Edwards v. Wyatt

Opinions of the United
2009 Decisions States Court of Appeals
for the Third Circuit
5-20-2009
Edwards v. Wyatt
Precedential or Non-Precedential: Non-Precedential
Docket No. 07-1466
Follow this and additional works at: http://digitalcommons.law.villanova.edu/thirdcircuit_2009
Recommended Citation
"Edwards v. Wyatt" (2009). 2009 Decisions. Paper 1349.
http://digitalcommons.law.villanova.edu/thirdcircuit_2009/1349
This decision is brought to you for free and open access by the Opinions of the United States Court of Appeals for the Third Circuit at Villanova
University School of Law Digital Repository. It has been accepted for inclusion in 2009 Decisions by an authorized administrator of Villanova
University School of Law Digital Repository. For more information, please contact Benjamin.Carlson@law.villanova.edu.
NOT PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
____________
Nos. 07-1466 & 07-1602
____________
JOHN JOSEPH EDWARDS,
Appellant in 07-1602
v.
A. WESLEY WYATT,
Appellant in 07-1466
____________
On Appeal from the United States District Court
for the Eastern District of Pennsylvania
(D.C. No. 01-cv-01333)
District Judge: Honorable Petrese B. Tucker
____________
Argued November 20, 2008
Before: SMITH, HARDIMAN, and ROTH, Circuit Judges.
(Filed: May 20, 2009)
Stephen L. Braga [Argued]
Ropes & Gray
700 12th Street, N.W.
One Metro Center, Suite 900
Washington, DC 20005
Attorney for John Joseph Edwards
Jeffrey A. Zucker [Argued]
FisherZucker
21 South 21st Street
Philadelphia, PA 19103
Paul J. Cianci, Esq.
FisherZucker
21 South 21 st Street
Philadelphia, PA 19103
Attorneys for A. Wesley Wyatt
____________
OPINION OF THE COURT
____________
HARDIMAN, Circuit Judge.
This case comes to us for the third time. Some ten years ago, John Joseph
Edwards sued his former business partner, A. Wesley Wyatt, for breaching an oral
agreement (the Handshake Agreement). In Edwards v. Wyatt, 335 F.3d 261 (3d Cir.
2003) (Edwards I), we reversed the District Court’s ruling that Edwards anticipatorily
repudiated the Handshake Agreement. Following a second bench trial, which produced
the same result as the first trial, we reversed again, explaining that the District Court’s
factual findings were still inadequate to sustain its legal conclusion that Edwards
anticipatorily repudiated the Handshake Agreement. See Edwards v. Wyatt, No. 04-3325,
2005 WL 1349531 (3d Cir. June 8, 2005) (Edwards II). After a third bench trial, the
District Court held that Edwards had not anticipatorily repudiated the Handshake
Agreement, and that Wyatt had breached it. See Edwards v. Wyatt (Edwards ‘06), No.
2
01-1333, 2006 WL 2945224 (E.D. Pa. Oct. 10, 2006). Ultimately, the court awarded
Edwards $5,482,500. See Edwards v. Wyatt (Edwards ‘07), No. 01-1333, 2007 WL
136687 (E.D. Pa. Jan. 8, 2007). This time, Wyatt appeals and Edwards cross-appeals.
I.
In 1993, Edwards was President of Pilot Air Freight Corporation (Pilot). Pilot
needed capital to remain financially stable and received a $2 million loan and personal
guaranty from Wyatt, who had been introduced to Edwards by Pilot’s lawyer, Richard
Phillips. In exchange, Wyatt and Phillips became members of Pilot’s Board of Directors
and acquired stock options (45% for Wyatt and 21.67% for Phillips). Edwards retained
an option on the remaining 33.33% of Pilot’s shares. In addition, Phillips became Pilot’s
Chief Executive Officer while Edwards retained his position as President and Director of
Pilot and entered into a three-year employment agreement with the company.
The relationship among the three men soon disintegrated and Edwards was
terminated in 1995. Edwards then filed for bankruptcy under Chapter 11 and listed his
one-third interest in Pilot on his schedule of assets. The case was eventually converted to
Chapter 7, and the Trustee assumed control of Edwards’s assets, including his Pilot stock.
See In re Edwards, 228 B.R. 552 (Bankr. E.D. Pa. 1998).
In February 1998, Edwards and Wyatt executed a written settlement agreement
whereby they would collaborate to settle Edwards’s bankruptcy while Edwards received a
3
weekly salary as a consultant for one of Wyatt’s companies until August 7, 1998. In
April 1998, the Trustee took steps to sell Edwards’s Chapter 7 assets. When it became
clear that Wyatt and Phillips would be in a bidding contest for Edwards’s stock, however,
Edwards and Wyatt entered into the Handshake Agreement which prohibited either man
from reaching a unilateral agreement with Phillips.
On July 29, Wyatt and Phillips informed the Bankruptcy Court that they were in
discussions to submit a joint bid. Wyatt communicated this to Edwards and informed him
that he would not continue their consulting arrangement past August 7. Edwards quickly
became concerned with Wyatt’s relationship with Phillips and ordered his attorney,
Stephen Braga, to send a letter to one of Wyatt’s attorneys, Jay Ochroch, on July 30,
which read, in relevant part:
The reality of the events over the past twenty-four hours only heightens
[Edwards’s] belief . . . that something fundamental has changed. In fact,
those events confirm that there is no ongoing relationship between
[Edwards] and [Wyatt] at this point in time. . . . [Edwards] believes [Wyatt]
ha[s] effectively severed the relationship. . . . I would suggest that you
make negotiating an end game result with [Edwards] your first and
immediate priority. Otherwise, the game may be over as far as he is
concerned; if it is not already.
The next day, having not heard from Ochroch or Wyatt, Braga sent Ochroch a
second letter, in which he stated that “[Edwards] views [Wyatt’s refusal to communicate
and renew the consulting agreement] as [a] breach of his relationship,” and stated that
Braga had “been authorized to give [Wyatt] a one-week period within which to conclude
a settlement agreement with [Edwards].” Wyatt contends that he understood this letter to
4
mean that Edwards had determined there was no more relationship between Edwards and
Wyatt and that the Handshake Agreement had been repudiated. However, in mid-August
1998, Wyatt and Edwards met face-to-face and Wyatt reassured Edwards that “nothing
had changed,” and asked Edwards to set up a meeting so that he could communicate this
to Braga. Edwards did so, and the following month Wyatt reconfirmed the essence of the
Handshake Agreement — specifically, that any settlement between Wyatt and Phillips
would need to include Edwards. In reliance upon these assurances, Edwards did not seek
out another investor.
Despite the Handshake Agreement, on October 30, 1998, Wyatt and Phillips
advised the Bankruptcy Court of a settlement, and jointly offered a cash bid of $5.2
million for Edwards’s Pilot stock and related assets. Edwards objected to the joint bid as
an illegal collusive effort to control the sale price for his assets in the Bankruptcy Court.
On December 15, 1998, the Bankruptcy Court denied Edwards’s objection and permitted
the sale of his assets. Because the sale proceeds exceeded the estate’s debts, all of
Edwards’s creditors were paid, and Edwards received the balance of approximately
$3,000,000. At the end of the day, Wyatt and Phillips each held 50% of Pilot’s stock.
Edwards sued Wyatt, asserting claims of breach of contract, promissory estoppel,
and fraudulent misrepresentation. After two bench trials were reversed because of
insufficient findings of fact, the case was remanded to consider two issues: (1) whether
Edwards anticipatorily breached or terminated the Handshake Agreement, and, if not; (2)
5
whether Edwards was entitled to damages. After a two-day bench trial, the District Court
ruled in Edwards’s favor, concluding that Braga’s letters were not sufficiently absolute or
unequivocal to constitute anticipatory breach. Because Edwards had not repudiated or
terminated the Handshake Agreement, the District Court found that Wyatt breached the
contract in October 1998 by settling with Phillips without Edwards’s participation.
As for damages, the District Court determined that because Wyatt profited
$12,900,000 from the settlement of Edwards’s bankruptcy estate, Edwards suffered
damages of $4,290,000 (one-third of Wyatt’s profits, which reflected Edwards’s one-third
share in Pilot). The District Court later amended that figure to $5,482,500, to reflect
Edwards’s and Wyatt’s respective shares of Pilot. Wyatt now appeals with regard to both
liability and damages and Edwards cross-appeals on the issue of damages.1
II.
A.
As a preliminary matter, Wyatt argues that the Handshake Agreement was
unenforceable and void ab initio under Pennsylvania law because Edwards concealed it as
an asset from the Trustee in violation of 18 U.S.C. § 152(6). Edwards argues that this
1
The District Court had diversity jurisdiction under 28 U.S.C. § 1332. We have
appellate jurisdiction pursuant to 28 U.S.C. § 1291. We exercise plenary review over the
District Court’s legal conclusions, but review the District Court’s factual findings for
clear error. Lansing v. Se. Pa. Transp. Auth., 308 F.3d 286, 290 (3d Cir. 2002).
6
claim has been waived and is without merit. We agree with Edwards that Wyatt has
waived this claim.
The only two issues presented to the District Court during the third trial were: (1)
whether Edwards anticipatorily repudiated or terminated the Handshake Agreement and,
if not; (2) whether Edwards was entitled to damages. Only in his summation following
the third trial did Wyatt ever raise this issue of unenforceability and even the District
Court noted that it appeared to be waived. Furthermore, when Wyatt reargued this issue
in a motion for reconsideration, the court again noted that it appeared to be waived, and
then denied the claim on its merits. See Edwards ‘07, 2007 WL 136687, at *4-5.
Issues not raised in the district court are waived. Ogden Fire Co. No. 1 v. Upper
Chichester Twp., 504 F.3d 370, 381 (3d Cir. 2007). “Absent exceptional circumstances,
this Court will not consider issues raised for the first time on appeal.” Del. Nation v.
Pennsylvania, 446 F.3d 410, 416 (3d Cir. 2006). Exceptional circumstances would
include a showing that the public interest requires that the issues be heard or that manifest
injustice would result from the failure to consider such issues. Brown v. Philip Morris
Inc., 250 F.3d 789, 799 (3d Cir. 2001). Because no such exceptional circumstances are
apparent here, we decline to reach the merits of this issue and conclude that Wyatt waived
the defense that the Handshake Agreement was void. See Massey-Ferguson Credit Corp.
v. Webber, 841 F.2d 1245, 1249 (4th Cir. 1988) (defense to breach of contract action
untimely where it was not raised until the third trial).
7
B.
Assuming arguendo that the Handshake Agreement was valid, Wyatt asserts that
the District Court erroneously found — in contrast to the first two trials — that Edwards
did not repudiate it. See Edwards ‘06, 2006 WL 2945224 at *8. Wyatt insists that
Braga’s letters of July 30 and 31, 1998 either repudiated or terminated the Handshake
Agreement. We disagree.
In Edwards I, we stated the legal standard that the District Court was required to
apply when addressing the issue of repudiation: “To constitute anticipatory breach under
Pennsylvania law there must be an absolute and unequivocal refusal to perform or a
distinct and positive statement of an inability to do so.” 335 F.3d at 272 (quoting 2401
Pa. Ave. Corp. v. Fed’n of Jewish Agencies, 507 Pa. 166, 172 (1985)) (emphasis in
original) (internal quotation marks omitted). We noted further that Wyatt’s subjective
belief would not suffice to demonstrate repudiation, and explained that Pennsylvania
courts would require repudiation to “be apparent in an objective sense.” Id. at 273 n.9.
In its 2006 opinion, the District Court emphasized the extensive use of terms such
as “if,” “belief,” “believes,” and “views” in Braga’s letters. See Edwards ‘06, 2006 WL
2945224 at *6 (Findings of Fact Nos. 34 and 36). After considering the surrounding
factual circumstances, the court concluded this language was too equivocal to constitute a
repudiation, and found that Braga’s letters were instead demands for assurance that Wyatt
intended to adhere to the Handshake Agreement. See id. at *6 (Finding of Fact No. 37)
8
and *8-9 (Findings of Law Nos. 4-8). Accordingly, the court found that these letters did
not terminate the Handshake Agreement.
Although the tone of the letters is stern, and notwithstanding that at least one of
them contains an ultimatum, an objective reader of Braga’s letters would not believe that
Edwards had repudiated the Handshake Agreement. Accordingly, we find no error in the
District Court’s finding that Edwards did not repudiate the Handshake Agreement. 2
C.
Wyatt next argues that the District Court failed to provide subordinate factual
findings to support its conclusion. This is the flaw that required us to reverse the District
Court in Edwards I (where we found that District Court’s findings omitted any discussion
of the effect of the July 30 and 31, 1998 letters) and Edwards II (where we concluded that
the court’s findings of fact were still insufficient because they failed to explain which
findings were germane to the question whether those two letters had objectively
2
In addition to reviewing Braga’s letters, the District Court properly determined
that the parties’ interaction after July 31 was consistent with a lack of repudiation. Wyatt
met Edwards in early August and agreed to continue giving Edwards some of the benefits
of the February 1998 consulting agreement, including health insurance and the use of one
of Wyatt’s cars. See Edwards ‘06, 2006 WL 2945224 at *6. Furthermore, Wyatt met
with Edwards a second time and explained that “as far as he was concerned, nothing had
changed, we were going forward with the same plan.” Id. at *7. Finally, in a face-to-face
meeting with Edwards and Braga on September 1, 1998, Wyatt confirmed that any
settlement would need to include Edwards. Id. Wyatt’s conduct and assurances are
inconsistent with his contention that he took Braga’s letters to be a repudiation of the
Handshake Agreement.
9
repudiated the Handshake Agreement). This time the District Court’s findings of fact
were sufficiently detailed to permit judicial review.
As we noted in Edwards I, “[w]e have required that the district court make
‘subordinate’ factual findings in support of its ‘ultimate’ findings so as to allow us to
ascertain what evidence the district judge accepted as credible or what he rejected.”
Edwards I, 335 F.3d at 275 (citation and internal quotation marks omitted). We explained
that subordinate findings “may not be left unarticulated,” at least where they “actually
were reached in the process of arriving at the ultimate factual conclusion.” Id. (citation
omitted). Where a court’s subordinate factual findings are insufficient, we “review the
district court’s ultimate factual findings under a standard more stringent than the clearly
erroneous standard ordinarily applicable to such findings.” United Steelworkers of Am.,
AFL-CIO v. N.J. Zinc Co., Inc., 828 F.2d 1001, 1009 (3d Cir. 1987).
Wyatt’s opening brief identified ten subordinate findings that he believed the
District Court failed to make. Each of the first three factual determinations that Wyatt
identifies corresponds to an ultimate factual finding actually contained in the District
Court’s order. See Edwards ‘06 at *3-8. The seven other subordinate findings need not
have been made because they became irrelevant once the District Court determined that
there was no anticipatory repudiation and that Wyatt was in breach. Wyatt points to no
authority that requires district courts to make irrelevant subordinate factual findings;
indeed, such a requirement would run contrary to the purpose of a subordinate finding of
10
fact. See Edwards I, 335 F.3d at 275; cf. Logue v. Int’l Rehab. Assocs., Inc. 837 F.3d 150,
155 (3d Cir. 1988) (requiring the district court to consider all “relevant” evidence in
making its findings of fact and conclusions of law). Accordingly, we conclude that the
District Court’s subordinate findings of fact are sufficient to permit judicial review of its
ultimate conclusions.
III.
Having determined that the District Court did not err with regard to liability, we
turn now to the complicated issue of damages.
A.
Wyatt argues that Edwards has not proven his damages to a reasonable certainty,
and insists that the District Court erred in using a pro rata formula for measuring
Edwards’s damages.
1.
Pennsylvania law requires a plaintiff seeking damages for breach of contract to
establish “(1) the existence of a contract, including its essential terms, (2) a breach of a
duty imposed by the contract, and (3) resultant damages.” CoreStates Bank, N.A. v.
Cutillo, 723 A.2d 1053, 1058 (Pa. Super. Ct. 1999). A party is entitled to recover
whatever damages it suffered, provided they would naturally and ordinarily result from
such a breach, or the damages were reasonably foreseeable and within the contemplation
of the parties at the time of contracting and can be proved with reasonable certainty.
11
Ferrer v. Trs. of Univ. of Pa., 573 Pa. 310, 341 (2002). “Reasonable certainty embraces a
rough calculation that is not too speculative, vague or contingent upon some unknown
factor.” Ware v. Rodale Press, Inc. 322 F.3d 218, 225-26 (3d Cir. 2003) (citations and
internal quotation marks omitted). Moreover:
Although the fact-finder may not render a verdict based on sheer conjecture
or guesswork, it may use a measure of speculation in estimating damages.
The fact-finder may make a just and reasonable estimate of the damage
based on relevant data, and in such circumstances may act on probable,
inferential, as well as direct and positive proof.
Liss & Marion, P.C. v. Recordex Acquisition Corp., 937 A.2d 503, 514 (Pa. Super. 2007)
(citations omitted). In addition, the Restatement of Contracts — which Pennsylvania
courts follow, see Edwards I, 335 F.3d at 272 n.8 — provides that “[d]oubts are generally
resolved against the party in breach,” and the court may “require a lesser degree of
certainty,” depending upon the circumstances of the breach. R ESTATEMENT (S ECOND) OF
C ONTRACTS § 352 (1981). Thus, absolute precision is not required. See Bigelow v. RKO
Radio Pictures Inc., 327 U.S. 251, 264 (1946); accord Berg Chilling Sys., Inc. v. Hull
Corp., 369 F.3d 745, 764 (3d Cir. 2004). Otherwise, we risk leaving the injured party
without a remedy.
Wyatt argues that Edwards has not proved his damages because the Handshake
Agreement did not contain a term whereby Edwards would receive anything in the
settlement contemplated among Edwards, Phillips, and Wyatt. However, it is undisputed
that Edwards was deprived of consideration for this agreement, i.e., the value of his
12
promise not to reach a unilateral agreement with Phillips. See Edwards ‘06, 2006 WL
2945224 at *5. Edwards reasonably relied on Wyatt’s assurances that he would abide the
Handshake Agreement, and he was damaged when Wyatt settled with Phillips in
contravention of that agreement. See Edwards ‘06, 2006 WL 2945224 at *7-8.
Accordingly, the District Court did not err in holding that Edwards was damaged by
Wyatt’s breach.
2.
We turn to the methodology used by the District Court to determine Edwards’s
damages. It calculated the amount that Wyatt realized by virtue of the breach and then
apportioned Wyatt’s earnings between Edwards and Wyatt based on their relative
ownership of Pilot. As Wyatt did not offer the District Court a competing theory of
damages,3 the District Court concluded that Edwards’s loss could be calculated by
determining the parties’ shared interest in Pilot — 33.33% for Edwards, and 45% for
Wyatt, for a total of 78.33% — and concluding that the ratio of that shared interest
controlled by Edwards was 42.5% (dividing 33.33% by 78.33% for a total of 42.5%).
The District Court then calculated the economic benefit Wyatt received as a result of his
breach of the Handshake Agreement and awarded Edwards 42.5% of that amount.
3
Wyatt proposes a different method of calculation in his opening brief, but he did
not raise this theory in the District Court. Accordingly, the argument is waived. See
Ogden Fire, 504 F.3d at 381; see also Delaware Nation, 446 F.3d at 416.
13
We find no error in this approach. Although the record supports Wyatt’s
contention that the Handshake Agreement itself does not yield a measure of damages, we
do not find this to be dispositive. Pennsylvania law permits courts to imply a missing
term in a parties’ contract “when it is necessary to prevent injustice and it is abundantly
clear that the parties intended to be bound by such term.” Solomon v. U.S. Healthcare
Sys. of Pa., Inc. 797 A.2d 346, 350 (Pa. Super. Ct. 2002) (citation omitted). Under the
Restatement, Pennsylvania courts will supply a reasonable missing term based on “a tacit
agreement or a common tacit assumption or where a term can be supplied by logical
deduction from agreed terms and circumstances.” R ESTATEMENT (S ECOND) OF
C ONTRACTS §204 cmt. c (1981). When a court cannot find an agreement as to a
particular term based on principles of contractual interpretation, “a term which is
reasonable in the circumstances is supplied by the court.” Id. at § 204. Given the course
of dealing between the parties — which presumed their respective percentages of
ownership in Pilot shares — we cannot say that the District Court’s method of calculation
was unreasonable. The District Court attempted to enforce Wyatt’s broken promise by
protecting the expectation that Edwards had when he made the contract. Id. at § 344, cmt.
a. “[The court] does this by attempting to put him in as good a position as he would have
been in had the contract been performed, that is, had there been no breach.” Id. In this
case, Edwards expected to share in the post-bankruptcy success of Pilot on a pro rata
basis with Wyatt and the District Court so found.
14
Wyatt’s citation to ATACS Corp. v. Trans World Communications, Inc., 155 F.3d
659 (3d Cir. 1998), is inapposite. ATACS involved a breach of a teaming arrangement
between a prime contractor and a subcontractor. When the prime contractor’s bid was
accepted, it turned its back on the teaming arrangement in favor of a cheaper
subcontractor to improve its profit margin. 155 F.3d at 662-64. We held that ATACS’s
expectancy was too speculative because the agreement was only preliminary and failed to
include a contract price, financing fees, and other terms; the District Court had
“absolutely no basis” for valuing ATACS’s lost profits under the subcontract. Id. at 670.
Because the parties “were far from agreeing” on these critical terms, we found ATACS
was precluded from demonstrating its expectancy. Id.
By contrast, we are not dealing here with lost profits, but with the evaluation of an
income-producing asset with an ascertainable market value. This difference is crucial.
See Schonfeld v. Hilliard, 218 F.3d 164, 176 (2d Cir. 2000) (explaining that “lost profit”
and “lost asset” damages are legally distinct: “When the defendant’s conduct results in the
loss of an income-producing asset with an ascertainable market value, the most accurate
and immediate measure of damages is the market value of the asset at the time of breach
— not the lost profits that the asset could have produced in the future.”). Although the
Handshake Agreement did not contain a damages provision, the course of dealing among
the parties — which always assumed their bargaining strength would be based on their
respective percentages of ownership in Pilot — was sufficient to supply the missing term.
15
Although the terms of that settlement doubtless would have allocated the former Pilot
assets differently among Edwards, Phillips, and Wyatt, it was not unreasonable to assume
that the total size of the “pie” at stake in that settlement — including the post-bankruptcy
value of the Pilot shares — would be unaffected by Edwards’s involvement. 4
Accordingly, calculating Edwards’s expectancy by comparing his and Wyatt’s pre-
settlement stakes in Pilot was a fair and principled way to determine Edwards’s
expectancy under the Handshake Agreement.
3.
Although we agree Edwards was entitled to damages and the District Court used
an appropriate formula, we find that the District Court erred in calculating Wyatt’s
economic benefit to determine Edwards’s pro rata share. In other words, the pie was split
appropriately, but it was the wrong size pie. Specifically, we find that the District Court
failed to account for the fact that Wyatt owned 45% of Pilot prior to his agreement with
Phillips. Because Wyatt and Phillips each controlled 50% afterwards, Wyatt netted only
5% of Pilot’s shares by breaching the Handshake Agreement.
4
We reject Wyatt’s contention that Edwards’s involvement in the discussions
would have scuttled any settlement among the three businessmen. To indulge in such
speculation would be to assume that the Handshake Agreement was either not a binding
agreement at all, or that its terms became impracticable by October 1998 (when Wyatt
and Phillips reached their private settlement) simply because of the personalities
involved. We reject both assumptions because either of them would be inconsistent with
the District Court’s finding that the Handshake Agreement was valid and enforceable at
the time Wyatt breached it. See Edwards ‘06, 2006 WL 2945224 at *8.
16
In his brief and again at oral argument, Edwards contended that Wyatt did not in
fact own 45% of Pilot because that ownership was contested and “there was a substantial
and gathering cloud over [the] 45 shares.” This contention is at odds with Edwards’s
position opposing the Wyatt-Phillips bid in the Bankruptcy Court, where Edwards stated
that “Wyatt received a 5% increase in his ownership control of Pilot.” Having taken this
position in the Bankruptcy Court, Edwards is judicially estopped from asserting an
inconsistent position now. See Ryan Operations G.P. v. Santiam-Midwest Lumber Co.,
81 F.3d 355, 358 (3d Cir. 1996). Furthermore, Edwards’s position on appeal contradicts
an undisputed fact set forth in the parties’ pre-trial stipulation and cited by the District
Court in its 2006 opinion: “In the fall of 1997, Wyatt owned forty-five percent of the
issued and outstanding stock of Pilot, Edwards’s Chapter 7 Trustee controlled his thirty-
three and one-third percent of Pilot’s stock and the balance was owned or controlled by
Phillips . . . .” 2006 WL 2945224 at *2.
In light of the aforementioned facts, we find that the District Court erred in
crediting Wyatt with having improved his position by receiving the entire value of 50% of
the company; because Wyatt owned 45% prior to the breach, he realized only a net gain
of 5% by breaching the Handshake Agreement. Accordingly, the District Court’s
inclusion of the value of Wyatt’s entire 50% interest in Pilot — valued at $9,500,000 5 —
5
Wyatt complains that the District Court’s valuation of the company was
erroneous because the court valued his 50% share when he sold his interest in Pilot to
Phillips in 2003, rather than the value at the time of breach (1998). As a general rule,
“[d]amages for breach of contract are to be determined as of the time of the occurrence of
17
was improper. The District Court should have included the value of just 5% of the
company — or $950,000 — in determining Wyatt’s economic benefit from the breach.
We find no error, however, in the other components of the District Court’s
calculation: payment of Wyatt’s legal fees ($700,000) 6 ; Wyatt’s four-year employment
contract ($1,200,000); and an interest in an Edwards real estate partnership ($1,500,000).
See Edwards ‘06, 2006 WL 2945224 at *9. Therefore, we find that the economic benefit
realized by Wyatt as a consequence of having breached the Handshake Agreement was
$4,350,000. Recognizing, as we have, that 42.5% of Wyatt’s benefits were attributable to
Edwards’s shares in Pilot and its affiliated holdings, we multiply Wyatt’s benefit by
the breach.” 22 Am. Jur. 2d Damages § 78 (2008); accord Gaylord Builders, Inc. v.
Richmond Metal Mfg. Corp., 186 Pa. Super. 101, 104 (Pa. Super. Ct. 1958). However,
there was no evidence that Wyatt’s shares were worth less in October 1998 or that Wyatt
and Phillips’s management of the company in the intervening five years substantially
increased the company’s value. Furthermore, we reject Wyatt’s assertion that expert
testimony was needed to determine the value of his shares. Wyatt has not pointed to any
authority which requires expert testimony to establish the company’s value, at least
where, as here, a defendant is a sophisticated investor whose opinion of the value of an
asset is reflected in what he was willing to pay for it, and where the fact-finder is given no
reason to think that the investor’s estimates did not reflect a reasonable approximation of
the value of the asset at the time of the breach.
6
We also reject Wyatt’s assertion that the District Court improperly included the
$700,000 he received for the payment of his legal fees. Wyatt argues that he is entitled to
an offset because some of those legal fees were spent “maximiz[ing] the value of
Edwards’ stock.” The Wyatt-Phillips settlement agreement expressly provided for the
payment of Wyatt’s legal fees up to that time and Wyatt has never introduced any
evidence to substantiate this offset. See Blum v. Witco Chem. Corp., 829 F.2d 367, 375
(3d Cir. 1987) (burden is on defendant to prove any setoffs to damages). Accordingly, we
find those fees were properly included.
18
42.5% for a total of $1,848,750. Therefore, we will vacate the judgment of $5,482,500
and remand for the District Court to enter judgment in favor of Edwards for $1,848,750.
B.
Though we find that the District Court properly awarded Edwards expectation
damages, Edwards presents two arguments in support of his claim that the District
Court’s damages award was insufficient. First, Edwards argues that the District Court
should have included income reported on Wyatt’s K-1 tax statements. Specifically,
Edwards insists that he is entitled to 42.5% of $9,106,917 — the Pilot Holding Company
income attributable to Wyatt on his K-1 — for a total of $3,870,439. We disagree.
Under the Internal Revenue Code, S-corporation and partnership shareholders pay
tax on the entity income allocated to them in accordance with their ownership percentages
in the year the entity received the income, whether or not the entity actually distributed
the income to the shareholder. 26 U.S.C. §§ 702(c), 1366(c). A partner’s pro rata share
of the corporation’s income is reported on a Schedule K-1, but the K-1 does not show the
amount of actual distributions that the partnership made to its partners; that information is
reported on a Form 1099-DIV. See Shareholder’s Instructions for Schedule K-1 (Form
1120S) for 2000, page 1. The K-1 is designed to show tax liability; the income need not
actually have been distributed to the shareholder. See I.R.C. §§ 1366(c) and 702(c).
In light of the purpose of the K-1, we cannot say that the District Court erred in
excluding the information contained therein from Edwards’s damages. Edwards
19
introduced no evidence at trial to demonstrate what portion, if any, of Wyatt’s taxable
interest in Pilot Holding Company translated into real income to Wyatt. Indeed, Wyatt
testified that the K-1 forms did not reflect any cash distributions from Pilot and Edwards
introduced no evidence to the contrary. This is fatal to Edwards’s claim that he is entitled
to a pro rata portion of the income listed on Wyatt’s K-1s. See Ad-Vantage Tel. Directory
Consultants, Inc. v. GTE Directories Corp., 849 F.3d 1336 (11th Cir. 1987) (finding that
K-1 did not show lost profits with reasonable certainty, where the plaintiff did not
demonstrate the relationship between a shareholder’s income and the S corporation’s
profits as reported on the K-1). Finally, we reject Edwards’s contention that Wyatt failed
to demonstrate that the K-1s did not reflect income distributions as an improper attempt to
shift Edwards’s burden of proof. See Spang & Co. v. U.S. Steel Corp., 519 Pa. 14, 25
(1988).
C.
Edwards also challenges the District Court’s denial of his post-trial request for
prejudgment interest. See Edwards ‘06, 2006 WL 2945224, at *9 (“No prejudgement
[sic] interest will be awarded.”).
State law governs awards of prejudgment interest in federal diversity actions. See
Liberty Lincoln-Mercury v. Ford Motor Co., 134 F.3d 557, 574 (3d Cir. 1998). Under
Pennsylvania law, the award of pre-judgment interest in contract actions is not
discretionary. See Buford v. Wilmington Trust Co., 841 F.2d 51, 56-57 (3d Cir. 1988)
20
(citing Palmgreen v. Palmer’s Garage, Inc., 383 Pa. 105, 108, 117 A.2d 721 (1955) (“In
all cases of contract interest is allowable at the legal rate from the time payment is
withheld after it has become the duty of the debtor to make such payment; allowance of
such interest does not depend upon discretion but is a legal right.”); Verner v. Shaffer, 347
Pa. Super. 206, 211, 500 A.2d 479 (1985) (“[I]n a contract action, the award of
prejudgment interest is not a matter of discretion, but is a legal right.”)). This principle
holds when contract damages are liquidated or unliquidated. See Spang & Co. v. USX
Corp., 599 A.2d 978, 983-84 (Pa. Super. Ct. 1991). Therefore, had Edwards petitioned
for prejudgment interest pursuant to state law, the District Court would have been
obligated to award it. However, Edwards requested prejudgment interest only pursuant to
federal law, which provides that the award of prejudgment interest is discretionary. See
Feather v. United Mine Workers of Am., 711 F.2d 530, 540 (3d Cir. 1983).
Edwards failed to cite the nondiscretionary state law standard before the District
Court and on appeal before this Court. Accordingly, pursuant to the doctrine of invited
error — which prohibits one from seeking appellate review of “alleged errors invited or
induced by himself,” see United States v. Riccobene, 709 F.2d 214, 228 (3d Cir. 1983) —
we will affirm the District Court’s denial of prejudgment interest. 7
7
Even if we were to review the discretionary denial of prejudgment interest under
the federal standard for abuse of discretion, see Thabault v. Chait, 541 F.3d 512, 533 (3d
Cir. 2008), we would affirm. Under Feather, a district court must consider four factors in
determining the propriety of a prejudgment interest award: (1) whether the claimant has
been less than diligent in prosecuting the action; (2) whether the defendant has been
unjustly enriched; (3) whether an award would be compensatory; and (4) whether
21
IV.
For the foregoing reasons, we find the judgment of the District Court free of
material error except insofar as it wrongly calculated Edwards’s damages. We will vacate
the District Court’s damages award and remand with instructions to enter judgment in
favor of Edwards and against Wyatt in the amount of $1,848,750.
countervailing equitable considerations militate against a surcharge. 711 F.2d at 540.
While acknowledging Edwards’s diligence throughout this protracted litigation, we find
that, on the whole, these factors support a denial of Edwards’s request. First, in order for
Wyatt to have been “unjustly enriched,” the benefit must have been conferred by the party
claiming restitution (Edwards); it is not enough that the benefit was simply derived from
the breach. Id. at 541 n.11. Furthermore, there are countervailing equitable
considerations — including the abnormal length of this litigation as well as the difficulty
in determining Edwards damages in the first place — that call for a rejection of
Edwards’s petition. Accordingly, the District Court did not abuse its discretion in
denying prejudgment interest under the federal discretionary standard.
22