Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-casd-3_15-cv-01852/USCOURTS-casd-3_15-cv-01852-3/pdf.json

Nature of Suit Code: 190
Nature of Suit: Other Contract Actions
Cause of Action: 

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UNITED STATES DISTRICT COURT 

SOUTHERN DISTRICT OF CALIFORNIA 

LEADING MANUFACTURING 

SOLUTIONS, LP, 

Plaintiff,

v. 

HITCO, LTD., et al., 

Defendants.

Case No.: 15cv1852-LAB (BGS) 

FINDINGS AND JUDGMENT 

FOLLOWING BENCH TRIAL 

 

 With the parties’ consent, this case was tried to the Court without a jury. The 

Court made findings, ruled on motions, and announced its verdict from the bench 

on the record. At the same time, the Court announced its intent to issue a 

supplemental follow-on written order. This Order is intended as a final and 

definitive summary and memorialization of the Court’s determinations and rulings 

at trial, as well as a supplement to them. 

 The Court made several rulings leading up to trial, and these rulings helped 

shape the issues for trial. In particular, the pretrial order set forth factual and legal 

issues to be tried. Also, before trial, the parties stipulated to a number of facts. 

Other facts, while not stipulated to, were undisputed at trial and implicitly accepted 

by the Court. In particular, the Court accepted the parties’ stipulation that Hitco, 

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Ltd.’s and Hitco, Inc.’s corporate status (including the alter ego theory) would be 

governed by New York law, while the claims and affirmative defenses would be 

governed by California law. 

 This Order includes factual findings together with legal conclusions. The 

Court’s factual findings are based on the evidence presented at trial, including 

admitted exhibits, as well as the parties’ stipulations. The Court also had the 

opportunity to observe the witnesses’ demeanor and its factual findings are, to 

some extent, based on how witnesses testified. Finally, these findings are also 

based on reasonable factual inferences the Court has drawn from the evidence. 

Some exhibits were not admitted, and the Court has not relied on those. That said, 

many of them were referred to by witnesses either directly or indirectly, and the 

Court relies, in part, on that testimony. 

Motions at the Close of Plaintiff’s Evidence

After Plaintiff Leading Manufacturing Solutions (“LMS”) rested, Defendants 

Hitco, Ltd.; Hitco, Inc.; and Theodore Smith moved under Fed. R. Civ. P. 52(c) for 

judgment in their favor on all issues. The Court granted that motion in part. 

 The Court found for Defendants as to the Sani-Lock claims. Specifically, the 

Court found that the parties had not entered into a written or oral contract involving 

LMS’s manufacture of this device. In particular, many of the central terms were 

never agreed on. The Court determined, however, that representations made in 

the course of negotiations concerning the Sani-Lock could and would be 

considered in support of LMS’s fraud claim. 

 The Court also found for Defendants as to LMS’s claim based on a ten-year 

exclusive manufacturing agreement for the Smart Clamp device. The purported 

contract, as LMS conceives it, would have bound Defendants and the company 

known as Rubber Fab to order the same number of Smart Clamps over the next 

ten years. While there was an exclusivity agreement between Hitco, Ltd. and 

Rubber Fab (Ex. 143), it did not contemplate orders of a particular number of units 

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over time. From a commercial standpoint, such a standing order would have made 

little sense. If demand increased, Defendants and Rubber Fab would have been 

unable to meet it. And if demand fell off because of unforeseen factors (which in 

fact happened), Defendants and Rubber Fab would have committed themselves 

to a recurring order of the unwanted and unsellable products for the next ten years. 

It’s not plausible that Defendants would have agreed to this. Instead, it’s much 

more plausible that they would have agreed to a “requirements” contract, though 

there was no evidence negotiations got that far. 

Furthermore, even supposing there were a ten-year contract, damages 

would be speculative. The product orders and profit margins that LMS based its 

damages calculation on depended on sales projections, and predictions about 

costs far in the future. The evidence made clear that costs could and did rise, as 

Defendants requested adjustments to the Smart Clamp to improve it and correct 

what customers had identified as defects. 

The Court denied the motion as to LMS’s alter ego theory and Defendants’ 

suggestion that there had been a novation as a result of which Defendants were 

no longer in any contractual relationship with LMS. 

Findings and Verdict

 After both parties had rested, the Court deliberated, then announced its 

findings and verdict as to all remaining claims and issues. Most of the facts 

underlying the claims were undisputed; the main dispute was the proper 

interpretation of those facts. 

Contract Formation

 The Court finds that a contract for 100,000 Smart Clamps was formed 

between LMS and Hitco, Ltd., and that this contract was formed and in place as of 

August, of 2011. The key terms were adequately set forth in writing including 

purchase orders, correspondence (such as Exhibit 259), and other documents. 

/ / / 

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The terms were clear and definite. One order contained pricing errors, but these 

were explained and all parties knew what was actually intended. 

The Court rejected Defendants’ argument that a second purchase order from 

Rubber Fab was either a novation or a replacement contract for the original one. 

Smith may have intended this, but there was no meeting of the minds between the 

parties. In particular, Glenn Davis, acting for LMS, did not understand the second 

purchase order this way, and the Court found Mr. Davis’s testimony credible on 

this point. At most, there was a modification of the agreement, although this was 

not at issue. 

There is evidence of an informal licensing agreement under which Hitco, Ltd. 

would receive a fee for each Smart Clamp sold. Defendants suggest this meant 

Hitco, Ltd. was going to “drop out” of the agreement, leaving LMS and Rubber Fab 

as the parties. But there was no evidence LMS agreed to let Hitco, Ltd. “drop out,” 

and in any event the parties treated Hitco, Ltd. as a party and it continued to 

participate. Among other things, this was necessary and practical because Hitco, 

Ltd. held the patent for the Smart Clamp, making its continued active partnership 

necessary. 

The evidence proved that Hitco, Ltd. materially breached the contract by 

refusing to pay for or take delivery of Smart Clamps after the initial production run. 

LMS was paid for the units Hitco, Ltd. and Rubber Fab received, but not for the 

rest of the units in the purchase order. LMS has a number of units still in storage. 

There was no adequate excuse for Hitco, Ltd.’s failure. Smith suggested that the 

Smart Clamps LMS had manufactured were defective, but the evidence 

established the opposite -- LMS manufactured them as Hitco, Ltd. had requested, 

using Hitco’s design and specifications. 

As a result of using materials called for in the specifications and problems 

with the design, the product could not be cleaned with chlorine, and there were a 

/ / / 

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few other problems making it unacceptable to some of the customer base.1 The 

Court finds that the problems were attributable to Hitco, Ltd. and not, as 

Defendants argued, LMS’s defective manufacture. The Court therefore finds that 

LMS has established its breach of contract claim, as to Hitco, Ltd. LMS is entitled 

to be paid for the Smart Clamps it produced pursuant to the contract, and also to 

be compensated for its lost profits on the remainder of the 100,000 Smart Clamps 

Hitco, Ltd. agreed to order. 

Alter Ego

LMS, motivated by a desire to collect on any judgment against Hitco, Ltd., 

has claimed that Hitco, Ltd. and Hitco, Inc. operated as alter egos of Smith and of 

each other. Neither corporation has significant assets. The parties stipulated that, 

since 2006, Hitco, Ltd. has not made a profit, and Hitco, Inc., since its founding, 

has never been profitable. The parties also stipulated that both corporations have 

been unable to pay their own operating expenses and have survived only because 

of frequent cash infusions from Smith. During the course of the disputes that gave 

rise to this litigation, and during the litigation itself, Hitco, Ltd. issued a promissory 

note to Smith, and in payment of that note, transferred the Smart Clamp patent to 

Smith. If LMS’s only recourse is against Hitco, Ltd., Hitco., Ltd.’s debt will go 

unpaid. 

/ / / 

                                               

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 These problems, it turns out, could be fixed fairly easily. The only remaining 

problem is that the use of stainless steel means the Smart Clamp cannot be 

cleaned with chlorine, which is a common practice in the dairy industry. Testimony 

showed that Rubber Fab is eager to buy Smart Clamps, if it has a reliable supply, 

and that the main problem with selling the product is the current disruption in the 

supply caused by Hitco, Ltd.’s dispute with LMS. Although it is not the subject of 

this lawsuit, it appears both Rubber Fab and LMS stand ready to perform under 

the contract, and that the Smart Clamp could be profitably manufactured and sold 

if Hitco, Ltd. and Smith agreed. 

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These facts, standing alone, do not establish alter ego. Businessmen and 

businesswomen are permitted to incorporate in order to escape personal liability. 

Walkovszky v. Carlton, 18 N.Y.2d 414, 417 (N.Y. App. 1966). And the mere fact 

that a plaintiff will otherwise remain unpaid does not constitute the kind of injustice 

that warrants a finding of alter ego. Additionally, the Court recognizes that there 

is a presumption against finding alter ego or piercing the corporate veil. William 

Passalacqua Builders, Inc. v. Resnick Developers South, Inc., 933 F.2d 131, 139 

(2d Cir. 1991). 

That said, a court may pierce the corporate veil to prevent fraud or achieve 

equity. Cortlandt St. Recovery Corp. v. Bonderman, 31 N.Y.3d 30, 47 (N.Y. App. 

2018). New York law allows a finding of alter ego only when both of these 

conditions are met: (1) The owner completely dominated the corporation and did 

not treat it as a separate business entity and (2) the owner used his complete 

control of the corporation to commit a fraud or a dishonest or an unjust act against 

the plaintiff. Id. The factors to be considered include (1) the absence of corporate 

formalities; (2) inadequate capitalization of the corporation; (3) personal use of 

corporate funds; (4) commingling of personal funds; (5) overlap in officers, 

directors and personnel; and (5) using common office space, phone numbers and 

addresses with other commonly owned corporate entities. William Passalacqua 

Builders, 933 F.2d at 139. All factors are to be considered, and no one factor is 

dispositive. Tap Holdings, LLC v. Orix Finance Corp., 970 N.Y.S. 2d 178, 183 (N.Y. 

Supreme Ct. 2013). 

Other facts that have been considered and may be relevant here: (1) having 

no regular meetings, (2) keeping no corporate records or minutes, (3) having no 

regular elections of directors and officers, (4) having no assets, (5) conducting no 

business, (6) having no employees, (7) not having its own phone line, and (8) 

having no income other than funds periodically contributed by defendants to meet 

periodic obligations. Ventresca Realty Corp. v. Houlihan, 838 N.Y.S. 2d 609, 610–

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11 (N.Y. Sup. Ct., App. Div., 2007). And all activity designed to drain away a 

corporation’s assets can be considered. See Grigsby v. Francabandiero, 58 N.Y.S. 

3d 835, 837 (N.Y. Supreme Ct. 2017) (taking “actions calculated to make [an entity] 

judgment-proof by undercapitalizing [it], and dissolving and thereafter diverting the 

assets . . . to a new entity” justified piercing the veil). The number of factors in play 

isn’t dispositive. In Rotella v. Derner, for example, that an undercapitalized 

corporation was unable to pay a judgment debt and there was “disregard of 

corporate formalities and personal use of corporate funds” amounted to sufficient 

evidence to pierce the corporate veil. 723 N.Y.S.2d 801, 802 (N.Y. Sup. Ct., 2001). 

The parties stipulated that Hitco, Ltd. was formed in 1983, and was dissolved 

in 1988. On August 19, 2011, while Smith (for Hitco, Ltd.) was negotiating with 

Davis (for LMS), Smith’s lawyer explicitly advised him that Hitco, Ltd. had no 

existence as a corporation, and that any actions he took in its name would be his 

own. (See Ex. 55.) Although Smith testified that he expected Hitco, Ltd. could be 

reinstated, Hitco, Ltd.’s dissolution wasn’t in fact annulled until the following year. 

Under New York law, the general rule is that contracts entered during its period of 

dissolution were validated at that time. See Nigro v. Dwyer, 438 F. Supp. 2d 229 

(S.D. N.Y. 2006). But there is an exception where a defendant acted fraudulently 

or in bad faith. Id. at 236–37. There was no evidence Smith acted fraudulently or

in bad faith by allowing Hitco, Ltd.’s corporate status to lapse, and then having it 

reinstated later. And there is no reason to treat Hitco, Ltd.’s reinstatement or its 

validation of the contract as ineffective. 

At the same time, however, Smith was at the very least very casual about 

corporate formalities, and apparently untroubled by the possibility that he might be 

deemed a personal party to the contract. Smith’s counsel warned him that, at the 

time, Hitco, Ltd. was “probably functionally only a Schedule C business activity 

operated by you personally, and that’s a problem both taxwise, and ownership wise 

for the patents.” (Ex. 55.) Had Smith’s efforts at having Hitco, Ltd.’s corporate 

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status reinstated after so many years failed for some reason, he assumed the risk 

of being personally liable on the contract. There was also the risk of problems with 

ownership of the Smart Clamp patent, which Hitco, Ltd. had to own in order to 

make good on its contract with LMS and Rubber Fab. Smith was apparently willing 

to accept these risks; at the time, he did not disclose Hitco, Ltd.’s dissolution to 

LMS, and did not make the contract contingent on Hitco, Ltd.’s successful 

corporate reinstatement. 

Although Smith testified confidently regarding Hitco, Ltd.’s status, he had the 

benefit of hindsight. But at the time he entered into the contract with LMS, he had 

less reason to be sanguine. His attorney’s message, after all, expressed 

uncertainty, concern, and urgency: “So you still need to get the corporation back 

into good standing with the Division of Corporation folks, somehow. Did you not 

talk with the corporate lawyer about this problem?” (Ex. 55.) A later message from 

Walter Morley (who was involved in the corporations’ financial management) 

similarly warned Smith that Morley had discussed Hitco’s status further with the 

attorney, and “if the corporation was reinstated within two to three weeks that 

would be fine.” (Id.) Yet Smith did not act to reinstate Hitco, Ltd. until five months 

later, on January 30, 2012. 

Corporate documents for the two corporations were at best thin. Defendants’ 

own expert testified that when looking at the books and records she found only 

one set of minutes. She testified that, other than those, she saw no recorded 

minutes for Hitco, Ltd. or Hitco, Inc. or any evidence at all of director or shareholder 

meetings. Carol Carrieri, an employee of the two corporations, testified that she 

thought there was no need for corporate minutes because she and Smith, the two 

shareholders of Hitco, Ltd., talked about the business daily. Defendants’ expert 

testified that small, closely-held corporations commonly operate this way, though 

she did not testify whether it was proper or what the consequences were. 

/ / / 

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Part of the problem with this is that, even if Smith’s and Carrieri’s regular 

discussions are deemed shareholder or director meetings, the record suggests 

other directors of Hitco, Ltd. had no notice and didn’t participate. Furthermore, 

Carrieri was not a shareholder of Hitco, Inc.; the other shareholder of that company 

besides Smith was George Carmichael. There was no mention or record of other 

corporate formalities, such as notice and annual meeting requirements, having 

ever been observed. 

Based on Smith’s and Carrieri’s testimony, the Court infers that, not only 

were no other records of director and annual shareholder meetings ever kept, no 

other meetings were held. Even important decisions such as the issuance of 

substantial promissory notes, or authorization of the transfer of both patents from 

the two corporations to Smith in payment of those notes were never presented to 

the full board or formally memorialized. In other words, Hitco, Ltd. and Hitco, Inc. 

appear to have been operated essentially by Smith, in occasional consultation with 

Carrieri. 

 Corporate finances and resources were not kept separate vis-a-vis Smith 

and the corporations. The two corporations shared the same office, equipment, 

and employees. The testimony suggested that the employees worked for both 

corporations simultaneously. Hitco, Ltd. paid all salaries and expenses, however, 

without receiving any corresponding benefit from Hitco, Inc. 

Besides making substantial ad hoc loans to the corporations, Smith 

personally guaranteed a Bank of America line of credit for Hitco, Ltd. (Ex. 185.) 

These activities were apparently carried out without any kind of written agreement 

or other formalized understanding between Smith and Hitco, Ltd. 

The evidence also established that Smith ran a significant number of his 

personal expenses through the corporations. For one or two years, the 

corporations made his monthly car payments for him, at $1676 per month. They 

also paid for maid service for his home, for a phone line in his Florida vacation 

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home, and some of his personal travel expenses. And Carrieri, while in the office, 

estimated that she spent 40% of her time handling Smith’s personal finances. She 

testified that she suggested this so that Smith could spend more time focusing on 

the corporations’ business. Yet there was no evidence that either corporation was 

particularly busy. These were small, closely-held corporations. During the years at 

issue in this case, the Smart Clamp deal with LMS was the only real business 

either entity engaged in. 

Defendants’ expert characterized these benefits as perquisites, offered in 

lieu of salary. Defendants also argued that these occasional benefits represented 

only a small percentage of the corporations’ overall budget. The Court disagrees 

with these characterizations. These benefits, though not a dominant part of the 

corporations’ budget, were substantial. But the freewheeling manner in which they 

were conferred is more significant still. 

No one who testified for Defendants seemed aware of any regular policy 

governing which expenses were to be paid, how often or for how long, and what 

limits there might be. For example, there was no explanation why the corporations 

started making Smith’s Mercedes payments when they did, or why they stopped 

when they did. Smith seemed to have discretion to charge his personal travel to 

the corporations. The very general explanation that some of the expenses were 

business-related was not satisfactory. Rather, all these expenses appear to have 

been paid on an ad hoc, sporadic, and casual basis, without much thought about 

how helpful they would be to the corporations’ business enterprises. This suggests 

they were not the result of any genuine arm’s-length arrangement between Smith 

and the corporations. Rather, it appears Smith put money into the corporations 

whenever they ran short, and had them pay his personal expenses when he 

determined it was convenient. This either amounts to actual commingling of assets 

or the functional equivalent. 

/ / / 

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 Because the corporations were S-corporations, Smith could use their losses 

to offset his personal income. There was no direct evidence that he did claim the 

tax deduction, but he completed the paperwork to enable him to do this, suggesting 

that he probably intended to. Under the circumstances, there was no reason why 

he would not have taken advantage of this offset. Being able to use the 

corporations in this way was an advantage to him, but not to the corporations. In 

other words, the evidence suggests he manipulated the corporations for his own 

tax advantage. Smith’s management decisions seem to have been motivated to a 

significant extent by the desire to personally benefit without bestowing any 

corresponding benefit on the corporations. 

Having considered all the factors, the Court finds that Smith completely 

dominated both corporations, and that they also functioned as each other’s alter 

egos. By itself, “complete domination” does not justify application of the alter ego 

doctrine; the arrangement must have been used to commit fraud or another unjust 

act against the plaintiff. Cortlandt St. Recovery Corp., 31 N.Y.3d at 47. But the 

“injustice” prong of the test is met too. 

One of the effects of Smith’s payment arrangements was that he could 

decide which creditors would be paid. For favored expenses, such as payroll, 

ordinary costs of operating the businesses, or his own personal expenses, he 

wrote personal checks to the corporations and those bills were paid. He never 

asked for a promissory note and none was issued until this litigation was underway. 

Several of the witnesses differed about whether the payments were intended to be 

loans or paid-in capital. But after Smith and the corporations were sued, he 

arranged for the corporations to issue promissory notes in his favor. (Ex. 80, 81.) 

While the notes could have accurately reflected the loans he made to the 

corporations, no records show what consideration supported those notes. Instead, 

they include just a bare recital that unspecified valuable consideration was given. 

/ / / 

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Smith also had the power, which he exercised, to withhold contributions that would 

have been needed to fund payments to LMS. 

During this litigation, Smith also arranged for the two patents to be 

transferred to him, in payment of promissory notes the corporations issued to him 

during this litigation. Smith testified he did not remember executing on the notes 

to get the patents. Carrieri testified that she consented to the transfer, because 

she thought retiring the promissory note would benefit Hitco, Ltd. The Court 

accepts this as an explanation of what she believed, but there is no convincing 

evidence Smith also believed this. Also, there is no record whether George 

Carmichael consented to transfer of the Sani-Lock patent from Hitco, Inc. to Smith. 

Even assuming all the shareholders consented to the transfer, there was no 

evidence the patents were ever valued by a qualified appraiser, or for that matter 

by anyone. Furthermore, transferring the patents effectively ended the 

corporations’ potential to stay in business. As new owner of the patents, Smith has 

the power to license them. Transferring the patents meant that the corporations 

have lost that power, and have nothing to offer Smith to get it back. And, without 

Smith’s consent, Hitco, Ltd. became permanently unable to honor its obligations 

under the existing contract. This transaction appears to have been in Smith’s 

interest far more than either of the corporations’. 

As characterized by all the witnesses including Smith himself, Smith’s 

decisions and actions, when acting on behalf of the corporations appeared to be 

motivated by what would serve his own interests, rather than theirs. In other words, 

he seemed to regard the corporations as extensions of himself. For example, he 

explained decisions in terms of his own personal motivations. In the fall of 2011, 

he explained, he decided to try to change the terms of the contract so that Rubber 

Fab would take on more responsibility. He did this, he said, because “I chickened 

out” and wanted to avoid the possibility of being held “personally responsible” on 

the purchase order in case something went wrong. His testimony strongly 

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suggested that he did not approach contract negotiations or other business 

dealings in terms of what would benefit Hitco, Ltd., the ostensible party to the 

contract, or in terms of what the board of directors or shareholders thought. 

Both corporations were also thinly capitalized and, without Smith’s regular 

loans, they would be insolvent. They had poor credit and few options for raising 

capital. One of Defendants’ theories, for instance, was that LMS was negligent in 

failing to pull the corporations’ credit reports; had LMS done so, they argued, LMS 

would have seen just how non-creditworthy they were. Smith suggested that they 

could have sold stock, but under the circumstances it seems unlikely they could 

have raised much capital, or that there were any potential buyers. 

Defendants also argued that capitalization should be measured as of the 

incorporation date. In the case of Hitco, Ltd., it was unclear whether that would 

mean the founding date or the reinstatement date. But under New York law, the 

answer does not appear to matter very much. A corporation can be 

undercapitalized from the outset, or can have its assets diverted later, rendering it 

judgment-proof. Regardless of the timing, the fact that a corporation has been 

unfairly rendered judgment-proof seems to be enough. See Grigsby, 58 N.Y.S. 3d 

at 837. 

Here, Smith has arranged for both corporations’ assets to be transferred to 

himself in payment for promissory notes he caused to be issued, leaving nothing 

for LMS to collect against. Had he left the patents in the corporation, LMS and 

Smith might both have laid claim to them. But by removing them and replacing 

them with cancelled debt, he has effectively diverted the corporations’ assets, 

making them judgment-proof and benefitting himself at the expense of LMS. Smith 

also operated Hitco, Ltd. in such a way as to force LMS to unwittingly bear the risk 

of loss if it breached. The Court finds that this injustice warrants application of the 

alter ego doctrine. 

/ / / 

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To the extent Hitco, Ltd. is liable, both Smith and Hitco, Inc. are also liable 

as its alter egos. 

Fraud

LMS’s theory is that Smith and, through him, the corporations, misstated 

material facts and concealed other material facts in order to induce it to enter into 

the contract, which Smith and the corporations never intended to fulfill. Specifically, 

LMS presented evidence suggesting that Smith attempted to create the impression 

that the corporations were robust and busy, when he knew they were thinlycapitalized and almost inactive. LMS also pointed to meetings between its 

principals and Smith at an exclusive club in Manhattan. It also pointed to 

misrepresentations on Hitco, Ltd.’s website regarding the corporation’s activity, 

assets, offices, and reach. And it pointed out that neither Smith nor any other 

representative of the corporations revealed that they were undercapitalized and 

could not have fulfilled the terms of the contract. 

 Smith’s portrayal of himself as financially successful was, by all accounts, 

true; he did have a lot of personal wealth. There was no evidence he ever claimed 

to have made a lot of money through Hitco, Ltd. or Hitco, Inc., or that either of the 

corporations was wealthy. While LMS pointed to Davis’ meeting with Smith at the 

exclusive Manhattan club, that meeting occurred after the contract was formed. 

 Smith conceded that Hitco, Ltd.’s website (see Ex. 40, 41, 43) included some 

false or inflated information about the corporation’s activities, connections, and 

global reach. For example, the website inaccurately claimed the corporation had 

offices and manufacturing operations in places in the U.S. and overseas where it 

didn’t, had more employees than it actually did, and was far more active than it 

actually was. LMS argued that this was held out to the public apparently in a bid 

to create a more favorable image of Hitco, Ltd. as a company than was warranted. 

 On the other hand, witnesses for Defendants characterized the two 

corporations as brokers, which did not need a great deal of capitalization. 

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According to the witnesses, the corporations (or Smith, acting for them) engaged 

in arbitrage, matching up manufacturers with buyers. For this reason, they argued, 

the corporations’ lack of substantial assets was not material. The flaw in this 

reasoning is that neither corporation was merely a broker. Rather, they were both 

patent holders, whose participation in the deal was necessary. Furthermore, when 

problems with design and specifications arose, as happened here, they had to be 

prepared to absorb the costs. In other words, they had to bear the risk that the 

deal would go somewhat awry, and that what their manufacturer partner (LMS) 

made and shipped would not be acceptable to their buyer (Rubber Fab) for 

reasons that neither of those two could be blamed for. In that event, Hitco, Ltd. 

would have to be prepared to absorb some costs to make things right. Defendants 

failed to account for this. The misrepresentations on the website were material as 

to the capacity of Hitco, Ltd. to deal with this risk. 

 That being said, the only person who steered Davis to the website was John 

Morton, whose honesty neither side questioned. When Morton testified, the Court 

had an opportunity to observe his demeanor and found him credible and fair. The 

Court does not believe he encouraged Davis to look at Hitco, Ltd.’s website in order 

to deceive Davis. It may have incidentally happened that Davis was misled, but the 

evidence didn’t prove and the Court does not believe this was Morton’s intent, nor 

that Smith commissioned this action. 

Furthermore, the misrepresentations on the website do not appear to have 

resulted in losses to LMS. Hitco, Ltd. breached the contract, apparently because 

Smith incorrectly or disingenuously blamed LMS for problems with the Smart 

Clamp. Had Hitco, Ltd. recognized and been willing to accept responsibility for its 

own errors, the deal likely would have continued. The evidence suggested that if 

Hitco, Ltd. had been willing to foot the bill for about $30,000 in “fixes” for the Smart 

Clamps, it would not have breached. The breach is attributable to Smith’s decision 

/ / / 

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not to contribute money to Hitco, Ltd. and to direct Hitco, Ltd. not to pay or accept 

delivery. But there is no reason to believe that was the intention from the start. 

 The evidence showed that, from the beginning, Defendants intended the 

deal to be carried out, for LMS to manufacture the Smart Clamps for Rubber Fab 

to buy them, and for Hitco, Ltd. to pay LMS out of the proceeds. Defendants stood 

to gain nothing by inducing LMS to enter into a contract which they would then 

breach. In fact, the breach appears to have hurt the corporations. The motive for 

breaching, the design and specification problems, was unknown at the start. 

 Not every injustice rises to the level of fraud. Likewise, not every breach of 

contract is fraud, and not all misrepresentations or concealment are fraud either. 

The Court agrees Defendants committed an injustice and made some 

misrepresentations, but finds that the actions do not rise to the level of fraud. 

Affirmative Defenses

 Defendants asserted statute of limitations and statute of frauds defenses, 

which are inapplicable to the surviving claim. As discussed above, LMS is suing 

on a written contract, and filed this lawsuit within the statutory period after the 

breach. 

Defendants’ defense of failure to mitigate was not supported by the evidence. 

Although Defendants suggested LMS should have sold the Smart Clamps it is 

holding in inventory, it could not legally have done so. The Smart Clamp is a 

patented device, and LMS can only sell it to the patent holder, or to an authorized 

buyer, such as Rubber Fab. LMS could not sell them on the open market. LMS’s 

holding the Smart Clamps in storage amounts to reasonable mitigation. They 

remain useful, and Rubber Fab apparently stands ready to buy them. They can be 

turned over to Defendants or sold at Defendants’ direction. LMS also mitigated 

damages by not continuing to manufacture Smart Clamps after it was clear they 

would not be accepted or paid for. 

/ / / 

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Damages

 LMS’s punitive damages claim depended on its fraud claim. Because fraud 

was not established and there was no other reason to award punitive damages, 

the Court declines to award them. For similar reasons, LMS is not entitled to an 

award of attorney’s fees. 

 The Court does, however, find that compensatory damages should be 

awarded. LMS manufactured some Smart Clamps for which it was never paid. It 

is also entitled to expectation damages in the form of lost profits on Smart Clamps 

it contracted to manufacture, which were never made because Defendants 

breached. LMS is also entitled to prejudgment interest at the statutory rate, which 

the parties agreed is 10%. 

The Court’s damages calculations are based largely on Exhibit 196 and the 

attached schedules, which the Court finds to be accurate. The Court announced 

its damages calculations on the record, and invited the parties to submit letter 

briefs if they believed the Court had made an error in calculating them. Neither 

party has done so. 

The Court awards $344,899 for the inventory never paid for, plus 10% 

interest amounting to $165,344, for a total of $510,243. 

The Court accepts the profit valuation of 27%, and awards $516,811 to 

account for lost profits on the 77,155 units never manufactured. Interest comes to 

$208,792. 

Conclusion and Order

 The Court finds that Smith; Hitco, Ltd.; and Hitco, Inc. were all each other’s 

alter egos and that Defendants are liable jointly and severally to LMS on the breach 

of contract claim. In total, the Court awards $1,235,846.00 in damages and interest 

to LMS against all Defendants. The Court finds for Defendants on all other claims. 

As explained during the announcement of the verdict and judgment, the 

Court is willing to amend the judgment to award additional interest through the end 

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of trial, i.e., August 16. But LMS must within ten court days submit a letter brief 

showing how this is to be calculated, and Defendants may within three court days 

after that file any objection. Alternatively, the parties can settle this amongst 

themselves. 

Once the entire award is paid, Smith and/or Hitco, Ltd. may take delivery of 

the unclaimed inventory. 

The existing injunction, requiring Smith to hold the patents and not transfer 

or encumber them, remains in place until Defendants pay the entire judgment, or 

until Smith is released from his obligation by this Court or another court. 

The Clerk is directed to enter judgment for Plaintiff LMS on the breach of 

contract claim only, against all three Defendants. 

 

IT IS SO ORDERED. 

Dated: August 31, 2018 

 Hon. Larry Alan Burns 

United States District Judge 

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