Ross v. Rothstein

Filing 297

MEMORANDUM AND ORDER granting 252 Motion for Summary Judgment; denying 255 Motion for Summary Judgment; granting in part and denying in part 261 Motion in Limine; adopting 283 Report and Recommendations. Signed by District Judge Daniel D. Crabtree on 03/12/2015. (mig)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF KANSAS
STANTON E. ROSS,
Plaintiff/Counter
Defendant,
v.
Case No. 13-2101-DDC-TJJ
ADAM ROTHSTEIN,
Defendant/Counterclaimant.
_______________________________________
MEMORANDUM AND ORDER
This matter comes before the Court on: (1) defendant’s Motion for Summary Judgment
on plaintiff’s claim for wrongful disposition of collateral, defendant’s right to a deficiency
damages award, and defendant’s entitlement to attorney’s fees (Doc. 252); (2) plaintiff’s Motion
for Summary Judgment on plaintiff’s claim for wrongful disposition of collateral under K.S.A.
§§ 84-9-624 and 84-9-626 and defendant’s counterclaim for fraud in the inducement (Doc. 255);
and (3) plaintiff’s Motion in Limine excluding all facts, evidence, testimony, opinions, and
inferences offered by defendant’s proffered expert attorney Brian C. Underwood (Doc. 261).
The Court referred all three motions to Magistrate Judge Teresa J. James for report and
recommendation. On December 23, 2014, Judge James issued her Report and Recommendation
(Doc. 283), recommending that the Court grant in part and deny in part plaintiff’s Motion in
Limine (Doc. 261), grant defendant’s Motion for Summary Judgment (Doc. 252), and deny
plaintiff’s Motion for Summary Judgment (Doc. 255).

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Plaintiff filed timely objections to the Report and Recommendation (Doc. 289).1 After
considering plaintiff’s objections and defendant’s response, and having reviewed Judge James’
well-reasoned Report and Recommendation, the Court overrules plaintiff’s objections and adopts
the Report and Recommendation of Judge James in its entirety.
I.

Undisputed Facts
Judge James’ Report and Recommendation (hereinafter, “Report”) accurately sets forth

the undisputed facts of the case. The Court briefly summarizes those facts here.
Plaintiff is a resident of Johnson County, Kansas, and currently the Chairman of the
Board, President, Chief Executive Officer, and shareholder of Infinity Energy Resources, Inc.
(“Infinity”), a publicly traded company with its principal place of business in Johnson County,
Kansas. Defendant is a Connecticut resident and currently the advisor to several funds
concentrating in the technology, media, and entertainment sectors.
On March 30, 2012, defendant agreed to loan plaintiff $210,000 for 60 days. The terms
of the loan were memorialized in a Secured Promissory Note and Pledge Agreement signed by
the parties. The Secured Promissory Note required plaintiff to repay the loan in full within 60
days, on or before May 31, 2012, and to pay the interest on the loan by transferring to defendant
15,000 shares of Infinity stock.
Plaintiff failed to repay the loan by its due date of May 31, 2012. At plaintiff’s request,
the parties entered into a signed, written Forbearance Agreement on August 27, 2012. Under the
Forbearance Agreement, among other things, (1) plaintiff reaffirmed all obligations under the
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Defendant also filed Conditional Objections to the Report and Recommendation (Doc. 286),
which he requested the Court to consider only if it rejected Judge James’ recommendation that the Court
enter summary judgment against plaintiff on plaintiff’s claim for wrongful disposition of collateral and in
favor of defendant on defendant’s claim for a deficiency damages award and determination (Doc. 286 at
1). Because the Court adopts Judge James’ Report and Recommendation in its entirety, it need not
consider defendant’s Conditional Objections. Therefore, the Court overrules defendant’s Conditional
Objections as moot.

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Secured Promissory Note, (2) plaintiff acknowledged the default, and (3) defendant agreed to
forbear from taking any remedial action on the Secured Promissory Note based on plaintiff’s
default until January 1, 2013. As consideration for the Forbearance Agreement, plaintiff agreed
to deliver and transfer an additional 50,000 shares of Infinity common stock. When they
executed the Forbearance Agreement, the parties entered into a (Superseding) Pledge Agreement
in which plaintiff pledged 77,310 shares of Infinity common stock that he owned.
Plaintiff did not repay the loan on or before January 1, 2013, and his failure to repay the
loan continues to date.
On January 30, 2013, plaintiff filed this lawsuit in the District Court of Johnson County,
Kansas, and defendant removed the action to this Court. On September 9, 2013, Judge
Lungstrum, the district judge then presiding over this case, granted summary judgment for
defendant on his counterclaims for breach of the Secured Promissory Note, breach of the
Forbearance Agreement, and breach of the (Superseding) Pledge Agreement and foreclosure of
security interest (Doc. 54). Two days later, Judge Lungstrum entered judgment for defendant on
defendant’s three breach of contract claims in the total amount of $210,000, plus 18% default
interest compounding monthly beginning September 5, 2012 (Doc. 56). Judge Lungstrum also
ruled that defendant was entitled to obtain from the Clerk of the Court the original Infinity
Energy Resources, Inc. Certificate No. 3287 representing 77,310 shares of Infinity common
stock (Doc. 54).
On September 12, 2013, the Clerk of the Court released this stock certificate to
defendant, which plaintiff previously had deposited with the Court (Docs. 52, 57). Four days
later, defendant deposited the certificate for the 77,310 shares of Infinity common stock in an
account with online broker Fidelity.com. He had established this account earlier in 2013, when

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he sold the 15,000 Infinity shares (that plaintiff had agreed to pay as interest on the loan) and the
50,000 Infinity shares (that plaintiff agreed to pay as additional consideration in the Forbearance
Agreement) that defendant previously had received from plaintiff.
Defendant sold the 77,310 shares of Infinity common stock on September 16, 2013. He
sold the shares in six different lots at prices ranging from $2.85 per share to $2.99 per share.
After deducting brokerage fees and commissions, defendant realized $221,361.91 from the sale
of the 77,310 shares.
Infinity’s common stock trades on the Over-the-Counter QB Tier Market (“OTCQB”)
under the symbol “IFNY.” Infinity’s common stock was not publicly traded or sold on any other
stock market in 2012, 2013, or anytime since.
On December 23, 2013, plaintiff filed an Amended Complaint asserting a claim against
defendant for Wrongful Disposition of Collateral under K.S.A. § 84-9-625. This amendment
relied on defendant’s sale of the 77,310 shares of Infinity common stock (Doc. 117 at 10 –11).
Plaintiff alleges that defendant violated Kansas law by failing to give plaintiff notice of the
impending sale and by selling the shares in a commercially unreasonable manner.
In July 2014, the parties filed cross-motions for summary judgment (Doc. 252, 255) and
plaintiff filed a motion in limine to exclude the testimony of defendant’s expert, Brian C.
Underwood (Doc. 261). Defendant’s motion seeks summary judgment against plaintiff’s claim
for wrongful disposition of collateral and in favor of defendant’s right to deficiency damages and
attorney’s fees (Doc. 252). Plaintiff seeks summary judgment on his claim for wrongful
disposition of collateral and against defendant’s counterclaim for fraud in the inducement.

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II.

Report and Recommendation
The Court referred the motions to Judge James for a report and recommendation (Doc.

282). In the Report issued December 23, 2014 (Doc. 283), Judge James first recommended that
the Court grant in part and deny in part plaintiff’s motion in limine. Her Report concluded that
though Mr. Underwood is qualified to testify as an expert under Fed. R. Evid. 702, he cannot
testify about the four opinions in his affidavit because they are inadmissible legal conclusions.
Judge James explained that Mr. Underwood cannot testify about legal opinions, he nonetheless
may testify about factual issues that will help the Court decide legal issues. In making her
recommendations on the cross-motions for summary judgment, Judge James determined that she
could consider the factual statements in Mr. Underwood’s affidavit “such as the operation,
function, and trading of stocks on over-the-counter securities markets generally, as well as the
OTCQB in particular and how it functions, operates, and how stocks trade on the OTCQB,” as
well as “the details of [defendant’s] actual trades of the Infinity shares at issue.” (Doc. 283 at
19–20) But Judge James’ recommended rulings on the cross-motions for summary judgment
nonetheless disregarded Mr. Underwood’s legal opinions. (Id. at 21)
Next, Judge James recommended that the Court grant defendant’s motion for summary
judgment for three reasons. First, Judge James recommended summary judgment against
plaintiff’s claim for wrongful disposition of collateral. She concluded that the undisputed facts
establish that plaintiff waived his right to notice of defendant’s sale of the 77,310 shares of
Infinity common stock and also that defendant had sold the shares in a commercially reasonable
manner. Second, Judge James recommended that the Court enter a deficiency damages
determination and award for defendant, and if the Court adopted her Report, she recommended
the Court set an evidentiary hearing to determine the amount of the deficiency judgment that

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plaintiff owes to defendant. Third, Judge James recommended that defendant is entitled to
recover his reasonable out-of-pocket costs and expenses (including attorney’s fees) because the
(Superseding) Pledge Agreement requires plaintiff to pay those costs and expenses. Judge James
recommended that the Court determine the amount that defendant is entitled to recover after
defendant complies with the fee application process established in Fed. R. Civ. P. 54(d)(2) and
D. Kan. Rule 54.2.
Judge James then turned to plaintiff’s motion for summary judgment. She recommended
ruling against plaintiff’s motion for summary judgment for two reasons. First, the same reasons
that led her to recommend summary judgment for defendant against plaintiff’s wrongful
disposition of collateral claim also warranted summary judgment against plaintiff on this same
claim. Namely, the undisputed facts establish plaintiff had waived his right to receive notice of
defendant’s sale of the stock and defendant had sold the stock in a commercially reasonable
manner. Second, Judge James recommended summary judgment against defendant’s
counterclaim for fraud in the inducement because plaintiff filed his motion out of time and
genuine factual issues exist that preclude summary judgment.
Plaintiff asserts thirteen objections to Judge James’ Report. The Court addresses each
objection below.
III.

Standards of Review
Under Fed. R. Civ. P. 72(b)(2) and 28 U.S.C. § 636(b)(1)(C), a party may file specific,

written objections to a magistrate judge’s proposed findings and recommendations. When
reviewing a magistrate judge’s report and recommendation on a dispositive issue, the Court
reviews de novo “those portions of the [magistrate’s] report or specified proposed findings or
recommendations to which objection is made.” 28 U.S.C. § 636(b)(1)(C). This de novo review

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requires the Court to “consider relevant evidence of record and not merely review the magistrate
judge’s recommendation.” In re Griego, 64 F.3d 580, 584 (10th Cir. 1995) (citation omitted).
When performing this review, the Court “may accept, reject, or modify the recommended
disposition; receive further evidence; or return the matter to the magistrate judge with
instructions.” Fed. R. Civ. P. 72(b)(3); see also 28 U.S.C. § 636(b).
The standard for deciding summary judgment is well-established. Summary judgment is
appropriate if the moving party demonstrates that there is “no genuine dispute as to any material
fact” and that he is “entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(a). When it
applies this standard, the Court views the evidence and draws inferences in the light most
favorable to the non-moving party. Nahno-Lopez v. Houser, 625 F.3d 1279, 1283 (10th Cir.
2010) (citing Oldenkamp v. United Am. Ins. Co., 619 F.3d 1243, 1245–46 (10th Cir. 2010)).
The Court applies this same standard to cross motions for summary judgment. Each
party bears the burden of establishing that no genuine issue of material fact exists and
entitlement to judgment as a matter of law. Atl. Richfield Co. v. Farm Credit Bank of Wichita,
226 F.3d 1138, 1148 (10th Cir. 2000). Cross motions for summary judgment “are to be treated
separately; the denial of one does not require the grant of another.” Buell Cabinet Co. v.
Sudduth, 608 F.2d 431, 433 (10th Cir. 1979). But where the cross motions overlap, the Court
may address the legal arguments together. Berges v. Standard Ins. Co., 704 F. Supp. 2d 1149,
1155 (D. Kan. 2010) (citation omitted).
IV.

Plaintiff’s Objections
A. Objection No. 1 – Plaintiff Objects that the Report Found True a Number of
Facts Material to Defendant’s Fraud in the Inducement Claim.
Plaintiff first objects to the Report’s acceptance of several summary judgment facts that

are material to defendant’s fraud in the inducement claim. By accepting those facts as true,
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plaintiff argues, Judge James ignored plaintiff’s evidence controverting those facts and thereby
engaged in an impermissible weighing of the summary judgment facts.
Plaintiff bases this objection on eight facts Judge James concluded were uncontroverted:
(1)

During the parties’ initial discussions about the loan, plaintiff said “it would be a
very short term loan since his company, Infinity, was moments away from closing
on a financing and the company owed him $300,000 in ‘back pay.’” (Doc. 283 at
2–3)

(2)

Plaintiff “assured [defendant] that he would be able to promptly repay the loan,
stating that Infinity was near to closing on a financing from which the $300,000 in
‘back pay’ Infinity owed him would be funded.” (Id. at 3)

(3)

“At no time during the conversations leading up to [defendant] agreeing to make
the loan to [plaintiff] did [plaintiff] tell [defendant] there were substantial tax liens
filed against [plaintiff] that would make any compensation payment to [plaintiff]
from Infinity subject to being consumed by taxing authorities.” (Id.)

(4)

“At no time during the conversations leading up to [defendant] agreeing to make
the loan to [plaintiff] did [plaintiff] tell [defendant] that [defendant] was counting
on Infinity entering into a business relationship with a drilling partner that would
result in Infinity being able to fund his ‘back pay.’” (Id.)

(5)

“At no time during the conversations leading up to [defendant] agreeing to make
the loan to [plaintiff] did [plaintiff] state to [defendant] that [plaintiff] was
counting on the value of Infinity’s stock to rise, the sale of which would enable
him to repay the loan.” (Id. at 4)

(6)

“Before [defendant] funded the $210,000 loan to [plaintiff] on March 30, 2012,
[defendant] was never told in any manner by [plaintiff] himself, or by Stephen
Gans, or by any Digital Ally Board member, or by anyone else, that [plaintiff] had
tax problems and tax liens filed against him.” (Id.)

(7)

“At no time did Mr. [Stephen] Gans hear or otherwise learn from [plaintiff], from
any other member of the Digital Ally Board, or from anyone else associated with
Digital Ally, that [plaintiff] had problems with the IRS and tax liens filed against
him.” (Id.)

(8)

“[Plaintiff] did not repay the Loan on or before the forbearance extended due date,
and his failure to repay the Loan continues to this date.” (Id. at 5)

Defendant set out each of these statements of fact in his Statement of Material Facts
supporting his summary judgment motion (Doc. 254 at ¶ 7) or in his Statement of Additional
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Material Facts filed in response to plaintiff’s summary judgment motion (Doc. 267 at ¶¶ 68, 70–
73, 76, 79). He properly cited evidence in the record to support each of these factual statements.
Plaintiff responded to defendant’s statement of fact that “[Plaintiff] did not repay the Loan on or
before the forbearance extended due date, and his failure to repay the Loan continues to this
date” (No. 8 above) by stating that it was “undisputed.” (Doc. 271 at ¶ 7) And plaintiff never
responded to the other statements of fact (contained in defendant’s Statement of Additional
Material Facts in response to plaintiff’s summary judgment motion (Doc. 267)), as Fed. R. Civ.
P. 56(c)(1) and D. Kan. Rule 56.1 require.2 Plaintiff did not controvert specifically defendant’s
Statement of Additional Material Facts in plaintiff’s reply (Doc. 280) or in any other document
filed with the Court. Thus, Judge James did not err when she accepted these eight facts as
uncontroverted and included them in her findings of fact.
Plaintiff lists another 30 statements of fact that purportedly controvert the eight
statements of fact described above and accepted by Judge James. Plaintiff asserts that Judge
James ignored these 30 statements of fact, and, by doing so, she engaged in an impermissible
weighing of the summary judgment facts. Plaintiff correctly stated that a court may not weigh
competing facts at summary judgment under the well-established standard. See Anderson v.
Liberty Lobby, Inc., 477 U.S. 242, 249 (1986) (“[A]t the summary judgment stage the judge’s
function is not [ ] to weigh the evidence and determine the truth of the matter but to determine
whether there is a genuine issue for trial.”).
Plaintiff included the 30 statements of fact (that he claims Judge James ignored) in his
Statement of Uncontroverted Material Facts in support of his motion for summary judgment

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Fed. R. Civ. P. 56(c)(1) requires a party asserting that a fact is disputed to cite particular parts of
the record or to establish a genuine issue; D. Kan. Rule 56.1(b) states that all material facts set forth in the
non-moving party’s statement of additional facts are deemed admitted unless specifically controverted by
the reply of the moving party.

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(Doc. 257). Defendant filed a Response to plaintiff’s Statement of Uncontroverted Material
Facts (Doc. 268). In Doc. 268, defendant responded to each of plaintiff’s 30 factual statements
by explaining that the majority of these facts either are immaterial, objectionable because they
lack foundation or are hearsay, or controverted based on other evidence in the record. Plaintiff
did not address defendant’s objections to these 30 factual statements in his reply (Doc. 280) or in
any filing with the Court.
In her Report, Judge James set out the statement of facts on which she based her
recommendation and explained that these facts were “either uncontroverted, or, where
controverted, are construed for summary judgment purposes in the light most favorable to the
party opposing the summary judgment motion.” (Doc. 283 at 2). She also made clear that
“[i]mmaterial facts and factual averments not properly supported by the record are omitted” from
her findings of fact. (Id. at 2)
The Court has reviewed the factual record cited by plaintiff in support of these 30 factual
statements and agrees with Judge James: these 30 factual statements are either immaterial or not
supported by the record. Therefore, Judge James did not err by failing to include these factual
statements in her findings of fact. Because the Report properly excluded these 30 factual
statements from the findings of fact, the Court concludes Judge James did not weigh the
summary judgment facts improperly. The Court therefore overrules plaintiff’s first objection to
the Report.
B. Objection No. 2 – Plaintiff Objects that the Report Erroneously Admits the
Factual Testimony of Defendant’s Expert While Excluding His Opinions.
In the Report, Judge James recommended that the Court grant in part and deny in part
plaintiff’s motion in limine seeking to exclude all facts, evidence, testimony, opinions, and
inferences offered by defendant’s proffered expert attorney, Brian C. Underwood (Doc. 283 at
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20–21). Judge James first determined that Mr. Underwood is qualified to testify as an expert
under Fed. R. Evid. 702. But having decided the threshold question of expertise, Judge James
then concluded that Mr. Underwood cannot testify at trial about the four opinions in his affidavit
because they are inadmissible legal conclusions. However, Judge James differentiated between
these four legal opinions and factual issues that will assist the Court in deciding legal issues
“such as the operation, function, and trading of stocks on over-the-counter securities markets
generally, as well as the OTCQB in particular and how it functions, operates, and how stocks
trade on the OTCQB,” as well as “the details of [defendant’s] actual trades of the Infinity shares
at issue.” (Id. at 19–20) Plaintiff objects to the Report’s recommendation for two reasons.
First, plaintiff objects that Mr. Underwood cannot testify as a fact witness about these
facts because he lacks personal knowledge of the facts, as Fed. R. Evid. 602 requires. But Judge
James did not recommend that the Court admit Mr. Underwood’s testimony as fact witness
testimony under Fed. R. Civ. P. 602. To the contrary, she determined that Mr. Underwood was
qualified to testify as an expert under Fed. R. Evid. 702, which allows a “witness who is
qualified as an expert by knowledge, skill, experience, training, or education [to] testify in the
form of an opinion or otherwise.” Fed. R. Evid. 702 (emphasis added). An expert witness may
testify about facts at trial when the testimony “will help the trier of fact to understand the
evidence or to determine a fact in issue.” Fed. R. Civ. P. 702(a); see also Specht v. Jensen, 853
F.2d 805, 809–10 (10th Cir. 1988) (holding that expert witness may testify about specific
questions of fact to aid the jury’s understanding of the facts in evidence); Hartzler v. Wiley, 277
F. Supp. 2d 1114, 1118 (D. Kan. 2003) (excluding expert’s opinion testimony that amounted to
legal conclusions but allowing expert to testify about facts and circumstances demonstrating the
parties’ intent in entering into an ambiguous contract).

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Judge James’ ruling left Mr. Underwood in a relatively uncommon position for an expert.
The Report excluded all his opinions because they amounted to legal opinions—an expertise
typically reserved for the Court. But Judge James concluded that Mr. Underwood still possessed
other “knowledge, skill, experience, training, or education” that, in Her Honor’s estimation,
helped understand the evidence. Fed. R. Evid. 702. May an expert in this position still testify
about the “non-opinion” aspects of the expert’s “knowledge” or “experience”? While plaintiff
argues in his objections that Mr. Underwood cannot be permitted to testify about any “facts” that
support his properly excluded opinions, plaintiff cites no authority for this argument. (Doc. 289
at ¶ 26, 32) In contrast, the available authority on this issue leads the Court to conclude that
Judge James correctly considered Mr. Underwood’s “knowledge” about and “experience” with
“the operation, function, and trading of stocks on over-the-counter securities markets generally,
as well as the OTCQB in particular . . . .” (Doc. 283 at 19–20)
As Judge James recognized, Rule 702(a) empowers a court to consider such evidence.
“A witness who is qualified as an expert . . . may testify in the form of an opinion or otherwise if:
(a) the expert’s . . . other specialized knowledge will help the trier of fact . . . .” Fed. R. Evid.
702(a). The Rule’s Advisory Committee Notes amplify this principle. “Most of the literature
assumes that experts testify only in the form of opinions. The assumption is logically
unfounded.” Fed. R. Evid. 702 advisory committee’s note (commenting on the 1972 proposed
rules). And the case authorities also reject the idea that opinions are essential to an expert’s
currency. See United States v. Mulder, 273 F.3d 91, 102 (2d Cir. 2001) (holding that the
government was “free to offer expert testimony . . . as background for an offense”); see also
Fisher v. Ciba Specialty Chems. Corp., No. 03-0566-WS-B, 2007 WL 2302470, at *2–3 (S.D.
Ala. Aug. 8, 2007) (citing, among others, United States v. Lewis, 240 F.3d 866, 869 –70 (10th

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Cir. 2001) (trial court properly admitted expert testimony to explain general requirements of
Oklahoma law although expert offered no opinions whether that law applied to defendant)).
Both Fisher and Lewis rejected motions seeking to exclude expert witnesses because they
offered background information but no opinions.
Here, Judge James did not err by recommending that the Court admit Mr. Underwood’s
uncontroverted background information even though she had excluded his opinions. Her
exclusion ruling did not nullify Mr. Underwood’s qualifications. And Rule 702 permits a court
to consider such testimony—here by Affidavit—as does the commentary of the advisory
committee and the cases applying the rule.
Plaintiff also objects that defendant never disclosed Mr. Underwood as a fact witness.
Defendant points out that plaintiff did not raise this argument in his original motion (Doc. 261),
and, therefore, the Court should not consider it. Nevertheless, the Court reiterates that Judge
James did not recommend that the Court treat Mr. Underwood as a fact witness but instead found
Mr. Underwood qualified to testify as an expert about these factual issues. Defendant properly
disclosed Mr. Underwood as an expert witness (Doc. 162), and thus plaintiff’s argument that the
Court should exclude Mr. Underwood’s testimony for failing to disclose him lacks merit.
Next, plaintiff argues that Mr. Underwood’s factual testimony is based on hearsay and
therefore is inadmissible under Fed. R. Evid. 703,3 unless the evidence’s probative value
outweighs its prejudicial effect. Plaintiff argues, without specificity, that the facts which Mr.
Underwood relies on “consist entirely of something he has read or heard” and thus constitute

Fed. R. Evid. 703 provides: “An expert may base an opinion on facts or data in the case that the
expert has been made aware of or personally observed. If experts in the particular field would reasonably
rely on those kinds of facts or data in forming an opinion on the subject, they need not be admissible for
the opinion to be admitted. But if the facts or data would otherwise be inadmissible, the proponent of the
opinion may disclose them to the jury only if their probative value in helping the jury evaluate the opinion
substantially outweighs their prejudicial effect.”
3

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hearsay. (Doc. 289 at ¶ 34) The Court, however, has reviewed Mr. Underwood’s affidavit (Doc.
253-3) and agrees with defendant: Mr. Underwood’s affidavit provides sufficient foundation for
his specialized knowledge about over-the-counter markets, including the OTCQB. The Court
therefore overrules plaintiff’s second objection to the Report.
C. Objection No. 3 – Plaintiff Objects to the Report’s Acceptance of Certain
Factual Testimony Provided by Mr. Underwood That Plaintiff Claims Is
Contradicted By Other Evidence in the Record.
Like the arguments made by his first objection, plaintiff argues that Judge James erred by
accepting as true certain factual testimony of Mr. Underwood because other evidence in the
record contradicts this factual testimony. By doing so, plaintiff argues, Judge James improperly
weighed the evidence on summary judgment. The Court rejects this argument for several
reasons.
First, plaintiff lists eight pieces of “factual testimony” that the Report purportedly
“admits, credits and adopts” and this “in some instances violat[es] the exclusion of rulings
elsewhere in the Report.” (Doc. 289 at ¶ 36 (noting, in particular, the Report’s ruling that the
Court cannot accept Mr. Underwood’s legal conclusion that the OTCQB is a “recognized
market” as defined under the Kansas Uniform Commercial Code)) The Court has reviewed the
eight factual statements and finds that Judge James did not err by including them in her Report.
Several of these statements address Mr. Underwood’s qualifications to testify as an expert and
Judge James’ determination that he has the requisite skill, experience, and knowledge to testify
as an expert about certain factual matters. The Court again has reviewed Mr. Underwood’s
education, training, and other professional background, as set out in his affidavit, and agrees with
Judge James. Mr. Underwood is qualified to testify as an expert under Fed. R. Evid. 702.

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The other statements include facts taken from Mr. Underwood’s affidavit that describe
the operation, function, and trading of stocks on over-the-counter securities markets, including
the OTCQB. Defendant included some of these facts in his Statement of Material Facts in
support of his summary judgment motion, citing Mr. Underwood’s affidavit to support these
facts (Doc. 254 at ¶¶ 31–39). Plaintiff responded that many of these facts were undisputed, or,
where disputed, plaintiff failed to controvert the facts with admissible evidence in the summary
judgment record (Doc. 271 at ¶¶ 31–39). Defendant presented additional factual testimony from
Mr. Underwood’s affidavit in his Statement of Additional Material Facts filed in response to
plaintiff’s summary judgment motion (Doc. 267 at ¶¶ 48–56). As explained above, plaintiff
never responded to these factual statements—not in plaintiff’s reply (Doc. 280) or in any other
document filed with the Court. The Court thus concludes that Judge James did not err when she
accepted Mr. Underwood’s factual testimony as uncontroverted.
Second, plaintiff argues that Judge James erred by accepting a statement made in Mr.
Underwood’s affidavit that “the sale of Infinity shares traded on the OTCQB ‘were sold in a
recognized market at standardized prices; and that the sale of the shares [was] not the subject of
individual negotiation.’” (Doc. 283 at 35 (quoting Mr. Underwood’s Affidavit (Doc. 253-3 at ¶
41)) Plaintiff contends that this statement of fact contradicts the Report’s other ruling that it
cannot accept Mr. Underwood’s legal conclusion that the OTCQB is a “recognized market,” as
defined by the Kansas Uniform Commercial Code (“UCC”). The Court disagrees. The Report
never adopted Mr. Underwood’s statement that the sale of Infinity shares traded on the OTCQB
were sold in a recognized market at standardized prices. Instead, the Report just described what
Mr. Underwood had stated in his affidavit; it did not make any explicit finding about his
statement or accept it as true. (Id.)

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Reading further in the Report, Judge James again stated that she “rejects the ultimate
conclusions offered by [Mr. Underwood],” but she found “that his factual statements and
explanations support the conclusion that the Infinity shares at issue were sold at standardized
prices and the sale of those shares was not subject to individual negotiation.” (Id. at 36) Judge
James also noted that plaintiff had not offered any evidence to refute Mr. Underwood’s
statements that defendant’s sale of the Infinity shares did not result from individually negotiated
transactions. (Id.) Based on this finding, Judge James rejected plaintiff’s argument that the
OTCQB was not a “recognized market” under the Kansas UCC because the share prices are
subject to negotiation. Contrary to plaintiff’s argument, Judge James did not accept Mr.
Underwood’s testimony that defendant’s sale of Infinity stock on the OTCQB was sold in a
recognized market as the Kansas UCC defines that term. To the contrary, Judge James
specifically rejected Mr. Underwood’s legal conclusions. (Id.)
Finally, plaintiff asserts that the Report ignored contrary evidence in the summary
judgment record when it accepted Mr. Underwood’s factual testimony as true. By ignoring that
contradictory evidence, plaintiff argues, Judge James improperly weighed the summary
judgment evidence and violated the established standard for deciding summary judgment.
Plaintiff objects that Judge James ignored five types of evidence that contradicted Mr.
Underwood’s testimony.
First, plaintiff argues that Judge James erred by disregarding ten factual statements about
the operation of the OTCQB. (See Doc. 289 at ¶ 50(a)–(j)) On summary judgment, plaintiff
supported each of these factual statements by reference to two screen prints from the OTC
Markets Group website. Defendant objected to these website screen prints as inadmissible
hearsay. Defendant also argued that even if the website screen prints were admissible, the

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information that they contained did not controvert facts establishing that the OTCQB operates as
a stock market where fungible marketable securities are: (a) traded publicly; and (b) the
securities’ prices are determined primarily through standardized real-time price quotations and
neutral market forces.
In the Report, Judge James explicitly addressed the website screen prints, questioning
“the authenticity and admissibility of the statements contained” in them. (Doc. 283 at 33 (citing
ColtTech LLC v. JLL Partners, Inc., 538 F. Supp. 2d 1355, 1357 n.3 (D. Kan. 2008) (“For
purposes of summary judgment, the court does not consider unsworn, unauthenticated
documents, including printed copies of web sites.”))) And putting aside the admissibility of this
evidence, the information from the website screen prints did not establish that the OTCQB
differed from other “recognized” securities markets because the prices of securities traded on the
OTCQB are individually negotiated, which, plaintiff argued, demonstrates that the Court should
not consider the OTCQB as a “recognized market” under Kansas law. (Id.) Judge James noted
that one of the screen prints “actually states that investors in OTCQB marketplaces can buy and
sell securities ‘in a manner almost identical to that of trading NYSE or NASDAQ securities,
through the broker of their choice (institutional, online, retail)’” and another of the screen prints
“states that ‘trading an OTCQX, OTCQB or OTC Pink security is comparable to trading a
security on NYSE or NASDAQ. Investors may buy and sell securities through the institutional,
online or retail broker-dealer of their choice.’” (Id. (quoting Docs. 272-5, 272-6)) The second
screen print also “provides a detailed explanation of the trading process for an individual
investor.” (Id.)
The Court has reviewed the factual statements cited by plaintiff and agrees with Judge
James. The admissibility of the screen prints used to support plaintiff’s purported facts is

17

questionable. The proffered evidence is hearsay, and, on summary judgment, plaintiff did not
identify any hearsay exception that would allow the Court to consider this evidence.4 See Argo
v. Blue Cross and Blue Shield of Kan., Inc., 452 F.3d 1193, 1199 (10th Cir. 2006) (the content
and substance of summary judgment evidence must be admissible at trial); see also Adams v.
Am. Guar. & Liab. Ins. Co., 233 F.3d 1242, 1246 (10th Cir. 2000) (“Hearsay testimony that
would be inadmissible at trial cannot be used to defeat a motion for summary judgment[.]”). The
Court also agrees that even if these facts were admissible, they do not establish that the OTCQB
differs from other recognized markets because the prices of securities sold on the OTCQB are
subject to individual negotiation.
Second, plaintiff argues that the Report improperly ignores certain factual statements
taken from an August 17, 2007 letter sent to the Securities and Exchange Commission (“SEC”)
by Cromwell Coulson, who was then the CEO of Pink Sheets, LLC and now is the President of
OTC Markets Group. In the summary judgment briefing, defendant objected to this letter
because it contained hearsay, was not previously produced in the litigation, was not cited in
plaintiff’s First Amended Complaint, or identified in any Rule 26 disclosure. (Doc. 278 at 41–

4

Plaintiff argues in Objection No. 4 below that the evidence is not hearsay because defendant
manifested an adoption or belief in the truth of the statements contained on the website. See Fed. R. Evid.
801(d)(2)(B). In support of his assertion, plaintiff argues that defendant attached copies of screen prints
from the same website to a motion to review Magistrate Judge Waxse’s decision to allow plaintiff to
amend his complaint (Doc. 126), defendant’s expert relied on information from this website in his expert
report (Doc. 253-3), and defendant admitted that certain information appears on this website (Doc. 268 at
¶¶ 30–36, 48–59). But, upon closer examination of those filings, defendant’s references to the website
were made in response to plaintiff’s citation of the website in his First Amended Complaint (Doc. 117).
Moreover, defendant’s admission that certain statements appear on a website does not establish that he
manifested a belief in the truth of those statements to bring them within the hearsay exception of Fed. R.
Evid. 801(d)(2)(B). To the contrary, defendant specifically stated in his Answer that he was not admitting
to the factual accuracy, completeness, or admissibility of the quoted excerpts from the website and
defendant continued to object to the admissibility of the statements in the summary judgment briefing.
(See, e.g., Doc. 268 at ¶ 30) Thus, the Court rejects plaintiff’s assertion that defendant manifested a belief
in the truth of the statements on these screen prints to bring the evidence within the hearsay exception.

18

43) Defendant also objected that plaintiff neither had designated Mr. Coulson as an expert
witness nor identified him as a fact witness under Rule 26. (Id.)
Judge James did not refer specifically to this August 17, 2007 letter in her Report, but
Judge James did announce that she had omitted all “factual averments not properly supported by
the record.” (Doc. 283 at 2) Plaintiff argues that this letter is a public document available for
inspection on the SEC’s website and the EDGAR system, but he cites no authority that would
allow the Court to take judicial notice of this letter under Fed. R. Evid. 201. A court may take
judicial notice of evidence “only if the facts in question are ‘not subject to reasonable dispute;’
if, instead, they are ‘capable of accurate and ready determination by resort to sources whose
accuracy cannot reasonably be questioned.’” Lozano v. Ashcroft, 258 F.3d 1160, 1165 (10th Cir.
2001) (quoting Fed. R. Evid. 201(b) and citing United States v. Burch, 169 F.3d 666, 672 (10th
Cir. 1999)). Plaintiff has failed to show that the contents of the August 17, 2007 letter are “not
subject to reasonable dispute” or that they are “capable of accurate and ready determination”
from sources “whose accuracy cannot reasonably be questioned.” Thus, the Court declines to
take judicial notice of this letter. Moreover, Judge James properly excluded the August 17, 2007
letter because it was inadmissible on summary judgment for all of the additional reasons asserted
by defendant and described above.
Third, plaintiff asserts that Judge James erred by failing to consider facts from two screen
prints purportedly taken from the OTC BB website. (See Doc. 289 at ¶ 52) Like the other
website screen prints described above, defendant objected to the OTC BB website screen prints
as inadmissible hearsay. Defendant also argued that even if the website screen prints were not
hearsay, the information contained in them did not controvert facts cited by defendant describing
the operation of the OTCQB. Again, the Report does not discuss the OTC BB website screen

19

prints explicitly, but Judge James disregarded this information on summary judgment. The
Court concludes that Judge James did not err by failing to consider these screen prints. For the
same reasons discussed above, the information contained in these website screen prints is
inadmissible hearsay, which the Court cannot consider on summary judgment. See Argo, 452
F.3d at 1199; see also Adams, 233 F.3d at 1246. The Court also agrees that, even if the facts
contained in these website screen prints are admissible, they do not controvert the admissible and
properly supported factual statements describing the OTCQB’s operation cited by plaintiff.
Fourth, plaintiff objects that Judge James failed to consider certain statements contained
in FINRA Rule 220.01 (Supplementary Material) which, plaintiff contends, shows that prices on
the OTCQB are negotiable. On summary judgment, defendant objected to plaintiff’s citation of
this supplementary material because it is hearsay, misleading, incomplete, and lacks foundation.
Defendant also pointed out that the rule’s actual language (as opposed to the supplementary
material) describes the OTC standardized price quotation system and the process that prevents
member dealers from “backing away” from quotes, thereby controverting the selected statements
cited by plaintiff in the supplemental material. (Doc. 278 at 40–41) The Court agrees with
defendant. Plaintiff failed to establish that this supplemental material is admissible on summary
judgment, and, even if admissible, it does not controvert other facts describing the OTCQB’s
price quotation system. Therefore, Judge James did not err by refusing to consider on summary
judgment these certain statements contained in FINRA Rule 220.01 (Supplementary Material).
Fifth, plaintiff argues that Judge James erred by failing to consider statements made on an
SEC website about the sale of OTC securities. Defendant again objected to these facts on
summary judgment because plaintiff had failed to establish that information from this
government website is admissible without a sponsoring witness or some other basis for

20

admissibility. Defendant also objected that the information was incomplete and therefore
misleading. Defendant cited other information from the website confirming that the OTC Link
(the trading platform) facilitates trading on the OTCQB based on standardized price quotations,
thereby contradicting the selected information cited by plaintiff trying to establish that OTCQB
prices are subject to negotiation. Defendant also objected to the statement that the OTC Link
provides subscribers the ability to send and receive trade messages, allowing them to
communicate for the purpose of negotiating trades, as immaterial. Defendant argued no
evidence exists showing that defendant had any such communications to negotiate the sale of
shares at issue in this case and the evidence establishes that the sale was transacted electronically
at then-prevailing market prices in the best bid/best offer process.
Judge James specifically considered the fact that the OTC Link allows communications
and trade negotiations among broker-dealers for possible private transactions of common stock
shares of a publicly traded company. (Doc. 283 at 35) But she disagreed that this feature
required the Court to conclude that the OTCQB is not a “recognized market” under the Kansas
UCC. (Id.) Judge James noted that private parties always have the ability to negotiate private
transactions outside of a recognized market. (Id.) Moreover, that kind of individual negotiation
did not occur with the sale of shares at issue here. (Id. at 36) Instead, Judge James determined
that the undisputed facts establish that defendant’s sale of the Infinity shares in this case was
consistent with public trading on the NYSE. (Id.)
The Court agrees with Judge James’ consideration of the governing facts pertinent to the
operation of the OTCQB. She did not weigh facts but, instead, considered the information as a
whole in reaching certain conclusions about the operation of the OTCQB and, more specifically,
about the sale of the Infinity shares on that market in this case.

21

Last, plaintiff asserts that Judge James erred by failing to consider 15 factual statements
which, plaintiff claims, are admissions made in defendant’s deposition that demonstrate that the
OTCQB is not a “recognized market” under the UCC. (Doc. 289 at ¶ 55) On summary
judgment, defendant objected to most of these factual statements because they were misleading
or incomplete citations from defendant’s deposition testimony about the OTCQB’s operation.
Defendant responded that certain testimony was uncontroverted to the extent defendant was
testifying as a lay witness, but he also referred to more accurate, complete, and admissible facts
about the OTCQB’s operation as described by defendant’s expert, Mr. Underwood. The Court
agrees with defendant that plaintiff’s purported facts rely on incomplete statements taken from
defendant’s deposition in which he was testifying about a topic only in a lay witness capacity and
not as an expert. These factual statements do not controvert the other evidence cited by
defendant describing the OTCQB’s operation. Therefore, Judge James did not err by failing to
consider these alleged admissions from defendant’s deposition testimony.
For all these reasons, the Court concludes that Judge James properly considered the
summary judgment record. Judge James did not weigh conflicting evidence. Instead, she
determined correctly that the Court could not consider certain evidence—evidence that plaintiff
contends contradicts Mr. Underwood’s testimony—because plaintiff’s proffered evidence is
inadmissible, immaterial, or not supported by the summary judgment record. Thus, the Court
overrules plaintiff’s third objection to the Report.
D. Objection No. 4 – Plaintiff Objects to Judge James’ Questioning of the
Authenticity and Admissibility of Website Screen Prints Proffered by
Plaintiff.
As discussed above, plaintiff relied on several statements taken from screen shot prints
off of the OTC Markets Group’s website to controvert defendant’s description of the OTCQB’s

22

operation. Judge James questioned the authenticity and admissibility of the screen prints from
the OTC Markets Group Website. But she also concluded that, if they were admissible, the
information did not establish that the OTCQB differs from other “recognized” securities markets
because the prices of securities traded on the OTCQB are individually negotiated. (Doc. 283 at
33)
In his fourth objection, plaintiff argues that Judge James erred by questioning the
authenticity and admissibility of this evidence. Plaintiff claims that this evidence is admissible
and that Judge James erred by failing to consider it on summary judgment. The Court already
has addressed the admissibility of the statements from this website above, concluding they are
hearsay and not subject to the hearsay exception in Fed. R. Evid. 801(d)(2)(B). The Court also
rejects plaintiff’s argument that defendant and his expert relied on statements from this same
website. Instead, the record shows that defendant and his expert referred to statements from this
website in response to plaintiff’s citations to this website in his First Amended Complaint (Doc.
117).
More important to this objection, however, plaintiff ignores that Judge James did
consider the evidence from the screen prints. Her Report specifically states, “[e]ven setting
aside the admissibility of these screen prints, the Court finds the information in them does not
support [plaintiff’s] position that the OTCQB is distinguishable from other ‘recognized’
securities markets because the prices of OTCQB securities are individually negotiated, and
therefore the OTCQB should not be considered a ‘recognized market’ under K.S.A. 84-9627(b)(1) or (2).” (Id. (emphasis added)) Judge James specifically referenced other statements
in the screen prints that supported defendant’s argument that the OTCQB operates in a manner
comparable to trading a security on the NYSE or NASDAQ. Thus, Judge James concluded that

23

the information in the screen prints failed to establish plaintiff’s assertion that the OTCQB is
different from other recognized markets. Judge James did not err in her consideration of this
evidence.
E. Objection No. 5 – Plaintiff Objects that the Report Failed to Require
Defendant to Meet His Burden Under K.S.A. § 84-9-626 of Proving that the
Collection, Enforcement, Disposition, and Acceptance of the Collateral
Complied with Kansas Law.
K.S.A. § 84-9-626 applies to an action, like this one, that “aris[es] from a transaction in
which the amount of a deficiency or surplus is in issue.” The statute requires a secured party to
bear the burden of establishing “that the collection, enforcement, disposition, or acceptance [of
collateral] was conducted in accordance with [Part 6 of Kansas UCC Article 9, K.S.A. §§ 84-9601 through 628].” K.S.A. § 84-9-626(2). The statute also provides:
[I]f a secured party fails to prove that the collection, enforcement, disposition, or
acceptance was conducted in accordance with [the statutory requirements], the
liability of a debtor or a secondary obligor for a deficiency is limited to an amount
by which the sum of the secured obligation, expenses, and attorney fees exceeds
the greater of:
(A) The proceeds of the collection, enforcement, disposition, or acceptance; or
(B) the amount of proceeds that would have been realized had the noncomplying
secured party proceeded in accordance with the provisions of this part relating to
collection, enforcement, disposition, or acceptance.
K.S.A. § 84-9-626(3). K.S.A. § 84-9-626(4) explains that “the amount of proceeds that would
have been realized is equal to the sum of the secured obligation, expenses, and attorney fees
unless the secured party proves that the amount is less than that sum.”
Plaintiff argues that the Report failed to hold defendant to this statutory burden on
summary judgment. The Court disagrees. As described in more detail below in response to
plaintiff’s sixth, seventh, eighth, ninth, and tenth objections, Judge James properly applied this
statutory burden to the deficiency claim on summary judgment. The Report concluded that no
24

genuine issues of material fact exist to demonstrate that defendant failed to comply with Part 6 of
Article 9 of the Kansas UCC in the collection, enforcement, disposition, or acceptance of the
collateral, and therefore, Judge James recommended that the Court grant summary judgment for
defendant and against plaintiff on this claim.
Plaintiff argued on summary judgment that defendant failed to comply with the
requirements of Kansas law because defendant failed to give plaintiff notice of the sale of 77,310
shares of Infinity stock, failed to obtain a waiver of notice after default, and failed to sell the
collateral in a commercially reasonable manner. First, Judge James concluded that, although
defendant did not give notice to plaintiff of the sale, as K.S.A. § 84-9-611 requires, defendant
established that plaintiff had waived notice in a post-default agreement making notice
unnecessary under K.S.A. § 84-9-624(a). (Doc. 283 at 26–28) Second, Judge James determined
that defendant had established as a matter of law that his disposition of the collateral was
commercially reasonable as K.S.A. §§ 84-9-610 and 84-9-627 require. (Id. at 29–38) Thus,
Judge James concluded that the summary judgment facts establish that defendant had complied
with Part 6 of Article 9. Therefore, the Report recommended that defendant was entitled to
summary judgment on plaintiff’s claim for wrongful disposition of collateral and a deficiency
damages determination award. (Id.)
The Report properly applied the statutory burden. See, e.g., Raytheon Aircraft Credit
Corp. v. Mi-Ka Aviation, Inc., No. 01-1339-WEB, 2003 WL 21496865, at *5 (D. Kan. May 5,
2003) (granting summary judgment against a debtor who was liable for a debt due under a
promissory note because, among other things, no evidence existed showing that the creditor
disposed of the collateral in violation of the Kansas UCC); United States v. Cox, 731 F. Supp.
1023, 1025–26 (D. Kan. 1990) (granting summary judgment against a debtor’s claim that a

25

secured creditor violated the Kansas UCC because the “evidence clearly show[ed]” that the sale
of collateral was conducted in a commercially reasonable manner); Gillenwater v. Mid-American
Bank and Trust Co., 870 P.2d 700, 703–04 (Kan. Ct. App. 1994) (holding that the trial court did
not err in granting summary judgment against a debtor’s claim that the secured creditor sold
collateral in a commercially unreasonable manner). Judge James concluded that defendant met
his burden under K.S.A. § 84-9-626(2) to establish that his collection, enforcement, disposition,
or acceptance of the collateral complied with Part 6 of Article 9 of the Kansas UCC. The Report
thus did not need to address K.S.A. § 84-9-626(3) which provides a formula for determining the
debtor’s liability, but only if the secured party fails to prove that the collection, enforcement,
disposition, or acceptance followed the statutory requirements. That statute does not apply here
because the uncontroverted facts establish that defendant complied with the requirements
contained in Part 6 of Article 9 of the Kansas UCC.
The Court recognizes that the Report speaks in terms of defendant’s proof. (See Doc. 37
(“The Court thus finds that [defendant] has sufficiently proven that his deposition of the . . .
stock was conducted in accordance with . . . Part 6 of Kansas UCC Article 9.”) The Court
understands this language to communicate Judge James’ ruling that the uncontroverted facts
establish that defendant sold the stock in compliance with the Kansas UCC’s requirements. To
verify, the Court has conducted an independent review of the relevant undisputed facts and
concludes that they establish this proposition as a matter of law. The Court overrules plaintiff’s
fifth objection to the Report.

26

F. Objection Nos. 6 and 7 – Plaintiff Objects to the Report’s Conclusion that
Plaintiff Waived the Notice Requirement After Default Because (1) the
Waiver of Notice in the (Superseding) Pledge Agreement is not a PostDefault Waiver as Defined By K.S.A. § 84-9-624(a), and (2) Even if the
(Superseding) Pledge Agreement Contains a Waiver of Notice, the Waiver
Does Not Include Notices of Sale.
Plaintiff’s sixth and seventh objections argue that the Report erred by concluding that
plaintiff waived notice of defendant’s sale of the Infinity stock. Plaintiff objects to the Report’s
conclusion for two reasons.
First, plaintiff contends that the waiver contained in the (Superseding) Pledge Agreement
is not a waiver as defined by K.S.A. § 84-9-624(a) because plaintiff did not agree to the waiver
after default. K.S.A. § 84-9-624(a) provides that a debtor may “waive the right to notification of
disposition of collateral . . . only by an agreement to that effect entered into and authenticated
after default.” Id. (emphasis added). Plaintiff argues that the (Superseding) Pledge Agreement
(which contains the waiver provision) extended the due date of the loan to January 1, 2013, and,
therefore, when plaintiff signed that Agreement on August 27, 2012, he was not in default on the
loan.
The Report rejected plaintiff’s argument, and the Court agrees with this conclusion.
Kansas law requires the Court, when considering a contract that is unambiguous and whose
language is not doubtful or obscure, to give the contract’s words “their plain, general and
common meaning” and to enforce the contract “according to its terms.” Wagnon v. Slawson
Exploration Co., Inc., 874 P.2d 659, 666 (Kan. 1994) (citations omitted). Applying the laws
governing contract interpretation in Kansas, Judge James properly construed the plain and
unambiguous language in the parties’ contracts.
It is undisputed that plaintiff defaulted on the Secured Promissory Note on May 31, 2012.
Therefore, when plaintiff entered into the (Superseding) Pledge Agreement on August 27, 2012,
27

he had defaulted already on the loan. Contrary to plaintiff’s argument, the (Superseding) Pledge
Agreement and Forbearance Agreement (which the parties also executed on August 27, 2012)
did not extend the loan’s maturity date to January 1, 2013. Instead, defendant agreed in the
Forbearance Agreement not to take any remedial action on the Secured Promissory Note based
on plaintiff’s default until January 1, 2013. Plaintiff also specifically acknowledged in the
Forbearance Agreement that the maturity date of the loan was May 31, 2012, that he had failed
to pay defendant the amount owed on the loan by that date, and that he was in default. Plaintiff
also agreed in the Forbearance Agreement that defendant was not waiving any of his rights or
remedies under the Secured Promissory Note, including his rights upon plaintiff’s default. Thus,
plaintiff’s execution of the (Superseding) Pledge Agreement (which included the waiver of
notice) occurred after default, as K.S.A. § 84-9-624(a) requires.
Second, plaintiff argues that the waiver of notice provision in the (Superseding) Pledge
Agreement contains an exception for notices of sale. Paragraph 12.1 of that Agreement states
that defendant “without notice except as specified below, [may] sell the Pledged Collateral or
any part thereof at a commercially reasonable price or prices and upon such other terms as
[defendant] deems reasonable.” (Doc. 253-9 at ¶ 12.1) Plaintiff asserts that the “except as
specified below” language refers to paragraph 17, which requires that “[a]ll notices . . . including
any . . . notice of sale . . . shall be in writing” and served in a particular manner. (Id. at ¶ 17)
Therefore, plaintiff contends, the Agreement required defendant to give plaintiff notice of the
sale of Infinity shares in writing and deliver the notice in the manner specified by paragraph 17.
The Court has reviewed the cited language in the (Superseding) Pledge Agreement and
agrees with Judge James’ interpretation of these two provisions. The language of paragraph 12.1
is both plain and unambiguous. It states that defendant may sell the collateral “without notice

28

except as specified below” but the Agreement contains no exceptions immediately following that
paragraph or anywhere else in the Agreement. The requirements contained in paragraph 17 do
not create an exception to the waiver of notice in paragraph 12.1. Instead, the language in
paragraph 17 merely sets out the requirements for providing notice under the Agreement if such
notice is required. But there is no provision in the Agreement requiring notice of the sale; rather,
plaintiff specifically waived notice in paragraph 12.1. In sum, then, Judge James did not err
when she decided that the undisputed facts show that plaintiff had waived his right to notice of
the sale of Infinity stock. The Court overrules plaintiff’s sixth and seventh objections to the
Report.
G. Objection Nos. 8, 9, and 10 – Plaintiff Objects to the Report’s Conclusion
that the Sale of Infinity Stock was “Commercially Reasonable” Because (1)
the Report Improperly Disregarded or Weighed the Summary Judgment
Evidence in Reaching this Conclusion; (2) Defendant Failed to Preserve the
Value of the Stock by Selling in the Manner That He Did, and, Thus, He
Could Have Received More Value From the Sale; and (3) the Report Failed
to Consider Defendant’s Admissions Proving that the OTCQB is Not a
“Recognized Market.”
With his eighth, ninth, and tenth objections, plaintiff argues that the Report erred by
concluding that defendant sold the Infinity stock in a commercially reasonable manner. Plaintiff
asserts that the Report’s conclusion is wrong for three reasons.
First, plaintiff argues that the Report failed to consider 11 factual statements about how
defendant sold the Infinity shares in different lots through an online broker dealer. (Doc. 289 at
¶ 110) In the summary judgment briefing, defendant responded to these factual statements by
stating that they were unconverted, but, in some instances, they were incomplete or immaterial.
(Doc. 268 at ¶¶ 61–71) For a full description of the manner in which defendant sold the shares,
defendant referred to his affidavit. (Doc. 253-2) The Court has reviewed the facts submitted by
the parties on summary judgment and determines that the Report states the undisputed and
29

material facts accurately, as supported by the complete summary judgment record, to describe
defendant’s sale of the Infinity stock. (See Doc. 283 at 7–9) Indeed, the Report includes several
of the facts listed among the 11 factual statements that plaintiff claims “were not mentioned,
discussed or considered” in the Report. (Doc. 289 at ¶ 110) Other statements that the Report
“failed” to include are immaterial, and Judge James specifically stated in her findings of fact that
she had omitted immaterial facts. (Doc. 283 and 2) The Report’s consideration of these 11
factual statements was not erroneous.
Second, plaintiff asserts that defendant failed to use reasonable care in the custody and
preservation of the collateral. Specifically, plaintiff claims that, by selling the stock in the
manner that he did, defendant received less value for the stock than he could have generated
otherwise. K.S.A. § 84-9-207(a) imposes a duty of care on a secured party by requiring it to “use
reasonable care in the custody and preservation of collateral in the secured party’s possession.”
The “preservation of collateral” requirement in this statute “‘includes preservation of value.’” In
re Krug, 189 B.R. 948, 960 (Bankr. D. Kan. 1995) (quoting Reed v. Cent. Nat’l Bank of Alva,
421 F.2d 113, 117 (10th Cir. 1970)). Plaintiff argues that defendant failed to preserve the value
of the Infinity stock by selling it in less than 40 minutes on the morning of September 16, 2013.
Plaintiff contends that had defendant waited even a few hours, when the stock was trading at a
higher price, he would have generated thousands of dollars more in his sale of the collateral.
But the Kansas UCC also provides that “[t]he fact that a greater amount could have been
obtained by . . . disposition . . . at a different time or in a different method from that selected by
the secured party is not of itself sufficient to preclude the secured party from establishing that the
. . . disposition . . . was made in a commercially reasonable manner.” K.S.A. § 84-9-627(a).
Several courts outside of Kansas, interpreting this same provision of the UCC, have reached the

30

same conclusion. See, e.g., Layne v. Bank One, Ky., N.A., 395 F.3d 271, 280 n.9 (6th Cir. 2005)
(recognizing that the shares were highly volatile, and it was not commercially unreasonable for
the secured party to delay the sale because the price could have rebounded); Federal Deposit Ins.
Corp. v. Air Atlantic, Inc., 452 N.E.2d 1143, 1147 (Mass. 1983) (although the debtor argued that
the secured party retained the collateral during a time when the market declined “ruinously,” “no
exception is made [in § 9-627] for serious and notorious market declines.”).
Here, the Report did not err by concluding that defendant’s sale of the Infinity stock was
made in a commercially reasonable manner. While plaintiff has the benefit of hindsight,
defendant had no such luxury. K.S.A. § 84-9-627(a) specifically provides that a “greater amount
opportunity” does not preclude the Court from finding that the secured party disposed of the
collateral in a commercially reasonable manner. For all of the reasons cited in the Report, Judge
James did not err by concluding that defendant’s sale of the collateral was made in a
commercially reasonable manner.
Third, plaintiff argues that the Report erred by failing to consider defendant’s admissions
about the operation of the OTCQB, which, plaintiff claims, prove that the OTCQB is not a
“recognized market’ under the Kansas UCC. The Court already has addressed this argument
above. See supra Part IV.C. While plaintiff argues that defendant made certain admissions
about the OTCQB’s operation, plaintiff’s descriptions of these alleged admissions are
incomplete. Reviewing the summary judgment record as a whole, including the facts describing
the OTCQB’s operation by defendant’s expert, Mr. Underwood, the Report correctly considered
the undisputed facts describing the OTCQB’s operation and properly determined from those
undisputed facts that the shares of Infinity stock were sold at standardized prices and were not
the subject of individual negotiation. Thus, the Report did not err by concluding that the shares

31

of Infinity stock were sold on a “recognized market” and that defendant’s sale was commercially
reasonable under K.S.A. § 84-9-627(b).
H. Objection Nos. 11 and 12 – Plaintiff Objects to the Report’s Conclusion that
Defendant is Entitled to Attorney’s Fees Under the (Superseding) Pledge
Agreement, But Even if Defendant Is So Entitled, Plaintiff Argues That The
Court Must Limit the Recovery of Fees to the “Reasonable Costs of
Collection” Under K.S.A. § 58-2312.
Plaintiff objects to the Report’s conclusion that defendant is entitled to recover attorney’s
fees under the (Superseding) Pledge Agreement. Plaintiff advances two objections to the
Report’s conclusion.
First, plaintiff argues that the Report erred in concluding that no genuine issues of
material fact exist to preclude defendant’s recovery of attorney’s fees under the (Superseding)
Pledge Agreement. The Court agrees with the Report’s conclusion. Paragraph 11 of the Secured
Promissory Note requires plaintiff to pay defendant’s costs of collection, including reasonable
attorney’s fees and all costs of suit, including “in the event [defendant] is made party to any
litigation because of the existence of the indebtedness evidenced by this Note . . . .” (Doc. 253-6
at ¶ 11) In addition, Paragraph 14 of the (Superseding) Pledge Agreement requires plaintiff to
pay “all reasonable out of pocket expenses” incurred by defendant “in connection with any
matters contemplated by or arising out of this Pledge Agreement” including costs and expenses
incurred in defending plaintiff’s claims against defendant. (Doc. 253-9 at ¶ 14) Judge James
correctly concluded that the plain language of the parties’ contracts require plaintiff to pay
defendant’s reasonable attorney’s fees, and she properly recommended that the fee application
process established by Fed. R. Civ. P. 54(d)(2) and D. Kan. Rule 54.2 shall govern the Court’s
determination of that amount.

32

Second, plaintiff argues that the Court should amend the Report to make clear that
defendant’s recovery of attorney’s fees is confined to “reasonable costs of collection,” as defined
by K.S.A § 58-2312. The Court disagrees. This statute does not limit defendant’s recovery just
to the “reasonable costs of collection.” Instead, K.S.A. § 58-2312 provides that “any note,
mortgage or other credit agreement may provide for the payment of reasonable costs of
collection, including, but not limited to, court costs, attorney fees and collection agency fees . . .
.” Id. (emphasis added).5 The Kansas Court of Appeals has held that this statute does not limit
the recovery of attorney’s fees under a note to collection actions. Santa Rosa KM Assocs., Ltd. v.
Principal Life Ins. Co., 206 P.3d 40, 53 (Kan. Ct. App. 2009). To the contrary, Santa Rosa held
that by enacting the current language in the statute, the Kansas Legislature “lift[ed] the blanket
prohibition [on recovery of attorney’s fees] and restor[ed] freedom of contract to parties to
negotiate on the issue of attorney fees, particularly in a commercial context . . . .” Id.
Even after Santa Rosa, plaintiff argues, Kansas law does not allow the recovery of
attorney’s fees when the secured party’s “defense of ‘counterclaims [does] not entail proof or
denial of essentially the same facts’ as its own attempts to collect an obligation and ‘are not
intertwined to the point of being inseparable.’” (Doc. 289 at ¶ 133 (quoting Brennan v. Kunzle,
154 P.3d 1094, 1113 (Kan. Ct. App. 2007), rejected on other grounds by Osterhaus v. Toth, 249
P.3d 888, 903 (Kan. 2011)) But the facts of Brennan differ significantly from those presented
here. In Brennan, the plaintiffs sought fees under a provision in a promissory note that limited
recovery to attorney’s fees incurred in enforcing the note. Brennan, 154 P.3d at 1112. In
contrast, here, the attorney’s fees provisions in the Secured Promissory Note and (Superseding)
Pledge Agreement contain broader language and that language provides for the recovery of
K.S.A. § 58-2312 contains two exceptions of costs that are not included in “the costs of
collection,” but neither one applies here.
5

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attorney’s fees in this litigation. Thus, the Court overrules plaintiff’s eleventh and twelfth
objections to the Report.
I. Objection No. 13 – Plaintiff Objects to the Report’s Conclusion that
Defendant Established Genuine Issues of Material Fact to Preclude
Summary Judgment on Defendant’s Fraud in the Inducement Claim.
In his final objection to the Report, plaintiff argues that the Report erred by concluding
that defendant presented evidence establishing genuine issues of material fact sufficient to avoid
summary judgment on defendant’s fraud in the inducement counterclaim. Plaintiff’s objection
ignores that the Report provided two bases for its recommendation that the Court deny plaintiff’s
summary judgment motion on defendant’s fraud in the inducement counterclaim.
First, the Report found that plaintiff’s summary judgment motion was untimely because
plaintiff filed it on July 17, 2014, more than six months after the January 10, 2014 deadline for
filing such a motion. Plaintiff offered no excuse for his failure to file on time, and the Report
properly recommended that the Court deny the motion as untimely filed.
Second, even if the Court excused the motion’s untimeliness, the Report determined that
genuine issues of material fact exist, and they prevent the Court from granting summary
judgment against this counterclaim. The Report properly recited the legal standard for proving a
fraud in the inducement counterclaim—defendant “must prove by clear and convincing evidence
that (1) [plaintiff] made an untrue statement of existing material fact, (2) [plaintiff] knew that
the statement was untrue or recklessly made it with disregard for the truth, (3) [plaintiff] made
the statement with the intent to induce [defendant] to act on the statement, (4) [defendant]
justifiably relied on the statement to [his] detriment and (5) [defendant] sustained injury as a
result of [his] reliance.” BHC Dev., L.C. v. Bally Gaming, Inc., 985 F. Supp. 2d 1276, 1288–89

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(D. Kan. 2013) (citing Stechschulte v. Jennings, 298 P.3d 1083, 1096 (Kan. 2013); PIK Civ. 4th
127.40).
The Report also concluded correctly that genuine disputes of material fact exist about
whether plaintiff made untrue statements in his conversations with defendant leading up to
defendant’s agreement to make the loan to plaintiff. The Report also correctly concluded that
disputes about material facts exist over plaintiff’s alleged concealment or failure to disclose
certain financial matters to defendant before he agreed to make the loan to plaintiff.
Plaintiff argues that his statement of uncontroverted facts establishes his intentions to
repay the loan at the time defendant agreed to make the loan to him, and, therefore, those facts
foreclose defendant’s fraudulent inducement claim. To support this argument, plaintiff cites
some of the 30 factual statements that the Court already has addressed. See supra Part IV.A. As
explained above, the Report properly excluded many of these factual statements from its
statements of fact because they either are immaterial or not supported by the record. Viewing
the undisputed, properly supported facts in the summary judgment record, the Court agrees with
Judge James. Genuine issues of material fact exist, and they prevent the Court from deciding
defendant’s fraud in the inducement claim on summary judgment. Thus, the Report did not err
by recommending that the Court deny plaintiff’s motion for summary judgment on defendant’s
fraud in the inducement claim. The Court overrules plaintiff’s thirteenth objection to the Report.
V.

Conclusion
After conducting a de novo review of the record, the Court accepts the Report and

Recommendation and overrules plaintiff’s objections to it. The Court also refers the parties to
the Report and Recommendation for additional legal authority for the conclusions reached in this
Memorandum and Order.

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IT IS THEREFORE ORDERED BY THE COURT THAT plaintiff’s objections to
the Report and Recommendation of Judge James (Doc. 289) are overruled and the Report and
Recommendation (Doc. 283) is adopted in its entirety.
IT IS FUTHER ORDERED THAT defendant’s Motion for Summary Judgment on
plaintiff’s claim for wrongful disposition of collateral, defendant’s right to a deficiency damages
award, and defendant’s entitlement to attorney’s fees (Doc. 252) is granted.
IT IS FUTHER ORDERED THAT plaintiff’s Motion for Summary Judgment on
plaintiff’s claim for wrongful disposition of collateral under K.S.A. §§ 84-9-624 and 9-626 and
defendant’s counterclaim for fraud in the inducement (Doc. 255) is denied.
IT IS FUTHER ORDERED THAT plaintiff’s Motion in Limine excluding all facts,
evidence, testimony, opinions, and inferences offered by defendant’s proffered expert attorney
Brian C. Underwood (Doc. 261) is granted in part and denied in part, as set out in this Order.
IT IS SO ORDERED.
Dated this 12th day of March, 2015, at Topeka, Kansas.
s/ Daniel D. Crabtree
Daniel D. Crabtree
United States District Judge

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