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DCV Holdings3/24/2005
31, 1996 audited financial statements of DuCoa had a TMA rebate receivable from Du Pont in the amount of $506,198 (based on a December 17, 1996 letter from Du Pont). This receivable was established at the rate of $0.035 per point on total TMA purchases of 14,462,800 pounds on total TMA purchases of 14,462,800 pounds by DuCoa in 1996. TMA is a major raw material for producing choline chloride. Historically, rebates and/or credits were provided to DuCoa based on Du Pont's approval. In March 1997, after further negotiations with Du Pont on TMA price, it was determined that Du Pont would not be remitting the rebate to DuCoa.
DuCoa has amortized $148,000 of these rebates and miscellaneous adjustments through June 30, 1997 with the balance of $416,000 of these rebates to be amortized. If these rebates had not been booked in 1996, incentive compensation would have been reduced by $404,000 and earnings by $160,000 by DuCoa. See attached schedule.
Despite the information contained in Halter's July 23 fax to Sikorski and reiterated in the Disclosure Schedule to the Purchase Agreement, Plaintiff argues that Defendants omitted two material facts in conveying information about the TMA rebate to the buyers. Plaintiff asserts first that Halter did not explicitly state that the rebate was "bogus." Plaintiff also asserts that Halter failed to tell Winward that the exact rebate amount had not been determined by 1996 year-end.
Defendants acknowledge that there was no authentic TMA rebate for 1996. They also concede that DuCoa management booked a 1996 rebate and used the rebate letter to obtain unearned bonuses for 1996. However, Defendants argue that the evidence shows that Halter, Stejskal and Gundersen believed the rebate letter to be genuine and that the only material facts were that Leddy, the Du Pont TMA business manager, had written a letter promising a TMA rebate in December 1996 and that Du Pont, after further negotiations, had refused to remit the rebate in March 1997. The question before the Court is whether Defendants' disclosures to the Buyers regarding the rebate were so inadequate as to constitute fraud.
In order to prevail on a claim of common law fraud claim, a plaintiff must prove the following elements:
1. A false representation, usually one of fact, made by the defendant; or omission of a fact of which defendant had to duty to disclose;
2. The defendant's knowledge or belief that the representation was false, or was made with reckless indifference to the truth;
3. An intent to induce the plaintiff to act or to refrain from acting;
4. The plaintiff's action or inaction taken in justifiable reliance upon the representation; and
5. Damage to the plaintiff as a result of such reliance. Plaintiff argues that Halter and James failed to state that the rebate was "bogus," despite a duty to do so. However, Plaintiff has not produced or identified any evidence to show that Halter and James were told that the rebate extended by the Du Pont TMA business manager Leddy was not genuine. The Buyers knew exactly what Halter and James knew -- that the booking of the unpaid rebate in 1996 constituted a GAAP violation. The buyers' knowledge affected the deal to the tune of $4 million off the purchase price. Both Halter's July 23 fax and the language of the Disclosure Statement clearly acknowledged that DuCoa used the rebate letter to obtain unearned executive bonuses and to inflate 1996 earnings. Even without using a such a colorful term as "bogus," the information conveyed the material realities to the buyers. When faced with these facts, Winward made an informed decision not to conduct a second audit of the books bu
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