United States District Court, D. Delaware
AIR PRODUCTS AND CHEMICALS, INC., Plaintiff and Counterclaim-Defendant,
ERIC P. WIESEMANN, et al., Defendants and Counterclaim-Plaintiff.
Timothy M. Holly, Esquire of Connolly Gallagher LLP,
Wilmington, Delaware. Counsel for Plaintiff and
Counterclaim-Defendant. Of Counsel: Oliver D. Griffin,
Esquire, Peter N. Kessler, Esquire, and Melissa A. Bozeman,
Esquire of Kutak Rock LLP, Philadelphia, Pennsylvania.
S. Saunders, Esquire, Joseph O. Larkin, Esquire, Matthew P.
Majarian, Esquire, Jessica R. Kunz, Esquire, Kathryn S.
Bartolacci, Esquire, and V. William Scarpato, III, Esquire of
Skadden, Arps, Slate, Meagher & Flom LLP, Wilmington,
Delaware. Counsel for Defendants and Counterclaim-Plaintiffs.
ROBINSON, SENIOR DISTRICT JUDGE
31, 2013, plaintiff Air Products and Chemicals, Inc.
("Air Products") acquired EPCO Carbon Dioxide
Products, Inc. ("EPCO") and Louisiana Leasing, Ltd.
of Illinois ("LLL") from its stockholders,
defendants Eric P. Wiesemann ("Wiesemann"), Kathryn
Elizabeth Barker Trust, Grant Raymond Barker Trust, Tyler
James Barker Trust, Mary Alyce Blum, Carl R. Buck, Davin
James DeGeus Trust, Dale Del Sasson Family Trust, Ramon Del
Sasso, Craig D. Dixon, Gail D. Dixon, Michael F. Duffy, Sr.,
Paul E. Gantzert, Mary Jo Gregorich, Dorothy Kaluzny Trust,
Roberta Kavanaugh, Joseph A. Komar, Jr., Kathleen Komar,
Michael Komar, Sophie H. Komar Trust, Susan Komar, Donald
Laasch, Lori D. Longueville, Sandra Mayerhofer, James K.
Murphy, Cheryl Nolden, Leon Odle, David Rogers, Rosedel, LLC,
Mary L. Wachtl, Denise Wiesemann, Zerebny Revocable Trust,
and Grady Collins (collectively, the "Seller
Defendants"). Wiesemann is also the founder of EPCO and
served as its Chief Executive Officer up until the
acquisition; defendant Darrel Craft ("Craft")
served as President (collectively with Seller Defendants, the
"Defendants"). Air Products has brought claims against
the Seller Defendants for breach of contract and unjust
enrichment, and against Wiesemann and Craft for securities
fraud, common law fraud, and negligent misrepresentation.
(D.I. 48 at ¶¶ 183-340) The claims are based on
EPCO's compliance with Department of Transportation
regulations governing drivers' hours of service and the
condition of EPCO's plant equipment and fleet. (D.I. 48;
D.I. 206) Craft has counterclaimed for breach of contract
based on a consulting agreement dated May 15, 2013. (D.I. 57
at ¶¶ 135-39)
court held a bench trial between May 23 and June 2, 2016, and
the parties have completed post-trial briefing. (D.I. 206,
207, 208, 209) The court has jurisdiction over the matter
pursuant to 28 U.S.C. § 1332(a). Having considered the
documentary evidence and testimony, the court makes the
following findings of fact and conclusions of law pursuant to
FINDINGS OF FACT
time of the acquisition, EPCO was a privately-held company
that produced and distributed liquid carbon dioxide. (JTX
020) It was based in Monroe, Louisiana, had 11 plants
throughout the United States, and employed approximately 100
truck drivers. (JTX 007-006; D.I. 204 at 1272:3-1273:7) LLL
owned tractors and trailers leased solely to EPCO. (JTX 020)
The acquisition allowed Air Products to add liquid carbon
dioxide to its North American gases portfolio. (Id.;
Relevant Provisions of the Stock Purchase Agreements
acquisition is governed by the EPCO Stock Purchase Agreement
and the LLL Stock Purchase Agreement (collectively, the
"SPAs"). (JTX 839; JTX 721) Air Products claims
that the Seller Defendants breached the following
representations and warranties in both SPAs: Section 4.7
(Tangible Assets), Section 4.20 (Financial Statements), and
Section 4.23.1 (Compliance with the Law).
4.7 of the EPCO SPA provides, in relevant part, that:
[A]ll of the Tangible Assets are in good working order,
repair and operating condition (ordinary wear and tear only
excepted), are, to the Company's Knowledge, free from
design or structural defects including any latent defects and
are suitable for the uses for which such Tangible Assets are
used in the conduct of the Business.
(JTX 839-021) "Tangible Assets" is defined as
"all of the tangible assets of the Company owned,
leased, used or held for use in the operation of the Business
...." (JTX 839-112) There is no dispute that the assets
at the heart of Air Products' claims are covered by
Section 4.7. "Company's Knowledge" essentially
means the "actual knowledge" of Wiesemann and Craft
and any knowledge they "would have had after reasonable
inquiry." (JTX 839-105; JTX 839-109) Section 4.7 of the
LLL SPA does not contain the exact same language, but the
parties have litigated as if there are no differences in
meaning. Because the parties have focused
exclusively on Section 4.7 in the EPCO SPA, the court will
similarly rely only on that provision.
4.20 of both SPAs provides, in relevant part, that:
[T]he Financial Statements ... were prepared in accordance
with GAAP and all applicable Legal Requirements. All of the
Financial Statements are true, complete and correct, contain
no untrue statement of a material fact, do not omit any
material fact necessary in order to make such Financial
Statements not misleading and are a true, complete and
correct reflection of the operations of the Company for the
periods described therein.
(JTX 839-033; JTX 721-026) "Financial Statements"
essentially means the audited balance sheets of the company
and related statements for fiscal years ending September 30,
2010, 2011, and 2012, and the unaudited balance sheet of the
company and related statements for the seven months ending
April 20, 2013. (JTX 839-107)
4.23.1 of both SPAs provides that EPCO and LLL operated in
compliance with the law. Specifically, it states, "the
Company has conducted its business and affairs, and has been
and is in compliance with all material Legal Requirements
which are applicable to the Assets, the Business and its
operations." (JTX 839-034; JTX 721-027) "Legal
Requirements" means "any statute, law, ordinance,
rule, [or] regulation ... issued, enacted or promulgated by
any Governmental Authority or any arbitrator." (JTX
839-109; JTX 721-072) "Governmental Authority"
includes any federal regulatory agency and its subdivisions,
such as the Department of Transportation and its subdivision,
the Federal Motor Carrier Safety Administration. (JTX
839-107; JTX 721-070)
4 of the SPAs starts with a preamble stating that EPCO and
LLL make these representations and warranties "as of the
Closing Date." (JTX 839-019; JTX 721-011) Section 10.1.1
further provides that the representations and warranties
"shall be true and correct in all material respects ...
as of the Closing Date, " which the parties represent is
May 31, 2013. (JTX 839-051; JTX 721-039; D.I. 206 at 2)
Finally, Section 12.2.1(d) of both SPAs provides that the
representations and warranties in Sections 4.7, 4.20, and
4.23.1 "survive the Closing" and will terminate on
November 30, 2014. (JTX 839-056; JTX 839-106)
31, 2013, Air Products and Seller Defendants also executed
the EPCO Escrow Agreement and LLL Escrow Agreement. (D.I. 185
at 12; JTX 839-013; JTX 721-008) Pursuant to the escrow
agreements, Air Products deposited a total of $15, 870, 000
into two escrow funds. (D.I. 185 at 12) Indemnification paid
from the escrow funds is Air Products' "sole and
exclusive remedy" for any "Losses" related to
a "breach of any representation and warranty" in
Article 4 of the SPAs. (JTX 839-013, 054-057 (§§
2.5, 12.1.1, 12.3 & 12.4.3); JTX 721-008, 042-46
(§§ 2.3 & 12.1.1, 12.3.1 & 12.4.3)) Any
indemnification for Losses is subject to a deductible and a
cap. Under the EPCO SPA, Air Products is not entitled to
indemnification unless and until the aggregate Losses exceed
$1, 008, 000. (JTX 839-057) Under the LLL SPA, the Losses
must exceed $50, 000. (JTX 721-045) Moreover, Air Products
cannot be indemnified for more than the amount in escrow.
(JTX 839-057; JTX 721-046) For claims of fraud, there is no
exclusive remedy, deductible, or cap. (JTX 839-058; JTX
the SPAs contain an "anti-sandbagging" provision
that prohibits Air Products from making indemnification
claims based on information it knew before closing. (JTX
839-059; JTX 721-047) Specifically, the SPAs provide:
No Seller shall be liable ... for any Claim or Losses
resulting from or arising out of or relating to any
inaccuracy in or breach of any of the representations or
warranties ... contained in this Agreement ..., if [Air
Products] had knowledge of such inaccuracy or breach prior to
the date of this Agreement, where such knowledge was acquired
because the facts and circumstances relating thereto were
clear on their face from information or materials provided by
the Company, the Sellers, or the Sellers' Representative,
and not merely knowledge of the underlying facts and
circumstances of such inaccuracy or breach.
(JTX 839-059; JTX 721-047) For the purposes of this section,
"knowledge" means "the actual knowledge of
Stanley L. Reggie, " a member of Air Products'
mergers and acquisition group. (JTX 839-059; JTX 721-047;
D.I. 202 at 698:7-10)
Hours of Service
trucking activities are regulated by the Federal Motor
Carrier Safety Administration ("FMCSA"), an agency
within the Department of Transportation. Air Products claims
that Defendants failed to accurately disclose EPCO's
"knowing, regular, and planned" violations of FMCSA
regulations governing drivers' hours of service. (D.I.
206 at 1) The court has grouped the evidence presented on
this issue into four categories: government regulations and
compliance programs, testimony and documents from EPCO's
management and drivers, testimony and documents from Air
Products' due diligence team, and, expert testimony.
section outlines the FMCSA regulations governing drivers'
hours of service and drivers' logs, describes EPCO's
internal controls used to ensure compliance with those
regulations, and concludes with the results from audits of
Hours of Service Regulations and Driver's Logs
395.3 of the FMCSA regulations provides that: (i) a driver is
limited to 11 hours of driving per 14-hour duty shift; (ii) a
driver must have 10 hours off between duty shifts; and (iii)
a driver can be on duty no more than 70 hours within 8
consecutive days (collectively, the "HOS
Regulations"). 49 C.F.R. § 395.3. For example, if a
driver came to work at 6:00 a.m., he cannot drive a truck
after 8:00 pm, which is 14 hours later. FMCSA, Interstate
Truck Driver's Guide to Hours of Service, at 3 (Mar.
2015). A driver "may do other work after 8:00 pm, but...
cannot do any more driving until [he] has taken ... 10
consecutive hours off." Id. The FMCSA does not
require 100% perfection. (D.I. 204 at 1384:24-1385:1) Under
FMCSA's enforcement protocols, a motor carrier is
considered in violation of the HOS Regulations when its
non-compliance rate goes over 10%. (D.I. 202 at 645:9-646:20;
D.I. 204 at 1384:20-23)
are required to keep a record of their hours of service on a
duty status log. At the time of the acquisition, FMCSA
regulations did not require electronic logs. 49 CFR §
395.8(a). Instead, drivers could log their duty status
"manually" on a paper grid in the form provided in
the regulations, as EPCO did. 49 CFR § 395.8(a)(iv)(C).
Each grid covered one 24-hour period. Id. Duty
status must be recorded as "off duty, "
"sleeper berth, " "driving, " or
"on-duty not driving." 49 CFR § 395.8(b). For
each change of duty status, the driver must record the name
of the town, with a state abbreviation. 49 CFR §
395.8(c). The driver also has to include the following
information on each log: (1) the date; (2) total miles driven
for that day; (3) truck and trailer number; (4) name of
carrier; (5) driver's signature; (6) 24-hour period
starting time; (7) main office address; (8) remarks; (9) name
of co-driver; (10) total hours; and (11) shipping document
number or name of shipper and commodity. 49 CFR §
395.8(d). Finally, FMCSA regulations provide that "[n]o
driver or motor carrier may make a false report in connection
with a duty status." 49 CFR § 395.8(e)(1).
Products claims that, before the acquisition, EPCO's
internal controls were deficient, thereby masking the routine
violation of HOS Regulations. (D.I. 206 at 9-10) EPCO
monitored compliance with HOS Regulations through
administration of the drivers' logs and communications
between drivers and dispatch. (D.I. 201 at 296:23-297:2) From
2006 to 2013, Candie Rowton ("Rowton") worked at
EPCO as a transportation specialist and administered the
drivers' logs. (D.I. 200 at 195:4-10, 198:12-14) Rowton
would make sure that a driver submitted a log for every day
he drove and that the log looked proper on its face.
(Id. at 196:22-197:2) She was not tasked with
cross-checking the drivers' logs against other data to
root out any falsifications. (Id. at 196:17-20)
After inspecting the logs, Rowton stored them in the drivers
file. (Id. at 197:20-24)
point, EPCO enabled RapidLog, a commonly used log auditing
tool within the trucking industry. (D.I. 202 at
610:23-611:17) With RapidLog, a company scans a log into the
program, and the program identifies any errors.
(Id.) Errors could include missing signature,
incorrect adding of mileage, potential speeding, and hours of
service violations. (Id.; D.I. 201 at 293:8-294:13)
Rowton testified that RapidLog identified a "high
volume" of violations she considered
"nitpicky" and "very, very time
consuming" to investigate. (D.I. 200 at 198:9-18,
214:2-13) Rowton was the only person at EPCO responsible for
administering the logs, which made it difficult for her to
stay on top of all the paperwork. (Id. at 198:16-17,
209:18-23) At some point she stopped scanning the logs
although she continued to eyeball them. (Id. at
213:6-8) Rowton estimates that this may have lasted for
several years. (Id. at 198:19-199:14) The record
indicates that Rowton was only nine months behind when she
left. (Id. at 59:1-5) Regardless, when Craft
discovered that Rowton was behind on scanning logs, he
brought in his son to eliminate the backlog. (Id. at
59:3-8; D.I. 203 at 1062:3-1063:1)
carrier is subject to three levels of regulatory scrutiny to
ensure compliance with FMCSA regulations. First, state and
federal officers can conduct roadside inspections that can
include looking at the driver's log book. (D.I. 204 at
1371:19-1372:20, 1379:2-10) Second, FMCSA can conduct a
focused audit that evaluates a particular aspect of a motor
carrier's operations. (Id. at 1372:20-25,
1379:11-19) Finally, FMCSA can conduct a full audit, called a
"compliance review." (Id. at 1369:23-24,
compliance review is an on-site inspection used to determine
a motor carrier's safety rating. 49 CFR Pt. 385 App'x
B Para. ll(C)(a). The safety rating is reported as
"satisfactory, " "conditional, " or
"unsatisfactory." Id. at Para. III. FMCSA
uses six factors to determine the safety rating: general,
driver, operational, vehicle, hazardous materials, and
accident rate. Id. at Para. ll(C)(a) & III. Each
factor is comprised of a group of regulations with similar
characteristics that FMCSA considers "acute and
critical." Id. at Para. 11(a) & ll(C)(a).
For example, the driver factor is comprised of the following
parts of the FMCSA regulations: Part 382 (controlled
substance and alcohol use and testing); Part 383 (commercial
driver's license requirements); and Part 391
(qualifications of drivers). Id. at Para. II (f).
The operation factor is comprised of Part 392 (driving of
commercial motor vehicles) and Part 395 (hours of service).
Id. Each part contains several subparts, which in
turn contain multiple individual regulations. Thus, the HOS
Regulations are just a few out of hundreds of regulations
that determine EPCO's safety rating.
addition to audits by FMCSA, EPCO had independent
third-parties complete mock audits. (D.I. 204 at 1286:17-18)
In November 2012, EPCO had Ryder Systems complete a mock
audit. (JTX 209) Ryder Systems found that "evidence of
regulation training material and the experience of managers
indicate[d] a support of highway safety." (Id.)
It noted some concerns with how certain paper logs were
completed, but overall concluded that the paper logs were
"in fair order." (Id.)
Management and Drivers
members of EPCO management had a role in the company's
trucking activities: the Director of Safety, the Director of
Maintenance, the Director of Logistics, the Vice President of
Transportation, the President, and the CEO. (D.I. 201 at
289:13-14) Joseph Worley ("Worley") joined EPCO as
Vice President of Transportation in October 2012, replacing
Dana Worster ("Worster"). (Id. at
251:5-18, 287:14-16) John Esposito ("Esposito")
served as the Director of Safety; Danny Dabbs
("Dabbs") served as the Director of Maintenance;
and Todd Demler ("Demler") served as the Director
of Logistics. (Id. at 288:19-289:14) Esposito,
Dabbs, and Demler reported to Worster, and then Worley.
(Id.) Esposito was responsible for ensuring
EPCO's compliance with FMCSA, OSHA, and EPA regulations.
(Id. at 289:21-23, 249:11-15) Dabbs oversaw
maintenance and refurbishment of the trailers. (Id.
at 290:14-23) Demler was responsible for dispatch, including
planning delivery trips and schedules. (Id. at
290:24-291:4; D.I. 203 at 1110:7-14, 1193:5-23) Worley
reported to Craft (the President), who reported to Wiesemann
(the CEO). At trial, the parties presented testimony from
Esposito, Demler, Worley, Craft, Wiesemann, and a
temp-to-hire driver named Frank Frost.
was the Director of Safety from April 2011 to November 2012.
Air Products relies on Esposito's testimony to show that
EPCO drivers ran illegal, and that Wiesemann and Craft knew.
(D.I. 206 at 6-7, 12) The court gives little weight to
Esposito's testimony for two reasons. First, he left EPCO
in November 2012. (D.I. 201 at 249:1-3, 252:21-23) Thus, he
lacks personal knowledge of the conditions at EPCO for the
six-month period before closing, the time period critical to
Air Products' claims. The court cannot assume that
EPCO's operations were the same before and after
Esposito's departure, particularly when the Vice
President of Transportation changed around that same time.
Second, there is a preponderance of evidence in the record,
some from Esposito himself, contradicting Air Products'
characterization of his testimony.
example, in June 2011, Esposito implemented an automatic
point system he devised to address DOT violations. (JTX 235;
JTX 241) After a driver accumulated a certain number of
points, he was supposed to be terminated. (JTX 235) The
program was shut down by August 2011. (JTX 241) Air Products
touts the quick abandonment of the program as evidence that
Craft and Wiesemann did allow Esposito to punish unsafe
drivers. (D.I. 206 at 6-7) Notably, in Esposito's email
announcing the program, two drivers received points, for a
brake violation and logbook violation respectively, while
eight drivers were "commended for being a safety
professional, " indicating that the majority of
EPCO's drivers were safe. (JTX 235) More important,
drivers were automatically given points not only for DOT
violations but also for an "unprofessional"
attitude, which has nothing to do with unsafe driving.
(Id.; JTX 239; D.I. 201 at 259:15-22) Finally,
Esposito testified that neither Craft nor Wiesemann were
"in the loop" on the point system. (D.I. 201
258:4-20) The point system was eliminated at the direction of
Senior Vice President Ken Niemeyer ("Niemeyer"),
because he thought it was "unfair." (JTX 241; D.I.
201 at 262:1-17) According to Esposito, Niemeyer did not care
what Wiesemann or Craft thought, "[h]e was going to do
it his way." (D.I. 201 at 262:1-17) Thus, there is no
evidence that either Wiesemann or Craft interfered with the
implementation of this program or that the program was an
effective, as opposed to arbitrary, method to curtail unsafe
Products also emphasizes Esposito's testimony that he
lacked autonomy to fire unsafe drivers. (D.I. 206 at 6; D.I.
201 at 250:3-251:6, 273:4-21) Esposito's testimony,
however, is inconsistent with his own contemporaneous emails.
In June 2012, Demler sent an email to Esposito writing in all
caps, "STOP FIRING DRIVERS WITHOUT TALKING TO MYSELF AND
THE REGIONAL DISPATCHER!" (JTX 243-002) Esposito
replied, "I was given complete permission by our CEO to
fire any driver I deem a risk to our safety program."
(JTX 243) Esposito also testified that he "got rid of
plenty" of drivers in his short time at the company.
(D.I. 201 at 260:1-19) Thus, the evidence suggests, contrary
to Air Products' assertions, that Esposito had the
autonomy to fire unsafe drivers.
Products relies on Demler's testimony to show that EPCO
drivers falsified their logs, violated HOS Regulations, and
Craft was aware of both issues. (D.I. 206 at 4) Demler
estimated that about ten percent of EPCO's drivers were
regularly violating HOS Regulations. (D.I. 200 at 52:6-16)
Specifically, Demler was asked if "EPCO's drivers
consistently keep the hours of service?" (Id.)
Well, if you look at their logs, they probably did. But, you
know, if you looked at the amount of runs that were being
done or if you looked at the daily boards, it was pretty easy
to see that some of them were going, you know, outside hours