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Air Products and Chemicals Inc. v. Wiesemann

United States District Court, D. Delaware

February 27, 2017

AIR PRODUCTS AND CHEMICALS, INC., Plaintiff and Counterclaim-Defendant,
v.
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.

          Robert 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.

          OPINION

          ROBINSON, SENIOR DISTRICT JUDGE

         I. INTRODUCTION

         On May 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").[1] 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)

         The 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 Fed.R.Civ.P. 52(a).

         II. FINDINGS OF FACT

         A. Parties

         At the 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.; JTX 007-005)

         B. Relevant Provisions of the Stock Purchase Agreements

         The 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).

         Section 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.[2] Because the parties have focused exclusively on Section 4.7 in the EPCO SPA, the court will similarly rely only on that provision.

         Section 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)

         Section 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)

         Article 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)

         On May 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 721-046)

         Finally, 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)

         C. Hours of Service

         EPCO's 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.

         1. Regulations

         This 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 EPCO's compliance.

         a. Hours of Service Regulations and Driver's Logs

         Section 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)

         Drivers 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).

         b. Internal Controls

         Air 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)

         At some 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)

         c. Regulatory Controls

         A motor 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, 1379:20-1380:3)

         A 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.

         In 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.)

         2. EPCO Management and Drivers

         Six 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.

         a. Esposito

         Esposito 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.

         For 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 driving behavior.

         Air 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.

         b. Demler

         Air 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.) He replied:

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 quite ...

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