Ross v. Rothstein

• Decision Date: 12 March 2015
• Docket Number: Case No. 13–2101–DDC–TJJ.
• Citation: 92 F.Supp.3d 1041
• Parties: Stanton E. ROSS, Plaintiff/Counter Defendant, v. Adam ROTHSTEIN, Defendant/Counterclaimant.
• Court: U.S. District Court — District of Kansas

92 F.Supp.3d 1041

Stanton E. ROSS, Plaintiff/Counter Defendant

v.Adam ROTHSTEIN, Defendant/Counterclaimant.

Case No. 13–2101–DDC–TJJ.

United States District Court, D. Kansas.

Signed March 12, 2015.

Adam J. Gasper, James F.B. Daniels, McDowell, Rice, Smith & Buchanan, PC, Kansas City, MO, for Plaintiff/Counter Defendant.

Neil L. Johnson, Nicholas L. Divita, Sharon A. Stallbaumer, Berkowitz Oliver Williams Shaw & Eisenbrandt, LLP, Kansas City, MO, for Defendant/Counterclaimant.

MEMORANDUM AND ORDER

DANIEL D. CRABTREE, District Judge.

This matter comes before the Court on: (1) defendant's Motion for Summary Judgment on plaintiff's claim for wrongful disposition of collateral, defendant's right to a deficiency damages award, and defendant's entitlement to attorney's fees (Doc. 252); (2) plaintiff's Motion for Summary Judgment on plaintiff's claim for wrongful disposition of collateral under K.S.A. §§ 84–9–624 and 84–9–626 and defendant's counterclaim for fraud in the inducement (Doc. 255); and (3) plaintiff's Motion in Limine excluding all facts, evidence, testimony, opinions, and inferences offered by defendant's proffered expert attorney Brian C. Underwood (Doc. 261). The Court referred all three motions to Magistrate Judge Teresa J. James for report and recommendation. On December 23, 2014, Judge James issued her Report and Recommendation (Doc. 283), recommending that the Court grant in part and deny in part plaintiff's Motion in Limine (Doc. 261), grant defendant's Motion for Summary Judgment (Doc. 252), and deny plaintiff's Motion for Summary Judgment (Doc. 255).

Plaintiff filed timely objections to the Report and Recommendation (Doc. 289).¹ After considering plaintiff's objections and defendant's response, and having reviewed Judge James' well-reasoned Report and Recommendation, the Court overrules plaintiff's objections and adopts the Report and Recommendation of Judge James in its entirety.

I. Undisputed Facts

Judge James' Report and Recommendation (hereinafter, “Report”) accurately sets forth the undisputed facts of the case. The Court briefly summarizes those facts here.

Plaintiff is a resident of Johnson County, Kansas, and currently the Chairman of the Board, President, Chief Executive Officer, and shareholder of Infinity Energy Resources, Inc. (“Infinity”), a publicly traded company with its principal place of business in Johnson County, Kansas. Defendant is a Connecticut resident and currently the advisor to several funds concentrating in the technology, media, and entertainment sectors.

On March 30, 2012, defendant agreed to loan plaintiff $210,000 for 60 days. The terms of the loan were memorialized in a Secured Promissory Note and Pledge Agreement signed by the parties. The Secured Promissory Note required plaintiff to repay the loan in full within 60 days, on or before May 31, 2012, and to pay the interest on the loan by transferring to defendant 15,000 shares of Infinity stock.

Plaintiff failed to repay the loan by its due date of May 31, 2012. At plaintiff's request, the parties entered into a signed, written Forbearance Agreement on August 27, 2012. Under the Forbearance Agreement, among other things, (1) plaintiff reaffirmed all obligations under the Secured Promissory Note, (2) plaintiff acknowledged the default, and (3) defendant agreed to forbear from taking any remedial action on the Secured Promissory Note based on plaintiff's default until January 1, 2013. As consideration for the Forbearance Agreement, plaintiff agreed to deliver and transfer an additional 50,000 shares of Infinity common stock. When they executed the Forbearance Agreement, the parties entered into a (Superseding) Pledge Agreement in which plaintiff pledged 77,310 shares of Infinity common stock that he owned.

Plaintiff did not repay the loan on or before January 1, 2013, and his failure to repay the loan continues to date.

On January 30, 2013, plaintiff filed this lawsuit in the District Court of Johnson County, Kansas, and defendant removed the action to this Court. On September 9, 2013, Judge Lungstrum, the district judge then presiding over this case, granted summary judgment for defendant on his counterclaims for breach of the Secured Promissory Note, breach of the Forbearance Agreement, and breach of the (Superseding) Pledge Agreement and foreclosure of security interest (Doc. 54). Two days later, Judge Lungstrum entered judgment for defendant on defendant's three breach of contract claims in the total amount of $210,000, plus 18% default interest compounding monthly beginning September 5, 2012 (Doc. 56). Judge Lungstrum also ruled that defendant was entitled to obtain from the Clerk of the Court the original Infinity Energy Resources, Inc. Certificate No. 3287 representing 77,310 shares of Infinity common stock (Doc. 54).

On September 12, 2013, the Clerk of the Court released this stock certificate to defendant, which plaintiff previously had deposited with the Court (Docs. 52, 57). Four days later, defendant deposited the certificate for the 77,310 shares of Infinity common stock in an account with online broker Fidelity.com. He had established this account earlier in 2013, when he sold the 15,000 Infinity shares (that plaintiff had agreed to pay as interest on the loan) and the 50,000 Infinity shares (that plaintiff agreed to pay as additional consideration in the Forbearance Agreement) that defendant previously had received from plaintiff.

Defendant sold the 77,310 shares of Infinity common stock on September 16, 2013. He sold the shares in six different lots at prices ranging from $2.85 per share to $2.99 per share. After deducting brokerage fees and commissions, defendant realized $221,361.91 from the sale of the 77,310 shares.

Infinity's common stock trades on the Over–the–Counter QB Tier Market (“OTCQB”) under the symbol “IFNY.” Infinity's common stock was not publicly traded or sold on any other stock market in 2012, 2013, or anytime since.

On December 23, 2013, plaintiff filed an Amended Complaint asserting a claim against defendant for Wrongful Disposition of Collateral under K.S.A. § 84–9–625. This amendment relied on defendant's sale of the 77,310 shares of Infinity common stock (Doc. 117 at 10 –11). Plaintiff alleges that defendant violated Kansas law by failing to give plaintiff notice of the impending sale and by selling the shares in a commercially unreasonable manner.

In July 2014, the parties filed cross-motions for summary judgment (Doc. 252, 255) and plaintiff filed a motion in limine to exclude the testimony of defendant's expert, Brian C. Underwood (Doc. 261). Defendant's motion seeks summary judgment against plaintiff's claim for wrongful disposition of collateral and in favor of defendant's right to deficiency damages and attorney's fees (Doc. 252). Plaintiff seeks summary judgment on his claim for wrongful disposition of collateral and against defendant's counterclaim for fraud in the inducement.

II. Report and Recommendation

The Court referred the motions to Judge James for a report and recommendation (Doc. 282). In the Report issued December 23, 2014 (Doc. 283), Judge James first recommended that the Court grant in part and deny in part plaintiff's motion in limine. Her Report concluded that though Mr. Underwood is qualified to testify as an expert under Fed.R.Evid. 702, he cannot testify about the four opinions in his affidavit because they are inadmissible legal conclusions. Judge James explained that Mr. Underwood cannot testify about legal opinions, he nonetheless may testify about factual issues that will help the Court decide legal issues. In making her recommendations on the cross-motions for summary judgment, Judge James determined that she could consider the factual statements in Mr. Underwood's affidavit “such as the operation, function, and trading of stocks on over-the-counter securities markets generally, as well as the OTCQB in particular and how it functions, operates, and how stocks trade on the OTCQB,” as well as “the details of [defendant's] actual trades of the Infinity shares at issue.” (Doc. 283 at 19–20) But Judge James' recommended rulings on the cross-motions for summary judgment nonetheless disregarded Mr. Underwood's legal opinions. (Id. at 21)

Next, Judge James recommended that the Court grant defendant's motion for summary judgment for three reasons. First, Judge James recommended summary judgment against plaintiff's claim for wrongful disposition of collateral. She concluded that the undisputed facts establish that plaintiff waived his right to notice of defendant's sale of the 77,310 shares of Infinity common stock and also that defendant had sold the shares in a commercially reasonable manner. Second, Judge James recommended that the Court enter a deficiency damages determination and award for defendant, and if the Court adopted her Report, she recommended the Court set an evidentiary hearing to determine the amount of the deficiency judgment that plaintiff owes to defendant. Third, Judge James recommended that defendant is entitled to recover his reasonable out-of-pocket costs and expenses (including attorney's fees) because the (Superseding) Pledge Agreement requires plaintiff to pay those costs and expenses. Judge James recommended that the Court determine the amount that defendant is entitled to recover after defendant complies with the fee application process established in Fed.R.Civ.P. 54(d)(2) and D. Kan. Rule 54.2.

Judge James then turned to plaintiff's motion for summary judgment. She recommended ruling against plaintiff's motion for summary judgment for two reasons. First, the same reasons that led her to recommend summary judgment for defendant against plaintiff's wrongful disposition of collateral claim also warranted summary judgment against plaintiff on this same claim. Namely, the undisputed facts establish plaintiff had waived his right to receive notice of defendant's sale of the stock and defendant had sold the stock in a commercially reasonable manner. Sec...