Paganelli v. Lovelace

Background

Parties’ agreement.

The defendant, and counterclaimant, Richard Lovelace, was an estimator and project manager for Safe Environmental Corp. (the Company). He eventually became a vice president but was not involved in the finances of the Company. The Company is an asbestos and lead paint remediation company.

Anthony Paganelli, the owner of the Company, approached Lovelace about buying the Company in 2009. The Company’s accountant prepared a stock purchase agreement. Lovelace would purchase 100% of the shares of the Company from Paganelli for $3 million over 10 years and a salary to Paganelli of $150,000 for as long as any of the $3 million is outstanding. 

Paganelli’s alleged breaches of the agreement.

Paganelli used as much as $484,606.79 in Company funds for personal purposes. “Except for three payments on Paganelli’s home loan, all of these transactions were recorded as Company business expenses,” Lovelace argued that these personal payments breached the representations Paganelli made in the agreement in many ways, including the representation that the financial statements did not conform to the books and records prepared in the ordinary course of business. Lovelace’s expert also opined that the financial statements Paganelli provided did not fairly show the company’s financial condition. For example, some jobs were noted as being 100% complete when they were not, thus increasing the Company’s reported revenues. Expert Kolodziej also stated that the financial statements did not conform to GAAP. “Kolodziej found that the 2008 year-end financial statements created in May 2009 changed materially from the numbers included in the Business Valuation Report created in February 2009, and revealed a net income decrease of over $600,000.”

Lovelace also argued that “Paganelli violated Section 3.7 of the Agreement, which promised that since December 31, 2008, the Company has operated ‘in the ordinary course and consistent with past practice.’” Lovelace argued Paganelli violated Section 3.7 in two ways: (1) the Company took on debt to fund shareholder distributions in the year of the sale, and (2) union liabilities for underfunding of the pension plan were not disclosed.

Procedural history

Paganelli’s amended complaint alleged three counts: breach of contract, a complaint about accounting, and a breach of the promissory note. Lovelace filed a counterclaim alleging breach of contract and fraud. Lovelace “now moves” for summary judgment on Paganelli’s claims and on the liability question of his breach of contract counterclaim.

Analysis

Paganelli argued that Lovelace’s affidavit contradicted his deposition testimony but did not offer any support for this argument. Paganelli’s request to strike Lovelace’s affidavit was denied.

Breach of contract

Both parties claimed the other was liable for breaching the contract. There was no dispute that Lovelace prematurely ceased performance under the contract. The question was whether Paganelli committed the first material breach. If so, his claims against Lovelace failed as a matter of law. “Because Lovelace seeks summary judgment on a claim as to which he will bear the ultimate burden of proof (his breach of contract counterclaim), he must have laid out the elements of the claim; identified the facts which satisfy those elements; and demonstrated that the record is so one-sided as to rule out the prospect of a finding in favor of Paganelli.” Lovelace has met this burden and has shown that Paganelli’s breaches were material. “The evidence further demonstrates that: Paganelli’s actions were willful; that Lovelace can be adequately compensated by damages in his favor; and that the likelihood of cure by Paganelli is very small.”

Paganelli argued that Lovelace failed to exercise due diligence before agreeing but did not present any authority for that position. The Indiana Supreme Court had long held that there was no duty to investigate where there was an express warranty.

The evidence showed that Paganelli committed the first material breach; thus, Lovelace was entitled to judgment on Paganelli’s claims as well as on his breach of contract counterclaim.

The defendant’s motion for partial summary judgment was granted, and the case was referred to the magistrate judge for settlement purposes.