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Hettinger v. Kleinman

August 17, 2010


The opinion of the court was delivered by: Pitman, United States Magistrate Judge


I. Introduction

This action arises out of plaintiffs' sales for and investment in defendants' failed business venture. Plaintiffs seek unpaid commissions pursuant to an alleged agreement among plaintiff PDH Associates, LLC and defendants Noel and Reid Kleinman. Plaintiffs also seek the return of amounts Hettinger invested in Alpha Beauty Distributors, Inc. alleging that defendants are guilty of fraud and breach of contract.

The parties consented to my exercising plenary jurisdiction over this matter pursuant to 28 U.S.C. § 636(c), and the matter was tried before me, without a jury, on January 25 through 27, 2010. Based on the testimony and other evidence offered at trial and the parties' pre- and post-trial submissions, I make the following findings of fact and conclusions of law.

II. Findings of Fact

A. The Parties and Their Relationship

1. Plaintiff, Peter Hettinger, is a resident and citizen of Pennsylvania (Joint Pre-Trial Order at ¶ 1; Supplement to Joint Pretrial Order at ¶ a(1)).

2. Hettinger is the sole member of PDH Associates, LLC ("PDH"), a limited liability company with a principal place of business in Pittsburgh, Pennsylvania (Supplement to Joint Pre-trial Order at ¶¶ a (2)-(3)). PDH was formed on June 20, 2008 (Tr.*fn1 134:6-8, 242:25-243:17).

3. Defendants Noel and Reid Kleinman reside in and are citizens of New York (Joint Pre-Trial Order at ¶ 1; Supplement to Joint Pretrial Order at ¶¶ a(4)-(5)). Noel Kleinman is Reid Kleinman's father (Tr. 16:25-17:2).

4. Defendant Alpha Beauty Distributors, Inc., ("Alpha Beauty Distributors"), is a New Jersey corporation formed by Reid Kleinman on January 8, 2008 (Supplement to Joint Pretrial Order at ¶ a(11)).

5. Hettinger became acquainted with the Kleinmans in the late 1990s when he was the manager of health and beauty care for the Stop & Shop supermarket chains (Tr. 7:7-8:17, 145:19-23, 380:23-381:4). A buyer for Stop & Shop who had met the Kleinmans at a trade show introduced them to Hettinger (Tr. 9:13-16; 146:19-147:5; 380:23-381:4).

6. The Kleinmans sold "professional hair care products," i.e., hair care products that are generally made for hair salons, to grocery stores and pharmacies (Tr. 8:18-9:5, 379:17-23). At that time the Kleinmans sold products for Belco Distributors (Tr. 9:22-24). All commissions that the Kleinmans earned from Belco were paid to Allstate Beauty Products, a corporation formed by the Kleinmans (Tr. 378:8-24).

7. Soon after Hettinger met the Kleinmans, Stop & Shop began buying from Belco (Tr. 9:13-16; 147:24-148:2).

8. After he left Stop & Shop in 2005, Hettinger used or recommended the Kleinmans to Meijer, Inc. and Giant Eagle, two other supermarket chains where he was employed (Tr. 10:13-17; 12:13-20; 15:11-17; 150:3-12). Hettinger left Giant Eagle in December 2006 (14:21-24).

B. The Independent Contractor Agreement

9. In approximately April 2007, Hettinger and the Kleinmans began to discuss the prospect of Hettinger selling for a company that the Kleinmans were forming (Tr. 16:10-24, 390:1-14).

10. On July 17, 2007, Hettinger, on behalf of PDH and the Kleinmans, on behalf of Alpha Group, Inc., ("Alpha Group"), d/b/a Alpha Beauty signed a document entitled "Independent Contractor Agreement" whereby PDH would act as a sales agent to Alpha Group in exchange for three percent of "net paid invoices, for products sold . . . through PDH's efforts . . ." (Supplement to Joint Pretrial Order ¶ a(9); PX 1).

11. Alpha Group was incorporated in Florida in January 2006 by Raimondas Talentas (PX 2). According to Noel Kleinman, Alpha Group was a company based in Florida that distributed professional hair care and other products to wholesalers (Tr. 514:25-516:3).

12. There is no evidence in the record that Alpha Beauty is registered as a fictitious name for Alpha Group.

13. In May 2007, Noel Kleinman incorporated Alpha Wholesalers, Inc., ("Alpha Wholesalers"), (Tr. 384:15-22; PX 29). According to Noel Kleinman, Alpha Wholesalers was formed because Manny Daskos, the owner of Alpha Group wanted to create a separate business that sold hair care products to retailers, as opposed to other wholesalers (Tr. 386:19-387:8).

14. Alpha Beauty is registered as a fictitious name for Alpha Wholesalers (PX 29).

15. As of July 2007, the Kleinmans referred to the entity on whose behalf they signed as "the Florida business" and represented to Hettinger that they each owned 40% of such a business (Tr. 25:14-26:22).

16. Noel Kleinman testified that he and his son began to work with Alpha Group in March or April of 2007, that he became the President of Sales of Alpha Group and that he and his son owned approximately four percent of the company's shares (Tr. 383:10-11, 385:1-386:1-3). He also testified that he was authorized by Alpha Group to enter into the Independent Contractor Agreement on its behalf (Tr. 391:2-4). At his deposition, however, he testified that although he thought that Alpha Group was a part of Alpha Wholesalers and that Alpha Group, d/b/a Alpha Beauty "had to do with" Alpha Wholesalers, he "never had any responsibility for" Alpha Group, had no affiliation with Alpha Group, and to his knowledge "was never authorized to do or engage in any business transactions on behalf of" Alpha Group (Noel Kleinman Dep. 14:24-16:12, 32:16-19). Noel Kleinman acknowledged at trial that he had given this testimony (Tr. 428:13-24, 429:14-23, 432:19-25). Based on his demeanor at trial, this inconsistent testimony and the lack of any other evidence that Noel Kleinman was authorized to enter into the Independent Contractor Agreement, I credit Noel Kleinman's earlier testimony and find that he was not authorized to enter into the Independent Contractor Agreement on behalf of Alpha Group.

17. Reid Kleinman testified at trial that he and his father were associated with Alpha Group (Tr. 514:25-515:3) but upon being shown the certificate of incorporation for Alpha Group, testified that he had no authority to act on behalf on such an entity (Tr. 541:10-21). At his deposition, Reid Kleinman testified that he knew he was not associated with Alpha Group because he did not recognize the name of the incorporator or the address listed on Alpha Group's certificate of incorporation (Reid Kleinman Dep. 23:8-24:13). The Kleinmans argue that Reid Kleinman cannot be expected to recognize the incorporator or address of Alpha Group because he did not become associated with Alpha Group until 2007 and "was not an authority on Alpha Group" (Defendants Noel Kleinman's and Reid Kleinman's Proposed Findings of Fact and Conclusions of Law, ("Kleinmans' Post-Trial Mem."), at Findings of Fact ¶ 27). Nevertheless, given the absence of any evidence that Reid Kleinman had authority to contract on behalf of any entity called Alpha Group, I find that he had no authority to enter into the Independent Contractor Agreement.

18. After the agreement was signed, Hettinger initially made sales for Alpha Wholesalers (Tr. 24:20-25:13, 26:25-27:10, 391:21-392:3). Although, under the agreement, Hettinger was to act as a sales agent for Alpha Group, Hettinger discovered after commencing this action that he did not actually sell products for Alpha Group (Tr. 20:12-16). Indeed, Noel Kleinman testified that Hettinger actually sold for Alpha Wholesalers from the date of the Independent Contractor Agreement until approximately December 2007 (Tr. 391:13- 392:1). After Alpha Beauty Distributors was incorporated on January 8, 2008 Hettinger sold products for Alpha Beauty Distributors until June 20, 2008 (Tr. 256:20-257:2, PX 118, 119).

19. When making sales, the Kleinmans and Hettinger represented themselves at all times as acting on behalf of Alpha Beauty (Tr. 99:16-23).

20. On May 14, 2008, at Hettinger's request, Reid Kleinman sent Hettinger a spreadsheet showing that Hettinger had helped procure a total of $1,192,586.53 in sales as of that date (Tr. 91:13-92:25; PX 4,5,37).

21. Hettinger responded that the figure did not reflect all amounts purchased by the distributor C&S from Alpha Wholesalers, and was $827,687.34 short (Tr. 95:20-96:9, 97:18-98:9; PX 6).

22. Based on those adjusted sales figures, Hettinger contends that his total sales as of May 2008 were $2,020,273.86 and the total amount due to him under the Independent Contractor Agreement was $60,608.21 (Tr. 97:20-98:13; PX 6).

23. Hettinger testified that approximately $827,000 of the sales on which he earned commissions were through Alpha Wholesalers and the remainder were through Alpha Beauty Distributors (Tr. 255:25-257:2). $2,020,273.86 less $827,000 equals $1,193,273.86.

24. Hettinger was paid $10,000 by Alpha Beauty Distributors in commissions (Supplement to the Pretrial order ¶ a(12)-(13)).

C. Alpha Beauty Distributors and the Letter Agreement

25. In November 2007, the Kleinmans told Hettinger that they wanted to buy out what they had referred to as the "Florida Company" and form a new entity in New Jersey and asked for Hettinger's advice regarding the terms of the agreement (Tr. 27:11-28:22). By December 2007 and at the Kleinmans' request, Hettinger was creating financial projections for the new company (Tr. 29:20-32:8; PX 8, 9 and 15).

26. To assist in preparing these projections, the Kleinmans provided Hettinger with information about past sales by Alpha Wholesalers, told him which suppliers they would be able to do business with and when, how much these suppliers sold and what costs the new company could expect to incur (Tr. 30:7-21, 447:2-12). The Kleinmans also told Hettinger that they anticipated sales at thirty-two or thirty-three percent profit margins (Tr. 30:7-21, 253:21-254:7). The Kleinmans and Hettinger discussed this information over the phone and by e-mail; Hettinger revised his projections based on input from the Kleinmans (Tr. 447:13-448:7).

27. In mid-December 2007, the Kleinmans asked Hettinger if he wanted to invest in their new business (Tr. 33:17-25). In an e-mail to the Kleinmans dated January 14, 2008, Hettinger stated that he would be "willing to invest as an equity partner" if the business could "line up the balance of the million in financing it looks like we will need," and that otherwise "we won't make it past probably August of 08" (PX 10). According to Hettinger, the $1 million referenced in the e-mail was in addition to existing commitments of $250,000 from the Kleinmans, $50,000 from Thierry Wizman, Reid Kleinman's brother-in-law and $200,000 from Hettinger (Tr. 35:12-36:23, 271:16-17, 272:25-273:3). In an e-mail to the Kleinmans on the same day, he attached financial projections and states that it "[l]ooks like we could barely squeeze by with $1.5 million in equity if had no safety net" (PX 11).

28. By January 20, 2008, Hettinger had solicited his father, father-in-law, brother and two other individuals to invest in the business and had approached PNC bank about potential financing (Tr. 173:17-174:15).

29. Hettinger also testified that at the beginning of January the Kleinmans informed him that their cousin, Bebert Azran, would contribute $500,000 in equity and would probably invest another $250-300,000 in the business (Tr. 37:22-38:14).

30. On January 17, 2008, the Kleinmans had a meeting with Merchants Factors about financing the new business. After the meeting, the Kleinmans called Hettinger, and Reid Kleinman reported to Hettinger that Azran committed to making an equity investment of $1 million dollars, $500,000 of which would be held by Merchants Factors as collateral for financing the business*fn2, in exchange for sixteen percent of shares; according to Reid Kleinman, Azran had signed a personal guarantee, as well as given Merchants Factors a lien against five of his companies as security for the loans (Tr. 42:17-43:14, 44:1-5). He also told Hettinger that the Kleinmans had both signed personal guarantees secured by their homes (Tr. 43:2-7). Hettinger communicated this information to his father in an e-mail of the same date, and then forwarded the same e-mail to the Kleinmans, stating, "Please look this over and let me know if I mis-stated anything?" (PX 12).

31. In fact, Azran never committed to putting one million dollars into Alpha Beauty Distributors (Tr. 290:6-7). Rather, he and Wizman together agreed to lend $250,000 to Alpha Beauty Distributors, $200,000 of which was to be retained by Merchants Factors as cash collateral (Tr. 286:6-287:9; PX 13, 77). In addition, Azran was the principal of only two companies (Tr. 290:10-15, 416:2-18)

32. Azran testified that in late 2007 he began discussing an investment in Alpha Beauty Distributors with the Kleinmans (Tr. 272:3-274:11). At one meeting in particular the Kleinmans told Azran that Hettinger was willing to invest $500,000 in the company (Tr. 279:12-24).

33. The Kleinmans never executed guarantees secured by their homes. Noel Kleinman's residence was already mortgaged as of January 2008. Reid Kleinman's apartment was in his wife's name and he lacked the authority to grant a mortgage (Tr. 416:21-417:6).

34. Nevertheless, According to Hettinger, Reid Kleinman confirmed the facts set forth in Hettinger's January 17 e-mail later that evening, and the Kleinmans never corrected any statement in the e-mail (Tr. 47:25-48:17).

35. Reid Kleinman testified that he spoke to Hettinger by telephone and corrected the statements in his e-mail "point by point" (Tr. 536:24-537:18). Noel Kleinman also testified that he informed Hettinger of the e-mail's inaccuracy in a telephone call (Tr. 420:1-7). In their depositions, however, neither of the Kleinmans recalled correcting the information in the e-mail (Reid Kleinman Dep. 67:3-6; Noel Kleinman Dep. 78:24-79:5). I do not credit the Kleinmans' trial testimony on this matter because it is inconsistent with their previous testimony, and no explanation was offered for this inconsistency.

36. Noel Kleinman's 2007 tax return shows a $69,700 loss from All State Beauty (PX 53). Noel Kleinman did not disclose this loss to Hettinger prior to Hettiger's investment in Alpha Beauty Distributors (Tr. 438:6-440:4). Noel Kleinman testified that despite this reported loss, the Kleinmans actually earned $100,000 from Alpha Wholesalers in 2007, but Alpha Wholesalers refused to pay them (Tr. 506:15 - 507:15). In February, 2008, however, Alpha Beauty Distributors purchased $1,395,462.90 worth of inventory from Alpha Wholesalers (PX 28). Noel Klainman's explanation for why Alpha Beauty Distributors bought over $1 million in inventory from an entity that refused to pay them $100,000 was unconvincing. Specifically, he testified that Alpha Wholesalers was the only entity that could supply them with inventory quickly (Tr. 507:16-18).

37. At some point after January 20th, 2008, the terms of Hettinger's investment in Alpha Beauty Distributors were finalized. Noel Kleinman, Reid Kleinman, and Robert Alfano would receive twenty percent of shares, Azran would receive sixteen percent of shares, Hettinger would receive twenty percent of shares as a partner in the business, and an additional 3.2 percent to reflect his $200,000 investment (Tr. 50:20-51:25).

38. Hettinger was supposed to meet all of the other investors in New York prior to investing in Alpha Beauty Distributors, but this meeting never took place. Instead, on January 28, 2008, he agreed to make an immediate $200,000 payment because Alpha Beauty Distributors was receiving telephone calls from customers complaining that if they didn't receive money owed to them they would look for another supplier (Tr. 53:9-22).

39. Along with his $200,000 check, Hettinger enclosed a letter ("Letter Agreement") stating that he was investing "prior to an acceptable 'operating agreement'" for the purpose of paying amounts owed to BI-LO, LLC and Bruno's Supermarkets and that if the parties did not agree on an operating agreement Hettinger's investment would be "returned immediately upon request" with ten percent annual interest. The Letter Agreement contains a signature line for Noel Kleinman as President of Alpha Beauty Distributors (PX 16).

40. Hettinger testified that he spoke with Noel Kleinman about the letter both before and after he sent it and that Noel Kleinman expressed agreement with its terms. He also testified that after he sent the letter, Noel Kleinman told him that he would sign and return it to him, but never did so (Tr. 58:23- 59:12). The Kleinmans did, however, cash Hettinger's check (Tr. 59:13-14; PX 17).

41. The amounts Alpha Beauty Distributors owed to BiLO, LLC and Bruno's Supermarkets were paid (Tr. 411:17-22).

42. On February 19, 2008, the Kleinmans sent Hettinger a draft shareholder's agreement (PX 19). This agreement gave Hettinger and Azran only eight percent of shares each (PX 19). Upon receiving this agreement, Hettinger called Noel Kleinman and informed him that these were not the terms they had discussed (Tr. 64:16-65:1). Noel Kleinman replied that adjustments to the original terms needed to be made (Tr. 65:2-6). Hettinger subsequently had his attorney review the agreement, and he brought fifteen or sixteen issues to Reid Kleinman's attention. Chief among these issues were inadequate corporate checks and balances. In particular, Hettinger wanted Azran or himself to have access to corporate accounts (Tr. 65:11-65:18, 66:16-24). The Kleinmans told Hettinger that his proposed changes would be difficult to implement (Tr. 65:16-20, 66:25-67:5).

43. Hettinger never received any other drafts of the shareholder agreement (66:25-67:5).

44. On May 22, 2008, pursuant to Reid Kleinman's request on May 8, 2008, Hettinger sent the Kleinmans a list of his concerns regarding the shareholder agreement (Tr. 88:18-89:18; PX 117*fn3 ).

45. On February 1, 2008, Noel Kleinman sent Hettinger a personal guarantee in favor of Merchants Factors (PX 106). Reid Kleinman informed Hettinger that he had to sign the guarantee in order to become a partner (Tr. 210:17-211:4). Hettinger told the Kleinmans, in an e-mail of the same date, that he would not sign the guarantee because it could subject him to liability for the full amount of debt to Merchants Factors and gave Merchants Factors the power to change the terms of the guarantee at will. He further stated that if Merchants Factors required him to sign the guarantee he wouldn't "be able to be a partner or I guess even an equity investor?" (PX 107).

46. On February 22, 2008, BI-LO, LLC contacted Hettinger seeking payment of Alpha Beauty Distributors' debt to it (PX 39). Hettinger forwarded this e-mail to Reid Kleinman and suggested that he take the necessary funds out of the operating account (Tr. 71:15-16, 72:6-13). Reid Kleinman responded that there was no money in the operating account because Azran had only contributed $500,000 to the business (Tr. 72:14-17). Reid Kleinman stated that Azran would invest the remaining $500,000 soon (Tr. 74:23-75:12).

47. Hettinger attempted to set up a meeting with the Kleinmans, Alfano and Azran in March 2008 (PX 20). Noel Kleinman told him that Azran was unavailable because he was at a trade show on the west coast (Tr. 73:2-74:13). Hettinger made a second attempt to meet with Azran in March 2008 and was again told that Azran was on the west coast (Tr. 102:7-15).

48. On April 6, 2008, Hettinger sent an e-mail to the Kleinmans stating that he no longer wished to invest in Alpha Beauty Distributors because (1) he felt "too far removed from the day-to-day details" because he lived in Pittsburgh and the business was in New Jersey, (2) he had concerns with the shareholder's agreement, and (3) the Kleinmans had made inaccurate statements regarding Azran's investment. He also stated that he had requested the return of his funds approximately one month prior and that the "target date" for the return of his money was April 17, 2008 (PX 21).

49. On April 23, 2008, Hettinger met with the Kleinmans in the airport in Birmingham, Alabama after a meeting with a customer (Tr. 82:1-9). Noel Kleinman was supposed to bring the signed Letter Agreement, but instead presented Hettinger with a loan agreement (Tr. 82:1-25). The Kleinmans encouraged Hettinger to sign the agreement and told him that it was the same agreement they had used for other investors (Tr. 83:18-84:6). The loan agreement was dated January 8, 2008, listed Hettinger as the lender, and $200,000 as the loan amount (PX 23).

50. Hettinger responded that he had made an equity investment and was not interested in loaning money to the Kleinmans (Tr. 83:24-84:1). He sent an e-mail to that effect later that day which also reiterated his demand for the return of his investment (Tr. 87:13-88:6; PX 24).

51. Based on the Kleinmans' statement that other investors had signed loan documents, Hettinger e-mailed the Kleinmans a few days later asking if Azran and the other investors had, in fact, made equity ...

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