Opinion
C.A. No. 08C-04-007 JRJ.
Date Submitted: December 29, 2010.
Date Decided: February 10, 2011.
Findings of Fact and Conclusions of Law Following Bench Trial.
David S. Eagle, Esquire and Kelly A. Green, Esquire, Klehr Harrison Harvey Branzburg LLP, Wilmington, DE, Counsel for Plaintiff.
John G. Harris, Esquire, Berger Harris, 1201 N. Orange Street, One Commerce Center, Wilmington, DE , Counsel for Defendants.
Introduction
This is the Court's opinion following a bench trial on breach of contract and unjust enrichment claims under a Loan Agreement (the "Loan") asserted by Plaintiff, RTN Investors, LLC ("RTN"), and counter breach of contract claims by Defendants, RETN, LLC ("RETN") and Jovica a/k/a Joshua Petrovic ("Petrovic").
The bench trial was held on October 29, 2009, November 16, 2009, April 30, 2010, June 3, 2010, and June 4, 2010.
Undisputed Facts
Background
Plaintiff RTN is a Delaware limited liability company organized and managed by John Nachef ("Nachef"). Nachef solicited Robert Popoff ("Popoff") to assist in managing RTN, and Joseph Hausauer ("Hausauer") to assist in conducting due diligence for RTN, underwriting the Loan for investors, and raising private equity. Defendant RETN is a Delaware limited liability company formed in 2006 by Petrovic, a German citizen and developer in the United States. Petrovic sought to fund RETN and its project, "Myestate," which would be the first 24/7 real estate advertising channel in Europe. Under Petrovic's business plan, RETN would sell broadcasting time to advertisers who owned real estate in the U.S. and wished to market it in Europe. A primary facet of Petrovic's plan was to acquire a building in Munich, Germany (the "Facility") to be used as the headquarters and call center for RETN.
Popoff Trial Tr., at 7:2-16, April 30, 2010.
Hausauer Trial Tr., at 56:17-20, June 4, 2010; Nachef Trial Tr., at 21:6-16, October 29, 2009.
Nachef Trial Tr., at 12:18-13:6, October 29, 2009; Petrovic Trial Tr., at 108:3-5, April 30, 2010.
Nachef Trial Tr., at 89:2-5, October 29, 2009; Petrovic Trial Tr., at 113:18-23, April 30, 2010; Petrovic Trial Tr., at 28:3-30:1, June 3, 2010.
Solicitation of RTN to Fund RETN
The Loan
Joseph Krzys is a self-employed real-estate developer who met Petrovic in 2005 at a FedEx Kinko's store in Florida. Krzys Trial Tr., at 6:5-7:1, November 16, 2009. At the request of Petrovic, Krzys became involved in several of Petrovic's projects, including Myestate. Krzys Trial Tr., at 7:6-14:13, November 16, 2009.
In late 2006 or early 2007, Petrovic asked Krzys to help him raise money to create RTN. Krzys Trial Tr., at 14:8-9, November 16, 2009. Krzys knew that Nachef had "raised money for some other people" and suggested that he and Petrovic meet with Nachef at a bank in which Nachef worked as a mortgage broker to discuss the Myestate project. Krzys Trial Tr., at 14:9-15:4, November 16, 2009; Nachef Trial Tr., at 38:15-21, October 29, 2009; Petrovic Trial Tr., at 110:5-8, April 30, 2010.
Petrovic Trial Tr., at 108:1-5; 117:17-19, April 30, 2010.
Nachef Trial Tr., 17:19-18:5, October 29, 2009.
Plaintiff's Ex. 6.
Plaintiff's Exs. 8-9.
Plaintiff's Ex. 9 (Purchase Agreement); and 11 (Assignment of Land Charge).
Plaintiff's Ex. 17, hereinafter "Loan".
Loan, Art. 8.09, at 13.
Loan, Recitals, at 1.
Plaintiff's Ex. 18.
Plaintiff's Ex. 19.
Plaintiff's Ex. 20.
Plaintiff's Ex. 21.
Plaintiff's Ex. 22.
Plaintiff's Ex. 23.
Loan, Art. 2.08, at 6.
Loan, Art. 2.01(c), at 5; Art. 2.08, at 6.
Loan, Art. 2.08, at 6; Petrovic Trial Tr., at 147:14-18, April 30, 2010; 56:18-20, June 3, 2010.
Plaintiff's Ex. 6.
Loan, Art. 7.02, at 11.
Loan, Art. 7.01 (a)-(i), at 10-11.
Loan, Art. 5.01(b), at 9.
Parties' Contentions
The Creation of RTN GmbH
Plaintiff and defendants refer to this entity as "RTN GmbH" and "RETN GmbH" interchangeably throughout their Post-Trial Briefs. It appears as though plaintiff and defendants are referring to the same entity, so that RTN GmbH and RETN GmbH are one and the same. The correct name of this entity is "RTN GmbH." Compare Plaintiff's Proposed Post-Trial Findings of Fact and Conclusions of Law, D.I. 72, at 30 (stating that "RETN GmbH" entered into an unenforceable contract with RETN to sell the Facility when in fact "RTN GmbH" is the correct entity as referenced in Plaintiff's Ex. 36), with Defendants' Proposed Post-Trial Findings of Fact and Conclusions of Law, D.I. 71, at 7 (stating that Petrovic created "RETN GmbH" when in fact Petrovic testified at trial that "RTN GmbH" was the entity created (Petrovic Trial Tr., at 137:14-17, April 30, 2010)).
Petrovic hired Jehl and Dr. Peter Fey ("Fey") to assist in the creation of RTN GmbH. Defendants assert that RTN GmbH was created in accordance with the Loan as an affiliate of RETN to raise funds to repay the Loan to RTN. Further, RTN GmbH was formed because neither RTN nor RETN, both Delaware entities, could serve as the investment vehicle for the Fund under German law. Defendants claim that plaintiff was aware that the creation of RTN GmbH was necessary to raise capital for the Fund and was informed of this fact at the April 2007 meeting in Germany. Defendants further assert that nowhere in the Loan is RETN required to structure the Fund, or to provide an 80/20 split of its proceeds, through RTN. According to defendants, plaintiff had the opportunity during the April 2007 and September 2007 meetings to ask Jehl any questions regarding RTN GmbH and its structure, and Fey mailed Nachef a letter on July 17, 2007, informing him of the existence of RTN GmbH.
Petrovic Trial Tr., at 137:14-19, April 30, 2010.
Fey Trial Tr., at 117:13-19, November 16, 2009; Jehl Depo. Tr., at 13:19-14:5, June 4, 2010.
Popoff Trial Tr., at 37:22-38:2, April 30, 2010.
Krzys Trial Tr., at 68:2-4, November 16, 2009.
Nachef Trial Tr., at 186:5-19, October 29, 2009.
Plaintiff's Ex. 25.
Plaintiff counters that structuring the Fund through RTN GmbH and not RTN was a breach of the Loan. Plaintiff contends that the parties' intent, as demonstrated in the Loan, was that the Loan would be repaid by funds from German investors. Although Petrovic testified that the Loan did not state that the funds must be paid to RTN from the Fund, a provision in the Loan specifically states that RETN intended to raise funds to repay the Loan through a German investment fund.
Krzys Trial Tr., at 34:13-35:1, November 16, 2009; Hausauer Trial Tr., at 82:20-83:19, June 4, 2010.
Fey Trial Tr., at 104:16-105:9, November 16, 2009.
Loan, Recitals, at 1.
The Closed End Fund Prospectus
Under the terms of the Loan, the Closed End Fund Prospectus ("Prospectus") was to be finalized by September 15, 2007. RTN did not waive any of its rights with regard to the completion deadline of September 15, 2007 and maintains that "finalize" under the terms of the Loan meant that the Prospectus had to be approved by Bundesanstalt für Finanzdienstleistungsaufsicht ("BaFin") no later than September 15, 2007. In mid-September 2007, due to RTN's concern that the Prospectus had not yet been finalized, Nachef and Popoff met with Petrovic and Jehl in Germany. Petrovic assured Nachef and Popoff that the Prospectus would be finalized shortly. Plaintiff notes that a dinner was held on September 11, 2007, celebrating the completion of the Prospectus brochure. At a meeting the following day, however, Jehl and Petrovic explained to Nachef and Popoff that the brochure needed to be amended due to a change in German tax law treatment of capital gains. Plaintiff claims that most of the conversation during this meeting was in German and RTN's representatives were not informed of such change and how or if this would affect the timing of the Prospectus.
Loan, Art. 7.01(g), at 11.
Nachef Trial Tr., at 68:20-69:1, October 29, 2009; Popoff Trial Tr., at 14:18-15:14, April 30, 2010.
Nachef Trial Tr., at 18:10-19:10, October 29, 2009.
Nachef Trial Tr., at 63:18-64:2, October 29, 2009.
Nachef Trial Tr., at 137:22-138:9, October 29, 2009; Popoff Trial Tr., at 12:6-8, April 30, 2010.
Jehl Depo. Tr., at 11:15-17, July 2, 2010.
Jehl Depo. Tr., at 23:8-24:4, June 4, 2010.
Although RETN and Petrovic claim that the Prospectus was not completed by the deadline because of a change in German tax law, the September 23, 2007 draft of the Prospectus included language regarding the tax law change, and other parts of the Prospectus not relating to tax laws were noticeably incomplete and missing. RTN's investors received a copy of this draft Prospectus on September 24, 2007, and raised serious concerns because it was far from complete. The draft made no mention of RTN or the fact that it was owed $5 million. Ultimately, RTN claims that Petrovic failed to raise any capital from the Fund and failed to send the Prospectus to potential German investors in a timely manner. While the Prospectus was eventually completed, and RTN funded all of RETN's operations, RTN asserts that RETN failed to perform its obligations under the Loan with regard to the Fund. The Prospectus was not received by BaFin until December 12, 2007, and was not finalized and approved by BaFin until January 8, 2008. Because this was past the completion deadline of September 15, 2007, RTN contends that RETN and Petrovic's failure to meet the deadline constituted an Event of Default.
Plaintiff's Ex. 28.
Id. See also Hausauer Trial Tr., at 82:20-83:12, June 4, 2010 (testifying that the Prospectus did not state that RETN was obligated to repay RTN under the terms of the Loan).
Plaintiff's Ex. 28. See also Hausauer Trial Tr., at 83:13-19, June 4, 2010 (noting that the Prospectus "made no mention of [RTN]").
Plaintiff's Ex. 40. See also Nachef Trial Tr., at 69:16-19, October 29, 2009 (stating that in January of 2008, the Prospectus was approved by BaFin).
Defendants maintain that the term "finalize" with regard to the completion of the Prospectus is not defined in the Loan and is therefore ambiguous. Further, according to defendants, RETN was required to maintain a permit or approval issued by any "Governmental Authority" in connection with its satellite television business. Therefore, the parties were fully capable of requiring specific governmental approval if they intended to do so. In addition, Defendants claim that a draft of the Prospectus was shown to RTN in August 2007, although admittedly different from the final version filed with BaFin due to the change in German tax laws. Moreover, defendants claim that Jehl told Nachef and Popoff of the need to change the Prospectus so that it would conform to the new German tax laws at a meeting on September 12, 2007 in Germany. Jehl claims he spoke with Nachef and Popoff in English, and that when there was trouble communicating, Petrovic provided further English translation. After the meeting, Jehl thought Nachef and Popoff fully understood the reason for the change in the Prospectus.
Loan, Art. 7.01(h), at 11. The term "Governmental Authority" is defined in Art. 1.01, at 2.
Jehl Depo. Tr., at 21:13-23, June 4, 2010.
Jehl Depo. Tr., at 23:5-19, June 4, 2010.
Jehl Depo. Tr., at 23:20-24:2, June 4, 2010.
Jehl Depo. Tr., at 24:2-4, June 4, 2010.
Defendants assert that the Prospectus was not filed with BaFin until December 2007 because Jehl had advised RETN that this would allow it to take advantage of the significant change in German tax law. Defendants further contend that RTN never objected to RETN's decision to file the Prospectus with BaFin after the September 15, 2007 deadline. Rather, it was not until three months after the September 15th deadline had passed and after Petrovic announced RTN's breach of financing obligations that RTN first claimed that the delay in filing the Prospectus was an Event of Default.
Jehl Depo. Tr., at 27:10-28:2, June 4, 2010.
Defendants' Exs. 59, 60.
RTN's Obligations to Disburse Funds under the Loan
RTN claims that it was entitled to make payments under the Loan in one or more disbursements to RETN because RTN needed time to raise money to fund the Loan. Plaintiff also claims that there was no requirement that it make payments pursuant to a set schedule incorporated into the Loan. Plaintiff contends that it made thirteen disbursements to RETN from April 19, 2007 to October 12, 2007, totaling $3,274,515.75, representing payment for RETN's cost of operations and the Facility. From the original $5 million Loan, $2.8 million was to be allocated to the cost of purchasing the Facility, with the remaining $2.2 million allocated to funding the operations of RETN.
Krzys Trial Tr., at 28:8-12, November 16, 2009; Nachef Trial Tr., at 27:18-28:8, October 29, 2009.
Nachef Trial Tr., at 122:14-17, October 29, 2009; Petrovic Trial Tr., at 18:20-23, June 4, 2010.
See Plaintiff's Ex. 62, for payments made on April 19, 2007 in the amount of $100,000 and April 25, 2007 in the amount of $150,000 by Southern Financial Trust, LLC to RETN and its vendor, Astra; Plaintiff's Ex. 63, for a payment made on May 30, 2007 in the amount of $150,000 by 1st Integrity Investments, LLC to RETN; and Plaintiff's Ex. 32, for payments made from June 29, 2007 to October 12, 2007 from RTN to RETN and its vendor, Astra, totaling $2,874,515.75.
Nachef Trial Tr., at 48:20-49:1, October 29, 2009; Petrovic Trial Tr., at 25:9-13, June 4, 2010.
Under the Loan, RTN and RETN were permitted to enter into agreements amending or waiving provisions of the Loan so long as these agreements were in writing. On August 17, 2007, Petrovic signed and sent a letter to RTN modifying the Loan by reducing the amount from $5 million to $4 million. In his letter, Petrovic stated the modification was required because RETN was generating cash from its advertising sales and the entire $5 million was no longer needed. It is important to note that at trial, however, Petrovic claimed he reduced the amount of the Loan as a "favor" to RTN. RTN relied upon this written amendment to the Loan and transferred $800,000 to the German Notar as Petrovic requested. With the reduction of the loan from $5 million to $4 million, allocation of funding for operations was reduced accordingly to $1.2 million. Therefore, under the parties' agreement, RTN asserts that it overfunded RETN's operations in the amount of $1 million.
Loan, Art. 8.03, at 12.
Plaintiff's Ex. 26.
Id.
Petrovic Trial Tr., at 26:9-12, June 4, 2010.
Nachef Trial Tr., at 60:20-22, October 29, 2009.
Nachef Trial Tr., at 61:13-20, October 29, 2009.
Defendants argue that because RTN was created for the express purpose of raising investment funds for RETN, and although some flexibility was allowed, RTN was never permitted to raise capital at its leisure. Rather, a schedule of cash flows was prepared before execution of the Loan to provide both parties with a basis for predicting RETN's funding needs. Defendants assert that RTN failed to provide the needed funding to RETN in a timely fashion and, as a result, RETN lost the opportunity to purchase the Facility. Defendants also contend that the Loan is ambiguous because it does not clearly delineate when RTN was required to make payments to RETN. According to Nachef, the Loan gave RTN flexibility in funding RETN and only required RTN to provide its "best efforts" to provide funding in a timely fashion.
Petrovic Trial Tr., at 122:14-123:2, April 30, 2010.
Petrovic Trial Tr., at 120:14-122:13, April 30, 2010.
Petrovic Trial Tr., at 123:3-124:6, April 30, 2010.
Nachef Trial Tr., at 119:11-13, October 29, 2009.
Nachef Trial Tr., at 126:6, October 29, 2009.
Defendants claim that plaintiff failed to meet its funding obligation under the Loan, raising only $2.8 million of the agreed $5 million before prematurely ceasing its funding efforts. Defendants acknowledge that plaintiff made eight disbursements to RETN for operations funding and made two deposits into an Escrow Account for the purchase of the Facility. Defendants assert, however, that two disbursements made to RETN on April 19, 2007 and April 25, 2007 from Southern Financial Trust, LLC ("Southern Financial") were not made pursuant to the Loan because Southern Financial was not a party to the Loan and made the disbursements before the execution of the Loan. In addition, defendants refute plaintiff's claim that it paid APS Astra Platform Services ("Astra") pursuant to the Loan because Astra was not a party to the Loan. Finally, funds held in the Escrow Account were released back to RTN on two separate occasions.
Defendants' Proposed Post-Trial Findings of Fact and Conclusions of Law, D.I. 71, at 2.
See Defendants' Ex. 54.
Defendants' Proposed Post-Trial Findings of Fact and Conclusions of Law, D.I. 71, at 13.
Id.
See Defendants' Ex. 54.
Purchase of the Facility
The original date for purchase of the Facility was June 30, 2007. However, the Seller of the Facility provided repeated extensions for its purchase. The funding date was extended until July 31, 2007, August 18, 2007, September 7, 2007, September 28, 2007, and December 15, 2007. RTN alleges that the contract to sell was finally terminated on February 15, 2008. RTN claims that although the contract was terminated in February 2008, the Seller was willing to sell the Facility to Petrovic until May 2008. RTN also claims that if threats of losing the Facility arose, it was told by its primary investors that they would provide any necessary funding to close on the Facility. According to plaintiff, Petrovic had knowledge of this information because he did not express concern regarding the purchase of the Facility and proceeded to enter into a contract on February 26, 2008, with realtors to market the Facility on his behalf as the alleged "owner of the property."
Plaintiff's Ex. 9, at 4.
Petrovic Trial Tr., at 82:18-22, June 3, 2010.
Petrovic Trial Tr., at 83:5-85:8, June 3, 2010.
Petrovic Trial Tr., at 85:9-86:3, June 3, 2010.
Plaintiff's Exs. 46, 47.
Nachef Trial Tr., at 58:23-59:13, October 29, 2009.
Petrovic Trial Tr., at 86:4-14, June 3, 2010; Plaintiff's Ex. 44.
Defendants contend that RTN's inability to raise sufficient funds spoiled RETN's ability to purchase the Facility at a favorable price. According to Petrovic, due to RTN's lack of sufficient funding to purchase the Facility, Petrovic had to secure several extensions. During these periods of extension for purchase of the Facility, Petrovic claims he stressed to Nachef that these extensions were not indefinite and that the required funding was needed to avoid the risk of losing the Facility. Further, according to Petrovic, Nachef repeatedly assured Petrovic that RTN would raise the additional $1 million needed to purchase the Facility in time to meet the extended closing dates. But Nachef testified that he told Petrovic certain changes needed to be made to the Loan before RTN could raise the additional funds. According to defendants, plaintiff's claim that additional investors were willing to cover RTN's deficiency in funding was incorrect. Defendants claim one investor was only interested in making a direct investment in the Facility in exchange for a first lien position on the Facility, which was impossible because RTN possessed the right to a first lien position on the Facility. Defendants further claim that a second investor was only willing to make an investment if the Loan was drastically amended. Defendants allege that RETN's contract to purchase the Facility was terminated on April 2, 2008, as a proximate result of lack of funding from RTN. RETN was obligated to pay back rent and interest as a result of the termination of the Purchase Agreement.
Petrovic Trial Tr., at 126:22-128:13, April 30, 2010.
Petrovic Trial Tr., at 128:17-129:3, April 30, 2010.
Nachef Trial Tr., at 114:6-117:2, October 29, 2009.
Hausauer Trial Tr., at 112:10-113:17, June 4, 2010.
However, this second investor, James Richards, testified at trial that he did not invest additional funds because he was advised by Nachef that RETN had not complied with the Loan terms on the initial investment. Richards Trial Tr. at 10:2-6, April 21, 2010.
Defendants' Proposed Post-Trial Findings of Fact and Conclusions of Law, D.I. 71, at 17 (citing Defendants' Ex. 75).
Defendants' Ex. 81.
Plaintiff claims that Petrovic caused RETN and RTN GmbH to enter into a contract to sell the Facility, which was in further breach of the Loan. Although the contract was unenforceable because it was not notarized, this attempt to sell the Facility was a direct violation of the terms of the Loan which stated that RETN was not permitted to incur any encumbrances against any of its properties or sell any of its assets. Plaintiff argues that RETN and Petrovic had no right to sell the Facility because it was encumbered by a first mortgage in RTN's favor. The Facility was only a contingent asset of RETN because it was subject to a first lien and surrender of title to RTN if RETN failed to repay the debt owed to RTN. Therefore, the proceeds of any sale of the Facility belonged to RTN, not RETN, until the Loan was paid in full. Additionally, on October 10, 2007, Petrovic caused a Supplement to the Purchase Agreement ("Supplement") to be drafted without RTN's knowledge. This Supplement permitted RTN GmbH to become 60% owner of the Facility, but Petrovic sought to have RETN pay for RTN GmbH's 60% interest in the amount of €1.2 million so that RTN GmbH was under no obligation to repay the Loan taken by RETN. The Supplement reduced RETN's mortgage on the Facility from €2 million to €800,000. Ultimately, the Supplement left RTN without the protection for which it had originally bargained.
Plaintiff's Ex. 36.
Loan, Art. 6.01, at 9; Art. 6.03, at 10.
See Loan, Art. 6.01, at 9 (stating that RETN shall not incur any Encumbrance against any of its properties, including the Facility); and Plaintiff's Ex. 11 (Assignment of Land Charge) (noting that the mortgage for the Facility is assigned to RTN). See also Petrovic Trial Tr., at 115:9-23, April 30, 2010 (testifying that the Assignment of Land Charge acted as a lien on the Facility).
See Plaintiff's Ex. 11 (Assignment of Land Charge).
Plaintiff's Ex. 30.
Nachef Trial Tr., at 76:21-77:6, October 29, 2009; Plaintiff's Exs. 27, 30.
Plaintiff's Ex. 30.
Plaintiff's Proposed Post-Trial Findings of Fact and Conclusions of Law, D.I. 72, at 32.
Defendants respond that the initial plan was for RETN to purchase and own the Facility. An opportunity arose for RETN to earn a €2.2 million profit by selling the Facility and leasing a portion of the building back to RETN for its operations. As a result, Petrovic entered into a contract to sell the Facility for €4.3 million, which was binding on the parties provided RETN could purchase the Facility by January 15, 2008. Petrovic claims, however, that neither of these opportunities were realized due to RTN's alleged failure to provide the necessary financing and, as a result, RETN lost this potential profit.
Petrovic Trial Tr., at 123:17-124:6, April 30, 2010.
Defendants' Ex. 36.
Id.
Petrovic Trial Tr., at 6:15-8:3, June 3, 2010.
RETN's Financial Information and Obligations to Creditors
Plaintiff contends that RETN and Petrovic failed to provide financial information to RTN in accordance with the terms of the Loan. RTN's representatives asked to see RETN's financials on numerous occasions, beginning in August 2007, but were repeatedly denied access. At trial, Petrovic admitted that he kept no financials for RETN, and therefore could not provide such to RTN. The only records possessed by Petrovic were RETN's bank statements, but Petrovic was not able to identify how RETN's funds were spent even after reference to those records. Petrovic's credibility was further eroded by his admission that at times he withdrew money that RTN had invested in RETN from RETN's bank account to pay for his own personal travel expenses and cash for himself. Specifically, he used $500.00 to pay a bill at a hotel in Las Vegas, he transferred $50,000.00 to an entity he later could not identify, and he took $5,000.00 cash for his own personal use.
Hausauer Trial Tr., at 75:15-22; 76:4-11; 80:8-17, June 4, 2010; Nachef Trial Tr., at 62:17-23; 63:1-12; 67:11-19, October 29, 2009; Popoff Trial Tr., at 77:22-78:11, April 30, 2010.
Petrovic Trial Tr., at 77:13-22, June 3, 2010.
Petrovic Trial Tr., at 8:22-12:6, June 4, 2010.
Petrovic Trial Tr., at 12:7-18, June 4, 2010.
Petrovic Trial Tr., at 12:19-21, June 4, 2010.
Petrovic Trial Tr., at 16:14-19, June 4, 2010.
Plaintiff argues that in addition to siphoning funds for his own personal use, Petrovic utilized RETN as a "shell" to improperly fund several entities he controlled. In 2007, he made two transfers from RETN to two entities with which he was affiliated. Further, RETN's bank statements indicated that amounts were withdrawn on various occasions, but Petrovic could not identify the purpose of the transfer or to whom the funds were transferred. Although Petrovic repeatedly assured RTN that advertising funds were flowing into RETN, these funds were actually being deposited with RTN GmbH. Petrovic moved money between RETN and RTN GmbH to create "phantom" debt obligations for RTN GmbH at the expense of RETN.
See Plaintiff's Ex. 39, for transfers made by RETN on June 28, 2007 to RTN GmbH in the amount of $136,870 and on July 25, 2007 to ACI Beteiligungs GmbH in the amount of $278,400.
Petrovic Trial Tr., at 9:17-14:6, June 4, 2010.
Petrovic Trial Tr., at 33:22-34:3, June 4, 2010.
Plaintiff's Proposed Post-Trial Findings of Fact and Conclusions of Law, D.I. 72, at 28. For example, when RTN GmbH was to become a 60% owner of the Facility, leaving RETN with a 40% interest, Defendants intended to pay for RTN GmbH's ownership interest with RETN's money, which was actually funded by RTN. Id.
In addition, Petrovic executed lease agreements between RETN and other entities in his control, which utilized space in the Facility for which RTN was paying rent. Petrovic caused RETN to incur debt for RTN GmbH's benefit through a Contract for the Digital Satellite Broadcasting of the TV Channel RTN Myestate. While RETN was involved in a contractual relationship with the satellite provider Astra, RTN GmbH (not RETN) was the beneficiary of Astra's services. Finally, RETN made loans of over $1 million to RTN GmbH with Petrovic signing on both sides of the transaction.
Plaintiff's Ex. 59.
Plaintiff's Ex. 57.
Plaintiff's Proposed Post-Trial Findings of Fact and Conclusions of Law, D.I. 72, at 29 (citing Plaintiff's Ex. 57).
Plaintiff's Ex. 2.
In further breach of the Loan, Plaintiff contends that RETN failed to pay its creditors, specifically Astra, on time in accordance with the terms of the Loan. Astra's services were a key element in RETN's business because in order for RETN to broadcast and advertise real estate sales information to potential buyers, it needed to be able to broadcast in Europe via satellite transmission through the use of Astra's services. RETN owed money to Astra for the services it received from October 2007 to March 2008. Although RETN was transferring money out of its account, it failed to pay Astra.
Hausauer Trial Tr., at 80:18-81:15, June 4, 2010.
Plaintiff's Ex. 45.
Plaintiff's Ex. 39.
Defendants claim that plaintiff was always able to access whatever information it needed, including financial information or documents, specifically during meetings in Germany. The person charged with RTN's due diligence, Hausauer, claimed at trial that he never asked Petrovic for such financial information. While Hausauer may not have asked Petrovic for RETN's financials, he repeatedly requested such information from Fey. And RTN representatives requested RETN's financial information on numerous other occasions, such as the September 2007 trip to Munich and in a letter dated December 12, 2007 to Petrovic.
Hausauer Trial Tr., at 75:15-22, June 4, 2010.
Nachef Trial Tr., at 62:17-23; 67:11-19, October 29, 2009; Popoff Trial Tr., at 77:22-78:11, April 30, 2010; Hausauer Trial Tr., at 76:4-11, June 4, 2010.
Plaintiff's Ex. 33.
Defendants claim that the reason they were unable to pay creditors such as Astra was due to RTN's inability to provide sufficient funding. Indeed, defendants blame plaintiff's lack of funding for their ultimate demise and insolvency.
Defendants' Ex. 77.
Opportunities for RETN to Cure Loan Defaults
Damages
Plaintiff's Ex. 33.
Nachef Trial Tr., at 113:17-21, October 29, 2009.
Krzys Trial Tr., at 39:16-40:3, November 16, 2009.
Krzys Trial Tr., at 40:3-6, November 16, 2009.
Krzys Trial Tr., at 72:5-12, November 16, 2009. See Loan, Recitals, at 1 ("[T]he Borrower intends to raise funds to repay the Loan through a German investment fund (the `Fund'), which is an affiliate of the Borrower.").
The "Notar," Dr. Martin Schuck, is a quasi-judicial officer in Germany who serves as escrow agent for, among other things, real estate transactions. Plaintiff's Proposed Post-Trial Findings of Fact and Conclusions of Law, D.I. 72, at 15.
Nachef Trial Tr., at 60:20-22, October 29, 2009.
Petrovic Trial Tr., at 51:5-52:10, June 4, 2010.
Plaintiff further avers, however, that defendants failed to repay the sums advanced on the Loan Expiry Date and that, pursuant to the Loan and Promissory Note, plaintiff is owed the net amount it funded to RETN, which is $3,124,515.75, plus the $1 million Exit Fee, and approximately $412,451.58, representing 10% of the outstanding balance due as of the Loan Expiry Date. After deducting the $1 million returned to RTN by the German courts, the plaintiff's damages total $3,536,967.33. In addition, RTN claims it is owed $1,250.00, representing half of the amount incurred for translation costs related to the September 23rd draft Prospectus utilized at trial. This does not include prejudgment interest or reasonable attorneys' fees, which plaintiff also claims.
Defendants counter that they have suffered harm as a result of RTN's breach under the Loan and are therefore entitled to damages in the amount of $4,422,043.00. This amount represents RETN's unsatisfied balance with Astra, expenses incurred by RETN on RTN's behalf, such as legal fees, travel and other expenses, and RETN's lost profit from its inability to buy and lease-back the Facility, excluding interest.
Defendants' Proposed Post-Trial Findings of Fact and Conclusions of Law, D.I. 71, at 19.
Id. at 18-19.
Court's Finding of Facts
The Court finds that the following facts were established by a preponderance of the evidence at trial.The Creation of RTN GmbH
The Closed End Fund Prospectus
Loan, Recitals, at 1.
Plaintiff's Ex. 25.
Petrovic Trial Tr., at 137:14-19, April 30, 2010. See Loan, Recitals, at 1 (stating how funds would be raised to repay RTN).
Loan, Art. 7.01(g), at 11.
RTN's Obligations to Disburse Funds under the Loan
Purchase of the Facility
Loan, Art. 2.01(a), at 5.
Loan, Art. 2.01(c), at 5.
See Plaintiff's Ex. 62, for payments made by Southern Financial to RETN and its vendor, Astra on April 19, 2007 and April 25, 2007 totaling $250,000; and Plaintiff's Ex. 63, for a payment made by 1st Integrity Investments, LLC to RETN on May 30, 2007 in the amount of $150,000.
Plaintiff's Proposed Post-Trial Findings of Fact and Conclusions of Law, D.I. 72, at 12. See Hausauer Trial Tr., at 81:1-5, June 4, 2010 (indicating that certain investor money went directly to Astra because it was the "single lynch pin of the value" of RETN).
Hausauer Trial Tr., at 71:4-12, June 4, 2010.
Petrovic Trial Tr., at 82:18-86:3, June 3, 2010.
Nachef Trial Tr., at 48:20-49, October 29, 2009; Petrovic Trial Tr., at 25:9-13, June 4, 2010.
The parties were permitted to enter into agreements amending or modifying the Loan. Petrovic took advantage of this provision on August 17, 2007, when he sent a letter to RTN, reducing the loan amount from $5 million to $4 million, thereby reducing the funding for operations from $2.2 million to $1.2 million (because the Facility purchase price of $2.8 million was a fixed amount). The letter stated that RETN was generating cash from its advertising sales and the entire $5 million was no longer needed. Although Petrovic testified that he reduced the loan amount as a "favor" to RTN, the Court finds the reason provided in the August 17, 2007 letter written and signed by Petrovic for the reduction of the Loan more credible. RTN relied on Petrovic's letter as a written amendment to the Loan and transferred $800,000 to the German Notar upon Petrovic's request.
Loan, Art. 8.03, at 12.
Nachef Trial Tr., at 61:13-20, October 29, 2009.
Plaintiff's Ex. 26. See also Nachef Trial Tr., at 60:3-10, October 29, 2009 (stating that the August 17, 2007 letter from Petrovic to RTN indicated RETN had begun to generate capital from the sale of advertising time and as a result, the Loan amount was reduced from $5 million to $4 million).
Petrovic Trial Tr., 26:9-12, June 4, 2010.
See Plaintiff's Ex. 26.
Nachef Trial Tr., at 60:20-22, October 29, 2009.
Petrovic made no mention in his August 17, 2007 letter of problems with funding for the Facility or the urgent need to provide the remaining funds to avoid default. If the Purchase Agreement for the Facility was in danger of termination, Petrovic should and would have notified RTN of this impending termination and would certainly not have reduced the loan amount by $1 million. If RTN was made aware of possible default, it would have requested the remaining funds from one of its investors, James Richards ("Richards"), who testified that he committed to funding the additional $1.8 million under the Loan if necessary and that he had the personal liquidity to do so within forty-eight hours of such request. It was not until December of 2007 that Richards decided not to make an additional investment in RETN, after Nachef warned against it due to RETN's failure to comply with the terms of the Loan on the initial investment.
See Plaintiff's Ex. 26.
See Id.
Richards Depo. Tr., at 8:15-9:7, April 21, 2010.
Richards Depo. Tr., at 10:2-15, April 21, 2010.
Although the Purchase Agreement for the Facility was terminated on February 15, 2008, the Seller did provide the opportunity for a new purchase agreement in a letter to Petrovic dated April 2, 2008. The Seller agreed to conclude a new purchase agreement for the Facility if RTN GmbH would transfer a one-time flat compensation amount of €160,000 by April 15, 2008, conclude a notarized purchase agreement by April 30, 2008, and pay a purchase price of €2 million by June 30, 2008.
Plaintiff's Ex. 46.
Plaintiff's Ex. 46.
Under the Loan, RETN was to use RTN's funds for purchase of the Facility. Only RETN had the right to purchase the Facility. Petrovic, however, drafted a Supplement to the Purchase Agreement on October 10, 2007 without RTN's knowledge. This Supplement permitted RTN GmbH to become 60% owner of the Facility. Yet, Petrovic sought to have RETN pay for RTN GmbH's 60% interest in the amount of €1.2 million so that RTN GmbH was under no obligation to repay the Loan taken by RETN. The Supplement reduced RETN's mortgage on the Facility from €2 million to €800,000 and left RTN without the protection for which it had originally bargained.
Loan, Recitals, at 1.
Loan, Art. 5.04, at 9.
Plaintiff's Ex. 30, at 4.
RETN's Financial Information and Obligation to Creditors
The Loan requires RETN to furnish to RTN "such other information, in such form as [RTN] may reasonably request from time to time." Under these terms, RTN requested RETN's financials on several occasions, beginning in September 2007. During the September 2007 trip to Munich, RTN representatives asked for RETN's financials in person but were refused. In a letter to Petrovic dated December 12, 2007, RTN again requested RETN's financials but received no information. In fact, Petrovic admitted that he did not keep financials for RETN other than bank records created by Petrovic himself. When asked how RTN's funds were being used by RETN, Petrovic could not specifically identify for what the funds were utilized. As a result, RTN had no way of knowing how its funds were being spent to further the business of RETN. Petrovic was a sophisticated businessman and should have kept detailed financial records of RETN's funds and expenses in anticipation of providing such information to RTN as an investor in RETN and as required by the Loan. He admittedly failed to keep such information, rendering him unable to provide it upon RTN's request in breach of the terms of the Loan.
Loan, Art. 5.01(d), at 9.
Hausauer Trial Tr., at 75:15-76:16, June 4, 2010.
Plaintiff's Ex. 2.
Petrovic Trial Tr., at 77:13-22, June 3, 2010.
Petrovic Trial Tr., at 8:22-12:6, June 4, 2010.
Petrovic admitted that on several occasions he utilized money from RETN's bank account for his own personal use. He withdrew $500.00 to pay a bill at the Bellagio in Las Vegas; he transferred $50,000.00 out of RETN's account to an entity he was unable to identify at trial; he withdrew $5,000.00 for his own personal use; and he took several other ATM withdrawals out of RETN's account. Under the Loan, funds provided to RETN by RTN were to be used only for the purchase of the Facility and for the cost of operations. Petrovic's use of RETN's money for his own personal use constituted a breach of the terms of the Loan.
Petrovic Trial Tr., at 12:7-18, June 4, 2010.
Petrovic Trial Tr., at 12:19-21, June 4, 2010.
Petrovic Trial Tr., at 16:14-19, June 4, 2010.
Petrovic Trial Tr., at 102:4-104:14, June 3, 2010.
Loan, Recitals, at 1.
In further breach of the Loan, Petrovic made two transfers in 2007 to two entities with which he was affiliated. At trial, he was unable to identify the purpose of the transfers or to whom the funds were transferred. Petrovic executed lease agreements between RETN and other entities in his control, ACI Vertiebs GmbH, RTN GmbH, and Myestate Expansion Beteiligungs GmbH Co. KG. These entities utilized space in the Facility while RTN was paying the rent. At trial, Petrovic admitted that none of these entities had made payments to RETN for the use of the Facility and RETN's bank statements confirmed this admission.
Petrovic Trial Tr., at 7:7-9:16, June 4, 2010.
Petrovic Trial Tr., at 116:17-19, June 3, 2010.
Plaintiff's Ex. 39.
Petrovic caused RETN to incur debt solely for the benefit of RTN GmbH via the Contract for the Digital Satellite Broadcasting of the TV Channel RTN Myestate. While RETN was the entity that had a contractual relationship with satellite provider Astra and was obligated to pay for Astra's services, RETN was not the beneficiary of those services. Instead, defendants caused RETN to contract with RTN GmbH so that RTN GmbH owned the rights to RTN Myestate but, in reality, RETN was solely responsible for paying a €200,000 deposit and making monthly payments to Astra. RTN GmbH was supposed to pay RETN €1.2 million per year in monthly payments starting in May 2007 for the right to utilize Astra's services, but RETN's bank statements reveal no such payments were made between June and December 2007. Finally, also in breach of the Loan, Petrovic caused RETN to make loans of over $1 million to RTN GmbH with Petrovic signing as both Borrower and Lender. RTN GmbH failed to repay any of these funds from June through December 2007.
Plaintiff's Ex. 27.
Plaintiff's Ex. 2.
Plaintiff's Ex. 39.
Under the terms of the Loan, if RETN failed to pay its creditors, then an Event of Default occurred. RETN failed to pay its most important debt to Astra, for services it received from October 2007 to March 2008. Astra's services were necessary to RETN's operations because in order for RETN to broadcast real estate sales information to potential buyers, it needed to be able to broadcast to Europe and the United Kingdom through use of Astra's services as a satellite provider. By not paying Astra with the funds received from RTN for operations, RETN was undermining the success of its business and rendering itself insolvent in breach of the Loan. RTN provided the necessary funding for operations to RETN, but this money was not used to pay for the critical services provided to RETN by Astra.
Loan, Art. 7.01(i), at 11.
Plaintiff's Ex. 45.
Hausauer Trial Tr., at 80:18-81:15, June 4, 2010.
See Loan, Recitals, at 1 (stating that the purpose of the Loan amount of $5 million is to "secure U.K. satellite broadcasting signal and existing satellite access"). See also Loan, Art. 7.01(i), at 11.
See Plaintiff's Ex. 45.
Opportunities for RETN to Cure Loan Defaults
Witness Credibility
Nachef Trial Tr., at 78:13-79:17, October 29, 2009.
Plaintiff's Ex. 2.
Nachef Trial Tr., at 113:17-21, October 29, 2009. See also Plaintiff's Ex. 35 (stating that RTN was able to secure additional funds in the amount of €1.3 million for the purchase of the Facility provided that certain changes could be made to the Loan).
Krzys Trial Tr., at 39:16-40:3, November 16, 2009.
Krzys Trial Tr., at 40:3-6, November 16, 2009.
Petrovic Trial Tr., at 143:3-144, April 30, 2010.
Petrovic Trial Tr., at 60:5-65:8, June 3, 2010.
Petrovic Trial Tr., at 144:17-145:19, April 30, 2010; 58:10-14, June 3, 2010.
Petrovic Trial Tr., at 122:22-123:2, April 30, 2010.
Petrovic Trial Tr., at 23:19-24:23, June 4, 2010.
Petrovic Trial Tr., at 6:14-12:6, 12:16-18, 16:3-23, June 4, 2010.
Jehl's credibility was undermined by his refusal to speak with plaintiff before trial. Jehl agreed to testify via telephone from Germany but he cut the questioning by Plaintiff short on several occasions and refused to testify regarding the September 2007 English version of the draft Prospectus.
Jehl Depo. Tr., at 43:10-12; 45:1-5; 47:8-9, June 4, 2010; and 23:6; 41:16-17; 61:2-5, July 2, 2010.
Jehl Depo. Tr., at 26:7-28:16, July 2, 2010.
After carefully considering all the testimony, exhibits, and each witness's means of knowledge; strength of memory; opportunity to observe; how reasonable or unreasonable the testimony is, whether it is consistent or inconsistent; whether it has been contradicted; the witnesses' biases, prejudices, or interests; the witnesses' manner or demeanor on the witness stand; and all circumstances that, according to the evidence, could affect the credibility of the testimony, the Court finds the plaintiff's witnesses and version of events more credible.
DEL. P.J.I. CIV. § 23.9 (2000).
Discussion
The Terms of the Loan
Under Delaware law, it is the Court's duty to "construe agreements as they are made by the parties and to give to language that is clear, simple and unambiguous the force and effect which the language clearly demands." The Court cannot make for the parties a better agreement than that which they bargained for and cannot afford protection to a party which the contract does not provide. "A contract is not rendered ambiguous simply because the parties do not agree upon its proper construction." Further, it is "the absence of ambiguity . . . [which leaves] no room for construction."After reviewing the Loan, the Court finds the terms of the Loan to be clear and unambiguous and, therefore, the Court will not entertain extrinsic evidence. Article 2.01(a) of the Loan states that RTN was permitted to make the Loan to RETN in "one or more disbursements during the term of the Loan." RTN and RETN and their representatives were sophisticated parties entering into the Loan who had the opportunity to incorporate a payment schedule if they so chose. Instead, the parties did not specify the amounts of such disbursements or the dates on which such disbursements were due, thereby according RTN significant flexibility in making payments to RETN.
Loan, Art. 2.01(a), at 4-5.
Defendants' contention that RTN was obligated to complete funding by the end of August 2007 is rejected because is it inconsistent with other provisions of the Loan. Specifically, Article 7.02, which allowed RTN to forego payments to RETN and declare the unpaid principal of the Loan, interest accrued and all other amounts owed by RETN, if an Event of Default should occur. Such an Event of Default did occur when defendants "failed to finalize all necessary investment documentation to begin raising the funds to repay the Loan by September 15, 2007." The Loan cannot be interpreted as requiring all funding to be complete by August 2007 because RTN's obligation to fund was expressly contingent upon RETN's performance under the Loan, including finalizing the Prospectus by September 15, 2007.
Loan, Art. 7.01(e), at 5.
Extrinsic Evidence Barred by the Parol Evidence Rule
Delaware courts consistently uphold integration or merger clauses within agreements. Under the parol evidence rule, evidence of prior or contemporaneous agreements that contradict the terms of an integrated and complete writing is inadmissible. Once the parties to an agreement determine the language that reflects their mutual understanding, evidence that suggests a different meaning should not be received.
See Velocity Express, Inc. v. Office Depot, Inc., 2009 WL 2415482, at *7 (Del. Super. 2009) (holding that the agreement at issue was completely integrated and that a subsequent oral agreement was therefore unenforceable); T.P. Inc. of Delaware v. JD's Pets, Inc., 1999 WL 135243, at *5 (Del. Ch. 1999) ("The final contract signed by the parties, by its terms, purports to be a fully integrated agreement."); Tracinda Corp. v. DaimlerChrysler AG, 364 F. Supp. 2d 362, 401 (D. Del. 2005) ("[T]he written documents governing this transaction contradict the oral representations allegedly made . . . and contain integration clauses precluding the parties from incorporating any oral representations into the parties' agreements.").
In re SLM Int'l, Inc., 248 B.R. 240, 247 (Bankr. D. Del. 2000) (citing Restatement (Second) of Contracts § 215 (1981)); Brandywine Shoppe, Inc. v. State Farm Fire Cas. Co., 307 A.2d 806, 808-809 (Del. Super. 1973); Arthur Jordan Piano Co. v. Lewis, 154 A. 467, 469 (Del. Super. 1930).
Mesa Partners v. Phillips Petroleum Co., 488 A.2d 107, 113 (Del. Ch. 1984).
Defendants' assertion that Article 2.01(a) of the Loan is ambiguous and that extrinsic evidence should be admitted is rejected. The Loan is a completely integrated writing, in which Article 8.09 specifically states that "[t]his Agreement supersedes all prior understandings and agreements, whether written or oral, among the parties relating to the transactions provided for herein." This provision is in no way vague or ambiguous. The extrinsic evidence defendants seek to admit, such as Nachef's handwritten notes and cash flow projections, are a product of negotiations that took place prior to signing the Loan. Because these notes and cash flow projections were created before the Loan was signed by the parties, they are superseded by the terms of the actual Loan.
Loan, Art. 8.09, at 13.
In addition, the extrinsic evidence defendants seek to admit does not demonstrate an agreement, or meeting of the minds, between plaintiff and defendants. "[U]nless extrinsic evidence can speak to the intent of all parties to a contract, it provides an incomplete guide with which to interpret contractual language." The extrinsic evidence consists of notes handwritten by Nachef or drafts of documents prepared for RTN's investors. As such, these notes and documents were prepared only for use by RTN and its investors, not RETN. There was no agreement or understanding between the parties regarding these notes and drafts. It is clear that the notes and drafts were only preliminary and were not intended to be integrated into the final terms of the Loan.
SI Mgmt. L.P. v. Wininger, 707 A.2d 37, 43 (Del. 1998).
As previously noted, this Court does not find the language of Article 2.01(a) of the Loan to be ambiguous and, therefore, it does not reach the issue of whether or not any ambiguities should be construed against the drafter of the agreement.
See supra Discussion, at p. 29.
Extensions for the Purchase of the Facility
"[I]t is a condition of each party's remaining duties to render performances to be exchanged under an exchange of promises that there be no uncured material failure by the other party to render any such performance due at an earlier time." In determining whether a failure is material, one factor to consider is "the extent to which the injured party will be deprived of the benefit which he reasonably expected." Further, "[e]ven if the failure is material, it may still be possible to cure it by subsequent performance without a material failure." No party may claim excuse of performance if the other party substantially performed.
Restatement (Second) of Contracts § 237 (1981).
SLMSoft.Com, Inc. v. Cross Country Bank, 2003 WL 1769770, at *13 (Del. Super. Ct. 2003) (citing Restatement (Second) of Contracts § 241).
Restatement (Second) of Contracts § 237 (1981), comment b.
Restatement (Second) of Contracts § 237 (1981), comment d.
Defendants' argument that they are excused from performance under the Loan because RTN breached the Loan first (by not meeting the funding deadline of June 30, 2007 to purchase the Facility) is unpersuasive. The seller of the Facility agreed to numerous extensions of the closing deadline. Therefore, RTN did not fail to perform under the Loan when the initial closing deadline of June 30, 2007 was not met because several extensions of the deadline were made. Defendants were not deprived of any reasonably expected benefit because the seller of the Facility did not enforce the initial closing date of June 30, 2007. Rather, the seller agreed to several extensions at Petrovic's request. In fact, the seller did not terminate the Purchase Agreement until February 15, 2008, at which time defendants had committed several uncured breaches of the Loan.
Defendants' conduct prior to this litigation is at odds with their assertion that RTN breached the terms of the Loan by failing to provide $2.6 million on June 30, 2007. Defendants did not declare RTN to be in default and did not express concern about the funding of the Facility and the potential for termination of the Purchase Agreement. To the contrary, Petrovic sent a letter to RTN on August 17, 2007, amending and restating the Loan to reduce the amount from $5 million to $4 million. Petrovic made no mention in the August 17th letter of RTN breaching the terms of the Loan with regard to the purchase of the Facility. Further, if defendants believed RTN to be in default, they did not provide RTN with an opportunity to cure such default and mitigate losses.
Defendants' argument that their obligation to repay the Loan is excused due to RTN's prior breach is also unavailing. The Loan amount was reduced by Petrovic from $5 million to $4 million in his August 17, 2007 letter to RTN. With this amendment to the Loan in effect, RTN substantially performed its obligations under the Loan in funding approximately $2.87 million by the end of October 2007. Because RTN substantially performed its funding obligations under the terms of the Loan, defendants cannot claim that they are excused from repaying RTN.
This amount of approximately $2.87 million does not include payments made to RETN by Southern Financial on April 19, 2007 and April 25, 2007, totaling $250,000, and by 1st Integrity Investments, LLC on May 30, 2007, totaling $150,000. These payments were made prior to the date of the Loan, (June 27, 2007), and these entities were not parties to the Loan.
Defendants' Breach under the Terms of the Loan
Article 7.01(a) through (i) sets forth such events which are considered "Events of Default" under the Loan. Article 7.02 states that if an Event of Default occurs, the lender (RTN) is under no further obligation to make payments under the Loan and the borrower (RETN) becomes immediately responsible for repaying the funds already disbursed under the Loan. Defendants failed to perform several of their obligations under the Loan, thereby constituting Events of Default and triggering their obligation to repay funds previously disbursed by RTN.
1. Defendants' Failure to Produce Financial Statements
2. Defendants' Failure to Finalize Investment Documentation by the Deadline
Loan, Art. 5.01, at 9.
Petrovic Trial Tr., at 77:13-22, June 3, 2010. As a result of defendants' failure to produce financial records pursuant to discovery requests, they were not permitted to use those same documents to prove their case at trial. See Digiacobbe v. Sestak, 1998 WL 684149 (Del. Ch. 1998) (stating that when documents "are not produced as required by the Rules of Court," the party who fails to produce those documents "must bear the consequences of not being allowed to use them at trial"); Philipbar v. Gourley, 1999 WL 1457019 (Del. Fam. Ct. 1999) (noting that because Husband failed to produce documents pursuant to a court order, he "was not allowed to make further production").
Loan, Art. 7.01(g), at 11.
Under Delaware law, "[a] party asserting an oral modification must prove the intended change with `specificity and directness as to leave no doubt of the intention of the parties to change what they previously solemnized by formal document.'" Defendants' contention that RTN waived the September 15, 2007 deadline and agreed to delay the Prospectus to enable Jehl to incorporate German tax law changes is without merit. Article 8.03 explicitly prohibits any modifications of the Loan terms except if in writing and bars any "implied waivers" by RTN through a course of conduct or otherwise. RTN never agreed to an extension orally or in writing. Further, RTN did not engage in a course of conduct or otherwise that would lead defendants to believe that the Prospectus deadline was implicitly waived.
Continental Ins. Co. v. Rutledge Co., 750 A.2d 1219, 1230 (Del. Ch. 2000) (quoting Reeder v. Sanford School, Inc., 397 A.2d 139, 141 (Del. 1979)).
Loan, Art. 8.03, at 12.
3. Defendants' Assignment of Interest in the Facility to RTN GmbH
Article 5.04 of the Loan states that "[t]he Borrower will use the proceeds of the Loan for the purposes set forth in Section 3.15 hereof." Article 3.15 states that "[t]he proceeds of the Loan shall be used for funding the Borrower's purchase of the Facility. . . ." On October 10, 2007, defendants entered into an agreement (the Supplement) with the seller of the Facility, without RTN's knowledge or consent. The Supplement amends the Purchase Agreement and introduces RTN GmbH as a co-purchaser with RETN, in which RETN possesses a 40% (or €800,000) interest in the base purchase price of the Facility and RTN GmbH possesses a 60% (or €1.2 million) interest. The Supplement is a violation of the terms of the Loan because only RTN had the right to purchase and hold an equity interest in the Facility. As such, RETN and RTN GmbH were not eligible to enter into the Supplement with the seller of the Facility. Further, under the Assignment of Land Charge, RTN GmbH has no obligation to release its majority interest in the Facility to RTN upon defendants' failure to repay RTN.
Loan, Art. 5.04, at 9.
Loan, Art. 3.15, at 7.
Defendants also sought to effect a reduction in the amount of RTN's mortgage from $6 million to €800,000, which represents RETN's share of the purchase price of the Facility. This act was a violation of the terms of the Loan, specifically, Articles 6.01 and 3.14, and constituted a "Material Adverse Effect" under Article 1.01. Defendants claim that such a mortgage reduction could not go into effect without RTN's approval, but there is no reason to believe that defendants intended to obtain RTN's approval because the entire transaction was concealed from RTN from the beginning. Further, the assignment of a 60% interest to RTN GmbH under the terms of the Supplement does not require RTN's approval.
Article 6.01 states that "[t]he Borrower shall not, at any time create, incur, assume or suffer to exist any material Encumbrance on or against any of its properties, including but not limited to the Facility . . ." except as stated in subsections (a) through (e). Loan, Art. 6.01, at 9.
Article 3.14 states that "the Borrower has good title to its properties and assets, free and clear of all mortgages, pledges, liens and other Encumbrances. . . ." Loan, Art. 3.14, at 7.
Loan, Art. 1.01, at 3.
4. Defendants' Structuring of the Fund
Recitals can be used to explain the intended meaning of the operative or granting part of an agreement. The Recitals to the Loan state that "the Borrower intends to raise funds to repay the Loan through a German investment fund, which is an affiliate of the Borrower." In reviewing the Prospectus, RTN discovered that defendants committed two further breaches of the Loan, (in addition to the failure to meet the September 15, 2007 submission deadline), with regard to repaying RTN through the Fund. First, the entity identified as the vehicle for raising capital, Myestate Expansion Beteiligungs GmbH Co., KG, was not an affiliate of RETN and had no contractual obligation to distribute to RETN funds raised for repayment of the Loan. At trial, Petrovic admitted that RTN investors had no recourse against the Myestate Expansion Fund if monies were not paid back under the Loan to RTN.
New Castle Co. v. Crescenzo, 1985 WL 21130 at *3 (Del. Ch. 1985).
Loan, Recitals, at 1.
Petrovic Trial Tr., at 53:10-14, June 3, 2010.
Second, the Prospectus failed to disclose to potential German investors the defendants' obligation to repay RTN. Such non-disclosure constitutes a Material Adverse Effect under the Loan because it involves RETN's financial condition, specifically, its obligation and ability to repay the Loan to RTN. In addition, the Prospectus failed to mention that the parties had agreed to split the proceeds raised from the Fund on an 80/20 basis, pursuant to which eighty cents of every dollar would go to RTN until the Loan was repaid in full, and RETN would retain twenty cents of every dollar raised for further expansion. RETN knew or should have known that RTN was relying upon this 80/20 split as an inducement to fund the Loan. The absence of this financial information from the Prospectus constituted a Material Adverse Effect under the terms of the Loan which triggered an obligation to notify RTN of such change.
Loan, Art. 1.01, at 3.
Loan, Art. 1.01, at 3.
Further undermining defendants' claim is Petrovic's testimony at trial that money from the Fund could not be transferred directly to RTN. Fey testified at trial that it would be "a criminal act" to transfer closed end funds to RTN if this obligation was not disclosed in the Prospectus. It is clear from the testimony of both Petrovic and Fey that RTN could not be repaid from the Fund. Rather, Petrovic's true intentions were revealed when he testified that he planned to repay RTN by purchasing the Facility back from RTN. Petrovic's plan to flip the Facility using money raised from the Fund constituted a breach of the Loan because he did not own the Facility and therefore could not sell it himself. Rather, the title to the Facility was to be held by the German Notar until the Loan was repaid because the building served as collateral to ensure that RTN was reimbursed for its previous funding. As a result, the Facility could not be used as the source of repayment because, in the event of a shortfall, there would be no collateral.
Petrovic Trial Tr., at 43:19-44:2, June 4, 2010.
Fey Trial Tr., at 105:10-106:1, November 16, 2009.
Petrovic Trial Tr., at 59:5-14, June 3, 2010.
5. Defendants' Depletion of the Loan Proceeds and Subsequent Insolvency
Article 7.01(i) of the Loan states that an Event of Default occurs if the Borrower (RETN) becomes insolvent and generally unable to pay its debts. RETN's liabilities exceeded its assets, thereby rendering it insolvent by definition. RETN's insolvency is apparent from its failure to pay its primary vendor, Astra, at least as early as October 2007. As a result of RETN's insolvency, an Event of Default was triggered under the Loan, thereby obligating RETN to immediately repay RTN.
Loan, Art. 7.01(i), at 11.
6. Defendants' Failure to Repay the Loan
Defendants' Counterclaim
RETN's failure to repay any portion of the Loan to RTN does not take into account the €800,000 (approximately $1 million U.S. dollars), which was returned to RTN by order of the German courts on January 15, 2009.
See Loan, Art. 2.07, at 6; Plaintiff's Ex. 19 (Agreement of Guaranty and Suretyship), Art. 1, at 1.
The first component of defendants' counterclaim, alleging lost opportunity damages, lacks merit. Defendants argue that their performance under the Loan is excused because of RTN's failure to perform. However, for a non-breaching party to successfully claim that its performance is excused as a result of the breaching party's failure to perform, there must be an "uncured material failure" of performance. RTN's alleged non-performance of its funding duties with respect to the Facility cannot be deemed material because the Facility was expendable to the defendants. It is clear to this Court that the Facility was not material to the long-term success of Petrovic's business plan because although defendants have asserted a counterclaim for lost opportunity damages, they were, in fact, ready to sell the Facility for a quick profit. Further, Petrovic testified that purchasing the Facility was not critical to the long-term success of his business plan, which was contrary to the initial representations made to RTN in which the building would serve as the headquarters for Petrovic's project. Because the Facility was not material to defendants' business plan and did not have any long-term value to the project, defendants cannot argue convincingly under Delaware law that RTN's alleged failure to fund the Facility's purchase excuses their non-performance under the Loan and justifies an award of breach damages.
Restatement § 237 (1981), comment b. See Restatement § 241 (1981) (describing the circumstances significant in determining whether a failure is material).
Petrovic Trial Tr., at 33:3-6, June 3, 2010.
In addition, Defendants' outstanding debt to RTN is not taken into account and defendants have failed to acknowledge the terms of the Loan which explicitly bar RETN from selling or disposing of its assets. Further, defendants had no entitlement to the proceeds of any sale and, therefore, no claim for damages, because RTN had a first lien position on the Facility and outstanding Loan. Defendants' counterclaim for damages cannot be based upon a sale which clearly breaches the terms of the Loan between RTN and RETN. In addition, the agreement of sale between RETN and RTN GmbH as joint sellers and Sulejman Berisha as buyer was unenforceable because it lacked the required German Notar's seal. Finally, RETN alone has no standing to assert a counterclaim for damages because its co-seller, RTN GmbH, is not a party to the counterclaim or this action.
Loan, Art. 6.03, at 10.
See Defendants' Answer to Complaint and Counterclaim, D.I. 8.
The second component of defendants' counterclaim, alleging fees and expenses incurred by defendants, also lacks merit. Under Delaware law, consequential damages for breach of contract must be reasonably foreseeable. In the present case, defendants' counterclaim for damages cannot be sustained because such damages were not reasonably foreseeable by RTN. Defendants' intent to sell the Facility to a prospective purchaser for profit was not expressed to RTN. Further, RTN was not aware of the expenses, penalties, or other alleged damages defendants' incurred as a result of their own failure to adhere to the covenants expressly set forth in the Loan. In addition, RTN was unaware that Petrovic owed legal fees to his attorneys. Finally, it was not foreseeable that RTN GmbH, a non-party to the Loan, would incur expenses or litigation.
Atwell v. RHIS, Inc., 2006 WL 2686531, at *1 (Del. Super. Ct. 2006), aff'd, 974 A.2d 148 (Del. 2009).
For example, RTN was not aware that defendants had made a deposit with Astra at the time of contracting. Nachef Trial Tr., at 82:9-12, October 29, 2009.
Further undermining defendants' counterclaim for damages is the fact that RTN fully funded the $2.2 million allocated to operations under the original $5 million Loan. Taking into account Petrovic's August 17, 2007 letter to RTN, which reduced the Loan amount from $5 million to $4 million, RTN actually over-funded defendants' operations by $1 million. Defendants' claim for damages as a result of travel expenses incurred by Petrovic similarly has no merit. Petrovic used RTN's money to pay for his travel expenses and as a result, he is not entitled to recoup those expenses because they were funded by RTN, not Petrovic.
Unjust Enrichment
Because this Court deems the Loan an enforceable and unambiguous contract, there is no need to reach plaintiff's alternative legal argument of unjust enrichment.
Conclusion
For all of the foregoing reasons, this Court enters judgment against defendants, RETN and Petrovic, jointly and severally, with damages totaling $4,161,967.32, consisting of $2,874,515.75 disbursed by RTN to defendants; and an Exit Fee of $1,287,451.57. The Court also awards reasonable attorneys' fees and costs. Plaintiff's counsel shall submit an affidavit setting forth such fees and costs within 15 days. Plaintiff's counsel shall also submit a proposed form of order including the amount of interest owed upon the unpaid principal balance of the Note within 15 days.
Petrovic is personally liable because of his designation as Guarantor in the Agreement of Guaranty Suretyship dated June 21, 2007.
This total does not include the cost of attorneys' fees or interest.
This amount consists of disbursements by RTN under the Loan from June 29, 2007 to October 12, 2007, and excludes those payments made on April 19, 2007 and April 25, 2007 by Southern Financial and on May 30, 2007 by 1st Integrity Investments, LLC because these payments were made before the Loan was entered into on June 27, 2007 and neither Southern Financial nor 1st Integrity Investments, LLC were parties to the Loan.
Under Article 2.08 of the Loan, "[i]f the Borrower fails to pay the entire unpaid principal balance of the Note, all accrued but unpaid interest thereon and the Exit Fee to the Lender on the Loan Expiry Date, the Exit Fee shall increase by 10.0% of the unpaid principal balance of the Note outstanding on the Loan Expiry Date." Because defendants failed to pay the entire unpaid principal balance of the Note, interest on that balance, and the Exit Fee to plaintiff on the Loan Expiry Date, the Exit fee of $1,000,000 increased by 10% of the unpaid principal balance of the Note (10% of $2,874,515.75 is $287,451.57). Therefore, the total Exit Fee is $1,287,451.57 (representing the original $1,000,000 Exit Fee plus $287,451.57).
IT IS SO ORDERED.