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Management Capital L.L.C. v. F.A.F. Inc.

Superior Court of Rhode Island

January 17, 2017

MANAGEMENT CAPITAL, L.L.C., Plaintiff,
v.
F.A.F., INC. and ARTHUR FIORENZANO, Defendants.

         Providence County Superior Court

          For Plaintiff: Joseph V. Cavanagh, Jr., Esq.

          For Defendant: Rajaram Suryanarayan, Esq. Robert D. Wieck, Esq.

          DECISION

          SILVERSTEIN, J.

         This matter is before the Court for decision following a nonjury trial between Plaintiff Management Capital, L.L.C. (Management) and Defendants F.A.F., Inc. (F.A.F.) and Arthur Fiorenzano (Fiorenzano). The crux of the dispute between the parties hinges on three issues: (a) contract reformation; (b) interpretation of the term "funded debt"; and (c) anticipatory repudiation. This Court has jurisdiction pursuant to G.L. 1956 §§ 8-2-13 and 8-2-14.

         I Facts and Travel

         In the spring of 2002, F.A.F.-a Rhode Island costume jewelry manufacturing and distribution business-and its President, Fiorenzano, engaged Management Solutions, LLC-an affiliate of Management[1]-to help resolve judgments rendered against F.A.F. in two unrelated lawsuits. Trial Tr. 70:20-73:5, 75:24-76:8. In addition to receiving an hourly fee for its services, Management's principals-Ernest Humphreys (Humphreys), Robert Manchester (Manchester), and Jerry Cerce-signaled to Fiorenzano and F.A.F.'s Chief Financial Officer, Armand Almeida (Almeida), that they were interested in a warrant for stock in F.A.F. as further compensation for Management's services. Id. at 78:4-79:12, 548:15-17, 554:1-17. After Almeida initially advised Fiorenzano against agreeing to a warrant, and although Fiorenzano declined Management's first warrant proposal, on October 10, 2002, Fiorenzano agreed in writing to grant Management a warrant. See id. at 555:19-556:10; Joint Exs. 4, 5.

         Fiorenzano's October 10, 2002 agreement was based on a set of terms-known as the Warrant Terms-that Management had provided in its October 9, 2002 letter to Fiorenzano. See Joint Ex. 4, Ex. A. The Warrant Terms were brief. See id. First, F.A.F. was to grant Management a right to acquire 10% of F.A.F.'s stock for a price of $710, 000. Id. According to the Warrant Terms, Management's right to acquire that stock had to be exercised "at any time prior to December 31, 2007." Id. at ¶ 2. Second, Management was to be granted a put[2] right that allowed it to redeem whatever interest Management had in F.A.F. or the Warrant itself, exercisable any time after December 31, 2007. Id. at ¶ 4. Finally, F.A.F. had a call[3] right that allowed it to force Management to sell whatever interest it had in F.A.F. or the Warrant itself, again exercisable any time after December 31, 2007. Id.

         In early 2003, after Management had successfully managed resolutions to F.A.F.'s judgments, Management and F.A.F. began a six-month process of circulating drafts of what would eventually become the Warrant. Trial Tr. 102:2-25, 358:16-19; see Pl.'s Ex. 47. During the drafting process, Management was focused on ensuring its right to review F.A.F.'s 2007 audited financial statements prior to deciding how to exercise its rights under the Warrant. Trial Tr. 114:19-115:17, 118:11-22, 119:10-20, 335:20-336:4. Following a conversation with Humphreys, Almeida agreed to Management's request regarding the 2007 audited financial statements. Id. at 591:25-592:2. Based on that agreement, on June 4, 2003, F.A.F.'s attorney inserted language in Sections 3.1 and 13 of the Warrant to ensure that Management could review F.A.F.'s audited financial statements for the year ending December 31, 2007 before deciding whether to buy shares or put the Warrant. Id. at 331:18-23, 335:23-25, 597:8-22; compare Joint Ex. 10 with Joint Ex. 9; see also Pl.'s Ex. 47. After F.A.F.'s attorney inserted that language into the Warrant, it remained unedited throughout the rest of the drafting process. See Pl.'s Ex. 47; compare Joint Ex. 16 with Joint Exs. 9, 10.

         On July 7, 2003, after six months of circulating drafts, Management and F.A.F. executed the Warrant. See Pl.'s Ex. 47. Just as under the Warrant Terms, Management could purchase 10% of F.A.F's stock shares at an exercise price of $710, 000. Compare Joint Ex. 4 (Warrant Terms) with Joint Ex. 16 (the Warrant). However, unlike the Warrant Terms, the final version of the Warrant included language regarding Management's review of F.A.F.'s 2007 audited financial statements. Compare Joint Ex. 4 with Joint Ex. 16. Section 3.1 of the Warrant, entitled "Exercise, " provided the expiration date for Management's right to exercise the Warrant and purchase 10% of F.A.F.'s stock for $710, 000. Joint Ex. 16 at 2, § 3. Pursuant to Section 3.1,

"This Warrant may be exercised in whole or in part at any time by the registered holder by the surrender of this Warrant at any time after the date hereof and before 5:00 p.m. on: (a) the date which is seventy-five (75) days after receipt by [Management], or any subsequent holder hereof, of the audited financial statements of [F.A.F.] for the year ending December 31, 2007; or (b) October 31, 2007, whichever is the earlier to occur ("Expiration Time") . . . ." Id.

         Thus, Management had until the earlier of seventy-five days post-receipt of F.A.F.'s 2007 audited financial statements or October 31, 2007[4] to purchase 10% of F.A.F.'s stock for $710, 000. Id.

         Similarly, Section 13 of the Warrant outlined when Management and F.A.F.'s put and call rights would kick in. Id. at 3, § 13. Under Section 13, entitled "Put and Call Rights, "

"At any time after 5:00 p.m. on (a) the date which is forty-five (45) days after receipt by [Management], or any subsequent holder hereof, of the audited financial statements of [F.A.F.] for the year ending December 31, 2007; or (b) September 30, 2007, whichever is the earlier to occur, [F.A.F.] shall have a call and [Management] or any subsequent holder hereof shall have a put with respect to the Warrant, or the shares issued pursuant to this Warrant, if applicable." Id.

         Thus, pursuant to Section 13, Management's right to put the Warrant began on the earlier date of forty-five days post-receipt of F.A.F.'s 2007 audited financial statements or September 30, 2007. Id. In sum, under the Warrant, Management had two options: it could buy shares in F.A.F. or it could put the Warrant. See Trial Tr. 335:23-25.

         Furthermore, with respect to the put and call rights, "[t]he purchase price for the Warrant, or the shares issued pursuant to the Warrant, if applicable, shall be determined and paid as provided in Section 14 . . . ." Joint Ex. 16 at 4, § 13. Under Section 14, entitled "Determination and Payment of Purchase Price, "

"The purchase price for the Warrant, or the shares issued pursuant to this Warrant, if applicable, shall be equal to the percentage ownership of [F.A.F.] represented by the shares, multiplied by the Value of [F.A.F.]. The Value of [F.A.F.] shall be equal to: (a) the average EBITDA of [F.A.F.] for the last 2 fiscal years of [F.A.F.] prior to the exercise of the put or call; (b) multiplied by 5; (c) less only funded debt, all as of the last day of the most recently completed fiscal year of [F.A.F.]." Id. at 4, § 14 (emphasis added).

         Several years passed without any action on the Warrant. However, in either August or September of 2007, when Management considered how to proceed with its options under the Warrant, Management noticed a conflict with the dates provided in Sections 3 and 13. Trial Tr. 135:20-24, 137:24-138:2, 373:13-374:3. Manchester formally brought this issue to F.A.F.'s attention in a September 28, 2007 correspondence to Fiorenzano and F.A.F.'s attorney. See Joint Ex. 17. In his letter, Manchester expressed concern that there had been a typo, or scrivener's error, with respect to Sections 3.1 and 13 of the Warrant. Id. Specifically, Manchester and Humphreys were concerned that under Section 3.1, Management's exercise right to purchase stock in F.A.F. would expire on October 31, 2007, a date prior to its ability to review F.A.F.'s 2007 audited financial statements. Trial Tr. 335:15-21. In other words, F.A.F.'s 2007 financial statements would not be available until sometime in late March or early April of 2008-well after the "drop dead date" of October 31, 2007. Tr. 114:8-24, 335:8-13, 369:5-24, 370:8-23, 591:13-20, 591:25-592:11.

         In his September 28, 2007 correspondence, Manchester expressed similar concern with respect to the date "September 30, 2007" in Section 13 of the Warrant. See Joint Ex. 17. Under Section 13's plain language, Management's right to put the Warrant would begin on September 30, 2007, again well before F.A.F.'s 2007 audited financial statements would be made available. See Joint Ex. 16 at 3, § 13. This was also important to Management because, as provided in Section 14 of the Warrant, the purchase price with respect to Management's put right was to include the last two fiscal years prior to the exercise of that right. See id. at 4, § 14. According to Management, to read Section 13 as triggering Management's put rights on September 30, 2007 would mean that F.A.F.'s value would be based on fiscal years 2005 and 2006, not 2006 and 2007.[5] To resolve what he ostensibly believed were two drafting errors, Manchester suggested two changes to the Warrant language: "1) Section 3.1: the date of October 31, 2007 should have been October 31, 2008[;] and 2) Section 13 (b): the [date of] September 30, 2007 should have been September 30, 2008." Joint Ex. 17. Manchester continued:

"In order to preserve [Management's] rights under the terms of the Warrant as presently written, we believe that it is necessary for Management [] to exercise its put rights as set forth in the Warrant. Therefore, Management [] hereby provides notice of the exercise of its right to put the Warrant.
"While nothing in this letter should be interpreted to affect the exercise by Management [] of its rights under the Warrant, we prefer to amend the Warrant to correct the dates in Sections 3.1 and 13 (b) of the Warrant as described above and then rescind this notice." Id.

         F.A.F. disagreed with Manchester's understanding of the Warrant. In an October 1, 2007 correspondence, F.A.F.'s attorney concurred with Humphreys' assessment that there was a drafting error with respect to the dates in Sections 3.1 and 13; however, F.A.F.'s attorney disagreed as to which dates were in error. See Joint Ex. 18. As F.A.F.'s attorney wrote, "F.A.F. agreed to the 'window' which is reflected in § 3.1 and § 13. In drafting the 'window' provisions, however we mistakenly referred to the December 31, 2007 financial statements vis-à-vis the December 31, 2006 financial statements." Id. at 1. According to F.A.F.'s attorney, it was F.A.F.'s position that "the Warrant had to be exercised prior to 12/31/07." Id. at 2; see also Trial Tr. 946:8-12, 947:6-8. This was a position contrary to Management's understanding of the Warrant. See Joint Ex. 17.

         By 2007, Louis Rotella (Rotella) had replaced Almeida as F.A.F.'s new CFO. Trial Tr. 136:16-137:3. Rotella's position on the purported error with respect to the dates in Sections 3.1 and 13 of the Warrant was consistent with F.A.F.'s attorney's October 1, 2007 correspondence. In conversations with Manchester in the summer of 2007, Rotella stated that it was F.A.F.'s position that the Warrant had to be exercised before October 31, 2007 and that the Warrant's value was based on the audited financial statements for the year ending December 31, 2006, not December 31, 2007 as provided under Section 3.1. Id. at 373:18-21, 375:16-376:6, 514:19-23. Throughout the fall of 2007, through conversations and correspondence involving Manchester and Humphreys, Rotella maintained F.A.F.'s position that Management's exercise right expired on October 31, 2007, and Management's put right would be based on fiscal years 2005 and 2006. Id. at 138:3-9, 331:24-332:113, 375:16-376:10. During this time, Fiorenzano concurred with Rotella's reading of Sections 3.1 and 13 and also rejected Management's assertion that it could review F.A.F.'s 2007 audited financial statements prior to deciding how to proceed under the Warrant. Id. at 136:13-137:3, 138:3-9, 140:25-141:9. In early 2008, Rotella again rejected Management's position. Id. at 381:3-7.

         On March 21, 2008, Management brought the present lawsuit against F.A.F. and Fiorenzano. Following the nonjury trial held before this Court, the parties submitted post-trial memoranda. Thereafter, the Court allowed the parties to file further supplemental memoranda to clarify the factual and legal issues at stake in this case. In its case against F.A.F. and Fiorenzano, Management primarily seeks three outcomes: (1) reformation of the Warrant to amend the dates in Sections 3.1 and 13; (2) a declaratory judgment that "funded debt" clearly and unambiguously means long-term debt; and (3) a finding that F.A.F., through a series of communications and actions, repudiated the Warrant and is therefore in breach of contract.

         II Standard of Review

         "When a trial justice presides over a nonjury trial, Rule 52(a) of the Superior Court Rules of Civil Procedure requires that he or she 'find the facts specially and state separately [his or her] conclusions of law thereon.'" S. Cnty. Post & Beam, Inc. v. McMahon, 116 A.3d 204, 210 (R.I. 2015). "The trial justice, however, 'need not engage in extensive analysis to comply with this requirement.'" Id. (quoting JPL Livery Servs., Inc. v. R.I. Dep't of Admin., 88 A.3d 1134, 1141 (R.I. 2014)). Along those lines, the Rhode Island Supreme Court "'has recognized that [a] trial justice's analysis of the evidence and findings in the bench trial context need not be exhaustive.'" Id. (alteration in original) (quoting Notarantonio v. Notarantonio, 941 A.2d 138, 144 (R.I. 2008)).

         III Discussion

         This nearly seven-year-long dispute between Management and F.A.F. boils down to three discrete issues: (a) contract reformation; (b) the meaning of the term "funded debt"; and (c) whether F.A.F. repudiated the Warrant. The Court will address each issue in turn.

         A Contract Reformation

         With respect to the first issue, Management contends that the dates listed in Sections 3.1 and 13 of the Warrant-October 31, 2007 and September 30, 2007, respectively-are the result of a mutual mistake in the form of a typo, or scrivener's error. Management argues that it has put forth clear and convincing evidence establishing that a mutual mistake occurred after F.A.F.'s attorney introduced the language regarding Humphreys and Almeida's agreement to allow Management to review the audited financial statements for the year ending December 31, 2007. According to Management, when F.A.F.'s attorney introduced that language, which accurately reflected the parties' intent, neither party noticed that the dates "October 31, 2007" and "September 30, 2007" needed to be changed to "October 31, 2008" and "September 30, 2008." In support of its argument, Management points to testimony from F.A.F.'s former CFO, Almeida, as well as from one of Management's principals, Humphreys. Management avers that its evidence of a mutual mistake is sufficiently clear and convincing for the Court to reform the Warrant.

         On the other hand, while F.A.F. agrees that there is a typo in Sections 3.1 and 13, it disputes which date is mistaken. F.A.F. counters that the typographical error occurred when its attorney inserted the date "December 31, 2007" instead of "December 31, 2006" with respect to the audited financial statements. To support this contention, F.A.F. ...


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