Foss v. Savage

• Decision Date: 06 February 2023
• Docket Number: A22-0898
• Parties: Jonathan G. Foss, Respondent, v. Mark Scott Savage, Appellant, Susan Foss, et al., Third Party Defendants.
• Court: Minnesota Court of Appeals

Jonathan G. Foss, Respondent,
v.
Mark Scott Savage, Appellant,

Susan Foss, et al., Third Party Defendants.

No. A22-0898

Court of Appeals of Minnesota

February 6, 2023

This opinion is nonprecedential except as provided by Minn. R. Civ. App. P. 136.01, subd. 1(c).

Hennepin County District Court File No. 27- CV-19-10716

Richard D. Snyder, Jeffrey W. Post, Ryan C. Young, Fredrikson &Byron, P.A., Minneapolis, Minnesota (for respondent)

Samantha J. Ellingson, Aaron R. Thom, Thom Ellingson, PLLP, Minneapolis, Minnesota; and Jonathan Uretsky (pro hac vice), PULLP, New York, New York (for appellant)

Considered and decided by Reilly, Presiding Judge; Bjorkman, Judge; and Cochran, Judge.

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OPINION

BJORKMAN, Judge

Appellant challenges a judgment in excess of $6 million following a jury trial on the parties' competing contract-related claims. Appellant argues that the district court (1) erred by granting summary judgment dismissing appellant's fraud and civil-theft claims; (2) erred by granting judgment as a matter of law (JMOL) dismissing appellant's rescission and conversion claims; (3) erred by excluding evidence that certain transactions amounted to a "universal settlement" between the parties; and (4) abused its discretion by denying appellant's motion for a new trial. We affirm.

FACTS

Appellant Mark Savage provides financial consulting services to small private companies. He met respondent Jonathan Foss through a mutual acquaintance. Foss and his wife, third-party defendant Susan Foss, are minority owners of third-party defendant Foss Swim School.

During the spring of 2017, Savage approached Foss about investing in a series of reverse-merger transactions. In a reverse-merger transaction, a public "shell" company is purchased for the purpose of merging a private company into it. Doing so converts the private company into a publicly traded company. Savage sought investors like Foss to fund these transactions in exchange for obtaining shares of the public company's stock. Common shares acquired in a reverse-merger transaction must be held for a period of time-usually six months. But the private companies raising funds to enter a reversemerger transaction can also award "consulting shares" to consultants like Savage as

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compensation for finding investors like Foss. Unlike common shares, consulting shares are "free trading" in that they are not subject to a holding period. And, to incentivize investors, consultants can agree to split these consulting shares with investors as additional compensation for funding a reverse-merger transaction.

Over the next two years, Savage brought a number of reverse-merger investment opportunities to Foss's attention. Foss would then either purchase company shares directly,^[1] loan funds to Savage to purchase shares on Foss's behalf, or a combination of the two. When an investment opportunity included the incentive of consulting shares, Savage advised Foss of the total funding required for a company to issue those shares to Savage, and Foss provided that funding to Savage on the condition that Savage agreed to split the consulting shares with him. When Foss loaned Savage funds to purchase shares of common stock, Savage agreed to sell those shares, with Foss's permission, once those shares were profitable. The proceeds from those sales were to be used first to repay Foss, plus interest, and then split between Foss and Savage, typically on either a 60-40 or 50-50 percentage basis.

At issue here are funds Foss loaned to Savage to acquire shares in six companies. The first three transactions involved Leafbuyers Technologies, Inc. (LBUY), Dala Petroleum Corp. (DALA or KTEL), and Telehealthcare, Inc. (TLLT or XSPT).^[2] In each

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instance, the parties memorialized the transaction through various documents, including promissory notes, stock assignments, stock pledge agreements, common-stock purchase agreements, and partnership agreements. The documents reflect that Foss invested a specific dollar amount in exchange for obtaining a certain number of shares in each public company (or warrants for future shares), including consulting shares.

By September 2017, Savage was in default because he had not fully repaid the funds Foss loaned him and had not provided Foss with the promised consulting shares. To address the situation, Foss and Savage entered into a Master Promissory Note (MPN) that consolidated the three transactions and memorialized a new payment agreement. The MPN required Savage to repay Foss for the funds loaned to him, and to pay Foss his share of any remaining proceeds from the sale of the stock. This included the consulting shares Savage promised to provide if Foss made certain contributions, though the MPN did not assign them a dollar value. Savage agreed to pay 8% interest on the amount owed (then $694,000) plus a late fee totaling 20% of the unpaid balance. At Savage's request, the parties extended the MPN twice. The final repayment deadline was March 31, 2018, and the amount due totaled $903,000.

The second group of transactions at issue here involved NDivision (NDVN), Driven Deliveries, Inc. (DRVD), and Quanta (QNTA). As to NDVN, the parties executed written agreements whereby Savage represented that, in return for certain payments, Foss would receive a specified number of shares, including consulting shares. Regarding QNTA, they entered into stock purchase agreements under which Savage sold Foss a total of 1,271,000 shares of his QNTA stock for $0.02 per share, for a total purchase price of $25,420.

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Although Foss provided the full amount to Savage, Savage did not immediately provide Foss with the QNTA stock. With respect to DRVD, Savage sought a series of investments from Foss, and in exchange for one of these investments Foss directly received 1,533,000 warrants for shares of common stock. Pursuant to their written agreements, Foss agreed to split these shares with Savage when Savage fully compensated Foss for the amounts due on the other transactions, including the MPN. At the time of trial, Savage had not compensated Foss in full for these transactions, and Foss had not provided Savage with any DRVD stock warrants.

After Savage failed to timely pay the balance of the MPN or provide the agreed-upon shares as to the second group of transactions, Foss sued Savage for: (1) breach of contract (MPN, NDVN, stock assignment agreements, and stock purchase agreements); (2) securities fraud under Minn. Stat. §§ 80A.68, .69 (2022); (3) common-law fraud; (4) breach of fiduciary duty (as an agent and as a partner); (5) conversion; (6) unjust enrichment; and (7) civil theft under Minn. Stat. § 604.14 (2022). Foss also sought and obtained a temporary restraining order, which required Savage to account for shares he purchased and sold in LBUY, XSPT, KTEL and NDVN, and to place the sales proceeds into a dedicated account until the account balance reached $1,150,000.

Savage asserted counterclaims against Foss and third-party claims against Susan Foss and the Foss Swim School alleging: (1) entitlement to contract rescission; (2) fraudulent inducement; (3) breach of the covenant of good faith and fair dealing; (4) unjust enrichment; (5) promissory estoppel; (6) securities fraud under Minn. Stat.

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§§ 80A.68, .69; (7) common-law fraud; (8) conversion; (9) civil theft under Minn. Stat. § 604.14; (10) breach of contract (MPN); and (11) breach of fiduciary duty as a partner.

The Foss parties moved for partial summary judgment seeking: (1) dismissal of Savage's third-party claims; (2) dismissal of all counterclaims against Foss; and (3) an award of QNTA stock to Foss. The district court granted the motion in part, dismissing Savage's third-party claims in their entirety^[3] and his counterclaims for fraudulent inducement, securities fraud, common-law fraud, civil theft, and breach of the MPN. And the court awarded Foss the 1,271,000 shares of QNTA stock that Savage had in his possession.

The case proceeded to trial on the remaining claims in July 2021. About a month before trial, the district court ruled on several motions in limine. In relevant part, the court granted Foss's motion to preclude Savage's expert from testifying that Foss agreed to fully fund the reverse-merger transactions, the consequences of failing to do so, and that the simplest solution was to unwind all transactions. The district court also ruled that Savage could not present evidence that the DRVD transactions constituted a universal settlement of all claims between the parties because the "clear language of the written agreements" defeated such an argument.

At trial, Foss sought to recover (1) the amount due under the MPN; (2) the shares he was owed under the various contracts, including consulting shares; and (3) damages based on Savage's failure to timely turn over the QNTA stock. Foss testified that the

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written documents-promissory notes, stock assignments, stock pledge agreements, common-stock purchase agreements, and partnership agreements-accurately represented the parties' agreements. His forensic accountant presented three written reports and testified that Foss sustained total losses (excluding the DRVD transaction) in the range of $8,571,587 - $8,846,787. The expert explained how he verified Foss's loans to Savage, traced Savage's purchases (or lack thereof) and sales of shares in each of the six companies, and how he calculated Foss's damages. He provided a detailed account of several instances in which Savage did not use Foss's loans to purchase the agreed-upon number of shares, instead using portions of the loans for Savage's personal expenses-wiring them to his significant other or to his attorney, for example-without informing Foss that he had not acquired the promised shares. And he testified that Savage sold shares without seeking permission from Foss and without splitting the proceeds with Foss, contrary to their...