Confidential
Settlement – $376,212Judge
Court
L.A. Superior Santa Monica
Attorneys
Plaintiff
Defendant
Thomas A. Kearney
(Kearney Littlefield LLP)
Experts
Plaintiff
David Ostrove
(technical)
Shahram Sheybany
(technical)
Joseph D. Vinso
(technical)
Defendant
Wayne Conner
(technical)
Elizabeth Nolte
(technical)
Steven J. Ruben
(technical)
Facts
In May 1992, the defendants/cross-complainants, a public corporation and its subsidiaries (defendants) were finishing negotiations to acquire specific equipment and three product lines from a bankrupt Michigan corporation. One of those product lines was a trade-named product line, consisting of specifically heat-treated wire mesh combinations. In conjunction with negotiating to buy selected assets from the bankrupt company, the defendants negotiated with one of its heat treating vendors, the plaintiff, a family run business, by consummating the Aug. 7, 1992, three-year written contract. The plaintiff agreed to pay to move a large hydrogen furnace and related equipment, at its cost, from Detroit to its facility in Southern California and get the furnace up to speed and running in exchange for title to the furnace and related equipment and a promise of a minimum of 120 heat runs from defendants for each year of the contract at specified prices, with a $600 liquidated damages provision for each run under 120 each year of the contract. The defendants fell behind on their payments to the plaintiff. In February 1993, at the defendants' request, the spouse of the owner of plaintiff, a mettalurgist, became a member of the defendant's board of directors. In December 1993, at the defendants' request, the plaintiff accepted partial payment in defendants' stock for monies due under the contract. In the summer of 1994, the defendants started using a second source for its specially heat treated wire mesh laminate product line and stopped paying monies overdue to the plaintiff. During 1994, the defendants' financial situation worsened. In September 1994, the defendants were in default to the bank and forced to hire an outside financial manager of its bank's choosing. The outside financial managers recommended closing down or selling all unprofitable product lines. From April to December 1994, the defendants attempted to renegotiate the price of the already existing Aug. 7, 1992, contract. In November 1994, the plaintiff threatened to sue the defendants for the balance of monies owed. The defendants provided the plaintiff a promissory note refinancing what was owed and agreed to make payments if the plaintiff would continue supplying heat treating services to the defendants. In December 1994, the defendants fired its CEO and CFO and requested plaintiff's spouse become interim CEO. Within several weeks of becoming interim CEO, the plaintiff spouse discontinued the trademarked wire mesh laminate product line in dispute. On May 1, 1995, the defendants consented to be placed in receivership by its bank. The plaintiff spouse was promptly terminated as CEO by the receiver. The other individual cross-defendant/cross-complainant was terminated as CFO on June 19, 1995, and did not receive compensation as interim CFO from Dec. 20, 1994, through Jan. 31, 1995. The plaintiff brought this action against the defendants based on breach of contract theories of recovery. The defendants cross-complained for breach of contract, breach of express and implied warranty, conversion, declaratory relief and breach of fiduciary duties contending they relied on plaintiff as an expert metallurgist relating to the product process and that the plaintiff improperly heat treated the product line and/or did not properly advise defendants how to resolve the product lines problems, notwithstanding their expertise, and that its principal became a director and later CEO of defendants.
Settlement Discussions
The plaintiffs made an early settlement demand for $80,000, increased to $120,000, then $225,000 or $125,000 plus attorney's fees and costs. The plaintiff made a C.C.P. º998 demand of $130,000 for the plaintiff company and $9,999 for the individual cross-complainant CFO, plus costs and attorney fees. Defendants made C.C.P. º998 offers of compromise following the January 1997 mediation totaling $42,500 to the plaintiffs and cross-complainant. The defendants offered a total of $40,000 at the plaintiffs' depositions and, thereafter, demanded payment to defendants of $3 million. The defendants made no offer at the July 1997 voluntary settlement conference.
Damages
The plaintiff claimed $133,821.37 in damages under the contract (approximately $100,000 in liquidated damages). The individual plaintiff CFO claimed $10,000 in unpaid compensation and an additional $20,000 for the breach of his one year employment contract. Defendants claimed between $3 million and $8 million in damages and no liability on the contract and alternatively $30,000 in liability in an purported amended contract.
Other Information
The settlement was reached approximately two years and six months after the case was filed. During the course of the lawsuit, the plaintiff discovered that defendant, after having knowledge of the issues in dispute, oversaw the destruction of critical physical evidence of "rejected" material without taking steps to preserve the evidence; defendant, without notice to the plaintiff parties, had sold relevant documentation relating to the disputed product line as "trade secrets" to an out-of-state competitor; defendant had not retained any copies or any compilation of the documents sold to the out-of-state company, but demonstrated the ability to retrieve certain limited favorable documentation from the out-of-state company; and defendant lost and/or destroyed critical documentation relating to the product line. The defendant inadvertently sent would-be privileged documents to plaintiff's counsel. After plaintiffs' counsel "surprised" defendant's CEO at his deposition, the defendants sought a protective order for the return of the "privileged documents" and to bar their admissibility for trial purposes. The motion was denied, and the privilege was deemed waived. The defendants made a motion to quash the deposition of the defendants' present counsel, who was also the receiver, and her law partner, based on attorney-client privilege. Binding referee, retired Judge Eli Chernow, denied the motion and determined that a receiver is an officer of the court and, as such, has no attorney-client privilege. Following $5,142 in previously issued sanctions in the case against the defendants, a pending motion for terminating sanctions and the reservation of monetary sanctions on several previous motions, defendant made a motion to disqualify and/or relieve retired Judge Eli Chernow as referee, which was denied. The plaintiff parties' motion for terminating sanctions was granted in part by retired Judge Eli Chernow. Judge Chernow issued severe issue sanctions barring defendants from introducing or otherwise contesting the quality of workmanship of plaintiffs' work or product relating to the product line and establishing as a fact for the litigation that the product produced by the plaintiff was fit for its intended purpose and otherwise met the requirements of the plaintiffs' obligations to defendants. The plaintiffs were awarded $32,591.83 in monetary sanctions and were given leave to file a further motion to strike portions of pleading, issue and/or evidence sanctions for the misuse of discovery. The matter then settled for $140,000 to the plaintiff company, $10,000 to the individual plaintiff CFO plus costs and attorney fees permitted under California law determined by the court (without appeal or reconsideration with a minimum award of $32,591.83 and judgment with an interest provision upon default). On March 3, 1998, Judge Daniel A. Curry awarded the plaintiff company all of its attorney fees, costs and expenses in the amount of $226,212.13.
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