Jas Enters., Inc. v. BBS Enters., Inc.

• Decision Date: 17 July 2013
• Docket Number: 26419.,Nos. 26414,s. 26414
• Parties: JAS ENTERPRISES, INC., a South Dakota Corporation, Plaintiff and Appellant, v. BBS ENTERPRISES, INC., a South Dakota Corporation, Bradley Staton, Brian Staton, and Daniel Staton, Defendants, Third Party Plaintiffs and Appellees, v. JAS Enterprises, Inc., a South Dakota Corporation, and James Swaby, Third Party Defendants and Appellants.
• Court: South Dakota Supreme Court

835 N.W.2d 117

2013 S.D. 54

JAS ENTERPRISES, INC., a South Dakota Corporation, Plaintiff and Appellant,

v.BBS ENTERPRISES, INC., a South Dakota Corporation, Bradley Staton, Brian Staton, and Daniel Staton, Defendants, Third Party Plaintiffs and Appellees,

v.JAS Enterprises, Inc., a South Dakota Corporation, and James Swaby, Third Party Defendants and Appellants.

Nos. 26414, 26419.

Supreme Court of South Dakota.

Argued Feb. 12, 2013.

Decided July 17, 2013.

John K. Nooney, Robert J. Galbraith, of Nooney Solay & Van Norman, LLP, Rapid City, South Dakota, Attorneys for plaintiff, third party defendants and appellants.

Steven C. Beardsley, Michael S. Beardsley, of Beardsley Jensen & Von Wald, Prof., LLC, Rapid City, South Dakota, Attorneys for defendants, third party plaintiffs and appellees.

SEVERSON, Justice.

[¶ 1.] On January 27, 2000, JAS Enterprises, Inc. (JAS) entered into a purchase agreement with BBS Enterprises, Inc. (BBS), which Bradley, Brian, and Daniel Staton signed as personal guarantors. JAS sued BBS and the Statons for breach of contract in February 2004. BBS and the Statons filed an answer and counterclaim. A trial was held in March 2012, resulting in a judgment of $100,000 for BBS and the Statons and a judgment of $67,000 for JAS.

BACKGROUND

[¶ 2.] James Swaby is the principal shareholder of a company called Equipment Service Professionals, Inc. (ESP), which installs and services a variety of heating, air conditioning, and refrigeration systems, including ductwork, in commercial and residential buildings. ESP operates out of two offices in South Dakota, one in Rapid City and one in Spearfish. The Rapid City office is incorporated as JAS Enterprises, Inc. (JAS), but it does business as ESP. Swaby is also the principal shareholder of JAS.

[¶ 3.] Bradley and Brian Staton worked at ESP, installing sheet metal or ductwork, and associated heating and air conditioning systems. Bradley began working for ESP in 1992 and his brother, Brian, began working for ESP in 1993. Both Statons began working for ESP out of the Spearfish office, but eventually transferred to the Rapid City office. In 1999, Swaby and the Statons began discussing whether the Statons were interested in purchasing the sheet metal installation portion of the business.¹ In November and December of 1999, the Statons worked with an accounting firm in Rapid City to develop a business plan and created a corporation called BBS Enterprises, Inc. (BBS) to purchase the sheet metal installation portion of the business.

[¶ 4.] On January 27, 2000, BBS entered into a purchase agreement with JAS only. Bradley, Brian, and Daniel Staton, Bradley and Brian's father, signed the purchase agreement as personal guarantors of the agreement. The purchase agreement sold the vehicles, equipment, and inventory used in ESP's sheet metal installation business. The purchase agreement also sold JAS's goodwill related to the sheet metal business and contained a covenant not to compete, prohibiting JAS from working in the sheet metal installation business for seven years within a one hundred mile radius of Rapid City.² The total purchase price was $245,000, which included $20,000 for the covenant not to compete and $58,000 for the goodwill of the business.

[¶ 5.] At the same time, BBS entered into a business consultant agreement with Swaby and an independent contractor's agreement with JAS for bookkeeping and secretarial services. BBS agreed to pay Swaby $1,250 per month for consulting and $2,135 per month to JAS for bookkeeping and secretarial services.

[¶ 6.] After signing the agreements at the end of January 2000, BBS began operating as Advance Heating and Air Conditioning. As early as March 2000, BBS had trouble making timely monthly payments under the purchase agreement. At various times over the next few years, ESP and JAS lent or advanced money to BBS to help BBS complete various projects.

[¶ 7.] In February 2004, JAS filed suit against BBS and the Statons alleging breach of contract on the purchase agreement. BBS and the Statons filed an answer and counterclaim, arguing that (1) JAS and Swaby personally breached the covenant not to compete, and (2) JAS and Swaby personally defrauded BBS and the Statons. The Statons eventually identified seven different heating and air conditioning installation projects that they alleged Swaby, JAS, or ESP worked on in violation of the covenant not to compete.

[¶ 8.] A jury trial was held from March 28 through 30, 2012. At the close of the trial, the jury found that the parties mutually assented to the essential terms of the contract; that BBS and the Statons breached their obligation to JAS to make payments as required by the purchase agreement; that JAS and Swaby breached the covenant not to compete; that Swaby failed to give preference to BBS and the Statons by competing against them in the sheet metal installation business; and that JAS and Swaby did not commit fraud or deceit. The jury awarded $67,000 to JAS and Swaby for breach of the purchase agreement and $100,000 to BBS and the Statons for breach of the covenant not to compete.

[¶ 9.] JAS and Swaby appeal the following issues: (1) whether BBS and Statons' counterclaim against Swaby personally should have been dismissed based on a failure to obtain jurisdiction because a summons was never served on Swaby personally and he was not identified as a third-party defendant; (2) whether the trial court erred as a matter of law when it denied JAS's motion for partial summary judgment on the separate claims of fraud or deceit; and (3) whether the trial court abused its discretion by admitting testimony from various witnesses at trial.

[¶ 10.] BBS and the Statons appeal the following issues: (1) whether the trial court erred in denying BBS and Statons' motion for partial summary judgment on the violation of the covenant not to compete and motion for directed verdict on the covenant not to compete; (2) whether the trial court erred in denying prejudgment interest to BBS and Statons; and (3) whether the trial court erred in answering a question from the jury without giving either party notice or an opportunity to be heard.

DISCUSSION

[¶ 11.] (1) Whether BBS and Statons' counterclaim against Swaby personally should have been dismissed based on a failure to obtain jurisdiction because a summons was never served on Swaby personally as a third-party defendant.

[¶ 12.] “ ‘When a [third-party] defendant moves to dismiss for insufficient service of process, the burden is on the [third-party] plaintiff to establish a prima facie case that the service was proper.’ ” R.B.O. v. Priests of the Sacred Heart, 2011 S.D. 86, ¶ 7, 807 N.W.2d 808, 810 (quoting Grajczyk v. Tasca, 2006 S.D. 55, ¶ 22, 717 N.W.2d 624, 631). “Whether a [third-party] plaintiff has presented a prima facie case of sufficient service of process is reviewed by this Court de novo, with no deference given to the circuit court's legal conclusions.” Id. (citing Grajczyk, 2006 S.D. 55, ¶ 22, 717 N.W.2d at 631).

[¶ 13.] “We have recognized that ‘proper service of process is no mere technicality: that parties be notified of proceedings against them affecting their legal interests is a “vital corollary” to due process and the right to be heard.’ ” R.B.O., 2011 S.D. 86, ¶ 9, 807 N.W.2d at 810 (quoting Spade v. Branum, 2002 S.D. 43, ¶ 7, 643 N.W.2d 765, 768) (citations omitted). Service of process advises a party that “ ‘a legal proceeding has been commenced’ ” and warns “ ‘those affected to appear and respond to the claim.’ ” Id. (quoting Spade, 2002 S.D. 43, ¶ 7, 643 N.W.2d at 768). South Dakota statutes allow a defendant to bring a claim against a third-party that is not a party to the original action. SDCL 15–6–14(a). SDCL 15–6–14(a) provides, in part:

At any time after commencement of the action a defending party, as a third-party plaintiff, may cause a summons and complaint to be served upon a person not a party to the action who is or may be liable to him for all or part of the plaintiff's claim against him.

(Emphasis added.) If the third-party plaintiff serves the third-party complaint within ten days of serving the original answer, the third-party plaintiff does not need the court's permission to make a third-party complaint. Id. However, if the third-party plaintiff does not serve the complaint within ten days, the third-party plaintiff “must obtain leave on motion upon notice to all parties to the action.” Id. If a plaintiff is suing a defendant personally, the summons must be delivered to the defendant personally. SDCL 15–6–4(d)(8). If, as in this case, a third-party plaintiff is suing a third-party defendant personally, the summons should be served on the third-party defendant personally. See id.

[¶ 14.] Here, BBS and the Statons argue that they substantially complied with the service of process so as to provide actual notice to Swaby via his attorney that Swaby personally was being sued. In Wagner v. Truesdell, we defined substantial compliance as:

“Substantial compliance” with a statute means actual compliance in respect to the substance essential to every reasonable objective of the statute. It means that a court should determine whether the statute has been followed sufficiently so as to carry out the intent for which it was adopted. Substantial compliance with a statute is not shown unless it is made to appear that the purpose of the statute is shown to have been served. What constitutes substantial compliance with a statute is a matter depending on the facts of each particular case.1998 S.D. 9, ¶ 7, 574 N.W.2d 627, 629 (quoting State v. Bunnell, 324 N.W.2d 418, 420 (S.D.1982) (internal citations and quotation marks omitted)). As we noted in R.B.O., “ ‘[a]ctual notice will not subject [third-party] defendants to personal jurisdiction absent substantial compliance with’ the governing service-of-process statute.” 2011 S.D. 86, ¶ 17, 807 N.W.2d at 813 (quoting Wagner, 1998 S.D. 9, ¶ 9, 574 N.W.2d at 629).

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