Erickson v. Brown

• Citation: 2008 ND 57,747 N.W.2d 34
• Decision Date: 24 March 2008
• Docket Number: No. 20070044.,20070044.
• Parties: John D. ERICKSON, Richard B. Dregseth, Jon A. Ramsey, Plaintiffs and Appellants v. Randy BROWN and Capital Harvest, Inc., Defendants and Appellees.
• Court: North Dakota Supreme Court

747 N.W.2d 34

2008 ND 57

John D. ERICKSON, Richard B. Dregseth, Jon A. Ramsey, Plaintiffs and Appellants v. Randy BROWN and Capital Harvest, Inc., Defendants and Appellees.

No. 20070044.

Supreme Court of North Dakota.

March 24, 2008.

Ronald H. McLean (argued) and Timothy G. Richard (on brief), Serkland Law Firm, Fargo, N.D., for plaintiffs and appellants.

David James Eilertson, Brown Corporations, Grand Forks, N.D., for defendants and appellees.

VANDE WALLE, Chief Justice.

[¶ 1] John D. Erickson, Richard B. Dregseth, and Jon A. Ramsey (collectively "plaintiffs") appealed from a district court judgment dismissing before trial some of their claims against Randy Brown and Capital Harvest, Inc., and dismissing their remaining claims after a jury verdict in an action to determine the plaintiffs' right to an ownership interest in Capital Harvest. The plaintiffs claim that Erickson and Dregseth left a prior employer to help Brown start Capital Harvest after Brown promised to "give" them an ownership interest in Capital Harvest and Brown thereafter unilaterally required them to "earn" an ownership interest in the company and that Ramsey subsequently left a prior employer to work at Capital Harvest as part of an agreement to "earn" an interest in Capital Harvest. The plaintiffs assert Brown breached his promises and made misrepresentations to them, which prevented them from receiving or earning an ownership interest in Capital Harvest. They argue the district court erred in dismissing most of their claims before trial for failure to state a claim or by summary judgment, the court erred in refusing to instruct the jury on accord and on good faith, and the court erred in refusing to allow the jury to hear evidence about Brown's accounting practices.

[¶ 2] We conclude the district court did not err in refusing to instruct the jury on accord and on good faith, and the court did not abuse its discretion in excluding the plaintiffs' proffered evidence. We further hold that although the court erred in dismissing Capital Harvest under N.D.R.Civ.P. 12(b)(vi) and in granting summary judgment on some of the plaintiffs' claims relating to earning an interest in Capital Harvest, the error was not prejudicial in view of the jury's finding that Brown did not breach his contract with Erickson to earn an interest in Capital Harvest. We also conclude that some of Dregseth's claims relating to whether or not Brown agreed to give him an interest in Capital Harvest raise issues of material fact, and we reverse those claims and remand for further proceedings.

I Facts

Brown was the sole owner of AGSCO, Inc., a family business in Grand Forks that sold farm seed and chemicals on credit to customers in North Dakota, South Dakota, Minnesota, and Montana. In the late 1990s, Erickson and Dregseth both worked at Bremer Bank in Grand Forks, which provided operating capital to AGSCO, and Erickson provided banking services to Brown and AGSCO. According to Erickson, Brown approached him in 1999 with a plan to create Capital Harvest as a captive finance company for AGSCO. Erickson claimed Brown orally agreed to "give" him a 25 percent interest in Capital Harvest as part of a compensation package to induce him to leave Bremer Bank and help start Capital Harvest. Erickson asserted he and Brown also discussed hiring Dregseth, and Brown authorized Erickson to negotiate a salary and stock ownership agreement with Dregseth, which included giving Dregseth a separate 8 percent ownership interest in Capital Harvest as part of his compensation package to work for Capital Harvest.

[¶ 4] Erickson left his job with Bremer Bank, and he started working for Brown and the yet-to-be formed Capital Harvest on September 13, 1999. According to Erickson, on that date, Brown told him that Brown could not "give" him a 25 percent interest in Capital Harvest, but he could "earn" up to a 25 percent interest under a written schedule that outlined his earned ownership interest based upon Capital Harvest's profits. The written schedule required Erickson to be vice president of Capital Harvest and authorized him to transfer any portion of his earned interest to other Capital Harvest employees. Erickson claimed Brown also told him that Dregseth's 8 percent interest in Capital Harvest would now come out of Erickson's 25 percent interest.

[¶ 5] Brown incorporated Capital Harvest on October 13, 1999, with himself as the sole shareholder of the corporation. Erickson asserted he did not tell Dregseth about the new arrangement to earn an ownership interest until after Dregseth began working at Capital Harvest on October 18, 1999. Erickson and Dregseth both claimed that because they had quit their jobs at Bremer Bank, they had no leverage to object to the new arrangement and they both decided to work for Capital Harvest under the new arrangement.

[¶ 6] Erickson and Dregseth asserted they subsequently became involved in the management of AGSCO and Brown's affiliated companies, and in 2000, they approached Ramsey, who was then working at Bremer Bank, about managing Capital Harvest for a salary and an opportunity to earn a 4 percent ownership interest in Capital Harvest, which would come out of the 25 percent interest earned by Erickson and Dregseth. The plaintiffs claimed Brown participated in and consented to the agreement with Ramsey.

[¶ 7] Erickson and Dregseth asserted their initial income projections for Capital Harvest were based on Capital Harvest making money on the "spread," which they described as the difference between the rate at which Capital Harvest could borrow money and the rate at which it would loan those funds, and they did not consider charging AGSCO a discount fee, which is a fee charged by credit card companies when they buy credit card debt from a business and assume the risk that the business's debtors will not pay that debt. Erickson and Dregseth claimed they subsequently realized Capital Harvest could not make a profit without charging AGSCO a discount fee. In 2000, they suggested AGSCO should pay Capital Harvest a discount fee for financing AGSCO's sales, but Brown declined to authorize a discount fee because he claimed Capital Harvest's financing arrangement with AGSCO customers did not require Capital Harvest assume the risk that those customers would not pay their debt.

[¶ 8] The plaintiffs asserted' Capital Harvest's profits were adversely affected by Brown's accounting practices and his refusal to authorize Capital Harvest to charge AGSCO a discount fee. The plaintiffs claimed that, at an October 2002, meeting, Brown said he was not going to honor any of his promises or agreements to the plaintiffs regarding their potential ownership interests in Capital Harvest. Shortly thereafter, Erickson and Ramsey terminated their employment with Capital Harvest, and Dregseth terminated his employment in July 2003. According to Brown, he did not transfer any shares of Capital Harvest to the plaintiffs because Capital Harvest never made the profits required by the written schedule.

[¶ 9] The plaintiffs sued Brown and Capital Harvest for breach of contract, fraud, deceit, promissory estoppel, equitable estoppel, unjust enrichment, and breach of a fiduciary duty. Except for unjust enrichment, the district court dismissed all the plaintiffs' claims against Capital Harvest for failure to state a claim under N.D.R.Civ.P. 12(b)(vi). The court also dismissed Ramsey's breach of contract claims against Brown under N.D.R.Civ.P. 12(b)(vi), concluding that, when Brown contracted with Erickson and Dregseth, Ramsey was not an intended beneficiary of that contract.

[¶ 10] The court thereafter granted summary-judgment dismissal of Ramsey's fraud claim against Brown and all the plaintiffs' claims against Brown for deceit, promissory estoppel, equitable estoppel, unjust enrichment, and breach of a fiduciary duty. As a result of the court's pretrial rulings, the plaintiffs' claims remaining for trial were Erickson's and Dregseth's claims against Brown for breach of contract and for fraud.

[¶ 11] A jury subsequently returned a special verdict, finding Brown entered into an oral contract with Erickson to give him an ownership interest in Capital Harvest, but Brown and Erickson intended that the written schedule for Erickson to earn an ownership interest in Capital Harvest was a novation. The jury found Brown and Erickson entered into a contract for Erickson to earn an interest in Capital Harvest, Brown did not breach that contract for Erickson to earn an interest in Capital Harvest, and Brown's conduct toward Erickson did not constitute actual fraud. The jury also found Brown did not enter an oral contract with Dregseth to give him an ownership interest in Capital Harvest and Brown also did not enter into a contract with Dregseth for him to earn an ownership interest in Capital Harvest. The court entered a final judgment dismissing all the plaintiffs' claims against Capital Harvest and Brown.

II Claims Against Capital Harvest

[¶ 12] The plaintiffs argue the district court erred in dismissing their claims against Capital Harvest before trial for failure to state a claim and by summary judgment.

[¶ 13] In dismissing all but the plaintiffs' unjust enrichment claim against Capital Harvest under N.D.R.Civ.P. 12(b)(vi), the district court said that under promoter liability, Brown's pre-incorporation agreements could be imputed to Capital Harvest if Capital Harvest ratified those agreements. The court decided, however, that even if Brown agreed to "give" Erickson and Dregseth an ownership interest in Capital Harvest, Brown rescinded that agreement before Capital Harvest was formed and Capital Harvest could not ratify that agreement. The court also said Ramsey did not have a claim based on the alleged agreement to "give" stock, because that agreement was rescinded before Ramsey left Bremer Bank and started working for Capital Harvest. In considering the plaintiffs' claims...