Keokuk Glycerin, LLC v. Midwest Labs., Inc., 3:14–cv–00111–JAJ–HCA

• Decision Date: 10 March 2016
• Docket Number: No. 3:14–cv–00111–JAJ–HCA,3:14–cv–00111–JAJ–HCA
• Citation: 241 F.Supp.3d 887
• Parties: KEOKUK GLYCERIN, LLC and John Rothgeb, Plaintiffs, v. MIDWEST LABORATORIES, INC., Defendant.
• Court: U.S. District Court — Southern District of Iowa

241 F.Supp.3d 887

KEOKUK GLYCERIN, LLC and John Rothgeb, Plaintiffs,

v.MIDWEST LABORATORIES, INC., Defendant.

No. 3:14–cv–00111–JAJ–HCA

United States District Court, S.D. Iowa, Central Division.

Signed March 10, 2016

Brian Andrew Melhus, William J. Miller, Dorsey & Whitney LLP, Des Moines, IA, for Plaintiffs.

Brian J. Brislen, Pro Hac Vice; Sean A. Minahan, Lamson Dugan & Murray LLP, Omaha, NE, for Defendant.

ORDER

JOHN A. JARVEY, Chief Judge UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF IOWA

Keokuk Glycerin, LLC, is a glycerin

refinement company partially owned and managed by John Rothgeb. In 2009, Keokuk planned to sell its operation to GreenMan Technologies. Before that deal could close, Keokuk had to produce 15,000 gallons of industrial grade glycerin. Glycerin must be at least 95% pure and meet several other quality standards to be industrial grade. Keokuk tracked the purity of its glycerin by sending Midwest Laboratories, Inc., samples for testing. On July 17, 2009, Midwest incorrectly reported that Keokuk's glycerin was only 62% pure. GreenMan subsequently walked away from the deal, and Keokuk and Mr. Rothgeb sued Midwest, alleging breach of contract and negligent misrepresentation.

Midwest now moves for summary judgment, arguing that Mr. Rothgeb has no individual right to maintain a suit, that Keokuk did not justifiably rely on its report, that its error did not cause Keokuk's harm, and that in fact Keokuk did not suffer damages. Keokuk and Mr. Rothgeb resist the motion.

I. LEGAL STANDARD FOR SUMMARY JUDGMENT

A motion for summary judgment may be granted only if, after examining all of the evidence in the light most favorable to the nonmoving party, the court finds that no genuine issues of material fact exist and that the moving party is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(a) ; HDC Medical, Inc. v. Minntech Corp. , 474 F.3d 543, 546 (8^th Cir. 2007). But the nonmoving party may not rest on its pleadings; it must cite materials in the record showing there is a genuine issue of material fact for trial. Fed. R. Civ. P. 56(c)(1)(A) ; Mosby v. Dolphin , 998 F.2d 1018, 1 (8^th Cir. 1993). An issue is genuine if the evidence would allow a reasonable jury to rule for the nonmoving party, and it is material if, under the governing law, it might affect the suit's outcome. Great Plains Real Estate Development, L.L.C. v. Union Central Life Ins. Co. , 536 F.3d 939, 944 (8^th Cir. 2008) ; Saffels v. Rice , 40 F.3d 1546, 1550 (8^th Cir. 1994).

II. FACTUAL BACKGROUND

In December 2007, John Rothgeb and other investors founded Keokuk Glycerin, LLC. They intended to refine crude glycerin

into industrial-grade glycerin, and in early 2008 began constructing a refinement plant. Mr. Rothgeb served as the company's CEO, and hired Ms. Laurie Scott, a chemist, to design the refinement process and run the plant. While Keokuk operated the plant, it never turned a profit. Despite that difficulty, the operation was appraised in March 2009 and valued at between $3.74 million and $4.5 million. The following month, Keokuk signed a Letter of Intent with GreenMan Technologies, Inc. The Letter outlined a plan to sell Keokuk's refinement operation to GreenMan in exchange for $1.35 million and a 10% stake in a new company, set up to run the refinement business. At the time, the parties appear to have valued the 10% stake at $150,000, bringing the purchase price to $1.5 million.¹ Its actual value is now hotly contested.

The Letter conditioned the sale on Keokuk producing 15,000 gallons of "acceptable and saleable industrial grade glycerin

." That standard required the refined glycerin to be at least 95% pure, and capped contaminant quantities: the refined glycerin had to, for example, be less than 1% water. Keokuk engaged Midwest Laboratories, Inc., to test its glycerin for compliance with those standards.

Midwest tested ten samples for Keokuk during May, June, and early July. No sample met all of the conditions of closing, although they steadily improved: the glycerin

was 75.7% pure and 6.5% water on May 15^th, but reached 93.2% purity and 1.5% water content as of June 26^th. Meanwhile, GreenMan discussed, both with Keokuk and internally, options for improving the process or for waiving the closing conditions, possibly in exchange for a purchase price reduction. GreenMan's CEO, Mr. Lyle Jensen, testified that as long as the glycerin

purity stayed "in the 90s" GreenMan's Board believed Keokuk could eventually fulfill the Letter's conditions. But on July 17^th, Midwest reported glycerin purity of 61.6% and 62.4% to Keokuk. Mr. Jenson received those results from Mr. Rothgeb, and describes GreenMan's reaction as "enough is enough, this is too far off the 95 percent to ... move forward." Shortly afterward, GreenMan walked away from the transaction.

About a week and a half later, Midwest contacted Keokuk again: the July 17^th results had been mistaken. The correct numbers were 87.4% and 90.3%. But negotiations with GreenMan did not resume; Keokuk was ultimately sold to a different buyer in exchange for a promise of an equity interest in that company. That sale soured. The details are not clear from the record, but Keokuk evidently never received that equity interest.

Keokuk and Mr. Rothgeb filed suit against Midwest in Iowa state court, alleging that Midwest had breached a contractual duty and committed the tort of negligent misrepresentation. Midwest removed the case to this Court, and moved for summary judgment.

III. ANALYSIS

Midwest makes four arguments for partial or complete summary judgment. First, it argues that Mr. Rothgeb has no individual right to recover. Second, it argues that Keokuk's reliance on its report was unjustified or negligent. Third, it contends that its mistake did not cause Keokuk's damages. Finally, it asserts that Keokuk did not suffer damages. The Court will address those arguments in turn.

A. Mr. Rothgeb's Rights

Generally, "shareholders have no claim for injuries to their corporations by third parties." Cunningham v. Ka r tridg Pa k Co. , 332 N.W.2d 881, 883 (Iowa 1983). "There is, however, a well-recognized exception to the general rule: a shareholder has an individual cause of action if the harm to the corporation also damaged the shareholder in his capacity as an individual." Id. The exception applies if either: 1) the shareholder was owed a "special duty"; or 2) his injury was "separate and distinct from that suffered by the other shareholders." Id. Actions to enforce the corporation's contracts and tort actions "are frequently mentioned as being, by definition, actionable only derivatively." C. Plus Northwest, Inc. v. DeGroot , 534 F.Supp.2d 937, 942 (S.D. Iowa 2008).

This case is no exception to the general rule. Mr. Rothgeb has two theories of individual injury: he argues that he invested in Keokuk² and lost that money, and that Midwest marketed its services to him and negotiated with him. If Mr. Rothgeb lost money, he lost it because Keokuk lost money; his damages "derive exclusively from the damage" Midwest caused Keokuk. Id. at 941. And he negotiated with Midwest in his capacity as Keokuk's manager. When an agent contracts on behalf of a disclosed principal, the contract obligates the third party to the principal, not to the agent. Restatement (Third) Of Agency § 6.01 (2006). Mr. Rothgeb has no individual right of action, and summary judgment is granted against his claims.

B. Keokuk's Reliance

Negligent misrepresentation claims only succeed if the plaintiff justifiably relied on the defendant's representation. Bradshaw v. Wakonda Club , 476 N.W.2d 743, 747 (Iowa Ct. App. 1991). Reliance is justifiable "if a person acting with reasonable and ordinary prudence and caution would have a right to rely on the representations." Kaiser Agr. Chemicals v. Ottumwa Production Credit Ass'n , 428 N.W.2d 681, 683 (Iowa Ct. App. 1988). It is not justifiable if "the person receiving the information knows or ... should know that the information is false." Boone County Community Credit Union v. Masel , 665 N.W.2d 440, 3 (Iowa Ct. App. 2003). "[T]he standard requires plaintiffs to utilize their abilities to observe the obvious, and the entire context of the transaction is considered to determine if the justifiable-reliance element is met." Union County, IA v. Piper Jaffray & Co., Inc. , 741 F.Supp.2d 1064, 1112 (S.D. Iowa 2010). Even if Keokuk proves that element of its case, Midwest could still prevail by showing that Keokuk was contributorily negligent. Restatement (Second) of Torts § 552A (1977) ; Cedar Falls Bldg. Center, Inc. v. Vietor , 365 N.W.2d 635, 639 (Iowa Ct. App. 1985).

Midwest argues that Keokuk overlooked the obvious when it believed Midwest's initial results. It points to two pieces of Ms. Scott's testimony in support of that claim. First, Ms. Scott explained that Keokuk usually tested the purity of its glycerin

internally, in parallel with Midwest's testing. The internal tests, Midwest reasons, should have revealed the error in Midwest's results. Second, when Midwest's counsel showed Ms. Scott the errant results, she testified that she had never seen them before, and that if she had, she would have immediately called Midwest to find out what had happened. The results, she said, were "shockingly different" from earlier batches, and "didn't make sense." The problem was "obvious" to her.

Neither point persuades. Although Ms. Scott testified that Keokuk usually did its own testing, she could not testify (nor is there other evidence showing) that Keokuk did test the relevant batch or what its results were. Keokuk was not obligated to test the batch. See Union County, IA v. Piper Jaffray & Co., Inc. , 741 F.Supp.2d 1064, 1113 (S.D. Iowa 2010) ("[T]he Court is not inclined to find, as a matter of law, that the County did not justifiably rely... simply because it did not undertake to... search[ ] for "red flags" on its own."); Cedar Falls Bldg. Center, Inc. v. Vietor , 365 N.W.2d 635, 639 (Iowa Ct. App. 1...