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Norman v. Elkin

United States District Court, D. Delaware

September 4, 2018

JEFFREY M. NORMAN, Plaintiff,
v.
DAVID W. ELKJN, et al, Defendants, US MOBILECOMM, INC., Nominal Defendant.

          David A. Felice, BAILEY & GLASSER LLP, Wilmington, DE Attorneys for Plaintiff.

          David A. Dorey, Adam V. Orlacchio, and Craig Haring, BLANK ROME LLP, Wilmington, DE Gerald Chalphin, Gerald Chalphin Law Office, Philadelphia, PA Attorneys for Defendants.

          MEMORANDUM OPINION

          STARK, U.S. DISTRICT JUDGE.

         This case comes before the Court on remand from the Third Circuit. Defendants David W. Elkin ("Elkin"), Richard M. Shorin ("Shorin"), The Elkin Group, Inc. ("TEG"), and U.S. Mobilcomm, Inc. ("USM") (collectively, "Defendants") seek judgment as a matter of law pursuant to Federal Rule of Civil Procedure 50(b) regarding Plaintiff Jeffrey M. Norman's ("Norman" or "Plaintiff) remanded claims. (D.I. 301) The issues before the Court on remand have been fully briefed. (D.I. 313, 315, 316, 318, 319, 321) For the reasons discussed below, the Court will grant Defendants' motion to the extent that it will enter judgment in Elkin's favor on Norman's claims for (i) breach of contract based on Elkin's failure to make pro rata distributions of the proceeds of the sale of USM's assets in 2001, (ii) conversion, (iii) usurpation of corporate opportunities, (iv) breach of the fiduciary duty of loyalty, (v) breach of the duty of disclosure, (vi) unjust enrichment, and (vii) declaratory judgment. However, the Court will also enter judgment in Norman's favor on Norman's (i) breach of contract claim based on Elkin's execution of the Shareholder Loan Agreement ("SLA") and (ii) for Elkin's failure to distribute the proceeds from the sale of USM's assets on a pro rata basis in 2002, as well as (iii) attendant damages for those claims.

         I. BACKGROUND[1]

         A. Procedural History

         On May 13, 2009, a jury returned a verdict in Norman's favor on Norman's breach of contract, [2] fraud, and conversion claims.[3] (See D.I. 118) Norman was awarded $1 in nominal damages on his breach of contract claim, $105, 756 in compensatory damages and $48, 000 in punitive damages on his fraud claim, and $38, 062 in compensatory damages on his conversion claim. (See D.I. 118) Following trial, Elkin moved for judgment as a matter of law, arguing that Norman's claims were barred by the applicable statute of limitations. See Norman v. Elkin, 726 F.Supp.2d 464, 469 (D. Del. 2010) ("Norman IF). Former Judge Joseph J. Farnan, Jr. largely agreed with Elkin and held that all of Norman's claims were time-barred except for Norman's second and third theories of breach of contract (alleging execution of the SLA and failure to make pro rata distributions, respectively). (See Id. at 470-76) Judge Farnan entered an Amended Judgment consistent with that decision. (See D.I. 158)

         Following resolution of additional motions filed by both Norman[4] and Elkin, the Court held a second jury trial on Norman's two remaining breach of contract theories. The jury again found in Norman's favor and awarded him $1 in nominal damages based on Elkin's execution of the SLA and $73, 180.17 in compensatory damages for Elkin's failure to make pro rata distributions. (See D.I. 246) Elkin again moved for judgment as a matter of law. The Court again agreed with Elkin and entered judgment in his favor on both theories. See Norman v. Elkin, 2015 WL 4886049, at *2-3 (D. Del. Aug. 14, 2015) ("Norman IV"). As to Norman's SLA-based claim, the Court concluded that Norman had failed to present evidence he was damaged by Elkin's actions independent of his other theory of breach (i.e., independent of Elkin's failure to make pro rata distributions). See Id. at *2. The Court also agreed with Elkin that Norman's breach of contract claim for failure to make pro rata distributions of the proceeds from the sale of USM assets was barred by the applicable statute of limitations. See Id. at *2-3. The Court concluded Norman had been on inquiry notice of his claims since "before December 2, 2002," and that the statute of limitations was not tolled during the pendency of Norman's § 220 action in the Delaware Court of Chancery and, thus, his claim was time-barred. See Id. Consistent with that decision, the Court vacated the jury's verdict and entered final judgement in Elkin's favor. (See D.I. 285)

         Norman appealed. So did Elkin, based on the sufficiency of the evidence supporting Norman's fraud and conversion claims. See Norman v. Elkin, 860 F.3d 111, 121 (3d Cir. 2017) ("Norman V). The Third Circuit affirmed on alternative grounds the Court's decision to enter judgement in Elkin's favor on his fraud claim, but vacated entry of judgment in Elkin's favor on all other claims. See Id. at 131. The case was remanded for two purposes: (1) for the Court to reinstate the jury verdict and award of nominal damages for Norman's SLA-based breach of contract claim and (2) for the Court to determine whether § 220 tolling should apply to Norman's claims, and, if so, whether Norman's remaining claims[5] are timely. See Id.

         B. Facts Relating to Norman's Remaining Claims

         1. Elkin and Norman Found USM and Acquire Phase I Licenses

         In 1991 and 1992, the FCC granted first-wave ("Phase I") 220 MHZ licenses by lottery. Norman and Elkin founded USM for the purpose of aggregating and selling these licenses. (See D.I. 315 Ex. 3 ¶ A) Norman and Elkin were USM's sole shareholders.

         It was primarily Norman's responsibility to acquire Phase I licenses. After the acquisition phase ended, Norman's day-to-day involvement in USM ended. Elkin continued to manage USM's affairs.

         2. Acquisition of Phase II Licenses

         In 1998, the FCC announced a competitive auction of "Phase II" licenses. Elkin registered USM with the FCC as a qualified bidder for Auction 18. (See D.I. 315 Ex. 3 ¶ Y; id Ex. 4 at 97; D.I. 318 at 4) Elkin also registered TEG, his own company, as a qualified bidder for Auction 24. (See D.I. 315 Ex. 3 ¶¶ AA-BB) Elkin testified that it was necessary to register TEG as a qualified bidder because USM did not have adequate funding to participate in the auctions, yet USM needed to ensure the Phase II licenses - which overlapped with the Phase I licenses owned by USM - ended up in "friendly hands." (D.I. 315 Ex. 2 at 106-07)

         USM won the rights to several Phase II licenses in Auction 18, and TEG won the rights to a single Phase II license in Auction 24. (See D.I. 315 Ex. 3 ¶ AA; D.I. 315 Ex. 4 at 101) Elkin subsequently transferred USM's rights in Phase II licenses to TEG. (See D.I. 315 Ex. 4 at 107) Some FCC notices listed USM as the winning bidder of the Phase II licenses, while others referred to TEG as the owner of the licenses. See Norman V, 860 F.3d at 116.

         Norman "closely monitored" the FCC auction. Id. After the auction closed, Norman emailed Elkin asking for information about Auction 18. (See D.I. 315 Ex. 4 at 102-03) Elkin did not respond. (See id.)

         3. Elkin Executes the SLA

         When Norman and Elkin founded USM, they entered into an oral agreement regarding capitalization of the company. To meet USM's $1M capital requirement, Norman was to contribute $250, 000 and Elkin was to contribute $750, 000. (See D.I. 315 Ex. 3 ¶ D)

         Sometime between 1995 and 2002, Elkin - without seeking Norman's approval - caused USM to enter into the SLA, pursuant to which USM agreed to treat any amount Elkin contributed above his capital requirement as a loan.[6] Elkin continued to make contributions to USM. USM's "Shareholder Loan Schedule" lists Elkin's contributions as totaling over $600, 000, with certain contributions listed as loans. (See D.I. 315 Ex. 7 at 2)

         4. Sale of Licenses and Distributions to Elkin

         From 1999 to 2001, Elkin sold off USM's and TEG's licenses. (See D.I. 315 Ex. 4 ¶¶ CC-EE, GG, JJ, KK, MM) USM used the proceeds from these sales to repay Elkin's loans, so that its creditors would be paid before distributions were made to holders of equity. See Norman IV, 2015 WL 4886049, at * 1. Over the course of two years, Elkin caused USM to pay out distributions to Elkin totaling $615, 026. (See D.I. 315 Ex. 4 ¶¶ SS-YY) Norman was paid nothing. (See D.I. 315 Ex.4 ¶ DDD)

         5. Norman Learns of License Sales and Distributions

         Norman received federal income tax K-l forms from USM for the tax years 2000 and 2001 that declared USM had realized a capital gain. (See D.I. 315 Ex. 4 ¶ RR; id. Ex. 9 at 19; id. Ex. 10 at 21) The forms did not specify what had been sold, nor did they list any shareholder loans or distributions. (See D.I. 315 Ex. 9 at 19-20; id. Ex. 10 at 21-22; see also D.I. 315 Ex. 9 at 4:19; id. Ex. 10 at 4:19) (reporting no "Loans from shareholders" on USM tax return Form 1120S for 2000 and 2001) "However, in a deposition, Norman admitted that, 'a capital gain, by definition . . . has to be sale of a license." Norman V, 860 F.3d at 117 (quoting App. at 512).

         In the summer of 2002, Norman called Elkin ("Summer 2002 Call"). During the Summer 2002 Call, Elkin told Norman that some of USM's licenses had been sold and that Elkin had taken a distribution. (See D.I. 315 Ex. 6 at 251-52) When Norman pressed Elkin about why Norman had not also received a distribution, Elkin told him, "Oh, it wasn't your turn." (Id. at 252) Norman asked Elkin to send him more information about the sales but never received it. (See id.)

         On October 2, 2002, Norman's attorney sent Elkin a letter requesting information pursuant to 8 Del. C. § 220 "about the sale or other disposition of any assets or stock of [USM] over the past three (3) years, and the distribution or use of any proceeds of any such sales or dispositions." (D.I. 315 Ex. 12) ("October 2002 Letter") Two months later, on December 3, 2002, Elkin sent Norman a letter acknowledging that USM had sold the licenses "it owned," that the net proceeds from those sales totaled $479, 708, and that $380, 588 of the proceeds had been used for the "Repayment of Shareholder Loans." (D.I. 315 Ex. 13 at 1) ("December 2002 Letter") The December 2002 Letter also included purchase and sale agreements revealing that TEG had sold Phase II licenses. See Norman V, 860 F.3d at 117. Nearly a year later, in October 2003, USM sent Norman's attorney a letter that included a copy of the SLA and Shareholder Loan Schedule. (See D.I. 315 Ex. 7) ("October 2003 Letter")

         6. Norman Files His § 220 Action and Subsequent Suit

         On November 16, 2004, Norman filed a § 220 action in the Delaware Court of Chancery, to compel USM to allow him to inspect the company's books and records. At a hearing in August 2005, former Vice Chancellor Parsons found "there [was] a credible basis here for inferring possible mismanagement and wrongdoing on the part of Mr. Elkin," including by executing self-dealing transactions with no notice to Norman, the minority shareholder. (See D.I. 315 Ex. 16 at 219) The Chancery Court granted Norman's § 220 request on October 2, 2005. Based on his successful § 220 action, Norman was able to obtain a number of documents related to his subsequent claims against Elkin. Norman filed suit against Elkin in the Court of Chancery on December 5, 2005. (D.I.I) Elkin then removed the action to this Court. (Id.)

         II. LEGAL STANDARDS

         Judgment as a matter of law is appropriate if "the court finds that a reasonable jury would not have a legally sufficient evidentiary basis to find for [a] party" on an issue. Fed.R.Civ.P. 50(a)(1). "Entry of judgment as a matter of law is a sparingly invoked remedy," one "granted only if, viewing the evidence in the light most favorable to the nonmovant and giving it the advantage of every fair and reasonable inference, there is insufficient evidence from which a jury reasonably could find liability." Marra v. Phila. Housing Auth., 497 F.3d 286, 300 (3d Cir.2007) (internal quotation marks omitted).

         To prevail on a renewed motion for judgment as a matter of law following a jury trial, the moving party "must show that the jury's findings, presumed or express, are not supported by substantial evidence or, if they were, that the legal conclusions implied [by] the jury's verdict cannot in law be supported by those findings." Pannu v. Iolab Corp.,155 F.3d 1344, 1348 (Fed. Cir. 1998) (internal quotation marks omitted). "'Substantial' evidence is such relevant evidence from the record taken as a whole as might be acceptable by a reasonable mind ...


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