Opinion
Case No. 2:03CV487DAK.
August 2, 2005
MEMORANDUM DECISION AND ORDER
This matter is before the court on Defendants Frank L. Davis, Harvest Marketing LLC, and First Harvest, LLC's Third Motion for Summary Judgment, and Plaintiff's cross motion for summary judgment. The court held a hearing on the motions on June 15, 2005. Plaintiff was represented by David M. Wahlquist and Defendant was represented by J. Bryan Quesenberry. The court has carefully considered all pleadings, memoranda, and other materials submitted by the parties. The court has further considered the law and facts relevant to the motions. Now being fully advised, the court enters the following Memorandum Decision and Order.
BACKGROUND
Plaintiff is the sole beneficiary of the Michelon Family Trust and the sole devisee of the Estate of Lynda Steimke Michelon. In the spring of 1999, Plaintiff's mother, Lynda Steimke Michelon, met Jae Forschen, who worked for World Contractual Services ("WCS"), and David Orr, the owner of WCS, at a booth at a financial planning seminar in Cancun, Mexico. Michelon agreed to invest money with Forschen and/or WCS. Michelon invested $100,000 from her individual retirement account to create the Michelon Family Trust ("MFT"). Forschen and Orr became co-trustees of the MFT.
Forschen sent the money from the MFT to individuals "back East" named Burt Patterson and Maralee Haldeman. The parties dispute the details of Forschen's intent with respect to the money — Plaintiff states that he made an investment and Forschen states that he used the money as front money for a loan. However, it does not appear to be disputed that Forschen did not disclose to Michelon the details of his management of the funds after the initial discussion regarding high yield investments. And, he did not inform her specifically about the debt elimination loan program.
At this same time, Defendant Davis, a customer of Forschen's, needed money to expand his company, Harvest Marketing, LLC. Forschen contacted Patterson to get a loan for Davis and his company, and Patterson represented that he could help Davis get a loan. Patterson told Forschen, however, that he would need $220,000 up-front to process the loan for Davis. Forschen told Davis that he could use the money from the MFT to pay the up-front fee for Davis and, once the loan funded, Davis could keep 8% of the loan proceeds and Forschen would take the remaining 92% of the proceeds and invest them in high yield programs to generate sufficient funds to pay the loan off and make some profit. Davis agreed to the plan. The parties, however, dispute whether Davis had knowledge of and agreed to the plan before or after Forschen transferred MFT funds "back East."
Patterson instructed Forschen to send the up-front fee to a bank account owned by Rehab by LM, Inc. at Huntington National Bank in Reynoldsburg, Ohio. Once the fee was received, Haldeman, a principal in Rehab, would process the loan. Forschen transferred the funds from MFT to Rehab's account as instructed. The day after the funds were sent, Davis received a loan commitment and some loan documents to complete.
In early 2000, Michelon began pressuring Forschen for an accounting of what he had done with the MFT money and when she would receive her promised return. In February 2000, Forschen approached Davis about executing a Promissory Note Agreement in the amount of $175,000 because of the "loan program." Forschen told Davis that he needed the Note "to cover myself with Lynda [Michelon]" and "[t]o show her that, you know, I had the note guaranteed, I had that money guaranteed."
Davis signed a Promissory Note Agreement to the MFT on February 15, 2000, with a back-dated effective date of November 15, 1999 ("Davis Note"). Two originals were signed. On the original Davis kept, Forschen hand wrote a promise on the back stating "I Jae R. Forschen personal [sic] will sign and take over this note with all responicbles [sic] and obligations that will be belong to Jae R. Forschen [sic] 2/9/2000." He also wrote: "The note referrenced [sic] above is Promisory [sic] note between Michelon Family Trust and Harvest Marketing Dated 11/15/99 wherein Jae R. Forschen will execute a note with Frank Davis/Harvest Marketing taking over the liability of the note all responsibilities associated with note." Forschen's version of the Davis Note did not contain the same handwritten portions on the back. Forschen showed Michelon the Davis Note but did not disclose to her the Forschen Note or the handwritten portions on the version of the Davis Note that Davis kept.
The parties debate whether Forschen expected Davis to fulfill his obligations under the Note — Davis claims it was understood that no money would change hands and the transaction was merely a paper transaction and Plaintiff claims that Forschen expected Davis to honor his note to MFT in the event the loan did not fund. However, the parties do not dispute that Forschen agreed to sign a similar promissory note transferring the obligation to himself, to be paid in the same amount and on the same terms.
Forschen signed a Promissory Note Agreement on that same day, February 15, 2000, ("Forschen Note") to cover any liability Davis had to the MFT under the Davis Note. Davis claims that Forschen's intent was for the Forschen Note to replace the Davis Note. However, Plaintiff claims that the parties intended the Forschen Note to serve as an indemnity for the Davis Note. In any event, the loan did not fund and nothing has occurred with respect to either Note.
DISCUSSION
Defendants Frank Davis, Harvest Marketing LLC, and First Harvest LLC (collectively "Davis"), move for summary judgment on the eight remaining causes of action asserted by Plaintiff Jennifer Steimke against them. Plaintiff has filed a cross motion for summary judgment on her claim for breach of the Davis Note. Defendants Jae Forschen, David Orr, and World Contracting Services are not moving for summary judgment. Because both Davis' and Plaintiff's motions for summary judgment address Plaintiff's claim for breach of the Davis Note, the court will decide that issue first. Accordingly, the court will then consider the remaining claims raised in Davis' motion.
Claim for Breach of Davis Note
Plaintiff argues that the Trust is entitled to summary judgment on its claim for relief based upon Davis' breach of the Davis Note. Plaintiff asserts that the Davis Note is a valid, enforceable promise on the part of Davis to pay the Trust $175,000 on March 3, 2000, together with late charges thereafter at the rate of $1,000 per week and MFT's costs and attorneys fees incurred in collection on the Davis Note. Davis argues that there are several issues of fact regarding the validity and intent of the Davis Note that preclude enforcement of it as a matter of law.
First, Davis contends that the Davis Note is no longer valid because it was replaced by the Forschen Note. The Forschen Note states: "This personal [sic] guaranteed note by Jae Forschen replaces the note of Frank Davis', his personal guarantee [sic] and the 200,000 shares of Harvest Marketing/First Harvest dated 15 November 1999." Although the Forschen Note states that it "replaces" the Davis Note, the difference between replacing the Note and acting as an indemnity appears meaningless because the Forschen Note states that Forschen entered it in his personal capacity. Therefore, the Davis Note remained effective between Davis and the MFT.
Davis calls the second note the Trustee's Note because he claims that it was made by Forschen in his Trustee capacity. The court, however, will refer to it as the Forschen Note because it was signed by Forschen.
However, Davis disputes that Forschen signed the Forschen Note in his personal capacity. Davis asserts that the personal guaranty provision within the Forschen Note indicates that Forschen executed the Forschen Note in his trustee capacity because the personal guaranty provision would be redundant if the Forschen Note is from Forschen personally. Davis further argues that the language that the "personal [sic] guaranteed note by Jae Forschen replaces the note of Frank Davis" supports the conclusion that the Note is from Forschen in his official capacity as trustee of the Trust. Davis argues that if Forschen was executing the Forschen Note in his personal capacity, he would have no authority to replace the Davis Note with the Trustee's Note.
The court concludes that the language of the Forschen Note is clear on its face. The Forschen Note states that it is a personal guarantee, there is no mention of the Trust, and it is signed by Forschen personally without any mention of his status as a Trustee. The handwritten promise on the back of the Davis Note similarly clearly identifies that Forschen agreed to execute the Forschen Note in his personal capacity. Forschen acknowledged that the Davis Note was between the MFT and Davis, whereas Forschen would execute a note taking over all liabilities and responsibilities in the Note. There is no reason for the court to go beyond the face of the documents.
Davis also claims that he understood that he was dealing with the Trust itself through its legal representative and trustee, Forschen. However, the court does not believe it is necessary to consider the parties' intent given the clear language of the Forschen Note. To determine the parties' intentions expressed in a document, the court first looks at the four corners of the document itself. If the document is ambiguous, the court may consider extrinsic evidence to determine the parties' intent. The language of the Forschen Note and the handwritten promise on the back of the Davis Note are not ambiguous with respect to whether Forschen signed the Forschen Note in his personal capacity. The Forschen Note itself indicates in three places that the signatory and obligor is Jae Forschen personally. There is no ambiguity that requires the court to look beyond the four corners of the Note. Even if the Court were to consider extrinsic evidence, it points overwhelmingly at the same conclusion. Despite Davis' arguments to the contrary, the evidence elicited by the parties demonstrates that the parties intended Forschen's signature on the Forschen Note to be in his individual capacity. Therefore, there is no issue of fact for a jury to decide on this issue.
In addition, Davis argues that the court should deny Plaintiff's motion based on estoppel and fraudulent inducement by Plaintiff's trustee and because the Note is unconscionable. Davis claims that when Forschen presented him with the Davis Note, Forschen, as the MFT Trustee, represented to him that his obligations under the Davis Note were contingent upon the Trustee obtaining the loan in question. Davis contends that Forschen only intended to enforce the Davis Note once the loan funded. It is undisputed that Forschen told Davis that he needed the Note to "cover himself with Lynda [Michelon]." Davis claims that in reliance on these representations from Forschen, he entered into the Davis Note which the Trust now intends to enforce to his detriment even though the loan was never funded.
Davis argues that these actions form a fraud on the Davis Defendants. Because fraud is an affirmative defense to a contract enforcement action, Davis contends that the court should deny the MFT's efforts to enforce the Davis Note. However, there is no provision in the Notes making them contingent on the funding of the loan. Davis could have negotiated for such a provision before he signed the Note. The lack of such a provision, however, does not constitute fraud.
Next, Davis asserts that the court should preclude Plaintiffs from enforcing the Davis Note based on equitable estoppel. "In order to prevail on a claim for equitable estoppel a party must show that the party to be estopped acted in such a way as to induce reasonable reliance by the other party and that allowing the first party to act contrary to its earlier actions would work to the detriment of the relying party." IHC Health Servs. v. DK Mgmt. Inc., 2003 UT 5, ¶ 10. Davis argues that the Trust should be estopped because through its Trustee it acted to induce reasonable reliance by the Davis Defendants on the Trustee's representations that the Davis Note would not be enforced until the loan funded.
However, the court again finds that if the parties intended the notes to be contingent on the funding of the loan, they could have included it. Moreover, Davis has not provided any citations to the court to support its contention that the Davis Note was contingent on Forschen obtaining the loan. Therefore, the court concludes that the doctrine of estoppel does not preclude enforcement of the Davis Note.
Davis also claims that the Davis Note is unconscionable. "Our consideration of whether a contract provision is unconscionable is made `in light of the twofold purpose of the doctrine, prevention of oppression and unfair surprise.'" Ryan v. Dan's Food Stores, Inc., 972 P.2d 395, 402 (Utah 1998). Davis asserts that the Note is one-sided — it depicts a loan of $100,000 based upon which the MFT would realize $75,000 in interest and was made February 15, 2000, and purports to be due March 3, 2000.
Davis did not raise unconscionability as an affirmative defense in his Answer, therefore the defense is waived. However, even if this court were to consider it, "[a] party claiming unconscionability bears a heavy burden." Ryan, 972 P.2d 395 (Utah 1998). "The law enables parties to freely contract, establishing terms and allocating risks between them. The law even permits parties to enter into unreasonable contracts or contracts leading to a hardship on one party." Id. (citations omitted). Davis had the choice of signing the Note. He does not claim he was acting under duress or undue influence at the time. The fact that Davis refused to sign the Davis Note until he received Forschen's personal indemnity shows that he had a meaningful choice. Therefore, the court concludes that the claim of unconscionability fails as a matter of law.
Davis further argues that there was no consideration for the Davis Note. Specifically, Davis contends that the Davis Note does not state anything about an antecedent debt, the fact that Davis could have realized some benefit from the loan program does not equate to consideration for the Davis Note, the Forschen Note is not consideration if he signed it personally because it was not consideration from the Trust, and Michelon's inaction cannot be consideration because it only benefitted Forschen who was the target of Michelon's inquiries.
Although the Davis Note does not state that there was an antecedent debt, the evidence shows that the Davis Note evidenced an antecedent debt which arose when Davis and Forschen used MFT funds to pay the up-front fee required for the Davis loan. The Note is Davis' acknowledgment of the existence of the debt and recognition that it had to be paid. A.M. Castle Co. v. Beagley, 467 P.2d 408, 409 (Utah 1970). No contemporary consideration must be given to sustain a contract relating to an antecedent debt.
In addition, the Forschen Note was provided as indemnity and was consideration for the Davis Note. The fact that the loan program did not turn out as Davis hoped, does not change the fact that Davis received consideration. Davis could sue Forschen under the Forschen Note. In Utah Nat. Bank of Salt Lake City v. Nelson, 111 P. 905 (Utah 1910), the court held that "consideration to a third party may be an inducement to a person to give his note, and in such case the promise is just as binding as though the promisor had received the benefit." Davis acknowledged that he expressly bargained for the Forschen Note in return for his signing and delivering the Davis Note.
Moreover, both Forschen and Davis needed to appease Michelon with respect to their use of her funds. Davis signed, backdated, and delivered the Davis Note to Forschen to be given to Michelon for this purpose. As a result, Michelon did not do anything from the date of the Note until March 3, 2000. Her inaction was the purpose for Forschen and Davis drafting the notes. Therefore, the court concludes that there was adequate consideration for the Davis Note.
Because the court finds that the Davis Note is a valid contract and the undisputed facts demonstrate that the terms of the Note were breached, Plaintiff is entitled to summary judgment on her claim. Accordingly, Plaintiff's motion for partial summary judgment is granted and Davis' motion for summary judgment with respect to the breach of promissory note claim is denied.
Davis' Motion for Summary Judgment
1. Second and Fourth Claims for Relief — Aider and Abettor Liability under Federal and State Securities Law
Davis argues that Plaintiff cannot demonstrate that Davis defrauded Plaintiff in the sale of securities. Davis asserts that there was no fraudulent misrepresentation as to the initial transfer of MFT money to Patterson and Haldeman "back East" because the money was transferred to be a part of the high-yield program and Forschen had discussed that investment program with Michelon. In addition, Davis asserts that Forschen did not sell any securities, he only invested money. For these same reasons, Davis contends that Plaintiff's state securities law claim fails.
The investment of money is not a security under 15 U.S.C. § 78c(a)(10) or Utah Code Ann. § 61-1-13(24) (2000). Furthermore, the diversion of the money to a loan or debt-elimination program would not be a sale of anything — it would only be a transfer of money. Therefore, even though the loan program was not discussed with Michelon, it was not a security under 15 U.S.C. § 78c(a)(10) or Utah Code Ann. § 61-1-13(24). Although Plaintiff argues extensively regarding Davis' knowledge of the use of MFT funds as up front money for the loan, Plaintiff does not establish that Davis or Forschen's actions relate to the sale of a security. Plaintiff also acknowledges that under federal security law, there is no private right of action for aiding and abetting. Therefore, the court grants Davis' motion for summary judgment on both the federal and state securities claims.
2. Seventh Claim for Relief — Conspiracy to Defraud
Davis argues that there is no evidence that he made any false misrepresentations of material facts to Plaintiff, to Forschen, or any other agent or representative of the Trust. To prove civil conspiracy, a plaintiff must demonstrate: "(1) a combination of two or more persons, (2) an object to be accomplished, (3) a meeting of the minds on the object or course of action, (4) one or more unlawful, overt acts, and (5) damages as a proximate result thereof." Alta Indus. v. Hurst, 846 P.2d 1282, 1290 n. 17 (Utah 1993). "A conspiracy to defraud is fraud committed by two or more persons who share an intent to defraud another." DeBry v. Cascade Enters., 879 P.2d 1353, 1359 (Utah 1994). "Conspiracy to defraud requires proof of the underlying fraud." Gildea v. Guardian Title Co., 970 P.2d 1265, 1271 (Utah 1998).
Under the reasoning of DeBry, Davis contends that Plaintiff must establish that he committed a fraud against Plaintiff to be held liable for conspiracy to defend. He contends that the fraud must be committed by two or more persons and only Forschen committed fraud. However, different participants in a conspiracy will have different roles in the conspiracy. It is sufficient to show that the underlying fraud was committed by one of the co-conspirators. Each participant need not know the exact limits of the plan.
"The existence or nonexistence of a conspiracy is generally a fact issue." Singer v. Wadman, 595 F. Supp. 188, 272 (D. Utah 1982); Isee also Adickes v. Kress Co., 398 U.S. 144 (1970) (Black, J. concurring). There are substantial factual issues and evidence supporting a conspiracy to defraud in this case. Plaintiff argues that the evidence demonstrates that Davis knew the Michelon's trust money was being used as part of the original "buy-in" for the debt elimination program without Michelon's knowledge. Davis knew that the Note was being used by Forschen to cover himself and make it look as though her investment was guaranteed. Davis also testified that he had no intent to honor the Note. Based on these facts, a jury could conclude that Davis had knowledge of the scheme, knowingly agreed to become a partner in it, and is liable to Plaintiff. Consequently, it would be inappropriate to grant Davis' motion for summary judgment on this issue.
3. Eighth Claim for Relief — Negligent Misrepresentation
Plaintiff alleges two misrepresentations: (1) the Davis Note, and (2) the failure to disclose the Forschen Note, the Forschen Loan, and the debt elimination program to Michelon before the Trust money was diverted into the debt elimination program. Utah law recognizes the tort of negligent misrepresentation as follows: "A party injured by reasonable reliance upon a second party's negligent misrepresentation of a material fact may recover damages resulting from that injury when the second party had a pecuniary interest in the transaction, was in a superior position to know the material facts, and should have reasonably foreseen that the injured party was likely to rely upon the fact." Price-Orem Co. v. Rollins, Brown Gunnell, 713 P.2d 55, 59 (Utah 1986).
To the extent that the Davis Note is the basis for the misrepresentation claim, it is barred by the economic loss rule. The economic loss rule bars economic damages "in negligence absent physical property damage or bodily injury." Grynberg v. Questar Pipeline Co., 2003 UT 8, P 41. The contract protects the parties interests, whereas tort law protects individuals and their property from physical harm. Because Plaintiff seeks damages based on her negligent misrepresentation cause of action, she must seek such an economic loss through the Davis Note.
Plaintiff argues that the economic loss rule is inapplicable because the rule focuses on a party's duty to the other party and Davis had an independent duty to Michelon based on his joint venture/conspiracy with Forschen. "The proper focus in an analysis under the economic loss rule is on the source of the duties alleged to have been breached. Thus, our formation of the economic loss rule is that a party suffering only economic loss from the breach of an express or implied contractual duty may not assert a tort claim for such a breach absent an independent duty of care under tort law." Hermansen v. Tasulis, 2002 UT 52, ¶ 16, 48 P.2d 235. However, there is no case law to support Plaintiff's theory that Davis took on Forschen's duties to third parties when he entered into a joint venture with him. Therefore, the court declines to find that Davis had an independent duty to Plaintiff or members of the Trust.
To the extent that Plaintiff's negligent misrepresentation claim is based on Davis' alleged failure to disclose the Forschen Note, the Forschen Loan, and the debt elimination program to Michelon before the Trust money was diverted into the debt elimination program, there are factual questions that preclude summary judgment. Davis argues that because his transaction was merely a paper transaction, he did not have a pecuniary interest. Plaintiff argues that Davis had a pecuniary interest because he stood to gain almost a million to three million dollars from the alleged scheme, he received benefit from Michelon's $100,000 which was diverted from the trust and used as the up-front fee for the Davis loan, and he agreed to participate in the loan scheme because he could receive an 8% split from Forschen. Davis also had a pecuniary interest in the Forschen Note and insisted upon receiving the Forschen Note before giving Forschen the Davis Note.
Davis also claims that he was not in a superior position to know the material facts associated with Forschen's use of the MFT monies because, unlike Forschen who was the Trustee at the time, Davis had no relationship to the Trust. Plaintiff contends that Davis had superior knowledge of the manner in which Michelon's money would be diverted to the loan program without her knowledge. Plaintiff argues that Davis and Forschen took some deliberate steps to conceal the true nature of the investment from Michelon, Davis knew the Note he signed and back dated was being used to cover Forschen with Michelon, and both Davis and Forschen were deliberately trying to keep Michelon in the dark about the use of the MFT money.
Finally, Davis contends he made no representations to Plaintiff or any agent of the Trust. Plaintiff asserts that misrepresentations were made and that a failure to disclose material facts is as actionable as affirmative misstatements. Smith v. Frandsen, 2004 UT 55 P 11. Plaintiff contends that the failure to disclose the Forschen Note to Michelon is an actionable omission.
The court concludes that there is enough for a jury to decide with respect to whether a negligent misrepresentation occurred regarding the existence and operation of the Forschen Note. Therefore, summary judgment on this claim is granted with respect to misrepresentations relating to the Davis Note, but denied with respect to misrepresentations or omissions relating to the Forschen Note.
4. Eleventh Claim for Relief — Conversion
Davis argues that he never exercised dominion or control over the Trust's money because it went from the Trust's bank to the organization "back East" before Forschen brought Davis into the transaction and, therefore, Plaintiff's conversion claim fails. "A conversion is an act of willful interference with a chattel, done without lawful justification by which the person entitled thereto is deprived of its use and possession." Allred v. Hinkley, 328 P.2d 726, 728 (Utah 1958). Conversion requires "an intent to exercise dominion or control over goods inconsistent with the owner's rights." Id.
Plaintiff argues that Davis was brought into the scheme before the funds were transferred. and he knew that the funds were going to be diverted from the Trust over to his loan transaction. Plaintiff claims that Davis had agreed to that diversion and helped cover it up by signing the Davis Note to the Trust. Plaintiff asserts that it has demonstrated at a minimum a genuine issue of fact regarding Davis' participation in the scheme to convert MFT funds to Forschen and Davis' use. The funds were diverted as up-front fees for a loan to help Davis' business and he stood to get an 8% split with Forschen. Plaintiff contends that the fact that the trust money was never physically in Davis' possession is immaterial.
Plaintiff does not cite any support for the argument that Davis can be liable for Forschen's conversion of funds merely because she alleges that they were joint venturers and/or co-conspirators. However, Davis does not cite to any cases stating that the person must possess the funds — the cases state a wilful interference with chattel which deprives the owner of its use and possession. A jury could find that Forschen diverted MFT funds for Davis' benefit and Davis knew it was going to happen and agreed to be a part of it. That interference with the funds deprived Plaintiff of the use and possession of the funds. Davis' potential knowledge that the diversion was to occur creates factual issues regarding wilful interference. Therefore, the court concludes that summary judgment is inappropriate.
5. Twelfth Claim for Relief — Money Had and Received
Plaintiff must "show that defendant obtained money from plaintiff, under such circumstances that in equity and good conscience it should be returned." Helper State Bank v. Crus, 90 Utah 207, 211 (1936). Davis argues that he never received any money belonging to Plaintiff or the Trust because Forschen transferred the money from the Trust to the organization "back East" before he was involved. Plaintiff argues that Davis received the benefit of the Trust money because of the diversion of the money to the loan program. Plaintiff contends that the money was transferred on Davis' behalf and with his full knowledge.
Even if the court accepted Plaintiff's argument that the money was transferred for Davis' benefit, the cause of action is not money had and benefitted from, it is "money had and received." Although Davis stood to receive a benefit based on the diversion of the MFT funds, it is clear and undisputed that Davis never "had" or "received" the money. Therefore, the court concludes that Plaintiff cannot meet the elements of this claim. Accordingly, Davis' motion for summary judgment is granted as to this claim.
6. Seventeenth Claim for Relief — Breach of Fiduciary Duty
Davis argues that as a matter of law he could not have breached a fiduciary duty to Plaintiff because he was never a principal, agent, or representative of the Trust, and he was never in control or possession of any Trust assets. Plaintiff argues that when Davis became Forschen's joint venturer and/or co-conspirator, he agreed to assume the liabilities arising out of the breach of Forschen's duties to Michelon.
Without case law to support the argument, the court declines to apply one party's fiduciary duties to third parties on another party based on a conspiracy or a joint venture. Therefore, the court grants Davis' motion for summary judgment on the breach of fiduciary duty claim.
CONCLUSION
Based on the above reasoning, Plaintiff's Motion for Partial Summary Judgment on the breach of the Davis Note is GRANTED. Davis' Motion for Summary Judgment is GRANTED IN PART and DENIED IN PART. Specifically, Davis' motion is GRANTED with respect to Plaintiff's claims for aider and abettor liability under state and federal law, negligent misrepresentations relating to the Davis Note, money had and received, and breach of fiduciary duty. Davis' motion is DENIED with respect to Plaintiff's claims for civil conspiracy, negligent misrepresentations regarding the Forschen Note, and conversion.