Meyer v. Dygert

• Decision Date: 11 June 2001
• Docket Number: Civil No. 99-618 MJD/JGL.
• Citation: 156 F.Supp.2d 1081
• Parties: David V. MEYER, Geraldine A. Meyer, James F. Murphy as custodian for Timothy J. Murphy, Pamela A. Murphy, Thomas A. Murphy, Irene N. Wilson, Steven E. Wilson, and Wendell E. Wilson, Plaintiffs, v. Jerry G. DYGERT, Kathryn E. Dygert, Dygert Law Office, and Kurt H. Jensen, Defendants.
• Court: U.S. District Court — District of Minnesota

Page 1081

156 F.Supp.2d 1081

David V. MEYER, Geraldine A. Meyer, James F. Murphy as custodian for Timothy J. Murphy, Pamela A. Murphy, Thomas A. Murphy, Irene N. Wilson, Steven E. Wilson, and Wendell E. Wilson, Plaintiffs, v. Jerry G. DYGERT, Kathryn E. Dygert, Dygert Law Office, and Kurt H. Jensen, Defendants.

Civil No. 99-618 MJD/JGL.

United States District Court, D. Minnesota.

June 11, 2001.

COPYRIGHT MATERIAL OMITTED

John R. Stoebner, David A. Harbeck, Lapp, Laurie, Libra, Thomson & Stoebner, Charted, Minneapolis, MN, for Plaintiffs.

Thomas J. Shroyer, Jerrie M. Hayes, Moss & Barnett, Minneapolis, MN, for Defendants Kathryn Dygert, Jerry Dygert, Dygert Law Office.

MEMORANDUM OPINION AND ORDER

DAVIS, District Judge.

INTRODUCTION

This matter is before the Court on Defendant Kathryn Dygert's motion for summary judgment and on Jerry Dygert and Dygert Law Office's motion for summary judgment. In response to Defendant Kathryn Dygert's motion, Plaintiffs have agreed to voluntarily dismiss their claims of common law fraud, state and federal securities law violations and RICO violations against Mrs. Dygert. Thus, the only claims left to be decided with respect to Mrs. Dygert are those arising under the Minnesota Consumer Fraud Act, conversion and unjust enrichment. With respect to Defendants Jerry Dygert and Dygert Law Office, Plaintiffs have agreed to voluntarily dismiss their conversion, unjust enrichment and RICO claims. The claims remaining against Jerry Dygert and the Dygert Law Office are claims of common law fraud, breach of fiduciary duty, legal malpractice, state and federal securities fraud and those arising under the Minnesota Consumer Fraud Act.

BACKGROUND

The Organic Conversion Corporation ("OCC") was incorporated in 1965 as a compost bagging and distribution facility, converting stockyard waste into gardening product for retail sale. OCC eventually expanded its product line to include peat and other soil products. Robert W. Dygert was one of OCC's founders and served as an officer and/or director for several years. Robert Dygert Dep. at 17.

In the mid-1970's, Robert Dygert devised a mechanism for increasing OCC's working capital; he would solicit private investments in the company that were evidenced by a promissory note secured by a mortgage on OCC's assets and inventory, referred to as Junior Mortgage Notes. To induce investors to participate in the Junior Mortgage Note program, Robert Dygert also offered his personal guarantee. Robert Dygert Dep. Exs. 5-11, and 12. This investment program was authorized by resolution of the Unanimous Consent of Shareholders dated October 20, 1976, which allowed corporate officers to:

borrow such further sums, without limitation as to amount, as may be deemed necessary to finance the operation of the company, from corporate officers, financial institutions or private persons, and to pledge as security therefore any or all of the company's real and personal property, inventories or accounts receivable. This authorization shall continue in full force and effect until and unless revoked by further action of the shareholders of the corporation.

Jerry Dygert Dep. Ex. 7. Both Robert and Jerry Dygert, as shareholders in OCC, signed this resolution. Id.

Robert Dygert subsequently obtained approximately $6.1 million dollars through the Junior Mortgage Note program. Findings of Fact, Conclusions of Law and Order for Summary Judgment in the matter of In re Dygert, 2000 WL 630833, Adv. No. 98-4363 (Bankr.D.Minn.2000) at p. 3 (Harbeck Ex. G). The Plaintiffs herein are individuals that invested in the Junior Mortgage Notes. Generally, they were either friends of the Dygert family, and/or clients of the Dygerts' law practice.

Robert Dygert sent quarterly reports to investors in the Junior Mortgage Note program, which included information as to the company assets, sales and profit before taxes and as to the investor's interest payments and balance. Id. at 7; Robert Dygert Dep. Ex. 14. No information was provided the investors concerning the company's liabilities, including the full extent of the outstanding Junior Mortgage Notes. Id.

In July 1998, OCC filed bankruptcy pursuant to Chapter 11 of the Bankruptcy Code. Robert Dygert also filed for personal bankruptcy. As a result of these bankruptcies, Plaintiffs allege they have lost all or substantially of their investments.

1. Defendant Kathyrn Dygert

Kathryn Dygert is Robert Dygert's wife. She is and has been a stay-at-home wife and mother. She asserts that without her knowledge and consent, Robert transferred 775 shares of OCC stock into her name in 1986. Kathryn Dygert Dep. at 13-14. By the time OCC filed for bankruptcy in 1998, she was one of three shareholders, owning 47% of OCC's stock.

It is Kathryn Dygert's position that she did not participate in any shareholder's meetings, nor did she receive any shareholder materials, information or updates. Id. at 26, 29-30 and 61-62. She admits that Robert Dygert, on occasion, would bring OCC-related work home, such as drafting and mailing letters, and that she occasionally helped stuff such letters into envelopes. Id. at 44-48 and 56-57. She was also generally aware that her husband was soliciting investments in OCC through the Junior Mortgage Note program, but she did not participate in such solicitations. Id. 18-19, 26-29 and 32-35. In fact, in her opinion, the Junior Mortgage Note program was not ethical, and it "bothered her terribly" that individuals asked to purchase the notes were clients of her son Jerry Dygert. Id. at 31. In addition, she was generally aware that her husband was making personal guarantees of repayment on the Notes and was admittedly uncomfortable that Robert Dygert was making these personal guarantees. Id. at 35-37.

Plaintiffs admit limited or no contact with Kathryn Dygert. Plaintiff Geraldine Meyer met Mrs. Dygert on a couple of occasions when she delivered OCC checks to the Dygert home. Geraldine Meyer Dep. at 23. Plaintiff Thomas Murphy testified that on a number of occasions, he delivered money for OCC investments to Kathryn Dygert at the Dygert home. Thomas Murphy Dep. at 28. Plaintiff Wendell Wilson only met with Mrs. Dygert once, but did not speak to anyone about OCC or his investment in OCC except Robert Dygert. Wendell Wilson Dep. at 18 and 24. Finally, Irene Wilson engaged in social small talk with Mrs. Dygert at times, and Mrs.Dygert may have delivered OCC-related documents to Ms. Wilson. Irene Wilson Dep. at 41, 140-141.

2. Defendants Jerry Dygert and Dygert Law Office

Defendant Jerry Dygert is Robert Dygert's son, and operates a solo law practice, Defendant Dygert Law Office. He became a shareholder in OCC in 1974 when he agreed to purchase 100 shares of OCC stock. When OCC filed for bankruptcy in 1998, Mr. Dygert's shares amounted to 6% of the company's stock. From 1976 to 1985, Jerry Dygert served on the Board of Directors of OCC, and was elected Assistant Secretary for those same years. Jerry Dygert Dep. Exs. 6 and 7. During that time period, Jerry Dygert authorized a number of OCC corporate actions. See id.

In addition to their involvement in OCC, Jerry and his father also formed a law partnership called Dygert & Dygert. Jerry and Robert Dygert were the only partners in this practice during its existence from 1971 until 1987. The partnership dissolved in 1987 when Jerry decided to open his solo practice. Robert formed a new partnership at that time, but left that practice a year later to devote himself fulltime to OCC as its corporate attorney. Jerry Dygert has admittedly provided legal services to certain of the Plaintiffs, namely Irene Wilson, Thomas Murphy, and Geraldine and David Meyer.

Late in the summer of 1996, Robert Dygert approached Mr. Dygert and told his son that security interests allegedly granted by the Notes had not been perfected. Robert Dygert asked Jerry to represent OCC in perfecting the investor's security interests, which was done through a trust indenture for the benefit of all Note holders.

By early fall of 1997, OCC was in need of additional operating capital. Robert Dygert approached Donald Drapeau for another investment. Mr. Drapeau is Jerry Dygert's domestic partner. Initially, Drapeau was reluctant to provide OCC funds, but he eventually agreed to provide a "last in, first out" working capital loan of $200,000 to OCC in exchange for a security interest in OCC's accounts receivable. Jerry Dygert prepared the Security Agreement between Drapeau and OCC, which, Plaintiffs allege, was in direct conflict with their security interests. Plaintiffs also allege that during the negotiations between OCC and Drapeau, Jerry became aware that OCC had a debt to Junior Mortgage Note holders in the amount of $5 million dollars. In March 1998, Plaintiffs allege that OCC was aware that it needed to file for bankruptcy, yet it continued to pay Drapeau on the loan, until such loan was paid in full.

DISCUSSION

Standard

Summary judgment, as a matter of law, is granted when no genuine issue of material fact exist. Fed.R.Civ.P. 56(c). Summary judgment is granted in favor of a defendant when the record clearly demonstrates an absence of evidence to support an essential element of the plaintiffs case. Celotex Corp. v. Catrett, 477 U.S. 317, 323-24, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). In addition, where the plaintiff has completely failed to offer probative material in support of an essential element of its claim, the court is required to enter summary judgment in favor of the defendant. Erickson v. Aetna Life Insurance Co., 777 F.Supp. 1463, 1466 (D.Minn.1991).

Consumer Fraud Act

Minnesota's Consumer Fraud Act prohibits the:

act, use, or employment by any person of any fraud, false pretense, false promise, misrepresentation, misleading statement, or deceptive practice, with the intent that others rely thereon in connection with the sale of any merchandise, whether or not any person has in fact been misled,...