Agracat, Inc. v. AFS–NWA, LLC

2010 Ark. App. 458

379 S.W.3d 64

AGRACAT, INC. and Agracat, Incorporated, Appellants

v.AFS–NWA, LLC, d/b/a Montana Tractors; The Estate of J.B. Hunt, Deceased; Charles Goforth; Dan Downing; Downing and Associates, Inc.; Outsource Investments, LLC; J.B. Hunt, LLC; and J.B. Hunt Revocable Trust, Appellees.

No. CA 09–1095.

Court of Appeals of Arkansas.

June 2, 2010.

David G. Nixon, Theresa L. Pockrus, The Nixon Law Firm, Cheslee Mahan, Fayetteville, for appellants.

Kenneth R. Shemin, J. Jason Boyeskie, Shemin Law Firm, PLLC, Rogers, for appellees.

LARRY D. VAUGHT, Chief Judge.

[Ark. App. 1]This case arises from a suit filed by appellants Agracat, Inc., and Agracat Incorporated (Agracat) against appellees for breach of fiduciary duty, fraud, interference with a business expectancy, and civil conspiracy. Agracat alleged that appellees parlayed a financing and joint-venture agreement into a take-over of Agracat's relationships with its employees, dealers, and suppliers. During a jury trial on Agracat's complaint, appellees moved for a directed verdict on all counts at the close of Agracat's proof. The circuit court denied the directed verdict in part, ruling that Agracat had presented substantial evidence of appellees' liability on the [Ark. App. 2]various causes of action. However, the court granted the directed verdict on the ground that Agracat failed to offer proof from which the jury could compute damages. On appeal, Agracat argues that the circuit court erred in granting the directed verdict and in excluding certain evidence. We agree that the directed verdict must be reversed.

We recite the following facts in the light most favorable to Agracat. See Crawford County v. Jones, 91 Ark. App. 161, 209 S.W.3d 381 (2005). Three Arkansas businessmen formed Agracat in 1999 for the purpose of importing tractors into the United States and selling them through a network of dealers. The business grew quickly, and Agracat financed its inventory with several bank loans. Jim Steele, Agracat's president and one of its founders, would later testify that the burden of those loans caught up with Agracat after September 11, 2001, when orders from dealers evaporated, leaving Agracat with unsold inventory, unmet personnel expenses, and unpaid debts. Agracat sought financing from private sources, and the company's outside accountant, appellee Dan Downing, took an interest in the situation. Downing agreed on September 11, 2002, to forego $26,569 in unpaid accounting fees in exchange for 18,193 shares of Agracat's preferred stock (convertible to 54,579 shares of common stock). Downing also helped Agracat obtain financing from two other northwest Arkansas businessmen,appellee Charles Goforth and the late J.B. Hunt, whose estate and revocable trust are appellees herein.

In the latter part of 2002, Downing, Goforth, and Hunt formed AFS–NWA, LLC (AFS) as a vehicle to provide inventory financing to Agracat. AFS executed a three-year [Ark. App. 3]operating agreement with Agracat that essentially gave AFS nine percent of Agracat's sales revenue in exchange for furnishing Agracat with a $2,000,000 letter of credit to facilitate inventory acquisition. The parties expressed confidence in Agracat's future, as shown by the agreement's statement that Agracat would “position itself for a public offering after three years from the contract date.” The parties also considered the possibility a few months later that appellees would purchase an interest in Agracat. In May 2003 Steele told Downing that he would sell fifty-one percent of Agracat for $1,350,000, or forty percent for $1,200,000. However, the sale did not take place.

Agracat's outlook improved in 2003, but problems persisted at the company. A number of creditors remained unpaid, and Agracat's dealers found it difficult to obtain product using the company's outmoded floor-plan arrangement. Further, in the summer of 2003, conflict arose between Agracat and AFS over missing inventory and Agracat's deposit of approximately $98,000 in sales proceeds into its own bank account rather than AFS's account, as required by the operating agreement. As a result, AFS began to monitor Agracat's operations more closely and became more intimately involved with Agracat's accounting procedures, personnel matters, and expense records. Nevertheless, the parties apparently remained optimistic about Agracat's chances for success. Steele spearheaded an effort to acquire new floor-plan financing from several large companies, and Downing told one of the companies that, if adequate capital were in place, Agracat could achieve a monthly estimated profit of $48,000 before taxes. Additionally, Downing's associate prepared a document [Ark. App. 4]predicting that AFS would earn approximately $4,200,000 in a year's time from its nine percent of Agracat sales.

In August or September of 2003, Steele met with Downing, Goforth, and Hunt to discuss the floor-plan situation. According to Steele, Hunt wrote him a check at the meeting for $1,000,000, which he offered in exchange for Steele resigning from Agracat and starting a new tractor company with Hunt. Hunt also offered Steele a nine-percent interest in the new company. Steele declined the offer in deference to his colleagues who had helped him form Agracat.

Efforts continued to finalize the floor-plan financing arrangements, but in late 2003, AFS's principals told Steele that they would not sign off on the arrangements or accept any further inventory shipments from overseas unless Agracat signed a new, three-year operating agreement. The agreement, executed in November 2003, gave AFS far greater involvement with Agracat's inventory, sales, and accounting procedures than the previous agreement and basically reduced Agracat's participation in the company to selling inventory and providing service and warranty work. The agreement also provided that, upon its termination, AFS had the option to acquire fifty-one percent of Agracat's 17,851,527.62 shares of common stock ($0.001 par value) for $1000, though the option was never exercised.

In the early part of 2004, AFS became more intertwined with Agracat's operations by advancing money to pay bills; making the decision to move Agracat to a new location; requesting job descriptions from Agracat's employees and seeking information about [Ark. App. 5]inventory purchases and sales forecasts; making decisions regarding Agracat's purchase of computer equipment; and weighing in on matters such as the payment of commissions, pay raises, and hiring and firing of employees. J.B. Hunt also began stating to Steele and others that “we've got fifty-one percent control and we're going to move forward.” Additionally, AFS indicated to one of Agracat's suppliers that AFS was “taking” Agracat's employees. Downing told another supplier that Agracat was “near to filing bankruptcy.”

On March 5, 2004, Agracat decided to file bankruptcy. Within a very short period, AFS began to operate Montana Tractors using many of Agracat's employees, salespeople, dealers, and suppliers. When Steele asked Hunt “what they would take for their interest,” Hunt replied $6,900,000. Steele could not afford that price and could not regain the business relationships lost to AFS and Montana Tractors. AFS representatives would later acknowledge that Agracat's former relationships had value to AFS, though they could not say how much value.

Based on this series of events, Agracat sued AFS and the other appellees for breach of fiduciary duty, fraud, interference with a business expectancy, and civil conspiracy.¹ Agracat's complaint alleged that appellees had acted in their own interest to Agracat's detriment and that appellees represented that they were planning a joint venture with Agracat but instead “took over” Agracat's relationships with its employees, dealers, and suppliers. The case was tried to [Ark. App. 6]a jury beginning March 20, 2009.

During Agracat's case-in-chief, it presented no expert testimony nor any testimony from Steele or other Agracat representatives as to the value of Agracat's business relationships. Consequently, appellees moved for a directed verdict at the close of Agracat's case on the ground that Agracat failed to place a dollar figure on any alleged damages. Agracat responded that it had produced evidence such as Downing's acquisition of stock shares or Steele's offers to sell the company, which would allow the jury to calculate the amount of damages. The circuit court disagreed and directed a verdict for appellees. This appeal followed.

In determining whether a directed verdict should have been granted by the circuit court, we review the evidence in the light most favorable to the party against whom the verdict was sought and give it its highest probative value, taking into account all reasonable inferences deducible from it. Crawford, 91 Ark. App. at 172, 209 S.W.3d at 390. A motion for directed verdict should be granted only if there is no substantial evidence to support a jury verdict. Id., 209 S.W.3d at 390. Where the evidence is such that fair-minded persons might reach different conclusions, then a jury question is presented, and the directed verdict should be reversed. Id., 209 S.W.3d at 390.

Agracat contends that, because its business relationships were the lifeblood of the company, evidence of the company's value or its potential profitability quantified the value of those relationships. In that vein, Agracat argues that the following evidence gave the jury a basis from which to compensate Agracat for the loss of its business relationships: 1) [Ark. App. 7]Downing's agreement to exchange $26,569 in...