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Air Solutions, Inc. v. Spivey.

2023 COA 14. No. 2020CA1998. Breach of Contract—Promissory Estoppel—Unjust Enrichment—Remedies—Damages—Specific Performance—Declaratory Judgments.

February 9, 2023

Vrbancic negotiated to buy Air Cleaning Specialists, Inc. for $2.5 million. He applied for a Small Business Administration (SBA) loan to finance part of the purchase price. In the meantime, Vrbancic filed articles of incorporation for Air Solutions, Inc., which would be the entity that would buy Air Cleaning Specialists. The articles indicated that Air Solutions would issue 1,000 shares of stock, but the company didn’t issue any shares at that time. Vrbancic didn’t qualify to borrow the full purchase price, so the sellers agreed to carry $375,000 of the price as a loan. To obtain the SBA loan for the remaining sum, Vrbancic needed to come up with $250,000 to put toward the purchase price, which he didn’t have. He thus entered into an agreement under which Spivey, an investor, would contribute $250,100 and be immediately entitled to a 17.5% ownership interest in Air Solutions, with the right to a 49% ownership interest when the company repaid its SBA loan. However, the parties continued to try to revise their contract terms, including Spivey’s attempt to obtain a shareholder agreement. After the business sale closed, Spivey began working for Air Solutions as chief financial officer. Over the next few months, Spivey and Vrbancic continued negotiating to revise their deal but could not reach a final agreement. Vrbancic terminated Spivey’s employment. Following his termination, Spivey demanded his shares. Air Solutions took the position that Spivey wasn’t a shareholder and that his $250,100 contribution had been merely a loan.

Air Solutions and Vrbancic brought this case seeking declarations that Spivey isn’t an Air Solutions owner because he never entered into a binding agreement to become an owner; Spivey isn’t entitled to expense reimbursement; and Air Solutions’ return of Spivey’s $250,100 contribution (with interest) would resolve the dispute between the parties. Spivey counterclaimed for breach of contract and fraud and sought equitable relief. At a pretrial conference, the parties and the court agreed that a jury would decide the breach of contract and fraud counterclaims against Vrbancic first, and the court would then decide the remaining counterclaims. The court also stated that it would let the jury decide first whether there was a contract and, if so, whether there was a breach; and it would resolve the specific performance issue after the jury trial. The jury found in Vrbancic’s favor on the fraud counterclaims but found in Spivey’s favor on his breach of contract counterclaim. After trial, Spivey asked the court for a decree of specific performance on the breach of contract counterclaim and for declaratory relief. The court denied Spivey’s request for specific performance and his remaining declaratory judgment and equitable counterclaims.

On appeal, Spivey argued that the district court erred by refusing to order specific performance of his contract with Vrbancic. The district court denied specific performance because (1) it determined that damages are an adequate remedy, since “the company” can be valued; (2) specific performance would not be “appropriate or workable” due to animosity between Spivey and Vrbancic; and (3) further remedy was not warranted, given that the jury awarded Spivey damages, so his $250,100 will be returned. Here, the contract that the jury found sets forth a purchase price ($250,100), clearly identifies the thing purchased (specific percentages of an interest in Air Solutions), and says when the thing purchased is to be transferred (in the case of the initial 17.5% of the company, upon formation of the contract; in the case of the 49% interest, upon repayment of the SBA loan). The reasons the district court gave for denying specific performance are based on incorrect understandings and applications of the governing law, a fundamental misreading of the contract that the jury found, or, as to Spivey’s supposed entitlement to return of his $250,100 contribution, a plainly erroneous understanding of the other remedies actually awarded. Accordingly, specific performance of the contract that the jury found is appropriate, and the district court abused its discretion by ruling otherwise.

Air Solutions and Vrbancic argued that the contract shouldn’t be specifically enforced because it contravenes public policy by violating 13 CFR § 120.160(a), which requires a person owning 20% or more of a borrowing entity to personally guarantee the loan (the 20% Rule). However, by its plain terms, this provision applies only when an owner reduces their interest from at least 20% to less than 20% within the six months before the borrower submits the loan application. Here, though the parties were negotiating during that six-month period and Spivey clearly wanted more than a 20% interest, there is no evidence that he actually obtained an interest of at least 20% during the six-month period. Therefore, the contract that the jury found doesn’t violate the 20% Rule and thus does not bar specific performance.

Spivey also argued that the district court erred by determining that the jury’s verdict on the breach of contract counterclaim rendered moot his counterclaims against Air Solutions and Vrbancic for declaratory relief. Given the holding that Spivey is entitled to specific performance of the contract, the clear conflict between Spivey and Vrbancic, and the consistently strident tone of the litigation, a declaratory judgment may be useful in terminating the controversy. Accordingly, the district court erred by denying Spivey’s counterclaims for declaratory judgment.

Spivey also contended that the district court erred by ruling against him on his promissory estoppel counterclaim against Air Solutions on the basis that the jury’s finding of a contract eliminated his equitable counterclaims against Air Solutions for promissory estoppel and unjust enrichment. He maintained that the court erred because the contract the jury found is between him and Vrbancic, not him and Air Solutions. However, Air Solutions could be held liable for a promise by Vrbancic only if Spivey pleaded and proved some theory of corporate liability for Vrbancic’s actions, which Spivey did not. And because the court of appeals concluded that Spivey is entitled to specific performance of the contract, he will receive what he paid for. Allowing him to recover against Air Solutions for unjust enrichment would give him a windfall or double recovery. Accordingly, the district court didn’t err by denying relief on these claims.

Those portions of the judgment denying Spivey specific performance of the contract that the jury found and declaratory relief against both Air Solutions and Vrbancic were reversed. The award of damages to Spivey on his breach of contract counterclaim was vacated. The case was remanded for further proceedings on the specific performance and declaratory relief issues. The judgment was otherwise affirmed.

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