Sacramento E.D.M., Inc., et al. v. Hynes Aviation Industries, Inc., et al.

Filing 150

ORDER signed by Magistrate Judge Kendall J. Newman on 4/18/17 ORDERING that Sac EDM is entitled to $413,151.00 in restitution against HAI. Sac EDM is entitled to restitution in the amount of $162,000.00 from Hynes Children, and $89,0 00.00 from HAI. The court declares that the entire balance of the US Banc judgment was fully satisfied as to both plaintiffs in August of 2005 when Dan and Geraldine Folk paid $52,451.51 in full satisfaction of their payment obligations under t he parties' agreement that was in place prior to Hynes' fraudulent breach of his fiduciary duty. HAI is entitled to the following relief against Sac EDM: Damages amounting to $808,746.36 based on Sac EDMs breach of contract with rega rd to the operating loans HAI had extended to it, Damages amounting to $70,930.00 based on Sac EDMs default under equipment leases 10 through 20, Damages amounting to $184,750.00 based on Sac EDMs breach of its contract with HAI regarding the payment of the premiums for the life insurance policies taken out on the lives of Dan Folk and Hynes. The parties are to bear their own attorneys fees and costs. The Clerk is directed to enter final judgment. CASE CLOSED (Kastilahn, A)

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UNITED STATES DISTRICT COURT

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FOR THE EASTERN DISTRICT OF CALIFORNIA

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SACRAMENTO E.D.M., INC., et al.

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Plaintiffs,

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No. 2:13-cv-0288-KJN

ORDER

v.
HYNES AVIATION INDUSTRIES, et al.,

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Defendants.

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Plaintiffs Sacramento E.D.M., Inc. (“Sac EDM”) and Dan Folk (collectively “plaintiffs”)

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bring this action asserting claims for breach of fiduciary duty, fraud, constructive fraud, and

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tortious interference with contract against defendants Hynes Aviation Industries, Inc. (“HAI”),

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Michael K. Hynes (“Hynes”), and Hynes Children TF Limited (“Hynes Children”) (collectively

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“defendants”) based on various acts of alleged self-dealing defendants engaged in over the course

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of the parties’ business relationship between 2004 and 2012.1 Defendants HAI and Hynes filed

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counterclaims against plaintiffs, alleging that plaintiffs breached their payment obligations under

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a number of contracts that defendants allege the parties entered into over the course of their

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business relationship.

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Plaintiffs also assert claims for negligent and intentional interference with prospective business
advantage, for which plaintiffs request dismissal in their post-trial briefing based on an admission
that insufficient evidence was presented at trial to support those claims.
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The court held a seven-day bench trial on the merits of the parties’ claims and their

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respective entitlement to damages and other appropriate remedies, commencing on September 15,

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2016, and concluding on November 14, 2016.2 After carefully considering the evidence offered

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at trial, the arguments of counsel, the parties’ post-trial written submissions, and the controlling

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law on the issues presented, the court issues its findings of fact and conclusions of law, as

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required by Federal Rule of Civil Procedure 52(a). However, before the court provides such

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findings, the court finds it necessary to make several observations regarding the presentation of

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evidence during the trial more generally.

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I.

Initial Observations and Comments Regarding the Presentation of Evidence

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While the court acknowledges that it is somewhat unusual to provide an initial statement

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regarding its observations about the trial, the court finds that the peculiarities of this case call for

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such an account. As the court repeatedly informed the parties over the course of the trial, the

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court is profoundly troubled by some of the evidence offered at trial, both in its content and in its

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presentation. In particular, the court is shocked and dismayed by the testimony provided by Dan

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Folk and Hynes, the two principal witnesses the parties presented at trial.

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With regard to Dan Folk, the court finds it difficult to reconcile the fact that he is regarded

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both by himself and the other parties and witnesses, including Hynes, as being talented and

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successful in his business endeavors, given his trial testimony and purported inability to recall, at

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times, even basic facts relating to his own business and his dealings with defendants. Indeed, it is

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clear to the court from the testimony provided by other witnesses and the parties’ Joint Exhibits

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admitted into evidence during trial that much of Dan Folk’s claimed difficulty in recollecting the

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events at issue is largely attributable to his attempt to obfuscate certain facts that could be seen as

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damaging to plaintiffs’ case, rather than a genuine inability to remember. Accordingly, the court

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finds Dan Folk’s testimony, as a general matter, to lack credibility.3

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The court conducted the bench trial on September 15, 2016, September 16, 2016, September 19,
2016, September 20, 2016, September 21, 2016, September 22, 2016, and November 14, 2016.
(ECF Nos. 120, 121, 122, 123, 124, 125, 134.)
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While the court finds Dan Folk’s testimony to generally lack credibility, this does not mean that
the court finds everything he testified to during trial untrustworthy. Accordingly, the court cites
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With regard to Hynes, the court finds much of his testimony consists of little more than

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self-serving and self-aggrandizing statements made in an attempt to obscure and re-characterize

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his clearly self-interested conduct as having been carried out with plaintiffs’ best business

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interests in mind. Such testimony is easily contradicted by other evidence offered at trial,

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including other statements Hynes provided during the course of his own testimony. The court

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finds it especially troubling that Hynes has advised multiple businesses over the years, including

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plaintiffs, teaches college-level economics courses, and considers himself an expert in business

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finance, but readily admitted at trial to advising and encouraging plaintiffs to engage in multiple

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deals with him and his companies that were clearly to plaintiffs’ detriment and defendants’

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benefit while acting in his role as plaintiffs’ paid business advisor and partner. The court is also

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distressed by the fact that Hynes demonstrated, at times, a total disregard for corporate formalities

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and the duties he owed to plaintiffs in those roles. The court is further disturbed by the fact that

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Hynes repeatedly testified to the accuracy of his record-keeping regarding the amounts

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defendants allege plaintiffs owe them through their various business arrangements, but was

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unable to plausibly articulate a factual basis for that accounting when questioned. Overall, the

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court also finds Hynes’ testimony to lack credibility.4

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Because the court finds the testimony provided by the two principal witnesses, both of

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whom provided the bulk of the testimony heard in this action and the only testimony as to certain

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key events and documentary evidence, to be largely unbelievable, the court finds itself in the

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unenviable position of trying to decide the merits of the parties’ claims with limited reliable

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evidence. Based on Dan Folk’s and Hynes’ lack of credibility and the parties’ overall poor

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presentation of evidence during the course of the trial, the court largely believes that none of the

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parties should prevail on any of their claims. Moreover, even to the extent the court can

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adequately analyze the merits of the parties’ claims based on evidence it finds credible, the lack

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of certain evidence and the limited evidence that was admitted leave the court with limited

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to his testimony in its findings of fact to the extent it finds that testimony believable.
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Nevertheless, as with Dan Folk’s testimony, the court cites to Hynes’ testimony in its findings
of fact to the extent it finds certain testimony believable.
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confidence in its ability to accurately determine the damages to which the parties may be entitled

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with regard to their meritorious claims.

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However, the nature of the parties’ business relationship and the circumstances created by

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their business dealings at issue in this action have created a situation where an otherwise simple

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determination that neither party prevails would be insufficient to ensure that justice is served in

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this matter, as the status quo would lead to a clearly inequitable result for all parties.

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Accordingly, in addition to determining the parties’ claims on their merits to the extent the

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credible evidence presented in this action allows, the court looks to two core principles it has

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drawn from the evidence presented at trial to guide it in determining both the merits of the

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parties’ claims and the relief to which each party is entitled.
First, the court recognizes that Hynes, acting in his roles as plaintiffs’ paid business

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advisor and partner, regularly constructed deals between the parties that favored his companies’

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and his own interests over plaintiffs’ interests, and were antithetical to the responsibility he owed

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to plaintiffs as his clients and business partners. The court takes this fact into account in

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determining the extent to which the debts defendants claim plaintiffs owe were incurred through a

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loan, rent, or other liability legitimately incurred for the purpose of assisting plaintiffs’ business

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operations, and therefore should be paid back, or an exorbitant charge defendants imposed on

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plaintiffs in violation of the duties Hynes owed to plaintiffs in his multiple roles.

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Second, the court takes into consideration the fact that both plaintiffs clearly received

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substantial sums of money from defendants that considerably benefitted their business

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operations—and in Dan Folk’s case, personal interests as well—and which they regularly

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accepted, both through signed, written agreements and their course of conduct, as loans they were

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required to repay to defendants. The court recognizes defendants’ significant cash outlay and the

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attendant risks involved in lending that money to plaintiffs under the circumstances presented by

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the evidence. Accordingly, the court also seeks to ensure that plaintiffs do not receive an

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unwarranted windfall or reprieve from legitimate financial responsibilities owed to defendants for

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a benefit they actually received simply because defendants sought to wrongfully benefit

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themselves.
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With those initial observations and principles in mind, the court now turns to its findings

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of fact based on the credible evidence presented at trial.

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II.

Findings of Fact

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The following section constitutes the court’s findings of fact pursuant to Federal Rule of

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Civil Procedure 52(a)(1). These Findings of Fact are drawn from witness testimony at trial and

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the parties’ admitted trial exhibits, to the extent the court finds that evidence to be credible.5

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Dan Folk is the president and founder of Sac EDM, a metal machining company

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specializing in electrical discharge machining. (Trial Transcript [“Tr.”] 35.)6 Dan Folk stopped

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attending his college coursework in order to run Sac EDM full time after he started the business

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in 1982. (Tr. 35-36.) Dan Folk’s then-wife, Geraldine Folk, who holds a bachelor’s degree in

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business, handled Sac EDM’s accounting and bookkeeping work such as filing the business’s

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taxes, handling payroll, accounts receivable, and accounts payable, and handled such work for the

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company starting in 2001. (Tr. 69, 207, 884, 1396, 1437-38.) Sac EDM was operated on an

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accrual basis, as opposed to a cash basis, for accounting purposes, meaning that it would realize

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an account receivable as a profit on its books once the payment first became due, rather than once

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the payment was actually received. (Tr. 271, 710.)

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Hynes is the president and owner of defendant HAI, which he formed as a corporation
about 50 years ago. (Tr. 640.) HAI is involved in the aviation industry, at one time manufactured

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The court notes that while the findings of fact are presented by the court in a manner that may
suggest that it was able to straightforwardly determine what evidence it found persuasive and the
factual conclusions to be drawn from that evidence, the reality is that the evidence offered by the
parties at trial presented the court with little opportunity to so cleanly make its factual
determinations. Indeed, as alluded to in the court’s initial observations, the court has little
confidence that much of the evidence presented by the parties at trial, even evidence that was not
contradicted or called into question on cross-examination, provides the court with an ability to
provide a truly accurate account of many key events that occurred over the course of the parties’
business relationship. Nevertheless, instead of noting in its findings of fact each and every factual
conclusion for which the court encountered this problem, the court provides this general
observation at the outset of its findings, and specifically notes hereafter only those factual
conclusions for which the evidence the parties presented was particularly troubling.
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The trial transcript is filed in the docket for this action at ECF Nos. 139, 140, 141, 142, 143,
144, and 145.
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helicopters and other aircraft, and, at the time of the parties’ dealings, was engaged in aircraft

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leasing and business consulting relating to the aviation industry. (Tr. 640, 1325.) Hynes holds a

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doctorate degree in aviation and aerospace education from Oklahoma State University, and holds

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a number of masters, bachelors, and associates degrees in areas relating to aviation and business.

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(Tr. 639, 643.) He has roughly 50 years of experience in the aviation industry and, in addition to

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HAI, has owned and operated about 20 different businesses within that industry over the course

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of his career. (Tr. 639-40.) Since 1964, Hynes has served as an expert witness regarding aircraft

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accidents and other aviation-related matters and certain business and finance-related matters in

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over 600 cases in over 100 different state and federal courts. (Tr. 640-42.) Hynes has also taught

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coursework in the areas of business operations and financial management for Southern Nazarene

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University’s masters of business administration program. (Tr. 642-43.) Approximately 40 to 50

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years ago, Hynes and his wife, Jane Hynes, formed defendant Hynes Children as a corporation for

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the benefit of assisting their children. (Tr. 1029.) Hynes is the president and managing executive

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of Hynes Children, and his children are its shareholders. (Tr. 1328.)7

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Dan Folk and Hynes first met in either late 2001 or early 2002 when Dan Folk hired

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Hynes to testify as an expert witness on Dan Folk’s behalf in an aviation lawsuit in which Dan

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Folk was the plaintiff. (Tr. 38, 59, 1249.) In early 2003, Hynes came to California to attend a

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deposition related to the aviation lawsuit. (Tr. 649-50.) While Hynes was in California, Dan

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Folk showed him the Sac EDM facility, and they briefly discussed Sac EDM’s business and its

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finances. (Tr. 649-51.) During that time, Sac EDM was experiencing financial difficulties,

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particularly relating to the fact that it had not yet filed its 2001 and 2002 tax returns, and was

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having problems maintaining cash flow sufficient to make payroll for its employees and pay its

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bills when they came due. (Joint Exhibits (“Exhs.”) 120, 122; Tr. 64, 1439.)

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The court has no confidence that Hynes Children was actually maintained as a distinct corporate
entity. No corporate records were offered at trial, none of the children testified, and all
documents appear to have been prepared by Hynes and signed by himself and Mrs. Hynes.
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Over the course of Hynes’ next several visits to California for the aviation matter, Dan

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Folk and Hynes discussed Sac EDM and its troubles relating to the filing of its 2001 and 2002 tax

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returns and finances; Hynes offered to help. (Tr. 58-59, 69, 651-53.) By May of 2003, Dan and

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Geraldine Folk had retained Hynes as a business consultant to assist with Sac EDM and its

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finances. (Exh. 83; Tr. 39.) Over the course of the rest of 2003, Geraldine Folk provided Hynes

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with some of Sac EDM’s financial data, and Hynes provided financial analyses and

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recommendations based on a review of that data. (Tr. 1444, 1452-55.) Specifically, Geraldine

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provided Hynes with financial data obtained from Sac EDM’s QuickBooks entries, and Hynes

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prepared an eight-year financial history for Sac EDM based on that information, which he sent to

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Geraldine on May 15, 2003. (Exh. 118; Tr. 654-55.) Hynes also worked on a business plan for

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Sac EDM and drafted a pro forma showing how he would structure Sac EDM’s tax returns for the

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years 2001 and 2002 based on his review of its prior returns. (Exh. 306; Tr. 1536.)

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In addition, Hynes planned to speak with banks in order to obtain business loans or other

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financing to fund Sac EDM’s operations, and implored both Dan and Geraldine Folk to quickly

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finalize a business plan for Sac EDM and determine how much financing the business needed to

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support its operations based on the advice he provided after reviewing Sac EDM’s records. (Exh.

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121.) The parties also discussed the potential of having Hynes act as a personal lender to Sac

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EDM. (Exh. 120.) Hynes charged a flat fee of $800 for the consulting services he rendered over

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the course of 2003, and also charged $115 for the materials he used in rendering those services,

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for a total of $915, which Hynes invoiced to Sac EDM on December 31, 2003. (Tr. 701.)

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On June 12, 2003, Geraldine Folk contacted Hynes via email to obtain his advice

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regarding Sac EDM’s problems relating to its ability to pay its equipment leases held by U.S.

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Bancorp (“US Banc”). (Exh. 122.) Specifically, Geraldine relayed to Hynes that “US Banc [was]

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on the verge of defaulting on all 5 of [Sac EDM’s] loans with them, taking all of 8 of [Sac

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EDM’s] 12 machines.” (Id.) She also stated that Sac EDM would need to give $4,500 to US

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Bank “tomorrow,” which would leave Sac EDM short in its ability to make its upcoming payroll,

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or else face default on the leases, which would result in repossession of the equipment. (Id.) In

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addition, she communicated her fear that default would cause US Banc to “go after” the Folks’
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personal assets, as they had signed a personal guarantee of the leases. (Id.) She also remarked to

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Hynes that Sac EDM had 18 months of payments on the leases left before it would own almost all

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of the leased equipment under the terms of its lease agreement. (Exh. 122; Tr. 1410.) Geraldine

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asked Hynes for his opinion regarding this situation, specifically asking “whether we should hold

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off [on making payments] and let [US Banc] start default proceedings.” (Exh. 122.)

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In late July 2003, Geraldine told Hynes that it “ha[d] not been possible [for Sac EDM] to

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catch up on past due payments with . . . US Banc” because Sac EDM’s sales for the first half of

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2003 had been very poor and were down from that same period during the prior year. (Exh. 123.)

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She also informed Hynes that she had spoken with a bankruptcy attorney, who suggested that the

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Folks close Sac EDM and set up a sole proprietorship to continue their business operations, and

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then wait to see if US Bank would pursue the Folks personally for Sac EDM’s debt, in which

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event the Folks would file for personal bankruptcy. (Id.)

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On November 10, 2003, Dan Folk sent an email to Hynes relaying the Folks’ further

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communications with their bankruptcy attorney, which resulted in a plan for the Folks to close

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Sac EDM down as a corporation and begin its operations as a sole proprietorship. (Exh. 124.)

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Dan Folk also told Hynes that the Folks were going to file for personal bankruptcy beginning on

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December 1, 2003, and that he had made an offer to US Banc to enter a stipulated judgment

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regarding Sac EDM’s outstanding lease payments ten weeks prior but had never received a

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response. (Id.)

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In mid-December 2003, the Folks and Hynes met in Tahoe, California and discussed Dan

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Folk’s problems with obtaining lending from banks for Sac EDM’s operations. (Tr. 667.) Dan

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Folk also disclosed to Hynes that he did not have enough money to buy Christmas presents for his

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family and employees, or to pay his employees a Christmas bonus. (Id.) Hynes wrote a $10,000

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personal check to the Folks so they could buy Christmas presents for their family and employees,

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and afford to give bonuses to their employees. (Tr. 667, 1122) The parties considered this

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payment a loan and agreed that Hynes would return to California in January of 2004 to draft

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paperwork to make the $10,000 loan “official.” (Tr. 667.) Also during this meeting, Hynes and

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Dan Folk devised the initial workings of the parties’ first business plan. (Tr. 669-70.) The parties
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determined that Hynes would deposit $200,000 into a special bank account for purposes of

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making it available for Sac EDM operations when needed. (Id.) When Sac EDM would need

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money, Geraldine was to call Hynes and request a transfer from that pool of funds. (Id.)

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On December 31, 2003, the parties finalized their initial business plan into written form,

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which Dan and Geraldine Folk signed on January 4, 2004. (Exh. 11.) The terms of this written

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business plan established that Sac EDM would begin to transfer all of the income it earned from

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the work it did for its customers after January 1, 2004, into a bank account held by OK EDM and

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Waterjet, Inc. (“OK EDM”), a new company devised by the parties to act as a joint venture

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between Dan Folk, Sac EDM, Hynes, and HAI. (Exh. 11; Tr. 728.) In return, OK EDM would

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provide Sac EDM with operating loans throughout the course of a given month at the times and in

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the amounts requested by Dan or Geraldine Folk or another authorized Sac EDM employee. (Tr.

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223-34.) The operating loans were to include interest at a rate of 9.5 percent per annum for any

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funds Sac EDM actually used, a three percent per annum rate for any other funds held in reserve

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by OK EDM as “standby funds” that Sac EDM did not use during a given month, and a one-time

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one percent “set up fee.” (Exh. 11.) Interest was to be compounded on the loans on a daily basis.

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(Tr. 795.)

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At the end of each month, Sac EDM was to send an invoice to OK EDM for all of its

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operating expenses, including payroll, materials purchased, cost to use its machines, lease

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payments, and other routine items, and OK EDM would deposit the total amount set forth in the

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invoice into Sac EDM’s bank account. (Exhs. 11, 13.) This monthly payment was not a loan,

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and Sac EDM was permitted to recoup the entire amount of the operating loans OK EDM had

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provided throughout the course of the month through this billing, provided that Sac EDM had

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applied the loaned money towards its necessary monthly operational expenses. (Exh. 13; Tr. 705-

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06, 1190-94.) Once Sac EDM received its monthly reimbursement, it could, but was not required

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to, use that money to pay down the operating loans it took out from OK EDM. (Tr. 1190-94.) If

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Sac EDM did not pay down the operating loans it took out from OK EDM in a given month, then

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the outstanding principal of the loans would remain and interest on that principal would continue

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to accrue.
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The parties entered into this particular business arrangement based on Hynes’

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representation that it would allow the parties to utilize a tax deduction based on HAI’s net

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operating loss carryforward of over $1 million that was set to expire in two years, which OK

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EDM would take advantage of through filing a joint tax return with HAI. (Tr. 45-46, 125-26,

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691, 1158-59, 1388.) This arrangement was also made on the parties’ belief that it would

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alleviate Sac EDM’s cash flow problems by ensuring that it had sufficient capital to pay its

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operating expenses as they became due. (Exh. 11; Tr. 179, 690.)

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The business plan provided that Dan Folk was to draw a salary of $4,000 per month,

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Geraldine Folk was to draw a salary of $2,000 per month, and Hynes was to draw a salary of

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$3,000 per month for five years, all as “W-2” employees of Sac EDM. (Exh. 11.) Dan Folk and

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Hynes were also to draw $4,000 per month each from OK EDM for “management fees” as

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“1099” contractors. (Id.) The plan also provided that salaries and management fees may be

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adjusted up or down each month by $1,000 per person after the first 90 days of the plan’s

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implementation. (Id.) The business plan provided further that “where possible all [of Sac

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EDM’s] equipment leases w[ould] be re-negotiated in the name of [OK EDM] with lower interest

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rates, longer terms, and more favorable purchase options, or the existing equipment would be

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replaced to accomplish the same goals (lower interest costs, better cash flow, and some equity

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gain).” (Id.) Finally, the business plan provided that a shareholder loan was to be distributed to

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Dan and Geraldine Folk in the amount of $25,000 each, which they would reinvest into OK EDM

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as part of the $200,000 startup capital the parties had envisioned. (Exh. 11; Tr. 737-38.) These

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loans were to be secured by Dan Folk’s stock he was to have in OK EDM and an equity interest

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in Dan and Geraldine Folk’s personal home and rental property. (Exh. 11.)

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The parties’ initial business plan set up OK EDM as a separate corporation, and Hynes

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drafted and filed incorporation documents prior to the date the business plan became operational

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in anticipation of the business plan’s implementation. (Tr. 683.) However, Hynes decided prior

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to drafting the parties’ business plan to instead operate the OK EDM joint venture as a d/b/a of

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HAI based on a belief that the Folks’ impending personal bankruptcy could result in a bankruptcy

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trustee reaching the money they put into OK EDM if it were operated as a corporation. (Tr. 68310

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85, 692.) Accordingly, instead of following the business plan with regard to having the Folks

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take on a loan to purchase stock to help fund the joint venture, Hynes loaned the full $200,000

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startup fund to OK EDM, acting as a d/b/a of HAI, which in turn was to provide operating loans

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to Sac EDM from that fund, when needed. (Exh. 195; Tr. 738, 770.)8
Hynes initially set up two Bank of America bank accounts under OK EDM, Inc.’s name in

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early 2004. (Exhs. 274, 275; Tr. 1133.) The parties would deposit Sac EDM’s income into one

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of the accounts. (Exh. 275; Tr. 1132-34.) Hynes placed standby funds into the other account that

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OK EDM would withdraw when Sac EDM needed operating loans or requested its monthly

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reimbursement. (Exh. 274; Tr. 1132-34.) Hynes would regularly transfer money between the

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two accounts. (Exhs. 274, 275; Tr. 1132-34.) Once Hynes decided that OK EDM would operate

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as a d/b/a of HAI, he changed the name on the account into which the parties deposited Sac

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EDM’s income to reflect that fact, but neglected to change the name on the other account. (Id.)

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Each monthly invoice Sac EDM provided to OK EDM for its monthly operating expenses

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was based on its own calculations, which Hynes generally relied on and honored unless he

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spotted specific items that he believed were clearly unrelated to Sac EDM’s operations, such as a

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gym membership fee for Dan Folk, which he would deduct from the reimbursement amount he

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would have OK EDM transfer to Sac EDM at the end of each month. (Tr. 705-06, 799, 1197-98.)

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Similarly, Hynes made calculations and kept records of Sac EDM’s financials based on

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bookkeeping information employees from Sac EDM provided him. (Exh. 175; Tr. 466-67.)
Hynes initially endeavored to ensure that OK EDM’s outstanding loan balance to Sac

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EDM at any given time was under $300,000. (Tr. 799.) However, in January 2004, Sac EDM

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successfully bid to manufacture armor plating for Humvees for the United States Army. (Tr. 805-

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06.) This contract presented an abnormally large job for Sac EDM and, in order to fulfill that job,

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Sac EDM required funds greater than what was usually necessary to cover its operating expenses.

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(Id.) Once Dan Folk informed Hynes of the Army contract, Hynes determined that OK EDM

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would need a larger cash reserve in order to keep up with Sac EDM’s operating costs in fulfilling

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However, the lack of evidence at trial as to how this and subsequent changes actually occurred,
as well as Hynes’ failure to comply with corporate formalities, was appalling.
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that contract. (Tr. 805-07.) Accordingly, Hynes increased the funds held by OK EDM from

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$200,000 to $500,000, so that Sac EDM would have sufficient reserves available to it to fund its

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operating costs in fulfilling the Army contract. (Tr. 807.) If OK EDM had not supplied operating

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loans to Sac EDM, it was unlikely that Sac EDM would have had sufficient operating capital to

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retain and fulfill the Army contract. (Tr. 817-18.)

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On January 25, 2004, the parties signed a document revising the accounting policies and

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other aspects of the OK EDM joint venture. (Exh. 28.) Pursuant to these revisions, Sac EDM

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was to place all payments it received for the work it performed after January 1, 2004, into one of

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the Bank of America bank accounts in OK EDM’s name every Tuesday and Thursday, or anytime

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a payment was more than $5,000. (Id.) The revision noted further that “[t]he needs of [Sac

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EDM] for additional funds will be determined on a month by month basis, with loans extended to

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[Sac EDM] by OK EDM as conditions warrant.” (Id.) Finally, the revision changed the reporting

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of Sac EDM’s monthly payment of consulting fees to Hynes from “W-2” income to “1099”

14

income, in order to highlight Hynes’ role as a consultant to Sac EDM. (Id.; Tr. 859.)9

15

On January 27, 2004, Dan and Geraldine Folk filed for personal bankruptcy in order to

16

remove the personal guarantees they made under the US Banc lease contract. (Tr. 90-91, 165-

17

66.) Days prior to that filing, on January 22, 2004, Dan and Geraldine Folk signed a loan

18

agreement with HAI for the $10,000 Dan Folk personally borrowed from Hynes in December of

19

2003. (Exh. 307.) The loan was secured by a lien on the Folks’ personal rental home, which was

20

recorded in the county recorder’s office for the purpose of helping the Folks avoid having that

21

property sold off through their personal bankruptcy. (Exh. 136; Tr. 163-66, 1123-24.) The Folks

22

repaid the $10,000 loan in full, and they did not have to sell their rental home as part of their

23

bankruptcy. (Exh. 136; Tr. 166.)

24

In late 2003 and early 2004, Hynes talked with two separate banks regarding obtaining

25

outside business loans and other funding for Sac EDM’s operations. (Tr. 262-63, 877, 895-96,

26

1030.) These efforts were unsuccessful, and Hynes determined that further efforts to obtain

27
28

9

The trial testimony established that virtually every corporate document, business plan and
“agreement” was drafted by Hynes.
12

1

outside financing for Sac EDM’s operations would be futile until the parties were able to improve

2

Sac EDM’s cash flow and demonstrate that it was financially stable. (Id.)

3

In February of 2004, Hynes advised Geraldine Folk to keep Sac EDM operating in its

4

corporate form “as long as possible,” and to work at its old debts until either it was forced into

5

bankruptcy, at which time it should file to restructure its debts under Chapter 11 of the

6

Bankruptcy Code, or it paid off those debts. (Exh. 130.) Hynes also expressed his belief to

7

Geraldine Folk that “every possible effort should be made to work with [US Banc] on their

8

outstanding lease balances” because none of the parties were “in a position to replace this

9

financing and equipment.” (Id.) He advised her further that Sac EDM should not walk away

10

from its agreement with US Banc based on his belief that “[a] business history of that type is

11

impossible to overcome.” (Id.)

12

At some point in early 2004, Dan Folk began to operate a sole proprietorship, which the

13

parties referred to as “Sac EDM & Waterjet, SP,” or “Sac EDM & Waterjet,” as a separate

14

business entity operating in conjunction with Sac EDM, the corporate entity. (Exhs. 16, 30, 162;

15

Tr. 306-11.) At times throughout 2004 and 2005, Dan Folk operated portions of Sac EDM’s

16

business through the sole proprietorship and used that entity to personally make payments on Sac

17

EDM’s behalf. (Exhs. 16, 280; Tr. 306-11.) During the time the sole proprietorship was in

18

operation, the parties largely treated Sac EDM and the sole proprietorship as a single entity and

19

generally transacted business with those two entities as if they were both a part of the Sac EDM

20

corporate entity. (Exh. 16; Tr. 306-11, 1019-20.)

21

Between March and May of 2004, the parties revised the OK EDM joint venture’s

22

business plan on three occasions and its accounting policy on one occasion (all drafted by Hynes),

23

which resulted in a salary increase of $1,000 per month each for Dan Folk, Geraldine Folk, and

24

Hynes, and other revisions that refined the parties’ intentions regarding the operation of the joint

25

venture and reflected the inclusion of Dan Folk’s sole proprietorship into the business operations.

26

(Exhs. 17, 18, 19, 30.) Over the course of the OK EDM joint venture, the parties would either

27

raise or lower their monthly salaries and/or consulting fees on a number of occasions based

28

largely on the income Sac EDM was bringing in at the time; raises were generally made at Dan
13

1

Folk’s insistence, while reductions were generally made at Hynes’ request. (Exh. 88.)

2

In their fourth amended business plan dated August 1, 2004, the parties removed the

3

language regarding Dan and Geraldine Folk’s option to obtain stock in HAI and shareholder loans

4

secured by that stock. (Exh. 31.) It had been Hynes’ intention to have the parties remove that

5

language through their prior revisions to the business plan, but he had forgotten to make such a

6

change until the parties’ fourth revision. (Tr. 1030, 1142-43.) Neither Dan nor Geraldine Folk

7

had purchased stock in OK EDM or HAI before that language was removed. (Tr. 1146, 1405.)

8
9

Shannon Gomez began working part-time at Sac EDM in the summer of 2004 as an
outside consultant to help with Sac EDM’s financial records, and assist with purchasing and

10

human resources matters. (Tr. 1466-77.) She was hired on as a full time employee of Sac EDM

11

in October of 2004 and largely took over Geraldine Folk’s role in handling Sac EDM’s

12

bookkeeping, including handling payroll, accounts receivable, accounts payable, and Sac EDM’s

13

interactions with its accountant. (Tr. 207, 1467-68.) Shannon Gomez provided Hynes with

14

certain financial information, including a profit and loss balance sheet for Sac EDM’s operations,

15

on a monthly basis. (Exh. 241; Tr. 1470-72.) Shannon Gomez was authorized to request and

16

accept operating loans from HAI d/b/a OK EDM on behalf of Sac EDM. (Tr. 476-77, 1475-78.)

17

At times throughout the course of the OK EDM joint venture, Hynes would unilaterally

18

have HAI d/b/a OK EDM send money to Sac EDM without anyone’s prompting from Sac EDM

19

based on Hynes’ belief that Sac EDM needed such funds for its operations. (Exhs. 147, 158.)

20

Hynes characterized the funds as operating loans pursuant to the parties’ business agreement in

21

the same way he characterized the operating funds requested by Sac EDM’s employees as loans.

22

(Exh. 158; Tr. 167-68.) Either Geraldine Folk or Shannon Gomez would accept, on Sac EDM’s

23

behalf, the additional loans Hynes provided with the understanding that those additional payments

24

were to be considered loans in the same way the funds they requested were loans. (Tr. 476-77,

25

1476.) At no time did Sac EDM decline or refund such loans when Hynes would extend them

26

during the course of the OK EDM joint venture. (Exh. 289; Tr. 1477.)

27

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28

////
14

1

In August of 2004, Sac EDM sold some equipment that it had owned outright to HAI via

2

an auction in order to raise capital to pay down the balance of the operating loans it owed to HAI

3

d/b/a OK EDM at that time. (Exh. 353; Tr. 798, 905-06, 925.) The sale price of the equipment

4

was based on Dan Folk’s estimate of the fair market value for each piece of equipment. (Tr.

5

1376.) While the parties’ purpose behind auctioning off Sac EDM’s equipment was to raise

6

capital for Sac EDM to use to pay down its operating loans to HAI d/b/a OK EDM, Sac EDM

7

was free to do what it wanted with the proceeds of those sales. (Exh. 171; Tr. 798.)

8

Nevertheless, it applied those funds towards the outstanding operating loan balance. (Exh. 353.)

9

Hynes drafted a written master lease agreement under which the purchased equipment

10

would be leased for use in Sac EDM’s operations. (Exhs. 1, 363.) Hynes drafted the terms of the

11

master lease based on provisions he liked from Sac EDM’s contracts with Dell, Inc. and other

12

third parties that he had reviewed. (Tr. 561, 916-17.)10 The master lease agreement was signed

13

by Dan Folk on behalf of Sac EDM as lessee, and by Hynes on behalf of Hynes Children as

14

lessor, and was dated August 1, 2004. (Id.) However, the individual leases for each of the eight

15

different pieces of equipment or groups of equipment that fell under the terms of the master lease

16

were dated October 1, 2004, and were signed by Hynes on behalf of “Hynes Aviation Industries,

17

Inc. d/b/a OK EDM and Waterjet and/or SacEDM & Waterjet” as lessee, and Hynes’ wife, Jane

18

Hynes, on behalf of Hynes Children as lessor. (Id.)

19

The monthly lease rates for each leased item under these contracts were calculated by

20

taking the sale price, dividing that amount by 60 (for the number of months Hynes represented

21

each lease was to last), and then adding an additional 30 percent to that amount.11 (Tr. 927-28,

22

1105-06.) Hynes initially characterized the additional 30 percent monthly charge as amounting to

23

10 percent interest, but later, after the lease document had been signed, characterized the

24
10

25
26
27
28

Cross-examination of Hynes and a review of the lease terms revealed that his “cutting and
pasting” of language from a number of other leases resulted in a master lease agreement with
some internally inconsistent terms.
11

In other words, the monthly loan payments were calculated using the following formula:
(purchase price / 60) + 30 percent. For example, an item purchased for $6,000 under such a
formula would be charged at a lease rate of $130 per month.
15

1

additional charge as 10 percent for interest, plus 10 percent for defendants’ “overhead,” plus 10

2

percent for “profit,” amounting to a 30 percent surcharge on each monthly payment. (Exh. 150;

3

Tr. 954-55.) Under the terms of the master lease agreement, 50 percent of all of Sac EDM’s

4

monthly payments would be credited towards a buyout of each leased item, and the buyout price

5

for each item was the purchase price plus 10 percent. (Exhs. 1, 150.) The master lease also

6

contained a choice of law provision stating that Missouri law governs each lease made under its

7

provisions.12 (Exh. 1.) It also provided, in all capitalized text, that the lessee under any lease

8

agreements subservient to that master lease “may not assign, sell, transfer, or sublease the

9

products, or [its] interest in [the] lease.” (Id.) Neither the master lease nor the individual leases

10

contained a provision regarding the duration of a given lease, but the parties contemplated that

11

each lease would terminate once Sac EDM paid an amount sufficient to exercise its right to

12

purchase the leased equipment under the above formula.13 (Exh. 150; Tr. 142-47, 1369, 1554.)

13

Each of the eight individual lease agreements attached to the August 1, 2004 master lease

14

set forth a description of the item or items leased and the lease rate for each item or group of

15

items. (Exh. 1.) Only four of the eight pieces or groups of equipment were initially leased at the

16

time the master lease was signed, and Sac EDM was billed by HAI for those four pieces on a

17

monthly basis starting on August 31, 2004. (Exhs. 277, 363; Tr. 1324.) The initial four leased

18

12

19
20
21
22
23
24
25
26
27
28

In their post-trial briefing the parties note their agreement that Missouri law governs the
equipment leases at issue based on this choice of law provision.
13

At trial, Hynes testified that he contemplated the lease term for each equipment lease between
the parties to be 60 months and calculated the monthly payments made under those leases with
the intention that Sac EDM would be able to buy out the leased equipment at that time, while Dan
Folk testified that he understood the lease terms for the equipment to be indefinite, but that Sac
EDM could buy out the leased equipment once it paid a sufficient amount. (Tr. 142-47, 1369,
1554.) In addition to this conflicting testimony regarding the term of the leases, the written terms
of the leases themselves contain contradictory language regarding lease termination. (Exhs. 1, 2,
3.) Accordingly, in reconciliation of this apparent conflict, the court finds that the parties
intended the equipment leases to terminate once Sac EDM exercised its option to purchase the
leased equipment under the master lease’s purchase provisions after it had made a sufficient
number of monthly lease payments. As discussed in further detail below, the parties subsequently
entered into two more master lease agreements, on October 1, 2006, and February 1, 2008,
respectively, that contain the exact same provisions as the August 1, 2004 master lease.
Therefore, the court reconciles the purchase terms contained in those master leases in the same
manner it reconciles those contained in the August 1, 2004 master lease.
16

1

items were all purchased from Sac EDM and then added to the lease. (Tr. 1323-24.) On

2

November 30, 2004, the parties added the fifth and sixth items to the leases, which were pieces of

3

equipment HAI had purchased from a third party supplier, not Sac EDM, with money that HAI

4

had allegedly borrowed from an outside source. (Exh. 277; Tr. 1326-27.) In January of 2005, the

5

last two of the eight items included in the attachments to the August 1, 2004 master lease were

6

purchased from Sac EDM and leased back to it. (Exh. 277; Tr. 1327-28.)

7

By January of 2005, Hynes Children had purchased the leased equipment from HAI in

8

order to receive a tax advantage, and had begun to lease that equipment to OK EDM as “a

9

division of [HAI],” with the first lease invoice sent to OK EDM on January 31, 2005. (Exh. 277;

10

1327-30.) In recognition of this fact, Hynes drafted the eight individual lease agreements

11

attached to the August 1, 2004 master lease and backdated each agreement to October 1, 2004.14

12

(Exh. 1.) Hynes signed each of the eight lease agreements, one for each piece or group of leased

13

equipment, on behalf of HAI as lessee, and Jane Hynes signed them on behalf of Hynes Children

14

as lessor. (Id.) In September 2005, Hynes Children purchased additional equipment from Tom

15

White, an individual who had recently been hired by Sac EDM, and then began to lease it to HAI

16

d/b/a OK EDM in addition to the eight items leased pursuant to the terms of the master lease

17

agreement dated August 1, 2004. (Exh. 277; Tr. 1337-38.)

18

////

19

////

20
14

21
22
23
24
25
26
27
28

The invoice and testimonial evidence shows that HAI d/b/a OK EDM was the initial lessor and
Sac EDM was the initial lessee under the leases for the eight items that were subject to the August
1, 2004 master lease; that HAI sold the subject equipment to Hynes Children, which in turn
leased it back to HAI beginning in January 2005; and the equipment subject to the August 1, 2004
master lease was added to the leases between August of 2004 and January of 2005. However,
that evidence appears to conflict with the master lease document itself, which was signed on
behalf of Hynes Children and dated August 1, 2004; and the eight attached lease documents,
which were all dated on October 1, 2004, and signed by representatives of Hynes Children as
lessor and HAI as lessee. (Compare Exh. 1 with Exh. 277 and Tr. 1327-30.) In reconciliation of
this apparently conflicting evidence, the court concludes that HAI was the initial lessor for each
lease, sold its interest in each leased item to Hynes Children by no later than January of 2005,
which in turn began leasing the equipment back to HAI d/b/a OK EDM starting on January 31,
2005, and the parties then backdated each of the eight attached lease documents naming Hynes
Children as lessor and HAI d/b/a OK EDM as lessee to October 1, 2004.
17

1

Hynes arranged to have HAI act as lessee under the equipment leases after Hynes

2

Children took over as lessor because Hynes Children’s board of directors allegedly wanted to be

3

able to hold Hynes and HAI responsible for any payments due under the leases, instead of Sac

4

EDM, with which Hynes Children’s board of directors was unfamiliar. (Tr. 1555-58.)15

5

Nevertheless, the parties understood that Sac EDM was to receive the beneficial use of the leased

6

equipment. (Id.) Accordingly, while each of the nine leases under the August 1, 2004 master

7

lease agreement were between Hynes Children as lessor and HAI d/b/a OK EDM as lessee, in

8

practice, Sac EDM used the leased equipment for its operations. (Tr. 1555-56.) HAI continued

9

to bill Sac EDM monthly for each of the nine leases, which Sac EDM paid, despite the existence

10

of the clause in the master lease providing that the lessee could not sublease the equipment.

11

(Exhs. 1, 363; Tr. 1555-56.)

12

On August 28, 2004, Hynes, acting on behalf of HAI d/b/a/ OK EDM, loaned Dan and

13

Geraldine Folk $150,000, which the Folks loaned to Sac EDM for the purpose of reducing Sac

14

EDM’s operating loan debts. (Exh. 291; Tr. 945-48.) The loan was secured by a mortgage on

15

two properties the Folks personally owned at eight percent interest per annum, which was

16

memorialized in a writing signed by Dan and Geraldine Folk on August 30, 2004. (Exh. 291.)

17

Throughout the course of 2004, HAI, doing business under the trade name OK EDM,

18

reimbursed Sac EDM for its operating expenses on a monthly basis, which included a monthly

19

payment for the use of the equipment Sac EDM leased from US Banc. (Exh. 162.) However, Sac

20

EDM at times failed to remit a portion of that money to US Banc to fully cover the monthly

21

payments it owed to that bank for the equipment it leased. (Id.) This failure caused US Banc to

22

deem Sac EDM in default of its lease agreement and to file an action in the Sacramento County

23

Superior Court against Sac EDM for breach of contract. (Exh. 8.) In August 2004, Hynes sent a

24

check for $172,569 to US Banc in an attempt to resolve fully Sac EDM’s payment obligations

25

under the US Banc lease and the pending state court action, but did not receive a response to that

26

offer. (Exh. 160; Tr. 1268-70.) Hynes also unsuccessfully tried to negotiate with US Banc in

27
28

15

Once again, no such corporate board minutes were offered as evidence, and there was no
testimony from any of the Hynes children.
18

1
2

order to extend Sac EDM’s payment term under the lease. (Tr. 94.)
After sending Sac EDM a notice of sale in November of 2004, US Banc came to Sac

3

EDM’s facility to repossess its leased equipment on December 21, 2004. (Exh. 38; Tr. 977-98.)

4

Hynes was present when this occurred, purchased two pieces of the repossessed equipment from

5

US Banc on the spot, and then leased that equipment back to Sac EDM using the same rental

6

calculation and terms contained in the August 1, 2004 master lease agreement. (Tr. 979-80.)

7

In January of 2005, Hynes and the Folks agreed that the Folks would try to obtain a

8

stipulated judgment on Sac EDM’s behalf from US Banc regarding the deficiency US Banc

9

claimed was still owing under the equipment lease after repossession, and afterwards, Hynes

10

would attempt to purchase that judgment from US Banc for “pennies on the dollar” and, in turn,

11

Sac EDM would pay Hynes the amount he paid for that judgment plus interest as full satisfaction

12

of the judgment. (Exh. 336; Tr. 100.) The Folks gave Hynes a limit of to $100,000 to purchase

13

the judgment. (Exh. 336; Tr. 101, 1413.) The Folks were planning to sell their personal home at

14

the time and told Hynes that they would use the proceeds from that sale to personally pay Hynes

15

back for the amount paid to purchase the judgment plus interest on Sac EDM’s behalf. (Id.) In

16

February of 2005, in keeping with the parties’ agreement, Sac EDM entered into a stipulated

17

judgment with US Banc in the deficiency action, Sacramento Superior Court case number

18

04AS03050, for a total of $283,473.77 plus interest. (Exh. 8; Tr. 91.) Hynes subsequently

19

entered into an agreement with US Banc to have HAI purchase the stipulated judgment for a total

20

of $50,000. (Exh. 336.)

21

After Hynes had purchased the stipulated judgment, but before the Folks had paid back

22

the $50,000 plus interest, Hynes approached Dan Folk with a new plan regarding that judgment.

23

Hynes proposed that, after the Folks paid HAI back for its cost to purchase the US Banc

24

judgment, Sac EDM would remain liable to HAI for the entire $283,473.77 owed under that

25

judgment plus interest, but that 50 percent of all of Sac EDM’s payments in satisfaction of that

26

liability would be distributed to Dan Folk personally after Sac EDM paid off the entire judgment

27

amount, with the other 50 percent going to Hynes, as “extra profit” under the terms of the parties’

28

business agreement. (Tr. 105-06.)
19

Based on Hynes’ representations, Dan Folk agreed to Hynes’ proposal and signed a

1
2

written amendment to the parties’ business plan that reflected those terms. (Exh. 162; Tr. 1571.)

3

The written agreement acknowledged that the purpose behind Hynes’ purchase of the deficiency

4

judgment from US Banc was “to preclude further legal action against Folk and their [sic]

5

companies for any resulting deficiency.” (Id.) The agreement provided that the Folks would pay

6

back the $50,000 HAI paid to purchase the stipulated judgment from US Banc at an interest rate

7

of eight percent per annum, and that a monthly payment of one percent of the loan balance was to

8

be paid from Dan Folk’s share of the OK EDM joint venture’s profit until the Folks paid off the

9

balance of that charge.16 (Id.) The agreement provided further that after the Folks paid Hynes

10

back for the purchase cost, Sac EDM would begin to make payments on the full balance of the

11

judgment plus interest. (Id.) It also stated that Sac EDM would not have to begin making

12

payments on the full amount of the judgment for one year, but that interest would continue to

13

accrue prior to the first payment. (Id.) Upon Sac EDM’s payment of the full judgment, the terms

14

of the written agreement entitled Dan Folk to receive 52.5 percent and Hynes 47.5 percent of

15

those payments as a lump sum “profit” payout. (Id.) The agreement also stipulated that the Folks

16

would personally guarantee Sac EDM’s payment of the full judgment. (Id.) After the agreement

17

was signed, Hynes determined that Sac EDM was not permitted to include its payments on the

18

judgment as part of the operating costs it billed to OK EDM for reimbursement every month

19

based on his claim that those payments arose from a liability that existed prior to January 1, 2004.

20

(Exh. 338; Tr. 1243-44.)

21

In August of 2005, the Folks sold their home for $895,000 and were able to apply

22

$52,451.51 of the proceeds from that sale towards the full satisfaction of the amount they owed

23

Hynes for his purchase of the US Banc judgment plus the interest that had accrued on that balance

24

as of that time. (Exhs. 291, 338; Tr. 100, 104, 952.) They also used some of those proceeds to

25

16

26
27
28

While Hynes testified at trial that the $50,000 loan he provided to the Folks was to cover a
charge for his services in negotiating with US Banc on Sac EDM’s behalf and for his willingness
to put his own money on the line to purchase the judgment (Tr. 963-64, 967, 1265), the court
finds that testimony to lack credibility in light of the preponderance of the evidence
demonstrating that the $50,000 charge to the Folks was to reimburse the amount HAI spent to
purchase the judgment from US Banc and then deem it satisfied.
20

1

satisfy fully the balance remaining on the $150,000 mortgage that HAI d/b/a OK EDM, had

2

placed on their personal properties on August 30, 2004. (Exh. 291; Tr. 951-52.) On August 31,

3

2005, Dan Folk charged Sac EDM for the $52,451.51 the Folks paid to HAI to resolve the US

4

Banc judgment on Sac EDM’s behalf. (Exh. 61.) The terms of that loan provided for 9.5 percent

5

interest per annum and that Sac EDM would begin to make payments to Dan Folk on that debt

6

beginning in January of 2006. (Id.) Sac EDM began making payments on that debt on January 1,

7

2006, and fully satisfied its payment obligation to Dan Folk on March 1, 2007. (Id.)

8
9

After HAI purchased the US Banc judgment, but before Sac EDM began to make monthly
payments on that debt, HAI sold the note for the US Banc judgment to Hynes Children. (Tr.

10

1027-28.) In January of 2006, Sac EDM began making monthly payments to Hynes Children on

11

the full amount of the US Banc judgment that HAI had purchased plus 10 percent interest, which

12

was set per the terms of the original settlement with US Banc. (Exh. 338; Tr. 115, 1028-29.) On

13

January 1, 2008, HAI wrote Hynes Children a check for $129,052.45 to repurchase the note on

14

the US Banc judgment. (Exh. 71; Tr. 1027-29.) From that date forward, Sac EDM made its

15

monthly payments on that judgment to HAI. (Exh. 84; Tr. 1027-29.) Sac EDM continued to do

16

so until it altogether stopped making such payments in April of 2010. (Exh. 84.)

17

Around the beginning of 2005, Dan and Geraldine Folk separated from one another and

18

began the process of getting a divorce, which was finalized in 2008. (Tr. 465, 1338, 1396.)

19

During the divorce process, Dan Folk bought out any financial interest Geraldine Folk had in the

20

Sac EDM business operation, and, on December 12, 2007, Hynes, HAI, and Hynes Children all

21

signed a release of any financial obligations Geraldine Folk may have owed to them in relation to

22

the parties’ business dealings. (Exh. 204; Tr. 1338.)

23

During the course of the divorce proceedings, Dan Folk had to incur substantial additional

24

personal expenses, such as finding a new residence, which caused him to seek out advances on

25

his share of OK EDM’s profits, which Hynes provided to him interest free. (Exh. 59; Tr. 524,

26

1004-07.) In order to obtain funds for personal use, Dan Folk also had Sac EDM write checks to

27

him, which was a practice both Dan and Geraldine Folk had engaged in since prior to the

28

commencement of the OK EDM joint venture, and would consider that amount a loan from the
21

1

company that he was obligated to pay back. (Exhs. 168, 177; Tr. 458-62, 1211-13, 1441-42,

2

1491, 1500-04.) These personal expenses paid for by Sac EDM could not be reimbursed each

3

month by way of its monthly invoice to OK EDM because they were not a part of Sac EDM’s

4

necessary operating expenses. (Tr. 705-06, 799, 1197-98.)

5

Throughout the course of 2005, Sac EDM operated at a loss. (Exhs. 171, 177.)

6

Accordingly, around September of 2005, Hynes agreed to temporarily cut the interest rate on the

7

operating loans OK EDM provided to Sac EDM down to 5 percent in order to further improve its

8

cash flow and its profit and loss balance. (Exh. 171; Tr. 996-98.) Hynes also agreed to

9

temporarily reduce Sac EDM’s monthly equipment lease costs by about $3,000. (Exh. 171.)

10

On January 15, 2006, Hynes prepared, and Dan Folk and Hynes signed, a business

11

relationship withdrawal plan that provided terms under which the parties could withdraw from the

12

OK EDM joint venture. (Exh. 21; Tr. 1008-10.) This agreement provided that either party could

13

terminate the joint venture upon 30 days’ notice, but that the actual effective date for termination

14

would be either 30 days after that notice, or as soon as Sac EDM and/or Dan Folk did not owe

15

any money to Hynes or HAI, including any accounts receivable, the US Banc judgment, or loans

16

of any type, whichever event came later. (Exh. 21.) The agreement provided further that if a

17

party provided notice of termination, Hynes would continue to provide and receive compensation

18

for his consulting services in a manner similar to the time prior to that notice until he and his

19

companies had been paid by Sac EDM and Folk in full, at which time the parties would begin to

20

wind down such services while still providing Sac EDM the option to continue leasing equipment

21

from defendants. (Id.)

22

On June 30, 2006, Hynes Children began to bill Sac EDM directly for the eight items

23

included in the attachments to the August 1, 2004 master lease and the Tom White equipment,

24

which was also leased under the terms of the August 1, 2004 master lease. (Exh. 277.)

25

Nevertheless, Sac EDM continued to remit its monthly payments for that equipment to HAI.

26

(Exh. 363.)

27

////

28

////
22

1

On October 1, 2006, Sac EDM and HAI entered into a second master lease agreement for

2

certain equipment that HAI had purchased for Sac EDM’s use in its operations for the OK EDM

3

joint venture. (Exhs. 2, 363.) The terms of the master lease agreement were substantially the

4

same as those contained in the August 1, 2004 master lease. (Id.) This second master lease was

5

signed by Dan Folk on behalf of Sac EDM as lessee and by Hynes on behalf of HAI as lessor.

6

(Id.) This agreement included two attachments describing each piece of leased equipment and the

7

rates at which that equipment was leased, which were derived from the same calculation used to

8

determine the rates of the leased equipment associated with the August 1, 2004 master lease. (Id.)

9

Unlike the attachments for the individual pieces or groups of equipment leased under the August

10

1, 2004 master lease, the two attachments to the October 1, 2006 master agreement named the

11

lessee as Sac EDM and lessor as HAI and were drafted at the same time as the master agreement.

12

(Id.)

13

By early 2007, as a result of Sac EDM’s operating losses, Hynes and HAI were allegedly

14

taking out their own loans in order to ensure there was a sufficient pool of funds available to

15

provide Sac EDM with operating loans when requested. (Exh. 197.) Also around that time,

16

Hynes approached Dan Folk about obtaining “key man” life insurance policies on both of their

17

lives for the purpose of ensuring Sac EDM’s outstanding operating loans were paid off in the

18

event of Dan Folk’s or Hynes’ death. (Tr. 1021-23.) On March 28, 2007, Dan Folk and Hynes

19

signed another amendment to the parties’ business plan. (Exh. 64.) Through this amendment,

20

they agreed that HAI would purchase and pay for term life policies on the lives of Dan Folk and

21

Hynes in an amount of $500,000 on each person, with the beneficiary of each policy being HAI.

22

(Id.) The parties agreed that the cost of each policy was to “be considered a necessary cost of

23

operations of the OK EDM program and included with the normal expenses on a monthly basis,”

24

meaning that Sac EDM was ultimately responsible for repaying HAI for those expenses, but

25

could seek loans and reimbursement through the OK EDM joint venture. (Id.; Tr. 547.) The

26

proceeds from the policy taken out on Dan Folk were to be used to fund Sac EDM’s operations in

27

the event of his death until either it was sold or HAI elected to continue its operations. (Id.) The

28

proceeds from the policy taken out on Hynes were to be applied in full satisfaction of all then23

1

existing loans Sac EDM owed to HAI and the US Banc stipulated judgment, even if those

2

liabilities exceeded the $500,000 payout. (Id.) However, those proceeds could not be applied

3

towards the amounts Sac EDM owed under the equipment leases. (Id.)

4

In accordance with the parties’ amended business plan, a $500,000 term life insurance

5

policy with a 20-year term was taken out on Dan Folk’s life with HAI named as the beneficiary.

6

(Exh. 64.) The yearly premium amount on the policy was $3,979, amounting to monthly

7

payments of roughly $340. (Id.) The term of the policy was set at 20 years based on Hynes’

8

belief at the time that that amount of time would be necessary for Sac EDM to pay back all of the

9

debts he claimed were owed to defendants. (Tr. 1025-26.)

10

A life insurance policy of $500,000 was also taken out on Hynes’ life with HAI as the

11

beneficiary on August 15, 2007. (Exh. 64.) The plan had a lifetime term and a yearly premium

12

of $18,686.92, amounting to monthly payments of roughly $1,560. (Id.) The large difference in

13

premium payments between the two policies was primarily attributable to the fact that Hynes was

14

in his seventies at the time, while Dan Folk was in his forties. (Tr. 176.)

15

Both insurance policies became effective in October of 2007. (Exhs. 64, 238.)

16

Accordingly, that month, HAI began to invoice Sac EDM $1,900 per month for the combined

17

monthly total of the two insurance policies’ premiums pursuant to the parties’ agreement, and Sac

18

EDM began sending that amount to HAI each month to cover that expense. (Exh. 238.) Hynes

19

later approached Dan Folk and requested that he own the insurance policy on Dan Folk in order to

20

ensure that Dan Folk did not change the policy, and Dan Folk agreed. (Tr. 549-51.) Beginning

21

March of 2009, Sac EDM began to send only $50 per month to HAI for the insurance premiums

22

based on Dan Folk’s contention that that amount covered the reasonable cost of life insurance on

23

his life alone. (Exh. 238; Tr. 853.)

24

On July 30, 2009, Dan Folk requested that Hynes not renew the insurance policy on Dan

25

Folk’s life and insisted that he could get a new term policy in place within a couple of months,

26

but Hynes did not agree to cancel it. (Exhs. 96, 102, 217; Tr. 182-83.) Nevertheless, Sac EDM

27

continued to make the $50 per month payment to HAI for the premiums until it stopped making

28

payments altogether in July of 2011 at Dan Folk’s insistence. (Exh. 102; Tr. 853.) HAI has
24

1

continued to make full premium payments on both policies since Sac EDM began to pay a

2

reduced amount in February of 2009.

3

On July 31, 2007, HAI began to charge a reduced flat rate of $5,000 per month for all nine

4

leases under the August 1, 2004 master lease, and continued to bill Sac EDM at that monthly rate

5

for the remainder of 2007. (Exhs. 277, 363; Tr. 1346.) HAI once again charged Sac EDM for the

6

full amount on these leases beginning in January of 2008. (Id.)

7

On February 1, 2008, Sac EDM and HAI entered into a third master lease agreement for

8

certain equipment that HAI had purchased for Sac EDM’s use in its operations for the OK EDM

9

joint venture. (Exhs. 3, 363.) The terms of the master lease agreement were substantially the

10

same as those contained in the August 1, 2004 and October 1, 2006 master leases. (Exhs. 1, 2, 3,

11

363.) This third master lease was signed by Dan Folk on behalf of Sac EDM as lessee and by

12

Hynes on behalf of HAI as lessor. (Exhs. 3, 363.) This agreement included five attachments

13

describing each piece of leased equipment and the rates at which that equipment was leased,

14

which were derived from the same calculation used to determine the rates of the leased equipment

15

associated with the August 1, 2004 and October 1, 2006 master leases. (Id.) Similar to the

16

October 1, 2006 leases, each of the five attachments to the February 1, 2008 master lease named

17

the lessee as Sac EDM, the lessor as HAI, and were drafted at the same time as the master

18

agreement. (Id.)
On July 19, 2008, Dan Folk and Hynes signed a written “Business Relationship Profit

19
20

Withdrawal Plan.” (Exh. 75.) Pursuant to this agreement, Sac EDM was to discontinue its

21

operation as a vendor to HAI on September 1, 2008, meaning that Sac EDM would retain all

22

income from its accounts receivable from that date forward and would not send those funds to

23

HAI d/b/a OK EDM. (Exhs. 75, 76, 77.) However, the parties were to continue the profit sharing

24

ratio set forth in their business plan. (Id.) Hynes and HAI were also to continue providing

25

operating loans to Sac EDM for at least six months, longer if Sac EDM could generate profits

26

sufficient to repay those loans and Hynes had access to such capital to provide the loans, under

27

the lending terms set forth in the previous business plans. (Id.)

28

////
25

1

In October of 2008, Dan Folk insisted that the monthly payments on each of the leases be

2

reduced to improve Sac EDM’s cash flow, and Hynes agreed. (Tr. 1353-56.) Accordingly,

3

beginning with the October 31, 2008 billings, HAI reduced the amounts on its lease invoices by

4

10 percent, and Hynes Children reduced the payments for the leases it held by 20 percent. (Exh.

5

277; Tr. 1353-56.)

6

Around the end of 2008, the board of directors of Hynes Children allegedly expressed its

7

concern to Hynes about having Hynes Children continue as a lessor under the equipment leases.

8

(Tr. 1342-43.) Accordingly, on December 31, 2008, Hynes Children assigned via writing “all

9

right, title, and interest” it had in any lease agreements under which it was named as lessor and

10

“Sacramento E.D.M., Inc. and/or SacEDM & Waterjet, SP and/or Dan Folk, an individual” as

11

lessee to HAI in exchange for one dollar “and other valuable consideration.” (Exh. 363.) The

12

agreement also acknowledged that HAI was now the owner of the property described in such

13

leases and that the lessee would send all payments under those leases to HAI. (Id.) This

14

agreement was signed by Jane Hynes on behalf of Hynes Children, and Hynes on behalf of HAI.

15

(Id.) Accordingly, beginning with the February 28, 2009 billing, HAI began to send to Sac EDM

16

a single invoice for all of the equipment subject to each of the three master leases. (Exh. 277.)

17

By early 2009, Dan Folk had retained the services of attorney Gregory Beyer to assist him

18

in communicating with Hynes regarding the parties’ remaining financial ties and the parties’

19

disputes regarding the payment of the outstanding debts Hynes claimed were owed by plaintiffs

20

to him and his companies, but the parties were unable to reach an agreement. (Exhs. 80-89, 101.)

21

Beginning in March of 2009, Sac EDM began to pay less than the full amount HAI

22

invoiced it each month for the leased equipment. (Exhs. 277, 363; Tr. 1359.) This reduction

23

occurred because Dan Folk instructed Shannon Gomez to send a check each month for less than

24

the amount invoiced by HAI. (Id.) HAI accepted the reduced payments because Hynes did not

25

want to declare the leases in default and repossess the equipment based on his belief that

26

declaring default and repossessing the leased equipment “wouldn’t help anybody out.” (Tr.

27

1359.) HAI did not assess any additional fees or penalties to Sac EDM for failing to pay the full

28

amounts due on the invoices. (Tr. 1379-80.)
26

1

In September of 2010, Dan Folk sold one of the pieces of leased equipment, identified by

2

the parties as a “Sodick AM3L large sinker EDM” in the fourth attachment to the February 1,

3

2008 master lease and as lease number 14, to a third party buyer in Mexico for $4,200. (Exh.

4

223; Tr. 561-62.) When Dan Folk communicated this fact to Hynes, Hynes accused Dan Folk of

5

stealing that property from Hynes and his companies and demanded that Sac EDM send a check

6

for the amount it would cost to buy that piece of equipment under the terms of the master lease

7

agreement, which Hynes calculated to be $22,770. (Exh. 225; Tr. 566.) After some further

8

disagreement between Dan Folk and Hynes regarding the buyout price, Dan Folk ultimately had

9

Sac EDM send HAI a check for the amount Hynes demanded to buy out the lease. (Exhs. 224,

10

225, 228, 230; Tr. 566-574.) Beginning with the October 2010 billing for the equipment leases,

11

HAI no longer charged Sac EDM for the “Sodick AM3L large sinker EDM,” the fourteenth lease.

12

(Exh. 277.)

13

In October of 2010, Dan Folk and Hynes discussed the possibility of cancelling the

14

equipment leases, but Dan Folk reconsidered and expressed his desire to not terminate the leases

15

on October 21, 2010, after Hynes explained that Sac EDM would lose all of the equity it had built

16

up in the leased equipment through its prior payments. (Exhs. 230, 231.)

17

In August of 2011, Dan Folk attempted to provide Hynes with notice that Sac EDM

18

desired to terminate all of the equipment leases that the parties had entered into, but Hynes

19

convinced him to reconsider after offering to allow Sac EDM to pay $6854.60 per month with a

20

five percent interest rate, which Hynes concluded would allow Sac EDM to exercise its option to

21

purchase all of the leased equipment in five years’ time under the buyout formula set forth in the

22

three written master lease agreements. (Exhs. 109, 277.) Sac EDM began to pay that amount

23

each month until December of 2011, when Dan Folk instructed Shannon Gomez to contact Hynes

24

and tell him that Sac EDM would stop sending any payments to HAI for the leased equipment.

25

(Exh. 277; Tr. 1364-65.) By January of 2012, Sac EDM had altogether stopped making monthly

26

payments to HAI on any of the 20 equipment leases.17 (Exh. 363.)

27
28

17

Specifically, Sac EDM stopped making monthly payments on lease numbers 11 and 12 in
November of 2011; lease numbers 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 13, 15, 16, and 17 in December of
27

1

On June 25, 2012, Dan Folk wrote to Hynes stating that he was once again interested in

2

having Sac EDM make payments on the leased equipment, but would only do so on the condition

3

that Hynes agree to the payment terms he proposed in August of 2011; Hynes did not agree to

4

these terms.18 (Exhs. 256, 257, 258; Tr. 282-83.)

5

On July 31, 2012, Sac EDM made its last payment towards the outstanding operating loan

6

balance. (Exh. 289.) After that payment was applied, the outstanding operating loan balance

7

owed by Sac EDM to HAI was allegedly $516,777.35. (Id.)

8
9

On October 4, 2012, plaintiffs filed the present action in the Sacramento County Superior
Court, which was removed to this court by defendants on February 14, 2013. (ECF No. 2.)

10

Defendants Hynes and HAI initially asserted their counterclaims in an action filed in the United

11

States District Court for the Western District of Missouri on December 10, 2012. (ECF No. 81.)

12

That action was subsequently transferred in to this court, and then consolidated with the present

13

action. (ECF No. 86.)

14

On February 13, 2015, HAI renewed the US Banc judgment in Sacramento County

15

Superior Court case number 04AS03050, the action originally filed by US Banc against Sac

16

EDM, as the assignee of record. (Exh. 305.) The renewed judgment amount was for

17

$247,393.60. (Id.)

18

////

19

////

20

////

21

////

22
23

2011; and lease numbers 18, 19, and 20 in January of 2012. (Exh. 363.)

24

18

25
26
27
28

While both the June 25, 2012 writing and Dan Folk’s testimony regarding this document refer
to Hynes’ proposal regarding revising the terms of the leases as having been made in August of
2009, the specific terms of the revised lease agreement Dan Folk referred to in his letter and
testimony and the invoice documents in evidence more strongly suggest that Dan Folk meant to
refer to the proposal Hynes made in August of 2011. Given the general unreliability of Dan
Folk’s testimony, particularly with regard to remembering the specific timeframes during which
the events at issue occurred, the court finds that Dan Folk intended to refer to the proposal made
in August of 2011, not 2009, when he sought to resume lease payments in June of 2012.
28

1
2
3

III.

Conclusions of Law
A.

Initial Matters
1.

Waiver of Plaintiffs’ Defenses to Defendants’ Counterclaims

4

As an initial matter, defendants argue in their post-trial briefing that plaintiffs have waived

5

all of the affirmative defenses they assert with regard to Hynes’ and HAI’s counterclaims because

6

plaintiffs never filed an answer to the counter-complaint. Plaintiffs acknowledge that they never

7

filed an answer to defendants’ counter-complaint, but urge that their failure to file such a pleading

8

was an oversight due to the genesis of the counter-complaint filed in this action. Plaintiffs

9

represent that Hynes and HAI initially filed their claims against plaintiffs as a separate action

10

filed in the United States District Court for the Western District of Missouri, which was

11

subsequently transferred to this district as a separate action and then later consolidated into the

12

present action. Plaintiffs represent further that they were represented by different counsel while

13

the action was pending in the Western District of Missouri and that their failure to file an answer

14

is based on an erroneous belief that an answer had already been filed by their previous counsel

15

while the action was still pending in that court. Plaintiffs argue that their failure to file an answer

16

should not have a fatal effect on their defenses to Hynes’ and HAI’s counterclaims because

17

plaintiffs’ defenses have been asserted in such a manner over the course of this action such that

18

defendants have been given fair notice of plaintiffs’ defenses and have not been unduly

19

prejudiced by the lack of an answer. The court finds plaintiffs’ arguments to prevail on this issue.

20

“The purpose of . . . pleading [an affirmative defense] is to give the opposing party notice

21

of the [defense] and a chance to argue, if he can, why the imposition of [the defense] would be

22

inappropriate.” Blonder-Tongue Lab., Inc. v. Univ. of Ill. Found., 402 U.S. 313, 350 (1971). It

23

appears the Ninth Circuit Court of Appeals has not yet provided a decision on whether the lack of

24

an answer asserting affirmative defenses entirely precludes a party opposing a counterclaim from

25

asserting defenses to that counter-claim. However, it has held that the failure to raise an

26

affirmative defense in an answer to a complaint does not bar a defendant from raising that defense

27

later on in the litigation “[i]n the absence of a showing of prejudice” to the plaintiff. Camarillo v.

28

McCarthy, 998 F.2d 638, 639 (9th Cir. 1993) (“Qualified immunity is an affirmative defense that
29

1

should be pled by the defendant. In the absence of a showing of prejudice, however, an

2

affirmative defense may be raised for the first time at summary judgment.” (internal citation

3

omitted)). Similarly, a number of other federal appeals courts have addressed the issue of

4

whether defenses are automatically waived if they are not raised in an answer, and have taken an

5

approach that is forgiving of parties raising defenses for the first time outside of an answer.

6

Indeed, such courts have held that “strict adherence to the pleading requirement is inappropriate

7

when the purpose of the requirement has been otherwise fulfilled.” Ahmad v. Furlong, 435 F.3d

8

1196, 1201 (10th Cir. 2006). Based on these principles, a number of federal appeals courts have

9

ruled that a defense may be raised for the first time outside of an answer without waiver under

10

circumstances where that “defense is raised in sufficient time that there is no prejudice to the

11

opposing party.” Ahmad, 435 F.3d at 1201; see also Williams v. Ashland Eng’g Co., 45 F.3d 588,

12

593 (1st Cir. 1995) (“Rule 8(c)’s core purpose [is] to act as a safeguard against surprise and unfair

13

prejudice . . . . Where, as here, a plaintiff clearly anticipates that an issue will be litigated, and is

14

not unfairly prejudiced when the defendant actually raises it, a mere failure to plead the defense

15

more particularly will not constitute a waiver.”); Saks v. Franklin Covey Co., 316 F.3d 337, 350

16

(2d Cir. 2003) (“[A] district court may still entertain affirmative defenses [not pleaded in the

17

answer] at the summary judgment stage in the absence of undue prejudice to the plaintiff, bad

18

faith or dilatory motive on the part of the defendant, futility, or undue delay of the proceedings.”);

19

Pro v. Donatucci, 81 F.3d 1283, 1286 n. 2 (3d Cir. 1996) (“Our court previously has taken the

20

position that whether an affirmative defense that must be pleaded in the answer is waived will

21

depend on whether the defense was raised at a pragmatically sufficient time and the plaintiff was

22

prejudiced in the ability to respond.” (internal quotation marks omitted)); Brinkley v. Harbour

23

Recreation Club, 180 F.3d 598, 612 (4th Cir. 1999) (“[T]here is ample authority in this Circuit for

24

the proposition that absent unfair surprise or prejudice to the plaintiff, a defendant’s affirmative

25

defense is not waived when it is first raised in a pre-trial dispositive motion.”); Giles v. Gen. Elec.

26

Co., 245 F.3d 474, 491-92 (5th Cir. 2001) (“Although failure to raise an affirmative defense

27

under rule 8(c) in a party’s first responsive pleading generally results in a waiver, where the

28

matter is raised in the trial court in a manner that does not result in unfair surprise technical
30

1

failure to comply with Rule 8(c) is not fatal.” (internal quotation marks, brackets, and ellipses

2

omitted)); Moore, Owen, Thomas & Co. v. Coffey, 992 F.2d 1439, 1445 (6th Cir. 1993) (“It is

3

well established, however, that failure to raise an affirmative defense by responsive pleading does

4

not always result in waiver.”); Fin. Timing Publ’ns, Inc. v. Compugraphic Corp., 893 F.2d 936,

5

944, n.9 (8th Cir. 1990) (affirmative defense not waived when other “notices were sufficient to

6

avoid unfair surprise”); Grant v. Preferred Research, Inc., 885 F.2d 795, 797 (11th Cir. 1989)

7

(“[I]f a plaintiff receives notice of an affirmative defense by some means other than pleadings, the

8

defendant’s failure to comply with Rule 8(c) does not cause the plaintiff any prejudice. When

9

there is no prejudice, the trial court does not err by hearing evidence on the issue.” (internal

10
11

quotation marks and citation omitted)).
Here, while plaintiffs did not file an answer asserting their affirmative defenses to Hynes’

12

and HAI’s counterclaims, the parties have had a seven-day trial on the merits of the parties’

13

claims and defenses in this action, in addition to extensive post-trial briefing that included reply

14

briefing that defendants used to address each of the affirmative defenses plaintiffs assert.

15

Furthermore, under the circumstances presented in this action, plaintiffs’ claims against

16

defendants are in the nature of counterclaims to the claims Hynes and HAI raise in their counter-

17

complaint, but could also easily be construed as defenses to Hynes’ and HAI’s counterclaims

18

because plaintiffs’ success on the merits of those claims would necessarily preclude those

19

defendants from prevailing with respect to some or all of the contractual and quasi-contractual

20

relief they seek through their counterclaims. See Fed. R. Civ. P. 8(c)(2) (“If a party mistakenly

21

designates a defense as a counterclaim, or a counterclaim as a defense, the court must, if justice

22

requires, treat the pleading as though it were correctly designated, and may impose terms for

23

doing so.”).

24

Nothing in the record suggests that plaintiffs’ failure to file an answer to Hynes’ and

25

HAI’s counter-complaint kept those defendants from seeking discovery that they would have

26

sought had an answer asserting plaintiffs’ defenses been filed, nor is there any indication that

27

those defendants have been unable to adequately respond to the defenses plaintiffs assert. It is

28

clear from the trial transcript and the parties’ post-trial briefing that defendants have received fair
31

1

notice of plaintiffs’ defenses to Hynes’ and HAI’s counterclaims and have taken the opportunity

2

to fully respond to each of those defenses. The notice plaintiffs provided with regard to each of

3

their defenses to Hynes’ and HAI’s counterclaims was sufficient to avoid unfair surprise or

4

prejudice to those defendants. Accordingly, the court finds that plaintiffs have not waived their

5

affirmative defenses.

6

2.

Defendants also argue as an initial matter that all of plaintiffs’ claims are barred by the

7
8

Statutes of Limitations

applicable statutes of limitations.
The applicable limitations period for plaintiffs’ claim for breach of fiduciary duty is four

9
10

years, Cal. Code Civ. Proc. § 343, while a three year limitations period applies to plaintiffs’ fraud

11

and constructive fraud claims, Cal. Code Civ. Proc. § 338; see also Boyd v. Blankman, 29 Cal.

12

19, 46 (1865). Defendants argue that the latest plaintiffs could have first become aware of the

13

wrongdoing alleged against defendants with regard to plaintiffs’ claims for breach of fiduciary

14

duty, fraud, and constructive fraud was either March or April of 2009, which defendants assert is

15

when the evidence presented at trial shows that attorney Beyer began representing plaintiffs with

16

regard to the parties’ business relationship. However, the court finds this argument unpersuasive

17

because the nature of plaintiffs’ claims for breach of fiduciary duty, fraud, and constructive fraud

18

as plaintiffs alleged them in the complaint and asserted them at trial demonstrates that plaintiffs

19

timely asserted those claims under the continuing violation doctrine.
“The continuing violation doctrine aggregates a series of wrongs or injuries for purposes

20
21

of the statute of limitations, treating the limitations period as accruing for all of them upon

22

commission or sufferance of the last of them.” Aryeh v. Canon Bus. Sols., Inc., 55 Cal. 4th 1185,

23

1192 (2013). “Allegations of a pattern of reasonably frequent and similar acts may, in a given

24

case, justify treating the acts as an indivisible course of conduct actionable in its entirety,

25

notwithstanding that the conduct occurred partially outside and partially inside the limitations

26

period.” Id. at 1197.

27

////

28

////
32

1

Here, plaintiffs assert their claims for breach of fiduciary duty, fraud, and constructive

2

fraud based on a theory that Hynes, acting on behalf of the other two defendants, engaged in

3

conduct that was both a breach of his fiduciary duty to plaintiffs and fraudulent throughout the

4

course of the parties’ business relationship, which spanned into 2012. More specifically,

5

plaintiffs assert those claims based on Hynes’ crafting of certain deals and business arrangements,

6

such as the equipment leases between defendants and Sac EDM, the agreement setting forth the

7

terms of repayment on the US Banc judgment, and the provision of operating loans to Sac EDM,

8

that caused continuing harm to plaintiffs with each additional payment defendants sought to

9

extract from plaintiffs via the terms of those agreements. Defendants continued their practice of

10

billing plaintiffs into 2012 and beyond pursuant to the terms of these agreements that were

11

allegedly entered into based on defendants’ tortious actions, and still seek to collect those

12

amounts through their counterclaims in this present action. Accordingly, the court concludes that

13

plaintiffs’ breach of fiduciary duty, fraud, and constructive fraud claims have been asserted within

14

the applicable limitations periods for those claims under the continuing violation doctrine.19
A two-year limitations period applies to plaintiffs’ claim for tortious interference with

15
16

contract.20 Kiang v. Strycula, 231 Cal. App. 2d 809, 811-12 (1965); see also Cal. Civ. Proc. Code

17

§ 339(1). “A tortious-interference claim typically accrues ‘at the date of the wrongful act.’” DC

18

Comics v. Pac. Pictures Corp., 938 F. Supp. 2d 941, 948 (C.D. Cal. 2013) (quoting Trembath v.

19

Digardi, 43 Cal. App. 3d 834, 836 (1974)). “But in no event does a claim accrue ‘later than the

20

actual breach of the contract by the party who was wrongfully induced to breach,’ because the

21

breach is the culmination of the alleged wrong.” Id.

22
23
24
25

19

Furthermore, even if the court were to accept defendants’ argument that the applicable
limitations periods began to run in either March or April of 2009, plaintiffs’ breach of fiduciary
duty claim would still fall within the applicable four-year limitations period as it was first asserted
when plaintiffs initially filed this action in state court on October 12, 2012. (See ECF No. 2.)
20

26
27
28

A two-year limitations period also applies to plaintiffs’ claims for negligent and intentional
interference with contract. However, as discussed below, plaintiffs request the court to dismiss
those two claims based on an admission that insufficient evidence with regard to those claims was
presented at trial. Accordingly, the court declines to address defendants’ statute of limitations
argument with regard to those claims.
33

1

Here, plaintiffs premise their claim for tortious interference with contract on the assertion

2

that Hynes wrongfully induced Sac EDM to breach the equipment lease contract it had with US

3

Banc. A preponderance of the evidence demonstrates that, at the absolute latest, Sac EDM

4

breached that contract in late 2004. Plaintiffs commenced the present action, and thus first

5

asserted their claim for tortious interference with contract, in the Sacramento County Superior

6

Court on October 12, 2012, well beyond the two-year limitations period. (See ECF No. 2.)

7

Unlike their other claims, plaintiffs cannot demonstrate a continuing violation with regard to their

8

tortious interference with contract claim because the breach of their contract with US Banc was

9

necessarily “the culmination of the alleged wrong,” and thus the beginning of the two-year

10

limitations period. DC Comics, 938 F. Supp. 2d 941, 948. Accordingly, the court concludes that

11

plaintiffs’ claim for tortious interference with contract is barred by the applicable statute of

12

limitations.21

13

3.

Plaintiffs’ Claims for Unjust Enrichment and Declaratory Relief

The court also addresses as an initial matter plaintiffs’ claims for unjust enrichment and

14
15

declaratory relief, which plaintiffs assert in their pleading as independent claims. Declaratory

16

relief and unjust enrichment are not independent causes of action under California law; instead,

17

they are forms of relief that may be requested in conjunction with a cognizable cause of action

18
19
20
21
22
23
24
25
26
27
28

21

Moreover, the court concludes that plaintiffs fail to meet their burden to prove all of the
elements necessary to support their tortious interference with contract claim on the merits. In
particular, the court finds that plaintiffs fail to establish evidence sufficiently demonstrating that
Hynes engaged in intentional actions that were designed to induce a breach or disruption of the
contractual relationship between Sac EDM and US Banc. See Quelimane Co. v. Stewart Title
Guar. Co., 19 Cal. 4th 26, 55 (1998) (quoting Pacific Gas & Elec. Co. v. Bear Stearns & Co., 50
Cal.3d 1118, 1126 (1990)). Contrary to plaintiffs’ assertion that Hynes engaged in such conduct
and caused the breach of Sac EDM’s equipment lease with US Banc, the evidence demonstrates
that Hynes actually encouraged both Dan and Geraldine Folk to ensure that Sac EDM did not
default on its US Banc lease and provided Sac EDM with a business structure that provided it the
opportunity to obtain sufficient operating capital to cover the monthly US Banc lease payments,
among other expenses, through the OK EDM joint venture. Furthermore, the evidence
demonstrates that, despite this opportunity, Sac EDM still decided to stop making its monthly
lease payments to US Banc, thereby causing US Banc to declare Sac EDM in default.
Accordingly, the court concludes that even if plaintiffs’ tortious interference with contract claim
was not barred under the statute of limitations, plaintiffs could not prevail on the merits of that
claim based on the evidence presented at trial.
34

1

that permits a court to grant such relief. Ward v. Wells Fargo Bank, N.A., 2011 WL 2458058, at

2

*5 (E.D. Cal. June 16, 2011) (“Declaratory relief is not an independent claim, rather it is a form

3

of relief.”); Munoz v. MacMillan, 195 Cal. App. 4th 648, 661 (2011) (“There is no freestanding

4

cause of action for ‘restitution’ in California.”); Hill v. Roll Int’l Corp., 195 Cal. App. 4th 1295,

5

1307 (2011) (“Unjust enrichment is not a cause of action,” therefore providing no basis for relief

6

in the absence of an actionable wrong); see also Lane v. Vitek Real Estate Indus. Group, 713 F.

7

Supp. 2d 1092, 1104 (E.D. Cal. 2010); Santos v. Countrywide Home Loans, 2009 WL 3756337,

8

at *5 (E.D. Cal. Nov. 6, 2009); Melchior v. New Line Productions, Inc., 106 Cal. App. 4th 779,

9

793 (2003). Therefore, plaintiffs cannot obtain such relief independent of proving their other

10

claims on the merits and that such relief is warranted with regard to their successful claims.

11

Accordingly, the court dismisses these claims to the extent they are asserted independently of

12

another cause of action, but considers the requested remedies to the extent they are appropriate

13

with regard to plaintiffs’ other claims discussed below.
Plaintiffs’ Breach of Fiduciary Duty, Fraud, and Constructive Fraud Claims

14

B.

15

Plaintiffs first claim that the evidence presented at trial proves that Hynes breached the

16

fiduciary duty he owed to plaintiffs in his roles as a paid business advisor and partner in the OK

17

EDM joint venture. More specifically, plaintiffs assert in their post-trial briefing that Hynes

18

breached his duty to plaintiffs in four different ways throughout the course of the parties’ business

19

relationship. First, plaintiffs claim that Hynes breached his duty to them by establishing OK

20

EDM’s structure in the manner it was set forth in the parties’ business plan. Second, plaintiffs

21

assert that Hynes breached his duty to plaintiffs by purchasing equipment on behalf of his

22

companies from Sac EDM and then having those companies lease that equipment back to Sac

23

EDM under the terms set forth in the parties’ various equipment leases. Third, plaintiffs contend

24

that Hynes’ actions with regard to the US Banc lease and subsequent deficiency judgment

25

breached his duty to plaintiffs. Finally, plaintiffs assert that Hynes breached his duty to them by

26

loaning Sac EDM funds through HAI d/b/a OK EDM in a manner that put defendants’ interests

27

above those of plaintiffs’ interests. In addition, plaintiffs assert that each of these instances also

28

gave rise to both fraud and constructive fraud.
35

1
2
3

1.

Legal Standards
a.

Breach of Fiduciary Duty

Under California law, a “fiduciary or confidential relationship may arise whenever

4

confidence is reposed by persons in the integrity and good faith of another. If the latter

5

voluntarily accepts or assumes that confidence, he or she may not act so as to take advantage of

6

the others’ interest without their knowledge or consent.” City of Atascadero v. Merrill Lynch,

7

Pierce, Fenner & Smith, Inc., 68 Cal. App. 4th 445, 483 (1998). “The elements of a cause of

8

action for breach of fiduciary duty are the existence of a fiduciary relationship, its breach, and

9

damage proximately caused by that breach.” Knox v. Dean, 205 Cal. App. 4th 417, 432 (2012).

10

“[E]xamples of relationships that impose a fiduciary obligation to act on behalf of and for

11

the benefit of another are ‘a joint venture, a partnership, or an agency.’” Cleveland v. Johnson,

12

209 Cal. App. 4th 1315, 1339 (2012) (quoting (City of Hope National Medical Center v.

13

Genentech, Inc., 43 Cal. 4th 375, 386 (2008)). However, “[t]hose categories are merely

14

illustrative of fiduciary relationships in which fiduciary duties are imposed by law.” City of Hope

15

National Medical Center, 43 Cal. 4th at 386.

16

Under California Corporation Code § 16404, a fiduciary relationship exists between

17

partners in a business partnership, which is defined as “an association of two or more persons to

18

carry on as co-owners a business for profit.” Id. § 16202(a). It is well-settled that the existence

19

of a partnership is a question of fact. Filippo Indus., Inc. v. Sun Ins. Co. of New York, 74 Cal.

20

App. 4th 1429, 1444 (1999). No particular formalities are required to create a partnership, and

21

whether a partnership has been created may be inferred from the parties’ conduct. See Weiner v.

22

Fleischman, 54 Cal. 3d 476, 482-83 (1991) (“A joint venture or partnership may be formed orally

23

or assumed to have been organized from a reasonable deduction from the acts and declarations of

24

the parties.”) (internal citations and quotation marks omitted); Bank of Cal. v. Connolly, 36 Cal.

25

App. 3d 350, 364 (1973) (“Whether a partnership . . . exists is primarily a factual question to be

26

determined by the trier of fact from the evidence and inferences to be drawn therefrom.”).

27

Whether or not the parties have entered into a partnership relationship generally depends on

28

whether they intended to share in the profits, losses, and the management and control of the
36

1

enterprise. See, e.g., Nelson v. Abraham, 29 Cal. 2d 745, 750 (1947) (noting that profit sharing is

2

a factor in determining whether a partnership exists); Bank of California, 36 Cal. App. 3d at 364

3

(1973) (quoting Holtz v. United Plumbing & Heating Co., 49 Cal.2d 501, 506-07 (1957)) (“A

4

joint venture exists where there is an ‘agreement between the parties under which they have a

5

community of interest, that is, joint interest, in a common business undertaking, an understanding

6

as to the sharing of profits and losses, and a right of joint control.’ ”); Billups v. Tiernan, 11 Cal.

7

App. 3d 372, 379 (1970) (noting that some degree of participation in management and control of

8

business is an element of partnership).

9

Under California law, partners to a partnership or joint venture owe certain duties to their

10

fellow partners to the enterprise. Cal. Corp. Code § 16404. Among those duties is a duty of

11

loyalty, which requires a partner to, among other things, “refrain from dealing with the

12

partnership in the conduct . . . of the partnership business as or on behalf of a party having an

13

interest adverse to the partnership.” Id. § 16404(b)(2). “[U]nder an agreement calling for a

14

division of profits, whether the contract is one of copartnership, joint venture, or employment,

15

good faith and fair dealing require that neither party may be permitted to take an unfair advantage

16

or enjoy greater rights than called for by the terms of the agreement.” Nelson v. Abraham, 29

17

Cal. 2d 745, 751 (1947). Furthermore, a partner must “discharge [his] duties to the partnership

18

and the other partners under [California law] or under the partnership agreement and exercise any

19

rights consistently with the obligation of good faith and fair dealing.” Id. § 16404(d). However,

20

“[a] partner does not violate a duty or obligation [owed under the statutory law] or under the

21

partnership agreement merely because the partner’s conduct furthers the partner’s own interest.”

22

Id. § 16404(e).

23

An agent owes a similar fiduciary duty of loyalty to his principal. In particular, “[a]n

24

agent has a fiduciary duty to act loyally for the principal’s benefit in all matters connected with

25

the agency relationship.” Restatement (Third) Of Agency § 8.01 (2006). As part of this duty of

26

loyalty, “[a]n agent has a duty not to deal with the principal as or on behalf of an adverse party in

27

a transaction connected with the agency relationship.” Id. § 8.03. Nevertheless, conduct by an

28

agent that would otherwise constitute a breach of his duty to not deal with the principal as or on
37

1

behalf of an adverse party

2

8

does not constitute a breach of duty if the principal consents to the
conduct, provided that (a) in obtaining the principal’s consent, the
agent (i) acts in good faith, (ii) discloses all material facts that the
agent knows, has reason to know, or should know would reasonably
affect the principal’s judgment unless the principal has manifested
that such facts are already known by the principal or that the
principal does not wish to know them, and (iii) otherwise deals
fairly with the principal; and (b) the principal’s consent concerns
either a specific act or transaction, or acts or transactions of a
specified type that could reasonably be expected to occur in the
ordinary course of the agency relationship.

9

Id. § 8.06. The rule articulated in § 8.06 requires the agent to engage in “full and fair disclosure”

3
4
5
6
7

10

of the material benefit he receives and requires the principal consent to either the specific

11

transaction or the type of transaction that could be reasonably expected in the ordinary course of

12

business. See id. § 8.06 cmt. c.22
b.

13

Fraud

The elements of a fraud claim under California law are: (1) misrepresentation of material

14
15

fact (consisting of a false representation, concealment or nondisclosure); (2) knowledge of the

16

falsity (or “scienter”); (3) intent to defraud, i.e., to deceive and induce reliance; (4) justifiable

17

reliance on the misrepresentation; and (5) resulting damage. Lazar v. Superior Court, 12 Cal. 4th

18

631, 638 (1996). “[T]o establish a cause of action for fraud a plaintiff must plead and prove in

19

full, factually and specifically, all of the elements of the cause of action.” Conrad v. Bank of

20

America, 45 Cal. App. 4th 133, 156 (1996). “The absence of any one of these required elements

21

22

22
23
24
25
26
27
28

California law is in accord with the above general agency principals set forth in the
Restatement (Third) Of Agency. See Cal. Civ. Code § 2306 (“An agent can never have authority,
either actual or ostensible, to do an act which is, and is known or suspected by the person with
whom he deals, to be a fraud upon the principal.”); Gordon v. Beck, 196 Cal. 768, 773 (1925)
(noting that “[t]he law will not tolerate” an agent acting on behalf of two principals, to the
advantage of one principal and to the disadvantage of the other, “without the knowledge and
consent of both principals”); Assilzadeh v. California Fed. Bank, 82 Cal. App. 4th 399, 415
(2000) (“The failure of the fiduciary to disclose a material fact to his principal which might affect
the fiduciary’s motives or the principal’s decision, which is known (or should be known) to the
fiduciary, may constitute constructive fraud.”); Baird v. Lascy, 71 Cal. App. 2d 142, 143 (1945)
(citing Gordon, 196 Cal. 768) (“[W]here an agent assumes to act for two opposing parties without
disclosing his dual capacity either party may repudiate and defend against the resulting contract
as having been procured by constructive fraud.”).
38

1

will preclude recovery.” Wilhelm v. Pray, Price, Williams & Russell, 186 Cal. App. 3d 1324,

2

1332 (1986).

3

c.

Constructive Fraud

4

To prove their claim for constructive fraud under California law, plaintiffs must

5

demonstrate: (1) the existence of a fiduciary or confidential relationship; (2) a misleading act,

6

omission or concealment by defendants involving a breach of that duty; (3) reliance by plaintiffs;

7

and (4) resulting damage to plaintiffs. Cal. Civ. Code § 1573; Dealertrack, Inc. v. Huber, 460

8

F.Supp.2d 1177, 1183 (C.D. Cal. 2006); Warren v. Merrill, 143 Cal. App. 4th 96, 109 (2006) (“A

9

constructive fraud arises on a breach of duty by one in a fiduciary relationship who misleads

10

another to his prejudice.”). Thus, plaintiffs do not need to establish defendants’ fraudulent intent

11

to prove their constructive fraud claim as long as they have proven the parties are in a fiduciary or

12

confidential relationship. Sandy v. McClure, 676 F. Supp. 2d 866, 882 (N.D. Cal. 2009). “The

13

failure of the fiduciary to disclose a material fact to his principal which might affect the

14

fiduciary’s motives or the principal’s decision, which is known (or should be known) to the

15

fiduciary, may constitute constructive fraud.” Assilzadeh, 82 Cal. App. 4th at 415. “A careless

16

misstatement may constitute constructive fraud even though there is no fraudulent intent.” Id.

17

“Most acts . . . in breach of [the fiduciary’s] duties constitute constructive fraud.” Id.

18
19

2.

Discussion
a.

Fraud

20

As an initial matter, the court notes that plaintiffs in no way argue in their post-trial

21

briefing why the preponderance of the evidence presented at trial demonstrates that Hynes, acting

22

either individually or as a representative of HAI or Hynes Children, committed actual fraud.

23

Instead, plaintiffs argue exclusively in their post-trial briefing that Hynes committed constructive

24

fraud. Plaintiffs cite to no evidence presented at trial showing that Hynes knowingly made a false

25

representation, concealment, or nondisclosure with the intent to deceive either Dan Folk or Sac

26

EDM into reliance at any point over the course of the OK EDM joint venture or the parties’ other

27

business dealings. Indeed, a review of the evidence presented at trial confirms that plaintiffs

28

failed to carry their burden to prove the third element necessary for a fraud claim, that defendants
39

1

knowingly made a misrepresentation with the intent to deceive. Accordingly, the court concludes

2

that plaintiffs failed to prove their fraud claim to the extent it is asserted as a cause of action

3

separate from their constructive fraud claim.

4

b.

5

Breach of Fiduciary Duty and Constructive Fraud
i.

6

Existence of a Fiduciary Relationship

The court finds that a preponderance of the evidence presented at trial demonstrates that a

7

fiduciary relationship existed between Hynes and both Dan Folk and Sac EDM. With regard to

8

Dan Folk, the facts show that both Dan Folk and Hynes were partners with regard to the OK

9

EDM joint venture. The business agreement between the parties provided that both Dan Folk and

10

Hynes were to receive salaries from managing and controlling the OK EDM enterprise and to

11

share in the profits it received through Sac EDM’s operations. All of these facts establish that a

12

partnership was formed between Dan Folk and Hynes with regard to their operation of the OK

13

EDM joint enterprise. Accordingly, the court concludes that plaintiffs have met their burden in

14

establishing the existence of a fiduciary relationship between Dan Folk and Hynes.23

15

Similarly, the court concludes that plaintiffs have met their burden to prove that Hynes

16

was in a fiduciary relationship with Sac EDM. The facts established at trial demonstrate that

17

Hynes, in his role as Sac EDM’s paid business consultant, acted as Sac EDM’s agent throughout

18

the course of the parties’ business relationship. Hynes was paid by Sac EDM to act as its

19

business consultant even prior to the formation of OK EDM and the parties’ joint venture on

20

January 1, 2004, and continued to act in that role throughout the course of the parties’ business

21

dealings. Furthermore, at least initially, the parties characterized the wages Hynes was drawing

22

from Sac EDM as “W-2” wages, indicating the degree of closeness to Sac EDM’s operations the

23

parties intended him to have in his role as its business consultant. While the parties subsequently

24

re-characterized the income Hynes drew from Sac EDM as “1099” wages, his role as a business

25

consultant in relation to Sac EDM continued in the same fashion as it had before. In short, the

26
27
28

23

Indeed, defendants acknowledge in their post-trial briefing that plaintiffs have established by a
preponderance of the evidence that Hynes owed a fiduciary duty to Dan Folk with regard to their
participation in the OK EDM joint venture. (ECF No. 146 at 35.)
40

1

court finds that a preponderance of the evidence demonstrates that the parties intended for Hynes

2

to act as Sac EDM’s agent in his role as its business consultant and that Sac EDM reposed its

3

confidence in Hynes and trusted that he would act with integrity and in good faith in that role to

4

ensure that his advice and actions taken with regard to and on behalf of Sac EDM were in that

5

entity’s best interests.

6
7

Accordingly, the court concludes that plaintiffs have met their burden of proof in showing
that a fiduciary relationship existed between Hynes and plaintiffs.

8

ii.

9

Breach
(a)

10

Creation of the OK EDM Joint Venture

With regard to the establishment of the OK EDM joint venture, plaintiffs argue that the

11

evidence shows that the only purpose behind setting up that venture in the manner Hynes did was

12

to allow himself and HAI to take advantage of HAI’s net operating loss carryforward deduction

13

that was set to expire over the next two years. Plaintiffs contend that the evidence shows that the

14

OK EDM joint venture provided no material advantage to Sac EDM or Dan Folk because Sac

15

EDM had its own net operating loss carryforward that it could have used instead to similar effect.

16

However, the court finds that plaintiffs have failed to offer evidence sufficient to prove that the

17

creation and structure of OK EDM itself constituted a breach of Hynes’ fiduciary duty to either

18

plaintiff.24

19

With regard to Sac EDM, Hynes owed a duty of loyalty to it through his role as Sac

20

EDM’s paid business advisor and agent. In encouraging Sac EDM to enter into the OK EDM

21

business structure as it was constituted by the terms of the business plan and accounting

22

procedures he drafted, Hynes risked breaching that duty of loyalty to Sac EDM because that

23

structure set up regular transactions, i.e., operational loans, with an adverse party that Hynes also

24

represented, i.e., HAI d/b/a OK EDM. Nevertheless, the evidence presented at trial demonstrates

25

that Hynes set forth all of the material details of the OK EDM joint venture, including key terms

26

24

27
28

The parties’ respective positions as to the benefits, if any, of HAI’s net operating loss
carryforward is completely unresolved because both parties did a woefully inadequate job of
presenting any reliable evidence (such as testimony of a retained accounting expert) to address
the relative merits or lack thereof to Sac EDM of any such loss carryforward.
41

1

regarding the provision of operating loans and their repayment, in the various business plan and

2

accounting procedure documents the parties signed, and discussed those terms with Dan Folk

3

prior to entering into the arrangement. Accordingly, the court finds that Hynes, in obtaining Dan

4

Folk’s consent to the OK EDM joint venture, acted in good faith, disclosed all material facts

5

regarding the joint venture’s structure, and otherwise dealt fairly with Dan Folk and Sac EDM.

6

Therefore, the court finds that Hynes did not breach his duty of loyalty to Sac EDM in structuring

7

the OK EDM joint venture as he did.25
The court finds further that Hynes also had Sac EDM’s business interests in mind when he

8
9

created the OK EDM joint venture, because a preponderance of the evidence shows that Sac

10

EDM received a substantial benefit from the formation and operation of the OK EDM joint

11

venture. Indeed, the loans HAI advanced through OK EDM to Sac EDM to cover Sac EDM’s

12

operating costs as those costs arose almost entirely alleviated Sac EDM’s short-term cash flow

13

problems, because it ensured that Sac EDM would have sufficient funds to make payroll,

14

purchase materials to fulfill its customers’ orders, make its lease payments, and pay other bills as

15

they became due, provided that Sac EDM’s management decided to obtain and use the loans

16

towards those ends. Furthermore, OK EDM’s structure permitted Sac EDM to obtain

17

reimbursement from HAI d/b/a OK EDM on a monthly basis for all of its operational expenses.

18

Sac EDM was allowed to use those reimbursement funds to pay down any operating loans it took

19

out from HAI d/b/a OK EDM over the course of a given month, and, ideally, it could have used

20

that reimbursement to fully pay off those loans every month, therefore leaving Sac EDM with no

21

loan balance and all of its expenses paid in full at the end of every month.

22

A preponderance of the evidence demonstrates that by the time Hynes was hired as a

23

consultant and the parties agreed to enter into the joint venture, Sac EDM had dire cash flow

24

issues that created uncertainty as to whether it had sufficient funds to make payroll each month,

25

left it on the brink of default with regard to its equipment lease with US Banc, and created a real

26
27
28

25

However, virtually all of Hynes’ dealings were with Dan Folk, and as the self-proclaimed
business “expert,” Hynes should have ensured that corporate formalities were followed and the
Sac EDM corporation actually approved his recommendations.
42

1

potential that it would have to declare bankruptcy in the near future. The evidence also shows

2

that Sac EDM was having difficulties with obtaining loans or other financing from banks and

3

other sources, even after Hynes was hired as its consultant and made attempts to obtain such

4

outside financing for Sac EDM. While Hynes stood to personally gain financially under the plan

5

through his profit sharing with Dan Folk and his ability to take advantage of HAI’s tax loss

6

carryforward, he would only realize that gain if Sac EDM’s operations were successful because

7

he would receive no profit sharing if the OK EDM joint venture had no profits to share (which

8

were derived solely from Sac EDM’s operations) and could not use HAI’s tax loss carryforward if

9

OK EDM had no positive income to which it could be applied.

10

Similarly, while Hynes and HAI stood to gain some profit from the arrangement through

11

any interest collected on the operating loans, they still had to make significant cash outlays to Sac

12

EDM, which posed a real risk of non-payment in the event that Sac EDM’s operations did not

13

bring in sufficient profits, or if Sac EDM decided to not use the funds it received from HAI d/b/a

14

OK EDM through its monthly invoices for expenses toward paying back those loans. Moreover,

15

the mere extension of the loans themselves to other participants in the OK EDM joint venture did

16

not, by itself, constitute a breach of any duties Hynes owed to Dan Folk by virtue of his role as a

17

partner in the joint venture. Pursuant to California Corporations Code § 16404, which sets forth

18

certain fiduciary duties owed by partners in a business partnership to the partnership and the other

19

partners, “[a] partner may lend money to and transact other business with the partnership, and as

20

to each loan or transaction, the rights and obligations of the partner regarding performance or

21

enforcement are the same as those of a person who is not a partner, subject to other applicable

22

law.” Cal. Corp. Code § 16404(f). Furthermore, the interest rate on the operating loans, at 9.5

23

percent, was not excessive under the circumstances presented by the evidence as the court finds

24

that it was similar to the rates on the loans Hynes and HAI themselves allegedly had to take out at

25

times from third parties in order to ensure that Sac EDM had continuous access to a pool of

26

operating funds through the OK EDM joint venture.

27

////

28

////
43

1

Even if, in practice, Sac EDM ended up taking on more loans than it paid back, the

2

circumstances make clear that Hynes devised the OK EDM joint venture in order to advance both

3

Sac EDM’s and Dan Folk’s business interests and provide Sac EDM with sufficient operating

4

capital at any given time such that it could pay its operating expenses as they became due. He

5

also regularly informed Dan Folk, Sac EDM’s president, of the financial risks Sac EDM would

6

face if it decided to use the operating loans extended to it for purely operational purposes and/or

7

did not use its monthly reimbursement from OK EDM to pay down those loans. Plaintiffs’

8

decision at times to either use portions of the operating loans for non-operations related purposes,

9

or to not pay down the outstanding monthly loan balance, does not mean that the entire OK EDM

10

structure as Hynes had devised it was misleadingly disadvantageous to plaintiffs and

11

advantageous only to defendants.26

12

In short, the court finds that the evidence presented at trial establishes that the structure of

13

the OK EDM joint venture as it was proposed and implemented by Hynes was designed to

14

advance the business interests of, and provide substantial advantages to, both Hynes and

15

plaintiffs. The court also concludes that Hynes clearly informed plaintiffs of the material details

16

of how the joint venture was to be operated, and regularly articulated the potential pitfalls

17

plaintiffs would face if they did not follow the parties’ business plan as it had been envisioned.27

18

Accordingly, the court finds that Hynes did not breach his fiduciary duty to either plaintiff by

19

advising plaintiffs to enter into and operating the OK EDM joint venture as he had structured it.28

20
26

21
22

Admittedly, the court has significant concerns in that Hynes was profiting as a paid consultant,
lender, and partner, however, plaintiffs have not met their burden of proof that such structure
itself was improper.
27

24

The court is also concerned that on a number of occasions the “business plan” was unilaterally
revised by Hynes, then signed by Dan Folk, almost always to benefit Hynes, but without better
evidence the court cannot conclude that those plans violated Hynes’ fiduciary duty.

25

28

23

26
27
28

The court notes that plaintiffs’ case would very likely have benefited from the testimony of an
expert witness regarding the potential tax and other financial implications of the OK EDM joint
venture’s structure and the parties’ various business dealings under that structure, as it would
have greatly assisted the court in determining whether a given business plan or agreement
between the parties that Hynes drafted was actually beneficial to plaintiffs and their operations.
However, no such testimony was given at trial. Accordingly, given the evidence that is before it,
44

1
2

(b)

Equipment Leases

With regard to the equipment leases, plaintiffs argue that Hynes breached his duty to

3

plaintiffs by purchasing certain equipment Sac EDM already owned outright in order to lease that

4

equipment back to it under contractual terms that were clearly favorable to Hynes and his

5

companies and unfavorable to plaintiffs. In particular, plaintiffs argue that the evidence presented

6

at trial shows that the interest rates Hynes misleadingly attached to the leases exceeded the lawful

7

rate allowed to be charged under Missouri law, which governs those agreements. Plaintiffs argue

8

further that the lack of a definite lease term and the onerous buyback provisions of the leases also

9

highlight the fact that Hynes encouraged Sac EDM in his role as its business consultant to enter

10

into the contracts for the purpose of benefitting his own companies’ financial interests without

11

any consideration for the consequences to his client. Based on a preponderance of the evidence,

12

the court agrees with plaintiffs’ assertions regarding certain provisions contained in the lease

13

agreements and concludes that Hynes’ advice and insistence that the parties agree to such terms

14

constituted not only a breach of the duties he owed to plaintiffs as a fiduciary, but also

15

constructive fraud.

16

Addressing the interest term on each of the leases, while Hynes initially represented to

17

Dan Folk and Sac EDM that the additional charge calculated into each monthly lease payment

18

consisted of 10 percent interest added on to each payment, he later, after Dan Folk had already

19

signed the master lease agreements on Sac EDM’s behalf, described that charge as consisting of

20

10 percent interest, 10 percent “overhead,” and 10 percent “profit,” (Exh. 150; Tr. 954-55), an

21

effective interest rate of 30 percent on each monthly lease payment. The evidence demonstrates

22

that Hynes, acting on behalf of both HAI and Hynes Children, while also acting as a fiduciary to

23

Sac EDM and Dan Folk, represented to plaintiffs, in encouraging them to have Sac EDM enter

24

into the leases, that the effective interest rate on each lease was only 10 percent, and was less

25

onerous than the interest terms contained in lease contracts Sac EDM had previously entered into

26
27
28

the court finds that the business plan Hynes had the parties enter into via the creation of OK EDM
was structured in a manner that created a reasonable opportunity for substantial benefit to both
Sac EDM and Dan Folk, regardless of whether they actually realized that opportunity.
45

1

with third parties. In fact, it was actually 30 percent, and much higher than the interest attached

2

to most of Sac EDM’s leases with third parties.

3

While Hynes testified at trial that the additional charges were added to each payment to

4

cover defendants’ overhead and fees in connection with obtaining the funds they needed to

5

purchase the equipment to be leased, the court finds that a preponderance of the evidence

6

demonstrates that the fees defendants incurred in obtaining those funds were generally small, one-

7

time charges, and that their overhead in maintaining the leases was, at most, minimal, and

8

nowhere near the percentage charged under the lease to cover that expense. Accordingly, the

9

court concludes that the bulk of the 30 percent fee on each monthly payment under the leases was

10

principally realized as profit to defendants, and resulted in an effective interest rate of well over

11

the 10 percent Hynes represented to plaintiffs when they entered into the lease contracts.

12

Furthermore, under Missouri Law, which the parties agreed would govern each of the

13

equipment leases at issue, “[p]arties may agree, in writing, to a rate of interest not exceeding ten

14

percent per annum on money due or to become due upon any contract . . . except that, when the

15

‘market rate’ exceeds ten percent per annum, parties may agree, in writing, to a rate of interest not

16

exceeding the ‘market rate.’” Mo. Ann. Stat. § 408.030. Here, the 30 percent interest rate Hynes

17

factored into the monthly lease rate in the written equipment leases well exceeded the 10 percent

18

maximum contemplated by Missouri law. Furthermore, defendants presented no credible

19

evidence at trial proving that the market rate regarding such leases was 30 percent or more.29

20

Accordingly, the court concludes that not only did Hynes misrepresent to plaintiffs the amount of

21

interest attached to each of the lease payments, but the actual rate he had his companies charge in

22

that regard was usurious under the law controlling each lease contract.

23

////

24

////

25
29

26
27
28

While Hynes testified at trial, and claimed in several of his memoranda, that Sac EDM had
other equipment leases with third parties that effectively charged interest rates higher than the 30
percent charged under the parties’ agreements, the court finds that evidence wholly incredible,
especially in light of the other evidence in the record demonstrating Hynes’ own admission that
the lease rates for equipment Sac EDM leased from third parties were lower than 30 percent.
46

1

In addition to being at a usurious rate, the 30 percent interest charged each month also

2

violated the terms of the parties’ business plan regarding the OK EDM joint venture. The parties’

3

initial business agreement regarding the OK EDM joint venture, which was drafted by Hynes, and

4

signed by the parties on January 4, 2004, stated that “where possible all [of Sac EDM’s]

5

equipment leases w[ould] be re-negotiated in the name of [OK EDM] with lower interest rates,

6

longer terms, and more favorable purchase options, or the existing equipment would be replaced

7

to accomplish the same goals (lower interest costs, better cash flow, and some equity gain).”

8

(Exh. 11.) This term of the parties’ agreement remained consistent throughout all of their

9

subsequent revisions to the business plan. (Exhs. 11, 17, 18, 19, 55, 58.) Accordingly, the 30

10

percent interest rate, which was higher than the rates in Sac EDM’s leases with third parties, ran

11

contrary to this provision.

12

Defendants argue in their post-trial briefing that the evidence establishes that the effective

13

rate of interest that Sac EDM had actually paid to defendants under the leases over the course of

14

time at issue was only 6.5 percent because defendants had allowed it to make reduced monthly

15

payments at times, and Sac EDM eventually stopped paying altogether but still enjoyed the use of

16

the leased equipment. While the evidence does prove that Hynes agreed to lower Sac EDM’s

17

monthly payments for certain periods, and that Sac EDM continued to use the equipment after it

18

stopped making lease payments, those facts do not mean that Sac EDM was not to be held

19

ultimately responsible for paying the 30 percent in interest under the terms of the lease

20

agreements (or the fact that Hynes breached his fiduciary obligations in initially demanding

21

30%). Moreover, the equipment lease agreements did not set forth a definite lease period.

22

Instead, the parties agreed that 50 percent of Sac EDM’s lease payments would be credited

23

towards purchasing the leased equipment, and that Sac EDM could purchase the leased

24

equipment once the credited amount reached the price defendants paid to purchase the leased

25

equipment plus 10 percent. This agreement meant that any reduction in payment or non-payment

26

on the leases in any given month would only prolong the life of the leases, provided that

27

defendants did not seek to declare the leases in default, thus still obligating Sac EDM to pay the

28

full 30 percent interest charge before the leases would terminate. Moreover, if defendants were to
47

1

declare a default based on any reduction in payment or nonpayment by Sac EDM, the terms of the

2

leases provide that the lessor would be entitled to the sum of all payments then due, all future

3

payments that would accrue over the course of the lease term, and any other costs or expenses

4

incurred as a result of Sac EDM’s breach of its payment obligations, which would include the full

5

30 percent interest.30 While Sac EDM benefitted from using the leased equipment at the reduced

6

rates during the months defendants accepted reduced payments, it was still ultimately required to

7

pay out the full buyout amount for each item as it was initially set forth in the master contracts.

8

Accordingly, defendants’ argument that the actual interest rate charged to Sac EDM under each

9

lease was effectively less than 30 percent lacks merit.

10

With regard to the lease periods, a preponderance of the evidence shows that Hynes

11

represented to Dan Folk and Sac EDM that he drafted each equipment lease and calculated their

12

payment amounts with the contemplation that each lease would conclude after 60 months of full

13

payments because Sac EDM would be able to exercise its purchase option. However, the way

14

those payments were calculated and the terms of Sac EDM’s purchase option, i.e., the fact that

15

Sac EDM could apply only 50 percent of each lease payment towards the buyout price of cost

16

plus 10 percent, would have required Sac EDM to make far more than 60 monthly lease payments

17

before the lease term for a given lease would conclude. Indeed, the calculation method Hynes

18

used to determine the monthly payments meant that Sac EDM would need to make nearly 102

19

months’ worth of payments at the rate Hynes initially calculated with respect to each lease in

20

order to exercise its right to purchase the equipment under the lease terms, and thus end the

21

otherwise open-ended lease period.31 Such a lease schedule would result in the lessor receiving a

22

30

23

Perhaps in recognition of this fact, Hynes’ and HAI’s damages calculation based on their
counterclaims premised on Sac EDM’s default of its monthly payment obligations under the
equipment leases includes the full 30 percent interest.

24
31

25
26
27
28

For instance, Hynes testified at trial that the purchase price of the group of office equipment
and furnishings listed in attachment one to the August 1, 2004 master lease was $6,000. (Tr.
1375.) Accordingly, Hynes calculated the monthly lease payment at $130 (($6000 [cost] / 60
[months]) + $30 [30 percent] = $130). Because Sac EDM could apply only 50 percent of each
lease payment ($65) towards the purchase price of $6,600 (cost + 10 percent), it would have
needed to make just under 102 months’ worth of full payments of $130 to be able to exercise its
purchase option.
48

1

total payment by the end of the lease period amounting to more than double the initial purchase

2

price.32

3

Hynes added a surcharge amounting to 30 percent, a usurious rate under the applicable

4

Missouri law and contrary to the contract creating the OK EDM joint venture, onto each monthly

5

payment and then characterized after the fact that each of the surcharges amounted to only 10

6

percent interest. Hynes also indicated to Dan Folk and Sac EDM that the lease buyout terms were

7

60 months long when they, by their natural operation, were to last substantially longer.

8

Accordingly, Hynes, acting both in his role as a business consultant to Sac EDM and partner to

9

Dan Folk in the parties’ joint venture, mischaracterized the terms of the lease agreements in a

10

manner that not only constituted a breach of his fiduciary duty to both plaintiffs, but also

11

constructive fraud.

12

First, as an agent of Sac EDM, Hynes breached his duty of loyalty by drafting and

13

encouraging Dan Folk, acting on behalf of Sac EDM, to enter into the lease agreements that

14

ultimately would have profited Hynes’ own companies at Sac EDM’s expense. The fact that Dan

15

Folk accepted the terms of those agreements despite his knowledge that defendants stood on the

16

other side of Sac EDM regarding the leases did not cure the breach of Hynes’ duty of loyalty,

17

because Hynes misrepresented the rate of interest associated with, and duration of, those leases.33

18

Similarly, Hynes’ misrepresentations regarding the leases’ terms also violated his duty of loyalty

19

to Dan Folk as a partner to the OK EDM joint venture. Bardis v. Oates, 119 Cal. App. 4th 1, 12

20

(2004) (“‘Partners are trustees for each other, and in all proceedings connected with the conduct

21

of the partnership every partner is bound to act in the highest good faith to his copartner and may

22
23
24
25

32

For instance, with regard to the group of office equipment and furnishings, which was initially
purchased from Sac EDM for $6,000, the lessor would receive $13,200 in total by the time the 50
percent of lease payments that could be applied towards purchase amounted to the buyout price of
cost plus 10 percent.
33

26
27
28

Furthermore, even if Dan Folk knew the effective rate, Hynes was taking advantage of Dan
Folk and Sac EDM to his own benefit because Hynes believed they had no other options, and,
acting in his role as Sac EDM’s paid business consultant, expressed that belief to Dan Folk on
numerous occasions prior to having Sac EDM enter into leases and other financial arrangements
with his companies.
49

1

not obtain any advantage over him in the partnership affairs by the slightest misrepresentation,

2

concealment, threat or adverse pressure of any kind.’ [Citations.] Moreover, this duty extends to

3

all aspects of the relationship and all transactions between the partners.’”); see also Enea v.

4

Superior Court, 132 Cal. App. 4th 1559, 1564 (2005).
In addition to constituting a breach of his duty of loyalty to both plaintiffs, Hynes’

5
6

misrepresentations regarding the leases’ terms were also acts of constructive fraud because

7

Hynes, a purported expert in business finance and longtime owner and executive of a company

8

that regularly leased aviation-related equipment, either knew or should have known that the

9

interest and duration terms he represented to plaintiffs were contained in the leases at the time the

10

parties entered into them reflected neither the true interest calculated into the monthly payments

11

nor the leases’ actual duration.34 See Assilzadeh, 82 Cal. App. 4th at 415.

12

In addition to concluding that Hynes both breached his fiduciary duty of loyalty and

13

committed constructive fraud with regard to his misrepresentations concerning the interest and

14

duration terms of the equipment leases, the court also concludes that those terms are

15

unconscionable as a matter of law at the time they were made. See Langemeier v. Nat’l Oats Co.,

16

775 F.2d 975, 977 (8th Cir. 1985) (holding that U.C.C. § 2-302, which Missouri has adopted

17

verbatim via Missouri Revised Statute § 400.2-302, permits a court to raise the issue of

18

unconscionability of a contract sua sponte).35

19

Under applicable Missouri law, a contract’s term may be deemed invalid when there is

20

both procedural and substantive unconscionability. Funding Sys. Leasing Corp. v. King Louie

21
34

22
23
24
25
26
27
28

As noted above with regard to plaintiffs’ fraud claim, the court concludes that plaintiffs offered
insufficient evidence at trial to demonstrate that Hynes acted with the intent to deceive necessary
to support a claim for actual fraud. However, the court also concludes that there exists evidence
sufficient to meet plaintiffs’ burden to prove that Hynes, acting as a fiduciary to both plaintiffs
and as a purported expert on the subject matter of business finance, made multiple negligent
misrepresentations to plaintiffs that induced Dan Folk to sign the leases on Sac EDM’s behalf to
Sac EDM’s detriment.
35

While the language of U.C.C. § 2A-108, which Missouri has also adopted via Missouri Revised
Statute § 400.2A-108, addresses specifically the issue of unconscionability in the context of lease
contracts, the language of that provision operates in the same fashion as U.C.C. § 2-302 when a
court raises the issue of unconscionability.
50

1

Int’l, Inc., 597 S.W.2d 624, 634-35 (Mo. App. 1979). Procedural unconscionability arises during

2

the contracting process when there is fine print in the contract, there has been some

3

misrepresentation, or there is unequal bargaining power. World Enterprises, Inc. v. Midcoast

4

Aviation Servs., Inc., 713 S.W.2d 606 (Mo. App. 1986). Substantive unconscionability, on the

5

other hand, occurs when the contractual terms are unduly harsh. Id.; Lyster v. Ryan’s Family

6

Steak Houses, Inc., 239 F.3d 943 (8th Cir. 2001). Provisions that an objective reasonable person

7

would find unexpected and unconscionably unfair are unenforceable. Hartland Computer

8

Leasing Corp., Inc. v. Insurance Man, Inc., 770 S.W.2d 525, 527-28 (Mo. App. 1989).

9

Procedural and substantive unconscionability are considered on a sliding scale, so that when more

10

substantive unconscionability is present less procedural unconscionability is necessary to

11

invalidate a contract and vice versa. Funding Sys. Leasing Corp., 597 S.W.2d at 634-45.
Here, procedural unconscionability arose when Hynes misrepresented the lease contracts’

12
13

terms regarding the rate of interest being charged and the lease period. Furthermore, the leases’

14

terms with regard to interest and duration are also substantively unconscionable as they are

15

unduly harsh. As discussed above, the 30 percent interest added on to each month’s payment is

16

usurious under the applicable Missouri law, which allows for only 10 percent interest under the

17

circumstances. Similarly, the actual duration of each lease is nearly twice as long as Hynes

18

represented they would be, and would result in Sac EDM paying more than double what

19

defendants paid for each piece of equipment, including the equipment that Sac EDM had owned

20

outright prior to the sale, before it could finally buyout that equipment and conclude the lease

21

term if it were to follow the payment schedule contemplated in the terms of each lease agreement.

22

Such a lease term was both contrary to the parties’ intentions and goals set forth in their business

23

plan, which was to obtain more favorable lease terms for Sac EDM, and was structured in such a

24

fashion as to clearly benefit defendants to the long-term detriment of Sac EDM.36 Finally, Sac

25

EDM could apply only 50 percent of its lease payments towards its purchase of the equipment, a

26

substantial portion of which was equipment that it had previously owned outright. This fact not

27
28

36

All of these terms were in addition to Hynes still receiving consulting fees from Sac EDM as
part of OK EDM and sharing in the profits.
51

1

only substantially increased the overall duration of each lease, but also ensured that Sac EDM

2

would have paid more than double defendants’ purchase cost for that equipment by the time it

3

could exercise its purchase option. Such a term is entirely contrary to the provisions of the

4

parties’ agreement and business plan regarding the operation of the OK EDM joint venture that

5

stated that defendants were to obtain more favorable purchase options with regard to any

6

equipment Sac EDM leased.37 Accordingly, the court concludes that the interest, duration, and

7

purchase terms of the leases are unconscionable.38

8

(c)

US Banc Judgment

With regard to Hynes’ actions pertaining to the US Banc judgment, plaintiffs argue in

9
10

their post-trial briefing that Hynes breached his duty to plaintiffs in two ways. First, plaintiffs

11

contend that the evidence shows that Hynes breached his duty to plaintiffs by channeling the

12

profits Sac EDM made from its operations into the OK EDM bank account and withholding those

13

profits from Sac EDM such that Sac EDM could not use them to pay what it owed under the US

14

Banc lease. Second, plaintiffs argue that the evidence shows that Hynes’ purchase of the US

15

Banc judgment in the name of HAI and his subsequent efforts to enforce the entire amount of the

16

judgment against Sac EDM were a breach of his fiduciary duty.

17

Based on a preponderance of the credible evidence, the court finds that the OK EDM

18

venture was structured such that Sac EDM could obtain loans from OK EDM to cover its

19

operating expenses, which included its monthly lease payments for the equipment leased from US

20

Banc, and could seek full reimbursement of those expenses from OK EDM at the end of each

21

month. Because the joint venture’s business structure as Hynes had devised it still left Sac EDM

22

with the ability to make its lease payments to US Banc even though all of its accounts receivable

23

were being diverted to and held by OK EDM, the court finds plaintiffs’ argument that Hynes

24
37

25
26
27
28

The court finds that the provision limiting Sac EDM from applying any more than 50 percent of
its lease payments towards purchase is particularly egregious with regard to the equipment that
defendants purchased from Sac EDM and leased back.
38

The court finds that defendants have offered no credible evidence that Sac EDM’s equipment
leases with third parties for similar equipment had more onerous provisions regarding interest,
duration, and/or the purchase of leased equipment.
52

1

breached his fiduciary duty by structuring the OK EDM joint venture in a manner that prevented

2

Sac EDM from making those lease payments to lack merit.

3

However, while the court concludes that plaintiffs’ first asserted basis for finding that

4

Hynes breached his fiduciary duty lacks merit, it finds that plaintiffs have established by a

5

preponderance of the evidence that Hynes breached the duty of loyalty he owed to both plaintiffs

6

when he purchased the US Banc judgment and then sought to pursue the entire amount of that

7

judgment against plaintiffs on top of charging the Folks for the amount he paid to purchase that

8

judgment plus interest. The credible evidence presented at trial demonstrates that the initial plan

9

Hynes proposed, and that plaintiffs accepted, was to have Sac EDM stipulate with US Banc to

10

enter a judgment for the full amount US Banc claimed was owing. Then Hynes, acting in his

11

roles as Sac EDM’s paid agent/advisor, president of HAI, and partner in the OK EDM joint

12

venture, would negotiate with US Banc to have HAI purchase the judgment for a steeply reduced

13

amount. The parties agreed further that whatever amount HAI paid to purchase the judgment

14

would be treated as a debt to be paid by the Folks personally on Sac EDM’s behalf with an

15

interest rate of eight percent per annum, and that once that full amount was paid off, whichever of

16

Hynes’ companies held the judgment at that time would deem it fully satisfied. The parties

17

agreed that the Folks, not Sac EDM, would pay the debt because they would soon be able to pay

18

off that debt in full through a lump sum payment from the proceeds of the sale of their personal

19

home, and because such an arrangement would further improve Sac EDM’s cash flow. The

20

parties also contemplated that the Folks would eventually be able to obtain full reimbursement

21

from Sac EDM for their payment on its behalf in satisfaction of the US Banc judgment by treating

22

that payment as a loan to Sac EDM that Sac EDM could pay back over time.

23

The court finds that had Hynes observed this initial agreement regarding the US Banc

24

judgment, he would not have breached his duty of loyalty he owed to Sac EDM as its agent

25

because, while Sac EDM was a beneficiary of that arrangement, neither Hynes nor his companies

26

actually dealt with that entity in an adverse fashion pursuant to the agreement because the debt

27

was to be owed by the Folks as individuals. Furthermore, such an agreement would not have

28

breached Hynes’ duty owed to Dan Folk as a partner in the OK EDM joint venture. California
53

1

Corporations Code § 16404(f) permits partners to extend loans and transact business with other

2

partners and the partnership itself in the same fashion an outside lender is permitted to conduct

3

such business. The terms of the $50,000 loan made to the Folks pursuant to the parties’

4

arrangement comported with this standard and, therefore, would not have resulted in a breach of

5

Hynes’ duty of loyalty.

6

However, the evidence demonstrates further that after Hynes purchased the judgment and

7

charged the Folks for the $50,000 he paid to make that purchase, he convinced Dan Folk to enter

8

into a second agreement whereby Sac EDM would agree to assume liability for the entirety of the

9

outstanding $283,473.77 plus interest it owed under the US Banc judgment, and Dan Folk would

10

personally receive a lump sum of the second half of all payments Sac EDM made on that

11

judgment after the judgment had been paid in full. The second agreement also made Dan Folk

12

personally guarantee the full amount of the outstanding judgment and kept in place his obligation

13

to pay back the $50,000 Hynes paid to purchase the judgment plus interest. In addition, Hynes

14

later determined that Sac EDM could not seek reimbursement for any monthly payments it made

15

towards the total US Banc judgment, thereby effectively rendering Sac EDM unable to make

16

monthly payments using its own then-incoming profits since all of its income from its customers

17

at that time was going to HAI d/b/a OK EDM.

18

By inducing Dan Folk to agree to these additional terms, Hynes breached the duty of

19

loyalty he owed to both plaintiffs and engaged in constructive fraud. First, Hynes’ addition of the

20

term requiring Sac EDM to assume an obligation to repay the entirety of the US Banc judgment

21

plus interest even after the Folks paid back the $50,000 plus interest loan was a clear breach of

22

Hynes’ fiduciary duty of loyalty to that entity. Under that term, Hynes and his companies stood

23

to massively profit as it ensured that they would receive a revenue stream that would ultimately

24

result in the judgment’s holder receiving a profit many times larger than the $50,000 purchase

25

price, while Sac EDM, which Hynes was also representing in the transaction, stood to only lose in

26

relation to the parties’ prior agreement. This clear instance of self-dealing violated Hynes’ duty

27

to not act as an adverse party in relation to a transaction in which Sac EDM was involved.

28

////
54

1

Furthermore, the court concludes that the mere fact that Dan Folk signed off on the second

2

agreement did not remedy Hynes’ breach under the circumstances. Even more troubling to the

3

court than Hynes’ recommendation that Sac EDM enter into the second agreement is the fact that,

4

in order to obtain Dan Folk’s consent to that agreement, Hynes appealed to Dan Folk’s personal

5

financial interest to the clear detriment of Sac EDM’s financial interests.39 The court finds that by

6

highlighting the personal financial gain Dan Folk would obtain under the arrangement, Hynes

7

acted in a misleading manner with regard to obtaining Dan Folk’s consent on behalf of Sac EDM.

8

Accordingly, the court finds that Hynes not only breached his duty of loyalty to Sac EDM as its

9

agent, but also committed constructive fraud.
Similarly, Hynes’ inclusion of Dan Folk’s personal guarantee of the debt into the second

10
11

agreement breached the duty of loyalty he owed to Dan Folk as a partner in the OK EDM joint

12

venture. The evidence demonstrates that after the parties had entered into the second agreement,

13

Hynes determined that Sac EDM could not invoice the monthly payments it was obligated to

14

repay under that agreement as part of its monthly operating expenses pursuant to the terms of the

15

OK EDM joint venture because Hynes saw that debt as arising prior to January 1, 2004. At the

16

time the parties entered into the second agreement, Sac EDM was sending all of its income from

17

its work to OK EDM, and therefore had no income with which to pay down the US Banc

18

judgment absent taking on loans from defendants at a similar interest rate. In the event of Sac

19

EDM’s default on the US Banc judgment payments, Dan Folk would be held to personally pay

20

that debt.40 Defendants presented no credible evidence at trial demonstrating that Hynes advised

21

Dan Folk that he would not consider the US Banc judgment payments as Sac EDM operating

22

expenses for purposes of reimbursement at the time the parties entered into the second agreement.

23

Accordingly, the court concludes that Hynes’ inclusion of the personal guarantee in the second

24
39

25
26
27
28

While the court acknowledges that Dan Folk’s liability to Sac EDM is not at issue in this
action, it is deeply troubled by the fact that Dan Folk would agree to enter into such an
arrangement to the clear detriment of his own company’s financial interests.
40

Such an arrangement was clearly contrary to what Hynes knew was a reason for the Folks
previous filing of bankruptcy so that they would not have any personal liability for the US Banc
indebtedness.
55

1

agreement without full disclosure of all of the material facts regarding the circumstances

2

concerning that agreement was inconsistent with his obligation of good faith and fair dealing with

3

regard to Dan Folk, his partner in the OK EDM joint venture. See Cal. Corp. Code § 16404(d)

4

(“A partner shall discharge the duties to the partnership and the other partners under this chapter

5

or under the partnership agreement and exercise any rights consistently with the obligation of

6

good faith and fair dealing.”).

7

(d)

Operating Loans

8

Finally, plaintiffs contend that Hynes breached his fiduciary duty with regard to the

9

operating loans HAI d/b/a OK EDM provided to Sac EDM pursuant to the parties’ business plan.

10

Specifically, plaintiffs argue in their post-trial briefing that the evidence shows that Hynes

11

structured the OK EDM joint venture such that it prevented Sac EDM from accessing the profits

12

it made from its own operations to fund its further operations, therefore making it reliant on the

13

loans provided by HAI through the OK EDM joint venture. Plaintiffs argue further that the

14

parties’ business agreement provided that HAI was to use withheld profits to make down

15

payments on equipment to be purchased or leased by defendants for Sac EDM’s use and to fund

16

Sac EDM’s operations, but that Hynes and HAI instead used those funds to loan Sac EDM money

17

that it had to pay back with interest. The court finds that the evidence presented at trial does not

18

meet plaintiffs’ burden of proof.

19

Under the terms of the parties’ joint venture agreement, all of Sac EDM’s income was to

20

be directed to HAI d/b/a OK EDM, and Sac EDM was to fund its week-to-week operations

21

through loans it sought and obtained from HAI d/b/a OK EDM. Sac EDM was also entitled to

22

seek full reimbursement from HAI d/b/a OK EDM for its operating expenses at the end of each

23

month. HAI d/b/a OK EDM’s payment to Sac EDM came from the pool of funds it was holding,

24

which included Sac EDM’s income from its operations channeled to HAI d/b/a OK EDM. Sac

25

EDM was permitted to use that payment to repay its loans obtained from HAI d/b/a OK EDM

26

throughout the course of the month. While this procedure fashioned by the parties’ business plan

27

resulted in a roundabout way of providing Sac EDM with some of its own income to pay for its

28

operations and gave rise to a risk that Sac EDM would incur additional debts to OK EDM if it did
56

1

not use its operational reimbursement funds regularly for the purpose of paying off the

2

operational loans, the OK EDM business structure and the loans advanced to Sac EDM via that

3

structure provided significant business advantages to that entity such that Hynes did not breach

4

his fiduciary duty of loyalty to Sac EDM or Dan Folk in recommending and implementing that

5

plan.

6

First, Sac EDM operated on an accrual basis, meaning that while it could realize income

7

for accounting purposes once it billed a customer, it would not receive the actual money for that

8

bill until the customer paid in full. Although, prior to the establishment of the OK EDM joint

9

venture and the availability of the loans HAI provided through that venture, Sac EDM received

10

income that, on paper, it could use freely, the evidence establishes that Sac EDM also had

11

extreme cash flow issues that posed a genuine risk to its ability to pay its regular operating

12

expenses and precluded it from obtaining outside funding. The terms of the business plan

13

allowed Sac EDM to take out operating loans to pay its short-term operating expenses as they

14

arose and then receive full reimbursement for its operating expenses that could be applied

15

towards those loans to essentially “zero out” the entire balance of the loans and, in a way, fully

16

cover Sac EDM’s monthly operating expenses in a manner similar to if it had used its own

17

income prior to the formation of OK EDM. Accordingly, the court finds that plaintiffs’ argument

18

that OK EDM’s provision of loans prevented Sac EDM from paying its operating expenses to the

19

advantage of Hynes and HAI is unsupported by the evidence.

20

Second, in addition to Sac EDM’s income, OK EDM was funded by other monies that

21

HAI and Hynes provided, at times obtained through loans they had to take out themselves. The

22

evidence introduced at trial demonstrates that HAI d/b/a OK EDM had to dip into these additional

23

funds or obtain further outside loans for itself at times throughout the course of the parties’ joint

24

venture when Sac EDM’s expenses outpaced the money coming in. Nevertheless, even during

25

such times, Sac EDM was still permitted to seek full reimbursement of its expenses from HAI

26

d/b/a OK EDM on a monthly basis. This aspect of the parties’ business relationship provided Sac

27

EDM with a substantial benefit because it effectively allowed Sac EDM access to operating

28

capital well beyond what it would have been able to access outside of the lending scheme Hynes
57

1

established.

2

Moreover, unlike with regard to the terms of the lease agreements and payment of the US

3

Banc judgment, the evidence offered at trial does not prove that Hynes made any misstatements,

4

or otherwise acted in a misleading manner, with regard to the terms of the operating loans Sac

5

EDM had access to under the OK EDM joint venture business plan. To the contrary, that

6

business plan and its subsequent revisions, all of which were drafted by Hynes for the purpose of

7

reflecting the parties’ understanding as to the terms of the parties’ business relationship under the

8

OK EDM joint venture, set forth the key terms of the parties’ agreement regarding the provision

9

of operating loans and their repayment.41 Furthermore, the evidence reflecting the parties’

10

subsequent conduct with regard to the provision and repayment of those loans shows that HAI, at

11

Hynes’ direction, allowed for a reduction in Sac EDM’s monthly payments on the outstanding

12

balance of the operating loans at times throughout the parties’ business relationship in order to

13

free up additional cash flow for Sac EDM’s operations.

14

In short, the evidence presented at trial demonstrates that Hynes’ implementation of the

15

operating loan scheme provided a substantial business advantage to Sac EDM’s operations, did

16

not mislead either plaintiff as to the loans’ terms, and generally was in Sac EDM’s best interests.

17

The fact that Dan Folk willingly entered into such an arrangement by signing the parties’ business

18

plans on Sac EDM’s behalf, despite knowing all of the material terms regarding the provision of

19

operating loans and that HAI was on the other side of the loan arrangement and stood to

20

potentially gain from it through accrued interest, means that no breach of Hynes’ duty of loyalty

21

occurred under the circumstances. Accordingly, the court concludes that there was no breach of

22

fiduciary duty with regard to HAI’s advancement of operating loans to Sac EDM. Thus, the court

23

also concludes that there was no constructive fraud with regard to HAI’s advancement of

24

operating loans to Sac EDM.

25

////

26

41

27
28

Admittedly some of the dates of the revisions and terms therein appear confusing, if not
contradictory, but other than Dan Folk testifying that he now doesn’t know what some of those
terms mean, plaintiffs did not introduce any reliable evidence that they didn’t understand the
documents when signing them.
58

1
2

iii.

Damages and Other Remedies

The measure of damages for a breach of fiduciary duty resulting in constructive fraud “is

3

the amount which will compensate for all the detriment proximately caused thereby, whether it

4

could have been anticipated or not.” Cal. Civ. Code § 3333; see also Pepitone v. Russo, 64 Cal.

5

App. 3d 685, 688 (1976) (“[F]raudulent breach of duty is a tort, and the faithless fiduciary is

6

obligated to make good the full amount of the loss of which his breach of faith is a cause.”); In re

7

Roussos, 251 B.R. 86, 93 (B.A.P. 9th Cir. 2000), aff’d, 33 F. App’x 365 (9th Cir. 2002) (noting

8

that “the injured party is given the benefit of his bargain” when a fraudulent breach of duty has

9

occurred). “Remedies for a breach of fiduciary duty include damages for all harm proximately

10

caused to the corporation, as well as rescission and restitution.” In re Intelligent Direct Mktg.,

11

518 B.R. 579, 589 (E.D. Cal. 2014) (quoting In re GSM Wireless, Inc., 2013 WL 4017123, at *41

12

(Bankr. C.D. Cal. Apr. 5, 2013)); see also Hicks v. Clayton, 67 Cal. App. 3d 251, 264 (1977)

13

(“Where a breach of fiduciary duty occurs, a variety of equitable remedies are available,

14

including imposition of a constructive trust, rescission, and restitution, as well as incidental

15

damages.”).

16

With regard to the equipment leases, plaintiffs argue in their post-trial briefing that they

17

are entitled to statutory damages pursuant to Missouri Revised Statute § 408.030, amounting to

18

double the amount of interest they paid to defendants in excess of the 10 percent interest

19

permitted under that statute. However, plaintiffs have not pleaded a separate claim under that

20

statute with regard to the interest defendants charged Sac EDM under the leases. Rather,

21

plaintiffs’ only claims as to the interest charged under the leases are their breach of fiduciary duty

22

and fraud claims. Accordingly, plaintiffs cannot now seek to recover damages based on an

23

entirely separate statutory claim that they have not previously raised in their pleadings.

24

Nevertheless, plaintiffs are entitled to the full amount of their loss for which Hynes’

25

breach of duty and constructive fraud is the cause. Here, Hynes misrepresented that the

26

equipment leases at issue contained a 10 percent interest provision while charging Sac EDM for

27

30 percent under those agreements. Furthermore, he misrepresented the duration of the lease

28

agreements at 60 months when, by their operation, the leases were set to last at least 102 months.
59

1

As discussed above, not only did Hynes misrepresent those terms, but also they were

2

unconscionable under the circumstances. “If the court as a matter of law finds a lease contract or

3

any clause of a lease contract to have been unconscionable at the time it was made the court may

4

refuse to enforce the lease contract, or it may enforce the remainder of the lease contract without

5

the unconscionable clause, or it may so limit the application of any unconscionable clause as to

6

avoid any unconscionable result.” Mo. Rev. Stat. § 400.2A-108; see also id. § 400.2-302. In

7

exercising this discretion, the court finds it appropriate to limit the clauses of the lease agreements

8

it determines to be unconscionable in order to reflect plaintiffs’ understanding of what those

9

agreements were to entail absent Hynes’ fraudulent breach of his duty of loyalty. In particular,

10

the court finds it appropriate to limit the 30 percent interest term on each of the leases to the

11

initial 10 percent that Hynes had represented when the parties entered into each of those

12

agreements. The court also finds it suitable to limit the duration term of those contracts to reflect

13

Hynes’ representation that the leases would terminate after 60 months, and that Sac EDM would

14

have the option to purchase the leased equipment at the end of that term.42
In order to receive the benefit of the bargain under the terms of the leases absent Hynes’

15
16

fraudulent breach of duty, Sac EDM is entitled to recover any payments made under the leases on

17

surcharges exceeding the 10 percent and, as discussed below with regard to defendants’ breach of

18

contract counterclaim regarding the equipment leases, is only liable for damages for its later

19

breach of those written contracts to the extent permitted by the terms of those agreements as they

20

have been limited by the court.43

21

////

22

////

23
24
25
26
27
28

42

This means that the court also limits the term from the leases permitting Sac EDM to apply 50
percent of its lease payments towards an option to buy out the leased equipment to a term giving
Sac EDM the option to purchase the equipment upon payment of 60 full monthly payments under
the revised monthly payment calculation set forth above.
43

Plaintiffs fail to demonstrate that Dan Folk individually suffered damages resulting from
Hynes’ fraudulent breach of fiduciary duty as the evidence demonstrates that each payment on the
leases was made by Sac EDM.
60

1

Furthermore, as discussed in further detail below with regard to Hynes’ and HAI’s

2

counterclaims concerning the equipment leases, HAI assigned its rights as lessor under equipment

3

leases one through nine to Hynes Children effective January of 2005, and replaced Sac EDM as

4

lessee under those leases.44 The terms of those leases expressly forbid the named lessee from

5

subleasing the equipment governed by those agreements. Nevertheless, HAI improperly

6

continued to bill Sac EDM monthly for payments under those leases. (Exhs. 277, 363.)

7

Accordingly, the court concludes that Sac EDM is entitled to restitution from HAI for the entirety

8

of any payments it made to HAI for equipment leases one through nine beginning in January of

9

2005.

10

In sum, the court concludes that Sac EDM is entitled to $413,151.00 in restitution from

11

HAI45 for the unjust gains it realized from Hynes’ fraudulent breach of fiduciary duty with regard

12

to the equipment leases.46

13
44

14
15
16
17
18
19
20
21
22
23
24
25
26
27
28

Although Hynes Children subsequently attempted to assign its rights as lessor under leases one
through nine back to HAI on December 31, 2008, that attempted assignment was without legal
effect for the reasons discussed below with regard to Hynes’ and HAI’s counterclaims.
45

While HAI assigned its rights as lessor under leases one through nine to Hynes Children and
assumed the role as lessee under those agreements beginning in January of 2005, the evidence
demonstrates that HAI continued to bill Sac EDM for the full monthly lease payments despite
lacking authority to do so under the terms of those leases. (Exhs. 1, 363.) Accordingly, the court
concludes that HAI is the defendant that was unjustly enriched by Hynes’ fraudulent breaches of
his fiduciary duty concerning those leases.
46

For purposes of restitution concerning any payments made to HAI under the first nine lease
agreements in January of 2005 and beyond, the court totals all such payments, as evidenced by
Joint Exhibit 363. With regard to leases 10 through 20, and any payments on the first nine leases
made to HAI prior to 2005, the court calculates the restitution figure by first taking the amount it
finds defendants paid to purchase each piece of equipment, dividing that price for each piece by
60 (based on the duration of the lease) and then adding 10 percent to that amount for interest.
The court then takes the amount derived from that calculation and subtracts it from the amount
the credible evidence shows Sac EDM paid each month to lease each piece of equipment. If the
remaining amount for a given month is greater than zero, then the court adds that amount to the
total restitution calculation; if that amount is either zero or negative (for months when Sac EDM
paid less than one-sixtieth of the purchase price plus 10 percent), then the court does not include
that amount in the total restitution calculation. The court rounds the difference for each month to
the nearest whole dollar (i.e., 50 cents and greater is rounded up to the nearest whole dollar, and
anything less than 50 cents is rounded down to the nearest whole dollar). In determining the price
paid for each piece of equipment and the amount of each monthly lease payment Sac EDM made
61

1

With regard to the US Banc judgment, defendants argue that plaintiffs fail to satisfy the

2

benefit of the bargain standard through the relief they seek because absent Hynes’ breach of his

3

fiduciary duty and commission of constructive fraud in having plaintiffs agree to the terms of the

4

January 21, 2005 writing, plaintiffs would have still faced a deficiency judgment held by US

5

Banc in the full principal amount of $283,473.77. However, this argument ignores the fact that

6

there existed a prior agreement between HAI, acting through Hynes, and the Folks whereby the

7

Folks would pay back the $50,000 HAI paid to purchase the stipulated judgment from US Banc

8

plus interest in full satisfaction of that liability. By inducing Dan Folk to enter into the second

9

agreement both on his own behalf and Sac EDM’s behalf after the first agreement was in place in

10

what amounted to a fraudulent breach of his duty of loyalty, Hynes denied plaintiffs the benefit of

11

the first bargain, which was that the US Banc judgment would be deemed satisfied in full after the

12

Folks paid the $50,000 plus interest to HAI on Sac EDM’s behalf.

13

The evidence presented at trial demonstrates that the Folks paid off the entirety of the

14

$50,000 plus interest obligation in August of 2005 using proceeds obtained from the sale of their

15

personal home. If not for Hynes’ actions in breach of his fiduciary duties owed to plaintiffs that

16

led plaintiffs to enter into the second agreement, Sac EDM would not have been obligated to pay

17

the entirety of the US Banc judgment, and Dan Folk would not have been held to personally

18

guarantee those payments. Absent Hynes’ tortious conduct, plaintiffs would have been under no

19

further obligation to make payments on the US Banc judgment after the Folks’ August 2005

20

payment because defendants would have been obligated to deem it fully satisfied. Therefore,

21

plaintiffs are entitled to receive the benefit of that bargain.

22

Accordingly, the court concludes that plaintiffs are entitled to declaratory relief finding

23

that the entire balance of the US Banc judgment was fully satisfied in August of 2005 when the

24

Folks paid $52,451.51 in full satisfaction of their payment obligations under the parties’

25

over the course of the parties’ dealings, the court relies on the records contained in Joint Exhibit
363. For purposes of determining the purchase price of leases 10 through 20, the court relies on
the “cost” value for each of those leases contained in Joint Exhibit 363. This calculation does not
take into account any payments made with regard to lease number 14, for which the evidence
demonstrates Sac EDM paid $22,770 to HAI in full satisfaction of its payment obligations under
that agreement.
62

26
27
28

1

agreement that was in place prior to Hynes’ fraudulent breach of his fiduciary duty. In

2

furtherance of this declaration, whichever defendant (or defendants) currently holds the right to

3

enforce the US Banc judgment shall file a Satisfaction of Judgment form in Sacramento County

4

Superior Court case number 04AS03050. Furthermore, defendants are enjoined from selling,

5

transferring, or otherwise alienating any interest they may have with regard to that judgment.47

6

Additionally, Sac EDM is entitled to restitution from HAI and Hynes Children for the

7

payments it has made towards that judgment since January 31, 2006, when it first began to make

8

such payments. The credible evidence presented at trial demonstrates that Sac EDM’s payments

9

to HAI and Hynes Children towards the US Banc judgment between January 31, 2006, and March

10

31, 2010, amounted to $251,000. $162,000 of this amount was paid to Hynes Children while it

11

held the note to the judgment between January 31, 2006, and December 31, 2007. The remaining

12

$89,000 was paid to HAI between January 31, 2008, and March 31, 2010. Accordingly, the court

13

concludes that Sac EDM is entitled to restitution in the amount of $162,000 from Hynes Children,

14

and $89,000 from HAI based upon the unjust profits those defendants reaped from Hynes’

15

fraudulent breach of his fiduciary duty of loyalty to Sac EDM with regard to the parties’ dealings

16

concerning the US Banc judgment.48

17

Plaintiffs also seek damages for the entire amount that Hynes was paid in consulting fees

18

over the course of the OK EDM joint venture, from January of 2004 through July of 2009.

19

However, plaintiffs fail to prove that their remittance of Hynes’ consulting fees over the course of

20

the parties’ business relationship was improperly caused by Hynes’ fraudulent breaches. In other

21

words, just because Hynes advised plaintiffs in several instances in breach of his fiduciary duties

22

to them does not mean that plaintiffs are entitled to recoup all of the fees they agreed to pay him

23

for his consulting services pursuant to the parties’ business plan and other agreements. A

24

preponderance of the evidence shows that Hynes assisted Sac EDM and Dan Folk in their

25

47

26
27
28

Because the court declares the US Banc judgment fully satisfied and enjoins defendants from
enforcing that judgment, it declines to address plaintiffs’ additional argument that defendants
cannot collect on that judgment pursuant to California Corporations Code § 2105(a).
48

The court calculates the amounts Sac EDM paid to HAI and Hynes Children towards the US
Banc judgment based on the figures included in Joint Exhibit 84.
63

1

business operations and regularly provided consulting services throughout the course of the

2

parties’ business relationship, and was paid for those services accordingly under the terms of the

3

parties’ business plan. Plaintiffs in no way demonstrate how Hynes’ fraudulent breaches caused

4

them to make payments to him in the form of consulting fees that they would not have made but

5

for those instances of misconduct. Accordingly, the court concludes that plaintiffs cannot recover

6

damages for the consulting fees they paid to Hynes during the course of the parties’ business

7

endeavors.

8

C.

9

Plaintiffs’ Intentional and Negligent Interference with Prospective Business
Advantage Claims

10

In their post-trial briefing, plaintiffs acknowledge that the evidence presented at trial fails

11

to establish one or more of the necessary elements for their claims based on theories of intentional

12

and negligent interference with prospective business advantage. Accordingly, plaintiffs request

13

that the court dismiss those claims without prejudice. The court grants plaintiffs’ request to

14

dismiss their claims. However, the court declines to approve their additional request that those

15

two claims be dismissed without prejudice. An entire seven-day trial on the merits of the parties’

16

claims has been conducted in this action, and by plaintiffs’ own admission they have failed to

17

produce evidence that meets their burden in proving the necessary elements of those claims.

18

Accordingly, plaintiffs’ intentional and negligent interference with prospective business

19

advantage claims are dismissed with prejudice.
Hynes’ and HAI’s Counterclaims

20

D.

21

Defendants Hynes and HAI assert counterclaims based on breach of contract for the

22

amounts they claim plaintiffs owe on outstanding balances for the operating loans, equipment

23

leases, and premiums on Dan Folk’s and Hynes’ life insurance policies.49

24

To prevail on a breach of contract claim under California law, the party asserting such a

25

claim must prove the following elements: (1) the existence of a contract, (2) the plaintiff’s

26

performance or excuse for nonperformance, (3) the defendant’s breach, and (4) damages to the

27
28

49

Defendant Hynes Children is not named as a counterclaimant in the counter-complaint. (See
ECF No. 87.)
64

1

plaintiff as a result of the breach. CDF Firefighters v. Maldonado, 158 Cal. App. 4th 1226, 1239

2

(2008). Similarly, for purposes of Hynes’ and HAI’s breach of contract claims relating to the

3

equipment leases, to prove such a claim under Missouri law, the plaintiff “‘must establish the

4

existence of a valid contract, the rights of plaintiff and obligations of defendant under the

5

contract, a breach by defendant, and damages resulting from the breach.’” Gillis v. Principia

6

Corp., 832 F.3d 865, 871 (8th Cir. 2016) (quoting Lucero v. Curators of Univ. of Mo., 400

7

S.W.3d 1, 5 (Mo. Ct. App. 2013)).

8

1.

Operating Loans

9

The court finds that the initial business plan that Hynes signed on behalf of HAI and Dan

10

Folk signed on behalf of Sac EDM on January 4, 2004, and the parties’ subsequent amendments

11

to that plan, including their July 19, 2008 partnership withdrawal plan, created a contract. Under

12

that contract, HAI, acting under the trade name OK EDM, was to provide loans to Sac EDM over

13

the course of each month either when Dan Folk, Geraldine Folk, or Shannon Gomez requested

14

them, or when Hynes believed Sac EDM needed immediate operating capital, in order to cover

15

Sac EDM’s daily operating expenses. Pursuant to that contract, to the extent it operated prior to

16

September 1, 2008, at the end of each month, Sac EDM could seek reimbursement from HAI

17

d/b/a/ OK EDM, for the full amount of the operating expenses it had incurred over the course of

18

that month. Sac EDM could use that reimbursement to repay HAI for any outstanding operating

19

loans, but was not required to apply the reimbursement money to those loans. Ideally, under the

20

parties’ plan, Sac EDM would be able to pay off all of the operating loans HAI advanced over the

21

course of a given month using its end of month reimbursement from OK EDM. However, a

22

preponderance of the evidence demonstrates that Sac EDM did not always use its monthly

23

reimbursement to pay off those loans, which caused the outstanding loan balance to accumulate

24

over the course of the parties’ business relationship.50 Under the terms of the parties’ business

25

plan, Sac EDM was obligated to repay any operating loans HAI advanced at an interest rate of 9.5

26

50

27
28

Indeed, the court finds that, at times, Dan Folk used portions of the operating loans extended to
Sac EDM for personal purposes that could not be reimbursed pursuant to the parties’ business
agreement by having Sac EDM provide him with interest free loans, thereby steadily increasing
the outstanding balance Sac EDM owed on the loans over time.
65

1

percent per annum. When Sac EDM stopped making further payments towards the outstanding

2

loan balance on July 31, 2012, Sac EDM breached that payment obligation. Accordingly, the

3

court finds that HAI is entitled to recover against Sac EDM for any unpaid amounts on the

4

operating loans it provided to Sac EDM over the course of the OK EDM joint venture and

5

beyond.

6

Based on a preponderance of the evidence that the court finds credible, the court

7

concludes that the unpaid operating loans amounted to a principal balance of $516,777.35 as of

8

July 31, 2012, the date Sac EDM stopped making payments.51 The contract under which such

9

operating loans were extended, i.e., the parties’ business plans regarding the OK EDM joint

10

venture and their withdrawal plan, provides for interest at 9.5 percent per annum, compounded

11

daily. Accordingly, as of the date of this judgment, the total outstanding amount of principal and

12

interest on the operating loans to Sac EDM is $808,746.36.

13

Hynes and HAI assert that Sac EDM and Dan Folk should be held jointly and severally

14

liable for any damages for breach of the operating loan contract based on two alternative theories.

15

First, they argue that the existence of the OK EDM joint venture meant that the actions of Dan

16

Folk, as controlling owner of Sac EDM, were also attributable to Sac EDM, and vice versa.

17

Second, they argue that the evidence shows that Sac EDM operated as an alter ego of Dan Folk,

18

therefore making Dan Folk liable for any debts Sac EDM incurred. The court finds both

19

arguments unavailing.

20

With regard to joint liability based on the OK EDM joint venture, the evidence

21

demonstrates that the parties formally withdrew from that business relationship as of September

22

1, 2008, via a signed writing on July 19, 2008. While that agreement still provided that HAI

23

would continue to extend operating loans to Sac EDM, it also terminated Sac EDM’s status as a

24

vendor to HAI, meaning that Sac EDM would no longer route its income to HAI d/b/a OK EDM,

25

and HAI would no longer reimburse Sac EDM for its monthly operating expenses. From

26

51

27
28

The court derives this amount from the parties’ Joint Exhibit 289, which is a recapitulation of
the balance of payments on the operation loans from January 1, 2005, through July 31, 2012, and
appears to have been prepared on behalf of Sac EDM by someone other than Hynes on November
6, 2012.
66

1

September 1, 2008 onward, Sac EDM’s relationship with HAI and the other defendants was more

2

in the nature of a lender-borrower relationship, rather than one of partnership. Accordingly, the

3

court concludes that when Sac EDM stopped making payments on the loan balance on July 31,

4

2012, it did so outside the bounds of the partnership on which Hynes and HAI premise their

5

argument.
With regard to Hynes and HAI’s argument under the alter ego doctrine, the court

6
7

concludes that defendants presented insufficient evidence to support the application of that

8

doctrine to Dan Folk and Sac EDM. While Hynes testified at trial that, at times, he considered

9

Sac EDM, the corporation, Dan Folk, the individual, and Sac EDM SP, the sole proprietorship, as

10

largely one and the same, and while some evidence indicates that Dan Folk, at times, took out

11

interest free loans from Sac EDM, the parties’ accounting and tax records presented at trial

12

demonstrate that Sac EDM operations were sufficiently separate from Dan Folk as an individual

13

such that the alter ego doctrine is not applicable. Accordingly, the court concludes that

14

defendants fail to meet their burden in proving that Sac EDM operated as the alter ego of Dan

15

Folk.

16

HAI and Hynes fail to persuasively demonstrate that Dan Folk should be held jointly

17

liable for Sac EDM’s breach of its payment obligation with regard to the operating loans.

18

Accordingly, the court concludes that only Sac EDM is liable for the $808,746.36 in damages

19

caused by its breach of its contract with HAI regarding the repayment of the operating loans that

20

defendant extended to it under the terms of the parties’ business plans that were in operation over

21

the course of the parties’ business relationship.

22
23

2.

Leases

As an initial matter, the court finds by a preponderance of the evidence that neither Hynes

24

nor HAI can enforce any of the first nine equipment leases at issue, which consist of the items

25

identified in the eight attachments to the first master lease dated August 1, 2004, and the items

26

identified as the “Tom White” equipment that was subsequently leased under the terms of that

27

same master lease. While the master lease agreement for these leases was signed by Dan Folk on

28

behalf of Sac EDM as lessee, and Hynes on behalf of Hynes Children as lessor, each of the
67

1

equipment leases themselves provided that HAI “d/b/a OK EDM and Waterjet and/or SacEDM &

2

Waterjet” was the lessee with regard to the specific equipment leased under those agreements.

3

(Exhs. 1, 277; Tr. 1337-38.) During trial, Hynes testified that HAI “d/b/a OK EDM and Waterjet

4

and/or SacEDM & Waterjet” was one of “two divisions” of HAI itself, acting as the trade name

5

for its California operations, for which Dan Folk and Sac EDM acted as a vendor, while the other

6

division was the consulting and aircraft leasing arm of HAI. (Tr. 1325.) By January of 2005,

7

HAI had transferred any interest it had in the leases under the master lease agreement to Hynes

8

Children and assumed the role of lessee under that agreement.52 Hynes arranged to have HAI act

9

as lessee under the equipment leases in place of Sac EDM after Hynes Children took over as

10

lessor because Hynes Children’s board of directors wanted to be able to hold Hynes and HAI

11

responsible for any payments due under the leases, instead of Sac EDM, with which the Hynes

12

Children’s board of directors was unfamiliar. (Tr. 1555-58.) Despite arranging the parties to

13

these leases in such a fashion, defendants still intended for Sac EDM to receive the beneficial use

14

of the equipment subject to those agreements. (Id.) Accordingly, the court finds upon a

15

preponderance of the evidence that each of these nine leased items were actually between Hynes

16

Children as lessor and HAI, under its trade name “OK EDM and Waterjet and/or SacEDM &

17

Waterjet,” as lessee, not Sac EDM, which was a separate corporate entity, and was merely a third

18

party beneficiary under the agreement.53

19
20
21
22
23
24
25
26
27
28

52

As noted above with regard to the findings of fact, the court finds that the parties subsequently
backdated each lease to which Hynes Children was lessor and HAI d/b/a OK EDM was lessee to
October 1, 2004.
53

The court acknowledges that these contracts could arguably be construed as having been
between Hynes Children as lessor and Hynes and Dan Folk personally as partners in OK EDM
given the fact that Dan Folk also signed each attachment under the lessee heading and the name
of the lessee included “SacEDM & Waterjet,” Dan Folk’s sole proprietorship, as one of the trade
names HAI used under these leases. However, any uncertainty in a contract must be construed
against its drafter. Marion v. Hazelwood Farms Bakeries, Inc., 969 F. Supp. 540, 543 (E.D. Mo.
1997) (“It is well settled under Missouri law that ambiguities in a contract are construed against
the drafter.”); see also Stanislaus Towing & Recovery Servs., Inc. v. City of Modesto, 2012 WL
1898917, at *7 (E.D. Cal. May 23, 2012) (quoting Roth v. Department of Veterans Affairs, 110
Cal. App. 3d 622, 628 (1980)). Here, Hynes drafted all of the parties’ equipment leases and their
attachments for each piece of equipment leased pursuant to those agreements. Accordingly, the
68

1

While Hynes Children attempted to assign to HAI all its rights under the leases at issue to

2

which it was named lessor and to which Sac EDM and/or Dan Folk was named as lessee, the

3

language of that assignment had no effect of legal assignment with regard to these equipment

4

leases because the lessee was HAI d/b/a OK EDM, not Sac EDM. (Exh. 363.) Moreover, to the

5

extent defendants argue that HAI subleased to Sac EDM any equipment Hynes Children leased to

6

it, the terms of the lease agreement itself demonstrate that such a sublease is unenforceable. The

7

terms of the master lease expressly prevent the lessee from subleasing any equipment subject to

8

that agreement. (Exh. 1.) Finally, defendants cannot seek to enforce those contracts on Hynes

9

Children’s behalf because that defendant is not named as a party to the counter-complaint.

10

In short, a preponderance of the credible evidence demonstrates that the leases are

11

unenforceable against Sac EDM as it is not the lessee under those agreements, but rather a third

12

party beneficiary with no payment obligations under the terms of those contracts. It demonstrates

13

further that, in any event, neither defendant asserting counterclaims in this action is the lessor

14

under any of the nine lease agreements, therefore meaning they have no right to damages for any

15

failure to pay under those agreements.

16

Hynes and HAI argue that they are nonetheless entitled to any unpaid amounts on the

17

leases they seek through their counterclaims, even in the event that no contract was formed

18

between either one or both of them and Sac EDM, based on the equitable theories of promissory

19

estoppel and/or equitable estoppel. The court finds those arguments unconvincing.

20

First, a party may recover in equity under a theory of promissory estoppel only when it

21

can prove that it relied on a promise to its detriment that would be otherwise unenforceable as a

22

contract for lack of consideration. See Barroso v. Ocwen Loan Servicing, LLC, 208 Cal. App.

23

4th 1001 (2012). Here, the court finds that a valid lease contract was established between Hynes

24

Children, as lessor, and HAI, as lessee, with Sac EDM in the role of third party beneficiary.

25

Consideration was present, because HAI agreed to make monthly payments in exchange for

26

Hynes Children’s agreement to allow Sac EDM to use the equipment it owned in Sac EDM’s

27
28

court finds it appropriate to construe these equipment leases against its drafter as having been
between Hynes Children as lessor and HAI as lessee.
69

1

operations on behalf of the OK EDM joint venture. Furthermore, the terms of the lease

2

agreements demonstrate that the promise to make monthly payments that Hynes and HAI seek to

3

enforce through their counterclaims was made by HAI, not Sac EDM. Accordingly, the court

4

concludes that Hynes and HAI cannot recover for any non-payment under these nine leases

5

through a claim of promissory estoppel.54
Hynes and HAI also cannot recover under a claim of equitable estoppel. “‘[The doctrine

6
7

of equitable estoppel] provides that a person may not deny the existence of a state of facts if he

8

intentionally led another to believe a particular circumstance to be true and to rely upon such

9

belief to his detriment. The elements of the doctrine are that (1) the party to be estopped must be

10

apprised of the facts; (2) he must intend that his conduct shall be acted upon, or must so act that

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the party asserting the estoppel has a right to believe it was so intended; (3) the other party must

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be ignorant of the true state of facts; and (4) he must rely upon the conduct to his injury.’” City

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of Goleta v. Superior Court, 40 Cal.4th 270, 279 (2006) (quoting City of Long Beach v. Mansell,

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3 Cal. 3d 462, 488 (1970)). “The ‘gravamen’ of [equitable] estoppel is a misleading

15

representation by the plaintiff that the defendant relies on to his detriment.” Petrella v. Metro-

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Goldwyn-Mayer, Inc., 134 S. Ct. 1962 (2014).

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Here, the court finds that defendants have not met their burden in proving that Dan Folk or

18

someone else at Sac EDM made a misleading representation to either HAI or Hynes regarding the

19

nine leases. To the contrary, the evidence demonstrates that Hynes, acting on behalf of all

20

defendants, was well aware of the true state of facts because he was the one who drafted the lease

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contracts with the intent that Hynes Children would be the lessor and HAI, not Sac EDM, the

22

lessee.55 Accordingly, the court concludes that neither Hynes nor HAI can recover against

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plaintiffs with regard to the first nine leases under the two estoppel theories they advance in their

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post-trial briefing.

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54

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If anything, Hynes Children, as lessor, could seek damages for breach of contract against HAI,
as lessee, for any non-payment under these leases.
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Hynes was also the one who included the term in the master lease agreement for these nine
leases that restricted the lessee from subleasing the equipment, thereby preventing HAI from
entering a valid sublease with Sac EDM regarding the equipment.
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Nevertheless, the preponderance of the evidence shows that the 11 other equipment leases

2

at issue, leases 10 through 20, are enforceable contracts to the extent that the terms of those

3

agreements have been limited by the court. The evidence demonstrates that each agreement was

4

in writing and signed by Dan Folk on behalf of Sac EDM and Hynes on behalf of HAI, and

5

clearly sets forth key terms such as the particular equipment subject to those leases and the

6

monthly lease rates. (Exhs. 2, 3.) The evidence also shows that HAI performed its duties under

7

those agreements by allowing Sac EDM to use the leased equipment to operate its business

8

without interruption. Under the reformed terms of those agreements discussed above, Sac EDM

9

was obligated to make monthly payments that were calculated by taking the price the lessor paid

10

to purchase the leased equipment divided by 60 (based on the months of the lease term), plus an

11

additional 10 percent on top of that amount. Sac EDM was obligated to make such monthly

12

payments for a total of 60 months, at which time it would be entitled to exercise its option to

13

purchase the leased equipment.

14

Sac EDM defaulted on these 11 leases when it decided to stop making monthly payments

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on each of them. See Mo. Rev. Stat. § 400.2 A-523 (a lessee is considered to be in default if the

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lessee fails to make a payment when due or repudiates its obligations with respect to a part or the

17

whole lease contract). Defendants correctly argue that HAI, as lessor, is entitled to recover any

18

unpaid rent it is owed under the terms of these leases based on Sac EDM’s default. See id.

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400.2A-529 (providing that a lessor is entitled to remedy a default where the leased items have

20

not been repossessed by recovering any “accrued and unpaid rent as of the date of entry of

21

judgment”). Because the court has limited the duration term of each equipment lease to 60

22

months and more than 60 months have passed between the initiation of Sac EDM’s payments and

23

the date of this judgment with regard to each of the leases at issue, the court concludes that HAI is

24

entitled to damages in the amount of the entire 60 months’ worth of full payments under each

25

lease, as limited by the court, minus any payments the evidence demonstrates Sac EDM made

26

towards each lease.56 Accordingly, HAI is entitled to damages amounting to $70,930 based on

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28

56

In other words, damages are calculated for each lease using the following formula: (60 x [(cost
/ 60) +10 percent]) – amounts Sac EDM paid under the lease.
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Sac EDM’s default under equipment lease numbers 10 through 20.57

2

3.

3

Insurance Premium Payments

Finally, defendants argue that Sac EDM breached a contractual obligation owed to HAI to

4

repay the amounts HAI invoiced to Sac EDM for premiums HAI paid for the life insurance

5

policies it took out on both Dan Folk and Hynes.

6

The evidence proffered at trial demonstrates that Dan Folk and Hynes signed a writing on

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March 28, 2007, amending the parties’ business plan to include a provision that “key man” life

8

insurance policies were to be taken out on both Dan Folk and Hynes moving forward, and that

9

Sac EDM would ultimately be responsible for paying the premiums under both policies. (ECF

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No. 64.) The court finds that this document constitutes a valid written contract between HAI and

11

Sac EDM whereby HAI would bill Sac EDM each month to cover the premiums it owed under

12

each policy. The preponderance of the evidence shows further that the combined premiums on

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both policies were $1,900 per month, which HAI billed to Sac EDM on a monthly basis. Sac

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EDM breached that agreement when it began to make only partial payments of $50 each month

15

beginning in March of 2009, and later when it stopped making payments altogether in July of

16

2011. HAI suffered damages as a result of this breach by having to continue to pay the premiums

17

under both policies without reimbursement from Sac EDM as the parties’ agreement had

18

envisioned.

19

While plaintiffs contend that HAI was the beneficiary under both policies and that the

20

premiums for the policy taken out on Hynes’ life were much larger than those for the policy on

21

Dan Folk’s life, they present no credible evidence that such terms were unconscionable under the

22

circumstances. With regard to the fact that HAI was the beneficiary under the agreement, the

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agreement itself sets forth a legitimate purpose for such an arrangement. In the event of either

24

insured’s death, the proceeds would go to HAI in full satisfaction of the outstanding operating

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The court notes that after Sac EDM pays HAI for the outstanding lease balance calculated
above, it is entitled to exercise its option to purchase all of the equipment under leases 10 through
20 pursuant to these leases’ buyout term, as that term has been limited by the court (i.e., Sac
EDM can exercise its option to purchase the leased equipment after making the equivalent of 60
full monthly payments). Specifically, once Sac EDM pays the amounts owed for the leases set
forth herein, it owns the equipment outright.
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debts Sac EDM owed. The evidence shows that the purpose of the two policies was to allow Sac

2

EDM to easily pay off its outstanding operating debts to defendants and the parties to wind down

3

their partnership in the event of either Dan Folk’s or Hynes’ death. It was reasonable for the

4

parties to have named HAI as the beneficiary in furtherance of fulfilling that purpose. With

5

regard to the relative prices of the two policies, a preponderance of the evidence introduced at

6

trial demonstrates that Hynes’ policy premiums were much larger than those associated with Dan

7

Folk’s policy due to Hynes’ advanced age. Accordingly, plaintiffs fail to put forth credible

8

evidence demonstrating that the premiums on either policy at issue were excessive under the

9

circumstances.

10

With regard to damages, defendants contend that the evidence shows that Sac EDM only

11

made payments of $50 starting in March of 2009, and stopped making payments altogether

12

beginning in August of 2011. Therefore, defendants contend that Sac EDM is liable for $1,850

13

per month ($1900 minus the $50 actually paid) for the period from March 2009 through July

14

2011, and $1900 per month thereafter.58 Defendants assert that the unpaid premiums continue to

15

accrue to this date, and that the outstanding payments should be calculated through the date of

16

judgment. The court agrees with defendants’ assessment of the damages.

17

A preponderance of the evidence shows that HAI invoiced Sac EDM $1,900 per month

18

beginning in October of 2007 for payment of the premiums on the two policies. It also shows that

19

Sac EDM paid only $50 per month towards the premium payments that HAI invoiced from

20

March of 2009 through July of 2011, and stopped paying altogether beginning in August of 2011.

21

HAI has continued to pay those premiums through the present day. Accordingly, the court finds

22

Sac EDM liable in the amount of $184,750.00 for the breach of its contract with HAI regarding

23

the payment of the premiums for the life insurance policies taken out on the lives of Dan Folk and

24

Hynes.59

25

58

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27
28

Defendants contend that this amounts to a total principal amount of $177,150 plus prejudgment interest as of December 2016.
59

The court calculates this total by multiplying $1850 ($1900 payment due – $50 Sac EDM paid)
by 29, for each of the 29 months Sac EDM paid only $50 per month towards the life insurance
premiums, and then adding that total to $1900 multiplied by 69, for each of the months since Sac
73

1

IV.

2

Conclusion
Based on the findings of fact and conclusions of law contained herein, IT IS HEREBY

3

ORDERED that:

4

1.

Based on the court’s conclusion that Hynes, while acting on behalf of HAI and

5

Hynes Children, breached his fiduciary duties owed to both plaintiffs and committed constructive

6

fraud through his misrepresentations in connection with the equipment lease contracts and the

7

parties’ agreement regarding the repayment of the US Banc judgment, the court finds that

8

plaintiffs are entitled to the following relief:

9

a.

Sac EDM is entitled to $413,151.00 in restitution against HAI for the

10

unjust gains it realized from Hynes’ fraudulent breach of fiduciary duty with regard to the

11

equipment leases. 60

12

b.

Sac EDM is entitled to restitution in the amount of $162,000.00 from

13

Hynes Children, and $89,000.00 from HAI based on the unjust profits those defendants reaped

14

from Hynes’ fraudulent breach of his fiduciary duty of loyalty to Sac EDM with regard to the

15

parties’ dealings concerning the US Banc judgment.

16

c.

The court declares that the entire balance of the US Banc judgment was

17

fully satisfied as to both plaintiffs in August of 2005 when Dan and Geraldine Folk paid

18

$52,451.51 in full satisfaction of their payment obligations under the parties’ agreement that was

19

in place prior to Hynes’ fraudulent breach of his fiduciary duty. In furtherance of this declaration,

20

whichever defendant (or defendants) currently holds the right to enforce the US Banc judgment

21

shall file a Satisfaction of Judgment form in Sacramento County Superior Court case number

22

04AS03050 forthwith. Furthermore, defendants are permanently enjoined from selling,

23
24

EDM altogether stopped making monthly payments towards the monthly premiums through the
date of this judgment.

25

60

26
27
28

While HAI assigned its rights as lessor under leases one through nine to Hynes Children and
assumed the role as lessee under those agreements beginning in January of 2005, the evidence
demonstrates that HAI continued to bill Sac EDM for the full monthly lease payments despite
lacking authority to do so under the terms of those leases. (Exhs. 1, 363.) Accordingly, the court
concludes that HAI is the defendant that was unjustly enriched by Hynes’ fraudulent breaches of
his fiduciary duty concerning those leases.
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1

transferring, or otherwise alienating any interest they may have with regard to the US Banc

2

judgment.

3

2.

Based on the court’s conclusion that Sac EDM breached its contractual obligations

4

to HAI to make monthly payments on the remaining balance of the operating loans HAI had

5

extended to it over the course of the parties’ business dealings, under the equipment lease

6

contracts under which HAI was lessor and Sac EDM was lessee, and under its agreement to

7

reimburse HAI for the monthly payments HAI made towards the premiums on Dan Folk’s and

8

Hynes’ life insurance policies, the court finds that HAI is entitled to the following relief against

9

Sac EDM:

10
11

a.

Damages amounting to $808,746.36 based on Sac EDM’s breach of

contract with regard to the operating loans HAI had extended to it.
Damages amounting to $70,930.00 based on Sac EDM’s default under

12

b.

13

equipment leases 10 through 20.

14

c.

Damages amounting to $184,750.00 based on Sac EDM’s breach of its

15

contract with HAI regarding the payment of the premiums for the life insurance policies taken out

16

on the lives of Dan Folk and Hynes.

17

3.

The parties are to bear their own attorneys’ fees and costs.

18

4.

The Clerk of Court is directed to enter final judgment in this action in accordance

19

with the above findings of fact and conclusions of law.

20

5.

21

IT IS SO ORDERED.

22

The Clerk of Court is directed to close this case.

Dated: April 18, 2017

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