SMC Holdings, LLC et al v. McCann et al
Filing
108
MEMORANDUM AND OPINION AND ORDER; granting in part, and denying in part defendants' Motion for Partial Summary Judgment #73 ; denying Defendant's Motion to Exclude Expert Testimony #67 ; granting in part, and denying in part Plaintiffs' Motion for Summary Judgment #61 ; and denying Plaintiffs' Motion to Strike Pleading #93 .(Written Opinion). Signed by Chief Judge John R. Tunheim on 09/27/2017. (JMK)
UNITED STATES DISTRICT COURT
DISTRICT OF MINNESOTA
SMC HOLDINGS, LLC, VINCO, INC.,
RENEWTECH, LLC, and STEVE
ANDERSON,
Civil No. 15-490 (JRT/LIB)
Plaintiffs / Counter Defendants,
v.
MEMORANDUM OPINION
AND ORDER
AARON A.J. MCCANN and
SWITCHINGGEARS, LLC,
Defendants / Counter Claimants.
Curtis D. Smith, MOSS & BARNETT, PA, 150 South Fifth Street, Suite
1200, Minneapolis, MN 55402, for plaintiffs / counter defendants.
Brooks F. Poley and Matthew C. Robinson, WINTHROP &
WEINSTINE, PA, 225 South Sixth Street, Suite 3500, Minneapolis, MN
55402, for defendants / counter claimants.
This action stems from a failed business venture related to wind energy
developments with Native American tribes. Plaintiffs brought this action seeking to
recover their $2.7 million investment and other expenses, bringing claims based on
common-law fraud, securities fraud, unjust enrichment, conversion, civil theft, and
breach of contract. Defendants counterclaimed for breach of a joint venture agreement,
breach of fiduciary duties, breach of the duty of loyalty, and negligence.
Defendants move for summary judgment on all of Plaintiffs’ claims except for the
breach of contract claim. The Court will grant in part and deny in part Defendants’
motion for summary judgment, finding insufficient support for some of Plaintiffs’ fraud
claims and Plaintiffs’ securities fraud claim.
Additionally, because the Court does not
find the testimony of Plaintiffs’ expert so factually unsupported as to warrant exclusion at
this time, the Court will deny Defendants’ motion to exclude the expert’s testimony.
Plaintiffs move for summary judgment on Defendants’ counterclaims and for
affirmative summary judgment on Plaintiffs’ claim for breach of contract. The Court will
grant Plaintiffs’ motion with regard to Defendants’ negligence counterclaim, but, because
questions of material fact remain over whether the parties entered into a joint venture or
partnership and whether Defendants breached the Convertible Loan Agreement, the
Court will deny Plaintiffs’ motion in all other respects. The Court will also deny
Plaintiffs’ motion to strike Defendants’ reply declaration because it was responsive to
Plaintiffs’ arguments in opposition that were not reasonably anticipated.
BACKGROUND
I.
THE PARTIES
Defendant Aaron McCann is the owner and sole member of Defendant
SwitchingGears, LLC (“SwitchingGears”). (Decl. of Aaron McCann in Supp. (“McCann
Decl.”) ¶ 1, Dec. 1, 2016, Docket No. 77.) McCann describes SwitchingGears as “a wind
energy developer that specializes in the development of wind turbine installments for
Native American tribes.”
(Id. ¶ 2.)
According to McCann, SwitchingGears began
developing relationships with Native American tribes in the Midwest, including the
Oglala Sioux Tribe in Pine Ridge, South Dakota, starting in 2009.
(Id. ¶¶ 3-4.)
SwitchingGears worked “to develop a project model that would allow [it] to expand the
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traditional target market for multiple wind turbine installments in rural and non-taxable
communities, such as Native American Tribes.” (Id. ¶ 5.) Pursuant to SwitchingGears’
financial model, it sought to “aggregate wind projects and finance them through a series
of investors; federal, state and local investment tax credits; grants; programs; and other
financing sources that were uniquely available, collectively, to these communities.” (Id.)
Plaintiffs include related companies, SMC Holdings, LLC (“SMC Holdings”),
Vinco, Inc. (“Vinco”), Renewtech, LLC (“Renewtech”), as well as Steve Anderson (the
president of Vinco and a member of SMC Holdings and Renewtech). (See Second Am.
Compl. ¶¶ 2-5, Jan. 27, 2016, Docket No. 44; Decl. of Steve Anderson (“Anderson
Decl.”) ¶ 1, Dec. 1, 2016, Docket No. 64.) Vinco is a telecom and electrical contractor,
and Renewtech is a wind turbine manufacturer and installer. (Decl. of Matthew C.
Robinson in Supp. (“Robinson Decl.”), Ex. C at 6:25-7:1, 10:20-11:15, Dec. 1, 2016,
Docket No. 76.) Non-party Steve Martineau worked for Vinco and was McCann’s
principal contact with Plaintiffs during the relevant period. (McCann Decl. ¶ 7; Robinson
Decl., Ex. C at 6:21-22.)
The contemplated roles of the parties in the failed wind energy business venture
were as follows. SwitchingGears was the project developer or sponsor responsible for
arranging financing. (Decl. of Curtis D. Smith in Supp. (“Smith Decl.”), Ex. 3 (“McCann
Dep.”) at 78:18-79:21, Dec. 1, 2016, Docket No. 65; McCann Decl. ¶ 6.) Renewtech was
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to be the manufacturer. 1
(McCann Decl. ¶ 6.)
Vinco would contribute in the
“engineering, procurement, and construction role.” (Id.) There is some dispute over
SMC Holdings’ precise role, but the parties agree that SMC Holdings was going to be an
investor in the project. (See id.; Anderson Decl. ¶¶ 6-7.)
II.
THE PINE RIDGE PROJECT
In early August 2012, SwitchingGears (through a wholly-owned subsidiary,
TREC-REDA, LLC) entered into a Joint Development Agreement and a Power Purchase
Agreement with the Renewable Energy Development Authority (“REDA”) of the Oglala
Sioux Tribe, in anticipation of what will be referred to as the “Pine Ridge Project.”
(Robinson Decl., Exs. D, E; McCann Decl. ¶ 8.) McCann contends that he initially
contemplated the Pine Ridge Project would include more than fifty wind turbines with a
project value of approximately $45 million. (McCann Decl. ¶ 10; Robinson Decl., Ex. F
at 1.) 2
Defendants chose US Bancorp Community Development Corporation (“US
Bank”) as an investor for the project; negotiations with US Bank resulted in a nonbinding
term sheet (the “US Bank Term Sheet”), executed on February 13, 2013. (Robinson
Decl., Ex. F; McCann Decl. ¶¶ 11-12.) Under the plan contemplated in the US Bank
Term Sheet, US Bank would contribute approximately $16,875,000 towards the project.
1
There is some dispute over whether Renewtech was going to be the manufacturer, (see
Pls.’ Mem. in Opp’n at 4-5, Dec. 22, 2016, Docket No. 85; see also Robinson Decl., Ex. I;
Lowell Dep. at 32:4-8; Robinson Decl., Ex. G; Smith Decl., Ex. 5 at 64:17-24), but the Court
does not find the disagreement relevant to this motion.
2
All record citations use internal pagination rather than CM/ECF pagination.
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(Robinson Decl., Ex. F at 3.) The US Bank Term Sheet provided several conditions for
its investments. (Id. at 6-7; Smith Decl., Ex. 6 (“Lowell Dep.”) at 79:8-80:24.) One
requirement was that SwitchingGears provide US Bank a guaranty against recapture of
investment tax credits.
(Robinson Decl., Ex. F at 13.)
According to McCann,
SwitchingGears had to demonstrate sufficient financial strength to support the guaranty.
(McCann Decl. ¶ 12.) SwitchingGears deposited $100,000 with US Bank as required by
the US Bank Term Sheet on February 15, 2013. (Robinson Decl., Ex. F at 16; McCann
Decl. ¶ 12.)
SwitchingGears’ primary contact at US Bank, Tracey Gunn Lowell, testified that
US Bank never advanced any money to SwitchingGears or held money on deposit in
relation to the Pine Ridge Project. (Lowell Dep. at 32:24-33:12; McCann Decl. ¶ 11.)
But, on March 4, 2013, McCann told Martineau in a text message that US Bank had “put
$1.6[ million] in escrow.”
(Decl. of Steve Anderson in Opp’n (“Second Anderson
Decl.”), Ex. E, Dec. 22, 2016, Docket No. 82; see also id., Ex. E-1; Decl. of Curtis D.
Smith in Opp’n (“Second Smith Decl.”), Ex. O (“Martineau Dep.”) at 99:14-100:18, Dec.
22, 2016, Docket No. 83.)
On June 4, 2013, US Bank notified SwitchingGears that it “ha[d] decided not to
pursue the [Pine Ridge Project] opportunity at this time.” (Robinson Decl., Ex. H.) US
Bank stated that it “remain[ed] committed to the intent and purpose of the project and . . .
would like to revisit the project with [SwitchingGears] once [its] plans and models [were]
more concrete.” (Id.) The letter stated that SwitchingGears’ $100,000 deposit was
applied to outstanding consulting fees. (Id.) The letter ended with the following:
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While we are terminating this specific term sheet, we respect the
relationship we have developed and would like to explore future
opportunities with you. But we would appreciate your written confirmation
and agreement that we are no longer negotiating the proposed investment in
the Pine Ridge “small-wind” turbines described in our February 14th term
sheet, that we have withdrawn our proposed terms, and that you have no
further rights, and we have no remaining obligations, arising out of that
term sheet, the proposed investment or our potential participation in the
project.
(Id.)
Lowell testified that US Bank withdrew from the Pine Ridge Project because the
valuation did not support SwitchingGears’ proposed model and because US Bank could
not get a tax opinion based on available information in a timely manner. (Lowell Dep. at
54:1-13.) Specifically, US Bank’s preliminary internal valuation estimated a total value
of around $12.5 million, rather than the $45 million SwitchingGears estimated. (Id. at
58:1-61:13.) Lowell stated that she and McCann spoke the day before she sent McCann
the letter, to make clear to McCann that US Bank was withdrawing, in part because the
Pine Ridge Project was not ready to move forward, and to state that if it became “more
concrete [the parties] could talk again.” (Id. at 55:1-22.)
Lowell testified that she did not have further substantive communication with
McCann aside from receiving an email from him in either late 2015 or early 2016 and a
cordial note at some point; Lowell did not consider either of these communications to be
attempts to reengage US Bank. (Id. at 56:21-57:17.) Lowell testified that, on December
27, 2013, US Bank was no longer involved in looking at the Pine Ridge Project. (Id. at
62:19-63:21.)
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According to McCann, he continued to communicate with Lowell and he
“believed that US Bank was still a viable possible investor for the [Pine Ridge] Project in
the future if [they] worked towards positioning [them]selves to better satisfy US Bank’s
proposed requirements, terms and conditions as set forth in the US Bank Term Sheet.”
(McCann Decl. ¶¶ 14.)
III.
SMC HOLDINGS’ INVOLVEMENT
McCann contends that, after US Bank withdrew its proposal, he sought other
investors and he and Anderson agreed that SMC would be an investor in the Pine Ridge
Project. (McCann Decl. ¶ 15.) According to Anderson, McCann stated that in order for
US Bank to participate in the Pine Ridge Project, SwitchingGears or another party had to
“agree to guaranty against any recapture of the federal tax credits associated with the
[Pine Ridge] Project, and demonstrate the financial ability to satisfy the guaranty.”
(Anderson Decl. ¶ 4.) Anderson contends that McCann suggested Vinco act as the
guarantor, but Anderson rejected the idea because he did not want to expose Vinco to the
guaranty; McCann then told Anderson “that if one of the Plaintiffs would make an equity
investment in [SwitchingGears], it could pay off a mortgage loan it owed to Lincoln
Savings Bank on [7Flags], thereby allowing [SwitchingGears] to demonstrate sufficient
financial strength to satisfy [US Bank’s] guaranty requirement without Vinco having to
also sign as a guarantor.” (Id. ¶ 5.)
As a result, SMC Holdings transferred $1.5 million to SwitchingGears on
December 30, 2013, and made a second payment of $1.2 million around February 27,
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2014. (Martineau Dep. at 61:22-63:21; Anderson Decl. ¶ 6.) The parties dispute the
purpose of these transfers. Anderson contends that he thought this “investment was the
last step needed to close the deal with [US Bank].” (Anderson Decl. ¶ 6.) Plaintiffs also
contend that these transfers were earnest money that McCann would hold in escrow
pending a final agreement and that the funds would be spent only for limited purposes
with Anderson’s express consent. (Id.; Martineau Dep. at 66:16-71:10.)
McCann testified that SMC Holdings’ payments were equity contributions to
SwitchingGears. (McCann Dep. at 99:9-101:12, 110:1-113:19.) According to McCann,
the parties contemplated that SMC Holdings would receive either 49% or 51% interest in
SwitchingGears. (Id. at 99:9-101:12.)
According to Anderson, Defendants used the $2.7 million provided by SMC
Holdings to pay Defendants’ creditors, “including the purchase of a personal
condominium in Hawaii, and motorhome and other personal expenses,” without getting
Anderson’s approval. (Anderson Decl. ¶ 8.)
IV.
THE TERM SHEET
Defendants and SMC Holdings executed a Term Sheet, dated just after the first
transfer, but not signed until the time of the second transfer in February 2014. (Robinson
Decl., Ex. I; Martineau Dep. at 61:22-63:21; McCann Decl. ¶ 16; see also Robinson
Decl., Exs. Q, R.) The Term Sheet contemplated a deal under which SMC Holdings
would contribute $2.7 million in exchange for a membership interest in SwitchingGears;
SMC Holdings would transfer $1.5 million for SwitchingGears to hold “as earnest money
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pending the negotiation and execution of the definitive agreements,” and after the
agreements were executed, the funds – along with another $1.2 million – would be
released to SwitchingGears for several specific purposes detailed in the Term Sheet.
(Robinson Decl., Ex. I at 1.) The Term Sheet stated that SwitchingGears could use SMC
Holdings’ contribution to pay off SwitchingGears’ mortgage on a particular property
(referred to elsewhere as the 7Flags property), ordinary and reasonable operational
expenses, and other approved payments. (Id.) The Term Sheet stated that the parties
would “negotiate in good faith with a view towards entering into one or more definitive
agreements” and that the Term Sheet itself was generally nonbinding. (Robinson Decl.,
Ex. I at 4.)
The parties continued to negotiate, but they never reached an agreement on the
essential terms or executed definitive agreements. (See Second Anderson Decl. ¶ 23;
Robinson Decl., Ex. J at 53:17-54:2.) Plaintiffs acknowledged in interrogatory responses
that they never purchased ownership interest in SwitchingGears. (Robinson Decl., Ex. O
at 2.)
McCann and Anderson did execute a separate contract, called the “Convertible
Loan Agreement,” on October 23, 2013. (Smith Decl., Ex. 4; Second Am. Compl. ¶ 43.)
Under the agreement, Anderson loaned McCann $370,000 and interest, in return for a
previous advance of that sum. (Smith Decl., Ex 4 ¶ 1.) McCann did not repay the loan
by the stated date, April 1, 2014, and Anderson contends that he never exercised his
option to accept an interest in another company, Scarab Investments, LLC, in lieu of
repayment. (Anderson Decl. ¶ 10.)
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V.
TERMINATION OF THE PINE RIDGE PROJECT
The Oglala Sioux Tribe terminated the project with SwitchingGears on October 8,
2014, stating that they had “not seen any progress that [would] give[ them] confidence in
moving forward with SwitchingGears.” (Robinson Decl., Ex. K.)
Defendants assert that Plaintiffs intentionally caused the tribe to terminate the Pine
Ridge Project in order to take the opportunity for themselves. Defendants rely on a text
message Martineau sent the day after the cancellation, in which he stated, “Barth had the
tribe fire [SwitchingGears] yesterday.” (Robinson Decl., Ex. S.) Plaintiffs subsequently
hired the subject of the text message, Barth Robinson, and the recipient of the text
message, Dave Loney. (Robinson Decl., Ex. N at 2-3; id., Ex. O at 6.)
Martineau admitted that the Oglala Sioux Tribe approached Renewtech about
replacing SwitchingGears on the Pine Ridge Project, and that they were told it was “not
possible until SwitchingGears ha[d] been terminated.” (Martineau Dep. at 90:6-15.)
Martineau stated that at the time “[n]othing was going anywhere” and “SwitchingGears
hadn’t put the . . . project together.” (Id. at 90:16-19.)
ANALYSIS
I.
MOTION TO STRIKE
As a preliminary issue, the Court will address Plaintiffs’ motion to strike the
declaration Defendants provided along with their reply brief. (Second Decl. of Matthew
C. Robinson in Supp. (“Third Robinson Decl.”), Jan. 5, 2017, Docket No. 92.) Plaintiffs
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argue that the filing is not permitted by local rule and contains facts that Defendants
should have included in their initial filing instead.
“Reply affidavits are appropriate only when necessary to address factual claims of
the responding party that were not reasonably anticipated.” Advisory Notes to Local
Rule 7.1(b)(2). While some of these documents are not particularly important to the
Court’s analysis, the Court finds them responsive to Plaintiffs’ arguments in opposition
that were not reasonably anticipated. Exhibits 1 through 3 relate to REDA’s agreements
with McCann, which are responsive to Plaintiffs’ new contention that McCann made
fraudulent statements about a land lease and Bureau of Indian Affairs ("BIA") approval.
Exhibits 4 and 5 involve Plaintiffs’ contacts with US Bank and are responsive to
Plaintiffs’ opposition because Plaintiffs submitted affidavits in which both Martineau and
Anderson stated that they were unaware US Bank had withdrawn from the US Bank
Term Sheet until they learned as much through this litigation. Exhibits 6 through 10
relate to Nathan Ante and are responsive to Plaintiffs’ assertions that McCann knew
about Ante’s second mortgage on the 7Flags property. Because these documents satisfy
Local Rule 7.1 requirements, the Court will deny Plaintiffs’ motion to strike.
II.
MOTIONS FOR SUMMARY JUDGMENT
Summary judgment is appropriate where “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(a). A fact is material if it might affect the outcome of the lawsuit, and a dispute is
genuine if the evidence is such that it could lead a reasonable jury to return a verdict for
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either party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48 (1986). A court
considering a motion for summary judgment must view the facts in the light most
favorable to the non-moving party and give that party the benefit of all reasonable
inferences that can be drawn from those facts. Matsushita Elec. Indus. Co. v. Zenith
Radio Corp., 475 U.S. 574, 587-88 (1986) (quoting United States v. Diebold, Inc., 369
U.S. 654, 655 (1962)). “When the moving party has carried its burden . . . its opponent
must do more than simply show that there is some metaphysical doubt as to the material
facts.” Id. at 586.
A.
DEFENDANTS’ MOTION FOR PARTIAL SUMMARY JUDGMENT
Defendants move for summary judgment on the following claims: common law
fraud (Count I), securities fraud (Count II), unjust enrichment (Count IV), conversion
(Count V), and civil theft (Count VI). The Court will address each claim below.
1.
Fraud Claim
Defendants argue that Plaintiffs’ fraud claim (Count I) fails. Under Minnesota
law, a fraud claim requires a showing that:
(1) there was a false representation by a party of a past or existing material
fact susceptible of knowledge; (2) made with knowledge of the falsity of
the representation or made as of the party’s own knowledge without
knowing whether it was true or false; (3) with the intention to induce
another to act in reliance thereon; (4) that the representation caused the
other party to act in reliance thereon; and (5) that the party suffer pecuniary
damage as a result of the reliance.
Damon v. Groteboer, 937 F. Supp. 2d 1048, 1071 (D. Minn. 2013) (quoting Specialized
Tours, Inc. v. Hagen, 392 N.W.2d 520, 532 (Minn. 1986)). Plaintiffs base their fraud
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claim on five representations. (Second Am. Compl. ¶ 22.) Defendants argue that none of
these representations support a fraud claim.
i.
Contracts with Oglala Sioux Tribe
First, Plaintiffs allege that McCann falsely stated that SwitchingGears “had an
enforceable contract with the Oglala Sioux Tribe to construct, supply, operate and sell
power generated from a wind farm.” (Id. ¶ 22a.) Plaintiffs contend that McCann made
this representation in several emails and messages, in August 2012, January 2013, March
2013, and July 2013. (Id. ¶ 12.)
Defendants argue that Plaintiffs have not provided any evidence suggesting these
statements were false. Defendants have provided the Joint Development Agreement and
Power Purchase Agreement with the Oglala Sioux Tribe, and those agreements were
entered into before the alleged misrepresentations occurred. (Robinson Decl., Exs. D, E.)
In response, Plaintiffs argue that Defendants read the complained-of conduct too
narrowly, and state – apparently for the first time – that they are basing the claim on
Defendants’ representation that they had lease agreements with the Oglala Sioux Tribe
and that the BIA signed off on those agreements. But, Plaintiffs did not mention this
basis for their claim in their complaint. Under Fed. R. Civ. P. 9(b), parties must plead the
circumstances supporting fraud claims with particularity.
One purpose of this
requirement is to “ensure[] that a defendant is given sufficient notice of the allegations
against him [or her] to permit the preparation of an effective defense.”
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Parnes v.
Gateway 2000, Inc., 122 F.3d 539, 549 (8th Cir. 1997) (quoting Weisburgh v. St. Jude
Med., Inc., 158 F.R.D. 638, 642 (D. Minn. 1994)).
Plaintiffs’ new, specific allegations that Defendants made false statements
regarding lease agreements and BIA approval were not mentioned in the complaint or
raised previously; accordingly, the Court will not consider those allegations here.
Plaintiffs must provide evidence related to their allegation that Defendants
misrepresented the existence of “an enforceable contract . . . to construct, supply, operate
and sell power generated from a wind farm to be located on tribal land,” and why the
Joint Development Agreement and Power Purchase Agreement do not satisfy the
representation. (Second Am. Compl. ¶ 22a.)
When asked about this claim, Martineau suggested Defendants’ representation was
false because the entity that entered into the agreements on behalf of the tribe may not
have had authority to do so, rendering the agreements unenforceable. (Martineau Dep. at
94:20-98:2.) Martineau agreed that this was his sole basis for asserting the statements
were false. (Id. at 97:24-98:2.) But, even if this authority was lacking, there is no
indication McCann knew about it; McCann states that he believed the agreements were
enforceable and that he would not have wasted his time negotiating and entering into
agreements that he knew were not binding. (McCann Decl. ¶ 9.)
Plaintiffs also argue that the agreements were unenforceable and McCann knew
they were unenforceable because they were signed by a non-existent entity, “TRECREDA, LLC.” (See Second Smith Decl., Ex. B.) However, even if TREC-REDA, LLC
was not formed at the time of the contract, that does not necessarily render the contract
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unenforceable or show that McCann knew the contracts were unenforceable. See, e.g.,
Williston on Contracts § 35:71 (“Contracts are frequently made by promoters on behalf
of corporations they expect to organize.”); see also Kilstofte Assocs., Inc. v. Wayzata
Bayview Ltd. P’ship, No. C2-93-856, 1994 WL 11254, at *2 (Minn. Ct. App. Jan. 18,
1994) (“A promoter enters a contract for the purpose of promoting and organizing an
unformed corporation and acts on its behalf.”)
Overall, the Court finds insufficient evidence to establish a fact question over
whether Defendants misrepresented that they entered into an enforceable contract to
construct, supply, operate, and sell power from a wind farm with the Oglala Sioux Tribe.
The Court will grant Defendants’ motion with regard to this basis for Plaintiffs’ fraud
claim.
ii.
McCann was Sole Member of SwitchingGears
Second, Plaintiffs base their fraud claim on McCann’s statement that “he was the
sole member and owner of [SwitchingGears].”
(Second Am. Compl. ¶¶ 17, 22b.)
Plaintiffs allege McCann made this statement “orally on numerous occasions, including,
but not limited to, in November and December 2013.” (Id. ¶ 17.)
Defendants argue that this allegation does not support a fraud claim because
Plaintiffs knew that McCann was not the sole member and owner of SwitchingGears
before paying any funds to SwitchingGears, and thus, the alleged misrepresentation did
not cause Plaintiffs to advance those funds. Defendants point to an email from October
24, 2013, in which Plaintiffs’ counsel acknowledged that James McCann (McCann’s
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father) was noted as the sole member of SwitchingGears on the operating agreement,
(Robinson Decl., Ex. T at 2), and Martineau’s admission that he knew about James
McCann, (Martineau Dep. at 106:20-107:5).
Plaintiffs admit that they were aware of the interest held by McCann’s father, but
state that their claim is based on the alleged interest Nathan Ante had in SwitchingGears
and the 7Flags property, which Defendants failed to disclose. (See Second Smith Decl.,
Exs. C-E.) But as discussed above, Plaintiffs are limited by the claims they pleaded in
their complaint, especially in light of the fact that they must plead fraud claims with
particularity. Accordingly, Plaintiffs alleged only that McCann misrepresented that he
was the sole member of SwitchingGears; Plaintiffs could not have relied upon this
representation because they knew it was false.
The Court will therefore grant
Defendants’ motion on this basis for Plaintiffs’ fraud claim.
iii.
Statements Regarding US Bank’s Involvement in the Pine
Ridge Project
Next, Plaintiffs rely on the alleged misrepresentation “[t]hat US Bank had agreed
to invest in the Pine Ridge [P]roject if Plaintiffs purchased a membership interest in
[SwitchingGears].” (Second Am. Compl. ¶ 22c.) More specifically, Plaintiffs alleged
that McCann stated in a November 26, 2012, email and in the Term Sheet that US Bank
would contribute “$16,875,000, subject to [SwitchingGears] and/or Vinco providing a
guaranty in the event of a recapture. . . and demonstrating the financial ability to satisfy
the guaranty.” (Id. ¶ 14.) Plaintiffs alleged that this representation was false because
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“US Bank had not agreed to invest in the Pine Ridge [P]roject conditioned only on
increasing [SwitchingGears’] net worth.” (Id. ¶ 24c.)
Defendants argue that this claim fails because Plaintiffs do not provide any
evidence that McCann represented that increasing SwitchingGears’ net worth was the
sole condition for US Bank’s investment and that any representation that it was a
precondition for the investment was not false.
Plaintiffs point to McCann’s false statement that US Bank had placed $1.6 million
in escrow for the Pine Ridge Project. (Second Anderson Decl., Exs. E, E-1.) Both
Anderson and Martineau state that McCann represented to them that Plaintiffs’
investment was “the last item necessary for [US Bank] to make a firm commitment to
invest in excess of $16,000,000 in the [Pine Ridge] Project.” (Second Anderson Decl.
¶ 12; Decl. of Steve Martineau in Opp’n (“Martineau Decl.”) ¶ 12, Dec. 22, 2016, Docket
No. 81.) Plaintiffs also point to documentary evidence in which McCann pushed the idea
that investment in SwitchingGears sufficient to support the guaranty was the last step to
US Bank’s investment. (See Anderson Decl., Ex. D (email showing that in response to
Anderson’s question regarding what items they needed to satisfy US Bank, McCann
focused on the guaranty funding); id., Ex. G (McCann stating “US Bank is ready to go,
but wants to verify the Guarantee and complete Deloitte consulting and tax
engagement”); id., Ex. H (email from November 2013 stating “my reason for this sudden
push is US Bank has the[ir] internal tax credit conference next week, so it will fast track
us to loan committee due to good timing”); id., Ex. I (McCann on December 27, 2013,
discussing a “list of items US Bank wants to see paid off”).)
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McCann denies that he ever said that the guaranty was the sole requirement for US
Bank’s investment and contends that Plaintiffs were aware that there were other
requirements. (McCann Decl. ¶ 12.) Along with their reply brief, Defendants provided
some emails suggesting that Plaintiffs were aware of the US Bank Term Sheet’s
requirements and that US Bank had terminated the US Bank Term Sheet.
(Third
Robinson Decl., Ex. 4 (McCann and Anderson emailing regarding “reengag[ing]” with
US Bank among other things and stating Anderson and Lowell spoke on the phone in
September 2013).)
This appears in conflict with Anderson’s and Martineau’s
declarations that McCann never told Plaintiffs that US Bank withdrew from the US Bank
Term Sheet. (Second Anderson Decl. ¶ 14; Martineau Decl. ¶ 13.) This also appears to
conflict with Lowell’s testimony that she did not have conversations with McCann after
the termination letter. (Lowell Dep. at 52:21-63:21.)
Considering this conflicting evidence, the Court finds questions of material fact
remain over the falsity of McCann’s representations regarding US Bank’s involvement in
the Pine Ridge Project and the extent to which Plaintiffs relied on those statements.
Accordingly, the Court will deny Defendants’ motion on this claim.
iv.
Mortgage was the Only Encumbrance on 7Flags Property
Plaintiffs also rely on the alleged false representation “[t]hat the only encumbrance
on 7F[lags]’s property was a mortgage to Lincoln Savings Bank with an outstanding
balance owed of approximately $1,057,000.” (Second Am. Compl. ¶ 22d.) Plaintiffs
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contend that this statement was false because “at least one other mortgage, in the amount
of $800,000, existed as well as other debt.” (Id. ¶ 24d.)
Defendants contend this claim fails because McCann did not know about this
second mortgage. McCann asserts that he was unaware that Ante “fraudulently executed
a mortgage on the property in the approximate amount of $1 million without [his]
knowledge or authorization.” (McCann Decl. ¶ 19.) In response, Plaintiffs provide a
declaration from Ante stating that he had advised McCann that he wished to file a second
mortgage and that McCann gave him permission to do so. (Decl. of Nate Ante in Opp’n
(“Ante Decl.”) ¶ 3, Dec. 22, 2016, Docket No. 80.) The documentary evidence provided
by the parties does not resolve the dispute.
It shows only that McCann or
SwitchingGears owed Ante money at the time, (see Ante Decl., Exs. B, C), and that Ante
admitted he did not have written authorization to execute the mortgage, (Third Robinson
Decl., Ex. 8 at 2).
Overall, based on this conflicting testimony and evidence, the Court finds
questions of material fact remain over whether McCann knew about the second mortgage
on the 7Flag property and therefore the Court will deny Defendants’ motion on this
claim.
v.
Statements Regarding Use of SMC Holdings’ Funds
Finally, Plaintiffs rely on the alleged misrepresentation that the $2.7 million
advance “would be placed in an escrow account that only Anderson and McCann had
signing authority on, and that none of these funds would be spent or transferred without
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the express consent of Anderson.” (Second Am. Compl. ¶ 22e.) Plaintiffs contend this
was false because the funds were not placed in an escrow account, used to pay the 7F
mortgage, or used on expenses for the Pine Ridge Project. (Id. ¶ 24e.)
Defendants first argue that Plaintiffs could not have relied on the statements in the
Term Sheet in making their first payment because the Term Sheet was not executed until
months after the first payment. But the Court finds the Term Sheet is still evidence of the
parties’ discussions and supports the idea that such representations were made before the
first payment as well. (See Second Anderson Decl. ¶ 21.) Plaintiffs also do not solely
base this claim on the Term Sheet. Plaintiffs provide testimony from Anderson and
Martineau stating that McCann told them the funds would be held in escrow pending
final agreement. (Martineau Decl. ¶¶ 14-16; Second Anderson Decl. ¶¶ 16-22; Martineau
Dep. at 66:16-67:6.) Plaintiffs also rely on some supporting documentary evidence. For
example, on November 12, 2013, McCann emailed Anderson stating that an account was
opened at Lincoln Savings Bank with both McCann and Anderson as signers and that the
money could be “held there as the lawyers do their thing with formations and legal
documents.” (Second Anderson Decl., Ex. H.) In the meantime, the email stated, the
funds would help show US Bank that SwitchingGears could support a guaranty because it
would reflect as a SwitchingGears account. (Id.)
Other documentary evidence does not clearly support either side.
McCann
discussed creating an account titled “escrow” with additional signers; but, in those
emails, McCann still discussed using the funds to pay off the mortgage on the 7Flags
property in January. (Second Smith Decl., Exs. H, I.) It appears an account titled
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“SwitchingGears Escrow” was opened, but did not receive any large deposits and did not
have Anderson as a signer. (Id., Ex. K.) The funds are reflected on SwitchingGears’
general ledger, (id., Ex. F at SWG000046; Id., Ex. G at SWG000072), but it is not clear
whether that also means that it was not deposited in the “escrow” account, which
McCann’s email suggests also would have been a SwitchingGears’ account.
Additionally, Defendants note that Plaintiffs could not identify a particular date or
time for these representations. (See Martineau Dep. at 66:16-77:1.) Defendants also
point out that there is evidence Martineau knew that some of the initial $1.5 million was
being used prior to the second transfer. (Robinson Decl., Ex. AA (Martineau asking
McCann if the SMC Holdings’ contribution went into the escrow account, but also
stating, “[i]s the full amount in or if I remember right you or [Anderson] told me that
some had been put to work already”).)
Considering the evidence in the light most favorable to Plaintiffs, the Court finds
questions of material fact remain over whether Defendants falsely represented that they
would place Plaintiffs’ funds in an escrow account with Anderson as a signer, pending
final agreement. The Court will therefore deny Defendants’ motion on this claim.
2.
Securities Fraud Claim
Defendants argue that they are entitled to summary judgment on Plaintiffs’ claim
for securities fraud under the Minnesota Securities Act (the “Act”) (Count II) because
Plaintiffs do not qualify as “purchasers” under the Act. The civil liability provision of the
Act provides:
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A person is liable to the purchaser if the person sells a security in
violation of section 80A.49 or, by means of an untrue statement of a
material fact or an omission to state a material fact necessary in order to
make the statement made, in light of the circumstances under which it is
made, not misleading, the purchaser not knowing the untruth or omission
and the seller not sustaining the burden of proof that the seller did not know
and in the exercise of reasonable care, could not have known of the untruth
or omission.
Minn. Stat. § 80A.76(b) (emphasis added).
Plaintiffs admitted in interrogatories that they did not “purchase or otherwise
obtain[] any securities of, or ownership interest in, SwitchingGears.” (Robinson Decl.,
Ex. O at 2.) Plaintiffs do not now argue that they ever purchased a security; instead, they
argue that the Court should broadly construe “purchaser” to include offerees of securities.
Plaintiffs also note that the general fraud provision of the Act covers fraudulent actions
made “in connection with the offer, sale, or purchase of a security.” § 80A.68 (emphasis
added). Plaintiffs contend that it would be incongruous for the legislature to provide for
criminal liability for fraudulent statements in connection with offers of securities while
not providing a civil remedy.
The parties did not provide, and the Court did not find, any Minnesota case
interpreting the term “purchaser” in § 80A.76(b). The Court finds that the civil liability
provision’s use of the word “purchaser” in contrast with fraud provision’s broader
language suggests that civil liability extends only to actual purchases. This reading is
also supported by the fact that the only civil remedy available under the Act is the actual
damages resulting from the sale: A purchaser may “recover the consideration paid for the
security, less the amount of any income received on the security . . . or for actual
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damages as provided in paragraph (3).” § 80A.76(b)(1). And actual damages include
“the amount that would be recoverable upon a tender less the value of the security when
the purchaser disposed of it” as well as interest, costs, and attorneys’ fees.
§ 80A.76(b)(3). Thus, it is not clear what damages would be available for an aborted
sale.
Moreover, courts have reached the same conclusion regarding other states’
securities fraud provisions.
Two courts found no remedy under the Utah Uniform
Securities Act for an incomplete sale of a security because the potential buyer was not a
“purchaser.” Levitz v. Warrington, 877 P.2d 1245, 1247 (Utah Ct. App. 1994); see also
IOSTAR Corp. v. Stuart, No. 07-133, 2009 WL 270037, at *11 (D. Utah Feb. 3, 2009)
(“Potential purchasers do not have a cause of action [under the Utah Uniform Securities
Act].”). Two courts reached the same conclusion interpreting the Washington Securities
Act. See Interlake Porsche & Audi, Inc. v. Bucholz, 728 P.2d 597, 606 (Wash. Ct. App.
1986) (finding the Washington statute “limit[ed] civil actions . . . to persons injured by
the actual purchase or sale of a security in violation of the statute”); see also Wealth by
Health, Inc. v. Ericson, No. 09-1444, 2011 WL 1214176, at *4 (W.D. Wash. Mar. 29,
2011).
Plaintiffs do not assert that they purchased a security interest, and therefore, they
are not “purchasers” entitled to bring a claim under the Act. The Court will therefore
grant Defendants’ motion on Plaintiffs’ securities fraud claim.
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3.
Unjust Enrichment, Conversion, and Civil Theft Claims
Defendants argue that Plaintiffs’ unjust enrichment, conversion, and civil theft
claims all fail because they are based on the same alleged fraudulent misrepresentations
discussed above. All of these claims require a finding that Defendants’ retention of the
funds was unjust, improper, or unlawful in some way. See Cobb v. PayLease LLC, 34 F.
Supp. 3d 976, 988 (D. Minn. 2014) (stating that “conversion is ‘an act of willful
interference with personal property, done without lawful justification’” (quoting DLH,
Inc. v. Russ, 566 N.W.2d 60, 71 (Minn. 1997))); Schumacher v. Schumacher, 627
N.W.2d 725, 729 (Minn. Ct. App. 2001) (stating that unjust enrichment requires retention
of a benefit in a manner that is unjust, fraudulent, illegal, or otherwise demonstrates
moral wrongdoing); Minn. Stat. § 604.14 (civil liability for theft requires stealing
property from another).
Defendants contend that because no questions of material fact remain over the
alleged fraudulent misrepresentations, there are also no remaining questions of material
fact over whether Defendants’ retention of the funds was unjust, improper, or unlawful.
Because the Court denies Defendants’ motion with regard to several of the fraud claims,
it will also reject their argument that Plaintiffs’ unjust enrichment, conversion, and civil
theft claims fail on that basis.
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B.
PLAINTIFFS’ MOTION FOR SUMMARY JUDGMENT
Plaintiffs move for summary judgment on Defendants’ counterclaims and for
affirmative summary judgment on Count III of their complaint, in which they seek to
recover $370,000, plus interest, for breach of the Convertible Loan Agreement.
1.
Defendants’ Counterclaims Based on Joint Venture
Plaintiffs argue that Defendants’ counterclaims fail because they are all premised
on the allegation that SwitchingGears and Plaintiffs entered into a joint venture or
partnership.
Defendants’ counterclaims include the following:
breach of the joint
venture agreement (Count I), negligence based on the duty of care owed by jointventurers or partners (Count II), breach of fiduciary duty based on the duties owed by
joint-venturers or partners (Count III), and breach of the duty of loyalty based on the
duties owed by joint-venturers or partners (Count IV). Accordingly, if the Court finds –
construing the facts in the light most favorable to Defendants – that the parties did not
establish a joint venture or partnership, all of Defendants’ counterclaims fail.
Defendants acknowledge that the parties never executed a written joint venture
agreement, but allege that SwitchingGears and Plaintiffs entered into “an implied joint
venture agreement . . . based on the parties’ clear actions, communications and intent.”
(Answer & Countcls. at 21, Feb. 9, 2016, Docket No. 45.) The party arguing for the
existence of a joint venture bears the burden of proof, Beehner v. Cragun Corp., 636
N.W.2d 821, 832 (Minn. Ct. App. 2001), and must establish the following four elements:
(1) each party must make a contribution of money, property, time, or skill
to the enterprise; (2) the parties must have joint proprietorship and control
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such that each party has a proprietary interest and the right of mutual
control over the enterprise; (3) the parties must have an express or implied
agreement to share the profits, but not necessarily the losses, from the
enterprise; and (4) the parties must have entered into an express or implied
contract.
Dorsey & Whitney LLP v. Grossman, 749 N.W.2d 409, 416 (Minn. Ct. App. 2008).
Plaintiffs argue that Defendants cannot meet elements two through four.
i.
Joint Control
Plaintiffs frame the second prong of the test as requiring that the parties had joint
control over each other’s businesses, citing Powell v. Trans Global Tours, Inc., 594
N.W.2d 252, 256 (Minn. Ct. App. 1999), and Dorsey & Whitney LLP, 749 N.W.2d at
416. But those cases stated the test as requiring a “right of mutual control over the
subject matter of the property engaged in the venture,” Powell, 594 N.W.2d at 256
(emphasis added), and that “each party has a proprietary interest and the right of mutual
control over the enterprise,” Dorsey & Whitney LLP, 749 N.W.2d at 416 (emphasis
added). As applied in those cases, the test turned on whether one party had control over
the other, rather than mutual right of control over a third entity or shared project,
primarily because there was no joint enterprise that the parties were controlling.
In Powell, the court found no joint venture between a tour operator and a hotel
because there was no evidence that the tour operator “had any control or direction of the
means the hotel used to accommodate guests” or that “the hotel had any control or
direction of the means [the tour operator] used to arrange tours.” Powell, 594 N.W.2d at
256. Essentially, the parties had different roles and no control over each other’s roles. In
- 26 -
Dorsey & Whitney LLP, the court found an attorney fee arrangement between a patent
owner and a law firm did not amount to a joint venture because the firm did not have
control over the client’s business. 749 N.W.2d at 416-17 (finding insufficient evidence
of joint control where the influence did not extend “beyond the scope of the attorneyclient relationship”). In both cases there was no true “joint enterprise” asserted.
Here, Defendants assert there was a joint enterprise between the parties, and thus,
they must show a mutual right of control over that joint enterprise – rather than control
over each other as member entities. Defendants point to record evidence showing that
the parties jointly engaged in the following activities: reviewed fund expenditures, (Decl.
of Matthew C. Robinson in Opp’n (“Second Robinson Decl.”), Ex. A, Dec. 22, 2016,
Docket No. 87); held frequent phone conferences and meetings, (id., Ex. B; Decl. of
Aaron McCann in Opp’n (“Second McCann Decl.”) ¶ 5, Dec. 22, 2016, Docket No. 86);
maintained an electronic management database in order to delegate responsibility to one
another, (Second Robinson Decl., Ex. C; Second McCann Decl. ¶ 6); jointly developed,
traveled to, and pitched potential clients, (Second Robinson Decl., Ex. D; Second
McCann Decl. ¶ 7); sought financing and applied for grants, (Second Robinson Decl., Ex.
E; Second McCann Decl. ¶ 8); and retained counsel and consultants, (Second Robinson
Decl., Ex. F). The record evidence could support a conclusion that the parties exercised
joint control over the Pine Ridge Project, and not that they had distinct and separate roles
outside of each other’s control.
Accordingly, the Court finds questions of material fact remain over whether the
parties had a mutual right of control over a joint enterprise.
- 27 -
ii.
Profit Sharing
Plaintiffs contend that Defendants have not established the profit sharing element
for forming a joint venture because McCann admitted the parties never reached a final
agreement regarding how to split profits between the parties. (See McCann Dep. at
222:11-224:8.) Defendants contend that this testimony only establishes that the parties
never reached a final agreement as to how to allocate profits among themselves for the
Pine Ridge Project, but they argue that there is clear evidence that the parties generally
agreed to share profits and allocate losses with regard to the joint venture as a whole.
The cases Plaintiffs cite suggest that there is insufficient profit sharing “[i]f the
amount that one party receives is fixed, regardless of the success or failure of the
enterprise.” Duxbury v. Spex Feeds, Inc., 681 N.W.2d 380, 390 (Minn. Ct. App. 2004);
see Meyers v. Postal Fin. Co., 287 N.W.2d 614, 618 (Minn. 1979) (finding no profit
sharing where one party received fixed payments from the other, but it had no right to
share in that party’s profits); Treichel v. Adams, 158 N.W.2d 263, 266 (Minn. 1968)
(finding that payment of a debt by net proceeds does not establish profit sharing for a
joint venture).
Additionally, receiving a portion of another party’s profits in lieu of a fee for
services may not be considered profit sharing for joint venture purposes, at least where
there was insufficient evidence of other joint venture requirements. Ringier Am., Inc. v.
Land O’Lakes, Inc., 106 F.3d 828, 828-29 (8th Cir. 1997) (finding that while a company
“received twenty percent of [the other company’s] profits, that was in lieu of part of its
- 28 -
publishing fee, which is not profit sharing ‘in [a] manner consistent with a status of joint
adventure’” (quoting Rehnberg v. Minn. Homes, 52 N.W.2d 454, 457 (Minn. 1952)); see
also Rehnberg, 52. N.W.2d at 457 (finding no profit sharing where the plaintiff was to
share in profits “only for the specific purpose of compensating him as an employe[e]” but
also noting “the indispensable element of a contract . . . is also absent”); Anderson v. ROI
Props, Inc., Nos. C3-92-2539, C5-93-74, C9-93-76, C0-93-113, 1993 WL 319066, at *4
(Minn. Ct. App. Aug. 24, 1993) (fixing compensation as a percentage of rents received,
regardless of net profit, was not profit sharing for a joint venture).
Here, the parties certainly contemplated profit sharing consistent with a joint
venture. (See, e.g., Second Robinson Decl., Exs. G, K (emails discussing the joint
venture and intent to make profit); Second McCann Decl. ¶ 9 (stating that the parties
“each invested a substantial amount of money, time and energy into developing the joint
venture and Pine Ridge project” and that “[i]t was fully expected and agreed that profits
resulting therefrom would be shared amongst and between the parties”).) This record
evidence supports a general agreement to share profits for the Pine Ridge Project and
other similar projects. In fact, it is difficult to understand the parties’ actions, unless there
was some agreement to share profits. See Hellenic Lines, Ltd. v. Commodities Bagging &
Shipping, Process Supply Co., 611 F. Supp. 665, 681 (D.N.J. 1985) (finding an
agreement to share profits, contrary to the parties’ assertions, where the parties’ actions
- 29 -
would have “run[] counter to logic” if no such agreement existed). 3 The facts here show
extensive ties between the parties and actions that only make sense if the parties intended
to share profits. Accordingly, the Court finds sufficient evidence regarding the profitsharing prong.
iii.
Implied Joint Venture Agreement
Plaintiffs lastly argue that Defendants have not provided evidence of a joint
venture agreement. To establish a joint venture existed, “there must be a contract,
whether express or implied, showing that a joint []venture was in fact entered into.”
Rehnberg, 52 N.W.2d at 457.
3
The Hellenic Lines court stated:
It runs counter to logic and experience that one would borrow $50,000 at the
prime rate plus, and thereupon loan it, interest free, to a pair of individuals one
barely knew. It seems far more likely that that $50,000 – whether viewed as an
investment in, or a loan to, the venture – formed part of the basis for a share of the
venture’s profits. Also counter to logic and experience is the defendants’
contention that, despite their enlarged role in the management and financing of
the venture, from the grain purchase through the bagging, [the individual
defendants] wanted nothing for their efforts but repayment of their capital
contributions. Far more likely, the enlarged role entailed an enlarged share of the
profits.
The court concludes, therefore, that the defendants did agree to share profits, and
more broadly, to enter into a joint venture. If the defendants had been
“independent contractors” engaging in separate, interlocking activities, the court
does not believe there would have been such a blurring of functions and payments
as eventually occurred, or that the parties would have been so incapable of
explaining what they had to gain economically from the series of transactions.
611 F. Supp. at 681.
- 30 -
The parties agree that they negotiated about entering into a joint venture
agreement. But Plaintiffs argue that the negotiations never concluded and they never
entered into a final agreement. McCann and the attorney involved in crafting the joint
venture “architecture” both testified that there was never a formal, final agreement.
When asked whether a final agreement was ever reached among the parties, the attorney
stated “[I]f you mean a final agreement that codified the entire business architecture as
we were hoping to do, the answer is no.” (Smith Decl., Ex. 1 at 38:14-20.) McCann
stated “[t]here was no formal joint venture,” that there was no agreement “other than
verbal,” and that the verbal agreement “would change a lot.” (McCann Dep. at 216:20218:20.) McCann also could not say when any party became a member of the joint
venture. (Id. at 219:22-220:21.)
But, in determining whether there was a joint venture agreement, the Court may
consider “the conduct of the parties to determine whether that conduct demonstrates an
implied contract or implied agreement of partnership or joint venture, or some tacit
understanding between the parties.” Carlson v. Olson, 256 N.W.2d 249, 254 (Minn.
1977) (internal citations omitted); see also McDonald v. Cahlander, No. A07-1376, 2008
WL 3288766, at *5 (Minn. Ct. App. Aug. 12, 2008) (“Although no written agreement
established a joint venture . . ., an implied contract formed through mutual assent or
conduct suffices to establish a joint venture.”); Fritz v. Strouth, No. C3-00-899, 2001 WL
69944, at *4 (Minn. Ct. App. Jan. 30, 2001) (affirming trial court’s finding of “a joint
venture based on the conduct of the parties in conceiving the project, financing the
project, and investing their time, energy, and labor in the renovation”).
- 31 -
Here, the parties developed and pitched potential customers together, (Second
McCann Decl. ¶ 7; Second Robinson Decl., Ex. D), and the parties sought funding
together, (Second McCann Decl. ¶ 8; Second Robinson Decl., Ex. E). Plaintiffs also
admit providing $2.7 million dollars to Defendants along with other costs for the Pine
Ridge Project. (Second Am. Compl. ¶ 23; Second Robinson Decl., Ex. A.)
Moreover, in contrast to Plaintiffs’ reliance on McCann’s and Headley’s supposed
admissions that there was no joint venture agreement, Martineau’s testimony suggests the
opposite. When asked if he believed the parties were engaged in a joint venture, he stated
“A definitive one? No. This one (indicating), yes, in a joint venture for Pine Ridge.”
(Second Robinson Decl., Ex. U at 91:2-6.) When asked again whether “Vinco, SMC,
Renewtech, and SwitchingGears were involved in a Pine Ridge joint venture,” Martineau
answered affirmatively. (Id. at 91:7-10.)
Considering the parties’ conduct and conflicting testimony, the Court finds
questions of material fact remain over whether the parties entered into an implied joint
venture agreement. Accordingly, the Court rejects Plaintiffs’ argument that Defendants’
counterclaims fail due to the lack of a joint venture. 4 The Court will therefore deny
Plaintiffs’ motion as to Defendants’ claims for which lack of a joint venture was
4
Because the Court finds sufficient evidence regarding a joint venture agreement, the
Court need not address whether the parties established a partnership; but the Court notes that the
same evidence would suggest the existence of a partnership. See Minn. Stat. § 323A.0202(a);
Severson v. Kevin Roche Fin. Servs., No. C2-00-1834, 2001 WL 741396, at *3 (Minn. Ct. App.
July 3, 2001) (finding a partnership existed where one party did not intend to form a partnership
but where the parties agreed to share profits and contribute to expenses).
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Plaintiffs’ only argument – the breach of contract claim (Count I), breach of fiduciary
duty claim (Count III), and breach of duty of loyalty claim (Count IV).
2.
Defendants’ Negligence Counterclaim (Count II)
Plaintiffs make several additional arguments with regard to Count II of
Defendants’ counterclaims, in which Defendants allege that Plaintiffs acted negligently
and failed to “exercise reasonable care in the performance of their respective duties
related to the Joint Venture and Project by failing to meet numerous established deadlines
and quality specifications for their tasks.” (Answer & Countercls. at 14-15.) Plaintiffs
contend that they are entitled to summary judgment on this claim because Defendants
have failed to identify the standard of care or any specific acts or omissions on which
they base their claim.
In response to interrogatories, Defendants stated that the Plaintiffs owed duties
based on their status as joint-venturers, co-partners, or co-fiduciaries, and that they
beached those duties by “failing to satisfactorily. . . perform their roles and duties under
the Joint Venture Agreement as well as by failing to satisfy fiduciary duties owed to
Defendants.”
(Second Robinson Decl., Ex. L at 6-7.)
Defendants also state more
specifically that Renewtech failed to “manufacture, produce or provide upon
request . . . new, non-refurbished parts, blades and towers, compliant warranties, part
certifications, turbine certifications,” and other items, and that SMC Holdings failed to
distribute agreed upon funds in several instances. (Smith Decl., Ex. 10 at 10-12.)
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Defendants’ claim fails as an improper claim for negligent breach of contract. “A
tort is usually defined as a civil wrong independent of a contract,” and “[t]he distinction
[between the two] is . . . whether a duty has been breached other than one established by
contract.” D & A Dev. Co v. Butler, 357 N.W.2d 156, 158 (Minn. Ct. App. 1984). There
is no cause of action for negligently performing a contract. See Lesmeister v. Dilly, 330
N.W.2d 95, 102 (Minn. 1983).
Defendants’ claim falls within this description:
Defendants point to the roles that Plaintiffs were meant to play in the Pine Ridge Project,
(see Smith Decl., Ex. 1 at 25:8-27:3), and then allege that they breached their duties by
failing to complete them. For example, Defendants alleged in their counterclaims that
“SMC fundamentally failed in its crucial role . . . by failing to advance funds in
accordance with established timelines necessary to procure requisite tax credits for the
[Pine Ridge] Project.” (Answer & Countercls. at 12.) The Court will therefore grant
Plaintiffs’ motion with regard to Defendants’ negligence claim (Count II) because it is an
improper claim for negligent performance of a contract.
3.
Summary Judgment on Count III
Next, Plaintiffs seek affirmative summary judgment on their claim for breach of
the Convertible Loan Agreement. McCann and Anderson executed the Convertible Loan
Agreement on October 23, 2013. (Second Robinson Decl., Ex. O; Second Am. Compl.
¶ 43.) Under the agreement McCann agreed to pay Anderson $370,000 and interest, in
return for a previous advance of that sum. (Second Robinson Decl., Ex. O ¶ 1.) Under
the terms of the Convertible Loan Agreement, the balance was due “on or before April
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1st, 2014 should the convertible transaction not commence.” (Id. ¶ 2.) The “convertible
transaction” refers to the option that Anderson could opt instead “for the distribution of
51% partnership interest of Scarab Investments LLC in lieu of loan and accrued interest
payback.” (Id. ¶¶ 2-3.)
McCann acknowledged signing the Convertible Loan Agreement and that he did
not timely pay the sum to Anderson. (McCann Dep. at 133:22-134:6, 135:15-18.) But,
according to McCann, Anderson exercised his right to take ownership of Scarab
Investments LLC (“Scarab Investments”) in lieu of repayment. (Id. at 135:25-136:1,
138:2-17.) McCann testified that Anderson exercised that option around the time they
signed the Convertible Loan Agreement. (Id. at 138:11-17.) McCann is the sole member
of Scarab Investments and its sole asset is another LLC, Jacobs Electric LLC (“Jacobs
Electric”). (Id. at 138:20-139:20.) McCann stated that he transferred ownership when he
“handed [Anderson or Martineau] . . . the corporate books.” (Id. at 139:21-25, 140:9-16.)
Plaintiffs argue that McCann’s testimony does not establish a question of material
fact because the factual context makes McCann’s version of events implausible and
Defendants have not provided persuasive evidence suggesting otherwise. Matsushita
Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 575 (1986) (“[I]f the factual
context renders respondents’ claim implausible – if the claim is one that simply makes no
economic sense – respondents must come forward with more persuasive evidence to
support their claim than would otherwise be necessary.”). Plaintiffs note there is no
evidence showing Anderson received ownership of Scarab Investments.
Plaintiffs
contend that it is implausible that Anderson would have chosen ownership of Scarab
- 35 -
Investments, considering neither Scarab Investments nor Jacobs Electric has ever filed
tax returns. (Smith Decl., Ex. 5 at 27:20-28:15.) Additionally, Plaintiffs contend it is
unclear why the parties would style the Convertible Loan Agreement as they did if
Anderson intended to immediately exercise the option to take ownership of Scarab
Investments. (See McCann Dep. at 141:5-15.)
However, this claim is not as straightforward as Plaintiffs assert. Defendants
provide record evidence suggesting that Plaintiffs were involved with Jacobs Electric. In
response to requests for admission, Plaintiffs denied having an ownership interest in
Jacobs Electric and Scarab Investments, but admitted taking actions in the name of
Jacobs Electric, stating that they did so at the request of Defendants. (Second Robinson
Decl., Ex. M at 6.) Minutes for a meeting of Jacobs Electric show that Martineau
replaced Ante as registered agent and president of the company. (Id., Ex. N at 1-2.)
Martineau also acted on behalf of Jacobs Electric by opening a bank account in Jacobs
Electric’s name, (id., Ex. P); retaining attorneys and consultants on behalf of Jacobs
Electric, (id., Ex. F); paying various expenses on behalf of Jacobs Electric, (id., Ex. A);
and using a Jacobs Electric email address, (id., Ex. Q).
Further, Defendants also cite an email from a few weeks before the date of the
Convertible Loan Agreement with a subject line “Jacobs Wind Electric Company
Transaction,” in which McCann proposed selling shares to Anderson in Scarab
Investments and another company for $370,000, and McCann discussed one benefit of
the transaction as an ownership interest in Jacobs Electric. (Id., Ex. I.) Similarly,
Defendants cite another email discussion from a few weeks before the Convertible Loan
- 36 -
Agreement, which sheds light on one reason the parties could have ended up with a lessthan-direct plan: it appears they were trying to keep Anderson’s name off of
SwitchingGears but still give him collateral for an investment in SwitchingGears. (Id.,
Ex. R.) While Plaintiffs point out that there is no evidence that either of these particular
deals occurred, it certainly suggests that the parties were contemplating selling shares in
Scarab Investment, describes some reasons why Anderson could consider ownership in
Jacobs Electric worth investing, and shows some considerations that may have led to an
unusual or circuitous contract.
Based on McCann’s testimony and record evidence suggesting the parties were
considering selling Anderson an ownership interest in Scarab Investments and showing
Plaintiffs obtained some operational control over Jacobs Electric, the Court finds
questions of material fact remain over whether Anderson exercised his right to take an
ownership interest in Scarab Investments in lieu of repayment. Thus, the Court will deny
Plaintiffs’ motion with regard to their claim for breach of the Convertible Loan
Agreement.
III.
MOTION TO EXCLUDE EXPERT TESTIMONY
Finally, Defendants move to exclude the expert testimony of Plaintiffs’ expert,
Richard Marhula. Defendants contend that Marhula’s opinions are based on incorrect
and speculative assumptions, contradicted by undisputed facts, and not scientific,
technical, or based on specialized knowledge.
- 37 -
Plaintiffs intend for Marhula to testify about Defendants’ use of the funds
Plaintiffs advanced. (Decl. of Matthew C. Robinson (“Fourth Robinson Decl.”), Ex. 2 at
1, Dec. 1, 2016, Docket No. 70.) Marhula’s testimony is based on SwitchingGears’
general ledgers and Marhula’s conversations with Anderson and Martineau. (Id. at 2.)
Defendants challenge the factual basis for Marhula’s opinion, arguing that
Marhula relied on the following improper assumptions: (1) the Term Sheet is binding; (2)
the Term Sheet was signed in December 2013; and (3) Plaintiffs had to expressly
authorize all of McCann’s expenditures. Defendants contend that Marhula’s reliance on
these assumptions renders his opinion “indisputably wrong” or unduly speculative.
Guillory v. Domtar Indus. Inc., 95 F.3d 1320, 1331 (5th Cir. 1996). However, these
assumptions are rooted in Plaintiffs’ view of the facts. (See Martineau Dep. at 78:1478:24, 66:15-67:6, 115:22-116:15; Second Anderson Decl. ¶¶ 18-23.) The assumptions,
therefore, do not render Marhula’s opinions “so fundamentally unsupported” that
exclusion is warranted, and Defendants’ challenge to the factual basis of Marhula’s
opinions are better left for cross-examination. Bonner v. ISP Techs., Inc., 259 F.3d 924,
929 (8th Cir. 2001) (quoting Hose v. Chicago Nw. Transp. Co., 70 F.3d 968, 974 (8th Cir.
1996)).
Next, Defendants argue that Marhula’s testimony should be excluded because it is
not “based on scientific, technical, or other specialized knowledge [that is] useful to the
finder of fact in deciding the ultimate issue.” Lauzon v. Senco Prods., Inc., 270 F.3d 681,
686 (8th Cir. 2001).
Defendants contend that Marhula’s testimony “merely repeats
information capable of easy comprehension by a jury” and is therefore “excludable.”
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Khoday v. Symantec Corp., 93 F. Supp. 3d 1067, 1084 (D. Minn. 2015). Marhula’s
testimony is essentially interpreting the general ledger to testify about how
SwitchingGears used SMC Holdings’ advance payments (in particular the fact that they
did not put the money into escrow). Plaintiffs contend that Marhula’s testimony would
be helpful to the jury in understanding SwitchingGears’ general ledgers and that
Marhula’s interpretation of the general ledgers is based on his accounting background.
Overall, the Court finds Marhula’s testimony is not so fundamentally unsupported
to warrant exclusion, and that Marhula’s testimony, while not particularly specialized,
could be helpful to a jury. Accordingly, the Court will deny Defendants’ motion to
exclude.
However, the Court notes that some of Defendants’ concerns go to the
usefulness and relevance of Marhula’s testimony, and in light of those concerns, the
extent of Marhula’s eventual testimony may need to be addressed prior to trial.
This case will be placed on the Court’s next available trial calendar.
ORDER
Based on the foregoing, and all the files, records, and proceedings herein, IT IS
HEREBY ORDERED that:
1.
Defendants’ Motion for Partial Summary Judgment [Docket No. 73] is
GRANTED in part and DENIED in part as follows.
a.
Defendants’ Motion is GRANTED with regard to Plaintiffs’
securities fraud claim and with regard to the fraud claim to the extent
that it is based on representations regarding an enforceable contract
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with the tribe and McCann being the sole member of
SwitchingGears.
b.
2.
Defendants’ Motion is DENIED in all other respects.
Defendants’ Motion to Exclude Expert Testimony [Docket No. 67] is
DENIED.
3.
Plaintiffs’ Motion for Summary Judgment [Docket No. 61] is GRANTED
in part and DENIED in part as follows.
a.
Plaintiffs’ Motion is GRANTED with regard to Defendants’
negligence claim.
b.
4.
Plaintiffs’ Motion is DENIED in all other respects.
Plaintiffs’ Motion to Strike Pleading [Docket No. 93] is DENIED.
DATED: September 27, 2017
at Minneapolis, Minnesota.
__________s/John R. Tunheim________
JOHN R. TUNHEIM
Chief Judge
United States District Court
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