Lakes Gas Co. v. Clark Oil Trading Company
Filing
104
MEMORANDUM AND ORDER denying 62 Motion for Partial Summary Judgment; denying 80 Motion for Summary Judgment; granting 82 Motion to Amend/Correct ; granting 83 Motion to Amend/Correct. Signed by District Judge Monti L. Belot on 6/21/2012. (alm)
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF KANSAS
LAKES GAS COMPANY,
)
)
)
)
)
)
)
)
)
)
Plaintiff,
v.
CLARK OIL TRADING COMPANY,
Defendant.
CIVIL ACTION
No.
08-1293
MEMORANDUM AND ORDER
This is a commercial dispute between companies that buy and sell
propane gas. Plaintiff Lakes Gas Company claims Defendant Clark Oil
Trading
Company
converted
propane
that
belonged
to
Lakes.
Alternatively, it contends Clark Oil was unjustly enriched and must
pay the value of the propane that Clark Oil received. Clark Oil denies
that it is liable. The matter is now before the court on the parties’
cross-motions for summary judgment.
I. INTRODUCTION
The claims spring in part from the conduct of a third entity,
Summit Propane, and its owner Dave Stevenson.
acted as a sales representative for
At times Stevenson
Lakes, taking orders for sales
of Lakes’ gas and receiving commissions from Lakes. In a series of
transactions
–
apparently
going
arranged to sell propane to
back
several
years
–
Stevenson
Clark Oil by misrepresenting that
Stevenson’s own company (Summit) owned the gas. In fact the gas
belonged to Lakes. Stevenson convinced Lakes to transfer the propane
to Clark Oil by yet another misrepresentation, this time that the gas
was being sold to Lakes’ customers and that Clark Oil would merely
hold the gas in storage for Lakes’ customers.
After the gas was transferred from Lakes’ account to Clark Oil’s
account at a storage facility, Clark Oil would pay Stevenson for the
gas. Lakes would then bill its customers for the gas. For several
years, Lakes apparently received payment from its customers and/or
from Stevenson and the transactions continued. In mid-2008, however,
things came to a screeching halt. Stevenson suddenly ceased operation
and Lakes received no payments on a number of propane transfers it
made to Clark Oil in July 2008.
Lakes now contends Clark Oil is liable for conversion and for
unjust enrichment, saying Stevenson had no title to the gas and that
Clark Oil obtained no better title than Stevenson. Clark Oil denies
liability, arguing that Lakes knowingly entrusted the gas to Stevenson
and that Clark Oil was a good-faith buyer in the ordinary course of
business.
Additionally, Clark Oil argues the claims are barred by
equitable defenses because Lakes knew that Stevenson had a history of
using straw purchasers in sales transactions.
II.
FACTS
The court finds the following facts to be uncontroverted for
purposes of summary judgment.
A. The Parties & Background.
Lakes Gas Company is a wholesaler of propane gas in Midwestern
states.
When it trades in large quantities of gas, it uses the brand
name North America Energy (NAE).
It is the twelfth largest propane
retailer in the U.S., with average sales of about 50 million gallons
of propane a year.
It has 280 employees, 18 of whom work in the
company’s home office in Forest Lake, Minnesota.
-2-
Howard Sargeant
is the President of Lakes Gas and owns 99% of the company.
Steven
Sargeant is the Vice President and General Manager. Jane Boyer is the
Accounting Supervisor.
Boyer supervises a staff of 7 who are
responsible for the company’s administrative and bookkeeping work.
She reports to Steven and Howard Sergeant.
Until October of 2008,
Patty Balfanz was one of Boyer’s direct reports.
Balfanz prepared
invoices, bills of lading, shipping reports, and recorded payments
from customers on Lakes’ Product Transfer Order (PTO) transactions.
Clark Oil is a Missouri trading company1 that buys and sells
various hydrocarbons, including propane.
including 5 or 6 traders.
It has about 15 employees,
John Hohman is one of Clark Oil’s traders.
Doug Berhorst is a scheduler for Clark Oil. Berhorst is responsible
for recording trades, issuing PTOs, making arrangements for product
transfers, preparing invoices, and billing customers.
B. Propane Storage & Product Transfer Orders (PTOs).
Mid-Continent Fractionation & Storage, L.L.C. (“MCF”), which is
owned by Williams Energy Services, owns and operates an underground
liquid gas storage facility in Conway, Kansas.
All of the propane
transactions at issue in this lawsuit occurred through the Conway MCF
facility.
The maximum storage of the facility is about 20 million
barrels.
All of the stored product is commingled in underground
storage. MCF leases storage capacity to third parties. In July 2008,
there were about 30-40 entities leasing storage rights at the Conway
facility.
1
Clark Oil is a fictitious name for a partnership of two
Missouri corporations – G.I.C., Inc. and NIC, Inc. – each with a
principal place of business in Missouri. Doc. 1, ¶3.
-3-
A storage lessee at the Conway facility can transfer product to
the account of another storage lessee by means of a PTO. A PTO is the
method by which Williams Energy documents the transfer of propane
stored at its facility from the account of one customer of the
facility to another customer of the facility. The PTO system is webbased.
MCF issues each storage lessee a user name and login password
for the PTO system.
An entity which is not a storage lessee at the
Conway facility cannot access the system.
A storage lessee generates
a PTO by accessing the PTO system. As noted above, a PTO can transfer
product from the account of one lessee to another at the facility.
A PTO is not used to transfer product out of the Conway storage
facility or to transfer product from a storage lessee to an entity
that does not have storage rights at the Conway facility. (Transfers
of product out of the facility are done by truck, rail, or pipeline,
and are accomplished with bills of lading or with pipeline tickets.)
The industry relies on the PTO to confirm the transfer of inventory
gas from one party to another and to identify intermediaries involved
without physically moving the gas within the storage facility.
The required fields on the PTO form are: the Issuing Customer,
the Receiving Customer, the Product, Volume, Start Date, and Flow
Date.
The Issuing Customer on a PTO is the entity that generates the
PTO.
The Start Date is the date the PTO is entered into the system.
There is a Comment field on the PTO, although it is not a required
field and may be left blank.
The industry standard is to use the
Comment field to identify the “lineup” of entities which may be
parties to the transaction in between the Issuing Customer and the
Receiving Customer.
It may also be used to make notes about the
-4-
transaction.
It can provide a form of communication between the
Issuer and the Receiver of the PTO.
After the Issuer completes the PTO, the PTO system reduces the
inventory account of the issuing storage lessee and transfers the
inventory volume to the inventory account of the receiving storage
lessee.
No physical transfer of product takes place.
After the
issuer has completed all required fields in the PTO form, and if the
inventory of the issuing customer is sufficient to meet the volume
obligation in the PTO, the product transfer is recorded in the MCF
accounting system and the Status field indicates the transfer is
“Complete.”
The system assigns an identification number to each PTO.
A storage lessee can use the PTO system to confirm that product has
been transferred to its inventory account by another storage lessee.
The system provides notification to the issuing lessee and the
receiving lessee of the transfer and the volume.
The PTO does not
constitute title, nor does it necessarily show a chain of title to the
product.
Clark Oil leases storage rights at the Conway facility.
Under
its lease, it had a maximum storage right of 75,000 barrels.
Lakes
Gas also leased storage rights at the Conway facility.
maximum volume storage right of 10,000 barrels.
It had a
If a lessee exceeded
its maximum storage rights, MCF would assess an additional daily
storage fee of 7.5 cents per barrel.
C. Lakes’ Relationship with Dave Stevenson.
Howard Sargeant, President of Lakes, first began doing business
with Dave Stevenson in early 2002.
company
with
which
Stevenson
was
-5-
At that time, Lakes acquired a
conducting
wholesale
propane
transactions.
Additionally, a company operated by Stevenson – Ray
Energy – became one of Lakes’ customers. Ray Energy eventually failed
to pay Lakes some $2 million on propane trades, prompting Lakes to
file suit.
In that litigation, Stevenson gave deposition testimony
in which he acknowledged that in 2002-03 he induced a company named
C.H. Wilson Transport, Inc. to act as a straw purchaser of propane
from Lakes so that Ray Energy could circumvent limitations on its line
of credit with Lakes.
Ray Energy would provide C.H. Wilson the money
to pay invoices from Lakes. Stevenson also acknowledged that since
1993 he had used Ken Fencl as a fictitious buyer in a similar manner.
Lakes ended up buying a propane terminal in which Ray Energy had
an interest.
The purchase price included a payment of $260,000 to
extinguish a lien that resulted in part from Stevenson’s debt to
another company.
In July 2003, Lakes brought suit against C.H.
Wilson in state court in Minnesota, seeking to recover nearly $700,000
for propane sales. Wilson denied that it was the buyer of the propane
and brought a third-party complaint against Ray Energy. In connection
with that litigation, Lakes determined that Tom Burling – who owned
one of the companies acquired by Lakes and who became a Lakes employee
under Howard Sargeant – and Stevenson had conspired to buy gas from
Lakes by using C.H. Wilson as a straw purchaser.
Stevenson failed to pay Lakes some $3 million for propane trades
he had conducted on behalf of NAE.
Howard Sargeant heard that
Stevenson also owed Williams Energy as much as $12 million.
conducted
a
criminal
investigation
of
Stevenson’s
interviewed Howard Sargeant at Lakes’ office.
The FBI
dealings
and
Stevenson’s financial
problems led him to declare bankruptcy. For its part, Lakes wrote off
-6-
its Ray Energy losses as bad debt.
Howard Sargeant acknowledges that
as a result of the prior Wilson litigation, he became aware of
Stevenson’s practice of using fictitious buyers to circumvent credit
limitations.
After all of the foregoing occurred, and despite their knowledge
of Stevenson’s history, Howard Sargeant and Steven Sargeant jointly
decided to continue their business relationship with Stevenson because
they felt he possessed very strong talents and “could provide some
opportunity to right some of the wrongs.”
Howard Sargeant reasoned
that by continuing to conduct business with Stevenson, Lakes could
recover some of the losses it incurred in prior dealings with him.
Steven Sargeant believed that because Stevenson had extensive contacts
with propane retailers in Iowa and southern Minnesota, Stevenson could
successfully sell to those customers and they could be converted to
Lakes customers.
Howard
Sargeant
relationship.
met
with
Stevenson
to
discuss
their
Howard did not want Stevenson to be an employee of
Lakes, so on August 5, 2003, Lakes and Stevenson entered into a “Sales
Rep Agreement,” which was drafted by Howard and Steven Sargeant. The
Agreement stated that Stevenson was an independent contractor for
Lakes, not an employee; that he had no authority to contractually bind
Lakes or to hold himself out as having that authority; and that he was
authorized
to
take
orders
for
gas
and
headquarters for approval or rejection.
sole
authority
to
approve
each
sales
forward
them
to
Lakes’
It provided that Lakes had
transaction
submitted
by
Stevenson. It also provided that Lakes would reject orders containing
a margin of less than 1.5 cents per gallon, a margin that ensured
-7-
Lakes would be able to make a profit on each transaction.
Because of
the built-in margin, the sole risk that Stevenson’s transactions
appeared to present to Lakes was the possibility of non-payment by a
customer.
The Agreement required Stevenson to report to Lakes headquarters
personnel “who have supervisory authority over” him.
The Agreement
set out a base commission of .25 cents (one-quarter cent)per gallon
of propane gas on approved sales, plus a possible supplemental
commission for each gallon sold up to 50 million gallons.
Stevenson
agreed not to sell any competing line of propane to Lakes’ customers.
Stevenson was the only person with whom Lakes had a relationship
of
this
sort.
identified
From
Stevenson
2006
as
to
one
February
of
the
of
2009,
company’s
Lakes’
website
wholesale
sales
representatives. Stevenson operated under the name “Summit Propane.”
Summit had its offices in Cedar Rapids, Iowa, where Stevenson worked.
Lakes imposed certain restrictions on Stevenson, requiring that Lakes
send the invoice to the customer and allegedly prohibiting Stevenson
from handling money on Lakes Gas’s PTO transactions. Lakes did not
require Stevenson to provide a financial guarantee.
Howard Sargeant
would not approve Stevenson’s request to conduct a transaction unless
Lakes would realize a profit.
Sargeant expected Stevenson to have a
trade volume in the range of fifty million gallons.
Sargeant was not
concerned about the transactions during 2008 because Lakes had been
doing transactions with those same customers for years. Stevenson
arranged large volume transactions that involved the transfer of
propane that Lakes stored at the Conway storage facility (“PTO
transactions”). In the absence of his business relationship with
-8-
Lakes, Stevenson could not have conducted PTO transactions because
Stevenson had no storage rights at the Conway storage facility. Lakes
conducted PTO transactions through Stevenson from August of 2003 until
August of 2008.
D. Lakes’ PTO Transactions.
Lakes conducted its PTO transactions in the name of NAE.
Lakes
maintained a separate bank account for NAE at Wells Fargo Bank and
received daily account statements. It received notification from Wells
Fargo by fax or e-mail whenever there was a wire transfer of funds
into the NAE account. On its financial statements, Lakes maintained
a separate subsection for Stevenson’s PTO transactions which was
denominated as “wholesale” under a section labeled
Hampton. Lakes
also maintained a monthly spreadsheet of Stevenson’s transactions on
which
Lakes
recorded,
for
each
transaction,
the
date
of
the
transaction, the name of Lakes’ supplier, the name of the customer(s),
the volume, and the price. Patty Balfanz prepared the spreadsheet.
Aside from Howard Sargeant and Jane Boyer, Stevenson was the only
person
who
conducted
PTO
transactions
for
Lakes.
Lakes
never
transferred product by PTO to Stevenson or Summit because neither
Stevenson nor Summit had storage rights at the Williams Conway
facility.
The customers on the PTO transactions were Lou’s, Fencl, D&J
Feed Service, Campbell Oil Co., Johnson Oil Co., Kruegel, and Hansen
Gas Co. In addition to the PTO transactions, Stevenson conducted
wholesale
transactions
with
his
customers
in
which
he
directly
contracted with them on behalf of NAE. Prior to conducting PTO
transactions, Lakes obtained a credit application from each customer.
-9-
Each of the PTO customers had bank balances in the range of $30,000
to $70,000. Each customer had two account numbers with Lakes: one for
wholesale propane deliveries and one for PTO transactions. The PTO
transactions were typically larger, involving a sale in excess of
$200,000. There was a 10% prepayment requirement for the wholesale
transactions, but not the PTO transactions. Lakes generally required
the customer to pay the remaining balance on a PTO transaction within
7 days after the sale.
Stevenson was the only Lakes’ representative who communicated
with customers on the PTO transactions. After Stevenson received a
product order from one of Lakes’ customers, Stevenson would call
Howard
Sargeant
to
request
approval
to
conduct
the
proposed
transaction. Stevenson could not conduct the proposed transaction
without Howard Sargeant’s approval. Howard would then call one of
Lakes’ suppliers to ascertain the price of the propane.
If Lakes
could acquire it at a price that would ensure a profit, Howard would
approve the transaction. On each PTO transaction, Stevenson would
convey by telephone to Howard or to Jane Boyer the details of the
transaction, which Howard or Boyer would then record on a “PTO Order
Form,” which set forth the date, the supplier from whom Lakes obtained
the gas and at what price, the location, the name of the customer to
whom Lakes was selling, any other companies in the “distribution
lineup,” and the volume and customer price.
Boyer accessed the Williams PTO system to generate a PTO using
the
information
on
the
Lakes’
PTO
Order
Form.
Stevenson
would
telephone Boyer periodically to confirm that a PTO had been issued and
that the propane had been transferred from Lakes’ storage account at
-10-
the Conway facility.
Boyer was the only Lakes employee who held a
login ID and password for the Williams PTO system. Stevenson did not
have a login ID or password. Lakes also used its PTO Order Form to
generate the invoice that was sent to the customer for payment. On
each transaction, Boyer gave Patty Balfanz the PTO Order Form, from
which Balfanz generated the customer invoice.
Balfanz forwarded a
copy of the PTO to Stevenson. Stevenson did not access the PTO Order
Form or generate the customer invoice. Balfanz also recorded payments
from customers on PTO transactions. She devoted about two hours a day
to her work on Stevenson’s PTO transactions.
On a daily basis,
Balfanz or another Lakes employee reconciled the PTO transactions,
matching the Wells Fargo account with the customer invoices. Lakes
generated a daily or weekly accounts receivable report for its PTO
transactions
that
identified
the
account
balance
for
each
PTO
customer.
Some transactions were “split,” meaning Lakes sold some portion
of the propane reflected on a single PTO to two customers. For
example, a July 16, 2008 PTO sale of 10,000 barrels was a split
transaction involving the sale of 7,500 barrels to Campbell and 2,500
to Fencl.
In the propane market, it is not the standard practice to
conduct a split PTO transaction. One cannot tell from the PTO itself
whether a transaction is split or the volume of propane that Lakes was
selling to a particular customer.
To determine that, one would have
to look at Lakes’ PTO Order Form. But Lakes issued a single PTO in
split transactions because Williams assessed a fee of $25 to $50 to
generate each PTO.
Records show that in about 62 PTO transactions, Lakes sent an
-11-
invoice to Hansen although Hansen does not appear in the lineup on the
Comment field of the PTO. In each of those transactions, “Hansen” was
written on the PTO Order Form after the PTO had been issued. Each of
these were split transactions.
E. Lakes’ PTOs and Wire Transfer Payments from Summit.
Stevenson and Summit were not supposed to be handling money in
PTO transactions, but Summit made substantial wire transfers into the
NAE account in 2007 and 2008. In 2007, Summit made 71 wire transfers
totaling $19.7 million into the account.
Summit made 55 wire
transfers into the account in 2008, totaling over $16 million. Summit
made 8-12 wire transfers a month into the account in 2008.
Whenever
a wire transfer came into the NAE account, Lakes would receive a wire
notification by fax or email from Wells Fargo.
Boyer received the
notifications and would have given them to Balfanz. A Lakes employee
(almost always Balfanz) would make a handwritten notation on the wire
transfer account regarding posting the funds to a customer’s account.
After Boyer received it, she would look at the customer notation and
reconcile the amount of the transfer with the customer’s account. When
Boyer received these notifications and reconciled the accounts, she
purportedly failed to recognize that the wire transfers were being
made by Summit. She testified that she failed to recognize the
reference to Summit on each of the notifications, and that she was not
aware that Summit had been making wire transfers into the NAE account
for several years up to July 2008.
She said if she had known, she
would have been concerned because Lakes was not selling propane to
Summit but rather to its PTO customers. Boyer testified that she did
not speak to Balfanz about Stevenson’s wire transfers.
-12-
Boyer also testified she may have made the notation that appears
on an April 25, 2008 wire transfer detail report of a wire transfer
in the amount of $722,404.15. The hand-written notation reads, “short
paid per Dave,” indicating that someone at Lakes Gas had been informed
of this circumstance by Dave Stevenson.
Steven Sargeant testified that until he witnessed Boyer’s
deposition in this case in April 2010, he was unaware that Stevenson
had made substantial wire transfers over an extended period into the
NAE account.
Lakes had reconciled each of these transfers with
invoices to its PTO customers and recorded the payments in the
respective customer’s account.
Clark Oil contends there are material discrepancies in Lakes’
transactional documents relating to the PTOs.
For example, Clark Oil
pointed out a PTO order and invoice dated May 20, 2008, that refers
to a later (June 3, 2008) transaction. Clark Oil also cites a Summit
wire to Lakes for $565,162 on July 16, 2008, with a reference to
“Krugel” in the wire, although there is apparently no Lakes record
showing a Kruegels transaction that the payment would apply to. By
putting “Krugel” on the wire transfer, Stevenson was instructing Lakes
on how to apply the funds. Another transaction was done with Kruegels
the day after Lakes received the foregoing wire transfer.
Clark Oil also identified a Lakes invoice to Hansen where Hansen
was not identified in the Comment field of the PTO. Balfanz had made
a handwritten notation reflecting “Hansen” on the PTO Order Form. This
was done on some 62 transactions, with Hansen being handwritten in and
invoiced for the propane. Balfanz was amending the PTO Order Form to
reflect Hansen’s purchase after the PTO had been issued. Boyer is
-13-
certain that she and Howard Sargeant did not instruct Balfanz to do
so, and the only reasonable possibility she could think of was that
Dave Stevenson told her to do so.
Howard and Steven Sargeant had no
explanation regarding the discrepancies in the Hansen transactions.
Clark Oil Exhibit 52 is a June 2, 2008 PTO in a transaction
between Lakes Gas and Lou’s. The second page of the exhibit is Lakes’
June 2, 2008 invoice to Lou’s in the amount of $539,437.50.
Summit’s
July 31, 2008 bank statement evidences a July 3, 2008 wire transfer
in the amount of $539,437.50 from Summit to NAE (Lakes).
The Summit
wire transfer was made on July 3, 2008, approximately 30 days after
the Lakes’ invoice to Lou’s.
This payment was well outside the 7-day
window for payment on Lakes’ sales. Lakes’ records did not show the
customer account to which the July 3, 2008 wire transfer was applied.
On the day of the July 3, 2008 wire transfer, Lakes made another PTO
sale to Lou’s.
Howard Sargeant’s practice was to condition his
approval of a transaction with a customer on the customer satisfying
its account balance. A July 3, 2008 NAE invoice to Lou’s shows a sale
in the amount of $546,105.
A July 23, 2008 Wells Fargo notification
shows a Summit wire transfer to the NAE account, also in the amount
of $546,105, and it references Lou’s. The wire notification bears a
handwritten notation by Balfanz referencing Lou’s account (“Lou’s
01603"). This payment is beyond Lakes’ 7-day payment period (20 days
past due). Other documents show that Lakes did another transaction
with Lou’s on the day after the July 23, 2008 wire transfer. The
documents show a course of dealing wherein Lakes received a late
payment
in
the
form
of
a
wire
transfer
from
Summit
immediately conducted another transaction with Lou’s.
-14-
and
then
Clark Oil Exhibit 48 is a July 10, 2008 NAE price sheet.
It
bears Boyer’s handwritten notation, “disregard per Dave.” Lakes issued
NAE price sheets on a daily basis, with prices set by Howard Sargeant.
The NAE price sheet states that NAE’s office is in Cedar Rapids, Iowa
– which is the location of Summit’s office. It provides telephone and
fax numbers for NAE that are in fact Summit’s numbers. Boyer testified
she does not remember where the price sheet came from; that Stevenson
might have emailed it to her; and she does not remember why she wrote
“disregard per Dave.”
F. Clark Oil - Dave Stevenson Transactions.
Clark Oil and John Hohman first began trading with Stevenson in
the early 2000s, when Stevenson was employed by Fencl. Hohman and
Stevenson bought and sold propane from one another. The subject of
those trades was propane that was stored at the Conway storage
facility. Hohman ceased trading with Stevenson in 2003 when Stevenson
experienced financial problems. Stevenson failed to pay Clark Oil
about $80,000 on propane trades in 2003, although he eventually repaid
Clark Oil in several payments at some point around September 2003.
In August 2005, Stevenson contacted Hohman about renewing his
trading relationship with Clark Oil and Hohman. Stevenson told Hohman
that he had formed a new company named Summit Propane and that he was
trading again. Hohman required Summit to make a prepayment of 10% of
the invoice price on a trade and to maintain a 20% cash equity margin
in its account as collateral. Hohman also required a cash equity
prepayment on transactions in which Summit sold propane to Clark Oil
to be transferred in the future, because if Summit were to fail to
deliver the product, Clark Oil could be required to cover it at a
-15-
higher price. If Summit exceeded its equity margin, Stevenson would
either close out his open positions or wire additional funds to Clark
Oil to cover the deficiency.
In July 2008, Summit maintained its 20% equity margin. Clark Oil
did not feel insecure about its financial position with Summit at any
time in July 2008. On “wet” sales to Summit (those involving the
immediate transfer of the product), Clark Oil required payment on the
day of the transaction. Clark Oil and Hohman bought propane from
Summit and sold propane to Summit. In selling propane to Summit in PTO
transactions, Clark Oil did not deliver product to Summit’s inventory
or identify Summit as the receiving customer, because Summit did not
have storage rights at the Conway facility. Rather, Stevenson would
inform Berhorst who should be named as the receiving customer on Clark
Oil’s PTO. Clark Oil would include Summit in the lineup on the PTO.
The transactions generally involved a lineup of Clark Oil to Summit
to Heartland to Plains. When Summit sold propane to Clark Oil,
Berhorst would access Clark Oil’s account on the PTO system to confirm
that a PTO had been issued transferring the product to Clark Oil.
Summit would issue an invoice to Clark Oil when it purchased propane.
All of Clark Oil’s transactions with Stevenson were with Summit.
Hohman, a Clark Oil trader, believed that Stevenson was simply
operating a trading company. Hohman did not know where Summit was
acquiring the propane that was the subject of Stevenson’s transactions
with Clark Oil, but he believed it was coming from Summit’s trading
partners or customers. Stevenson never mentioned Lakes Gas, and
Berhorst believed that he was dealing with Summit.
Despite repeated requests by Berhorst, Stevenson never had
-16-
himself listed in the PTO lineup when Lakes Gas was the issuer of the
PTO.
It
eventually
became
the
“standard
business
practice”
for
Berhorst to write the name “Summit” into the PTO lineup where Lakes
Gas was the issuer.
Berhorst said he did not consider Summit’s omission from the
distribution lineup on the PTOs from Lakes to be suspicious because
Berhorst believed the only purpose of naming Summit there is to
provide a reference in Clark Oil’s transactional documents. Clark Oil
did not know of Stevenson or Summit’s relationship with Lakes and
thought Stevenson and Summit were trading on their own account because
Stevenson “never made reference that he was with Lakes at all.”
Hohman, in addition to being a trader with Clark Oil, owns a
fractional interest in Clark Oil’s parent company. He traded the PTO
orders at issue with Stevenson. He testified that his understanding
was that “I was buying barrels from Summit and he was getting them
from somebody and the issuer of the PTO ended up being Lakes.” He
thought Summit was not an agent of Lakes and was merely trading as an
independent party. Hohman said he did not care where Stevenson was
getting the product, as long as Clark Oil received it.
When Hohman and Stevenson agreed on a deal, Hohman would write
up the agreed price and quantity on a piece of paper and give it to
his assistant, who would enter it in the Clark Oil computer system and
assign it an internal contract number. No written contract was entered
into between Summit and Clark Oil in these instances and no contract
was sent to Summit. Summit sent invoices to Clark Oil when Clark Oil
purchased propane from Summit, and Clark Oil invoiced Summit when
Summit purchased propane from Clark Oil.
-17-
In 2005, Summit sold propane to Clark Oil on one occasion. In
2006, the number of transactions increased. There were occasions when
Clark Oil would engage in both buy and sell transactions with Summit
on a single day. Such trades typically occur when a trader purchases
propane in the belief that the market is going up, but later in the
day the market price goes down, which induces the trader to sell.
In
the
first
quarter
of
2008,
Hohman
increased
Summit’s
prepayment requirement to 20% of the invoice price because propane
prices were increasing. In early July 2008, Stevenson informed Hohman
that he was closing his books; that is, closing his market positions
on open transactions. In phone conversations on July 14 and 17, 2008,
Stevenson told Hohman that a person in Florida who was providing him
with financial support was leaving the business because of a divorce.
Hohman assumed that Stevenson was liquidating his position because of
that circumstance, although Hohman thought that Summit would continue
to do business. Hohman spoke with Stevenson a couple of days before
August 6, 2008.
There are 50 to 100 propane traders in the United States. The
price of propane is generally 50 to 70 per cent of the price of oil.
Winter
demand
for
propane
is
filled
in
the
summer
months.
Historically, July is a low-demand month, so it is not unusual for
traders to offer propane at a reduced price in July. In July 2008,
propane prices were higher than normal owing to the price of crude
oil. The propane market in July 2008 was volatile, with prices
starting the month at $1.82 a gallon and falling by the end of the
month to $1.68 a gallon.
G. Disputed PTOs and Cessation of Business by Summit.
-18-
From the beginning of her employment in 2003, Boyer was told
that Clark Oil’s listing on PTOs issued by Lakes meant that Clark Oil
was holding the gas for the benefit of Lakes’ customers. She was told
that either by Stevenson or by Howard Sargeant; she cannot remember
which. That was how Lakes operated from the time
she started in 2003
up until 2008.
In 2008,
credit
limits
Lakes’ PTO customers began to exceed their customer
with
greater
frequency.
Exhibit
20
is
an
Excel
spreadsheet of the July 2008 PTO transactions between Lakes and Clark
Oil. Boyer created this spreadsheet and similar ones on a monthly
basis
which
Howard
Sargeant
used
to
monitor
Stevenson’s
PTO
transactions. She also maintained a PTO reconciliation to track the
income that Lakes was earning on Stevenson’s PTO transactions.
Lakes issued an invoice on July 2, 2008 to existing customer L&S
Gas Corp. for 294,000 gallons of propane at $1.84750 a gallon, or
$543,165. Pursuant to the sale, Lakes issued PTO No. 50734, dated July
3, 2008, with a comment box notation, “lakes-l&s-clark oil@conway
wms.”
Lakes issued an invoice on July 15, 2008 to existing customer
Fencl Oil & LP Co., Inc. for 189,000 gallons of propane at $1.90750
per gallon, a total of $360,517.50 (referencing PTO No. 50950), and
a July 16, 2008 invoice to Fencl for 105,000 gallons at $1.86250 per
gallon, a total of $195,562.50 (referencing PTO No. 50979). Lakes
issued these PTOs with the comment “lakes-fencl-clark oil @ Conway
wms.”
Lakes issued an invoice on July 24, 2008 to existing customer
Lou’s LP for 336,000 gallons of propane at $1.72750 per gallon, a
-19-
total of $580,440 (referencing PTO No. 51113), and an invoice on July
25, 2008 for 84,000 gallons at a price of $1.71500 per gallon, a total
of $144,060 (referencing PTO No. 51138). Lakes issued these PTOs with
the comment “lakes-campbell-lou’s-djfe-clark oil@ Conway wms.”
On each of the foregoing July 2008 transactions involving L&S,
Fencl, and Lou’s, Lakes issued the PTOs as the “Issuing Customer,” and
the
“Receiving
Customer”
was
listed
as
Clark
Oil.
Stevenson
represented to Clark Oil that the transactions were sales from
Stevenson (Summit) to Clark Oil. Summit invoiced Clark Oil for the
deliveries. Clark Oil paid Summit’s invoices and then sold the gas as
its own.
In early August 2008, Lakes learned that Summit was ceasing to
do business. Lakes learned of discrepancies in its July 2008 PTO
transactions when Ken Fencl sent an email to Balfanz on August 7,
2008. On August 8, 2008, Howard Sargeant called John Hohman to inquire
about Clark Oil’s trades with Summit and Stevenson. During that call,
Sargeant informed Hohman that Lakes had “a problem, we buy a lot of
gas and run it through Summit Energy.”
Boyer determined that Stevenson had been buying propane in the
names of Lakes customers, providing the customer with the purchase
price which was then paid by the customer to Lakes Gas. Lakes claimed
in a subsequent lawsuit that Stevenson falsely represented to Clark
Oil that Summit was selling the gas, that Clark Oil would then pay
Stevenson for the gas, that Stevenson would then pay the customer
(Lou’s, Fencl, or others), who would in turn pay the invoices issued
to them by Lakes.
In each of the disputed July 2008 transactions, Boyer issued a
-20-
PTO on behalf of Lakes that identified Clark Oil as the receiving
customer. Lakes transferred the propane pursuant to purchase orders
purportedly solicited by Stevenson for a variety of customers. In each
of those disputed transactions, Clark Oil paid Summit. In generating
a PTO on the Williams system, Boyer thought she had identified in the
Comment field each PTO customer in the transaction (i.e. the lineup).
Lakes is identified on each of the PTOs as the Issuing Company and
Clark Oil is identified as the Receiving customer. Both Howard
Sargeant and Boyer maintain that Stevenson told them Clark Oil was
holding the gas in its account at the Conway facility for the benefit
of Lakes’ Gas PTO customers. Ordinarily, there would be some type of
agreement if Clark Oil had in fact been holding propane in storage for
Lakes. Lakes had no such business relationship with Clark Oil. Lakes
did not pay Clark Oil a fee to hold propane in storage. Neither
Sargeant nor Boyer contacted a representative of Clark Oil to confirm
Stevenson’s representations. All invoices issued by Lakes to its
customers were issued F.O.B. Conway.
On July 30, 2008, Campbell paid Lakes $974,925 in satisfaction
of outstanding invoices, but Howard Sargeant voluntarily returned the
money to Campbell.
Clark Oil Exhibit 50 is a September 4, 2008 letter from Howard
Sargeant to Ken Fencl regarding July 15 and 16, 2008 invoices. In his
letter, Sargeant states that because Stevenson had placed these orders
without Fencl’s knowledge or consent, Lakes would not hold Fencl
responsible for payment of the invoices.
Stevenson declared bankruptcy and listed Lakes as a creditor.
Lakes initially filed an objection to the Trustee’s motion to dismiss
-21-
its complaint to revoke discharge, but Lakes subsequently dropped its
objection because it determined it was not appropriate to pursue a
denial of discharge.
III. SUMMARY JUDGMENT STANDARDS
The
standards
for
summary
judgment
are
well-established.
Summary judgment must be granted if “the movant shows that there is
no genuine dispute as to any material fact and the movant is entitled
to
judgment
as
a
matter
of
law.”
Fed.R.Civ.P.
56;
Thomas
v.
Metropolitan Life Ins. Co., 631 F.3d 1153, 1160 (10th Cir. 2011).
A
fact is “material” if under the substantive law it is essential to the
proper disposition of the claim.
Wright ex rel. Trust Co. of Kansas
v. Abbott Laboratories, Inc., 259 F.3d 1226, 1231–1232 (10th Cir.
2001) (citation omitted).
Only disputes over facts that might affect
the outcome of the suit under the governing law will properly preclude
the entry of summary judgment.
U.S. 242, 248 (1986).
Anderson v. Liberty Lobby, Inc., 477
A dispute of fact is “genuine” if the evidence
is such that a reasonable jury could return a verdict for the nonmoving party.
Id.
In assessing a motion for summary judgment, the
court must view the evidence and all reasonable inferences therefrom
in the light most favorable to the non-moving party. Palladium Music,
Inc. v. EatSleepMusic, Inc., 398 F.3d 1193, 1196 (10th Cir. 2005).
The movant for summary judgment bears the initial burden of
demonstrating the absence of a genuine dispute of material fact.
Celotex Corp. v. Catrett, 477 U.S. 317 (1986).
See
It may meet that
burden by pointing to an absence of evidence on an essential element
of the non-moving party’s claim.
-22-
Id. at 325.
If it meets this
burden, the non-movant must demonstrate a genuine dispute for trial
on a material matter.
See Concrete Works of Colorado, Inc. v. City
& County of Denver, 36 F.3d 1513, 1517 (10th Cir. 1994).
It must do
so by citing to particular parts of materials in the record or by
showing that the materials cited do not establish the absence of a
genuine dispute.
See Fed.R.Civ.P. 56(c)(1).
IV. SUMMARY OF ARGUMENTS
Lakes contends Clark Oil is liable for conversion because Lakes
held title to the gas in question, it never relinquished that title,
and Clark Oil deprived Lakes of its title by selling the gas.
Lakes
argues that under the Minnesota U.C.C. – which both parties agree
controls here – Stevenson had no title to the gas and thus could not
pass valid title to Clark Oil.
At best Stevenson had only a void
title, Lakes asserts, because there was no “transaction of purchase”
between Lakes and Stevenson. Without such a transaction, Lakes argues
that Stevenson could not transfer good title even to an innocent
purchaser.
Lakes says Clark Oil would have to show that Summit first
acquired the gas in a transaction of purchase from Lakes and that
Summit then delivered the gas to Clark Oil, neither of which it says
occurred.
Lakes argues the UCC puts the risk of
fraud on Clark Oil
in these circumstances because it was in the best position to guard
against it.
It denies delivering or entrusting possession of the gas
to Summit, saying Stevenson merely represented to Clark Oil that he
owned the gas without producing any documentation to show title.
Moreover, it says Stevenson did not possess the gas, because he had
no rights to any gas in the Williams Conway storage facility, the
facility through which the transfers occurred.
-23-
Lakes also denies that Stevenson had any apparent authority to
conduct the transactions on its behalf.
It says it never signaled to
Clark Oil that Stevenson was acting on its behalf and that Clark Oil
never
even
Stevenson.
knew
It
of
the
contends
agency
Clark
relationship
Oil
cannot
between
prove
that
Lakes
Lakes
and
held
Stevenson out as its agent, asserting that Clark Oil “constantly had
conversations with Stevenson regarding who was backing Stevenson and
how he was getting the gas,” to which Stevenson allegedly replied he
was backed by “a mystery Florida investor who was getting a divorce.”
In sum, Lakes argues Clark Oil is liable because Stevenson was a
converter, and Clark Oil only acquired the title of a converter.
Plaintiff
seeks
partial
summary
judgment
with
respect
to
five
transactions from July 2008. It seeks the value of the gas involved
–
a little over $1.8 million – plus prejudgment interest from August
8, 2008, the date the conversion was allegedly discovered.
In
response,
Clark
Oil
entrustment bars Lakes’ claim.
maintains
that
the
doctrine
of
It says Lakes entrusted the propane
to Stevenson and thereby granted him voidable title to the gas.
According to Clark Oil, “[t]he entrustment doctrine operates on the
assumption that both the entruster and the buyer have been equally
harmed by the dishonesty of the merchant-dealer, and resolves the
issue in favor of the buyer.”
Doc. 83-1 at 54 (citation omitted).
It contends Stevenson’s propane transfers could only occur with the
acquiescence of Lakes, which issued PTOs affecting the transfers.
Clark Oil says that for each of the disputed transactions, Lakes
issued a PTO naming Clark Oil as the receiving customer, which
resulted in the transfer of the propane to Clark Oil’s storage account
-24-
at the Conway Williams storage facility.
“On these facts,” Clark Oil
asserts, “the Court should find that Lakes entrusted Stevenson with
the propane.” It argues that Lakes conferred at least constructive
possession
of
the
propane
on
Stevenson,
regardless
of
whether
Stevenson was in physical possession of it.
Clark Oil also contends the claims are barred by the defenses
of in pari delicto and “unclean hands.”
It points out that Howard
Sargeant, the president and principal owner of Lakes, had extensive
prior dealing with Stevenson including two occasions when Stevenson
caused Lakes to incur substantial losses on propane trades.
Sargeant
also knew of Stevenson’s practice of using fictitious buyers to
circumvent
credit
limits,
something
transactions now challenged.
he
allegedly
did
on
the
Despite such prior knowledge, Lakes
entered into a Sales Representative Agreement with Stevenson so that
it could recoup losses from prior Stevenson transactions.
Clark Oil
also says that in 2007-08, Summit made substantial wire transfers to
Lakes’
account
on
behalf
of
purported
buyers,
although
Lakes
prohibited Stevenson from handling money on PTO transactions.
Clark
Oil says the evidence suggests Stevenson was using fictitious buyers
and that Lakes knew it. In sum, Clark Oil argues that “Lakes Gas bears
substantial – if not sole responsibility – for its losses in the July
2008 PTO transactions,” such that equitable defenses bar the claims.
Finally, Clark Oil argues the court should deny Lakes’ motion
for summary judgment as a sanction for spoliation. Clark Oil maintains
that
Lakes
preserve
destroyed
email,
in
electronic evidence.
electronic
violation
of
instant
its
messages
duty
to
and
preserve
failed
to
relevant
Clark Oil says the challenged transactions were
-25-
facilitated in part by instant messaging and email between Stevenson
and two Lakes’ employees, but Lakes destroyed or failed to preserve
such evidence in its entirety after being on notice of potential
litigation. Clark Oil says Lakes also failed to produce PTOs and other
evidence in a timely fashion during discovery.
V. DISCUSSION
The parties agree that the disputed transactions involved the
sale of goods and are governed by Article 2 of the Minnesota Uniform
Commercial Code. Doc. 63 at 12; Doc. 82-1 at p.42, n.1.
Their
arguments focus on Section 2-403 of the Minnesota Code, which provides
in part:
336.2-403.
Power
to
transfer;
good
faith
purchase
of
“entrusting”
(1) A purchaser of goods acquires all title which
the purchaser's transferor had or had power to
transfer except that a purchaser of a limited
interest acquires rights only to the extent of
the interest purchased. A person with voidable
title has power to transfer a good title to a
good faith purchaser for value. When goods have
been delivered under a transaction of purchase
the purchaser has such power even though
(a) the transferor was deceived as to the
identity of the purchaser, or
(b) the delivery was in exchange for a check
which is later dishonored, or
(c) it was agreed that the transaction was to be
a “cash sale,” or
(d) the delivery was procured through fraud
punishable as larcenous under the criminal law.
(2) Any entrusting of possession of goods to a
merchant who deals in goods of that kind gives
the merchant power to transfer all rights of the
entruster to a buyer in ordinary course of
business.
-26-
goods;
(3) “Entrusting” includes any delivery and any
acquiescence
in
retention
of
possession
regardless of any condition expressed between the
parties to the delivery or acquiescence and
regardless of whether the procurement of the
entrusting or the possessor's disposition of the
goods have been such as to be larcenous under the
criminal law.
(4) The rights of other purchasers of goods and
of lien creditors are governed by the articles on
secured transactions (article 9) and documents of
title (article 7).
M.S.A. §336.2-403.
1. 2-403(1). Under subsection (1), a buyer generally acquires
whatever interest his seller had in the goods. See 1 White & Summers,
Uniform Commercial Code §3-12 (5th ed.).2 The reference in subsection
(1) to any title which the purchaser’s transferor “had power to
transfer” means that the law of agency, apparent agency and estoppel
apply in determining the extent of a seller’s power to transfer title.
Id. Under subsection (1), then, and with respect to the transactions
in which Stevenson purported to sell propane to Clark Oil, Clark Oil
would have obtained any title that Stevenson3 had or that Stevenson
had the power to transfer. But Clark Oil does not claim Stevenson had
title to the transferred gas. And although Clark Oil makes some
reference to the agency relationship between Lakes and Stevenson, it
does not argue that Lakes gave Stevenson actual authority to transfer
Lakes’ propane. The undisputed facts show that Stevenson was not
expressly authorized by Lakes to issue a PTO himself or to complete
2
See generally Hampton Bank v. River City Yachts, Inc., 528
N.W.2d 880 (Minn.App. 1995) (extensively citing and relying on White
& Summers).
3
“Stevenson” is used here to mean both Stevenson and his
company, Summit Propane.
-27-
a transfer of Lakes’ propane to third parties such as Clark Oil. As
for apparent authority, Clark Oil does not claim that Lakes in any way
signaled to Clark Oil that it authorized Stevenson to make such
transfers on its behalf. (Nor would such an argument be tenable on
these facts – it is uncontroverted that Clark Oil was unaware of any
agency relationship between Lakes and Stevenson at the time of the
transactions and in fact believed that Stevenson was acting on his own
behalf). In sum, Clark Oil does not claim that Stevenson conveyed any
title to it under subsection (1) of 2-403. Rather, Clark Oil relies
on the entrustment rule of subsection (2) and the defenses of in pari
delicto and unclean hands.
2.
2-403(2) & (3) - Entrustment. With respect to subsection
(2), Stevenson was clearly a merchant who dealt in propane. Thus,
“[a]ny entrusting of possession” of the propane to him by Lakes would
have given Stevenson the power to transfer title to the gas to a buyer
in the ordinary course of business.
“Entrusting” includes “any delivery” of the goods from the
entrustor (i.e. Lakes) to the entrustee (allegedly Stevenson/Summit).
“Delivery”
in
turn
means
“the
voluntary
transfer
of
physical
possession or control of goods.” M.S.A. 336.2-103(1)(e).
The official comments to the Minnesota code say subsections (2)(4) of 2-403 are designed to protect “persons who buy in ordinary
course out of inventory,” although White & Summers note that nothing
in the Code requires that goods be physically located in a seller’s
inventory to be considered entrusted. “Entrusting” typically falls
into one of four fact patterns: (1) an owner leaves the goods with a
dealer to resell; (2) a wholesaler delivers goods to a dealer’s
-28-
inventory; (3) an owner leaves goods to be repaired with a person who
also sells used goods of that kind; and (4) a buyer leaves the goods
purchased
in
the
seller’s
inventory.
Anderson
on
the
Uniform
Commercial Code, 3A Anderson U.C.C. § 2-403:76 (3d. ed.).
According to White & Summers, problems arise because the UCC
does not define possession. 1 White & Summers, Uniform Commercial
Code, § 3-12 (5th ed.). White & Summers take the view that in
determining whether there is possession for purpose of entrustment,
the court should look beyond the fact of control to the dealer’s
appearances of control over the goods. Id. See also Anderson on
Uniform Commercial Code, 3A Anderson U.C.C. § 2-403:95 (3d. ed.)
(“Some courts have held that there has been a sufficient entrustment
of the goods as long as the goods appear to be in the possession, and
control, of the entrustee as the emphasis is upon the appearance of
the situation to the [buyer] in the ordinary course of business. Thus,
there may be an entrustment to the dealer/entrustee when goods are
sent to the point designated by the dealer even though the goods are
never placed on the entrustee's property or place of business.”). See
also Stowell v. Cloquet Co-op Credit Union, 557 N.W.2d 567, 571 (Minn.
1997) (because one of the purposes of the UCC is to foster nationwide
uniformity in the application of commercial law, cases from other
jurisdictions interpreting the Code should be given substantial
weight).
The underlying purpose of section 2-403(2) is to facilitate the
free flow of goods based on a buyer’s reasonable expectation that a
merchant in possession of goods it ordinarily sells has title to them:
The 2–403 requirement of a “merchant that deals
-29-
in goods of that kind” restricts the Code
definition of merchant in 2–104. Unlike the 2–104
definition, which turns on the person's skill or
knowledge, the concern of 2–403 is with a
narrower
class
based
on
appearances.
An
individual buying a product from an apparent
dealer in such goods expects to get good title.
This expectation facilitates exchange. One cannot
ascertain the seller's title without slowing
commerce. One expects to get good title when
buying a shiny new car from a General Motors
dealer. On the other hand, one buying goods from
a mere warehouseman trying to recover storage
costs knows that the seller is dealing with
somebody else's goods. Similarly, a buyer is
expected to know that a broker deals with goods
that are not the broker's own.
White & Summers, supra. See also Executive Coach Builders v. Bush &
Cook
Leasing,
Inc.,
81
Ohio
App.3d
808,
812,
612
N.E.2d
408
(1992)(purpose of entrustment rule is to protect the purchaser where
the latter acts in good faith and the owner takes the risk by placing
or leaving the good with a merchant of his own choosing who could
convert or otherwise misdeal it).
Under the uncontroverted facts, can it rationally be said that
Lakes delivered the disputed propane to Stevenson? Certainly not
insofar as physical possession of the goods are concerned. There was
never any movement of propane; it remained in storage the entire time,
under
the
direct
control
and
possession
of
the
Conway
storage
facility. But it is fair to say there was a transfer of the right to
control the propane that was the subject of the disputed transactions.
The right to control or direct propane stored at the Conway facility
depended upon two things: a company having a storage-rights account,
and execution of a PTO transferring the propane from the account of
one storage lessee to another. Lakes emphasizes that Stevenson never
had storage rights and was not listed on the PTOs that transferred
-30-
propane to Clark Oil. As such, it argues he never had control over the
propane. Moreover, Lakes says there is no evidence that it intended
Stevenson to have such control. But a jury viewing all the evidence
might reasonably conclude that Lakes’ actions created an appearance
of Stevenson’s control over the propane. How is it that Stevenson
could represent to Clark Oil that he had specific amounts of propane
to sell at a given time, and the promised propane would shortly
thereafter be delivered to Clark Oil’s account? Unless Stevenson had
control over the propane and the ability to dispose of it, how is it
that he – a third-party dealer ostensibly unconnected to Lakes – could
promise delivery, arrange for such delivery, and then be the only one
to invoice Clark Oil for the delivery? And the fact that this
apparently went on over a period of years without objection or without
even contact from Lakes would certainly reinforce the perception of
a buyer in Clark Oil’s position that Stevenson in fact had control
over the gas and the legitimate ability to dispose of it through sale.
One reasonable view of the evidence – though not the only one
– is that Lakes effectively entrusted its propane to Stevenson to sell
to third parties. Under the Minnesota UCC, a delivery of goods means
a voluntary transfer of physical possession or control of goods. Clark
Oil has cited evidence that Lakes basically turned over PTO sales to
Stevenson. And from the perspective of a buyer such as Clark Oil,
Stevenson could reasonably be viewed as having control of the propane
sold in these transactions because of the manner in which Lakes used
him and his company as a “front man” on PTO sales. Lakes allowed
Stevenson to make nearly all of the arrangements for PTO sales, and
it relied on him exclusively to communicate with Clark Oil concerning
-31-
PTO transfers. Lakes had virtually no contact or communication with
Clark Oil outside of cryptic PTOs transferring propane to Clark Oil’s
account. Insofar as Clark Oil was concerned, it was Stevenson of
Summit Propane who agreed to and arranged
the terms of sales.
Stevenson was the only one to communicate with Clark Oil about the
sales and the only one to demand payment for the product. The
transfers occurred over an extended period, with Lakes repeatedly
providing
propane
to
Clark
Oil
upon
request
by
Stevenson.
Cf.
Executive Coach Builders, 81 Ohio App. 3d at 83, 612 N.E.2d at 411
(“Under the ‘appearance of control’ test, we find that Gold Key had
possession of the limousine for entrustment purposes. Even though the
merchant here did not have actual physical possession of the limousine
at the time of the sale to appellee, Gold Key nevertheless manifested
its ability to control and dispose of the limousine as if it was in
its inventory.”). The fact that Stevenson arranged for delivery of the
propane, demanded payment for it, and then received payment without
objection from any other entity would convey to a reasonable buyer
that Stevenson in fact had control of the propane provided by Lakes.
This is particularly true given that Stevenson was able to arrange a
number of apparently successful sales over time. Cf. Cugnini v.
Reynolds Cattle Co., 687 P.2d 962, 966-67 (Colo. 1984) (“Reynolds ...
observed the apparent control that Russell had over the cattle and
concluded that they belonged to him.”).
Howard Sargeant says Lakes transferred the gas to Clark Oil
based on a belief that Lakes’ customers had storage arrangements with
Clark Oil and that Clark Oil was holding the gas for these customers.
That
belief was apparently based on fraudulent representations from
-32-
Stevenson. Even so, under 2-403(3) the fact that a delivery was
induced by fraud does not prevent an entrustment from being found.
M.S.A. §336.2-403, Comment 2 (technicalities of larceny do not effect
the entrustment doctrine). See also Executive Coach Builders, 81 Ohio
App.3d at 812, 612 N.E.2d 408 (“Entrustment should be given a liberal
reading. Professor Grant Gilmore, one of the drafters of the UCC,
stated that the Code ‘defines ‘entrusting’ as including everything
short of armed robbery (larceny is expressly approved).”)). And Clark
Oil has cited instances of Lakes disregarding its own purported
restrictions on Stevenson’s handling of PTO transactions, including
at times apparently allowing him to dictate even the price on PTO
sales. There is evidence that Stevenson instructed Lakes as to all
facets of the terms of the PTOs. Significantly, Clark Oil cites
evidence that despite Lakes’ stated policy of not allowing Stevenson
to handle money on PTO sales – a policy borne out of knowledge that
Stevenson had a history of using straw purchasers – Stevenson in fact
wired tens of millions of dollars into Lakes’ NAE account for PTO
sales, thereby clearly indicating that he was involved as a party to
sale transactions. Lakes’ asserted explanation that it did not notice
the money was coming directly from Stevenson strains credulity, to say
the least, particularly given a pattern suggesting that
Stevenson
repeatedly
new
made
account
payments
to
Lakes
so
that
sale
transactions could be conducted. Viewed in a light most favorable to
defendant, the summary judgment evidence shows that Lakes was willing
to allow Stevenson to make under-the-table arrangements involving
Lakes propane so as long as the money flowed in. Once propane was
diverted, however, and the piper came calling, Lakes took the position
-33-
that Stevenson was a mere solicitor of orders rather than its dealer
in charge of PTO sales.
As noted above, the purpose of the UCC entrustment rule is to
protect a good-faith purchaser where the owner of the goods “takes the
risk by placing or leaving his chattel with a merchant of his own
choosing who could convert it or otherwise misdeal it.” Locke v. Arabi
Grain & Elev. Co., Inc., 197 Ga.App. 854, 856, 399 S.E.2d 705 (1990).
Lakes chose Stevenson, a propane merchant with a checkered past, and
arguably gave him carte blanche to arrange PTO sales of its product.
A jury considering all of the circumstances of the relationship could
find that Lakes voluntarily transferred control over Lakes propane to
Stevenson and thereby allowed him to sell it to third parties.
3. Ordinary Course of Business. Even if goods are entrusted
within the meaning of 2-403(2), title will pass only to a buyer in the
ordinary course of business. Lakes argues the evidence shows Clark Oil
did not comport with usual or customary practices in buying propane
from Stevenson, and was therefore not a buyer in the ordinary course.
Under M.S.A. § 336.1-201(9):
“Buyer in ordinary course of business” means a
person that buys goods in good faith, without
knowledge that the sale violates the rights of
another person in the goods, and in the ordinary
course from a person, other than a pawnbroker, in
the business of selling goods of that kind. A
person buys goods in the ordinary course if the
sale to the person comports with the usual or
customary practices in the kind of business in
which the seller is engaged or with the seller's
own usual or customary practices. A person that
sells oil, gas, or other minerals at the wellhead
or minehead is a person in the business of
selling goods of that kind. A buyer in ordinary
course of business may buy for cash, by exchange
of other property, or on secured or unsecured
credit, and may acquire goods or documents of
-34-
title under a preexisting contract for sale. Only
a buyer that takes possession of the goods or has
a right to recover the goods from the seller
under article 2 may be a buyer in ordinary course
of business. “Buyer in ordinary course of
business” does not include a person that acquires
goods in a transfer in bulk or as security for or
in total or partial satisfaction of a money debt.
“Good faith” means “honesty in fact and the observance of reasonable
commercial
standards
of
fair
dealing.”
M.S.A.
§336.1-201(20).
“Knowledge” means actual knowledge. M.S.A. §336.1-202(b).
“Under Minnesota law, the good faith test is a subjective rather than
objective test. It requires honesty of intent rather than the absence
of circumstances which would put an ordinarily prudent purchaser on
inquiry. It is an issue of honesty of intent rather than of diligence
or negligence.” Schluter v. United Farmers Elevator, 479 N.W.2d 82,
85 (Minn.App. 1991) (citing Eldon's Super Fresh Stores, Inc. v.
Merrill Lynch, 296 Minn. 130, 136, 207 N.W.2d 282, 287 (1973)).
Lakes relies on various aspects of Clark Oil’s purchases to
argue that they did not comport with usual and customary practice. For
example, it notes that Clark Oil required prepayments from Stevenson,
something it did not do for all of its customers. But the evidence
suggests propane dealers sometimes imposed limitations or payment
requirements on particular entities that were considered credit risks.
Lakes also says that Stevenson could not guarantee dates of delivery
and that the terms of delivery were negotiated for every deal. Such
factors might be probative of unusual practices in the industry, but
Lakes fails to show as a matter of law that they were outside of
normal practice or that they would necessarily suggest to a propane
merchant that the sales violated a third party’s rights. The most
-35-
significant factor relied upon by Lakes is that Summit’s name did not
appear in the lineup of parties in the Comment field of the PTOs.
Lakes argues that this shows Clark Oil had knowledge that the sale
violated the rights of others, and says Clark Oil’s practice of handwriting Summit into the lineup on Clark Oil’s internal documentation
bolsters that fact. The court agrees with Lakes insofar as it contends
that Summit’s absence from the PTO lineup should have been a “red
flag” to Clark Oil prompting further inquiry. The evidence shows it
was a common practice to list parties involved in a transaction in the
PTO lineup, and Hohman of Clark Oil told Stevenson that Summit should
be in the lineup when the purchases first began. But there is evidence
that the listing of a complete lineup on a PTO was not considered
mandatory, and in fact both parties engaged in transactions without
listing all interested parties. For example, Lakes engaged in dozens
of sales to Hansen despite the fact that Hansen was not listed in the
PTO lineup. Like Clark Oil, Lakes made hand-written additions to the
PTO after-the-fact to document these sales for its own records. Lakes
engaged in “split sale” transactions, where a single PTO was used for
multiple buyers without listing all of the purchasers on the PTO.
There is some evidence that propane sellers were typically unconcerned
with intermediate or subsequent steps in a series of buy-and-sell
transactions, and focused only on the immediate seller’s delivery of
promised gas and the receiving purchaser’s payment for gas received.
As for Clark Oil’s asserted purchases from Summit, these transactions
were carried out over an extended period without Summit being listed
in the lineup, until it simply became the parties’ standard practice.
The initial red flag may have faded into insignificance as purchases
-36-
were
repeatedly
carried
out
without
any
objections
or
apparent
problems. Whether or not such a practice was contrary to industry
custom, and whether or not Clark Oil can be said to have had actual
knowledge that the sales violated the rights of others, are genuine
issues of fact on the record now before the court. See Foy v. First
Natl. Bank of Elkhart, 868 F.2d 251, 254 (7th Cir. 1989) (whether a
buyer is in the ordinary course of business is generally a question
of fact); Wohlrabe v. Pownell, 307 N.W.2d 478, 483 (Minn. 1981)(it is
not sufficient that there be circumstances or suspicions such as would
put a careful purchaser upon inquiry; subjective good faith is simply
the honest belief that your conduct is rightful).
4.
Unclean Hands/In Pari Delicto. Clark Oil contends Lakes’
claims are barred by the doctrines of in pari delicto and unclean
hands.4
An initial stumbling block to Clark Oil’s defenses, at least
insofar as the claim of conversion is concerned, is that the only case
to address the matter has concluded that Minnesota law
would not
allow equitable defenses on a claim for damages. See Bieter v.
Blomquist, 848 F.Supp. 1446, 1451 (D. Minn. 1994)(“Because the Court
finds
no
indication
availability
of
that
equitable
Minnesota
defenses
4
to
courts
have
actions
for
expanded
damages,
the
it
The court rejects Lakes’ argument that Clark Oil has waived
reliance on the principle of in pari delicto because Clark Oil’s
answer listed the defense as “unclean hands.” The two doctrines are
closely related; in fact, in pari delicto is said to be a corollary
of the unclean hands doctrine. See 27A Am.Jur.2d Equity §103. Lakes
has established no surprise or prejudice from Clark Oil’s reliance on
the doctrine, and the court concludes that Clark Oil has not waived
it. See Loxley South, L.L.C. v. Western Express, Inc., 2011 WL
2469823, *2 n.4 (S.D. Ala. 2011).
-37-
concludes that unclean hands is not a valid defense to Bieter's claim
for tortious interference.”). Other Minnesota decisions likewise
indicate
that
equitable
defenses
serve
only
to
restrict
the
availability of equitable, not legal, relief. See e.g., Heidbreder v.
Carton, 645 N.W.2d 355, 371 (Minn. 2002);
Based on these decisions,
the court concludes the Minnesota Supreme Court likely would not
recognize unclean hands or in pari materia as a defense to a claim for
damages under a conversion theory. The defense could be potentially
available, however, on Lakes’ claim of unjust enrichment. See e.g.,
Progressive Technologies, Inc. v. Shupe, 2005 WL 832059 (Minn.App.
2005) (“To the extent Progressive's underlying claim is contractual,
it is not a claim for equitable relief. Thus, unclean hands is not a
defense to the contractual claim. However, the district court also
granted summary judgment to Progressive on a theory of the equitable
claim of unjust enrichment. [Thus] we consider appellant's defense of
unclean hands for this limited purpose.”).
A second hurdle to the defense is the UCC. Section 336.1-103(b)
of
the
Minnesota
Code
provides
that
unless
displaced
by
the
particular provisions of the UCC, the principles of law and equity
supplement the Code’s provisions. But the comments make clear that
resort to equitable principles is limited:
[T]he Uniform Commercial Code is the primary
source of commercial law rules in areas that it
governs, and its rules represent choices made by
its drafters and the enacting legislatures about
the appropriate policies to be furthered in the
transactions
it
covers.
Therefore,
while
principles of common law and equity may
supplement provisions of the Uniform Commercial
Code, they may not be used to supplant its
provisions, or the purposes and policies those
provisions reflect, unless a specific provision
-38-
of
the
Uniform
Commercial
Code
provides
otherwise. In the absence of such a provision,
the Uniform Commercial Code preempts principles
of common law and equity that are inconsistent
with either its provisions or its purposes and
policies.
Id., Comment 2.
Section 2-403 of the Code allocates the risk of loss among
parties to sales transactions generally, and specifically addresses
the consequences of entrusting goods to a merchant in the business of
selling such goods, even where the entrustment has occurred as a
result of fraud or larceny. Cf. First Nat. Bank of Blooming Prairie
v. Olsen, 403 N.W.2d 661, 666 (Minn.App.1987) (Where UCC provisions
are
determinative,
the
application
of
equitable
principles
is
unnecessary). The section is designed not only to protect good faith
purchasers, but more broadly to ensure the free flow of commerce by
establishing clear ground rules for transfers of goods. These policies
could be undermined by easy resort to equitable defenses that upend
the remedial scheme adopted by the Code. Whether or not application
of “unclean hands” would do so here depends on the circumstances
surrounding these transactions and the relationships among all of the
entities involved. That in turn requires a determination of the facts
from all of the evidence. And only based on such facts could the court
determine if application of the defense is warranted, and whether it
would violate a policy underlying section 2-403. Cf. Foy v. Klapmeier,
992 F.2d 774, 779 (8th Cir. 1993) (unclean hands is a matter for
discretion of the district court; defense is applied only where a
party’s conduct has been unconscionable). The court concludes that the
matter is inappropriate for determination on this summary judgment
-39-
record.
5. Spoliation of Evidence & Discovery - Sanctions. Clark Oil
argues that Lakes spoliated evidence and was dilatory in producing
discovery. It argues that the court should deny Lakes’ Motion for
Summary Judgment as a sanction for such conduct.
Spoliation sanctions are proper when (1) a party has a duty to
preserve
evidence
because
it
knew,
or
should
have
known,
that
litigation was imminent, and (2) the adverse party was prejudiced by
the destruction of the evidence. Turner v. Public Service Co. of
Colorado, 563 F.3d 1136, 1149 (10th Cir. 2009). If the aggrieved party
seeks an adverse inference to remedy the spoliation, it must also
prove bad faith. Id. Without a showing of bad faith, a district court
may only impose lesser sanctions. Id. [citations omitted].
It seems clear there was some loss of evidence in this case –
in the form of certain email and/or “instant messages” – from Lakes’
computer records, at a time when Lakes knew litigation was imminent.
The evidence suggests the loss was inadvertent. No claim of bad faith
is made and no evidence is cited to support such a finding. In these
circumstances, the court looks to the culpability of those involved
and the relevance of the proof to the issues at hand. HR Technology,
Inc. v. Imura Intern. U.S.A., Inc., 2010 WL 4792388, *2 (D. Kan.
2010). While it is possible that the lost materials contained some
relevant evidence, Clark Oil’s claim of prejudice from the loss is
largely speculative. Cf. Turner, 563 F.3d at
1150 (“there is no
evidence that Turner was ‘actually, rather than merely theoretically’
prejudiced by their loss.”). The court also notes that Clark Oil did
not pursue discovery sanctions before the Magistrate on the matter and
-40-
did not pursue all avenues of discovery that might have helped
mitigate
any
loss
of
relevant
evidence.
After
considering
the
circumstances, the court concludes that the requested sanction of
denying plaintiff’s motion for summary judgment is not warranted.
VI. CONCLUSION
Clark Oil’s unopposed Motions to Amend Memoranda (Docs. 82 and
83) are GRANTED;
Lakes’ Motion for Partial Summary Judgment (Doc. 62) is DENIED;
and
Clark Oil’s Motion for Summary Judgment (Doc. 80) is DENIED.
A motion for reconsideration of this order is not encouraged.
The standards governing motions to reconsider are well established.
A motion to reconsider is appropriate where the court has obviously
misapprehended a party's position or the facts or applicable law, or
where the party produces new evidence that could not have been
obtained through the exercise of reasonable diligence. Revisiting the
issues already addressed is not the purpose of a motion to reconsider
and advancing new arguments or supporting facts which were otherwise
available for presentation when the original motion was briefed or
argued
is
inappropriate.
Comeau
v.
Rupp,
810
F.Supp.
1172
(D.Kan.1992). Any such motion shall not exceed three pages and shall
strictly comply with the standards enunciated by this court in Comeau
v. Rupp. The response to any motion for reconsideration shall not
exceed three pages. No reply shall be filed.
IT IS SO ORDERED.
-41-
Dated this
21st
day of June 2012, at Wichita, Kansas.
s/ Monti Belot
Monti L. Belot
UNITED STATES DISTRICT JUDGE
-42-
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