25 Cal. App. 5th 1172
Cal. Ct. App. 5th2018Background
- Inet (California) sold substantially all assets to Cavotec (a Swiss company with a Delaware subsidiary) under an APA providing stock plus two $2M earn-out payments; Inet’s CEO Colaco became president of Cavotec Inet US and Barry became CFO.
- Due to customer-consent issues, parties executed Guidelines: Inet would continue performing ongoing contracts and forward postclosing customer payments to Cavotec; Cavotec would make the two earn-out payments at anniversaries.
- After closing, disputes arose; Cavotec paid the first earn-out but withheld the second $2M alleging Inet/Colaco/Barry withheld postclosing customer payments and engaged in misconduct (false/backdated invoices, conversion, sabotage).
- Colaco and Inet sued for the withheld second $2M; Cavotec cross-complained for unpaid customer funds, breach of fiduciary duty (against Colaco and Barry), breach of Colaco’s employment contract, conversion, and punitive damages.
- Jury awarded Cavotec $1.313M against Inet, Colaco, and Barry (jointly and severally) for withheld customer payments and related claims, and $2M punitive damages against Colaco; trial court denied JNOV motions.
- Court of Appeal: Cavotec’s $1.313M award must be offset by Cavotec’s admitted failure to pay the $2M earn-out (an independent covenant), producing a $687,000 judgment in favor of Inet; other holdings on choice-of-law, fiduciary and punitive claims affirmed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Cavotec’s failure to pay the final $2M earn-out could be excused by Inet’s failure to forward postclosing customer payments | Cavotec: Inet’s breaches justified withholding earn-out; jury verdict excused payment | Inet: The earn-out obligation was independent; Inet’s breach only gives Cavotec an offset/damages, not excuse | Earn-out obligation was independent; Cavotec still liable for $2M; set-off required, yielding $687,000 net judgment for Inet |
| Choice-of-law for claims against Colaco (Delaware internal affairs v. contract choice-of-law) | Colaco: internal affairs doctrine requires Delaware law; under Delaware punitive and certain fiduciary claims barred | Cavotec: Colaco’s employment contract selected California law; Nedlloyd standard favors enforcing choice-of-law unless another state has materially greater interest | Court applied California law (choice-of-law clause enforceable); Colaco failed to show Delaware has materially greater interest; trial court did not err |
| Whether fiduciary-duty and punitive-damage claims against officers are preempted by contract remedies (Delaware primacy-of-contract argument) | Colaco/Barry: any claims arising from contract obligations are subsumed by contract (Delaware law); punitive damages barred | Cavotec: fiduciary claims rest on officers’ independent duties and misconduct beyond contract; punitive damages allowed under California law | Court: Under California choice-of-law (and even under Delaware analysis for Barry the result is same), fiduciary and punitive claims survived; Delaware primacy-of-contract does not bar such claims where independent fiduciary basis exists |
| Whether APA’s indemnity/exclusive-remedy and punitive-damage waiver bars Cavotec’s claims against Colaco (employment contract-based claims and punitive damages) | Colaco: APA’s indemnity/exclusive-remedy and §7.3 punitive waiver bar recovery against him | Cavotec: Claims against Colaco arise under his separate employment contract and fiduciary duties, not under the APA | Court: APA’s exclusive remedy and punitive-waiver apply only to liabilities under the APA; they did not bar Cavotec’s separate employment-contract/fiduciary and punitive claims against Colaco |
Key Cases Cited
- Scott v. Ford Motor Co., 224 Cal.App.4th 1492 (review standard on JNOV)
(articulates substantial-evidence review on denial of JNOV) - Verdier v. Verdier, 133 Cal.App.2d 325 (dependent vs independent covenants)
(discusses when contractual covenants are independent and breach remedies) - Starr v. Davis, 105 Cal.App. 632 (independent covenants; seller’s breach doesn't permit buyer to keep business without paying)
(early statement that covenants performed at different times are independent) - Perrin v. Fresno Canal & Irr. Co., 170 Cal. 411 (independent covenant doctrine)
(payment obligations at different times are independent) - Hall v. Dekker, 45 Cal.App.2d 783 (independent covenants)
(same principle applied) - Nedlloyd Lines B.V. v. Superior Court, 3 Cal.4th 459 (choice-of-law enforcement)
(California enforces reasonable choice-of-law clauses unless another state has materially greater interest) - State Farm Mut. Auto. Ins. Co. v. Superior Court, 114 Cal.App.4th 434 (internal affairs doctrine scope)
(internal affairs doctrine applies to quintessential internal corporate matters) - Friese v. Superior Court, 134 Cal.App.4th 693 (limits on internal affairs application)
(statutory/private-law claims protecting broader public interests may be governed by forum law) - Lidow v. Superior Court, 206 Cal.App.4th 351 (internal affairs vs public policy)
(internal affairs doctrine does not automatically bar forum law for non-organic internal matters) - Nemec v. Shrader, 991 A.2d 1120 (Del.) (primacy of contract in Delaware)
(Delaware holds fiduciary claims may be foreclosed where duties are solely contractual) - Fullington v. Equilon Enterprises, Inc., 210 Cal.App.4th 667 (punitive damages survive offset)
(an offset that satisfies compensatory damages does not negate punitive award) - Esparza v. Specht, 55 Cal.App.3d 1 (punitive damages and offsets)
(similar principle regarding punitive damages surviving compensatory offsets) - Margott v. Gem Properties, Inc., 34 Cal.App.3d 849 (offset is equivalent to payment)
(discusses offset as payment and debtor’s election to apply offsets) - Krusi v. Bear, Stearns & Co., 144 Cal.App.3d 664 (relation of offsets to joint tortfeasors)
(payments by one tortfeasor reduce joint liability of others)