Opinion
C.A. No. 01C-05-279 SCD, C.A. No. 02C-03-033 SCD
Submitted: August 12, 2002
Decided: November 6, 2002, Corrected: November 8, 2002
Upon Consideration of Defendant Grant Thornton L.L.P.'s Motion to Dismiss or Stay, and Express One Holding Corp.'s and Orchard Express L.L.C.'s Motion to Consolidate
John H. Small, Esquire, David E. Brand, Esquire, William S. Snyder, Esquire, and Scott L. Cole, of Prickett Jones Elliott, Wilmington, DE, attorneys for Alinda H. Wikert and James H. Wikert;
Jesse A. Finkelstein, Esquire, J. Travis Laster, Esquire, and Peter B. Ladig, Esquire, of Richards Layton Finger, Wilmington, DE, and Steven W. Thomas, Esquire, and Mark H. Forrester, Esquire, of Sullivan Cromwell, Los Angeles, CA, for Defendants Express One Holdings Corp. and Orchard Express, L.L.C.;
Donald E. Reid, Esquire, and James G. McMillan, III, Esquire, of Morris, Nichols, Arsht Tunnell, Wilmington, DE, for Defendant Grant Thornton, L.L.P.;
John H. Small, Esquire and David E. Brand, Esquire, of Prickett Jones Elliott, Wilmington, DE, William S. Snyder, Esquire, of Saules, Lidji Werbner of Dallas, TX, and Scott L. Cole, Esquire, of McKool Smith P.C., Dallas, TX, for Third-Party Defendants and Third-Party Counterclaimants The Wisenbaker Wikert Trusts;
Brian J. McLaughlin, Esquire, of Walsh Monzack and Monaco, P.A., Wilmington, DE, and Michael W. Oyler, Esquire, of Reed Weitkamp Schnell Vice PLLC, Louisville, KY, for Third-Party Defendants Consolidated National Corporation, Robert T. Shaw, Robert Thomas Shaw, Jr. Irrevocable Trust, Michelle Shaw, Jerry Rice, Cindy Rice Grissom, Linda Rice, Patricia Gleissner, and Ronald Apple.
OPINION
The above captioned lawsuits, filed in this Court, are two of four lawsuits which have been filed as a result of business dealings involving the sellers, the purchasers, and the auditors of an air cargo business. The Delaware actions were the first ("Wikert action") and fourth ("Holdings action") actions filed. Pending before this Court are two motions.
In the Holdings action, defendant Grant Thornton L.L.P. ("Thornton") has filed a motion to dismiss or stay in deference to similar litigation proceeding in Texas. For the reasons set forth below, the motion to dismiss or stay is DENIED.
Also pending is a motion to consolidate the Wikert and the Holdings actions. In the interest of judicial economy, the motion to consolidate is hereby GRANTED.
DISCUSSION Factual Background
Express One International, Inc. ("EOI") is a Delaware corporation with a principal place of business in Dallas, Texas. EOI is principally engaged in the air-cargo business with regional distribution airport hubs in the southwest and a global network of EOI carrier licenses for private cargo and light passenger transportation. EOI was founded in 1983. When originally created, EOI had a number of investors. James and Alinda Wikert, among others, were the founding owners. The Wikerts controlled the corporation until they sold their remaining shares to the investment group, Express One Holdings Corp. ("Holdings").
James R. Wikert and Alinda Wikert individually and/or jointly own or control a number of aviation related businesses, all based in the Dallas area. Many of the businesses apparently operate out of the hangar adjacent to that owned by EOI. It is alleged that the Wikert-controlled businesses were involved in aircraft engine leasing transactions which inappropriately required EOI to pay for maintenance and installation costs attributable to the Wikert controlled businesses (i.e., EOI would lease engines and EOI would maintain and install the engines though the Wikert affiliates were under contract to do so). It is also alleged that when EOI billed the Wikert affiliates, Mr. Wikert would instruct the staff to write off the charges. It is further alleged that the Wikerts hid assets and inappropriately carried many off balance sheet items that were not reflected in their financial statements. Allegedly, during the 1990's and through to the close of EOI's sale to Holdings, EOI was secretly in poor financial condition.
Aircorp, Inc., Aircorp V, Inc. and, JRW Aviation, Inc.
Holdings is a conglomerate holding company based in California. In 1999, Holdings purchased all outstanding shares of EOI in accordance with terms established in the Stock Purchase Agreement ("Agreement"). To that end, the Wikerts and other sellers received a combination of cash and securities from Holdings, though the Wikerts complain that some disbursements under the escrow agreement have not been made.
Grant Thornton L.L.P. ("Thornton") is a limited liability partnership headquartered in Chicago, Illinois, with offices in cities in twenty-seven (27) states, including one in Dallas, Texas. It is a medium-sized accounting firm that has been auditing and issuing opinions for EOI in Texas since the early 1990's. Every year since, Thornton has apparently issued an unqualified opinion as to EOI's financial position. When Holdings decided to purchase EOI, Thornton was called upon to furnish interim financial statements in accordance with the Agreement for the purpose of Holdings review. Thornton allegedly prepared the final statement of account and balance sheet value so that Holdings could finalize its decision and forward an accurate offer price for outstanding EOI shares. The acquisition transaction was consummated.
Holdings contends that after the acquisition it discovered that the financial situation of EOI was worse than represented. Holdings secured an independent audit of the EOI statements. This independent audit not only reviewed the interim and final statements relied upon by Holdings in the EOI acquisition, but it also included all statements during the prior decade in which Thornton had conducted audits for EOI and issued unqualified opinions. Holdings claims that accounting shenanigans related to aircraft engine leases and other off balance sheet activities were not discovered (or in the alternative were deliberately hidden) by Thornton. EOI is now insolvent.
At the time the motions under consideration were filed there were four pending actions: (1) the Wikert action against Holdings in Delaware for damages and declaratory judgment on the Agreement, (2) the EOI action and shareholders derivative action against the Wikerts in Texas for breach of fiduciary duty and against Thornton for malpractice in audits 1990 to present, (3) Holdings action against Thornton in Texas for accounting malpractice, and (4) the Holdings action against Thornton in Delaware with essentially the same allegations as in action (3). An explanation of each, as captioned, follows.
The first action, filed May 31, 2001 — Delaware Superior Court ("Wikert action")
Alinda H. Wikert, and James R. Wikert, Plaintiffs v. Express One Holdings Corp., and Orchard Express L.L.C., Defendants and Counterclaimants.
Express One Holdings Corp., and Orchard Express L.L.C., Third-Party Plaintiffs, v. The Wisenbaker Wikert Trusts, Consolidated National Corporation, Robert T. Shaw, Robert Thomas Shaw, Jr. Irrevocable Trust, Jerry Rice, Cindy Rice Grissom, Linda Rice, Patricia Gleissner, and Ronald Apple, Third-Party Defendants.
This is a declaratory judgment action brought by the Wikerts (previous owners/sellers of EOI) to enforce payment of certain purchase monies from escrow pursuant to an escrow contract integrated into the Agreement. This Court has jurisdiction because of a forum clause in the Agreement.
See Wikert's Complaint, C.A. No. 01C-05-279.
Plaintiffs contend that an acquisition transaction was completed requiring the defendant's to (i) pay a specified sum of cash upon closing, (ii) pay $3.0 million in cash into escrow pursuant to the Agreement, (iii) transfer a specified sum in promissory notes, and (iv) repay specified obligations of the Wikerts company, EOI, at closing. Absent a notice of dispute, plaintiffs and the other sellers were to receive a distribution from the escrow account on March 15, 2001. To date, the money has not been distributed.
On March 14, 2001, Holdings sent Sellers a letter citing five specific breaches of the Agreement and announcing that the escrow was frozen. Plaintiffs seek declaration under the Agreement that they are entitled to the escrowed funds.
Specifically, Holdings and Orchard Express L.L.C. aver that the interim balance sheets provided them by plaintiffs/sellers contain accounting misstatements. Defendants claim as follows: failure of the balance sheet to follow representation warranty in clause 4.06 of the Stock Purchase Agreement; an inadequate allowance for doubtful accounts to comply with GAAP standards in breach of clause 4.06; unrecorded liabilities held off balance sheet breaching sections 4.06 and 4.20; failure to adequately depreciate certain aircraft assets until after the transaction, artificially inflating their value in breach of section 4.06 and GAAP principles; failure to accurately account for certain off-wing engine lease return liabilities in violation of sections 4.06 and 4.20 of the Stock Purchase Agreement.
Defendants responded on December 17, 2001, with a counterclaim and third-party claim. The counterclaim against plaintiffs is for (1) fraud, (2) breach of contract and the implied warranty of good faith and fair dealing, and (3) unfair business practices, as they relate to the entire transaction as accomplished by the Agreement. Defendants seek rescissory, compensatory, and punitive damages. Defendants third-party action merely joins as allegedly complicit, all the original owners and/or sellers of EOI.
The second action, filed December 20, 2001 — Texas, District Court of Dallas County, E-101st judicial district ("EOI action") Express One International, Inc., Plaintiff, v. Alinda H. Wikert, James R. Wikert, Aircorp V, Inc., JRW Aviation, Inc., Grant Thornton L.L.P., and DOES 1-20, Defendants.
This is a derivative action filed in Texas on December 20, 2001, on behalf of EOI shareholders alleging breach of fiduciary duties and fraud against the Wikerts and various companies owned or controlled by the Wikerts. Additionally, the action seeks recovery against Thornton for losses associated with accounting malpractice and failure to discover the breaches of fiduciary duty leading to the alleged pilfering of corporate assets for periods prior to and leading up to engagement letters associated with EOI's acquisition, through December 17, 1999, but not after the acquisition of EOI by Holdings.
The third action, filed February 28, 2002 — Texas, District Court of Dallas County, L-193rd judicial district
Express One Holdings Corp., Plaintiff, v. Grant Thornton, L.L.P., Defendant.
This action has been dismissed in favor of the following identical action filed in Delaware.
The fourth action, filed March 5, 2002 — Delaware Superior Court ("Holdings action")
Express one Holdings Corp., Plaintiff, v Grant Thornton, L.L.P., Defendant.
This is an action by Holdings, against EOI's accountant, Thornton, alleging that Holdings justifiably relied upon inaccurate interim and final financial statements associated with the Agreement and sale of EOI to Holdings. Holdings alleges it is entitled to damages as a third-party beneficiary of the audit performed by Thornton.
Thornton's Motion to Dismiss or Stay
This motion has been mooted by the nonsuit taken by Holdings of the duplicate action in Dallas, Texas, on June 26, 2002. The motion is therefore DENIED.
Express One Holding's and Orchard Express L.L.C.'s Motion to Consolidate
Having declined to dismiss or stay the Holdings action, I turn to the pending motion to consolidate the Wikert action and the Holdings action, as both are currently pending in Delaware. It appears that these two separate actions have at their nexus the Agreement, and involve actions and/or transactions that surround the Agreement. Therefore, it is appropriate and in the best interest of judicial economy that these actions be consolidated, at least for pre-trial purposes. Therefore, Holdings motion to consolidate C.A. No. 02C-03-033 SCD and C.A. No. 01C-05-279 SCD is hereby GRANTED. The cases shall proceed under the number of the earlier filed Wikert action, Civil Action No. 01C-05-279 SCD.
The consolidation of two civil trials is ultimately within the discretion of the Superior Court. See Super. Ct. C. R. 42(a); see e.g. Union Mutual Life Insurance Co. v. Dewey, 270 A.2d 833 (Del.Super. 1970), Earl D. Smith, Inc. v. Carter, 2000 WL 972825, at *1 (Del.Super.).
IT IS SO ORDERED.