Management Capital, L.L.C.
F.A.F., Inc. et al.
Superior Court Providence County PB 08-2364 Michael A.
Silverstein, Associate Justice
Plaintiff: Joseph V. Cavanagh, Jr., Esq., Robert James
Cavanagh, Jr., Esq.
Defendants: Robert D. Wieck, Esq. Rajaram Suryanarayan, Esq.
Present: Suttell, C.J., Goldberg, Flaherty, and Indeglia, JJ.
A. Suttell, Chief Justice
case arises from the milieu of the financial world where
arcane terms such as "stock warrant,"
"put," and "call" are commonplace but
nevertheless remain alien to the uninitiated. The resolution
of this appeal, however, requires us to resort to concepts
distilled from principles taught in a first-year contracts
class: reformation, ambiguity, and anticipatory repudiation.
The plaintiff, Management Capital, L.L.C. (Management),
initiated this litigation after the defendant, F.A.F., Inc.
(FAF), maintained that a common stock warrant held by
Management had no value. A Superior Court justice, sitting
without a jury at a trial held over six days in June 2015,
found in favor of Management. On appeal, FAF contends that
the trial justice erred when he: (1) reformed certain dates
in a stock warrant that he found were a result of mutual
mistake; (2) determined that "funded debt" was an
unambiguous term meaning "long-term debt"; (3)
found that FAF repudiated its obligations under the stock
warrant; (4) found that Management properly preserved its
post-repudiation rights; (5) determined that Management
proved its damages with reasonable certainty; (6) determined
that prejudgment interest would accrue from October 13, 2008
onward; and (7) did not rule on FAF's counterclaims. For
the reasons set forth in this opinion, we affirm the judgment
of the Superior Court.
and Procedural History
early 2002, Ernest Humphreys (Humphreys), Robert Manchester
(Manchester), Steve Carlotti (Carlotti), and Jerry Cerce
(Cerce) formed Management Capital, L.L.C. and Management
Solutions, L.L.C. Drawing on the deep business and legal
experience of their founding principals, Management Capital,
L.L.C. invested in companies-often small, privately-owned
business entities that had the potential to grow. Providing
consulting and advisory services to these companies,
Management Solutions, L.L.C. worked in concert with
Management Capital, L.L.C.
Rhode Island jewelry company, was just the kind of company in
which Management sought to invest; in other words, "an
ideal client" for Management. Humphreys thought FAF was
an "exciting company" with "tremendous
opportunity," but, as of 2002, FAF faced an $11.5
million judgment (the BHG judgment) and a $1 million claim
for damages (the Drianna claim) (collectively the claims).
Manchester testified that, in light of the claims, FAF's
value at that time was "not zero, but * * *
introduced Humphreys to his cousin, Arthur Fiorenzano
(Fiorenzano), president of FAF, in early 2002. In the spring
of 2002, Management and FAF agreed that Management would help
FAF resolve the claims. The principals at Management were
"excited" about "help[ing] [FAF] become more
successful in the future." In addition to charging a
$300 hourly fee, Management would receive a
yet-to-be-determined "success fee" pending the
results of Management's work.
summer of 2002, Management suggested to FAF that it grant a
common stock warrant (the Warrant) to Management upon its
successful settlement of the BHG judgment. The Warrant would
essentially serve as Management's "success
fee." Armand Almeida (Almeida), FAF's chief
financial officer (CFO), initially advised Fiorenzano against
issuing a warrant to Management. Despite Almeida's
qualms, FAF ultimately agreed to issue Management a warrant.
26, 2002, Humphreys sent an email to Fiorenzano with a
one-page summary of the "Warrant Terms" (the
Warrant Terms) attached for the parties to discuss at an
upcoming meeting. The Warrant Terms outlined the basic
provisions of what would eventually become the Warrant. After
some negotiation, the Warrant Terms were agreed to by both
parties in writing on October 9, 2002.
to the Warrant Terms, Management had the right to acquire 10
percent of FAF's stock for the exercise price of $710,
000, exercisable any time before December 31, 2007. The $710,
000 exercise price was based on 10 percent of FAF's
then-current agreed value of $7.1 million. The Warrant Terms
stated that the $7.1 million figure "values FAF at a 4
multiple of the average of the EBITDA for 2001 and forecast
2002, less only funded debt of approximately $3.7
the Warrant Terms, Management also had the right to
the Warrant to redeem either the shares it had purchased from
FAF or the Warrant itself; likewise, FAF had the right to
the Warrant to force Management to sell whatever shares
Management had purchased from FAF or the Warrant itself. Both
the put and call rights were exercisable any time after
December 31, 2007.
December 2002, Management successfully resolved the claims
against FAF. The next month, Management turned its focus to
drafting the Warrant. On January 14, 2003, Humphreys sent an
email to Almeida (David Syner, FAF's accountant (Syner),
Fiorenzano, and Cerce were also copied), with a draft of the
Warrant attached. During the following months, FAF and
Management exchanged several communications regarding various
terms of the Warrant.
and Manchester testified that, at that time, Management's
main priority was to ensure that Management would be able to
review FAF's 2007 audited financial statements before
Management decided whether to exercise or put the Warrant;
this review period was not a concept captured by the initial
draft Warrant or Warrant Terms. FAF agreed to
Management's request, and a forty-five-day review period
was inserted into the draft. The following day, FAF's
attorney, who was also involved in negotiating the Warrant,
added language proposing September 30, 2007 as a definite
date for the Warrant's expiration, among other edits. In
a later draft, FAF's attorney, after a conversation with
Humphreys, also inserted a provision that created a
thirty-day window (the Window), allowing Management to put
and exercise the Warrant simultaneously, or put the Warrant
before Management was required to exercise the purchase of
creation of the Window resulted in two inconsistencies
regarding the years in the provided deadlines to exercise and
put/call the Warrant. Section 3 of the draft Warrant provided
that the deadline to exercise the Warrant was seventy-five
days after receipt of the 2007 audited financial statements
or October 31, 2007, whichever was the earlier to
occur. Similarly, Section 13 provided that the date the
put/call rights began to run started forty-five days after
receipt of the 2007 audited financial statements or September
30, 2007, whichever was the earlier to occur. A
literal reading of Sections 3 and 13 would always result in
the respective dates of October 31, 2007 and September 30,
2007 as the earlier date to occur, because the audited
financial statements for the year ending December 31, 2007
would never be available until sometime in calendar year
2008. Despite a clear contradiction, these dates remained in
the final Warrant.
and FAF executed the final Warrant on July 7, 2003. Under the
terms of the final Warrant, Management had the right to
acquire 10 percent of FAF's stock for the exercise price
of $710, 000, exercisable any time before either seventy-five
days elapsed after Management received FAF's 2007 audited
financial statements or October 31, 2007, whichever was the
earlier to occur. The final version of Section 3.1 provided:
"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 [FAF] for the year ending
December 31, 2007; or (b) October 31, 2007, whichever is the
earlier to occur ('Expiration Time'); together with
payment to [FAF] of the Exercise Price (or portion thereof)
for the shares to be purchased hereunder."
13 provided a timeline for the put and call rights. Similar
to Section 3, the right to put/call was exercisable any time
before either forty-five days elapsed after Management
received FAF's 2007 audited financial statements or
September 30, 2007, whichever was the earlier to occur. The
final version of Section 13 stated, in relevant part:
"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 [FAF] for the year ending December 31, 2007; or (b)
September 30, 2007, whichever is the earlier to occur, [FAF]
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. * * *
The 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 hereof."
14 set out a formula for calculating the purchase price.
Section 14 provided, in relevant part:
"The purchase price for the Warrant, or the shares
issued pursuant to this Warrant, if applicable, shall be
equal to the percentage ownership of [FAF] represented by the
shares, multiplied by the Value of [FAF]. The Value of [FAF]
shall be equal to: (a) the average EBITDA of [FAF] for the
last 2 fiscal years of [FAF] 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 [FAF]. EBITDA shall be calculated using the audited
financial statements of [FAF]."
the final Warrant encapsulated the basic ideas from the
Warrant Terms, the final Warrant diverged from the Warrant
Terms in a few significant respects. As mentioned above, the
final Warrant included language providing Management with
time to review FAF's 2007 audited financial statements,
with a final expiration date. It also included the Window
which allowed Management to simultaneously
"exercise" and "put" the Warrant, netting
out the difference. Moreover, Section 14 of the Warrant
provided a formula to value FAF, should Management have
decided to put or FAF decided to call the Warrant. Unlike the
Warrant Terms, this formula did not provide an estimated
amount of "funded debt."
years passed without any action on the Warrant. In late
summer 2007, Management started to think about how it might
want to proceed under the Warrant. Although FAF and
Management had ceased working together sometime in 2005,
Management continued to have an "excellent"
relationship with FAF, according to Humphreys. Humphreys
testified that, in light of this congenial relationship,
Management's principals wanted to meet with Fiorenzano to
express that, while Management still intended to exercise its
rights under the Warrant, it wanted to "figure out what
work[ed] best" for FAF.
met with Fiorenzano in August 2007 to discuss how Management
was to proceed under the Warrant. At that meeting, Fiorenzano
informed Humphreys that FAF's new CFO, Lou Rotella
(Rotella), would handle any Warrant-related issues.
Manchester subsequently met with Rotella in September 2007.
According to Manchester, Rotella had deemed the Warrant
"valueless" based on his calculation using the
years 2005 and 2006. Manchester testified that he explained
to Rotella that the Warrant was intended to be based on 2006
and 2007, but that Rotella "agreed to disagree"
with Manchester's understanding. Humphreys testified that
Manchester was "shocked" when he returned from his
meeting with Rotella. It was after this conversation that
Management realized that the Warrant's dates were
fundamentally inconsistent with each other.
Management realized the mistakes, Manchester sent a letter to
Fiorenzano and FAF on September 28, 2007, asking FAF to amend
the errors and asserting that, in Section 3.1, "the date
of October 31, 2007 should have been October 31, 2008"
and, in Section 13, "the [date of] September 30, 2007
should have been September 30, 2008." The letter stated
that if FAF was in agreement as to the errors, Management
would prefer the Warrant be amended. The letter continued,
however, to inform FAF that "[i]n order to preserve
[Management's] rights under the terms of the Warrant as
presently written," Management believed it
"necessary" to exercise its put rights.
through its attorney, promptly replied to Management's
letter on October 1, 2007. In the letter, he noted the
discrepancy between the dates, but asserted that the December
31, 2007 date was incorrect-not the September 30, 2007 and
October 31, 2007 dates. FAF's attorney wrote "[m]y
file clearly indicates that the parties always intended that
the expiration date for the exercise of the Warrant would
always be prior to 12/31/7." He attributed the error
to the drafting of the thirty-day Window, which allowed
Management to simultaneously put and exercise the Warrant.
back-and-forth discussions ensued between Management and FAF,
including Management's rejected proposal that FAF
purchase the Warrant for $2 million based on FAF's value
in 2006 and 2007, in exchange for its release of FAF's
obligations. During the fall of 2007, FAF also informed
Management that it considered "funded debt" to
include its revolving debt and not simply its long-term debt.
On December 31, 2007, Manchester sent an email to Rotella and
Fiorenzano, which served as a notice to FAF that Management
was exercising its rights under the Warrant but would
withdraw the notice "provided that a mutually
satisfactory valuation with regard to the put" was
reached. Manchester had one last meeting with Rotella in
early 2008; Rotella maintained FAF's position, and no
agreement regarding the Warrant dates was reached.
March 21, 2008, Management filed a complaint against FAF in
Providence County Superior Court. Count I asserted
reformation of the Warrant based on mutual mistake; Count II
requested declaratory judgment that funded debt is long-term
debt; and Count III alleged breach of the duty of good faith
and fair dealing. Count IV alleged that Fiorenzano had
breached his fiduciary duty by funneling funds from FAF to an
offshore account, and requested that FAF's affiliates be
included in FAF's valuation. Count V requested injunctive
relief to bar FAF from holding stockholder meetings regarding
the Warrant without first providing notice to Management.
11, 2014, FAF moved for summary judgment on Counts I, II, and
V of Management's complaint. Following a hearing on
FAF's motion, the trial justice allowed the parties to
submit supplemental briefing on whether FAF had repudiated
its obligations under the Warrant. The trial justice denied
FAF's motion for summary judgment in a written decision
on April 2, 2015. In that decision, the trial justice
explained that he would allow Management to pursue a theory
of repudiation. The trial justice did not rule on the
repudiation matter, however, because he determined that the
disputed dates were the threshold issue, and that those dates
were necessarily factual.
Management filed an amended complaint on May 6, 2015, adding
a count for repudiation. A jury-waived trial was held on June
2, 3, 5, 8, 9, and 10, 2015. Manchester, Humphreys, Almeida,
and Syner testified for Management; FAF's attorney
testified for FAF.
January 17, 2017 the trial justice issued a written decision,
determining that: (1) the Warrant would be reformed to
correct the dates based on the parties' prior mutual
understanding; (2) the term "funded debt" meant
"long-term debt"; and (3) FAF repudiated its
obligations under the Warrant. Additionally, after finding
that Management had proven its damages with reasonable
certainty, the trial justice awarded $1, 234, 055 in damages