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Preferred Investment Services, Inc. v. T&H Bail Bonds, Inc.

Court of Chancery of Delaware

July 24, 2013

PREFERRED INVESTMENT SERVICES, INC., Plaintiff,
v.
T&H BAIL BONDS, INC., TED L. PRIDGEN, ROBERT LUBACH, JOANNE M. LUBACH, MELISSA M. MATARESE, JERZY WIRTH and WIRTH FINANCIAL SERVICES, LLC, Defendants.

Submitted: March 13, 2013

E. Calvin Harmon, Jr., Esquire, LAW OFFICE OF THEOPALIS K. GREGORY, SR., ESQ., Wilmington, Delaware; Attorneys for Plaintiff.

Neil R. Lapinski, Esquire, GORDON, FOURNARIS & MAMMARELLA, P.A., Wilmington, Delaware; Attorneys for Defendants.

MEMORANDUM OPINION

PARSONS, Vice Chancellor

This case arises from the soured relationship between two parties to an exclusive cash bail financing agreement. The parties to the agreement are a cash bail business and the financing company that would supply the cash. The agreement provided that the financing company would supply the cash bail business with a certain amount of cash and, in return, the cash bail business would provide customers and the resources to administer its business. The agreement precluded the financing company from assisting or financing any other cash bail business during the five-year term of the agreement. Likewise, the agreement precluded the cash bail business from accepting cash from any other source to post cash bails.

Both parties ultimately breached the agreement. This case turns largely on which party breached first, as there are claims and counterclaims for breach of contract. In addition, the financing company, which is the plaintiff in this action, claims that the cash bail business owes it for loans, cash bail refunds, and cash bail forfeitures. The plaintiff also asserts claims for tortious interference with contractual relations against individuals and entities that it alleges provided cash to the cash bail business in contravention of the agreement. The cash bail business defends on the ground that the plaintiff began financing or assisting other bail agents in violation of the agreement's exclusivity provision long before the cash bail business went outside of the agreement to secure financing from other sources. In addition to pressing that argument defensively, the cash bail business is pursuing damages under a breach of contract counterclaim. The cash bail business also has asserted a counterclaim against the plaintiff for abuse of process, and it seeks to recover its attorneys' fees on that ground and under the bad faith exception to the American Rule. According to the cash bail business, the plaintiff knew from the outset of this action that the financing agreement was unenforceable against it due to the plaintiff's prior breach, but the plaintiff persisted in bringing and prolonging this litigation to drive the cash bail company out of business.

I presided over a three-day trial on the parties' claims and counterclaims and later heard oral argument after full post-trial briefing. Having carefully considered the evidence presented at trial and the parties arguments about that evidence, I rule predominantly in favor of the defendants. I find that the plaintiff is entitled to payment for certain loans, bail refunds, and bail forfeitures. But, I find in favor of the cash bail business on the plaintiff's breach of contract claim and the cash bail business's breach of contract counterclaim. The plaintiff materially breached the parties' exclusive financing agreement before the cash bail business engaged in the acts that the plaintiff alleges were in breach of that agreement. The cash bail business is entitled to recover damages from the plaintiff for that breach. I also find that the defendants who provided funding to the cash bail business did not tortiously interfere with the exclusive financing agreement. The cash bail business did not prove its counterclaim for abuse of process. Nevertheless, I find that the plaintiff's actions in this litigation clearly warrant the shifting of attorneys' fees, and I, therefore, award the defendants 80% of the attorneys' fees and expenses they reasonably incurred in this litigation.

I. BACKGROUND

A. The Parties

Plaintiff, Preferred Investment Services, Inc. ("PISI"), was the financier of Defendant T&H Bail Bonds, Inc.'s ("T&H") cash bail business. Edwin Swan is the principal of PISI.

Defendant Ted Pridgen owns and operates T&H. T&H and Pridgen post cash bails for T&H customers. Defendants Robert and Joanne M. Lubach (the "Lubachs"), Melissa M. Matarese, Jerzy Wirth, and Wirth Financial Services, LLC ("WFS") (collectively, the "Additional Defendants") allegedly provided financing to T&H's cash bail business.

B. Facts

1. T&H and PISI's business relationship

Swan, the sole owner of PISI and a related business Preferred Tax Services, Inc., provides business consulting, tax preparation, and bookkeeping services to his clients.[1]Beginning in 1995, before Swan incorporated PISI, he provided tax preparation and bookkeeping services to T&H.[2] Swan later attempted to purchase T&H for approximately $3, 000, 000, but was unable to arrange the financing for that transaction.[3] As an alternative, Swan and T&H discussed having Swan finance T&H's cash bail business. Then, shortly after Swan incorporated PISI in 2007, T&H and PISI entered into a Cash Bail Financing Agreement (the "Agreement").[4]

Over the course of the parties' business relationship, in addition to financing T&H cash bails, PISI or Swan also occasionally loaned T&H funds to cover its payroll expenses.[5] According to Swan, Pridgen would request such a loan by telephoning Swan and, if Swan approved, Pridgen would pick up the loan at Swan's office.[6] There was no formal agreement between Swan and Pridgen for the repayment of the loans.[7] Swan said he typically did not charge any interest for "smaller amounts, " but would charge interest in certain circumstances depending on what the money was borrowed for.[8] Swan testified that Pridgen agreed to an interest rate of 9.75%.[9]

2. The Cash Bail Financing Agreement

By its terms, the Agreement was to span a five year period from May 21, 2007 to May 31, 2012.[10] The Agreement required T&H to "provide cash bail customers and the office space, bail agents, bounty hunters, licensing, insurance and general support to administer its cash bail business."[11] In return, PISI undertook to provide T&H funds as needed to post T&H's cash bails up to $1, 000, 000 (the "Bail Limit").[12] Additionally, the Agreement provided that PISI must supply T&H with a sum of $100, 000 by May 24, 2007, and thereafter must maintain a minimum cash balance of $100, 000 on-hand with T&H.[13]

The Agreement also provided that T&H and PISI would deal with each other exclusively. Section II(f) of the Agreement states: "So long as T&H is not in default under the [A]greement, [PISI] shall not without the prior consent of T&H, directly or indirectly provide cash or other cash bail financing or assistance to any person other than T&H."[14] Similarly, Section II(e) provides that:

So long as the total amount of cash bails held by courts is less than the Bail Limit and so long as [PISI] is making the contributions specified in paragraph I, T&H shall not directly or indirectly deal with any entity other than [PISI] for the cash to post cash bails.[15]

The Agreement defines "directly or indirectly" to include,

among other things, transactions done by or on behalf of immediate family members of or legal entities owned or controlled by [Pridgen] or [Swan] or legal entities owned or controlled by any [] immediate family member of [Pridgen] or [Swan], as the case may be, or any other method used for the purpose of circumventing this agreement.[16]

Under the terms of the Agreement, T&H would pay PISI one half of all cash bail fees that T&H charged to its customers. The Agreement required T&H to charge its customers a cash bail fee between 32% and 34%. T&H typically charged a fee of 33%, of which PISI was entitled to half, or 16.5%.[17] The Agreement also provided that when cash bails funded by PISI were refunded or otherwise returned, those amounts should be collected by T&H and paid in full to PISI.[18] If a cash bail was forfeited, the parties agreed to bear the loss equally.[19] To reconcile the amounts owed, the Agreement provided that T&H and PISI "shall meet periodically but in no case less often than monthly to settle accounts of forfeited or refunded bails, [to divide] cash bail fees and [to divide] expenses" (each a "Settlement Meeting").[20]

The Agreement was to continue in effect until May 31, 2012, unless T&H or PISI terminated it earlier. The Agreement contemplated two circumstances under which the Agreement could be terminated. First, T&H could terminate the Agreement at any time if PISI failed "to provide cash as required by paragraphs I & II of the Agreement."[21] In addition, the Agreement provided that either party could terminate the Agreement "after giving the other party 10 days notice and [an] opportunity to cure if the other party materially breached th[e] [A]greement."[22] If the Agreement was terminated for any reason, the parties agreed that "the obligation of T&H to make payments to [PISI] . . . shall continue until all monies required to be paid or returned to [PISI] shall have been paid or returned."[23]

3. Cash bail application and business

To facilitate understanding of the details of this dispute, it may be helpful briefly to describe T&H's usual process for completing a cash bail transaction. According to Swan, the first step in securing a cash bail from T&H is to fill out a cash bail application.[24] Before the customer completes the application, T&H and the customer agree on the fee for posting the bail. Once the application is complete, the customer pays the agreed upon fee in exchange for the cost of that particular cash bail and then receives a receipt indicating the amount of the cash bail being posted and the fee she paid.

Access to a reliable supply of cash on-hand is imperative to the success of T&H's business. Under the Agreement, PISI would provide T&H with an up-front bank of a combination of cashier's checks and cash so that T&H had ready access to cash when cash bail opportunities arose.[25] The Agreement required PISI to maintain with T&H a minimum cash balance of $100, 000 to fund T&H's cash bails.[26]

PISI and T&H met every two, three, or four weeks to conduct a Settlement Meeting to determine, among other things, the fees T&H owed to PISI for the cash bails it posted during that time period and also to replenish T&H's cash supply.[27] At the Settlement Meetings, T&H would provide PISI with all the supporting documentation for the cash bails it posted in that particular time period. The number of cash bails to be settled could range from five to twenty-five at any given Settlement Meeting.[28]

To reconcile the cash inventory that PISI provided to T&H, T&H kept a cash inventory list.[29] The list began with the amount of cash T&H had on hand. As T&H used the cash inventory to post its cash bails, T&H added line items for those amounts on the list. At the Settlement Meetings, Swan and Pridgen would calculate the remaining balance by deducting the line items from the beginning balance to arrive at a final figure. Pridgen and Swan then compared the cash balance remaining at T&H's office with the final figure to ensure that the cash inventory was accurately reconciled. The cashier's checks were reconciled in the same manner as the cash inventory. Upon request from T&H, PISI would replenish T&H's cash inventory by delivering cash or cashier's checks to T&H. PISI would make the checks out to the State of Delaware for incremental amounts between $1, 500 and $2, 500.[30]

4. T&H and PISI's rocky relationship

By 2009, Pridgen and Swan's relationship had become rocky. Around 2008 or 2009, Swan accused one of T&H's employees of miscalculating the settlement amount that Swan was entitled to from the cash bails posted during the settlement period.[31] On multiple occasions, Pridgen told Swan to refrain from contacting his employees or customers.[32] Nevertheless, without Pridgen's permission, Swan called one of T&H's customers to inform her that he would be withholding a portion of the collateral she had paid to T&H due to the long delay in resolving the customer's case.[33] In that case, the customer had requested financing from T&H for an unusually high cash bail amount. Due to the high amount, T&H asked the customer to provide some security or collateral before it could post the bail. As collateral, the customer gave T&H $20, 000 to secure the cash bail.[34] Swan demanded to hold the $20, 000 for its safekeeping. After the case concluded, the customer telephoned Pridgen and requested that he return its collateral. Although Pridgen called Swan multiple times to request that he return the client's money to T&H's office, Swan refused.[35] Pridgen ultimately called his client's attorney.[36] The attorney contacted Calvin Harmon, Esquire and shortly thereafter, the collateral was returned to Pridgen's office.[37]

In or around 2009, T&H began to encounter problems obtaining financing from PISI when cash bail opportunities arose. T&H claimed that it had the right under the Agreement to expect PISI and Swan to be available the entire day to finance T&H's cash bails, including nights and weekends.[38] According to Pridgen, it was typical within the cash bail industry to have bail requests at 3:00 am in the morning.[39] Swan refused to be available to finance cash bails in the middle of the night, but said he would be available at 9:00 am when the banks opened. Around the same time, T&H received complaints that PISI was interfering with operations in T&H's downtown offices.[40] In addition, T&H began to hear "industry rumors" that PISI was financing other cash bail agents besides T&H.[41] Pridgen repeatedly approached Swan about these rumors, but Swan consistently denied that PISI was financing any other cash bail agents beside T&H.[42] In January 2010, however, T&H learned that a cash bail was posted for Tybrie Briscoe using Swan's government issued driver's license.[43] Lorin Jones, an employee of T&H, told Pridgen that Swan posted the cash bail for Briscoe.[44] Swan initially denied that he posted the Briscoe bail, but later admitted to Pridgen that he had done so after Pridgen told Swan that the court clerk identified him as the individual who posted the bail for Briscoe.[45]Pridgen became aware of the Briscoe transaction in January 2010.[46]

5. PISI's secret transactions

On or about January 20, 2009, a company called NC Cash Bails, Inc. ("NC Cash") was incorporated in Delaware by one of Swan's entities.[47] The owner of NC Cash was Nickulas Maglaras.[48] According to Swan, NC Cash employed PISI to conduct the day-to-day transactions of its business, such as receiving calls from bail agents needing financing, providing cashier's checks to bail agents, maintaining NC Cash's books and records, and making bank accounts available to NC Cash in which cash bail refunds could be deposited and from which cashier checks could be purchased.[49]

PISI also had arranged with Montanez Reed, owner of Mark Bail Bonds ("MBB") in November or December 2008 to have NC Cash finance MBB's cash bails in Delaware.[50] Before NC Cash began financing cash bails for MBB, however, Swan approached Pridgen to seek permission for PISI to enter into a cash bail financing agreement with Reed.[51] Pridgen declined that request and, in turn, reminded Swan of the exclusive financing agreement that PISI had with T&H.[52] The evidence shows, however, that Swan and PISI went ahead anyway with financing, or at least, assisting NC Cash and MBB in connection with their cash bail-related business.

As part of the arrangement with Reed, PISI provided $10, 000 in December 2008 to MBB to fund its cash bail operations.[53] PISI also made an arrangement with Top Bail Bonds ("TBB"), similar to the arrangement it made with MBB, to have NC Cash finance TBB's cash bail postings.[54]

Additionally, PISI opened new bank accounts for other bail bond agents, in which it listed Swan as an authorized signor on the accounts.[55] Specifically, Swan was the signor for Just Bails LLC, an affiliate of MBB. Swan testified that he did not feel obligated to disclose to T&H that he was a signor on any of the new accounts because they were not Swan's bank accounts.[56] Swan explained that he became a signor on the bank account so that he could facilitate the transfer of money between accounts.[57] As a signor, Swan admittedly transferred money from PISI accounts to accounts owned by cash bail agents other than T&H.[58] PISI also deposited check refunds that Delaware courts issued to other bail agents into PISI's bank accounts.[59] Furthermore, Swan admitted that in PISI's bank accounts, PISI commingled its own money with NC Cash's money.[60] In addition, on occasions when NC Cash did not have sufficient funds in its bank accounts to finance cash bails for MBB or TBB, Swan would transfer funds from PISI's accounts to cover the shortfall.[61] This was done because NC Cash had only a narrow time frame within which to post its cash bails.[62]

6. PISI's designs on T&H's business

On October 2, 2007, PISI reserved the name "T&H Cash Bails" on the New Castle County Registration of Trade Names Partnerships & Associations pursuant to the fictitious name statute.[63] On May 28, 2008, PISI also reserved the same name in Kent and Sussex Counties.[64] In early 2011, Swan also reserved the name "T&H Bail Bonds, Inc." with the Delaware Division of Corporations.[65] Swan admitted that he reserved this name because he was thinking about expanding into the bail bond business on a full-time basis.[66] Swan testified that it came to his attention that T&H Bail Bonds Inc. was available as a corporate name and, therefore, he reserved the name in Delaware.[67] PISI knew that T&H was operating under the same name in Delaware when it reserved the name, but was not troubled by that fact. Indeed, Swan expressed indifference to the possibility that T&H might have to change its name, saying simply, "it's a free market."[68]

7. T&H's alternate source of financing and termination of the Agreement

In 2010, after learning that PISI was engaged in financing other cash bail operations, T&H began accepting cash financing from Defendant Matarese.[69] The cash bails that Matarese financed for T&H between 2010 and 2011 totaled $495, 925.[70] In late November 2010, T&H also entered into an agreement with Defendants Wirth and WFS whereby WFS funded cash bails for T&H.[71] The cash bails Wirth and WFS financed for T&H totaled $2, 149, 746.[72]

On August 8, 2010, Pridgen advised PISI that he intended to terminate the Agreement on August 12, 2010.[73] T&H memorialized its purported termination in a letter to PISI on August 30, 2010. In the termination letter, T&H made seven requests to PISI, one of which specifically asked PISI to refrain from doing any cash bail business with anyone, except T&H.[74] Evidently, PISI responded to the termination letter on September 9, 2010.[75] PISI's counsel and T&H's counsel exchanged emails thereafter regarding PISI's intention to file a complaint and T&H's intention to counterfile in the event of a lawsuit.[76]

On September 22, 2010, T&H's counsel sent an email to PISI's counsel, informing him that T&H was aware that PISI was funding other cash bail agents.[77]PISI's counsel sent a copy of that email to Swan on September 27, 2010, and he told Swan that T&H allegedly had photocopies of canceled checks to support its claims that PISI was funding other bail agents beside T&H.[78] As discussed further, infra, PISI initiated this litigation on October 8, 2010.

8. Modifications made to PISI's accounting records before trial

Swan routinely reconciled by hand PISI's cash bail logs and the cashier's check log for the NC Cash and PISI accounts to ensure that he had accounted for all money handled by those companies.[79] Swan would input the amounts from his settlement sheet into an Excel spreadsheet and also into QuickBooks to create journal entries to reflect the expected accounts receivable from those cash bails.[80] Swan kept the amounts in various forms in the Excel spreadsheet as well as QuickBooks to ensure that his books were accurate and that his balances would reconcile.[81] During Swan's deposition on April 24 and 25, 2012, he indicated that all of PISI's accounting records were stored electronically.[82] After this testimony, T&H requested that PISI produce its accounting records. In response, PISI produced hard copies of its records in portable document format, or "pdf, " to T&H on August 30, 2012. T&H had requested that the documents be produced in electronic form, but PISI resisted production of the electronic files. T&H then filed a motion to compel and a motion for rule to show cause on July 30, 2012. On August 7, 2012, I ordered PISI to provide the electronic files to T&H in native format and awarded T&H the attorneys' fees it incurred in prosecuting the motion to compel that production.

Thereafter, T&H hired a forensic accounting expert, George Prenger, to review the electronic version of PISI's accounting records. Prenger produced an audit report that provided the following information: a list of each accounting transaction that had been altered in the course of PISI's production of the books of the Company; additions, deletions, and modifications that affected those transactions; the dates alterations were made; and the account of the user who made the alterations.[83] Prenger's expert report in this matter (the "Expert Report") stated that, in 2012, 108 entries or alterations were made to entries from the 2009 and 2010 accounting records.[84] These alterations included changes to the memo fields of various entries, the reclassification of the account to which a certain transaction was posted, and even the elimination of several accounts, such as "Loan Receivable – MBB." The changed entries involved transactions for "loans receivable" and "loans payable" between PISI and NC Cash, and between PISI and MBB.[85] In one instance, a journal entry recorded in December 2008 as pertaining to a "Loan Receivable – MBB" was reclassified in April 2012 to read "1075-Cash Bank – Sttlmts/Escrows."[86] Additionally, changes were made to at least nine entries for transactions reportedly involving money going from PISI to MBB in which the transaction originally was classified as a "Loan Payable – MBB." The memo description lines for these nine transactions were modified in April 2012 to indicate only that the payment was to a "fiduciary" account.[87]

9. PISI's objections to Prenger's evidence

I interrupt the factual narrative briefly here to address PISI's motion in limine to exclude the testimony or related evidence presented by Prenger. Prenger is a Certified Public Accountant ("CPA") and Certified Information Systems Auditor ("CISA"). T&H called Prenger to provide testimony on whether PISI and NC Cash's accounting records were created contemporaneously with the transactions that PISI alleges they represent. Additionally, Prenger was to provide testimony on whether NC Cash had sufficient funds available in its bank accounts to fund the cash bails it purportedly financed. PISI seeks to exclude Prenger's evidence in its entirety. Specifically, PISI contends that Prenger has no certification on the functionality of the QuickBooks software, that he has little experience with its use, and that his analysis and conclusions are not based on current standards or generally accepted and reliable principles or methods.[88] In response, T&H argues that Prenger's expert testimony is proper because he has the requisite technical and specialized knowledge to analyze and opine on the accounting and bank records of a business such as PISI.[89]

The principles governing the admissibility of expert testimony are set forth in Rule 702 of the Delaware Rules of Evidence ("D.R.E."):

If scientific, technical or other specialized knowledge will assist the trier of fact to understand the evidence or to determine a fact in issue, a witness qualified as an expert by knowledge, skill, experience, training or education may testify thereto in the form of an opinion or otherwise, if (1) the testimony is based upon sufficient facts or data, (2) the testimony is the product of reliable principles and methods, and (3) the witness has applied the principles and methods reliably to the facts of the case.

The judge acts as a gatekeeper to ensure that the scientific testimony is not only relevant but reliable and must play an active role in ruling on the admissibility of evidence.[90] The proponent of the proffered expert testimony bears the burden of establishing its relevance, reliability, and admissibility by a preponderance of the evidence.[91]

PISI's arguments that Prenger is not qualified as an expert are not persuasive. Prenger is both a CPA and a CISA. He has over thirteen years of experience in his field. He has the technical knowledge and specialized skills necessary to review banking statements and perform forensic analysis of financial activities.[92] As an investigator for Special Services International, Prenger also has recreated financial activities from original source documentation.[93] Here, the documents that Prenger reviewed were produced by PISI during the discovery process. Prenger did not look to outside activities within the bail industry or independent data to make his findings. The audit trail reports[94]that Prenger relied upon were produced using a standard function available on all QuickBooks software. In fact, it cannot be turned off on post 2010 versions of the software.[95] PISI's QuickBooks software is a post 2010 version. The audit trail report ("Audit Report") lists all the accounting transactions that have been altered and shows any additions, deletions, or modifications that would affect those transactions. Thus, any information presented to the Court by Prenger as it pertains to modifications made to PISI's QuickBooks records readily would have been discoverable by anyone that reviewed such an Audit Report. Moreover, PISI made no objection to Prenger's Expert Report in the joint exhibit list.[96]

Furthermore, Prenger's analysis will assist the Court to understand the evidence regarding the accounting transactions that are recorded in QuickBooks and to determine whether they involved other cash bail agents beside T&H. Thus, T&H has met its burden of demonstrating that Prenger qualifies as an expert under D.R.E. 702 because of his specialized skill in forensic accounting and in recreating the details of financial activities from original source documentation. Hence, I consider Prenger to be a competent and credible expert witness to testify reliably about the modifications made to PISI's accounting ...


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