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Restaurant Supply, LLC v. Pride Marketing and Procurement, Inc.

United States District Court, E.D. Louisiana

October 17, 2018


         SECTION “F”



         Before the Court are two motions: (1) the plaintiff's motion to reconsider two findings made in the Court's Order and Reasons dated August 22, 2018, in which the Court granted in part the defendant's motion for partial summary judgment, dismissing the plaintiff's equitable accounting claim; and (2) the defendant's motion for partial summary judgment, seeking partial dismissal of the remaining claims, except with respect to patronage distributions made between March 21, 2016 and May 20, 2016, to which the plaintiff may be entitled. For the following reasons, the plaintiff's motion is GRANTED in part, and the Court now finds that there is a genuine factual dispute as to the ownership of rebates; and the defendant's motion is DENIED as moot.


         This lawsuit arises from a dispute over whether a shareholder is entitled to distributions of rebates from a restaurant equipment cooperative.

         Pride Centric Resources, Inc. (formerly known as Pride Marketing & Procurement, Inc.) is a cooperative of food service wholesale suppliers and dealers engaged in the business of buying and selling food service supplies and equipment products. Each supplier and dealer owns one share in the buying group. Pride uses the collective purchasing strength of its Shareholders to negotiate advantageous pricing from food service suppliers and equipment manufacturers, referred to as Pride Vendors. Organized as a cooperative for tax purposes, Pride would receive rebates from manufacturers when its Shareholder patrons exceeded certain purchasing minimums set by the manufacturer. Typically, Pride would redistribute the rebates, also referred to as patronage dividends, to the Shareholders in the amount that each one earned. Pride is obligated by its By-Laws to remit rebates less expenses and losses to its Shareholders.

         In March 2016, Pride informed its Shareholders that it could not pay rebates for 2015 and 2016 because it had sustained significant losses after guaranteeing the debt of[1] FSW established a $2 million line of credit from Iberia Bank in August 2012 and increased the line to $21 million over a three year period. With the approval of its Board of Directors, Pride guaranteed FSW's line of credit for $15 million. Simultaneously, FSW was seeking a larger debt instrument from JP Morgan Chase, which was intended to continue to fund FSW's expansion and satisfy the Iberia line of credit. However, in February 2016, FSW members were notified that this funding was delayed and that the JP Morgan debt instrument would not be accessible until April 2016, at the earliest. In late February 2016, Pride made a $4 million payment to Iberia Bank in an attempt to provide FSW with additional time to work through some of its issues. Weeks later, Iberia swept Pride's bank accounts, taking all of the funds therein, including Pride's operating, rebate, and procurement funds, totaling $9.8 million. On March 11, 2016, Iberia issued a Notice of Default of FSW and accelerated the remaining debt due. Pride immediately paid $4 million to extinguish and satisfy its guaranty of the FSW debt. On May 20, 2016, FSW filed Chapter 11 Bankruptcy.

         Immediately after the Iberia sweep, the Pride Board of Directors informed Shareholders that they would not be receiving payments of the remaining 2015 rebates but that Pride intended to pay these rebates in the future. In response, on March 21, 2016, Restaurant Supply, which had been a Shareholder of Pride since 2006, sent a letter to Pride demanding all rebates “due and owing.” Specifically, Restaurant Supply asserted a right to $2 million in rebates it had accrued from its purchases in 2015 and 2016. In addition, Restaurant Supply stated that it would be “ceasing all purchasing procurements through PRIDE, ” effective immediately. Shortly thereafter, the Pride Board learned that Restaurant Supply had joined a competitive buying group. Deciding that Restaurant Supply's decision to cease purchasing and join a competitor would be detrimental to Pride's interest, the Pride Board voted to terminate Restaurant Supply's interest in Pride on May 20, 2016, thereby withdrawing its status as Shareholder.

         Restaurant Supply initially sued Pride in Connecticut state court on June 28, 2016, seeking to recover the $2 million in rebates Pride refused to remit. The case was removed to the United States District Court for the District of Connecticut and then transferred to this Court on August 31, 2017. In its amended complaint, Restaurant Supply alleged the following causes of action: (1) equitable accounting; (2) conversion; (3) unjust enrichment; (4) breach of fiduciary duty and the duty of loyalty; (5) breach of contract; and (6) negligence. In its April 25, 2018 Order and Reasons, this Court granted Pride's motion to dismiss pursuant to Federal Rule of Civil Procedure 12(c) as to the unjust enrichment claim, and denied the motion as to all other claims. On June 27, 2018, the Court denied Restaurant Supply's motion for partial summary judgment on its breach of contract claim and denied Pride's motion for sanctions under Rule 37, or in the alternative, motion for partial summary judgment.

         Most recently, in its August 22, 2018 Order and Reasons, the Court granted Pride's motion for summary judgment in part, as to the plaintiff's claim for equitable accounting, and denied the motion as to the remaining claims. In considering the motion, the Court reiterated that there were two potential theories under which Restaurant Supply could demonstrate its entitlement to the rebates Pride refused to remit: (1) the Shareholder Agreement and the First Amendment and (2) the By-Laws.

         First, in looking to the four corners of the Shareholder Agreement, as amended, the Court found that Section 9.01 explicitly vested ownership of the rebates in Pride, while Section 3.02(B) vested a security interest in Pride. Because Pride would not have a security interest and ownership of the rebates, the Court determined that the Agreement was “hopelessly ambiguous.” As such, in accordance with principles of contract interpretation under Louisiana law, the Court looked to extrinsic evidence to determine the parties' intent in adopting the First Amendment - namely, whether they intended for ownership of rebates to be governed by Section 9.01 or Section 3.02(B). In so doing, the Court stated that Pride had submitted substantial evidence supporting its contention that the First Amendment was intended to unequivocally vest ownership of the rebates in Pride, and that Restaurant Supply had failed to submit any competent evidence to show otherwise.

         The Court explained that Pride submitted evidence of an email dated October 12, 2010, in which Pride announced the First Amendment and its purpose to Shareholders as follows:

[I]f PRIDE is to continue to issue Authorization Approval Codes based upon vendor rebates it will have to be explicitly clear that the vendor rebates are the exclusive property and funds of PRIDE, with the Shareholders to have no legal, equitable, or any other interest or claim whatsoever in the rebate.

         Pride also submitted the deposition testimony of its CEO, Karin Sugarman, in which she testified that the First Amendment reflected Pride's need “to own th[e] rebates.” The Court further noted that Pride submitted affidavits of the representatives of four Shareholders, who attested that they understood from the language of the First Amendment that Pride would own the rebates. After considering this evidence, the Court determined that both Pride and the Shareholders understood that the First Amendment was intended to vest ownership of the rebates in Pride. The Court went on to conclude that the evidence submitted by Restaurant Supply in an attempt to contradict Pride's evidence as to the parties' intent failed to do so.[2] Accordingly, the Court concluded that the First Amendment unambiguously gave Pride ownership of the rebates.

         The Court next found that, even though Restaurant Supply did not own the rebates under the Shareholder Agreement and First Amendment, it may still have a right to the rebates under Section 10.2 of the By-Laws. Referencing the findings from its June 27, 2018 Order and Reasons, the Court explained that Section 10.2 obligates Pride to pay its Shareholders patronage dividends that result from “net savings.”[3] And on the record before the Court, there was a fact issue as to whether Pride had sufficient revenue to make a patronage distribution in April of 2016.

         However, the Court clarified that the import of this fact issue depended on: (1) whether Restaurant Supply was entitled to receive rebates after its membership terminated, and (2) when its membership terminated. The Court determined that a fact issue existed as to when Restaurant Supply's membership in Pride was effectively canceled. It then then concluded that, pursuant to Section 10.2 of the By-Laws, only current Shareholders are entitled to distributions.[4] However, it also explained that if Pride was obligated to pay patronage dividends in April 2016, and Restaurant Supply was still a Shareholder at that time, nothing in Pride's corporate governance documents would allow Pride to skip its obligation. Ultimately, the Court stated, the determination of whether Pride was obligated to pay Restaurant Supply rebates depended on whether Pride was obligated to pay any Shareholder rebates in April and May of 2016, and if so, whether Pride was still a Shareholder during those months, both outstanding issues of fact. Thus, the Court concluded that it could not grant summary judgment on the issue of whether Restaurant Supply had a valid claim to the rebates under Section 10.2.

         Finally, the Court applied its findings to Restaurant Supply's claims still before the Court. It concluded that Pride was entitled to summary judgment dismissing the equitable accounting claim but that issues of fact regarding Restaurant Supply's right to rebates under Section 10.2 precluded summary judgment as to the conversion and breach of contract claims. Finally, the Court concluded that summary judgment was premature as to the breach of fiduciary duty and duty of loyalty claims, as well as the negligence claim, in light of inadequate briefing.

         Restaurant Supply now moves for reconsideration of the Court's findings that: (1) the First Amendment to the Shareholder Agreement vests ownership of the rebates in the Pride; and (2) the By-Laws provide that a Shareholder's right to rebates terminates when it ceases to be a Shareholder. And Pride moves for partial summary judgment, seeking partial dismissal of the plaintiff's remaining claims, except with ...

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