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Tavadia v. Mitchell

Court of Appeals of Kentucky

October 19, 2018



          BRIEF FOR APPELLANT: Scott P. Zoppoth Louisville, Kentucky




          DIXON, JUDGE.

         Appellants, Behram Tavadia and Tavadia Enterprises, Inc. (collectively "Tavadia"), appeal from an opinion and order of the Jefferson Circuit Court, following a bench trial finding in favor of Appellee, Sheri Mitchell, and dismissing Tavadia's claims of breach of fiduciary duty, misappropriation and conversion of company assets, forgery, and fraud.

         In April 2013, Mitchell started One Sustainable Method Recycling, LLC ("OSM"), a company that contracted with healthcare providers to assist in the recycling of healthcare waste, such as plastics and sharp metal objects. OSM accepted the materials from the healthcare facilities at its Louisville warehouse and prepared them for recycling. Initially, Mitchell was a 99% owner of OSM and was the acting CEO. Ahmet Mehta held the other 1% ownership interest. Shortly after OSM's start-up, Mitchell approached Tavadia, [1] who lived in Florida, about investing in the company.

         In June 2013, OSM and Tavadia Enterprises, Inc, a Florida corporation owned solely by Tavadia, entered into a loan agreement wherein Tavadia loaned OSM $40, 000 with interest accruing at a rate of 6% per year. The agreement provided that OSM would repay Tavadia $1, 000 per month and further that Tavadia would acquire a 5% interest in OSM's yearly profits. Mitchell did not execute a personal guaranty for the loan. After securing the loan from Tavadia, OSM received an additional $150, 000 loan from Louisville's Metropolitan Business Development Corporation ("METCO"). Tavadia assisted OSM in securing that loan by signing a "Security Agreement and Pledge of Bonds," as well as agreeing to act as a personal guarantor for the METCO loan to OSM.

         By the beginning of 2015, OSM had not made any payments on the loan agreement with Tavadia nor paid any profits, as the company had yet to realize such. However, instead of invoking the loan agreement's acceleration clause and demanding payment of the outstanding balance, Tavadia agreed to delay repayment of the loan based upon Mitchell's representations that OSM was making money but that all funds were going to pay expenses. Subsequently, in February 2015, OSM and Tavadia entered into a second loan agreement, which incorporated the first $40, 000 loan. The second loan agreement provided OSM with an additional $250, 000 for equipment that Mitchell had represented to Tavadia the company needed to purchase. In addition, the second agreement acknowledged that Tavadia had secured the METCO loan in the amount of $150, 000, and also memorialized an additional $12, 000 loan that Tavadia had made to OSM in the fall of 2014. Finally, the second loan agreement provided that Tavadia would receive a 25% ownership interest in OSM and 25% of net monthly profits. Again, Mitchell did not execute a personal guaranty for the second loan.

         Despite the second loan between OSM and Tavadia, OSM's financial situation continued to deteriorate. Between April 2014 and September 2015, OSM incurred $14, 540 in overdraft charges. In August 2015, OSM obtained a $20, 000 loan from Fundworks, LLC. Mitchell signed the loan in both her and Tavadia's name on behalf of OSM, as well as signed a personal guaranty in her name and Tavadia's name. The loan carried an interest rate of 15% and required daily payments of $277.78.

         By October 2015, OSM had ceased operations and Mitchell sold some of the equipment for a total of $46, 899. Of that, $24, 929 went into Mitchell's personal bank account and $21, 970 went into OSM's account. OSM also ceased making loan payments to Tavadia.[2] It was around this time that Tavadia first learned of the Fundworks loan when a representative called demanding payment. Further, OSM defaulted on the METCO loan, and METCO contacted Tavadia stating its intent to sell or redeem the bonds he pledged.

         On October 21, 2015, Tavadia filed an action in the Jefferson Circuit Court against OSM and Mitchell, individually, asserting claims for breach of contract, breach of fiduciary duty, misappropriation and conversion of company assets, and failure to allow access to company records in violation of KRS[3]275.185. Tavadia subsequently amended his complaint to add claims for fraud, relating to bank records indicating Mitchell had paid for personal expenses out of OSM's bank account, as well as forgery and fraud relating to Mitchell's signing of Tavadia's name on the Fundworks loan.

         The record indicates that Mitchell proceeded without counsel and attempted to represent both her individual interests and OSM's interests. However, the trial court informed her that although she could personally proceed pro se as to the causes of action against her individually, she could not represent OSM, as she was not an attorney. Counsel was never retained to represent OSM and, on August 12, 2016, the trial court entered a default judgment against OSM in the amount of $302, 000.

         A bench trial was conducted on May 26, 2017, on the claims against Mitchell and whether she could be held personally liable for OSM's debts to Tavadia. On August 4, 2017, the trial court entered an opinion and order dismissing all claims against Mitchell. Citing to the factors set forth in Inter-Tel Technologies, Inc. v. Linn Station Properties, LLC, 360 S.W.3d 152 (Ky. 2012), the trial court concluded that the evidence did not support piercing OSM's corporate veil to hold Mitchell personally liable for OSM's debts to Tavadia. Further, with respect to the claims related to the Fundworks loan, the trial court concluded:

The Court concludes that Ms. Mitchell signed Mr. Tavadia's name to the loan application and guaranty without Mr. Tavadia's permission. This could open Ms. Mitchell to personal liability under a breach of fiduciary duty, but Mr. Tavadia has not proven that he has suffered any damages. He had paid nothing to fundworks, LLC relating to this loan at the time of trial, and he has an excellent defense in the event fundworks, LLC files suit against him because Ms. Mitchell acknowledged that she signed his name to the documents. She has nothing supporting her contention that she had his ...

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