Gray v. Bicknell

Decision Date25 June 1996
Docket Number95-1956,Nos. 95-1857,s. 95-1857
Citation86 F.3d 1472
Parties44 Fed. R. Evid. Serv. 1308 Ralph L. GRAY, Appellant/Cross-Appellee, v. O. Gene BICKNELL, Appellee/Cross-Appellant.
CourtU.S. Court of Appeals — Eighth Circuit

Mark Stingley, Kansas City, MO, argued (R. Keith Johnston, on the brief), for appellant/cross-appellee Ralph Gray.

Benjamin Mann, Kansas City, MO, argued (Price A. Sloan, on the brief), for appellee/cross-appellant O. Gene Bicknell.

Before MAGILL, GOODWIN, * and MURPHY, Circuit Judges.

MAGILL, Circuit Judge.

Ralph Gray and Gene Bicknell entered into a series of contracts in connection with the formation of a restaurant joint venture. After the joint venture failed, Gray commenced this diversity action against Bicknell for payment on two promissory notes, breach of contract, and breach of fiduciary duty. Bicknell counterclaimed for breach of contract and contribution on joint obligations.

Gray now appeals from a jury verdict, arguing, in part, that Bicknell failed to provide adequate notice of breach as required by their contract and that Bicknell waived his attorney-client privilege by inadvertently disclosing two letters written to him by his attorney. Bicknell cross-appeals, asserting that Gray lacks standing to bring a breach of fiduciary duty claim. We affirm in part and reverse in part.

I.

In 1983, Ralph Gray, a real estate broker, entered the restaurant business when a client withdrew from a deal to purchase a restaurant site, leaving Gray with the property. Gray converted the property into a Mexican restaurant called Raphael's Mexican Restaurant.

Over the next five years the business expanded, and by early 1988 Gray owned and operated three Raphael's Mexican Restaurants through a holding company called RMR # 1, Inc. (RMR). Gray also owned Raphael's Management, Inc. (RMI), which provided general management services to the restaurants in exchange for five percent of RMR's gross sales. Both RMR and RMI were organized under Missouri law.

On March 8, 1988, Bicknell purchased fifty percent of RMR from Gray. Gray initially approached Bicknell about buying a stake in RMR in 1986. Bicknell's involvement in the enterprise would, Gray believed, have three primary benefits: (1) Bicknell had significant experience in restaurant management, (2) Bicknell possessed the financial resources to expand the business, and (3) Bicknell's involvement would reduce the work load for Gray, freeing him to pursue other interests. Bicknell presumably believed that RMR offered the prospect of future growth and favorable return on investment.

The central component of the agreement between Gray and Bicknell was a stock purchase agreement (SPA). Bicknell purchased 500 shares of RMR stock from Gray in exchange for $500,000 in cash and a $261,380 promissory note payable in two annual installments. Under the terms of the SPA, RMR was required to cancel its management contracts with RMI. Gray and Bicknell also entered into two ancillary agreements on March 8. First, a real estate agreement (REA) transferred half ownership of the Battlefield restaurant property to Bicknell in exchange for a $114,312 promissory note. 1 Second, a stock transfer restriction agreement established the terms by which RMR stock could be transferred upon the death of a party or a disagreement or breach between the parties. In case of a breach of the SPA by one of the parties, the restriction agreement limited the nonbreaching party's remedy to requiring the other to repurchase the stock of the nonbreaching party.

Gray and Bicknell divided responsibility for controlling and managing RMR. Both parties acted as directors of the company. Gray remained the president of RMR, while Bicknell became chairman of the board of directors. Day-to-day operations of the restaurants were the responsibility of the on-site managers. To handle the bookkeeping and management functions previously done by RMI, Gray and Bicknell agreed to form a new company.

Not long after the parties concluded the March agreements, the business began to flounder. A new restaurant failed to perform up to RMR's expectations, placing a financial and operational strain on RMR. More significantly, the relationship between Gray and Bicknell began to sour over the payment of management fees and the division of management responsibilities.

For a variety of reasons, the responsibilities of RMI never fully shifted to its newly-formed replacement. Consequently, RMI continued to take five percent of RMR's revenues as a management fee despite the SPA's provision that this practice would cease once Bicknell became a fifty percent owner. In May 1988, after Bicknell realized that RMR was still paying RMI a management fee, he voiced his objection to Gray during a directors' meeting, and he asked that Gray repay RMR the full amount of management fees received by RMI since March 8, 1988 and discontinue paying RMI these fees in the future. Bicknell also asked Gray to buy back his 500 RMR shares. On June 23, 1988, Bicknell's attorney wrote Gray to reiterate Bicknell's requests. Gray did neither and Bicknell apparently did not pursue the issue further.

From August 1988 to March 1989, Gray and Bicknell did not communicate. In the first part of 1989, Gray called several board meetings with the stated purpose of reducing the distrust that had grown between him and Bicknell and addressing RMR's financial problems. According to Bicknell, he did not attend because he believed that Gray's intention was to pressure him into increasing his investment in RMR and forgiving Gray's breach of the SPA. He did, however, offer to sign consents and other resolutions necessary for the board to continue its business. In June 1989, Gray and Bicknell finally met to discuss RMR. Bicknell offered to purchase Gray's share of RMR, but, after protracted negotiations, the parties could not reach agreement. Three months later, on September 14, 1989, Bicknell, and then Gray, resigned as directors of RMR.

The damage to RMR from the management impasse was exacerbated by RMR's continuing cash flow problems. By late 1989, RMR was delinquent on its lease and mortgage obligations on the restaurant buildings. RMR's accounts payable were $300,000 in arrears and vendors required RMR to purchase food and supplies C.O.D. The business continued to deteriorate until May 10, 1990, when creditors placed RMR into involuntary bankruptcy.

The bankruptcy court appointed a trustee to run RMR. In the trustee's judgment, RMR did not have enough cash at the time of filing to meet its ongoing operational needs. The trustee therefore went about selling the company's assets. Eventually, the trustee sold RMR's assets to Bicknell for $575,000. A separate corporation owned by Bicknell purchased RMR's real estate.

On June 18, 1990, Gray sued Bicknell in federal court based on diversity jurisdiction, asserting four claims. Three of Gray's claims were for breach of contract, alleging respectively that Bicknell failed to pay the $261,380 promissory note given as consideration for the stock purchase, failed to pay the promissory note given as consideration in the REA, and failed to pay one-half of the debt secured by the real estate. Gray also claimed that Bicknell breached a fiduciary duty owed to him by failing to adequately direct RMR and by forcing RMR into bankruptcy for Bicknell's own benefit.

In response, Bicknell asserted three counterclaims. In Count I, Bicknell argued that Gray had materially breached the SPA by continuing to take management fees and that, after the cure period had expired without action by Gray, the SPA obligated Gray to repurchase RMR stock owned by Bicknell. In Count II, Bicknell asserted a claim for contribution arising from loan guarantees signed by both parties. In his final counterclaim, Count III, Bicknell argued that Gray, as guarantor of the note held by Bicknell Properties, Inc., must cover any deficiency after foreclosure.

On December 9, 1994, the jury returned verdicts in favor of Bicknell on all counts except Gray's claim for breach of fiduciary duty. After the jury returned its verdict, Gray filed a Renewed Motion for Judgment as a Matter of Law pursuant to Rule 50(b) of the Federal Rules of Civil Procedure, contending that, as a matter of law, there was insufficient evidence to support Counts I and III of Bicknell's counterclaim. Specifically, Gray argued that he could not have an obligation under the SPA to repurchase Bicknell's RMR stock because the evidence was insufficient to show that Bicknell had provided adequate notice of an SPA breach. Gray also argued that the evidence was insufficient to establish his obligation to pay the deficiency on a note he guaranteed because the merger doctrine operated to extinguish the debt when both the promissory note and the underlying real property came into Bicknell's control. The district court found both of Gray's contentions to be without merit and denied the motion.

In addition to filing his Renewed Motion for Judgment as a Matter of Law, Gray also filed a motion for new trial under Federal Rule of Civil Procedure 59(a). According to Gray, the district court made eight prejudicial errors in the course of the trial that, to be remedied, require a new trial. The district court disagreed with all of the grounds offered by Gray and denied the motion for a new trial. Gray now appeals.

II.

We review de novo a district court's denial of a renewed motion for judgment as a matter of law, applying the same standard as the district court. Fox v. T-H Continental L.P., 78 F.3d 409, 413 (8th Cir.1996); Amerinet, Inc. v. Xerox Corp., 972 F.2d 1483, 1505 (8th Cir.1992). A motion for judgment as a matter of law presents a legal question of "whether there is sufficient evidence to support a jury verdict." Fox, 78 F.3d at 413 (citing White v. Pence, 961 F.2d 776, 779 (8th Cir.1992)). It is properly granted only when the nonmoving party...

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