United States District Court, S.D. New York
THOMAS W. CHARRON, JR., Plaintiff,
SALLYPORT GLOBAL HOLDINGS, INC., et al., Defendants
For Plaintiffs: Brian A. Glasser, Esq., Bailey & Glasser, LLP, Charleston, WV; Athanasios Basdekis, Esq., Bailey & Glasser, LLP, Morgantown, WV; James B. Perrine, Esq., Bailey & Glasser, LLP, Montgomery, AL.
For Defendants: Brian P. Waagner, Esq., Elizabeth G. Leavy, Esq., Thomas F. Rath, Esq., Michael Gatje, Esq., Husch Blackwell LLP, Washington, DC; Daniel P. Jaffe, Esq., Omri E. Praiss, Esq., Husch Blackwell LLP, St. Louis, MO.
AMENDED OPINION & ORDER
WILLIAM H. PAULEY III, UNITED STATES DISTRICT JUDGE.
This breach of contract action arises out of a business divorce. For many in the service of their country, terrible sacrifices have been exacted in Iraq and Afghanistan, For others, including Plaintiff Thomas W. Charron, Jr. and Defendant John P. DeBlasio, those armed conflicts presented lucrative opportunities. Just how lucrative is put into stark relief by this case. The two primary players in this lawsuit grew a startup government contractor into an enterprise with thousands of employees providing mission-critical logistical support to Government operations abroad and generating annual revenues in the tens of millions of dollars.
While their business boomed, animosity between the two abounded, leading to an agreement in which DeBlasio bought out Charron. But that deal had a catch: if DeBlasio sold the company within one year at a sufficient price, Charron got to share in the proceeds of the sale. That provision is the primary subject of this lawsuit. Also at issue, Defendant Sallyport Global Holdings, Inc. counterclaims that Charron misappropriated funds as his transaction with DeBlasio closed. Following a three-week bench trial, this Court makes the following findings of fact and conclusions of law pursuant to Federal Rule of Civil Procedure 52.
It is little surprise the two main players in this case ended up as military contractors. Both Charron and DeBlasio graduated from the United States Military Academy at West Point. After seven years of active duty, Charron left military service and earned an MBA at the University of North Carolina. (Tr. 403-04 (Charron). Thereafter, he held a number of positions in the high-tech industry before founding Defendant Sallyport Global Holdings, Inc. (SGH). Charron started SGH as a sole proprietorship in 2003 and funded it with a $100, 000 home equity loan. (Tr. 403, 504--06 (Charron).) DeBlasio left military service as a lieutenant colonel after 21 years of active and reserve duty. (Tr. 220-21 (J. DeBlasio).) While a reservist, he spent several years in executive positions in three different divisions at General Electric. (Tr. 221 (J. DeBlasio).)
In January 2004, Charron and DeBlasio were introduced to each other in Iraq by another West Point graduate. (Tr. 222 (J. DeBlasio); 404 (Charron).) They met again in April and began working together, utilizing their networks of contacts in Iraq. (Tr. 222 (J. DeBlasio).) Their initial collaboration was successful, and later in 2004, Charron offered DeBlasio a 50% equity interest in his fledgling enterprise. (Tr. 407 (Charron).) DeBlasio accepted Charron's offer of sweat equity. Under their operating agreement, Charron was the chief executive officer, and DeBlasio served as president. (Tr. 504-06 (Charron)), 1868 (stipulations of fact).) Each owned half the company until December 2010. (Tr. 1868-69 (stipulations of fact).)
As the United States Government's involvement in Iraq and Afghanistan escalated, SGH's logistics business grew exponentially. With Charron and DeBlasio at the helm, SGH was hard-wired into the Department of Defense's military operations. SGH provided facility maintenance and logistical support to the United States Government and its contractors. (Tr. 222 (J. DeBlasio); 404-06 (Charron).) It dealt primarily with " contingency operations, " providing short-term services abroad, principally in Iraq and Afghanistan, and more recently, in South Sudan. (Tr. 143, 220-22, 225-26, 235-36, 296 (J. DeBlasio); 479-80 (Charron); Ex. 68.) Many of its contracts were " no-bid, " cloaked in secrecy, and tied to Operation Iraqi Freedom or Operation Enduring Freedom (Afghanistan). (Tr. 225-226 (J. DeBlasio).) Those contracts involved great risks: a number of SGH employees were killed, including 19 who were pulled off a bus and executed on the side of the road. (Tr. 235 (J. DeBlasio).) In DeBlasio's words, " it was one of those businesses where people had to really swallow hard to get the hairball down." (Tr. 235 (J. DeBlasio).) SGH's contracts ran the gamut from fire services at military installations to housing compounds in Mansour. (Tr. 143 (J. DeBlasio).)
SGH is the parent company of various subsidiaries. Among them, Sallyport Global Services (SGS) is a Bermuda entity wholly owned by SGH. (Tr. 132 (J. DeBlasio).) Sallyport Support Services (SSS) is a Florida entity also owned by SGH. (Tr. 118-19 (J. DeBlasio).)
As the drawdown in Iraq began in the fall of 2009, Charron and DeBlasio tried to sell their company. (Tr. 224-25 (J. DeBlasio); 1869 (stipulations of fact).) The motivation to sell SGH was driven, at least in part, by growing friction between Charron and DeBlasio. (Tr. 826-27 (Charron); 82-83, 157 (J. DeBlasio); 885, 888 (Phelps).) Because their relationship was acrimonious, Charron and DeBlasio retained various consultants to facilitate communications between them. (Tr. 408-09 (Charron).) But their differences were irreconcilable. DeBlasio's brother was SGH's accountant and tightly controlled access to the company's financial information. Charron believed he had " lost control" of his company and " felt [it] had been hijacked from underneath [him]." (Tr. 422 (Charron).) Charron no longer wanted to travel to Iraq, and instead sought to develop new opportunities in the United States with other Government agencies like NASA. (Tr. 490-91, 500-01 (Charron).) They retained additional investment bankers to market the company, but no firm offers materialized in 2009 or 2010. (Tr. 241-45 (J. DeBlasio); 1869 (stipulations of fact).)
I. The Charron Buyout
When it became clear no third party would save them from each other, the two began discussing the possibility of one partner buying out the other or winding down the business. DeBlasio even proposed a " Dutch auction, " where he would name a price at which he would either sell his interest or purchase Charron's, at Charron's election (Tr. 287 (J. DeBlasio).) While threats to wind down the business were exchanged, they eventually agreed that the company would redeem Charron's shares.
SGH retained WilmerHale to draft a stock purchase agreement. Outside consultants placed valuations on the company. On November 30, the concept of a " windfall protection" provision surfaced for the first time. (Ex. R.) Charron proposed " windfall protection" in the event DeBlasio sold the company within three years. (Ex. R.) DeBlasio was " fine with a provision giving [Charron] something in the event I 'flip' the company in the next calendar year, but beyond that it's not really fair to ask as beyond a year there would be no 'windfall' to speak of." (Ex. R.) Hours later, WilmerHale drafted an " industry standard" windfall protection provision and circulated it to the parties and their advisers. (Ex. R.) That provision allowed Charron to receive a percentage of all proceeds from a subsequent sale. In response, DeBlasio instructed WilmerHale that Charron should only share in a percentage of proceeds above a threshold amount. (Ex. R.) A new draft windfall provision was generated in less than an hour and circulated reflecting that permutation. (Ex. R.) Confused by the new draft provision, Charron asked for clarification and input from WilmerHale about a " reasonable timeframe" for the provision to apply. (Ex. R.) WilmerHale offered different scenarios to illustrate the operation of the provision, which let Charron share in a percentage of proceeds above a certain amount. After this email exchange, WilmerHale circulated a draft agreement that included the following:
In the event that Sallyport commits to sell shares, to a third party, subsequent to this transaction, for a purchase price exceeding an enterprise value of $65 million, in the period ending one year from the date of closing, the Selling Shareholder will receive 20% of the sales proceeds, as additional compensation.
(Ex. T at JD1-00011868.) This language is closer to the language that was circulated earlier in the day than it is to the language that DeBlasio requested. But for the first time, a threshold enterprise value of $65 million was inserted. That figure came from DeBlasio. (Tr. 824 (Charron).) Charron accepted that number because he believed that the company was worth " way more" than $65 million. (Tr. 825 (Charron).) There were no other iterations proposed in subsequent email traffic.
Charron did not retain his own counsel until December 1, 2010, when he hired Williams & Connolly. (Tr. 55 (O'Connor).) By that point, negotiations were well underway. Charron's lawyer saw the draft agreement for the first time on Friday, December 3. (Tr. 57 (O'Connor).) He revised the proposed windfall protection language and exchanged drafts over the weekend and on Monday, December 6. (Tr. 58 (O'Connor).)
On December 7, Charron and SGH executed a stock purchase agreement in which SGH redeemed all of Charron's shares, leaving DeBlasio as the sole shareholder. (Ex. A.) The sense of urgency was palpable on all sides, but in retrospect, no one can explain why the parties and their highly-paid professionals rushed to conclude the transaction on an arbitrary and " self-imposed" deadline. (Tr. 398 (J. DeBlasio).) Perhaps this litigation could have been averted by several days' reflection.
Charron sold his interest in SGH for just over $40.7 million. He believed he was selling at a significant discount and that SGH was actually worth somewhere between $80 and $115 million. (Tr. 418, 424-25 (Charron).) In particular, just two months earlier, SGH had secured its largest government contract, known as LOGCAP III (" LOGCAP" stands for Logistics Civil Augmentation Program, which provides contingency support to the U.S. Army). Charron knew he would not share in this new significant source of revenue, even though the company had financed the startup costs before his departure. (Tr. 825-26 (Charron).)
The December 2010 agreement contained the following:
2.04 Windfall Protection. As additional consideration for the Shares, the Company agrees to make an additional payment to Sellers, on the basis and subject to the limitations provided in this Section 2.04. If, on or prior to the first anniversary of the date hereof, John DeBlasio or any of his affiliates or any other direct or indirect equity holder sells or agrees to sell shares of the Company's capital stock (or equity of an intervening Person or assets of the Company or any Company subsidiary) constituting 20% or more by voting power or economic value of the Company's assets or equity to a third party in one or a series of related transactions for a price that reflects an enterprise value of the Company equal to or greater than $65, 000, 000 (a " Windfall Sale"), within three Business Days following the closing of such Windfall Sale, the Company or such stockholder shall pay Sellers an amount equal to 20% of the proceeds received from the Windfall Sale, such payment to be made to Sellers pro rata in accordance with the percentages set forth on Schedule I.
(Ex. A § 2.04 (" Windfall Provision").)
One of the few thin as the parties agree on is that DeBlasio did sell the company within a year. Whether that sale constituted a " Windfall Sale, " and if so, what Charron is owed, are the primary topics of this litigation.
There are also counterclaims against Charron relating to money Charron paid himself as the stock purchase transaction closed. On December 8, 2010, Charron deposited three checks he wrote to himself from SGH's bank account totaling $227, 364.22. (Tr. 793; Ex. AS.) Charron claims he is entitled to these funds. According to Charron, he was owed $44, 400 in salary for November 1, 2010 to December 7, 2010. (Tr. 467 (Charron).) He paid himself $35, 237.22 to reimburse business expenses. (Tr. 468-70 (Charron).) And Charron paid himself $147, 727 to settle the " Tom/John account." (Tr. 465-66 (Charron); Ex. 145.) DeBlasio and Charron would occasionally take cash out of SGH for personal use, which they tracked in a crude method they referred to as the " Tom/John account." (Tr. 148-49 (J. DeBlasio); 457-58 (Charron).) They kept track of each other's distributions with the aim of ensuring they were roughly equal over time. SGH asserts Charron was entitled to none of these payments and that they had agreed the Tom/John account was a " wash." (Tr. 869-70; 871 (Phelps); 355-56 (J. DeBlasio).) SGH makes counterclaims for the money, arguing it was a simple theft.
II. The DC Capital Transaction
DeBlasio maintains that he had no intention of selling SGH at the time the company redeemed Charron's shares. (Tr. 246 (J. DeBlasio).) However, this claim is belied by the fact that on December 19, 2010, less than two weeks after the Chan-on transaction, DeBlasio emailed Thomas Campbell of DC Capital Partners, a private equity firm, to inform him that he was now SGH's sole shareholder. (Ex. BO.) Campbell responded that he " would still suggest that DC Capital buy half of SGH, revealing this was not the first time they had discussed that possibility. (Ex. BO.) On January 11, 2011, Doug Lake of DC Capital emailed DeBlasio a proposed timeline for a transaction between DC Capital and SGH, including a 45-day exclusivity agreement and anticipated closing at the end of February. (Ex. 267.) DeBlasio responded he was " not sure why we need 45 days for closing and exclusivity given all the interaction thus far. (Ex. 267.) Clearly a sale was already on DeBlasio's mind in December 2010.
DC Capital had been a possible partner for SGH for some time. SGH's consultants contacted DC Capital in 2009 when Charron and DeBlasio first attempted to sell the company. (Tr. 310 (J. DeBlasio).) DC Capital reviewed marketing materials and met with DeBlasio, but did not move forward. (Tr. 1136-37 (Lake).) SGH reached out to DC Capital again in 2010, this time through the investment bank Sagent Advisors. DC Capital reviewed materials and conducted some due diligence (Tr. 239-41 (J. DeBlasio); 1137-38 (Lake)), and in August 2010 Campbell sent Charron and DeBlasio an indication of interest in acquiring SGH, stating DC Capital valued the company at $85 to $105 million. (Ex. 36.) DC Capital later backed away from that valuation, and no deal materialized. (Tr. 241; 311-12 (J. DeBlasio).)
After communication reopened following the Charron buyout, Campbell sent DeBlasio a letter of intent on January 20, 2011 proposing that DC Capital purchase SGH. (Ex. X.) Negotiations carried on for months, and the parties signed a final agreement on May 6, 2011. (Ex. B.) The deal closed on June 29, 2011 (the " DC Capital Transaction"). (Exs. B, C, 132.) DC Capital established a new entity, Sallyport Holdings LLC (" New Sallyport"), to acquire SGH. New Sallyport acquired not only SGH and its affiliated companies, but also an unaffiliated entity called Sallyport Global, Inc. (SGI.) At the time of the sale, SGI was owned by the John P. DeBlasio Trust dated January 1, 2011, (" Florida Business Trust") and SGH was owned by what is now known as the GPD Charitable Trust dated December 7, 2010 (" Bermuda Charitable Trust, " and formerly known as the John DeBlasio Charitable Trust for World Peace and Devlopment. The trustee of the Bermuda Charitable Trust, JPD Private Trust Company, Ltd., is also a Defendant in this action.) (Tr. 35 (O'Connor); Ex. C at Schedule 2.4.)
The DC Capital Transaction called for the Bermuda Charitable Trust to receive $60.7 million in cash. (Ex. C at Schedule 2.4.) The Florida Business Trust was not paid in cash, but received a 38% equity interest in New Sallyport, the acquiring company. (Ex. 7 at JD1-00000518.) The agreement stated that the 38% interest was worth $3.8 million, which would make the total purchase price $64.5 million--half a million dollars shy of the Windfall Provision in the Charron stock purchase agreement.
The agreement required New Sallyport to merge with another DC Capital company, Kaseman Holdings LLC, to form KS International (KSI.) (Tr. 30-31 (O'Connor); Ex. C at Schedule 2.4.) The companies merged on July 29, 2011, and the Florida Business Trust's 38% stake in New Sallyport was converted into a 19.38% interest in KSI. (Tr. 1739-40 (Hitchner); 1818-19 (P. DeBlasio); 1293-94 (Risius); Ex. C ¶ 19.)
I. Enterprise Value
The parties agree there is no standard definition of " enterprise value." (Tr. 1299-1300 (Risius); 1669-70 (Hitchner).) But both define it, somewhat loosely, as the overall value of the entire business, or alternatively, as the value of the anticipated future cash flows. (Tr. 1299 (Risius); 1670-71 (Hitchner).) Charron argues that the true value of the rollover equity interest was much greater than the stated $3.8 million, making the total value of the DC Capital transaction greater than $65 million. In addition, he argues DeBlasio stripped out certain assets from the company before the sale and kept them for himself, which also must be accounted for in the enterprise value.
a. Rollover Equity Interest
i. Unreliability of $3.8 Million Value in Deal Documents
If one takes the DC Capital agreement at face value, SGH was sold for $64.5 million and there was no windfall sale. It is Defendants' position that the $64.5 million price " agreed" to with DC Capital establishes the enterprise value of SGH and cannot be challenged. But dissecting this deal is complicated by the fact that the sellers were paid partly in cash and partly in the stock of the acquiring entity. Because of the two variables being negotiated, one can imagine scenarios in which the $64.5 million price in the deal papers becomes arbitrary. For example, the parties could agree the company was worth $74.5 million and the 38% equity share worth $13.8 million, but agree to list the equity share as being worth $3.8 million and the total sale price as $64.5 million. After agreeing to pay $60.7 million in cash and 38% of the acquiring entity, any value " assigned" to the equity stake would not affect the economics of the deal. While the deal as a whole may be the product of an arm's length negotiation, it does not follow that the rollover equity is actually worth the $3.8 million attributed to it.
This is not to say that there was fraud, but only that because of the way the deal is structured, it is necessary to probe behind the $64.5 million figure. There is no question DeBlasio and DC Capital were aware of the Windfall Provision as they negotiated their deal. The amount in the deal documents, $64.5 million, is startlingly close to the $65 million trigger. One draft of the DC Capital agreement even contained a provision stating " [a]nything to the contrary herein notwithstanding, the parties acknowledge and agree that the enterprise value of the company is $64.5 million." (Ex. 83 § 2.2(c).) The only purpose that provision could have served was to negate any claim that the Windfall Provision was triggered. Aware of Charron's windfall protection clause, DC Capital insisted upon an indemnification against suits by former stockholders of SGH (Tr. 1192-98 (Lake); Ex. 74)--the only former stockholders being Charron and DeBlasio. (Tr. 31 (O'Connor); Ex. B § 11.1.)
None of this is damning--DeBlasio and DC Capital were well within their rights to ensure the transaction did not trigger the windfall protection clause and for DC Capital to insist on indemnification. But it is harder to explain why DeBlasio never informed Charron of the DC Capital transaction. Instead, Charron's lawyer had to contact DeBlasio's lawyer to ask if SGH had been sold. (Tr. 230-34 (O'Connor).) DeBlasio's lawyer sent an opaque two-sentence letter stating that " Sallyport has authorized me to disclose to you that a transaction involving the sale of greater than 20% by voting power of Sallyport's equity was consummated on June 29, 2011 for a price that reflected an enterprise value of Sallyport and related entities of $64.5 million." (Ex. 8.) No further information was given.
This was very different from how SGH's lawyer described the transaction in another letter, just one month earlier. Sagent Advisors, SGH's former investment bank, sued SGH in New York state court in 2011. See Sagent Advisors Inc. v. Sallyport Global Holdings Inc., No. 653644/2011 (N.Y. Sup. Ct.). In August 2011, SGH's lawyers wrote to Sagent's lawyers, describing the transaction ...