Courtesy of the Coulee Pioneer Museum.
Monday, June 17, 2019
Sunday, June 16, 2019
Saturday, June 15, 2019
Friday, June 14, 2019
Thursday, June 13, 2019
Wednesday, June 12, 2019
In short, the suit was thrown out.
STEVEN LAWSON, an individual; and MICHAEL S. LERNER, an individual, Plaintiffs,
BNSF RAILWAY COMPANY, a Delaware corporation, Defendant.
ORDER ON DEFENDANT'S MOTION TO DISMISSTHOMAS O. RICE, District Judge.
BEFORE THE COURT is Defendant BNSF Railway Company's motion to dismiss for failure to state a claim (ECF No. 10). The motion was heard with oral argument on October 15, 2015. Daniel J. Appel and Dale M. Foreman appeared on behalf of Plaintiffs Steven Lawson and Michael S. Lerner. James B. King, Bridget K. O'Connor, and Daniel T. Donovan appeared on behalf of Defendant BNSF Railway Company ("BNSF").
The Court has reviewed the motion and the file therein and heard from counsel. Being fully informed, the Court grants Defendant's motion.
BACKGROUNDOn April 7, 2015, Plaintiffs filed a Complaint (ECF No. 1) seeking damages under the following causes of action: (1) intentional interference with business expectancy; (2) promissory estoppel; and (3) fraud/negligent misrepresentation. BNSF filed a motion to dismiss all claims against it pursuant to Federal Rule of Civil Procedure 12(b)(6). ECF No. 10.
FACTSThe following facts are drawn from Plaintiffs' complaint, as well as the matter of judicial notice and materials incorporated by reference and attached for this Court's review by Defendant, and are accepted as true for the purposes of the instant motion. Bell Atl. Corp. v. Twombly, 550 U.S. 544, 556 (2007).
Rail Logistics, LC ("Rail Logistics") operated the "Cold Train," an intermodal shipping service for fresh and frozen food items, from 2010 until 2014. ECF No. 1 at ¶¶ 3; 9-10, 27-28. Plaintiff Steven Lawson was the president and chief executive officer of Rail Logistics. Id. at ¶ 3. Plaintiff Michael S. Lerner is the owner and managing member of Rail Logistics. Id. at ¶ 4.
Cold Train was developed in 2009 when Plaintiffs began discussions with BNSF "to begin a refrigerated intermodal shipping service the primary focus of which was to ship fresh produce grown in North Central Washington State to retailers in the Midwest." Id. at ¶ 6. Plaintiffs allege BNSF notified them of a "special service for expedited container movement with a 72-hour eastbound transit time" between Cold Train's terminal in Quincy, Washington and BNSF's terminal in Chicago, Illinois. Id. at ¶ 7. Plaintiffs further allege this expedited service was not publicly available and that BNSF knew that Cold Train's success depended upon this expedited service. Id. Plaintiffs claim they relied on the 72hour service schedule "promised by BNSF" and developed a business plan accordingly. Id. at ¶ 8.
In March 2009, Rail Logistics entered into a contract with BNSF to operate Cold Train on BNSF's rail network. See ECF No. 13. The contract was signed by Michael S. Lerner in a representative capacity as the Managing Member of Rail Logistics. Id. at 3. Pursuant to the contract, Rail Logistics began operating Cold Train on BNSF's network in 2010. See ECF Nos. 1 at ¶ 9; 13 at ¶ 1.
In 2011, Cold Train shipped approximately 300 containers a month, rising to 500 per month in 2012, and to almost 700 per month in 2013. ECF No. 1 at ¶ 10. By September 2013, Cold Train had acquired over 400 containers and delivered cargo from Quincy, Washington and Portland, Oregon to terminals in nineteen different states. Id. at ¶ 11. Plaintiffs claim "BNSF knew that the Cold Train was acquiring these assets to grow its business and encouraged it to do so." Id. Plaintiffs also claim that BNSF was aware that Mr. Lerner incurred personal liability to acquire Cold Train assets and "turned down other business opportunities to focus on building the Cold Train business." Id. at ¶ 12.
In August 2013, Plaintiffs sought out a capital partner to provide needed funds to expand Cold Train's business. Id. at ¶ 14. Plaintiffs allege, starting in September of 2013, that the 72-hour delivery on-time percentage ("OTP") from Quincy to Chicago began to steadily decline, falling to 81% in September, 54% in October, 44% in November, 35% in December, 28% in January 2014, and 4% in February 2014. Id. at ¶¶ 15-16. Plaintiffs allege BNSF assured them in September and October of 2013 that the OTP issues would be addressed and resolved. Id. Plaintiffs claim that "[b]ased on these assurances, the Cold Train continued to invest additional money into its business and to add new customers." Id. at ¶ 15.
In January 2014, Plaintiff Steve Lawson travelled to Fort Worth, Texas to inform BNSF of an offer Plaintiffs received to sell Cold Train to Federated Railways, Inc. ("Federated"). Id. at ¶ 17. Plaintiffs allege "BNSF responded enthusiastically," and based on this encouragement Plaintiffs formalized the deal with Federated by signing a letter of intent on January 20, 2014. Id. at ¶¶ 17-18. Plaintiffs claim the sale was worth "approximately $31.7 million in cash, debt assumption and lease acquisitions." Id. at ¶ 18. The sale also provided a five-year employment contract for Mr. Lawson. Id.
In March 2014, Mr. Lawson and a representative of Federated met with BNSF to "to discuss the Cold Train's business and its future with BNSF." Id. at ¶ 19. Plaintiffs allege BNSF encouraged the sale to proceed, and based "solely on this meeting" Federated infused capital of $1.25 million into Cold Train. Id.
In April 2014, Plaintiffs allege BNSF's OTP dropped to 3%. Id. at ¶ 20. Mr. Lawson claims to have repeatedly complained to BNSF that the declining OTP was detrimental to Cold Train's business. Id. Plaintiffs allege that the low OTP caused Cold Train to "lose most of its business as its customers refused to tolerate the delays." Id. at ¶ 21.
On April 24, 2014, BNSF informed Plaintiffs that the 72-hour service would be cancelled the following day and substituted for a new 125-hour service. Id. at ¶ 23. Plaintiffs allege BNSF planned to make this change for several months and prepared other major customers for the change but "purposefully concealed" this plan from Cold Train. Id. Plaintiffs further allege the change was motived by BNSF's decision to commit all of its resources to more profitable oil and coal shipments. Id. at ¶ 24. Plaintiffs requested that BNSF restore the service, and informed BNSF that the 72-hour service and high OTP were "vital to the Cold Train's economic viability." Id. at ¶ 25. BNSF declined to restore the service. Id.
Plaintiffs allege that "[a]s a direct result of the service change," Federated withdrew its offer to purchase the Cold Train." Id. at ¶ 26. Plaintiffs allege to have lost the value of their Cold Train business and now face significant liabilities. Id. at ¶ 28.
STANDARD OF REVIEWDefendant attaches a number of documents to its Declaration in support of the instant motion. ECF No. 11. These documents include (1) the contract between Rail Logistics and BNSF (ECF Nos. 11-2; 13;14) and (2) copies of pleadings from a case in the District Court of Johnson County, Kansas showing Rail Logistics is in receivership (ECF Nos. 11-4; 11-5; 11-6; 11-7). Plaintiffs argue that the materials are improperly before the Court and therefore the Defendant's motion to dismiss should be converted into a motion for summary judgment, ECF No. 23 at 2-3, for which they seek additional time to respond after discovery.
On a motion to dismiss, the Court may consider materials incorporated into the complaint or matters of public record. See Coto Settlement v. Eisenberg, 593 F.3d 1031, 1038 (9th Cir. 2010). Materials incorporated into the complaint includes "situations where the complaint necessarily relies upon a document or the contents of the document are alleged in a complaint." Id. A court may consider such a document if its authenticity is not questioned. See Marder v. Lopez, 450 F.3d 445, 448 (9th Cir. 2006).
Here, the Complaint does not explicitly refer to the contract between Rail Logistics and BNSF. However, the Complaint contains allegations relative to the business agreement the parties contracted to perform. Moreover, as Defendant points out, the Complaint refers to certain provisions of the contract. See ECF No. 1 at ¶ 10 (alleging BNSF "required the Cold Train to acquire" and ship a minimum number of containers). Plaintiffs do not contend that the contract provided in the record is not authentic. See ECF No. 23 at 3; 9; 15. Additionally, the document showing Rail Logistics is in receivership is a matter of public record. See Coto Settlement, 593 F.3d at 1038. Accordingly, the Court will consider the contract incorporated by reference and attached for review by Defendant, take judicial notice of the Kansas state court pleadings, and treat Defendant's motion as one for dismissal.
1. Legal StandardA motion to dismiss for failure to state a claim tests the legal sufficiency of the plaintiff's claims. Navarro v. Block, 250 F.3d 729, 732 (9th Cir. 2001). To withstand dismissal, a complaint must contain "enough facts to state a claim to relief that is plausible on its face." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). "Naked assertion[s]," "labels and conclusions," or "formulaic recitation[s] of the elements of a cause of action will not do." Id. at 555, 557. "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). While a plaintiff need not establish a probability of success on the merits, he or she must demonstrate "more than a sheer possibility that a defendant has acted unlawfully." Id.
A complaint must also contain a "short and plain statement of the claim showing that the pleader is entitled to relief." Fed. R. Civ. P. 8(a)(2). This standard "does not require detailed factual allegations, but it demands more than an unadorned, the defendant-unlawfully-harmed-me accusation." Iqbal, 556 U.S. at 678 (quoting Twombly, 550 U.S. at 555). In assessing whether Rule 8(a)(2) has been satisfied, a court must first identify the elements of the plaintiff's claim(s) and then determine whether those elements could be proven on the facts pled. The court should generally draw all reasonable inferences in the plaintiff's favor, see Sheppard v. David Evans and Assocs., 694 F.3d 1045, 1051 (9th Cir. 2012), but it need not accept "naked assertions devoid of further factual enhancement." Iqbal, 556 U.S. at 678 (internal quotations and citation omitted).
Federal Rule of Civil Procedure 9(b) governs the pleading of allegations involving fraud or mistake. In contrast to the more lenient standard set forth in Rule 8(a)(2), Rule (9)(b) requires that a party "state with particularity the circumstances constituting fraud or mistake" in his or her complaint. To satisfy this standard, the allegations of fraud must "be specific enough to give defendants notice of the particular misconduct so that they can defend against the charge and not just deny that they have done anything wrong." Vess v. Ciba-Geigy Corp. USA, 317 F.3d 1097, 1106 (9th Cir. 2003) (quotation and citation omitted). Thus, "[a]verments of fraud must be accompanied by the who, what, when, where, and how of the misconduct charged." Id. (quotation and citation omitted). A party may, however, plead allegations of "[m]alice, intent, knowledge, and other conditions of a person's mind" more generally. Fed. R. Civ. P. 9(b).
In ruling upon a motion to dismiss, a court must accept all factual allegations in the complaint as true and construe the pleadings in the light most favorable to the party opposing the motion. Sprewell v. Golden State Warriors, 266 F.3d 979, 988 (9th Cir. 2001). The court may disregard allegations that are contradicted by matters properly subject to judicial notice or by exhibit. Id. The court may also disregard conclusory allegations and arguments which are not supported by reasonable deductions and inferences. Id.
The Ninth Circuit has repeatedly instructed district courts to "grant leave to amend even if no request to amend the pleading was made, unless . . . the pleading could not possibly be cured by the allegation of other facts." Lopez v. Smith, 203 F.3d 1122, 1130 (9th Cir. 2000). The standard for granting leave to amend is generous—the court "should freely give leave when justice so requires." Fed. R. Civ. P. 15(a)(2). In determining whether leave to amend is appropriate, a court must consider the following five factors: bad faith, undue delay, prejudice to the opposing party, futility of amendment, and whether the plaintiff has previously amended the complaint. United States v. Corinthian Colleges, 655 F.3d 984, 995 (9th Cir. 2011).
DISCUSSIONDefendant argues Plaintiffs' claims should be dismissed because (1) Plaintiffs lack standing, (2) Rail Logistics contract with BNSF preclude the claims asserted in this action, and (3) the claims should be dismissed as a matter of law. The Court will address each argument in turn.
1. StandingAs a preliminary matter, Defendant argues Plaintiffs lack standing to assert claims that belong to Rail Logistics. See ECF No. 10 at 8-11. Defendant argues Plaintiffs only allege BNSF made promises relative to Rail Logistics' Cold Train business, not independent promises to Plaintiffs. Id. at 10. Defendant also argues that Plaintiffs only allege injury to Cold Train's business, not to themselves as individuals. Id. In support of its argument, Defendant cites cases discussing the rule that shareholders do not have standing to sue for injuries done to a corporation. See id. at 8-9.
The Court agrees with defendant. Standing consists of two related components: the constitutional requirements of Article III and nonconstitutional prudential considerations. See Franchise Tax Bd. Of California v. Alcan Aluminium Ltd., 493 U.S. 331, 335 (1990). Art. III requires a plaintiff to allege:
(1) "that he personally has suffered some actual or threatened injury as a result of the putatively illegal conduct of the defendant;" (2) "that the injury fairly can be traced to the challenged action;" and (3) that the injury "is likely to be redressed by a favorable decision." Id. (internal quotations and citations omitted). Among the prudential considerations related to standing is the Ninth Circuit's "shareholder standing rule." See id. at 336 (rule recognized and left intact). That rule provides that "[g]enerally, a shareholder must assert more than personal economic injury resulting from a wrong to the corporation. A shareholder must be injured directly and independently of the corporation." Shell Petroleum, N.V. v. Graves, 709 F.2d 593, 595 (9th Cir. 1983) (internal citations omitted); see also United States v. Stonehill, 83 F.3d 1156, 1160 (9th Cir. 1996) ("Well-established principles of corporate law prevent a shareholder from bringing an individual direct cause of action for an injury done to the corporation or its property by a third party."). Washington state law also recognizes the shareholder standing rule. See Sabey v. Howard Johnson & Co., 101 Wash. App. 575, 584 (2000) ("Ordinarily, a shareholder cannot sue for wrongs done to a corporation, because the corporation is a separate entity.").
Here, Mr. Lerner is the managing member and sole shareholder of Rail Logistics. ECF Nos. 1 at ¶ 3; 23 at 12. Mr. Lawson was the president and chief executive officer of Rail Logistics (an employee). ECF No. 1 at ¶ 3. The gravamen of Plaintiffs' claims are that BNSF caused injury to Cold Train through low OTPs and cancelled the 72-hour service. This alleged injury reduced the value of Rail Logistics' Cold Train. Plaintiffs now seek to recover damages for losses that are merely incidental to the alleged harm inflicted upon Rail Logistics' business.
Nonetheless, Plaintiffs claim to have standing and assert the two exceptions to the shareholder standing rule. ECF No. 23 at 10-12. In general, plaintiffs are excepted from the shareholder standing rule if they can (1) allege an injury distinct from other shareholders or members of the corporation or (2) allege that there was a special duty, such as a contractual duty, between the plaintiff and the defendant. See Sparling v. Hoffman Constr. Co., 864 F.2d 635, 640 (9th Cir. 1988).
Neither exception has been properly pleaded in this case. First, Plaintiffs do not sufficiently allege a distinct injury. See Sparling, 864 F.2d at 640. A reduction in Cold Train's value would negatively impact any shareholder of Rail Logistics. While Plaintiffs have arguably shown, at least on the pleadings, they suffered personal economic loss as a result of BNSF's alleged conduct, this is insufficient because their personal loss merely derives from their employment at and ownership of Rail Logistics. See Shell Petroleum, 709 F.2d at 595.
Second, Plaintiffs' Complaint does not allege a special relationship or duty existed between them and BNSF. See Sparling, 864 F.2d at 640. However, in Plaintiffs' Response to Defendant's Motion to Dismiss they allege, for the first time, special duties existed between BNSF and Plaintiffs. ECF No. 23 at 14. The purported duties were "to not misrepresent facts, interfere with [their] business expectancies, or go back on its promise." Id. Such alleged duties do not establish a special or contractual relationship between Plaintiffs and BNSF and do not show Plaintiffs had a relationship with BNSF independent of Rail Logistics'.
Plaintiffs also argue that as an officer of Rail Logistics, not a shareholder, the shareholder standing rule does not bar Mr. Lawson's claims. ECF No. 23 at 10-11. However, even if true, Mr. Lawson still lacks standing as he is attempting to assert claims that belong to Rail Logistics. The purpose of the shareholder standing rule is to avoid "multitudinous litigation" and to recognize corporations as separate entities. See Von Brimer v. Whirlpool Corp., 536 F.2d 838, 846 (9th Cir. 1976). Surely if an owner and shareholder cannot sue for injuries suffered by a corporation neither can an employee, even if he is a corporate officer. Moreover, as discussed above, Mr. Lawson has not alleged he suffered a direct and independent injury, and consequently, he lacks Art. III standing. See Franchise Tax Bd., 493 U.S. at 335.
This Court finds Plaintiffs injuries, as currently plead, are merely incidental to the alleged injury caused to Rail Logistics by Defendant and therefore, Plaintiffs lack standing. Accordingly, Plaintiffs' action is dismissed with leave to amend within thirty (30) days of the date of this Order.
2. Contract between Rail Logistics and BNSFNext Defendant argues that the contract between Rail Logistics and BNSF preclude Plaintiffs' claims. See ECF No. 10 at 11-13. Specifically, Defendant argues the terms of the contract show BNSF did not guarantee a 72-hour service from Quincy to Chicago and it excludes BNSF from liability due to changes in service. See id.
The Court will not consider these arguments at this stage of the litigation. The Court only considers the contract between Rail Logistics and BNSF in its determination whether to dismiss this action. See supra "Standard of Review" at 6-8. However, in its consideration of the contract, the Court recognizes, only for the purposes of this order, the existence of the contract and that it was signed by Mr. Lerner in a representative capacity on behalf of Rail Logistics. The Court declines to interpret the terms of the contract at this time. Therefore, Defendant's argument that the terms of the contract between Rail Logistics and BNSF preclude Plaintiffs' claim does not support its motion to dismiss.
3. Failure to State a ClaimPlaintiffs' complaint raises three express claims against BNSF: (1) intentional interference with business expectancy; (2) promissory estoppel; and (3) fraud/negligent misrepresentation. See ECF No. 1 at ¶¶ 29-39. Defendant argues each claim must be dismissed as a matter of law for failure to state a claim. See ECF No. 10 at 13-20.
At oral argument Defendant claimed, pursuant to the contract between Rail Logistics and BNSF, the Court should apply Texas law when analyzing the merits of Plaintiffs' claims. The Court disagrees. This is not a contract cause of action. Plaintiffs' Complaint alleges certain torts occurred in Washington, thus Washington law applies. Accordingly, the Court will apply Washington law and evaluate each of Plaintiffs' claims in turn below.
a. Claim for Intentional Interference with Business ExpectancyPlaintiffs' first cause of action alleges Defendant intentionally interfered with Plaintiffs' business expectancy in the sale of Cold Train to Federated. ECF No. 1 at ¶¶ 29-33. Plaintiffs' allege Defendant knew of this expectancy based on its meetings with Mr. Lawson and a representative from Federated. Id. at ¶ 30. Plaintiffs allege Defendant intentionally interfered with this expectancy by "preferring business from other customers over the Cold Train's business . . . [and] by cancelling the 72-hour service." Id. at ¶ 31. Plaintiffs further allege Defendant's motive for this conduct "was purely greed" and to devote its resources to ship oil and coal. Id.
Under Washington state law, the elements of intentional interference with business expectancy are (1) the existence of a valid contractual relationship or business expectancy; (2) the defendant had knowledge of that relationship; (3) an intentional interference inducing or causing a breach or termination of the relationship or expectancy; (4) the defendant interfered for an improper purpose or used improper means; and (5) resultant damages. See Commodore v. Univ. Mech. Contractors, Inc., 120 Wash.2d 120, 137 (1992) (as amended).
Plaintiffs fail to allege sufficient facts to make a plausible claim under this cause of action. First, Cold Train is represented to be Rail Logistics' business, not Plaintiffs' business. Complaint, ECF No. 1 at ¶ 3. Second, Plaintiffs do not allege sufficient facts to show intentional interference or improper purpose on Defendant's part. Plaintiffs' alleged facts that (1) Defendant preferred costumers other than Cold Train and (2) cancelled a service, do not allow the court to "draw the reasonable inference" that Defendant is liable for intentionally interfering in Rail Logistics' sale of Cold Train to Federated. See Iqbal, 556 U.S. at 678. Similarly, Plaintiffs' alleged fact that Defendant was motivated by "greed" is not sufficient to show Plaintiffs could prove improper purpose or motive. Most businesses aim to increase profits, and thus, are "motivated by greed." Accordingly, Plaintiffs' claim for intentional interference with business expectancy is dismissed with leave to amend within thirty (30) days of the date of this Order.
b. Claim for Promissory EstoppelPlaintiffs' second cause of action is for promissory estoppel. ECF No. 1 at ¶¶ 34-36. Plaintiffs allege to have "had extensive discussions with BNSF regarding the 72-hour service from Quincy to Chicago [and] BNSF promised this service could support [Rail Logistics'] Cold Train business." Id. at ¶ 34. Plaintiffs claim to have detrimentally relied upon this promise by "incurring liability, by forgoing other opportunities, and by expending their time to build the Cold Train business." Id. at ¶ 35.
There are five prerequisites for a recovery in promissory estoppel: (1) A promise which (2) the promisor should reasonably expect to cause the promisee to change his position and (3) which does cause the promisee to change his position (4) justifiably relying upon the promise, in such a manner that (5) injustice can be avoided only by enforcement of the promise. Corbit v. J.I. Case Co., 70 Wash.2d 522, 539 (1967).
Here, as it is currently plead in the Complaint, it is not plausible Plaintiffs justifiably relied upon BNSF's alleged promise it would resolve OTP issues. First, the OTP issues concerned Rail Logistics' operation of the Cold Train. There are no independent promises alleged in the Complaint that concern the individual Plaintiffs. Second, at the same time BNSF allegedly promised to address service issues, Plaintiffs allege the 72-hour OTP steadily fell from 81% in September 2014 down to 3% in April 2014. ECF No. 1 at ¶¶ 14-15, 20. Plaintiffs claim to have relied on Defendant's amorphous and inadequately plead promise despite this continual and drastic drop in OTP. As currently plead, this Court finds such justifiable reliance not plausible given these nebulously alleged facts. Accordingly, Plaintiffs' claim for promissory estoppel is dismissed with leave to amend within thirty (30) days of the date of this Order.
c. Claim for Fraud and Negligent MisrepresentationPlaintiffs' third cause of action alleges fraud and negligent misrepresentation based on BNSF's allegedly false representation it was taking steps to improve its OTP. ECF No. 1 at ¶¶ 37-39. Defendant contends Plaintiffs' fraud and negligent misrepresentation claim fails to satisfy Rule 9(b)'s heightened pleading requirement. ECF No. 10 at 18-20. Defendant argues Plaintiffs allegations fail to provide the "who, what, when, where, and how" required to plead a claim for fraud. Id. at 19.
The Court agrees. Plaintiffs allege "BNSF represented to [Plaintiffs] it was taking steps to improve its OTP . . . BNSF knew or should have known that these statements were false . . . In the alternative, BNSF negligently obtained and communicated this false information to [Plaintiffs]." ECF No. 1 at ¶ 38. These allegations are not "specific enough to give [Defendant] notice" of its particular misconduct so it can defend itself against this claim. See Vess, 317 F.3d at 1106. Plaintiffs do not state who at BNSF was making these alleged misrepresentations. Plaintiffs do not provide sufficient information as to when and where these statements were made. Plaintiffs allege "BNSF reiterated these statements at the March 4, 2014 meeting," but only generally state that the alleged misrepresentations were first made "[t]hroughout the latter part of 2013 and well into 2014" and "other times." ECF No. 1 at ¶ 37. Moreover, besides the March 4, 2014 meeting, Plaintiffs do not state how these misrepresentations were made. For instance, whether the statements were made in person, over the phone, or written in electronic or letter correspondence. The Court finds Plaintiffs have not pled its claims with sufficient particularity to satisfy Rule 9(b).
Moreover, as currently plead in the Complaint and explained above, Plaintiffs fail to show any independent, personal interest they have in the subject of the allegedly fraudulent misrepresentations that Rail Logistics would not be the rightful plaintiff to assert.
Accordingly, Plaintiffs' claims for fraud and negligent misrepresentation are dismissed with leave to amend within thirty (30) days of the date of this Order. ACCORDINGLY, IT IS HEREBY ORDERED:
1. Defendant's Motion to Dismiss for Failure to State a Claim (ECF No. 10) is GRANTED.
2. Plaintiffs' Complaint (ECF No. 1) is DISMISSED WITH LEAVE TO AMEND within thirty (30) days of the date of this Order.The District Court Executive is directed to enter this Order, and provide copies to counsel.
 Generally a court may not consider material beyond the pleadings on a 12(b)(6) motion without converting the motion to dismiss to a motion for summary judgment, however, a court may consider materials including documents attached to the complaint, documents incorporated by reference in the complaint and matters of judicial notice without converting the motion. See United States v. Ritchie, 342 F.3d 903, 907-908 (9th Cir. 2003).
 At oral argument, Counsel informed the Court that Rail Logistics is a Limited Company, a limited liability company formed under Kansas law.
 BNSF attached the contract (ECF No. 13), an amendment to the contract (ECF No. 14), and BNSF Intermodal Rules and Policies Guide (ECF No. 11-2), which is incorporated by reference into the contract. Hereinafter, the Court refers to these documents collectively as the "contract."
 In support of its standing argument, Defendant contends that Rail Logistics entered into receivership proceedings in which the presiding court ordered that no person other than the appointed Receiver is authorized to seek relief for the company. ECF No. 10 at 8 n.4 (citing ECF No. 11-5 at ¶¶ 5, 18).
Tuesday, June 11, 2019
LPF II, LLC, Plaintiff,
CORNERSTONE SYSTEMS, INC., Defendant.
Cornerstone Systems, Inc., Defendant, represented by Matthew W. Geary, Dysart Taylor Cotter McMonigle & Montemore, PC, Patrick K. McMonigle, Dysart Taylor Cotter McMonigle & Montemore, PC & Scott D. Carey, Baker, Donelson, Bearman, Caldwell & Berkowitz, PC, pro hac vice.
MEMORANDUM AND ORDERDANIEL D. CRABTREE, District Judge.
This matter comes before the court on defendant Cornerstone Systems, Inc.'s Motion to Dismiss or, in the Alternative, to Compel Arbitration or, in the Alternative, to Transfer (Doc. 6). Plaintiff LPF II, LLC has filed a response opposing the motion, and defendant has filed its Reply.
For reasons explained below, the court denies defendant's motion to compel arbitration based on the current record. Instead, the court concludes that a summary trial is necessary to determine whether the Carrier Agreement requires the parties to this lawsuit to arbitrate their current disputes with one another. Given that conclusion, the court denies without prejudice the portion of defendant's motion seeking dismissal or transfer.
I. BackgroundThe facts recited here are taken from plaintiff's Complaint (Doc. 1-1) and the Carrier Agreement at issue in this lawsuit (Doc. 7-1). Although plaintiff does not attach the Carrier Agreement to its Complaint, the court may consider it because plaintiff references it in the Complaint. See GFF Corp. v. Associated Wholesale Grocers, Inc., 130 F.3d 1381, 1384 (10th Cir. 1997) ("[I]f a plaintiff does not incorporate by reference or attach a document to its complaint, but the document is referred to in the complaint and is central to the plaintiff's claim, a defendant may submit an indisputably authentic copy to the court to be considered on a motion to dismiss."); Black & Veatch Int'l Co. v. Wartsila NSD N. Am., Inc., No. CIV.A. 97-2556-GTV, 1998 WL 953966, at *2 (D. Kan. Dec. 17, 1998) (deciding a Rule 12(b)(6) motion to dismiss and compel arbitration where the Complaint referenced the contract containing the arbitration provision without converting motion to one seeking summary judgment).
A. The Carrier AgreementOn March 18, 2014, defendant Cornerstone Systems, Inc. ("Cornerstone") entered into a Carrier Agreement with two nonparties—Rail Logistics, L.C. ("Rail Logistics") and Rail Logistics/Cold Train, L.C. f/k/a Cold Train, L.C. ("Cold Train"). Doc. 7-1; Doc. 1-1 at 3 ¶ 10. Cornerstone had served as a Registered Property Broker under the auspices of the Federal Motor Carrier Safety Administration. Doc. 7-1 at 1. Rail Logistics and Cold Train were the carriers. Rail Logistics and Cold Train each agreed to provide fleet management and other services to Cornerstone. And Cornerstone agreed to pay Rail Logistics and Cold Train for those services. Doc. 1-1 at 3 ¶ 8-10.
The Carrier Agreement contains a "Disputes" provision. It provides:
In the event of a dispute arising out of this Agreement, including but not limited to Federal or State statutory claims, BROKER shall sole right to determine Arbitration or Litigation. Arbitration proceedings shall be conducted under the rules of the Transportation Arbitration and Mediation PLLC (TAM), or Transportation ADR Council, Inc. (ADR), upon mutual agreement of the Parties, or if no agreement, then at BROKER's sole discretion. Arbitration or Litigations proceedings shall be started within eighteen (18) months from the date of delivery or scheduled date of delivery of the freight, whichever is later. Upon agreement of the Parties, arbitration proceedings may be conducted outside of the administrative control of the TAM or ADR. The decision of the arbitrators shall be binding and final and the award of the arbitrator may be entered as judgment in any court of competent jurisdiction. The rationale and reasoning of the decision of arbitrator(s) shall be fully explained in a written opinion. The prevailing party shall be entitled to recovery of costs, expenses and reasonable attorney fees as well as those incurred in any action for injunctive relief, or in the event further legal action is taken to enforce the award of arbitrators. Arbitration proceedings shall be conducted at the office of the TAM or ADR nearest Memphis, Tennessee or such other place including by teleconference, or video conference, as mutually agreed upon in writing or directed by the acting arbitration association. Provided, however, either Party may apply to a court of competent jurisdiction for injunctive relief. Unless preempted or controlled by federal transportation law and regulations, the laws of the State of Tennessee shall be controlling notwithstanding applicable conflicts of laws rules. The arbitration provisions of this paragraph shall not apply to enforcement of the award of arbitration.
In the event of litigation the prevailing Party shall be entitled to recover costs, expenses and reasonable attorney fees, including but not limited to any incurred on appeals. Venue, controlling law, and jurisdiction in any legal proceedings shall be in Shelby County in the State of Tennessee not withstanding conflicts of laws and rules to the contrary.Doc. 7-1 at 6.
B. Rail Logistics and Cold Train's Accounts ReceivableSome two years before defendant Cornerstone had entered into the Carrier Agreement with Rail Logistics and Cold Train, Rail Logistics and Cold Train had entered into a security agreement with Great Western Bank. This 2012 security agreement gave the bank a security interest in all assets owned by Rail Logistics and Cold Train. These secured assets included Rail Logistics and Cold Train's accounts receivable.
In January 2016, plaintiff LPF II, LLC ("LPF") and Great Western Bank agreed to settle a dispute they had with one another. In their settlement agreement, the bank assigned its interest in Rail Logistics and Cold Train's accounts receivable to plaintiff LPF.
C. Current LawsuitIn short form, plaintiff LPF's Complaint in this case alleges that defendant Cornerstone owes Rail Logistics and Cold Train about $157,000 for fleet management services that they provided defendant Cornerstone. Plaintiff LPF claims that it owns the right to collect on this account receivable because it owns a security interest in Rail Logistics and Cold Train's assets— including the $157,000 account receivable owed by defendant Cornerstone.
After defendant Cornerstone was sued in state court, it removed the case to our court claiming that federal subject matter jurisdiction existed because plaintiff and defendant were citizens of different states. See Doc. 1 (invoking 28 U.S.C. § 1332). Now that the court has resolved some uncertainty about the parties' citizenship, the court turns to defendant's response to plaintiff's Complaint. This initial response asks the court to dismiss the case because the contractually adopted limitations period bars plaintiff from recovering. See Doc. 7 at 4. But this same motion also invokes the arbitration provision contained in the Carrier Agreement between Rail Logistics/Cold Train and defendant Cornerstone. See Doc. 7 at 5 (quoted in its entirety in part A, above). Specifically, Cornerstone's motion asserts the following: "Cornerstone, in its sole discretion pursuant to the Carrier Agreement, hereby elects arbitration, whereby plaintiff must submit its claims to binding arbitration, in accordance with Section 5(E) of the Carrier Agreement." Id. Given defendant's unequivocal election to invoke an arbitration agreement, the court must turn first to the arbitration aspect of defendant's motion. See Conn. Gen. Life Ins. Co. v. CST Indus., Inc., No. CIV.A. 05-2029-KHV, 2005 WL 1398660, at *2 (D. Kan. June 14, 2005) ("Federal policy favors arbitration agreements and requires that the Court rigorously enforce them." (citing Shearson/Am. Exp., Inc. v. McMahon, 482 U.S. 220, 226 (1987)) (other citations omitted)).
II. AnalysisFor the court to compel the parties to arbitrate disputes presented by the Complaint, the defendant, as the party seeking to compel arbitration, must establish that: (1) the Carrier Agreement applies to disputes between this plaintiff and this defendant; (2) the Carrier Agreement's arbitration clause encompasses the disputes at issue in the case; and (3) the Arbitration Clause is valid and enforceable. As explained in more detail below, the court cannot decide the first issue on the current record. The moving papers currently before the court present genuine issues of material fact whether the Carrier Agreement applies to plaintiff's claims against defendant. The court thus must hold a summary trial to resolve this issue. Consequently, the court declines to compel arbitration pending a summary trial, as described below, and denies without prejudice the motion's request for dismissal or transfer.
A. Federal Arbitration ActThe Federal Arbitration Act ("FAA"), 9 U.S.C. § 1 et seq., requires that "[a] written provision in any . . . contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction . . . shall be valid, irrevocable, and enforceable. . . ." 9 U.S.C. § 2. Section 3 of the FAA permits the court to stay litigation in favor of arbitration. The United States Supreme Court has interpreted the FAA to establish a strong federal policy in favor of arbitration thus requiring "liberal reading of arbitration agreements." Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 23 n.27 (1983); see also ARW Exploration Corp. v. Aguirre, 45 F.3d 1455, 1462 (10th Cir. 1995) (finding, the FAA "evinces a strong federal policy in favor of arbitration" (citing Shearson/Am. Express, Inc. v. McMahon, 482 U.S. 220, 226 (1987))).
When an agreement contains an arbitration clause, "a presumption of arbitrability arises . . . ." ARW Exploration Corp., 45 F.3d at 1462 (citing AT & T Techs., Inc. v. Commc'ns Workers of Am., 475 U.S. 643, 650 (1986)). But, "because `arbitration is a matter of contract' and the authority of an arbitrator arises only from the parties' agreement to that forum in advance, `a party cannot be required to submit to arbitration any dispute which [it] has not agreed so to submit.'" Sanchez v. Nitro-Lift Techs., L.L.C., 762 F.3d 1139, 1146 (10th Cir. 2014) (quoting AT & T Techs., 475 U.S. at 648-49); see also Hicks v. Cadle Co., 355 F. App'x. 186, 192 (10th Cir. 2009) ("[T]he FAA's proarbitration policy does not operate without regard to the wishes of the contracting parties." (citations and internal quotation marks omitted)).
The presumption of arbitrability thus "falls away," when the parties dispute whether a valid and enforceable arbitration agreement exists. See Riley Mfg. Co., Inc. v. Anchor Glass Container Corp., 157 F.3d 775, 779 (10th Cir. 1998) (citation omitted). To say it another way, a court may compel arbitration "only when satisfied that the making of the agreement [to arbitrate] is not at issue." Nat'l Am. Ins. Co. v. SCOR Reinsurance Co., 362 F.3d 1288, 1290 (10th Cir. 2004) (citation and internal quotation marks omitted).
B. Does the Carrier Agreement's Arbitration Provision Apply to Plaintiff?The parties agree about some of the operative facts. For instance, they agree that defendant Cornerstone entered into the Carrier Agreement with non-parties Rail Logistics/Cold Train. They likewise agree that the Carrier Agreement contains an arbitration provision. And last, they agree that plaintiff LPF was not a party to the Carrier Agreement and its arbitration provision. But from there, they part company.
Defendant Cornerstone asserts that plaintiff, in June 2017, "step[ped] into the shoes of Rail Logistics-Cold Train, sued Cornerstone for amounts allegedly due and owing to Rail Logistics-Cold Train" and that this debt arose "exclusively from the Carrier Agreement." Doc. 7 at 2. In context, these allegations and others made by the Complaint and defendant's motion imply that plaintiff—by stepping into shoes that permit plaintiff to sue on the debt allegedly owed to Rail Logistics/Cold Train—also stepped into their shoes as parties to the Carrier Agreement. See Doc. 7 at 2. Thus, defendant reasons, plaintiff must arbitrate its disputes with defendant Cornerstone because Rail Logistics and Cold Train were obligated to arbitrate. Plaintiff disagrees. It argues that conclusory assertions like the ones Cornerstone has made here cannot establish that a binding arbitration agreement exists between this plaintiff and this defendant.
Given the meager information supplied so far, the court agrees with plaintiff. The record presented by this motion does not permit the court to determine whether an arbitration agreement exists that encompasses these parties and the disputes at issue in their lawsuit. Subsections 1 and 2, following, explain the rationale for this conclusion.
1. Procedural MechanismWhen the parties dispute whether an arbitration agreement exists, the party moving to compel arbitration bears a burden like the one faced by a summary judgment movant—the proponent of arbitration must make an initial showing that a valid arbitration agreement exists. Hancock v. Am. Tel. & Tel. Co., Inc., 701 F.3d 1248, 1261 (10th Cir. 2012); SmartText Corp. v. Interland, Inc., 296 F. Supp. 2d 1257, 1262-63 (D. Kan. 2003) (citations omitted); Phox v. Atriums Mgmt. Co., Inc., 230 F. Supp. 2d 1279, 1282 (D. Kan. 2002). If the moving party satisfies this requirement, the burden shifts to the non-moving party to demonstrate that there is a genuine issue of material of fact whether the parties have formed an agreement to arbitrate. Hancock, 701 F.3d at 1261; SmartText Corp., 296 F. Supp. 2d at 1263; Phox, 230 F. Supp. 2d at 1282. If the non-moving party "demonstrates [such] a genuine issue of material fact, then a trial on this issue is required." SmartText Corp., 296 F. Supp. 2d at 1263 (citing 9 U.S.C. § 4 (if the making of the arbitration agreement is seriously disputed, then "the court shall proceed summarily to the trial thereof") (further citation omitted)); see also Howard v. Ferrellgas Partners, L.P., 748 F.3d 975, 978 (10th Cir. 2014).
2. Substantive Legal PrinciplesTo decide whether the parties agreed to arbitrate their current disputes, courts generally apply "`ordinary state-law principles that govern the formation of contracts.'" Hardin v. First Cash Fin. Servs., Inc., 465 F.3d 470, 475 (10th Cir. 2006) (quoting First Options of Chi., Inc. v. Kaplan, 514 U.S. 938, 944 (1995)). Here, the analysis is more challenging. Plaintiff LPF was not a party to the contract that contains the arbitration agreement. The only information provided by defendant Cornerstone—the proponent of the arbitration motion—is that plaintiff "stepped into the shoes" of two companies who, it appears, were parties to an arbitration provision. The record for the current motion includes no other information about the content of the agreement that purportedly placed plaintiff in those shoes. It likewise omits any citation to legal authority supporting defendant's legal conclusion. Still, the gravamen of defendant's motion is clear enough. That is, plaintiff, by asserting rights arising under the Carrier Agreement, also inherits the Carrier Agreement's obligation to arbitrate claims arising from that agreement. And while Cornerstone's showing is not a textbook showing of arbitrability, the court concludes that defendant has discharged its burden to make "an initial showing that a valid arbitration agreement exists" between this plaintiff and this defendant.
But that showing does not conclude the discussion. Plaintiff's response to Cornerstone's motion reveals a dispute whether a valid and enforceable agreement exists between the parties to this lawsuit. This showing means that the presumption of arbitration arising under the Federal Arbitration Act "falls away." Riley Mfg. Co., 157 F.3d at 779.
C. What Happens Now?While the case law is not rich with guidance, precedent from our Circuit identifies the path forward. The court should not deny defendant's motion to compel arbitration based on its inconclusive showing. Instead, the court must proceed to a second phase of the analysis. Howard, 748 F.3d at 978 (holding district court erred by denying arbitration outright when moving papers revealed dispute about arbitrability). Specifically, Howard and the FAA instruct district courts to "proceed summarily to the trial" on the facts relevant to arbitrability. Id. at 977 (citing 9 U.S.C. § 4). Likewise, Howard makes clear, the court should get on with this "summary trial" quickly. Id. at 978 (emphasis in original). The court should not delay the summary trial, nor should it allow the parties to engage in "death by discovery" on this threshold question. Indeed, Howard directs the court to sponsor an efficient and summary process "so the parties can get on with the merits of [litigating] their dispute in the right forum." Id. This is precisely what our court has done in the past, albeit before Howard provided such clear rules of the road. See SmartText Corp., 296 F. Supp. 2d at 1263.
Consistent with these directives, the court denies defendant's motion to compel arbitration pending a summary trial on the question of arbitrability. Also, the court denies defendant's motion to dismiss, or alternatively, to transfer without prejudice to its right to reassert such a request for relief once the summary trial resolves the arbitration issue.
IT IS THEREFORE ORDERED THAT the court: (a) denies the portion of defendant's "Motion to Dismiss or, in the Alternative to Compel Arbitration or, in the Alternative, to Transfer" (Doc. 6) pending a summary trial on the issue of arbitrability; and (b) denies the remainder of this motion without prejudice to defendant's right to reassert those requests for relief once the forum issue is decided. The court will conduct a summary trial to decide the issue whether a valid arbitration agreement exists between this plaintiff and this defendant that encompasses the disputes at issue in this case. Consistent with this Order, counsel for the parties must confer with one another and contact Deputy Clerk Megan Garrett at (785) 338-5340 or email@example.com within 10 days of the date of this Order to establish a prompt trial date for a summary trial. Also, the parties must confer and advise Ms. Garrett whether either party demands a jury trial on this issue and, if so, whether they dispute the propriety of a jury trial on this limited issue.
IT IS SO ORDERED.
 Defendant requests oral argument on its Motion to Dismiss. Doc. 6 at 1. D. Kan. Rule 7.2 provides that "[t]he court may set any motion for oral argument or hearing at the request of a party or on its own initiative." The discretion to conduct oral argument rests with the court. The court, in effect, grants defendant's request by ordering the summary trial required by this Order.
 See Doc. 12, 14.
 The court recognizes that the parties may manage to stipulate to the dispositive facts and thus submit the issue for decision on stipulated facts. The court does not understand Howard to forbid the court from resolving the threshold arbitrability question on stipulated facts. Instead, the court understands it merely to describe the governing procedure when the parties disagree about the arbitrability facts.
Monday, June 10, 2019
RAIL LOGISTICS, L.C., et al., Appellees,
COLD TRAIN, L.L.C., et al., (Christopher Mnichowski), Appellants.
Luke R. Hertenstein, of Foland, Wickens, Eisfelder, Roper & Hofer, P.C., of Kansas City, Missouri, for appellants.
Mick Lerner, of The Lerner Law Firm, P.A., of Overland Park, for appellees.
Before Standridge, P.J., McAnany, J., and Hebert, S.J.
1217*1217 and inferences reasonably drawn from the evidence in favor of the party against whom the ruling is sought. When reasonable minds could reach different conclusions based on the evidence, the court must deny the motion. The issue is not whether there is literally no evidence supporting the party against whom the motion is directed, but whether there is evidence upon which the jury could properly find a verdict for that party. An appellate court applies these same standards in its de novo review.
2. Courts consider written documents jointly when they are executed contemporaneously by the same parties. The fact that complementary instruments do not refer to each other does not necessarily detract from their significance as integral and related parts of one contract. When a court construes instruments together, the general purpose of the entire transaction controls.
3. The court's purpose in construing a contract is to ascertain the intent of the parties, and such intent best may be determined by looking at the language employed and taking into consideration all the circumstances and conditions which confronted the parties when they made the contract.
4. When a court is called on to interpret multiple interrelated documents, not all of which were signed by the same parties, the court can read and construe them together because of their interrelated nature and because the true nature and character of a document is not determined by the name attached to it but by the intent of the parties as reflected by its terms and content.
5. Under Supreme Court Rule 6.05 (2017 Kan. S. Ct. R. 36) an appellant may not raise new issues in a reply brief.
6. Constructive fraud is the breach of a legal or equitable duty which, irrespective of moral guilt, the law declares fraudulent because of its tendency to deceive others or violate a confidence. Neither actual dishonesty nor purpose or intent to deceive is necessary to establish constructive fraud.
7. In order to be successful on a claim of constructive fraud, the plaintiff must show (1) a confidential relationship and (2) a betrayal of a confidence or breach of a duty imposed by the relationship.
8. A confidential or fiduciary relationship refers to any relationship of blood, business, friendship, or association in which one party reposes special trust and confidence in the other party who is in a position to have and to exercise influence over the first party.
9. As a general rule, fiduciary relationships either are created by contract or by formal legal proceedings or they are implied in law due to the facts surrounding the transactions and the relationship of the parties to the transactions.
10. A fiduciary relationship is characterized by a peculiar confidence placed by one individual in another. A fiduciary is one who is in a position to have and exercise, and does have and exercise, influence over another. A fiduciary relationship implies a condition of superiority of one of the parties over the other. Thus, a fiduciary relationship generally implies that one party is weaker than the other, either in business intelligence, knowledge of facts, or mental strength, thereby giving the other party an advantage. Generally, in a fiduciary relationship, the property, interest, or authority of the other party is placed in the charge of the fiduciary. Thus, a fiduciary has the duty to act primarily for the benefit of the other party.
Michael Lerner and Christopher Mnichowski were co-managers of Rail Logistics, L.C., and Cold Train, L.L.C., but they had a falling-out and decided to end their relationship. The details of the steps they would take to end their relationship and to divide the ownership of these companies were memorialized in three written agreements: an exchange 1218*1218 agreement, a promissory note, and a pledge agreement. The end result was that Lerner became the sole owner of Rail and Mnichowski became the sole owner of Cold Train.
Thereafter, Rail brought this action against Cold Train and Mnichowski, asserting claims that include breach of contract and constructive fraud. Following a jury trial, judgment was entered against Mnichowski for two counts of breach of contract and for constructive fraud. Rail was awarded damages of $375,091. Mnichowski appeals, claiming there was insufficient evidence to support these claims, that the court erred in instructing the jury on them, and that the court erred in not entering judgment as a matter of law on them.
We conclude that the district court did not err in its rulings or in its instructions on the contract claims, for which there was sufficient evidence to support the jury's findings, but that the court erred in allowing the claim of constructive fraud to go to the jury because there was no showing of a relationship of trust and confidence between the parties.
FactsLerner and Mnichowski were joint owners and active co-managers of Rail and Cold Train. Rail originally was formed as a limited liability company in 1998, with Lerner as its sole managing member. Rail's business was manufacturing special purpose rail cars, leasing rail cars to third parties, and providing logistic services to third parties with fleets of rail cars. In 2009, Mnichowski became a co-managing member of Rail. At that time, Lerner owned two-thirds and Mnichowski owned one-third of Rail.
Cold Train was formed as a limited liability company in 2009 with Lerner and Mnichowski equal owners and co-managers of the company. Cold Train is in the refrigerator intermodal business. It transports refrigerated containers from trains to its customers and then returns the refrigerated containers to the trains.
In 2010, Mnichowski proposed to Lerner that they start their own trucking company in order to provide Cold Train with better trucking rates and to provide better service to customers. Lerner was not interested, so Mnichowski formed the trucking company, CT Cartage, and agreed with Lerner that the new company would not do business with Cold Train.
In the fall of 2010, Lerner found out that CT Cartage was doing business with Cold Train. As a result, he felt he could no longer rely on Mnichowski, so he proposed that they divide up the ownership of Rail and Cold Train with Lerner taking Rail and Mnichowski taking Cold Train.
On December 17, 2010, Lerner and Mnichowski entered into three written agreements — an exchange agreement, a promissory note, and a pledge agreement — to end their joint ownership of Rail and Cold Train.
• EXCHANGE AGREEMENT — Under the exchange agreement, Mnichowski became the owner of Cold Train and Lerner became the owner of Rail. The agreement provided that Mnichowski relinquish to Lerner his interest in Rail, resign from all positions with Rail, and agree to other related terms. In exchange, Lerner relinquished to Mnichowski his interest in Cold Train and resigned from all positions with Cold Train.
Rail had a contract with the Burlington Northern Santa Fe Railroad (BNSF) it had entered into in 2009. (We will discuss that contract below regarding the pledge agreement.) Rail apparently had not engaged in the intermodal services provided for in the contract. Under the exchange agreement Rail agreed to assign the BNSF contract to Cold Train.
Rail agreed to loan Cold Train $320,000 in the form of a line of credit line for Cold Train's "working capital, day-to-day needs, [and] cash needs." Cold Train agreed to repay this credit line along with the promissory note described below.
As part of the exchange agreement, Cold Train agreed that so long as it remained indebted to Rail (see also the promissory note below), it would provide monthly financial statements to Rail, including a balance sheet and an income statement.
1219*1219 • PROMISSORY NOTE — The 2-year promissory note (signed by Cold Train but not personally by Mnichowski) was for $1,413,396.17. It was given to Rail and was secured by a pledge of Cold Train's assets.
As of December 17, 2010, Cold Train owed Rail between $1.5 million and $2 million, an amount in excess of the value of Cold Train's receivables. As a part of dividing the ownership of these two companies, the parties agreed that Rail would convert part of the debt into a 2-year loan evidenced by this promissory note. The note covered (1) Cold Train's obligations to Rail, accumulated during the time Lerner and Mnichowski jointly owned Cold Train, (2) the unpaid charges for refrigerated containers Cold Train leased from Rail, and (3) certain start-up operating expenses Rail paid for Cold Train.
Under the terms of the promissory note, Cold Train's failure to perform any obligation under the exchange agreement or the pledge agreement would constitute a default of the note.
• PLEDGE AGREEMENT — The pledge agreement, entered into at the same time as the promissory note, prohibited Mnichowski from taking any action which would impair the position or interest of Rail in the pledged collateral without obtaining Rail's prior written consent. Thus, Mnichowski agreed not to sell, assign, transfer, pledge, or otherwise encumber any of the collateral securing Cold Train's promissory note without Rail's permission until the note was paid in full.
Cold Train's assets included about $1 million in accounts receivable and the exclusive 5-year BNSF contract, mentioned earlier, to provide intermodal rail service in refrigerated cars. The BNSF contract was the only contract of its kind in the United States and was worth millions of dollars. It gave Cold Train the exclusive right to use shipping refrigerated containers on railroad cars. Cold Train was the only business that used the intermodal rail service after the split and the assignment of the BNSF contract to Cold Train. Rail's business was different from that of Cold Train, and Rail did not have use for the BNSF contract except as collateral for Cold Train's debt.
These assets were supposed to be retained by Cold Train, free of any encumbrance, until the debts to Rail were fully paid. If the pledge agreement was violated, Rail was entitled to take immediate ownership of Cold Train from Mnichowski.These three written documents were interconnected, with each document referencing the other two. Under the terms of the promissory note, Cold Train's failure to observe or perform any agreement under the exchange agreement or the pledge agreement constitutes an event of default. The promissory note states that the pledge agreement is intended to secure the payment of the promissory note with Mnichowski's interest in Cold Train. The execution of the promissory note and the pledge agreement was stated to be a condition for the closing of the exchange agreement, and the exchange agreement expressly refers to them as "transactions under this Agreement."
In February 2011, after the division of Rail and Cold Train, Mnichowski negotiated with BNSF for a contract in the name of Cold Train Intermodal, Inc., one of the companies he would later own. BNSF required a letter of credit as a condition of a contract with Cold Train Intermodal, Inc. In order to obtain that letter of credit, Mnichowski pledged Cold Train's assets, thereby encumbering Cold Train's assets in violation of the pledge agreement with Rail. (Mnichowski later stipulated in this case to these facts and admitted that this act was a violation of the pledge agreement.)
On September 30, 2011, Rail sued Cold Train, Mnichowski, CT Cartage, Inc., Cold Train Intermodal, Inc., CM Financial Group, Inc., and CMF Leasing, Inc., for a restraining order and other injunctive relief; for the appointment of a receiver for Cold Train; and for a declaratory judgment, specific performance, and damages. The district court issued a temporary restraining order which prohibited 1220*1220 Mnichowski and Cold Train from transferring or encumbering any other assets of Cold Train, including cash, and which otherwise maintained the status quo pending a temporary injunction hearing.
The following day, Rail notified Mnichowski that it was exercising its right under the pledge agreement to take over Cold Train and to terminate Mnichowski as an officer of Cold Train. In subsequent court filings and in his deposition, Mnichowski acknowledged Rail's take-over of Cold Train as provided for in the pledge agreement.
At the time of trial in August 2016, Rail had control of Cold Train and had assumed all of Cold Train's obligations. A lengthy stipulation containing many of the facts recited above was read at trial to the jury. In the stipulation, the parties stated that certain agreements were made in writing "to accomplish the termination of the joint ownerships." Lerner testified that the three agreements — the exchange agreement, the promissory note, and the pledge agreement — were intended to be considered jointly.
Steve Lawson, vice-president of intermodal operations for Cold Train before this suit, testified about a meeting he had with Mnichowski on April 8, 2011. Mnichowski told Lawson that "he was in a Machiavellian plan to strip" Cold Train of its assets. Mnichowski planned to leave Cold Train with no assets to pay off the $1,413,396.17 promissory note and with about $2 million in debts to suppliers. By that time all the assets would be gone. Mnichowski said he had already set up a new contract between BNSF and Cold Train Intermodal, Inc., and he planned to transfer Cold Train's customers and equipment to Cold Train Intermodal, Inc.
"[Mnichowski] said he was going to move [Cold Train's assets] into a new entity, and he was going to leave Cold Train, LLC, a shell that had nothing but a million four in debt to Rail Logistics, another $300,000 credit line that was offered by Rail Logistics, and some various vendor debt that would have been left, somewhere probably two million dollars."In response, Lawson asked Mnichowski if he thought Lerner "would take a multi-million dollar ass-whipping lying down." When asked what that meant, Lawson stated that Mnichowski's plan effectively "would be stealing. If you're going to leave a shell that can't pay [its] bills and can't repay a debt owed to Rail Logistics, it's going to be theft." This April 8, 2011, conversation was so shocking to Lawson that he made a written record of it.
In a prior hearing, Mnichowski had admitted that it was possible that he had the meeting with Lawson on April 8, 2011. Mnichowski said he did not recall using the word "Machiavellian," but he had used the word in the past, and he understood the word to mean "a plot." This admission was read to the jury at trial.
Lawson testified that on several occasions after the April 8, 2011, meeting, Mnichowski asked him to help move customers from Cold Train to Cold Train Intermodal, Inc., but Lawson refused. On one occasion, Mnichowski told Lawson he was going to talk to his attorney about bankrupting Cold Train. Lawson testified that Cold Train was "very slow paying vendors," and suppliers often called to complain about not being paid.
In 2011, right after Mnichowski took over Cold Train, Cold Train began paying management fees to one of Mnichowski's other companies, CM Financial Group, Inc. Lerner testified that in the first 2 weeks after the agreements were signed, Cold Train started paying management fees three times larger than the amount it previously paid. They totaled over $489,000 that year. Though the number of Cold Train employees decreased by about half after Mnichowski took over, the management fees drastically increased in 2011. Lerner was concerned about the amount of these fees. He suspected that Mnichowski was stripping Cold Train of its assets.
"Well, it's nothing out of the ordinary to pay a management fee to a third party company. But it is questionable to strip money from a company. That's used frequently by swindlers. It's called a bust-out scheme, where they would just take money out of the company, not pay debts, and call them a number of things like management 1221*1221 fees. So, it concerned me when I found out that the amount of the management fees that were taken from Cold Train, and given to Mr. Mnichowski's other companies."Mnichowski also began extracting from Cold Train a transaction fee of $25 for each shipment that used CT Cartage, Inc., one of his other companies. There were over 1,400 such fees paid in the 10 months between November 30, 2010, and September 30, 2011. These fees had not been charged before the split between Rail and Cold Train.
Before the Rail/Cold Train split, Cold Train had not made loans to other companies. After Mnichowski took over Cold Train, he began making loans from Cold Train to himself and to other companies Mnichowski owned. For example, Cold Train loaned (1) $10,000 to Mnichowski, individually; (2) $244,228.93 to CM Financial Group; (3) $136,367.30 to CT Cartage, Inc.; (4) $42,000 to CMF Leasing, Inc.; and (5) $67,204 to Heartland Motor Coach, Inc., a bus company in which Mnichowski owned a substantial interest.
Rail learned about these loans and other transfers of Cold Train assets to Mnichowski and his companies after Rail took over Cold Train pursuant to the district court's order in this suit. Before then, Mnichowski had not provided the monthly financial statements to Rail that he was required to provide under the terms of the exchange agreement, thereby concealing from Rail these loans and other transfers.
The jury found in favor of Rail and against Mnichowski on four of its theories: (1) Mnichowski breached the separation agreements with respect to the $1,413,396.17 loan; (2) Mnichowski breached the separation agreements with respect to the $320,000 loan; (3) Mnichowski committed fraud by silence during the time he was supposed to submit Cold Train's financial statements to Rail; and (4) Mnichowski engaged in constructive fraud against Rail by transferring away valuable assets of Cold Train. The jury found in favor of Mnichowski and CM Financial Group, Inc., on Rail's other claims.
The jury awarded damages to Rail as follows: (1) $117,783.02 for breach of the separation agreements with respect to the $1,413,396.17 loan; (2) $247,308.41 for beach of the separation agreements with respect to the $320,000 loan; (3) no damages for Mnichowski's fraud by silence; and (4) $10,000 for constructive fraud.
Mnichowski's posttrial motions were denied, and his appeal brings the matter to us. He raises on appeal nine different points of error. With respect to the $1,413,396.17 loan, the $320,000 loan, and the claim of constructive fraud, he argues that the district court should have granted judgment as a matter of law on each of those claims, that the court erred in instructing the jury on each of them, and that the evidence was insufficient to support the jury verdict on each of them. While his arguments on these claims for the most part are repetitive, we will consider each in order.
$1,413,396.17 Loan — Judgment as a Matter of LawMnichowski asserts that the district court erred in denying motions for judgment as a matter of law on Rail's breach of contract claim related to the promissory note. He argued to the district court that (1) he was not personally liable on the promissory note; and (2) the remedy for breach was the return of Cold Train to Rail, which happened before trial. These motions were denied at the close of the plaintiffs' case, at the conclusion of all of the evidence, and in posttrial motions.
Under K.S.A. 2016 Supp. 60-250(a)(1), if a party has been fully heard on an issue during a jury trial, and there is no legally sufficient evidentiary basis for the jury to find for the party on the issue, the court may: "(A) Resolve the issue against the party; and (B) grant a motion for a judgment as a matter of law against the party on a claim or defense that, under the controlling law, can be maintained or defeated only with a favorable finding on that issue."
In ruling on a motion for judgment as a matter of law, "[t]he question is not whether there is literally no evidence supporting the party against whom the motion is directed, but whether there is evidence upon which the jury could properly find a verdict 1222*1222 for that party." Sampson v. Hunt, 233 Kan. 572, 578, 665 P.2d 743 (1983). In deciding the motion, the court must resolve all facts and inferences reasonably drawn from the evidence in favor of the party against whom the ruling is sought. When reasonable minds could reach different conclusions based on the evidence, the court must deny the motion. National Bank of Andover v. Kansas Bankers Surety Co., 290 Kan. 247, 267, 225 P.3d 707 (2010); Michaelis v. Farrell, 48 Kan. App.2d 624, 629, 296 P.3d 439 (2013). On appeal, we apply this same standard in our de novo review. Michaelis, 48 Kan.App.2d at 629, 296 P.3d 439.
Mnichowski admits that he violated the pledge agreement by encumbering the assets of Cold Train. But he contends he was not personally liable on the promissory note itself, so he could not be liable in damages for its breach.
In the contentions instruction, Jury Instruction No. 12, Rail claimed:
"That, with respect to the $1,413,396.17 loan, Defendant Mnichowski breached the separation agreements reached with plaintiffs in December of 2010, namely, the Exchange Agreement, the Pledge Agreement, and the Promissory Note, considered jointly, by encumbering the assets of Cold Train, L.L.C., and by transferring away from Cold Train, L.L.C., to himself and to other defendants, its valuable assets."Mnichowski's argument is based on the premise that the exchange agreement, the promissory note, and the pledge agreement were separate and distinct from each other. He asserts that although the breach of contract claims "make reference to the three separate contracts being `considered jointly,' it is clear from the express terms of these three documents that they are separate contracts." While the three agreements reference each other, Mnichowski argues that no clause in any of them expressly incorporates the terms of the others. But Kansas law does not require that the documents expressly incorporate each other, and Mnichowski provides no support for his assertion to the contrary.
We consider written documents jointly when they are executed contemporaneously by the same parties. "[T]hey will be read and construed together, although they do not in terms refer to each other." Place v. Place, 207 Kan. 734, Syl. ¶ 1, 486 P.2d 1354 (1971). See Insurance Co. v. Hanks, 83 Kan. 96, 103, 110 P. 99 (1910). And when "instruments are construed together ... the general purpose of the entire transaction should control." Place, 207 Kan. 734, Syl. ¶ 2, 486 P.2d 1354. See In re Estate of Garden, 158 Kan. 554, 562, 148 P.2d 745 (1944) (the fact that complementary instruments do not refer to each other does not detract from their significance as integral and related parts of one contract).
Here, there is ample evidence that all three written contracts were considered to be one written agreement to accomplish the break-up between Lerner and Mnichowski. Not only were the contracts executed at the same time and concerning the same subject matter, but they also explicitly referred to each other.
But Mnichowski also argues that the contracts have different parties. The parties to the exchange agreement were Mnichowski, Lerner, Cold Train, CM Financial Group, Inc., and CMF Leasing, Inc. The parties to the promissory note were Cold Train and Rail. The parties to the pledge agreement were Mnichowski and Rail. Thus, Mnichowski argues that the court must consider each contract separately to see if Rail presented legally sufficient evidence from which a reasonable jury could find Mnichowski liable for the claimed breach.
"The primary rule in construction of any contract is to ascertain the intent of the parties, and such intent may best be determined by looking at the language employed and taking into consideration all the circumstances and conditions which confronted the parties when they made the contract." New Hampshire Ins. Co. v. Fox Midwest Theatres, Inc., 203 Kan. 720, Syl. ¶ 1, 457 P.2d 133 (1969)
In Atlas Industries, Inc. v. National Cash Register Co., 216 Kan. 213, 531 P.2d 41 (1975), the court examined the relationship 1223*1223 between the parties who executed three written documents. Though not all three documents were signed by the same three parties, the court read and construed them together because of the interrelated nature of the documents and because "the true nature and character of a document is not determined by the name attached thereto but by the intent of the parties as reflected by the terms or the contents thereof." 216 Kan. at 220, 531 P.2d 41 (citing Atwell v. Maxwell Bridge Co., 196 Kan. 219, 409 P.2d 994 ).
Here, the overall settlement was primarily between Lerner and Mnichowski but also included various entities they controlled. The exchange agreement, which included Mnichowski and Lerner and entities they owned or controlled, was intended to separate the ownership of Rail from the ownership of Cold Train. The promissory note memorialized the various loans Rail had made to Cold Train during the time Lerner and Mnichowski jointly owned Cold Train, loans which were not of particular concern when Lerner and Mnichowski both owned these entities, but which now needed to be dealt with given the change in ownership of Cold Train and Rail. The pledge agreement provided security for the promissory note which was needed to separate the interests of Lerner and Mnichowski in these entities. The district court accurately expressed the relationship of the parties:
"From the outset, this case was about the failed business relationship of two men. Both were owners and decision makers in several different but somewhat related companies. Some of the companies were solely owned by Mr. Mnichowski. The bottom line was that these men had intertwined their business relationships and then found that it was not working for them. So, they negotiated a split. The breakup, or business divorce, was between the two men. The vehicles by which they did business were those several different entities. Although the law recognizes the entities [as] separate persons the real dispute that led to the divorce was between the two principal men, Michael Lerner and Chris Mnichowski."Even so, Mnichowski signed the promissory note on behalf of Cold Train, the "Maker," and not in his individual capacity. The document did not expressly provide that Mnichowski was personally liable under the promissory note. Thus, if Rail's breach of contract claim was based solely on the breach of the terms of the promissory note, it would fail.
But Rail's breach of contract claim was not based solely on the promissory note which Mnichowski did not sign. Rail did not seek judgment against Mnichowski for the unpaid balance on the note. Rail's claim was based on Mnichowski stripping away and encumbering Cold Train's assets, contrary to the pledge agreement, so as to make it impossible for Cold Train to pay back its obligations to Rail under the promissory note. Evidence of this is found in Mnichowski's own admission that he breached the pledge agreement and Lawson's testimony about Mnichowski's self-described Machiavellian scheme to strip Cold Train of its assets so that nothing would be left for its creditors, including Rail. To that end, Mnichowski diverted Cold Train's assets to himself and to entities he owned and encumbered Cold Train's asserts as a part of his dealings with BNSF.
Mnichowski's final argument on this issue is that Rail already obtained relief for any breach of pledge agreement when it took over Cold Train. The pledge agreement provided:
"Upon the occurrence of an Event of Default..., [Rail] ... is hereby authorized and empowered to transfer and register in its name or in the name of its nominee the whole or any part of the Pledged Collateral... to exercise the voting and all other rights as a holder with respect thereto, to collect and receive all cash dividends, interest, principal and other distributions made thereon, to sell in one of more sales... the whole or any part of Pledged Collateral and to otherwise act with respect to Pledged Collateral as though [Rail] was the outright owner thereof."But the pledge agreement does not provide that taking over Cold Train is Rail's exclusive remedy and does not foreclose an action for damages. Rail's reacquisition of Cold 1224*1224 Train was an inadequate remedy because so many of Cold Train's assets had already been transferred away. Thus, Rail was entitled to sue Mnichowski under the theory that his breach of the pledge agreement damaged Rail. The damages Rail sought were not measured by the balance due on the promissory note. The jury understood this in awarding Rail $117,783.02 in damages under this theory of recovery.
The district court did not err in denying the motions for judgment as a matter of law on these claims.
$1,413,396.17 Loan — Erroneous InstructionMnichowski next claims that Jury Instruction No. 12 was erroneous because it stated that the three written agreements comprising the settlement agreement — the exchange agreement, the promissory note, and the pledge agreement — should be considered jointly.
Jury Instruction No. 12 stated:
"That, with respect to the $1,413,396.17 loan, Defendant Mnichowski breached the separation agreements reached with plaintiffs in December of 2010, namely, the Exchange Agreement, the Pledge Agreement, and the Promissory Note, considered jointly, by encumbering the assets of Cold Train, L.L.C., and by transferring away from Cold Train, L.L.C., to himself and to other defendants, its valuable assets."Mnichowski objected to this instruction and preserved the issue for appeal. Our standards for reviewing jury instructions are well known to the parties and can be found in Foster v. Klaumann, 296 Kan. 295, 301-02, 294 P.3d 223 (2013). Further, in a civil case such as this, the district court is required to give an instruction supporting a party's theory of the case if the instruction is requested and there is evidence supporting the theory which, if accepted as true when viewed in the light favoring the requesting party, is sufficient to support a verdict based upon it. See Puckett v. Mt. Carmel Regional Med. Center, 290 Kan. 406, 419, 228 P.3d 1048 (2010).
Instruction No. 12 is a contentions instruction. It sets forth the claims and defenses of the parties. It does not present principles of law which the jury must apply to the case, except for the sections of the instruction stating the various burdens of proof on the different claims and defenses. The substantive instructions on the applicable principles of law included instructions on the basic principles of contracts, to which there is no claim of error. It was up to the jury to find the elements necessary on the breach of contract claims.
Mnichowski claims that Rail alleged only a breach of the pledge agreement, which does not include an explicit promise to repay the $1,413,396.17 loan, and it was error for the district court to state that all three written documents should be considered jointly. But, of course, this ignores the facts that this was merely Rail's contention. Without providing support for his argument, Mnichowski merely alleges that including references to the exchange agreement, the promissory note, and the $1,413,396.17 loan may have misled the jury and prejudiced him. He acknowledges that his argument on this claim of error is the same as his argument he asserted in his first claim of error. We need not repeat here our analysis on this issue. It suffices to say that based on that analysis, we find no error in this instruction.
In his reply brief, Mnichowski raises a new issue on appeal regarding this instruction's use of the phrase "with respect to the $1,413,396.17 loan." This argument was not asserted in his appellate brief. An appellant may not raise new issues in a reply brief. State v. McCullough, 293 Kan. 970, 984-85, 270 P.3d 1142 (2012). See Supreme Court Rule 6.05 (2017 Kan. S. Ct. R. 36). Accordingly, we do not address this issue.
$1,413,396.17 Loan — Sufficiency of the EvidenceMnichowski's last contention with respect to the $1,413,396.17 loan is that there is insufficient evidence to support the jury's verdict. This is another variation of the same argument raised in the first issue we discussed. Our analysis remains the same and 1225*1225 we find no insufficiency in the evidence supporting this claim.
$320,000 Line of Credit — Judgment as a Matter of Law.Mnichowski's first claim regarding Cold Train's $320,000 line of credit is that the district court should have granted him judgment as a matter of law. As noted earlier, in the exchange agreement Rail agreed to loan Cold Train $320,000 in the form of a line of credit line for Cold Train's "working capital, day-to-day needs, [and] cash needs." Mnichowski claims he was not personally responsible for repaying Cold Train's line of credit so he cannot be liable for Cold Train's breach.
Rail's breach of contract claims were out-lined in Jury Instruction No. 12, which provided:
"That, with respect to the $320,000 loan, Defendant Mnichowski breached the separation agreements reached with plaintiffs in December of 2010, namely, the Exchange Agreement, the Pledge Agreement, and the Promissory Note, considered jointly, by encumbering the assets of Cold Train, L.L.C., and by transferring away from Cold Train, L.L.C., to himself and to other defendants, its valuable assets."Mnichowski argues, "the only promise to repay [the $320,000] loan is contained in the Exchange Agreement, and the promise is made by Cold Train, not [by him]."
Rail gave Cold Train a line of credit in the amount of approximately $320,000 in order to help Cold Train establish itself as an independent entity. Rail did not claim that Mnichowski was personally liable on the credit line. Rather, Rail claimed that by his breach of the pledge agreement, Mnichowski stripped Cold Train of its assets so as to render it incapable of repaying this debt.
The applicable analysis of this issue is found in our discussion of Mnichowski's first claim of error. Based on that analysis, we conclude that the district court properly denied the motions for judgment as a matter of law on this issue. There was a legal basis for the jury to conclude that Mnichowski's breach caused Cold Train to be unable to repay Rail for its draws on the $320,000 credit line.
$320,000 Line of Credit — Erroneous InstructionMnichowski repeats here the jury instruction argument that he raised with respect to the district court's instruction on the $1,413,396.17 loan discussed above. The only difference is that Rail's breach of contract claim here was in regards to Cold Train's failure to repay the draws on its $320,000 line of credit. Our analysis remains the same. We find no error in the district court giving this instruction.
$320,000 Line of Credit — Sufficiency of the EvidenceAgain, rather than making a separate argument to support this issue, Mnichowski relies on the arguments he presented with respect to the $1,413,396.17 loan. He argues:
"Rail only alleged and presented evidence that Mnichowski breached the Pledge Agreement. Moreover, Pledge Agreement contains no promise to repay the $320,000 loan; the only promise to repay that loan is contained in the Exchange Agreement, and the promise is made by Cold Train, not Mnichowski."As previously discussed, there is a legal basis to construe all three of the written documents together as one contract. Mnichowski stipulated to the fact that he breached the pledge agreement by pledging the assets of Cold Train. As previously explained, there was evidence presented at trial to support the fact that this breach, along with his stripping of assets from Cold Train, rendered it incapable of repaying its debt to Rail. The jury considered Rail's claim and awarded damages in the amount of $247,308.41. There is evidence in the record supporting the jury's verdict.
Constructive Fraud Claim — Motion for Judgment as a Matter of LawMnichowski argues that the district court erred in denying his motion for judgment as a matter of law on Rail's claim of constructive fraud because Rail failed to present evidence 1226*1226 at trial from which a reasonable person could find the existence of a confidential relationship between Mnichowski and Rail.
This issue has been preserved for appellate review. It was raised at the close of the plaintiffs' case, at the close of all the evidence, and again in posttrial motions. We apply the same review standards on appeal that were described with respect to Mnichowski's second issue above.
Our Supreme Court has defined constructive fraud as "`"a breach of a legal or equitable duty which, irrespective of moral guilt, the law declares fraudulent because of its tendency to deceive others or violate a confidence, and neither actual dishonesty [n]or purpose or intent to deceive is necessary.'" [Citation omitted.]" Schuck v. Rural Telephone Service Co., 286 Kan. 19, 26, 180 P.3d 571 (2008). In order to be successful on a claim of constructive fraud, the plaintiff must show: (1) a confidential relationship, and (2) a betrayal of a confidence or breach of a duty imposed by the relationship. 286 Kan. at 26, 180 P.3d 571.
The jury awarded Rail $10,000 on this claim, based on the transfer of Cold Train's assets to Mnichowski and his companies. Rail presented evidence that Mnichowski had a contractual relationship with Cold Train, but Mnichowski argues that Rail did not present evidence of a confidential relationship; i.e., that Rail placed "`special trust and confidence'" in him. In fact, Lerner, the owner of Rail, testified that he wanted to break up the ownership of Rail and Cold Train because he did not trust Mnichowski to act fairly. Based on this testimony, Mnichowski argues that no reasonable jury could find that Rail placed "special trust and confidence" in him.
We agree. A confidential or fiduciary relationship refers to any relationship of blood, business, friendship, or association in which one party reposes special trust and confidence in the other party who is in a position to have and to exercise influence over the first party. Heck v. Archer, 23 Kan. App.2d 57, 63, 927 P.2d 495 (1996).
"[G]enerally there are two types of fiduciary relationships: (1) those specifically created by contract ... [or] by formal legal proceedings ..., and (2) those implied in law due to the factual situation surrounding the involved transactions and the relationship of the parties to each other and to the questioned transactions. The determination of the existence of a fiduciary relationship of the first category ... is usually relatively simple. The second category ... becomes much more difficult to determine and must depend upon the facts in each case." Denison State Bank v. Madeira, 230 Kan. 684, 691, 640 P.2d 1235 (1982).Here, the confidential relationship Rail seeks to impose on Mnichowski is claimed to arise out of the circumstances of the transaction and the relationship of the parties, matters which are unique to each case. The court in Denison State Bank expressed no exact definition of a confidential or fiduciary relationship, but the court provided some guiding principles:
"A fiduciary relationship imparts a position of peculiar confidence placed by one individual in another. A fiduciary is a person with a duty to act primarily for the benefit of another. A fiduciary is in a position to have and exercise, and does have and exercise influence over another. A fiduciary relationship implies a condition of superiority of one of the parties over the other. Generally, in a fiduciary relationship, the property, interest or authority of the other is placed in the charge of the fiduciary. See generally, 36A C.J.S., Fiduciary, p. 381 et seq." Denison State Bank, 230 Kan. at 692 [640 P.2d 1235].Further, a confidential or fiduciary relationship generally implies that one party is weaker than the other, either in business intelligence, knowledge of facts, or mental strength, thus giving the other party an advantage. 230 Kan. at 692, 640 P.2d 1235.
Here, Rail asserts that the confidential relationship was based on its dependence on Mnichowski to maintain adequate security for the loans of $1,413,396.17 and $320,000. But Rail was able to provide certain protections in the contract — such as the requirement for monthly financial reports and the remedy that Cold Train would be immediately turned over to Rail upon a breach — and 1227*1227 Rail was not in a position inferior to that of Mnichowski. Lerner was an experienced businessman, able to protect his own interests in his business dealings with Mnichowski.
For example, in the exchange agreement Mnichowski agreed to provide monthly balance sheets and income statements within 20 days after the end of each month so long as Cold Train was indebted to Rail. Mnichowski failed to provide monthly statements to Rail from the get-go. He sent the first financial statement to Rail in July 2011, and it covered only the first quarter of that year. Rail could have declared a breach and filed suit when the first monthly financial statement was not provided.
Rail claims it placed a great deal of trust in Mnichowski by loaning Cold Train a significant amount of money in the division of the companies. But Rail fails to explain how this amounted to a confidential relationship. Such an argument, if valid, would tend to support a claim that any borrower is in a relationship of trust and confidence with its lender.
Rail has not shown that it was in a weaker position than Mnichowski. Rail was able to contract to protect its interests. Rail and Mnichowski were familiar with each other and did not trust one another. The agreement was reached to effect an end to the relationship. There is no evidence that Rail was in a weaker position or dependent upon Mnichowski. Both parties, represented by counsel, were able to negotiate a contract to protect their interests. There is no evidence of a confidential relationship. In fact, the relationship between the parties can be characterized more accurately as a relationship of mistrust and lack of confidence rather than a relationship of trust and confidence. Thus, we conclude that the district court erred when it denied the defendants' motion for judgment as a matter of law on the constructive fraud claim and reverse the $10,000 award for constructive fraud.
Mnichowski raises additional issues regarding the court's instruction to the jury on this claim and the sufficiency of the evidence to support the jury's verdict on this claim. In view of our last ruling, these issues are now moot.
Affirmed in part and reversed in part.