Kozlowski et al v. Palmquist et al
Filing
118
Memorandum Opinion and Order denying 79 Motion for Leave to Amend Plaintiffs' Complaint; granting in part and denying in part 81 Motion for Summary Judgment; denying 95 Motion for Sanctions. Signed by U.S. District Judge Karen E. Schreier on 3/29/2016. (JLS)
UNITED STATES DISTRICT COURT
DISTRICT OF SOUTH DAKOTA
SOUTHERN DIVISION
JAMES KOZLOWSKI, an individual;
AND PERRY KOZLOWSKI, an
individual;
Plaintiffs,
4:12-CV-04174-KES
MEMORANDUM OPINION AND
ORDER
vs.
GREGORY J. PALMQUIST, an
individual;
NORTH AMERICAN NATIONAL
MARKETING, LLC, a Colorado limited
liability company;
NANM, LLC, a Colorado limited liability
company;
GARDINER LIMITED PARTNERSHIP
ACQUISITIONS, LLC, a Colorado limited
liability company;
AVANZAR FINANCIAL GROUP, LLC, a
Colorado limited liability company;
and JOHN DOE DEFENDANTS 1-5,
being any other related person or entity;
Defendants.
Plaintiffs, James Kozlowski and Perry Kozlowski, move the court for an
order to amend the amended complaint. Defendants, Gregory Palmquist, North
American National Marketing, LLC, NANM, LLC, Gardiner Limited Partnership
Acquisitions, LLC, and Avanzar Financial Group, LLC, resist the motion.
Defendants move the court for summary judgment and for an order imposing
sanctions.1 The Kozlowskis resist the motions. For the following reasons, the
court denies the motion to amend the amended complaint, grants in part and
denies in part the motion for summary judgment, and denies the motion for
sanctions.
PROCEDURAL HISTORY
James Kozlowski is a resident of South Dakota, and Perry Kozlowski is a
resident of North Dakota. Defendant Gregory Palmquist is a resident of
Colorado, and the four defendant entities are Colorado limited liability
companies.
The Kozlowskis filed their complaint on October 10, 2012, alleging
causes of action for an accounting, breach of contract, fraud and deceit, and
tortious interference with a business/contractual relationship. Docket 1. The
defendants moved to dismiss the complaint or, in the alternative, to transfer
this case to the United States District Court for the District of Colorado. Docket
17. The Kozlowskis sought leave to amend their complaint while the
defendants’ motion was pending. Docket 21. On August 29, 2013, the court
granted the Kozlowskis’ motion to amend the complaint but dismissed the
fraud and deceit cause of action. Docket 29. The court denied the defendants’
motion to transfer venue. Id. On October 16, 2013, the court entered a
scheduling order setting discovery and pre-trial deadlines. Docket 34.
Defendants also requested oral argument pursuant to D.S.D. Civ. LR
7.1. Docket 81 at 1. Because the court can resolve the pending motions
without oral argument, defendants’ request is denied.
1
2
Additional facts will be discussed as those facts relate to the specific motions
pending before the court.
I.
The Kozlowskis’ Motion to Amend the Amended Complaint.
LEGAL STANDARD
Motions to amend the pleadings are ordinarily governed by Rule 15 of the
Federal Rules of Civil Procedure. The Rule provides that a party may amend a
pleading with “the court’s leave,” and the Rule directs the court to “freely give
leave when justice so requires.” Fed. R. Civ. P. 15(a)(2). But “[i]f a party files for
leave to amend outside of the court's scheduling order, the party must show
cause to modify the schedule” in accordance with Rule 16(b). Popoalli v. Corr.
Med. Servs., 512 F.3d 488, 497 (8th Cir. 2008) (citing Fed. R. Civ. P. 16(b)).
Under Rule 16(b), “[a] schedule may be modified only for good cause and with
the judge’s consent.” Fed. R. Civ. P. 16(b)(4). The “good cause” requirement of
Rule 16(b) necessitates a stronger showing that the movant is entitled to relief
than “the more liberal standard” of Rule 15(a). Morrison Enters., LLC v. Dravo
Corp., 638 F.3d 594, 610 (8th Cir. 2011) (quoting Sherman v. Winco Fireworks,
Inc., 532 F.3d 709, 716 (8th Cir. 2008)). “Thus, a moving party must first make
the requisite [good cause] showing. Even then the district court retains
discretion as whether to grant the motion.” Bradford v. DANA Corp., 249 F.3d
807, 809 (8th Cir. 2001) (explaining that “[a]s a vehicle designed to streamline
the flow of litigation through our crowded dockets, we do not take [scheduling]
orders lightly, and will enforce them”).
3
“What constitutes good cause sufficient to justify the modification of a
scheduling order necessarily varies with the circumstances of each case.” 6A
Charles Alan Wright & Arthur R. Miller, Federal Practice & Procedure, § 1522.2
(3d. ed) (hereinafter Wright & Miller). In Sherman, the Eighth Circuit explained
the contours of the “good cause” standard as follows:
The primary measure of good cause is the movant's diligence in
attempting to meet the order's requirements. Rahn v. Hawkins,
464 F.3d 813, 822 (8th Cir. 2006); see also Fed. R. Civ. P. 16(b),
advisory committee note (1983 Amendment) (“[T]he court may
modify the schedule on a showing of good cause if it cannot
reasonably be met despite the diligence of the party seeking the
extension.”). While the prejudice to the nonmovant resulting from
modification of the scheduling order may also be a relevant factor,
generally, we will not consider prejudice if the movant has not been
diligent in meeting the scheduling order's deadlines. . . . Our cases
reviewing Rule 16(b) rulings focus in the first instance (and usually
solely) on the diligence of the party who sought modification of the
order.
Sherman, 532 F.3d at 716-17 (alterations in original) (internal citations
omitted).2
DISCUSSION
Here, the court’s original scheduling order set March 31, 2014, as the
deadline to amend the pleadings. Docket 34 at 2. This deadline has not
changed. The Kozlowskis filed the pending motion on October 13, 2015,
approximately a year-and-a-half after the deadline to amend the pleadings
passed. Thus, the Kozlowskis must show “good cause” under Rule 16(b).
The Rahn decision was abrogated on other grounds. See Avichail ex rel.
T.A. v. St. John’s Mercy Health Sys., 686 F.3d 548, 552-53 (8th Cir. 2012).
2
4
The Kozlowskis’ original complaint alleged the existence of a business
arrangement between themselves, the defendants, and non-party Fox
Financial. The basis of the Kozlowskis’ fraud and deceit claim involved an
allegedly clandestine side-agreement between the defendants and Fox Financial
that contravened the parties’ original business arrangement. See Docket 1 at 6.
The court dismissed the fraud and deceit claim because the claim did not
comply with Rule 9. See Fed. R. Civ. P. 9(b) (“In alleging fraud . . ., a party
must state with particularity the circumstances constituting fraud”); Docket 29
at 19 (“Therefore, the court finds that plaintiffs failed to state with particularity
the circumstances constituting the alleged fraud and deceit.”). More
specifically, the court found that the Kozlowskis failed to specify which of the
five named defendants bore responsibility for the alleged fraud and deceit.
Docket 29 at 18 (explaining that the defendants were “left to guess who was
responsible for the alleged fraud and deceit” and that the defendants “were
hindered in their ability to respond specifically and quickly to the potentially
damaging allegations.”). The court dismissed the claim without prejudice. Id. at
21.3
The Kozlowskis filed as an exhibit a copy of their proposed second
amended complaint. Docket 79-1. It contains additional allegations supporting
the fraud and deceit claim that were not asserted in the original complaint. For
The court granted the Kozlowskis’ motion to amend the original
complaint so that the amount in controversy with respect to their claims was in
excess of $75,000. The court found the Kozlowskis’ failure to include the
appropriate amount in controversy was inadvertent. Docket 29 at 4. Also, the
Kozlowskis moved to amend the original complaint before the court entered its
scheduling order. Id.
3
5
example, the Kozlowskis allege that defendant Palmquist and non-party Daniel
Davies secretly met with Fox Financial in October of 2009. Id. at 6-7. The
Kozlowskis also allege that Palmquist sent an email about the meeting to them
later that month but that Palmquist assured them the parties’ original
business arrangement would continue. Id. at 7. But according to the proposed
amended complaint, Palmquist’s representations were false and the defendants
and Fox Financial actually decided to, and did in fact, cut the Kozlowskis out of
the business arrangement. Id. at 7. The Kozlowskis argue that the new facts
underlying their fraud and deceit claim were uncovered through the discovery
process. The Kozlowskis contend that they have diligently attempted to comply
with the court’s scheduling order and that they should be permitted to reassert their claim for fraud and deceit.
The court disagrees. In Sherman, the Eighth Circuit reversed the district
court’s decision to allow the defendant to add an affirmative defense based on
preemption more than seventeen months after the deadline for amending the
pleadings passed. Sherman, 532 F.3d at 712-13. The Eighth Circuit held that
Rule 16(b)’s good cause requirement was not satisfied. Id. at 717. The court
found that
Even though preemption is a purely legal defense based on readily
available federal law, [the defendant] waited to seek leave to plead
the affirmative defense until two and a half years after the suit was
filed; a month after the close of discovery; a month after it raised
the defense in its summary judgment motion; almost eighteen
months after the deadline for amending pleadings; and eight full
months after it was actually aware of the preemption defense's
applicability.
6
Id. at 717. Here, the Kozlowskis were aware of the court’s order dismissing
their fraud and deceit claim as well as the court’s scheduling order. But while
the court granted numerous requests from both parties to extend other
deadlines in the scheduling order, the Kozlowskis never asked for an extension
of time to amend the pleadings. Rather, and similar to Sherman, the
Kozlowskis did not seek leave to amend until over two years after the court
dismissed the fraud and deceit claim without prejudice (Docket 29), one-and-ahalf years after the deadline to amend the pleadings lapsed (Docket 34), and
nearly a month after the discovery deadline passed. Docket 74. The length of
the delay and the Kozlowskis’ failure to comply with or seek an extension of the
court’s scheduling order indicates a lack of diligence. See Sherman, 532 F.3d at
718 (“Had [the defendant] been diligent, it would have performed this research
at the outset of the litigation, and at least prior to the scheduled deadline for
adding affirmative defenses.”).
Similarly, in Popoalli, the plaintiff moved to amend her complaint almost
six months after the court’s deadline to do so passed. Popoalli, 512 F.3d at 495.
Her original complaint alleged that the defendants were deliberately indifferent
to her medical needs, and she sought leave to add a claim for negligence. Id. at
495-96. She argued that “she decided to add a negligence count only after
extensive discovery[.]” Id. at 497. The Eighth Circuit found her argument
unpersuasive because the facts supporting her negligence claim should have
been available to her even without discovery. Id. (explaining the overlap
between pleading a claim for deliberate indifference and a claim for negligence).
7
Here, an element of the Kozlowskis’ fraud and deceit claim is that they relied to
their detriment on representations made by someone. See N. Am. Truck &
Trailer, Inc. v. M.C.I. Commc’ns Servs., Inc., 751 N.W.2d 710, 713-14 (S.D.
2008) (providing the elements of a fraud and deceit claim). The court dismissed
the fraud and deceit claim because the Kozlowskis did not allege with
specificity which of the five named defendants committed the tortious conduct.
The Kozlowskis contend that they could not sufficiently plead a claim for fraud
and deceit until engaging in discovery. But like in Papoalli, the deficiency this
court identified when it dismissed the Kozlowskis’ claim should have been
knowable and curable even without discovery. The Kozlowskis’ renewed claim
alleges that they relied to their detriment on representations emailed to them
by defendant Palmquist. But that email was allegedly sent to the Kozlowskis in
2009. If so, then the email, as well as the identity of its sender, should have
been available to the Kozlowskis at the outset of this litigation. Cf. Barstad v.
Murray Cty., 420 F.3d 880, 883 (8th Cir. 2005) (finding a lack of good cause
and noting that “the Barstads knew of the claims they sought to add when they
filed the original complaint[.]”) Thus, the court finds that the Kozlowskis did
not diligently attempt to comply with the court’s scheduling order.
Additionally, even if the Kozlowskis had acted diligently, the court finds
that the defendants would be unfairly prejudiced by allowing the Kozlowskis to
now amend. The Kozlowskis waited until nearly a month after the discovery
deadline passed before filing their motion. Granting the motion would require
reopening discovery on the fraud and deceit claim and it would necessitate
8
further delay in a case that is already over three years old. The Eighth Circuit
identified the need to conduct additional discovery and further delay as
“precisely the sort of prejudice that justifies denial of a motion to amend” a
complaint. In re Milk Prods. Antitrust Litig., 195 F.3d 430, 438 (8th Cir. 1999).
The prejudice flowing to the defendants is an independently sufficient reason
that justifies the denial of the Kozlowskis’ motion to amend their complaint.
Thus, the Kozlowskis’ motion to amend is denied.
II.
Defendants’ Motion for Summary Judgment.
BACKGROUND
The facts viewed in the light most favorable to the Kozlowskis, the non-
moving party, are as follows:
Palmquist is a member of North American National Marketing, LLC
(North American); NANM, LLC; and Gardiner Limited Partnership Acquisitions
LLC. Non-party Robert Meek is a member of NANM, LLC, and Gardiner. Nonparty Daniel Davies worked for North American prior to forming and acting as
principal of Avanzar Financial Group, LLC. Davies also performed brokerage
services for Gardiner before forming Avanzar, although Davies was not
considered an employee of Gardiner. Davies continued to send emails from
North American and Gardiner email addresses after forming Avanzar and
Avanzar/Davies shared office space and a computer server with the other
defendants.
Palmquist, Davies, and Meek knew Perry Kozlowski for many years as a
field representative of the Transamerica Life Insurance Company. James
9
Kozlowski was employed by Bison Enterprises, LLC, as a life settlement broker.
James was the sole member of Bison. In January 2007, Perry introduced
James to Palmquist, Davies, and Meek, so that James could work on
transactions involving life settlements with them.
Life settlements involve the sale of a life insurance policy from the
insured to a third-party. The insured seeks to sell the policy for more than the
policy’s surrender value but less than its face value or death benefit. In return,
the third-party assumes responsibility for paying the premiums but receives
the death benefit upon the death of the insured. The third-party can treat the
policy as an investment, allow the policy to lapse, or attempt to sell the policy
to another buyer.
The value of a life insurance policy is based on a number of variables,
including the health and life expectancy of the insured, the amount of the
death benefit, and the cost of paying the premium over the insured’s lifetime.
Another variable is the presence of a so-called “shadow account” on certain life
insurance policies. The shadow account is a secondary guarantee that will keep
the policy in force and prevent the policy from lapsing in the same manner as if
the policyholder continued to pay the premiums. The payment required to keep
the shadow account operative, however, can be lower than the payment
required to satisfy the premium. Thus, the policyholder can forego some of the
costs of maintaining the policy if he or she knows about and utilizes the
shadow account.
10
The valuation of a shadow account, like the valuation of the life
insurance policy itself, is complex. Palmquist, along with other representatives
from Gardiner, established a consulting business for owners and/or potential
purchasers of life insurance policies. One of Gardiner’s services involves
analyzing a policy and opining as to its value, a calculation that includes an
assessment of the shadow account if one is present. Gardiner receives a
consulting fee that is equal to 20% of the policy’s increase in value if the
customer owned or purchased the policy in a life settlement transaction.
Non-party James Rooney is the sole principal of non-party Fox Financial
Management. Fox Financial acquires life settlement policies as assets. Rooney
was also an officer of non-party Fox Life, Inc., along with non-party Larry
Tuttle. Fox Life is an issuer of securities. In 2008, Tuttle formed Morningstar
Settlements to acquire life settlement policies.
On July 6, 2008, James met Rooney in South Dakota. James and
Rooney executed what was styled as a mutual confidentiality agreement. James
signed the agreement on behalf of Bison and Rooney signed the agreement on
behalf of Fox Financial. Sometime after this meeting, James introduced Fox
Financial to the defendants.
Between May and September of 2008, the Kozlowskis and the defendants
discussed entering a business arrangement. The arrangement was never
memorialized in writing. According to the Kozlowskis, however, the parties
reached an agreement or understanding wherein they received compensation
11
for bringing potential purchasers of life settlements to the defendants who then
consulted with the purchasers and closed on the transactions.
In October 2009, Palmquist and Davies met with Rooney at Rooney’s
office in Texas. The Kozlowskis were unaware that this meeting took place. In
December 2009, non-party GLP Settlement Solutions was formed by North
American National Re-Insurance Company, a North American-related life
insurance company. The purpose of GLP was to invest in life settlement
policies, and it purchased 33 policies over time. Several of those policies were
sold to Fox-related entities or Morningstar. The Kozlowskis were not
compensated for these transactions.
LEGAL STANDARD
Summary judgment on all or part of a claim is appropriate when 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); see
also In re Craig, 144 F.3d 593, 595 (8th Cir. 1998). The moving party can meet
its burden by presenting evidence that there is no dispute of material fact or
that the nonmoving party has not presented evidence to support an element of
its case on which it bears the ultimate burden of proof. Celotex Corp. v. Catrett,
477 U.S. 317, 322-23 (1986). Once the moving party has met this burden,
“[t]he nonmoving party may not ‘rest on mere allegations or denials, but must
demonstrate on the record the existence of specific facts which create a
genuine issue for trial.’ ” Mosley v. City of Northwoods, Mo., 415 F.3d 908, 910
(8th Cir. 2005) (quoting Krenik v. Cty. of Le Sueur, 47 F.3d 953, 957 (8th Cir.
12
1995)). “Further, ‘the mere existence of some alleged factual dispute between
the parties is not sufficient by itself to deny summary judgment. . . . Instead,
the dispute must be outcome determinative under prevailing law.’ ” Id. (quoting
Get Away Club, Inc. v. Coleman, 969 F.2d 664, 666 (8th Cir. 1992)). The facts,
and inferences drawn from those facts, are “viewed in the light most favorable
to the party opposing the motion” for summary judgment. Matsushita Elec.
Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986) (quoting United
States v. Diebold, Inc., 369 U.S. 654, 655 (1962)).
DISCUSSION
A.
Breach of Contract Claim
1.
Can the Kozlowskis rely on an implied contract theory?
It is undisputed that the parties did not enter into a written contract
governing their relationship. The Kozlowskis argue that an oral or implied
contract exists, however, and that the defendants breached that contract. The
defendants argue that the Kozlowskis did not plead a cause of action for breach
of an implied contract and that they cannot pursue the theory now.
In South Dakota, a breach of contract claim has three elements: (1) a
binding contract; (2) a breach of the contract; and (3) resulting damages.
Guthmiller v. Deloitte & Touche, LLP, 699 N.W.2d 493, 498 (S.D. 2005). A
contract can either be express or implied. SDCL 53-1-3. An express contract is
“one, the terms of which are stated in words,” whereas “[a]n implied contract is
one, the existence and terms of which are manifested by conduct.” Id. The
amended complaint states as a cause of action that the defendants are liable
13
for breach of contract. The amended complaint does not state whether the
alleged contract is express or implied. But a contract is still a contract
regardless of whether it is express or implied. St. John’s First Lutheran Church
in Milbank v. Storsteen, 84 N.W.2d 725, 727 (S.D. 1957) (“There is no
distinction in legal effect between an express contract and an implied
contract.”). Thus, the court concludes that the Kozlowskis are not precluded
from arguing that their contract was an implied contract.
The South Dakota Supreme Court has held, however, that a party cannot
recover on both an express and an implied contract theory concerning the
same set of facts. Eberle v. Siouxland Packing Co., Inc., 266 N.W.2d 256, 258
(S.D. 1978). Rather, “[o]nly when parties do not expressly agree will the law
intercede and determine whether the conduct of the parties has created an
implied contract.” Aberle v. City of Aberdeen, 718 N.W.2d 615, 621 (S.D. 2006).
“If, in fact, a valid express contract exists, which establishes the rights of the
contracting parties, [then] no implied contract will be or need be inferred.”
Weller v. Spring Creek Resort, Inc., 477 N.W.2d 839, 841 (S.D. 1991). Thus, the
issue is whether an express contact exists and, if not, then whether an implied
contract was formed.
2.
Did the parties have an express, oral contract?
“The existence of an express contract is a question of law[.]” Humble v.
Wyant, 843 N.W.2d 334, 343 (S.D. 2014). “An express contract results when
the parties mutually express an intent to be bound by specific terms and
conditions.” Weitzel v. Sioux Valley Heart Partners, 714 N.W.2d 884, 892 (S.D.
14
2006). For an express, oral contract to be enforceable, its essential terms must
be “sufficiently definite to enable a court to give it an exact meaning.” Id.
“ ‘However, absolute certainty is not required; only reasonable certainty is
necessary.” ’ Id. (quoting 17A Am. Jur. 2d Contracts § 196 (1991)). But “[w]here
there is no showing that the terms of an alleged oral agreement were ever
settled or agreed upon, it is proper for the trial court to make a summary
finding against the existence of a contract.” Owens v. Moyes, 530 N.W.2d 663,
665 (S.D. 1995); see also Werner v. Norwest Bank S.D., N.A., 499 N.W.2d 138,
141 (S.D. 1993).
The nucleus of the Kozlowskis’ express contract theory consists of the
Kozlowskis receiving compensation in the past for life settlement transactions
between the defendants and Fox Finacial-related entities and/or Morningstar.
Perry testified that he believed an agreement between the parties was finalized
in May of 2008. Docket 86-2 at 17. James testified that he believed the
agreement was finalized sometime between May and August of 2008. Docket
86-3 at 8. Perry and James both testified that they believed the agreement
would last into perpetuity. Docket 86-2 at 13; Docket 86-3 at 13. Palmquist, in
contrast, testified that the arrangement was fluid and “subject to constant
negotiation as opportunities emerged and changed,” and he could not
articulate a natural start or end point for the agreement. Docket 85-9 at 23.
In terms of the parties to the agreement, Perry testified that the parties
included himself, James, Palmquist, North American, North American National
Re-Insurance, GLP, Avanzar, Davies, and Meek. Docket 86-2 at 15, 23. James
15
testified that the parties included himself, Palmquist, Meek, Davies, and
“whoever else they represented in the organization.” Docket 86-3 at 10. James
testified that he was led to believe that Palmquist represented all of the
defendant entities and that the agreement was with the defendants
“collectively.” Id. at 12, 24. Palmquist testified that the arrangement was with
Perry and James. Docket 85-9 at 18. He explained that “we” were responsible
for the consultation work but that Avanzar was responsible for acting as a
broker. Id.
As to the scope of the agreement, the Kozlowskis insist that they should
receive 20% of the consulting fees and 50% of the brokerage fees derived from
certain transactions involving life settlement policies with Fox Fiancial or
Morningstar. Docket 86-2 at 21; Docket 86-3 at 13. Perry also testified that the
Kozlowskis should be entitled to at least a 20% share on a life settlement policy
sold to Fox Financial or its related entities if the policy’s value increased even if
the defendants did not perform a consultation service. Docket 86-2 at 31. For
example, if the policy’s market value increased through a sudden decline in the
insured’s life expectancy, and the policy was then sold to Fox Financial, Perry
believed that the Kozlowskis would be entitled to “market compensation which
is much higher than 20 percent.” Id. Perry also testified the compensation
arrangement applied to any business that took place between Fox Financial, its
related entities, and the defendants. Id. at 24. He retreated from that position,
however, and agreed that it would not apply to all transactions involving Fox
Financial. Id. at 29. For example, if Rooney purchased a personal life insurance
16
policy directly from the defendants or a piece of real estate, the agreement
would not apply. Id.
James testified that the 20% consulting fee would apply when the
defendants’ evaluation of a policy resulted in an increase in the policy’s value
due to the presence of a shadow account. Docket 86-3 at 13. When James was
presented with the scenario given to Perry that involved a sudden decline in the
insured’s health, James testified that the Kozlowskis would not be entitled to a
portion of that increase in value. Id. at 26-27. James also testified that he had
an agreement with Palmquist that involved James locating a policy in the
marketplace so “that [James] could bring these policies in where we could
scrub them to make sure there was no fraudulent basis of how they were
originated and to make sure they were regulatory-compliant.” Id. For that
service, “that’s where the compensation agreement was in place.” Id. Palmquist
testified that there was not a single, oral agreement that dictated the terms of
the defendants’ relationship with the Kozlowskis. Docket 85-9 at 57. He also
testified that “[w]e had many agreements that no business ever came of and
many opportunities where we never came to an agreement on what the
compensation split would be[.]” Id. at 24.
Regarding the party responsible for the Kozlowskis’ compensation, Perry
testified that he did not know which defendant was responsible for making
payments because he never received any direct compensation from them.
Docket 86-2 at 9. Rather, Perry was compensated through James. Id. James
testified that he was not sure which party was responsible for payment, either,
17
because he claimed to have received compensation from North American,
Gardiner, and through an undisclosed wire transfer. Docket 86-3 at 10. James
also testified that Avanzar was responsible for making payments in certain
circumstances. Docket 86-3 at 13. Palmquist testified that some of the
payments were made by Gardiner and some originated through Avanzar but
were made by North American. Docket 85-9 at 18.
The court finds there was no mutual expression of an intention to be
bound by specific terms and conditions between the parties. The parties
expressed different opinions on the duration of the agreement, the number and
names of the parties to the agreement, the types of transactions to which the
Kozlowskis were entitled compensation under the agreement, and the identity
of the party that was responsible for paying the Kozlowskis. Because a number
of the essential terms of the oral agreement are left open or otherwise
insufficiently definite, this court cannot give the agreement an exact meaning.
Thus, the court finds that the parties did not have an express contract.
3.
Did the parties have an implied contract?
Although the parties did not have an express contract, “[t]he absence of
an express contract does not . . . foreclose the possibility of a contractual
relationship, because the parties may, by their acts and conduct, create an
implied contract.” Jurrens v. Lorenz Mfg. Co. of Benson, Minn., 578 N.W.2d 151,
154 (S.D. 1998). The South Dakota Supreme Court has held that
A contract is implied in fact where the intention as to it is not
manifested by direct or explicit words by the parties, but is to be
gathered by implication or proper deduction from the conduct of
the parties, language used, or acts done by them, or other
18
pertinent circumstances attending the transaction.
Weller, 477 N.W.2d at 841 (quoting Mahan v. Mahan, 121 N.W.2d 367, 369
(S.D. 1963)). “[T]he totality of the parties’ conduct [is examined] to learn
whether an implied contract can be found.” In re Regennitter, 589 N.W.2d 920,
924 (S.D. 1999). The “ ‘facts are viewed objectively and if a party voluntarily
indulges in conduct reasonably indicating assent he may be bound even
though his conduct does not truly express the state of his mind.’ ” Id. (quoting
Federal Land bank of Omaha v. Houck, 4 N.W.2d 213, 219-20 (S.D. 1942)). And
unlike the existence of an express contract which is a question of law, “ ‘[t]he
existence and governing terms of an implied contract present questions of fact
to be decided by a jury.’ ” Holland v. FEM Elec. Ass'n, Inc., 637 N.W.2d 717, 719
(S.D. 2001) (quoting Jurrens, 578 N.W.2d at 154).
Here, the record shows that Avanzar brokered the sale of three policies to
Morningstar in November 2008 that insured the life of Ruth Anderson. Docket
89-2. Palmquist testified that the Kozlowskis, through Bison, received a 50%
share of the brokerage fees received by Avanzar through North American.
Docket 85-9 at 19. A bank statement from North American shows that two wire
transfers totaling $21,505 were made to the Kozlowskis. Docket 89-5.
Palmquist also explained that Gardiner performed consulting work for
Morningstar on one of the Anderson policies. Docket 85-9 at 19. Gardiner then
paid the Kozlowskis 20% of the fee assessed by Gardiner for its consulting
services. Id. A Gardiner bank statement shows that a wire transfer of $26,400
was made to the Kozlowskis. Docket 89-4.
19
The record also shows that Fox Financial purchased three policies
insuring the life of John Osborne in 2009. In April of 2009, Gardiner performed
consulting work for Fox Financial on one of the policies. Docket 89-6. Gardiner
received $133,333.96 from Fox Financial. Id. Gardiner made two wire transfers
to the Kozlowskis, through Bison, in May of 2009. Docket 89-7. One of the
transfers was made on May 28, 2009, in the amount of $26,666.67. Id. The
other transfer was made on May 29, 2009, in the amount of $7,223.00. Id.
Palmquist testified that the May 28 transfer was for the Kozlowskis’ share of
the consulting fees and the May 28 transfer was for the Kozlowskis’ share of
the brokerage fees. Docket 85-9 at 21. Unlike with the Anderson policy, the
Kozlowskis’ brokerage fee payment came from Gardiner rather than North
American. According to Palmquist, the policy was brokered by Avanzar. Id. The
record is not clear, however, as to the amount received in brokerage fees by
Avanzar from the sale of this policy.
Gardiner performed consulting work on the second Osborn policy in
August of 2009. Docket 89-8. Gardiner received $80,000 for its work. Id.
Gardiner paid the Kozlowskis $16,000, through Bison, on September 16, 2009,
for their share of the consulting fees. Docket 90-1. Palmquist attested that
North American did not receive a share of brokerage fees from Avanzar on this
policy so the Kozlowskis did not receive a share from North American, either.
Docket 85 at 5.
Gardiner performed consulting work on the third Osborn policy in
September of 2009. Docket 90-2. Gardiner received $26.666.66 for its work.
20
Docket 90-3.4 This time North American paid the Kozlowskis $5,200, through
Bison, as their share of Gardiner’s consulting fee. Docket 90-4. Palmquist
attested that North American did not receive a share of brokerage fees from
Avanzar on this policy so the Kozlowskis did not receive a share of North
American’s fee. Docket 85 at 5.
The defendants argue that if the parties had an enforceable agreement,
the agreement was limited to the circumstances exemplified in the Anderson
and Osborn transactions. The agreement would not apply if, for example, the
defendants purchased a life settlement policy and sold it directly to Fox
Financial or another entity. The Kozlowskis disagree. They argue that if Fox
Financial or Morningstar is involved in a life settlement transaction with the
defendants, then the Kozlowskis were entitled to some measure of
compensation.
As to the Anderson and Osborn policies, the parties’ conduct suggests an
agreement existed between them and that they conducted at least some
business under that agreement. The parties’ conduct, however, is not entirely
consistent. On the Anderson policy, for example, Gardiner paid the Kozlowskis
a share of consulting fees and North American paid the Kozlowskis a share of
brokerage fees. But on the first Osborn policy, Gardiner paid both the share of
consulting fees and the brokerage fees. As for the second and third Osborn
policies, Gardiner and North American each assumed responsibility for paying
the Kozlowskis a share of consulting fees. Additionally, it is not clear what
The fee schedule identified by defendants that correlates to this policy
indicates Gardiner would receive $46,666.66.
4
21
brokerage fee Avanzar received from any of the Osborn policies. Palmquist
attested that North American did not receive any brokerage fees from Avanzar
for the second and third Osborn policies. But it is unclear if Avanzar did not
act as a broker for the sale of those policies or if Avanzar simply did not share
its brokerage fee with North American. And if Gardiner paid the Kozlowskis
their portion of brokerage fees from the first Osborn policy, it is unclear
whether North American needed to receive any brokerage fees at all under the
agreement for the Kozlowskis to be entitled to a share. Consequently, the
precise contours of the agreement are not manifested by direct or explicit words
from the parties but must be gathered by implication or deduction from the
facts of the case. The totality of the parties’ conduct could reasonably indicate
that the parties intended to be bound by the terms of an implied contract.
Whether an implied contract exists and, if so, its governing terms, are
questions of fact for the jury. Thus, the defendants are not entitled to summary
judgment on the Kozlowskis’ breach of contract claim.
B.
Tortious Interference
The Kozlowskis allege that they had a valid business relationship or
expectancy with Fox Financial.5 They contend that the defendants tortiously
interfered with that relationship or expectancy when the defendants began
transacting business with Fox Financial directly and to the exclusion of the
Kozlowskis. The defendants argue that summary judgment should be granted
The amended complaint also lists Morningstar as an entity with which
the Kozlowskis alleged to have a business relationship or expectation. The
parties’ briefs focus on the Fox Financial relationship.
5
22
in their favor because the Kozlowskis cannot establish several of the essential
elements of their tortious interference claim.
In South Dakota, the elements of a tortious interference with business
relationships or expectancy claim are: (1) the existence of a valid business
relationship or expectancy; (2) knowledge by the interferer of the relationship or
expectancy; (3) an intentional and improper act of interference on the part of
the interferer;6 (4) proof that the interference caused the harm sustained; and
(5) damage to the party whose relationship or expectancy was disrupted. Tibke
v. McDougall, 479 N.W.2d 898, 908 (S.D. 1992). The South Dakota Supreme
Court has analogized this cause of action to “a ‘triangle’ [involving] a plaintiff,
an identifiable third party who wished to deal with the plaintiff, and the
defendant who interfered with the plaintiff and the third party.” Landstrom v.
Shaver, 561 N.W.2d 1, 16 (S.D. 1997). This is a “factually driven cause of
action” and is “dependent on the plaintiff’s factual situation.” Hayes v. N. Hills
Gen. Hosp., 590 N.W.2d 243, 250 n.6 (S.D. 1999). “ ‘One is liable for
commission of this tort who interferes with business relations of another, both
existing and prospective, by inducing a third person not to enter into or
continue a business relation with another or by preventing a third person from
continuing a business relation with another.’ ” Id. at 248 (quoting N. Plumbing
The South Dakota Supreme Court previously described the third
element as involving “unjustified” interference, which was recently modified to
require a showing of “improper” interference. See Gruhlke v. Sioux Empire Fed.
Credit Union, Inc., 756 N.W.2d 399, 408 (S.D. 2008).
6
23
& Heating, Inc. v. Henderson Bros., Inc., 268 N.W.2d 296, 299 (Mich. Ct. App.
1978)).
1.
Valid business relationship or expectancy
The defendants argue that the Kozlowskis cannot show that they had a
valid business relationship or expectancy with Fox Financial. “[T]o establish a
‘valid business relationship or expectancy,’ there [must] be a showing of a
‘contract or business relationship’ between the plaintiff and an identifiable
third party.” Landstrom, 561 N.W.2d at 16 (quoting Tibke, 479 N.W.2d at 908).
But “ ‘[f]or this tort to occur, the business relationship, if in existence, need not
be cemented by written or verbal contract and, whether or not it is in existence,
it need not be intended that there be a contract.’ ” Hayes, 590 N.W.2d at 248
(quoting 45 Am. Jur. 2d Interference § 50 (1969)). Whether a business
relationship or expectancy exists is a question of fact. Tibke, 479 N.W.2d at
909.
The Kozlowskis alleged to have a non-compete and non-circumvent
agreement with Fox Financial. The defendants asked the Kozlowskis to produce
the agreement through discovery. The Kozlowskis produced two documents
representing written contracts. “The construction of a written contract is a
question of law.” Alverson v. Nw. Nat. Cas. Co., 559 N.W.2d 234, 235 (S.D.
1997) (quoting Bell v. E. River Elec. Power Coop. Inc., 535 N.W.2d 750, 754
(S.D. 1995)). The proper interpretation of a contract must give effect to the
intention of the contracting parties. Ziegler Furniture & Funeral Home, Inc. v.
Cicmanec, 709 N.W.2d 350, 355 (S.D. 2006). The language in a contract is
24
given its “plain and ordinary meaning.” Am. State Bank v. Adkins, 458 N.W.2d
807, 809 (S.D. 1990).
The first document is titled as a “mutual confidentiality agreement.”
Docket 94-7. It was executed on July 6, 2008, by James on behalf of Bison and
by Rooney on behalf of Fox Financial. The agreement governs the protection
and dissemination of any confidential information disclosed between the
parties. See id. at 1 (“[T]he Parties wish to protect their respective confidential
information against any unauthorized use and any unauthorized or
uncontrolled disclosure.”). It contains several clauses that dictate the parties’
rights and obligations toward the other party’s confidential information. It does
not, however, contain a non-competition or non-circumvention clause.
The second document is titled as a “mutual confidentiality & noncircumvention agreement.” Docket 88-3. It was executed on October 2, 2007,
by James on behalf of Stampede, LLC, by Perry on behalf of Kozlowski Group,
LLC, and by non-party David Dorr on behalf of Life-Exchange, Inc. This
document predates the Kozlowski-Rooney meeting in July of 2008 and neither
Rooney nor Fox Financial or any Fox-related entity is a party to the agreement.
Consequently, this agreement has no bearing on the Kozlowski-Fox Financial
relationship. Thus, neither document supports the Kozlowskis’ argument that
they had a non-compete or non-circumvent agreement with Fox Financial.
Even without a signed non-compete or non-circumvent agreement,
however, the Kozlowskis may still have a valid business relationship or
expectancy with Fox Financial. Hayes, 590 N.W.2d at 248. Perry acknowledges
25
that he did not have a direct relationship with Fox Financial. Docket 86-2 at
14-15. James testified that he sought Rooney out as a potential purchaser of
life settlements. Docket 86-3 at 6. James testified that he introduced Fox
Financial to the defendants after Rooney and he signed the July 2008
confidentiality agreement. Id. at 7. According to James, Rooney and he
executed the confidentiality agreement to protect their own business interests.
Id. at 8. James testified that he viewed Fox Financial as his own client and that
he would act as an intermediary between Fox Financial and the defendants. Id.
at 20, 24. James testified that he would locate potential life settlement policies
that Fox Financial might be interested in and then bring those policies to Fox
Financial for purchase. Id. at 12. James testified that this arrangement was
lucrative. Id. at 11.
Rooney testified that he did not consider his relationship with James to
be a professional relationship. Docket 86-4 at 7. According to Rooney, the
confidentiality agreement allowed him and James to speak openly about their
businesses. Id. Rooney was asked about a number of correspondences sent in
2009 and 2010 concerning the potential sale of life settlement policies. Id. at 89. Although Rooney was included on those correspondences, he could not
recall receiving them. Id. at 9. He also could not recall if he spoke with James
on the phone after their meeting but prior to the instigation of this lawsuit. Id.
The court finds that whether in fact the Kozlowskis and Fox Financial
had a valid business relationship or expectancy is a question for the jury. A
jury could find that the Kozlowskis and Fox Financial mutually obtained an
26
economic advantage by virtue of their relationship. For the Kozlowskis, the jury
could find that their benefit was derived from locating potential life settlement
policies for Fox Financial. If those policies also involved the defendants, then
the Kozlowskis could be entitled to a measure of compensation when Fox
Financial purchased the policies or used the defendants’ services. For Fox
Financial, the jury could find that its benefit came from obtaining the policies
identified by the Kozlowskis. Fox Financial could then treat the policies as an
asset. The Kozlowskis and Fox Financial did not need to cement their
relationship by a written or verbal contract nor did they need to intend to form
a contract. Hayes, 590 N.W.2d at 248. Rather, “[t]he ‘expectancies’ this tort
protects . . . is the prospect or opportunity of repeat and additional [business].”
Id. at 250. Thus, the jury must determine whether such a relationship or
expectancy existed.
2.
Knowledge of the relationship
The defendants argue that the Kozlowskis cannot prove that the
defendants knew about the Kozlowski-Fox Financial relationship. To establish
this element, a plaintiff must show that the defendant either actually knew or
should have known of the business relationship or expectancy. Tibke, 479
N.W.2d 908 (citing Restatement (Second) of Torts §§ 766 and 766B)). Whether a
defendant knew about a business relationship or expectancy is a question of
fact. Id. at 909. A party’s description of their state of mind typically implicates
their credibility, however, which is also an issue for the jury to consider. See
Gleason v. Peters, 568 N.W.2d 482, 489 (S.D. 1997) (“It is the jury, not the
27
court, which . . . judges the credibility of witnesses[.]”) (quoting Fajardo v.
Cammack, 322 N.W.2d 873, 878 (S.D. 1982) (Wollman, C.J., concurring
specially)); Strassburg v. Citizens State Bank, 581 N.W.2d 510, 517 (S.D. 1998)
(explaining that “when Strassburg had actual or constructive knowledge of a
claim” was an issue of fact for the jury).
Palmquist testified that “[the Kozlowskis] introduced Fox Financial to
us.” Docket 85-9 at 24. He testified that he did not believe Fox Financial was
one of the Kozlowskis’ clients. Id. Palmquist explained that he did not believe
that “[i]t was [ever] part of our business arrangement. . . . And I never had an
agreement with any of them that gave them any of kind rights to anybody.” Id.
at 27. Davies testified that he asked James if he could contact Fox Financial
directly rather than going through James, although Davies also testified that
he did not believe he needed James’s permission. Docket 86-1 at 28. Meek
agreed that the Kozlowskis represented that Fox Financial was their client,
although he could not recall when that representation was made. Docket 86-5
at 22.
The evidence is disputed as to whether the defendants knew or should
have known about the Kozlowski-Fox Financial relationship. It is for the jury to
determine if there was, in fact, a valid business relationship or expectancy
between the Kozlowskis and Fox Financial. And if the jury finds that a valid
business relationship or expectancy existed, it is also for the jury to determine
whether the defendants knew or should have known about that relationship.
The jury will need to hear live testimony and judge the credibility of the
28
witnesses. Thus, the defendants are not entitled to summary judgment on the
Kozlowskis’ tortious interference claim.
C.
Other issues
1.
Claims against Palmquist as an individual
The defendants argue and conclude in a single paragraph that the
Kozlowskis’ claims against Palmquist in his individual capacity must be
dismissed because he was acting at all times as an agent of the named entity
defendants. Thus, he is entitled to limited liability protection. And according to
the defendants, the Kozlowskis have not shown that the corporate veil of any of
the named entity defendants should be pierced. The Kozlowskis respond that
Palmquist has held himself out as an individual as well as a corporate actor.
“[A]s a general rule, a corporation is to be considered a legal entity
separate and distinct from its shareholders, officers and directors unless and
until there is sufficient reason to the contrary.” Brevet Int’l, Inc. v. Great Plains
Luggage Co., 604 N.W.2d 268, 273 (S.D. 2000). A limited liability company is
not a corporation but it affords its members limited liability protection like a
corporation. Smith v. Rustic Home Builders, LLC, 826 N.W.2d 357, 359 (S.D.
2013). “The concept of limited liability is considered one of the central purposes
for choosing the corporate form, because it permits shareholders to limit their
personal liability to the extent of their investment.” Brevet, 604 N.W.2d at 274.
“[B]ut when the notion of a legal entity is used to defeat public convenience,
justify wrong, protect fraud, or defend crime, the sufficient reason will exist to
pierce the corporate veil.” Kanas Gas & Elec. Co. v. Ross, 521 N.W.2d 107, 112
29
(S.D. 1994). The South Dakota Supreme Court considers several factors to
determine if piercing the corporate veil is justified, such as: (1) fraudulent
misrepresentation by corporate officers or directors; (2) undercapitalization; (3)
failure to observe corporate formalities; (4) absence of corporate records; (5)
payment by the corporation of individual obligations; and (6) use of the entity
to promote fraud, injustice, or illegality. Id. at n.6. “[A] court should pierce the
corporate veil only upon the strongest evidence of these factors.” Id. at 113 n.9.
The court finds that the Kozlowskis have not shown that the corporate
form of any of the named entity defendants should be disregarded so as to
subject Palmquist to individual liability. The record shows that Palmquist is a
member of North American, NANM, and Gardiner. There has been no showing
that any of the defendant entities are undercapitalized, that their records have
not been maintained, that funds from the entities have been used to pay for
individual obligations, or that the entities have been used to promote fraud,
injustice, or illegality. The record shows that all of the payments the Kozlowskis
received came from bank accounts belonging to the defendant entities rather
than Palmquist and that the transactions that are alleged to form the basis of
the Kozlowskis’ contract claim involved Fox Financial and the defendant
entities rather than Palmquist individually. Similarly, the Kozlowskis’ tortious
interference claim is predicated on the defendant entities usurping the
Kozlowskis’ business relationship or expectancies with Fox Financial. There are
no facts suggesting that Palmquist was acting as anything but an agent of the
defendant entities. Therefore, the court grants Palmquist’s summary judgment
30
motion and dismisses the Kozlowskis’ claims against Palmquist in his
individual capacity.
2.
Claims against the named defendants
The defendants argue that the Kozlowskis’ claims against each of the
defendant entities should be dismissed. Their argument is based on the court
entering summary judgment in the defendants’ favor. The defendants also
single out Avanzar and argue that there are no facts suggesting that Avanzar
was a party to any agreement with the Kozlowskis or that Avanzar was involved
in the Kozlowskis’ tortious interference claim.
The court disagrees. Regarding Avanzar and the breach of contract claim,
there is a factual question whether Avanzar was responsible for making any of
the payments owed to the Kozlowskis. As to Avanzar and the tortious
interference claim, the facts suggest that Davies is Avanzar’s principal and that
Davies accompanied Palmquist to Texas in order to meet with Rooney. It is this
meeting in Texas and the events that followed that form the basis of the
Kozlowskis’ tortious interference claim. Thus, there is a factual question
whether Avanzar, through Davies, is liable for the Kozlowskis’ tortious
interference claim. And because the court has denied the defendants’ summary
judgment motion as to the breach of contract and tortious interference claims,
the court also denies the other defendant entities’ motions here as well.
31
3.
Perry Kozlowski
a.
breach of contract
The Kozlowskis’ claims are brought on behalf of both Perry and James.
The defendants argue that Perry is not a party to the alleged contract between
the parties and therefore he is not a proper plaintiff with respect to the breach
of contract claim. “Only parties to a contract have rights in the contract. As
such, the parties to the contract are the only ones who can seek enforcement of
the contract.” Mahan v. Avera St. Luke’s, 621 N.W.2d 150, 154 (S.D. 2001).
Perry testified that he believed he was a party to the oral agreement with the
defendants. Palmquist testified that he believed the agreement involved both
Perry and James. The court has concluded that whether the parties had an
implied contract and, if so, its governing terms are questions for the jury. Thus,
the defendants’ motion to dismiss Perry as a plaintiff from the breach of
contract claim is denied.
b.
tortious interference
The defendants argue that Perry does not have a valid business
relationship or expectancy with respect to Fox Financial and, therefore, that
Perry is not a proper plaintiff with respect to the tortious interference claim.
Perry testified that he does not have a relationship with Fox Financial. Docket
86-2 at 14 (“I had no relationship with Fox”). He testified that he never directly
communicated with Rooney or Tuttle. Id. at 7. The court finds that Perry did
not have a business relationship or expectancy with Fox Financial. Thus, the
32
court concludes that Perry is not a proper plaintiff regarding the tortious
interference claim. Rather, the claim must be asserted solely by James.
4.
Accounting
The defendants contend that the Kozlowskis’ claim for an accounting
should be summarily rejected because the defendants have disclosed a large
number of documents through discovery. The defendants provide no legal
authority for their argument, and the court has not found any authority
supporting it. Thus, the defendants’ motion for summary judgment on the
Kozlowskis’ accounting claim is denied.
III.
The Defendants’ Motion for Sanctions.
The defendants move the court for an order of sanctions under Rule 11
of the Federal Rules of Civil Procedure. They argue that sanctions are proper
because counsel for the Kozlowskis failed to conduct a reasonable pre-filing
investigation and because counsel continued to pursue the Kozlowskis’ claims
after it became clear that the claims are meritless.
LEGAL STANDARD
Rule 11 provides in relevant part:
(b) Representations to the Court. By presenting to the court a
pleading, written motion, or other paper—whether by signing,
filing, submitting, or later advocating it—an attorney or
unrepresented party certifies that to the best of the person's
knowledge, information, and belief, formed after an inquiry
reasonable under the circumstances:
(1) it is not being presented for any improper purpose,
such as to harass, cause unnecessary delay, or
needlessly increase the cost of litigation;
33
(2) the claims, defenses, and other legal contentions
are warranted by existing law or by a nonfrivolous
argument for extending, modifying, or reversing
existing law or for establishing new law;
(3) the factual contentions have evidentiary support or,
if specifically so identified, will likely have evidentiary
support after a reasonable opportunity for further
investigation or discovery; and
(4) the denials of factual contentions are warranted on
the evidence or, if specifically so identified, are
reasonably based on belief or a lack of information.
Fed. R. Civ. P. 11(b). The general standard for imposition of Rule 11 sanctions
is that the conduct of a party or its counsel was objectively unreasonable.
Black Hills Inst. Of Geological Research v. S.D. Sch. of Mines & Tech., 12 F.3d
737 (8th Cir. 1993). “If, after notice and a reasonable opportunity to respond,
the court determines that Rule 11(b) has been violated, the court may impose
an appropriate sanction on any attorney, law firm, or party that violated the
rule or is responsible for the violation.” Fed. R. Civ. P. 11(c)(1). A district court’s
determinations concerning Rule 11 are reviewed for an abuse of discretion.
Clark v. United Parcel Serv., Inc., 460 F.3d 1004, 1008 (8th Cir. 2006).
DISCUSSION
Before filing a motion for sanctions with the court, parties must also
adhere to the “safe harbor” provision of Rule 11. The Rule provides that a
motion
must be served under Rule 5, but it must not be filed or be
presented to the court if the challenged paper, claim, defense,
contention, or denial is withdrawn or appropriately corrected
within 21 days after service or within another time the court sets.
Fed. R. Civ. P. 11(c)(2). The Advisory Committee notes explain that
34
The motion for sanctions is not, however, to be filed until at least
21 days . . . after being served. If, during this period, the alleged
violation is corrected, as by withdrawing (whether formally or
informally) some allegation or contention, the motion should not be
filed with the court. These provisions are intended to provide a type
of “safe harbor” against motions under Rule 11 in that a party will
not be subject to sanctions on the basis of another party’s motion
unless, after receiving the motion, it refuses to withdraw that
position or to acknowledge candidly that it does not currently have
evidence to support a specified position.
Fed. R. Civ. P. 11, Advisory Committee Notes (1993 Amendment). The rule
makes clear that a party must first serve its motion for sanctions on the
opposing party and then wait to file the motion with the court until the 21-day
grace period has elapsed. Kirk Capital Corp. v. Bailey, 16 F.3d 1485, 1488-89
(8th Cir. 1994). The failure to comply with Rule 11’s procedural requirements is
grounds for denial of the motion for sanctions. Gordon v. Unifund CCR Partners,
345 F.3d 1028, 1030 (8th Cir. 2003).
Here, the defendants did not comply with the safe harbor provision of
Rule 11. Counsel for the Kozlowskis’ has submitted a copy of an email sent by
defendants’ counsel at 1:56 p.m. on October 13, 2015, stating that “we are
moving the Court to grant sanctions pursuant to Rule 11” and that they “would
welcome the opportunity to discuss voluntary dismissal of Plaintiffs’ claims, if
Plaintiffs are interested.” Docket 103-1 at 1. Counsel for the Kozlowskis has
attested to the accuracy of the email. Docket 103. The defendants’ motion was
filed with this court at 8:50 p.m. on October 13, 2015. Docket 95.
The defendants contend that the October 13, 2015 email was not the
first time they discussed filing a motion for sanctions with counsel for the
Kozlowskis. The defendants have not cited any part of the record, however,
35
substantiating their claim. Regardless, the Eighth Circuit has held that
warning letters and emails are not a substitute for compliance with Rule 11’s
safe harbor provision. Gordon, 345 F.3d at 1030 (citing VanDanacker v. Main
Motor Sales Co., 109 F. Supp. 2d 1045, 1055 (D. Minn. 2000)). To the contrary,
“ ‘[t]o stress the seriousness of a motion for sanctions and to define precisely
the conduct claimed to violate the rule, the revision provides that the ‘safe
harbor’ period begins to run only upon service of the motion.’ ” Id. (quoting Fed.
R. Civ. P. 11, Advisory Committee Notes (1993 Amendment) (emphasis added).
The court finds that the defendants did not serve their motion in accordance
with the procedural requirements of Rule 11.
Moreover, the court denied the defendants’ motion for summary
judgment on the Kozlowskis’ breach of contract and tortious interference
claims. The court does not consider the Kozlowskis’ claims “so baseless as to
warrant Rule 11 sanctions.” Exec. Air Taxi Corp. v. Bismarck, N.D., 518 F.3d
562, 571 (8th Cir. 2008). Thus, the defendants’ motion for sanctions is denied.
CONCLUSION
The court finds that the Kozlowskis did not diligently attempt to comply
with the court’s scheduling order. The court finds that whether the parties had
an implied contract is a question for the jury. Similarly, the court finds that
whether James had a valid business relationship or expectancy with Fox
Financial and, if so, whether the defendants knew of that relationship or
expectancy are questions for the jury.
36
The court concludes that the Kozlowskis have not demonstrated that
Palmquist should be subject to personal liability and, therefore, Palmquist is
dismissed as a defendant in his individual capacity. The court concludes that
the Kozlowskis’ claims against the named defendant entities will not be
dismissed as a matter of law. The court finds that whether Perry is a party to
the agreement between the parties is a question for the jury, but the court also
concludes that Perry is not a proper plaintiff regarding the Kozlowskis’ tortious
interference claim. The court concludes that the Kozlowskis’ cause of action for
an accounting will not be dismissed. Finally, the court denies the defendants’
motion for sanctions. Thus, it is
ORDERED that the Kozlowskis’ motion to amend the amended complaint
(Docket 79) is denied.
IT IS FURTHER ORDERED that the defendants’ motion for summary
judgment (Docket 81) is granted in part and denied in part.
IT IS FURTHER ORDERED that the defendants’ motion for sanctions
(Docket 95) is denied.
DATED this 29th day of March 2016.
BY THE COURT:
/s/ Karen E. Schreier
KAREN E. SCHREIER
UNITED STATES DISTRICT JUDGE
37
Disclaimer: Justia Dockets & Filings provides public litigation records from the federal appellate and district courts. These filings and docket sheets should not be considered findings of fact or liability, nor do they necessarily reflect the view of Justia.
Why Is My Information Online?