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Koch Foods, Inc. v. Pate Dawson Co., Inc.

United States District Court, S.D. Mississippi, Northern Division

October 25, 2017




         This cause is before the Court on cross-motions for summary judgment [Doc. Nos. 8');">85, 8');">87] filed by plaintiff Koch Foods, Inc. (“Koch”) and defendants Malcolm Sullivan, Micah Sullivan, and other unidentified officers and directors of Pate Dawson Company (collectively, “Defendants”). Having considered the motions, responses, and applicable statutory and case law, and being otherwise fully informed in the premises, the Court finds as follows:

         I. Background

         This is a commercial dispute between a major poultry processor and the former officers and directors of a defunct foodservice distributor with whom it did much business. The poultry processor claims that the foodservice distributor, while on the verge of financial ruin, ordered $3.6 million in poultry products with neither the intention nor the ability to pay. The foodservice distributor disagrees.

         A. The Parties

         Plaintiff Koch is a major poultry processor. The Pate Dawson Company (“PDC”) was a foodservice distributor. Defendants are the former officers and directors of PDC.

         For about eight years, Koch delivered “specialized chicken products” to PDC [Doc. Nos. 8');">86, ¶¶34-36; 92');">92');">92');">92, ¶¶34-37]. PDC would then sell the chicken products to restaurants such as Bojangles9; Famous Chicken ‘N Biscuits, a southeastern regional fast-food chain and PDCs biggest customer [Doc. Nos. 8');">86, ¶¶34-36; 92');">92');">92');">92, ¶¶34-37]. This suit arises from $3.6 million in orders PDC placed with Koch for delivery to Bojangles.

         The parties9; payment arrangement was straightforward. Once PDC delivered Koch9;s chicken products, Bojangles paid PDC for the cost of (1) shipping; and (2) the chicken products it had delivered [Doc. Nos. 8');">86, ¶¶37-38');">8; 92');">92');">92');">92, ¶¶37-38');">8]. PDC then paid Koch a portion of those payments [Doc. Nos. 8');">86, ¶¶37-38');">8; 92');">92');">92');">92 ¶¶37-38');">8]. Koch invoiced PDC once Koch9;s chicken products had been delivered to Bojangles [Doc. Nos. 8');">86, ¶37; 92');">92');">92');">92, ¶37]. PDC ordinarily paid each invoice within 21 days [Doc. Nos. 8');">86, ¶37; 92');">92');">92');">92, ¶37].

         B. PDC9;s Financial Status

         PDC was balance sheet insolvent in 2014 [Doc. Nos. 8');">86, ¶1; 92');">92');">92');">92, ¶1]. It promptly enlisted a restructuring firm, Huron Consulting Group, [Doc. Nos. 8');">86, ¶2; 92');">92');">92');">92, ¶2] and posted a net loss of over $5.7 million for the fiscal year ending in June of 2014 [Doc. Nos. 8');">86, ¶3; 92');">92');">92');">92, ¶3].

         Bojangles ended its business relationship with PDC in September 2015 [Doc. Nos. 8');">86, ¶4; 92');">92');">92');">92, ¶4]. As a result, PDC lost about 60% of its revenue [Doc. No. 92');">92');">92');">92, ¶5]. After learning that PDC had lost its biggest customer in Bojangles, PNC Bank, PDC9;s senior lender, informed PDC that its line of credit would not be renewed [Doc. Nos. 8');">86, ¶6; 92');">92');">92');">92, ¶6]. PDC owed PNC Bank about $13 million at the time [Doc. Nos. 8');">86, ¶7; 92');">92');">92');">92, ¶7]. The parties agree that these events damaged PDC9;s business prospects; however, they dispute the degree of damage done: whether PDC9;s business was at this point certain to fail [Doc. Nos. 8');">86, ¶9; 92');">92');">92');">92, ¶9].

         To mitigate damage caused by PNC Bank9;s non-renewal of PDC9;s line of credit, Huron advised PDC to find a “debt replacement facility” [Doc. Nos. 8');">86, ¶7; 92');">92');">92');">92, ¶7]. Huron further counseled that PDC needed to find a debt replacement facility if it wished to continue its normal course of business [Doc. Nos. 8');">86, ¶8');">8, 92');">92');">92');">92, ¶8');">8]. The parties dispute the odds that PDC would find the facility it admittedly needed to maintain its business.

         C. The Relevant Orders

         From December 2015 to February 2016, PDC placed 38');">8 purchase orders with Koch for chicken products worth about $3.6 million [Doc. Nos. 8');">86, p. 3; 92');">92');">92');">92, p. 5]. In March 2016, PDC sent Koch a proposed payment schedule for its outstanding invoices [Doc. Nos.

         8');">86, ¶10; 92');">92');">92');">92, ¶10]. PDC paid Koch about $106, 000 for the first invoice in March 2016 [Doc. No. 92');">92');">92');">92, ¶16]. The parties dispute whether this was an “ordinary course” payment showing that PDC was cash flow solvent, or a delayed payment signaling that PDC was not paying its bills as they became due.

         D. PDC9;s Transition Period

         Around the time of its last order with Koch, PDC sought a loan from AloStar Bank [Doc. Nos. 8');">86, ¶17; 92');">92');">92');">92, ¶17]. PDC hoped the AloStar loan would allow it to meet the terms of its payment plan with Koch [Doc. No. 92');">92');">92');">92, ¶16]. But the PDC - AloStar loan deal fell through in April 2016 [Doc. Nos. 8');">86, ¶21; 92');">92');">92');">92, ¶21]. Four months later, Cheney Brothers, Inc. bought PDC9;s assets [Doc. Nos. 8');">86, ¶21; 92');">92');">92');">92, ¶21].

         During its transition period, PDC paid two entities owned by the Sullivan family, P&D Corporation and P and S One, LLC [Doc. Nos. 8');">86, ¶24; 92');">92');">92');">92, ¶24]. The parties dispute whether PDC, or an entity agreeing to pay Koch on its behalf, has made good on any of the remaining invoices [Doc. Nos. 8');">86, ¶40; 92');">92');">92');">92, ¶40].

         E. This Suit

         In May of 2016, Koch sued PDC, Malcolm Sullivan, Micah Sullivan, and Mike Pate Jr. for breach of contract, breach of fiduciary duty, unjust enrichment, and fraudulent misrepresentation [Doc. No. 1].

         After a period of discovery, Koch amended its complaint to allege the following claims against defendants Malcolm Sullivan, Micah Sullivan, and Mike Pate Jr.: (1) breach of fiduciary duty [Doc. No. 49, ¶¶44-45]; (2) constructive fraud [Doc. No. 49, ¶¶46-47]; (3) unfair and deceptive trade practices [Doc. No. 49, ¶¶48');">8-49]; and (4) conspiracy [Doc. No. 49, ¶¶55-58');">8]. The Court does not address the claims asserted against PDC because the parties have informed the Court that PDC9;s successor, Cheney Brothers, Inc., has settled those claims with Koch [Doc. Nos. 8');">85, p. 1; 91, ¶2].

         II. Law

         A. Summary Judgment Standard

         The Court evaluates cross-motions for summary judgment under the familiar Rule 56(a) standard. See Shaw Constructors v. ICF Kaiser Eng9;rs, Inc., 95 F.3d 533');">395 F.3d 533, 538');">8-39 (5th Cir. 2004). Summary judgment is properly entered if the movant shows that there is no genuine dispute as to any material fact and that it is entitled to judgment as a matter of law. Fed.R.Civ.p. 56(a).

         On cross-motions for summary judgment, the Court reviews each party9;s motion independently, viewing the evidence and inferences in the light most favorable the non-movant. Ford Motor Co. v. Texas Dep9;t of Transp., 264 F.3d 493, 498');">8 (5th Cir. 2001); 10A Charles Alan Wright, Arthur R. Miller & Mary Kay Kane, Federal Practice and Procedure § 2720 (3d ed. 1998');">8).

         The movant in each summary judgment motion must “inform the district court of the basis for its motion, and identify those portions of the [record] . . . which it believes demonstrate the absence of a genuine issue of material fact.” Celotex Corp. v. Catrett, 17');">477 U.S. 317, 323 (198');">86). If the movant makes this initial showing, then the burden shifts to the non-movant to “designate specific facts showing that there is a genuine issue for trial.” Davis v. Fort Bend Cty., 8');">80');">765 F.3d 48');">80, 48');">84 (5th Cir. 2014). A party cannot defeat summary judgment with conclusory allegations, unsubstantiated assertions, or only a scintilla of evidence. Little v. Liquid Air Corp., 1069');">37 F.3d 1069, 1075 (5th Cir. 1994) (en banc) (per curiam).

         B. Conflict of Laws

         Although this Court sits in Mississippi, no party is a Mississippi citizen, and the parties9; relationship is centered elsewhere. Thus, the Court must determine which state9;s substantive law should apply. The parties agree that North Carolina law governs three of four claims; however, the Court conducts its own conflict of laws analysis here.

         Because this Court9;s jurisdiction is based on diversity of citizenship, the Court applies state substantive law. Gasperini v. Ctr. for Humanities, Inc., 518');">8 U.S. 415, 427 (1996); Erie R. Co. v. Tompkins, 304 U.S. 64, 78');">8-79 (1938');">8). The Supreme Court of the United States has long held that state conflict of law rules are substantive under Erie. Klaxon Co. v. Stentor Elec. Mfg. Co., 13 U.S. 48');">87');">313 U.S. 48');">87, 496 (1941); Williams v. Liberty Mut. Ins. Co., 1 F.3d 617');">741 F.3d 617, 620 (5th Cir. 2014). Thus, this Court applies the conflict of law rules of Mississippi.

         Under Mississippi9;s conflict of laws regime, the Court first decides whether there is a “true conflict” between the laws of two states with an interest in the litigation. South Carolina Ins. Co. v. Keymon, 974 So.2d 226, 230 (Miss. 2008');">8) (en banc). Here, a “true conflict” exists between the laws of Mississippi and North Carolina relative to Koch9;s breach of fiduciary duty, [1" name="FN1" id= "FN1">1] constructive fraud, [2] and unfair and deceptive trade practices claims.[3] Because the laws of Mississippi and North Carolina are in accord on the elements of conspiracy, [4] the Court applies Mississippi9;s law of conspiracy. See Daniels v. Crocker, 2017 WL 2505196, *4, ___ So.3d ___ (Miss. 2017).

         Finding a “true conflict” exists on three of Koch9;s four claims, the Court conducts a three-step analysis: “(1) determine whether the laws at issue are substantive or procedural; (2) if substantive, classify the laws as either tort, property, or contract; and (3) look to the relevant section of the Restatement (Second) of Conflict of Laws.” Hartford Underwriters Ins. Co. v. Foundation Health Servs. Inc., 8');">88');">8');">524 F.3d 58');">88');">8, 593 (5th Cir. 2008');">8) (citing Zurich Am. Ins. Co. v. Goodwin, 92');">92');">92');">920 So.2d 427');">92');">92');">92');">920 So.2d 427, 432 (Miss. 2006)).

         Regarding the first step, forum law dictates whether an issue is substantive or procedural. 1A C.J.S. Actions § 41. Under Mississippi law, few laws qualify as procedural: statutes of limitations, awards of attorney9;s fees, and awards of prejudgment interest. Zurich, 92');">92');">92');">920 So.2d at 433. Each of the laws at issue here, concerning elements of tort claims, is “substantive” under Mississippi law.

         Regarding the second and third steps, breach of fiduciary duty, constructive fraud, and unfair trade practices are tort-based claims governed by Chapter 7 of the Restatement ...

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