Smith v. Kleynerman

• Decision Date: 16 June 2016
• Docket Number: No. 2015AP207.,2015AP207.
• Parties: Scott SMITH, Plaintiff–Respondent–Cross–Appellant, Alpha Cargo Technology, LLC, Plaintiff, v. Greg KLEYNERMAN, Defendant–Appellant–Cross–Respondent, Red Flag Cargo Security Systems, LLC, Defendant.
• Court: Wisconsin Court of Appeals

370 Wis.2d 786

882 N.W.2d 870 (Table)

Scott SMITH, Plaintiff–Respondent–Cross–Appellant,

Alpha Cargo Technology, LLC, Plaintiff,

v.Greg KLEYNERMAN, Defendant–Appellant–Cross–Respondent,Red Flag Cargo Security Systems, LLC, Defendant.

No. 2015AP207.

Court of Appeals of Wisconsin.

June 16, 2016.

¶ 1 PER CURIAM.

This case arises from a June 2009 transaction involving the sale of all valuable assets, including patents and related materials, owned by Alpha Cargo Technology, LLC to Red Flag Cargo Security Systems, LLC.¹ Greg Kleynerman and Scott Smith each own fifty percent of ACT. In December 2011, Smith initiated this action against Kleynerman and Red Flag, claiming, among other things, that: (1) Kleynerman breached his fiduciary duty owed to Smith with respect to the Red Flag transaction; and (2) Kleynerman intentionally made material misrepresentations to Smith that caused Smith to suffer pecuniary damages.²

¶ 2 A jury found against Kleynerman as to the breach of fiduciary duty claim and awarded Smith $499,000 in compensatory damages. The jury found in favor of Kleynerman as to the intentional misrepresentation claim, but the jury awarded Smith punitive damages in response to the related punitive damages question: “How much should Smith receive from Kleynerman as punitive damages for Kleynerman's intentional misrepresentation(s)?” The circuit court accepted the jury's verdict.

¶ 3 The parties filed cross post-verdict motions. The circuit court found that the jury's award of punitive damages was legally inconsistent with the jury's verdict that the representations were not untrue and, therefore, struck the punitive damages award. The circuit court denied the parties' motions seeking to alter any other portion of the verdict.

¶ 4 Kleynerman appeals the order granting judgment as to the breach of fiduciary duty claim. Smith cross-appeals as to the intentional misrepresentation claim. For the reasons set forth below, we affirm.

BACKGROUND

¶ 5 We summarize the facts of this case here and relate additional pertinent facts in the discussion.

¶ 6 In 2002, Smith and Kleynerman formed Alpha Cargo Technology, LLC to distribute cargo security seals in the United States. Smith and Kleynerman each own fifty percent of ACT, which owned certain security technology patents before those patents were sold in June 2009 to Red Flag as part of an assets sale transaction.

¶ 7 Prior to June 2009, ACT had no employees aside from Kleynerman and Smith, no business office, and no manufacturing facility. Its business model then was to import cargo security seals, primarily from the Ukraine, and then to re-sell those seals to its customers. The drawbacks of this model included high import costs, long production lead times, and unsteady cash flows due to required pre-payment for orders.

¶ 8 ACT's gross revenue grew from $18,856 in 2003 to $680,187 in 2006 and $475,813 in 2007. In late 2007, ACT lost its biggest customer, and its gross revenue dropped to $56,428 in 2008. By September 2008, Kleynerman and Smith recognized that their company was in financial trouble and that they needed to find a way to “fix” it.

¶ 9 In early 2008, Kleynerman became acquainted with Bruce Glaser, a “consultant for owners of businesses.” Glaser subsequently entered into certain business dealings with Kleynerman and his wife, and loaned money to Kleynerman. In late 2008 and early 2009, Kleynerman and Glaser engaged in discussions relating to ACT and the business of cargo security seals, specifically to create new companies that would manufacture cargo security seals domestically and sell the manufactured seals.

¶ 10 Meanwhile, in January 2009, Smith wrote an email to Kleynerman to propose a new business model in an effort to save their business. Kleynerman forwarded that message to Glaser and told Glaser: “As you can see, he [Smith] really want[s] to do something. He know[s] nothing about our work with you. I guess I will have to talk with him soon.” Soon after that email, Kleynerman told Smith that he had found investors and began to involve Smith in the discussions with Glaser and a second investor, Greg Grinberg.

¶ 11 In March 2009, Smith, Kleynerman, and Glaser signed a Memorandum of Understanding that described the terms of the potential transaction between Red Flag and ACT. According to the MOU, ACT would sell all valuable assets including its patents to Red Flag, which was owned by Glaser and Grinberg, for a nominal dollar. Glaser owned seventy-five percent of Red Flag and Grinberg owned the remaining twenty-five percent. ACT would then serve as Red Flag's sales representative for one year.

¶ 12 In June 2009, the parties signed an asset sale agreement, a sales representative agreement, and a bill of sale, which together contained the terms described above. The asset sale agreement further indicated that Red Flag would pay ACT up to $70,000 for its assets depending on actual sales of the manufactured seals. But, if no seals were sold, then ACT would receive nothing for its assets beyond the nominal dollar. According to Kleynerman, there were no sales until 2012 after domestic production was ready.

¶ 13 In May 2010, Glaser terminated the sales representative agreement between Red Flag and ACT. Glaser asked Kleynerman to continue to work for Red Flag, but did not make a similar offer to Smith. Smith was left owning fifty percent interest in a company, ACT, with no valuable assets.

¶ 14 In February 2011, Glaser sold his seventy-five percent interest in Red Flag to Kleynerman for a nominal value. Kleynerman subsequently made changes to the cargo seal product, which improved cost and performance. Red Flag's gross revenue increased from $98,152 in 2011 to more than $1.5 million in 2012.

¶ 15 In December 2011, Smith filed this action against Kleynerman and Red Flag. Pertinent to this appeal, Smith claimed that Kleynerman breached his fiduciary duty owed to Smith as it related to Smith's interests in the June 2009 transaction with Red Flag, and that Kleynerman made various misrepresentations to Smith to induce him to agree to the transaction to his detriment.

¶ 16 At the end of a six-day jury trial, the jury was presented with a special verdict form containing nineteen questions. As to the breach of fiduciary duty claim, the jury found that Kleynerman owed a fiduciary duty to Smith and that Kleynerman breached that duty, causing Smith damages in the amount of $499,000.

¶ 17 As to the misrepresentation claim, the jury found that Kleynerman made certain representations to Smith but that those representations were not “untrue.” The jury was also asked to answer the question of punitive damages if they found that Kleynerman had made misrepresentations and that those misrepresentations caused Smith to suffer damages. Although the jury did not make those findings, the jury nevertheless awarded Smith $200,000 in punitive damages.

¶ 18 The parties filed cross post-verdict motions. The circuit court found the jury's award of punitive damages was legally inconsistent with the jury's verdict that the representations were not untrue—in other words, that there were no misrepresentations—and, therefore, the circuit court struck the punitive damages award. The circuit court denied the parties' motions seeking to alter any other portion of the verdict.

DISCUSSION

¶ 19 In the sections that follow, we first address Kleynerman's appeal with respect to the breach of fiduciary duty claim. We then address Smith's cross-appeal as to the intentional misrepresentation claim.

A. Kleynerman's Appeal: Breach of Fiduciary Duty Claim

¶ 20 Kleynerman appeals the order granting judgment in favor of Smith, and denying his motion for judgment notwithstanding the verdict, as to the breach of fiduciary duty claim. To prove a claim for breach of fiduciary duty, Smith must show that: (1) Kleynerman owed Smith a fiduciary duty, (2) Kleynerman breached that duty, and (3) that breach caused Smith damage. See Groshek v. Trewin, 2010 WI 51, ¶ 12, 325 Wis.2d 250, 784 N.W.2d 163.

¶ 21 Kleynerman argues that the order granting judgment should be reversed for five reasons: (1) Kleynerman did not owe Smith a fiduciary duty; (2) Smith's claim is barred by the two-year statute of limitations because his claim accrued when the Red Flag transaction occurred in June 2009; (3) Kleynerman did not breach any fiduciary duty owed to Smith; (4) Smith presented no competent evidence of any damages caused by Kleynerman's alleged breach of fiduciary duty; and (5) Smith has no standing to recover damages that ACT allegedly sustained.

¶ 22 Kleynerman frames his arguments within the context of the circuit court's denial of his motion for judgment notwithstanding the verdict. As a general matter, “[w]e review a [circuit] court's denial of a motion for judgment notwithstanding the verdict de novo, applying the same standards as the [circuit] court.” Hicks v. Nunnery, 2002 WI App 87, ¶ 15, 253 Wis.2d 721, 643 N.W.2d 809. “A motion for judgment notwithstanding the verdict accepts the findings of the verdict as true but contends that the moving party should have judgment for reasons evident in the record other than those decided by the jury.” Id. “The motion does not challenge the sufficiency of the evidence to support the verdict, but rather whether the facts found are sufficient to permit recovery as a matter of law.” Id.

¶ 23 Despite the framework that Kleynerman asserts as being employed here, Kleynerman's third and fourth arguments appear to be challenges to the sufficiency of the evidence. “In reviewing the sufficiency of the evidence on appeal, we view the evidence in the light most favorable to the jury's verdict, and we sustain the jury's verdict if there is any credible evidence to support it.” K & S Tool & Die Corp. v. Perfection Machinery Sales, Inc., 2006 WI App 148, ¶ 46, 295 Wis.2d 298, 720 N.W.2d 507. We address and reject Kleynerman's arguments in the sections that follow.

1. Existence of Fiduciary Duty

¶ 24 Kleynerman argues that, as a...