JUDSON ATKINSON CANDIES, INC. v. KENRAY ASSOCIATES INC et al
Filing
178
CLOSED/ENTRY ON PLAINTIFFS' MOTION TO SET ASIDE COVENANT NOT TO EXECUTE BASED UPON FRAUD IN THE INDUCEMENT - Plaintiffs have failed to prove the elements necessary to prevail in their Motion to Set Aside Covenant Not to Execute Based on Fraud in the Inducement, and the Motion is DENIED. The Agreed Judgments entered on 12/7/2004 remain in effect. Because the Agreed Judgments remain in effect, the Clerk is DIRECTED to close these matters on the Court's docket. See Entry for details. Signed by Magistrate Judge William G. Hussmann, Jr on 1/23/2014.(LBT)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF INDIANA
NEW ALBANY DIVISION
ATKINSON CANDY COMPANY,
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Plaintiff,
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v.
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KENRAY ASSOCIATES, INC.,
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CHARLES A. “CHUCK” McGEE, and
)
KENNETH J. McGEE,
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Defendants.
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__________________________________________)
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JUDSON ATKINSON CANDIES, INC.,
)
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Plaintiff,
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v.
)
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KENRAY ASSOCIATES, INC.,
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CHARLES A. “CHUCK” McGEE, and
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KENNETH J. McGEE,
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Defendants.
)
4:02-cv-242-WGH-SEB
4:03-cv-12-WGH-SEB
ENTRY ON PLAINTIFFS’ MOTION TO SET ASIDE COVENANT NOT TO
EXECUTE BASED UPON FRAUD IN THE INDUCEMENT
This matter is before the Honorable William G. Hussmann, Jr., United
States Magistrate Judge, on Plaintiffs’ Motion to Set Aside Covenant Not to
Execute Based on Fraud in the Inducement filed January 14, 2011.1 (Dkt. 16263 in Cause No. 4:02-cv-242-WGH-SEB (“the 2002 case”); Dkt. 132-33 in Cause
Pursuant to the Consents of counsel and the Orders of Reference entered by the
Honorable Sarah Evans Barker, District Judge, on January 30, 2004.
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No. 4:03-cv-12-WGH-SEB (“the 2003 case”). Defendants filed their Response on
March 28, 2011. (Dkt. 173 in the 2002 case; Dkt. 143 in the 2003 case).
Plaintiffs’ Reply was filed on April 15, 2011. (Dkt. 174 in the 2002 case; Dkt.
144 in the 2003 case). On April 25, 2011, Defendants filed a Motion to Strike
and Response to Plaintiffs’ Reply. (Dkt. 176 in the 2002 case; Dkt. 146 in the
2003 case). The Court issued its Order on December 13, 2011, denying the
Motions. (Dkt. 190 in the 2002 case; Dkt. 160 in the 2003 case).
On July 3, 2013, the United States Court of Appeals for the Seventh
Circuit issued its Order remanding this case for a further hearing and findings.
(Dkt. 202 in the 2002 case; Dkt. 168 in the 2003 case). An evidentiary hearing
was held before the Magistrate Judge on October 30, 2013. For purposes of this
Entry, the Court must address whether the covenant at issue was fraudulently
induced.
I. Legal Standards to be Applied
Fraudulent Inducement:
A covenant not to execute or a settlement agreement – like any other
contract – is unenforceable against a party who is fraudulently induced to enter
it. E.g., Tru-Cal, Inc. v. Conrad Kacsik Instrument Systems, Inc., 905 N.E.2d 40,
44-45 (Ind. Ct. App. 2009). To prove fraudulent inducement, Plaintiffs must
prove five elements:
(1)
Defendants made a false, material representation of fact.
(2)
Defendants made their misrepresentation with knowledge of,
or with reckless disregard toward, its falsity.
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(3)
Defendants made their misrepresentation with intent to
deceive Plaintiffs.
(4)
Plaintiffs reasonably relied on the misrepresentation.
(5)
Plaintiffs’ reliance on Defendants’ misrepresentation
proximately caused their injury.
See Bilimoria Computer Sys., LLC v. Am. Online, Inc., 829 N.E.2d 150, 155 (Ind.
Ct. App. 2005) (as cited in Judson Atkinson Candies, Inc. v. Kenray Assocs. Inc.,
719 F.3d 635, 639 (7th Cir. 2013)). A litigant who proves fraudulent inducement
may enforce the contract and seek damages, or he may rescind the contract and
ask the Court to restore the parties to their original positions. See Seigel v.
Williams, 818 N.E.2d 510, 514 (Ind. Ct. App. 2004).
Element 1: Misrepresentation of Fact
A claim of fraudulent inducement must be based upon a
misrepresentation of a past or existing fact. E.g., Maynard v. 84 Lumber Co., 657
N.E.2d 406, 409 (Ind. Ct. App. 1995). A misrepresentation of a prior or existing
fact is a statement “susceptible to exact knowledge” at the time it is made. See
Reginald Martin Agency, Inc. v. Conseco Med. Ins. Co., 478 F.Supp.2d 1076, 1089
(S.D. Ind. 2007) (quoting Vaughn v. General Foods Corp., 797 F.2d 1403, 1411
(7th Cir. 1986)) (internal quotations omitted).
A claim of fraudulent inducement cannot be predicated on an action a
party has a legal right to perform or on non-performance of an action the party is
not legally obligated to perform. E.g., Maynard, 657 N.E.2d at 409. Nor can a
claim of fraudulent inducement be predicated on a representation as to future
conduct, a broken promise, an unfulfilled prediction, a statement of
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once-existing intent that has not been carried out, or a subjective statement of
belief. Biberstine v. New York Blower Co., 625 N.E.2d 1308, 1315 (Ind. Ct. App.
1993); see also Vaughn, 797 F.2d at 1411. An expression of opinion can
precipitate a successful fraudulent inducement claim only where it is presented
as a statement of fact by a person with special knowledge who knows his
statement will be relied upon as one of fact. See, e.g., Vernon Fire and Cas. Ins.
Co. v. Thatcher, 285 N.E.2d 660, 669-70 (Ind. Ct. App. 1972) (applying Bailey v.
London Guarantee and Accident Co., 121 N.E. 128, 133 (Ind. App. 1918)
(considering doctor’s description of patient’s condition)). See also Vaughn, 797
F.2d at 1412 (applying Boltz v. O’Connor, 90 N.E.496, 497 (Ind. App. 1910)
(considering landowner’s representation of value of parcel to buyer he knew was
“wholly ignorant” as to the land’s value)).
Element 4: Reasonableness of Reliance
The element of reliance actually presents two requirements: Plaintiffs must
prove not only that they relied on Defendants’ misrepresentation, but also that
their reliance was reasonable. Ruff v. Charter Behavioral Health Sys. of Nw.
Indiana, Inc., 699 N.E.2d 1171, 1174 (Ind. Ct. App. 1998). Ordinarily, the
reasonableness of a party’s reliance depends on the facts of the case. See Park
100 Investors, Inc. v. Kartes, 650 N.E.2d 347, 450 (Ind. Ct. App. 1995).
A party asserting fraudulent inducement generally owes a duty to protect
his interests and guard against fraud by exercising such ordinary care, diligence,
common sense, and judgment as he has at his disposal. See id.; see also Ruff,
699 N.E.2d at 1174-75. In other words, professionals dealing at arm’s length
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must exercise reasonable prudence. Sofaer Global Hedge Fund v. Brightpoint,
Inc., 2011 WL 2413831 at *9 (S.D. Ind. June 10, 2011) (citing Plymale v. Upright,
419 N.E.2d 756, 768 (Ind. Ct. App. 1981)). A court should consider six factors
when determining whether reasonable prudence has been exercised:
(1)
the form of the representations;
(2)
the materiality of the representations;
(3)
the parties’ relationship to one another;
(4)
the parties’ respective knowledge and means of knowledge;
(5)
the party to whom the representations were made; and
(6)
the parties’ respective character, intelligence, experience, age,
and mental and physical condition.
Id. (citing Plymale, 419 N.E.2d at 761 n.4). “Where persons stand mentally on
equal footing, and in no fiduciary relation, the law will not protect one who fails
to exercise common sense and judgment.” Ruff, 699 N.E.2d at 1175.
Despite the requirement of reasonable prudence, the law “will not ignore
an intentional fraud practiced on the unwary.” See Sofaer, 2011 WL 2413831 at
*9 (quoting Plymale, 419 N.E.2d at 768) (internal quotation marks omitted).
Reasonable prudence is not required where the party against whom fraudulent
inducement has been asserted has prevented the exercise of due diligence by
trickery or by manipulating his relationship of trust or confidence with the party
asserting fraud. Ruff, 699 N.E.2d at 1175. A party is entitled to rely on
representations as to matters he could reasonably expect the other to know as a
matter of fact, or to look up (e.g., the terms of an insurance policy), but it is
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unreasonable to rely on representations as to matters that amount to subjective
opinions (e.g., advice as to the fairness of a settlement offer). See Darst v. Illinois
Farmers Ins. Co., 716 N.E.2d 579, 582 (Ind. Ct. App. 1999).
II. Factual Findings
The Court finds as follows:
1. The Covenant Not to Execute at issue in this case was signed during
the middle of the trial of this lawsuit.
2. The issues pending before the Court during this trial included
allegations that:
(a)
Defendants violated the Texas Deceptive Trade Practices Act
(or its Indiana counterpart); and
(b)
Defendant Kenray Associates, Inc.’s corporate veil should be
pierced and personal liability imposed upon the individually
named Defendants.
3. Defendants believed, and a reasonable person could also believe, that
these tort-like claims would be covered by Defendants’ Commercial General
Liability (“CGL”) Policy and Umbrella Policy.
4. A declaratory judgment action seeking coverage under Defendants’ CGL
Policy and Umbrella Policy for the claims pending in this lawsuit had in fact
been filed and was being pursued in a state court action under Cause No.
22D01-0406-PL-0209.
5. At the time of the representations made to induce the Covenant Not to
Execute at issue in this Motion, the McGees incorrectly, but subjectively,
believed that the “Umbrella” Policy would provide coverage for additional claims
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beyond those covered by the CGL Policy and might cover the unique and tort-like
claims pending before this Court.
6. The negotiations and discussions between the parties at the time of the
execution of the Covenant Not to Execute primarily concerned the already
pending declaratory judgment action. Any purported claims for “errors and
omissions” to be brought against the Defendants’ insurance agent had not and
would not accrue until there had been a determination that no coverage existed
in the pending declaratory judgment action.
7. Such a “claim” against an insurance agent did not exist at the time of
the execution of the Covenant Not to Execute because no determination had yet
been made as to whether coverage existed under the CGL Policy and Umbrella
Policy purchased by the McGees. At the time of the execution of the Covenant,
paragraphs 3 and 4 were promises to perform in the future, or subjective beliefs
that a claim for errors and omissions could be brought against the insurance
agent, and were not statements of fact.
8. Plaintiffs have not proven that any of the Defendants made a material
misrepresentation of a “fact” that relates to the assignment of any errors and
omissions “claims” specified in paragraphs 3 and 4 of the Covenant Not to
Execute. (Dkt. 163-3 in the 2002 case; Dkt. 133-3 in the 2003 case).
(a)
The only direct representation to Plaintiffs themselves proven
to have occurred is found in the deposition of Eric Atkinson,
reflected in the following deposition testimony:
Q:
Okay. Can you tell me specifically what those
conversations were about?
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A:
Well, there wasn’t a lot of conversing going on.
We simply – I think I said something to the effect
that, “Chuck, I really hope you got that
insurance,” and he and his dad both said “Yes, we
do, don’t worry about it.” So that’s kind of the
extent of it.
Atkinson Deposition, p. 18.
(b)
The only representation made to Plaintiffs by Defendants or
Defendants’ counsel was not a misrepresentation of a fact:
Q:
Okay. Were there any – do you recall any specific
statements, either by the McGees or defense
counsel to you, about the errors and omissions
claim against Glenn Smith or the Callistus Smith
Agency?
A:
That was all being discussed at the same time
that we were talking about the Hoosier Insurance
Company.
Q:
Okay. Do you have any recollection of any
specific statements, though, anything that sticks
in your mind as we sit here today?
A:
Well, yes, there’s some things, like that the agent had
made representations to the McGees and that they
thought that they had coverage under the policy; and if
they didn’t have coverage under the policy, then they
would go back after the agent because he had made
them think that they did, or something along those
lines.
Atkinson Deposition, p. 22.
(c)
The representation found in paragraph 8(a) above – that they
(McGees) thought they had “that insurance” – is not a fact, but
is rather a subjective statement of belief or an opinion that a
party has a “legal right to perform” an act.
(d)
With respect to a conversation alleged to have occurred when
Mr. McGee was involved in the discovery process at his office
without Mr. Hancock present, Plaintiffs have not proven by a
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preponderance of the evidence that any statement of fact was
made during that conversation.
(e)
The representation found in paragraph 8(b) above made by
Defendants or Defendants’ counsel to Plaintiffs’ counsel – that
“then they would go back after the agent because he had
made them think that they did” – did not include any
predictions of success or state a basis or legal theory for that
claim.
9. Even if some possible statement of fact was made, Plaintiffs have not
shown that they relied upon those representations to enter into the agreement.
(a)
Any representations made by the McGees during the in-court
negotiations period occurred after the Covenant was signed.
Specifically, the testimony of Atkinson states:
Q:
Do you recall when that conversation [that McGee
had coverage] would have taken place? Is that –
was that something that occurred early on in
negotiations or was it after this deal was signed?
A:
After the deal was signed.
Q:
Okay. So you had this conversation with them
sometime after all the signatures were in place?
A:
Yes, sir.
Atkinson Deposition, p. 19.
10. Even if representations that the insurance agent “made them think”
they had coverage would be deemed “factual” and were made at a time prior to
the execution of the Covenant at issue, it was not reasonable for Plaintiffs to rely
on those representations. This is because it was not reasonably prudent to
accept representations that “claims” against an insurance agent–which were not
yet in existence–were viable without obtaining more specific information about
the relationship between the Defendants and their insurance agent.
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Conclusion
In summary, the Court concludes that at the time the parties negotiated
the Covenant Not to Execute here at issue, Defendants were told by their agent
that their CGL Policy and Umbrella Policy would not provide coverage for
“Breach of Contract” claims that software provided by their company was
defective.
However, the lawsuit brought by the Plaintiffs contained counts alleging
that Defendants violated the Texas Deceptive Trade Practices Act (or its Indiana
counterpart), in addition to Breach of Contract, and the suit further sought
individual liability against shareholders, and sought to pierce the corporate veil.
(See Second Amended Complaint, Dkt. 37). To this Court, and certainly to the
reasonable layperson, a complaint alleging violation of the Deceptive Trade
Practices Act–and containing claims seeking to impose personal liability–seeks
“tort-like” liability and damages. A reasonable layman could believe that
notwithstanding the fact that they did not carry “professional liability” or “E&O”
coverage, nevertheless their CGL Policy and Umbrella Policy might provide
coverage for such claims.
Thus, although Defendants made representations that “the agent made us
think we had coverage,” those representations are insufficient to sustain the
Plaintiffs’ burden of fraud in the inducement. First, representations that “the
agent made us think we had coverage” are not sufficiently factual. Case law is
clear that “unfulfilled predictions” are not facts. Thus, Plaintiffs have failed to
meet the first element necessary to find fraudulent inducement.
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Second, even if these representations were sufficiently factual, Plaintiffs
have not shown that they were made with reckless disregard toward their falsity
and/or with the intent to deceive. For the reasons stated above, Defendants
could have subjectively and reasonably believed there was coverage for at least
some counts of the Complaint under the CGL and Umbrella policies. Plaintiffs
have, therefore, failed to satisfy the second and third elements of fraudulent
intent.
Third, Plaintiffs have failed to prove that the statements were made prior
to executing the Covenant Not to Execute and therefore have not shown actual
reliance. No proximate cause – as required by the fifth element to establish
fraudulent inducement – has been proven.
And, finally, even if the statements were made prior to the execution of the
Covenant, it would not have been reasonable to rely on them. Reasonable
reliance, where attorneys are involved, requires some prudent investigation of
the policies, and where coverage litigation exists, review of that litigation. Simply
accepting an opposing party’s counsel’s “prediction” that an errors and
omissions “claim” might be made in the future does not satisfy the degree of
diligence required by law to constitute reasonable reliance. The fourth element
of the test is therefore also not satisfied.
For these reasons, Plaintiffs have failed to prove the elements necessary to
prevail in their Motion to Set Aside Covenant Not to Execute Based on Fraud in
the Inducement, and the Motion is DENIED. The Agreed Judgments entered
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December 7, 2004, remain in effect.2 (Dkt. 156 in the 2002 case; Dkt. 126 in the
2003 case). Perhaps the lesson to be learned here is that notwithstanding very
competent work by Plaintiffs’ counsel in attempting to structure a settlement,
the best time to do so is not in the middle of a trial when pressures are at
maximum levels.
IT IS SO ORDERED the 23rd day of January, 2014.
__________________________
William G. Hussmann, Jr.
United States Magistrate Judge
Southern District of Indiana
Served electronically on all ECF-registered counsel of record.
Because the Agreed Judgments remain in effect, the Clerk is DIRECTED to close
these matters on the Court’s docket.
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