Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—M.D. Pa.: Window manufacturer’s fraud counterclaim may proceed against former distributor, (Jul 7, 2015)

By Michael Menzhuber, J.D., LL.M.

A window manufacturer’s counterclaim that a former distributor and its principal fraudulently induced it to continue their business relationship, to the manufacturer’s detriment, withstood a motion for summary judgment, according to the federal district court in Harrisburg, Pennsylvania (LightStyles, LTD. v. Marvin Lumber and Cedar Company, July 6, 2015, Caldwell, W.).

Background. Between 1995 and 2011, Marvin Lumbar and Cedar Company had an oral distribution agreement with LightStyles, LTD for the sale of Marvin windows. When Marvin learned, in January of 2009, that LightStyles’ largest single customer, Smitty’s Building Supply Inc., had filed for bankruptcy protection, it became concerned that LightStyles would not recover from the loss. In an effort to reassure Marvin of LightStyles’ strength and financial condition, Robert Slagle, LightStyles’ principal, sent Marvin a subset of its financial records for the period ending November 30, 2008. The records represented that LightStyles had more than $20 million in current, collectable accounts receivables.

Marvin terminated its relationship with LightStyles in August of 2011, and LightStyles was forced into bankruptcy the following year. The trustee in bankruptcy for LightStyles filed a lawsuit against Marvin, alleging several causes of action based on its decision to terminate its business relationship with Lightstyles. Marvin counterclaimed and sued Slagel on the basis that Slagel and LightStyles had fraudulently induced it to continue their business relationship by misrepresenting LightStyle’s financial condition. Slagel and LightStyles moved for summary judgment to dismiss Marvin’s fraud claim. In denying the motion, the court found that Slagel and LightStyles were unable to show that the evidence in the record was not sufficiently clear and convincing to persuade a reasonable juror that they committed fraud in the inducement.

Falsity of representation. Slagel and LightStyles argued that the record did not establish that their representation in January 2009 was false because: (1) nothing in the financial records represented the age or collectability of the receivables and (2) listing the bad debts did not represent that the other accounts receivable were collectable. The court disagreed because the listing of the accounts receivable as “current assets” falsely represented that they were collectable.

The court noted a declaration of Marvin’s chief financial officer that, under “standard accounting practices,” the “current assets” category on balance sheets represents the value of all assets that are reasonable expected to be converted to cash within one year. The court further noted that Slagel told Marvin that that the receivable were “good” and that, under common accounting usage, “good receivables” means accounts that are less than 90 days from invoice date and are reasonably expected to be converted to cash within one year in the normal course of business.

Slagel and LightStyles also argued that Marvin improperly attempted to transform the CFO’s deposition testimony into a statement by Slagel that the receivable were “good receivables.” The court determined that argument lacked merit because it had accepted that the CFO could testify to the significance of “current assets” and “good receivables” and the testimony of a single witness was sufficient establish fraud.

Justifiable reliance. Slagel and LightStyles argued that Marvin could not have justifiably relied on the financial records because the CFO knew that the accounts receivable amount included the amount of Smitty’s accounts receivable. The court determined that this argument also lacked merit because: (1) Marvin knew to take into account Smitty’s bankruptcy and this still left substantial, apparently collectable, accounts receivable and (2) there was evidence of an additionally significant accounts receivable that would be uncollectable.

The court also disagreed with Slagel and LightStyles’ arguments that Marvin could not have justifiably relied on the records because: (1) Marvin had admitted, through deposition testimony of its CD, that all accounts receivable, not just current ones, would appear on monthly statements and (2) Marvin’s CFO had testified that “there were a lot of old receivables.” The court found that Marvin’s CD’s testimony was not dispositive of the fraud claim and that there was no evidence that Marvin’s CFO testified that he knew the accounts receivable were “old.”

Intent to mislead. Finally, Slagel and LightStyles argued that, because they did not know the reason why Marvin wanted to see their financials, they could not have intended for Marvin to rely on them. The court, however, found that Slagel had been told that the reason Marvin wanted to see the financials was to assess whether LightStyles had the financial strength to continue full operations after Smitty’s bankruptcy.

The case is No. 1:13-CV-1510

Attorneys: John M. Ogden (Holt & Ogden, LLP), and Steven A. Lamb (Rovens Lamb, LLP) for LightStyles, Ltd. Joseph M. Windler (Winthrop & Weinstine, PA) for Marvin Lumber and Cedar Co.

Companies: LightStyles, Ltd.; Marvin Lumber and Cedar Co.

Cases: FranchisingDistribution PennsylvaniaNews