not supported by the record. At no time on remand has that testimony been presented. Apparently that is a quote from an employee of Empire who testified at the liability trial. Her assessment of profit has not been tendered to me; its factual underpinnings are suspect given the actual reported income of the business.
Empire, 900 A.2d at 94.
The testimony of Gwyn Wood at trial describes one month when $22,000 was retained by Empire. It is a gross number, not a net number. Trial transcript of June 28, 2004, pgs. 108-110.
Second, not all of the business records regarding the accounts in question have been produced. This matter has been considered fully in the spoliation decision of February 20, 2007, where I wrestled with the fact that some 45% of the relevant business records have not been produced and are effectively unavailable due to the cost of retrieval. Having those records, which theoretically show the actual recovery on the 855 paying and legal accounts at issue, would simplify the presentation of this case considerably. Since more than half of the records are available to both parties, and since my decision of February 2007, details the duel responsibility for the production difficulties, no more will be said here.
Empire Financial Services, Inc. v. Bank of New York (Delaware), 2007 WL 625899 (Del.Super.).
It is axiomatic that a claim for lost profits requires evidence of lost revenues, minus the costs associated with generating those revenues. At argument on the summary judgment motion, Empire argued that the cost of developing the accounts was largely expended, and that evidence of the minimal cost that remained would be presented through fact witnesses. No quantification of the lost profit claim was attached to this theory of recovery.
Honeywell Int'l Inc. v. Air Prods. Chems., Inc., 858 A.2d 392, 425 (Del.Ch. 2004), rev'd in part on other grounds, 872 A.2d 944 (Del 2005); Kutner Buick, Inc. v. American Motors Corp., 868 F.2d 614, 618 (3rd Cir. 1993). (". . .[N]et income must be measured by revenue lost less costs avoided.")
The following excerpts reveal the methodology:
Court: So you reject the notion that you have the burden of proving the revenue less costs as a statement of profit?
Radulski: Well, I submit, Your Honor, under this — under the circumstances of this case, under the circumstances of this case, where there is an admitted amount that's being collected, it's essentially been found that we're entitled to half of that, that those accounts have already been liquidated. What we're doing is we're going to deprive Empire of an opportunity to receive those — receive those funds. Based on the fact that Empire wasn't making a lot of money, that doesn't make any sense. I mean there's going to be unjust enrichment.
Court: Where is this admitted amount collected?
Radulski: I beg your pardon?
Court: The admitted amount collected, that's PriceWaterhouseCoopers —
Radulski: That's PriceWaterhouse's, you know, improved estimate by Daws.
Court: Okay, so you're relying on the expert retained by the defendant as an admission to support your claim of lost profits?
Radulski: Exactly, your Honor, they basically — they've admitted that they've collected monies. Half of those monies belong to Empire. I don't know how to get around that. Your Honor, their idea of the expenses, it's like if I assault somebody and put them in the hospital for a year and they can't work and that person makes a claim for $10,000 for his lost wages. Their position is, oh, those lost wages — that lost wage award should be reduced by your nonincurred community expenses, by the fact you don't have to pay for parking when you go to work, so forth and so on.
June 11, 2007, summary judgment hearing transcript, pgs. 34-36.
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Court: The money didn't just walk in the door. There was a cost associated with it.
Radulski: Certainly. Certainly.
Court: But you're saying that you think you're entitled to the full amount of the revenue without considering either Ocasio's costs or any reasonable projection of your costs.
Radulski: Exactly. They've committed a tort. They have liquidated an asset. We're entitled to half the value of the liquidated asset, but even assuming that somehow or other we have hypothetical costs that should be reduced from this liquidated inventory of assets, we submit that the — we can do so with factual witnesses. Now, Mr. Grant, I heard his presentation today and he keeps talking about, well, if someone gives an estimate that's an opinion. It's not an opinion. These are factual witnesses. I mean they can testify to the best of their knowledge as to what the actual expenses were required to collect — to collect on this subset of accounts, okay? (balance of paragraph omitted).
As the text above clearly demonstrates, Empire's case does not comport with the requirements of Daubert, Superior Court Civil Rules 702 and 705, or the legal requirements for lost profits. Additionally, even as of the time of this argument a day before the scheduled jury selection, the actual hard numbers of the claim were ambiguous, at best.
The lost earnings evidence offered by Empire in support of its lost profits claim is legally insufficient to survive summary judgment.
Consumer Loan Accounts:
The issue presented is whether lost profits on consumer loan accounts are a proper component of Empire's damages case.
Empire contends that but for Ocasio's wrongful interference, the Bank would have referred consumer loan accounts to Empire for collection. Empire would have collected those accounts and turned a profit.
This portion of the compensatory damages claim is based on a statement allegedly made by Armistead to Ocasio. The following excerpt from the February 14, 2007, deposition of Maccari was the impetus for adding this claim:
Q. The next category of damages identified in the interrogatory response is "The profits Empire would have earned from the consumer loan portfolio of accounts which the Bank referred to DBA which would have been referred to Empire but for Ocasio's wrongful interference." What is the basis for the contention that consumer loans that were referred to DBA would have been referred to Empire but for Ocasio's wrongful interference?
A. Well we know that the consumer loans were placed with DBA, okay, after Ocasio went there to work or bought the company. And we know that from prior conversations with Ocasio, Armistead told him, since we are their number one agency, that we would still be getting business from Bank of New York, but it would be doing the consumer loan portfolio.
Q. Ocasio told you Armistead said that?
A. Right.
Q. When and where, give me the details, please.
A. This is back in 1996, I believe, when I had a meeting with Ocasio.
Q. Where was the meeting?
A. I believe it was at EFS, EFS' office, I think it was 301 South DuPont road.
Q. When in 1996 was the meeting? What season?
A. I don't remember offhand.
Q. Do you remember the season?
A. I believe it was like spring [sic] `96.
Joseph Maccari was deposed on February 14, 2007. References to his deposition will be cited as "Maccari at . Maccari at 112-113.
Empire argues that this statement is an admission and a statement of a co-conspirator. Empire's attorneys have not asked Armistead about this, nor have they spoken to Ocasio to try and corroborate Maccari's deposition testimony. Empire provides no evidence as to how many consumer loan accounts Empire is alleging would have been referred, how much revenue the accounts would have produced, or the cost of collecting on the accounts.
June 11, 2007, summary judgment hearing transcript, pgs. 84-85.
Assuming, arguendo, that Maccari's statement is admissible; that raising this element of damages for the first time on remand is not untimely; and that the timing of the alleged statement (Spring 1996) is not entirely inconsistent with the timing of the conspiracy (January 1997), this component of the damages claim must be excluded for a far more fundamental reason. Other than Maccari's deposition testimony, there is no evidence to support a claim for lost profits on consumer loan accounts. The alleged statement alone is an insufficient foundation. Empire has not offered any expert testimony related to the revenues and expenses that would have been attributable to servicing consumer loan accounts. Empire had no history of handling consumer loan accounts for the Bank. Absent such evidence the jury would be left to speculate as to how many accounts might have been referred, how much, if anything, Empire would have collected on the accounts, and what Empire's costs would have been. The record contains no evidence, much less evidence which meets the standard of reasonable probability, to support Empire's claim of lost profits on consumer loan accounts.
Maccari at 113.
Money v. Manville Corp. Asbestos Disease Compensation Trust Fund, 596 A.2d 1372, 1377 (Del. 1991).
Punitive Damages:
When this lawsuit was commenced in 1999, Empire made a claim for punitive damages. No mention of punitive damages was made in the pre-trial stipulation, a document which was prepared before I decided to sever the damages claim and proceed solely on liability. The stipulation was signed by both parties.
The factual predicate for punitive damages is an evil or malicious motive. That motive must be attributable to the conduct of the charged party, not a joint tortfeasor. The special interrogatories put to the liability jury track the elements of civil conspiracy; they do not address the factual predicate for an award of punitive damages.
Jardel Co., Inc. v. Robbins, 523 A.2d 518, 529 (Del. 1987).
Smith v. Lightning Bolt Products, Inc., 861 F.2d 363, 374 (2d Cir. 1988), Pyramid Condominium Assoc. v. Morgan, 606 F.Supp. 592, 599 (D. Md. 1985), McKinnon v. City of Berwyn, 750 F.2d 1383, 1387 (7th Cir. 1984)("[P]unitive damages, like criminal fines, which they resemble, are always assessed individually. But the obligation to pay compensatory damages to rectify an inseparable injury for which several defendants are liable is joint and several."), Davidson v. Dixon, 386 F.Supp. 482, 489 (D. Del. 1974).
Empire urges the court to conclude that the remand for a determination of damages permits a broadening of its damages claim. To support that position, Empire relies, inter alia, on the following statement from the Supreme Court's decision: "Empire has obtained a favorable jury verdict on the civil conspiracy claim and will be entitled to seek recovery of all damages, including lost profits, arising from the wrongful conduct." That statement must be read in the context of the appeal.
June 11, 2007, summary judgment hearing transcript, pgs. 130-131.
Empire, 900 A.2d at 98-99.
The appeal raised the issue of whether tort or contract damages applied. I do not construe the language in the decision on remand to mean that Empire may now seek damages which exceed that permitted by factual findings at the liability trial. The decision on remand directs this court to hold a trial on damages. It does not require the reopening of the liability case.
I find the claim for punitive damages associated with events of January 1997 to have been abandoned prior to the liability trial.
Office damages:
I find that the claim for office damages must be dismissed as there is no factual predicate from the liability trial for such an award. The jury found the Bank to have been a participant in a civil conspiracy "to wrongfully remove property and data belonging to Empire in January 1997". The Bank is responsible for the damages which occur in furtherance of the conspiracy. Vandalism is not the type of conduct which is so clearly and obviously within the scope of a civil conspiracy to transfer accounts that it can be inferred without a specific factual finding. Armistead testified in the liability trial that he did not know anything about the vandalism, or the theft of records, prior to the commencement of this lawsuit. Empire's counsel acknowledged at argument after the liability trial that the record is unclear as to whether Armistead was aware that Occasio was going to "trash" the office at Empire. A special interrogatory could have been sent to the jury on this question, but it was not requested.
See Jury Instructions, June 30, 2004, Conspiracy — Essential Factual Elements, pg. 7.
Nicolet, Inc. v. Nutt, 525 A.2d 146, 150 (Del. 1987).
Trial testimony of James Armistead, a.m. of June 30, 2004, p. 65.
At a hearing on March 14, 2005, when Mr. Radulski was asked a question related to damages, he said:
"The components? Absent the conspiracy and the theft of the documents, the components of Empire's damages possibly could have been — if the — if that agreement included the trashing of the office in some fashion, I'm not sure that there's evidence in the record to that effect, but clearly, there's evidence [the trashing] occurred, I'm not sure to what extent the bank was aware that Mr. Ocasio was going to do that." Transcript of March 14, 2005, summary judgment hearing Pg. 30-31.
On numerous occasions Empire's counsel was asked to describe the damages claimed. The response was limited to the transfer of accounts. The office damages component of Empire's damages claim was never pursued.
Pretrial Stipulation, signed June 18, 2004; trial transcript of June 29, 2004, pg. 264.
I recognize that the Supreme Court's decision specifically contains the following language: Empire's damages, therefore, are not limited to the value of the stolen records and of the assets that were destroyed at its offices. Empire can recover for the lost profits that it would have earned, but for Ocasio's wrongful interference, from servicing the Bank's accounts. (emphasis added) I also note that the Court has directed on remand that the Superior Court "hold a trial on damages, in accordance with this Opinion." The issue presented to the Supreme Court, as outlined in the introductory paragraph of the opinion, is whether contract or tort damages apply to the claim. "We conclude that the trial court erred in limiting the collection agency to a contract measure of damages. The tort measure of damages, which should have been applied, allows recovery for lost profits resulting from the bank's wrongful conduct. Accordingly, we reverse and remand for a trial on damages."
Empire, 900 A.2d at 98.
Id. at 99.
Id. at 93.
I conclude from the language quoted that the Supreme Court was focused on the claim of lost profits, as a tort remedy. The absence of a finding regarding the forseeability of damages due to vandalism was not before it. Since there is no factual predicate for considering that component of damages, I will exclude it.
Attorneys' Fees:
Taking a broad interpretation of the Supreme Court's decision on remand, Empire claims reimbursement for a portion of the attorneys fees incurred in connection with this action. It has limited the claim to the period of time from the commencement of the action through the stipulated arbitration which resolved the contract issue. Empire concedes that it arbitrarily chose this period of time.
June 11, 2007, summary judgment hearing transcript, pg. 103. Mr. Radulski: "[W]e've arbitrarily in our papers limited our position to the point where the arbitrator said, look, the Bank's contract controlled."
Empire's basis for claiming attorneys' fees is laid out in the following excerpts:
What happened here is documents were stolen, namely, the contract between Empire and the Bank which put the Bank in a position of dictating which version of the contract would be — would govern the course of at least the contract action in this case. As a consequence, Your Honor, those actions imposed upon Empire costs which would not have been incurred if the Bank's conduct in this case had simply been, we're going to withdraw our accounts, you know, if you think there's a breach, you can do what you want sue, whatever, take us to court if you don't think we're permitted to do so.
June 11, 2007, summary judgment hearing transcript, pg. 102.
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[O]ur claim on the attorneys' fees, that the litigation costs were increased tremendously to try to unravel the conspiracy, if you will. And these would not — if this had been a simple matter of a contract case, obviously we would not be looking for attorneys' fees because we would have litigated whose contract controlled, the Bank's or ours. If we had a copy of our contract, we would at least be able to take a position that the Bank was doing something that they weren't supposed to do in recalling the accounts. We had no contract.
Prior to arbitration, Empire was able to locate a copy of its contract in the file of a deceased Empire employee in New York.
But these are all things that resulted from the fact that the contract was stolen by the coconspirator [sic] and that Empire, to try to establish its contract claim, had to go to extraordinary lengths and tremendous expense and litigation to run down that contract to find the — at least a copy of what we maintained was the operative contract in this case, but, of course, the arbitrator ruled against us in your court and Your Honor had sustained that ruling. But it doesn't lessen the fact that the expenses had to be incurred to try to litigate that aspect of the case.
Id. at 106-107.
Delaware follows the American Rule which requires that "a litigant must, himself, defray the cost of being represented by counsel." Limited exceptions to the rule include situations where there is an express statutory authorization, or there is bad faith conduct during the course of the litigation.
Dover Historical Soc., Inc. v. City of Dover Planning Com'n, 902 A.2d 1084, 1089 (Del. 2006) (quoting Chrysler Corp. v. Dann, 223 A.2d 384, 386 (Del. 1966)).
Id. at 1090.
Empire argues that its claim for attorneys' fees is not a fee-shifting claim. "Rather it is a claim that the conspiracy, and in particular the theft of documents and proprietary information, imposed legal costs on Empire which Empire would not have incurred had Ocasio and the Bank not stolen Empire's documents."
Answering brief of Empire Financial Services, Inc. in opposition to The Bank of New York (Delaware)'s motion for summary judgment at 13.
Empire offers no authority to support its claim of attorneys' fees as part of its case in chief for compensatory damages. The exception for bad faith conduct during litigation does not apply to conduct that gives rise to the substantive claim itself. Empire claims that because the contract was stolen as part of the conspiracy its litigation costs were tremendously increased. Theft of the contract is conduct which occurred prior to the litigation and gives rise to the substantive claim itself. Therefore, that conduct cannot form the basis for a claim of attorneys' fees under the bad faith exception to the American Rule.
Johnston v. Arbitrium (Cayman Is.) Handels AG, 720 A.2d 542, 546 (Del. 1998).
There is no legal basis for the compensation Empire seeks.
The Bank's motion for summary judgment is GRANTED.
IT IS SO ORDERED.