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Complete Logistical Services, LLC v. Rulh

United States District Court, E.D. Louisiana

June 6, 2019

COMPLETE LOGISTICAL SERVICES, LLC
v.
DONALD RULH, JR. ET AL

         SECTION “L” (5)

          ORDER & REASONS

          Eldon E. Fallon U.S. District Court Judge

         Before the Court are several motions: (1) Defendant Donald Rulh's Motion for Partial Summary Judgment, in which Mr. Rulh also moves the Court to strike Plaintiff's expert, Mr. Jason MacMorran, R. Doc. 209; (2) a Motion for Partial Summary Judgment filed by Plaintiff Complete Logistical Services, LLC (“CLS”), R. Doc. 229; (3) CLS' motion to Exclude the Testimony of Mr. Athen M. Sweet, R. Doc. 231; and (4) Defendant Donald Rulh's Motion for Summary Judgment, R. Doc. 239. Each motion is opposed, R. Docs. 248, 245, 255, 252, and the parties have offered replies, R. Docs. 271, 275, 278, 273. The Court heard oral argument on the motions on June 4, 2019. R. Doc. 300. Because the motions are interrelated, the Court rules on them collectively.

         I. BACKGROUND

         CLS provides contract labor to various marine industries. It alleges its former member, Defendant Rulh, breached his fiduciary duties to CLS, misappropriated CLS' assets, damaged CLS' image, and took confidential and proprietary information after he was removed from the LLC by its remaining members. R. Doc. 98 at 1-3.[1]

         In its verified complaint, CLS alleges that, as a result of Mr. Rulh's allegedly egregious conduct-specifically, his failing to collect payments from clients; refusing to reimburse the LLC for money he borrowed to refinance his private home; arriving intoxicated to company events; and changing the locks on the CLS office without first discussing the matter with the other LLC members-the other three members of CLS voted to treat Mr. Rulh as an assignee of the Company, thereby revoking his authority to manage the business or act unilaterally on its behalf. Id. at 4-6. CLS alleges that after Mr. Rulh was stripped of this authority, he stole from CLS confidential information including financial statements, customer lists, and sales records while the other members were at a company crawfish boil. Id. at 8. According to CLS, these documents were printed, scanned, and then emailed to Mr. Rulh's personal email account. Id. at 8. CLS further alleges Mr. Rulh took this information intending to start a competing business with his co-Defendants.[2] Finally, Plaintiff alleges Mr. Rulh took $222, 000.00 from the LLC's bank account without authorization. Id. at 2. According to CLS, this resulted in the company's inability to pay holiday bonuses to its employees, including Mr. Scott Coker, head of CLS' diving division. Id. CLS submits Mr. Coker left CLS because he did not receive a bonus. Id.

         After voting to make Mr. Rulh an assignee of the company, on July 23, 2018, the remaining CLS members “availed themselves of their rights in the CLS Operating Agreement to expel Mr. Rulh from CLS membership” and obtained a financial report that valued Mr. Rulh's expulsion price at negative $172, 664.00. Id. at 14. Ultimately, the remaining members of CLS agreed to offer Mr. Rulh an expulsion price of $3, 333.00 for his 33% membership interest in CLS. Id. at 4.

         Based on this factual background, CLS brings claims against Mr. Rulh for violations of the Defend Trade Secrets Act (“DTSA”); Louisiana Uniform Trade Secrets Act (“LUTSA”); Computer Fraud and Abuse Act (“CFA”); Louisiana Unfair Trade Practices Act (“LUTPA”); and for unjust enrichment; breach of fiduciary duties, duty of loyalty, and duty of due care; conversion; conspiracy; and fraud. Id. at 3. Finally, CLS seeks a declaration “that the expulsion proceedings were proper in all respects and confirming that Mr. Rulh is no longer a member of CLS.” Id. at 4.[3]

         On May 7, 2018, Mr. Rulh answered the complaint and filed counterclaims against CLS and a third-party complaint against CLS members Spencer Sens and Natchez Morice, III. R. Doc. 30. On August 21, 2018, the Court granted Mr. Sens and Dr. Morice's motion to strike Defendants' third party claims against them. R. Doc. 94. On May 2, 2019, Mr. Rulh filed an amended counterclaim, asserting a breach of contract claim as well as seeking a declaratory judgment that the expulsion price offered by CLS did not comply with the terms of the Operating Agreement. R. Doc. 237.

         II. PRESENT MOTIONS

         The motions presently before the Court mostly overlap. The parties both move to strike the other's expert, R. Docs. 209, 231, and both seek summary judgment on the issue of whether the expulsion price offered to Mr. Rulh complied with the terms of the CLS Operating Agreement, R. Docs. 209, 229, 239. Finally, Mr. Rulh seeks summary judgment on Plaintiff's remaining claims, namely its DTSA, CFAA, LUTSA, and LUTPA claims.

         III. DISCUSSION

         The facts relevant to the instant motions are largely undisputed. By April 23, 2014, CLS consisted of four members: Mr. Rulh, Mr. Spencer Sens, Dr. Natchez “Trey” Morice III, and Dr. Brett Casey.[4] On January 12, 2018, pursuant to section 10.3 of the CLS Operating Agreement, Mr. Sens, Dr. Morice, and Dr. Casey voted to initiate expulsion proceedings against Mr. Rulh. These proceedings took the form of three meetings. The first meeting, held January 22, 2018, proceeded in two parts. First, Mr. Sens, Dr. Morice, and Dr. Casey “agree[d] by vote that [Mr. Rulh] ha[d] caused direct harm to [CLS]” and thereafter voted to immediately treat Mr. Rulh “as an assignee of [CLS] for all purposes.” See CLS Operating Agreement, § 10.3. The members then scheduled the second meeting for February 26, 2018. Having set the second meeting, the CLS Operating Agreement allowed Mr. Rulh to “make a specific request to [CLS] to receive computer generated financial reports so that he may have an independent evaluation at his own cost if he so chooses.” Id. Mr. Rulh did not request financial documents from the company.

         At the second meeting, held February 26, 2018, Mr. Sens, Dr. Morice, and Dr. Casey “agree[d] by vote to have a financial evaluation of [Mr. Rulh's] interest, ” authorizing Postlewaithe & Netterville to provide CLS with a financial valuation of Mr. Rulh's interest in CLS. Id.; R. Doc. 98 ¶¶ 65, 67. Pursuant to this authorization, Mr. Jason MacMorran of Postlewaithe & Netterville completed a valuation of Mr. Rulh's membership interest, ultimately concluding that the appropriate expulsion price for Mr. Rulh was negative $172, 664.00. Id. at 68. This valuation was “sent out with the certified notice of the [third] meeting, ” which the parties set for July 23, 2018.

         In the event Mr. Rulh intended to introduce his own membership valuation at the July 23, 2018 meeting, the CLS Operating Agreement required Mr. Rulh to first request that the members consider his independent evaluation. See CLS Operating Agreement, § 10.3 (“If the offending member wishes to introduce his own evaluation price at the meeting, then he must request that his independent evaluation should be considered.”). On July 6, 2018, Mr. Rulh's counsel sent a letter to the remaining members of CLS indicating that Mr. Rulh intended to introduce his own evaluation prepared by Mr. Athen Sweet. R. Doc. 209-10 at 1; see also R. Doc. 231-10 at 7. In his letter, Mr. Rulh contended the “fair and proper evaluation for his interest in CLS” was $7, 448, 891.00. R. Doc. 209-10 at 1.

         During the July 23, 2018 meeting, however, Mr. Rulh stated his $7, 448, 891.00 price was “not an official valuation, ” and that he “need[ed] more information.” R. Doc. 229-5 at 6. To clarify, Mr. Rulh's attorney explained Mr. Rulh had obtained “discounted cash flow analysis information” and “based upon that analysis [made a good faith] estimate that [Mr. Rulh's] share was in excess of $7.4 million.”[5] Id. at 6. Nevertheless, thereafter, Mr. Rulh's attorney stated Mr. Rulh was “standing down” on “the $7.4 million that was in [his] July 6 letter” and confirmed that Mr. Rulh was not offering a specific valuation; rather, Mr. Rulh's attorney explained the $7, 448, 891.00 was “just [a] proposal.”[6] Id. at 9. Mr. Rulh and his counsel then left the meeting. Id. at 11.

         Following Mr. Rulh's departure, the members of CLS passed the following resolution pursuant to section 10.3 of the CLS Operating Agreement:

WHEREAS, the Members have determined Mr. Rulh has caused direct harm to the Company and his conduct is egregious enough to warrant a full expulsion by the Company;
NOW, THEREFORE, BE IT RESOLVED, that Mr. Rulh is hereby expelled from the Company effective July 23, 2018 in accordance with Section 10.3 of the Operating Agreement of the Company. . . .
WHEREAS, the Members have determined to pay Mr. Rulh $3, 333.00 for his 33.3% equity interest in the Company notwithstanding the Members' determination that the Postlethwaite & Netterville valuation of Mr. Rulh's 33.3% equity interest in the Company at a negative $172, 664.00 is a correct valuation for such interest;
NOW, THEREFORE, BE IT RESOLVED, that the Company purchase Mr. Rulh's 33.3% equity interest in the Company [for] $3, 333.00 . . . .

Id. at 11-12.

         After Mr. Rulh was formally expelled from CLS, Mr. Athen Sweet, whom Mr. Rulh now offers as an expert, prepared a valuation report wherein he concludes Mr. Rulh's membership interest in CLS is $6, 419, 000.00. R. Doc. 231-10 at 16. Although Mr. Rulh no longer contests the fact of his expulsion, R. Doc. 248-3 at 11-14, he maintains his allegation that CLS failed to comply with the terms of the CLS Operating Agreement with respect to setting his expulsion price.[7]

         Chief among the disputes in this matter is the proper calculation of Mr. Rulh's ownership interest and corresponding expulsion price. CLS' expert, Mr. MacMannon, takes the position that he appropriately calculated Mr. Rulh's expulsion price as negative $172, 664.00, R. Doc. 229-8 at 24; Mr. Rulh's expert, Mr. Sweet, takes a different position, setting Mr. Rulh's proper expulsion price at $6, 419, 000.00, R. Doc. 231-10 at 16.

         In coming to his calculation, CLS expert Mr. MacMorran “perform[ed] a business valuation of Mr. Rulh's 33.33 percent ownership interest, ” by calculating the value of the company as a whole using the asset, income, and market approaches. R. Doc. 229-8 at 13. Under these approaches, Mr. MacMorran underwent his analysis comparing CLS' “post-incident” and “pre-incident” metrics and values. Id. “The primary difference between the Pre-Incident and Post-Incident forecasts [of CLS] was the treatment of revenues from the diving division as a result of the departure of Mr. [Scott] Coker attributable to [Mr. Rulh's having taken $222, 000.00 out of the CLS bank account without authorization].” Id. at 14.[8] Using these valuation methods, Mr. MacMorran came to his valuation “of a 100 percent ownership interest in the Company on a Pre-Incident and Post-Incident basis.” Id. at 18. Next, Mr. MacMorran applied reductions for marketability and control to the post-incident value of the company. Id. at 19-21. After calculating the 100% “Post-Incident non-marketable, non-controlling interest value” of CLS, Mr. MacMorran extrapolated Mr. Rulh's 33.33% interest in the company and reduced Mr. Rulh's ownership interest value for diminution of value losses and out of pocket costs, arriving at Mr. Rulh's expulsion price of negative $172, 664.00. Id. at 24.

         Mr. Sweet, Mr. Rulh's expert, took a different approach. In coming to his valuation, Mr. Sweet underwent an analysis using three methods to calculate the 100% ownership value of CLS: (1) a discounted cash flow analysis, (2) a guideline transaction indication of value, and (3) the guideline public company indication of value. R. Doc. 231-10 at 16. He then extrapolated Mr. Rulh's 33.33% interest. Id. Notably, Mr. Sweet did not make any adjustments for lack of control or marketability. Id. Additionally, Mr. Sweet did not make any reduction for any losses to the company's value allegedly caused by Mr. Rulh, as he submits nothing in his analysis “indicat[ed] [Mr. Rulh had caused CLS] any losses, whether actual or speculative.” Id. at 17. Based on his analysis, Mr. Sweet concluded the proper expulsion price for Mr. Rulh is $6, 419, 000.00. Id.

         The relevant facts being largely undisputed, the case is ripe for summary judgment. The Court first considers the parties' motions to exclude their respective experts, R. Docs. 209, 231, before determining whether CLS complied with the terms of the CLS Operating Agreement in coming to Mr. Rulh's expulsion price, R. Docs. 209, 229, 239. Finally, the Court analyzes whether CLS' remaining claims survive summary judgment, R. Doc. 239.

         A. Whether the Court Should Exclude Either Expert

         In his motion, Mr. Rulh argues the Court should exclude the testimony of Plaintiff's expert, Jason MacMorran, as Mr. Rulh contends Mr. MacMorran's use of a fair market valuation, wherein Mr. MacMorran applied discounts for marketability and control, is contrary to the CLS Operating Agreement and Louisiana law. R. Doc. 209-1 at 18. Further, Mr. Rulh submits Mr. MacMorran also applied the improper section of the CLS Operating Agreement-specifically, Section 11.3-in coming to his assessment. Id. Finally, Mr. Rulh contends that, because Mr. MacMorran's “valuation of Mr. Rulh's interest is premised on inapplicable valuation methodology, ” and “intentionally depress[es] the value of Mr. Rulh's interest, ” Mr. MacMorran “has clearly shown an inherent bias and lack of partiality” and his testimony should therefore be stricken. Id. at 18-19.

         In opposition, CLS argues “Mr. Rulh does not point to any ‘deliberate, manifest, pervasive, and systematic bias [by Mr. MacMorran] in selecting his data points, in adjusting the data points, and in assigning weights to the data points' that would render Mr. MacMorran's testimony fundamentally unreliable.” R. Doc. 248 at 17. Thus, CLS submits, because Mr. Rulh “merely challenges Mr. MacMorran's legal authority to apply discounts, ” he has not established that Mr. MacMorran's testimony is fundamentally unreliable. R. Doc. 248 at 17. Accordingly, CLS argues Mr. MacMorran's testimony should be permitted at trial. Id.

         In its motion, CLS moves the Court to exclude Mr. Sweet as an expert. R. Doc. 231-1. CLS takes issue with the methodology employed by Mr. Sweet in coming to his valuation. Id. at 2. According to CLS, although Mr. Sweet purports to have applied standard industry calculations in valuing CLS, “Mr. Sweet misapplies valuation techniques, deviates from accepted valuation principles and professional standards, applies data sources erroneously and inconsistently, and selects biased data that inflates the value of Mr. Rulh's interest.” Id. at 3. Moreover, CLS contends Mr. Sweet's opinion exceeds his expertise and contains impermissible conclusions of law. Id.

         Mr. Rulh opposes the motion, arguing the “legal conclusions” offered by Mr. Sweet in his report are statements “commonly made by experts, who are permitted to determine the appropriate valuation methodology based on the facts and circumstances of the case.” R. Doc. 255 at 17. Next, Mr. Rulh argues Mr. Sweet's opinions and valuation are consistent with industry practice, pointing to paragraphs 38-42 of Mr. Sweet's report, in which he “discusses the merits of the various valuation methods with consideration for the specific facts and circumstances of this case.” Id. at 21.[9] Finally, Mr. Rulh argues Mr. Sweet is qualified to render these opinions, as “Rule 702 does not require valuation credentials, an active CPA license, or membership to any specific organizations.” Id. at 20. Rather, because Mr. Sweet's expertise will assist the trier of fact in making its determination, Mr. Sweet's experience in the field of business valuations passes muster. Id.

         i. The Daubert Standard

         The admissibility of expert testimony is governed by Federal Rule of Evidence 702, which provides that,

If scientific, technical, or other specialized knowledge will assist the trier of fact to understand the evidence or to determine a fact in issue, a witness qualified as an expert by knowledge, skill, experience, training or education, may testify thereto in the form of an opinion or otherwise, if (1) the testimony is based on sufficient facts or data, (2) the testimony is the product of reliable principles and methods, and (3) the witness has applied the principles and methods reliably to the facts of the case.

         This rule codifies the Supreme Court's decisions in Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993) and Kumho Tire Co. v. Carmichael, 526 U.S. 137 (1999).

         The threshold question in determining whether an individual may offer expert testimony under Rule 702 is whether the individual has the qualifications to do so. Fed.R.Evid. 702. “Trial courts have ‘wide discretion' in deciding whether or not a particular witness qualifies as an expert.” Hidden Oaks Ltd. v. City of Austin, 138 F.3d 1036, 1050 (5th Cir. 1998) (quoting Ellis v. K-Lan Co., 695 F.2d 157, 162 (5th Cir. 1983)). Under Rule 702, “the expert is viewed, not in a narrow sense, but as a person qualified by ‘knowledge, skill, experience, training or education.'” Fed.R.Evid. 702 advisory committee's note.

         Apart from determining the qualifications of the expert, the Court must act as a “gate-keeper” to ensure that the proffered expert testimony is “both reliable and relevant.” Wells v. SmithKline Beecham Corp., 601 F.3d 375, 378 (5th Cir. 2010). “This entails a preliminary assessment of whether the reasoning or methodology underlying the testimony is scientifically valid and of whether that reasoning or methodology properly can be applied to the facts in issue.” Id. (quoting Daubert, 509 U.S. at 592-93). With respect to reliability, the Court's focus “must be solely on principles and methodology, not on the conclusions that they generate.” Daubert, 509 U.S. at 595.

         When the admissibility of expert testimony is challenged under Daubert, the proponent of the evidence bears the burden of proving that the testimony is reliable and relevant. Moore v. Ashland Chem. Inc., 151 F.3d 269, 276 (5th Cir. 1998) (en banc). To meet this burden, a party cannot simply rely on its expert's assurances that he has utilized generally accepted scientific methodology. Id. Rather, some objective, independent validation of the expert's methodology is required. Id. In this regard, however, it is not necessary for the proponent of the evidence to prove that “the testimony is factually correct.” Paz v. Brush Engineered Materials, Inc., 555 F.3d 383, 388 (5th Cir. 2009).

         Ultimately, a court's role as a gatekeeper does not replace the adversary system. Daubert, 509 U.S. at 596. “Vigorous cross-examination, presentation of contrary evidence, and careful instruction on the burden of proof are the traditional and appropriate means of attacking shaky but admissible evidence.” Id. Proper deference is to be accorded to the jury's role “as the arbiter of disputes between conflicting opinions.” United States v. 14.38 Acres of Land, 80 F.3d 1074, 1077 (5th Cir. 1996) (quoting Viterbo v. Dow Chemical Co., 826 F.2d 420, 422 (5th Cir. 1987)). “As a general rule, questions relating to the bases and sources of an expert's opinion affect the weight to be assigned that opinion rather than its admissibility and should be left for the jury's consideration.” Id. (quoting Viterbo, 826 F.2d at 422).

         ii. Analysis

         Both parties challenge the credentials of the other's expert, their methodology, and perceived bias. Moreover, CLS challenges the propriety of allowing Mr. Rulh's expert, Mr. Sweet, to offer his legal interpretations of the CLS Operating Agreement. The Court addresses each challenge in turn.

         1. ...


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