United States District Court, W.D. Kentucky, Louisville
MICHAEL E. FLINN, Plaintiff,
R.M.D. CORP. and NEAL HARDING, Defendants.
MEMORANDUM OPINION AND ORDER
JOHN G. HEYBURN, II, District Judge.
This suit arises from Michael Flinn's failed acquisition of Defendant Neal Harding's interest in RMD Corporation ("RMD"), which owned and operated multiple Hooters restaurants across four states. This Court previously ruled that Flinn could not enforce an alleged agreement due to of Kentucky's Statute of Frauds. Nevertheless, the Court allowed Flinn to amend his complaint to allege quantum meruit, unjust enrichment, equitable estoppel, and fraud. The Court now finds that Flinn subsequently waived all his claims other than those for fraud. He did so by writing in his response to Defendants' summary judgment motion that he "elects to respond [only] to Defendants' arguments about his fraud claim, because this case is at its core a serious fraud claim for which quantum meruit, equitable estoppel and unjust enrichment provide insufficient redress." The Court finds it hard to imagine a more clear way to waive claims short of using the term "waive."
Defendants have now moved for summary judgment on the remaining claim of fraud. The record contains some three years of interactions and business dealings among the parties. To be sure, the parties had obvious disagreements and misunderstandings. But those disagreements fall far short of suggesting fraud. For the reasons that follow, the Court concludes that Flinn's fraud claim cannot succeed.
The most important facts are these.
Flinn was the General Partner and 70% owner of South Pacific Partners, a company that owned franchise rights for Hooters in Australia and New Zealand and hoped to acquire RMD's assets. In mid-2008, during ongoing negotiations for this purchase, Flinn began serving as RMD's unofficial president and, by all accounts, was doing a commendable job. In December 2008, during the worst financial climate since the Great Depression, negotiations for the purchase ended when financing could not be arranged. At that point, Flinn individually began negotiations to purchase Neal Harding's interest in RMD.
Over the weekend of December 13-14, 2008, Harding and Flinn met to discuss the potential deal. Flinn claims that the parties reached a full verbal agreement on a three-year option purchase agreement (hereinafter termed the "Option Agreement") containing the following terms:
a. Flinn would have a three-year option to purchase RMD for a price of $45, 000, 000.00, with the option period running from January 1, 2009 through December 31, 2011;
b. Flinn would serve as the president of RMD and would earn a $300, 000 annual salary, which sum would be retroactive to Flinn's initial informal service as president;
c. Flinn would receive 20% of RMD's pre-tax earnings while acting as president during the three-year option period; the remaining 80% of RMD's pre-tax earnings were to be paid to Harding and applied toward the $45, 000, 000 purchase price of RMD; and
d. The attorney's fees and expenses Flinn incurred in the failed GE/Sun Trust Transaction would be reimbursed.
In exchange for these terms,  Flinn would help guarantee some of RMD's debt and serve as its President. Flinn alleges Harding wanted him to have "skin in the game" by "step[ping] up" and guaranteeing "probably up to 20 percent" of RMD's refinancing with First Federal Savings Bank ("FFSB"). Flinn says that the purchase price covered not just Harding's equity stake in RMD but also the underlying real estate free and clear of debt. He says that interest was "never" discussed at the weekend meeting. The parties never reduced the Option Agreement to writing and never signed a similar document.
Harding's recollection of the discussions is quite different. He says that Flinn agreed to continue serving as President and begin receiving a $300, 000 yearly salary, but his service term was not necessarily delineated by any option period. Harding represented that he would accept $45-50 million for his interest in RMD if Flinn could make a $10 million down payment. In return, Harding would finance the remainder of the purchase price over five years, "with 80% of the total cash available for distribution being applied to Flinn's loan with Harding, and, after the full payment of [a specified rate of] interest [to Harding/RMD], Flinn [would] keep the remaining 20% of the total cash available for distribution to pay for Flinn's tax liability he would... incur by virtue of his ownership of Harding's interest in RMD." Harding is adamant he and Flinn never reached a final agreement in December 2008. Moreover, the deal was never completed because "Flinn was never able to raise the $10 million down payment." The evidence supports this conclusion and, in any event, falls well short of suggesting fraud.
After the weekend meeting, Harding asked Mike Gregory, RMD's General Counsel, to document the major points of the parties' discussion. Flinn later contacted Gregory to discuss it. Defendants produced Gregory's planner pages for December 15, 2008 which described the terms. The notes are inconclusive. Regardless, Gregory did not prepare a draft agreement until sometime in January, 2009.
Flinn began acting as RMD's official President on January 1, 2009, and was paid retroactively to his start date in mid-2008. According to Flinn, between the weekend meeting and the closing of the first tranche of FFSB loans, he "pressed" Gregory and Harding to get a memorandum of understanding ("MOU") finalized. Flinn alleges
Harding told me that he would get the Option Agreement finalized and signed. Harding also told me not to distract Gregory from finishing his work on the FFSB refinancing by asking him to work on the MOU... He told me not to worry about getting [it] in writing because Gregory had all of the information he needed to write it up. He told me that if the refinancing did not get finished, Chase could call in its notes, leaving nothing for me to buy. Harding told me the Option Agreement would be put in writing and signed promptly after RMD's debt was refinanced.
Despite the lack of a signed Option Agreement, on January 9, 2009, Flinn and his wife personally guaranteed the first tranche of loans in RMD's debt refinancing. Flinn learned for the first time at closing that he was expected to guarantee not 20% but roughly 70% of RMD's debt. Flinn originally explained that, notwithstanding this new information, he guaranteed the first tranche anyway because he "knew RMD had enough real estate assets to justify taking on more risk early in his purchase of RMD. Appraisals showed that the company real property assets exceeded the debt."
A week later, Gregory sent Flinn a draft MOU. Gregory circulated four MOUs in total, the last one on February 15, 2009 but the parties signed none of them. Each version contains a section labeled "Memo Purpose":
This Memo outlines the essential provisions of the OPA; Neal and Mike will follow this Memo with a full agreement containing the OPA essentials defined below, with details further defined and with the terms and conditions ordinary to such agreements. Neal and Mike acknowledge that, having agreed upon the essential terms of employment and installment purchase, it is in RMD's and the Entities' best interests that Neal and Mike move forward with Mike's employment and assumption of authority and responsibility for RMD's and the Entities' operation. Neal and Mike agree to negotiate the remaining OPA details in good faith, taking into account the tax and cash flow ramifications to each other, and their joint purpose of engaging in a practical and workable agreement.
The terms in each draft MOU differ markedly from Flinn's account of the Option Agreement. For instance, even the first draft contemplates a seller-financed installment purchase and adds to the $45 million price tag an as-yet undetermined amount "representing [Flinn's] share of expenses of the failed asset purchase paid by RMD or Neal on [Flinn's] behalf." Flinn downplays these differences. He says that he "would have preferred to draft the Option Agreement with the terms agreed in the December 2008 Weekend Meeting, but the MOU drafts correctly stated that he and Harding had agreed to the essential terms' of their deal and were required to negotiate the remaining [option] details in good faith'...."
By month's end, after circulating two "stabs at" the MOU, Gregory put Flinn on further notice that Harding might adjust the terms. He said that he and Harding and Harper (RMD's Controller) had reviewed RMD's financial situation: "We'll see how that compares to the purchase price as it stands; it may need adjusting, and Neal will determine, with [Harper's] help, what he thinks is fair." On March 25, 2009, after the last draft MOU was circulated, Flinn's transactional attorney Art Berner emailed Harding's transactional attorney Tom Ice to inquire whether he was working on a definitive agreement. Ice answered, "Not until the loan with First Federal is completed." At this point, it seems pretty clear that the parties knowingly had not reached any sort of purchase agreement.
Meanwhile, counsel for Hooters of America ("HOA") began reaching out to Gregory to describe its "two primary concerns" with the proposed transaction:
First, we asked Mike Flinn's attorneys, repeatedly and for several months, to provide us with the terms of your proposed transaction with Mike. They did not provide us with the terms... [Gregory] apparently drafted the bulled-point description; however, he reported to our attorney that you would not let him send it. As a result, at this point, we simply do not know the actual terms of your proposed transaction with Mike Flinn. Second, we have concerns about Mike Flinn. We are not going to disclose the business issues that have suddenly arisen between HOA and Mike, unless Mike authorizes us to do so. However, these issues, at this point, lead us to believe that we may be unable to approve Mike as a transferee of your equity in RMD.
Counsel then reminds Harding "any transfer of [Harding's] rights and obligations under [the franchise agreements at issue], including transfers of equity, requires HOA's consent." Harding admits he received this letter on April 22, 2009. Nevertheless, on April 24, 2009, Flinn personally ...