Haugrud v. Craig

• Decision Date: 16 November 2017
• Docket Number: No. 20170157,20170157
• Citation: 903 N.W.2d 537
• Parties: TJ HAUGRUD, Plaintiff and Appellee v. Jesse CRAIG, Defendant and Appellant
• Court: North Dakota Supreme Court

903 N.W.2d 537

TJ HAUGRUD, Plaintiff and Appellee

v.Jesse CRAIG, Defendant and Appellant

No. 20170157

Supreme Court of North Dakota.

Filed November 16, 2017

Sean T. Foss, Fargo, ND, for plaintiff and appellee.

Lee M. Grossman and Jesse D. Maier (on brief), Fargo, ND, for defendant and appellant.

Crothers, Justice.

[¶ 1] Jesse Craig appeals from a judgment awarding TJ Haugrud $120,000 plus interest on Haugrud's breach of contract claim against Craig, dismissing Craig's counterclaims against Haugrud, and sanctioning Craig's attorney $5,000. We affirm the district court's grant of summary judgment on Haugrud's breach of contract claim. We reverse its dismissal of Craig's counterclaims on the pleadings and the sanction, and remand for further proceedings.

I

[¶ 2] In August 2015, Haugrud and Craig formed Acquisition, LLC, for the purpose of developing, owning and managing real estate, and each were 50 percent owners of the limited liability company. In October 2016, Haugrud and Craig entered into a written agreement for Craig to purchase Haugrud's interest in the company for $130,000 payable in two installments. Craig paid $10,000 by November 1, 2016 for the first installment, but did not pay the $120,000 second installment which was due by December 1, 2016.

[¶ 3] Haugrud sued Craig for breach of contract seeking the unpaid installment of $120,000. Craig filed a counterclaim against Haugrud alleging actual fraud, constructive fraud, deceit, unintentional misrepresentation, and civil conspiracy in connection with the parties' business dealings, including transactions between their respective business entities that were not made parties to the lawsuit. Craig's counterclaim appears to be based generally on four business transactions. First, after Haugrud sold his interest in Acquisition to Craig, Acquisition sold a property and distributed $30,000 of the sale proceeds to Haugrud, even though that distribution was not required by the purchase agreement. Second, Acquisition transferred real property to THJ Development, LLC, which is owned by Haugrud. Third, Craig is the sole owner of 220 West, LLC, which in turn is the actual owner of an apartment project under construction. 220 West hired H2 Incorporated, owned by Haugrud, as the general contractor. Craig claims H2 Incorporated committed a variety of actionable misconduct regarding the apartment building project. Fourth, Craig claimed misconduct on the part of Haugrud in connection with the purchase agreement for Acquisition and contended all of these transactions were intended "to offset against one another." Craig sought an award of $133,981.47 to be offset against any award Haugrud might obtain on his breach of contract action.

[¶ 4] Haugrud moved for summary judgment under N.D.R.Civ.P. 56 on his breach of contract claim, moved for dismissal of Craig's counterclaims under N.D.R.Civ.P. 12(b)(6), and sought sanctions against Craig under N.D.R.Civ.P. 11 alleging the counterclaims were not warranted under existing law and lacked evidentiary support. Craig responded that summary judgment was inappropriate because "there were more deals at play outside" the Acquisition agreement and sought additional time for discovery under N.D.R.Civ.P. 56(f). The district court granted summary judgment on Haugrud's breach of contract claim because Craig "conceded" he failed to make the second installment payment required by the contract. The court also dismissed Craig's counterclaims for failure to state claims upon which relief can be granted because Craig "treats [Haugrud] as an individual with respect of his sole interest" in the limited liability companies, Craig "made no allegation to pierce the corporate veil," and Craig "treats his own interest" in the limited liability companies "as giving rise to personal claims" which belong to the separate entities. The court further found Craig's "attempt to make [Haugrud] responsible as a shareholder of a corporation, the obligations of the corporation, is not grounded in law" and awarded Haugrud $5,000 in attorney fees as a sanction assessed against Craig's counsel.

II

[¶ 5] Craig argues the district court erred in granting summary judgment on Haugrud's breach of contract claim.

[¶ 6] In Hokanson v. Zeigler, 2017 ND 197, ¶ 14, 900 N.W.2d 48, we explained:

"Summary judgment is a procedural device for the prompt resolution of a controversy on the merits without a trial if there are no genuine issues of material fact or inferences that can reasonably be drawn from undisputed facts, or if the only issues to be resolved are questions of law. A party moving for summary judgment has the burden of showing there are no genuine issues of material fact and the moving party is entitled to judgment as a matter of law. In determining whether summary judgment was appropriately granted, we must view the evidence in the light most favorable to the party opposing the motion, and that party will be given the benefit of all favorable inferences which can reasonably be drawn from the record. On appeal, this Court decides whether the information available to the district court precluded the existence of a genuine issue of material fact and entitled the moving party to judgment as a matter of law. Whether the district court properly granted summary judgment is a question of law which we review de novo on the entire record."

(quoting Tibert v. Nodak Mut. Ins. Co., 2012 ND 81, ¶ 8, 816 N.W.2d 31 ).

[¶ 7] The facts involving the breach of contract claim are undisputed. In October 2016, Haugrud and Craig in their individual capacities entered into the Acquisition purchase agreement. Haugrud transferred all of his interest in the company to Craig and Craig paid Haugrud $10,000 for the first installment by November 1, 2016. Craig failed to pay the $120,000 second installment by December 1, 2016 as required under the parties' agreement.

[¶ 8] Viewing the undisputed facts in the light most favorable to Craig, the district court did not err in granting summary judgment on Haugrud's breach of contract claim.

III

[¶ 9] Craig argues the district court erred in dismissing his counterclaims against Haugrud for failure to state claims upon which relief can be granted.

[¶ 10] In Gaede v. Bertsch, 2017 ND 69, ¶ 9, 891 N.W.2d 760, we explained:

"A district court decision to dismiss a complaint under N.D.R.Civ.P. 12(b)(6) is reviewed de novo on appeal. In re Estate of Nelson, 2015 ND 122, ¶ 5, 863 N.W.2d 521. ‘A motion to dismiss a complaint under N.D.R.Civ.P. 12(b)(vi) tests the legal sufficiency of the claim presented in the complaint.’ Nelson, at ¶ 5 (quoting Brandvold v. Lewis & Clark Pub. Sch. Dist. No. 161, 2011 ND 185, ¶ 6, 803 N.W.2d 827 ). On appeal, we construe the complaint in the light most favorable to the plaintiff and accept the well-pleaded allegations as true. Nelson, at ¶ 5. ‘We will affirm a judgment dismissing a complaint for failure to state a claim if we cannot discern a potential for proof to support it.’ In re Estate of Dionne, 2013 ND 40, ¶ 11, 827 N.W.2d 555 (quoting Ziegelmann v. DaimlerChrysler Corp., 2002 ND 134, ¶ 5, 649 N.W.2d 556 )."

Our Rule 12(b)(6) jurisprudence for testing the legal sufficiency of claims in a complaint applies equally to counterclaims. See N.D.R.Civ.P. 12(b) ("Every defense to a claim for relief in any pleading must be asserted in the responsive pleading ... [or] by motion.").

[¶ 11] The district court based dismissal of the counterclaims on its view that the counterclaims treat Craig's own interests in Acquisition and 220 West as giving rise to personal claims, and treat Haugrud as an individual with respect to his interests in THJ Development and H2 Incorporated. It is well settled that a corporation and its shareholders are separate and distinct entities and its shareholders are generally not personally liable for corporate actions. Fed. Sav. and Loan Ins. Corp. v. Morque, 372 N.W.2d 872, 876 (N.D. 1985) ; Dangerud v. Dobesh, 353 N.W.2d 328, 331 n.2 (N.D. 1984) ; Airvator, Inc. v. Turtle Mountain Mfg. Co., 329 N.W.2d 596, 602 (N.D. 1983). Equally settled is that a LLC and its members are separate and distinct entities and its members generally are not personally liable for company actions. See Monster Heavy Haulers, LLC v. Goliath Energy Servs., LLC, 2016 ND 176, ¶ 22, 883 N.W.2d 917 ; Arrow Midstream Holdings, LLC v. 3 Bears Constr., LLC, 2015 ND 302, ¶ 14, 873 N.W.2d 16 ; N.D.C.C. § 10–32.1–26 ; A. Wooster, Annot., Construction and application of limited liability company acts—issues relating to personal liability of individual members and managers of limited liability company as to third parties, 47 A.L.R. 6th 1 (2009), and cases collected therein. "Individual shareholders generally have no right to bring actions in their individual names and on their own behalf for a wrong committed against the corporation." Nodak Mut. Ins. Co. v. Ward Cty. Farm Bureau, 2004 ND 60, ¶ 15, 676 N.W.2d 752 ; see also Marhula v. Grand Forks Curling Club, Inc., 2015 ND 130, ¶ 11, 863 N.W.2d 503 ; Littlefield v. Union State Bank, 500 N.W.2d 881, 885 (N.D. 1993) ; Fisher v. Pederson, 100 N.W.2d 156, 159 (N.D. 1959) ; N.D.C.C. § 10–32.1–34 ; Annot., Construction and application of limited liability company acts—issues relating to derivative actions and actions between members of limited liability company, 48 A.L.R. 6th 1, §§ 4–9 (2009), and cases collected therein. "The shareholder standing rule applies even if the plaintiff is the sole shareholder of the corporation." Potthoff v. Morin, 245 F.3d 710, 716 (8th Cir. 2001) ; see also Canderm Pharmacal, Ltd. v. Elder Pharmaceuticals, Inc., 862 F.2d 597, 603 (6th Cir. 1988), and cases collected therein.

[¶ 12] Craig argues Haugrud is personally liable for his own wrongful conduct as an agent for his limited liability company and corporation. See Wills v. Schroeder Aviation, Inc., 390 N.W.2d 544, 547 (N.D. 1986) ("It is well settled that ‘[a] corporate agent cannot shield himself from personal liability for a...