Simpson v. C & R SUPPLY, INC.

• Decision Date: 25 August 1999
• Docket Number: No. 20451., No. 20427
• Citation: 1999 SD 117,598 N.W.2d 914
• Parties: Mike SIMPSON, individually and d/b/a Delta Enterprises, Plaintiff and Appellant, v. C & R SUPPLY, INC., a South Dakota Corporation, and C & R Supply, Inc., d/b/a A & M Industries, Defendant and Appellee.
• Court: South Dakota Supreme Court

598 N.W.2d 914

1999 SD 117

Mike SIMPSON, individually and d/b/a Delta Enterprises, Plaintiff and Appellant, v. C & R SUPPLY, INC., a South Dakota Corporation, and C & R Supply, Inc., d/b/a A & M Industries, Defendant and Appellee.

Nos. 20427, 20451.

Supreme Court of South Dakota.

Argued December 3, 1998

Decided August 25, 1999.

Gale Fisher, Sioux Falls, for plaintiff and appellant.

Thomas J. Welk, Lisa Hansen Marso, of Boyce, Murphy, McDowell & Greenfield, Sioux Falls, for defendant and appellee.

KONENKAMP, Justice.

[¶ 1.] Mike Simpson appeals a grant of summary judgment in favor of C & R Supply. We affirm in part, reverse in part, and remand.

Facts

[¶ 2.] In 1970, Mike Simpson began Delta Enterprises. Delta acted as a manufacturer's sales representative for companies making component parts for agricultural sprayers and other farm equipment. It took orders from customers and forwarded those orders directly to the manufacturers. In 1971, Simpson and an associate, Arlan Maranell, formed a separate company, A & M Industries, Inc., to sell molded fittings, strainers, valves and other plastic parts. A & M differed from Delta in that it had a product inventory in storage. A & M was not a retail outlet, however; it sold its products to distributors and manufacturers. Maranell oversaw A & M's operations, while Simpson continued doing business as Delta. A & M grew to become a highly successful business, with customers across the United States. It bought molds for use in producing some of its plastic fittings and parts, and sent them to a company specializing in custom injection molding, a process by which plastic molds are used to create duplicate parts and fittings. [¶ 3.] Clay Moyer owned C & R Supply, Inc., a company that sold products to farmers and retail customers. C & R's product line included items similar to those sold by A & M and the companies Delta represented. It was a customer of Delta and A & M. Both companies supplied parts and fittings to C & R for assembling the field sprayers that it sold to other customers. C & R never manufactured its own components.

[¶ 4.] In August 1989, Simpson and Moyer discussed the sale of A & M to C & R. Moyer wanted to expand C & R by acquiring A & M's business. Eventually, the parties agreed on a price. To take advantage of certain federal tax benefits, the parties agreed that $160,000 of the purchase amount would be allocated to a noncompetition agreement ("agreement" or "covenant"). Simpson and Maranell would each receive from Moyer $20,000 per year for four years, subject to the terms of the noncompetition agreement. It provided in relevant part:

NOW, THEREFORE, in consideration of the premises set forth above and mutual promises herein made, the parties hereto agree as follows:

1. Non-Competition. Simpson covenants and agrees that for a period of four (4) years from and after the closing date specified in the Asset Purchase Agreement he shall not, directly or indirectly:

(a) in any manner induce, attempt to induce, or assist others to induce or attempt to induce any employee, independent contractor or customer of C & R or the Business to terminate its, his, or her association with C & R or the Business, or do anything to interfere with the relationship between C & R or the Business and such person or entity or other persons or entities dealing with C & R or the Business;

(b) own, manage, operate, control, be employed by, work for, consult with or for, participate in, or be connected in any manner with the owenership, management, operation or control of any business competitive with the Business:

(i) within a radius of twenty-five (25) miles of Sioux Falls, South Dakota;

(ii) within a radius of two hundred fifty (250) miles of Sioux Falls, South Dakota;

(iii) within all counties within any of the United States of America.

In the recitals of the agreement, the parties were defined as follows:

Simpson is a principal owner and employee of A & M Industries, Inc., a South Dakota corporation ("A & M"), which is principally engaged in the business of developing, manufacturing, distributing and selling various plastic products and molds and nylon fittings (the "Business"). A & M has entered into an Asset Purchase Agreement dated August 24th, 1989 (the "Asset Purchase Agreement") with C & R. Pursuant to the Asset Purchase Agreement, C & R will acquire substantially all of the operating assets of the Business owned by A & M. The execution and delivery of this Agreement by Simpson is a specific condition precedent to C & R's obligations under the Asset Purchase Agreement.

After the sale, A & M operated as a "sister company" or subsidiary of C & R. The two had separate accounting systems, which were combined at the end of the year for tax purposes. As part of the sale, Maranell was given a "management position" with the two companies.

[¶ 5.] Sometime between late 1989 and early 1991, C & R moved into the custom molding business and acquired injection molding machines. It began making nylon fittings for its inventory. In October 1991, A & M started manufacturing its own parts, as well. Maranell was placed in charge of the custom injection molding operations at A & M. A & M landed the Power Sentry account shortly after it purchased the injection molding machines. Power Sentry gave C & R its moldings and A & M manufactured the components. Power Sentry became A & M's largest account with product sales of over $93,000 from January to April 1992.

[¶ 6.] In February 1992, Maranell ended his employment with C & R and A & M. Afterwards, a representative of Power Sentry approached Maranell to say that the company was not happy with A & M's handling of its account, that production had dropped, and that Power Sentry wondered if Maranell could "help [them] out." Power Sentry wanted to take its molds away from A & M, but could not do so, as it owed A & M money. Maranell loaned Power Sentry $30,000 to help pay its debt to A & M. In March 1992, Maranell and Simpson started Custom Plastics, Inc., located near Tea, South Dakota. By May 1992, Custom Plastics was manufacturing components for Power Sentry. Between May and October 1992, Power Sentry was Custom Plastics' only customer.

[¶ 7.] Under the noncompetition covenant, Moyer made the annual $20,000 payments to Simpson and Maranell in both 1990 and 1991. In 1992, however, Moyer paid Maranell, but refused to pay Simpson. He paid neither Simpson nor Maranell in 1993.¹ Simpson sued C & R in November 1995. On February 24, 1997, C & R moved to dismiss for failure to prosecute under SDCL 15-11-11. After a hearing on March 25, 1997, the circuit court denied C & R's motion. The court found that the one-year period had just run, no one was prejudiced by the delay, and the case was ready for trial. In addition, the court noted that the statute of limitations had not run on the cause of action; thus, the suit could be reinitiated the next day. Finally, the judge commented that this Court might find an abuse of discretion if the case were dismissed.

[¶ 8.] After a series of intermediate orders, the circuit court concluded that Simpson had breached the noncompetition agreement, granted summary judgment dismissing Simpson's complaint, and ordered him to pay back to C & R the $40,000 it previously paid him for the covenant not to compete. Simpson had contended, nonetheless, that he and Moyer had an oral understanding that he could continue business with Delta Enterprises without violating the agreement. The court ruled that because their written agreement was unambiguous, parol evidence was inadmissible to vary the terms of the noncompetition provisions.

[¶ 9.] Simpson appeals the granting of summary judgment and, by notice of review, C & R appeals the trial court's refusal to grant its motion to dismiss for failure to prosecute under § 15-11-11. The parties present the following issues: (1) Whether the trial court abused its discretion when it denied C & R Supply's motion to dismiss for failure to prosecute under § 15-11-11.(2) Whether the covenant not to compete was valid under SDCL 53-9-9.(3) If the covenant was invalid as written, whether it would be valid if modified to conform to the statute. (4) If valid as modified, whether the covenant was breached. (5) Whether the alleged conversations between Simpson and Moyer are admissible to modify the terms of the noncompetition covenant.²

Standard of Review

[¶ 10.] On motions to dismiss for failure to prosecute we review trial court decisions under the abuse of discretion standard. Schwartzle v. Austin Co., 429 N.W.2d 69, 71 (S.D.1988); see Duncan v. Pennington County Hous. Auth., 382 N.W.2d 425, 427 (S.D.1986). In reviewing rulings on summary judgment motions our standard was reiterated in Estate of Shuck v. Perkins County:

Summary judgment is authorized "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact, and that the moving party is entitled to judgment as a matter of law." SDCL 15-6-56(c). We will affirm only when there are no genuine issues of material fact and the legal questions have been correctly decided. Bego v. Gordon, 407 N.W.2d 801, 804 (S.D.1987). All reasonable inferences drawn from the facts must be viewed in favor of the non-moving party. Morgan v. Baldwin, 450 N.W.2d 783, 785 (S.D.1990). The burden is on the moving party to clearly show an absence of any genuine issue of material fact and an entitlement to judgment as a matter of law. Wilson v. Great N. Ry. Co., 83 S.D. 207, 212, 157 N.W.2d 19, 21 (1968).

1998 SD 32, ¶ 6, 577 N.W.2d 584, 586 (citations omitted). When examining "a grant of summary judgment, we are not bound by the trial court's factual findings, but rather must undertake an independent review of the record." Spenner v. City of Sioux Falls, 1998 SD 56, ¶ 7, 580 N.W.2d 606, 609 (citing Walz v. Fireman's Fund Ins. Co., 1996 SD...