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Greenwood Products, Inc. v. Greenwood Forest Products, Inc.

Court of Appeals of Oregon

July 2, 2014

GREENWOOD PRODUCTS, INC., an Oregon corporation; and JEWETT-CAMERON LUMBER CORP., an Oregon corporation, Plaintiffs-Respondents Cross-Appellants,
v.
GREENWOOD FOREST PRODUCTS, INC., an Oregon corporation; JIM DOVENBERG, an individual; and BILL LEFORS, an individual, Defendants-Appellants Cross-Respondents

Submitted on Remand July 30, 2012.

Multnomah County Circuit Court. 050302553. On remand from the Oregon Supreme Court, Greenwood Products v. Greenwood Forest Products, 351 Ore. 604, 273 P.3d 116 (2012) . Jerry B. Hodson, Judge.

Maureen Leonard and Ron D. Ferguson filed the briefs for appellants-cross-respondents.

Robert D. Newell, Kevin H. Kono, and Davis Wright Tremaine LLP filed the answering-cross-opening brief for respondents-cross-appellants. With them on the supplemental brief was Timothy R. Volpert.

Before Armstrong, Presiding Judge, and Haselton, Chief Judge, and Duncan, Judge.

OPINION

Page 663

[264 Or.App. 3] HASELTON, C. J.

This case is on remand from the Oregon Supreme Court, which reversed, in part, our prior decision and remanded the case to us for further proceedings concerning three assignments of error that we either had no occasion to address in light of our disposition or need to readdress in light of its decision.[1] Greenwood Products v. Greenwood Forest Products, 238 Or.App. 468, 242 P.3d 723 (2010) ( Greenwood I ), rev'd in part and rem'd, 351 Ore. 604, 273 P.3d 116 (2012) ( Greenwood II ). The dispositive issue on remand concerns the denial of defendants' motion for a new trial under ORCP 64 B(4).[2] For the reasons that follow, we conclude that defendants are entitled to a new trial on plaintiffs' breach of contract claim, based on " newly discovered" evidence. Accordingly, we reverse and remand in part on appeal and affirm on cross-appeal.

The Supreme Court has previously described the circumstances that gave rise to this case--as well as two other legal actions and a disciplinary proceeding--in Greenwood II and in its decision reprimanding plaintiffs' attorney for his conduct in litigating this case, In re Newell, 348 Ore. 396, 234 P.3d 967 (2010). We take the background facts from our decision in Greenwood I and the Supreme Court's decisions in Greenwood II and Newell, supplemented as necessary with the undisputed facts pertinent to the issue on remand.

Forest Products " was in the business of processing and selling industrial wood products" and " maintained a large inventory of such products at numerous distribution centers throughout the United States." Greenwood II, 351 Ore. at 606. In February 2002, Forest Products and Greenwood [264 Or.App. 4] entered into an asset purchase agreement (APA). As pertinent, the APA provided that, (1) by the closing date, Forest Products would dismiss most of its employees who would then be rehired by Greenwood; (2) Greenwood would purchase Forest Products' inventory in seven geographically determined units for cost plus a two percent premium over a two-year period; [3] and (3) until Greenwood's purchase of an inventory unit, Greenwood, for a fee, would provide Forest Products with, in the words of the APA, " all management and administrative services associated with purchasing, processing, and maintaining [Forest Products'] inventory."

As the Supreme Court recounted in Greenwood II,

" [a]fter closing on February 28, 2002, Greenwood took over Forest Products' offices and equipment. Most of Forest Products' employees and management all became employees of Greenwood, holding the same positions that they had occupied at Forest Products. Forest Products continued to exist side-by-side with Greenwood--with Forest Products responsible, at least on paper, for maintaining the inventory that Greenwood employees sold. What this meant in practice was that, in those 'units' that had not yet been purchased by Greenwood, Greenwood employees sold wood products to outside customers, purchasing inventory to cover each sale from Forest Products, at cost plus two percent. The purchases and sales were tracked automatically on two sets of books--as one witness described it, 'when a sales entry was made, it was made in one company and automatically appeared as a * * *

Page 664

purchase and a sale in the other company.' Although, as noted, Forest Products was responsible, during the transition, for replenishing, processing, and maintaining the supply of inventory that Greenwood employees would be selling, it was Greenwood employees who actually performed all of that work, under the 'management and administrative services' provision of the [APA].
" In fact, the parties interpreted the 'management and administrative services' provision as extending to the work performed at Forest Products' highest levels. After the closing, Forest Products retained only two employees-- [264 Or.App. 5] Dovenberg and LeFors; the remainder of the company's central staff went to work for Greenwood. Various key Greenwood employees, including Fahey, the head bookkeeper, and Pattillo, the vice president, spent part of their day attending to Forest Products' accounts and overseeing that company's operations. In practice, it was difficult to say which 'hat' a given employee was wearing at any given time. [4]
" After the February 28, 2002, closing, units of inventory were purchased and sold as the parties had envisioned for some 13 months, at which point the parties agreed to 'finish it off' in a single transaction. At that point, Greenwood issued two promissory notes, dated March 18, 2003, for the remaining inventory. A few months later, in June 2003, Greenwood issued another promissory note and paid some $100,000 in cash for 'an accumulation of payable for prior purchases of inventory that were due for payment.' The amounts of the notes and cash payment were based on inventory numbers provided by traders' assistants and other higher level 'accounting people' (including Fahey and Pattillo) who, at the time of the sale and purchase, were employed by Greenwood but who provided inventory-related services to Forest Products. At the time of the final payments and transfers, the transaction set out in the APA appeared to be essentially completed.
" In August 2003, Greenwood's books were audited by a certified public accountant, Schmidt. Schmidt found certain unusual entries in the books--an unexplained account with a balance of nearly $1.2 million and many entries that did not appear to be related to normal inventory activity. Schmidt suspected that there was a problem with the 'intercompany account,' i.e., the accounting of sales of inventory between Greenwood and Forest Products. On the theory that any inventory transactions by Greenwood also should be reflected in Forest Products' books, Schmidt asked for, and obtained, permission to review Forest Products' books. While comparing those books with Greenwood's books, Schmidt found hundreds of entries that did not match. Schmidt eventually decided that, to really understand what had happened with the inventory, he would have to [264 Or.App. 6] reconstruct both Greenwood's and Forest Products' books from scratch, using 'invoices and purchase orders and all the underlying documentation that would happen on a day-to-day basis in a business.' When Schmidt completed that work, the figures led him to the conclusion that Greenwood had paid Forest Products for $819,731.68 of inventory that it never had received.
" After Schmidt completed his work on Forest Products' books, Dovenberg approached him about some inconsistencies in Dovenberg's own personal accounts. Schmidt attempted to help Dovenberg sort out the problem. Ultimately, the two men determined that Fahey, the bookkeeper (who was employed by Greenwood but was providing inventory-related services to Forest Products) had embezzled at least $360,000 from Forest Products accounts between February and December of 2002."

351 Ore. at 609-11 (footnote omitted; omission in original).

Those circumstances gave rise to three legal actions--including this case. First, in 2004, Forest Products brought a conversion

Page 665

action against Fahey.[5] Newell, 348 Ore. at 399. Second, in March 2005, plaintiffs brought this action against defendants " asserting breach of contract and equitable claims for reformation or rescission of the promissory notes" and defendants asserted counterclaims, " including a claim based on plaintiffs' failure to pay the entire face value of their promissory notes to Forest Products." Greenwood II, 351 Ore. at 612. Third, in April 2005, after being contacted by Forest Products, the district attorney brought criminal charges for theft against Fahey, who hired attorney Andrew Coit to represent him. Newell, 348 Ore. at 399. As we will explain shortly, __ Or.App. at __ (slip op at 11-12), immediately after his sentencing following the trial in this case--that is, the civil action between plaintiffs and defendants--Fahey executed an affidavit that was the focus of defendants' new trial motion based on newly discovered evidence.

In January 2006, Fahey pleaded guilty to 10 counts of theft. Newell, 348 Ore. at 399. " As part of the plea agreement, Fahey agreed to cooperate with [Forest Products'] [264 Or.App. 7] efforts to locate missing assets, and the trial court delayed the sentencing hearing to give Fahey time to carry out his part of the plea agreement." Id. Fahey's sentencing was scheduled for May 2, 2006--approximately one week before trial was scheduled to begin in this case. On May 1, Coit " moved to continue Fahey's sentencing." Id. at 400.

Thereafter, plaintiffs' attorney, Robert Newell, learned about the request to set over Fahey's sentencing in the criminal action and that defendants had subpoenaed Fahey to testify in the trial in this case. Id. On Friday, May 5, Newell had a subpoena served on Fahey for a deposition that was scheduled to begin 14 hours later on Saturday morning at 9:00 a.m.[6] Id. at 400-01. Although Newell served defendants' attorney, Ron Ferguson, with notice of the deposition, he " did not attempt to notify Coit[, Fahey's criminal attorney,] that he had subpoenaed Fahey." [7] Id. at 401.

As a result, Newell and Ferguson were present the following morning, but Coit was not. Id. At the beginning of the deposition, Fahey made the following statement:

" For the record, I was served yesterday evening at 6:35 p.m. I have not had a chance to contact my counsel. As there is a pending criminal case on this in Washington County, [on] anything alluding to any of those areas I will be taking the Fifth Amendment." [8]

[264 Or.App. 8] During the deposition, Newell asked Fahey questions about his work at Forest Products, as well as questions about the criminal action, including questions " about the amount of money that Fahey had taken--an issue that was central both to [plaintiffs'] lawsuit against [defendants] and also to the state's criminal charges against Fahey." Id. at 403. In response to many questions, Fahey asserted his Fifth Amendment privilege. In addition, he did not respond to some questions because he thought that a

Page 666

protective order precluded him from answering.

Nevertheless, Fahey answered many of Newell's questions. In doing so, Fahey indicated that Greenwood may not have, in fact, paid for more inventory than it had actually received. That was so based on Fahey's " theory" concerning the activities of Pattillo, Greenwood's vice president and his supervisor, in manipulating inventory amounts reflected in Forest Products' computer system. According to Fahey, Pattillo " may have phantomly * * * purchased" inventory, placed it on Forest Products' books, and " then [had] taken [it] off the books prior to those locations being sold to [Greenwood]." Fahey stated that Pattillo had instructed him to remove inventory from Forest Products' books on several occasions and that he " always requested a note or something signed or initialed" from Pattillo before doing so. According to Fahey, he placed the documentation from Pattillo in a file with other miscellaneous documents at the end of each month.

Newell also asked Fahey about his prior discussions with Ferguson as well as Forest Products' attorneys in the conversion action.[9] With regard to his discussion with Ferguson, Fahey indicated that he did not recall talking about Pattillo but explained that his " attorney * * * was present at the time and our subject was incredibly limited to what we would talk about." With regard to his discussions with Forest Products' attorneys in the conversion action, Fahey said that he had not " really told [those attorneys] anything yet." Instead, Fahey explained:

" I suggested that they get copies of cancelled checks. I suggested that they go to certain vendors and locations and [264 Or.App. 9] get copies of any inventory records they might have. I mentioned that before[,] at the meeting in February [2006]. But up to this point in time[,] I can't give any specific information to them regarding anything."

On May 8, 2006--two days after Newell took Fahey's deposition--trial in this case began. Before Fahey was scheduled to be called as a witness, Coit appeared on his behalf and filed a motion to seal the deposition transcript. There is no indication from the record on appeal that defendants objected to Coit's motion. The hearing that followed was not transcribed for this proceeding. Ultimately, the trial court granted Coit's motion and sealed the deposition transcript; however, the court did not preclude Fahey from testifying at trial.

Thereafter, defendants called Fahey as a witness outside the presence of the jury, and defendants' attorney, Ferguson, asked the following question: " Was there a time within [February 25, 2002 until December 31, 2002,] when you were instructed to remove inventory off the books of Forest Products?" At that point, Coit interjected, " Judge, I'd advise my client to invoke the Fifth Amendment on that question."

A detailed account of the discussion that ensued between Ferguson, Coit, and the trial court would not benefit the bench, bar, or public. It is sufficient to note that defendants' position was that the Fifth Amendment privilege was unavailable to Fahey, because the statute of limitations had run as to the conduct referenced in the question. Coit, however, disagreed that the privilege was necessarily unavailable, particularly in that Fahey had not yet been sentenced for the crimes to which he had pleaded guilty.[10]

[264 Or.App. 10] Ultimately, the trial court indicated, " I'm not going to make any findings with regard

Page 667

to statutes of limitation[.]" Ferguson, defendants' attorney, sought clarification after which the following exchange occurred:

" THE COURT: So Mr. Coit's going to advise his client to invoke the Fifth in areas where he's uncomfortable because he doesn't know ...

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