On appeal from the Superior Court of New Jersey, Chancery Division, General Equity Part, Union County, Docket No. C-0050-09.
NOT FOR PUBLICATION WITHOUT THE
APPROVAL OF THE APPELLATE DIVISION
Submitted December 14, 2011
Before Judges Cuff and Lihotz.
Defendant Cargo Warehouse Distribution Services, Inc. (Cargo) and its president and sole shareholder, defendant Frank Suraci, appeal from a judgment entered following a bench trial, ordering payment of $300,724.16 to plaintiff, Radiant Global Logistics, Inc. a/k/a Airgroup Corp. (Airgroup). On appeal, Cargo does not dispute its liability, but rather challenges the amount of the award, maintaining the trial court erred in disregarding proven offsets asserted in their counterclaim, which would reduce the obligation. We affirm in part and reverse in part.
Airgroup is a publically traded freight forwarding company, in the business of moving freight, internationally and domestically, by air, land and rail. Airgroup operates through a network of approximately seventy local stations throughout the country. Two stations are company owned and the "balance are independently owned agent stations." All stations operate under the Airgroup name and are tasked with providing "sales and operations functions on behalf of Airgroup." In turn, Airgroup provides the stations with a "technology platform, . . . marketing, all underlying business documents, . . . the network and the buy rates[.]"
Cargo is a small private freight forwarding company that was formed by Suraci in May of 1990. On July 13, 1990, Suraci, on behalf of Cargo, executed a Transportation Services Agreement (TSA) with Airgroup to become an independent owner and operator of the Newark Station, "represent[ing] Airgroup in the New York, New Jersey metropolitan area." Thereafter, all of Cargo's services were provided under the Airgroup name, pursuant to the terms of the TSA.
Through the course of this relationship, Cargo's sales force, "anywhere from 5 to 11 people," would provide the prices and rates to customers and, if the customer accepted the price quote, handle the logistics of shipment. Customer invoices were on Airgroup letterhead, but "cut locally" by Cargo. Customers sent payment directly to Airgroup's corporate headquarters in Bellevue, Washington, which handled all accounting. Airgroup retained a percentage of the gross revenue for general administrative costs, then remitted payment to Cargo upon receipt of a written "recap," showing the details of the shipment (recap check), which were prepared weekly.
The terms of the TSA required Cargo to maintain "compliance with all federal, state, county, city, and local taxes arising out of its operations[.]" The failure to comply, allowed Airgroup the right to terminate the TSA. Also, the TSA included Cargo's indemnification for "any claims, demands, liabilities, actions, suits or proceedings asserted by third parties from the operation of the business and arising out of [Cargo]'s obligations under [the TSA.]" The TSA required a portion of the revenue from Cargo's billings to be deposited into a bad debt reserve account.
At trial, Bohn H. Crain, Airgroup's Chief Executive Officer, explained the bad debt reserve "functioned as a security deposit, keeping the agent stations in a first loss position if the underlying customer failed to pay the[ir] invoices . . . [o]n a timely basis." Accordingly, "if an account receivable aged out to [ninety] days or older, then [Airgroup] would charge the security deposit account for such amounts." Under the TSA, if the balance of Cargo's bad debt account was insufficient to cover the bad debt expenses of its customers, Airgroup could satisfy the deficiency by withholding recap payments.
Beginning in 2001, Cargo began to suffer "a number of setbacks" that contributed to a general decline in its business. Suraci, as Cargo's responsible officer entrusted with the obligation, failed to remit all of the federal income tax withholding attributable to wages paid to Cargo's employees (941 taxes). Periodically, Cargo would resolve its 941 tax obligation, then, "for whatever reason, . . . would fall behind again."
In 2008, Suraci began contacting competitors in an effort to sell Cargo. He also informed Airgroup of his desire to sell the business, "to give Airgroup an opportunity" to purchase Cargo. Airgroup offered a letter of intent (LOI) to acquire Cargo's assets and in a February 29, 2008 letter, Suraci as corporate president, notified Airgroup that Cargo had ceased operations. On March 11, 2008, Suraci met with Airgroup executives to resolve the details of the sale transaction, but withdrew from the transaction the following day after he learned Airgroup was withholding Cargo's $46,000 March recap check. Airgroup agreed to loan Cargo $25,000, at eight percent interest, due and payable in a little more than six months, under the terms of a promissory note executed by Cargo and Suraci to meet its payroll obligations.
That month, the Internal Revenue Service (IRS) filed a $396,000 lien against Cargo for unpaid 941 taxes. Also, as of March 7, 2008, Cargo had accumulated a $178,693.65 bad debt reserve deficit with Airgroup.*fn1 On March 17, 2008, the IRS notified Airgroup of its outstanding tax lien. Airgroup informed the IRS it did not owe Cargo any money.
Acquisition negotiations between Airgroup and Cargo resumed. On March 25, 2008, Airgroup tendered a new LOI, which included an Executive Employment Agreement (EEA). Airgroup proposed to acquire Cargo, paying a base purchase price for assets of $425,000, less: (1) "any amounts paid or assumed by Airgroup related to the operation of the [c]ompany for periods prior to March 1, 2008[,]" which would not exceed $150,000; (2) the accumulated bad debt reserve deficit; and (3) the $25,000 loan with any accumulated interest. The LOI also provided for a proposed contingent purchase price based on Cargo's performance over the ensuing five years, as defined by a detailed formula, generally stating payments were based on 43.75% of the Newark Station's normalized earnings before interest, taxes, depreciation, and amortization (EBITDA) over the five-year period, less Airgroup's administrative costs. The parties anticipated the earn-out payments could exceed $2 million. The EEA offered Suraci a three-year position as Vice President of Sales for Airgroup, with compensation of $175,000 per year. Suraci's employment could be terminated "for cause," which included acts of theft, embezzlement, falsification of records, and also in the event the Newark Station failed "to generate cumulative [n]ormalized EBITDA . . . in excess of ten thousand [dollars] ($10,000) over any consecutive [twelve] month period."
The LOI expressed the parties' willingness to enter into a "definitive acquisition agreement," stating it was their "mutual objective to achieve a closing on the proposed acquisition as soon as all of the respective conditions to closing have been satisfied." One such condition "to Airgroup's execution of a definitive [acquisition] agreement," required Cargo and Suraci to "execute[ ] a final and binding offer and compromise with the IRS covering all outstanding federal tax obligations (including interest and penalties)" to remove the tax lien encumbering Cargo's assets.
The LOI would terminate upon the earlier one year from its execution, the date of an acquisition agreement, or upon "the mutual written consent of Airgroup" and Cargo. In the event of termination, Cargo and Suraci would "immediately become jointly and severally obligated to pay to Airgroup an amount equal to the Pre March 1 Obligations which obligation shall survive any such termination."
Finally, the LOI set forth the parties "understanding," but except for the general obligations related to confidentiality, exclusivity (preventing Cargo from shopping for another buyer), Airgroup's ability to conduct due diligence, inspection of documents and access to information as stated in "paragraphs 6, 7, 8, and 9," the LOI was not "a legally binding contract and the ...