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Sloan v. Cunningham

United States District Court, S.D. Alabama, Southern Division

November 29, 2017

LARRY E. SLOAN, Plaintiff,
v.
JAMES P. CUNNINGHAM, Defendant/Counterclaim Plaintiff,
v.
ECOVERY, LLC, Counterclaim Defendant.

          ORDER

          KRISTI K. DuBOSE CHIEF UNITED STATES DISTRICT JUDGE

         This matter is before the Court on Larry Sloan's Motion for Summary Judgment as to Count One of his Claim, and Sloan and Ecovery, LLC's joint Motion for Summary Judgment as to all counterclaims asserted by James P. Cunningham (Doc. 46), Cunningham's Response (Doc. 55) and Sloan and Ecovery, LLC's Reply (Doc. 59). The Court also relied upon supplemental briefing that addressed whether Alabama law requires additional consideration when parties to a contract mutually assent to a modification. (See Doc. 62, 63, & 64). For the reasons provided below, summary judgment is GRANTED as to Count One. Because Cunningham does not contest Sloan's motion “as it relates to [his] counterclaims, ” (Doc. 55 at 1), against both Sloan and Ecovery, Sloan and Ecovery's Motion for Summary Judgment as to each counterclaim is GRANTED.

         I. Findings of Fact [1]

         James P. Cunningham and Larry Sloan began working together on a new venture in the spring of 2008. (Doc. 55-1 at 2). The collaboration resulted in the formation of Ecovery, LLC. (Id. at 5). Ecovery's articles of organization were filed on July 17, 2008. (Doc. 47-1 at 1). Members of Ecovery included both Sloan and Cunningham along with two other individuals, Walter Norris and Mauro Guidetti. Ecovery originally divided each member's stake in the company in the following manner: Cunningham and Norris each had a 20% stake, Guidetti had a 5% stake, and Sloan held the remaining stake of the company. (Doc. 47-2 at 19). The 20% stake Cunningham owned was valued at $180, 000. (Doc. 55 at 3 (citing Doc. 55-1 at 8)).

         Cunningham acquired a 20% stake in Ecovery without investing any of his own money in the venture. Instead, Sloan fronted the money on Cunningham's behalf for Ecovery's start-up expenses. (Doc. 55 at 3). Cunningham claims he executed a promissory Note in favor of Mr. Sloan evidencing the $180, 000 indebtedness in 2008. (Doc. 48 at 2 (citing Doc. 47-6 at 15)).[2]Cunningham testified that he understood he was obligated to repay Sloan under the 2008 Note. (Doc. 47-6 at 16). Cunningham is unable to locate the promissory Note (Id. at 15), but he specifically remembers signing one. (Id. at 15). Sloan said he “expected” Cunningham to repay him, but he does not remember a written agreement executed in 2008 to that effect. (Doc. 48 at 2).

         Cunningham believed his 20% stake would be repaid to Sloan from future Ecovery distributions. (Doc. 55 at 3-4). The foundation for his belief stemmed from a verbal representation Sloan allegedly made in 2008 at the time of Ecovery's inception. (Doc. 55-2 at ¶ 4). Cunningham, in return, agreed to contribute his recycling industry expertise to Ecovery. (Doc. 55-1 at 9). As part of the oral agreement Sloan purportedly made with Norris and Cunningham, the three decided whatever profit they derived from Ecovery would first go toward taxes on the profits then be paid back to Sloan to settle the debt. (Doc. 55-1 at 4-5). Sloan denies the existence of the verbal agreement regarding the method of repayment. (Doc. 48 at 3).

         In addition to the Articles of Incorporation, Ecovery's members also signed an Operating Agreement (“OA”). (Doc. 47-2). The OA detailed Ecovery's operating rules, including how it received financing. (Id. at 5). Specifically, Article Two addressed the company's finances. Section 2.1 detailed initial capital contributions. (Id.) In relevant part, § 2.1 reads: “The Company shall be capitalized by each Member contributing the property and cash set forth in the books and records of the Company” in exchange for a percentage membership interest. (Id.) The OA also defined “Capital Calls.” Capital calls, according to the OA, occur upon the affirmative vote of the Members and are used to infuse funding into the company. Finally, the OA detailed the procedures for when a member defaulted. These procedures are limited to capital calls.

         More than two years after Ecovery's inception, both Cunningham and Norris executed a promissory Note in favor of Sloan. (Doc. 55 at 4; Doc. 47-3). It is this Note, executed on November 15, 2010, and Cunningham's failure to repay that lie at the heart of this dispute.

         Cunningham agrees that the 2010 Note evidenced a debt he owed for his initial membership contribution. (Doc. 55-2 at ¶ 8). Cunningham states that the 2010 Note represented the initial valuation of his 20% stake ($180, 000) and interest accrued at the Wall Street Journal prime rate. (Id.) The Note did not provide Cunningham any additional funds nor did it provide him with an increased stake in Ecovery.

         The 2010 Note begins with the words “For value received.” (Doc. 47-3). This statement of the consideration fails to identify when Cunningham actually received the value or the value he received. However, although the parties dispute the precise terms of the 2008 agreement (and dispute whether the 2008 agreement was memorialized into a written Note), neither party disputes the fact that Sloan provided $180, 000 to Ecovery on Cunningham's behalf in 2008. (Doc. 55-2 at ¶ 3).

         The 2010 Note contains a deadline for full repayment of the principal and interest. (Doc. 47-3). According to Cunningham's recollection, the 2008 Note was open-ended; it had no date of maturity. (Doc. 47-6 at 16). Under the unambiguous terms of the 2010 Note, Cunningham had to repay his debt by November 15, 2015.

         After executing the 2010 Note, Sloan's son, Kevin, purchased a 20% interest in Ecovery from his father. (Doc. 55-7 at 3). Both Norris and Cunningham retained their original 20% stake in Ecovery. In the same month, Ecovery members began discussion to bifurcate Ecovery. (Id. at 4). The Sloans wanted to divide the company, with one focused on the equipment sales and one devoted to the processing aspect of the company. (Doc. 55-7 at 5). At the time of the separation discussions, Sloan told Cunningham he desired the separation occur “without any money changing hands[.]” (Doc. 55-2 at ¶ 9).

         The parties executed a Separation Agreement to effectuate the bifurcation. (See Doc. 47-4). As part of the Separation Agreement, Cunningham received $1, 311, 447.94 in assets from Ecovery and assumed a corresponding $1, 311, 447.94 in Ecovery liability. (Id. at 4). In return, Cunningham executed a Transfer and Assignment of Membership Interest in Ecovery, LLC by which Cunningham transferred his 20% stake in Ecovery to Ecovery “for no monetary compensation” and subject to the terms of the Operating Agreement. (Doc. 55 at 6). On April 4, 2012, Cunningham signed a Mutual Release, which specifically excluded from the release “obligations of the parties under the . . . Promissory Note dated November 15, 2010 from James P. Cunningham to Larry E. Sloan.” (Doc. 47-5 at 2).

         During the course of Cunningham's membership, Ecovery did not make any distributions or profits. (Doc. 55-2 at 3). In 2015, after Cunningham's departure in 2012, remaining Ecovery members received distributions. (Doc. 55 at 6). Norris received a distribution of $215, 933. (Doc. 55-5 at 7). Following Norris' receipt of the distribution, he paid Sloan $105, 225 and indicated the payment on his November 2010 promissory Note. (Id. at 3).

         II. Conclusions of Law

         a. Standard of Review

         “The court shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(a). Rule 56(c) provides as follows:

(1) Supporting Factual Positions. A party asserting that a fact cannot be or is genuinely disputed must support the assertion by:
(A) citing to particular parts of materials in the record, including depositions, documents, electronically stored information, affidavits or declarations, stipulations (including those made for purposes of the motion only), admissions, interrogatory answers, or other materials; or
(B) showing that the materials cited do not establish the absence or presence of a genuine dispute, or that an adverse party cannot produce admissible evidence to support the fact.
(2) Objection That a Fact Is Not Supported by Admissible Evidence. A party may object that the material cited to support or dispute a fact cannot be presented in a form ...

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