Metro Sales, Inc. v. Core Consulting Group, LLC et al
Filing
84
MEMORANDUM OPINION AND ORDER. 1. Plaintiff's Motion for Summary Judgment (Doc. No. 59 ) is GRANTED IN PART and DENIED IN PART as follows: a. The motion is GRANTED with respect to Defendant Core Consulting Group, LLC's ("Core") co unterclaim Count II Unjust Enrichment, and this claim is DISMISSED WITH PREJUDICE. b. The motion is GRANTED with respect to Cores counterclaim Count III Promissory Estoppel, and this claim is DISMISSED WITH PREJUDICE. c. The motion is denied in al l other respects, and the following claims will proceed to trial: (1) Plaintiff's Count I Breach of Fiduciary Duty; (2) Plaintiffs Count II Declaratory Judgment; (3) Cores counterclaim Count I Breach of Contract; and (4) Cores counterclaim Co unt IV Deceit/Misrepresentation. 2. Plaintiff's Motion to Exclude Expert Testimony (Doc. No. 62 ) is GRANTED IN PART and DENIED IN PART as follows: a. The motion is GRANTED with respect to Leonard Sliwoski, and his opinion shall be presumptive ly inadmissible. b. The motion is DENIED with respect to Steven Greenapple and Duane Lillehaug, and their expert opinions shall be presumptively admissible, subject to proper foundation being established. (Written Opinion) Signed by Judge Donovan W. Frank on 7/26/2017. (BJS)
UNITED STATES DISTRICT COURT
DISTRICT OF MINNESOTA
Metro Sales, Inc.,
Civil No. 15-3233 (DWF/SER)
Plaintiff,
v.
MEMORANDUM
OPINION AND ORDER
Core Consulting Group, LLC and
Rodger Mohagen,
Defendants.
and
Core Consulting Group, LLC,
Counter-Claimant,
v.
Metro Sales, Inc.,
Counter-Defendant.
________________________________________________________________________
Gretchen L. Gurstelle, Esq., Karla M. Vehrs, Esq., and Sarah Pruett, Esq., Lindquist &
Vennum LLP, counsel for Plaintiff.
Kasey D. McNary, Esq., and Ronald H. McLean, Esq., Serkland Law Firm, counsel for
Defendants.
________________________________________________________________________
INTRODUCTION
This matter is before the Court on a Motion for Summary Judgment brought by
Plaintiff Metro Sales, Inc. (“MSI”). (Doc. No. 59.) Also before the Court is MSI’s
Motion to Exclude Expert Testimony. (Doc. No. 62.) Defendants Core Consulting
Group, LLC (“Core”) and Rodger Mohagen (“Mohagen”) (collectively, “Defendants”),
oppose the motions. (Doc. Nos. 72, 73.) For the reasons set forth below, the Court
grants the motions, in part, consistent with this opinion. As outlined below, the following
claims will proceed to trial: (1) Plaintiff’s breach-of-fiduciary-duty and declaratory
judgment claims; and (2) Core’s breach-of-contract and deceit counterclaims.
BACKGROUND
Jerry Mathwig (“Mathwig”) is the founder and president of Metro Sales, Inc., a
Minnesota corporation that provides and services office equipment. (Doc. No. 75
(“McNary Decl.”) ¶ 3.bb, Ex. 28 (“Mathwig Dep.”) at 21:20-22, 23:16-18, 28:15-23,
35:14-19.) This case relates to MSI’s efforts to pursue an employee stock ownership plan
(“ESOP”) 1 for the company in late 2014 through the spring of 2015 in consultation with
Core Consulting Group, LLC.
1
“[A]n ‘employee stock ownership plan’ (ESOP) [is] a type of pension plan that
invests primarily in the stock of the company that employs the plan participants.” Fifth
Third Bancorp v. Dudenhoeffer, 134 S. Ct. 2459, 2463 (2014). Through various statutory
provisions, Congress has encouraged companies to pursue ESOPs. See id. at 2465-66
(“The Congress, in a series of laws [including ERISA] has made clear its interest in
encouraging [ESOPs] as a bold and innovative method of strengthening the free private
enterprise system.” (quoting Tax Reform Act of 1976, § 803(h), 90 Stat. 1590)).
2
I.
The First Consulting Agreement
In an October 2, 2014 e-mail, Mathwig reached out to Core, a North Dakota
company that provides professional ESOP services. (McNary Decl. ¶ 3.c, Ex. 3.)
Mathwig sent the e-mail to Core’s president, Rodger Mohagen, asking if he and his
company would be interested in discussing a possible ESOP for a Minneapolis company.
(Id.) Mohagen’s response was positive, and the parties signed an initial Consulting
Agreement (the “First Consulting Agreement”) effective October 30, 2014 for Core to
provide MSI with an ESOP “feasibility analysis.” (Id.; Doc. No. 67 (“Vehrs Decl.”) ¶ 2,
Ex. 3 (“1st CA”).) The First Consulting Agreement had the following purposes:
[T]o gather information related to the governance and operations of [MSI]
necessary to allow [Core] to determine primary issues to be addressed in
[MSI’s] formation and ongoing sponsorship of an [ESOP] . . . and to
present these issues to [MSI] in a form . . . which enables [MSI] to make
informed decisions in forming and addressing ongoing administration of
a[n] . . . ESOP.
(Id., Ex. 1.) In performing the feasibility analysis, Core anticipated that it would
“[r]equest and review . . . [MSI] documents,” and “review and comment on”
implementing the ESOP as well as pre- and post-ESOP-formation transaction issues.
(Id.) These services were to run from October 30, 2014 through January 15, 2015. (Id.)
The First Consulting Agreement had “a fixed fee of . . . $35,000.” (Id. ¶ 2.)
II.
The Second Consulting Agreement
MSI and Core entered into another Consulting Agreement (the “Second
Consulting Agreement”) effective December 16, 2014 with a fixed fee of $25,000. (Doc.
No. 1 (“Compl.”) ¶ 9, Ex. B (“2nd CA”).) The Second Consulting Agreement contained
3
the same provisions as the first, but provided for additional services to run from
December 8, 2014 through January 30, 2015. (Id.; see also 1st CA.) The services in the
Second Consulting Agreement focused on designing and drafting documents for the
ESOP, such as an ESOP plan document, minutes, and other corporate documents. (2nd
CA, Ex. 1.) Core also agreed to counsel MSI on several issues, including the timing of
employee notices, provisions to include in the ESOP Document, the accrual and payment
of ESOP contributions, and “anticipated income tax benefits.” (Id.)
Communication and work on services contained in each of the two signed
Consulting Agreements continued after the terms of the contracts ended. The feasibility
analysis continued into February 2015, when Mohagen e-mailed Mathwig and noted that
Core was “winding up the ‘feasibility’ portion.” (Vehrs Decl. ¶ 2, Ex. 22.) MSI adopted
the ESOP plan document on December 30, 2014. (McNary Decl. ¶ 3.i, Ex. 9.) This was
before the Second Consulting Agreement’s term ended, but some matters relating to this
agreement were still in progress in March 2015. (Vehrs Decl. ¶ 2, Ex. 23.) MSI has paid
the $60,000 in fixed fees under the First and Second Consulting Agreements. (See
Compl. ¶ 12; Doc. No. 47 (“Am. Answer”) ¶ 12.) The consulting agreements are
governed by North Dakota law. (See 1st CA ¶ 12; 2nd CA ¶ 12.)
III.
Additional Fees
As Core’s consulting work continued, the parties discussed additional fees and
services on numerous occasions. On November 2, 2014, Mohagen sent Steve Zenz
(“Zenz”), a member of MSI’s board of advisors, a fee estimate. (McNary Decl. ¶ 3.a,
Ex. 1; Vehrs Decl. ¶ 2, Ex. 6.) Including the First Consulting Agreement’s $35,000 fixed
4
fee, this anticipated fee estimate ranged from $105,000 to $127,500. (Vehrs Decl. ¶ 2,
Ex. 6; McNary Decl. ¶ 3.r, Ex. 18.) Mohagen noted that “it is extremely difficult if not
impossible to provide an ‘estimated fee’” partly because of “the high number of potential
issues to be addressed.” (Vehrs Decl. ¶ 2, Ex. 6.) He also noted that “if any issues arise
in the feasibility analysis, those issues will be resolved outside of a ‘simplified’ ESOP
formation.” (Id.) On November 3, 2014, Zenz e-mailed Mathwig and told him he “let
[Mohagen] know we are okay with the feasibility fee and that we want to know in
advance if he is going to do anything with an additional fee.” (Vehrs Decl. ¶ 2, Ex. 25.)
On March 13, 2015, Mohagen e-mailed Zenz another fee estimate indicating fees
of $395,000 plus at least an additional $122,500. (Vehrs Decl. ¶ 2, Ex. 5.) On March 14,
2015, Zenz responded to Mohagen’s e-mail, noting that he “was expecting the all-in fee
would be around $300k, maybe $350k” and stating that he was “very concerned” about
the high fee estimate. (Id.) On March 25, 2015, Mohagen sent Mathwig an e-mail and
attached an anticipated fixed fee schedule for additional services in response to a request
from MSI. (Vehrs Decl. ¶ 2, Ex. 6.) The estimated fees totaled $532,500, including the
$60,000 already paid. (Id.)
IV.
Additional Services
As the engagement continued, Core proposed additional consulting agreements
beyond those signed by the parties. On March 25, 2015, Mathwig sent a proposed
Consulting Agreement for services totaling $7,500 to be executed from March 2, 2015
through April 30, 2015. (Vehrs Decl. ¶ 2, Ex. 7.) On April 20, 2015, Mohagen e-mailed
three new proposed consulting agreements, which were to account for work from
5
March 2, 2015 until June 30, 2015. (Vehrs Decl. ¶ 2, Ex. 11.) The additional fees
proposed in these agreements totaled $180,000. (Id.) Then, Mathwig e-mailed five more
proposed consulting agreements on April 23, 2015, totaling $285,000. (Vehrs Decl. ¶ 2,
Exs. 12, 13.) The term of these proposed agreements also began on March 2, 2015. (Id.)
Mohagen noted on both April 20, 2015 and April 23, 2015 that Core had already
“engaged in significant services related to each of the attached [consulting agreements].”
(Vehrs Decl. ¶ 2, Ex. 11; Vehrs Decl. ¶ 2, Ex. 13.)
MSI did not sign any of the additional proposed consulting agreements. (McNary
Decl. ¶ 3.w, Ex. 23.) However, the parties dispute whether Mathwig promised to do so.
In his deposition, Mohagen asserted that he had a conversation with Mathwig on April 7,
2015, and Mathwig “agreed to all the engagement letters that were the product of the
[fixed fee] schedule that he had been provided.” (Vehrs Decl. ¶ 2, Ex. 38 (“Second
Mohagen Dep.”) at 17:24-18:6.) On April 8, 2015, Mohagen wrote to Zenz that “Jerry
[Mathwig] did agree to sign engagement agreements and pay fees as we go.” (Vehrs
Decl. ¶ 2, Ex. 10.) Mathwig does not deny that a phone call occurred on April 7, 2015,
but he asserts that he “made no such promise,” and noted that he “had not even seen the
other proposed agreements as of the date of that phone call.” (Doc. No. 66 (“Mathwig
Decl.”) ¶¶ 5, 6.)
It is also disputed whether MSI knew Core was undertaking additional services
beyond the scope of the First and Second Consulting Agreements. Mohagen testified that
he informed Mathwig about such services and fees in “personal meetings” or “telephone
conferences.” (Vehrs Decl. ¶ 2, Ex. 37 (“Mohagen Dep.”) at 48:3-24.) Additionally, at
6
least some agenda items and communications appear to include items not explicitly listed
in either of the two signed Consulting Agreements. For example, a February 2, 2015
agenda included “NA Trading” and “Treatment of AAA”—both of which were not
specifically listed in either of the signed Consulting Agreements. (McNary Decl. ¶ 3.j,
Ex. 10; see 1st CA; 2nd CA.) On February 17, 2015, Mohagen also e-mailed Mathwig a
summary of anticipated services for moving forward and indicated that some services
would be completed immediately. (Vehrs Decl. ¶ 2, Ex. 22.)
However, on March 13, 2015, Mohagen wrote to Zenz that “Core anticipates
entering into Consulting Agreements prior to material services being initiated on a
particular project within the confines of the overall engagement.” (Vehrs Decl. ¶ 2,
Ex. 5.) And on March 25, 2015, Mohagen wrote to Mathwig that the First and Second
Consulting Agreements for fees of $35,000 and $25,000 “have been engaged, initiated
and completed, therefore the services [sic] fees have been set and paid. The remaining
services have not as of yet been engaged.” (Vehrs Decl. ¶ 2, Ex. 6.)
V.
“Halt All Work” Instruction and Termination of the Relationship
On May 6, 2015, the relationship between MSI and Core quickly deteriorated
when Mathwig sent Mohagen an instruction “to halt all work until I approve a restart”
and “to bill all work that has been done so far.” (Vehrs Decl. ¶ 2, Ex. 15.) In response,
Mohagen sent an e-mail to Mathwig and Zenz regarding Mathwig’s instruction to “halt
all work.” (McNary Decl. ¶ 3.w, Ex. 23.) His e-mail included a statement reminding
Mathwig that “Core sent you, personally and MSI a schedule . . . of the Projects to be
7
undertaken with regard to this Engagement and the anticipated cost/benefit of individual
Projects.” (Id.)
On May 12, 2015, Mathwig wrote another e-mail stating that he expected “the
Valuation Process to be completed fully and not excluded.” (Vehrs Decl. ¶ 2, Ex. 15.)
However, on June 16, 2015, Mathwig sent another e-mail ending the relationship
between Core and MSI. (Vehrs Decl. ¶ 2, Ex. 20.) On June 25, 2015, Mohagen e-mailed
Mathwig the signed Consulting Agreements along with eight “[i]nvoices for Core
services provided outside Exhibit 1 of the attached CA’s billed at Core’s standard hourly
rates.” (Vehrs Decl. ¶ 2, Ex. 21.) The invoices totaled $207,032.50. (Id.)
VI.
Procedural Background
On August 7, 2015, MSI commenced this action. (Compl.) In the Complaint,
MSI asserts the following claims: (1) breach of fiduciary duty (Count I); and
(2) declaratory judgment pursuant to 28 U.S.C. § 2201(a) (Count II). (Id. ¶¶ 30-38.)
MSI seeks the following relief: (1) $60,000 as damages for its breach-of-fiduciary-duty
claim; (2) an award of costs and attorney fees; (3) a declaration that MSI is not obligated
to Core Consulting to pay $207,032.50 in additional fees; (4) a declaration that the First
and Second Consulting Agreements are unconscionable and void; and (5) other relief the
court deems appropriate. (Id. at Prayer for Relief.)
On March, 1, 2016, Defendants filed an Amended Answer and Counterclaim.
(Am. Answer.) Core asserts the following counterclaims against MSI: (1) breach of
contract under the First and Second Consulting Agreements (Count I); (2) unjust
enrichment (Count II); (3) promissory estoppel (Count III); and
8
(4) deceit/misrepresentation (Count IV). (Id. ¶¶ 90-117.) Core seeks the following relief:
(1) dismissal of MSI’s Complaint with prejudice; (2) $207,032.50 plus interest; (3) an
award of costs and attorney fees; and (4) other relief the court deems equitable. 2 (Id. at
Prayer for Relief.) The Court provides additional facts as they are relevant to the claims
and issues analyzed below.
DISCUSSION
I.
MSI’s Motion for Summary Judgment
MSI asserts it is entitled to summary judgment on all claims before the Court,
including its own claims for declaratory judgment and breach of fiduciary duty as well as
Core’s breach of contract, promissory estoppel, unjust enrichment, and deceit
counterclaims. Defendants, on the other hand, contend that genuine issues of material
fact preclude summary judgment in MSI’s favor.
A.
Legal Standard
Summary judgment is appropriate 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(a). Courts must view the evidence and all reasonable inferences in the
light most favorable to the nonmoving party. Weitz Co., LLC v. Lloyd’s of London, 574
F.3d 885, 892 (8th Cir. 2009). However, “[s]ummary judgment procedure is properly
regarded not as a disfavored procedural shortcut, but rather as an integral part of the
2
For simplicity, the Court refers to Core and Mohagen collectively as “Defendants”
throughout this order. To the extent the Court references “Defendants’” counterclaims,
the Court acknowledges that these claims are brought by Core only and not Mohagen.
9
Federal Rules as a whole, which are designed ‘to secure the just, speedy, and inexpensive
determination of every action.’” Celotex Corp. v. Catrett, 477 U.S. 317, 327 (1986)
(quoting Fed. R. Civ. P. 1).
The moving party bears the burden of showing that there is no genuine issue of
material fact and that it is entitled to judgment as a matter of law. Enter. Bank v. Magna
Bank of Mo., 92 F.3d 743, 747 (8th Cir. 1996). The nonmoving party must demonstrate
the existence of specific facts in the record that create a genuine issue for trial. Krenik v.
Cty. of Le Sueur, 47 F.3d 953, 957 (8th Cir. 1995). A party opposing a properly
supported motion for summary judgment “may not rest upon mere allegation or denials
of his pleading, but must set forth specific facts showing that there is a genuine issue for
trial.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 256 (1986).
B.
Declaratory Judgment and Breach of Contract
MSI contends that it is entitled to a declaratory judgment to resolve the parties’
actual dispute over MSI’s obligation to pay invoices totaling $207,032.50. Accordingly,
MSI also argues that it is entitled to summary judgment on Defendants’ counterclaim for
breach of contract. First, MSI argues that the parties’ contracts—the First and Second
Consulting Agreements—plainly required Core to provide notice to MSI if any requested
services went beyond the existing agreements. Second, MSI contends that there is no
evidence that such notice was provided, absent Mohagen’s self-serving testimony. MSI
further asserts that it had no reason to believe services were being performed outside of
the First and Second Consulting Agreements. In particular, MSI argues that Mohagen’s
February 17, 2015 e-mail could not have provided notice because it stated that Core was
10
“winding up the ‘feasibility’ portion of our engagement,” and working on an outline of
issues not yet addressed. (Doc. No. 76 at 6 (quoting Vehrs Decl. ¶ 2, Ex. 22).) MSI
points out that it is not relevant if MSI should have known that additional services were
being provided beyond the scope of the existing agreements because Core had an
obligation to provide actual notice.
Defendants assert that summary judgment on MSI’s declaratory judgment claim is
improper. 3 First, Defendants suggest that the Consulting Agreements contain no
requirement that Core provide advance notice of services falling outside the scope of the
agreements. Second, Defendants identify “several instances of Core notifying MSI of
services not described in the two executed Consulting Agreements.” (Doc. No. 73 at 19.)
For example, Defendants point out that Mathwig participated in weekly conference calls
relating to the ESOP transaction even after the ESOP document was adopted. In
addition, Defendants point to Mohagen’s testimony that Mathwig was informed of
outside services “[o]n a number of occasions.” (Id. at 19-20.) Defendants also identify
conference call agendas that cover topics outside the scope of the First and Second
Consulting Agreements and point out that conference calls nearly always included
discussions of fees and projects. Defendants also note that Mohagen explained via e-mail
on February 17, 2015 that he would “continue to address matters requiring immediate
3
Defendants do not frame their argument on this issue as a challenge to MSI’s
Motion for Summary Judgment on Defendants’ breach-of-contract counterclaim. MSI
therefore argues that Core’s “failure to respond as to their own breach-of-contract claim
may be deemed a concession that judgment is appropriate on that portion of their case.”
(Doc. No. 76 at 3.) In light of the overlapping nature of these claims, the Court construes
Defendants’ response to address both claims.
11
attention” after describing many services that were not yet engaged. (Id. at 20 (quoting
Vehrs Decl. ¶ 2, Ex. 22).) In short, Defendants argue that genuine issues of material fact
remain, precluding summary judgment.
The Court first notes the apparent dispute between the parties over the proper
framing of the issues under these claims. With respect to its own declaratory judgment
claim and Core’s breach-of-contract counterclaim, MSI focuses on the invoices totaling
$207,032.50. However, MSI points out that Mohagen testified Defendants sent the
invoices totaling $207,032.50 to MSI to attempt to settle Core’s claimed entitlement to
the additional fixed fees under the unsigned Consulting Agreements. In responding to
MSI’s declaratory judgment claim, Defendants assert that “MSI asks the Court to declare
that MSI owes no additional fees to Core for consulting services,” not specifically
referencing the $207,032.50 invoice figure. (Doc. No. 73 at 18 (emphasis added).)
Notwithstanding the parties’ inconsistent framing of the issues under these claims, the
Court interprets MSI’s declaratory judgment claim as seeking to resolve the parties’
dispute over MSI’s liability to Core for $207,032.50 under the First and Second
Consulting Agreements—the only signed contracts between the parties. The Court will
thus analyze these claims by focusing on this disputed issue.
Under North Dakota law, “[a] breach of contract is the nonperformance of a
contractual duty when it is due.” Welch Const. & Excavating, LLC v. Duong, 2016 ND
70, ¶ 5, 877 N.W.2d 292, 294 (quoting WFND, LLC v. Fargo Marc, LLC, 2007 ND 67,
¶ 13, 730 N.W.2d 841, 848). The following three elements must be established: “the
existence of a contract, a breach of the contract, and damages flowing from the breach.”
12
Id. The burden rests on the party who has asserted a breach-of-contract claim. Serv. Oil,
Inc. v. Gjestvang, 2015 ND 77, ¶ 15, 861 N.W.2d 490, 496.
Construing a written contract is generally a question of law. Welch Const., 2016
ND 70, ¶ 6, 877 N.W.2d at 294. Contract terms should “be understood in their ordinary
and popular sense rather than according to their strict legal meaning, unless used by the
parties in a technical sense, or unless a special meaning is given to them by usage, in
which case the latter must be followed.” N.D. Cent. Code § 9-07-09 (2017). Dictionaries
provide a useful aid because “[t]he ordinary meaning is the definition a non law-trained
person would attach to the term.” Martin v. Allianz Life Ins. Co. of N. Am., 1998 ND 8,
¶ 12, 573 N.W.2d 823, 826. A contract should be interpreted as a whole, with every
clause being used “to help interpret the others.” N.D. Cent. Code § 9-07-06 (2017).
Whether a contract has been breached is a question of fact. Welch Const., 2016
ND 70, ¶ 5, 877 N.W.2d at 294. If a party seeks to establish the existence of an oral
agreement by testimony, a court should not “resolve disputed issues of material fact as to
the terms of the contract” at the summary judgment stage. Martin Const., Inc. v.
Concrete Strategies, LLC, 2016 WL 4218591, at *2 (D.N.D. Mar. 23, 2016). Further,
“[n]otice is a question of fact, which is generally inappropriate for summary judgment.”
Van Sickle v. Hallmark & Assocs., Inc., 2008 ND 12, ¶ 17, 744 N.W.2d 532, 538
(quotation marks and citation omitted).
To be recoverable, damages must be “clearly ascertainable in both their nature and
origin.” Serv. Oil, Inc., 2015 ND 77, ¶ 16, 861 N.W.2d at 496 (quoting N.D. Cent. Code
§ 32-03-09). Although “mere uncertainty in the exact amount of damages will not
13
preclude recovery when obvious damages were suffered or reasonably certain substantial
damages have resulted,” recovery is precluded where there is “uncertainty as to the fact
of damages, rather than the amount.” Id. A court may conclude that the “fact of
damages” is uncertain, for example, based on a lack of inventories relevant to the claimed
damages. See id. at ¶¶ 20-21, 497-98.
Both the First and Second Consulting Agreements include an attached “Exhibit 1”
which outlines the “specific consulting and advisory services to be provided by [Core]”
pursuant to the agreement. (1st CA ¶ 1 & Ex. 1; 2nd CA ¶ 1 & Ex. 1.) The agreements
provide:
During the term of this Agreement, [MSI] may engage [Core] to complete
consulting and advisory services which are outside the scope of services
outlined in Exhibit 1. . . . When [MSI] engages [Core] to provide additional
services under the terms of . . . this Agreement, whether or not [Core]
provides [MSI] with a written outline of the services to be completed and
the fees to be charged by [Core] for these additional services, additional
services shall be provided under the terms of this Agreement at standard
hourly rates. If these additional services take longer than the term of this
Agreement to be completed, this Agreement shall continue to be in effect
until the completion of these additional services by [Core].
(1st CA ¶ 1; 2nd CA ¶ 1.) With respect to fees, the agreements state:
[MSI] agrees that the fees quoted for this Agreement are for the services
outlined in Exhibit 1 of this Agreement only and do not include services
that may be required or engaged for with [Core] outside of the services
summarized in Exhibit 1 . . . . [Core] will notify [MSI] verbally or in
writing when requested consulting services fall outside of the services
rendered pursuant to Exhibit 1 . . . .
(1st CA ¶ 2; 2nd CA ¶ 2.) Under a provision addressing termination, the First Consulting
Agreement states:
14
The term of this Agreement shall commence October 30, 2014, and
terminate January 15, 2015, unless extended by ongoing services as
outlined under Section 1 of this Agreement. The Agreement may be
terminated by either party upon written notice if the other party breaches
any of its obligations hereunder and the breaching party fails to cure such
breach within thirty (30) days after receipt of notice of such breach. . . .
If [MSI] elects to terminate this Agreement at any time after thirty (30)
days from the execution of this Agreement, [MSI] shall be obligated to pay
the fees enumerated in Section 2 of this Agreement and any fees agreed to
on engagements falling outside of the services summarized in Exhibit 1
....
(1st CA ¶ 5.) The Second Consulting Agreement contains an identical provision except
for the term which “shall commence December 8, 2014, and terminate January 30, 2015.”
(2nd CA ¶ 5.)
The Court first concludes that the First and Second Consulting Agreements
unambiguously require Core to provide advance notice of services being provided outside
the scope of the existing agreements. Both agreements plainly state that “[Core] will
notify [MSI] verbally or in writing when requested consulting services fall outside of the
services rendered pursuant to Exhibit 1.” (1st CA ¶ 2; 2nd CA ¶ 2.) There is no
indication that the use of the term “notify” in this provision should be construed
according to its “strict legal meaning,” “in a technical sense,” or in accordance with a
“special meaning.” See N.D. Cent. Code § 9-07-09. Understood in its “ordinary and
popular sense,” see id., “notify” means, in relevant part, “to give notice of or report the
occurrence of.” Notify, Merriam-Webster, http:// www.merriamwebster.com/dictionary/notify (last visited July 20, 2017). In turn, the first-listed
definition of “notice” is “warning or intimation of something.” Notice, Merriam-
15
Webster, http://www.merriam-webster.com/dictionary/notice (last visited July 20, 2017).
Consistent with these definitions, the Court concludes that the requirement to “notify”
MSI most sensibly requires prior notice which would warn MSI and permit it to evaluate
whether or not to engage such additional services. The Court acknowledges that the
word “notify” may refer to prior notice or notice provided after the fact. When read in
context, however, the Court concludes that the commonsense reading of this provision
requires advance notice. See N.D. Cent. Code Ann. § 9-07-06 (providing that contracts
should be read as a whole).
Second, the Court concludes that a genuine issue of material fact exists regarding
whether Core notified MSI in advance that the additional services being provided were
beyond the scope of the First and Second Consulting Agreements. In particular,
Mohagen testified in his deposition as follows:
THE COURT REPORTER: “Did you tell him in each conversation that you had
with him starting in December that you were undertaking work outside of the
agreements that he had already signed?”
[Mohagen]: No.
[Counsel for MSI]: Did you ever tell him that?
[Mohagen]: I believe we told him at a number of occasions.
[Counsel for MSI]: When?
[Mohagen]: I think if you look at every agenda for every phone conference there’s
always a discussion about fees and billings. Every Steve Zenz prepared agenda.
[Counsel for MSI]: So you’re saying it was in personal meetings when you told
him that you were undertaking work already outside the scope of the two signed
consulting agreements?
16
[Mohagen]: Yes. And/or in telephone conferences.
[Counsel for MSI]: Was it in every one?
[Mohagen]: I don’t know that it was in every one. I don’t recall.
(Mohagen Dep. at 48:3-24.)
While the evidence to support Defendants’ position is slim, the Court cannot hold
on this record that Core undisputedly failed to notify MSI of services being engaged
beyond the scope of the First and Second Consulting Agreements. MSI agreed to a
contract provision whereby Core could give verbal notice of requested services falling
outside the scope of the written agreements. The record establishes that the parties
engaged in frequent verbal communications throughout the course of their business
relationship. By not contracting for written notification only, Mathwig and MSI took the
risk that disputes relating to this provision may be resolved via conflicting testimony. To
hold that Mohagen’s sworn testimony is insufficient to establish that Core in fact notified
MSI would be inconsistent with the terms agreed upon by the parties. A jury could
reasonably conclude that MSI was notified in advance that Core was providing services
beyond the scope of the First and Second Consulting Agreements. Therefore, MSI’s
Motion for Summary Judgment is denied with respect to its declaratory judgment claim
and MSI’s breach-of-contract counterclaim.
The Court notes, however, that Core may have difficulty establishing its damages
with respect to its breach-of-contract claim in light of the limited evidence in the record
regarding the nature and timing of the notice given and the particular “additional
services” agreed upon by the parties. To support their claimed entitlement to additional
17
fees, Defendants must clearly establish that particular work identified in the invoices
totaling $207,032.50 was both (1) beyond the scope of the existing agreements and
(2) agreed upon by the parties following Core’s timely notification.
C.
Promissory Estoppel
MSI argues that Defendants’ promissory estoppel counterclaim should be
dismissed because Mathwig’s purported promise was not sufficiently definite as to
essential terms, and Defendants could not have justifiably relied on this promise with
respect to work performed before the alleged promise. According to MSI, Mohagen’s
February 17, 2015 e-mail did not include many of the services eventually identified in the
proposed consulting agreements. In addition, the March 25, 2015 Services Summary
e-mail was only a draft proposal which did not include contract terms, a clear description
of services to be provided, or fixed fees. Even assuming Mathwig agreed to sign the
consulting agreements he had not yet seen, MSI argues, Defendants’ promissory estoppel
claim must fail because the essential terms were unknown at the time of the alleged
April 7, 2015 promise. MSI also argues that Defendants have failed to establish that they
substantially changed their position as a result of Mathwig’s alleged promise. MSI
contends that there is no injustice to Core in dismissing this claim.
According to Defendants, Mathwig agreed to sign the consulting agreements
described in the March 25, 2015 Services Summary e-mail and pay the related fees.
Mohagen asserts that Mathwig knew the provisions included in the unsigned consulting
agreements would be the same as those included in the First and Second Consulting
Agreements. Defendants also assert that Mathwig was aware of the services being
18
proposed because they had been previously communicated via e-mail on February 17,
2015. Thus, Defendants argue, MSI knew all of the essential terms of the agreements
Mathwig agreed to sign prior to his April 7, 2015 oral promise. Defendants argue that
their continued performance in reliance on Mathwig’s promise and expectation of
compensation was justifiable. Defendants assert that they had a reasonable belief that
MSI would execute the consulting agreements and pay the related fees if Core continued
to perform services for MSI. Defendants argue that Mathwig’s promise must be enforced
to avoid the injustice of Core going without compensation for months of work performed
for MSI.
A claim of promissory estoppel requires a party to establish the following four
elements: “1) a promise which the promisor should reasonably expect will cause the
promisee to change his position; 2) a substantial change of the promisee’s position
through action, or forbearance; 3) justifiable reliance on the promise; and 4) injustice
which can only be avoided by enforcing the promise.” Valentina Williston, LLC v.
Gadeco, LLC, 2016 ND 84, ¶ 25, 878 N.W.2d 397, 404 (quoting Univ. Hotel Dev., L.L.C.
v. Dusterhoft Oil, Inc., 2006 ND 121, ¶ 11, 715 N.W.2d 153, 157). Failure on one
element precludes a promissory estoppel claim and renders it unnecessary to evaluate the
remaining elements. Erickson v. Brown, 2012 ND 43, ¶¶ 19-20, 813 N.W.2d 531, 53637.
Under North Dakota law, in order for a promise to support a promissory estoppel
claim it “must be clear, definite, and unambiguous as to essential terms.” Valentina
Williston, 2016 ND 84, ¶ 25, 878 N.W.2d at 404 (quotation marks and citation omitted).
19
“A promise is too indefinite for reasonable enforcement when a party retains the right to
determine the extent of his performance.” Id. A court should consider whether “[t]he
terms of the agreement . . . were . . . preliminary,” or if “the parties simply agree[d] to
negotiate the remaining terms in the future.” Knorr v. Norberg, 2015 ND 284, ¶ 14, 872
N.W.2d 323, 327; see also Erickson, 2012 ND 43, ¶ 16, 813 N.W.2d at 536 (noting that
the requirement of a clear and definite promise “arises from a reluctance to enforce
incomplete agreements based upon preliminary negotiations and discussions or upon an
agreement to negotiate the remaining terms of a contract in the future” (quotation marks
and citation omitted)).
Promissory estoppel “involve[s] questions of fact.” Knorr, 2015 ND 284, ¶ 7, 872
N.W.2d at 326. However, summary judgment is proper where a party fails to establish
that “a specific promise” was made with respect to “an essential term” such as the
amount of payment. Dusterhoft Oil, Inc., 2006 ND 121, ¶¶ 18, 20, 715 N.W.2d at 158;
see also Lohse v. Atlantic Richfield Co., 389 N.W.2d 352, 357-58 (N.D. 1986) (affirming
summary judgment in favor of the defendant where “the parties failed to agree to or even
discuss many essential terms of the oil and gas lease”).
On February 17, 2015, Mohagen sent Mathwig an e-mail stating that Core was
“working on an outline (generally a game plan)” of engagements and issues yet to be
agreed upon. (Vehrs Decl. ¶ 2, Ex. 22.) The e-mail noted that such issues were “to
include but not limited to” multiple enumerated services. (Id.) On March 13, 2015,
Mohagen sent Zenz an “‘anticipated’ fixed fee schedule.” (Vehrs Decl. ¶ 2, Ex. 5.)
Mohagen explained that “[o]nly upon Core and MSI entering into a Consulting
20
Agreement for a particular project will the Core fees for that project become ‘fixed’ as to
amount.” (Id.) Further, Mohagen noted that “Core anticipates entering into Consulting
Agreements prior to material services being initiated on a particular project within the
confines of the overall engagement.” (Id.) In response, Zenz e-mailed Mohagen to
suggest Core “take a hard look” to determine if it was possible “to substantially reduce
the estimate.” (Id.) Mohagen responded on March 15, 2015, suggesting that they
“discuss the fee issues and Jerry’s lates [sic] voice mail.” (Id.)
On March 25, 2015, Mohagen e-mailed Mathwig and Zenz a Services Summary
spreadsheet, including a general description of services and fees relating to MSI’s ESOP
Implementation. (Vehrs Decl. ¶ 2, Ex. 6.) The spreadsheet included both completed
services under the First and Second Consulting Agreements as well as other services and
fees indicated “to be Engaged, Initiated and Completed.” (Id.) Projects in the latter
category were designated as either “Required” or “Elective.” (Id.) Mohagen’s e-mail
noted that the “Estimated Actual Core Fixed Fee” noted on the spreadsheet “is a fee
‘estimate’ subject to revision until Core issues a Consulting Agreement indicating
specific services and a fixed fee for these specific services.” (Id.) Mohagen asked
Mathwig to respond after reviewing the Services Summary to arrange an opportunity to
discuss it over the phone. (Id.) Also on March 25, 2015, Mohagen sent Mathwig a
proposed consulting agreement relating to the appointment of transactional trustees.
(Vehrs Decl. ¶ 2, Ex. 7.)
According to Mohagen’s deposition testimony, in an April 7, 2015 phone call,
Mathwig “agreed to sign all the engagement agreements” and agreed to all related fees.
21
(Mohagen Dep. at 7:25-8:22.) Specifically, Mohagen testified that Mathwig “agreed to
sign the engagement agreements that were to be drafted following the schedule that he
had received on . . . March 25.” (Id. at 43:3-18.) Mohagen acknowledged that he had not
sent all of the consulting agreements to MSI at the time of the telephone call. (Id. at
43:19-24; see also id. at 50:3-6 (“He agreed to sign all the consulting agreements which
were going to be prepared, and he agreed to all the fees that were on the schedule that
was sent to him on March 25.”).) Mohagen also testified that Mathwig agreed to the
specific payment terms that were eventually included in the consulting agreements. (Id.
at 51:11-14.) Mohagen acknowledged that some terms were not discussed such as
termination or confidentiality. (Id. at 51:15-52:13.) Mohagen agreed that those terms
were “material.” (Id. at 52:14-16.) In his declaration, Mohagen asserted that
“Mr. Mathwig understood that the material terms of the proposed consulting agreements
would be the same as the two Consulting Agreements previously signed by Mr. Mathwig
on behalf of MSI.” (Doc. No. 74 (“Mohagen Decl.”) ¶ 5.) In particular, Mohagen
explained that “Mr. Mathwig understood from our conversation that only the flat fee
amounts and the ‘Exhibit 1’ description of services would differ from the Consulting
Agreements previously consummated.” (Id.)
Mathwig testified that he did not recall the April 7, 2015 telephone conversation.
(Mathwig Dep. at 222:9-16.) In his declaration, Mathwig asserted that he did not make
the promise Mohagen described in the April 7, 2015 phone call. (Mathwig Decl. ¶¶ 5-6.)
Mathwig explained that “I had not even seen the other proposed agreements as of the date
22
of that phone call. I had no clear understanding of what Mr. Mohagen was all proposing
for MSI.” (Id. ¶ 6.)
On April 8, 2015, in response to an e-mail from Zenz inquiring whether Mohagen
and Mathwig had discussed fees, Mohagen wrote:
We did resolve the fee issue. Jerry wants to wait until the end and see if
there is any “room” for a “discount” (Jerry’s idea). Not sure that this isn’t
“kicking the can down the road” however Jerry did agree to sign
engagement agreements and pay fees as we go. . . . Jerry did ask me to
copy both you and David on the engagement agreements primarily for the
purpose of reminding him to sign the agreements and also to make sure we
are following the services summary.
(Vehrs Decl. ¶ 2, Ex. 10.)
On April 20, 2015, Mohagen re-sent Mathwig the transactional trustee consulting
agreement along with three additional consulting agreements, noting that the fees in the
agreements “follow the Services Summary – Metro Sales, Inc. ESOP Implementation
(‘Schedule’) schedule previously provided for your review and comment.” (Vehrs Decl.
¶ 2, Ex. 11.) On April 23, 2015, Mohagen sent Mathwig five more consulting
agreements. (Vehrs Decl. ¶ 2, Exs. 12, 13.) Mohagen again noted that the fees in these
consulting agreements were consistent with the Services Summary, “with the exception
of the NA Trading Stock Purchase Transaction which was not contemplated at the time
the Schedule was prepared and sent to you for review.” (Vehrs Decl. ¶ 2, Ex. 13.) Later
that same day, an MSI representative e-mailed Mohagen asking for an Excel file version
of the Services Summary so that he could “enter all of the amounts associated with the
consulting agreements you’ve sent, how much needs to be paid and when, etc.” (McNary
Decl. ¶ 3.t, Ex. 20.) On May 12, 2015, Mohagen wrote Mathwig via e-mail: “Although
23
there has been verbal agreement as to MSI signing the Core provided CA’s [sic] for each
of the Projects and further a follow up e-mail request to sign the CA’s [sic], at this point
Core has not received signed CA’s [sic].” (McNary Decl. ¶ 3.w, Ex. 23.)
The Court concludes that Defendants have failed to establish the existence of a
promise that is sufficiently “clear, definite, and unambiguous as to essential terms.”
Valentina Williston, 2016 ND 84, ¶ 25, 878 N.W.2d at 404 (citation omitted). The Court
acknowledges that there are disputed facts in the record, but these disputes are not
material for resolving MSI’s motion. Even if Mathwig made the oral promise Defendants
identify, this promise is “too indefinite for reasonable enforcement” because the actual
services Core was agreeing to provide had not been identified in detail. See id. The
Services Summary and prior e-mail communications between the parties were
preliminary in nature and subject to revision. Importantly, the Services Summary
provides only very general descriptions of the categories of services Mohagen intended to
perform for MSI. Following the April 7, 2015 telephone call, Mohagen retained full
discretion to outline the specific scope of services to be provided in the remaining
consulting agreements. This is precisely the type of indefinite and preliminary agreement
North Dakota courts decline to enforce. See id. (“A promise is too indefinite for
reasonable enforcement when a party retains the right to determine the extent of his
performance.”); Erickson, 2012 ND 43, ¶¶ 17-19, 813 N.W.2d at 536-37 (declining to
enforce a promise that, even if made, was “an incomplete promise based upon
preliminary negotiations and discussions”); see also Lohse, 389 N.W.2d at 357. Even if
Mathwig understood the general services to be provided and the associated fees, his
24
alleged oral promise to sign multiple consulting agreements he undisputedly had not seen
is insufficient to support Defendants’ promissory estoppel counterclaim. 4 The Court
therefore grants MSI’s motion with respect to this claim.
D.
Breach of Fiduciary Duty
MSI also asserts a claim for breach of fiduciary duty, arguing that Mohagen
breached fiduciary duties owed to MSI based on Mohagen’s role as an attorney,
accountant, and expert in ESOP transactions. MSI argues that it is entitled to summary
judgment on this claim and seeks an award of reimbursement for the $60,000 it has paid
to Core under the First and Second Consulting Agreements. Defendants assert that
summary judgment should not be granted in MSI’s favor and propose instead that the
4
The record reflects that Mathwig received one proposed consulting agreement on
March 25, 2015 relating to “Director & Transactional Trustee Appt.” (Doc. No. 67
“Vehrs Decl.” ¶ 2, Ex. 7.) Although Mathwig’s alleged promise may be clearer and more
definite with respect to this particular consulting agreement which he had in fact received
prior to the April 7, 2015 telephone conversation, the Court nonetheless concludes that
MSI is entitled to summary judgment with respect to this consulting agreement as well.
The fixed fee associated with this consulting agreement is $7,500. (Id.) Core’s
invoice relating to “Appointment of ESOP Trustees and Directors” identifies a total
amount due of $6,836.25. (Vehrs Decl. ¶ 2, Ex. 21.) However, $5,936.25 out of this
total is associated with work predating Mathwig’s alleged April 7, 2015 promise. (Id.)
Only $900 (associated with 2.5 hours of work) is identified as being performed after
April 7, 2015. (Id.)
As a matter of law, the Court concludes that this evidence is insufficient to support
that there was “a substantial change in [Core’s] position through action or forbearance”
following Mathwig’s alleged promise as it pertains to the “Director & Transactional
Trustee Appt” consulting agreement. See Dalan v. Paracelsus Healthcare Corp. of N.D.,
Inc., 2002 ND 46, ¶¶ 11, 16-18, 640 N.W.2d 726, 728, 731-32 (affirming summary
judgment dismissal of the plaintiff’s promissory estoppel claim where the plaintiff failed
to establish a substantial change in position). Thus, Defendants’ promissory estoppel
claim is properly dismissed in its entirety.
25
Court should consider summary judgment dismissal of this claim for failure to establish
evidence on each essential element.
MSI argues that it sought Core and Mohagen’s services because Mathwig and his
employees had no experience in ESOP formation. Because Mohagen held himself out as
an expert in this area and knew that MSI was relying on his expertise, MSI argues that a
fiduciary relationship existed based on Mohagen’s consulting role. MSI also argues that
Mohagen had a fiduciary relationship to MSI based on his roles as an attorney and an
accountant and his use of legal and accounting knowledge in advising MSI. According to
MSI, even though Mohagen claimed he was not acting in his capacity as an attorney in
providing services to MSI, the parties undisputedly had an attorney-client relationship. In
particular, MSI asserts that Defendants’ expert witness designated to testify regarding the
existence of an attorney-client relationship should not be permitted to testify, so
Defendants will not be able to raise any genuine issues of material fact regarding this
issue. MSI also suggests that a disclaimer that an attorney-client relationship does not
exist cannot be relied upon when legal services are actually provided. MSI argues that it
is entitled to summary judgment because Defendants breached their fiduciary duties as a
matter of law by providing services pursuant to a conflict of interest. Specifically, MSI
contends that Core impermissibly represented both the buyers and the sellers in the
contemplated ESOP transaction as demonstrated by Mohagen’s e-mails and invoices.
Citing Minnesota law governing breach of fiduciary duties in the context of an
attorney-client relationship, MSI alleges it is entitled to the full $60,000 it has paid to
Core for its services.
26
Defendants argue that disputed facts exist relating to numerous aspects of MSI’s
fiduciary duty claim, including whether there was a fiduciary relationship, the scope of
duties owed, whether any such duties were breached, and what damages MSI has
suffered. Defendants emphasize that whether an attorney-client relationship exists is
ordinarily a question of fact and that the burden is on the party seeking to establish such a
relationship. Defendants also suggest that a fiduciary relationship must be established by
clear and convincing evidence. Defendants argue that MSI never engaged Mohagen
himself to provide services and that Core only provided consulting services not legal
services. In particular, Defendants point to the disclaimer language in the First and
Second Consulting Agreements which provided that Core was not a law firm and that
Core and MSI were not entering into an attorney-client relationship. Defendants also
point out that Mohagen’s expert witness contradicts MSI’s expert witness on this issue.
With respect to whether any fiduciary duties were breached, Defendants again point out
that this presents a fact question. Defendants also argue that MSI oversimplifies the
nature of an ESOP transaction by describing the ESOP trustees as the buyer and the
company as the seller. Because the negotiated sale of stock had not yet occurred,
Defendants argue, no conflict could have arisen. In addition, Defendants assert that MSI
has failed to establish how Core actually represented conflicted parties. Finally,
Defendants suggest that MSI is not entitled to the damages it seeks because MSI has not
27
established that the alleged conflict of interest arose under the scope of services provided
under the First and Second Consulting Agreements for which MSI paid $60,000. 5
“In order to establish a breach of fiduciary duty, the plaintiff must prove: ‘1. A
fiduciary relationship between the plaintiff and defendant. 2. A duty by the defendant to
the plaintiffs arising from that relationship. 3. The defendant[’s] breach of that duty.
4. Damage to the plaintiffs proximately caused by that breach of duty.’” In re Estate of
Vendsel, 2017 ND 71, ¶ 14, 891 N.W.2d 750, 755 (quoting Meyer v. Maus, 2001 ND 87,
5
With respect to MSI’s breach-of-fiduciary-duty claim, the parties each cite both
North Dakota and Minnesota law, and neither argues that there is a material conflict
between the laws of these states. The Court will apply North Dakota law based on the
choice-of-law provisions in the First and Second Consulting Agreements. (See Vehrs
Decl. ¶ 2, Ex. 3 (“1st CA”) ¶ 12; Doc. No. 1 (“Compl.”) ¶ 9, Ex. B (“2nd CA”) ¶ 12
(“This Agreement will be governed by and interpreted in accordance with the substantive
laws of the State of North Dakota without reference to conflicts of law.”).)
Federal courts sitting in diversity apply the forum state’s choice of law rules, Nw.
Airlines, Inc. v. Astraea Aviation Servs., Inc., 111 F.3d 1386, 1393 (8th Cir. 1997), and
“Minnesota traditionally enforces parties’ contractual choice of law provisions” absent
evidence of bad faith or “an intent to evade the law,” Hagstrom v. Am. Circuit Breaker
Corp., 518 N.W.2d 46, 48 (Minn. Ct. App. 1994). The Eighth Circuit has construed a
contractual choice-of-law provision to apply to tort claims under Minnesota law where
“[the] claims are closely related to the interpretation of the contracts and fall within the
ambit of the express agreement that the contracts would be governed by [the chosen
state’s] law.” Astraea, 111 F.3d at 1392. In particular, the Eighth Circuit has applied a
choice-of-law provision where the non-contract claims “raise[d] issues of performance
and compensation for work done under the . . . contracts.” Id.; see also Warren E.
Johnson Cos. v. Unified Brand, Inc., 735 F. Supp. 2d 1099, 1104-08 (D. Minn. 2010)
(discussing Astraea and collecting cases that have applied its holding).
Applying these rules and in light of the parties’ express agreement that
North Dakota law would govern the parties’ obligations under the First and Second
Consulting Agreements, the Court concludes that MSI’s breach-of-fiduciary-duty claim
should be analyzed under North Dakota law. See Fla. State Bd. of Admin. v. Law Eng’g
& Envtl. Servs., Inc., 262 F. Supp. 2d 1004, 1012-15 (D. Minn. 2003) (following Astraea,
applying a choice-of-law clause to a breach-of-fiduciary-duty claim, and noting that
“plaintiff’s breach of fiduciary duty claim is related to contract performance”).
28
¶ 14, 626 N.W.2d 281, 286). The Court concludes that summary judgment in MSI’s
favor would be premature at this stage as numerous issues of material fact are genuinely
disputed.
1.
Existence of a Fiduciary Relationship and Duties Owed
First, whether Mohagen owed fiduciary duties to MSI is genuinely disputed by the
parties, and this issue presents questions of fact properly resolved at trial. This dispute
involves the first two elements of a fiduciary-duty claim—the existence of a fiduciary
relationship and any corresponding duties created by that relationship.
The North Dakota Supreme Court has explained that “[a] fiduciary relationship is
something approximating business agency, professional relationship, or family tie
impelling or inducing the trusting party to relax the care and vigilance . . . ordinarily
exercise[d].” Nesvig v. Nesvig, 2004 ND 37, ¶ 20, 676 N.W.2d 73, 80 (quotation marks
and citation omitted). “A fiduciary relationship exists when one is under a duty to act for,
or to give advice for the benefit of another upon matters within the scope of the
relationship.” Id. The trusting party “repos[es] confidence” in the fiduciary and “must be
in a position of inequality, dependence, weakness, or lack of knowledge.” Snortland v.
State, 2000 ND 162, ¶ 16, 615 N.W.2d 574, 579 (citation omitted).
A fiduciary relationship may arise out of a principal-agent relationship. Border
Res. LLC v. Irish Oil & Gas, Inc., 2015 ND 238, ¶ 18, 869 N.W.2d 758, 764; see also
Burlington N. & Santa Fe Ry. Co. v. Burlington Res. Oil & Gas Co., 1999 ND 39, ¶ 17,
590 N.W.2d 433, 437 (“A business agency represents a fiduciary relationship.”). “In a
fiduciary relationship, an agent is generally under a duty to act for, or to give advice to, a
29
principal upon matters within the scope of the relationship . . . .” Border Res., 2015 ND
238, ¶ 18, 869 N.W.2d at 764 (citation omitted). Whether an agency relationship exists is
a fact question. Lagerquist v. Stergo, 2008 ND 138, ¶ 9, 752 N.W.2d 168, 171. “Agency
is never presumed, and if an agency relationship is denied, the party alleging agency must
establish it by clear and convincing evidence.” Id. at ¶ 10, 752 N.W.2d at 172 (citation
omitted).
Where a fiduciary relationship arises from an agency relationship, “the agent’s
duties to the principal are determined by the parties’ agreement and the nature of the
fiduciary relationship.” Border Res., 2015 ND 238, ¶ 18, 869 N.W.2d at 764 (citation
omitted); see also Burlington, 1999 ND 39, ¶ 15, 590 N.W.2d at 437. As a general
matter, the superior party in a fiduciary relationship “has a duty to act in the dependent
party’s best interest.” Nesvig, 2004 ND 37, ¶ 20, 676 N.W.2d at 80.
In addition, “[a]n attorney-client relationship is a fiduciary relationship.” Id. It is
typically a fact question whether an attorney-client relationship exists. Moen v. Thomas,
2001 ND 110, ¶ 13, 628 N.W.2d 325, 329. In evaluating whether certain conduct
constitutes the practice of law, the North Dakota Supreme Court has noted that activities
such as “the work of an accountant dissociated from legal advice,” “[t]he giving of advice
as to investments,” and “in making tax returns” are activities that “lie close to the border
line and may easily become or be accompanied by practice of the law.” Cain v. Merchs.
Nat. Bank & Trust Co. of Fargo, 268 N.W. 719, 723 (N.D. 1936).
“An attorney must employ the degree of skill, care, diligence, and knowledge
commonly possessed and exercised by a reasonable, careful, and prudent lawyer . . . .”
30
Nesvig, 2004 ND 37, ¶ 20, 676 N.W.2d at 80. The North Dakota Rules of Professional
Conduct provide that “[a] lawyer shall not represent a client if the lawyer’s ability to
consider, recommend, or carry out a course of action on behalf of the client will be
adversely affected by the lawyer’s responsibilities to another client or to a third person, or
by the lawyer’s own interests.” N.D.R. Prof. Conduct 1.7 (2016). These rules also apply
to the provision of “law-related services” under specified circumstances. See N.D.R.
Prof. Conduct 5.7 (2006). 6 A disclaimer that a lawyer is not providing legal services is
not effective where the attorney actually performs legal services. (See Doc. No. 78
(“Second Vehrs Decl.”) ¶ 2, Ex. 43 (State Bar Ass’n of North Dakota Ethics Comm., Op.
No. 01-03, May 24, 2001).) The North Dakota Supreme Court has clarified the relevance
of the North Dakota Rules of Professional Conduct in connection with a claim for breach
of fiduciary duty against an attorney, stating that they “are designed to provide guidance
6
Specifically, Rule 5.7 of the North Dakota Rules of Professional Conduct states:
(a) A lawyer is subject to these Rules with respect to the provision of
law-related services, as defined in paragraph (b), if the law-related services
are provided:
(1) by the lawyer in circumstances that are not distinct from the
lawyer’s provision of legal services to clients; or
(2) in other circumstances by an entity controlled by the lawyer
individually or with others if the lawyer fails to take reasonable
measures to assure that a person obtaining the law-related services
knows that the services are not legal services and that the protections
of the client-lawyer relationship do not exist.
(b) The term “law-related services” denotes services that might reasonably
be performed in conjunction with and in substance are related to the
provision of legal services, and that are not prohibited as unauthorized
practice of law when provided by a nonlawyer.
31
to lawyers and a structure for regulating conduct through disciplinary agencies, and they
are not intended to be a basis for civil liability.” Nesvig, 2004 ND 37, ¶¶ 1, 23, 66
N.W.2d at 74, 81. 7
In the context of an attorney-client relationship, “[e]xpert testimony is required
generally to establish the standard of care and a breach of the standard of care.” Moen,
2001 ND 110, ¶ 20 n.4, 628 N.W.2d at 330 n.4 (Maring, J., concurring in part and
dissenting in part); see also Richmond v. Nodland, 501 N.W.2d 759, 761 (N.D. 1993)
(“Generally, expert testimony is necessary to establish the professional’s standard of care
(duty) and whether the professional’s conduct in a particular case deviated from that
standard of care (breach of duty).”). This is true unless “the professional’s misconduct is
so egregious and obvious that a layperson can comprehend the professional’s breach of
duty without the assistance of expert testimony.” Wastvedt v. Vaaler, 430 N.W.2d 561,
565 (N.D. 1988). The North Dakota Supreme Court has noted that in matters involving
tax planning or other complex circumstances involving specialized knowledge, expert
testimony is essential to establish a professional’s duty and corresponding breach. See id.
at 566 (“[E]xcept in rare cases, the nuances and variations of the practice of law make
7
The Code of Professional Conduct of the American Institute of Certified
Professional Accountants, by which North Dakota requires all licensed CPAs to abide,
also regulates conflicts of interest. (See Vehrs Decl. ¶ 2, Ex. 37 (“Mohagen Dep.”) at
117:22-120:23.)
32
indispensable expert testimony to acquaint the trier-of-fact with the applicable standard
of care and any deviation therefrom.”). 8
In his declaration, Mathwig asserts that he had no “direct experience” with ESOPs
“and relied on Core and Mohagen’s expertise to guide us through the process.”
(Mathwig Decl. ¶ 3.) The First and Second Consulting Agreements describe Core’s areas
of expertise and outline the nature of the consulting services to be provided. (1st CA at 1,
¶ 1; 2nd CA at 1, ¶ 1.) Specifically, the Agreements provide that “[Core] shall furnish
[MSI] with its best advice, information, judgment and knowledge with respect to matters
for which the Consultant has been engaged.” (1st CA ¶ 1; 2nd CA ¶ 1.) The Agreements
also state, however, that “[MSI] shall be solely responsible for taking action on issues
raised and documentation completed by [Core]” and that “[MSI] shall be solely
responsible for determining what action and documentation, if any, is necessary and
appropriate in addressing issues raised by [Core] during the term of this engagement.”
(Id.)
Regarding the nature of the parties’ relationship, the Agreements provide that
“[MSI] and [Core] are independent contractors,” and that “neither shall have the right or
authority to contract in the name of the other nor shall it assume or create any obligations,
debts, accounts or liabilities for the other.” (1st CA ¶ 8; 2nd CA ¶ 8.) Importantly, the
Agreements state that “[MSI] acknowledges that [Core] is not a law firm and that
8
The Court relies on caselaw relating to legal malpractice because the factfinder’s
ultimate analysis in such cases is similar to the analysis required to evaluate a
breach-of-fiduciary-duty claim in the context of an attorney-client relationship. See
Meyer v. Maus, 2001 ND 87, ¶ 15, 626 N.W.2d 281, 287.
33
[Core] and [MSI] will not have an attorney-client relationship. If required by the
engagement or requested by [MSI], [Core] shall prepare sample documents to be
reviewed by [MSI] with its legal counsel.” (Id. (emphasis in original).) The Agreements
also provide that “[MSI] acknowledges that all legal services related to this Agreement
shall be rendered by the Serkland Law Firm . . . or such other law firm licensed to
practice law in applicable states agreed to by both [MSI] and [Core].” (Id.) As
Defendants note, Mohagen himself had no contractual relationship with MSI separate
from the Consulting Agreements between Core and MSI.
MSI’s expert on legal ethics, Eric Cooperstein (“Cooperstein”), opines “that
Mohagen’s work for MSI was subject to the Rules of Professional Conduct” because
Mohagen performed legal services and law-related services for MSI. (See Vehrs Decl.
¶ 2, Ex. 28 (“Cooperstein Rep.”) at 5-8, 12.) Cooperstein opines that the disclaimer
regarding an attorney-client relationship in the Consulting Agreements was ineffective
based on the work actually performed. (Id. at 7.) Second, Cooperstein suggests that even
if Mohagen’s services are only characterized as law-related services, the Rules of
Professional Conduct would apply. (Id. at 7-8.) Cooperstein provides the opinion that
“[t]he non-legal services provided by Mohagen were undoubtedly law-related services.” 9
(Id. at 8.) MSI’s expert on ESOP transactions, W. James Vogl, Jr. (“Vogl”), also opines
9
Cooperstein declined to give weight to the North Dakota State Bar Association’s
dismissal of the ethics complaint against Mohagen because it “does not include any
analysis of the alleged violations of the North Dakota Rules of Professional Conduct.”
(Vehrs Decl. ¶ 2, Ex. 28 (“Cooperstein Rep.”) at 12.)
34
“that Defendants, and particularly Mr. Mohagen, were performing the role of an attorney
on behalf of Metro Sales.” (Vehrs Decl. ¶ 2, Ex. 29 (“Vogl Rep.”) at 7.)
Defendants’ expert, Duane Lillehaug (“Lillehaug”), offers an opinion on the
applicability of the North Dakota Rules of Professional Conduct to Core’s services in this
matter. (Vehrs Decl. ¶ 2, Ex. 31 (“Lillehaug Rep.”).) Lillehaug provides the following
opinion:
Pursuant to Rule 5.7, N.D. Rules of Professional Conduct, the Rules of
Professional Conduct did not apply to the services provided by Core
Consulting Group to Metro Sales, Inc. because any “law-related services,”
as defined in Rule 5.7(b), N.D.R.Prof.Cond., were provided in
circumstances that were distinct from the lawyers provision of legal
services to clients and the lawyer took reasonable measures to assure that
the person obtaining the legal [sic] 10 services knew that the services
provided were not legal services and that the protections of the
client/lawyer relationship did not exist.
(Id. at 1.) Lillehaug notes that Mohagen’s former firm, the Tax Law Office, did not exist
when Core provided services to MSI, and that any legal services performed by Mohagen
during the relevant time period would have been accomplished through the Serkland Law
Firm in which Mohagen had an “of counsel” relationship. (Id. at 2.) Lillehaug also
points out that “Mathwig . . . was an experienced and sophisticated businessman” relying
on “independent advisors” throughout the ESOP process. (Id. at 2, 4.) Lillehaug
10
Considering Lillehaug’s entire report, the Court reads this reference to “legal
services” to be a typographical error. Instead, the Court presumes Lillehaug intended to
refer to “services” or “law-related services.” This reading is consistent with Lillehaug’s
subsequent explanation of this opinion in his report. (See Vehrs Decl. ¶ 2, Ex. 31
(“Lillehaug Rep.”) at 4 (“Mr. Mohagen took reasonable measures to assure that Metro
Sales and its representatives knew that the Core Consulting services were not legal
services and that the protections of the client lawyer relationship did not exist.”).)
35
emphasizes the disclaimer language in the Consulting Agreement relating to Core’s
limited role, and he suggests that “Mr. Mohagen took reasonable measures to assure that
Metro Sales and its representatives knew that the Core Consulting services were not legal
services and that the protections of the client lawyer relationship did not exist.” (Id. at
3-5.)
The Court concludes that the existence of a fiduciary relationship between MSI
and Defendants and the scope of any fiduciary duties owed is genuinely disputed on this
record. Notably, the parties’ competing experts reach divergent conclusions on whether
Defendants were subject to the professional responsibility rules governing an
attorney-client relationship. Even if the fiduciary relationship arises only out of a general
business agency relationship or Mohagen’s position as an accountant, the Court
concludes that genuine issues of material fact remain regarding the nature of that
relationship and the scope of any duties arising from the signed Consulting Agreements
or the parties’ business relationship. Because it is typically a fact question whether an
attorney-client relationship or other fiduciary relationship exists, and in light of the
competing evidence on these issues in the record, the Court concludes that MSI has failed
to establish that summary judgment in its favor is warranted on this issue.
2.
Breach of Fiduciary Duty
Second, even if a fiduciary relationship were established, MSI has failed to
demonstrate that Mohagen undisputedly breached a fiduciary duty by engaging in
representation pursuant to a conflict of interest in the contemplated ESOP transaction.
36
The Court reaches this conclusion whether Defendants’ duty is evaluated on the basis of a
general principal-agent fiduciary relationship or an attorney-client relationship.
In cases alleging legal malpractice, a violation of the North Dakota Code of
Professional Responsibility “merely constitute[s] evidence to be considered by the trier of
fact.” Martinson Bros. v. Hjellum, 359 N.W.2d 865, 875 (N.D. 1985). With respect to a
claim for breach of fiduciary duty against an attorney, “representing both the buyer and a
seller” in a transaction may constitute a conflict of interest and support a finding of
liability. Meyer, 2001 ND 87, ¶ 15, 626 N.W.2d at 287. “While the existence and scope
of a fiduciary duty depends on the parties’ agreement, whether a person has breached a
fiduciary duty presents a question of fact . . . .” Border Res., 2015 ND 238, ¶ 18, 869
N.W.2d at 764. Similarly, the North Dakota Supreme Court has noted that “summary
judgment is generally inappropriate in legal malpractice actions.” Moen, 2001 ND 110,
¶ 10, 628 N.W.2d at 328; see also Martinson Bros., 359 N.W.2d at 872 (“[I]n the context
of a legal malpractice action, whether or not an attorney has breached his professional
duty is ordinarily a question of fact.”).
MSI’s expert on ESOP transactions, Vogl, opines that “Defendants’ simultaneous
representation of Metro Sales and the ESOP trustees constituted an inherent and
impermissible conflict of interest.” (Vogl Rep. at 13-14.) As a general matter, Vogl
explains that:
Because an ESOP transaction involves both a seller and a buyer—the
company’s shareholders selling their securities and the trust established to
purchase the securities for the company’s employee’s—each party must be
represented by separate legal counsel due to the inherent conflicts of
interest. Specifically, the company’s existing shareholders have an interest
37
in receiving a higher per share price for the sale of their stock while the
ESOP Trustee has an interest in obtaining the stock at the lowest price
possible.
(Id. at 5.)
Vogl suggests that “performing valuation-support services on behalf of the ESOP
trustees would have constituted an obvious conflict of interest given Defendants’
representation of Metro Sales” because the ESOP trustees are responsible for selecting
and working with an appraisal company to identify an appropriate share price. (Id. at 11.)
Based on the information he considered in forming his opinion, Vogl concludes that
“Defendants were representing not only Metro Sales, through its existing shareholders,
but also the ESOP trustees.” (Id. at 13.) Ultimately, Vogl provides the opinion that
“Defendants improperly represented Metro Sales, Inc., its shareholders and the ESOP
trustees, which presents an impermissible conflict of interest.” (Id. at 17.) 11
When asked whether he had “ever represented both the company and the ESOP
trust at the same time in the same transaction,” Defendants’ ESOP expert, Steven
Greenapple (“Greenapple”), stated that he had not because “[t]hat would be a conflict of
interest.” (See Second Vehrs Decl. ¶ 2, Ex. 40 (“Greenapple Dep.”) at 31:10-15.) In his
expert report, Greenapple outlines numerous services involved in establishing an ESOP.
(Vehrs Decl. ¶ 2, Ex. 30 (“Greenapple Rep.”) at 5-6.) His report states that “[a] business
that considers whether to establish an ESOP and engage in an ESOP transaction, and
11
With regard to whether Mohagen breached any fiduciary duties, MSI’s expert
Cooperstein focuses his analysis on the reasonableness of Mohagen’s fees and billing
practices. (Cooperstein Rep. at 8-12.) MSI has not moved for summary judgment on this
basis, so the Court does not consider Cooperstein’s report at this stage on this issue.
38
decides to do so, requires a great deal of services.” (Id. at 5.) Such services include, for
example, “analyzing the appropriateness of an ESOP for that business,” “recommending
a structure for an ESOP transaction,” “selecting an ESOP trustee,” “assisting the ESOP
trustee in engaging legal and financial advisors,” and “closing the ESOP transaction and
the related financing transaction.” (Id. at 5-6.) Greenapple suggests that “[t]ypically
these services are performed by one or more individuals or organizations.” (Id. at 6.)
Greenapple’s report emphasizes the complexity of ESOP transactions and related
services. (Id.)
In his deposition, Mohagen noted that it is “an extremely debatable thing” whether
an appraiser can work on behalf of the corporation and trustees in an ESOP transaction.
(Mohagen Dep. at 111:15-18.) After discussing a recent administrative development in
the ESOP field relating to potential conflicts of interest, Mohagen acknowledged that,
“obviously there’s conflicts. ESOPs are loaded with conflicts. Always have been,
always will be.” (Id. at 111:18-114:14.) Mohagen acknowledged that he did not copy
Mathwig on e-mails when “crossing over into transactional trustee territory” because
under recent administrative guidance, “it might appear that there’s a conflict.” (Id. at
115:9-24.) When asked whether he performed any work for the ESOP trustees, Mohagen
stated that “[w]e did work for the ESOP trustees on behalf of Metro Sales.” (Id. at
11:9-13.) The proposed but unsigned consulting agreements related to “Director &
Transactional Trustee Appointments” and “ESOP Transactional Trustee Valuation
Assistance and Support” proposed consulting services that could be construed as work
done on behalf of the transactional trustees, such as “[d]esign[ing] and draft[ing]
39
Indemnification Agreements for the Transactional Trustees . . . effective January 1,
2014.” (See Vehrs Decl. ¶ 2, Exs. 7, 11.) The invoices Core sent to MSI also include
references to services performed relating to the transactional trustees. (See Vehrs Decl.
¶ 2, Ex. 21.)
Based on the evidence and construing the record in the light most favorable to
Defendants, the Court concludes that there is a genuine issue of material fact regarding
whether Core or Mohagen breached any fiduciary duties in its relationship with MSI. In
light of the complexity of establishing an ESOP and the number of interrelated services
required to do so, a jury could reasonably infer that Core’s services involving the
transactional trustees were performed for MSI’s benefit. Expert testimony will be
necessary to aid the trier of fact in evaluating a possible breach of fiduciary duty based on
a purported conflict of interest, and the Court concludes that such facts are more properly
resolved at trial.
Although the ESOP experts on both sides appear to agree that it would be a
conflict of interest for an attorney to simultaneously represent both the company and the
ESOP trustees in negotiations, the record does not conclusively establish that Mohagen in
fact represented both parties in this manner. Vogl’s expert opinion that Defendants
engaged in such conflicted representation can be weighed by a factfinder at trial. Indeed,
some evidence tends to suggest that Core provided services to the transactional trustees
and even gave them advice or counsel on certain issues. However, these services could
reasonably be considered proper and within the scope of necessary services to MSI
leading up to the ultimate stock sale. Again, expert testimony will likely provide
40
significant assistance to the factfinder in evaluating Defendants’ actions. Based on the
complexity of the issues and construing the record in the light most favorable to
Defendants, the Court declines to hold that Defendants breached a fiduciary duty on this
record as a matter of law.
3.
Damages
Third, even if MSI had established that Core and Mohagen owed MSI fiduciary
duties and breached those duties by representing conflicting parties, the record does not
conclusively establish that this purported conflict was causally related to the services for
which MSI paid Core $60,000. As the North Dakota Supreme Court recently
emphasized, “[d]amages are an essential element for a breach of fiduciary duties claim.
Merely stating damages exist is not enough.” Vendsel, 2017 ND 71, ¶ 18, 891 N.W.2d at
756 (citation omitted). Even where the facts support a finding that the defendant
breached a fiduciary duty and held a conflict of interest, “there also must be evidence to
raise a factual issue that the defendants’ . . . breach of fiduciary duty proximately caused
damage to the plaintiffs.” Meyer, 2001 ND 87, ¶ 15, 626 N.W.2d at 287. With respect to
an attorney-client relationship, the North Dakota Supreme Court has held that “[t]he
lawyer who does not represent his client with undivided loyalty is not ordinarily entitled
to compensation for his services.” Rolfstad, Winkjer, Suess, McKennett & Kaiser, P C. v.
Hanson, 221 N.W.2d 734, 737 (N.D. 1974). Given the disputed facts highlighted above,
the Court finds that the issue of damages for any alleged breach of fiduciary duty is
properly resolved at trial.
41
The Court will deny MSI’s Motion for Summary Judgment on its
breach-of-fiduciary-duty claim against Defendants. Because there is evidence in the
record that tends to support liability on this basis, however, the Court also declines
Defendants’ invitation to grant summary judgment dismissal of this claim.
E.
Unjust Enrichment
MSI argues that Defendants’ unjust enrichment claim must be dismissed because
the parties’ claims are governed by express contracts, namely the First and Second
Consulting Agreements. Notwithstanding the unsigned consulting agreements, MSI
asserts that the terms of the executed agreements (including those requiring Core to
notify MSI of additional services and fees it was incurring) control.
Defendants, on the other hand, argue that they have validly asserted their unjust
enrichment counterclaim as an alternative claim to recover for services Core performed
and for which MSI has refused to pay. Defendants argue that this claim is not barred
because MSI did not execute the additional proposed consulting agreements.
Under North Dakota law, a claim of unjust enrichment requires proof of five
elements: “(1) an enrichment, (2) an impoverishment, (3) a connection between the
enrichment and the impoverishment, (4) the absence of a justification for the enrichment
and impoverishment, and (5) the absence of a remedy provided by law.” KLE Const.,
LLC v. Twalker Dev., LLC, 2016 ND 229, ¶ 6, 887 N.W.2d 536, 538 (quoting McColl
Farms, LLC v. Pflaum, 2013 ND 169, ¶ 18, 837 N.W.2d 359, 367). Unjust enrichment is
an equitable theory applicable “in the absence of an express or implied contract.”
42
Northstar Founders, LLC v. Hayden Capital USA, LLC, 2014 ND 200, ¶ 53, 855 N.W.2d
614, 633.
An existing contract between the parties forecloses a claim for unjust enrichment
because any impoverishment flowing from a valid contract “is not contrary to equity.”
Northstar Founders, ¶ 57, 855 N.W.2d at 634 (quoting BTA Oil Producers v. MDU Res.
Grp., Inc., 2002 ND 55, ¶ 23, 642 N.W.2d 873, 882). In particular, a valid contract
undermines the “essential element” underlying the theory of unjust enrichment—“the
receipt of a benefit by the defendant from the plaintiff which would be inequitable to
retain without paying for its value.” KLE Const., 2016 ND 229, ¶ 6, 887 N.W.2d at 538
(quoting McColl Farms, 2013 ND 169, ¶ 18, 837 N.W.2d at 367); Apache Corp. v. MDU
Res. Grp., Inc., 1999 ND 247, ¶ 15, 603 N.W.2d 891, 895; see also Zuger v. N.D. Ins.
Guar. Ass’n, 494 N.W.2d 135, 138-39 (N.D. 1992). The presence of a contract between
the parties also implies an adequate legal remedy by which the aggrieved party can seek
recovery for any alleged impoverishment. See KLE Const., 2016 ND 229, ¶¶ 14, 17, 887
N.W.2d at 540-41.
In short, “the jurisprudence of the Supreme Court of North Dakota clearly
forecloses relief on claims for unjust enrichment in the face of an express contract.” JN
Expl. & Prod. v. W. Gas Res., Inc., 153 F.3d 906, 913 (8th Cir. 1998). Indeed, “where
. . . the parties have voluntarily entered into an express written contract which defines the
rights of each, unjust enrichment is a non sequitur.” Id. at 910; see also Ritter, Laber &
Assocs., Inc. v. Koch Oil, Inc., 2004 ND 117, ¶ 28, 680 N.W.2d 634, 643 (“[I]t is
well-settled that unjust enrichment applies only in the absence of a contract between the
43
parties, and there can be no implied-in-law contract when there is an express contract
between the parties relative to the same subject matter.”).
In light of these principles, the Court concludes that MSI is entitled to summary
judgment on Defendants’ unjust enrichment claim. By their terms, the First and Second
Consulting Agreements plainly address MSI’s payment obligations with respect to the
services described in Exhibit 1 as well as “additional services” provided by Core. 12 (1st
CA ¶ 1; 2nd CA ¶ 1.) If a factfinder ultimately concludes that Core is not entitled to
additional fees because it failed to properly notify MSI that it was performing services
outside the scope of the executed agreements, any impoverishment suffered by Core
would be equitable under the written terms agreed upon by the parties. The parties do not
dispute the validity or enforceability of the First and Second Consulting Agreements.
Indeed, these agreements are the basis for Defendants’ breach-of-contract counterclaim,
demonstrating that Core has an adequate remedy at law to pursue reimbursement for
services rendered. Thus, Defendants’ unjust enrichment claim is properly dismissed.
F.
Deceit
MSI argues that Defendants’ deceit counterclaim is meritless because other than
Mohagen’s self-serving testimony Defendants failed to produce any evidence to support
that MSI engaged in willful deception. In particular, MSI argues that Defendants fall
short of the clear and convincing evidence standard required to establish a deceit claim.
12
For this reason, the Court finds it immaterial that Mathwig failed to sign the
remaining proposed consulting agreements. The parties’ relationship was governed by
the signed Consulting Agreements until it was terminated, precluding the application of
unjust enrichment.
44
Defendants argue that the evidence and inferences from the evidence support that
Mathwig made a promise to sign the consulting agreements and pay the fees outlined in
the Services Summary without intending to sign the agreements or pay the corresponding
fees. Defendants point out that MSI has failed to present competent evidence to refute
Mohagen’s testimony about the April 7, 2015 telephone conversation and contend that
Mathwig’s deposition testimony and declaration conflict. In short, Defendants argue that
genuine issues of material fact preclude summary judgment on this claim.
“One who willfully deceives another with intent to induce that person to alter that
person’s position to that person’s injury or risk is liable for any damages which that
person thereby suffers.” N.D. Cent. Code. § 9-10-03 (2017). For purposes of this
provision, “[a] deceit” means, in relevant part, “[a] promise made without any intention
of performing.” N.D. Cent. Code § 9-10-02. Such a promise may establish deceit even if
the promise “does not meet the requirements of a contract between the parties.” Erickson
v. Brown, 2008 ND 57, ¶ 25, 747 N.W.2d 34, 45 (N.D. 2008) (quoting Delzer v.
United Bank of Bismarck, 527 N.W.2d 650, 653 (N.D. 1995)).
“Although deceit is ordinarily a question of fact, it must be established by clear
and convincing evidence.” Id. at ¶ 30, 747 N.W.2d at 47. At the summary judgment
stage, a court evaluating a deceit claim may properly “consider the quantum of proof
necessary to support liability.” Macquarie Bank Ltd. v. Knickel, 723 F. Supp. 2d 1161,
1200 (D.N.D. 2010) (quoting Erickson, 2008 ND 57, ¶ 30, 747 N.W.2d at 47), aff’d, 793
F.3d 926 (8th Cir. 2015). “Deceit is ordinarily not susceptible of direct proof and may be
inferred from the circumstances.” Delzer, 527 N.W.2d at 656. However, where a claim
45
for deceit rests on an alleged promise made without any intention to perform, failure to
provide clear and convincing evidence of that promise may render summary judgment
dismissal appropriate. See Macquarie Bank, 723 F. Supp. 2d at 1198-1200.
The Court concludes that genuine issues of material fact exist, precluding
summary judgment on Defendants’ deceit claim. When viewed in the light most
favorable to Defendants, the relevant evidence summarized above presents disputes of
fact appropriate for resolution at trial. This is so even under the clear and convincing
evidence standard. Specifically, if a jury finds Mohagen’s testimony regarding the
April 7, 2015 telephone conversation to be credible, it could reasonably conclude that
Mathwig made the alleged promise to execute the remaining consulting agreements on
behalf of MSI and pay related fees as outlined in the Services Summary. Notably,
Mohagen’s testimony is corroborated by subsequent e-mail correspondence referencing
Mathwig’s alleged agreement. Reasonable jurors could also infer from the circumstances
that Mathwig made the alleged promise on behalf of MSI without intending to execute
the consulting agreements and with the intent to induce Core to continuing providing
services.
To be sure, the Court acknowledges that the evidence could also support that
Mathwig engaged in no such willful deception. However, the Court’s role at this stage is
not to find facts, but to determine whether there are any genuine issues of fact appropriate
for trial. Having concluded that there are, the Court denies MSI’s motion for summary
judgment on Defendants’ deceit claim.
46
II.
MSI’s Motion to Exclude Expert Testimony
MSI has also moved to exclude Defendants’ experts Leonard Sliwoski, Steven
Greenapple, and Duane Lillehaug from testifying at trial. In short, MSI argues that all
three of these experts “would provide irrelevant and unreliable expert testimony and
should be excluded.” (Doc. No. 64 at 6.) Defendants oppose MSI’s motion.
A.
Daubert Standard
Before accepting the testimony of an expert witness, the trial court is charged with
the “gatekeeper” function of determining whether an opinion is both relevant and
reliable. Daubert v. Merrell Dow Pharms., Inc., 509 U.S. 579, 589-90 (1993); Aviva
Sports, Inc. v. Fingerhut Direct Mktg., Inc., 829 F. Supp. 2d 802, 820 (D. Minn. 2011).
Under Federal Rule of Evidence 702, which governs the admission of expert testimony, a
duly qualified expert may testify if: (1) “the expert’s scientific, technical, or other
specialized knowledge will help the trier of fact to understand the evidence or to
determine a fact in issue”; (2) “the testimony is based on sufficient facts or data”; (3) “the
testimony is the product of reliable principles and methods”; and (4) “the expert has
reliably applied the principles and methods to the facts of the case.” Fed. R. Evid. 702;
see also Lauzon v. Senco Prods., Inc., 270 F.3d 681, 686 (8th Cir. 2001).
Rule 702 recognizes five bases for expert qualification: “knowledge, skill,
experience, training, or education.” Fed. R. Evid. 702. While an expert witness must be
qualified to testify in a given subject area, the requirement is not rigorous, and “[g]aps in
an expert witness’s qualifications or knowledge generally go to the weight of the
witness’s testimony, not its admissibility.” Am. Auto. Ins. Co. v. Omega Flex, Inc., 783
47
F.3d 720, 726 (8th Cir. 2015) (quoting Robinson v. GEICO Gen. Ins. Co., 447 F.3d 1096,
1100 (8th Cir. 2006)).
The Court also notes that “Rule 702 reflects an attempt to liberalize the rules
governing the admission of expert testimony,” and it favors admissibility over exclusion.
Lauzon, 270 F.3d at 686 (quoting Weisgram v. Marley Co., 169 F.3d 514, 523 (8th
Cir. 1999), aff’d, 528 U.S. 440 (2000)). When examining an expert opinion, a court
applies a general rule that “the factual basis of an expert opinion goes to the credibility of
the testimony, not the admissibility, and it is up to the opposing party to examine the
factual basis for the opinion in cross-examination.” Bonner v. ISP Techs., Inc., 259 F.3d
924, 929 (8th Cir. 2001) (quoting Hose v. Chi. Nw. Transp. Co., 70 F.3d 968, 974 (8th
Cir. 1995)). “[I]f the expert’s opinion is so fundamentally unsupported that it can offer
no assistance to the jury,” then it must be excluded. Id. at 929-30. In Kumho Tire Co. v.
Carmichael, 526 U.S. 137, 152 (1999), the Supreme Court concluded that “the trial judge
must have considerable leeway in deciding in a particular case how to go about
determining whether particular expert testimony is reliable.” The proponent of the
evidence has the burden of establishing by a preponderance of the evidence that
testimony is admissible. Lauzon, 270 F.3d at 686.
An expert’s testimony should not be excluded based on “mere disagreement with
the assumptions and methodology used.” See S.E.C. v. Das, 723 F.3d 943, 951 (8th Cir.
2013) (quoting Synergetics, Inc. v. Hurst, 477 F.3d 949, 956 (8th Cir. 2007)). As the
Supreme Court has emphasized, “[v]igorous cross-examination, presentation of contrary
evidence, and careful instruction on the burden of proof are the traditional and
48
appropriate means of attacking shaky but admissible evidence.” Daubert, 509 U.S. at
596. Notwithstanding “some flaws in the expert[’s] methods, if the testimony is within
the range where experts might reasonably differ, the jury, not the trial court, should be the
one to decide among the conflicting views of different experts.” Hill v. Sw. Energy Co.,
858 F.3d 481, 486 (8th Cir. 2017) (quotation marks and citation omitted); see also
Johnson v. Mead Johnson & Co., 754 F.3d 557, 562 (8th Cir. 2014) (“[D]istrict courts are
admonished not to weigh or assess the correctness of competing expert opinions.”).
“Courts should resolve doubts regarding the usefulness of an expert’s testimony in favor
of admissibility.” Marmo v. Tyson Fresh Meats, Inc., 457 F.3d 748, 758 (8th Cir. 2006).
B.
Defendants’ Expert Leonard Sliwoski
MSI moves to exclude testimony by Defendants’ expert Leonard Sliwoski
(“Sliwoski”). Sliwoski has more than three decades of experience as an accounting
professor and litigation and business consultant. (Vehrs Decl. ¶ 2, Ex. 32 (“Sliwoski
Rep.”) at 4 & Ex. B at 1-2.) He is experienced in assessing commercial damages and
valuing closely-held businesses, and he has provided litigation support or expert
testimony in numerous cases. (Id. at 4.) In this case, Sliwoski offers an opinion on
Core’s damages. (Id. at 1.) Specifically, Sliwoski’s report states that “[o]ur opinion of
economic damages relates only to future lost profit after ESOP formation, and the
opinion is based on information that is referenced in this report.” (Id.) Such information
includes the signed and unsigned Consulting Agreements as well as interviews with
Mohagen and Bart McIlonie. (Id. at 3-4.) Importantly, Sliwoski notes the following
regarding the basis for his opinion in this matter: “It is management’s assertion, and we
49
have relied on this assertion, that approximately $150,000 of annual revenue would occur
for a seven-year time period if ESOP formation would have occurred, and that Core
Consulting would have provided ESOP services to earn the $150,000 of annual revenue.”
(Id. at 2.) Taking into account Core’s operating expenses, Sliwoski opines that Core’s
lost profit damages amount to “approximately $517,000.” (Id.) MSI asserts two primary
bases for excluding Sliwoski’s testimony: (1) that his opinions relating to future lost
profit damages are unreliable; and (2) that these opinions are irrelevant.
MSI argues that Sliwoski’s opinion is unreliable “because it is based on
speculation rather than on any substantive facts.” (Doc. No. 64 at 10.) Specifically, MSI
contends that there is no support for Sliwoski’s assumption that MSI would have engaged
Core to provide future services following the ESOP formation. MSI also argues that a
purported agreement to provide services into the future for seven years would need to be
in writing to be enforced and notes that there is no such written contract. MSI also
suggests that Defendants’ argument that they were entitled to seven years of services into
the future is contrary to the freedom of parties to terminate a professional services
relationship at any time. Finally, MSI argues that there is no support for Defendants’
estimate that future services would have resulted in $150,000 in revenue each year or that
those services would last for seven years. Along with challenging the reliability of
Sliwoski’s opinions, MSI argues that they are irrelevant in light of the fact that no
agreement for post-ESOP formation services existed between the parties. Even if
Defendants’ breach-of-contract counterclaim succeeds, MSI argues, “it is not entitled to
damages for hypothetical post-ESOP formation services.” (Doc. No. 77 at 3.)
50
Defendants contend that Sliwoski’s opinions are both reliable and relevant.
Defendants challenge MSI’s suggestion that Sliwoski’s opinions are based on
unsupported facts. Rather, Defendants argue that his opinions are “premised on the need
for post-ESOP administration services to be provided by Core, and of which MSI was
informed of [sic] prior to MSI terminating the relationship.” (Doc. No. 72 at 12-13.)
Defendants argue that future lost profits damages are relevant in light of Core’s
counterclaims against MSI for deceit and breach of contract. According to Defendants,
deceit claims permit broad damages, even those not anticipated. Similarly, Defendants
argue that lost profit damages are permissible in a breach-of-contract action if they are
reasonable, even if they are not certain.
The Court concludes that Sliwoski’s testimony is neither reliable nor relevant and
should therefore be excluded. Sliwoski’s opinion regarding Core’s lost profit damages
relies on unfounded assumptions that Core would provide post-ESOP formation services
to MSI and that those services would result in $150,000 of revenue on an annual basis for
seven years. There was no agreement between the parties regarding
post-ESOP-formation services, and Defendants have pointed only to cursory and
preliminary references to the need for such services being provided. Notably, the
executed Consulting Agreements state that “[a]t [MSI’s] sole discretion [Core] or other
service providers may be engaged separately and specifically to address the issues raised
by the Consultant.” (1st CA ¶ 1; 2nd CA ¶ 1.) Because Sliwoski’s opinion regarding
future lost profits is founded on unwarranted assumptions, his opinion is not sufficiently
reliable to provide assistance to the factfinder. See Meterlogic, Inc. v. KLT, Inc., 368
51
F.3d 1017, 1019 (8th Cir. 2004) (affirming the district court’s conclusion that an expert’s
testimony regarding damages was unreliable; noting that the expert “predicted financial
results ten years into the future even though the parties’ contract extended only two years
and allowed for termination at any time” and “assumed that Meterlogic would be the sole
representative of the appellees, even though the contract was a non-exclusive
agreement”).
Defendants argue that Sliwoski’s opinion should not be excluded because it is
relevant for assessing damages with respect to Core’s deceit and breach-of-contract
counterclaims. However, neither the record nor the law support Core’s claimed
entitlement to future lost profit damages under these claims. The North Dakota Supreme
Court has explained that in a breach-of-contract action, “the injured party may not
recover conjectural profits.” Bergquist-Walker Real Estate, Inc. v. William Clairmont,
Inc., 333 N.W.2d 414, 420 (N.D. 1983). Specifically, “[i]n connection with the loss of
prospective profits, the injured party can recover only to the extent that the evidence he
produces affords a sufficient basis for estimating with reasonable certainty the amount of
profits prevented by the wrongful breach of the contract.” Id.; see also Leingang v. City
of Mandan Weed Bd., 468 N.W.2d 397, 398 (N.D. 1991) (“[A] party is entitled to recover
for the detriment caused by the defendant’s breach, including lost profits if they are
reasonable and not speculative.”). As noted above, the executed Consulting Agreements
do not provide a reasonable basis to support Core’s entitlement to post-ESOP formation
services.
52
With respect to deceit, North Dakota law provides that “[o]ne who willfully
deceives another with intent to induce that person to alter that person’s position to that
person’s injury or risk is liable for any damage which that person thereby suffers.” N.D.
Cent. Code § 9-10-03 (2017). Damages for such a claim are measured according to “the
amount which will compensate for all the detriment proximately caused thereby, whether
it could have been anticipated or not.” N.D. Cent Code § 32-03-20 (2017). Although
“[t]he measure of damages in tort is broader than in contract,” Delzer v. United Bank,
1997 ND 3, ¶ 17, 559 N.W.2d 531, 536 (citation omitted), the claimed damages must still
bear a proximate relationship to the alleged deceit, see Schneider v. Schaaf, 1999
ND 235, ¶ 18, 603 N.W.2d 869, 875 (noting that the North Dakota Supreme Court has
“rejected an all-encompassing concept of damages in fraud and deceit cases”). As in a
breach-of-contract action, in a tort claim, “[d]amages for lost profits are recoverable
when they are reasonable and not speculative.” See Red River Wings, Inc. v. Hoot, Inc.,
2008 ND 117, ¶ 42, 751 N.W.2d 206, 223. Even if Defendants prevail on their deceit
claim based on Mathwig’s alleged promise to execute the unsigned consulting
agreements, Core’s claimed entitlement to lost profits for post-ESOP formation services
is simply too speculative to justify an award of damages.
Because Sliwoski’s opinion is based on unreliable assumptions and is irrelevant to
any damages to which Defendants are lawfully entitled, the Court will grant MSI’s
motion to exclude his testimony.
53
C.
Defendants’ Expert Steven Greenapple
MSI also challenges the admissibility of the testimony of Defendants’ expert
Steven Greenapple. Greenapple has a J.D. from Cornell Law School and has been
practicing law since 1984. (Greenapple Rep. at 1.) Since 1990, he has been involved in
transactions involving ESOPs, and his current practice includes “well over 90% ESOP
related work.” (Id. at 1-2.) Greenapple is also a shareholder of a “financial advisory
firm,” SES Advisors, Inc. (“SES”), that provides ESOP-related services. (Id.) His work
with SES involves “ESOP feasibility studies,” financing, record-keeping, and other
consulting services. (Id. at 2.) Greenapple explains that “[a]lthough I do not personally
perform the analysis required for these services, I am very involved in the process of
identifying and explaining the need for such services, negotiating the terms upon which
such services will be provided, and presenting the results of such services.” (Id.)
Greenapple is also “a member of, and a frequent speaker for, The ESOP Association and
of the National Center for Employee Ownership, and is the Immediate Past Chair of The
ESOP Association’s Legislative and Regulatory Committee.” (Id., Attachment at 1.)
Greenapple intends to testify about whether MSI was an appropriate candidate for an
ESOP, the appropriateness of Core’s consulting agreements and fees, and whether MSI
demonstrated an intention to proceed with the ESOP transaction in the spring of 2015.
(See generally Greenapple Rep.)
MSI seeks to exclude Greenapple’s opinions because they are both (1) unreliable
and (2) irrelevant. Regarding reliability, MSI asserts that Greenapple used an unreliable
methodology for evaluating the reasonableness of Defendants’ fees. Specifically, MSI
54
questions the applicability of a fair market value standard for assessing the
appropriateness of Defendants’ fees. This standard, MSI suggests, arises from the
Employee Retirement Income Security Act (“ERISA”) definition of fair market value and
applies to arms-length transactions rather than fees for professional services. MSI argues
that “Greenapple’s novel application of the ERISA standard to professional services has
not been tested, subject to peer review, and is not generally accepted.” (Doc. No. 64 at
14.) According to MSI, Defendants have not met their burden to establish the reliability
of this method. MSI also notes that Greenapple relied on propositions that conflict with
the evidence in the record such as a purported agreement between the parties to the fixed
fees proposed by Core. In short, MSI argues, “Greenapple’s opinion regarding the
appropriateness of Core and Mohagen’s fees is unreliable, irrelevant, and provides no
assistance to the jury.” (Id. at 16.) MSI also argues that Greenapple’s other proffered
opinions are improper expert testimony and are irrelevant to MSI’s fiduciary duty claim
or Defendants’ counterclaims. In particular, these opinions include (1) that MSI was an
excellent candidate for ESOP formation, (2) that MSI intended to follow through with the
ESOP transaction as of April 2015, and (3) that Defendants appropriately presented their
services to MSI through multiple agreements. In particular, MSI suggests that these
opinions are not relevant for evaluating the existence of an attorney-client relationship or
whether Mohagen engaged in conflicted representation in the ESOP transaction.
Defendants argue that Greenapple is qualified to provide an opinion on the
appropriateness of Core’s fees and suggest that Greenapple’s methodology for reaching
this conclusion can be evaluated at trial. According to Defendants, “[s]imply because
55
MSI does not agree with the ‘fairness’ methodology used to determine whether the fees
charged by Core were reasonable does not require exclusion of Greenapple’s opinions.”
(Doc. No. 72 at 4.) Defendants suggest that MSI put this issue into question by alleging
that Core’s fees were not reasonable. Regarding the three other opinions offered by
Greenapple, Defendants suggest that those opinions “are all relevant to rebutting MSI’s
allegations.” (Id. at 5.) In particular, Defendants argue that Greenapple’s opinions are
relevant for evaluating MSI’s breach-of-fiduciary-duty claim, tied to the allegations in the
Complaint, and responsive to the opinions of MSI’s experts.
The Court concludes that Defendants’ expert, Greenapple, should be permitted to
testify at trial. Greenapple’s opinions are sufficiently reliable and relevant and would
provide assistance to the jury in resolving the claims at issue.
First, Greenapple’s opinion regarding Core’s fees should not be excluded based on
an arguably unreliable methodology. Greenapple explains the standard by which he
evaluated Core’s fees as follows:
The appropriateness of fees is largely a question of fairness. Fairness is a
fundamental issue in the ESOP world. ERISA defines “fair market value”
as “the price at which an asset would change hands between a willing buyer
and a willing seller when the former is not under any compulsion to buy
and the latter is not under any compulsion to sell, and both parties are able,
as well as willing, to trade and are well-informed about the asset and the
market for that asset.”
Stated a little more simply, if both parties are willing, neither is under any
compulsion, and both are well informed, the price they agree on is, by definition,
fair. The same concepts are applicable in determining the fairness of a fee for
services . . . .
56
(Greenapple Rep. at 6-7.) Greenapple thereafter applies this standard to the parties’
transaction based on a review of numerous e-mails between the parties illustrating that
“[t]he fees were discussed and negotiated extensively.” (Id. at 7-8.) When asked in his
deposition whether “ERISA govern[s] what fees can be charged by professional service
providers in ESOP transactions,” Greenapple responded, “Not that I know of.”
(Greenapple Dep. at 133:12-15.)
The Court is not persuaded that Greenapple’s methodology is so unreliable to
warrant exclusion. In particular, a lack of peer review, testing, or general acceptance is
not dispositive in evaluating an expert’s methodology, and a court need not apply these
factors in all cases. See Kumho, 526 U.S. at 152 (“[A] trial court should consider the
specific factors identified in Daubert where they are reasonable measures of the
reliability of expert testimony.”). Here, Greenapple’s opinion is not based on the type of
expertise where such factors should carry significant weight. MSI may raise its criticisms
of Greenapple’s application of a fair market value standard in opining on the
reasonableness of Core’s fees at trial.
The Court also finds Greenapple’s opinion to be sufficiently reliable even though
it relies on disputed facts. Specifically, Greenapple based his opinion in part on the
proposition that “Mr. Jerry Mathwig and MSI agreed to the fees proposed by [Core].”
(Greenapple Rep. at 8.) In his deposition, Greenapple acknowledged that the parties
dispute whether MSI agreed to the proposed consulting agreements and fees.
(Greenapple Dep. at 140:23-142:3.) However, after reviewing documents in the case,
Greenapple made the conclusion that the parties reached such an agreement. (See id.) As
57
the Court previously concluded in evaluating Defendants’ deceit counterclaim, a jury
could reasonably conclude Mathwig promised to pay the proposed fees in light of the
evidence in the record. To the extent MSI wishes to challenge the factual basis for
Greenapple’s opinion, it may do so at trial.
Second, the Court finds Greenapple’s opinions to be relevant in light of MSI’s
allegations against Defendants. Specifically, in its breach-of-fiduciary claim, MSI
alleges that “Mohagen and Core Consulting breached their fiduciary duties to MSI by,
among other things, recommending services and courses of action that were not in the
best interests of MSI, [and] attempting to charge MSI amounts vastly in excess of the flat
fees that MSI agreed to pay.” (Compl. ¶ 32.) MSI also alleges that “[u]pon information
and belief, Core Consulting and Mohagen’s recommendation of an ESOP to MSI was
motivated by a desire to earn fees for professional services, rather than by a proper and
informed assessment of MSI’s best interests.” (Id. ¶ 17.) In addition, MSI alleges that
“[u]pon information and belief, Core Consulting divides the agreements for the services it
proposes into numerous different contracts in an effort to obscure the exorbitant amount
of fees that it tries to collect . . . and to make ESOP-related work appear vastly more
complex than it is in reality.” (Id. ¶ 14.) MSI also alleges that Defendants’ billings
violate the North Dakota Rule of Professional Conduct that prohibits unreasonable fees.
(Id. ¶ 28.) Consistent with these allegations, MSI’s expert, Vogl, opines on the
reasonableness of Core’s fees and consulting agreements in his expert report. (See
generally Vogl Rep.) Although MSI has limited its breach-of-fiduciary claim at
summary judgment to the issue of whether Defendants improperly represented both sides
58
in the anticipated ESOP transaction, MSI has not claimed to have waived alternative
theories on which it may pursue its breach-of-fiduciary duty claim at trial. In light of the
allegations in the Complaint, the Court concludes that Greenapple’s opinions are
relevant. 13 Depending on the breach-of-fiduciary-duty theory MSI ultimately pursues at
trial, the Court will entertain objections to limit Greenapple’s testimony as appropriate at
a later time. 14
13
Greenapple’s report provides an opinion that certain actions by MSI and the
transactional trustees in April and May 2015 “indicate an intention on the part of MSI
and Mr. Mathwig to proceed with the ESOP transaction.” (Vehrs Decl. ¶ 2, Ex. 30
(“Greenapple Rep.”) at 9.) To the extent this opinion can be construed as seeking an
opinion on “the state of mind, intent, or motives of” MSI or particular individuals, the
Court agrees with MSI that such expert testimony would be improper. See Kruszka v.
Novartis Pharms. Corp., 19 F. Supp. 3d 875, 888 (D. Minn. 2014). However, to the
extent it becomes relevant to the claims and theories advanced at trial, Greenapple may
appropriately testify on this issue to assist the factfinder in evaluating MSI’s actions. The
Court reserves the right to address this issue further at trial.
14
The Court also notes that Greenapple’s testimony will be useful for assisting the
jury in developing a “global understanding” of ESOPs and the services required to
establish an ESOP. See Clark ex rel. Clark v. Heidrick, 150 F.3d 912, 914-915 (8th Cir.
1998) (affirming the admission of expert testimony that “gave the jury a global
understanding of possible causes of brachial plexus injuries”). The Court concludes that
ESOP transactions are “a subject matter on which the factfinder can be assisted by an
expert,” and that general background testimony on this topic will be useful at trial. See
United States v. Coutentos, 651 F.3d 809, 821 (8th Cir. 2011) (quoting Advisory
Committee’s Note on Fed. R. Evid. 702); see also id. (“In some cases, it might be
important ‘for an expert to educate the factfinder about general principles, without ever
attempting to apply these principles to the specific facts of the case’ such as ‘instruct[ing]
the factfinder on the principles of thermodynamics, or bloodclotting, or on how financial
markets respond to corporate reports.’” (quoting Advisory Committee’s Note on Fed. R.
Evid. 702)).
The Court will not, however, permit Greenapple to testify to any opinions not
disclosed in his expert report. Specifically, Greenapple did not render an opinion on
whether Defendants’ services on behalf of MSI and the transactional trustees were
affected by a conflict of interest. To the extent Greenapple’s report contains background
(Footnote Continued on Next Page)
59
In short, the Court concludes that Greenapple’s testimony is both sufficiently
reliable to be admitted at trial and relevant to the claims and allegations asserted in this
case. MSI’s challenges largely go to the weight of Greenapple’s testimony rather than its
admissibility and should therefore be addressed at trial.
D.
Defendants’ Expert Duane Lillehaug
Finally, MSI moves to exclude testimony by Defendants’ expert Duane Lillehaug,
an expert disclosed to rebut the testimony of MSI’s expert, Eric Cooperstein. Lillehaug is
an attorney who received his J.D. from the University of North Dakota in 1975.
(Lillehaug Rep., Ex. A at 1.) He has been admitted to practice law in North Dakota and
Minnesota for more than four decades. (Id. at 2-3.) Lillehaug practices in “personal
injury, wrongful death, insurance coverage, commercial and business disputes and
employment law in both Minnesota and North Dakota.” (Second Vehrs Decl. ¶ 2, Ex. 41
(“Lillehaug Dep.”) at 10:9-18.) He has held numerous professional memberships and
leadership positions in the legal community, including serving as President of the
Minnesota Association for Justice from 2002 through 2003. (Lillehaug Rep., Ex. A at
3-4.) Lillehaug intends to provide an opinion on the applicability of the North Dakota
Rules of Professional Conduct to Core’s relationship with MSI. (Id. at 1.)
MSI argues that Lillehaug’s testimony should not be admitted for two reasons:
(1) he lacks the requisite qualifications, and (2) his opinions are unreliable. Essentially,
(Footnote Continued From Previous Page)
information that could assist the jury in evaluating this issue, the Court will permit such
testimony. Greenapple, however, will not be permitted to offer an undisclosed opinion.
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MSI contends that “Lillehaug’s testimony should be excluded because professional ethics
is not within his area of expertise and he has not shown the application of any valid
reasoning or methodology with respect to his conclusions.” (Doc. No. 77 at 7.)
First, MSI argues that “Lillehaug has no specialized knowledge, skill, experience,
training or education in attorney ethics or professional responsibility.” (Doc. No. 64 at
19.) In particular, MSI points out that Lillehaug has no particular training in ethics
beyond the minimum required of all licensed North Dakota attorneys and that necessary
to obtain malpractice insurance. MSI also notes that Lillehaug has no relevant expertise
regarding ESOPs. MSI suggests that “Lillehaug’s proposed testimony regarding the
application of the Rules of Professional Conduct to the facts of this case are well beyond
the scope of his expertise.” (Id. at 21.)
Second, MSI contends that Lillehaug’s testimony should be excluded because his
opinions are not reliable and would be of no assistance to a jury. In particular, MSI
asserts that Lillehaug’s opinion regarding whether Defendants provided legal services to
MSI is based on certain flawed or incorrect assumptions and an unreliable methodology.
MSI emphasizes Lillehaug’s reliance on the disclaimer language in the First and Second
Consulting agreements and suggests that Lillehaug failed to properly evaluate the nature
of the services provided. MSI also notes that Lillehaug failed to clearly identify the
definition of “legal services” he applied in reaching his opinion. According to MSI,
Lillehaug failed to apply reliable principles in evaluating the disclaimers, and he failed to
consider a relevant North Dakota ethics opinion which states that disclaimers are
ineffective if legal services are provided. MSI further notes that Lillehaug’s analysis of
61
this issue is based on facts provided by Mohagen regarding ESOP transactions. For this
reason, MSI suggests, “Lillehaug’s opinion on whether Core and Mohagen provided legal
services amounts to an improper attempts [sic] to cloak Core and Mohagen’s own
self-serving arguments in the authority of expert testimony.” (Id. at 24.) Similarly, MSI
notes that Lillehaug’s reference to the dismissal of the ethics complaint against Mohagen
is merely “restating the conclusions of others.” (Doc. No. 77 at 10.)
MSI also challenges the reliability of Lillehaug’s opinion regarding whether
Defendants engaged in law-related services subject to Rule 5.7 of the North Dakota Rules
of Professional Conduct. According to MSI, Lillehaug failed to reliably analyze whether
Core provided services that would fall under the provision of law-related services in this
rule. MSI challenges Lillehaug’s conclusion that Rule 5.7(a) does not apply because
Lillehaug does not specify a rationale for the weight he gives to certain facts supporting
his opinion. In short, MSI argues that “even if Lillehaug were qualified to provide expert
testimony on legal ethics, his methodology is so woefully unreliable and inadequate that
it would provide no assistance to the jury and should be excluded.” (Doc. No. 64 at 28.)
Defendants argue that “Lillehaug is well qualified, based upon his knowledge,
skill, and experience, to offer opinions about whether Mohagen breached any obligations
under the applicable rules of professional conduct.” (Doc. No. 72 at 7.) Defendants
point to Lillehaug’s forty-one years of experience practicing law and note that Lillehaug
has specifically handled legal malpractice cases in the past five years. Defendants further
argue that Lillehaug does not need any specialized knowledge of ESOPs to give an
opinion on legal ethics in this matter. Defendants emphasize that MSI may rebut
62
Lillehaug’s opinions or challenge them through cross-examination at trial and argue that
his opinion should not be excluded.
Regarding reliability, Defendants argue that MSI’s challenges address weight and
credibility rather than admissibility. Defendants point out that Lillehaug is licensed to
practice law in North Dakota whereas MSI’s legal ethics expert is not, rendering
Lillehaug’s opinion helpful to a jury and reliable. In response to MSI’s challenges to
Lillehaug’s methodology, Defendants argue that “Lillehaug properly analyzed the
language of Rule 5.7 and the corresponding commentary in determining that
Mohagen/Core took proper steps to ensure that no attorney-client relationship was
formed with MSI.” (Id. at 10.) Defendants also note that Lillehaug did cite the
North Dakota ethics opinion that MSI asserts he failed to consider. In addition,
Defendants point out that Lillehaug gave proper consideration to the dismissal of the
ethics complaint filed against Mohagen related to the facts underlying this matter.
Because MSI’s expert failed to give this disposition weight, Defendants argue that
Lillehaug provides a more reliable and relevant opinion.
The Court concludes that Lillehaug should be permitted to testify at trial. First,
the Court concludes that Lillehaug is qualified to testify on the matters outlined in his
report. Lillehaug has previously offered deposition testimony in a legal malpractice case
in North Dakota state court. (Lillehaug Rep., Ex. B; Lillehaug Dep. at 6:4-7:21.)
Although Lillehaug does not consider himself to be an expert in ESOPs, he does consider
himself “an expert in lawyer ethics and professional responsibility.” (Lillehaug Dep. at
12:5-18.) In his deposition, Lillehaug explained that he obtains a minimum of three
63
hours of ethics training each year along with additional seminars on occasion. (Id. at
13:1-7.) Lillehaug has represented one or two clients in legal malpractice cases in the
past five years. (Id. at 14:5-14.) Lillehaug’s four decades of experience as an attorney as
well as his specific experience representing clients and testifying in a legal malpractice
matter demonstrate that he is qualified to assist the jury in understanding the applicability
of the ethics rules in this case. Any gaps in Lillehaug’s qualifications go to the credibility
of his testimony, not its admissibility.
Second, the Court determines that Lillehaug’s methodology is sufficiently reliable
to permit his testimony on the matters outlined in his expert report. Lillehaug’s ultimate
opinion is that the North Dakota Rules of Professional Conduct did not apply to Core’s
provision of services to MSI. (Lillehaug Rep. at 1.) This opinion is supported by two
separate conclusions. First, “any ‘law-related services,’ as defined in Rule 5.7(b),
N.D.R.Prof.Cond., were provided in circumstances that were distinct from the lawyers
provision of legal services to clients.” (Id.) Second, “the lawyer took reasonable
measures to assure that the person obtaining the legal [sic] 15 services knew that the
services provided were not legal services and that the protections of the client/lawyer
relationship did not exist.” (Id.) In reaching his opinion, Lillehaug reviewed the
North Dakota Rules of Professional Conduct and related commentary, ethics opinions,
caselaw, and documentary materials related to this lawsuit. (Id.; Lillehaug Dep. at 15:1217:3, 45:21-46:25.) Lillehaug also relied upon two conversations with Mohagen
15
See supra note 10.
64
regarding the matter. (Lillehaug Dep. at 18:22-22:14.) To the extent any particular
methodology is necessary in order for an expert to render an opinion in this context, the
Court is persuaded that Lillehaug reliably applied a valid methodology in forming his
opinion. MSI may certainly cross-examine Lillehaug on any particular shortcomings in
his methodology at trial. Likewise, any challenges to the factual basis for Lillehaug’s
opinion may be raised on cross-examination. Ultimately, a factfinder can evaluate the
weight to afford his testimony based on the competing opinion of MSI’s own expert. The
Court’s role at this stage, however, is not to weigh competing expert opinions. Because
Lillehaug reliably applied a valid methodology in rendering an opinion, the Court
declines to exclude his testimony on this basis.
Specifically, MSI criticizes Lillehaug’s failure to adequately analyze whether the
ESOP services being rendered by Core and Mohagen were legal services or law-related
services under Rule 5.7 of the North Dakota Rules of Professional Conduct. In
evaluating the circumstances and rendering an opinion, Lillehaug did so “[e]ven
assuming that some of the services Core Consulting provided to Metro Sales were
‘law-related services.’” (Lillehaug Rep. at 3.) His opinion also appears to rest on the
premise that the services provided were not “legal services” under the rule. (See id.)
MSI clearly disputes these underlying premises, but that dispute does not render
Lillehaug’s entire opinion unreliable or unhelpful to the jury.
Lillehaug agreed in his deposition that the rule relating to disclaimers “only comes
into play if the services are solely law-related services.” (Lillehaug Dep. at 51:8-12.) He
also agreed that a lawyer is subject to the rules of professional conduct if he in fact
65
provides legal services. (Id. at 34:14-35:1.) Finally, he agreed that the rules apply where
a lawyer is providing legal and law-related services in the same representation. (Id. at
40:19-24.) Lillehaug stated that he would defer to the expertise of Defendants’ ESOP
expert, Greenapple, regarding which services are commonly performed by lawyers in an
ESOP transaction. (Id. at 60:19-61:1.) The Court agrees that Lillehaug’s analysis could
be clearer regarding whether legal services were provided. However, to the extent the
factfinder concludes Core provided only law-related services and not legal services,
Lillehaug’s opinion will aid the jury in evaluating the nature of the parties’ relationship
and the scope of Core’s obligations to MSI. Although MSI disputes the assumptions or
premises upon which Lillehaug based his opinion, the Court concludes that his testimony
is sufficiently reliable and will be useful in helping the jury to evaluate the issues.
Rule 702 is a rule “of admissibility rather than exclusion.” Lauzon, 270 F.3d at
686 (quoting Arcoren v. United States, 929 F.2d 1235, 1239 (8th Cir.1991)).
Notwithstanding any doubts about Lillehaug’s methodology or the bases for his ultimate
opinion in this matter, the Court concludes that he may properly testify at trial. 16
16
The Court notes that Lillehaug’s testimony shall be admitted only to the extent it
does not wade into offering legal conclusions properly reserved for the factfinder. While
Lillehaug may assist the factfinder in evaluating the standard of care applicable to the
relationship between the parties, Lillehaug will not be permitted to instruct the jury on the
law. See S. Pine Helicopters, Inc. v. Phoenix Aviation Managers, Inc., 320 F.3d 838, 841
(8th Cir. 2003) (“[E]xpert testimony on legal matters is not admissible. Matters of law
are for the trial judge, and it is the judge’s job to instruct the jury on them.” (citation
omitted)).
In addition, as the Court noted with respect to Greenapple’s anticipated testimony,
Lillehaug may not offer any undisclosed opinions. The Court will entertain objections at
(Footnote Continued on Next Page)
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CONCLUSION
In light of genuine fact disputes in the record, the Court concludes that MSI is not
entitled to summary judgment on its declaratory judgment or breach-of-fiduciary-duty
claims. In addition, the Court concludes that the record precludes dismissal of Core’s
breach-of-contract and deceit counterclaims at this stage. However, Core’s counterclaims
for promissory estoppel and unjust enrichment are dismissed. The record fails to support
that Mathwig made a sufficiently clear and definite promise to support a promissory
estoppel claim, and Core’s unjust enrichment claim is foreclosed by the First and Second
Consulting Agreements which governed the parties’ obligations. At trial on the
remaining claims, the Court will permit the testimony of Steven Greenapple and Duane
Lillehaug, but Leonard Sliwoski may not testify regarding future lost profits.
ORDER
Based on the files, records, and proceedings herein, and for the reasons set forth
above, IT IS ORDERED that:
1.
Plaintiff’s Motion for Summary Judgment (Doc. No. [59]) is GRANTED
IN PART and DENIED IN PART as follows:
a.
The motion is GRANTED with respect to Defendant Core
Consulting Group, LLC’s (“Core”) counterclaim Count II – Unjust
Enrichment, and this claim is DISMISSED WITH PREJUDICE.
(Footnote Continued From Previous Page)
trial as appropriate to properly limit Lillehaug’s opinions to those contained in his expert
report.
67
b.
The motion is GRANTED with respect to Core’s
counterclaim Count III – Promissory Estoppel, and this claim is
DISMISSED WITH PREJUDICE.
c.
The motion is denied in all other respects, and the following
claims will proceed to trial: (1) Plaintiff’s Count I – Breach of Fiduciary
Duty; (2) Plaintiff’s Count II – Declaratory Judgment; (3) Core’s
counterclaim Count I – Breach of Contract; and (4) Core’s counterclaim
Count IV – Deceit/Misrepresentation.
2.
Plaintiff’s Motion to Exclude Expert Testimony (Doc. No. [62]) is
GRANTED IN PART and DENIED IN PART as follows:
a.
The motion is GRANTED with respect to Leonard Sliwoski,
and his opinion shall be presumptively inadmissible.
b.
The motion is DENIED with respect to Steven Greenapple
and Duane Lillehaug, and their expert opinions shall be presumptively
admissible, subject to proper foundation being established.
Dated: July 26, 2017
s/Donovan W. Frank
DONOVAN W. FRANK
United States District Judge
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