Preview
1
A PROFESSIONAL CORPORATION
2
Martin N. Jensen, SBN 232231
3 Jeffrey A. Nordlander, SBN 308929
350 University Avenue, Suite 200
4 Sacramento, California 95825
TEL: 916.929.1481
5 FAX: 916.927.3706
6 Attorneys for Defendants,
7 PACIFIC AIR CONDITIONING & HEATING, INC., ESSENTIAL RETAIL SERVICES, INC.,
and DENNIS F. GRAHAM
8
9 SUPERIOR COURT OF CALIFORNIA COUNTY OF PLACER
10
ESSENTIAL MECHANICAL SERVICES, Case No.: SCV0040825
11 INC.,
PACIFIC AIR CONDITIONING &
12 Plaintiff, HEATING, INC., ESSENTIAL RETAIL
350 University Avenue, Suite 200
13 SERVICES, INC., AND DENNIS F.
95825
v. GRAHAM’S OPENING TRIAL BRIEF
PORTER | SCOTT
FAX: 916.927.3706
TEL: 916.929.1481
14
PACIFIC AIR CONDITIONING &
Sacramento, CA
15 HEATING, INC.; ESSENTIAL RETAIL
16 SERVICES, INC.; DENNIS F. GRAHAM,
an individual; and DOES 1 through 100, Complaint Filed: February 28, 2018
17 inclusive, Trial: March 9, 2020
18 Defendants. Judge: Honorable Charles D. Wachob
19 ____________________________________/
AND RELATED CROSS ACTION.
20 ____________________________________/
21
22
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28 {02259186.DOCX}
PACIFIC AIR CONDITIONING & HEATING, INC., ESSENTIAL RETAIL SERVICES, INC.,
AND DENNIS F. GRAHAM’S OPENING TRIAL BRIEF
1 TABLE OF CONTENTS
2 PAGE(S)
3
I. INTRODUCTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
4
II. STATEMENT OF THE FACTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
5
6 A. Graham Successfully Manages Pacific And ERS For
Decades Prior To The October 2017 Closing Date. . . . . . . . . . . . . . . . . . . . 2
7
B. Pacific, ERS, and Graham Provide True And Accurate Due
8 Diligence Materials To EMS Prior To Execution of the APA .......... 3
9
C. Pacific, ERS, And EMS Execute the APA In July 2017. . . . . . . . . . . . . . . . 5
10
D. EMS Fails To Timely Obtain Its California Contractors Licenses . . . . . . . 8
11
12 E. The Modified Closing Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
13
350 University Ave., Suite 200
F. Gerhardt Tries Unsuccessfully to Manage Pacific
95825
And ERS From Across The Country . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
PORTER | SCOTT
FAX: 916.927.3706
TEL: 916.929.1481
14
Sacramento, CA
15 G. Gerhardt And McCumber Are Unable To Manage Pacific And ERS’S
Accounting System ............................................. 12
16
H. EMS Did Not Have Sufficient Working Capital To
17
Appropriately Manage The Business In Its First Months . . . . . . . . . . . . . . 13
18
I. EMS Fails To Timely Reimburse Pacific And ERS For
19 Accounts Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
14
20
J. Pacific And ERS Retain Accounts Receivable To Ensure
21 All Obligations Are Paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
16
22 K. EMS Makes The Disastrous Decision To Terminate The
23 Employment Agreement With Graham In February 2018 . . . . . . . . . . . . . 17
24 L. Gerhardt Operates An Illegal HVAC Contracting Business
Between February 2018 and November 2018 . . . . . . . . . . . . . . . . . . . . . . . . 18
25
26 M. Graham Tries To Salvage The Business He Spent Decades Building. . . . . 19
27 N. EMS’s Witnesses Lacked Credibility .............................. 19
28
{02266963.DOCX} i
TABLE OF CONTENTS / TABLE OF AUTHORITIES
1 III. PACIFIC, ERS AND GRAHAM’S SECOND
AMENDED CROSS-COMPLAINT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
2
3 1. First Cause of Action: Breach of Contract
Against EMS And Gerhardt ................................ 20
4
a. Breach of the Earnout Agreement. . . . . . . . . . . . . . . . . . . . . . 21
5
6 b. Breach of the Seller’s Note for Additional Inventory . . . . . . 22
7 c. Breach of the APA Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
23
8 d. Additional Breaches ................................ 24
9
2. Second Cause Of Action: Breach Of The Implied
10 Covenant Of Good Faith And Fair Dealing . . . . . . . . . . . . . . . . . . . . 28
11
3. Third, Fourth and Fifth Causes of Action: Intentional
12 Misrepresentation, Negligent Misrepresentation,
and False Promise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
29
13
350 University Ave., Suite 200
95825
4. Sixth And Seventh Causes of Action: Conversion
PORTER | SCOTT
FAX: 916.927.3706
TEL: 916.929.1481
14
And Trespass To Chattels Against EMS And Gerhardt . . . . . . . . . . 32
Sacramento, CA
15
IV. EMS’S SECOND AMENDED COMPLAINT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
16
1. EMS Cannot Maintain This Action To Collect
17
Compensation For Unlicensed Contracting Work. . . . . . . . . . . . . . . 34
18
2. Second And Third Cause of Action: Breach of Contract
19 Against Pacific, ERS, and Graham . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
20
a. EMS and Gerhardt’s Multiple Breaches Void
21 The Competitive Activity Restrictions in the APA .............. 37
22 b. The Non-Compete Provisions Have Limited
23 Terms And Only Apply To National Retail Commercial
HVAC Customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
40
24
c. Pacific And ERS Did Not Compete With EMS . . . . . . . . . . . . . . . . . 41
25
26
d. Graham Did Not Compete Against EMS After
27 February 6, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
43
28 e. EMS Cannot Prove that Competition by Defendants
Was a Substantial Factor In Causing EMS Harm. . . . . . . . . . . . . . . . 44
{02266963.DOCX} ii
TABLE OF CONTENTS / TABLE OF AUTHORITIES
1
f. EMS has not Established any Claimed Damages .............. 45
2
3 3. Fourth and Fifth Causes of Action: Misrepresentation
Against Pacific, ERS, And Graham. . . . . . . . . . . . . . . . . . . . . . . . . . 45
4
4. Seventh Causes Of Action: Trade Secret Misappropriation
5 Against Pacific And ERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
47
6
5. Tenth Cause Of Action: Breach Of Duty
7 Of Loyalty Against Graham . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
8 6. Eleventh and Twelfth Cause Of Action: Conversion
9 And Trespass To Chattels Against Pacific And ERA . . . . . . . . . . . 49
10 7. Thirteenth Cause Of Action: Inducing Breach Of
Contract Against Pacific And ERS . . . . . . . . . . . . . . . . . . . . . . . . . . 50
11
12 a. EMS’s Inducing Breach of Contract Cause of
Action Is Preempted By the California
13
350 University Ave., Suite 200
Uniform Trade Secret Act ................................. 51
95825
PORTER | SCOTT
FAX: 916.927.3706
TEL: 916.929.1481
14
b. This Cause of Action Is Barred By
Sacramento, CA
15 The Economic Loss Doctrine ............................... 52
16 c. There Is No Evidence Pacific or ERS Caused Any Customer
To Cancel Their Contract With EMS . . . . . . . . . . . . . . . . . . . . . . . . 53
17
18 8. Fourteenth Cause Of Action: Tradename And Trademark
Infringement Against Pacific AND ERS . . . . . . . . . . . . . . . . . . . . . . 54
19
20 V. GRAHAM IS NOT THE ALTER EGO OF PACIFIC OR ERS . . . . . . . . . . . . . . 55
21 VI. CONCLUSION .. . . . .. . . . . .. . . . . .. . . . . .. . . . .. . . . . .. . . . . .. . . . . .56
22
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{02266963.DOCX} iii
TABLE OF CONTENTS / TABLE OF AUTHORITIES
1 TABLE OF AUTHORITIES
2 CASES PAGE(S)
3
1-800 Contacts, Inc. v. WhenU.com, Inc.,
4 414 F.3d 400 (2d Cir. 2005). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
54
5 Alliant v. Gady
6 (2008) 159 Cal.App. 4th 1292 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
40
7 Angelica Textile Services, Inc. v. Park
(2013) 220 Cal.App.4th 495, 505 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
51
8
9 Applied Equip. Corp. v. Litton Saudi Arabia Ltd.
(1994) 7 Cal.4th 503, 516 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
52
10
Beckwith v. Dahl
11 (2012) 205 Cal.App.4th 1039, 1059–1060. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
30
12
Brunzell Const. Co., of Nev. v. Barton Dev. Co.
13
350 University Ave., Suite 200
(1966) 240 Cal.App.2d 442, 443. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
35
95825
PORTER | SCOTT
FAX: 916.927.3706
TEL: 916.929.1481
14
Bus. Sols., LLC v. Ganatra,
Sacramento, CA
15 2019 WL 926351, at *8 (C.D. Cal. Jan. 7, 2019) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
16 Cansino v. Bank of America
(2014) 224 Cal.App.4th 1462, 1469 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
45
17
18 Comunale v. Traders & General Ins. Co.
(1958) 50 Cal.2d 654, 658 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
28
19
20 Engalla v. Permanente Medical Group, Inc.
(1997) 15 Cal.4th 951, 974 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
29
21
Erlich v. Menezes
22 (1999) 21 Cal.4th 543, 552 ............................................... 52
23
Foley v. Interactive Data Corp.,
24 47 Cal. 3d 654, 683 (1988) ............................................... 52
25 Jeff Tracy, Inc. v. City of Pico Rivera
26 (2015) 240 Cal.App.4th 510, 517 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
35
27 Johnson v. Mattox
(1968) 257 Cal.App.2d 714, 716019. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
35
28
{02266963.DOCX} iv
TABLE OF CONTENTS / TABLE OF AUTHORITIES
1 Judicial Council of California v. Jacobs Facilities, Inc.
(2015) 239 Ca1.App.4th 882, 896-897 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
35
2
3 K.C. Multimedia, Inc. v. Bank of America Technology & Operations, Inc.,
171 Cal. App. 4th 939, 958 (2009) ......................................... 51
4
Lee v. Hanley
5 (2015) 61 Cal.4th 1225, 1240 ........................................... 32, 49
6
Lewis &Queen v. N. M. Ball Sons
7 (1957) 48 Ca1.2d 141, 154. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
35
8 MacPherson v. Eccleston
9 (1961) 190 Cal.App.2d 24, 27 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
56
10 Mattel, Inc. v. MGA Entertainment, Inc.,
782 F. Supp. 2d 911, 987 (C.D. Cal. 2011) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
51
11
12 Oracle USA, Inc. v. XL Global Servs., Inc.,
2009 WL 2084154, at *4 (N.D. Cal. July 13, 2009) . . . . . . . . . . . . . . . . . . . . . . . . . . . 52, 53
13
350 University Ave., Suite 200
95825
Pacific Gas & Electric Co.,
PORTER | SCOTT
FAX: 916.927.3706
TEL: 916.929.1481
14
supra, 50Cal.3d at p. 1126 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
50
Sacramento, CA
15
PMC, Inc. v. Saban Entertainment, Inc.
16 (1996) 45 Cal.App.4th 579,601 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
50
17
Racine & Laramie, Ltd. v. Department of Parks & Recreation
18 (1992) 11 Cal.App.4th 1026, 1031–1032 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
28
19 Ragland v. U.S. Bank National Assn.
20 (2012) 209 Cal.App.4th 182, 196 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
30
21 Richman v. Hartley
(2014) 224 Cal.App.4th 1182, 1186. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
20, 36
22
23 Robinson Helicopter Co. v. Dana Corp.
(2004) 34 Cal.4th 979, 988 ............................................... 52
24
Sequoia Vacuum Systems,
25 supra, 229 Cal.App.2d at p. 288. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
48
26
Silvaco DataSystems v. Intel Corp.
27 (2010) 184 Cal.App.4th 210, 220 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
47, 51
28 Sonora Diamond Corp. v. Superior Court
(2000) 83 Cal.App.4th 523, 538 ........................................... 55
{02266963.DOCX} v
TABLE OF CONTENTS / TABLE OF AUTHORITIES
1 Sonora Diamond Corp. v. Superior Court,
supra, 83 Cal.App.4th at 539 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
55
2
3 Thrifty-Tel, Inc. v. Bezenek
(1996) 46 Cal.App.4th1559, 1566–1567 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
32
4
Toho-Towa Co., Ltd. v. Morgan Creek Productions, Inc.
5 (2013) 217 Cal.App.4th 1096, 1107-1108. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
55
6
Troyk v. Farmers Group, Inc.
7 (2009) 171 Cal.App.4th 1305, 1341. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
55
8 US Ecology, Inc. v. State
9 (2005) 129 Cal.App.4th 887, 909. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
44
10 Vallejo Development Co. v. Beck Development Co.
(1994) 24 Ca1.App.4th 929, 941. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
35
11
12 Zaslow v. Kroenert
(1946) 29 Cal.2d 541, 551 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
32
13
350 University Ave., Suite 200
95825
STATUTES
PORTER | SCOTT
FAX: 916.927.3706
TEL: 916.929.1481
14
Sacramento, CA
15 Business and Professions Code § 7031 .......................................... 35, 36
16 Cal. Bus. & Prof. § 16600 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
40
17
Texas Reg., § 1302.251 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
34
18
OTHER
19
20 CACI 1900 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
45
21 CACI 2101 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
49
22 CACI 4102 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
48
23
24
25
26
27
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{02266963.DOCX} vi
TABLE OF CONTENTS / TABLE OF AUTHORITIES
1 Defendants and Cross-Complainants PACIFIC AIR CONDITIONING & HEATING,
2 INC. (“Pacific”), ESSENTIAL RETAIL SERVICES, INC. (“ERS”), and DENNIS F.
3 GRAHAM (“Graham”) (collectively, “Cross-Complainants” or “Defendants”) respectfully submit
4 this closing brief in support of their Second Amended Cross-Complaint (“SACC”) and in
5 opposition to Plaintiff and Cross-Defendant ESSENTIAL MECHANICAL SERVICES,
6 INC.’s (“EMS”) Second Amended Complaint (“SAC”).
7 I. INTRODUCTION
8 EMS, and its principal, Tim Gerhardt (“Gerhardt”), purchased the business assets of Pacific
9 and ERS – excluding work in progress, approximately $800,000 in accounts receivable, and other
10 defined assets – pursuant to a July 26, 2017, Asset Purchase Agreement (“APA”). EMS and
11 Gerhardt bungled nearly every facet of the acquisition. They destroyed the value of Pacific and
12 ERS – companies that had together operated profitably for decades – in a span of months. After
350 University Avenue, Suite 200
13 failing to pay half of the purchase price, they filed a meritless lawsuit, blaming Pacific, ERS, and
95825
PORTER | SCOTT
FAX: 916.927.3706
TEL: 916.929.1481
14 Graham for their incompetence.
Sacramento, CA
15 Pacific, ERS, and Graham should be awarded compensation for the grievous harm they
16 suffered as a direct result of EMS and Gerhardt’s breaches and misrepresentations before, during,
17 and after the October 16, 2017, Closing Date. Cross-Complainants were damaged in an amount not
18 less than $2,483,334.00, which is comprised of:
19
i. $1,250,000 for breach of the Earnout Agreement.
20
21 ii. $111,699 for breach of the Seller’s Note for Additional Inventory.
22 iii. $100,000 for breach of the APA Note.
23
iv. $702,000 in accounts receivable that could not be collected because of EMS
24 and Gerhardt refused Pacific and ERS access to their historical source
records, including invoices and field-service reports.
25
26 v. $117,885 in sales tax liability that Pacific and ERS must pay to California
Department of Tax and Fee Administration in sales tax liability because EMS
27 refused Pacific and ERS access to their historical source records.
28 {02259186.DOCX} 1
PACIFIC AIR CONDITIONING & HEATING, INC., ESSENTIAL RETAIL SERVICES, INC.,
AND DENNIS F. GRAHAM’S OPENING TRIAL BRIEF
1
vi. $32,000 in accounts receivable belonging to Pacific and ERS that EMS
2 wrongfully collected from customers.
3 vii. $50,000 Pacific incurred purchasing replacement office equipment, including
4 computers, printers, monitors, keyboards, and a server to host Compusource,
after EMS converted Pacific’s property.
5
viii. Personal Property items that were converted by EMS consisting of 7
6 computers, fax machine, copy machine and a Compusource server. These
7 items had an approximate value of $20,000.
8 ix. $12,000 for technician labor that EMS underpaid Pacific for between the
Closing Date and EMS’s disastrous decision to terminate the Employment
9 Agreement with Graham in February 2018.
10
x. $87,570 in salary and benefits owed to Graham due to EMS’s wrongful
11 termination of the Employment Agreement.
12 EMS should take nothing on its Complaint. Defendants performed or were excused from
350 University Avenue, Suite 200
13 performing all of their material obligations under the APA. EMS failed because of the actions and
95825
PORTER | SCOTT
FAX: 916.927.3706
TEL: 916.929.1481
14 inactions of EMS, Gerhardt, and McCumber, including failing to meet the requirements to obtain
Sacramento, CA
15 necessary California Contractors Licenses. Had EMS and Gerhardt complied with the APA,
16 responsibly managed operations after the closing date, and injected necessary capital to operate the
17 business, the transaction would have been successful. Defendants are not responsible for EMS and
18 Gerhardt’s failures.
19 II. STATEMENT OF FACTS
20 A. Graham Successfully Manages Pacific And ERS For Decades Prior To The October
21 2017 Closing Date.
22 Graham is the founder of ERS and Pacific. Graham holds California Contractors Licenses
23 C-20 HVAC, C-10 Electrical, C-32 Refrigeration, and B-2 General Contractor, and in multiple
24 states. Graham, June 2, 2020, p. 7:6 – 10. 1 Graham served as the Responsible Managing Officer
25 (“RMO”) for Pacific, which provided HVAC and refrigeration services to clients located along the
26 west coast, the southwest, and Texas. ERS performed marketing tasks for the predominantly HVAC
27 1
Highlighted trial transcript excerpts containing all testimony cited in this Opening Brief are being separately filed
with the Court.
28 {02259186.DOCX} 2
PACIFIC AIR CONDITIONING & HEATING, INC., ESSENTIAL RETAIL SERVICES, INC.,
AND DENNIS F. GRAHAM’S OPENING TRIAL BRIEF
1 and refrigeration business. ERS has never had employees and relies entirely on Pacific to meet all
2 operating obligations, a fact that Gerhardt was well aware of before executing the APA in July 2017.
3 Ex. 1360; Graham, June 2, 2020, 48:3 – 9; Gerhardt, July 1, 2020, 151:6 – 12, 153:4-23.
4 Gerhardt is the owner of Allpoints, Inc., an Illinois based HVAC company. Gerhardt resides
5 in Illinois. Gerhardt retained Loren Gerch, a business consultant, to represent Gerhardt in his search
6 for a business to acquire. Gerch, June 2, 2020, 13:20 – 22. In or around 2016, Gerch contacted
7 Graham to inquire about Graham selling the assets of Pacific and ERS. Gerch, June 2, 14:4 – 7.
8 Gerch had previously worked with Graham in connection with Graham’s highly successful sale of
9 an HVAC business in 2001. Gerch, June 2, 2020, 9:23 – 10:8. Graham was reluctant to sell to
10 Gerhardt, but eventually agreed. Gerch, June 2, 2020 27:7 – 27:22. Prior to Closing, Gerhardt
11 visited the Roseville office of Pacific and ERS. Gerhardt July 1, 2020, 145:25-146-8; Ex. 1496;
12 Graham, June 2, 2020, 46:10 – 50:7. Gerhardt observed Pacific’s Contractor Licenses’ displayed at
350 University Avenue, Suite 200
13 the office. Gerhardt July 1, 2020, 147:1-9; Graham, June 2, 2020, 46:10 – 50:7.
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FAX: 916.927.3706
TEL: 916.929.1481
14 Gerch represented that Allpoints was a company almost double in size to Pacific and ERS,
Sacramento, CA
15 doing six millions dollars per year in sales, with a large staff to transition the operations and
16 sufficient capital to grow the business. Graham, June 2, 2020, 55:10-25. Graham later learned this
17 was false. Id.
18 B. Pacific, ERS, and Graham Provide True And Accurate Due Diligence Materials To
19 EMS Prior To Execution of the APA
20 Pacific and ERS provided due diligence financial information to EMS prior to closing,
21 including “balance sheets, financial statements, income statements, customer lists, contracts, those
22 kinds of things.” Gerhardt, March 2, 2020, 137:20 – 138:4. Gerhardt read from many of those
23 records at trial, observing that: (1) Pacific’s 2016 corporate tax return (Exhibit 210) shows 2016
24 gross receipts of $615,781; (2) ERS’s 2014 corporate tax return (Exhibit 236) shows 2014 gross
25 receipts of $1,860.666; and (3) Pacific’s December 31, 2014 income statement (Exhibit 203) shows
26 total revenue of $2,187,768.55. Gerhardt, March 10, 2020, 42:18 – 43:8, 43:9 – 44:14, 45:21 –
27 46:21.
28 {02259186.DOCX} 3
PACIFIC AIR CONDITIONING & HEATING, INC., ESSENTIAL RETAIL SERVICES, INC.,
AND DENNIS F. GRAHAM’S OPENING TRIAL BRIEF
1 The information contained in Pacific and ERS’s due diligence financial information was true
2 and accurate, without material exception. Graham June 2, 2020, 130:25-132:7, 144:21-146:25,
3 Graham June 3, 2020, 10:9-17, 15:7-14, 15:15-20:17. This is not a controversial statement; at trial,
4 Gerhardt admitted he is aware no information to suggest Pacific and ERS’s financials were false or
5 misleading. Gerhardt, July 1, 2020, 231:22 – 232:2; Gerhardt, July 2, 2020, 7:9 – 13; Gerhardt, July
6 2, 2020, 11:11 – 15. Despite refusing to dismiss their fraud claims, EMS did not retain a forensic
7 accountant to examine Defendants’ financials.
8 Defendants’ highly qualified forensic accountant, Ms. Jolene Fraser, concluded that Pacific
9 and ERS’s recorded revenue in their financial statements were true and accurate. Ms. Fraser’s
10 exhaustive analysis included verifying Pacific and ERS’s revenue for the years 2015, 2016 and the
11 first six months of 2017. Ex. 152, 153. Ms. Fraser verified the revenue figures by tracing the
12 amounts reported in the financial statements to individual, underlying invoices – from financial
350 University Avenue, Suite 200
13 statements, to greenbook summary, to prebill, to invoice. Fraser, July 6, 2020, 178:1 – 183:11;
95825
PORTER | SCOTT
FAX: 916.927.3706
TEL: 916.929.1481
14 183:17-185:15, Ex. 152, 153.
Sacramento, CA
15 Mr. Fraser selected months with the “highest amount[s] of revenue” and sampled other
16 months for the analysis. Fraser July 6, 2020 184:20 – 185:8. Ms. Fraser analyzed approximately
17 88 percent of ERS’s reported revenue and verified 86 percent of reported revenue to specific
18 invoices, meaning Ms. Fraser could not verify a mere 2 percent of ERS’s revenue with reference to
19 specific invoices. Id. Ms. Fraser analyzed 85 percent of Pacific’s reported revenue and verified 82
20 percent of reported revenue to specific invoices. Fraser July 6, 2020 184:19 – 24. With an incredibly
21 “high degree of confidence,” Mr. Fraser validated the revenue reported by Pacific and ERS for the
22 years 2015, 2016, and 2017 as being “recorded in the correct amount and reported in the correct
23 period, without material exception.” Fraser July 6, 2020 178:1 – 183:11, 183:17-185:15, Ex. 152,
24 153.
25 Gerhardt and/or his lender, Canadian Imperial Bank of Commerce (“CIBC”), requested that
26 Graham identify add-backs figures amounting to $500,000 - $600,000; Graham did not volunteer
27 any add-back information. Gerch, June 2, 33:1 – 20; Ex. 1578, , 1356, Graham June 2, 2020 151:12-
28 {02259186.DOCX} 4
PACIFIC AIR CONDITIONING & HEATING, INC., ESSENTIAL RETAIL SERVICES, INC.,
AND DENNIS F. GRAHAM’S OPENING TRIAL BRIEF
1 153:19, 154:19-156:17, Gerhardt July 2, 2020, 15:20-16:17. As used by the parties to this
2 transaction, add-backs are expenses – relating to the core HVAC and refrigeration business, or not
3 – that Gerhardt determined he would not incur after acquiring the business. Graham June 2, 2020
4 149:6 – 151:2. Addbacks are not revenue. Gerch, June 2, 2020, 12:14-17, Graham June 2, 2020,
5 147:20-25; Fraser, July 6, 2020, 186:21-187:13. Gerch confirmed “it’s the role of the buyers to
6 determine what add-backs would need to be analyzed going forward” and “add-backs are not a
7 guarantee of future performance” and “are not a guarantee of future profitability.” Gerch June 2,
8 2020, 12:18-13:19, 34:22-25.
9 Graham’s trial testimony that the add-back information he identified prior to closing was
10 true and accurate to the best of his knowledge is undisputed. Graham June 3, 2020, 10:9-17, 15:7-
11 14. Gerhardt has no information to suggest that the add-backs identified by Graham are in any way
12 false or misleading. Gerhardt, July 2, 2020, 14:14 – 19.
350 University Avenue, Suite 200
13 Unlike EMS, Defendants’ forensic accountant, Ms. Jolene Fraser, did take the time to
95825
PORTER | SCOTT
FAX: 916.927.3706
TEL: 916.929.1481
14 actually analyze the add-backs reported by Graham. Ex. 154. Ms. Fraser categorized add-backs as
Sacramento, CA
15 core or non-core business expenses. Fraser July 7, 2020 8:9 – 9:1. For core business expenses, Ms.
16 Fraser verified $256,304 of the $281,535 amount reported with reference to underlying source
17 documentation, including invoices and payment records. Fraser July 7, 2020 13:11 – 23. For
18 noncore business expenses, Mr. Fraser verified $163,570 of the $367,374 with reference to
19 underlying source documentation, including invoices and payment records. Fraser July 7, 2020 10:7
20 – 19. Ms. Fraser concluded the remaining sum was reasonably estimated, and that she had no reason
21 to doubt the expenses were inc
Preview
1 A PROFESSIONAL CORPORATION 2 Martin N. Jensen, SBN 232231 3 Jeffrey A. Nordlander, SBN 308929 350 University Avenue, Suite 200 4 Sacramento, California 95825 TEL: 916.929.1481 5 FAX: 916.927.3706 6 Attorneys for Defendants, 7 PACIFIC AIR CONDITIONING & HEATING, INC., ESSENTIAL RETAIL SERVICES, INC., and DENNIS F. GRAHAM 8 9 SUPERIOR COURT OF CALIFORNIA COUNTY OF PLACER 10 ESSENTIAL MECHANICAL SERVICES, Case No.: SCV0040825 11 INC., PACIFIC AIR CONDITIONING & 12 Plaintiff, HEATING, INC., ESSENTIAL RETAIL 350 University Avenue, Suite 200 13 SERVICES, INC., AND DENNIS F. 95825 v. GRAHAM’S OPENING TRIAL BRIEF PORTER | SCOTT FAX: 916.927.3706 TEL: 916.929.1481 14 PACIFIC AIR CONDITIONING & Sacramento, CA 15 HEATING, INC.; ESSENTIAL RETAIL 16 SERVICES, INC.; DENNIS F. GRAHAM, an individual; and DOES 1 through 100, Complaint Filed: February 28, 2018 17 inclusive, Trial: March 9, 2020 18 Defendants. Judge: Honorable Charles D. Wachob 19 ____________________________________/ AND RELATED CROSS ACTION. 20 ____________________________________/ 21 22 23 24 25 26 27 28 {02259186.DOCX} PACIFIC AIR CONDITIONING & HEATING, INC., ESSENTIAL RETAIL SERVICES, INC., AND DENNIS F. GRAHAM’S OPENING TRIAL BRIEF 1 TABLE OF CONTENTS 2 PAGE(S) 3 I. INTRODUCTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 4 II. STATEMENT OF THE FACTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 5 6 A. Graham Successfully Manages Pacific And ERS For Decades Prior To The October 2017 Closing Date. . . . . . . . . . . . . . . . . . . . 2 7 B. Pacific, ERS, and Graham Provide True And Accurate Due 8 Diligence Materials To EMS Prior To Execution of the APA .......... 3 9 C. Pacific, ERS, And EMS Execute the APA In July 2017. . . . . . . . . . . . . . . . 5 10 D. EMS Fails To Timely Obtain Its California Contractors Licenses . . . . . . . 8 11 12 E. The Modified Closing Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 13 350 University Ave., Suite 200 F. Gerhardt Tries Unsuccessfully to Manage Pacific 95825 And ERS From Across The Country . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 PORTER | SCOTT FAX: 916.927.3706 TEL: 916.929.1481 14 Sacramento, CA 15 G. Gerhardt And McCumber Are Unable To Manage Pacific And ERS’S Accounting System ............................................. 12 16 H. EMS Did Not Have Sufficient Working Capital To 17 Appropriately Manage The Business In Its First Months . . . . . . . . . . . . . . 13 18 I. EMS Fails To Timely Reimburse Pacific And ERS For 19 Accounts Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 20 J. Pacific And ERS Retain Accounts Receivable To Ensure 21 All Obligations Are Paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 22 K. EMS Makes The Disastrous Decision To Terminate The 23 Employment Agreement With Graham In February 2018 . . . . . . . . . . . . . 17 24 L. Gerhardt Operates An Illegal HVAC Contracting Business Between February 2018 and November 2018 . . . . . . . . . . . . . . . . . . . . . . . . 18 25 26 M. Graham Tries To Salvage The Business He Spent Decades Building. . . . . 19 27 N. EMS’s Witnesses Lacked Credibility .............................. 19 28 {02266963.DOCX} i TABLE OF CONTENTS / TABLE OF AUTHORITIES 1 III. PACIFIC, ERS AND GRAHAM’S SECOND AMENDED CROSS-COMPLAINT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 2 3 1. First Cause of Action: Breach of Contract Against EMS And Gerhardt ................................ 20 4 a. Breach of the Earnout Agreement. . . . . . . . . . . . . . . . . . . . . . 21 5 6 b. Breach of the Seller’s Note for Additional Inventory . . . . . . 22 7 c. Breach of the APA Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 8 d. Additional Breaches ................................ 24 9 2. Second Cause Of Action: Breach Of The Implied 10 Covenant Of Good Faith And Fair Dealing . . . . . . . . . . . . . . . . . . . . 28 11 3. Third, Fourth and Fifth Causes of Action: Intentional 12 Misrepresentation, Negligent Misrepresentation, and False Promise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 13 350 University Ave., Suite 200 95825 4. Sixth And Seventh Causes of Action: Conversion PORTER | SCOTT FAX: 916.927.3706 TEL: 916.929.1481 14 And Trespass To Chattels Against EMS And Gerhardt . . . . . . . . . . 32 Sacramento, CA 15 IV. EMS’S SECOND AMENDED COMPLAINT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 16 1. EMS Cannot Maintain This Action To Collect 17 Compensation For Unlicensed Contracting Work. . . . . . . . . . . . . . . 34 18 2. Second And Third Cause of Action: Breach of Contract 19 Against Pacific, ERS, and Graham . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 20 a. EMS and Gerhardt’s Multiple Breaches Void 21 The Competitive Activity Restrictions in the APA .............. 37 22 b. The Non-Compete Provisions Have Limited 23 Terms And Only Apply To National Retail Commercial HVAC Customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 24 c. Pacific And ERS Did Not Compete With EMS . . . . . . . . . . . . . . . . . 41 25 26 d. Graham Did Not Compete Against EMS After 27 February 6, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 28 e. EMS Cannot Prove that Competition by Defendants Was a Substantial Factor In Causing EMS Harm. . . . . . . . . . . . . . . . 44 {02266963.DOCX} ii TABLE OF CONTENTS / TABLE OF AUTHORITIES 1 f. EMS has not Established any Claimed Damages .............. 45 2 3 3. Fourth and Fifth Causes of Action: Misrepresentation Against Pacific, ERS, And Graham. . . . . . . . . . . . . . . . . . . . . . . . . . 45 4 4. Seventh Causes Of Action: Trade Secret Misappropriation 5 Against Pacific And ERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 6 5. Tenth Cause Of Action: Breach Of Duty 7 Of Loyalty Against Graham . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 8 6. Eleventh and Twelfth Cause Of Action: Conversion 9 And Trespass To Chattels Against Pacific And ERA . . . . . . . . . . . 49 10 7. Thirteenth Cause Of Action: Inducing Breach Of Contract Against Pacific And ERS . . . . . . . . . . . . . . . . . . . . . . . . . . 50 11 12 a. EMS’s Inducing Breach of Contract Cause of Action Is Preempted By the California 13 350 University Ave., Suite 200 Uniform Trade Secret Act ................................. 51 95825 PORTER | SCOTT FAX: 916.927.3706 TEL: 916.929.1481 14 b. This Cause of Action Is Barred By Sacramento, CA 15 The Economic Loss Doctrine ............................... 52 16 c. There Is No Evidence Pacific or ERS Caused Any Customer To Cancel Their Contract With EMS . . . . . . . . . . . . . . . . . . . . . . . . 53 17 18 8. Fourteenth Cause Of Action: Tradename And Trademark Infringement Against Pacific AND ERS . . . . . . . . . . . . . . . . . . . . . . 54 19 20 V. GRAHAM IS NOT THE ALTER EGO OF PACIFIC OR ERS . . . . . . . . . . . . . . 55 21 VI. CONCLUSION .. . . . .. . . . . .. . . . . .. . . . . .. . . . .. . . . . .. . . . . .. . . . . .56 22 23 24 25 26 27 28 {02266963.DOCX} iii TABLE OF CONTENTS / TABLE OF AUTHORITIES 1 TABLE OF AUTHORITIES 2 CASES PAGE(S) 3 1-800 Contacts, Inc. v. WhenU.com, Inc., 4 414 F.3d 400 (2d Cir. 2005). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 5 Alliant v. Gady 6 (2008) 159 Cal.App. 4th 1292 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 7 Angelica Textile Services, Inc. v. Park (2013) 220 Cal.App.4th 495, 505 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 8 9 Applied Equip. Corp. v. Litton Saudi Arabia Ltd. (1994) 7 Cal.4th 503, 516 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 10 Beckwith v. Dahl 11 (2012) 205 Cal.App.4th 1039, 1059–1060. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 12 Brunzell Const. Co., of Nev. v. Barton Dev. Co. 13 350 University Ave., Suite 200 (1966) 240 Cal.App.2d 442, 443. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 95825 PORTER | SCOTT FAX: 916.927.3706 TEL: 916.929.1481 14 Bus. Sols., LLC v. Ganatra, Sacramento, CA 15 2019 WL 926351, at *8 (C.D. Cal. Jan. 7, 2019) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 16 Cansino v. Bank of America (2014) 224 Cal.App.4th 1462, 1469 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 17 18 Comunale v. Traders & General Ins. Co. (1958) 50 Cal.2d 654, 658 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 19 20 Engalla v. Permanente Medical Group, Inc. (1997) 15 Cal.4th 951, 974 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 21 Erlich v. Menezes 22 (1999) 21 Cal.4th 543, 552 ............................................... 52 23 Foley v. Interactive Data Corp., 24 47 Cal. 3d 654, 683 (1988) ............................................... 52 25 Jeff Tracy, Inc. v. City of Pico Rivera 26 (2015) 240 Cal.App.4th 510, 517 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 27 Johnson v. Mattox (1968) 257 Cal.App.2d 714, 716019. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 28 {02266963.DOCX} iv TABLE OF CONTENTS / TABLE OF AUTHORITIES 1 Judicial Council of California v. Jacobs Facilities, Inc. (2015) 239 Ca1.App.4th 882, 896-897 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 2 3 K.C. Multimedia, Inc. v. Bank of America Technology & Operations, Inc., 171 Cal. App. 4th 939, 958 (2009) ......................................... 51 4 Lee v. Hanley 5 (2015) 61 Cal.4th 1225, 1240 ........................................... 32, 49 6 Lewis &Queen v. N. M. Ball Sons 7 (1957) 48 Ca1.2d 141, 154. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 8 MacPherson v. Eccleston 9 (1961) 190 Cal.App.2d 24, 27 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 10 Mattel, Inc. v. MGA Entertainment, Inc., 782 F. Supp. 2d 911, 987 (C.D. Cal. 2011) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 11 12 Oracle USA, Inc. v. XL Global Servs., Inc., 2009 WL 2084154, at *4 (N.D. Cal. July 13, 2009) . . . . . . . . . . . . . . . . . . . . . . . . . . . 52, 53 13 350 University Ave., Suite 200 95825 Pacific Gas & Electric Co., PORTER | SCOTT FAX: 916.927.3706 TEL: 916.929.1481 14 supra, 50Cal.3d at p. 1126 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 Sacramento, CA 15 PMC, Inc. v. Saban Entertainment, Inc. 16 (1996) 45 Cal.App.4th 579,601 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 17 Racine & Laramie, Ltd. v. Department of Parks & Recreation 18 (1992) 11 Cal.App.4th 1026, 1031–1032 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 19 Ragland v. U.S. Bank National Assn. 20 (2012) 209 Cal.App.4th 182, 196 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 21 Richman v. Hartley (2014) 224 Cal.App.4th 1182, 1186. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20, 36 22 23 Robinson Helicopter Co. v. Dana Corp. (2004) 34 Cal.4th 979, 988 ............................................... 52 24 Sequoia Vacuum Systems, 25 supra, 229 Cal.App.2d at p. 288. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 26 Silvaco DataSystems v. Intel Corp. 27 (2010) 184 Cal.App.4th 210, 220 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47, 51 28 Sonora Diamond Corp. v. Superior Court (2000) 83 Cal.App.4th 523, 538 ........................................... 55 {02266963.DOCX} v TABLE OF CONTENTS / TABLE OF AUTHORITIES 1 Sonora Diamond Corp. v. Superior Court, supra, 83 Cal.App.4th at 539 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 2 3 Thrifty-Tel, Inc. v. Bezenek (1996) 46 Cal.App.4th1559, 1566–1567 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 4 Toho-Towa Co., Ltd. v. Morgan Creek Productions, Inc. 5 (2013) 217 Cal.App.4th 1096, 1107-1108. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 6 Troyk v. Farmers Group, Inc. 7 (2009) 171 Cal.App.4th 1305, 1341. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 8 US Ecology, Inc. v. State 9 (2005) 129 Cal.App.4th 887, 909. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 10 Vallejo Development Co. v. Beck Development Co. (1994) 24 Ca1.App.4th 929, 941. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 11 12 Zaslow v. Kroenert (1946) 29 Cal.2d 541, 551 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 13 350 University Ave., Suite 200 95825 STATUTES PORTER | SCOTT FAX: 916.927.3706 TEL: 916.929.1481 14 Sacramento, CA 15 Business and Professions Code § 7031 .......................................... 35, 36 16 Cal. Bus. & Prof. § 16600 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 17 Texas Reg., § 1302.251 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 18 OTHER 19 20 CACI 1900 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 21 CACI 2101 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 22 CACI 4102 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 23 24 25 26 27 28 {02266963.DOCX} vi TABLE OF CONTENTS / TABLE OF AUTHORITIES 1 Defendants and Cross-Complainants PACIFIC AIR CONDITIONING & HEATING, 2 INC. (“Pacific”), ESSENTIAL RETAIL SERVICES, INC. (“ERS”), and DENNIS F. 3 GRAHAM (“Graham”) (collectively, “Cross-Complainants” or “Defendants”) respectfully submit 4 this closing brief in support of their Second Amended Cross-Complaint (“SACC”) and in 5 opposition to Plaintiff and Cross-Defendant ESSENTIAL MECHANICAL SERVICES, 6 INC.’s (“EMS”) Second Amended Complaint (“SAC”). 7 I. INTRODUCTION 8 EMS, and its principal, Tim Gerhardt (“Gerhardt”), purchased the business assets of Pacific 9 and ERS – excluding work in progress, approximately $800,000 in accounts receivable, and other 10 defined assets – pursuant to a July 26, 2017, Asset Purchase Agreement (“APA”). EMS and 11 Gerhardt bungled nearly every facet of the acquisition. They destroyed the value of Pacific and 12 ERS – companies that had together operated profitably for decades – in a span of months. After 350 University Avenue, Suite 200 13 failing to pay half of the purchase price, they filed a meritless lawsuit, blaming Pacific, ERS, and 95825 PORTER | SCOTT FAX: 916.927.3706 TEL: 916.929.1481 14 Graham for their incompetence. Sacramento, CA 15 Pacific, ERS, and Graham should be awarded compensation for the grievous harm they 16 suffered as a direct result of EMS and Gerhardt’s breaches and misrepresentations before, during, 17 and after the October 16, 2017, Closing Date. Cross-Complainants were damaged in an amount not 18 less than $2,483,334.00, which is comprised of: 19 i. $1,250,000 for breach of the Earnout Agreement. 20 21 ii. $111,699 for breach of the Seller’s Note for Additional Inventory. 22 iii. $100,000 for breach of the APA Note. 23 iv. $702,000 in accounts receivable that could not be collected because of EMS 24 and Gerhardt refused Pacific and ERS access to their historical source records, including invoices and field-service reports. 25 26 v. $117,885 in sales tax liability that Pacific and ERS must pay to California Department of Tax and Fee Administration in sales tax liability because EMS 27 refused Pacific and ERS access to their historical source records. 28 {02259186.DOCX} 1 PACIFIC AIR CONDITIONING & HEATING, INC., ESSENTIAL RETAIL SERVICES, INC., AND DENNIS F. GRAHAM’S OPENING TRIAL BRIEF 1 vi. $32,000 in accounts receivable belonging to Pacific and ERS that EMS 2 wrongfully collected from customers. 3 vii. $50,000 Pacific incurred purchasing replacement office equipment, including 4 computers, printers, monitors, keyboards, and a server to host Compusource, after EMS converted Pacific’s property. 5 viii. Personal Property items that were converted by EMS consisting of 7 6 computers, fax machine, copy machine and a Compusource server. These 7 items had an approximate value of $20,000. 8 ix. $12,000 for technician labor that EMS underpaid Pacific for between the Closing Date and EMS’s disastrous decision to terminate the Employment 9 Agreement with Graham in February 2018. 10 x. $87,570 in salary and benefits owed to Graham due to EMS’s wrongful 11 termination of the Employment Agreement. 12 EMS should take nothing on its Complaint. Defendants performed or were excused from 350 University Avenue, Suite 200 13 performing all of their material obligations under the APA. EMS failed because of the actions and 95825 PORTER | SCOTT FAX: 916.927.3706 TEL: 916.929.1481 14 inactions of EMS, Gerhardt, and McCumber, including failing to meet the requirements to obtain Sacramento, CA 15 necessary California Contractors Licenses. Had EMS and Gerhardt complied with the APA, 16 responsibly managed operations after the closing date, and injected necessary capital to operate the 17 business, the transaction would have been successful. Defendants are not responsible for EMS and 18 Gerhardt’s failures. 19 II. STATEMENT OF FACTS 20 A. Graham Successfully Manages Pacific And ERS For Decades Prior To The October 21 2017 Closing Date. 22 Graham is the founder of ERS and Pacific. Graham holds California Contractors Licenses 23 C-20 HVAC, C-10 Electrical, C-32 Refrigeration, and B-2 General Contractor, and in multiple 24 states. Graham, June 2, 2020, p. 7:6 – 10. 1 Graham served as the Responsible Managing Officer 25 (“RMO”) for Pacific, which provided HVAC and refrigeration services to clients located along the 26 west coast, the southwest, and Texas. ERS performed marketing tasks for the predominantly HVAC 27 1 Highlighted trial transcript excerpts containing all testimony cited in this Opening Brief are being separately filed with the Court. 28 {02259186.DOCX} 2 PACIFIC AIR CONDITIONING & HEATING, INC., ESSENTIAL RETAIL SERVICES, INC., AND DENNIS F. GRAHAM’S OPENING TRIAL BRIEF 1 and refrigeration business. ERS has never had employees and relies entirely on Pacific to meet all 2 operating obligations, a fact that Gerhardt was well aware of before executing the APA in July 2017. 3 Ex. 1360; Graham, June 2, 2020, 48:3 – 9; Gerhardt, July 1, 2020, 151:6 – 12, 153:4-23. 4 Gerhardt is the owner of Allpoints, Inc., an Illinois based HVAC company. Gerhardt resides 5 in Illinois. Gerhardt retained Loren Gerch, a business consultant, to represent Gerhardt in his search 6 for a business to acquire. Gerch, June 2, 2020, 13:20 – 22. In or around 2016, Gerch contacted 7 Graham to inquire about Graham selling the assets of Pacific and ERS. Gerch, June 2, 14:4 – 7. 8 Gerch had previously worked with Graham in connection with Graham’s highly successful sale of 9 an HVAC business in 2001. Gerch, June 2, 2020, 9:23 – 10:8. Graham was reluctant to sell to 10 Gerhardt, but eventually agreed. Gerch, June 2, 2020 27:7 – 27:22. Prior to Closing, Gerhardt 11 visited the Roseville office of Pacific and ERS. Gerhardt July 1, 2020, 145:25-146-8; Ex. 1496; 12 Graham, June 2, 2020, 46:10 – 50:7. Gerhardt observed Pacific’s Contractor Licenses’ displayed at 350 University Avenue, Suite 200 13 the office. Gerhardt July 1, 2020, 147:1-9; Graham, June 2, 2020, 46:10 – 50:7. 95825 PORTER | SCOTT FAX: 916.927.3706 TEL: 916.929.1481 14 Gerch represented that Allpoints was a company almost double in size to Pacific and ERS, Sacramento, CA 15 doing six millions dollars per year in sales, with a large staff to transition the operations and 16 sufficient capital to grow the business. Graham, June 2, 2020, 55:10-25. Graham later learned this 17 was false. Id. 18 B. Pacific, ERS, and Graham Provide True And Accurate Due Diligence Materials To 19 EMS Prior To Execution of the APA 20 Pacific and ERS provided due diligence financial information to EMS prior to closing, 21 including “balance sheets, financial statements, income statements, customer lists, contracts, those 22 kinds of things.” Gerhardt, March 2, 2020, 137:20 – 138:4. Gerhardt read from many of those 23 records at trial, observing that: (1) Pacific’s 2016 corporate tax return (Exhibit 210) shows 2016 24 gross receipts of $615,781; (2) ERS’s 2014 corporate tax return (Exhibit 236) shows 2014 gross 25 receipts of $1,860.666; and (3) Pacific’s December 31, 2014 income statement (Exhibit 203) shows 26 total revenue of $2,187,768.55. Gerhardt, March 10, 2020, 42:18 – 43:8, 43:9 – 44:14, 45:21 – 27 46:21. 28 {02259186.DOCX} 3 PACIFIC AIR CONDITIONING & HEATING, INC., ESSENTIAL RETAIL SERVICES, INC., AND DENNIS F. GRAHAM’S OPENING TRIAL BRIEF 1 The information contained in Pacific and ERS’s due diligence financial information was true 2 and accurate, without material exception. Graham June 2, 2020, 130:25-132:7, 144:21-146:25, 3 Graham June 3, 2020, 10:9-17, 15:7-14, 15:15-20:17. This is not a controversial statement; at trial, 4 Gerhardt admitted he is aware no information to suggest Pacific and ERS’s financials were false or 5 misleading. Gerhardt, July 1, 2020, 231:22 – 232:2; Gerhardt, July 2, 2020, 7:9 – 13; Gerhardt, July 6 2, 2020, 11:11 – 15. Despite refusing to dismiss their fraud claims, EMS did not retain a forensic 7 accountant to examine Defendants’ financials. 8 Defendants’ highly qualified forensic accountant, Ms. Jolene Fraser, concluded that Pacific 9 and ERS’s recorded revenue in their financial statements were true and accurate. Ms. Fraser’s 10 exhaustive analysis included verifying Pacific and ERS’s revenue for the years 2015, 2016 and the 11 first six months of 2017. Ex. 152, 153. Ms. Fraser verified the revenue figures by tracing the 12 amounts reported in the financial statements to individual, underlying invoices – from financial 350 University Avenue, Suite 200 13 statements, to greenbook summary, to prebill, to invoice. Fraser, July 6, 2020, 178:1 – 183:11; 95825 PORTER | SCOTT FAX: 916.927.3706 TEL: 916.929.1481 14 183:17-185:15, Ex. 152, 153. Sacramento, CA 15 Mr. Fraser selected months with the “highest amount[s] of revenue” and sampled other 16 months for the analysis. Fraser July 6, 2020 184:20 – 185:8. Ms. Fraser analyzed approximately 17 88 percent of ERS’s reported revenue and verified 86 percent of reported revenue to specific 18 invoices, meaning Ms. Fraser could not verify a mere 2 percent of ERS’s revenue with reference to 19 specific invoices. Id. Ms. Fraser analyzed 85 percent of Pacific’s reported revenue and verified 82 20 percent of reported revenue to specific invoices. Fraser July 6, 2020 184:19 – 24. With an incredibly 21 “high degree of confidence,” Mr. Fraser validated the revenue reported by Pacific and ERS for the 22 years 2015, 2016, and 2017 as being “recorded in the correct amount and reported in the correct 23 period, without material exception.” Fraser July 6, 2020 178:1 – 183:11, 183:17-185:15, Ex. 152, 24 153. 25 Gerhardt and/or his lender, Canadian Imperial Bank of Commerce (“CIBC”), requested that 26 Graham identify add-backs figures amounting to $500,000 - $600,000; Graham did not volunteer 27 any add-back information. Gerch, June 2, 33:1 – 20; Ex. 1578, , 1356, Graham June 2, 2020 151:12- 28 {02259186.DOCX} 4 PACIFIC AIR CONDITIONING & HEATING, INC., ESSENTIAL RETAIL SERVICES, INC., AND DENNIS F. GRAHAM’S OPENING TRIAL BRIEF 1 153:19, 154:19-156:17, Gerhardt July 2, 2020, 15:20-16:17. As used by the parties to this 2 transaction, add-backs are expenses – relating to the core HVAC and refrigeration business, or not 3 – that Gerhardt determined he would not incur after acquiring the business. Graham June 2, 2020 4 149:6 – 151:2. Addbacks are not revenue. Gerch, June 2, 2020, 12:14-17, Graham June 2, 2020, 5 147:20-25; Fraser, July 6, 2020, 186:21-187:13. Gerch confirmed “it’s the role of the buyers to 6 determine what add-backs would need to be analyzed going forward” and “add-backs are not a 7 guarantee of future performance” and “are not a guarantee of future profitability.” Gerch June 2, 8 2020, 12:18-13:19, 34:22-25. 9 Graham’s trial testimony that the add-back information he identified prior to closing was 10 true and accurate to the best of his knowledge is undisputed. Graham June 3, 2020, 10:9-17, 15:7- 11 14. Gerhardt has no information to suggest that the add-backs identified by Graham are in any way 12 false or misleading. Gerhardt, July 2, 2020, 14:14 – 19. 350 University Avenue, Suite 200 13 Unlike EMS, Defendants’ forensic accountant, Ms. Jolene Fraser, did take the time to 95825 PORTER | SCOTT FAX: 916.927.3706 TEL: 916.929.1481 14 actually analyze the add-backs reported by Graham. Ex. 154. Ms. Fraser categorized add-backs as Sacramento, CA 15 core or non-core business expenses. Fraser July 7, 2020 8:9 – 9:1. For core business expenses, Ms. 16 Fraser verified $256,304 of the $281,535 amount reported with reference to underlying source 17 documentation, including invoices and payment records. Fraser July 7, 2020 13:11 – 23. For 18 noncore business expenses, Mr. Fraser verified $163,570 of the $367,374 with reference to 19 underlying source documentation, including invoices and payment records. Fraser July 7, 2020 10:7 20 – 19. Ms. Fraser concluded the remaining sum was reasonably estimated, and that she had no reason 21 to doubt the expenses were inc