Marino v. Patriot Rail Company LLC

131 A.3d 325 (2016)

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Nature of the Case

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Facts

P served as Chairman, President, and CEO of D until June 18, 2012. P indirectly owned 23.75% of its equity. Patriot Rail Holdings LLC (Parent) owned all of the stock of the Company. Patriot Rail LLC (Grandparent) owned all of the member interests of the Parent. Patriot Equity LLC (Great-Grandparent) owned 23.75% of the member interests of Grandparent and served as its managing member. Marino owned 100% of Great-Grandparent. P previously controlled 59.25% but transferred some of his indirect stock to another company to a Family Trust for no consideration. D discussed the possibility of acquiring Sierra with Sierra's management team. D and Sierra entered into a non-disclosure agreement dated September 29, 2005. Sierra had a contract to provide rail switching services scheduled to expire on February 29, 2008. Sierra provided D with confidential information about the Contract. At the time, Sierra was negotiating with McClellan, and Sierra took P and D employees to meet with McClellan representatives. McClellan decided not to extend the Switching Contract and issued a request for proposals. Sierra and D submitted bids. In January 2008, McClellan awarded the contract to D. Sierra sued D for breach of the non-disclosure agreement, misappropriation of trade secrets, and interference with prospective business relationships. D and Sierra entered into a letter of intent for an asset purchase, and Sierra dismissed its claims without prejudice, but the deal did not close. D then sued Sierra for breaching the letter of intent. Sierra filed counterclaims, including the claims it previously had dismissed without prejudice, plus a new claim that D had breached the letter of intent. Sierra filed an amended pleading that sought to add D's indirect companies to the litigation. Sierra did not serve Parent or Great-Grandparent. The Company and Grandparent filed answers. Parent and Great-Grandparent did not appear. In 2012, Patriot Funding LLC (Buyer) purchased 100% of the Company's stock from the Parent (Stock Sale). The Stock Sale closed on June 18, 2012. Effective upon closing, P resigned from all of his positions with the Company. The buyer paid the Parent $230 million for the stock. The Stock Purchase Agreement created a special indemnification procedure for claims related to the Underlying Action, secured by an escrow fund of $20 million. The governing agreements called for up to $16 million to be released from the escrow fund to Parent one year after closing. If the Underlying Action was not yet resolved at that point, the remaining $4 million would remain in escrow until its conclusion. P arranged to distribute his shares from Parent so they would not go through Grandparent because of the suit. In March 2013, Sierra moved for leave to serve Parent and Great-Grandparent with its claims and bring them into the case as parties. Sierra argued that it needed Parent and Great-Grandparent in the case to protect its ability to collect on a potential judgment. D argued that it would not make itself judgment proof and the court denied Sierra’s motion. The jury awarded compensatory damages of $22.3 million in favor of Sierra and against D and Grandparent. It also awarded punitive damages of $16.2 million against D, plus $1.2 million against Grandparent. On October 23, the California Court awarded additional exemplary damages of $13.1 million in favor of Sierra and against D. The jury awarded compensatory damages of $22.3 million in favor of Sierra and against D and Grandparent. It also awarded punitive damages of $16.2 million against D, plus $1.2 million against Grandparent. On October 23, the California Court awarded additional exemplary damages of $13.1 million in favor of Sierra and against D. Sierra moved to add P and D and Great-Grandparent as judgment debtors. P then asked D to advance the fees and expenses that P would incur to oppose the latest Post-Judgment Motion. D refused as the Motion focused primarily on the Fund Transfers, which took place when P was no longer an officer or director of D. P sued D. Both parties moved for summary judgment.