Facts

In the fall of 2002, House of Brussels Chocolates Inc. (HOBC) was on the brink of going out of business and could not obtain financing to sustain its operations. At the same time, it had achieved contracts for holiday sales, which, if fulfilled, would enable it to turn the corner and become significantly profitable. Defendants Evan Baergen and Grant Petersen recruited plaintiff Stephen A. Whittington to come aboard as a director and chief executive officer of HOBC, and to invest $60,000 in the company in exchange for stock and warrants. Whittington's funds enabled HOBC to survive and prosper. Over the next several months, the price of HOBC stock steadily rose from 1.2 cents per share ultimately to more than $3 per share.

PLAINTIFFS' CONTENTIONS:
Plaintiffs contended that Baergen and Petersen refused to issue Whittington the stock and warrants he had purchased. Instead, they awarded 7.5 million shares and warrants to themselves in a pair of stealth transactions that were not disclosed to Whittington or the public until long after the fact. They thereby awarded themselves a massive windfall and at the same time granted themselves 52 percent of the total authorized stock of the company. They failed to document any basis for the massive awards they made to each other.

Baergen and Petersen also awarded HOBC stock to family and friends for what the trial court found was phantom consideration. They also controlled the corporation notwithstanding Whittington's ostensible title of CEO.

DEFENDANT'S CONTENTIONS:
The defendants contended at trial that Whittington had not purchased securities but instead had made an unsecured loan with no provision for interest, and with repayment contingent on the achievement of financing and sales targets. They also contended that Whittington should not be permitted to allege an alter ego theory for events that occurred while he was an officer and director of the company. The trial court rejected these contentions.

Settlement Discussions

Prior to trial, the defendants offered $135,000, and Whittington offered to accept $500,000. After the trial court issued its judgment and while the case was on appeal, the defendants offered $35,000. Whittington declined to respond.

Damages

To simplify the trial and eliminate certain potential appellate issues, Whittington stipulated to accept the damage calculations of the defendants' expert. The damages awarded to Whittington were based on calculations by the defendants' own expert.

Result

After a bench trial, plaintiff Stephen A. Whittington obtained a judgment for $3,262,305 for breach of contract against HOBC. The trial court awarded $2,701,918 in compensatory damages, prejudgment interest of $583,883, and costs of $21,506, against HOBC, Baergen, and Petersen, jointly and severally. Whittington also established alter ego liability against individual defendants Evan Baergen and Grant Petersen, who were officers and directors of HOBC, notwithstanding the fact that HOBC was a publicly traded company subject to the corporate governance and reporting standards of the Sarbanes-Oxley Act of 2002. The Nevada Supreme Court affirmed the judgment in all respects.

Other Information

On appeal, the Nevada Supreme Court affirmed the trial court's findings. The court also rejected the defendants' contention that in breach of contract cases, an actual fraud requirement be imposed on the already high standard for an alter ego finding.