Opinion
No. 1:03-cv-01896-DFH-VSS.
March 25, 2005
ENTRY ON DEFENDANTS' MOTION TO DISMISS
Plaintiff Thomas Frey sues his former employer, its parent company, and its chief executive officer, claiming that the defendants broke promises they had made relating to compensation and employment benefits to induce him to leave his position as president of another company, and to join defendants as president of their company. He brings claims for breach of contract, constructive fraud, promissory estoppel, and violation of the Indiana Wage Payment Statute. The court has jurisdiction pursuant to 28 U.S.C. § 1332.
The defendants have moved to dismiss on two grounds. First, they argue that plaintiff's claims are compulsory counterclaims in a pending action previously filed by defendants against plaintiff in a federal court in Illinois, so that Rule 13(a) of the Federal Rules of Civil Procedure bars them in this court. Second, defendants assert that plaintiff has failed to state a claim for which relief can be granted so that dismissal is proper under Rule 12(b)(6) of the Federal Rules of Civil Procedure. For reasons stated below, plaintiff's claims are not compulsory counterclaims in the Illinois action, and plaintiff has stated a claim upon which relief can be granted for breach of contract, promissory estoppel, constructive fraud, and for part of his claim under the Indiana Wage Payment Statute.
I. The Facts Alleged in the Amended Complaint
Defendant Workhorse Custom Chassis LLC ("Workhorse") manufactures chassis for motor homes, school buses, and commercial vans. Grand Vehicle Works Holdings Corporation ("GVW") is the parent company and owns 100% of Workhorse. Defendant Andrew Taitz is CEO of Workhorse and GVW.
In March 1999, plaintiff Thomas Frey was employed as president of a Minnesota company called DeZurik. Frey was contacted by a recruiter and put in touch with Taitz. Frey and Taitz discussed the possibility of Frey leaving DeZurik and becoming president of Workhorse. Negotiations ensued.
In a letter dated May 4, 1999, Taitz extended an offer to Frey to become president of Workhorse. The letter referred to a previous discussion and contained terms of employment such as starting date, salary, and relocation expenses. It also stated:
Under your direction, we will implement an Economic Value Added incentive compensation plan in which you will participate. You will also participate in a Phantom Equity Plan, which will afford you the opportunity to benefit from an appreciation in the company's equity.
Cplt. Ex. A. The "Economic Value Added incentive compensation plan" ("EVA plan") and the Phantom Equity plan are central to this case.
In a May 10, 1999, letter, Frey accepted the offer but insisted that the compensation package provided by Workhorse be equivalent in value to his compensation at DeZurik. A letter to Frey from Taitz dated May 14, 1999, included the following statements:
Dear Tom:
I am really excited with the fact that you have decided to join Workhorse and look forward to developing this great opportunity with you. I am writing to respond to your letter of May 10th as best as I can at this stage. . . .
2. Thanks for sending your current EVA plan. I propose that you and I sit down and adapt this plan to Workhorse's capital structure and allow you the same income opportunity from this plan.
3. I am enclosing the most recent draft of the [Phantom Equity] plan. If you have any questions on how it works I will arrange a conference call with the attorneys. This should allow you to participate in all the equity value creation. . . .
5. Unfortunately I am not in position to propose an employment contract that provides for any type of guarantees.
Hopefully I have addressed all the issues you raised in your letter and I am more than happy to further discuss and clarify in writing any of the above points at your request.
Cplt. Ex. B.
Frey claims that during negotiations, he specifically informed Taitz that his "secure employment and opportunities for substantial equity participation" at DeZurik were worth approximately $1 million. According to Frey, Taitz promised that the equity participation opportunities outlined by Taitz, namely the EVA plan and the Phantom Equity plan, would be worth between $4 million and $5 million. Cplt. ¶ 19.
Frey resigned from DeZurik and joined Workhorse in May 1999. He eventually moved his family to Ohio. According to Frey, this decision was based on Taitz's "repeated written promises and verbal representations." Cplt. ¶ 20. By late 1999, Workhorse had not yet adopted an equity participation plan.
In May or June 2000, Taitz sold 70 percent of GVW, the parent company of Workhorse, to the Carlyle Group Company for approximately $70 million. Frey claims that Workhorse accounted for "essentially all" of the parent company's profitability and value, and thus estimates Workhorse's value at that time of the Carlyle sale to be $100 million. Frey claims that when he began his tenure as president of Workhorse, the company was worth between $5 million and $10 million. Accordingly, he alleges, during the one year under his direction, the value of Workhorse had increased by at least $90 million. Yet Frey, contrary to Taitz's alleged promises, did not receive any share of this increased equity value of Workhorse for this one year period. Cplt. ¶¶ 24-25.
In February 2001, Frey reminded Taitz that he still had not initiated the equity participation plans they had discussed, and that Frey still had not participated in the growth in equity value of Workhorse realized after Frey joined Workhorse and before the sale to Carlyle. Cplt. ¶ 27.
In June or July 2001, Taitz announced a stock option program for approximately a dozen managers. Taitz stated that he was granting Frey options on company stock at $10.20 per share, and that Frey's option agreement would be worth between $8 and $10 million. On February 11, 2002, the stock option agreement ("2002 Stock Option agreement") was formally executed. Frey's agreement did not reflect equity growth gained before the Carlyle sale. Cplt. ¶¶ 28-29.
As a condition to participation in the stock option program, Frey signed a Confidentiality and Non-compete Agreement restricting him from engaging in competing business or sharing confidential information belonging to GVW or Workhorse during his employment and for a term of one year after his employment with the company ended. Def. Br. Tab 1, Ex. A. This non-compete agreement is the basis of the defendants' suit against Frey in the Illinois action.
In late July 2002, Frey and Taitz agreed that Frey would receive a bonus equal to 50% of his salary (as an addition to an existing bonus of 100% of his salary) if the company met certain budget targets for 2002. Taitz confirmed the bonus agreement in writing on September 30, 2002. The bonus, if earned, would be paid "on the normal bonus cycle, normally March/April 2003." Cplt. Ex. C. This agreement is the basis of Frey's claim under the Indiana Wage payment Statute.
Workhorse achieved its budget goal for 2002. However, Frey was not satisfied that the equity participation opportunities (the EVA and the Phantom Equity plan) had been implemented as promised, so he resigned in January 2003. When he demanded the bonus for Workhorse meeting its 2002 budget goals, Taitz refused to pay the bonus.
After resigning from Workhorse, Frey became CEO of Universal Trailer, a company involved in the manufacture and sale of trailers and motor homes. In August and September 2003, two other Workhorse executives in the sales and marketing departments left Workhorse and went to work for Universal Trailer.
On November 7, 2003, GVW filed an action in the United States District Court for the Northern District of Illinois, case number 03C-7948. Def. Br. Tab 1. The complaint in the Illinois action alleged that Frey had breached the Confidentiality and Non-compete Agreement by working for Universal Trailer after resigning from Workhorse. Id.
The Illinois complaint also alleged that Frey had tortiously interfered with GVW's contractual relations with the other two executives by recruiting them to leave GVW and join Universal Trailer. The complaint also alleged that Frey breached fiduciary duties to the company by persuading the two executives to join Universal Trailer.
On December 3, 2003, Frey filed claims against the defendants in this court arising from the defendants' alleged failure to allow him to participate in the equity growth of the company during his employment, and for their alleged failure to pay him his earned bonus.
II. Defendants' Rule 13(a) Motion
The defendants contend that Frey's claims in this action and their own claims in the Illinois action arise out of the same transaction or occurrence. Therefore, they argue, Frey's claims are compulsory counterclaims in the earlierfiled Illinois action and pursuant to Rule 13(a) cannot be brought in this court. The court does not agree.
Rule 13(a) states in pertinent part that a claim is a compulsory counterclaim to an opposing party's claim "if it arises out of the transaction or occurrence that is the subject matter of the opposing party's claim." The test in this circuit for determining whether two claims arise out of the "same transaction" for purposes of Rule 13(a) is the "logical relationship" test. Burlington Northern R.R. Co. v. Strong, 907 F.2d 707, 711 (7th Cir. 1990). In discussing the logical relationship test in the context of Rule 13(a), the Seventh Circuit has stated:
The purpose behind the rule is judicial economy; to avoid a multiplicity of actions by resolving in a single lawsuit all disputes that ensue from a common factual background. 6 C. Wright, A. Miller M. Kane, Federal Practice and Procedure § 1409, at 46-47 (2d ed. 1990). The inquiry is not intended to be "a wooden application of the common transaction label," but rather a careful examination of the factual allegations underlying each claim in determining whether the test is met.Price v. United States, 42 F.3d 1068, 1073 (7th Cir. 1994), quoting Burlington Northern, 907 F.2d at 711. As this statement makes clear, the logical relationship test is grounded in the purpose of Rule 13(a): judicial economy. A "wooden application" is one that asks whether the claims have facts and circumstances in common, but fails to ask whether that common ground means that adjudication of the claims in one action as opposed to two would promote the interests of judicial economy. The latter question is the touchstone of the logical relationship test. The relationship between the claims in the Illinois action and the claims here does not meet the test.
Frey's complaint alleges that the defendants promised him equity participation in Workhorse for a period to begin at the onset of Frey's tenure as president, and that during his tenure the defendants never made good on that promise. Frey also alleges that the defendants failed to pay him his earned 2002 bonus. These claims revolve around the employment negotiations and resulting promises of compensation allegedly made between March and May 1999; detrimental reliance on those promises in the form of Frey's resignation from DeZurik and relocation of his family to Ohio; defendants' reiteration of the promises during Frey's tenure as president of Workhorse; and their alleged failure to fulfill them during his tenure or (for the bonus) upon his resignation in January 2003.
Defendants' claims in Illinois are based on conduct that occurred after Frey resigned from Workhorse in January 2003. They center on Frey's alleged postemployment breaches of the non-compete agreement and of his fiduciary duties to the company; specifically, his assumption of employment at Universal Trailer in 2003 and his subsequent alleged solicitation of Workhorse employees to join him at Universal Trailer in the late summer months of 2003. These factual allegations on their face bear little relationship to the core of facts underlying Frey's claims involving promises of equity participation and the bonus made before and during his tenure.
The defendants, however, argue that there is an "indisputable" logical relationship between the actions. They rely on the 2002 Stock Option agreement as the common link between the claims. In the Illinois Action, GVW alleges that Frey breached his Donfidentiality and Non-Compete Agreement signed in connection with the Stock Option Agreement. Signing the Confidentiality and Non-Compete Agreement was a condition to Frey's eligibility for the Stock Option agreement.
Defendants try to draw a connection between the Stock Option agreement and Frey's claims in this case: "Likewise, Frey's Amended Complaint in this action alleges breach of contract in connection with promises made by Defendants, largely in connection with GVW's Stock Option Plan and Frey's Stock Option Agreement." Def. Br. at 5 (emphasis added). Defendants significantly overstate the role of the 2002 Stock Option agreement in Frey's claims. Frey has not alleged breach of contract "largely in connection with" the Stock Option agreement. He has alleged breach of contract in connection with Taitz's promises to Frey to implement the EVA and the Phantom Equity plans. These alleged promises were made prior to Frey's acceptance of employment at Workhorse in the spring of 1999 and are the core of his complaint. See Cplt. ¶ 34. The 2002 Stock Option agreement, which the defendants try to place at the center of Frey's complaint, is instead peripheral to Frey's complaint.
As defendants would have it, "Frey contends in the [complaint] that the Stock Option Agreements were the result of the negotiations between [Frey] and Defendant Taitz relating to the providing to Frey of equity participation in GVW." Def. Reply Br. at 4, citing Cplt. ¶¶ 23-29. Frey's complaint contends no such thing. From a fair reading of the complaint, Frey had become openly impatient by Taitz's failure to fulfill his initial promises to allow Frey to participate in the equity created during the period between Frey's hiring and the Carlyle sale. The complaint depicts the offered stock options as a too-little-too-late attempt by Taitz to induce Frey to remain at the company despite Taitz's ongoing breaches of pre-existing promises of equity participation. See, e.g., Cplt. ¶¶ 26-28. According to the complaint, the offered stock options did not reflect the period from his hiring to the Carlyle sale. Frey bases his claim of breach on the promised equity participation during this period.
Defendants, by contrast, state in their reply brief:
Defendants herein contend that the Stock Option Agreement . . . covers any and all equity participation to which Frey claims he was entitled. In response, Frey contends that the Stock Option Agreement did not give Frey all of the value to which he claims he was entitled. The resolution of that issue rests on the negotiation, enforceability and value of the Stock Option Agreement.
Def. Reply Br. at 4 (emphasis added). Frey did allege the relative worthlessness of the stock options in his complaint. But he did not do so "in response" to any contention made by the defendants. Defendants first raised the notion that the Stock Option agreement constituted performance on the promises on which Frey sues in their reply brief. Defendants attempt to highlight an argument that has not taken place in order to place "the negotiation, enforceability and value of the Stock Option Agreement" at the center of Frey's complaint. From here, they point to Frey's answer in the Illinois action: "Frey's defense in the Illinois action relates, at least in part, to the negotiation, enforceability and value of the Stock Option Agreements." Def. Reply Br. at 4. For this, the defendants point to Frey's second and third affirmative defenses in the Illinois action. In those affirmative defenses Frey alleged without elaboration that the non-compete agreement was not enforceable because the Stock Option agreement was an illusory promise and was signed under duress.
Frey has not raised the execution, negotiation or enforceability of the Stock Option agreement as issues in this action. And he has referenced its relative value in a way not central or essential to his claim. Yet, according to the defendants, both this action and the Illinois action "address the value, negotiation, execution and circumstances of the Stock Option Agreement." Def. Br. at 5. The issue is "therefore, presented in both cases." Def. Reply Br. at 4. Indeed, according to defendants, the claims "each have as their central issue the same transaction." Id. at 4-5 (emphasis added).
This is an inaccurate characterization of both actions. The 2002 Stock Option agreement is not the central issue in this action. The central issue in this action arises out of events beginning in 1999 with the negotiations between Frey and Taitz, and Taitz's alleged promises to implement the EVA and Phantom Equity plans and to pay Frey the 2002 bonus. The central issue in the Illinois action is whether Frey violated the non-compete agreement and other duties to defendants after he resigned in 2003. To the extent the Stock Option agreement is relevant at all to the Illinois action, it is only because Frey raised its enforceability (not its value) as a defense.
In any event, "the pertinent inquiry is whether the claim arises out of the same transaction or occurrence." Price, 42 F.3d at 1073. One might go so far as to say that the claimed breaches of the Confidentiality and Non-Compete Agreement in the Illinois action arise out of the Stock Option agreement, at least on the theory that the Confidentiality and Non-Compete Agreement was signed as a condition to the Stock Option agreement. But that is the only factual connection between the Illinois action and the Stock Option agreement. Factually, the Illinois action involves Frey's taking a position at Universal Trailer in January 2003 and his alleged solicitation of two Workhorse executives later that summer.
It certainly cannot be said that Frey's claims in this action "arise out of" the Stock Option Agreement. Frey's claims arise out of the promises related to the EVA and Phantom Equity plans allegedly made by Taitz before Frey signed on at Workhorse, and well before the existence of the Stock Option agreement, as well as Taitz's alleged breach of these promises during Frey's tenure. In short, "the conduct giving rise to the two claims occurred at different times and involved different acts by different parties." Andersen v. Chrysler Corp., 99 F.3d 846, 853-54 (7th Cir. 1996) (applying "same transaction" test and disagreeing with district court's finding that res judicata barred new action); see also Colonial Penn Life Ins. Co. v. Hallmark Ins. Administrators, 31 F.3d 445, 448 (7th Cir. 1994) (factual overlap between claims — i.e. "all part of the same business deal" — was not sufficient to establish "same transaction" under Rule 13(a) where facts supporting each claim involved different acts, by different parties, at different times, based on different documents).
The defendants' attempt to support their Rule 13(a) argument on the mere mention of the Stock Option plan in the pleadings of both actions is the sort of "wooden application of the common transaction label" the Seventh Circuit has warned against. Price, 42 F.3d at 1073. The touchstone of the Seventh Circuit's logical relationship test to determine if claims are compulsory is whether the interest of judicial economy is served by deeming them compulsory. See By-Prod Corp. v. Armen-Berry Co., 668 F.2d 956, 960 (7th Cir. 1982); Martino v. McDonald's System, Inc., 598 F.2d 1079, 1082 (7th Cir. 1979) (Rule 13(a) "is the result of a balancing between competing interests. The convenience of the party with a compulsory counterclaim is sacrificed in the interest of judicial economy").
The interest of judicial economy would not be served by granting defendants' motion. The core of facts in each case — defendants' alleged breaches of the equity and bonus agreements in this action, and Frey's alleged post-employment violations of the non-compete agreement in the Illinois action — are distinct and would remain so whether adjudicated in one action or two. Separate actions will require little if any of the duplication of judicial effort or resources to be prevented by application of Rule 13(a). The Stock Option agreement presents a possible source of a potential common issue that might arise in both cases. This connection is "so insignificant that compulsory adjudication of both claims in a single lawsuit will secure few, if any, of the advantages envisioned in Rule 13(a)." Valencia v. Anderson Bros. Ford, 617 F.2d 1278, 1291 (7th Cir. 1980), reversed on other grounds, Anderson Bros. Ford v. Valencia, 452 U.S. 205 (1981). The defendants' motion to dismiss pursuant to Rule 13(a) is denied.
III. Defendants' Rule 12(b)(6) Motion
The defendants argue that Frey's complaint should also be dismissed pursuant to Rule 12(b)(6) because it does not state any claim upon which relief can be granted. In ruling on a motion to dismiss under Rule 12(b)(6), the court must assume as true all well-pleaded facts set forth in the complaint, construing the allegations liberally and drawing all reasonable inferences in the light most favorable to the plaintiff. Forseth v. Village of Sussex, 199 F.3d 363, 368 (7th Cir. 2000). For purposes of the defendants' motion, the issue is whether Frey might prove any set of facts consistent with the allegations that would give him a right to relief. Wudtke v. Davel, 128 F.3d 1057, 1061 (7th Cir. 1997), citing Leatherman v. Tarrant County Narcotics Intelligence Coordination Unit, 507 U.S. 163, 168 (1993). A defendant is entitled to dismissal only where "it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46 (1957); Chaney v. Suburban Bus Division, 52 F.3d 623, 626-27 (7th Cir. 1995). Frey's complaint contains four counts: breach of contract, promissory estoppel, constructive fraud, and a violation of the Indiana Wage Payment Statute.
A. Count 1: Breach of Contract
Frey claims breach of contract for defendants' alleged failure to fulfill their equity participation promises, and also for defendants' failure to pay him the 2002 bonus. Defendants argue that Frey's breach of contract claims fail "because virtually none of the essential contract formation or content information is alleged." Def. Br. at 9.
To begin with, it is a "misconception . . . that a complaint must allege all of the facts essential to recovery under the plaintiff's legal theory." Albiero v. City of Kankakee, 122 F.3d 417, 419 (7th Cir. 1997); see Hemenway v. Peabody Coal Co., 159 F.3d 255, 261 (7th Cir. 1998) ("Complaints need not spell out every element of a legal theory; that's the big difference between notice and code pleading."). Frey's complaint stands so long as it provides "a short plain statement of the claim that will give the defendants fair notice of what the claim is and the grounds on which it rests." Conley, 355 U.S. at 47; see also Albiero, 122 F.3d at 419 ("A complaint must narrate a claim, which means a grievance such as `the City violated my rights by preventing me from renovating my apartments.'").
Frey alleged that Taitz offered him the job as president of Workhorse, and that this offer included a promise of participation in the Phantom Equity plan and a commitment to implement the EVA plan. Cplt. ¶ 17. Frey alleged that he accepted the offer. Cplt. ¶¶ 20-21. Frey alleged that in 2002, "Plaintiff and Taitz agreed that Plaintiff would receive a bonus equal to 150% of his base salary if Workhorse met [its financial] target for 2002." Cplt. ¶ 31. Frey alleged that Workhorse met the target and that he was not paid the bonus. Cplt. ¶ 32. Finally, Frey alleged that "Defendants breached the terms of the agreement by failing to pay Frey the bonus he earned for 2002, and by refusing to afford Frey the promised participation in Workhorse's equity value growth during his stewardship. As a proximate result of Defendant's breach, Plaintiff was damaged in an amount in excess of Five Million dollars ($5,000,000.00) to be determined at trial." Cplt. ¶ 37.
Frey has clearly narrated a claim of breach of contract sufficient to put the defendants on notice of the claim and the grounds on which it rests. Of course a plaintiff may nonetheless plead himself out of court if the pleadings establish that he cannot prevail "under any set of facts that could be proved consistent with the allegations." Hishon v. King Spalding, 467 U.S. 69, 73 (1984). In Indiana, the essential elements of a breach of contract action are the existence of a contract, the defendant's breach thereof, and damages. Rogier v. American Testing and Engineering Corp., 734 N.E.2d 606, 614 (Ind.App. 2000). The existence of a contract is established by "[a]n offer, acceptance, consideration, and a manifestation of mutual assent." Rodziewicz v. Waffco Heavy Duty Towing, 763 N.E.2d 491, 493 (Ind.App. 2002). Nothing in the complaint establishes that Frey will be unable ultimately to prove these elements. The defendants' motion to dismiss Frey's breach of contract claim is denied.
Defendants have attached to their brief a document entitled "GVW 2002 Incentive Compensation Plan," Def. Br. Ex. 7, arguing that this document contains particulars that defeat plaintiff's breach of contract claim as to the bonus. Pursuant to Federal Rule of Civil Procedure 12(c), this court may not consider this document in deciding the motion to dismiss unless the complaint refers to it and it is central to the case. E.g., Menominee Indian Tribe v. Thompson, 161 F.3d 499, 456 (7th Cir. 1998). Frey's complaint refers to a 2002 "Incentive Compensation Plan," though without referencing this document, and only to indicate that plan's irrelevance to Frey's claims. Cplt. ¶ 30. Accordingly, the court does not consider this document in deciding this motion, while expressing no opinion as to its legal significance on the merits.
B. Count 2: Promissory Estoppel
In Indiana, to prevail on a claim of promissory estoppel a plaintiff ultimately must prove the following elements: (1) a promise by the promisor; (2) made with the expectation that the promisee will rely thereon; (3) which induces reasonable reliance by the promisee; (4) of a definite and substantial nature; and (5) injustice can be avoided only by enforcing the promise. Truck City of Gary, Inc. v. Schneider National Leasing, 814 N.E.2d 273, 279 (Ind.App. 2004).
In count 2, Frey alleges the following:
Defendants . . . made clear and unambiguous promises to Frey to allow him to participate in the equity value Workhorse realized under Frey's stewardship. Plaintiff Frey resigned from a lucrative and stable position with his previous employer, and sacrificed an opportunity to retire with valuable stock options and pension plan in reliance on the representations made by Taitz. Defendants were aware of and encouraged Plaintiff's reliance. Plaintiff Frey reasonably and foreseeably relied upon Defendants' promises to his detriment. As a result, Plaintiff Frey was damaged in an amount well in excess of [$1 million]. Defendants should be bound by the promises made to Plaintiff Frey.
Cplt. ¶ 39. This is a short, plain statement that puts the defendants on notice of Frey's claim of promissory estoppel and the grounds on which it is based.
The defendants argue that the promises alleged by Frey in the foregoing paragraph are "unenforceable as a matter of law." They point in particular to Taitz's May 14, 1999, letter and argue that the alleged promises of equity participation contained in it are merely predictions or expressions of intention and as such could not have induced reasonable reliance. Def. Br. at 9-10, citing Cplt. Ex. B. For example, the May 14th letter contains the phrase: "I am enclosing a copy of the most recent draft of the [Phantom Equity] plan. . . . This should allow you to participate in all the equity value creation." (emphasis added).
For purposes of promissory estoppel, "the mere expression of an intention is not a promise." Security Bank Trust Co. v. Bogard, 494 N.E.2d 965, 969 (Ind.App. 1986). However, Frey has not alleged that Taitz's May 14th letter constitutes the promises on which he sues. He has offered the letter as among evidence of existing promises and the negotiations which gave rise to them. Frey's complaint refers to "repeated written promises and verbal representations." Cplt. ¶ 20. The May 4th letter containing Taitz's offer states: "[W]e will implement an [EVA] incentive compensation plan in which you will participate. You will also participate in a Phantom Equity Plan, which will afford you the opportunity to benefit from an appreciation in the company's equity." Cplt. Ex. A (emphasis added). The first paragraph of Taitz's May 14th letter suggests that an acceptance of terms had already occurred and that the parties were discussing the details of performance. One might infer from the language of the May 14th letter cited by defendants that defendants had promised the equity participation, that Taitz was proposing means which "should allow" defendants to keep those promises, and that if not, other means would be required.
The defendants may argue that negotiations took place between the May 4th and the May 14th letters, as a result of which the terms of the agreement were less certain than what is suggested by the May 4th letter. But such arguments are for later stages of the litigation. A promise sufficient to support a claim of promissory estoppel:
. . . . need not be as clear as a contractual promise would have to be in order to be enforceable. Indiana may go furthest in this direction: "Even though there were insufficient terms for the enforcement of an express oral contract, and unfulfilled pre-existing conditions prohibiting recovery for breach of a written contract . . ., we are not precluded from finding a promise under these circumstances. Indeed, it is precisely under such circumstances, where a promise is made but which is not enforceable as a `contract,' that the doctrine of promissory estoppel is recognized."Garwood Packing, Inc. v. Allen Co., 378 F.3d 698, 702-03 (7th Cir. 2004), quoting First National Bank of Logansport v. Logan Mfg. Co., 577 N.E.2d 949, 955 (Ind. 1991) (internal citations omitted).
At this stage of the litigation, the May 14th letter does not preclude the possibility that Frey may be able to prove a set of facts consistent with his allegations that Taitz made promises that would support a claim of promissory estoppel under Indiana law. Defendants' motion to dismiss is denied as to Frey's claim of promissory estoppel.
Defendants also attack the claim as insufficient because "nowhere is it or can it be alleged how much of any such equity participation Plaintiff was to receive." However, paragraph 19 of the complaint states: "Taitz . . . promised that Frey's equity participation in Workhorse under the promised EVA plan and the `phantom [equity]' plan would be worth between Four and Five Million dollars ($4-$5,000,000.00) to Plaintiff."
C. Count 3: Constructive Fraud
Constructive fraud occurs when there is a course of conduct which, if sanctioned by law, would secure an unconscionable advantage, without regard to an actual intent to defraud. Mullen v. Cogdell, 643 N.E.2d 390, 401 (Ind.App. 1994). To prevail on his claim of constructive fraud, Frey will ultimately have to prove: (1) a duty existing by virtue of the relationship between the parties; (2) representations or omissions made in violation of that duty; (3) reliance thereon; (4) injury as a proximate result thereof; and (5) the gaining of an advantage by the party to be charged at the expense of the plaintiff. Rice v. Strunk, 670 N.E.2d 1280, 1284 (Ind. 1996).
The defendants argue that Frey's claim fails because he cannot allege that a sufficient confidential relationship between the parties and that he has failed to allege fraud with particularity as required by Rule 9(b).
1. Relationship
In constructive fraud, the relationship between the parties and the circumstances that surround them give rise to the duty necessary to sustain the claim. Wells v. Stone City Bank, 691 N.E.2d 1246, 1251 (Ind.App. 1998). "Constructive fraud may be found where one party takes unconscionable advantage of his dominant position in a confidential or fiduciary relationship." Research Systems Corp. v. IPSOS Publicite, 276 F.3d 914, 922 (7th Cir. 2002), quoting Estates of Kalwitz v. Kalwitz, 717 N.E.2d 904, 913 (Ind.App. 1999).
The defendants argue correctly that no fiduciary relationship existed between themselves and Frey. But Indiana courts have found the requisite duty in non-fiduciary "confidential" relationships. See, e.g., Wells, 691 N.E.2d at 1251 (debtor and creditor), and Mullen, 643 N.E.2d at 401 (buyer and seller). In determining whether a non-fiduciary relationship between parties will sustain a claim for constructive fraud, the "focus is on whether the relationship invokes a duty of good faith and fair dealing. In certain relationships, one party may be in the unique possession of knowledge not possessed by the other and may thereby enjoy a position of superiority over the other; such a relationship is one that invokes a duty of good faith and fair dealing." Mullen, 643 N.E.2d at 401. In general terms, the party alleging constructive fraud must "be in a position of inequality, dependence, weakness, or lack of knowledge." Nicoll v. Community State Bank, 529 N.E.2d 386, 389 (Ind.App. 1988). Defendants argue that Frey cannot claim he was in such a position. Def. Br. at 11.
Generally, the existence of a legal duty owed by one party to another is a pure question of law. Evans v. Buffington Harbor River Boats, LLC, 799 N.E.2d 1103, 1116 (Ind.App. 2003). However, factual questions regarding the circumstances surrounding the relationship between parties may "render the existence of a duty a mixed question of law and fact to be determined by the [trier of fact]." Coca-Cola Co. v. Babyback's International, Inc., 806 N.E.2d 37, 48 (Ind.App. 2004), citing Evans, 799 N.E.2d at 1116.
In his complaint, Frey alleged that he provided Taitz with information regarding his employment terms and compensation package at DeZurik. He alleged that Taitz lured Frey to quit his secure job at DeZurik and join Workhorse by agreeing to provide a compensation package at least the equivalent in value of what Frey was receiving at Dezurik, and suggesting the possibility of much higher value. Frey has alleged that in reliance he quit his job at DeZurik, surrendered the security and benefits of that job, including accrued equity, and sold his home and moved his family to Ohio. Cplt. ¶¶ 19-22.
The pleadings neither require nor preclude a finding that the defendants were in the unique possession of knowledge not possessed by Frey allowing them to enjoy a position of superiority over Frey and invoking a duty of good faith and fair dealing. The pleadings also do not preclude a finding that Frey, after quitting his job at DeZurik and moving his family to Ohio, was in a position of dependence or inequality relative to his new employer. A dismissal under Rule 12(b)(6) is proper only where it appears beyond doubt that the plaintiff can prove no set of facts that would entitle it to relief. Conley, 355 U.S. at 45-46. The pleadings alone do not establish beyond doubt that no set of facts exists to support a finding of duty sufficient to support Frey's claim for constructive fraud. Cf. Wesleyan Pension Fund, Inc. v. First Albany Corp., 964 F. Supp. 1255, 1273 (S.D. Ind. 1997) ("We cannot conclude solely on the basis of the pleadings that Wesleyan will be unable to establish that the Clover Defendants owed it some form of duty" to support a claim of constructive fraud).
2. Rule 9(b)
The defendants also argue that Frey's constructive fraud claim fails because it does not plead the elements of "a constructive fraud claim" with the heightened particularity required by Rule 9(b) of the Federal Rules of Civil Procedure. Def. Br. at 10-11. This argument overstates a plaintiff's burden under Rule 9(b).
"Rule 9(b) does not require that the complaint explain the plaintiff's theory of the case, but only that it state the misrepresentation, omission, or other action or inaction that the plaintiff claims was fraudulent." Midwest Commerce Banking Co. v. Elkhart City Centre, 4 F.3d 521, 523 (7th Cir. 1993), citing DiLeo v. Ernst Young, 901 F.2d 624, 627 (7th Cir. 1990). Rule 9(b) requires that a plaintiff "set forth the date and content of the statements or omissions that it claimed to be fraudulent. [A plaintiff is] not required to go further and allege the facts necessary to show that the alleged fraud was actionable." Id. at 524, citing Uni*Quality v. Infotronx, 974 F.2d 918, 923 (7th Cir. 1992); see also Sears v. Likens, 912 F.2d 889, 893 (7th Cir. 1990) (Rule 9(b) requires a plaintiff to state "the identity of the person making the misrepresentation, the time, place, and content of the misrepresentation, and the method by which the misrepresentation was communicated to the plaintiff").
In other words, the heightened pleading standard of Rule 9(b) pertains to only one element: fraudulent representations or omissions. However, that element ultimately will require proof of "representations or omissions in violation of that duty." Rice, 670 N.E.2d at 1284 (emphasis added). Therefore, Frey's constructive fraud claim can only rest on misrepresentations or omissions made after the requisite duty came into existence. As suggested above, if this duty is found at all, it will likely have been created when Frey quit DeZurik. Before then, there was no dominant party with an advantage over the other; Frey could simply have walked away from the negotiations.
Thus, Taitz's promises allegedly made during negotiations, and any others made before Frey quit DeZurik, remain viable bases for Frey's breach of contract and promissory estoppel claims, but without more, they probably would not support his constructive fraud claim. Nonetheless, Frey has alleged misrepresentations on the part of Taitz that occurred after he quit DeZurik in May 1999.
Paragraph 23 alleges: "In late 1999, Frey reminded Taitz of his agreement and promise to adopt an equivalent EVA plan and presented him with an outline of an EVA plan. Taitz reaffirmed his agreement and promise and stated that the company would adopt the plan in 2000."
Paragraph 27 alleges in part: "In February 2001, Frey again reminded Taitz of his written and verbal promises and agreement to allow Frey to participate in the growth in equity value realized from the time that Frey joined Workhorse until the sale to Carlyle. Taitz reaffirmed his promises and agreed to `do something' for Frey in fulfillment of the promises and agreement."
Paragraph 31 of the complaint alleges:
In late July 2002, Plaintiff and Taitz agreed that Plaintiff would receive a bonus equal to 150% of his base salary if Workhorse met its [financial] targets for 2002. Taitz confirmed his agreement in writing on or about September 30, 2002 and on a business trip to Las Vegas. See Exhibit C attached hereto. The bonus promised by Taitz was earned if the agreed upon target was met, and was not contingent upon Plaintiff remaining employed with Workhorse beyond the end of 2002.
Exhibit C referenced in paragraph 31 is the letter from Taitz to Frey confirming the details of the agreement between them regarding the terms of the 2002 bonus.
Frey's allegations meet the heightened pleading requirement of Rule 9(b). They are specific enough to apprise defendants of his claim of constructive fraud. They provide sufficient details to establish that Frey is not simply beating the bushes trying to scare up a claim. They describe serious conduct with enough information to warrant further litigation despite risk to the defendants' reputations. Dismissing Frey's constructive fraud claim under Rule 9(b) would serve none of the purposes behind the rule. See Vicom, Inc. v. Harbridge Merch. Servs., Inc., 20 F.3d 771, 777 (7th Cir. 1994) (Rule 9(b) is intended to protect a defendant's reputation from unwarranted harm, to minimize "fishing expeditions," and to provide notice of the claim to the adverse party). The defendants' motion to dismiss Frey's constructive fraud claim is denied.
D. Count 4: Indiana Wage Payment Statute
Frey bases count 4 on the defendants' alleged failure to pay him the 2002 bonus in the amount of 150% of his base salary, claiming that this failure is a violation of the Indiana Wage Payment Statute. Ind. Code § 22-2-5-1 (1998). The pertinent provision of the Indiana Wage Payment Statute requires that "Employees, upon separation from employment, must be paid the amount [of wages] due them at their next and usual payday." Fardy v. Physicians Health Rehabilitation Services, Inc., 529 N.E.2d 879, 882 (Ind.App. 1988). Accordingly, Frey believes, the 2002 bonus, due him at the next and usual time for payment of bonuses (March or April 2003), was due him when he resigned in January 2003. If Frey is correct, the defendants' failure to pay him the bonus would entitle him, under § 22-2-5-2 of the statute, to double the amount of compensation due to him and to costs and attorney fees.
Defendants argue that count 4 fails to state a claim under the statute because the 2002 bonus does not qualify as a "wage" under Indiana law. Def. Br. at 11. According to the Supreme Court of Indiana, "a `bonus' is a wage `if it is compensation for time worked and is not linked to a contingency such as the financial success of the company.'" Highhouse v. Midwest Orthopedic Institute, 807 N.E.2d 737, 740 (Ind. 2004), quoting Pyle v. National Wine Spirits Corp., 637 N.E.2d 1298, 1300 (Ind.App. 1994); see also Herremans v. Carrera Designs, Inc., 157 F.3d 1118, 1121 (7th Cir. 1998) (plaintiff's pay based not on "his own time or effort or product . . . but, on the profits of his plant" is not a wage); Manzon v. Stant Corp., 138 F. Supp. 2d 1110, 1113 (S.D. Ind. 2001) (bonus based on "the attainment of financial targets established by the Company" was not a wage under Indiana law).
The law is clear. Employee bonuses based on the financial performance of the employer are not wages under the Indiana Wage Payment Statute. But the facts of this case are not so clear. The agreement upon which Frey relies is described in Taitz's letter of confirmation to Frey reproduced in Exhibit C to the complaint. It states in relevant part: "As we discussed, we agreed that should Workhorse meet its 2002 $42M [budget] target . . . we would pay a 50% add-on premium to your existing incentive bonus of 100% of base salary. These amounts would be paid on the normal bonus cycle, normally March/April of 2003." Cplt. Ex. C.
By this agreement, the "50% add-on premium" is clearly tied to the $42 million budget target of the company and is therefore not a wage under the Indiana statute. It "appears beyond doubt" that Frey has no statutory claim for that portion of the bonus. Conley, 355 U.S. at 45-46. Accordingly, the defendants' motion to dismiss count 4 is granted as to this portion of the bonus.
This ruling pertains only to Frey's statutory claim and does not affect his other claims for recovery of the entire bonus.
However, the basis of Frey's "existing incentive bonus of 100% of base salary" is not clear from the pleadings. The defendants would have the court ignore the distinction, but "the law in Indiana does not exclude a bonus as wages simply because it is denominated as a `bonus.'" Gurnik v. Lee, 587 N.E.2d 706, 709 (Ind.App. 1992). In Gurnik, the Indiana Court of Appeals found that a bonus was a "wage" where it "related directly to the time she worked, . . . was paid on a regular, periodic basis [and] was not predicated on the financial success" of the company). Id.
The pleadings before the court do not show the circumstances that trigger Frey's "existing incentive bonus of 100% of base salary." Perhaps it is tied to the financial performance of the company, but the court cannot reach that conclusion at this stage. Most important, nothing in the pleadings precludes a finding that it is paid regularly and based on time worked by Frey or on some other basis that would qualify it as a wage under Indiana law. The defendants' motion to dismiss count 4 must be denied as to this portion of the bonus.
Conclusion
Frey's claims in this action do not bear a logical relationship to defendants' claims in the Illinois action sufficient to deem them compulsory counterclaims in the Illinois action. Accordingly, the defendants' motion to dismiss Frey's complaint under Rule 13(a) is denied. Frey's complaint states claims upon which relief can be granted in each of counts 1 through 3, and count 3 meets the pleading standard set by Rule 9(b). Count 4 states a claim as to Frey's "existing incentive bonus," but does not state a claim as to his "50% add-on premium" bonus. Accordingly, defendants' motion to dismiss under Rule 12(b)(6) is denied as to counts 1 through 3. The motion is denied in part and granted in part as to count 4.So ordered.