Jonathan "Slade" Taylor and Mark A. Casey v. Eric "Rico" Elmore and Fatheadz, Inc. ( 2014 )


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  • Pursuant to Ind. Appellate Rule 65(D),
    this Memorandum Decision shall not be
    regarded as precedent or cited before any
    court except for the purpose of                                        Feb 18 2014, 9:18 am
    establishing the defense of res judicata,
    collateral estoppel, or the law of the case.
    ATTORNEY FOR APPELLANT                                 ATTORNEY FOR APPELLEES:
    JONATHAN “SLADE” TAYLOR:
    ANDREW L. TEEL
    TRAVIS W. MONTGOMERY                                   Haller & Colvin, P.C.
    Parr Richey Obremskey Frandsen & Patterson LLP         Fort Wayne, Indiana
    Indianapolis, Indiana
    IN THE
    COURT OF APPEALS OF INDIANA
    JONATHAN “SLADE” TAYLOR and            )
    MARK A. CASEY,                         )
    )
    Appellants-Plaintiffs,           )
    )
    vs.                       )                     No. 32A05-1305-PL-257
    )
    ERIC “RICO” ELMORE and FATHEADZ, INC., )
    )
    Appellees-Defendants.            )
    APPEAL FROM THE HENDRICKS SUPERIOR COURT
    The Honorable David H. Coleman, Judge
    Cause No. 32D02-1109-PL-108
    February 18, 2014
    MEMORANDUM DECISION - NOT FOR PUBLICATION
    SHEPARD, Senior Judge
    The CEO bought out the other shareholders at just a fraction of their investments
    by representing that the company was failing, neglecting to tell them that a big deal with
    Walmart was imminent. The trial court granted summary judgment for the CEO and the
    corporation on a complaint alleging fraud and other claims. We reverse.
    FACTS AND PROCEDURAL HISTORY
    Fatheadz, Inc., sells sunglasses designed for people with large heads. In 2008,
    Jonathan “Slade” Taylor invested $40,000 in the company and became one of its
    shareholders. At the time, other shareholders included Eric “Rico” Elmore, the CEO;
    Mark Casey, President; and Rico’s brother Dan Elmore, Vice President.
    Slade worked as Fatheadz’s International Sales Director. In that role, he hired an
    attorney to draft an exclusive distributor agreement, traveled to Australia to meet with
    potential distributors, and established distribution arrangements there in anticipation of
    Fatheadz’s future expansion overseas. Rico acknowledged in an email that Slade had
    “put in endless amounts of time including starting Fatheadz Australia.” Appellant’s App.
    p. 145. Slade believed he would be compensated for his work and reimbursed for his out-
    of-pocket expenses.
    Slade also worked with Mark and Dan to assess the company’s cash flow
    problems. They discovered that Rico put personal expenses on multiple credit cards that
    were being paid from Fatheadz accounts, that sales revenues were not being properly
    recorded, that the company had outstanding bills from law firms, and that it had been
    sued numerous times for failure to pay its trade creditors. In addition, in early 2009, Rico
    unilaterally changed Fatheadz’s primary place of banking from Huntington National
    2
    Bank to another bank. Slade, Mark, and Dan repeatedly asked Rico for basic financial
    information such as the name of the new bank, the company’s account number, and bank
    documents, but Rico denied their requests.
    When Fatheadz continued to ignore good business practices, Mark and Dan
    decided to consult an attorney. The attorney agreed with their concerns and advised them
    to leave the company. In April and May 2009, Mark and Dan resigned from Fatheadz.
    Although their company shares were relinquished at that time, the purchase price for the
    shares was subject to further negotiations.
    Slade did not resign. However, like Mark and Dan, he had stopped doing any
    work for Fatheadz by May 2009. For his part, Rico had stopped providing them with any
    information about the business.     Indeed, without notice to Slade, Rico redistributed
    Mark’s and Dan’s shares to himself. Based on the ownership interests Rico listed in a
    2008 email, his assumption of their shares easily gave him majority ownership.
    In the summer of 2010, Rico contacted Slade, Mark, and Dan about selling the
    entire business in order to cut their losses. He complained about the headaches of
    operating the company, indicated that its financial affairs were in dire shape, and noted
    that creditors were attempting to collect on debts. He said he had found a third-party
    buyer, but to complete the transaction, the three men needed first to sell their shares back
    to Fatheadz. Rico claimed that proceeds from the buyer afforded Fatheadz the liquidity
    to buy back the shares. Still, he refused to reveal the name of the buyer, the amount for
    which Fatheadz would be sold, or any other details.
    3
    In June 2010, Slade, Mark, and Dan agreed to sell their shares. Slade, who had
    bought into the company for $40,000, agreed to sell his ownership interest for $5,000.
    Mark, whose total investment in Fatheadz exceeded $200,000, agreed to sell for $25,000.
    In December 2010, Rico told Mark that the purchase was completed and dropped off two
    checks, one to Mark for $25,000 and one to Slade for $5,000.
    Rico actually never sold Fatheadz. Instead, he had become its sole owner, and
    Fatheadz had entered into a lucrative deal with Walmart. Rico knew about the Walmart
    deal as early as January 2010. See id. at 184 (Rico’s email to potential third-party buyer:
    “Wal-Mart has committed to us for another two years and I feel we will knock [i]t out of
    the park this year with lower cost and a better price point.”). But he never told Slade and
    Mark about it even as they sold their shares back to Fatheadz at a loss. See id. at 156
    (Mark’s affidavit: “Rico never disclosed to me that Fatheadz[’s] previous courtship of
    Walmart was successful and that Walmart would be placing large orders with
    Fatheadz.”). In fact, the source of Slade’s $5,000 payment from Fatheadz did not come
    from a third-party buyer but from a $1,308,725 payment received from Walmart. Slade
    and Mark would have never sold their shares had they known that Rico was going to
    retain ownership and that there was a pending deal with Walmart. Id. at 142, 156, 179.
    In addition, rather than being in dire shape, Fatheadz’s financial situation had been
    improving at the time Slade and Mark sold their ownership interests. The company’s net
    worth had improved from negative $327,156 in 2009, to negative $221,834 in 2010, to
    positive $59,859 in 2011.
    4
    In September 2011, Slade sued Rico and Fatheadz for fraud, violation of the
    Indiana Uniform Securities Act, and breach of fiduciary duties. He also made a quantum
    meruit claim. 1         Rico and Fatheadz moved for summary judgment and designated
    evidence. Slade responded and also designated evidence. Before the April 2013 hearing
    on the motion, Mark moved to intervene as a plaintiff, and the trial court allowed him to
    do so. Mark did not file anything regarding the summary judgment motion, but Rico and
    Fatheadz replied to Slade’s response. The court entertained the parties’ arguments at the
    hearing, and in May 2013, granted summary judgment for Rico and Fatheadz without
    specific findings or conclusions. Slade now appeals. 2
    ISSUE
    Did the trial court err by granting summary judgment for Rico and Fatheadz?
    DISCUSSION AND DECISION
    Summary judgment is appropriate only where there is no genuine issue of material
    fact and the moving party is entitled to a judgment as a matter of law. Ind. Trial Rule
    56(C); Dreaded, Inc. v. St. Paul Guardian Ins. Co., 
    904 N.E.2d 1267
     (Ind. 2009). All
    facts established by the designated evidence and reasonable inferences drawn from those
    facts are construed in favor of the nonmoving party. Naugle v. Beech Grove City Sch.,
    
    864 N.E.2d 1058
     (Ind. 2007). 3
    1
    The complaint included two other counts, but they are not relevant here.
    2
    Mark does not participate in this appeal.
    3
    Rico and Fatheadz claim that Slade waived his right to sue for fraud, securities violations, and breach of
    fiduciary duty because he essentially challenges the price he received for his shares. They point out that
    the written agreement regarding the sale of his shares provided, “Slade hereby agrees and acknowledges
    5
    I. FRAUD
    To establish fraud, a plaintiff must show: (1) the defendant made a material
    misrepresentation of past or existing fact that (2) was untrue, (3) made with knowledge of
    or in reckless ignorance of its falsity, (4) made with the intent to deceive, (5) rightfully
    relied upon by the plaintiff, and (6) proximately caused the plaintiff injury or damage.
    Kesling v. Hubler Nissan, Inc., 
    997 N.E.2d 327
     (Ind. 2013).
    The evidence most favorable to Slade shows that when Rico approached him in
    the summer of 2010 about selling Fatheadz due to its financial ruin, Slade had no way of
    evaluating the situation. Rico had already changed the company’s bank and refused
    requests for financial information, and at the time he was trying to convince Slade to sell,
    he refused to identify the buyer or reveal any details of the sale.
    Despite Rico’s claim to have found a buyer, the designated evidence shows only
    two brief emails between Rico and the purported buyer, one from January 2010 and the
    other from February 2010, and both discuss Walmart’s two-year commitment to
    Fatheadz. See Appellant’s App. pp. 183-84. And although Rico complained to Slade that
    Fatheadz’s financial affairs were in dire shape, Walmart’s commitment is certainly an
    indication otherwise, as is his January 2010 email to the purported buyer in which he said
    he felt Fatheadz would “knock [i]t out of the park this year.” Id. at 184. Rico never told
    Slade about Walmart’s deal with Fatheadz even though his January 2010 email to the
    purported buyer shows he knew about it well before approaching Slade about selling.
    that the purchase price set forth above represents the current Fair Market Value of the Company Shares
    and hereby waives the right to challenge this valuation in any forum or proceeding.” Appellant’s App. p.
    83. We decline to find waiver because it is the very fraudulent acts alleged by Slade that caused him to
    sign the agreement to sell his shares.
    6
    Rico and Fatheadz nonetheless argue that there was no Walmart purchase order at
    the time Slade decided to sell his shares in June 2010. The record is unclear as to the
    precise timing of the Walmart order. Even if no deal had yet been consummated, though,
    Rico clearly knew it was imminent.
    Rico and Fatheadz also argue that Slade’s specific claims as set forth in his
    complaint asserted a much narrower set of facts that do not amount to fraud. Slade’s
    complaint alleged that “Rico communicated to the other Fatheadz owners that he had
    identified and begun negotiations with a third party buyer for the corporation” and that
    “Rico stated that in order for the other owners to recoup a portion of their equity
    investment in the company, the owners must sell their Fatheadz stock to Rico.” Id. at 12.
    Rico and Fatheadz point to the potential buyer’s affidavit, which states that it entered into
    negotiations to buy Fatheadz in December 2009, that it had recommended to Rico that
    Fatheadz would need to reacquire any outstanding stock before it would consider the
    purchase, and that it decided not to acquire Fatheadz in late 2010. Id. at 60. Rico and
    Fatheadz argue that since there was in fact a potential buyer who wanted the other
    shareholders to sell back their shares before any purchase, Slade cannot show that Rico’s
    statements were false.
    Rico’s alleged representations, however, also indicated that business was bad and
    that the only way Slade could cut his losses was to sell his shares back so the business
    could be sold. Slade has easily shown genuine issues of material fact by designating
    evidence that Rico convinced him to sell his shares at a loss so that Fatheadz could be
    sold, all while hiding that the business’s financial affairs were actually improving and a
    7
    large deal had been made with Walmart. The trial court erred by granting summary
    judgment to Rico and Fatheadz on Slade’s fraud claim.
    II. SECURITIES ACT
    Under the Indiana Uniform Securities Act, “[i]t is unlawful for a person, in
    connection with the offer, sale, or purchase of a security, directly or indirectly: (1) to
    employ a device, scheme, or artifice to defraud; (2) to make an untrue statement of a
    material fact or to omit to state a material fact necessary in order to make the statement
    made, in the light of the circumstances under which they were made, not misleading; or
    (3) to engage in an act, practice, or course of business that operates or would operate as a
    fraud or deceit upon another person.” 
    Ind. Code § 23-19-5-1
     (2008).
    Rico and Fatheadz argue that the only basis for Slade’s Securities Act claim is
    Rico’s representation that a possible buyer existed. That representation, they say, was not
    false. 4
    Slade’s Securities Act claim, though, also incorporated the allegations made in the
    fraud count. Moreover, while the designated evidence shows that a potential buyer did in
    fact exist, there is a genuine issue of material fact as to whether Rico misrepresented how
    serious the buyer was. Slade believed from Rico’s representations that the purchase was
    imminent and that the only major hurdle was that Fatheadz buy back its shares. The
    designated evidence, however, reveals only a brief affidavit from the buyer and two even
    4
    We reject Rico and Fatheadz’s assertion that Slade has waived his claim under the Securities Act for
    failure to present a cogent argument. Slade cited the appropriate statute, explained that his shares
    constituted securities, and incorporated his arguments regarding actual fraud.
    8
    briefer emails between Rico and the buyer, none of which show that the buyer ever came
    close to purchasing Fatheadz.
    Rico and Fatheadz also argue that Slade’s claim is barred by two defenses. First,
    they argue that Slade was in pari delicto with Rico and cite Thomas v. Hemmelgarn, 
    579 N.E.2d 1333
    , 1336 (Ind. Ct. App. 1991) (“A purchaser of stock securities is barred from
    asserting that the sale was invalid, because of a state securities regulation violation, if he
    is found to be in pari delicto with the seller. A purchaser is generally held to be in pari
    delicto with the seller if he participates in the organization or management of the issuing
    corporation.”), trans. denied.
    Rico and Fatheadz point to designated evidence they believe shows that Slade was
    sufficiently involved in the organization and management of Fatheadz that he is
    precluded from claiming a securities violation. But the evidence most favorable to Slade
    shows that he stopped doing any work for Fatheadz by May 2009, and Rico stopped
    providing him with any information about the business.
    Second, Rico and Fatheadz note that the Securities Act provides a defense if “the
    seller knowingly participated in the violation.” 
    Ind. Code § 23-19-5-9
    (b) (2008). Rico
    and Fatheadz claim that Slade knowingly participated in the violation because he knew
    he lacked essential information but sold his shares anyway.              They cite B & T
    Distributors, Inc. v. Riehle, 
    266 Ind. 646
    , 
    366 N.E.2d 178
     (1977), in which the Supreme
    Court affirmed the trial court’s determination that the sellers of a business did not commit
    a securities violation where the buyers were aware they did not have knowledge of the
    business’s most recent financial reports but bought it nevertheless. B & T Distributors,
    9
    however, involved a decision after trial, where the finder of fact had the opportunity to
    weigh the evidence and assess the credibility of the witnesses. In contrast, it is enough to
    avoid summary judgment here that there is a question of fact about whether Slade
    knowingly participated in the violation. The trial court erred by granting summary
    judgment to Rico and Fatheadz on Slade’s Securities Act claim.
    III. FIDUCIARY DUTIES
    A corporate director acting for the corporation in a purchase of its own stock
    stands in a fiduciary relationship with respect to the shareholder from whom the stock is
    purchased and is under a duty to disclose to the shareholder the facts affecting the value
    of the stock. Hardy v. S. Bend Sash & Door Co., 
    603 N.E.2d 895
    , 900 (Ind. Ct. App.
    1992), trans. denied. Pursuant to this rule, Rico had a fiduciary duty to disclose to Slade
    the business’s improving financial condition and the pending Walmart deal before buying
    back Slade’s shares on behalf of Fatheadz.
    Rico and Fatheadz argue that Rico had no fiduciary duty because he was actually
    buying the shares for himself, not for Fatheadz, and because he bought the shares from a
    fellow director, not just a shareholder. See 
    id.
     (“[A] corporate director who . . . buys
    shares from other shareholders for his personal ownership owes no fiduciary duty to
    disclose information he possesses regarding the value of the stock to the other
    shareholders, provided that, such a sale does not affect the general well-being of the
    corporation.”).
    Rather than supporting the trial court’s judgment, Rico and Fatheadz have only
    highlighted that a fact-finder must determine whether Rico bought the shares personally
    10
    or on behalf of Fatheadz. The evidence certainly shows that he represented he was
    buying them for Fatheadz. Moreover, “[w]here one director has superior knowledge of
    corporate affairs because he is intimately involved in the daily operations of the
    corporation while the other director has only a limited role in corporate management, the
    fiduciary duty is the same as if the latter were a stockholder not actively engaged in
    corporate affairs.” Fleetwood Corp. v. Mirich, 
    404 N.E.2d 38
    , 46 (Ind. Ct. App. 1980).
    Slade’s designated evidence shows that any role he had in corporate management had
    ended by May 2009, when he stopped working for Fatheadz and Rico stopped providing
    him with any information about the business. The trial court therefore erred by granting
    summary judgment on this claim.
    IV. QUANTUM MERUIT
    Quantum meruit is a common law remedy that permits recovery where there is no
    contract but where the circumstances are such that “under the law of natural and
    immutable justice there should be a recovery as though there had been a promise.”
    Woodruff v. Ind. Family & Soc. Servs. Admin., 
    964 N.E.2d 784
    , 791 (Ind. 2012), cert.
    denied, 
    133 S. Ct. 233
    , 
    184 L. Ed. 2d 44
     (2012). To recover on a theory of quantum
    meruit, a plaintiff must show: (1) the plaintiff conferred a benefit upon the defendant at
    the express or implied request of the defendant; (2) allowing the defendant to retain the
    benefit without restitution would be unjust; and (3) the plaintiff expected payment. 
    Id.
    Slade’s complaint alleged he believed he would be paid for his work at Fatheadz
    but was instead uncompensated for his ten months of work, which included establishing
    11
    distribution plans in Australia. Rico himself acknowledged in an email that Slade “put in
    endless amounts of time including starting Fatheadz Australia.” Appellant’s App. p. 145.
    Rico and Fatheadz defend summary judgment on this claim by citing Rico’s
    affidavit that Fatheadz did not make a single sale and thus realized no measurable benefit
    as a result of Slade’s efforts. The fact that no sales occurred does not mean that Rico and
    Fatheadz obtained no benefit. The court thus erred by granting summary judgment on
    this claim.
    CONCLUSION
    We therefore reverse the trial court’s judgment and remand for further
    proceedings.
    VAIDIK, C.J., and BRADFORD, J., concur.
    12
    

Document Info

Docket Number: 32A05-1305-PL-257

Filed Date: 2/18/2014

Precedential Status: Non-Precedential

Modified Date: 4/18/2021