Morningstar Holding Corporation v. G2, LLC et al

Filing 158

MEMORANDUM DECISION AND ORDER denying 88 Motion for Partial Summary Judgment; denying 91 Motion to Dismiss; granting in part and denying in part 96 Motion for Summary Judgment; denying 98 Motion for Summary Judgment; denying 106 Motion for Leave to File Amended Counter-claim; denying 117 Motion to Strike ; granting 129 Motion to Augment the Record; denying 135 Motion to Strike ; granting 145 Motion for Consideration of Late-Filed Affidavit and Amendment to Response to Morningstars State of Facts in Support of Motion for Partial Summary Judgment. Signed by Judge B. Lynn Winmill. (caused to be mailed to non Registered Participants at the addresses listed on the Notice of Electronic Filing (NEF) by cjm)

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF IDAHO

MORNINGSTAR HOLDING
CORPORATION, a Foreign
Corporation qualified to do business in
Idaho,
Plaintiff,
v.
G2, LLC, a California Limited Liability
Company, HENRY GEORGE A/K/A
JOHN DOE I, and RICH DOUGLAS
A/K/A JOHN DOE II, individually, and
as Partners or Members of a Joint
Venture,

Case No. CV-10-439-BLW

MEMORANDUM DECISION AND
ORDER ON PLAINTIFF’S
MOTION FOR SUMMARY
JUDGMENT (Dkt. 88),
DEFENDANTS’ MOTION FOR
SUMMARY JUDGMENT (Dkt. 96),
G2's MOTION FOR SUMMARY
JUDGMENT ON
COUNTERCLAIMS (Dkt. 98),
MOTION TO DISMISS (Dkt. 91)
and MOTION FOR LEAVE TO
AMEND (Dkt. 106).

Defendants.

The Court has before it Plaintiff’s Motion for Partial Summary Judgment,
Defendants’ Motion for Summary Judgment, G2's Motion for Summary Judgment on its
counter-claims, a motion to dismiss the non-appearing individual defendant, a motion for
leave to amend the counter-claim to add a claim for punitive damages, and several
evidentiary motions. The Court heard oral argument on October 5, 2011, and took the
matters under advisement. After further review, the Court issues the following

MEMORANDUM DECISION AND ORDER - 1

Memorandum Decision and Order denying both Plaintiff’s motion for partial summary
and the Defendants’ cross motions with respect to Plaintiff’s and Defendant G2's contract
claims/counter-claims, granting Defendants’ motion for summary judgment on Plaintiff’s
breach of fiduciary duty and negligence claims, and denying Defendants’ motion to
dismiss Rich Douglas.
MOTIONS FOR SUMMARY JUDGMENT
A.

Background
Plaintiff Morningstar invested and lost approximately $2,000,000 in a fraudulent

high-yield investment scheme operated by an individual doing business as Sentinel
Funds, Inc., Sentinel Holdings Corporation and Sentinel Partners, Ltd. (hereafter
“Sentinel Scam”). Beginning as early as 2005, Defendant G2, through its principal
partners – Defendants George Goldsmith a/k/a Henry George and Rich Douglas a/k/a
Rich Gurnett – was retained to recover the losses experienced by other victims of the
Sentinel Scam. An agent with the FBI referred Morningstar to G2, and the two entities
entered into an Asset Recovery Agreement (ARA) in August of 2005. (See Dkt. 88-2, p.
31)
Hal McNee, president of Morningstar, negotiated the ARA primarily with Rich
Douglas. One point of negotiation was G2's payment. At the time of retention, G2
anticipated an imminent recovery of the funds through settlement negotiations with Bank

MEMORANDUM DECISION AND ORDER - 2

of America.1 The ARA required Morningstar to pay G2 a 50% “Success Commission” on
any recovery “returned or obtained by any other method through our sources and
methods.” Id. Other victims who had contracted with G2 earlier in the investigation
would pay only a 20% Success Commission. This discrepancy was to account for the fact
that the other victims (an "Original Claimant" and "Secondary Claimants") had paid the
costs and expenses of G2's investigation and recovery efforts. The ARA also required
that the claims of the these other victims would be prioritized making Morningstar a
“Tertiary Claimant.” (Dkt. 88-2, p. 31).
McNee expressed concern about the 50% commission, which he considered
“exorbitant,” but felt time-pressured to sign the agreement so that Morningstar could
participate in the settlement that was perceived to be imminent. He claims that Rich
Douglas assured him that G2 would fairly resolve his concerns later.
Negotiations with Bank of America failed, however, and G2 determined that
Morningstar and the other victims would need to hire attorneys to pursue their losses
through legal proceedings – including filing a claim in the Sentinel bankruptcy
proceeding and a civil lawsuit against Bank of America. Using a Power of Attorney
Morningstar signed as required by the ARA, G2 hired separate counsel for the two
proceedings and advanced Morningstar’s pro-rata cost of their respective retainers. G2

1

Bank of America’s involvement in the Sentinel Scam is not entirely clear from the
record. It appears, though, that acting as Fleet Investment Bank, Bank of America held
the funds that were lost through a fraudulent transfer.
MEMORANDUM DECISION AND ORDER - 3

informed Morningstar that it would need to reimburse G2 for these expenses.
Morningstar objected to paying the legal fees without renegotiating the other
issues of concern, including the 50% commission. When Morningstar refused to pay the
legal fees, G2 indicated that it would demote Morningstar to a “sub-tertiary” claimant.
Simultaneously, various disputes arose among G2, Morningstar, and G2's other clients.
Initially, the representation agreement with the civil litigation attorney, Michael Josephs
of the Joseph Jacks law firm, designated G2 as the representative of its clients to act as
the liason between Josephs and the victims. The relationship proved unworkable,
however, given the ongoing disputes, and Morningstar – along with other victims –
retained the attorneys directly, removing G2 as the “middle-man,” and subsequently gave
G2 notice of termination of the ARA.
Morningstar received a settlement in both proceedings, and ultimately recovered
more than its original investment, less 30% in attorney’s fee commissions. G2 received
payment of $65,000 through the bankruptcy proceeding, but has not received any
payment from Morningstar, and maintains that it was entitled to its 50% commission of
the recovery based on the ARA.
Morningstar, on the other hand, contends that its recovery was not the result of
G2's efforts, but the work of the attorneys hired to represent Morningstar in the legal
proceedings. Accordingly, and for other reasons, Morningstar contends that G2 is not
entitled to receive its full 50% commission. Morningstar filed this action alleging that G2

MEMORANDUM DECISION AND ORDER - 4

and its principals committed fraud, made intentional and negligent misrepresentations,
breached its fiduciary duty to Morningstar, and breached the terms of the ARA.
(Amended Complaint, Dkt. 9). Douglas has not been served or otherwise appeared in this
action. G2 counter-claimed for breach of the ARA seeking payment of its commission, or
alternatively, for the value of its services under an unjust enrichment claim. (Answer to
Amended Complaint and Counterclaim, Dkt. 52).
Morningstar now moves for partial summary judgment on all claims related to
breach of contract. Defendants cross-move for summary judgment on these claims, as
well as the remainder of Morningstar’s claims. G2 moves for summary judgment on its
Counter-claims and Morningstar’s affirmative defenses to its counter-claims.
B.

Summary Judgment Legal Standard
One of the principal purposes of the summary judgment “is to isolate and dispose

of factually unsupported claims . . . .” Celotex Corp. v. Catrett, 477 U.S. 317, 323-24
(1986). It is “not a disfavored procedural shortcut,” but is instead the “principal tool[ ] by
which factually insufficient claims or defenses [can] be isolated and prevented from going
to trial with the attendant unwarranted consumption of public and private resources.” Id.
at 327. “[T]he mere existence of some alleged factual dispute between the parties will not
defeat an otherwise properly supported motion for summary judgment; the requirement is
that there be no genuine issue of material fact.” Anderson v. Liberty Lobby, Inc., 477
U.S. 242, 247-48 (1986).

MEMORANDUM DECISION AND ORDER - 5

The evidence must be viewed in the light most favorable to the non-moving party,
id. at 255, and the Court must not make credibility findings. Id. Direct testimony of the
non-movant must be believed, however implausible. Leslie v. Grupo ICA, 198 F.3d 1152,
1159 (9th Cir. 1999). On the other hand, the Court is not required to adopt unreasonable
inferences from circumstantial evidence. McLaughlin v. Liu, 849 F.2d 1205, 1208 (9th
Cir. 1988).
The Court must be “guided by the substantive evidentiary standards that apply to
the case.” Liberty Lobby, 477 U.S. at 255. If a claim requires clear and convincing
evidence, the issue on summary judgment is whether a reasonable jury could conclude
that clear and convincing evidence supports the claim. Id.
The moving party bears the initial burden of demonstrating the absence of a
genuine issue of material fact. Devereaux v. Abbey, 263 F.3d 1070, 1076 (9th Cir.
2001)(en banc). To carry this burden, the moving party need not introduce any
affirmative evidence (such as affidavits or deposition excerpts) but may simply point out
the absence of evidence to support the nonmoving party’s case. Fairbank v. Wunderman
Cato Johnson, 212 F.3d 528, 532 (9th Cir.2000).
This shifts the burden to the non-moving party to produce evidence sufficient to
support a jury verdict in her favor. Id. at 256-57. The non-moving party must go beyond
the pleadings and show “by her affidavits, or by the depositions, answers to
interrogatories, or admissions on file” that a genuine issue of material fact exists.

MEMORANDUM DECISION AND ORDER - 6

Celotex, 477 U.S. at 324.
However, the Court is “not required to comb through the record to find some
reason to deny a motion for summary judgment.” Carmen v. San Francisco Unified Sch.
Dist., 237 F.3d 1026, 1029 (9th Cir.2001) (quoting Forsberg v. Pac. Northwest Bell Tel.
Co., 840 F.2d 1409, 1418 (9th Cir. 1988)). Instead, the “party opposing summary
judgment must direct [the Court’s] attention to specific triable facts.” Southern
California Gas Co. v. City of Santa Ana, 336 F.3d 885, 889 (9th Cir. 2003).
Only admissible evidence may be considered in ruling on a motion for summary
judgment. Orr v. Bank of America, 285 F.3d 764, 773 (9th Cir.2002); see also
Fed.R.Civ.P. 56(e). In determining admissibility for summary judgment purposes, it is
the contents of the evidence rather than its form that must be considered. Fraser v.
Goodale, 342 F.3d 1032, 1036-37 (9th Cir. 2003). If the contents of the evidence could be
presented in an admissible form at trial, those contents may be considered on summary
judgment even if the evidence itself is hearsay. Id. (affirming consideration of hearsay
contents of plaintiff’s diary on summary judgment because at trial, plaintiff’s testimony of
contents would not be hearsay).
In order to preserve a hearsay objection, “a party must either move to strike the
affidavit or otherwise lodge an objection with the district court.” Pfingston v. Ronan
Engineering Co., 284 F.3d 999, 1003 (9th Cir. 2002). In the absence of objection, the
Court may consider hearsay evidence. Skillsky v. Lucky Stores, Inc., 893 F.2d 1088, 1094

MEMORANDUM DECISION AND ORDER - 7

(9th Cir. 1990).
C.

Contract Claims
Morningstar moves for partial summary judgment on its claim for breach of

contract supporting rescission and G2's counter-claim for breach of contract seeking
payment pursuant to the contract terms. Morningstar contends that (1) the ARA is
unenforceable as a matter of law, and (2) G2's unilateral subrogation of its claims to the
“sub-tertiary” prioritization category was a material breach of the contract which entitled
Morningstar to rescind the contract.
Defendant G2, on the other hand, moves for summary judgment on its counterclaim for breach of contract claiming that there are no genuine issues of fact in dispute
preventing the Court from finding that Morningstar breached the ARA by failing to pay
G2 its commission. Because it involves the pivotal question of what the parties agreed to
in the ARA, the Court will first address Defendants’ motion for summary judgment on
breach of contract, and then the remaining contract issues. As explained below, the
motions will be denied.
1.

There are disputed issues of material fact regarding the meaning of the
ARA and whether G2 is entitled to a commission based upon
Morningstar’s recovery.

Defendants claim that all of the pivotal facts regarding liability under the ARA are
undisputed: G2 was authorized to take whatever action was necessary for the recovery
efforts, including hiring the attorneys to file lawsuits on behalf of the clients; that the

MEMORANDUM DECISION AND ORDER - 8

clients – including Morningstar – would be responsible for paying these legal fees in
addition to G2's commission; G2 is entitled to its commission from any recovery
obtained through any of its sources; G2 – on behalf of Morningstar by virtue of the Power
of Attorney granted in conjunction with the ARA – instituted the legal proceedings that
ultimately resulted in Morningstar’s recovery; and G2 has not been paid its commission.
The Court disagrees and finds disputed questions of material fact precluding summary
judgment in G2's favor. Specifically, the Court believes that the ARA is ambiguous in
several respects which preclude a finding that G2 is entitled to payment under its terms.
Where its language is clear and unambiguous, the meaning and legal effect of a
contract is a matter of law for the Court to decide from the plain meaning of the contract's
words. See Pinehaven Planning Bd. v. Brooks, 70 P.3d 664, 667 (Idaho 2003). On the
other hand, if a contract is ambiguous, the meaning and legal effect of the contract is a
question of fact which may be determined from extrinsic facts. See Albee v. Judy, 31
P.3d 248, 252 (Idaho 2001). It is only if the extrinsic evidence of the parties' intent is not
conflicting, that the court may determine the parties' intended meaning of the ambiguous
terms from such evidence. See Jensen v. Westberg, 707 P.2d 490, 492 (Idaho Ct. App.
1985). Otherwise, the parties' intent is generally a question of fact reserved for the jury.
See id.; Albee, 31 P.3d at 252.
The determination of whether a contract is ambiguous is a question of law for the
court to decide. Pinehaven Planning Bd., 70 P.3d at 667. A contract is ambiguous if it is

MEMORANDUM DECISION AND ORDER - 9

subject to reasonable but conflicting interpretations, or is nonsensical. Swanson v. Beco
Const. Co., 175 P.3d 748, 751 (2007)(citations omitted).
The basic terms of the ARA were as follows. G2 was to perform the following
“Deliverables”:
(1)
(2)

(3)
(4)

Continue with investigation.
Continue to coordinate closely with law enforcement authorities to manage
ongoing criminal investigation to the fullest benefit of G2's clients, both
original, secondary and tertiary.
Discuss and negotiate settlement terms and conditions with individuals and
institutions.
Respond appropriately to unexpected developments, some of which may
require additional travel, expenses, action on the part of G2 or it clients.

ARA, p. 2, § 4 (Dkt. 88-2, p. 31).
Morningstar was to pay “expenses,” defined as “all modes of transportation,
lodging, meals, telecommunications, office and courier, computer and other electronic
support and any and all expenses which can be reasonably related to the recovery effort,”
Id., p. 2, § 3(e) (emphasis added); and, a “Success Commission” defined as 50% “of any
and all of the Claim Amount recovered and/or returned or obtained by any other method
through our sources and methods to the Claimant after the execution date of this
Agreement.” Id., p. 2.
Broadly speaking, the language of the ARA is so vague that it defies any clear
understanding of what the parties intended – and is therefore susceptible to conflicting
interpretations. For example, with respect to G2's Deliverables, substantial questions
arise: What will the promised “investigation” entail? What is the purpose and nature of

MEMORANDUM DECISION AND ORDER - 10

the continued “coordination” with law enforcement? What metrics will be used to
measure success in “discussing and negotiating” settlement terms? What is an
“appropriate response” to unexpected developments? The same is true with respect to
Morningstar’s payment obligations: What standard would be used to determine which
expenses are “reasonably related” to the recovery effort? What is the “recovery effort”?
What will be included in G2's “sources and methods?” How does one differentiate
between amounts recovered from other sources, including attorneys retained directly by
Morningstar, and those recovered from G2's “sources and methods?”
The Court concludes that the numerous unresolved issues concerning the parties’
obligations are so substantial that it is impossible to view the ARA as anything but vague
and ambiguous.
In addition to the inherent ambiguity of the language used in the ARA, there are
specific examples of uncertainty. For example, the scope of G2's recovery effort is
clearly susceptible to more than one interpretation. On the one hand, there is broad
language in the ARA that implies that the recovery could include other “unforseen
methods” and involve additional, non-specified expenses which could include legal fees.
On the other hand, there are several provisions and communications suggesting that the
parties thought that the “recovery” would be the result of either the negotiation of a
settlement, or collection of assets through restitution in the ongoing criminal proceedings
– and that no other method was truly contemplated. The ARA mentions both negotiation

MEMORANDUM DECISION AND ORDER - 11

and restitution in a few places, while remaining silent on any other method including
filing additional lawsuits. Specifically, for example, it addresses G2's entitlement to a
Success Commission if recovery resulted from Restitution following arrests or
convictions, versus direct negotiations, Id., p. 32, making no mention of any other
methods of recovery, including litigation.
Another example is Exhibit A to the ARA, which is a status update as of June
2005, incorporated into and made part of the agreement. In that update, Goldsmith
describes Morningstar and others as “second stage” victims joining the “last phase of the
investigation and recovery.”(ARA, Exh. A, Status of Recovery as of June 1, 2005. Dkt.
88-2, p. 36.) His description lends credence to the view that, at the time Morningstar
agreed to the ARA, no one contemplated filing lawsuits.
In addition, once the Court concludes that the ARA itself is ambiguous and
examines the extrinsic evidence, it is clear there are disputed issues of fact as to whether
the parties had a meeting of the minds concerning attorney fees. Several communications
from G2 suggest that litigation or corresponding legal fees were not anticipated. For
example, in February 2006, when G2 informed the clients that attorneys would in fact
need to be hired, it also addressed requesting legal fees from its "tertiary" clients
including Morningstar:
To our "Tertiary Clients": Because you joined our group late in the investigation
(through no fault of your own) or because you were financially unable to
contribute to our retainer for hours and expenses, we must ask that you contribute
to the legal fund referred to above. Although we could not possibly anticipate

MEMORANDUM DECISION AND ORDER - 12

requiring legal fees from your group when we drafted your agreement it is
unreasonable and unfair to expect our initial client and our secondary clients to
fund this expense for you.
Id., Update February 6, 2006 (Dkt. 88-2, at p. 48).
Even if the Court assumes that Morningstar agreed to such expenses under the
ARA, there remain disputed issues of fact as to whether all or part of Morningstar’s
recovery was the “result of” G2's efforts or independent efforts by Josephs and the
bankruptcy attorneys.
In summary, the Court believes that the ARA is ambiguous as to whether the
parties intended that G2's recovery efforts would include filing additional lawsuits and
whether legal fees incurred in the pursuit of such litigation would be a client-borne
expense. The Court also finds that whether G2 is entitled to its commission from all or
part of Morningstar’s recovery involves disputed questions of fact as to how the recovery
“resulted.” Because of these disputed questions of fact, Defendant’s motion for summary
judgment will be denied.
2.

The ARA is not Unenforceable Because of Illegality or Contravention
of Public Policy.

Plaintiff argues that the contract is void and unenforceable on the grounds of
illegality and contravention of public policy because Defendants (1) were hired to be
investigators without the required licenses, and (2) engaged in the unauthorized practice

MEMORANDUM DECISION AND ORDER - 13

of law.2
“Whether a contract is illegal is a question of law for the Court to determine from
all the facts and circumstances of each case.” Trees v. Kersey, 56 P.3d 765, 760 (Idaho
2002) (citation omitted) An illegal contract is one based on illegal consideration
consisting of any act or forbearance furthering any matter of thing prohibited by statute.”
Id. (citation omitted).
a.

Unlicensed private investigators

Morningstar argues that because both Florida and California prohibit conducting
private investigation without a license, and neither Goldsmith or Douglas are licensed
private investigators, the ARA’s purpose is illegal, and therefore void.
Florida Statute Annotated § 493.6101 defines “private investigation” as the
investigation into:
(a) Crime or wrongs done or threatened against the United States or any
state or territory of the United States, when operating under express written
authority of the governmental official responsible for authorizing such
investigation.
(b) The identity, habits, conduct, movements, whereabouts, affiliations,
associations, transactions, reputation, or character of any society, person, or
group of persons.

2

Morningstar made several requests that the Court “take judicial notice” of all of
the files and records in this case in consideration of the pending motions. The Court
denies this request. The Court will not comb through the entire record to ascertain if
questions of fact exist. See Carmen, 237 F.3d at 1029; Southern California Gas Co., 336
F.3d at 889.
MEMORANDUM DECISION AND ORDER - 14

(c) The credibility of witnesses or other persons.
(d) The whereabouts of missing persons, owners of unclaimed property or
escheated property, or heirs to estates.
(e) The location or recovery of lost or stolen property.
(f) The causes and origin of, or responsibility for, fires, libels, slanders,
losses, accidents, damage, or injuries to real or personal property.
(g) The business of securing evidence to be used before investigating
committees or boards of award or arbitration or in the trial of civil or
criminal cases and the preparation therefor.
The California statute is nearly identical. See West’s Ann. Cal. Bus. & Prof. Code
§ 7521.
By its express terms, G2 was to receive compensation for successfully recovering
Morningstar’s assets in the form of money from specific known entities, which is more
akin to “debt collection” than the more traditional investigative activities described above.
In any event, Plaintiff has failed to come forward with evidence establishing that
Defendants conducted the activities described in the statute which would constitute
private investigation, where any activity took place, or whether or not Defendants would
have been required to be licensed for the particular activity. The Court agrees that simply
advertising investigative services, or using the term “investigate” in the ARA and
communications is not sufficient to establish that the statute has been satisfied.
Moreover, the Florida Act specifically exempts from the definition of a “private
investigator” an individual who “on a one-time or limited basis, as a result of a unique

MEMORANDUM DECISION AND ORDER - 15

expertise, ability, vocation, or special access and who, under the direction and control of a
Class “C” licensee or a Class “MA” licensee, provides information or services that would
otherwise be included in the definition of private investigation.” F.S.A. § 493.6101(16).
The un-controverted evidence in the record is that Defendants possessed unique expertise,
were hired to recover funds, but in the process acquired information that aided the
investigation of the fraud scheme, and retained properly licensed investigators to work
with when required. See G2 SOF, (Dkt. 118), ¶ 12; Affidavit by George Goldsmith in
Opposition to Morningstar’s Motion for Summary Judgement Dated 8/1/11, (Dkt. 120),
¶¶ 6 -8. Even if Defendants performed some otherwise investigative tasks, it appears that
the exception would apply, or at least there are questions of fact on this record.3
Finally, the briefing and supporting evidence does not address which law applies
to the contract action. The parties have previously argued and cited Idaho law, though no
decision has been rendered on this issue. Without facts to determine which state law
applies, the record is insufficient to determine whether that State’s public policy or law is
violated by unlicensed conduct. Idaho does not require private investigators to be
licensed. Assuming Idaho law applies to the contract, then the California or Florida
private investigation statutes would not be relevant in determining whether the contract is
void for violating Idaho law or public policy.

3

The Court has considered the evidence submitted with Plaintiff’s Request to
Augment the Record (Dkt. 129). The motion will be granted.
MEMORANDUM DECISION AND ORDER - 16

For these reasons, the Court finds that the record is not sufficient to support a
claim that Defendants were engaged in unlicensed investigative services.
b.

Unauthorized practice of law

Morningstar claims that Defendants engaged in the unauthorized practice of law
by conducting legal research, drafting a legal document (a witness statement in the form
of an “affidavit”) and a release, filing complaints with financial regulatory agencies, and
engaging in negotiations on behalf of G2's clients.
Morningstar failed to submit evidence or point to facts in the record supporting
many of its factual assertions. The record contains no evidence of specific legal research.
Instead, Plaintiff points to G2 communications either offering knowledge of legal issues
or referencing generally that G2 had done legal research. See PSOF, B.1.

G2 submits

Goldsmith’s testimony, by affidavit and in deposition, disputing that Defendants
conducted any legal research or gave any legal advice. He explains that where G2 offers
legal research as an expertise, G2 is referring to its “network of professionals in a variety
of fields.” G2 SOF, ¶ 10. He also explains that “the legal research” referenced in
particular correspondence was either G2 reading legal cases as part of its own due
diligence, or consulting attorneys on relevant legal issues and then passing that
information on to G2's clients. PSOF, ¶ ¶ 10, 11, 13 - 18. G2 explains that the witness
statements were provided to prosecuting agencies and attorneys for background
information in their work, and the release was drafted by a law firm. PSOF, ¶ 19-24.

MEMORANDUM DECISION AND ORDER - 17

Plaintiff has failed to come forward with sufficient evidence establishing that
Defendants’ themselves engaged in the unauthorized practice of law, or to refute
Defendants’ evidence that attorneys were consulted and relied upon for any relevant legal
issues.
Further, the court has reviewed the cases Plaintiff cites in support of its argument
and finds them distinguishable in that they involve conduct more akin to the traditional
role of an attorney – providing legal counsel and advice, appearing in proceedings and
preparing legal documents which have legal ramifications – than the debt collection
activities and negotiations Defendants undertook. See Drake v. Superior Court, 26 Cal.
Rptr.2d 829 (1994) (Attorney in fact sought stay in court on behalf of principal); In re
Jackman, 761 A.2d 1103 (N. J. 2000) (Out-of-state attorney worked in law firm,
counseled clients, prepared non-court filings, and negotiated merger and acquisition);
Florida Bar v. Neiman, 816 So.2d 587 (Fla. 2002) (Paralegal held himself out as an
attorney, argued and advocated clients positions on legal issues, provided legal advice to
clients).
Finally, the Court agrees that what constitutes the unauthorized practice of law in
Florida or Idaho is more appropriately determined by the Supreme Court of the respective
state. See Idaho State Bar Ass’n v. Idaho Public Utilities Commission, 637 P.2d 1168
(Idaho 1981); Golderg v. Merrill Lynch Credit Corp., 35 So.3d 905, 906 (Fla. 2010).
Plaintiff has not shown that the Supreme Courts of Idaho or Florida have made the

MEMORANDUM DECISION AND ORDER - 18

determination that the facts alleged in this case constitute the unauthorized practice of
law.
For these reasons, Plaintiff’s motion based on the allegation that Defendants
engaged in the unauthorized practice of law will be denied.
3.

Unilateral Modification

Plaintiff also argues that G2's attempt to unilaterally modify the terms of the ARA
by relegating Morningstar to the “sub-tertiary investor” category was a material breach of
the contract justifying Morningstar’s termination of the contract as a matter of law, and
judgment in its favor for breach of contract and for G2's counter-claim for breach of
contract. The Court disagrees. Whether G2's attempt to unilaterally demote Morningstar
to “sub-tertiary” status in G2's collection efforts violated the ARA involves questions of
fact which are in dispute.
First, generally, “whether a breach of contract is material is a question of fact.”
Independence Lead Mines v. Hecla Mining Co., 137 P.3d 409, 415 (Idaho 2006) (citation
omitted). No evidence has been presented on materiality.
Second, G2 submits an affidavit by Goldsmith that G2 only proposed that
Morningstar be relegated to a “sub-tertiary” claimant, which Morningstar rejected.
Accordingly, the proposal had no effect and caused no damage. McNee disagrees in his
affidavit, and states that the demotion was presented as “Fait accompli,” and that
Morningstar had no choice. Accordingly, it was a breach of the agreement and not

MEMORANDUM DECISION AND ORDER - 19

simply a rejected attempt to modify the agreement.
It is undisputed that G2 sought to convert Morningstar to a “sub-tertiary investor”
and suggested that it could do so unilaterally. However, it is also undisputed that G2 is
not attempting to enforce the terms which it attempted to add to the ARA. Likewise, it is
undisputed that Morningstar never treated Morningstar as a sub-tertiary investor in a way
that violated the original contract terms. Thus, Morningstar has not suffered any injury as
a result of G2's actions.
Morningstar claims this is irrelevant because G2's breach supports its claim for
rescission. However, the Court is not persuaded that rescission is a viable remedy in this
action. First, the right to rescind is waived where a party continues to treat the contract as
valid after grounds for rescission arise. See White v. Mock, 104 P.3d 356, 362 (Idaho
2004) (citation omitted). McNee received notice of G2's intent to demote Morningstar to
a “sub-category of non-contributing tertiary investors” on February 27, 2006. McNee
Affix., Dkt 27-3, ¶ 8.He received further notice that G2 considered Morningstar in the
subordinated category on March 1, 2006. Id. He then communicated a willingness to
contribute legal fees contingent on certain conditions, to which he never received a
response. Id. at ¶ 9.
In the meantime, G2 proceeded to hire the attorneys for both the bankruptcy and
civil legal proceedings and advance the costs of Morningstar’s share of the legal costs.
(See id. ¶¶ 9 - 10). Although the extent of G2's contribution or participation in these

MEMORANDUM DECISION AND ORDER - 20

proceedings is disputed, they nonetheless continued for over two years before
Morningstar revoked the Power of Attorney and gave notice of termination of the Asset
Recovery Agreement, in August 2008. (Id.) It is also unlikely that status quo could be
restored – a requirement of rescission – under these facts. See White, 104 P.3d at 362.
The Court finds disputed questions of fact regarding the claim for rescission, and
therefore denies both Plaintiff’s motion for summary judgment and Defendants’ crossmotion for summary judgment on this claim.
D.

Henry George’s Personal Liability
Plaintiff argues that Henry George should be personally liable for G2's conduct

and not be allowed the protection of the G2 corporate veil because the California state
corporate filings list him by his pseudonym in violation of the California Penal Code
section criminalizing false filings. Cal. Penal Code, § 115(a). The Court is unpersuaded
and finds that Plaintiff has not set forth a factual or legal basis justifying a judgment that
G2's liability be imposed against Henry George personally. See Shoaxing County Huayue
Import & Export v. Bhaumik, 120 Cal.Rptr.3d 303, 309-310 (Ct. App. 2011) (citing
Sonora Diamond Corp. v. Superior Court, 99 Cal. Rptr.2d 824 (2000)) (California alter
ego doctrine requires that there be “such a unity of interest and ownership between the
corporation and its equitable owner that the separate personalities of the corporation and
the shareholder do not in reality exist. . . .[and] an inequitable result if the acts in question
are treated as those of the corporation alone.”)

MEMORANDUM DECISION AND ORDER - 21

E.

Plaintiff’s Negligence and Breach of Fiduciary Duty Claims
Defendants have moved for summary judgment on Plaintiff’s claim that

Defendants breached their fiduciary duty and were negligent in allowing the expiration of
the statute of limitations for a claim under the Florida Securities & Investor Protection
Act (“FSIPA”) which, if successful, would have entitled Plaintiff to collect mandatory
attorney fees in the civil action against Bank of America. Defendants have also moved
for summary judgment on Plaintiff’s claim that Defendants breached their fiduciary duty
by requiring Plaintiff to pay a pro-rata share of legal expenses for the Florida bankruptcy
and civil actions, and unilaterally demoting Plaintiff to a sub-tertiary status claimant.
1.

FSIPA Claim

Plaintiff’s sole claim for monetary damages in this action is for $800,000 based on
Defendants’ negligence or breach of fiduciary duty that caused Plaintiff to lose the
opportunity to file the FSIPA claim and thereby receive a mandatory award of attorney
fees. Plaintiff contends that it lost money either because it would have successfully
pursued the claim and been entitled to mandatory attorney fees, or because the existence
of the claim would have resulted in a higher settlement with Bank of America. The Court
agrees with Defendants that under either scenario, Plaintiff has failed to submit evidence
to raise a genuine triable issue of fact on causation or damages on these claims. Simply
put, they have done nothing to take this claim out of the realm of speculation.
It is possible that the filing of the FSIPA claim would have caused Morningstar to

MEMORANDUM DECISION AND ORDER - 22

forego settlement with Bank of America and that they would have been successful in that
litigation. However, Plaintiff has offered nothing in the way of expert opinion or fact
testimony establishing that the filing of such a claim would have resulted in the claim
having been pursued to a favorable verdict. Likewise, it is possible that the filing of the
FSIPA claim would have improved Morningstar’s negotiating posture with Bank of
America such that they would have obtained a more favorable settlement. However,
Morningstar has again failed to provide expert opinion or fact testimony indicating that
the lack of a FSIPA claim affected the settlement negotiations and resulted in a lower
settlement.
Furthermore, Plaintiff’s negligence claim based on the expiration of the FSIPA
statute of limitations is barred by the statute of limitations. The Idaho statute of
limitations for a negligence claim is two years, Idaho Code § 5-219(4), and begins to run
when the damage is objectively ascertainable. Blahd v. Richard B. Smith, Inc., 108 P.3d
996, 1002 (Idaho 2005). Plaintiff’s alleged damage became objectively ascertainable the
day the FSIPA statutes of limitations ran against Bank of America – October 31, 2005–
and ran on October 31, 2007. This action was filed on May 4, 2010, nearly three years
later. Therefore, the Plaintiff’s claim that the Defendants negligently permitted the
FSIPA statutes of limitation to run is barred by the applicable Idaho statute of limitations

MEMORANDUM DECISION AND ORDER - 23

governing negligence claims.4
For the foregoing reasons, Defendants are entitled to summary judgment on
Plaintiff’s negligence and breach of fiduciary duty claims related to the FSIPA statute of
limitations.
2.

Demotion to Sub-Tertiary Investor Group

Morningstar also claims that Defendants breached their fiduciary obligations when
they demanded that Morningstar pay legal fees and – when Morningstar objected –
demoted it to the sub-tertiary investor group. Plaintiff learned that G2 unilaterally recategorized Morningstar to a sub-tertiary investor category on March 1, 2006. McNee
Affid., ¶ 9 (Dkt. 27-3). Morningstar had learned even earlier, on February 6, 2006, that
G2 intended to hire attorneys and demanded that Morningstar pay its pro-rata share
–$33,400 – of the legal expenses (Amend. Cmplt. Dkt., ¶ 11; Sealed Affid. of Harold
McNee Jr. Re: 8/29/11, Dkt. 126, ¶ 8). Thus, by no later than March 1, 2006, Morningstar
had actual knowledge regarding the demand for attorneys fees and the unilateral recategorization to sub-tertiary status. Under Idaho’s statute of limitations, Plaintiffs had

4

The statute of limitations is four years for the breach of fiduciary duty claims.
Idaho Code § 5-224. Jones v. Kootenai County Title Insur. Co., 873 P.2d 861, 868 (Idaho
1994). The limitation period began to run when Morningstar knew or should have known
of the breach. DBSI/TRI v. Bender, 948 P.2d 151, 164 (Idaho 1997). There are disputed
questions of fact as to when Plaintiff knew or should have known of the facts constituting
its breach of fiduciary duty claim relating to the expiration of the statute of limitations.
However, as noted above, the claim will nevertheless be dismissed on summary judgment
because the Plaintiffs have wholly failed to support their claim with evidence of causation
or damages.
MEMORANDUM DECISION AND ORDER - 24

four years to file their fiduciary duty claims. This lawsuit was not filed until May 4,
2010. Accordingly, the breach of fiduciary duty claims based on the demand for fees and
the unilateral decision to demote Morningstar are time barred.
F.

Damages/Set-Off for Bankruptcy Fees Paid to Goldsmith.
Defendants move for summary judgment on several claims they contend are

immaterial. Most are addressed above. The one remaining deals with Morningstar’s
claim for a set-off for fees paid to Goldsmith through the bankruptcy. Defendants contend
this claim is barred by res judicata because neither the bankruptcy trustee nor the Joseph
Jack Ad Hoc committee representing Morningstar’s interest objected to the payment.
The record indicates that the Joseph Jacks Ad Hoc Committee and trustee did not
object to the fees, in part, based on an agreement with Morningstar that by not objecting,
Morningstar was not prejudicing any claims regarding the ARA dispute. The record also
shows that G2 contends that the work Goldsmith was paid for was additional work not
encompassed by the ARA. Thus, there are disputed issues of fact with respect to whether
or not receipt of recovery on top of the fees would result in double-recovery to G2, or if
Morningstar waived any right to claim set-off.
G.

Morningstar’s Affirmative Defenses
G2 moves for summary judgment on all of Morningstar’s affirmative defenses to

its Counter-claim because Morningstar has not produced any admissible evidence in
support of the defenses. Morningstar refers the Court to Plaintiff’s Response to

MEMORANDUM DECISION AND ORDER - 25

Defendants’ Motion for Summary Judgment with the exception of equitable affirmative
defenses. The Court agrees that Morningstar failed to present evidence sufficient to
maintain its Third, Fourth, Fifth, Sixth, Eighth and Ninth Defenses. The Court finds
disputed questions of fact remain as to the Seventh Defense that the ARA is void or
voidable, as discussed above.
MOTION TO AMEND
Defendant G2 seeks leave to amend its counter-claim to request punitive damages,
as required by Idaho Code § 6-1604.
Conduct justifying punitive damages requires “an intersection of two factors: a
bad act and a bad state of mind.” See Linscott v. Ranier Nat. Life. Ins. Co., 606 P.2d 958,
962 (Idaho 1980). The defendant must act (1) in a manner that was an extreme deviation
from reasonable standards of conduct with an understanding of – or disregard for – its
likely consequences, and (2) with an extremely harmful state of mind, described variously
as with malice, oppression, fraud, gross negligence, wantonness, deliberately, or willfully.
See Meyers v. Workmen's Auto Ins. Co., 95 P.3d 977, 983 (Idaho 2004). For a party to be
entitled to amend its claims to request punitive damages, it must put forth sufficient
evidence to establish “a reasonable likelihood of proving facts at trial sufficient to support
an award of punitive damages.” See Idaho Code § 6-1604(2).
While Idaho case law allows punitive damages in contract actions, “they are not
favored in the law and therefore should be awarded only in the most compelling

MEMORANDUM DECISION AND ORDER - 26

circumstances; they should be awarded cautiously and within narrow limits.” Jones v.
Panhandle Distributors, Inc., 792 P.2d 315 (1990).
A.

Motion to Strike Hal McNee’s testimony regarding discussions with Rich
Douglas.
As Defendants point out, Morningstar’s opposition to the motion to amend rests

largely on reported conversations Hal McNee claims he had with Rich Douglas, who is
named as a co-defendant but is not yet served. Defendants argue that the statements are
inadmissible hearsay and lack foundation required for their admissibility by Fed. R. Evid.
901(6).
Whether Douglas’s statements are hearsay depends upon the context in which they
are offered. In this motion, they are offered to explain McNee’s state of mind – that is to
refute that he acted with the requisite bad intent to justify a claim for punitive damages.
Accordingly, in this context Douglas’s statements are not offered for the truth of the
matters asserted and are not hearsay. Fed. R. Evid. 801(c).
The Court also finds that the minimal foundational requirements are met for
McNee’s testimony of his discussions with Douglas given the context of the discussions,
the contemporaneous negotiations between McNee and Douglas, and corroborating email discussions. Defendants’ objection based on foundation goes to the weight of the
evidence not its admissibility, and is therefore denied.

B.

Discussion of Amendment

MEMORANDUM DECISION AND ORDER - 27

Defendant G2 argues that it has a reasonable likelihood of proving that
Morningstar’s principal, McNee, entered into the ARA solely to induce G2 to perform its
services, with no intent to pay for them. The Court finds that the record is insufficient to
establish a reasonable likelihood of proving such facts in support of G2's claim for
punitive damages.
Defendants rely on McNee’s deposition testimony arguing that he had admitted
that he had no intention of paying G2's commission when he signed the contract. Entering
into a contract with no intent to honor its terms will justify punitive damages. Vista
Engineering Technologies, LLC v. Premier Technology, Inc., 2010 WL 300426 (D. Idaho
2010); Hansen-Rice Inc. v. Celotex Corp., 414 F.Supp.2d 970 (D. Idaho 2006). However,
in this instance, the record shows that although McNee indicated he had no intention of
paying the full 50% commission, he did so in the context of discussions with Douglas in
which McNee was pressured to sign the contract quickly, promised that the contract terms
could be renegotiated, and assured that G2 “would be fair.” Further, McNee only stated
that he would not pay the full 50% commission, and never indicated that he would not
pay G2 at all. See, e.g., McNee Depo., (Dkt. 109-01), at 80, 166-69, 174-75, 191-92, 21516, 266. Defendants present no evidence to contradict or controvert McNee’s discussions
with Douglas, or state of mind or intentions when he signed the ARA or that his conduct
in signing the agreement with a belief that some provisions would be renegotiated later is

MEMORANDUM DECISION AND ORDER - 28

an extreme deviation from reasonable standards.5
Instead, Defendants contend that his bad state of mind should be inferred based on
other circumstances including that he is a “sophisticated” businessman who cut G2 out of
the deal by retaining the Joseph Jacks law firm directly, and cancelled the ARA, when
recovery was “imminent.” The Court disagrees.
It is true that “[w]here evidence is conflicting, and where it can be said that if one
theory of the case is correct there may be ground for the imposition of exemplary
damages, the matter is properly submitted to the jury” to determine the correct theory.
Williams v. Bone, 259 P.2d 810, 813 (Idaho 1953). Defendants arguments, however, are
not evidence, and require the Court to stretch inferences beyond reason to find the
necessary bad state of mind on this record. The Court has examined the evidence
presented in the light most favorable to Defendant G2 as it must do, but finds that it does
not rise to the level of malice, or harmful state of mind, required under the Idaho case law
necessary to support an award of punitive damages. See Cheney v. Palos Verde Inv.
Corp., 655 P.2d 661 (Idaho 1983) (Punitive damages supported by evidence that cattle
owner lied about sending payment to induce the warehouse owner to ship the cattle to a
new location so that it would lose its possessory lienholder status); Cuddy Mountain

5

Defendants submit an affidavit by George Goldsmith stating that he does not
believe Rich Douglas made the statements to Hal McNee. Goldsmith was not a party to
the discussions and his testimony is not competent evidence of the content of the
discussion.
MEMORANDUM DECISION AND ORDER - 29

Concrete Inc. v. Citadel Const., Inc., 824 P.2d 151 (Idaho Ct. App. 1991) (Punitive
damages justified by evidence of malice and intentional falsification of documents.);
Griff, Inc. v. Curry Bean Co., Inc., 63 P.3d 441 (Idaho 2003) (Punitive damages
supported by evidence that bean warehouse operator intended to defraud the grower by
failing to disclose that the beans were intended to cover a shortfall and that the warehouse
records had been intentionally altered to support the warehouse’s position.); Hansen-Rice,
Inc. v. Celotex Corp., 414 F.Supp.2d 970 (D. Idaho 2006) (Court granted motion to
amend to add claim for punitive damages based on statements and other evidence that
defendant had no intention of paying for contract work on buildings because he was
selling the assets); Vista Engineering Technologies, LLC v. Premier Technology, Inc.,
2010 WL 300426 (D. Idaho 2010) (Punitives justified based on evidence that defendant
never intended to pay for services.)
Plaintiffs have pointed the Court to nothing indicating that Morningstar intended to
deprive G2 of a fair payment, or intended not to pay for the value of the services it
rendered, or even intended to short G2 unilaterally.6 Further, the record in this case
establishes that the law firm of Josephs Jack – not Hal McNee – terminated the original
representation agreement with G2, and renegotiated the agreement with G2's clients

6

To this date, $100,000 of the settlement funds Morningstar remains in
Morningstar’s attorney trust fund and the rest in an interest bearing account in
Morningstar’s name for distribution upon resolution of this litigation. McNee Affid.
8/29/11, (Dkt. 126) at ¶ 14.
MEMORANDUM DECISION AND ORDER - 30

directly, including Morningstar. There is no evidence that this was done by Morningstar
with the intent to injure G2.
Without some evidence that Morningstar’s conduct was an extreme deviation from
reasonable standards or of a bad state of mind, i.e., something more than a breach of
contract, the Court cannot allow an amendment to the counter-claim to add punitive
damages as a remedy for the breach of contract claim. Cf. Hansen-Rice, Inc., 414
F.Supp.2d at 970 (D. Idaho 2006) (Specifying three pieces of evidence which supported
failure to pay under contract was motivated by “unprofessional” desire “to stiff” Plaintiff
and not legitimate contract dispute.)
For all of these reasons, the Court finds that G2 has/has not shown “a
reasonable likelihood of proving facts at trial sufficient to support an award of
punitive damages.” See Idaho Code § 6-1604(2). Defendants’ motion to amend will
therefore be denied/granted.
MOTION TO DISMISS
Defendants move to dismiss Rich Douglas as a defendant for lack of service. Oral
argument was set to be heard along with several others on October 5, 2011. The parties
did not address this motion. The Court finds, however, that argument is unnecessary to
assist it in rendering its decision on the discrete issue presented.
Rich Douglas is or was a principal of Defendant G2 and Defendant George
Goldsmith’s partner. Plaintiff has had difficulty effecting service upon Douglas.

MEMORANDUM DECISION AND ORDER - 31

Plaintiff’s efforts to do so are detailed in Morningstar’s Notice of Results Re: Process
Service on Defendant Rich Douglas a/k/a Richard Douglas Gurnett. Dkt. 50.
Essentially, Plaintiff was unable to confirm that the correct person had been served and
therefore was not in a position to seek default against the named defendant.
Defendants seek to have Rich Douglas dismissed as a co-defendant, without
prejudice, purportedly to clean up the record as to who are legitimate parties to this
action. Plaintiff argues that Defendants have no standing to bring the motion, and are
making it only as a strategic attempt to suppress Douglas’s testimony by having him
dismissed as a party. Plaintiff fails to address whether the Court could or should dismiss
Douglas as a party regardless of Defendants’ standing to, or motive in, seeking the
dismissal.
Fed. R. Civ. P. 4(m) provides that the Court by motion, or on its own with notice
to the Plaintiff, must dismiss a defendant not served within 120 days of filing the
complaint. Morningstar’s objection based on standing is denied. See id. The Court is not
inclined, however, to dismiss Defendant Douglas without further information regarding
the status of Plaintiff’s attempts to achieve service of process and Plaintiff’s reasons for
opposing his dismissal. The Court will therefore order Plaintiff to show cause why
Defendant Douglas should not be dismissed without prejudice for failure to serve timely.7

7

The Court's ultimate decision on Douglas's status, does not necessarily resolve the
admissibility of Douglas's statements. His statements may, for example, be considered
admissions by G2. That issue will be addressed at trial.
MEMORANDUM DECISION AND ORDER - 32

CONCLUSION
Based on the foregoing analysis, Plaintiff’s Motion for Partial Summary Judgment
is denied; Defendants’ Motion for Summary Judgment is denied with respect to Plaintiff’s
breach of contract claim and Plaintiff’s affirmative defense that the contract is void or
voidable, but granted as to Defendants’ remaining points; G2's Motion for Summary
Judgment on its Counter-claim is denied; Defendants’ Motion for Leave to Amend is
denied; and, Defendants’ Motion to Dismiss Rich Douglas is denied and Morningstar
shall file a Memorandum within ten (10) ten days of this Order showing cause why the
Court should not dismiss Rich Douglas without prejudice.
ORDER
For the foregoing reasons,
IT IS HEREBY ORDERED:
1.

Plaintiff’s Motion for Partial Summary Judgment (Dkt. 88) is DENIED;

2.

Defendants’ Motion to Dismiss Rich Douglas (Dkt. 91) is DENIED;

3.

Defendants’ Motion for Summary Judgment (Dkt. 96) is DENIED as to
Plaintiff’s Claims breach of contract claim, and GRANTED and as to
Plaintiff’s claims for negligence and breach of fiduciary duty;

4.

G2's Motion for Summary Judgment on Counter-claims (Dkt. 98) is
DENIED;

5.

Defendants’ Motion for Leave to File Amended Counter-claim (Dkt. 106) is

MEMORANDUM DECISION AND ORDER - 33

DENIED;
6.

Defendants’ Motions to Strike (Dkt. 117 & 135) are DENIED as moot;

7.

Plaintiff’s Request to Augment the Record (Dkt. 129) and Motion for
Consideration of Late-Filed Affidavit and Amendment to Response to
Morningstar’s State of Facts in Support of Motion for Partial Summary
Judgment (Dkt. 145) are GRANTED.

DATED: January 31, 2012

Honorable B. Lynn Winmill
Chief U. S. District Judge

MEMORANDUM DECISION AND ORDER - 34