Immense Salon & Spa, LLC, and Micheal J. Covington v. Linda L. Williams, Kevin D. Williams, Melvin D. Brandenburg, and Studio 2000, Inc. (mem. dec.)

• Court: Indiana Court of Appeals
• Decided: December 17, 2019
• Docket: 19A-PL-1048
• Status: Published

Opinion

MEMORANDUM DECISION Pursuant to Ind. Appellate Rule 65(D), this Memorandum Decision shall not be FILED regarded as precedent or cited before any Dec 17 2019, 7:43 am court except for the purpose of establishing CLERK the defense of res judicata, collateral Indiana Supreme Court Court of Appeals estoppel, or the law of the case. and Tax Court

ATTORNEY FOR APPELLANTS ATTORNEYS FOR APPELLEES Clinton E. Blanck Ann Marie Waldron Blanck Legal, P.C. Waldron Law Indianapolis, Indiana Indianapolis, Indiana John Thomas Funk Benjamin Spandau Tate Bowen Daugherty Funk Spandau LLC Indianapolis, Indiana

IN THE COURT OF APPEALS OF INDIANA

Immense Salon & Spa, LLC, and December 17, 2019 Michael J. Covington, Court of Appeals Case No. Appellants-Plaintiffs, 19A-PL-1048 Appeal from the Marion Superior v. Court The Honorable Heather A. Welch, Linda L. Williams, Kevin D. Judge Williams, Melvin D. Trial Court Cause No. Brandenburg, and Studio 2000, 49D01-1601-PL-2403 Inc., Appellees-Defendants

Baker, Judge. Court of Appeals of Indiana | Memorandum Decision 19A-PL-1048 | December 17, 2019 Page 1 of 12 [1] Immense Salon & Spa, LLC (Immense), and Michael J. Covington

(collectively, the Purchasers) appeal the trial court’s order entering final

judgment in favor of Linda Williams, Kevin Williams, Melvin Brandenburg

(collectively, the Sellers), and Studio 2000, Inc. (Studio 2000), on the

Purchasers’ complaint seeking specific performance of the contract between the

parties. The Purchasers argue, essentially, that the Sellers breached the contract

first and are not entitled to rescission. Finding that the Purchasers were the first

breaching party and that the trial court did not err by ordering rescission and

declining to order specific performance, we affirm.

Facts [2] Sometime in 2015, Covington, who is the sole managing member of Immense,

offered to purchase Studio 2000 from the Sellers. In July 2015, the Sellers

informed Covington that they had hired a broker, David Gorman, to help

negotiate the sale of the business. Following discussions, a letter of intent was

negotiated by Covington and Gorman. At that point, an attorney was hired to

draft the transactional documents.

[3] Among the documents was a Corporate Stock Purchase Agreement (Purchase

Agreement). The purchase price for Studio 2000 totaled $660,108.70, and

payment was structured as follows:

• $240,000 in the form of a cashier’s check or wire transfer at closing (the Down Payment); • a credit of $55,000 from Sellers to Covington for gift cards previously sold by Sellers and unredeemed;

Court of Appeals of Indiana | Memorandum Decision 19A-PL-1048 | December 17, 2019 Page 2 of 12 • a $90,500 payment to be paid on or before May 15, 2017, which was evidenced by promissory notes executed by Covington and Kimberly Morgan-Dade;1 • an amount of up to $140,000 in future gift card sales; • $47,108 for costs of inventory (to be adjusted by a final valuation at closing); and • $87,500 to be paid by December 1, 2016, plus annual interest accruing at 6%.

Covington planned to acquire Studio 2000 through a series of loans on the

assets of Studio 2000 and its future business rather than using any of his own

cash. He applied for several loans before December 2015. In those loan

applications, he stated that he was the owner of Studio 2000 and had been the

owner for as long as a year, even though he had not yet purchased the

company. Morgan-Dade also applied for financing as an owner of Studio 2000,

claiming ownership going back at least a year.

[4] The parties agreed to close the deal on December 2, 2015. A few hours before

the scheduled closing, Covington sent a revised Purchase Agreement to Sellers

that added a last-minute change to the language. Specifically, he inserted a

Document Closing, to occur on December 2, 2015, and a Funding Closing, to

allow Covington to pay the Down Payment by the end of business on

December 4, 2015. Covington made no other changes to the Purchase

Agreement, which contains multiple sections referring to a single closing and

1 Morgan-Dade is Covington’s friend; she is not an officer or member of Immense. Covington planned for her to run the salon after the transaction was completed. She attended four meetings leading up to the closing and ultimately signed the promissory note as an individual.

Court of Appeals of Indiana | Memorandum Decision 19A-PL-1048 | December 17, 2019 Page 3 of 12 requiring Covington to pay the Down Payment at the December 2, 2015,

closing. While the Sellers agreed to the change in language, no one other than

Covington believed that Covington would own Studio 2000 or that the sale

would be completed until payment of the Down Payment on December 4,

2015.

[5] After the documents were signed on December 2, but before the Down

Payment was made on December 4, Kay Fleming, the Purchasers’ attorney,

changed the records with the Indiana Secretary of State to show Covington (not

Immense) as the owner of Studio 2000 and to show herself as the registered

agent.

[6] Beginning on December 3, Covington began indicating to the Sellers that he

would not be able to pay the Down Payment on December 4. From December

3 through December 11, the Sellers attempted to work with Covington

regarding the Down Payment. On December 7, 2015, a partial payment in the

amount of $92,730 was made to the Sellers from Quarterspot, a lending

company.

[7] At some point, the Sellers learned about the change the Purchasers had made to

the Secretary of State records; they believed that the change was improper given

their understanding that the transaction would not be fully executed and final

until the Purchasers paid the full Down Payment. As a result, on December 14,

2015, having still not received the full Down Payment, the Sellers sent a letter

to the Purchasers terminating the Purchase Agreement (the Termination

Court of Appeals of Indiana | Memorandum Decision 19A-PL-1048 | December 17, 2019 Page 4 of 12 Letter). On December 21, 2015, Fleming responded, stating that Covington

refused to accept the termination and claiming that Covington (finally) had the

funding in place to complete the purchase.

[8] On January 20, 2016, the Purchasers filed a complaint against the Sellers,

asking the trial court to order the Sellers to specifically perform the terms and

conditions of the Purchase Agreement and alleging breach of contract,

conversion, and tortious interference with a contractual relationship. The

Sellers filed their answer and counterclaim on February 18, 2016, asking the

trial court to interplead Quarterspot and rescind or reform the Quarterspot loan

documents and raising claims of breach of contract, fraud, and a violation of

Indiana’s Corrupt Business Influence Act against the Purchasers. 2

[9] A bench trial took place from August 6 through 8, 2018. On November 7,

2018, the trial court ruled in favor of the Sellers, finding and concluding, in

relevant part, as follows:

7. During cross-examination, the Court found Covington to be unresponsive toward several leading questions about

2 The Sellers also filed a third-party complaint against Morgan-Dade, Fleming, and Fleming’s law firm, alleging claims of fraud, fraudulent inducement, conspiracy to commit fraud, and violation of the Corrupt Business Influence Act. Morgan-Dade, Fleming, and Fleming’s firm each filed counterclaims against the Sellers for abuse of process. The trial court granted summary judgment in favor of Fleming and her firm on all the Sellers’ claims and in favor of Morgan-Dade on all the Sellers’ claims except for claims alleging that Covington was acting as her agent in the transaction. Additionally, Quarterspot asserted a cross-claim against Covington. This claim was severed and stayed pending the outcome of this case.

Court of Appeals of Indiana | Memorandum Decision 19A-PL-1048 | December 17, 2019 Page 5 of 12 specific, relevant aspects of his financial experience and general aspects of his business.

***

22. An addendum to the Purchase Agreement that extended the Funding Closing to December 11 was tendered to the Court as evidence. It was dated December 8, 2015 and was [signed] only by Covington. The tendered copy did no[t] include any of the signatures of the sellers.

30. The evidence at trial concerning the additional “loans” which Covington claims were approved to fund the Downpayment were all secured by the exact same assets— all assets of Studio 2000. In that application he misstated his ownership, stating that he [had] owned Studio 2000 for one year.

IV. Conclusions of Law

11. Upon a review of the evidence, the Court finds that the Closing as outlined in the Purchase Agreement never occurred because Covington did not tender the Closing funds in the proper timeframe to execute the Agreement.

Court of Appeals of Indiana | Memorandum Decision 19A-PL-1048 | December 17, 2019 Page 6 of 12 16. By failing to tender the $240,000 payment by December 4th, . . . Covington and Immense [] failed to abide [by] an essential term of the agreement.

20. Until [the Purchasers] had tendered the $240,000, the Purchase Agreement could not be considered executed because Covington had not provided consideration for the purchase.

22. Even if the Purchase Agreement were to have been fully executed by the signing of the documents on December 2nd with the promise to pay as consideration, Covington would be in breach . . . because he did not tender the $240,000 by December 4 . . . . As the party who first materially breaches a contract, [the Purchasers] are not permitted to then use other provisions of the contract as a shield against remedy, especially as [the Purchasers] have never satisfied the first condition of prompt payment.

26. Oral conversations without additional consideration . . . are not sufficient to alter material terms of a written contract. . . .

27. . . . The $92,300 [payment] from Covington does not constitute additional consideration because Covington was already obligated to make that payment.

Court of Appeals of Indiana | Memorandum Decision 19A-PL-1048 | December 17, 2019 Page 7 of 12 28. Finally, [the Purchasers] argue that they were ready to make the payment but the Sellers have frustrated his attempts to access funds. . . . The testimony on this matter showed, however, that Covington never explained to the Sellers where he was receiving his financing and that he would need them to permit “view-only” access to Studio 2000 accounts as a condition of receiving the loan amounts. . . . [The Purchasers’] late-stage push to blame Sellers for not being able to acquire financing well-after [sic] the original Closing date is unconvincing. . . .

30. The Court finds that the Closing for the Purchase Agreement never took place, and no contract between the [Purchasers] and the Sellers was ever[] fully executed. The Court finds in favor of [the Sellers] on [the Purchasers’] Count I: Breach of Contract and in favor of [the Sellers] on their Counterclaim III: Breach of Contract.

Appealed Order p. 7-17.3 The Purchasers now appeal.4

3 The trial court also found in favor of the Sellers on the Purchasers’ claims for conversion and tortious interference with a contractual relationship; and on the Sellers’ third-party complaint against QuarterSpot for rescission, though certain issues remained to be determined on that claim, so the judgment was not final. The trial court ruled against the Sellers on their fraud-related claims and on their claims under the Corrupt Business Influence Act. The trial court ruled in favor of the Sellers on Morgan-Dade’s and Fleming’s counterclaims for abuse of process. None of these portions of the order are at issue in this appeal. 4 The appealed order was initially not a final judgment because there were issues yet to be determined regarding the rescission claim. At the Sellers’ request, the trial court entered final judgment on the rescission claim on April 9, 2019. The Purchasers then filed a notice of appeal.

Court of Appeals of Indiana | Memorandum Decision 19A-PL-1048 | December 17, 2019 Page 8 of 12 Discussion and Decision [10] Here, the trial court’s judgment included findings and conclusions pursuant to

Indiana Trial Rule 52(A). We will not set aside the findings or judgment unless

clearly erroneous, and we give due regard to the trial court’s ability to assess the

credibility of witnesses. E.g., WindGate Props., LLC v. Sanders, 93 N.E.3d 809,

813 (Ind. Ct. App. 2018). When reviewing the judgment, we first consider

whether the evidence supports the factual findings and then consider whether

the findings support the judgment. Id. Although we defer substantially to

findings of fact, we do not do so to conclusions of law. Id. We also note that

the Purchasers are appealing from a negative judgment, which we may reverse

only if the judgment is contrary to law. RCM Phoenix Partners, LLC v. 2007 E.

Meadows, LP, 118 N.E.3d 756, 760 (Ind. Ct. App. 2019).

[11] The Purchasers argue that the trial court erroneously (1) found that the

Purchase Agreement was ambiguous, (2) determined the parties’ intent,

(3) concluded that the Purchase Agreement was not fully executed, and (4) in

the alternative, concluded that even if the contract was fully executed, the

Purchasers breached it and are not entitled to enforce it against the Sellers.

[12] We can cut quickly through most of these arguments. We will assume solely

for argument’s sake that the Purchase Agreement was fully executed and

unambiguous. By its plain terms, the transaction would be funded, including

payment of the $240,000 Down Payment, “on or before 5:00PM Eastern

Standard Time, Friday, December 4, 2015[.]” Appellants’ App. Vol. II p. 83.

Court of Appeals of Indiana | Memorandum Decision 19A-PL-1048 | December 17, 2019 Page 9 of 12 It is undisputed that this payment was not made by December 4, 2015. At that

point, the Purchasers had breached the contract. See Black’s Law Dictionary 7th

ed. 182 (1999) (defining “breach of contract” as a “[v]iolation of a contractual

obligation . . . by failing to perform one’s own promise”).

[13] The Purchasers spend much time in their brief arguing that their failure to make

a timely Down Payment does not constitute an “Event of Default” as defined

by the Purchase Agreement. Specifically, they note that they would have

committed an “Event of Default” with respect to the Down Payment only if the

Sellers had provided them written notice of their lack of compliance and they

did not make the payment within fifteen days of the notice. Appellants’ App.

Vol. II p. 87-88. Initially, we note that they did not need notice that they had

failed to make a timely payment, as they were more than aware of their own

conduct. Moreover, the fact that the Sellers did not give the Purchasers fifteen

days to cure the breach does not change the fact that the breach occurred to

begin with.

[14] The Purchasers insist that the Sellers committed at least two breaches of the

Purchase Agreement: first, by failing to give the Purchasers fifteen days to cure

their breach; and second, by terminating the contract, which was not a remedy

provided by the Purchase Agreement for an event of default. As noted by the

trial court, it is well established that when one party to a contract commits the

first material breach of that contract, it cannot seek to enforce the provisions of

the contract against the other party if that other party breaches the contract at a

later date. Coates v. Heat Wagons, Inc., 942 N.E.2d 905, 917 (Ind. Ct. App.

Court of Appeals of Indiana | Memorandum Decision 19A-PL-1048 | December 17, 2019 Page 10 of 12 2011). Because the Purchasers were clearly the first breaching party, the trial

court correctly concluded that they were not entitled to enforce the provisions

of the Purchase Agreement against the Sellers.

[15] The Purchasers also argue, essentially, that the trial court should have ordered

specific performance of the Purchase Agreement. The grant of specific

performance directs the performance of a contract according to, or substantially

in accordance with, the precise terms agreed upon. Kesler v. Marshall, 792

N.E.2d 893, 896 (Ind. Ct. App. 2003). Specific performance is an equitable

remedy, and the power of a court to compel specific performance is an

extraordinary power that is not available as a matter of right. Id. Generally,

our courts will not exercise equitable powers when an adequate remedy at law

exists. Id. at 897.

[16] Here, by ruling in favor of the Sellers, the trial court ensured that the parties

were put back in the respective positions they held before entering into the

Purchase Agreement.5 That is an adequate remedy at law. Moreover, we note

that because the Purchasers were the first breaching party, we would be hard

pressed to find that equity lies in their favor. Consequently, we find that the

trial court did not err by ordering rescission and declining to order specific

performance of the Purchase Agreement. See Van Bibber Homes Sales v. Marlow,

778 N.E.2d 852, 857-58 (Ind. Ct. App. 2002) (noting that rescission is a proper

5 At some point, the Sellers returned to the Purchasers the $92,730 partial payment they had made on December 7, 2015.

Court of Appeals of Indiana | Memorandum Decision 19A-PL-1048 | December 17, 2019 Page 11 of 12 remedy if a breach of the contract is a material one that goes to the heart of the

contract).6

[17] The judgment of the trial court is affirmed.

Riley, J., and Brown, J., concur.

6 We have little difficulty concluding that the purchasing party’s failure to make a timely down payment is a material breach that goes to the heart of the contract.

Court of Appeals of Indiana | Memorandum Decision 19A-PL-1048 | December 17, 2019 Page 12 of 12