Waitt v. Speed Control, Inc., Nos. C-00-4060-MWB, C-00-4087-MWB (N.D. Iowa 6/28/2002), s. C-00-4060-MWB, C-00-4087-MWB.

Decision Date28 June 2002
Docket NumberNos. C-00-4060-MWB, C-00-4087-MWB.,s. C-00-4060-MWB, C-00-4087-MWB.
PartiesNORMAN W. WAITT, JR., Plaintiff, v. SPEED CONTROL, INC.; JAMES H. BERGLUND; EUGENE F. HUSE, JR.; NED D. MILLS; ROBERT N. TOMCHUCK; AND LOUIS E. BARTON, Defendants. NORMAN W. WAITT, JR., Plaintiff, v. THOMAS C. LEVITT, Defendant/Counterclaimant and Third Party Plaintiff. v. MATTHEW L. RIX and STEVEN W. SELINE, Third-Party Defendants.
CourtU.S. District Court — Northern District of Iowa

MARK W. BENNETT, Chief Judge.

Although venture investments can often feel more like a game of chance than a sound investment, unlike the roulette wheel, investing is a game of chance subject to changing prospects and probabilities. Companies come and go all the time, of course; it's part of the cycle of business. Losing money as a result is part of the investment gamble. However, there's a difference between losing money in an unwise investment, and losing it in a game that's been rigged against you. Here, in this litigation, the plaintiff claims the later has occurred and that he has lost his investment in a closely held corporation due to defendants' actions. Defendants, on the other hand, contend that they did not rig plaintiff's investment in the company, but that plaintiff merely made a risky investment that did not pan out.

A. Procedural Background

On June 13, 2000, plaintiff Norman W. Waitt filed a diversity lawsuit against Speed Control, Inc., James H. Berglund, Eugene F. Huse, Jr., Ned D. Mills, Robert N. Tomchuck, and Louis E. Barton, C-00-4060-MWB ("the Speed Control Case"). In the Speed Control Case, plaintiff Waitt alleges that officers and directors of Speed Control, Inc. made false and misleading representations to him in order to induce him to make certain investments in Speed Control, Inc.1

Subsequently, plaintiff Norman W. Waitt filed a diversity lawsuit on August 25, 2000, against his former attorney, Thomas C. Levitt, C-00-4087-MWB ("the Levitt Case"). In the Levitt Case, plaintiff Waitt alleges in his complaint that defendant Levitt breached his fiduciary duties to him and committed legal malpractice with regard to investment advice he gave to Waitt with respect to Speed Control, Inc. Plaintiff Waitt also alleges that Levitt, as an officer of Speed Control, Inc. made false and misleading representations to him in order to induce him to make certain investments in Speed Control, Inc. Defendant Levitt filed an answer to the complaint and a counterclaim against Waitt for unpaid legal services, defamation, and abuse of process. On May 24, 2001, Levitt amended his answer and asserted a third-party complaint against Matthew L. Rix and Steven W. Seline alleging claims for defamation, and abuse of process, and intentional interference with a contractual relationship.

On December 31, 2001, defendant Levitt moved for summary judgment on all claims against him. On January 2, 2002, defendant Levitt filed an amended motion for summary judgment. On January 15, defendants Speed Control, James H. Berglund, Eugene F. Huse, Jr., Ned D. Mills, and Robert N. Tomchuck (collectively "the Speed Control defendants" unless otherwise indicated) filed for summary judgment on claims against them. Waitt then sought and was granted an extension of time in which to file his response to defendants' respective motions for summary judgment. Waitt filed his response to the motions for summary judgment on February 6, 2002. Defendant Levitt and the Speed Control defendants then sought and were granted extensions of time in which to file a reply brief to Waitt. The defendants subsequently filed their respective reply briefs on March 1, 2002. On May 7, 2002, defendant Levitt filed a supplement to his reply brief. Before turning to discuss the standards for defendants' motions for summary judgment, the court will first examine the factual background of this case.

The court heard telephonic oral arguments on defendants' respective motions for summary judgment on June 21, 2002. At the oral arguments, plaintiff Waitt was represented by counsel Theodore R. Boecker of Sherrets & Boecker, L.L.C., Omaha, Nebraska. Defendant Levitt was represented by counsel Daniel B. Shuck and Patrick L. Sealey of Heidman, Redmond, Fredregill, Patterson, Plaza, Dykstra & Prahl, L.L.P., Sioux City, Iowa. The Speed Control defendants were represented by Maurice B. Nieland of Rawlings, Nieland, Probasco, Killinger, Ellwanger, Jacobs & Mohrhauser, Sioux City, Iowa.

B. Factual Background

The record reveals that the following facts are undisputed.

Plaintiff Norman W. Waitt, Jr. is a resident of the state of South Dakota. Defendant Thomas C. Levitt resides and practices law in the state of California. Matthew L. Rix is a resident of New Mexico and has acted as an agent for Waitt in a business and professional capacity.

Steven W. Seline is a resident of the state of Nebraska and a licensed attorney in that state. Seline was formerly associated with the law firm of Kutak Rock in Omaha, Nebraska. In his capacity as an attorney with Kutak Rock, Seline first performed legal work concerning financial matters for Waitt in approximately 1990. Defendants Ned Mills, Robert Tomchuck and Louis Barten are or were executives with Speed Control.

In June 1997, Waitt was contacted by defendant James H. Berglund, and invited to come to Berglund's home in Okoboji, Iowa, to discuss a possible investment in Speed Control. Defendant Eugene F. Huse, Jr. was also at this meeting. Both Berglund and Huse owned residences on Lake Okoboji, Iowa where Waitt also had a vacation home. Berglund and Huse were looking for another partner to invest in Speed Control. Berglund explained Speed Control's product as being a cable drive transmission for bicycles that did not have to use a derailleur system in order to shift gears.

Waitt did not view himself as a venture capitalist and generally did not like venture capital investments, having only invested in one such concern between 1991 and 1997. However, following the meeting with Berglund and Huse, on June 15, 1997, Waitt wrote to Seline and Levitt regarding Speed Control:

I'm sending each of you a copy of a business plan for "Speed Control, Inc." I received yesterday from Jerry Huse. Jerry owns and runs the Norfolk Daily News. He and Jim Bergland (one of our neighbors on Omaha Beach who is a very experienced venture capitalist) have good track records in business and I respect both of them by knowing them as well as by their reputations.

As you know, normally I'm pretty reluctant to jump in to most venture deals, but considering knowing these guys, it makes a difference. This business venture could possibly revolutionize bike transmissions which is now controlled 90% by the Japs. It could have other applications as well. They have patents and prototypes in place and want to raise about $3,000,000+ to grow the business. I think I understood him to say it would be sold to me at the same price they and a couple others paid. He said this project would not require my personal time if I so desire. I would like to know what you guys think of it. I'll be out of town until around 7/03 but I'll try to check in before hand. It would be beneficial if you two can discuss it as well.

Levitt App., Ex. 9, App. p. 66.

Speed Control's Business Plan included the following business mission:

Speed Control, Inc. ("SCI" or the "Company") has developed the world's first and only, fully-operational and manufacturable continuously-variable transmission (CVT) for application on bicycles. The SCI CVT is the first major innovation in bicycle drive systems in over forty years; this unparalleled transmission is destined to have a major positive impact within a large, well established bicycle marketplace.

The Company will soon initiate production and marketing of its CVT product line in North America and Europe. SCI's objective is to become the premier supplier of variable-speed bicycle systems. As reflected herein, the Company's plan is to capture a 20% market share of upper-end bicycles sold through independent bicycle dealers (IBDs), provide a high return to investors, achieve a sustained double-digit compound annual growth rate and achieve the industry's highest customer satisfaction rating.

Waitt App., Exp. 91, Ex. A at p. 2. Speed Control's business plan also stated that it was seeking $3,000,000 in financing in order to "Move [Speed Control's] CVT products into production." Waitt App., Exp. 91, Ex. A at p. 4. The plan further disclosed that: "Speed Control has completed initial product development; it has leveraged its in house design talent with independent consultants and part-time workers. Now is the time to expand operations to commercialize the Company's CVT products and technology." Waitt App., Exp. 91, Ex. A at p. 27. The plan also announced that "Speed Control expects to start manufacturing and selling its products approximately nine to twelve months after the cash infusion. Waitt App., Exp. 91, Ex. A at p. 33.

On June 23, 1997, Levitt wrote to Waitt and Seline regarding his review of Speed Control's November 1996, business plan. In his report, Levitt noted the following regarding the patent technology that Speed Control was seeking to use in its CVT transmission:

It is not clear who is the patent owner nor is it clear the placement of these patents within the field of similarly positioned patent technology. It is not possible from these materials to know to what extent, if any, other displacing technologies or similar patents would adversely impact the economic potential of the technological position of this company. No picture of a prototype nor pictures of the internal parts is provided so it is difficult to get a feeling for the type of assembly and purchasing of subcomponents that would be necessary.

Levitt App., Ex. 28, App. p. 137. Levitt also made the following conclusions:

Since only...

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