Lion Copolymer Holdings, LLC v. Lion Polymers, LLC

Citation: Not availableDocket: 01-17-00671-CV

Court: Court of Appeals of Texas; December 20, 2021; Texas; State Appellate Court

Original Court Document: View Document

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On December 21, 2021, the Texas Court of Appeals issued an opinion concerning the appeal by Lion Copolymer Holdings, LLC against Lion Polymers, LLC, following a jury trial verdict favoring LP in a breach-of-contract suit. The appellate court had previously affirmed the jury's verdict as legally sufficient, deemed the factual sufficiency challenge inadequately briefed, upheld the trial court's evidentiary decisions, but reversed the award of pre-judgment interest and costs. The Texas Supreme Court later disagreed regarding the factual sufficiency briefing and remanded for further consideration of that issue.

Upon remand, the appellate court found the evidence factually sufficient to support the jury's determination that the Company breached its contract with LP and affirmed the damages awarded to LP, totaling $361,295. 

The background of the case involves the Company's operations in synthetic rubber manufacturing and its structure as a pass-through entity under an amended LLC Agreement. This Agreement outlines the profit-sharing mechanism among members, including LP, which holds specific Class 1 and Class 3 units. A key provision (section 6.01(d)) mandates the Company to make tax distributions to members to cover their estimated income tax liabilities based on profits allocated to their units, calculated using the highest tax rates applicable for an individual in New York.

Distributions made to members under Section 6.01(d) are considered advanced distributions that reduce future amounts payable under Section 6.02. Section 6.02 outlines the distribution of proceeds following a "Recapitalization Transaction," defined as debt financing exceeding $10 million, resulting in significant member distributions. It specifies a priority order for distributions: first to Class 4 Common Unit Holders, then to Class 1 Preferred Unit Holders until their unpaid returns and unreturned capital are cleared, followed by pro-rata distributions to Class 2, 3, and 4 Common Unit Holders. The company provides cash advances to members to cover estimated tax liabilities, which are subsequently recouped from future distributions.

In a related legal dispute, LP contested the distribution of proceeds from two Recapitalization Transactions in 2011 and 2013, claiming it did not receive its correct share. LP accused the Company of improperly withholding amounts as a "strike-price deduction" from the 2011 Distribution and deducting tax advances twice from both distributions. The trial court ruled in favor of LP on the strike-price claim. The double-deduction claim, severed into a separate case, alleges the Company breached the Agreement by deducting future tax advances that were not authorized. Despite later paying the tax advances, the Company deducted the same amount again from the 2013 Distribution. LP learned of this issue during depositions in the prior case and intended to present a spreadsheet and testimony as evidence. The Company sought to exclude this evidence, but the trial court denied the motion.

Stephen Lyttleton, an owner and manager of LP, testified regarding the inaccuracies in the calculations of LP’s share of the 2011 Distribution, as communicated to him by Furlin on September 9, 2011. The trial court accepted evidence of a wire transfer notice indicating the Company’s payment to LP for its Class 1 and Class 3 units. Lyttleton pointed out that Furlin's initial calculations failed to deduct prior tax advances received by LP in 2010 and also incorrectly included future tax advances for the third and fourth quarters of 2011, which were not authorized by the Agreement. The correct deduction for LP’s Class 3 units should have been $1,603,197, while the February 2012 Spreadsheet indicated a deduction of $1,964,492, creating a discrepancy of $361,295 due to the erroneous inclusion of future tax advances. 

Additionally, Lyttleton provided documentation, including wire transfer notices confirming payments and an email exchange with Furlin clarifying the deductions. On March 8, 2012, Lyttleton raised concerns about errors in the February 2012 Spreadsheet based on his own calculations. Subsequently, on May 25, 2012, LP’s principal, Pete De Leeuw, informed the Company’s board of directors that LP's tax attorney, Robert Phillpott, had reviewed the distributions and found significant discrepancies in amounts distributed to members. Phillpott's report indicated that LP had received cumulative tax advances of $238,086 prior to a 2010 recapitalization and $2,375,013 between that recapitalization and the September 9, 2011 Distribution.

The trial court accepted cancelled checks and bank records as evidence. Lyttleton clarified that the tax advances cited by Phillpott encompassed amounts for LP’s Class 1 and Class 3 units. To isolate the tax advances relevant to Class 3 units, the total advances were multiplied by their proportional share, yielding $146,066 for 2010 and $1,457,070 through the 2011 Distribution, totaling $1,603,136 that should have been deducted from LP's share of the 2011 Distribution. Lyttleton noted these figures aligned with those on the February 2012 Spreadsheet, which controversially included future tax advances totaling $361,295 for the third and fourth quarters of 2011 that had not yet been disbursed to LP.

On March 7, 2013, LP was informed by Company accountant David Wascom that the tax advances made after the 2011 Distribution would be deducted from LP’s 2013 Distribution, which included the disputed 2011 advances, resulting in damages of $361,295 for LP due to this double deduction. Vijay Goradia, chairman of the boards of Goradia and the Company, testified that he relied on Rich Furlin for calculations regarding tax advances and distributions. Furlin, secretary of the Company and its Tax Matter Member, admitted to incorrect initial calculations for the 2011 Distribution, failing to deduct prior tax advances in line with the Agreement. He recalculated the Distribution in the February 2012 Spreadsheet but mistakenly included the unissued future tax advances totaling $361,295, believing it was appropriate due to another unrelated lawsuit. Ultimately, Furlin stated that the Company did not utilize the February 2012 Spreadsheet or subsequent spreadsheets from Lyttleton or Phillpott, relying instead on a June 2012 Spreadsheet prepared by attorney Corby Brooks for their final calculations.

Furlin clarified that the June Spreadsheet was utilized to evaluate the amounts individuals should have received in 2010 and 2011 compared to what they actually received. However, he indicated that Brooks’s June 2012 Spreadsheet was not the final version. By August 2012, the Company completed its calculations and discovered it had overpaid LP during the 2011 Distribution, planning to recoup this overpayment by withholding specific amounts. Furlin detailed the communication of these adjustments, noting that estimates of owed amounts were deducted quarterly throughout 2012, culminating in a total of $1.3 million withheld from LP. He asserted that this process did not involve double-deduction of tax advances.

The trial court admitted the August 2012 Spreadsheet, which showed LP owed the Company $1,331,655, with $865,361 linked to its Class 3 units. Furlin addressed the necessity of reconciling the Company’s spreadsheets with actual distributions, emphasizing that the final spreadsheet reflected deductions rather than cash payments. He acknowledged the Company’s incorrect statement regarding $1,935,154 in distributions made to LP and noted a prior affidavit stating LP had received over $1.9 million in tax advances before the 2011 Distribution.

Furlin claimed he was the sole individual responsible for the calculations used by the Company, asserting that the February 2012 Spreadsheet was the definitive one. The ultimate amount withheld from LP's share of the 2011 Distribution was reported as $1,964,000. Wascom, a CPA, confirmed that he did not perform any calculations and stated that Furlin created the spreadsheets used for the 2011 Distribution, admitting he did not review Furlin’s calculations at the time.

During the deposition, Wascom clarified that he did not verify the calculations made by Rich Furlin for the 2011 Section 6.02 distributions but did review the spreadsheets created by Furlin to prepare tax documents, indicating that LP was overpaid by $1.3 million in the 2011 Distribution. He stated that all tax advances since that distribution would be deducted from LP's 2013 Distribution. Kenyon, a managing director, confirmed that the final August 2012 Spreadsheet indicated a withholding of $1,331,655 from LP’s distributions due to overpayments. The jury encountered conflicting testimonies regarding the tax advances received by LP before and after the 2011 Distribution, including cumulative advances of $238,086 before the 2010 recapitalization and $2,375,013 thereafter. Testimony suggested that these amounts should be adjusted based on LP’s Class 3 units, leading to a total of $1,603,136 in tax advances that should have been deducted from LP’s share of the 2011 Distribution. Additionally, Lyttleton's testimony, supported by the February 2012 Spreadsheet, noted that $1,964,492 was deducted from LP’s Class 3 distribution, with a discrepancy of $361,295 attributed to tax advances made in late 2011, which were not authorized for deduction from future distributions as per the Agreement. The jury has the authority to determine the credibility of witnesses and resolve any inconsistencies in their testimonies.

The jury had sufficient grounds to accept Lyttleton's testimony regarding a double deduction that resulted in LP suffering damages of $361,295. Furlin, serving as the Company’s secretary and Tax Matter Member, testified that he was responsible for ensuring correct member distributions and that the February 2012 Spreadsheet, which he compiled, showed $1,964,492, including $361,295 related to LP’s unpaid tax advances for the last two quarters of 2011. This claim was supported by Goradia, the Company chairman, and Wascom, who corroborated that Furlin created the relevant spreadsheets. Despite Furlin’s later affidavit indicating that LP received over $1.9 million in tax advances, the jury could have justifiably questioned the consistency of his and Wascom’s statements, particularly regarding the usage of the February 2012 Spreadsheet and the amounts deducted from LP’s 2011 Distribution.

The Company argued that Furlin, Wascom, and Kenyon testified definitively that the February 2012 Spreadsheet was not utilized, favoring the August 2012 Spreadsheet as the final version. However, the jury could have reasonably found that the testimonies were not unequivocal and that Kenyon’s claims were self-serving. The Company claimed that the August 2012 Spreadsheet aligned with bank records and did not account for certain tax advances, but the jury could have credited Lyttleton’s testimony that these amounts included LP’s Class 1 and Class 3 units. Consequently, determining the portion attributable to LP’s Class 3 units required a percentage calculation of the overall amounts involved.

A total of $1,603,136 in tax advances related to LP's Class 3 units should have been deducted from LP's share of the 2011 Distribution. This amount aligns closely with figures previously noted by Furlin in the February 2012 Spreadsheet, which totaled $1,603,197. Furlin clarified that these amounts are deductions rather than payments made to LP, indicating a discrepancy between bank records and spreadsheets. 

The Company contends that ongoing discussions and exchanges of spreadsheets after February 2012 confirm the use of the August 2012 Spreadsheet. Lyttleton expressed disagreement with the February 2012 calculations shortly after they were sent. Subsequent communications included a March 2012 spreadsheet from Lyttleton, an April 2012 revision from the Company, and a May 2012 analysis from LP, which led to the Company hiring Brooks for further calculations. By August 2012, the final recalculations were completed, adjusting non-tax distributions and deducting only pre-September 2011 tax advances.

Despite these exchanges, Furlin testified that the spreadsheets created by Lyttleton, Phillpott, and Brooks were not final or utilized. The jury could have reasonably discredited the assertions regarding the August 2012 Spreadsheet and determined that the figures from the February 2012 Spreadsheet were never amended, leading to the current litigation.

The Company claims it paid LP $19,719,245.27 between January 2010 and March 2013, with no evidence suggesting a different total owed to LP. However, LP's trial burden was to substantiate its claim for $361,295 in damages. The jury found that the Company breached the Agreement by deducting $361,295 in tax advances from LP's distributions, resulting in damages of the same amount. The court concluded that the jury's findings were supported by sufficient evidence and upheld the judgment awarding LP $361,295 in damages.