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  • Essential Mech. Svcs., Inc. vs. Pac. Air Cond. & Heating, Inc. civil document preview
  • Essential Mech. Svcs., Inc. vs. Pac. Air Cond. & Heating, Inc. civil document preview
  • Essential Mech. Svcs., Inc. vs. Pac. Air Cond. & Heating, Inc. civil document preview
  • Essential Mech. Svcs., Inc. vs. Pac. Air Cond. & Heating, Inc. civil document preview
  • Essential Mech. Svcs., Inc. vs. Pac. Air Cond. & Heating, Inc. civil document preview
  • Essential Mech. Svcs., Inc. vs. Pac. Air Cond. & Heating, Inc. civil document preview
  • Essential Mech. Svcs., Inc. vs. Pac. Air Cond. & Heating, Inc. civil document preview
  • Essential Mech. Svcs., Inc. vs. Pac. Air Cond. & Heating, Inc. civil document preview
						
                                

Preview

Kurt D. Hendrickson, State Bar No. 251509 1 KDH Law 2 2101 Stone Blvd., Suite 115 West Sacramento, CA 95691 3 916.993.5226 Email address: Kurt@KDHendrickson.com 4 Attorney for Essential Mechanical Services, Inc. and Tim 5 Gerhardt 6 SUPERIOR COURT OF CALIFORNIA IN AND FOR THE COUNTY OF PLACER 7 ESSENTIAL MECHANICAL SERVICES, INC., CASE NO. SCV0040825 8 Plaintiff, 9 v. 10 ESSENTIAL MECHANICAL SERVICES, 11 PACIFIC AIR CONDITIONING & HEATING, INC.’S AND TIM GERHARDT’S INC.; ESSENTIAL RETAIL SERVICES, INC.; CLOSING BRIEF 12 DENNIS F. GRAHAM, an individual; and DOES 1 through 100, inclusive, 13 14 Defendants. 15 16 PACIFIC AIR CONDITIONING & HEATING, 17 INC.; ESSENTIAL RETAIL SERVICES, INC.; DENNIS F. GRAHAM, and individual, 18 Cross-Complainants, 19 v. 20 ESSENTIAL MECHANICAL SERVICES, INC., 21 TIM L. GERHARDT, an individual, and DOES 1 through 100, inclusive, 22 Cross-Defendants. 23 24 25 26 27 28 1 1 Table of Contents 2 I. INTRODUCTION..................................................................................................................... 8 II. ARGUMENT AND EVIDENCE IN SUPPORT OF EMS’S CLAIMS. .............................. 9 3 A. EMS’S SECOND CAUSE OF ACTION FOR BREACH OF CONTRACT— AGAINST 4 PACIFIC AND ESSENTIAL RETAIL ....................................................................................... 9 5 ELEMENT 1: The Parties Entered Into the APA. This is not in dispute. ................................. 9 ELEMENT 2: EMS Performed All of Its Significant Obligations Under the APA. If EMS 6 Did Not Perform a Term of the APA, Its Performance was Excused. ...................................... 10 7 EMS Performed All of Its Significant Obligation Required by the APA............................... 10 EMS’s Performance of Its Other Obligations Under the APA was Excused Because 8 Essential Retail and Pacific Breached the APA by Providing EMS Inaccurate and Untrue Financial Statements............................................................................................................. 13 9 EMS’s Performance of its Other Obligations Under the APA was Excused Because 10 Essential Retail Could Not Legally Provide HVAC and Refrigeration Services in California. ............................................................................................................................................... 15 11 EMS’s Performance of Its Other Obligations Under the APA was Excused Because 12 Essential Retail and Pacific Withheld Accounts Receivable that Belonged to EMS. ........... 17 EMS’s Performance of Its Other Obligations Under the APA was Excused Because 13 Essential Retail and Pacific Began Illegally Competing with EMS in February 2018. ....... 18 14 ELEMENT 3: Pacific and Essential Retail Breached the APA by Failing to Perform Terms of the APA and by Performing Acts Prohibited by It. .................................................................. 18 15 ELEMENT 4: As a Result of Pacific’s and Essential Retail’s Breach of the APA EMS’s was Severely Harmed. ...................................................................................................................... 21 16 ELEMENT 5: Pacific’s and Essential Retail’s Breaches of the APA were Substantial Factors 17 in Causing EMS Harm. ............................................................................................................. 25 B. EMS’S THIRD CAUSE OF ACTION FOR BREACH OF CONTRACT – AGAINST 18 GRAHAM .................................................................................................................................... 28 19 ELEMENT 1: Mr. Graham Entered into the Employment Agreement with EMS. ................ 28 ELEMENT 2: EMS Performed Its Obligations Required by the Employment Agreement.... 29 20 ELEMENT 3: Mr. Graham Breached they Employment Agreement by Performing Acts 21 Prohibited by It. ........................................................................................................................ 29 ELEMENT 4: As a Result of Mr. Graham’s Breach of the Employment Agreement EMS was 22 Severely Harmed. ...................................................................................................................... 31 23 C. FOURTH CAUSE OF ACTION FOR FRAUD – INTENTIONAL MISREPRESENTATION— AGAINST PACIFIC AND ESSENTIAL RETAIL ................ 39 24 Pacific’s and Essential Retail’s Financial Records. .................................................................. 39 25 ELEMENT 1. Pacific and Essential Retail Fraudulently Misrepresented Their Financial Information. .......................................................................................................................... 40 26 ELEMENT 2: Pacific and Essential Retail Knew Their Representations Were False or Made Them Recklessly Without Regard for the Truth in Order to Induce EMS to Make the 27 $1,475,000 Payment.............................................................................................................. 42 28 2 ELEMENT 3: Pacific and Essential Retail Intended that EMS Rely Upon their False 1 Financials Records. .............................................................................................................. 42 2 ELEMENT 4: EMS Justifiably Relied Upon the Financial Records Provided by Pacific and Essential Retail. .................................................................................................................... 43 3 ELEMENT 5: EMS was Harmed Because It Paid Pacific and Essential Retail $1,525,380 4 Based on Their Misrepresentations. ..................................................................................... 44 B. Essential Retail Non-Compliance with California Contracting Law. .................................. 44 5 ELEMENT 1: Essential Retail Falsely Represented It Could Legally Service HVAC and 6 Refrigeration Customers in California. ................................................................................ 44 ELEMENT 2: Essential Retail Knew It Could Not Service HVAC and Refrigeration 7 Customers in California........................................................................................................ 45 ELEMENT 3: Essential Retail Intended that EMS to Rely on Its Representation that It 8 Could Service Customers in California. It Made the Representation a Term of the APA.... 45 9 ELEMENT 4: EMS Justifiably Relied upon the Representation that Essential Retail could Legally Services Customers in California. ........................................................................... 45 10 ELEMENT 5: EMS was Harmed Because It Purchased Assets from a Company that Could 11 Not Legally Generate and Collect Revenues in California. ................................................. 46 D. EMS’S FIFTH CAUSE OF ACTION FOR FRAUD – INTENTIONAL 12 MISREPRESENTATION— AGAINST GRAHAM ............................................................... 47 13 ELEMENT 1: Mr. Graham Misrepresented He Would Comply with the Employment Agreement. ................................................................................................................................ 47 14 ELEMENT 2: Mr. Graham Knew He Would Never Be EMS’s RME and Perform the Terms of the Employment Agreement. ................................................................................................ 48 15 ELEMENT 3: Mr. Graham Intended that EMS Rely Upon the Employment Agreement and 16 Him Being EMS’s RME. .......................................................................................................... 48 ELEMENT 4: EMS Justifiably Relied Upon Mr. Graham’s Employment Agreement and Him 17 Being its RME........................................................................................................................... 49 18 ELEMENT 5: EMS Was Harmed by Mr. Graham’s Fraudulent Misrepresentation. ............. 49 E. EMS’S SEVENTH CAUSE OF ACTION FOR MISAPPROPRIATION OF TRADE 19 SECRETS- AGAINST PACIFIC AND ESSENTIAL RETAIL.............................................. 49 20 ELEMENT 1: The Customer Files, Prospect Files, Customer Lists, and Databases Constitute Trade Secrets ............................................................................................................................. 50 21 The Customer and Prospect Files, Lists, and Databases Constitute Information ................ 50 22 The Customer and Prospect Information Gathered by of Pacific and Essential Retail Was Not Generally Known ........................................................................................................... 50 23 Pacific’s and Essential Retail’s Detailed Customer Information has Independent Economic Value Because It is Secret. .................................................................................................... 51 24 EMS Took Reasonable Efforts to Maintain the Secrecy of The Customer Information. ...... 51 25 ELEMENT 2: Pacific and Essential Retail Improperly Used EMS’s Trade Secrets to Solicit EMS’s Customers. .................................................................................................................... 51 26 ELEMENT 3: Pacific and Essential Retail’s Use of the Trade Secrets Damaged EMS. ........ 52 27 F. EMS’S TENTH CAUSE OF ACTION FOR BREACH OF DUTY OF UNDIVIDED LOYALTY— AGAINST GRAHAM ........................................................................................ 52 28 3 ELEMENT 1: Mr. Graham Was an Agent of EMS. ............................................................... 53 1 ELEMENT 2: Mr. Graham Acted Against the Interest of EMS when He Withheld Accounts 2 Receivable Due to EMS ............................................................................................................ 53 ELEMENT 3: EMS Did Not Consent to Mr. Graham’s Decision to Withhold the Accounts 3 Receivable. ................................................................................................................................ 54 4 ELEMENT 4: EMS was Harmed by Mr. Graham’s Conduct. ................................................ 54 ELEMENT 5: Mr. Graham’s Conduct Was a Substantial Factor in EMS’s Harm. ................ 54 5 G. EMS’S ELEVENTH CAUSE OF ACTION FOR CONVERSION — AGAINST PACIFIC 6 AND ESSENTIAL RETAIL ...................................................................................................... 54 ELEMENT 1: EMS was Entitled to the Accounts Receivables for Work Performed After 7 October 16, 2017. ...................................................................................................................... 55 8 ELEMENT 2: Pacific and Essential Retail Wrongfully Withheld EMS’s Revenues. ............ 55 ELEMENT 3: EMS was Harmed to the Tune of $321,904.02 in Revenue and $295,944.15 in 9 Stolen Profits. ............................................................................................................................ 55 10 H. EMS’S FOURTEENTH CAUSE OF ACTION FOR TRADENAME AND TRADEMARK INFRINGEMENT — AGAINST PACIFIC AND ESSENTIAL RETAIL . 55 11 ELEMENT 1: EMS Bought Pacific’s and Essential Retail’s Tradenames ............................. 56 12 ELEMENT 2: EMS Did Not Authorize Pacific and Essential Retail to Use their Tradenames. EMS used them. ........................................................................................................................ 56 13 ELEMENT 3: Pacific’s and Essential Retail’s Use of the Trade Names Caused Confusion in the Market ................................................................................................................................. 57 14 III. ARGUMENT AND EVIDENCE AGAINST PACIFIC’S, ESSENTIAL RETAIL’S 15 AND MR. GRAHAM’S CLAIMS ................................................................................................. 58 16 A. CROSS-COMPLAINTS’ FIRST CAUSE OF ACTION FOR BREACH OF WRITTEN CONTRACT................................................................................................................................ 58 17 ELEMENT 2: Pacific, Essential Retail, and Mr. Graham Failed to do All or Substantially All of the Significant Things Required by the APA. ...................................................................... 58 18 ELEMENT 3: EMS Did All, or Substantially All, of the Significant Things Required or It 19 was Excused from Performance. ............................................................................................... 59 EMS Performed the Significant Terms of the APA. .............................................................. 59 20 EMS’s Performance of its Obligations Under the Earnout Agreement and any Promissory 21 Note was Excused ................................................................................................................. 61 B. CROSS-COMPLAINANTS’ SECOND CAUSE OF ACTION FOR BREACH OF 22 IMPLIED COVENANT OF GOOD FAITH AND FAIR DEALING ..................................... 62 23 C. CROSS-COMPLAINANTS’ THIRD CAUSE OF ACTION FOR INTENTIONAL MISREPRESENTATION .......................................................................................................... 63 24 ELEMENT 2: EMS nor Mr. Gerhardt Made Any Alleged Representation with Knowledge 25 they Were False or with Reckless Disregard for the Truth. ...................................................... 63 D. CROSS -COMPLAINANTS’ FOURTH CAUSE OF ACTION FOR NEGLIGENT 26 MISREPRESENTATION .......................................................................................................... 65 E. CROSS-COMPLAINANTS’ FIFTH CAUSE OF ACTION FOR FALSE PROMISE ..... 65 27 F. CROSS-COMPLAINANTS’ SIXTH CAUSE OF ACTION FOR CONVERSION ......... 66 28 4 ELEMENT 1: Cross-Complainants Did Not Have a Right to Client Lists, Work-in-Progress, 1 or Access to Files ...................................................................................................................... 67 2 ELEMENT 2: EMS’s Withholding was Not Improper ........................................................... 67 G. CROSS-COMPLAINANTS’ SEVENTH CAUSE OF ACTION FOR TRESPASS TO 3 CHATTELS................................................................................................................................. 67 4 ELEMENT 1: Cross-Complainants Did Not Have a Right to Client Lists, Work-in-Progress, or Access to Files ...................................................................................................................... 68 5 ELEMENT 2: EMS’s Withholding Was Not Improper .......................................................... 68 6 IV. JUSTICE AND EQUITY REQUIRE THAT MR. GRAHAM BE FOUND PERSONALLY LIABLE FOR EMS’S DAMAGES AWARD. ................................................. 69 7 FACTOR 1: EXISTS. COMMINGLING, FAILURE TO SEGREGATE, AND DIVERSION OF CORPORATE 8 FUNDS ........................................................................................................................................... 71 FACTOR 2: EXISTS. TREATMENT BY AN INDIVIDUAL OF THE CORPORATE ASSETS AS HIS OWN 9 ...................................................................................................................................................... 72 10 FACTOR 4: EXISTS. IDENTICAL EQUITABLE OWNERSHIP WITH DOMINATION AND CONTROL OF THE TWO ENTITIES ................................................................................................................. 73 11 FACTOR 5: EXISTS. THE USE OF THE SAME OFFICE OR BUSINESS LOCATION AND THE 12 EMPLOYMENT OF THE SAME EMPLOYEES AND/OR ATTORNEY. ................................................ 73 FACTOR 6: EXISTS. THE USE OF A CORPORATION AS A MERE SHELL, INSTRUMENTALITY OR 13 CONDUIT FOR A SINGLE VENTURE OR THE BUSINESS OF AN INDIVIDUAL OR ANOTHER CORPORATION. ............................................................................................................................. 73 14 FACTOR 8: EXISTS. A DISREGARD OF LEGAL FORMALITIES AND A FAILURE TO MAINTAIN 15 ARM’S LENGTH RELATIONSHIPS AMONG THE ENTITIES. .......................................................... 74 FACTOR 9: EXISTS. THE USE OF THE CORPORATE ENTITY TO PROCURE LABOR, SERVICES OR 16 MERCHANDISE FOR ANOTHER PERSON OR ENTITY. .................................................................. 74 17 FACTOR 11: EXISTS. USE OF A CORPORATION AS A SUBTERFUGE OF ILLEGAL TRANSACTIONS. ...................................................................................................................................................... 75 18 SUMMARY: EIGHT OF TWELVE FACTORS EXIST IN FAVOR OF PIERCING PACIFIC’S AND 19 ESSENTIAL RETAIL’S CORPORATE VEILS. .................................................................................. 76 V. DAMAGES AWARD TO EMS ............................................................................................. 76 20 A. DAMAGES AWARD FOR EMS’S SECOND, THIRD, SEVENTH, TENTH, ELEVENTH AND 21 FOURTEENTH CAUSES OF ACTION: ............................................................................................. 76 B. DAMAGES AWARD FOR EMS’S FOURTH AND FIFTH CAUSES OF ACTION: ............................ 76 22 23 24 25 26 27 28 5 1 Cases Alliance Mortgage Co. v. Rothwell (1995) 10 Cal.4th 1226, 1239, fn. 4 ......................................... 65 2 American Paper & Packaging Products, Inc. v. Kirgan (1986) 183 Cal.App.3d 1318, 1323–132450 3 Associated Vendors, Inc. v. Oakland Meat Co. (1962) 210 Cal.App.2d 825, 838–840 ............. 71, 76 Automotriz etc. de California v. Resnick (1957) 47 Cal.2d 792, 796 ............................................... 69 4 Balesteri v. Holler (1978) 87 Cal.App.3d 717, 721 .......................................................................... 56 5 Bily v. Arthur Young & Co. (1992) 3 Cal.4th 370, 407–408 ............................................................ 65 6 Brandon & Tibbs v. George Kevorkian Accountancy Group (“Brandon & Tibbs”) (1990) 226 Cal.App.3d 442, 455 .............................................................................................................. passim 7 Brown v. Grimes (2011) 192 Cal.App.4th 265, 277 ......................................................................... 13 8 Brunzell Const. Co., Inc., of Nev. v. Barton Development Co. (“Brunzell”) (1966) 240 Cal.App.2d 442, 445 ............................................................................................................................ 16, 45, 75 9 Careau & Co. v. Security Pacific Business Credit, Inc. (“Careau”) (1990) 222 Cal.App.3d 1371, 1388 .................................................................................................................................... 9, 28, 62 10 Church of Merciful Saviour v. Volunteers of America (1960) 184 Cal.App.2d 851, 859 ................ 66 11 City of Atascadero v. Merrill Lynch, Pierce, Fenner & Smith, Inc. (1998) 68 Cal.App.4th 445, 483 ...................................................................................................................................................... 52 12 Colvig v. KSFO (1964) 224 Cal.App.2d 357, 368 ............................................................................ 56 13 Continental Airlines, Inc. v. McDonnell Douglas Corporation (1989) 216 Cal.App.3d 388, 434 .. 44 CytoDyn of New Mexico, Inc. v. Amerimmune Pharmaceuticals, Inc. (2008) 160 Cal.App.4th 288, 14 297 ................................................................................................................................................ 49 15 Daniels v. Select Portfolio Servicing, Inc. (2016) 246 Cal. App. 4th 1150, 1166 ................ 39, 47, 63 David Welch Co. v. Erskine & Tulley (1988) 203 Cal.App.3d 884, 890 .......................................... 53 16 De Burgh v. De Burgh (“De Burgh”) (1952) 39 Cal.2d 858, 863 .............................................. 13, 15 17 Discovery Communications, Inc. v. Animal Planet, Inc. (C.D. Cal. 2001) 172 F.Supp.2d 1282, 1288 ...................................................................................................................................................... 56 18 Dynamex Operations W. v. Superior Court (“Dynamex”) (2018) 4 Cal.5th 903, 964 .................... 12 19 Edmunds v. Valley Circle Estates (1993) 16 Cal.App.4th 1290, 1301 ............................................. 66 20 Engalla v. Permanente Medical Group, Inc. (“Engalla”) (1997) 15 Cal.4th 951, 974 ........ 39, 42, 47 Engineering etc. Corp. v. Longridge Inv. Co.(1957) 153 Cal.App.2d 404, 416-417 ....................... 71 21 Gruber v. Pacific States Sav. & Loan Co. (1939) 13 Cal.2d 144, 148 ....................................... 54, 66 22 H.A.S. Loan Service, Inc. v. McColgan (1943) 21 Cal.2d 518, 523 ................................................. 69 Hodges v. County of Placer (2019) 41 Cal.App.5th 537, 546–547 .................................................. 53 23 Lakin v. Watkins Associated Industries (1993) 6 Cal.4th 644, 663 .................................................. 44 24 Las Palmas Associates v. Las Palmas Center Associates (“Las Palmas”) (1991) 235 Cal.App.3d 1220, 1249 .............................................................................................................................. 16, 45 25 Lazar v. Superior Court (1996) 12 Cal.4th 631, 638 .................................................................. 47, 65 26 Los Angeles Federal Credit Union v. Madatyan (2012) 209 Cal.App.4th 1383, 1387 .............. 54, 66 Magpali v. Farmers Group, Inc. (1996) 48 Cal.App.4th 471, 481 ................................................... 66 27 Martinez v. Combs (“Martinez”) (2010) 49 Cal.4th 35, 64 .............................................................. 12 28 McCombs v. Rudman (“McCombs”)(1961) 197 Cal.App.2d 46, 50 ................................................. 70 6 Mesler v. Bragg Management Co. (“Mesler”) (1985) 39 Cal.3d 290, 300................................. 69, 76 1 Minton v. Cavaney (“Minton”) (1961) 56 Cal.2d 576, 579 .............................................................. 70 2 OMC Principal Opportunities Fund v. CIBC World Markets Corp. (2018) 157 Cal.App.4th 835, 859 .......................................................................................................................................... 15, 41 3 Pan Pac. Sash & Door Co. v. Greendale Park, Inc. (1958) 166 Cal.App.2d 652, 658–659 ........... 70 4 Plotnik v. Meihaus (2012) 208 Cal.App.4th 1590, 1602–1603 ........................................................ 13 Racine & Laramie, LTD. v. Dept. of Parks & Recreation (1992) 11 Cal.App.4th 1026, 1031-1032 5 ...................................................................................................................................................... 62 6 Richman v. Hartley (“Richman”) (2014) 224 Cal.App.4th 1182, 1186 .................................. 9, 28, 58 Riddle v. Leuschner (“Riddle”) (1959) 51 Cal.2d 574, 577-578 ................................................ 70, 71 7 San Jose Const., Inc. v. S.B.C.C., Inc. (2007) 155 Cal.App.4th 1528, 1538 .................................... 50 8 Schiff v. Peerless Motor Car Co. (1910) 13 Cal.App.600 ................................................................ 22 9 Shea v. Leonis (1939) 14 Cal.2d 666, 669 ........................................................................................ 71 Shoemaker v. Acker (1897) 116 Cal. 239 ......................................................................................... 22 10 Thrifty-Tel, Inc. v. Bezenek (1996) 46 Cal.App.4th 1559, 1566–1567 ............................................. 68 11 Uzyel v. Kadisha (2010) 188 Cal.App.4th 866, 919 ......................................................................... 44 Weatherford v. Eytchison (1949) 90 Cal.App.2d 379, 383............................................................... 56 12 Welco Electronics, Inc. v. Mora (2014) 223 Cal.App.4th 202, 208 ........................................... 55, 66 13 Wheeler v. Superior Mortgage Co.(1961) 196 Cal.App.2d 822, 827-828........................................ 71 14 Statutes Bus. & Prof. Code § 7068.2 .............................................................................................................. 39 15 Bus. & Prof. Code, § 14401 .............................................................................................................. 55 16 Bus. & Prof. Code, § 7000 et seq...................................................................................................... 17 Bus. & Prof. Code, § 7031 ................................................................................................................ 16 17 Bus. & Prof. Code, § 7065 ................................................................................................................ 45 18 Bus. & Prof. Code, § 7114 .................................................................................................... 17, 74, 75 19 Bus. & Prof. Code, §§ 7025 .................................................................................................. 17, 74, 75 Cal. Const., art. XV, § 1.................................................................................................................... 44 20 Civ. Code, § 3426.1 .......................................................................................................................... 49 21 Civil Code section 3287 .................................................................................................................... 44 Civil Code, § 3300 ................................................................................................................ 21, 32, 35 22 23 24 25 26 27 28 7 1 I. INTRODUCTION 2 On October 10, 2017, EMS 1 paid $1,475,000 to Pacific and Essential Retail to purchase their 3 assets. Thereafter, EMS was swindled out of everything it purchased. The reason? Pacific, Essential 4 Retail and Mr. Graham 2 never intended to perform the terms of the Asset Purchase Agreement nor 5 the Employment Agreement. 3 Instead, they planned to deprive EMS of all the assets it purchased. 6 Defendants accomplished their scheme in three steps. 7 The first step was accomplished, on July 26, 2017, when the parties signed the APA and the 8 Employment Agreement. Pacific and Essential Retail, under Mr. Graham’s direction, planned to only 9 sell EMS one line of business. But by then, Pacific and Essential Retail had misrepresented the 10 purchase included all their lines of business because they gave EMS and Mr. Gerhardt their financial 11 information that included the revenues and profits from all their lines of business. They just omitted 12 to inform EMS that it was only buying one of their many lines of business. 13 The second step begin immediately after the sale closed on October 16, 2017. Mr. Graham 14 represented he would transfer Pacific’s California contractors licenses to EMS by applying to be the 15 responsible managing employee (“RME”) for EMS. Thereafter, Defendants purported to comply 16 with APA and Employment Agreement while EMS paid payroll, accounts payable and received some 17 accounts payable for the operations. 18 They executed the second step in their plan when Pacific’s and Essential Retail’s largest 19 customer, Travel Centers of America (“TCA”), increased its need for services. As a result, at the end 20 of December 2018, with one term remaining to complete the license transfer, Mr. Graham refused to 21 transfer the licenses to EMS. Leaving EMS in a lurch to obtain its California contractors licenses. 22 Defendants deprived EMS of the licenses they hypocritically claimed to be necessary to operate their 23 businesses. 24 25 26 1 Essential Mechanical Services (“EMS”). 27 2 Pacific Air Conditioning & Heating, Inc. (“Pacific”); Essential Retail Services, Inc. (“Essential Retail”); and Dennis F. Graham (“Mr. Graham”) (collectively “defendants”). 28 3 Asset Purchase Agreement (the “APA”) and the Employment Agreement of Dennis Graham (the “Employment Agreement”). 8 1 The third step began on February 6, 2018, when Pacific, Essential Retail and Mr. Graham 2 began illegally soliciting EMS’s clients and competing with EMS. They intentionally breached the 3 APA and the Employment Agreement to usurp any and all assets they sold to EMS. Their scheme 4 was complete. They had taken back all the revenue generating assets EMS had purchased pursuant 5 to the APA. 6 In the process, they also kept the $1,525,380 EMS paid them at the closing, leaving EMS to 7 pay its loan commitment without offsetting revenues. Mr. Graham must have believed this would 8 cripple EMS’s ability to seek justice. 9 As a result of Pacific’s, Essential Retail’s and Mr. Graham’s fraudulent conduct and 10 egregious breaches of the APA and the Employment Agreement they caused EMS severe damage. 11 EMS lost millions of dollars in profits due to defendants’ conduct. It is time for defendants to make 12 EMS whole. EMS must be awarded compensation in ordered to receive nearly as possible the 13 equivalent of the benefits of performance of the APA and Employment Agreement. Mr. Graham 14 should be found personally liable for EMS’s award. 15 II. ARGUMENT AND EVIDENCE IN SUPPORT OF EMS’S CLAIMS. 16 a. EMS’S SECOND CAUSE OF ACTION FOR BREACH OF CONTRACT— AGAINST 17 PACIFIC AND ESSENTIAL RETAIL Pacific Air and Essential Retail breached the APA. The elements of a breach of contract 18 are: 1) The parties entered the APA; 2) EMS performed the APA or an excuse for EMS’s 19 nonperformance; 3) Pacific and Essential Retail breached the APA; 4) EMS was harmed as a result 20 of the breach. (Richman v. Hartley (“Richman”) (2014) 224 Cal.App.4th 1182, 1186; [citing 21 Careau & Co. v. Security Pacific Business Credit, Inc. (“Careau”) (1990) 222 Cal.App.3d 1371, 22 1388.].) 23 24 ELEMENT 1: The Parties Entered Into the APA. This is not in dispute. 25 Mr. Gerhardt is the incorporator and chief executive officer of EMS. (Ex. 91; RT 3/10 26 Gerhardt, 67:16-69:2.) Mr. Graham is the CEO of Pacific, and its highest-ranking officer. (RT 6/2 27 Graham, 10:19-25.) And Mr. Graham is the CEO of Essential Retail and its highest-ranking officer. 28 9 1 (RT 6/2 Graham, 15:9-19.) As the highest-ranking officers of their respective corporations, each 2 was capable of contracting on behalf of their company. 3 The APA was signed on July 26, 2017. (Ex. 92; RT 6/2 Graham, 61:16-20.) Thereafter, a 4 series of additional documents were executed before the transaction closed on October 16, 2017. 5 (Ex. 92; RT 6/2 Graham, 63:12-17.) The extensive negotiations, APA, and ancillary agreements 6 demonstrate all parties agreed to enter into the APA. This is not disputed. 7 ELEMENT 2: EMS Performed All of Its Significant Obligations Under the APA. If EMS Did Not 8 Perform a Term of the APA, Its Performance was Excused. 9 EMS Performed All of Its Significant Obligation Required by the APA. 10 On October 10, 2017, EMS performed its most significant obligation under the APA. 11 Pursuant to section 2.1, it paid $1,475,000 to Pacific and Essential Retail. (Ex. 92, § 2.1; RT 5/27 12 Graham, 50:10-21.) Graham acknowledged EMS made all the payments required at closing, 13 including the $1,475,000 payment. (Id. at p. 60 4 [Graham identifying all amounts due at close] & p. 14 58 [Graham acknowledging all payments have been received]; RT 5/27 Graham, 59:6-19 15 [acknowledging exhibit 72 as the Seller’s Note referenced in the APA]; RT 5/27 Graham, 51:5- 16 52:4 [acknowledging delivery of the Seller’s Note].) 17 At closing, EMS also satisfied its other obligations under the APA. It secured general 18 liability, property damage, auto, umbrella/excess, and workers compensation insurance policies. 19 (Ex. 92, p. 85 [Prepaid general liability coverage]; RT 3/10 Gerhardt, 90:2-25, 115:18-25, & 140:3- 20 7; Exs. 176, 179, & 237 [general liability & property coverage]; RT 3/10 Gerhardt, 150:21-153:4, 21 155:7-23, & 156:6-22; Ex. 178 [auto coverage], RT 3/10 Gerhardt, 153:14-154:8; Ex. 180 [excess 22 liability coverage]; RT 3/10 Gerhardt, 156:23-157:10; Exs. 186 & 187 [workers’ compensation 23 coverage]; RT 3/10 Gerhardt, 116:13-14; RT 5/27 Graham, 54:1-5) EMS also paid the premiums 24 for these policies. (Exs. 181 & 184-185; RT 3/11 McCumber, 15:22-16:18.) 25 EMS also purchased all of Pacific’s and Essential Retail’s vendor contracts, including 26 insurance policies. (Ex. 92, p. 23 [Exhibit B].) At closing, EMS prepaid Pacific and Essential 27 28 Exhibit 92 is not Bates numbered. As a result, any references to page numbers are references to the page number of 4 the PDF file. 10 1 Retail $6,182.00 for their general liability policy premium. (Exhibit 92, p. 85 [Closing combined 2 balance sheet]; RT 5/27 Graham, 54:1-55:3.) EMS also paid them $1,022.00 towards their workers 3 compensation insurance policy. (Ibid.) After the transaction, EMS continued to pay policy 4 premiums for Pacific and Essential Retail. (Exs. 181 & 184-185; RT 3/11 McCumber, 15:22- 5 16:18.) 6 EMS employed Mr. Graham and the other employees. Their wages were paid by EMS. (Ex. 7 38, RT 5/27 Graham, 66:7-67:21; RT 3/11 McCumber, 46:5-56:11 & 78:5-13.) EMS exercised 8 control over the employees. (RT 3/10 Gerhardt, 111:13-18; RT 5/27 McCoy, 7:17-24 [Ms. McCoy 9 promoted and given a raise by Mr. Gerhardt]; Ex. 1320; RT 6/3 Graham, 63:15-64:6, 101:21-102:4 10 [Graham acknowledging McCumber being given power over the administrative team and raises 11 granted by Gerhardt]; RT 3/11 Gerhardt, 19:21-20:12 [McCoy terminated by Gerhardt]; RT 6/3 12 Graham, 68:6-11 [Graham terminated by Gerhardt]; RT 7/2, 63:1-64:5 [Gerhardt discussing effect 13 of his termination of Graham, McCoy, & Rusk]; RT 6/2 Graham, 118:3-7, 153:17-154:9, [Graham 14 describing his experiences as branch manager].) 15 The employees performed the tasks necessary to conducted EMS’s business and worked in 16 EMS’s office. (RT 5/27 Graham, 65:22-67:21 [Graham discussing agreed-to operation procedure]; 17 RT 3/13 McCain, 20:4-32:17 [McCain discussing in detail the process for deposits]; Exs. 36-39 18 [Payroll, Accounts Payable and Accounts Receivable for EMS]; RT 5/27 McCoy, 35:21- 39:24 19 [McCoy discussing reimbursement process] & 6:17-7:10 [McCoy admits McCumber was her 20 supervisor]; RT 6/2 Graham, 118:3-7 & 153:17-154:9 [Graham describing his experiences as 21 branch manager].) 22 Also, Pacific, Essential Retail and Mr. Graham agreed to the process by which EMS’s 23 employees, including Mr. Graham, were paid. (RT 5/27 Graham, 57:7-58:7 [Mr. Graham admits he 24 received compensation from EMS & 125:13-16 [Graham acknowledging payroll was actually 25 reimbursed].) Under the Supreme Court ruling in Dynamex, a worker is considered the employee of 26 a company if (A) the worker is under the control and direction of the company; (B) the worker is 27 engaged in tasks that are in the usual course of the company’s business, and (C) that the worker is 28 not otherwise engaged in an independently established trade or occupation. (Dynamex Operations 11 1 W. v. Superior Court (“Dynamex”) (2018) 4 Cal.5th 903, 964.) A similar rule was announced by 2 the Supreme Court’s in Martinez v. Combs (“Martinez”) (2010) 49 Cal.4th 35, 64. It states, “To 3 employ, then, under the IWC’s definition, has three alternative definitions. (Ibid.) It means: (a) to 4 exercise control over the wages, hours or working conditions, or (b) to suffer or permit to work, or 5 (c) to engage, thereby creating a common law employment relationship. (Ibid.) 6 As was shown above, the employees were under EMS’s control and direction. EMS 7 exercised control over their wages, their duties, including Mr. Graham’s, and directions given by 8 Mr. Graham on behalf of EMS were done so as EMS’s branch manager. (RT 6/2 Graham, 118:3-7 9 & 153:17-154:9.) All payroll amounts were reimbursed through an agreement, meaning EMS paid 10 the wages of the workers. (RT 6/3 Graham, 125:13-16.) The workers were engaged in tasks that 11 were normal tasks related to EMS’s contracting business. (RT 3/13 McCain, 20:4-32:17; RT 5/27 12 McCoy, 35:21- 39:24 [McCoy discussing reimbursement process] & 6:17-7:10 [McCoy admits 13 McCumber was her supervisor].) The technicians in the field do not possess their own contractor’s 14 license, rendering themselves incapable of being engaged in an independently established 15 refrigeration business. (RT 3/13 Zimmer, 7:6-9.) As such, these employees were employees of 16 EMS under the ABC test of Dynamex, supra, 4 Cal.5th 903, p. 964 as well as any of the three 17 definitions announced in Martinez, supra, 49 Cal.4th p. 64. 18 Mr. Graham testified he received the Seller’s Note required by section 2.1, and due to the 19 SBA Standby Agreement, Pacific agreed to “accept payment of the principle and interest only after 20 the two (2) year anniversary of the Lender’s Loan.” (RT 5/27 Graham, 50:22-52:9; Ex. 73.) This 21 term applied to any loans by Pacific. (Ex. 73, ¶ 8.) Although an allegation has been raised that 22 EMS never delivered a second $100,000 promissory note, Pacific, Essential Retail nor Mr. Graham 23 provided evidence of said promissory note. 24 As a result, EMS performed substantially all of the things it was required to perform under