Central Sec. and Alarm Co., Inc. v. Mehler, 16441

Citation121 N.M. 840, 918 P.2d 1340, 1996 NMCA 60
Case DateApril 22, 1996
CourtCourt of Appeals of New Mexico


1. This case involves an appeal and a cross-appeal from two cases consolidated for trial. Defendant Lee Mehler (Mehler) appeals from a judgment that he breached his duty of loyalty to Plaintiff Central Security and Alarm Co. (Central). Central was awarded damages of $450,484.50 comprising $434,024.50 in compensatory damages and $16,460.00 in punitive damages. The issues raised on appeal are: (1) whether the measure of damages for an employee's breach of the duty of loyalty is the employer's "gross profit" or "net profit" lost because of the breach; (2) whether the trial court erred in admitting documents under the business records exception to the hearsay rule; (3) whether the trial court abused its discretion by refusing to sanction Central for ignoring the court's discovery order; (4) whether the court abused its discretion by refusing to allow Mehler to present rebuttal testimony; and (5) whether the court abused its discretion by refusing to cure prejudice created by Central's closing argument. We reverse the decision of the trial court on the first issue and remand with instructions and affirm on the other issues.

2. Central cross-appeals from a directed verdict denying declaratory relief and dissolution of H & M Holdings, Inc. (H & M). The issues raised in the cross-appeal are: (1) whether the purchase agreement was ambiguous; (2) whether the trial court admitted evidence in violation of the parol evidence rule; and (3) whether, assuming the purchase agreement was ambiguous as the trial court found, it was reversible error for the court to direct a verdict in favor of H & M and Mehler. We affirm on the cross-appeal.

I. Breach of Duty of Loyalty Case

3. Both Central and Microtek Security Systems, Inc. (Microtek) install, service, and monitor alarm systems. Mehler was a salesman for Central for more than fifteen years. While working for Central, Mehler was responsible for obtaining the company's two largest accounts, including the Lionel Leisure, Inc. (Lionel) account.

4. Microtek was incorporated in December 1989. Mehler participated in the organization of Microtek and owned a fifty percent interest in the company from its inception. While Mehler was still an employee of Central, he diverted some of Lionel's business to Microtek. Microtek received $434,024.50 in revenues from Lionel in 1989 and 1990. The jury returned a verdict against Mehler for breach of the duty of loyalty.

II. Dissolution Case

5. H & M was incorporated in January 1991 by Nick Cifuni. The initial directors and officers were Mehler, Cifuni, and John Lance Hunter, a former employee of Central and the founder and first president of Microtek. Although H & M never distributed stock, the directors and officers understood that Hunter and Mehler were each fifty percent shareholders in the company. The same parties set up H & M as a holding company with the sole purpose of owning and managing Microtek, La Parque Salon, Inc. (La Parque), and Ocean Leathers.

6. On June 7, 1991, Hunter sold his interest in Microtek, La Parque, and Ocean Leathers to Mehler. The purchase agreement, which was an integrated agreement authorizing the transfer of interest in the three corporations, said nothing of H & M. On February 27, 1992, Central purchased Hunter's interest in H & M for the lesser of twenty-five percent of H & M's book value and $10,000. At that point, H & M owned ninety percent of the stock in Microtek, all of the stock in La Parque, and all of the stock in Ocean Leathers. Shortly thereafter, Central, claiming to own fifty percent of H & M, attempted to hold a corporate board meeting of H & M, but Mehler made it impossible to achieve a quorum. Central then filed a complaint for declaratory relief and dissolution. The trial court directed a verdict against Central, finding that when Hunter sold his interest in Microtek, La Parque, and Ocean Leathers, he had effectively sold his interest in H & M.

I. Breach of Duty of Loyalty Case
A. Damages
1. Preservation

7. Central argues that Mehler failed to preserve the issue of the proper measure of damages because Mehler did not tender a jury instruction on the subject of Microtek's expenses in doing business with Lionel. As we discuss below, Central is confusing principles of restitution and damages.

8. After other questions about the duty of loyalty, the special verdict form asked the jury to determine: "(4) ... the total amount of money without deduction for any expenses that [Central] would have received from [Lionel] had [Mehler] not breached his duty of loyalty to [Central]," and "(5) ... the reasonable amount of business expenses [Central] would have had to expend to make or earn" that amount. The verdict form did not ask the jury to subtract the second figure from the first, but the jury's findings were $434,024.50 for revenue and $325,518.37 for expenses. The trial court did not make a final decision on whether to award "gross profit" or "net profit" until some time after the presentment hearing, and after it had allowed the parties additional time to submit cases in support of their arguments.

9. The purpose of the rule requiring preservation is to alert the trial court to a claimed error and allow it an opportunity to correct the matter. Madrid v. Roybal, 112 N.M. 354, 356, 815 P.2d 650, 652 (Ct.App.), cert. denied, 112 N.M. 308, 815 P.2d 161 (1991); see SCRA 1986, 12-216(A) (Repl.1992). Unfortunately, some of the discussion on the measure of damages occurred off the record. The record shows, however, that both before and after the case was submitted to the jury, Mehler argued the proper measure was "net profit" while Central argued it was "gross profit." The special verdict form included the questions necessary to determine either "gross profit" or "net profit" in its most general form. Under the circumstances of this case, we believe Mehler adequately preserved the issue of the proper measure of damages.

2. Central's Choice of Remedy

10. An employee has a duty of loyalty to the employer. Gelfand v. Horizon Corp., 675 F.2d 1108, 1110 (10th Cir.1982); Salter v. Jameson, 105 N.M. 711, 713-14, 736 P.2d 989, 991-92 (Ct.App.), cert. denied, 105 N.M. 720, 737 P.2d 79 (1987); Restatement (Second) of Agency §§ 387-398 (1958). Unless otherwise agreed, the employee may not compete with the employer. Restatement, supra, § 393. The employer's potential remedies for violation of this duty include an action for losses and an action for restitution, including a constructive trust or accounting for profits. Restatement, supra, §§ 393(f), 399; 1 Dan B. Dobbs, Law of Remedies § 1.1 (2d ed. 1993); see Salter, 105 N.M. at 712-13, 736 P.2d at 990-91 (action for losses). The determination of what the employer can recover depends upon the remedy pursued. See 1 Dobbs, supra, § 1.1.

11. In an action for losses caused by a breach of the duty of loyalty, the employer may recover compensatory and punitive damages. See Salter, 105 N.M. at 712, 714, 736 P.2d at 990, 992. The purpose of compensatory damages is to make the injured party whole by compensating it for losses. Hood v. Fulkerson, 102 N.M. 677, 680, 699 P.2d 608, 611 (1985). If compensatory damages are awarded, punitive damages may also be recovered if a culpable mental state is shown. Paiz v. State Farm Fire & Casualty Co., 118 N.M. 203, 210-11, 880 P.2d 300, 307-08 (1994); Clay v. Ferrellgas, Inc., 118 N.M. 266, 269, 881 P.2d 11, 14 (1994), cert. denied, --- U.S. ----, 115 S.Ct. 1102, 130 L.Ed.2d 1069 (1995); see SCRA 1986, 13-1827 (Repl.1991) (jury instruction on punitive damages). In an action for restitution, the employer may force the defendant to give up what was wrongfully obtained from the plaintiff, the purpose being to prevent unjust enrichment of the defendant. See Tom Growney Equip., Inc. v. Ansley, 119 N.M. 110, 112, 888 P.2d 992, 994 (Ct.App.1994), cert. denied, 119 N.M. 168, 889 P.2d 203 (1995); 1 Dobbs, supra, § 1.1, at 5.

12. The measure of compensatory damages is the plaintiff's loss or injury, while the measure of restitution is the defendant's gain or benefit. 1 Dobbs, supra, § 3.1, at 280. Even when the plaintiff seeks only a monetary award, the two measures may lead to different awards on the same facts. See id. § 1.1, at 5-6. The plaintiff may be able to pursue several theories of recovery; if liability is found on each, the plaintiff would be required to make an election among awards if duplication or double recovery would otherwise result. See Hood, 102 N.M. at 680, 699 P.2d at 611 (plaintiff required to choose between award of $14,600 based on negligence and award of $13,500 based on breach of warranty); see also 3 Dobbs, supra, § 12.7(6), at 187.

13. Central's amended complaint stated counts for breach of the duty of loyalty, intentional interference with contract relations, conversion or replevin, and prima facie tort. Only the first two counts went to the jury, which found for Central on the first count and for Mehler and Microtek on the second. Boilerplate language in Central's amended complaint requested "compensatory and incidental damages, punitive or exemplary damages, injunctive and other appropriate equitable relief and for all other relief" to which Central was entitled. It appears, however, from the jury instructions and special verdict form that...

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