Opinion
No. 104,378.
2012-06-1
GFSI CANADA COMPANY, Appellee, v. FLETCHER LEISURE GROUP, INC., Appellant.
Appeal from Johnson District Court; David W. Hauber, Judge. Barry L. Pickens, Patrick J. Whalen, and J. Loyd Gattis, of Spencer Fane Britt & Browne LLP, of Kansas City, Missouri, for appellant. Robert J. Bjerg, of Colantuono Bjerg Guinn, LLC, of Overland Park, for appellee.
Appeal from Johnson District Court; David W. Hauber, Judge.
Barry L. Pickens, Patrick J. Whalen, and J. Loyd Gattis, of Spencer Fane Britt & Browne LLP, of Kansas City, Missouri, for appellant. Robert J. Bjerg, of Colantuono Bjerg Guinn, LLC, of Overland Park, for appellee.
Before McANANY, P.J., LEBEN and ATCHESON, JJ.
MEMORANDUM OPINION
LEBEN, J.
For several years, GFSI Canada Company (Gear Canada), sold golf apparel in Canada through a company there, Fletcher Leisure Group, Inc. (Fletcher). But sales were much lower than expected over a 5–year period, and Gear Canada eventually sued Fletcher for breach of the contract between them, under which Fletcher had been the exclusive distributor of Gear Canada's wares in Canada. The district court found in favor of Gear Canada and awarded nearly $450,000 in total damages.
Fletcher has appealed, arguing that Gear Canada's claim was barred by the statute of limitations, that the evidence presented didn't support a finding of breach of contract or the award of damages in the amount determined by the district court, and that attorney fees and prejudgment interest should not have been awarded. We have found only one error: the district court should not have awarded prejudgment interest from the date it selected. We will analyze each of these issues in detail later but briefly set out a summary here:
• Fletcher had the burden to show that the statute of limitations barred Gear Canada's claim, which required a showing that if Fletcher breached the contract, the first breach took place before December 2, 2004, 4 years before suit was filed. But the district court found that the suit was timely filed, and we find no uncontroverted evidence showing that Fletcher breached its contract before December 2, 2004.
• Gear Canada's breach-of-contract claim was based on its claim that Fletcher didn't value the inventory it had on hand according to generally accepted accounting principles. Although exact numbers for the value of inventory at various points in time weren't provided, Gear Canada provided sufficient evidence that Fletcher had substantially misreported the inventory valuations—an error that benefitted Fletcher financially.
• The district court then based its main damages award on the value at which the remaining inventory was sold to a liquidator. While other methods of calculating damages might have been used, damages may be awarded even where they cannot be calculated with exactness; the district court's award was a reasonable one based on the evidence.
• Fletcher claims that any damages awarded should have been offset by currency-exchange gains Gear Canada benefitted from during the course of financial transactions between the two companies. But the district court was within its discretion when it refused to consider this issue, which wasn't raised in the pretrial order.
• The district court awarded Gear Canada pretrial interest from October 2007. But prejudgment interest generally is awarded only when the amount owed can be clearly determined, and—with no evidence here of the inventory value at various times—the amount owed on Fletcher's breach of contract could not be clearly determined until the inventory was sold to a liquidator in September 2009. Thus, prejudgment interest should not have been awarded before that date.
• The district court awarded Gear Canada its attorney fees for pursuing this lawsuit because its written contract with Fletcher provided that Fletcher would “indemnify and hold harmless Gear [Canada] ... from ... any and all claims ... arising out of, resulting from or relating to ... any breach by Fletcher” under the contract. We agree with the district court that attorney fees were properly awardable under this provision.
Factual Background
We base our factual background on the district court's factual findings where those findings are supported by substantial evidence. Where no specific findings were made, we base our factual summary on the evidence, taking it generally in the light most favorable to Gear Canada since the district court—the fact-finder in this case—ruled in Gear Canada's favor. See Hodges v. Johnson, 288 Kan. 56, 65, 199 P.3d 1251 (2008).
We will generally reference dollar amounts throughout the opinion in Canadian dollars (Can$) except for the amount of the district court's judgment or when discussing potential currency-exchange gains. The evidence was mostly presented in Canadian dollars (except for litigation expenses incurred in the United States); the district court then entered judgment in U.S. dollars based on the exchange rate at the time the damages were calculated ($1 = Can$1.0846).
In 2002, Gear Canada and Fletcher entered into a written agreement to sell golf products in Canada. Gear Canada is a Canada-based company with its principal place of business in Johnson County, Kansas; it is a subsidiary of a United States corporation, GFSI, Inc., which does business as Gear for Sports, Inc. Fletcher is a Canadian corporation with its principal place of business in Canada. Under the agreement, Fletcher—an independent contractor—was appointed the exclusive sales and sales administration representative for the marketing, decoration, and delivery of Gear Canada's apparel within Canada. Fletcher ordered, stored, sold, and collected payments for Gear Canada's products in Canada, but the inventory was always owned by Gear Canada.
Under the agreement, Fletcher was required to account for the inventory using generally accepted accounting principles, which are usually referred to by the acronym GAAP. Under GAAP, Fletcher was required to account for inventory at the lower of cost or market. Essentially, Fletcher would report the inventory at the price paid—its cost—unless there was evidence that the goods would actually sell for less than cost, in which case the market price would be the lower value.
Gear Canada paid Fletcher a monthly management fee equal to 50% of the operating contribution calculated according to the agreement. When there was a negative operating contribution for a month, no management fee was paid and the negative amount was carried over to the following months, thereby reducing the following months' operating contributions. Thus, on a month-to-month basis, Fletcher was not required to reimburse Gear Canada for negative operating contributions—such losses merely reduced later management fees. The agreement specified that certain provisions would survive the termination of the agreement, but management fees were not listed.
Fletcher's sales were much lower than either party expected. Fletcher's inventory turnover was “abysmal” and well below the level needed to maintain a successful business. Accordingly, Gear Canada became concerned that Fletcher might not be valuing outdated inventory at the lower cost of market. Gear Canada inquired by email on October 8, 2003, about creating an obsolescence reserve or markdown allowance for outdated merchandise, but Fletcher assured Gear Canada that was not necessary. Gear Canada continued to request inventory allowances over the next several years but was largely ignored or rebuffed by Fletcher. On June 30, 2006, Fletcher finally recorded an inventory reserve of Can$51,419.06 (against what was then a total inventory value of Can $1,195,219.79). On June 30, 2007, Fletcher again recorded an inventory reserve of Can$15,000.57 (against a total inventory value of Can$898,639.85). Fletcher made no further inventory reserves, even though the inventory was clearly dated and stale. Fletcher later admitted it had struggled to sell any inventory even at cost.
By 2007, the parties agreed to “wind down” their relationship. On May 15, 2007, the parties modified the agreement, terminating any obligations for future merchandise. Fletcher agreed to use commercially reasonable efforts to sell the remaining inventory and to collect outstanding accounts receivable. Fletcher also agreed to ship remaining inventory to Gear Canada at its discretion. Over the next 2 years, however, Fletcher only sold a small portion of the remaining inventory and did not ship the rest back to Gear Canada. In September 2009, Gear Canada finally sold the remaining inventory to a liquidator for Can$168,130. At the time, Fletcher's books had valued that same inventory at Can$599,273, resulting in a loss of Can$431,143 on the sale.
Proceedings in the District Court
Gear Canada filed suit on December 2, 2008, claiming that Fletcher breached the agreement by (1) failing to account for its inventory as GAAP required; (2) failing to timely liquidate its inventory; and (3) failing to use commercially reasonable efforts to liquidate its remaining inventory. Gear Canada argued that Fletcher owed Gear Canada half the loss incurred at termination. The district court disagreed with Gear Canada, holding that Fletcher was not required to share the losses at the termination of the agreement. Gear Canada and Fletcher were not partners, and the unambiguous agreement did not require the sharing of losses.
But the district court nonetheless held that Fletcher breached its inventory and auditing obligation by failing to declare appropriate inventory reserves. The court explained:
“[Fletcher] should have declared inventory reserves long before it continued to accept management fees from a contracted formula that required such an accounting component to be determined as part of the management fee. The effect of including reserves would have meant that for every dollar written down in bad inventory, the parties would have shared a 50–cent reduction in potential management fees. Thus, while there is no express end-of-contract sharing, a breach of the accounting provision, in this case, results in a damage to Gear for having to pay Fletcher for half of the management fee that was overpaid because of a failure to perform an inventory write-down.”
The district court also determined the action was filed within the 4–year statute of limitations:
“In essence, the damage in this case was ongoing but its valuation was controlled by Fletcher which refused or failed to provide the inventory reports it was required to issue until February of 2006 or January of 2007.... This action was timely brought and filed within four years of the first potential breach known (or suspected) by Gear.”
In February 2006, Fletcher classified Can$337,003.91 of merchandise as “discontinued.” Yet, in June 2006, Fletcher recorded an inventory reserve of only Can$51,419.06 The court found that Fletcher should have declared an inventory write-down when it knew the vast majority of its inventory could not be sold. “This occurred,” the court found, “when Fletcher knew the vast majority of the remaining inventory was either very old, discontinued, or consisted of broken sizes and styles, all of which Fletcher should have recorded at the ‘lower of cost or market.” ‘
The district court used a different damage model than Gear Canada had pled, but it refused to provide damages beyond the amount Gear Canada had requested in the pretrial order. The court awarded $198,756.90 to Gear Canada for the breach of accounting obligations. The court also awarded sums of $30,637.71 and $19,829.51 for claims that are not argued on appeal.
The district court awarded prejudgment interest in its initial judgment but did not determine the amount. To calculate prejudgment interest, the court concluded that Fletcher should have been certain of all sums on October 31, 2007—the date by which Gear Canada had expected Fletcher to have sold all the inventory. On June 4, 2010, 61 days after the journal entry, Gear Canada moved to correct a clerical mistake in omitting the specific amount of prejudgment interest.
Based on the language in the agreement, the court concluded that Gear Canada also was entitled to reasonable attorney fees from Fletcher. The relevant part of the agreement is paragraph 21; we include all of the portions of it that we will discuss later in our opinion:
“21. Indemnification; Damages.
“(a) Fletcher will indemnify and hold harmless Gear and its directors, officers, employees and agents from and against, and in respect of, any and all claims, demands, losses, obligations, liabilities, damages and deficiencies, costs and expenses (including, without limitation, interest, penalties, court costs, settlement costs, costs of investigation and reasonable attorneys' fees ) (collectively, “Damages”), incurred by any such parties and arising out of, resulting from or relating to:
(i) any breach by Fletcher of its representations, warranties or obligations under this Agreement,
....
....
“(d) If a claim for indemnification involves the claim of any third party and the indemnifying party confirms in writing its responsibility for the liability, if established, the indemnifying party will be entitled to participate in and, to the extent it desires, to assume control over (and all expense with respect to) the defense, settlement, adjustment or compromise of the claim. The indemnified party will have the right to employ separate counsel in any third-party action or claim and to participate in the defense thereof at its own expense.” (Emphasis added.)
In its final entry of judgment, the court granted Gear Canada's motion to correct, inserting $60,496.61 as the value of prejudgment interest. The court also awarded $139,233.48 in attorney fees to Gear Canada. The final sum awarded was $448,954.27. Fletcher appealed to this court.
The Claims on Appeal
1. Fletcher Has Not Shown That Gear Canada's Claim Was Barred by the Statute of Limitations.
Fletcher's first argument is that Gear Canada's claims are barred by the statute of limitations. The district court applied the 4–year statute of limitations applicable under K.S.A. 84–2–725(1), which is part of the Uniform Commercial Code, citing L & M Enterprises, Inc. v. BEI Sensors & Systems, 45 F.Supp.2d 879, 885 (D.Kan.1999) (holding that agreements to distribute products are governed by the Uniform Commercial Code). Although Gear Canada argued in the district court that a longer, 5–year limitation period applied, it has accepted application of the UCC provision for the purposes of this appeal.
The party raising an affirmative defense, like the statute of limitations, has the burden of proof on that issue. See Lyons v. Holder, 38 Kan.App.2d 131, 139, 163 P.3d 343 (2007); Hogue v. Johnson, 28 Kan.App.2d 334, 337, 17 P.3d 364 (1999). The cause of action accrues—and the statute of limitation begins to run—when the breach of the contract occurs, whether the aggrieved party knows of the breach or not. K.S.A. 84–2–725(2). The suit was filed December 2, 2008, so Fletcher had to show that it first breached the contract before December 2, 2004.
Although there is some evidence from which one might surmise that Fletcher may have breached the agreement before December 2004 by failing to record inventory at market value when that was below cost, the district court made no finding that a breach had occurred by then, and the district court rejected Fletcher's statute-of-limitations defense. The district court's factual findings are, of course, critical here because it, not the appellate court, must determine the facts.
Gear Canada argues that the district court found that the first breach occurred in February 2006, citing paragraph 61 of the district court's factual findings. There, the district court noted that Fletcher's final inventory report was made that month, and the court found that by then “Fletcher knew that the vast majority of the remaining inventory was either very old, discontinued, or consisted of broken sizes and styles, all of which Fletcher should have recorded at the ‘lower of cost or market.” ‘
Fletcher argues that the district court implicitly found a breach in 2002 or 2003, citing paragraph 57. There, the court at least criticized Fletcher for failing to document why it had concluded that the inventory's value had not fallen below cost, but the court did not specifically find that the inventory's value was, in fact, below cost:
“57. The Court also does not find credible denials by defendant that it was complying with directions from its accounting department to justify its failure to book what obviously was a growing and stale inventory of product that it could not sell for several years, beginning most prominently in 2002–2003. Fletcher is a family-run entity and the Court believes that its principal officers knew or should have know[n] of the likely impact of Gear's insistence that reserves or a write-down be increased or considered because such principals knew that it would have eliminated the management fee that Fletcher was ‘sharing’ with Gear, but which Gear, effectively, was paying.”
Although Fletcher reads paragraph 57 to conclude that it breached the contract “in 2002–2003,” the paragraph can be read merely to criticize Fletcher's principals for not taking seriously their accounting responsibilities (noting Fletcher did not “justify its failure to book” an inventory-value write-off), rather than specifically finding that the market value of products in inventory actually had fallen below cost by sometime in 2002 or 2003.
We cannot say for sure when the district court concluded the first breach occurred. Its statement in paragraph 61 suggests that a breach occurred at least by February 2006 but does not specifically say that was the first breach. The court's legal conclusion, in paragraph 16 of a separate section of its opinion, simply concluded that the action “was timely brought and filed within four years of the first potential breach known (or suspected) by Gear.” That statement is somewhat problematic because neither Gear Canada's knowledge of nor its suspicion of a breach is required before the statute of limitations begins to run—all that's required under the Uniform Commercial Code is the breach itself. K.S.A. 84–2–725(2). But the district court also said that even the first potential known or suspected breach wouldn't have taken place before December 2, 2004; we certainly have no finding from the district court that a breach had occurred before December 2004 but that Gear Canada simply didn't know about it or suspect it.
When there is a gap in the trial court's findings and there was no request in the district court for additional findings, the appellate court ordinarily presumes that the district court found all facts necessary to support its judgment. Hodges, 288 Kan. at 65. The district court here found that the statute of limitations did not bar Gear Canada's claim. We certainly may not presume facts contrary to the district court's factual findings and legal conclusions, so unless there is some indisputable evidence of breach before December 2, 2004, Fletcher has not sustained its burden to prove this affirmative defense.
Key to the resolution of this issue is a failure of proof that Fletcher cites in arguing that Gear Canada did not prove breach of contract, as we will discuss later in the opinion. That failure is that neither party presented comparative information regarding the market value of inventory as compared to the cost of inventory at various points in time. While Fletcher is correct that there is no information in the record from which either the district court or this one could determine the exact cost of inventory or its market value at specific points during the parties' relationship, this lack of evidence stands in the way of Fletcher's statute-of-limitations defense because Fletcher had the burden of proof on that defense. Thus, Fletcher had to show that if it breached the contract at all, the breach must have occurred before December 2, 2004. The district court made no finding to that effect, and we find no indisputable evidence to that effect, either.
Fletcher has not shown that Gear Canada's claims were barred by the statute of limitations.
2. Substantial Evidence Supports the District Court's Finding that Fletcher Breached the Contract.
Fletcher's next argument is that Gear Canada failed to prove that the Fletcher violated GAAP by not valuing the inventory properly. In order to prove a breach, Gear Canada needed to show that the market value was lower than cost at the time of the alleged breach. According to Fletcher, Gear Canada needed to prove the market value in 2002 and 2003, as opposed to 2009 when the inventory was liquidated.
Gear Canada responds that the market value of the inventory was conclusively established when it was sold to the liquidator for Can$168,130.02 in 2009. Additionally, Gear Canada cites two other analyses (one by an officer of Gear Canada and another by a company interested in selling the remaining goods) that valued the inventory at a similar amount in 2008.
An appellate court reviews the trial court's findings of fact to see whether the findings are supported by substantial evidence and are sufficient to support the trial court's conclusions of law. Hodges, 288 Kan. at 65. Substantial evidence is such legal and relevant evidence as a reasonable person might regard as sufficient to support a conclusion. 288 Kan. at 65. After giving deference to the district court's factual findings, we review its legal conclusions independently, without any required deference. See American Special Risk Management Corp. v. Cahow, 286 Kan. 1134, 1141, 192 P.3d 614 (2008).
Fletcher is correct that the low market value in 2009 does not necessarily prove that Fletcher failed to value the inventory properly in earlier years. But Fletcher ignores the district court's lengthy findings of fact, which provide substantial evidence of Fletcher's breach:
“56. ... [T]he Court determines that Gear's representatives are credible. Their testimony was steady, consistent and well documented, and not based on conclusory statements. They were consistent and persistent in their recollections and documentation of asking Fletcher repeatedly to perform inventory reserves consistent with GAAP. They documented the reasons for believing that Fletcher had failed to book adequate inventory reserves by demonstrating that Gear, in fact, booked a greater reserve on its own consolidated financial statements.
“57. The Court also does not find credible denials by defendant that it was complying with directions from its accounting department to justify its failure to book what obviously was a growing and stale inventory of product that it could not sell for several years, beginning most prominently in 2002–03....
“58. The Court further does not find credible the numerous statements of defendant's expert, Morrie Fogelbaum, who, essentially, is Fletcher's own CPA.... The court rejects this testimony as not credible....
“59. From the factual findings above, it is clear that when the inventory was sold to [the liquidator] in September of 2009, for [Can]$168,130.02, Fletcher had been carrying the same as an inventory value of [Can]$665,69[2], as of August 31, 2009. Subtracting the previous and only inventory write-down of [Can]$66,420, leaves a total inventory reserve that should have been taken of [Can]$599,273. Further subtracting what Gear actually recovered for the inventory that should have been reserved, leaves a total of [Can]$431,143 that should have been written down if Fletcher had complied with its inventory accounting obligations, resulting in an overpayment of managements fees to Fletcher of [Can]$215,571.50.”
After hearing all the testimony, the district court was far more convinced by Gear Canada's evidence than by Fletcher's. An appellate court does not weigh conflicting evidence, evaluate witnesses' credibility, or redetermine questions of fact. In re Adoption of Baby Girl P., 291 Kan. 424, 430–31, 242 P.3d 1168 (2010). Additionally, the 2009 value cited by Gear is still relevant to show how little in inventory write-downs Fletcher recorded over the years and how inflated Fletcher's valuation of the inventory was. Taken together, there is substantial evidence of Fletcher's breach, which the district court apparently concluded had occurred by February 2006. A reasonable person could reach this conclusion from the evidence.
3. Substantial Evidence Supports the District Court's Calculation of Damages.
Fletcher claims that the district court did not explain how it calculated the damages. Fletcher maintains that the $198,756.90 the court arrived at reflects a loss at the end of the relationship, which Fletcher was not required to share. Further, Fletcher argues that the award exceeds the harm caused by the breach. Fletcher notes that Gear Canada never quantified the impact of Fletcher's accounting. Once again, we must accept the district court's factual findings if supported by substantial evidence, but we must independently review its conclusions of law. Hodges, 288 Kan. at 65;American Special Risk Management Corp., 286 Kan. at 1141.
Gear Canada responds that the court's damages were clearly based on Exhibit 39. Gear Canada explains that subtracting the inventory value on Fletcher's books (minus previous inventory write-downs) from the final sale price yields Can$431,143 of negative gross profit. Because the business has wound down, negative Can$431,143 was deemed the final operating contribution, of which Fletcher would receive half as management fees. By halving that amount and converting to U.S. dollars, the court arrived at $198,756.90. Gear Canada justifies this calculation by claiming that the parties agreed to share equally in the profits and losses. But the court expressly rejected this theory, finding no such loss-sharing agreement. Therefore, the loss-sharing theory cannot justify this calculation.
Gear Canada alternatively explains that the $198,756.90 reflects the amount Fletcher was overpaid in management fees because of its inappropriate accounting. If Fletcher had valued the inventory properly, the amount shown on Fletcher's books for the value of inventory would have been much closer to the amount gained on final sale—and Fletcher would have received less in management fees for a substantial period of time. The district court relied on this as a basis for its ruling:
“[If Fletcher had properly declared inventory reserves, then] for every dollar written down in bad inventory, the parties would have shared a 50–cent reduction in potential management fees. Thus, while there is no express end-of-contract sharing, a breach of the accounting provision, in this case, results in a damage to Gear for having to pay Fletcher for half of the management fee that was overpaid because of a failure to perform an inventory write-down.”
Fletcher rightly attacks Gear Canada's incorrect assertion that the parties agreed to share the loss. But Fletcher does not show how the court's reasoning quoted above is in error. Although the final calculation relates to the depressed value at the end of the contract, the amount was still determined by Fletcher's accounting practices throughout the life of the contract. If Fletcher had properly marked down inventory—which would have reduced the management fees it received—then the final sale would not have yielded such a large negative gross profit.
We cannot determine with any degree of precision exactly when the value of inventory should have been written down and in what amounts. But “[t]he fact that damages cannot be calculated with absolute exactness will not render them so uncertain as to preclude an assessment.” Vickers v. Wichita State University, 213 Kan. 614, 619, 518 P.2d 52 (1974). The district court's method of calculating damages here was a reasonable one.
Alternatively, Fletcher claims that the calculated damages ($198,756.90) were excessive because they exceeded Fletcher's management fees (Can$164,317.99) paid in the period following June 30, 2006—which Fletcher contends is when the district court found that Fletcher had first breached the contract. As we have previously discussed, however, the district court's written decision indicates that it found that Fletcher had breached the agreement by at least February 2006, a conclusion supported by the evidence. Fletcher reasons that the calculated number cannot reflect the actual amount of overpaid management fees. Fletcher received Can$l 18,136.60 in management fees for the second quarter of 2006 (March through June) and Can$51,734.50 for the first quarter (January through March). Adding those sums to the management fees Fletcher cites that were paid after June 30, 2006, gives us a total of Can$334,189.09, which is substantially in excess of the amount the district court awarded in damages to reflect overpayment of the management fees (Can$215,572). Summarized, Fletcher's argument here boils down to a claim that the damages must have been overstated since more was awarded in damages than was paid out in management fees after Fletcher had breached the contract. Once we correct the analysis to reflect that Fletcher's breach occurred by at least February 2006, Fletcher's argument loses its logical foundation in the evidence.
4. The Court Properly Refused to Consider Evidence of Gear's Currency–Exchange Gains.
Fletcher argues that the court erred in ignoring evidence from its expert witness, Morrie Fogelbaum, that Gear Canada gained $289,944 because of currency-exchange rates between the United States and Canada. Fletcher insists that this figure offsets any loss caused by Fletcher's breach. Although Fletcher did not assert a claim about the exchange rate in the pretrial order, Fletcher argues that the claim should have been considered because it was elicited on cross-examination. Fletcher also notes that Gear Canada did not controvert or attempt to strike the testimony.
The admission of expert testimony generally lies within the trial court's sound discretion, and its decision will not be overturned in the absence of an abuse of discretion. Puckett v. Mt. Carmel Regional Med. Center, 290 Kan. 406, 444, 228 P.3d 1048 (2010).
Fogelbaum was called to the stand by Fletcher. On direct examination, Fogelbaum explained Gear's currency-exchange gain and remarked, “[I]t increases your gross profit, your contribution margin, which, in effect, Fletcher should have participated in 50 percent of it.” On cross-examination, Fogelbaum deviated from a line of questions about inventory turnover to further expound on this point:
“[L]et me qualify something.
....
“Foreign exchange should have entered into it as well. And Gear—Fletcher didn't take advantage of the offset. In other words, you could take the reserve, but you should also put back the gain you made on the exchange; one counters the other.
“So when they did their management fees, they did not—they excluded their foreign exchange. So they hurt themselves.”
Contrary to Fletcher's assertion, Gear Canada did not “elicit” that evidence—Fogelbaum shoehorned it into a question about inventory turnover. The court clarified in its journal entry that Fletcher never claimed in the pretrial order that exchange gains should have been shared with Fletcher. The court refused to consider the exchange gains because it deemed them irrelevant to how the parties contracted to calculate management fees. The court also rejected them because they were not included in the disclosure of Fogelbaum's expert-witness testimony or in his pretrial deposition. And the district court also concluded that Fogelbaum's testimony was not credible.
Gear Canada argues that Fletcher miscasts the issue. Instead of ignoring uncontroverted evidence, the district court simply refused to admit Fogelbaum's testimony. Therefore, an abuse-of-discretion standard applies.
Unless modified for manifest injustice, the pretrial order controls: an issue not contained in the pretrial order should not be considered by the court. See K.S.A. 60–216(e); McCain Foods USA, Inc. v. Central Processors, Inc., 275 Kan. 1, Syl. ¶ 8, 61 P.3d 68 (2002). Fletcher cites Supreme Court Rule 140(g)(2) (2011 Kan. Ct. R. Annot. 229) to show that a defendant is only required to state his factual contentions, theories of defense, and claims for relief in a pretrial order—not to state all the evidence that may be elicited on cross-examination. But Fogelbaum first introduced the exchange-gains evidence on direct examination. Then, on cross-examination, the record shows that Fogelbaum's discussion of exchange gains was not elicited by Gear—it was a nonresponsive answer to a question about inventory turnover. Accordingly, the court properly refused to consider the testimony.
Even if Fogelbaum's testimony on this point had been admitted, a judge is not obligated to ‘ “accept and give effect to any evidence which, in its honest opinion, is unreliable, even if such evidence be uncontradicted.’ “ Beard v. Montgomery Ward & Co., 215 Kan. 343, 348, 524 P.2d 1159 (1974) (quoting Collins v. Merrick, 202 Kan. 276, Syl. ¶ 3, 448 P.2d 1 [1968] ). The court did not abuse its discretion when refusing to consider the exchange-rate-gains evidence.
5. The Court Erred in Awarding Prejudgment Interest as of October 2007.
Fletcher makes two arguments in its assertion that the district court erred in awarding prejudgment interest. First, because the amount of interest was not set out in the district court's initial judgment, Fletcher contends that Gear Canada didn't follow the necessary procedural steps to allow the court to add a specific amount of interest later. Second, Fletcher argues that prejudgment interest should not be awarded at all because the amount of damages was never liquidated.
An appellate court reviews the award of prejudgment interest for abuse of discretion. OwenLumber Co. v. Chartrand, 283 Kan. 911, 925, 157 P.3d 1109 (2007). A district court generally acts within its discretion if a reasonable person could agree with its decision. Critchfield Physical Therapy v. The Taranto Group, Inc., 293 Kan. 285, 292, 263 P.3d 767 (2011).
Of course, discretion is abused when the district court makes a legal error, see Martinez v. Milburn Enterprises, Inc., 290 Kan. 572, 578–79, 233 P.3d 205 (2010), so we must also make sure that the applicable legal rules allow the award of prejudgment interest. “In Kansas, the general rule is that prejudgment interest is allowable on liquidated claims.” Owen Lumber Co., 283 Kan. at 925; see K.S.A. 16–201. “A claim becomes liquidated when both the amount due and the date on which such amount is due are fixed and certain or when the same become definitely ascertainable by mathematical calculation.” 283 Kan. at 925–26. a. There Was No Procedural Error in Awarding Prejudgment Interest.
Fletcher contends that because the court's initial written ruling was in the form of its journal entry of judgment, Gear Canada needed to file a motion to alter or amend judgment under K.S.A. 60–259(f) in order to obtain prejudgment interest. At the time the judgment was entered, such motions had to be filed no later than 10 days after the entry of judgment. K.S.A. 60–259(f). Instead, Gear Canada filed a motion under K.S.A. 60–260(a) to correct a clerical mistake in the omission of a specific amount of prejudgment interest. Fletcher argues that Gear Canada failed to timely seek prejudgment interest and that its 60–260(a) motion cannot correct the error.
Gear Canada responds that it continuously requested prejudgment interest dating back as far as the filing of its initial petition against Fletcher. Although the April 5, 2010, judgment did not specify the dollar amount, the court expressly awarded prejudgment interest. Gear Canada also argues that the April 5 judgment was not a final judgment and that the 10–day window for filing a K.S.A. 60–259(f) motion did not begin to run until the entry of the final judgment, which contained an amount of interest, on July 20, 2010.
Gear Canada also argues that the amount of prejudgment interest is clear from the original judgment, even though the court did not perform the calculation. This makes the omission a clerical mistake, which can be fixed by a K.S.A. 60–260(a) motion. Under the statute when the motion was filed, “[c]lerical mistakes in judgments, orders or other parts of the record and errors therein arising from oversight or omission may be corrected by the court at any time of its own initiative or on the motion of any party....” K.S.A. 60–260(a).
Whether simple calculation of prejudgment interest is a clerical mistake does not appear to have been addressed in Kansas. Because K .S.A. 60–260 was modeled on Rule 60 of the Federal Rules of Civil Procedure, courts may look to federal law for guidance. Wilson v. Miller, 198 Kan. 321, 323, 424 P.2d 271 (1967). Federal courts indicate that a Rule 60(a) motion is appropriate when the court has already granted prejudgment interest but not yet calculated the amount. See, e.g., Pfizer Inc. v. Uprichard, 422 F.3d 124, 130 (3d Cir.2005); Pogor v. Makita U.S.A., Inc., 135 F.3d 384, 388 (6th Cir.1998); Kosnoski v. Howley, 33 F.3d 376, 379 (4th Cir.1994). If a party sought prejudgment interest for the first time after trial, or if the district court failed to award prejudgment interest, then Rule 60(a) would probably not apply. Granting prejudgment interest is more than a clerical act, but calculating interest is clerical and easily correctable. Federal caselaw is strongly persuasive that Gear Canada's K.S.A. 60–260(a) motion was appropriate.
Fletcher cites In re Marriage of Leedy, 279 Kan. 311, 315, 109 P.3d 1130 (2005) to show that K.S.A. 60–260(a) narrowly applies to clerical errors and omissions. In Leedy, the court held that K.S.A. 60–260(a) could not correct a mathematical error inflating a father's child-support obligations. 279 Kan. at 316. But in Leedy, the error came from inaccurate figures supplied by the mother; it was not a simple miscalculation by the court. 279 Kan. at 317. Correcting that error would be more than a clerical act—it would instead change the judgment. See 279 Kan. at 315. Gear Canada's case is distinguishable for two reasons. First, no error was made. The amount of prejudgment interest was simply omitted. Second, calculating the prejudgment interest would not change the judgment. The court had already stated that prejudgment interest would be awarded and had stated the date from which it would begin to run. Because the interest rate is set by statute when no other sum has been agreed upon, see K.S.A. 16–201, nothing more was required beyond a mathematical calculation.
We therefore conclude that the court did not abuse its discretion by granting Gear Canada's motion to modify the judgment to reflect the specific amount of prejudgment interest. b. Gear's Claim Was Not Liquidated until September 2009.
Fletcher also argues that the court erroneously determmed that Gear's claim was liquidated as of October 31, 2007. Fletcher contends that Gear's claim was not liquidated until the entry of judgment. As Fletcher points out, the court's calculation of damages was based on 2009 data, after Gear sold its remaining inventory. Yet the court determined that Gear's claim was liquidated as of October 31, 2007; the district court concluded that Fletcher “should have been certain” of the value of the remaining inventory by then.
Although unliquidated claims generally do not receive prejudgment interest, Gear Canada correctly notes that a claim is not considered unliquidated merely because there is a good-faith controversy about whether any amount is due at all. See Owen Lumber Co., 283 Kan. at 927. But Gear Canada never explains how the amount of damages was certain as of October 2007 when the remaining inventory wasn't sold to a liquidator until September 2009. The district court's damages calculation relied upon the amount of proceeds obtained from the 2009 sale, and there was no direct evidence regarding the value of the inventory as of October 2007. Even though we ordinarily presume that the district court found such facts as needed to support its judgment, we find that presumption an inadequate basis from which to conclude that the inventory value was exactly the same in October 2007 as it was 2 years later given the testimony that its value generally declined over time.
In support of its prejudgment-interest award, the district court noted that when an amount is due based upon a contract and there is no uncertainty as to the amount or as to the date it is due, then prejudgment interest should be awarded. See Plains Resources, Inc. v. Gable, 235 Kan. 580, 583–84, 682 P.2d 653 (1984). For the amount to be certain, it must be capable of mathematical computation. 235 Kan. at 583.
Fletcher argues that so long as the market value of the inventory was uncertain, damages couldn't be calculated and prejudgment interest can't be awarded. In support, Fletcher cites two cases in which prejudgment interest on contract damages were not awarded: Lisbon v. Heatcraft, Inc., 23 Kan.App.2d 374, 930 P.2d 1096 (1997); and Schatz Distributing Co. v. Olivetti Corp. of America, 7 Kan.App.2d 676, 647 P.2d 820 (1982).
In Schatz, a computer sold to the plaintiff did not perform as warranted, and the primary measure of damages was the difference in the value of the computer as represented and its market value. The Court of Appeals held that prejudgment interest could not be awarded on those damages because the market value of the computer was uncertain until its value was determined at trial. 7 Kan.App.2d at 683. In our case, by contrast, the market value of the remaining inventory was determined when it was sold—in a market sale to a third party—in September 2009, and that value was the one adopted by the trial court. No similar market-sale information was available in Schatz.
Lisbon came to the Court of Appeals in a different posture: the trial court had not awarded prejudgment interest, and the plaintiff appealed on that issue, which is a discretionary call for the trial court, Owen Lumber Co., 283 Kan. at 925, though our court did not note that in the Lisbon opinion. But our court affirmed the denial of prejudgment interest, noting that the amount of damages wasn't certain until the jury rendered its verdict. Lisbon, 23 Kan.App.2d at 378–79. Our court noted that the plaintiff had been seeking nearly $50,000 until the first day of trial, when it reduced the amount of claimed damages to $26,124.93, the amount of commissions that had been obtained by another sales representative after the defendant had wrongly terminated the plaintiff. Although the jury awarded that exact amount, we think it well within the district court's discretion to deny prejudgment interest in a case in which the plaintiff had been seeking a much higher amount until trial began.
While our court's opinion held that the damages in Lisbon “were not liquidated until the jury reached its verdict,” 23 Kan.App.2d at 378, the factual situation there was much different than is found here. The jury had been told that a proper measure of damages could be measured by the commissions paid to the new sales representative minus any costs that the plaintiff would have incurred in securing the same sales. But the jury decided not to deduct any costs of sale and awarded the plaintiff the full amount of commissions that had been paid to the new sales representative. That could not have been determined before trial, and the district court decided not to award prejudgment interest. In our case, the district court decided to award prejudgment interest, and the damage calculations appear to have needed no information that wasn't available as of the September 2009 sale of the remaining inventory.
We conclude that the damages were capable of being determined through mathematical calculations as of the date the inventory was sold, September 24, 2009. The district court had discretion to award prejudgment interest from that date forward, but it erred in awarding prejudgment interest from October 2007. The case will be remanded with directions to modify the award of prejudgment interest by running it from September 24, 2009, not from October 31, 2007.
6. The Court Did Not Err in Awarding Attorney Fees to Gear Canada Based on an Indemnity Provision.
Fletcher argues that paragraph 21 of the parties' agreement is an indemnification clause but not an attorney-fee provision. Fletcher insists that the indemnity provisions apply only to claims by third parties—not claims by Gear Canada or Fletcher, the parties to the contract. Gear Canada responds that the provision by its very terms says that Fletcher “will indemnify and hold harmless Gear ... from ... any and all claims ... arising out of, resulting from or relating to ... any breach by Fletcher” under the agreement, and the provision says that the indemnification will include the costs of any suit, including the payment of reasonable attorney fees.
The plain language of paragraph 21 certainly seems to support Gear Canada's position. Yet there are some cases in which the word “indemnify” has been held to apply only if one of the contracting parties is sued and suffers damages from a suit or claim of a third party, not one of the contracting parties. Fletcher cites two such opinions, both unpublished, from our court: Polaris Restaurants, Inc. v. Village Enterprises, Inc., No. 95,807, 2007 WL 2819932 (Kan.App.2007) (unpublished opinion), rev. denied April 23, 2008; and Bretches v. Curtis Machine Co., No. 92,776, 2005 WL 1429904 (Kan.App.) (unpublished opinion), rev. denied 280 Kan. 981 (2005); see Five Rivers Ranch Cattle Feeding LLC v. KLA Environmental Services, Inc., No. 08–2185–EFM, 2010 WL 2609426, at *4 (D.Kan.2010) (unpublished opinion).
Kansas follows the American rule on whether a party may recover its attorney fees as damages in a lawsuit. Under that rule, a court may not award fees unless authorized by statute or by the parties' agreement. Unruh v. Purina Mills, 289 Kan. 1185, 1200, 221 P.3d 1130 (2009). Because it's a legal question whether the court has the authority to award attorney fees, our review on appeal is unlimited, so we review the matter independently, without any required deference to the district court. 289 Kan. at 1200. Here, the question is what is meant by paragraph 21 of the parties' contract.
We find the Polaris Restaurants and Curtis Machine Co. cases of limited help. Polaris Restaurants is decided as a matter of Missouri law, and the Missouri courts had defined indemnity narrowly. 2007 WL 2819932, at *9 (citing Missouri Employers Mutual Ins. Co. v. Nichols, 149 S.W.3d 617, 626 [Mo.App.2004] ). And the result in both cases was clearly dependent upon the exact wording of the contract provision at issue there.
In our view, three considerations strongly support the district court's interpretation of paragraph 21. First, the plain language of the provision is broadly written—the phrases “indemnify and hold harmless,” “from ... any and all claims,” “arising out of, resulting from or relating to,” and “any breach by Fletcher” stand out for the lack of any apparent limitation. Second, although the word “indemnify” is often used with respect to agreements to reimburse another for claims made by third parties, the word's basic meaning is broad enough to encompass both third-party and direct claims. Black's Law Dictionary defines “indemnify” as “[t]o reimburse (another) for a loss suffered because of a third party's or one's own act or default; HOLD HARMLESS.” (Emphasis added.) Black's Law Dictionary 837 (9th ed.2009). Black's defines “hold harmless” in a similarly broad way: “To absolve (another party) from any responsibility for damage or other liability arising from the transaction; INDEMNIFY.” Black's Law Dictionary 800. Thus, the terms that are used are sufficiently broad to include the claims made here by Gear Canada. Third, one of the provisions in paragraph 21 specifically refers to third-party suits, and in context it's clear that this provision is not applicable to the entirety of the paragraph.
We must place this one provision of paragraph 21 that specifically refers to third-party suits in context. Paragraph 21 is headed “Indemnification; Damages,” and it contains five separate paragraphs. In the first one, Fletcher indemnifies Gear Canada; in the second, Gear Canada indemnifies Fletcher. The third provides how notice of indemnification claims shall be made. The fifth provides that the indemnifying party will, “[t]o the extent reasonably practicable,” obtain the other party's written approval before settling any claim for relief other than money damages or that may otherwise adversely affect the indemnified party. None of these provisions is explicitly limited to third-party claims, though the fifth provision would have no application to direct claims between the parties.
The fourth provision, though, applies only in the event of third-party claims. It provides that when an indemnification claim “involves the claim of any third party,” the indemnifying party will have the right to participate in and even control the defense of the claim if it agrees to be responsible for the liability. And that paragraph begins by specifically mentioning a third party: “ If a claim for indemnification involves the claim of any third party....” (Emphasis added.) By setting off in a separate paragraph one provision specifically dealing only with third-party claims, and by beginning that paragraph with the introduction of a third party, the structure suggests that there are some indemnification claims that do not involve third-party claims.
When we consider the overall structure of section 21 (including its fourth paragraph, on third-party claims) along with the broad language of the indemnity provision (contained in the first two paragraphs) and the general definition of indemnify, we conclude that the parties' contract authorizes the award of reasonable attorney fees in suits between the parties for breach of contract. Fletcher has not challenged the amount of the attorney-fee award, and we therefore affirm the district court's fee award.
The district court's award of prejudgment interest is vacated, and the case is remanded to modify that award by granting prejudgment interest from September 24, 2009. The district court's judgment is otherwise affirmed.