MALIK v. FALCON HOLDINGS, LLC (March 14, 2012)

Falcon Holdings owned and operated over 100 Church’s Chicken restaurants. Aslam Khan was a 40% owner of Falcon — Sentinel Capitol Partners II and others owned the rest. A number of restaurant managers allege that they accepted lower salaries in return for Khan’s promise that he would own 100% of Falcon one day and that he would provide 50% of its equity to the store managers. Kahn became 100% owner in 2005 but provided no reward to his managers. In fact, he denies that he made the promise. Judge Guzman (N.D. Ill.) denied the claim of three of the managers on the grounds that they had not adequately estimated damages. The managers appeal.

In their opinion, Seventh Circuit Chief Judge Easterbrook and Circuit Judge Bauer and District Judge Shadid vacated and remanded. The plaintiffs’ damages theory was simple—the price Khan paid Sentinel implied that Falcon was worth $48 million, half of which is $24 million. The $24 million, when divided among the 20 managers, equals $1.2 million apiece. The Court disagreed with the district court’s rejection of that theory. First, the district court said that the value of the whole could not be implied from the price paid for a part. But, what a willing buyer will pay is the “gold standard of evaluation,” said the Court. Khan does not assert that he overpaid Sentinel and, if he underpaid, the plaintiffs have underestimated their damages—that is no reason to dismiss the case. The second reason the district court rejected the damage estimate was that it depended on how much Khan could borrow. Again, the Court noted that the plaintiffs have only underestimated their damages if Khan’s ability to borrow artificially kept the price down. Notwithstanding its disagreement with the district court, the Court did identify its own concern with the damage estimate. The promise alleged by the plaintiffs is not that Khan promised them 50% of Falcon’s value, but that he promised 50% of its equity. Assuming that Khan borrowed significant amounts to finance his purchase of the outstanding ownership, 50% of the company’s equity does not equal 50% of its value. But the record is silent on the details of the transaction and the defendants had not asked the Court to affirm on that ground. The Court also pointed out that might be unreasonable to assume that Khan’s promise, even if made, meant that he was going to turn over the equity without any terms or conditions. The Court noted that that it would have serious tax and structural disadvantages. If, as is more likely, the promise (if proven) would have entailed other terms and conditions, the contract may be too indefinite to enforce. But again, defendants do not seek affirmance on those grounds. Finally, the Court rejected the defendants’ argument that the judgment should be affirmed because plaintiffs quantified their damages too late in the proceedings. Defendants asked for no relief in the district court on that issue and have shown no injury.